9911796707
TMI Blog1950 (5) TMI 33X X X X Extracts X X X X X X X X Extracts X X X X ..... ntil 1943, when, in consequence of the disturbances which had taken place in the previous year the company decided to wind it up and entered into negotiations with Messrs. Dalmia Jain Co. with a view to selling the sugar factory to them. Prior to this the manager of the Bettiah Raj had apparently intimated that, in his opinion, the Bettiah Raj should exercise its option to repurchase the mukarrari villages and made certain recommendations in the matter to the Court of Wards. These latter negotiations, however, eventually fell through. Messrs. Dalmia Jain Co. decided, to purchase the whole of the rest of the property of the assessees with the exception of their stocks of sugar, as it existed on the 9th of August, 1943, for a sum of ₹ 28,00,000. It appears from the correspondence that the company had hoped that the sale would be completed on or before the 30th September, 1943, which was the end of its usual accounting year. Owing, however, to the delay in correspondence between India and England it was not until the 7th of December, 1943, that a memorandum of agreement was finally entered into as between the assessees on the one hand and Messrs. Dalmia Jain Co. on the oth ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or which the machinery or plant is actually sold or its scrap value . In order to entitle an assessee to the allowance, it was incumbent on him to show that the machinery or plant had become obsolete, that is, that, while it may not have ceased altogether to perform its function, it was of a type which was regarded in the particular trade or business as out of date. Although it was not made a condition as it was in England, of an allowance being granted that the obsolete plant or machinery should have been actually replaced by a modern and up-to-date type, it is clear that the allowance was, in substance, an allowance made towards the cost of replacement. It rarely or never happens that plant or machinery can be discarded or sold without its having to be replaced. When the clause was amended in 1939, it ceased to be a condition that the machinery or plant should have become obsolete. An assessee who chose to instal machinery or plant of the most modern type and such as few, if any, of his business rivals had yet begun to use, might, therefore, become entitled to an allowance and so reduce the capital expenditure to be incurred, the whole of which, prior to 1939, would have fallen o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... id was that the proviso applied only in the case of a business which had continued throughout the year of assessment and into the succeeding year and did not apply to a business which had been discontinued or was in the process of being discontinued, it being immaterial that the business of selling goods already manufactured continued, if the business of manufacturing goods had been stopped. That, however, is merely another way of stating the point. Mr. S.N. Dutta, for the Department, on the other hand, contended that the proviso applied whenever a sale took place, whether the plant or machinery sold was replaced or intended to be replaced or not. Assuming for the moment and for the sake of argument, that two constructions are possible, I would adopt the method of interpretation laid down by Lord Salvesen in Scottish Shire Line, Ltd. v. Lethent [1912] 6 Tax Cas. 91. It was there said: Even in a taxing statute it is legitimate to consider which of two possible constructions is most in accordance with the spirit and intention of the Act . Machinery and plant wear out or become obsolete and have to be replaced, and every prudent businessman sets aside out of his annual profits a cert ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is view of the matter, although the sale proceeds of a capital asset appear in the account taken for the purpose of computing income-tax, the tax is still a tax on income and not a tax on capital. All that can be said is, to adopt the language of Rankin, C.J., that depreciation or appreciation enters into the computation of profits more than hitherto. In the view contended for by the Department, on the other hand, the tax is not wholly a tax on income, but in part a levy on capital. In this particular case the assessees did not use their machinery and plant during the year of assessment and no depreciation allowance was at all admissible (vide Central Provinces Manganese Ore Co. Ltd. v. Commissioner of Income-tax, C.P. and U.P. [1937] 5 ITR 734 ) I do not myself attach any great importance to this. It would not, I think, have made any difference if the machinery and plant had been used and a proportionate allowance for depreciation had been admissible The reason why depreciation allowance is granted may be, as I have said, to enable the assessee to lay aside part of his profits to cover the cost of replacement, but in theory it is an expense incurred by him in earning his profits, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... wner was entitled to retain the whole of the resulting benefit When I pointed out to Mr. Datta that it was not until 1946 that Section 12B was inserted in the Income-tax Act and capital gains were made assessable to income-tax, Mr. Datta could only say that Section 12B applied to property of every kind and not merely to plant and machinery. I cannot persuade myself that, if it was in 1939 and not until 1946 that the Legislature decided to make so striking a departure from its hitherto well settled fiscal policy, it would have chosen to do so by inserting what is, at most, no more than an ambiguous proviso in a clause dealing with an allowance for replacements. Applying the test laid down by Lord Salvesen, it appears to me that there is everything to be said for the more restricted, and nothing to be said for the more extended, meaning sought to be given to the proviso. Is there, however, any real or serious ambiguity in the language used by the Legislature ? Too much weight cannot be attached to the words shall be deemed to be profits of the previous year , nor can the proviso, in which these words appear, be more or less completely divorced from its context. The words any suc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Co. which showed that that company or some officer of that company had valued these stores at ₹ 88,000. Neither the Income-tax Officer nor the Appellate Tribunal has, in dealing with this matter, referred to the memorandum of agreement. Paragraphs 15 and 16 of the agreement made it quite clear that, so far as any stores ordered or received by the assessees after the 9th August, 1943, were concerned, Messrs. Dalmia Jain Co. were to pay nothing more than the cost price and, in consequence, on these stores at least the assessees made no profit at all. It is not very clear whether the stores with which we are now concerned are stores which did not at all come within the purview of paragraphs 15 and 16 of the memorandum but stores which came wholly within the purview of clause (c) of paragraph 19. That paragraph, as I have already said, contained a statement by the purchasers as to how they proposed to allocate the total consideration money of ₹ 28,00,000 between certain specific items. It is quite clear that this statement was made in order to enable the vendees to claim certain allowances, and, in particular, allowances for depreciation when they came to be assessed to i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... it is not open to us to travel beyond the points which have been referred to us by the Tribunal and to take into consideration some of the other points raised by the assessee. The facts leading to this reference may be stated as follows: The assessee is The Pursa Limited , a joint stock company which carried on business in growing, manufacturing and selling sugar. The assessee company is incorporated in India under the Indian Companies Act but the shareholders and directors reside in the United Kingdom and the meetings are held there directing the affairs and management of the company. It went into voluntary liquidation on the 20th of June, 1945, and it is at present represented by the liquidators who are the applicants before this Court. The year of assessment is 1945-46 and the accounting year runs between the 1st of October, 1943, and the 30th of September, 1944. The assessee sold its sugar factory and zirat lands appertaining thereto to Messrs. Dalmia Jain and Company for a sum of rupees twenty eight lakhs during the year of accounting. The sale took place by virtue of a memorandum of agreement dated the 7th of December, 1943. It is admitted that the factory did no crushin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y the vendor to such cane growers, as also in respect of stores and other articles ordered by the vendor for the purposes of the factory and received since the 9th of August, 1943. The assessee in effecting the sale of the buildings, plants and machineries etc. as also the stores as stated above made certain profits which form the subject-matter of the questions under reference. After the sale of the plants and machineries the assessee disposed of its stock of sugar not sold to the vendee and then it went into liquidation. Evidently in submitting its return the assessee claimed certain .deductions in respect of the business carried on by the company during the year of accounting. The Income-tax Officer thought that the deductions claimed were not admissible and wrote to the company on the 21st of February, 1947, to show cause why the activities of the company during the accounting year should not be taken as tantamount to realisation of assets on liquidation and not to carry on of any business. The liquidators in their reply dated the 19th of March, 1947, refused to accept the position that the activities of the company during the accounting year were merely confined to reali ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... perty sold. He nevertheless proceeded to assess the profits as he says on expert advice. This assessment was affirmed on appeal by the Appellate Assistant Commissioner of Income-tax under his order dated the 31st of January, 1948. The actual hearing of the case, it appears, took place on the 20th of August, 1947, and Mr. S. Mitra on behalf of the assessee complains that, in view of the delay in delivering judgment, the Appellate Assistant Commissioner did not give full weight to the arguments placed before him. The Assistant Commissioner also concedes that in the year under assessment there was no manufacture of sugar by the company because of the negotiations which started from August, 1943, and culminated in the memorandum of agreement in December, 1943, and that there was only sale of sugar during the period in question. He, however, also agreed with the Income-tax Officer in his view that the sale of sugar by the company amounted to carrying on business, and that as the plant and machinery were sold during the continuance of the business, the business not having been closed at any stage, it must be assumed that Section 10(2)(vii) applied to the case, and, as such, the profits m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... owever, not entertained by the Tribunal. The Tribunal found that the sale of sugar continued up to June, 1944, and the appellant company spent substantial amount of money in the way of establishment and general charges even subsequent to the sale of the machinery. These activities of the assessee amounted to carrying on the company's business as contemplated by Section 10(1) of the Act. In addition to the above, the Tribunal observed as follows: Besides the question of the company's activities subsequent to the sale on 7th December, 1943, it was admitted by the learned Counsel for the appellant that up to the date of the sale the company's business went on normally. It was at no stage claimed before us that there was discontinuance of the business previous to the sale itself. The only contention raised before us was that as the sale en-bloc brought about cessation of the company's business it must be held that the sale itself was not in the course of carrying on of the company's business. We are afraid, we cannot subscribe to this view of the learned Counsel. There was no break between the company's carrying on business and the sale of the assets. The sale ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the business of the company; in other words, if the business of the company continued up to the date of the sale or even after the date of the sale during the accounting year, then it is not disputed that the profits would be chargeable to tax under the second proviso to Section 10(2)(vii) of the Income-tax Act. On this point the finding of the Tribunal appears to be quite specific, and it is not easy for me to comprehend how on that finding the Tribunal could make a reference under Section 66(1) of the Act to this Court. On the finding as it stands the question is purely a question of fact, and if there is any evidence to support the finding of the Tribunal on the point, it is impossible for us to interfere with such a finding on this reference. Mr. S. Mitra, the learned Counsel for the applicants, who has presented the case on their behalf with remarkable learning and lucidity, has urged that the finding in question has not the sanctity of a finding of fact at all; and indeed, he points out that the members of the Tribunal themselves do not attach that sanctity to it. He argues that the question whether trade or business was being carried on during the accounting year is a mix ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... udes any trade, commerce, or manufacture or any adventure or concern in the nature of trade, commerce or manufacture . Therefore, profits and gains out of any trade, commerce or manufacture or any such adventure or concern are liable to be assessed as income. Now, Section 10 of the Act is the section which deals specifically with income arising from business which is chargeable to income-tax. Under sub-section (1) of the section it is provided that the tax shall be payable by an assessee under the head Profits and gains of business, profession or vocation in respect of the profits or gains of any business, profession or vocation carried on by him. Sub-section (2) of the section provides for certain deductions which are admissible in respect of the profits or gains of such a business and some of the clauses show that the assessee is entitled to claim a deduction in respect of the buildings, machinery, plant etc. used for the purposes of the business. Clause (iv), for instance, provides for deduction on account of the insurance premium paid for insuring buildings, plant, machinery etc. against risk of damage or destruction. In clause (v) deduction is permissible in respect of curre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mpany on the 8th of October, 1943, but the memorandum of sale was actually executed and the purchase money paid on the 7th of December, 1943, and the concern was turned over to the purchaser, Dalmia Jain Co., on the 10th of December, 1943. Prior to that, there is absolutely nothing to indicate that the company had stopped its business. We have been persuaded by the learned Counsel for the applicant to peruse the correspondence, the affidavits and the letter of Commander Dixon, and I do not find anything anywhere to indicate that the company actually had stopped its business. There is no resolution of the Board of Directors or of the general body of shareholders directing cessation of business. These materials, on the contrary, show that although the intention was to dispose of the entire concern, yet the shareholders or directors never wanted that the business of the company should stop until, at any rate, the sale was effected. In fact, it is admitted by Commander Dixon himself that the trading and manufacturing had to be carried on until such time as any sale was completed. The directors realised that they had various difficulties in bringing to fruition the sale of the entire ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Income-tax Officer did not consider that the deductions were admissible, they in their letter dated the 19th of March, 1947, asserted that the company was carrying on business during the year ending 30th September, 1944. This assertion of theirs, they said, was further supported by the fact that there were various debits contained in the sugar factory accounts showing expenses incurred in carrying on the company's business. The learned Counsel for the assessee very strongly urged that this statement of the liquidators was based on a misapprehension of the legal position. I have shown this was not actually so. It was an admission on a point of a fact and an admission which is also borne out by the materials placed before us. The learned Counsel also suggested that the admission, if at all, referred to the state of affairs up to the 9th of August, 1943, only which was very much prior to the accounting period. He lays emphasis upon a term of the memorandum of agreement where it is provided that the buildings, plants, machineries etc. were to be sold as on the 9th day of August, 1943. Now it is quite obvious that this term only means that they were to be sold as they existed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ontinuance of the business previous to the sale itself, and in fact there was no break between the company's carrying on business and the sale of the assets. The other phase of the question relates to the sale of the stock of sugar and grains. It is to be noticed that this stock of sugar was not intended to be sold along with the plants and machineries. In explaining the position to Messrs. Lovelock Lewes, Commander Dixon says that the sugar stocks and grains were purposely excluded as it could not be known at what date such a sale would be concluded and the quantity of both these items and also their market prices were bound to fluctuate from day to day. Robert Adam Brown's affidavit is to the same effect and so is the recital in the memorandum of agreement. Adam Brown says that in the regotiation for the sale of assets the sugar stocks and grains were purposely excluded, inasmuch as they could not foresee when the sale of the assets would be actually concluded, and the market price of sugar as also the quantity of sugar and grains varied from day to day. Evidently the factory was, therefore, not anxious to dispose of the stock of sugar at any cost, but to sell it at ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ly entered into by the selling agents and the sugar stocks were not sold all at once as it was considered more profitable to sell them gradually in normal course of business. They found that the sale of sugar in fact continued up to June, 1944. Some of the observations of the Tribunal have been very severely criticised before us; for instance, where they said that the company spent substantial amount of money in the way of establishment and general charges subsequent to the sale of machinery. It may be that if we had to go into facts ourselves, we might possibly, on a review of the evidence, have come to a different conclusion on the point, but that does not mean that there is no basis for the finding of the Tribunal, and that we would be entitled to interfere with that finding on such an assumption. This Court is not a Court of facts, and even if a different view were permissible on facts, this Court would not be entitled to reverse the finding of the Tribunal if there is a basis for that finding of fact. In my opinion, the matters which I have discussed above show that there was ample basis for the finding arrived at by the Tribunal, namely, that the business of the company conti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e is no evidence or which is in consistent with the evidence and contradictory of it . I have shown above that there is no such error in the present case which would justify our interference with the finding of the Tribunal. At one stage I felt that there was much strength in the criticism of the learned Counsel that the contents of the various documents have not been specifically discussed by the Tribunal, and we, therefore, allowed ourselves to be taken through those documents. This we did because the learned Counsel for the Taxing Department also raised no objection to it. There is no doubt that if material documents which would have influenced the decision of the Tribunal were ignored from consideration, in so far as they had a bearing upon the points involved, it would be open to this Court to set aside the finding of the Tribunal and remit the case to them for a reconsideration of those materials and then to submit a case afresh. But having examined the materials ourselves, I find nothing to support the argument that the company had ceased its business during the accounting period. Therefore, no useful purpose will be served in remitting the case to the Tribunal. I must no ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... had stopped long before the accounting period. In the present case there is no such thing. In fact the liquidation actually took place in 1948 long after the accounting year. The decision, to my mind, is against the contention of the learned Counsel because in disposing of the case Moore, L.C.J., observed: In my opinion the question remained a pure question of fact. Was the company trading or was it not ? The Recorder has found as a fact that these were not ordinary trading sales, and, that therefore, the profits were not profits of trade. On the evidence we cannot override the decision of the learned Recorder, nor decide that he was bound to find the company liable . Brown, J., Concurred in that decision and he also observed: The question whether or not the liquidator was carrying on a trade or business was a question of fact . Therefore, when the Tribunal in the present case has come to a definite finding that the assessee was carrying on business, it is impossible for us to override that finding which related to a pure question of fact. The next case 13 a decision in Commissioners of Inland Revenue v. Nelson [1939] 22 Tax Cas. 716. In this case the assessee was a whisky-br ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d. In that case there were ample materials to show that the sale had taken place after the assessee had wound up and retired from his business. Mr. S.N. Dutt on behalf of the Department has very rightly pointed out that in none of the cases cited by Mr. S. Mitra for the assessee the High Court interfered with the findings of fact arrived at by the Income-tax Tribunal in holding whether trading was or was not being carried on by the assessee in each case. The only exception was the case in Lalit Ram Mangilal ( supra) where the facts found did not amount to trading at all. He has also drawn our attention to a decision in Hillerns and Fowler v. Murray [1932] 17 Tax Cas. 77. The, facts of the case show that there was a partnership agreement for a limited period and after the expiry of the period the partnership stood dissolved by lapse of time. The assessment in the case related to business carried on by the partnership after its dissolution. The partnership had trading stock and received further stocks on account of the previous contracts and supplied the stocks to customers. It was held by the revenue authorities that the business was being carried on, and the High Court of justic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... udes the assessee from re-opening the matter that there was no evidence on which the Tribunal could hold that the profits on the said item amounted to the above sum. The proper remedy of the assessee in such a case was to apply to this Court under Section 66(2) of the Act for calling for a reference on the point within the period of limitation allowed by law. This was not done by the assessee, and, therefore, on the question referred to us we cannot now say that the profit of ₹ 13,882 as assumed by the Tribunal was without any basis. This contention also, therefore, fails. The result is that the answer to both the questions under reference is in the affirmative, and the decision of the Tribunal is upheld. The reference may be answered accordingly. After this judgment had been prepared, my learned brother Shearer, J., in course of consideration of the matter discovered certain aspects of the case which had not been specifically pressed into our consideration at the Bar. Those aspects had an important bearing upon the interpretation of Section 10(2)(vii) of the Income-tax Act, 1922. Shortly put, they may be stated as follows:-(1) whether the second proviso to clause (vii) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a price below the written down value. There was, however, a significant omission. It did not take into account the possible cases of profits earned by an assessee on such sales which were for a price in excess of the written down value and in certain cases even in excess of the original cost. The result was that the assessee had only advantages. He had the advantage of the depreciation allowance already given to him on account of the wear and tear of the machinery used in course of business. He had also the advantage of the profits on sales where it exceeded the written down value. To add to these in case of sales for a lower price than the depreciated value the advantage of a further allowance on account of the difference was also secured to him. When the provision was amended in 1939 (this being the provision with which we are concerned in this case), it provided for an allowance in respect of any machinery or plant which had been sold or discarded not merely on account of its becoming obsolete but also on account of any other factor. In all such cases an allowance had to be made to the assessee in respect of the amount by which the written down value of the machinery or plant ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is anomaly was subsequently rectified by an amendment in 1947 wherein it was specifically provided that the difference between the written down value and the actual sale of the property which was to be treated as income should not in any case exceed the difference between the original cost and the written down value. In other words, only ₹ 25,000 in the illustration in question after the amendment of 1947 would be treated as income within the meaning of the provision, whereas the remaining ₹ 10,000 would be regarded as capital gain. The introduction of Section 12B by the amendment of 1947 which section deals with capital gains strengthens the same conclusion. It appears, therefore, that the intention of the amendment of 1939 to Section 10(2)(vii) of the Act quite clearly was to make equitable adjustments on account of depreciation allowances for plants and machineries used in business. This depreciation allowance, after nil, had to be on a notional basis; if the depreciation allowed did not cover the loss incurred on actual sale of the property or its scrap value, then a further proportionate allowance had to be made to the assessee; if, on the contrary, the assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er the sale, and therefore the profits earned on account of the saie of these plants will have to be taxed as income within the meaning of the second proviso to clause (vii) of Section 10(2) of the Act. I do not see how any different principle can arise on the plain wording of the section. The other point that the machinery or plant was admittedly not in use fore manufacturing purposes during the year of accounting and therefore any profits gained on account of the sale thereof could not be deemed to be profits of the business did at first create a great deal of impression on my mind. This argument was evidently based on the analogy of clause (vi) of Section 10(2) of the Act wherein an allowance for depreciation of the machinery in use is permissible. If was suggested that if during the period of accounting the machinery in question had not been used, then the assessee would not be entitled to any allowance on account of depreciation of such machinery or plant as provided by clause (vi) of Section 10(2) of the Act. For this purpose reliance was placed upon a decision in Central provinces Manganese Ore Co. Ltd. v. Commissioner of Income-tax, C.P. U.P. [1937] 5 ITR 734 . That wa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iable to assessment in case the sale was for a price lower or higher than the written down value. Therefore, although the plant or machinery sold was not during the year of accounting actually used for manufacturing sugar, yet this factor would be no bar to the application of clause (vii) of the Act provided the business otherwise continued. If the assessee had claimed a depreciation in respect of the plant or machinery during the year of accounting, such an allowance might possibly have been refused to him on that account. Therefore, in my opinion, the decision in Central Provinces Manganese Ore Co. Ltd. v. Commissioner of Income-tax, C.P. and U.P. [1937] 5 ITR 734 , has no application to the point which we are at present investigating with reference to the interpretation of clause (vii) of the section. It does not appear to me that the interpretation which I am giving will work any hardship on the assessee. By virtue of clause (vii) he gets the benefit of any loss which he incurs in case of sale below the written down value, and the Department has to make an allowance for it in his favour. There is no reason why if he makes a profit over the written down value, he should not b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ment 1945-46 but was based on the accounting period from 1st October, 1943, to 30th September, 1944. The assessee is Pursa Limited , a joint stock company which carried on business in growing, manufacturing and selling sugar. The assessee company was incorporated under the Indian Companies Act but the shareholders and directors resided in the United Kingdom and directed the affairs of the company therefrom. The company went into voluntary liquidation on 20th June, 1945, and is at present represented by liquidators in this Court. In June, 1943, the directors had commenced to negotiate for the sale of the factory and other assets with the ultimate object of winding up the business. On 7th December, 1943, an agreement for sale was concluded between the assessee on the one hand and Messrs. Dalmia Jain Co. on the other. The memorandum of agreement provided that the vendor was to sell and demise to the purchaser for a total price of ₹ 28 lakhs all the lands, buildings and machinery and plant. But the stock of manufactured sugar and of grain lying in the godown was expressly excluded and remained the property of the company. It was stipulated that the possession of the assets cov ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hs and odd on account of the proceeds of the sale of plant and machinery and ₹ 15,882 on account of the proceeds of the sale of stores. The assessment was affirmed in appeal by the Appellate Assistant Commissioner of Income-tax by his order dated 31st January, 1948. The appellate Assistant Commissioner held that in the year of account there was no manufacture of sugar by the company and there was only sale of sugar. But he agreed with the Income-tax Officer that the sale of sugar by the company amounted to carrying on business, that the plant and machinery were sold during the continuance of the business and the profits made by the company were liable, to assessment under Section 10(2)(vii). Before the Appellate Tribunal the assessee did not dispute the correctness of the figure as to the amount of profits in respect of the sale of machinery and building. But his argument was that Section 10(2)(vii) of the Act had no application to the case since the sale had been effected in the process of winding up the company and realising its assets. The Appellate Tribunal however rejected the contention of the assessee holding that the sale of sugar continued up to June, 1944, and the a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ounted to ₹ 15,882. In view of the difference of opinion this case has been placed before me for decision under Section 98(2) of the Civil Procedure Code read with Section 66A of the Indian Income-tax Act. The learned Judges have formulated the following points of law on which they have differed: (1) When, in the process of closing down a manufacturing business, the entire aggregate of plant and machinery is sold, is the difference between the price obtained at the sale and the written down value of the plant and machinery to be deemed to be profits of the business and assessable to income-tax under the proviso to Section 10(2)(vii) of the Indian Income-tax Act ? Does it make any difference that the business of selling goods manufactured in the previous accounting year has continued ? and (2) when, in such a case, stores used in the business are sold, is the difference between the price paid by the vendee and the value which the vendee puts on the stores in his books of account a profit ? If so, is it deemed to be a profit of the business and liable to income-tax under the aforesaid provision? . It is desirable at the outset to call attention to the scheme and struc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e meaning and effect of the second proviso to clause (vii) of Section 10(2) of the Act. Before the amendment of 1939, Section 10(2)(vii) only made an allowance admissible in respect of any machinery or plant which in consequence of its having become obsolete had been sold or discarded , the allowance being the amount by which the written down value of the plant or machinery exceeds the amount for which the machinery or plant is actually sold or its scrap value . To cite an example, if the original cost of the machinery was ₹ 10,000, depreciation allowed up till the year of sale was ₹ 3,000, written down value was ₹ 7,000 and the plant was sold for ₹ 6,000, the balancing allowance would be ₹ 1,000. But it was incumbent on the assessee to show that the machinery or plant had become obsolete, before he could be granted the allowance. It was not however made a condition as it was in the corresponding English statute of an allowance being granted that the obsolete plant or machinery should have been actually replaced by a modern and up-to-date type. When the clause was amended in 1939 it ceased to be a condition that the machinery or plant should have ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... allowance granted till the time of sale but the excess of the sale proceeds over cost price of the plant was treated as capital profit free of tax. On behalf of the assessee, it was contended by Mr. Mitra that Section 10(2)(vii) will operate, and the excess sale proceeds will be taxable only if the machinery or plant sold has been replaced and the business of manufacture continued in .the .year of account. It was argued in effect that Section 10(2)(vii) will not be applicable if the machinery was sold in the process of closing down a manufacturing business. I see no reason why the section should be construed in this restricted manner. There is no express condition (as in the corresponding English statute) that the allowance could be claimed only if the assessee replaced or intended to replace the machinery or plant which had been sold. It was also contended for the assessee that clause (vii) will not operate in a case where the entire aggregate of plant or machinery is sold. In my opinion this argument too is not valid. As a matter of construction. the words of the clause any machinery or plant are obviously applicable to any number of items of machinery or plant. It is clear tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ds the company would carry on a business in legal sence. For it is no paradox to say that there can be trading or carrying on of business during the course of winding up of affairs of a business. A trader for instance who fishes to retire from business may wind up his business in several ways. He may cell his concern as a going concern or he may auction off his stock. But he may also without resorting to a forced sale involving him in a sacrifice, wind up by continuing to carry his business in the ordinary way, without however replenishing his stock. He would ultimately leave himself with no stock and then retire. In these circumstances the realisation of stock would effectuate both his purposes and consequently there would be trading. For example in J. R.O' Kane Co. v. Commissioners of Inland Revenue [1922] 12 Tax Cas. 303, the appellants, who carried on business as wine and spirit merchants, issued a circular letter early in 1916, announcing their decision to retire from business, and shortly afterwards they issued to their regular customers lists of spirits for sale. The lists were headed Retiring from business and contained certain conditions of sale which required that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bought before that date. The stock thus held and acquired was delivered to customers in fulfillment of contracts made before, but due for fulfillment after 31st March, 1926. No new contracts of purchase or sale were made after 31st March, 1926. An assessment to income-tax was made upon the firm for the year 1926-27 in respect of profits realised through the fulfillment of contracts in that year. On appeal it was held by the King's Bench Division that there was evidence upon which it could be found that the appellants were trading after the date of dissolution of partnership. At page 91 Romer, L.J., states:- Where there is stock-in-trade which can only be sold at a sacrifice by what is called a forced sale-some immediate sale by auction-it may be necessary, in order to dispose of that stock-in-trade to the best advantage, to carry on the business so that the stock-in-trade can be sold in the usual course of trade. That seems to me to have been the case in Ireland which came before the House of Lords in O'Kane's case (supra). Or it may be, and in my opinion this is what happened in the present case, the partnership may be possessed of outstanding contracts of a bene ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , and the assessee company undertook that they would not themselves or through any other agent sell any sugar manufactured in the factory, though by clause 16 of the agreement the assessee company did retain the right to effect direct sales up to 5,000 maunds per season. The Appellate Tribunal has found that the stock of sugar was valued at ₹ 6 lakhs but it was sold for ₹ 7 lakhs. It is an admitted fact that the company spent a sum of ₹ 50,000 on account of establishment and general charges even after the machinery and plant had been sold. It appears that the proposal to sell the plant and machinery was agreed to on 8th October, 1943, in a general meeting of the shareholders of the company. But the contract of sale was actually executed and the purchase money paid on 7th December, 1943, and possession was given to the purchaser Dalmia Jain Co. on 10th December, 1943. It is true that there was no crushing of sugar cane on the part of the assessee during the accounting period but the crushing season, it is conceded, did not start until the month of December. On behalf of the assessee Mr. S. Mitra contended that the Tribunal had failed to consider copies of certai ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ary, these documents support the finding of the Appellate Tribunal that during the accounting period the company carried on business even after they had sold the machinery and plant to Dalmia Jain Co. For the reasons assigned I agree with my brother Sarjoo Prosad, J., and hold that upon the facts of this case the surplus of ₹ 13,05,144 arising out of the sale of the plant and machinery of the sugar factory is chargeable under Section 10(2)(vii), proviso 2, of the Indian Income-tax Act. I would answer the first question of law formulated by the Division Bench in the above manner, I regret that on this question I have reached a conclusion different from that of my brother Shearer, J., for whose opinion I have great respect. As regards the second question the finding of the Appellate Tribunal is, in my opinion, erroneous, for there is no material upon which the Tribunal could hold that the profit of ₹ 15,882 was made on the sale of the factory stores. From the statement of the case it appears that the sum of ₹ 15,882 represented the difference between ₹ 88,000 which the Income-tax Officer described as sale proceeds on the basis of expert valuation and ..... 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