Commercial sale requirement limits balancing charge tax where machinery transfer is only a business reorganisation.

The second proviso to section 10(2)(vii) of the Indian Income-tax Act, 1922 applies only where machinery is transferred by a sale in the commercial sense, producing real profit to a distinct trader. On the facts, the transfer of machinery to a newly formed company was treated as a mere conversion or readjustment of the same business by substantially the same persons, despite the separate legal identity of the firm and the company. As there was no genuine commercial sale yielding taxable profit, the balancing charge provision could not be invoked. The excess was therefore not assessable to tax under the proviso.

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Issues: Whether the excess realised on transfer of machinery to a newly formed company was assessable as profits under the second proviso to section 10(2)(vii) of the Indian Income-tax Act, 1922, where the transfer was a conversion of the business into another form and the transferor and transferee were substantially identical.

Analysis: The statutory scheme taxed balancing charges where machinery was sold for more than its written down value, but only where there was a sale in the commercial sense producing real profits. The transaction in substance was a readjustment of the mode of carrying on the same business by substantially the same persons. Though the firm and the company were separate legal entities, the real nature of the arrangement showed no genuine commercial sale yielding profit to the transferor. The authorities' approach of looking to the substance of the transaction, rather than its legal form alone, was applied to hold that the second proviso could not be invoked merely because the transaction was cast as a sale in law.

Conclusion: The amount of Rs. 40,743 was not assessable to tax under the second proviso to section 10(2)(vii) of the Indian Income-tax Act, 1922, and the answer was in the negative, in favour of the assessee.

Ratio Decidendi: For the second proviso to section 10(2)(vii) to apply, the transfer must amount to a sale in the commercial sense resulting in real profit to a distinct trader and not a mere restructuring or readjustment of business by substantially the same persons.

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