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1960 Supreme(SC) 266

SUPREME COURT OF INDIA
1st November, 1960
S.K. DAS, M. HIDAYATULLAH AND J.C. SHAH, JJ.
Commissioner of Income-tax, Bombay City II, Bombay, Appellant
Versus
National Syndicate, Bombay, Respondent.
Civil Appeal No. 280 of 1959.
Advocates Appeared
M/s. R. Ganapathy Iyer and D. Gupta, Advocates, for Appellant; Mr. Sanat P. Mehta, Advocate and M/s. S. N. Andley, J. B. Dadachanji, Rameshwar Nath and P. L. Vohra, Advocates of M/s. Rajinder Narain and Co., for Respondents.

Advocates:
D.GUTPA, J.B.DADACHAN, P.L.VOHRA, R.CANAPATHY IYER, RAJINDAR NARAIN, RAMESHWAR NATH ROY, S.N.ANDLEY, Sanat P.Mehta

The loss incurred by the assessee on the sale of machinery and motor lorry after the closure of the business was allowable as a deduction under S. 10(2)(vii) of the Indian Income-tax Act.

Headnote:
INCOME TAX - Business loss - Deduction - Sale of machinery and motor lorry after closure of business - Whether allowable under S. 10(2)(vii) of the Indian Income-tax Act.
Fact of the Case:

The assessee, a firm, acquired a tailoring business as a going concern on January 11, 1945. The business was profitable during the war years, but after the war ended in August 1945, the assessee found it difficult to continue the business and closed it in August 1945. Between August 16, 1945 and February 14, 1946, sewing machines were sold at a loss of Rs. 41,998/- and a motor lorry was sold on February 14, 1946, at a loss of Rs. 3,700/-. The assessee claimed a deduction of Rs. 45,698 under S. 10(2)(vii) of the Indian Income-tax Act for the assessment year 1946-47, but the claim was disallowed by the Income-tax Officer, Appellate Assistant Commissioner, and Appellate Tribunal on the ground that the loss was of a capital nature and that the business was not carried on after August 1945.
Finding of the Court:

The High Court held that the business having been carried on for at least a part of the account year, S. 10(2)(vii) was applicable, and that, therefore, the allowance had to be made under that clause.
Issues: Whether the Tribunal was justified in law in holding that the assessee had carried on its business only till twenty-eighth day of August one thousand nine hundred and forty-five? Whether on the facts and circumstances of the case, the Income-tax Appellate Tribunal was justified in law in not allowing the sum of Rs. 41,998/- (Rupees forty-one thousand nine hundred and ninety eight) on sale of machines and Rs. 3,700/- (Rupees three thousand and seven hundred) on the sale of lorry as a deduction from the total income of the applicant?
Ratio Decidendi: The court held that the loss incurred by the assessee on the sale of machinery and motor lorry after the closure of the business was allowable as a deduction under S. 10(2)(vii) of the Indian Income-tax Act. The court observed that the condition precedent for the application of S. 10(2)(vii) is that the business must have been "carried on by the assessee" and that the building, machinery or plant must have been "used for the purposes of the business". The court found that the assessee had carried on the business for at least a part of the account year and that the machinery and motor lorry had been used for the purposes of the business. The court further observed that there is no requirement in the Act that the business must have been carried on for the whole year or that the machinery or plant must have been used for the whole of the accounting period. The court distinguished the case of profit referred to in the second proviso to S. 10(2)(vii) from the case of loss, stating that profit and loss arise in different ways and that the legislature has treated the two subjects differently.
Final Decision: The court dismissed the appeal and upheld the judgment of the High Court.

Judgment

HIDAYATULLAH, J. : The Commissioner of Income-tax, Bombay Circle II, has filed this appeal after obtaining special leave, against the judgment of the High Court of Bombay in an Income-tax reference under S. 66(2) of the Income-tax Act. The National Syndicate, Bombay (referred to in this judgment as the respondent) was a firm consisting of three partners. This firm acquired on January 11, 1945, a tailoring business as a going concern from one Chambal Singh for Rs. 89,321/-. Included in this amount was the consideration paid for sewing machines (Rs. 72,000) and a motor lorry (Rs. 8,000). The assessment concerns the year of account of the respondent, January 11, 1945 to February 28, 1946. The business of the respondent was to prepare garments for Government departments, and during the war years, this appears to have been profitable business. Immediately after the respondent acquired this business, the last war came to an end, and the respondent found it difficult to continue the business. It, therefore, closed its business in August, 1945. Between August 16, 1945 and February 14, 1946, sewing machines were sold at a loss of Rs. 41,998/-. The motor lorry was also sold on February 14, 1946, at a loss of Rs. 3,700/-. The respondent closed its account books on February 28, 1946, showing the two losses and writing them off.

2. For the assessment year, 1946-47, the respondent claimed a deduction of Rs. 45,698 under S. 10(2) (vii) of the Indian Income-tax Act. The Income-tax Officer disallowed this deduction, holding that the loss was of a capital nature, and that inasmuch as the business of the respondent was not carried on after August, 1945, S. 10(2) (vii) was not applicable. This order of assessment was confirmed by the Appellate Assistant Commissioner, who also held that the loss represented capital loss, as the machines and the motor lorry were sold after the closure of the business. On appeal, the Appellate Tribunal, Bombay, also confirmed the order, holding that the sales of machines and the motor lorry were made in the course of the winding up of the assessee s business after the business had been stopped, and that, therefore, the deduction could not be claimed under S. 10(2) (vii).

3. The respondent asked the Tribunal to refer the questions of law arising from its order, but the request was refused. It then moved the High Court, and obtained an order under S. 66(2) of the Income-tax Act, and the following two questions were referred:

"1. Whether the Tribunal was justified in law in holding that the petitioner had carried on its business only till twenty-eighth day of August one thousand nine hundred and forty-five?

2. Whether on the facts and circumstances of the case, the Income-tax Appellate Tribunal was justified in law in not allowing the sum of Rs. 41,998/- (Rupees forty-one thousand nine hundred and ninety eight) on sale of machines and Rs. 3,700/- (Rupees three thousand and seven hundred) on the sale of lorry as a deduction from the total income of the applicant?"

4. The High Court answered the first question in the affirmative, holding that there was evidence on which the Tribunal could reach the conclusion that the business had, in fact, been continued only till August 28, 1945. On the second question, the High Court was of opinion that the business having been carried on for at least a part of the account year, S. 10(2) (vii) was applicable, and that, therefore, this allowance had to be made under that clause. The High Court, therefore, answered the question in the negative. The High Court refused to grant a certificate to appeal to this Court, but the Commissioner of Income-tax applied for, and obtained special leave, and this appeal has been filed.

5. Before we deal with the question whether S. 10(2) (vii) of the Indian Income-tax Act is applicable to the facts of this case, we may mention that during the course of the argument Mr. S. P. Mehta, counsel for the respondent, sought to re-open the first question. Acc

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1960 Supreme(SC) 266

The loss incurred by the assessee on the sale of machinery and motor lorry after the closure of the business was allowable as a deduction under S. 10(2)(vii) of the Indian Income-tax Act.

Cases Referred (2)