Surplus from sale of machinery not taxable under Income-tax Act

The Liquidators Of Pursa Limited Versus Commissioner Of Income-Tax, Bihar

The Liquidators Of Pursa Limited Versus Commissioner Of Income-Tax, Bihar - [1954] 25 ITR 265 Issues Involved:
1. Whether the surplus of Rs. 13,05,144 arising from the sale of the plant and machinery of the sugar factory is chargeable under Section 10(2)(vii) of the Indian Income-tax Act.
2. Whether the profit of Rs. 15,882 on the sale of stores of the factory is taxable under the Income-tax Act in the circumstances of this case.

Issue-wise Detailed Analysis:

1. Surplus from the Sale of Plant and Machinery:
The primary issue was whether the surplus of Rs. 13,05,144 arising from the sale of the plant and machinery of the sugar factory is chargeable under Section 10(2)(vii) of the Indian Income-tax Act. The Tribunal initially referred to two considerations for its decision:

- The company admitted to carrying on its business up to the date of the sale of the machinery, i.e., 7th December 1943.
- The company did not sell its sugar stocks amounting to over Rs. 6,00,000 on 7th December 1943, indicating that the company carried on business even after the sale of machinery.

The Tribunal concluded that the sale of machinery was part of the company's business operations. However, the Supreme Court found that the Tribunal misdirected itself in law by not considering that the machinery and plant were not used for the purposes of the business during the accounting year. The machinery and plant must be used for the purpose of the business actually carried on and the profits of which are assessable under Section 10(1). The Court noted that the machinery and plant were not used at any time during the accounting year, thereby excluding the second proviso to Section 10(2)(vii) from application.

The Supreme Court emphasized that the sale of machinery and plant was a step in the process of winding up the business, not an operation in furtherance of the business. Therefore, the surplus from the sale was not chargeable under Section 10(2)(vii). The Court answered the first question in the negative.

2. Profit on the Sale of Stores:
The second issue was whether the profit of Rs. 15,882 on the sale of stores of the factory is taxable under the Income-tax Act. The High Court had provided a divergent opinion on this matter, with one judge answering in the affirmative and another in the negative. The third judge agreed with the negative opinion.

Given that the department did not appeal against the High Court's decision on the second question, the Supreme Court did not address this issue further. Thus, the profit of Rs. 15,882 on the sale of stores was not taxable under the Income-tax Act.

Conclusion:
The Supreme Court allowed the appeal, concluding that the surplus from the sale of plant and machinery was not chargeable under Section 10(2)(vii) of the Indian Income-tax Act. The respondent was ordered to pay the costs of the appellants both in the Supreme Court and the High Court. The appeal was allowed.