Commissioner of Income-Tax, Madras Vs.
Ajax Products Ltd. Through Its Liquidator  INSC 224 (8 October 1964)
08/10/1964 SUBBARAO, K.
CITATION: 1965 AIR 1358 1965 SCR (1) 700
RF 1966 SC 870 (8) RF 1967 SC 193 (18) R 1968
SC 623 (29) RF 1969 SC 812 (9) RF 1969 SC 869 (6) R 1971 SC 57 (7) R 1973
SC1016 (13) RF 1975 SC 67 (7) F 1976 SC 313 (27)
Indian Income Tax Act, 1922, s. 10(2) (vii),
2nd proviso and section 66-No business activity in year of sale of assetsExcess
of sale-price over written down values whether can be treated as profits under
proviso-Appellate Tribunal making its own estimate of sale-value of
buildings-No material for finding--Jurisdiction of High Court to interfere in
The respondent company went into voluntary
liquidation in October 1954. The company had the calendar year as its
accounting year and the business of the company was finally closed before the
end of the calendar year 1954. The liquidator sold the company's assets
including buildings, plant and the machinery in March 1955 at a price higher
than the written down value. The Income-tax Officer taxed the surplus in the
assessment year 1956-57invoking the proviso to s. 10(2)(vii) of the Indian Income-tax
Act. His order in this respect was upheld by the Appellate Assistant
Commissioners well as by the Appellate Tribunal. However the High ,Court held
that since there was no business in the accounting year 1955, the proviso was
not attracted. It further held that the estimate of the sale value of the
buildings made by the Tribunal could not stand as it was based only on
surmises. The Commissioner of Income-tax appealed to the Supreme Court.
HELD : (i) The High Court rightly interfered
with the Tribunal's estimate of the sale-value of the buildings because the
Tribunal's finding was not based on any material. [704 D] (ii)The legal fiction
in the second proviso to s. 10(2) (vii) is a limited fiction for a specific
purpose. What are not regarded as profits in commercial practice are under the
proviso treated as profits of the previous year. This fiction adequately serves
the purpose of the section. The fiction must not be stretched beyond the
purpose for which it was enacted. [710 F-G] Additional Income Tax Officer,
Circle I Salem v. E. Alfred,  Supp. 1 S.C.R. 143 and C.I.T. Bombay City
v. Amarchand N. Shroff  Supp. 1 S.C.R. 699, referred to.
(iii)If the words of a statute are precise
and unambiguous they must be taken as declaring the express intention of the
legislature. By giving the natural meaning to every expression used in the
proviso in question, the proviso serves the purpose intended by the
legislature. To sustain the argument of the Revenue many words have to be read
in it which are not there. [706 F; 710 G] Cape Brandy Syndicate v. I.R.L.
 1 K.B. 64, referred to.
(iv)The expression 'previous year' does not
have a different meaning in the proviso from what it bears under the definition
in s. 2 (11) (b).
[711 C-D] Dandhania Kedia & Co. v. C.I.T.
 Supp. 1 S.C.R. 204 and Commissioner of Income-tax v. K. Srinivasan and
K. Gopalan,  S.C.R. 486, referred to.
(v) Even if a proviso is construed as a
substantive clause it must be construed harmoniously with the main enactment.
[709 B-C] 701 Commissioner of Income-tax,
Mysore, Travancore-Cochin and Coorg v. Indo Mercantile Bank Ltd.  Supp. 2
256, referred to.
(vi)Before the amendment of 1949 the proviso
in question was interpreted by this Court as laying down three conditions for
its applicability, namely, that business should have been carried on by the
assessee for the whole or at least a part of the previous year, that the
machinery etc. should have been used in the business and that the machinery
should have been sold while the business was being carried on and not for the
purpose of closing it down or winding it up.
The amendment removed only the last condition
for the eligibility of the tax. [706 B; 711 F-G] The Liquidators of Pursa Ltd.
v. Commissioner of Income-tax, Bihar  S.C.R. 767 and Commissioner of
Income-tax, Madras v. Express Newspapers Ltd.  53 I.T.R. 250, relied on.
The expressed intention of the legislature is
that the surplus mentioned in the proviso is not exigible to tax unless the
assessee did business during the accounting year and unless such buildings or
machinery were used for the purpose of the business in the said year or at any
rate a part of the year, though they were sold after the cessation of the
business. If the argument of the Revenue were accepted there would be no time
limit for the assessment of the surplus. [708 A-B; 711 E] In the present case
the sale took place in the accounting year 1955 during no part of which
business was carried on by the assessee. The proviso was therefore not
applicable to the surplus realised on sale.
CIVIL APPELLATE JURISDICTION : Civil Appeal
No. 1098 of 1963.
Appeal by special leave from the judgment
dated December 7, 1960, of the Madras High Court in T.C. No. 74 of 1959.
C. K. Daphtary, Attorney-General, S. C.
Gupte, SolicitorGeneral, K. N. Rajagopala Sastri, R. H. Dhebar and R. N.
Sachthey, for the appellant.
R. Venkataram and R. Gopalakrishnan, for the
R. Gopalakrishnan, for the intervener.
The Judgment of the Court was delivered by
Subba Rao J. This appeal by special leave is directed against the judgment of
the High Court of Judicature at Madras in Tax Case No. 74 of 1959.
The facts may briefly be stated. The
The Ajax Products Ltd.-now under liquidation
was a public limited company incorporated in 1939 to carry on business in the
manufacture and sale of steel and abrasives products.
On October 30, 1954, the company, at an
extraordinary general body meeting, made a resolution to go into voluntary
liquidation and the Liquidator appointed by the said resolution carried on the
business till the middle of December 1954 when the business 702 was completely
closed down. On March 10, 1955, the Liquidator executed a sale deed to
Garborundum Universal Limited transferring to the latter the plant, machinery
and buildings for a sum of Rs. 10,00,000. The said amount was made up of : (1)
Rs. 1,00,000 being the value of the land, (2) Rs. 1,31,732 being the value of
the buildings and (3) Rs. 7,68,268 being the value of plant and machinery. The
books of the assessee-company showed that the original cost of the buildings
was Rs. 3,46,034. that its written down value was Rs. 1,08,321, that the cost
of the machinery was Rs. 3,90,148 and its written down value Rs. 90,098. The
total amount of the depreciation allowed in the past for both the buildings and
machinery amounted to Rs. 5,36,034.
The sale resulted in the excess realisation
of Rs. 23,411 over the written down value of the buildings. In the case of the
machinery the sale price exceeded the difference between the cost and the
written down value and that excess was Rs. 3,00,050.
The relevant assessment year is 1956-57 and
the corresponding accounting year is the calendar year 1955. The Incometax Officer
held that the sale was the result of collusion between the vendor and the
vendee. He came to the conclusion that the assessee had realised the full
original cost of the buildings and machinery and on that basis, he treated the
sum of Rs. 5,36,034 which was allowed as depreciation in respect of buildings
and machinery in the previous years as profits within the meaning of the second
proviso to S. 10(2)(vii) of the Indian Income-tax Act, 1922.
On appeal, the Appellate Assistant
Commissioner held that the valuation fixed in the sale deed executed by the
assessee in favour of Carborandum Universal Limited was genuine and on that
basis, determined the profits liable to tax at a sum of Rs. 3,23,461. He
rejected the contention of the assesses that the second proviso to S. 10(2)
(vii) was not applicable to his case. Against the order of the Appellate
Assistant Commissioner, both the assessee and the Income-tax Officer preferred
appeal& to the Income-tax Tribunal. The Tribunal estimated the value of the
buildings at a sum of Rs. 2,32,963 which gave a profit on sale of Rs. 1,25,000
instead of Rs. 23,41,1 showed by the assessee. Agreeing with the Appellate
Assistant Commissioner, it accepted the figure of Rs. 3,00.050 shown by the
assessee as profit on the sale of plant and machinery. In the result, it held
that a sum of Rs. 4,25,050 was liable to tax under the second proviso to S. 10
(2) (vii). It also rejected the contention of the assessee that the said
proviso was not applicable to its 703 case. On the application filed by the
assessee, the Tribunal referred to the High Court the following two questions :
(1) Whether the assessee was properly
assessed on Rs. 4,25,050 as profits under the proviso s. 10(2) (vii) of the
Act; and (2) Whether there were materials for the Tribunal estimating the sale
value of the buildings at Rs. 2,32,963.
The Divisional Bench of the High Court held
that the estimate of the sale value of the buildings by the Tribunal was not
based upon any material and therefore could not stand. On that finding, it
substituted the figure of Rs.
3,23,461 for the figure of Rs. 4,25,050 in
question (1). It further held that as the said machinery and buildings were not
used for the purpose of the business of the assessee during any part of the
accounting year, the said profits were not liable to tax under the second
proviso to s. 10(2) (vii) of the Act. In the result, it answered the two
questions in favour of the assessee. Hence the present appeal has been filed.
Mr. Rajagopala Sastri learned counsel for the
Revenue raised before us two points; (1) that/the High Court had no
jurisdiction to set aside the finding of fact arrived at by the Tribunal to the
effect that the profit on sale of the buildings was Rs. 1,25,000; and (2) that
the second proviso to S. 10(2)(vii) after its amendment by Act 67 of 1949
brings to charge the said deemed profits irrespective of the fact whether the
buildings and the machinery were used for the business in the Previous year or
To appreciate the first contention, it would
be necessary to notice the reasons given by the Appellate Tribunal for
differing from the findings of the Appellate Assistant Commissioner and coming
to the conclusion which it did in respect of the sale price of the buildings.
The Appellate Assistant Commissioner accepted the valuation of the buildings
given by the Chartered Engineer. The Tribunal rejected that estimate on the
following grounds': (1) the valuation certificate of the buildings and
machinery must have been obtained by the vendee company in connection with its
flotation for the purpose of its prospectus or statement in lieu of Prospectus;
(2) some of the buildings found useless for the vendee's purpose had been left
out in the valuation. After rejecting the certificate on the said grounds it
assumed that the building cost had gone up steadily since 1939 and on that
basis it surmised that the value of the buildings in 1955 would be Rs.
704 it would at once be noticed that both the
reasons given and the conclusion arrived at by the Tribunal were based on
surmises. There is nothing on the record to disclose that the valuation
certificate was issued in connection with the flotation of the company; nor is
there any material to suggest that any particular building was omitted from the
estimate and that those omitted had any marketable value at all What is more,
the estimate of the value given by the Tribunal was a pure guess unrelated to
the material placed before it. The High Court in dealing with this matter
"There was however no basis for the
finding of the Tribunal, that the assessee should have made a profit of Rs.
1,25,000 by the sale of the buildings. The position was that the Tribunal did
not reject the genuineness of the valuation made by the experts and it had no material
either for the estimates it purported to make, the estimate either of the sale
value or of the profits realised by the sale of the buildings." As the
finding of the Tribunal was not based upon any evidence, the High court was
certainly entitled to go behind that finding and answer the question referred
to it in the negative.
The second question raised before us turns
upon the relevant provisions of the Income-tax Act. The relevant provisions
"10(1) The tax shall be payable by an
assessee under the head 'Profits and gains of,, business, profession or
vocation' in respect of the profit or gains of any business profession or
vocation carried on by him. (2) Such profits or gains shall be computed after
making the following allowances.
(vii)in respect of any such building,
machinery or plant which has been sold or discarded or demolished or destroyed,
the amount by which the written down value thereof exceeds the amount for which
the building, machinery or plant, as the case may be, is actually sold or its
Provided Provided further that where the
amount for which any such building, machinery or plant is sold, (whether during
the continuance of the business or after the cessation thereof,) exceeds the
written down value, so-much of the excess as does not exceed the difference
between the original cost and the written down value shall be 705 deemed to be
profits of the previous year in which the Sale took place It may be noticed
that in the second proviso, the words "whether during the continuance of
the business or after the cessation thereof" were introduced by Act 67 of
1949. The argument of Mr. Rajagopala Sastri may be summarised as follows : File
second proviso to S. 10(2) (vii) is a substantive charging section though
couched in the form of a proviso and under the said proviso as amended,
whenever a sale takes place after the cessation of the business, the surplus
must be deemed to be the profits of the year previous to the year in which the
sale took place; and for the purpose of the proviso, the business must also be
deemed to have been conducted by the assessee during the said previous year. By
fiction, the argument proceeded that all the necessary conditions to the
exigibility of tax are introduced though in fact none exists. For the assessee,
Mr. Venkatram contended that the amendment only released one of the conditions
of taxability, namely, that the sale shall not have been held after the
cessation of the business.
The respondent in Special Leave Petitions
(Civil) Nos. 916918 of 1964 have filed an application for intervention in this
appeal on the ground that the High Court has decided his case following the
judgment under appeal. We allowed him to intervene. Mr. Gopalakrishnan appeared
for the intervener and supported the arguments advanced on behalf of the
respondent in this appeal.
Before we advert to the arguments of the
learned counsel for ,the Revenue, it would be convenient to notice the scope of
the decisions of this Court dealing with the construction of the said proviso
before its amendment. The leading case on this subject is The Liquidators of
Pursa Limited v.
Commissioner of Income-tax, Bihar(1). There,
the question was whether the surplus made by the company on the sale of plant
and machinery could be brought into charge as profits under the second proviso
to s. 10 (2) (vii) of the Act before the said amendment. This Court held that
the said surplus was not taxable as the plant or machinery was not used in the
accounting year and also for the reason that the said assets were sold in the
process of gradual winding up of the company, i.e., after the cessation of the
The same question again fell to be considered
in a recent decision of this Court in Commissioner of Income-tax, Madras v.
Express Newspapers, Ltd. This Court after considering the earlier (1) 
S.C.R. 767. (2) (1964) 53 I.T.R. 250 706 decisions laid down at p. 255 the
following three conditions for the applicability of the second proviso :
"(1) During the entire previous year or
a part of it the business shall have been carried on by the assessee;
(2) the machinery shall have been used in the
business; and (3) the machinery shall have been sold when the business was
being carried on and not for the purpose of closing it down or winding it up;"
It is therefore clear that if the amendment was not there, the present case is
directly covered by the said two decisions as the plant and machinery were not
used during the accounting year and were sold only after the cessation of the
Would the amendment make any difference in
the application of the proviso? The rule of construction of a taxing statute
has been pithily stated by Rowlatt J. in Cape Brandy Syndicate v. I.R.C.(1)
"In a Taxing Act one has to look merely
at what is clearly said. There is no room for any intendment. There is no
equity about a tax. There is 'no presumption as to a tax.
Nothing is to be read in, nothing is to be
implied. One can only look fairly at the language used." To put it in
other words, the subject is not to be taxed unless the charging provision
clearly imposes the obligation. Equally important the rule of construction is
that if the words of a statute are precise and unambiguous, they must be
accepted as declaring the express intentions of the legislature. Giving a close
scrutiny to the second proviso, it will be clear that by giving the natural
meaning to every word used therein, it clearly fits in within the scheme of the
entire section. The key expressions in the proviso are : (1) such building, (2)
whether during the continuance of the business or after the cessation thereof
and (3) 'deemed to be the profits of the previous year'.
The words 'such building' have already been
given an authoritative interpretation by this Court in the aforesaid two decisions.
In the latter decision (Express Newspaper's case) at p. 254, it is observed
"The adjective "such" refers
back to clauses (iv), (V) (vi) and (vii) of S. 10 (2). Under clause (iv) an
allowance is allowed in regard to any premium paid in respect of insurance
against risk of damage or destruc(1)  1 K.B. 64 at p. 71.
707 tion of buildings, machinery, plant, etc.
used for the purpose of the business, profession or vocation. Under this clause
allowance is allowed only in respect of the machinery used for the purpose of
the business. Clauses (v), (vi) and (vii) refer to such buildings, machinery,
plant, etc. used for the purpose of the business. The result is that the second
proviso will only apply to the sale of such machinery which used for the
purpose of the business during the accounting year." The words
"whether during the continuance of the business after the cessation
thereof" were not present in the unamend proviso. In the two decisions
cited earlier, in the absence of words, this Court held that to attract the
said proviso the chinery shall have been sold before the business was closed .
This clause omits that condition for the exigibility of tax.
The third expression 'shall be deemed to be
profits of the previous year' in its ordinary connotation, carries a natural
meaning with it. Though the surplus contemplated by the proviso is not in the
technical sense of the term profits of the previous, year ,it is deemed to be
the profits of the previous year. It is a limited fiction for a specific
purpose. What are not profits in commercial practice are treated as profits for
the purpose of the provisio. This fiction was in existence even before the
amendment .The two decisions of this Court cited earlier laid down the scope of
the fiction. In the Express Newspaper's case('), it was held that having regard
10(l) of the Act, the main condition which
attracts all the other sub-sections and clauses of the section is at the tax
shall be payable by an assessee in respect of profit or gains of the business
carried on by him. If the business was carried on by him during the accounting
year, this court held that the said surplus, if the other conditions laid down
by the provisio were complied with, would be deemed to be the profits of the
previous year. One of the important expressions in the provisio is 'previous
year'. (Previous Year is defined in s. 2 (I I) (b) to mean in the case of any
person, business or company or class of person . business or company, such
period as may be determined by the Central Board of Revenue or by such
authority as the Board may authorise in this behalf.) In the present case, the.
previous year is the calender preceding the
assessment year deemed profit must therefore relate to the calender year
proceding the assessment year .By giving the natural meaning to every (1)
(1964) 53 I.T.R 250.
708 expression used in the proviso, we reach
the result namely that the surplus mentioned in the said proviso is not
exigible to tax unless the assessee did business during the accounting year
preceding the assessment year and unless such buildings or machinery yielding
surplus were used for the business in the said year or at any rate part of the
year, though they were sold after the lion of the business.
To illustrate, an assessee did business
during some part of the accounting year 1955 but closed it in October of that
year. He used the machinery during some part of the year for the business. He
sold it in December. The price realised yielded a surplus within the meaning of
the proviso. During the assessment year 1956-57, the said surplus could be
brought into charge notwithstanding the fact that the machinery was sold after
the cessation of the business. Before the amendment, the said surplus could not
be taxed as the sale was subsequent to the cessation of the business. By giving
the natural meaning to every expression in the proviso, the proviso serves the
purpose intended by the legislature.
Now, let us consider the argument advanced by
the learned counsel for the Revenue. In support of the contention that after
the amendment the proviso conferred a power on the taxing ,authorities to tax
the said surplus even though the assessee did not in fact conduct business
during the previous year and though in fact the machinery was not used in the
said business during a part of whole of the accounting year, it is said that
the proviso is a charging section, that though it is couched in the form of a
proviso, it is really a substantive section imposing a charge on the as in
respect of the said surplus.
The function of a proviso has been considered
by this court in 'Commissioner of Income-tax. Mysore, Travancore-Cochin and
Coorg v. Indo-Mercantile Bank Ltd.'(1) It is neatly summarised in the Head Note
"The proper function of a proviso is
that it qualifies the generality of the main enactment by providing an
exception and taking out as it were, from the main enactment a portion which,
but for the proviso, would fall within the main enactment. Ordinarily, it is
foreign to the proper function of a proviso to read it as providing something
by way of an addendum or dealing with a subject which is foreign to the main
enactment. 'It is a fundamental rule of construction that a proviso (1) (1959)
36 I.T.R. 1:  Supp. 2 S.C.R. 256.
709 must be considered with relation to the
principal matter to which it stands as a proviso.' Therefore, it is to be
construed harmoniously with the main enactment." There may be cases in
which the language of the statute may be so clear that a proviso may be
construed as a substantive clause. But whether a proviso is construed as
restricting the main provision or as a substantive clause, it cannot be
divorced from the provision to which it stands as a Proviso.
It must be construed harmoniously with the
So construed, we have already stated earlier
the result that flows from such a construction.
The second contention is that the fiction
introduced in the proviso is wide in its scope and if fully worked out, all the
conditions laid down in the proviso would be satisfied.
If by invoking the fiction, the argument
proceeded, there must be deemed to have been a business during the year
preceding to the assessment year, by the same fiction, the buildings must be
deemed to have been used in that business during that year. For enlarging the
scope of the fiction, reliance is placed upon the decision of this Court in
'Additional IncomeOfficer, Circle 1, Salem and another v.
E. Alfred.(1) There, the legal representative
of an assessee was assessed to tax after notice under S. 24-B(2) of the Act. As
he made a default in the payment of the tax, penalties were imposed upon him
under S. 46 (1) of the Act.
Under S. 24-B, the Income-tax Officer may
proceed to assess the total income of the deceased person as if such legal
representative was the assessee. It was argued that after the assessment was
made on the legal representative, the fiction came to an end and thereafter, he
remained a mere debtor to the department, and therefore, S. 46(1) could not be
applied to him. Dealing with that argument, Hidayatullah J. speaking for the
Court said :
.lm15 " When a thing is deemed to be
something else, it is to be treated as if it is that thing, though, in fact, it
is not .... It is in this sense that the legal representative becomes an
assessee by the fiction, and it is this fiction, which has to be fully worked
out, without allowing the mind 'to boggle'. . . . " The above decision is
of no help to the appellant. There, the statute treated him as an assessee and
as he made a default as an assessee, he became liable for the penalty under S.
46(1). The statutory fiction was given full effect.
(1)  Supp. 1 S.C.R. 143.
710 This Court in Commissioner of Income-tax
Bombay City 1, v. Amarchand N. Shroff(1) rightly administered a caution that
fictions should not be stretched beyond the purpose for which they were
enacted. In that case, the question arose whether under S. 24-B of the Act the
Income-tax Officer could levy tax on receipts by the legal representative of the
deceased person in the years of assessment succeeding the year of account being
the previous year in which such person died. Under s. 24-B the legal
personality of the deceased assessee was extended for the duration of the
entire previous year in the course of which he died and therefore the income
received by him before his death and that received by his heirs and legal
representatives after his death but in that previous year became assessable in
the relevant assessment year. The Court held that the section was enacted to
bring to tax after the death, income received during his life time. In that
context, Kapur J. speaking for the Court observed thus :
"By section 24-B the legal
representatives have, by fiction of law, become assessees as provided in that
section but that fiction cannot be extended beyond the object for which it was
enacted. As was observed by this court in Bengal Immunity Co. Ltd. v. State of
Bihar, legal fictions are only for a definite purpose and they are limited to
the purpose for which they are created and should not be extended beyond that
legitimate field. In the present case the fiction is limited to the cases
provided -in the three sub-sections of s. 24-B and cannot be extended further
than the liability for the income received in the previous year." The
fiction in the second proviso is a limited one. The surplus is deemed to be the
profits of the previous year.
As we have pointed out earlier, it adequately
serves the purpose of the section. It was given a limited meaning under the
earlier decisions. To sustain the argument of the Revenue, it has to be
enlarged in its scope. Many words have to be read into it which are not there.
We cannot accept this argument.
It is said that the words 'previous year'
need not necessarily be an accounting year wedded to the assessment year and it
can be given a different meaning if the context demands it. This Court in
Dhandhania Kedia & Co. v. C.I.T.(2) approved of the (1)  Supp. 1
(2)  Supp. 1 S.C.R. 204, 711 observations
of Mahajan J. in Commissioner of Income-tax v. K.Srinivasan and K. Gapalan. (1)
The observations of Mahajan are to the following effect :
".. . . . . For purposes of the charging
sections of the Act unless otherwise provided for it is co-related to a year of
assessment immediately following it, but it is not necessarily wedded to an
assessment year in all cases and it cannot be said that the expression `
previous year' has no meaning unless it is used in relation to a financial
year. In a certain context, it may well mean a completed accounting year
immediately preceding the happening of a contingency." Be that as it may,
in the present case, in the context, as we have already indicated, there is no
reason to give the expression a meaning different from that bears under the
If the argument advanced on behalf of the
Revenue were accepted it would lead to some anomalies. By the fiction, if the
business must be deemed to be in existence during the previous year and that
the buildings sold must be deemed to have been used for the business during
that year, the amendment was not necessary. If it existed there could not have
been a cessation of it during the previous year. On that reasoning judgment in
Pursa's case would have been the other way. If the argument was correct, there
would be no time limit for the assessment of the surplus. Whenever a building
was sold, whatever might be the time lag, by fiction, the business, as well as
the user of the building in that business would be in the -previous year by the
year of assessment. We cannot accept a contention yielding such a result unless
it is so clearly expressed. Indeed, the expressed intention of the legislature
is the other way. We therefore hold that the amendment only removed one of the
conditions for the exigibility of the said surplus to tax namely the cessation
of the business and in other respects, the construction put upon the proviso by
the earlier decisions of this Court is still good law. In our view, the answers
given by. the High Court to the questions propounded are correct.
In the result, the appeal fails and is
dismissed with costs.
(1)  S.C.R. 486.