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TMI Blog1954 (2) TMI 1X X X X Extracts X X X X X X X X Extracts X X X X ..... ed on a reference made by the Income-tax Appellate Tribunal under Section 66(1) of the Indian Income-tax Act. The Tribunal referred the following two questions for the opinion of the High Court : 1. On the facts and in the circumstances of this case is the surplus of Rs. 13,05,144 arising out of the sale of the plant and machinery of the sugar factory chargeable under Section 10(2)(vii) ? 2. Was the profit of Rs. 15,882 on the sale of stores of the factory taxable under the Income-tax Act in the circumstances of this case. The reference came up for hearing before a Division Bench consisting of Shearer and Sarjoo Prasad, JJ., and after a prolonged hearing the learned Judges delivered separate judgments on the 27th February, 1951, giving divergent answers to the questions, Shearer, J., answering both the questions in the negative and Sarjoo Prasad, J., giving an affirmative answer to both of them. The matter thereupon was placed before a third Judge, Ramaswami, J., who, after a fresh hearing delivered his judgment on the 16th May, 1951, agreeing with Sarjoo Prasad, J., on the first question and with Shearer, J., on the second question. The result was that the High Court b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... had started. At that meeting the firm offer of Dalmia Jain and Company Ltd. was accepted and a concluded agreement for sale came into existence. Thereafter instructions were given to the solicitors to draw up the necessary documents. On the 7th December, 1943, a written memorandum of agreement was executed whereby the company agreed to sell and demise to Dalmia Jain and Company Ltd. free from all mortgages and charges at and for the price of Rupees twenty-eight lacs all the lands, buildings, machinery and plant and all vats, reservoirs, cisterns, pumps, machinery, engines, boilers, plant, implements, utensils, tramways, furniture, stores, articles and things as on the ninth day of August one thousand nine hundred and forty-three (subject to subsequent use and consumption in the ordinary course of business) used in connection with the said sugar factory, but excepting stocks of manufactured sugar and stocks of grain in godown on the ninth day of August one thousand nine hundred and forty-three and all stores and other articles bought or received by the company after that date. Dalmia Jain and Company Ltd. paid the sum of Rupees twenty eight lacs on the same day and on the 10th D ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he company's business. By his letter dated the 17th May, 1947, the Income-tax Officer claimed that large profits which had been made by the company on the sale of their machinery and plant were taxable under the second proviso to Section 10(2)(vii) of the Income-tax Act and called upon the liquidators to retain sufficient funds and assets in their hands to meet the heavy tax liabilities that might eventually arise and also to warn the shareholders accordingly. He also asked for certain information which, however, the liquidators did not furnish. The liquidators, in their letter in reply dated the 22nd May, 1947, did not agree that the profits were taxable, for the profits to which reference had been made were not profits arising from a business carried on by the company but were profits arising from the company ceasing to carry on business. The Income-tax Officer, however, by his order dated the 21st June, 1947, held that the profits on the sale of machinery and plant were liable to assessment under Section 10(2)(vii) of the Act and added a sum of Rs. 13,05,14 to the profits. The Appellate Assistant Commissioner of Income-tax having dismissed the liquidators' appeal on the 30th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ace : .................................................................................................... ...................................................................................................." It is necessary to bear in mind the meaning and import of the provisions of Section 10(2)(vii) in so far as they apply to the present case. Under Section 10 tax is payable by an assessee "in respect of the profits or gains of any business, profession or vocation carried on by him". "Business" is defined by Section 2, sub-section (4), as "including any trade, commerce or manufacture, or any adventure or concern in the nature of trade, commerce or manufacture." As pointed out by the Judicial Committee in Shaw Wallace Co.'s case the fundamental idea underlying each of these words is the continuous exercise of an activity and the same central idea is implicit in the words "carried on by him" occurring in Section 10(1) and those critical words are an essential constituent of that which is to produce the taxable income. Therefore, it is clear that the tax is payable only in respect of the profits or gains of the business which is carried on by the assessee. Sub-section ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tted by the applicant company the company had been carrying on its business up to the date of the sale of the machinery, namely, 7th December, 1943. The Tribunal was of the opinion that as the applicant company had not ceased to carry on its business till the date of the sale of the machinery, it must be held that the sale of the machinery was a part of the applicant company's carrying on of the business. The second reason for the decision of the Tribunal was that the applicant company did not sell its sugar stocks amounting to over Rs. 6,00,000 on 7th December, 1943. The applicant company's plea that the sugar stocks could not be sold as the applicant company had sole agents for the sale of sugar, was not accepted by the Tribunal. The Income-tax Appellate Tribunal found that sugar continued to be sold for more than 6 months after the sale of the machinery and substantial expenses on establishment and general charges continued to be incurred. From this the Income-tax Appellate Tribunal concluded that the sugar stocks had not been sold on 7th December, 1943, purposely in order to sell these to the best advantage later on. This, the Income-tax Appellate Tribunal held, showed that the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sugar during the whole of the accounting year. Therefore, this finding that the company carried on its business up to the 7th December, 1943, certainly does not indicate that the company was also carrying on any business of growing sugarcane or manufacturing sugar by the use of the machinery or plant in question. The second finding that the company carried on business even after the sale of the machinery and the plant clearly indicates that that business had nothing to do with the machinery or plant. Both the findings, therefore, are inconclusive. The matter, however, does not rest there. It appears to us that the findings of fact, taken literally, cannot support the decision of the Tribunal. If, as held by the Tribunal, "the sale of the machinery was a part of the applicant company's carrying on of the business" then the sale must be regarded as an ordinary operation of such business and consequently the profits arising out of such ordinary business operation would be assessable under the provisions of Section 10(1) and it would not be necessary to have recourse to the statutory fiction created by the second proviso to clause (vii) under which the excess of the sale proceeds over ..... X X X X Extracts X X X X X X X X Extracts X X X X
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