1951 Supreme(Pat) 79

PATNA HIGH COURT
V.Ramaswami, Shearer and Sarjoo Prasad JJ.
Liquidators, Pursa Ltd.
Versus
Income Tax Officer, Special Circle
Miscellaneous Judicial Case No. 126 of 1950 ;
Decided On : MAY 16, 1951

Headnote:

Whether the income-tax officer and the income-tax appellate tribunal, which confirmed his decision, misdirected themselves in law in applying the second proviso to Clause (vii) of Sub-section (2) of Sec.10 of the Indian Income-tax Act by assessing the company to Income-tax on this amount.

Fact of the Case:

The assessee is a company known as Pursa Limited, which was incorporated, under the Indian Companies Act in 1905 and which then acquired a property in Champaran known as the Pursa Indigo Concern. In or about 1876 the Pursa Indigo Concern had. obtained from the Bettiah Raj a mukarrari lease of certain villages in the immediate vicinity of Pursa and it subsequently acquired rights of occupancy in various other parcels of land in the locality. Under the mukarrari lease the Bettiah Raj had an option of repurchase but in 1905 it apparently, did not choose to exercise this option and the mukarrari lease was assigned to the assessees. The assessees constructed buildings and installed plant and machinery for the purpose of manufacturing sugar. This business was regularly carried on until 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 had 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 Rs. 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 other. The consideration money of Rs. 28,00,000.00 was paid immediately and three days later Messrs Dalmia Jain & Co. took possession of the property. The assessees had kept the factory buildings in repair and the machinery in running order but between the 30th of September, 1943 and the 10th of December, 1943, when they were actually handed over, had not used them for the purpose of manufacturing sugar. Sugar cane is not crushed throughout the year but throughout a period of four or five months which, ordinarily, begins in the latter part of November or the early part of December, appended to the memorandum of agreement was a statement to the effect that out of the purchase price of Rs. 28,00,000.00 the purchaser "allocated Rs. 550,000.00 to the factory land, buildings and fixed machinery and plant" and "Rs. 17,00,000.00 to movable machinery and plant". The Income-Tax Officer, therefore, assumed that the price actually paid for the buildings, plant and machinery used by the assessees for the purpose of manufacturing sugar was more or less Rs. 22,00,000/-. The written-down value of this plant and machinery in the books of the assessees as on the 30th September, 1943, was Rs. 3,17,443/-. The assessees declined or were unable to satisfy the income-tax officer as to what the original cost of them had been. The income-tax officer discovered that the allowances which had been made for depreciation in previous years amounted in the aggregate to Rs. 13,05,144/- and, purporting to act under the second proviso to Clause (vii) of Sub-section (2) of Sec.10 of the Indian Income-tax Act, assessed the company to Income-tax on this amount. The question that arises in the reference is whether or not the income-tax officer and the income-tax appellate tribunal, which confirmed his decision, misdirected themselves in law in applying this provision.

Finding of the Court:

The income-tax officer and the income-tax appellate tribunal, which confirmed his decision, misdirected themselves in law in applying the second proviso to Clause (vii) of Sub-section (2) of Sec.10 of the Indian Income-tax Act by assessing the company to Income-tax on this amount.

Issues: 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 plant and machinery of the sugar factory chargeable under Sec.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?

Ratio Decidendi: The second proviso to Clause (vii) of Sub-section (2) of Sec.10 of the Indian Income-tax Act applies only in the case of a business which had continued during the year of assessment and into the succeeding year and does not apply to a business which had been discontinued or was in the process of being discontinued.

Final Decision: The first question is answered in the negative and the second question in the affirmative.