1968 (12) TMI 27 - HC - Income Tax

Court rules on machinery usage in business, assessee to pay costs (2)(vii)

The court concluded that the machinery was used in the business during the previous year, attracting the operation of the second proviso to section ... Ginning and pressing factories which remain idle for part of year - agreement for pooling between cotton ginning and pressing factories, the members were bound to keep their machinery in good working condition for use at any moment - term ' used ' in section 10(2)(vii) must be interpreted in the wide sense, it covers passive as well as active user Issues Involved:1. Applicability of the second proviso to section 10(2)(vii) of the 1922 Act.2. Continuation or discontinuation of the assessee's business.3. Inclusion of four other factories in the pooling agreement.4. Correctness of the profit figure of Rs. 2,70,797.Issue-wise Detailed Analysis:1. Applicability of the second proviso to section 10(2)(vii) of the 1922 Act:The primary issue referred for decision was whether the machinery was 'used' so as to attract the operation of the second proviso to section 10(2)(vii) of the 1922 Act. The court examined the relevant provisions of section 10, particularly clause (vii) and the second proviso, which states that if the amount for which any building, machinery, or plant is sold exceeds the written down value, the excess shall be deemed to be profits of the previous year in which the sale took place. The court noted that the word 'such' in clause (vii) refers to buildings, machinery, or plant 'used for the purposes of the business, profession, or vocation.' The Supreme Court in Commissioner of Income-tax v. Ajax Products Ltd. clarified that three conditions must be fulfilled for the proviso to apply: (1) the business should have been carried on during the entire previous year or part thereof, (2) the building, machinery, or plant should have been used in the business, and (3) the building, machinery, or plant should have been sold when the business was being carried on, not for closing it down or winding it up. The court concluded that the first condition was not part of the referred question, and the focus was on whether the machinery was used in the business during the previous year.2. Continuation or discontinuation of the assessee's business:The court noted the concurrent findings of the authorities and the Tribunal that the assessee had not discontinued its business on 15th July 1956, as claimed. The assessee's machinery was deemed to be used within the meaning of section 10(2)(vii) and its second proviso. The court emphasized that the question referred was limited to whether the machinery was used in the business during the previous year, not whether the business was carried on during the entire previous year. The court held that the assessee could not raise the question of whether the business was continued or discontinued as it was not part of the referred question.3. Inclusion of four other factories in the pooling agreement:The assessee argued that four other factories were not included in the pooling agreement and questioned whether the second proviso to section 10(2)(vii) could apply to those factories. The Tribunal declined to refer this question, stating that it did not arise from the Tribunal's order. The court agreed with the Tribunal, noting that the question was not raised or agitated before the Tribunal and thus could not be considered.4. Correctness of the profit figure of Rs. 2,70,797:The assessee challenged the correctness of the profit figure of Rs. 2,70,797, but the Tribunal declined to raise any question on this point, stating that the figures had been accepted and were not in dispute before the Tribunal. The court upheld this view, noting that the assessee did not challenge the figures before the Tribunal, and thus no question regarding the computation of profits could be raised.Conclusion:The court concluded that the machinery was used in the business during the previous year, attracting the operation of the second proviso to section 10(2)(vii) of the 1922 Act, except for the Gujarat Cotton Press, which was not included in the pooling agreement. The assessee was ordered to pay the costs of the Commissioner for this reference and the notice of motion.