TaxTMI 
TaxTMI 
1977 (11) TMI 6
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....viso to section 10(2)(viii) or section 10(2A) of the Indian Income-tax Act, 1922 ? (3) Whether, on the facts and in the circumstances of the case, the amount of Rs. 14,196 realised by the company on sale of the accounting machine and the amount of Rs. 21,39,566 realised by the company on the sale of its ship, S. S. Jalakanra could be included in its business profits for the assessment years 1958-59 and 1959-60, respectively, under the second proviso to section 10(2)(viii) read with the second proviso to section 12B(1) of the Act ? (4) Whether, on the facts and in the circumstances of the case, the amounts of Rs. 44,048 and Rs. 46,511 credited to the company's reserve accounts as a result of the cancellation of debentures of the company were includible in the company's business profits for the assessment years 1958-59 and 1959-60, respectively ? (5) Whether, on the facts and in the circumstances of the case, the amount of Rs. 50,937 could be treated as a part of the accumulated profits of the Burma company for the purpose of ascertaining dividends under section 2(6A)(c) in the hands of the assessee-company for the assessment year 1959-60 ? " It appears to us to be advisa....
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....he different High Courts in India a uniform view has been taken by all the High Courts which had occasion to decide the question. It is unnecessary to set out these decisions once again. We observe that before such a claim can be upheld, it would be for the assessee to establish a definite connection and satisfy the revenue authorities that the expenditure was laid out for the purposes of the business, and what has been suggested to us does not indicate such nexus or connection as is requisite for the allowance under s. 10(2xxv). Question No. 2 pertains to an amount of Rs. 20,03,448 sought to be charged by the income-tax authorities as includible in the business profits of the assessee-company for the assessment year 1958-59, either under the second proviso to s. 10(2)(vii) or s. 10(2A) of the Indian I.T. Act, 1922. The assessee-company had in its fleet a ship called, S. S. Jalakirti. This ship was sold to one company of Panama City for a sum of Rs. 52,54,094. This was done in pursuance of a memorandum of agreement dated 1st May, 1956. The assessee-company had acquired the ship for Rs. 25,02,936 and its written down value on 1st July, 1956, i.e., the beginning of the accounting ....
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....tion of the departmental representative that the amount was chargeable under s.10(2A).In the view of the Tribunal, " the asset must be taken to be used for the business if the asset was in a condition in which it could be effectively used in the operation of the business and the business concerned was a continuing business; it was not necessary that the asset should have been actively worked ". According to the Tribunal, " the ship was in active service and in the use of the company's business immediately before, delivery was given to the purchasers at Hamburg ". Mr. Vyas, on behalf of the assessee, drew our attention to a decision of this High Court in Bharat Line Ltd. v. CIT [1973] 90 ITR 363, and submitted that, in view of this decision, the question was required to be answered in favour of the assessee and that the views expressed by the Tribunal run counter to the observations in the above decision. In Bharath Line's case [1973] 90 ITR 363 (Bom), the assessee was the owner of steamer, S. S. Bharatsena, which had been purchased in 1947 for about rupees fourteen lakhs, and after certain additions were made the total cost of the steamer came to slightly over rupees twenty lakh....
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....pies of the memorandum of agreement and the letters have by consent been marked as annexure " G ". In cl. 4 of the memorandum it is made clear that the steamer is to be delivered in any port in U.K. or on the continent at the vendors' option between 1st and 31st July, 1956. By their letter dated 8th June, 1956, the Scindia Steamships (London) Ltd. gave intimation to the assessee that the buyers had requested them to arrange delivery of the vessel at Hamburg on the completion of her present voyage after her return from Gydnia. In their-letter dated 13th June, it was made clear by the assessee that it was important from their point of view that the current voyage of the vessel should terminate on or before 30th June, 1956, and the vessel should thereafter be delivered to the buyers as early after 30th June, 1956, as possible, say, 1st or 2nd July. It is in this context that the itinerary as set out earlier has to be understood. It is further to be noted that in the course of its voyage out from India the ship in question had earlier reached Hamburg on 17th June, 1956, and discharged substantial cargo. It left Hamburg on 20th June, went to Gydnia in Poland and discharged the remain....
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....alue, which came to Rs. 14,196, was chargeable as profits under the proviso to s. 10(2)(vii). In the assessment year 1959-60 the assessee-company sold one ship, viz., S. S. Jalakanya, to M/s. Kamal Shipping Co. Ltd., which was also 100% subsidiary of the assessee. The original cost of the ship was Rs. 25,59,495 and the depreciation allowed up to the beginning of the accounting year was Rs. 21,39,566. The ship was sold to the subsidiary company for a sum of Rs. 35,00,000 and the question that arose was whether the depreciation allowance, i.e., Rs. 21,39,566, which was recovered in the course of sale, could be charged as profits under the proviso to s. 10(2)(vii). It is interesting to observe that the answer to the question will not be found from s. 10(2)(vii) but depends upon the proper interpretation of the second proviso to s. 12B(1), which relates to capital gains. The statutory provision (excluding the first proviso) may be fully set out : "12B. Capital gains (1) The tax shall be payable by an assessee under the head Capital gains' in respect of any profits or gains arising from the sale, exchange, relinquishment or transfer of a capital asset effected after the 31st day o....
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.... this proviso, which expressly refers to cls. (vi) and (vii) of sub-s. (2) of s. 10, as very material. In his view such wording clearly went to show that the parent company was also exempted from the charge. According to his view, therefore, the addition of the two amounts was clearly unjustified. He accordingly ordered their deletion. In further appeal, the Tribunal upheld the departmental contention for both these items. It found several difficulties in accepting the contentions of the assessee which are summarized in para. 26 of the order of the Tribunal and in para. 17 of the statement of the case. Broadly speaking, we are in agreement with the views expressed by the Tribunal. According to us, fair reading of the second proviso to s. 12B(1) would seem to suggest that after providing for imposition of tax on capital gains an exemption has been made in respect of transfer of a capital asset by a company to its wholly owned subsidiary. By the proviso in which it is made clear that such exemption is for the purpose of this section dealing with capital gains only, and in continuation of that scheme of exemption a corresponding liability is imposed on the subsidiary company to the ef....
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....14,000 1956-57 12,85,000 1957-58 12,85,000 The surpluses accrued to the company since the debentures were quoted at a discount in the open market. We are only concerned with the surpluses in the last two years, viz., Rs. 44,048 in the accounting year 1956-57 and Rs. 46,511 in the accounting year 1957-58. The surpluses in the earlier years were not charged to tax. The ITO took the view that since the assessee-company was purchasing and cancelling debentures year after year, these two amounts for the two years in question could properly be regarded as business profits. According to him, profit making was the dominant motive and in view of the motive and the frequency and the nature of the transactions, the conclusion was inescapable that these were business profits and should be regarded properly as part of the business income of the assessee for these years. In appeal, the AAC agreed with the ITO, relying on the definition of " gross income " in the United States' Inland Revenue Code. In further appeal, the Tribunal upheld the assessee's contention, observing that what had been done had nothing whatsoever to do with the regular business of shipping. According to the Tribuna....
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....ned out of the business activity. Once that conclusion is reached, it is immaterial for us to consider whether the accrual of surplus by the assessee-company is of capital nature or asset. In this view of the matter we are in agreement with the conclusions of the Tribunal and the question would be required to be answered in favour of the assessee. This brings us to the fifth and the final question. This pertains to the amount of Rs. 50,937, and we are concerned with the assessment year 1959-60. The assessee-company had a 100% subsidiary company called M/s. Scindia Steamships (Burma) Ltd., which will be hereinafter referred to as the " Burma company ". The Burma company went into voluntary liquidation with effect from 14th June, 1956. The assessee's share capital in the Burma company was rupees five lakhs. On the date of liquidation the Burma company's reserve was Rs. 4,50,000 while the depreciation fund was Rs. 79,630. As against this there was a debit balance in the profit and loss account of Rs. 3,52,652. The net reserves, therefore, would work out at Rs. 1,76,978. Before the Burma company went into liquidation, its assessment for the year 1942-43 was in dispute before the Inc....
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....ting this further restriction on the statutory provision. In this connection, Mr. Vyas, on behalf of the assessee, referred us to the observation in Navnitlal C. Jhaveri v. CIT [1971] 80 ITR 582 (Bom), at page 586, where it is observed as under: " Now, 'accumulated profits' signifies, firstly, that there must have been profits in earlier years and, secondly, that amounts out of such profits have been accumulated from time to time, with the result that there is some amount of accumulated profits in the possession of the company just before the commencement of the accounting year in this reference. " In our view, bearing in mind what the court was considering in the above reference, this sentence must be regarded as a casual observation and cannot even be elevated to the status of obiter dicta; it cannot be clearly and legitimately used for the purpose of evolving any principle of interpretation of the statutory provision. On the other hand, it may be pointed out that in connection with s. 2(6A)(e) it has been observed that the phrase " accumulated profits " for the purposes of that provision does not mean profits as disclosed by the company's balance-sheet: [see CIT v. J....