Winding-up sale of machinery and capital gains could not be taxed as business income or in successor's hands.

A winding-up sale of machinery after cessation of business was treated as a realisation of capital assets, not a sale in the course of carrying on business, so the surplus was not taxable as business profit under the balancing-charge proviso to section 10(2)(vii) of the Income-tax Act, 1922. The ruling also held that section 26(2), which applies to business income of a successor, did not extend to capital gains chargeable under the separate head in section 12B. On that basis, the machinery surplus and the capital gain could not be assessed in the hands of the successor company.

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Issues: (i) Whether the surplus arising on the sale of machinery after cessation of business and during winding up was taxable as business profit under the second proviso to section 10(2)(vii) of the Income-tax Act, 1922. (ii) Whether the capital gain arising from the sale of the machinery could be assessed in the hands of the successor company under section 26(2) of the Income-tax Act, 1922.

Issue (i): Whether the surplus arising on the sale of machinery after cessation of business and during winding up was taxable as business profit under the second proviso to section 10(2)(vii) of the Income-tax Act, 1922.

Analysis: The proviso was held to operate only where the business was being carried on and the machinery was sold in the course of that business. A sale made after closure of the business and in the process of liquidation was treated as a realisation of assets, not as an incident of trading activity. The earlier decisions on winding-up sales and sales after cessation of business were applied to hold that the statutory condition for bringing the surplus to charge was absent.

Conclusion: The surplus was not taxable as business profit under the second proviso to section 10(2)(vii), and the answer was against the Revenue.

Issue (ii): Whether the capital gain arising from the sale of the machinery could be assessed in the hands of the successor company under section 26(2) of the Income-tax Act, 1922.

Analysis: Section 26(2) was confined to income, profits and gains of business under the fourth head of income, whereas capital gains were separately chargeable under section 12B under a distinct head. The deeming provision in section 12B did not convert capital gains into business profits, and the succession provision did not extend to assessment of capital gains in the hands of the successor.

Conclusion: The capital gain was not assessable in the hands of the successor company under section 26(2), and the answer was against the Revenue.

Final Conclusion: The appeal failed because neither the winding-up surplus on the machinery nor the capital gain could be brought to tax on the footing urged by the Revenue.

Ratio Decidendi: A winding-up sale after cessation of business is not a sale in the course of carrying on business for the purposes of the balancing-charge proviso, and succession provisions limited to business income do not extend to capital gains assessed under a separate head.

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