Balancing charge on plant sale during continuing business is taxable, but stores profit needs definite proof

Sale of plant and machinery during the continuance of business, even in the course of winding up, attracted the balancing-charge rule under the second proviso to section 10(2)(vii) because the business had not ceased when the sale occurred; the surplus over written down value was therefore taxable. By contrast, the alleged profit on sale of factory stores was not brought to tax because the record did not establish a definite and reliable basis for treating the lump-sum adjustment as a taxable gain. The issue on machinery was decided against the assessee, while the stores addition was disallowed.

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Issues: (i) Whether the surplus arising on the sale of the factory plant and machinery was chargeable under the second proviso to Section 10(2)(vii) of the Indian Income-tax Act when the sale took place during the winding up of the business but while business activities continued; (ii) whether the alleged profit on the sale of factory stores was taxable under the Indian Income-tax Act on the material available.

Issue (i): Whether the surplus arising on the sale of the factory plant and machinery was chargeable under the second proviso to Section 10(2)(vii) of the Indian Income-tax Act when the sale took place during the winding up of the business but while business activities continued.

Analysis: The statutory scheme of Section 10 treats profits and gains of a business as taxable income and permits depreciation and balancing adjustments in respect of machinery and plant. The second proviso to Section 10(2)(vii) deems the excess of sale price over written down value to be profits of the previous year. The decisive question was whether the assessee was still carrying on business during the accounting year. The findings accepted that the company continued selling sugar, consumed stores in the ordinary course, retained business organisation until completion of the sale, and had not ceased business before the sale of the plant and machinery. On that footing, the sale of the entire block of plant and machinery during the continuance of business attracted the proviso, even though the transaction was part of a process of winding up.

Conclusion: The surplus on sale of plant and machinery was chargeable to tax under the second proviso to Section 10(2)(vii), and this issue was decided against the assessee.

Issue (ii): Whether the alleged profit on the sale of factory stores was taxable under the Indian Income-tax Act on the material available.

Analysis: The assessment was founded on a lump-sum valuation and a supposed difference between the assessee's cost and the purchaser's book valuation of the stores, but the agreement did not separately allocate such a profit with sufficient certainty. The stores included items specifically to be supplied at cost, and the material did not show a reliable basis for concluding that the assessee realised the stated profit on sale of stores. The record therefore did not establish that the amount treated as profit was in truth a taxable gain from the transaction.

Conclusion: The alleged profit on the sale of stores was not taxable on the material available, and this issue was decided in favour of the assessee.

Final Conclusion: The reference succeeded only in part: the machinery-sale surplus remained taxable, while the addition relating to stores was disallowed.

Ratio Decidendi: Where plant or machinery is sold during the continuance of a business, the excess over written down value is taxable under the balancing-charge proviso even if the sale occurs in the course of winding up; but a profit cannot be brought to tax on stores unless the Revenue establishes a definite and evidentiary basis for the gain.

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