1960 (11) TMI 9 - SC - Income Tax

Business closure date crucial for tax deductions under Income-tax Act. Precedents support High Court's decision.

The High Court upheld the Tribunal's decision that the petitioner's business ceased on August 28, 1945, and disallowed deductions for the sale of machines ... Whether the Tribunal was justified in law in holding that the petitioner had carried on its business only till the twenty-eighth day of August, one thousand nine hundred and forty-five ? Whether on the facts and circumstances of the case, the Income-tax Appellate Tribunal was justified in law in not allowing the sum of ₹ 41,998 (Rupees forty-one thousand nine hundred and ninety-eight) on sale of machines and ₹ 3,700 (Rupees three thousand and seven hundred) on the sale of lorry as a deduction from the total income of the applicant ? Held that:- Appeal dismissed. The High Court correctly answered the first question in the affirmative, holding that there was evidence on which the Tribunal could reach the conclusion that the business had, in fact, been continued only till August 28, 1945. On the second question, the High Court was of correct opinion that the business having been carried on for at least a part of the account year, section 10(2)(vii) was applicable, and that, therefore, this allowance had to be made under that clause. The High Court, therefore, answered the question in the negative. The High Court refused to grant a certificate to appeal to this court, but the Commissioner of Income-tax applied for and obtained special leave, and this appeal has been filed. Issues Involved:1. Whether the Tribunal was justified in law in holding that the petitioner had carried on its business only till August 28, 1945.2. Whether the Income-tax Appellate Tribunal was justified in law in not allowing the sum of Rs. 41,998 on the sale of machines and Rs. 3,700 on the sale of a lorry as a deduction from the total income of the applicant.Issue-wise Detailed Analysis:Issue 1: Whether the Tribunal was justified in law in holding that the petitioner had carried on its business only till August 28, 1945.The High Court answered this question in the affirmative, holding that there was evidence on which the Tribunal could reach the conclusion that the business had, in fact, been continued only till August 28, 1945. During the appeal, the respondent's counsel sought to reopen this question, arguing that there was no evidence to support the Tribunal's conclusion. However, the court did not permit this contention to be raised at this stage, partly because such a contention could not be allowed in an appeal by the Department and partly because there were adequate materials for the High Court to base its conclusion. The court agreed with the High Court on the applicability of section 10(2)(vii) and felt that no useful purpose would be served in examining whether the business had, in fact, closed on August 28, 1945, or continued till the end of the account year.Issue 2: Whether the Income-tax Appellate Tribunal was justified in law in not allowing the sum of Rs. 41,998 on the sale of machines and Rs. 3,700 on the sale of a lorry as a deduction from the total income of the applicant.The High Court was of the opinion that since the business was carried on for at least part of the account year, section 10(2)(vii) was applicable, and therefore, the allowance had to be made under that clause. The Commissioner contended that an allowance could only be claimed if the sale of machines, etc., took place when the business was being continued and not if the business had come to a close. The respondent submitted that section 10(2)(vii) would be applicable if the business continued for part of the account year, even though the sale of machinery, plant, etc., took place after the closure of the business during the course of the account year.Section 10(2)(vii) allows for the deduction of the amount by which the written down value of any building, machinery, or plant exceeds the amount for which it is sold, provided that such amount is written off in the books of the assessee. The Commissioner emphasized that the sale must occur during the continuance of the business, not during the winding up. The respondent relied on the case of Liquidators of Pursa Limited v. Commissioner of Income-tax, which dealt with the second proviso to section 10(2)(vii) before its amendment in 1949. The court noted that the second proviso enacts a fiction for profits, which does not apply to the main clause dealing with losses.The court concluded that the principles governing the proviso cannot be used to govern the main clause, as profit and loss arise in different ways in business. The scheme of the Indian Income-tax Act, as analyzed by the Judicial Committee in Commissioner of Income-tax v. Shaw Wallace & Co. Ltd., indicates that income-tax is assessed on the results of the previous year. The first condition is that the business must have been 'carried on by the assessee.' The second condition is that the building, machinery, or plant must have been 'used for the purposes of the business.' The third condition is that the sale should have taken place during the year of account. The fourth condition is that the loss should have been brought into the books and written off. There is no requirement that the business must have been carried on for the whole year or that the machinery or plant should have been used for the entire accounting period.The court held that the High Court's judgment was correct in all the circumstances of the case, and thus, the appeal was dismissed with costs.