1967 (12) TMI 7 - HC - Income Tax

Whether the second proviso to clause (vii) of sub-section (2) of section 10 of the Income-tax Act does not apply to the case covered by section 12(3)- Held yes

Issues Involved:
1. Whether the income derived by the assessee from the lease of the factory has been rightly treated as income from business assessable under section 10.
2. Whether the second proviso to clause (vii) of sub-section (2) of section 10 of the Income-tax Act does not apply to the case covered by section 12(3).

Issue-wise Detailed Analysis:

Issue 1: Income from Lease Treated as Business Income

The primary question is whether the income derived by the assessee from leasing the factory should be treated as income from business under section 10. The assessee, a Hindu undivided family, acquired a ginning factory and ran it until 1948, after which it was leased out annually until its sale in 1951. The Income-tax Officer treated the depreciation amount of Rs. 67,420 as profit of the business and brought it to tax. The assessee contended that this amount was not profit under section 10(2) but under section 12, claiming the benefit of allowance under section 10(2)(vii) without being liable under the second proviso to that provision.

The Tribunal upheld the orders of the authorities below, applying the second proviso to section 10(2)(vii) and rejecting the assessee's contention that its case falls under section 12(3). The Tribunal made the reference to the High Court on the assessee's application.

The Court referred to the Supreme Court's decision in Commissioner of Income-tax v. Express Newspapers Ltd., which clarified that the second proviso to section 10(2)(vii) brings to charge the difference between the original cost and the written down value as profits of the previous year in which the sale takes place. This applies if the machinery was used for the business during the accounting year. The Court noted that the factory was leased out as a going concern and the business was carried on by the lessee until the sale.

The Court also referenced Commissioner of Excess Profits Tax v. Shri Lakshmi Silk Mills Ltd., where it was held that leasing out machinery temporarily for profit is part of the normal activities of the business. The Court concluded that the assessee's income from leasing the factory is business income under section 10, as the factory was a commercial asset exploited for profit.

Issue 2: Applicability of Second Proviso to Section 10(2)(vii)

The second question concerns whether the second proviso to section 10(2)(vii) applies to the case covered by section 12(3). The Court noted that the second proviso to section 10(2)(vii) deems the difference between the original cost and the written down value as profits of the previous year in which the sale occurs. This proviso applies to the sale of machinery used for business during the accounting year.

The Court referred to the Supreme Court's decision in Express Newspapers Ltd., which stated that the second proviso brings to charge escaped profit or gain of a business carried on by the assessee. The second proviso is not an allowance provision covered by sub-section (3) of section 12. Therefore, if section 12(3) applied, the second proviso to section 10(2)(vii) would not be attracted.

The Court concluded that the second proviso to section 10(2)(vii) applies to the assessee's case, as the factory was a business asset used for profit. The answer to the first question being affirmative, the second question does not arise. However, if it did, the second proviso to section 10(2)(vii) would still apply, as it is not an allowance provision under section 12(3).

Conclusion:

The Court held that the income derived from leasing the factory is assessable as business income under section 10. The second proviso to section 10(2)(vii) applies, deeming the difference between the original cost and the written down value as profits of the previous year of sale. The assessee will bear the costs of the Commissioner of Income-tax in this reference.

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