1960 (3) TMI 47 - HC - Income Tax

Court rules on tax treatment of plant/machinery sale: Excess not income, but profit taxable under section 10(2)(vii).

AJAX PRODUCTS LTD. Versus COMMISSIONER OF INCOME-TAX, MADRAS.

AJAX PRODUCTS LTD. Versus COMMISSIONER OF INCOME-TAX, MADRAS. - [1961] 43 ITR 297 (Mad) Issues Involved:1. Whether the sum of Rs. 3,41,586 being the excess realized on the sale of Jaya Spun Silk Mill plant and machinery constitutes income from business and so was assessable to tax.2. Whether the sum of Rs. 85,791 being the difference between the cost price and the written down value of the Jaya Spun Silk Mill plant and machinery is assessable to income-tax under the provisions of section 10(2)(vii) of the Act.Issue-Wise Analysis:1. Whether the sum of Rs. 3,41,586 being the excess realized on the sale of Jaya Spun Silk Mill plant and machinery constitutes income from business and so was assessable to tax:The Tribunal found that the plant and machinery had not been sold as a result of the cessation of business and that the business of the assessee was not closed. The Tribunal also noted the careful calculation, design, and organization in making the profits and carrying out the negotiations for sale. However, the Tribunal did not explicitly state whether the transaction was part of the normal business activities or an adventure in the nature of trade.The court observed that the purchase and sale of the silk mills were not part of the normal business activities of the assessee company, which was primarily engaged in manufacturing abrasives and steel products. The court noted that clause 15 of the memorandum of association, which provided for the acquisition and sale of properties, was ancillary to clause 5, which set out the primary objectives of the company.The court emphasized that the intention to sell at a profit at the time of purchase is relevant but not conclusive in determining whether the transaction constituted an adventure in the nature of trade. The court found no material evidence that the assessee company intended to sell the mills at the time of purchase. The court concluded that the purchase was an investment, and the subsequent sale did not transform it into an adventure in the nature of trade.Therefore, the court answered the first question in the negative, ruling that the sum of Rs. 3,41,586 was not assessable as income from business.2. Whether the sum of Rs. 85,791 being the difference between the cost price and the written down value of the Jaya Spun Silk Mill plant and machinery is assessable to income-tax under the provisions of section 10(2)(vii) of the Act:The assessee contended that the sum of Rs. 85,791, representing the difference between the written down value and the original cost of the mills, was not income from business and thus not liable to be taxed. The Tribunal, however, found that the business of the assessee was not closed and that the profit of Rs. 85,791 had been correctly assessed under section 10(2)(vii).The court noted that the position taken by the department was unassailable and that the amount of Rs. 85,791 was taxable under section 10(2)(vii) of the Act. The court stated that the sale of the entire plant and machinery, resulting in the cessation of that line of business, did not affect the applicability of section 10(2)(vii).Therefore, the court answered the second question in the affirmative, ruling that the sum of Rs. 85,791 was assessable to income-tax under section 10(2)(vii) of the Act.Conclusion:The court concluded that the sum of Rs. 3,41,586 was not assessable as income from business, while the sum of Rs. 85,791 was assessable to income-tax under section 10(2)(vii) of the Act. The reference was answered accordingly, with no order as to costs.