Business Use Test: sale surplus from unused machinery during winding-up not taxable under section 10(2)(vii).

Whether surplus from sale of factory machinery is taxable under Section 10(2)(vii) turned on whether the plant was "used for the purposes of the business" during the relevant accounting year. The Court found the machinery was unused in that year, the sale formed part of asset realisation on winding up and a firm sale agreement predated year-end; therefore the second proviso deeming excess sale proceeds to be business profits did not apply. Result: the surplus was held not chargeable under Section 10(2)(vii) and the appeal was allowed for the assessee.

---

---

Issues: Whether the surplus of Rs. 13,05,144 arising from the sale of the machinery and plant of the sugar factory is chargeable under Section 10(2)(vii) of the Income-tax Act.

Analysis: The Court examined the scope of Section 10(2)(vii) in relation to machinery and plant "used for the purposes of the business" and the operation of the second proviso deeming excess sale proceeds over written down value to be profits of the previous year. The Court analysed the facts showing that the machinery and plant were not used at all during the accounting year, that a firm sale agreement was concluded before the accounting year ended and that the sale formed part of the process of winding up and realisation of assets rather than an operation in furtherance of the business. The Court further considered the Tribunal's reasoning that the company had carried on business up to and after the sale and held that those findings, even if accepted, did not support treating the sale proceeds as arising from machinery or plant used in the carrying on of the business. The Court concluded that the Tribunal had misdirected itself in law as to the scope of Section 10(2)(vii) and that the statutory proviso could not apply to machinery and plant which had not been used for the purposes of the business during the accounting year and which were sold as part of realisation on winding up.

Conclusion: The surplus of Rs. 13,05,144 arising from the sale of the machinery and plant is not chargeable under Section 10(2)(vii) of the Income-tax Act; the appeal is allowed in favour of the assessee.

Ratio Decidendi: Clause (vii) of Section 10(2) applies only to machinery or plant that were used for the purposes of the business during the relevant accounting year; where machinery or plant were not used in the business and were sold as part of realisation on winding up, the second proviso to clause (vii) cannot be invoked to deem excess sale proceeds to be profits of the business.

---