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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 ..... 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 buyer was communicated to the assessee by a cable and letter dated December 2, 1955, by the assessee's agents, M/s. Harley Mullion & Co., Ltd., London. Thereafter other formalities regarding Government permission, mode of remittance of sale proceeds from purchaser with the approval of the Reserve Bank of India, etc., were carried out. On December 28, 1955, the ship sale contract was reduced to writing in accordance with the terms agreed during the course of negotiations. The contract, inter alia, provides that the vessel is sold on outright basis and is to be delivered to the purchaser safely afloat with her present class maintained free of all recommendations and free of average at an Indian port in vendors' option. The purchase price was agreed at ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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, in the event of such sanction not being obtained, the contract was to become null and void and, in that event, the deposit paid by the purchasers was to be refunded to him. When negotiations resulted in an oral agreement on December 2, 1955, the ship was actually being used by the assessee for the purposes of its business and was on its way to Rangoon with cargo. By the cable dated December 12, 1955, Rangoon agents of the assessee enquired whether the ship, Bharatsena, can load Madras. A reply to this cable was sent by the assessee-company by its cable dated December 13, 1955, whereby the Rangoon agents were informed that the ship, Bharatsena, cannot load Madras. On December 12, 1955, a letter was written by the assessee to the Rangoon agents inf ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h 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 of the accounting year and that the provisions of section 10(2)(vii) were applicable to the assessee's case. Profit on sale of the steamer was computed at Rs. 19,00,650 and was accordingly taxed. In appeal the Appellate Assistant Commissioner took the view that the ship was not used by the assessee for its business purpose after December 29, 1955, and that no profit arose under section 10(2)(vii) for the assessment year 1957-58. In the appeal by the revenue before the Income-tax Tribunal, the contention was advanced in a threefold manner. Firstly, it was contended that India was the home country of the ship ; that it was sailing under the Indian flag, that it was to be delivered at the Indian port by the terms of the contract ; that though it might ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ould 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 revenue, Mr. Joshi urged the same contentions as were urged before the Tribunal. Firstly, he submitted that at least up to January 4, 1956, when the ship reached Calcutta in ballast, it was being used by the assessee for the purpose of its business, as under the terms of the contract, delivery thereof was to be given at an Indian port. He also submitted that under the terms of the contract, it was obligatory upon the assessee to carry out such repairs to the ship as to retain the class to which it belonged ; that while such repairs were being carried out, the ship was in any event passively used by the assessee for its business. Lastly, the submission was that the repairs were completed on June 15, 1956, while delivery was actually given to the purchasers ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. Strong reliance was placed on behalf of the assessee upon the decision of the Supreme Court in the case of Liquidators of Pursa Ltd. v. Commissioner of Income-tax. The Supreme Court took the view that the words "used for the purpose of the business" in section 10(2)(iv) of the Indian Income-tax Act, 1922, mean "used for the purpose of enabling the owner to carry on the business and earn profits in the business". In other words, the machinery or plant must be used for the purpose of that business which is actually carried on and the profits of which are assessable under section 10(1). It was further held that in order to attract the operation of clauses (v), (vi) and (vii) of section 10(2) the machinery and plant must be such as were used, in whatever sense that w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed 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 having any connection with the carrying on of that limited business during the accounting year, section 10(2)(vii) could have no application to the sale of any such machinery or plant. Consequently, the surplus arising on the sale of the machinery and plant was not chargeable under section 10(2)(vii). The principle laid down in the case of Liquidators of Pursa Ltd. v. Commissioner of Income-tax was followed by this court in Whittle Anderson Ltd. v. Commissioner of Income-tax, but on the facts it was held that it was not attracted. This court took the view that such building, machinery or plant in clause (vii) means "building, machinery or plant used for the purposes of the business, profession or vocation" and, even for the applicability of the second proviso t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rdance 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, it should be made to discharge its cargo as quickly as possible and thereafter it should sail for Calcutta without loading any cargo. It was clearly stated "Please do not book any freight for her as we require the steamer urgently in Calcutta." That letter was replied to by the Rangoon agents on December 16, 1955. In this letter, the Rangoon agents stated that they expected the ship to arrive in a day or two and shall sail it immediately to Calcutta no sooner the discharge of cargo was completed and without loading any cargo. Later on, by a cable dated December 26, 1955, the assessee-company informed the Rangoon agents to supply enough fuel oil to Bharatsena so that it may reach Calcutta. There is no controversy that in view of these specific and express instr ..... X X X X Extracts X X X X X X X X Extracts X X X X
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