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TMI Blog2000 (6) TMI 145X X X X Extracts X X X X X X X X Extracts X X X X ..... inery at Rs. 1,18,539. The assessee was also in receipt of Rs. 75,000 as lease rent on letting out the business premises. The lease rent was brought to tax as income under the head 'other sources'. The total income for the assessment year 1976-77 was assessed at Rs. 1,25,743 including profit under section 41(2) determined at Rs. 1,18,539. For the assessment year 1977-78 the total income was assessed at Rs. 23,850. For the assessment year 1976-77 though there was a sum of Rs. 1,18,539 assessed as income from business it was only deemed business income under section 41(2) and the other sum of Rs. 7,500 was only by way of lease rent. The assessments for both years were made with levy of tax at the rate applicable to industrial company. The CIT later passed a revision order under section 263 of the I.T. Act setting aside the assessments with the direction to adopt the correct rate of tax as per section 2(8)(c) of the Finance Act, 1976 after giving the assessee a fresh opportunity of being heard. The Assessing Officer then passed revised assessment orders levying tax at the rate of 65 per cent (with surcharge at 5 per cent) as applicable to a non-industrial company. Though the asses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... see for the relevant previous year, although in fact that the business had ceased to exist. If so, the inevitable corollary of that fiction would be that the business would be deemed to have been carried on in that year. He also placed reliance on the decision of Kerala High Court in the case of CIT v. Official Liquidator, New Era Mfg. Co. Ltd. [1977] 109 ITR 262. In that case, it was held that the assessee would be entitled to set off of the unabsorbed depreciation of the past years against the profit assessable under section 41(2). Arguing on the above lines the learned counsel made a strong plea before us for reversing the findings of the revenue authorities and for holding that the sum of Rs. 1,18,539 should be deemed as income from the business of manufacture of rubber products and that the assessee would be qualified as an industrial company for assessment at the lower rate of tax. 4. Per contra, Shri G.S.D. Babu, the Departmental Representative supported the order of the Commissioner (Appeals) and submitted that there was no dispute about the fact that during the previous years under consideration there was no business carried on by the assessee, much less the business of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s letting out the factory premises and receiving rental income it was assessable as income from other sources. There was no question of it being an industrial company under the definition as provided in the Finance Act. 5. The point for consideration is whether during the previous year the assessee qualified as an industrial company entitled to concessional rate of tax as provided in section 2(8)(c) of the Finance Act, 1976. According to the facts arising in this case, the assessee was previously carrying on the business of manufacture of rubber products. When there was the business the assessee was admittedly an industrial company entitled to the concessional rate of tax. During the previous year relevant to the assessment year 1976-77 and 1977-78 the assessee was not carrying on that business and the factory premises were leased out to a third party. The assessee also sold its machinery and on the sale price profit was computed under section 41(2) of the I.T. Act. The assessee claimed concessional rate of tax of 55% under section 2(8)(c) of the Finance Act, 1976. According to the department inasmuch as the assessee was not mainly engaged in the business of manufacturing or proc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... acture and processing of goods. It was held that the assessee was not entitled to the concessional rate of tax as an industrial company. For the assessment year 1976-77, apart frorm the lease rent of Rs. 7,500 there was also the sum of Rs. 1, 1 8,539 brought to tax as profit under section 41(2) of the I.T. Act. Sub-section (2) of section 41 reads: "(2) Where any building, machinery, plant or furniture which is owned by the assessee and which was or has been used for the purpose of business or profession is sold, discarded, demolished or destroyed and the moneys payable in respect of such building, machinery, plant or furniture, as the case may be, together with the amount of scrap value, if any exceed the written down value so much of the excess as does not exceed the difference between the actual cost and the written down value shall be chargeable to income-tax as income of the business or profession of the previous year in which the moneys payable for the building machinery plant or furniture became due; Provided that where the building, sold, discarded, demolished or destroyed is a building to which Explanation 5 to section 43 applies and the moneys payable in respect of suc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... C 109; [1951] 2 All. ER 587 (HL), permit one's imagination to boggle when it comes to the inevitable corollaries of the state of affairs introduced by the fiction. Consequently, the income computed under sub-section (2) of section 41, which with the aid of the Explanation is made chargeable to tax even when the business was no longer in existence in the relevant previous year, has to be before it is charged, subjected to a set-off against the carried forward depreciation allowance by giving full play to the provisions of sub-section (2) of section 32 and sub-section (5) of section 41." The Allahabad High Court in Rampur Timber Turnery Co. Ltd's case interpreted in the same way the provisions of section 41 (1) which are identical to section 41(2). The assessee's claim in the present case, is that it was carrying on one business only in the earlier years and that was the business of manufacture of rubber products undoubtedly ail industrial activity. The assessee never had any other non-industrial business. Section 41(2) creates a legal fiction that the profit is chargeable to tax as 'income of the business or profession of the previous year' in which the money became due. In the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ble to' occurring in the phrase 'profits and gains attributable to the business of' the specified industry (here generation and distribution of electricity) on which the learned Solicitor-General relied, it will be pertinent to observe that the Legislature had deliberately used the expression, attributable to' and not the expression 'derived from'. It cannot be disputed that the expression 'attributable to' is certainly wider in import than the expression 'derived from'. Had the expression 'derived from' been arising from the sale of old machinery and buildings cannot be regarded as profits and gains derived from the conduct of the business of generation and distribution of electricity. In this connection, it may be pointed out that whenever the Legislature wanted to give a restricted meaning in the manner suggested by the learned Solicitor-General, it has used the expression 'derived from', as, for instance, in section 80J. In our view, since the expression of wider import, namely 'attributable to' has been used, the Legislature intended to cover receipts from sources other than the actual conduct of the business of generation and distribution of electricity." In the light of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the relevant previous year, then the Explanation provides that the provisions of section 41(2) will apply notwithstanding the fact that the business is no longer in existence. It is for that purpose that the fiction is created that the business or profession will be treated as being in existence." From the above it is clear that it is for the purpose of assessment of the income chargeable under section 41(2) that the fiction is created that the business or profession will be treated as being in existence. If a legal fiction is created to charge to tax a certain amount as income from business that legal fiction should be extended to the tax rate to be applied to that income. It would not be correct to permit one's imagination to boggle when it comes to the tax rate to be applied to the amount treated as income under the legal fiction. Consequently the income chargeable to tax under section 41(2) as profit of the business has to be charged at the rate applicable to the income from that, business only. We thus hold that the profit charged to tax under section 41(2) should be treated as profit attributable to the business of manufacture of rubber products, and accordingly such profi ..... X X X X Extracts X X X X X X X X Extracts X X X X
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