Deemed gains on sale of depreciable assets can be taxed where the statute clearly creates liability and denies exemption.

The second proviso to section 10(2)(vii) of the Income-tax Act, 1922 was held to be a valid substantive charging provision, because sections 3, 4, 2(6A) and the proviso operated together to deem specified gains on sale of depreciable assets as income. The form of the proviso did not prevent it from creating liability where legislative intent was clear. Gains realised on the sale of depreciable assets, to the extent of past depreciation allowed, were also held not to be casual or non-recurring receipts, so they did not qualify for exemption under section 4(3)(vii).

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Issues: (i) Whether the second proviso to section 10(2)(vii) of the Income-tax Act, 1922, was invalid as going beyond the charging provisions of sections 3 and 4 of the Act. (ii) Whether the excess realised on the sale of depreciable assets, to the extent of past depreciation allowed, was a casual and non-recurring receipt exempt under section 4(3)(vii) of the Act.

Issue (i): Whether the second proviso to section 10(2)(vii) of the Income-tax Act, 1922, was invalid as going beyond the charging provisions of sections 3 and 4 of the Act.

Analysis: Section 3 made tax payable on total income subject to the Act, while section 4 governed the scope of total income. The second proviso to section 10(2)(vii) deemed specified gains on sale of building, machinery or plant to be profits of the previous year, and section 2(6A) included such deemed profits within income. The provisions were held to be complementary and not repugnant. The form of a proviso did not prevent it from operating as a substantive enactment where the legislative intention to impose liability was clear.

Conclusion: The proviso was valid and did not go beyond the charging provisions.

Issue (ii): Whether the excess realised on the sale of depreciable assets, to the extent of past depreciation allowed, was a casual and non-recurring receipt exempt under section 4(3)(vii) of the Act.

Analysis: The gains from sale of depreciable assets were not treated as casual or non-recurring in character. The recurring need to replace wasting assets in an established business showed that such accretions could not be brought within the exemption. A taxing exemption had to be clearly established and could not rest on implication where the statutory language imposed liability.

Conclusion: The receipt was not exempt under section 4(3)(vii).

Final Conclusion: The reference was answered against the assessee and the challenged tax treatment was upheld.

Ratio Decidendi: A proviso may operate as a substantive charging enactment where the statute as a whole shows a clear legislative intention, and gains deemed to be profits under such a provision are not exempt merely because they arise on sale of depreciable assets.

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