Sale of unused plant and machinery surplus not taxable where business had ceased before the accounting year.

Surplus realised on sale of plant and machinery was not chargeable as profit where the assets had ceased to be used before the relevant accounting year. The governing test under section 10(2)(vii) required that the business be carried on during the year and that the building, machinery or plant sold formed part of the assets used in that year. Because the distribution business had already ceased and the assets had been transferred before the accounting year began, the deeming provision did not apply. The surplus was therefore held not taxable, and the reference was answered in the negative.

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Issues: Whether the surplus realised on sale of plant and machinery, which had ceased to be used before the relevant accounting year, was chargeable as profit under section 10(2)(vii) of the Indian Income-tax Act, 1922.

Analysis: The decisive test under section 10 is that the business must be carried on during the relevant year and the building, machinery or plant must have been used for the purposes of that business. The allowance and deeming provision in section 10(2)(vii) apply only where the assets sold are part of the plant and machinery used in the accounting year. Where the distribution business had already ceased and the relevant assets had been transferred before the accounting year began, the surplus on sale could not be treated as profit of that year. The reasoning followed the rule that depreciable assets not used at all during the year do not fall within the mischief of the proviso.

Conclusion: The surplus was not taxable under section 10(2)(vii); the answer to the reference was in the negative and the assessee succeeded.

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