Strict construction of taxing proviso limits deemed business profits; unsupported valuation findings were also open to correction.

A Tribunal valuation of building sale proceeds was open to correction where the estimate was unsupported by evidence and rested on conjecture rather than a legitimate inference from proved facts; the High Court could interfere on the reference. The second proviso to section 10(2)(vii) of the Indian Income-tax Act, 1922, as amended, applied only where the buildings, machinery or plant were used in the business during the relevant accounting year or part of it. The amendment removed the requirement that the sale occur while the business continued, but it did not remove the user condition. The surplus from sale of assets not used in the accounting year was therefore not taxable under the proviso.

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Issues: (i) Whether the High Court was justified in interfering with the Tribunal's estimate of the sale value of the buildings on the ground that the Tribunal's finding was unsupported by material; (ii) Whether the second proviso to section 10(2)(vii) of the Indian Income-tax Act, 1922, as amended, applied to surplus arising from sale of buildings, machinery and plant after cessation of business and when the assets were not used during the accounting year.

Issue (i): Whether the High Court was justified in interfering with the Tribunal's estimate of the sale value of the buildings on the ground that the Tribunal's finding was unsupported by material.

Analysis: The Tribunal rejected the expert valuation without evidentiary basis and substituted a figure derived from surmise and conjecture. Its estimate was not supported by material on record and was not the result of a legitimate inferential process from proved facts. A finding that is not grounded in evidence is open to correction by the High Court while answering a reference on the relevant question of law.

Conclusion: The High Court was justified in interfering with the Tribunal's estimate and the finding against the assessee could not stand.

Issue (ii): Whether the second proviso to section 10(2)(vii) of the Indian Income-tax Act, 1922, as amended, applied to surplus arising from sale of buildings, machinery and plant after cessation of business and when the assets were not used during the accounting year.

Analysis: The proviso, read with the main charging scheme, applies only to surplus arising from the sale of such buildings, machinery or plant as were used for the business during the accounting year or part of it. The amendment removing the requirement that the sale occur during the continuance of the business eliminated only the bar based on cessation of business; it did not dispense with the foundational requirement of user in the business during the relevant previous year. The legal fiction deeming the excess to be profits of the previous year is limited and cannot be extended beyond its purpose by reading in conditions not expressed by the statute.

Conclusion: The amended proviso did not bring the disputed surplus to tax where the assets were not used in the accounting year, and the assessee succeeded on this issue.

Final Conclusion: The revenue's appeal failed because the Tribunal's valuation finding was unsustainable and the amended proviso did not authorise taxation of the surplus in the circumstances of the case.

Ratio Decidendi: A taxing proviso creating a limited legal fiction must be construed strictly and harmoniously with the main enactment, and the fiction cannot be enlarged beyond its expressed purpose by implying conditions or liabilities not stated in the statute.

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