1967 (3) TMI 28 - HC - Income Tax

Balancing Charge - allowable deduction - Whether, on the facts and in the circumstances of the case, the assessee is entitled to the deduction of Rs. 4,350 in the computation of the profits u/s. 41(2)

Summary

Issues:
Deduction of brokerage amount in computation of profits under section 41(2) of the Income-tax Act.

Analysis:
The judgment pertains to a reference under section 256(1) of the Income-tax Act, 1961, regarding the deduction of brokerage in the computation of profits under section 41(2). The assessee, who had wound up her lorry business, claimed a deduction of Rs. 4,350 as brokerage paid during the sale of lorries. The Income-tax Officer added the depreciation amount to her income, which was contested by the assessee. The Appellate Assistant Commissioner allowed a reduced deduction, but the Income-tax Appellate Tribunal overturned this decision, leading to the reference to the High Court.

The court examined the provisions of section 41(2) in comparison to the previous law under section 10(2)(vii) of the Act of 1922. The section deals with the treatment of assets sold after depreciation has been allowed. The court emphasized that the surplus realized from the sale is deemed as business income to the extent of depreciation allowed previously. The judgment highlighted that the surplus is a capital receipt, not business income, and the deduction of brokerage under section 37 does not apply unless the receipt is considered a business income.

Referring to the Supreme Court's decision in Commissioner of Income-tax v. Bipinchandra Maganlal & Co. Ltd., the court reiterated that the surplus from the sale of assets is a capital receipt, not a business income. The court rejected the argument that the Explanation to section 41(2) creates a complete fiction of the sale process being part of business activity, including brokerage as a business expenditure. The court emphasized that the purpose of the Explanation is to give effect to the main fiction of treating surplus as business income.

Regarding the interpretation of "price for which it is sold," the court agreed with the Tribunal that it refers to the gross price, not the net price after deductions like brokerage. The judgment concluded that the assessee was not entitled to the deduction of Rs. 4,350 in the computation of profits under section 41(2) of the Income-tax Act. The court held the decision against the assessee, emphasizing that the surplus from the sale of assets is a capital receipt, not business income, and the deduction of brokerage does not apply in this context.