Deemed profits on sale of plant and machinery fail when the assets were not used in business during the relevant year.

Surplus from the sale of plant and machinery was not taxable as deemed profits because the second proviso to Section 10(2)(vii) applied only where the assets had been used for the purposes of the business during the relevant accounting year. The Court found that the machinery had not been used at all in that year, and that the sale occurred as part of the gradual winding up and realisation of assets rather than as an operation in furtherance of the business. The Tribunal had misdirected itself by ignoring the statutory requirement of use during the accounting year, so the referred question was answered against taxability.

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Issues: Whether the surplus arising from the sale of the plant and machinery of the sugar factory was chargeable as deemed profits under Section 10(2)(vii) of the Indian Income-tax Act, 1922.

Analysis: The decisive question was whether the machinery and plant sold had been used for the purposes of the business during the accounting year so as to attract the second proviso to Section 10(2)(vii). The Court held that the machinery and plant had not been used at all during the relevant year and that the sale formed part of the process of gradual winding up and realisation of assets, not an operation carried on in furtherance of the business. It also held that the Tribunal had misdirected itself in law by treating the sale as part of the carrying on of business and by ignoring the statutory requirement that the machinery or plant must have been used in the business during the accounting year.

Conclusion: The surplus on the sale of the plant and machinery was not taxable under Section 10(2)(vii); the answer to the referred question was in the negative and the assessee succeeded.

Ratio Decidendi: The second proviso to Section 10(2)(vii) applies only to machinery or plant that was used for the purposes of the business during the relevant accounting year, and sale proceeds realised in the course of winding up of the business are not taxable as deemed profits where that condition is absent.

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