1972 (10) TMI 9 - HC - Income Tax

Whether the ship can be said to have been used by the assessee for the purposes of its business at any time during the previous year 1956 - Held, no - purchaser committed default in carrying out its obligations under the contract, the repairs so carried out may be useful to the assessee-company while the ship was being used by it for its business. There is no evidence whatever in the present case to indicate that if in case the purchaser committed default in carrying out. his obligations under the contract, the assessee would have used the ship for its business. It may well enter into another contract for its sale. Even during the period between June 15, 1956, and June 23, 1956, when actually delivery was given, it cannot be regarded that the ship was used passively for the purpose of its business

Summary

Issues Involved:
1. Whether the ship, ss. Bharatsena, was used by the assessee for the purposes of its business at any time during the previous year 1956.

Detailed Analysis:

Issue 1: Whether the ship, ss. Bharatsena, was used by the assessee for the purposes of its business at any time during the previous year 1956.

The question pertains to the assessment year 1957-58, with the previous year ending on December 31, 1956. The assessee, a company running a fleet of cargo steamers, purchased the ship, ss. Bharatsena, on July 1, 1947, for Rs. 14,45,288. Subsequent additions brought the total cost to Rs. 20,36,189. In October 1955, the assessee began negotiations for the sale of the ship through its agents in London, resulting in an oral agreement on December 2, 1955, and a written contract on December 28, 1955.

The contract stipulated that the ship was to be delivered to the purchaser at an Indian port by February 1956. Specific instructions were given to the Rangoon agents not to load any cargo and to sail the ship in ballast to Calcutta for repairs necessary under the contract. The ship sailed from Rangoon to Calcutta on December 29, 1955, and reached Calcutta on January 4, 1956, where it underwent repairs until June 15, 1956. The ship was delivered to the purchaser on June 23, 1956.

Before the Income-tax Officer, the assessee argued that the ship ceased to be used for business purposes after December 29, 1955, as no freight was accepted or received after that date. The Income-tax Officer rejected this contention, holding that the ship was used for business purposes up to June 23, 1956, or at least until January 4, 1956, when it returned to an Indian port. The Appellate Assistant Commissioner, however, ruled that the ship was not used for business purposes after December 29, 1955.

The Income-tax Tribunal upheld the revenue's appeal, stating that repairs to the ship constituted passive use for business purposes. The Tribunal found that the ship was used for business purposes during the accounting year 1956.

The court examined the relevant provisions under section 10 of the Indian Income-tax Act, 1922, particularly clause (vii) of sub-section (2) and its second proviso, which deals with the computation of profits from the sale of machinery or plant used for business purposes. The court noted that the essential conditions for taxing the excess amount, as laid down by the Supreme Court in Commissioner of Income-tax v. Moon Mills Ltd., were that the business must have been carried on during the previous year and the machinery must have been used in the business during that year.

The court referred to the Supreme Court's decision in Liquidators of Pursa Ltd. v. Commissioner of Income-tax, which held that machinery or plant must be used for the purpose of enabling the owner to carry on the business and earn profits. In that case, the sale of machinery was part of the process of winding up the business, and the machinery was not used during the accounting year, rendering section 10(2)(vii) inapplicable.

Applying this principle, the court found that the ship, ss. Bharatsena, was not used for business purposes during the relevant accounting year 1956. The oral contract to sell the ship was concluded on December 2, 1955, and the written contract on December 28, 1955. Subsequent communications and instructions indicated that the ship was not to be used for business purposes but was to be sailed in ballast to Calcutta for repairs under the contract. The repairs were necessary to fulfill contractual obligations, not to make the ship useful for the assessee's business.

The court concluded that the ship was neither actively nor passively used for business purposes during the accounting year 1956. Even the period between June 15, 1956, and June 23, 1956, when the ship was ready for delivery, did not constitute passive use for business purposes.

Judgment:

The court answered the question in the negative, ruling that the ship, ss. Bharatsena, was not used by the assessee for the purposes of its business at any time during the previous year 1956. The revenue was ordered to pay the costs of the assessee.