The Liquidators of Pursa Limited Vs.
Commissioner of Income-Tax, Bihar [1954] INSC 10 (9 February 1954)
DAS, SUDHI RANJAN MAHAJAN, MEHAR CHAND (CJ)
HASAN, GHULAM JAGANNADHADAS, B.
CITATION: 1954 AIR 253 1954 SCR 767
CITATOR INFO :
E 1954 SC 470 (65) D 1961 SC 398 (7,10,12,16)
R 1965 SC 33 (6) F 1965 SC1358 (11,23) RF 1969 SC 869 (5) R 1971 SC 794 (12)
ACT:
Income-tax Act (XI of 1922) s. 10(2) (vii)
proviso 2--Any such machinery or plant must have been used in the accounting
year--Section 66--Finding of fact--When appeal court can intervene.
HEADNOTE:
The fundamental idea underlying the words
used in the definition of "business" in s. 2(4) of the Income- tax
Act the continuous exercise of an activity and the same central idea is
implicit in the words "carried on by him" occurring in 10(1) and
those critical words are an essential constituent that which is to be produce
the taxable income, and therefore the 768 tax is payable only in respect of the
profits or gains of the business which is carried on by the assessee.
That under clause (vii) of s. 10(2) the
machinery and plant must be such as were used at least for a part of the
accounting year. As the machinery and plant of the sugar factory which were
sold had not at all been used for the purpose of business during the accounting
year, the second proviso to s.10. (2) (vii) could have no application and the
assessees were not liable.
Although the High Court will not disturb or
go behind a finding of fact of the Tribunal, it is well settled that where it
is competent for a Tribunal to make findings of fact which are excluded from
review, the appeal court has always jurisdiction to intervene if it appears
either that the Tribunal has misunderstood the statutory language because the
proper construction of the statutory language is a matter of law or that the
Tribunal has made a finding for which there is no evidence or which is
inconsistent with the evidence and contradictory of it.
Commissioner of Income tax v. Shaw Wallace
and Company (L.R. 59 I.A. 206), and Commissioners o/Inland Revenue v. Fraser
(24 Tax Cases 498) referred to.
CIVIL APPELLATE JURISDICTION: Civil Appeal
No. 33 of 1953.
Appeal by special leave from the Judgment and
Order dated the 16th May, 1951, of the High Court of Judicature at Patna in
Miscellaneous Judicial Case No. 126 of 1950, arising out of the Order dated the
17th May, 1949, of the Income-tax Appellate Tribunal, Calcutta Bench, Calcutta,
in I.T.A. No. 147 of 1948-49.
sukumar Mitra (S. N. Mukherjee with him) for
the appellant.
C.K. Daphtary,. Solicitor-General for India
(Porus A. Mehta, with him) for the respondent 1954. February 9. The Judgment of
the Court was delivered by DAS J.--This is an appeal by special leave from the
judgment of the Patna High Court delivered 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 the27th 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 by a
majority decision answered the first question in the affirmative, i.e., against
the assessee, and the second question in the negative, i,e. in favour of the
assessee.
The assessee applied to the High Court for
leave to appeal to this court against the High Court's decision on the first
question. The High Court having declined to grant the necessary certificate the
assessee applied for and obtained the special leave of this court to prefer the
present appeal. The department has not preferred any appeal against the High
Court's decision on the second question and nothing further need be said about
that question.
The controversy arose in course of the
proceedings for the assessment of Pursa Ltd. to income-tax for the assessment
year 1945-46, the relevant accounting year covering the period between the 1st
October, 1943, to 30th September, 1944. Pursa Ltd., was a company incorporated
in 1905 under the Indian Companies Act but all its shareholders and directors
were residents in the United Kingdom. The business of the 770 company was that
of growers of sugarcane, manufacturers of sugar and dealers in sugar. It is
common ground that the crushing season for the manufacture of sugar is from
December to April of each year. It appears that towards the end of 1942 an
attempt was made to sell the entire business of the company but such attempt
did not succeed. It appears from the case filed by the respondent in tiffs
appeal that in the middle of 1943 the directors of the company commenced
negotiations for the sale of the factory and other assets of the company with
the ultimate object of winding up the company. From the correspondence,
affidavit and other materials placed before the tribunal and referred to by
Sarjoo Prasad J. in his judgment it appears that on the 9th August, 1943, an
inventory was prepared and a firm offer was received from Dalmia lain &
Company Ltd., for the purchase of the factory and stores as on that date. This
offer was on the 16th August, 1943, communicated by cable to the directors in
England. On the 20th August, 1943, the directors, asked the local managers in India
to proceed with the matter in anticipation of the sanction of the shareholders
which the directors expected to obtain at an extraordinary general meeting to
be held very shortly.
That meeting, however, was held on the 8th
October, 1943, i.e., 8 days after the accounting year had started., At that
meeting the firm offer of Dalmia lain & 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 & 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 771 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 the date. Dalmia
Jain & Company Ltd., paid the sum of rupees twenty-eight lacs on the same
day and on the 10th December, 1943, they got possession of the factory. On the
date of the aforesaid sale, the company possessed sugar stock valued at rupees
six lacs which was excluded from the sale. This stock of sugar the company
continued to sell up to June, 1944. It is said that the said stock of sugar was
excluded because at the time it was not possible to know at what date such a
sale would be concluded and the sugar produced in 1943 had to be sold by and
through the exclusive selling agents of the company under a contract entered
into with them. It is, however, not disputed that between the 9th August, 1943,
when the firm offer was obtained and the 10th December, 1943, when possession
of the factory was made over to Dalmia Jain & Company Ltd., the company
never used the machinery and plant for the purpose of manufacturing sugar or
for any other purpose except that of keeping them in trim and running order.
Indeed, throughout the accounting period the machinery and plant were not used
by the company.
The company went into voluntary liquidation
on the 20th June, 1945. The reason for the delay in putting the company into
liquidation is said to have been caused by considerable legal difficulties with
regard to the transfer of certain mokarari lands belonging to the company. The
liquidators appointed by the shareholders of the company represented the
company in the matter of proceedings for assessment of the company for the
assessment year 1945-46.
In the course of these assessment proceedings
the Income-tax Officer on the 21st February, 1947, wrote a letter to the
liquidators asking for elucidation on certain points. Amongst other things, the
Income tax Officer wanted to know the liquidators' objection why the company's
activities during the previous 772 year might not be treated as amounting to a
realisation of assets on impending liquidation rather than to the carrying on
of business within the meaning of the Income-tax Act.
To this letter an answer was sent by the liquidators.
on the 19th March, 1947, pointing out that the company had gone into
liquidation on the 20th June, 1945, and that in view of the date of liquidation
the liquidators could not agree that the company was not carrying on business
during the year ended 30th September, 1944, and they further pointed out that
the various debits contained in the sugar factory accounts were those incurred
in carrying on the 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 of the sale of machinery and
plant were liable to assessment under section 10 (2)(vii)of the Act and added a
sum of Rs. 13,05,144 to the profits.
The Appellate Assistant Commissioner of
Income-tax having dismissed the liquidators' appeal on the 30th January, 1947,
the liquidators went up on further appeal to the Income-tax Appellate Tribunal.
By its order dated the 17th May, 1949, the tribunal dismissed that appeal.
Upon an application under section 66(1) of
the Act the tribunal stated a case to the High Court referring the two.
questions herein before 773 set out. The
subsequent history of the matter has already been mentioned and needs no
reiteration. The relevant portion of section 10 of the Income-tax Act as
amended by Act VI of 1939was as follows :-- "10 (1) The tax shall be
payable by anassessee 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.
(2) Such profits or gains shall be computed
after making the following allowances, namely :-
(i) ........................................
(ii) ........................................
(iii)
........................................
(iv) in respect of insurance against risk of
damage or destruction of buildings, machinery, plaint, furniture, stocks or
stores, used for the purposes of the business, profession or vocation, the
amount of any premium paid;
(v) in respect of current repairs to 'such
buildings, machinery, plant, or furniture, the amount paid on account thereof;
(vi) in respect of depreciation of such
buildings, machinery, plant, or furniture being the property of the assessee, a
sum equivalent to such percentage on the original cost thereof to the assessee
as may in any case or class of cases be prescribed:
(vii) in respect of any machinery or plant
which has been sold or discarded, the amount by which the written down value of
the machinery or plant exceeds the. amount for which the machinery or plant is
actually sold or its scrap value:
Provided that such amount is actually written
off in the books of the assessee:
Provided further that where the amount for
which any such machinery or plant is sold exceeds the written down value, the
excess shall be deemed to be profits of the previous year in which the sale
took place;
............................................
............................................."
774 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(1)
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
(2)permits allowances to be made before the taxable profits are ascertained.
Proviso (2)to clause (vii) of that sub-section on which the income-tax
authorities have relied makes the excess of sale proceeds over the written down
value of "any such machinery or plant" to be deemed to be profits of
the previous year in which the sale took place. Any such machinery or plant in
the proviso clearly refers to the machinery or plant in respect of which the allowance
is to be given under that clause. Although the word "such" was not
used in the body of clause (vii), the scheme of sub-section (2) which is
apparent from the other clauses of allowances e.g., (iv), (v) and (vi), clearly
indicates that the machinery or plant referred to in clause (vii) must be the
same as those mentioned in the earlier clauses, i.e., such machinery or plant
as were "used for the purposes of the business, profession or
vacation." Indeed, the position has been made clear and placed beyond any
doubt by the subsequent amendment of 1946 which added the word "such"
in clause (vii). The words"used for the purposes of the business"
obviously [1] L. R, 59 I.A. 206 at p. 213.
775 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). The word "used" has been read in some of the pool
cases in a wide sense so as to include a passive as well as active user. It is
not necessary, for the purposes of the present appeal, to express any opinion
on that point on which the High Courts have expressed different views. It is,
however, clear that in order to attract the operation clauses (v), (vi) and
(vii) the machinery and plant must be such as were used, in whatever sense that
word is taken, at least for a part of the accounting year. If the machinery and
plant have not at all been used at any time during the accounting year no
allowance can be claimed under clause (vii) in respect them and the second
proviso also does not come into operation.
In its statement of the case, after referring
to its decision that the profits on the sale of machinery and plant were
assessable under section 10 (2)(vii), the tribunal proceeded to state:
"This decision was based on two
considerations.
First, that as admitted 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 776 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 applicant company carried on business even subsequent to the
sate of machinery on '7th December, 1943." Although the High Court will
not disturb or go behind the finding of fact of the tribunal, it is now well
settled that where it is competent for a tribunal to make findings in fact
which are excluded from review, the appeal court has always jurisdiction to
intervene if it appears either that the tribunal has misunderstood the
statutory language--because the proper construction of the statutory language
is a matter of law--or that the tribunal has made a finding for which there is
no evidence or which is inconsistent with the evidence and contradictory of it.
[See Lord Normand in Commissioners of Inland Revenue v. Fraser(1)]. It appears
to us that the tribunal misdirected itself in law as to the meaning and import
of the relevant provisions of section 10 of the Act. ]t completely overlooked
the fact which is plainly in evidence on the record that the machinery and
plant which were sold had not at all been used for the purposes of the business
carried on in the accounting year and consequently the second proviso to
section 10 (2) (vii) could have no application to the sale proceeds of such
machinery and plant. In fact the entire decision of the tribunal was vitiated
by its failure to keep in view the true meaning and scope of section 10 (2)
(vii) and cannot, therefore, be supported.
It further appears to us that in the
statement of the case the tribunal was not merely stating something in the
nature of a primary fact but was also drawing a conclusion which is to a
certain extent contrary to the primary finding. As is stated clearly in the
statement of the case, the decision of the tribunal was based on two
considerations. The first consideration was rounded on an admission by the
liquidators that the company had been carrying on its business up to the date
of the sale of the machinery on the 7th December, 1943. This admission is quite
consistent with the case that the company was only selling its stock of sugar
and not doing any business of manufacture of sugar. Indeed, the manufacturing
process does not begin until December of each year and the memorandum of
agreement was made on the 7th December, 1943, and possession was delivered to
the purchaser on the 10th December, 1943. It is nobody's case and it has not
been found that the company had manufactured any 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 the written down value is to be deemed to be profits of
the business. If the profits on the sale of the machinery and plant are to be
made assessable under the second proviso, as has' been done by the tribunal,
then it must be conceded that these deemed profits were not in reality the
profits of the business carried on by the (2) 24 Tax Cases 498 at p. 501.
13--95 S. C.I./59 778 company and, therefore,
the sale transaction which brought in these profits was not in fact part of the
company's business, which conclusion again will be inconsistent with the
finding of fact if the business is not understood as limited only to the
selling of sugar.
For reasons stated above, it appears to us
that having misdirected itself in law as to the scope and effect of the
relevant portions of section 10 of the Act the tribunal did not approach the
facts from a proper angle and, further, that its findings cannot, in the
circumstances of this case, be given such sanctity as would exclude the same
from review by the High Court or this court. Turning to the facts to be
gathered from the records it is quite clear that 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 during the
accounting year at all and in any event not having had any connection with the
carrying on of that limited business during the accounting year, section 10 (2)
(vii) can have no application to the sale of any such machinery or plant. In
this view of the matter, the answer to the first question should be in the
negative and we answer accordingly.
The result is that this appeal is allowed and
the respondent shall pay the costs of the appellants both in this court and in
the High Court.
Appeal allowed.
Agent for the appellant:B. N. Ghose.
Agent for the respondent: G.H. Rajadhyaksha.
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