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TMI Blog1972 (10) TMI 9X X X X Extracts X X X X X X X X Extracts X X X X ..... termination is : "Whether, on the facts and in the circumstances of the case, the ship, ss. Bharatsena, can be said to have been used by the assessee for the purposes of its business at any time during the previous year 1956 ?" The question for determination relates to the assessment year 1957-58, the previous year of which was the calendar year ending December 31, 1956. The assessee is a company, registered under the Indian Companies Act, carrying on the business of running a fleet of cargo steamers, mostly on Indian waters. On July 1, 1947, the assessee purchased for the purpose of its business the steamer, ss. Bharatsena, for the sum of Rs. 14,45,288. Certain additions at the cost of Rs. 5,90,901 were made to the steamer and depreciation was allowed by the Income-tax Officer to the assessee on the footing that the total cost of the steamer was Rs. 20,36,189. In or about October, 1955, the assessee commenced negotiations for sale of the above steamer through its agents in London, M/s. Harley Mullion Co., Ltd., London. These negotiations resulted into acceptance of offer on December 2, 1955, by the agent of the buyer, a company floated in Panama. The acceptance of the bu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hasers. Under that clause failing due payment by the purchasers of any part of the purchase money, the deposit in respect of the vessel was liable to be forfeited to the sole use of the vendors and the vendors were at liberty to resell the vessel either by public or private sale and any deficiency between the amount realised and the amount due was to be made good by the defaulting purchasers together with interest at the rate of 5% p.a. and all expenses of such resale. Clause 8 of this contract provided for consequences of default on the part of the vendors. Under that clause if the vendor committed default in the execution of the legal bill of sale or in the delivery of the vessel as provided therein, other than from any cause whatsoever beyond the vendor's control, the deposit was to be released to the purchasers on demand together with interest at the rate of 5% p.a. without prejudice to the purchaser's claim for proved damage. Clause 15 of the agreement provided that the agreement was subject to the vendor's securing the sanction of the Indian authorities to the sale of the steamer to the purchasers for registration under Panamanian Registry. This clause further provided that, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o freight was received till the date of delivery. It was urged that, while the repairs were being carried out in the year 1956, that was with a view to fulfil and carry out the terms of the contract of sale dated December 28, 1955. In short, the submission was that at no time during the relevant accounting period was the ship put to any use for the purpose of business. The Income-tax Officer rejected these contentions and held that the assessee must be considered to have used the steamer up to June 23, 1956, when the sale was completed by actually giving the steamer to the buyers. According to him, the steamer's undergoing repairs amounted to passive user of the steamer as earlier depreciation used to be allowed on steamers for the period during which they were undergoing repairs. Without prejudice to these findings, he further held that, in any event, the steamer was used by the assessee for its business up to January 9, 1956, on which date the memorandum of agreement was signed on behalf of the assessee or till January 4, 1956, when the steamer returned from its foreign voyage to an Indian port. According to the Income-tax Officer, the steamer was used for its business for a part ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s business--is a ship so used while it is under such repairs. In view of this finding, the Tribunal allowed the appeal of the revenue. On behalf of the assessee Mr. Kolah urged that it is not the case of the assessee that during the accounting period, it did not carry on its business. The submission, however, was that the question to be considered is whether during the relevant accounting period, the ship, Bharatsena, was being used, even either dormantly or passively for the purpose of its business. It was urged that latest at least by December 28, 1955, a concluded contract was entered into by the assessee whereunder it agreed to sell the ship to a foreign company ; that it gave express and specific instructions to the agents at Rangoon that it should not load any cargo and it should be sent simply in ballast to Calcutta for the purpose of repairs that were to be carried out under the contract ; that at least from December 28, 1955, it was quite clear that the ship, Bharatsena, was not being used by the assessee for the purpose of its business at any time until delivery thereof, when it was handed over to the purchaser on June 23, 1956. On the other hand, on behalf of the rev ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ... used for the purpose of the business, profession or vocation" as stated in clause (iv). There is no controversy in the present case as regards the conditions which are essential to be fulfilled before the excess amount can be brought to tax. These essential conditions are laid down by the Supreme Court in the case of Commissioner of Income-tax v. Moon Mills Ltd. This case relates to the excess amount of insurance money received by the assessee. It is held that before the excess insurance money received over the difference between the written down value and scrap value of the machinery is brought to charge under the fourth proviso to section 10(2)(vii) of the Indian Income-tax Act, 1922, it is essential that, (i) during the previous year in which moneys are received the business shall have been carried on by the assessee for the part or whole of it ; and (ii) that machinery shall have been used in the business in the previous year. There is no controversy in the present case that the assessee-company carried on business during the previous year, but the question, however, arises whether the ship, Bharatsena, has been used in the business at any time in the previous year. Str ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uildings, plant and machinery as profits under proviso (2) to section 10(2)(vii). The Appellate Tribunal found that the assessee-company was carrying on a business and treated the surplus as taxable profits. On a reference under section 66(1) the High Court by majority upheld the decision of the Tribunal. On appeal the Supreme Court took the view that the decision of the Tribunal was vitiated by its failure to keep in view the true meaning and scope of section 10(2)(vii) and could not, therefore, be supported. The intention of the company was to discontinue its business and the sale of the machinery and plant was a step in the process of the winding up of its business. The sale of the machinery and plant was not an operation in furtherance of the business carried on by the company but was a realisation of its assets in the process of gradual winding up of its business which eventually culminated in the voluntary liquidation of the company. Even if the sale of the stock of sugar be regarded as carrying on of business by the company and not a realisation of its assets with a view to winding up, the machinery or plant not being used in the accounting year at all and in any event not h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the facts stated in the statement of case that an oral contract to sell the ship, Bharatsena, came into existence when the acceptance of the buyer was communicated to the assessee by cable and letter, dated December 2, 1955, by the assessee's agents, M/s. Harley Mullion Co. Ltd., London. Actually, the ship sale contract was reduced to writing on December 28, 1955. Relying upon certain observations made by the Income-tax Officer, it was sought to be urged by the revenue that the contract was signed on behalf of the assessee on January 9, 1956. Such a contention is not permissible to take in view of the clear statement in the statement of the case. In paragraph 3 thereof it is stated that on December 28, 1955, the ship sale contract was reduced to writing in accordance with the terms agreed during the course of negotiations. After an oral contract to sell the ship was arrived at, all subsequent communications clearly go to show that prior to December 31, 1955, the assessee-company decided not to use the ship, Bharatsena, for the purposes of its business. By the letter dated December 12, 1955, the assessee-company intimated to the Rangoon agents that when the ship arrived at Rangoon ..... X X X X Extracts X X X X X X X X Extracts X X X X
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