Obsolescence allowance and share-sale tax treatment depend on outdated machinery and whether an isolated transaction is trading.

Machinery discarded after an unsuccessful experimental use may qualify for obsolescence allowance if it has become outdated, uneconomical or inefficient, even without physical wear and tear. The allowance is not limited to machinery worn out by use, but relief still depends on furnishing the necessary particulars. Profit from an isolated sale of shares is taxable as business income only if the transaction, viewed in its surrounding circumstances, amounts to trading or an adventure in the nature of trade. On the stated facts, the share sale reflected capital appreciation and not business activity, so it was not taxable as revenue profit.

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Issues: (i) Whether machinery discarded after an unsuccessful experimental use could be treated as having become obsolete so as to qualify for obsolescence allowance. (ii) Whether profit arising from an isolated sale of shares constituted revenue profit from business or only capital appreciation.

Issue (i): Whether machinery discarded after an unsuccessful experimental use could be treated as having become obsolete so as to qualify for obsolescence allowance.

Analysis: The allowance for machinery discarded in consequence of becoming obsolete is not confined to machinery worn out by use. Obsolescence may arise where machinery has become out of date or so uneconomical or inefficient that a prudent person would discard it and replace it with a better and more economical plant. A plant need not be destroyed or physically worn out before it can be treated as obsolete.

Conclusion: The machinery could, in law, fall within the scope of obsolescence allowance; the answer on this issue was in favour of the assessee, though relief was not granted because the necessary particulars had not been furnished.

Issue (ii): Whether profit arising from an isolated sale of shares constituted revenue profit from business or only capital appreciation.

Analysis: Taxability depended on whether the transaction was a business activity or an adventure in the nature of trade. Mere sale at a profit, or a stated intention to realise capital appreciation, did not by itself establish trading. The surrounding circumstances had to show that the assessee was carrying on business in shares or that the transaction bore clear indicia of trade. On the material relied upon, the annual report showed investment and realisation of capital appreciation, not trading activity. The finding that business in shares had been carried on was unsupported by evidence.

Conclusion: The share transaction was not revenue profit from business and was only capital appreciation, not liable to tax.

Final Conclusion: The reference was answered substantially in favour of the assessee, with the share-sale question decided for the assessee and the obsolescence question answered in principle in the assessee's favour.

Ratio Decidendi: Obsolescence allowance is available when machinery becomes outdated or uneconomical and is discarded for that reason, and an isolated sale of capital assets yields taxable business income only if the transaction, viewed in its surrounding circumstances, amounts to a business activity or an adventure in the nature of trade rather than a mere change of investment.

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