# COMMISSIONER OF INCOME-TAX, KERALA v. K. B. KALIKUTTY AND ANR

- **Citation:** [1969] 1 S.C.R. 531
- **Court:** Supreme Court of India
- **Decided:** 1968-08-02
- **Bench:** J. ·c. SHAH, V. Ramaswam!, A. N. Grover
- **Source:** https://unisonlegal.in/judgment/supreme-court-of-india/commissioner-of-income-tax-kerala-v-k-b-kalikutty-and-anr-4436
- **Pages:** 6

## Headnote

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Income Tax Act, 1922, s. 10(2)(vii), second proviso-as amended by
Act 67 of 1949-Scope of.
The assessee was running a business of plying buses and during its
previous year ending on August 16, 1959, the buses h:lli been plied for
part of the year but were sold the~eafter. The Income-tax. Offic~r assessed
the difference between the sale pnce Of the buses and their written down
value to tax as profit under the second proviso to
s.
10(2)(vii). In
appeal, the Appellate Assistant Commissioner rejected the assessee's contention that the business had been transferred as a whole and therefore
the profit in question could not be taxed. The Tribunal also dismissed
an appeal taking the view that the buses had been plied by the assessee
for part df the previous year and the profit on the sale of these buses was
taxable under the said provision.
However, the
High
Cou'ft, upon a
reference, held that the amount ·in question was not assessable as pro.fit
under s. 10(2) (vii) on the assumption that the whole of the bus service
business. had been wound up during the relevant period.
On appeal to this Court.
HELD : allowing the appeal :
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Even on the assumption that the sale of the buses was a closing down
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or a realization sale it would nonetheless be taxable since the sale was
made after the amendment of the second proviso to s. 10(2) (vii) by Act
67 of 1949. [533 F-0]
According to the law laid down by this Court the view of the High
Court would have been sustainable if the sale in the present case had been
effected during the assessment year prior to the amendment o'f the proviso
by Act 67 of 1949. The critical words which were inserted by that proviso namely, "whether during the continuance of the busines·s or after
the cessation thereof', must be given their proper meaning.
It is quite
plain that if the building, machinery or plant is sold during the continuance of the 'business or after the business ceases, the sale proceeds would
be liable to tax in accordance with the pro:viso.
When the legislature
clearly provided that the proviso would apply even if the sale was made
after the cessation Qlf the busineS"s, it is difficult to conceive that it was
intended to exclude from the ambit of the proviso a sale made for the
purpose C\f closing down the business or effecting its cessation. [535 F-H]
Commissioner of Income-tax, Madras v. Express Newspapers Ltd.,
Madras, f1964] 8 S.C.R. 189, 195; Commissioner of Income-tax, Kera/a
v. West Coast Chemicals and lndus·tries Ltd., 46 I.T.R. 135; Co1n1nissioner
of Inr:ome-tax, Kera/a v. R. R. Ramakrishna Pillai, 66 I.T.R. 725
and
The Liquidators of Pursa Limited v. Commissioner of Income-tax, Bihar,
[1954], S.C.R. 767; distinguished.
Commissioner of Income-tax v. Ajax Products Ltd., [1965] 1 S.C.R.
700; referred to.
Ll3Sup.Cl/68-3
532
SUPRE:ME COURT REPORTS
[ 1969] I S.C.R.
Civ1L APPELLATE JuR1smcnoK :· Civil Appeal No. 714 of
A
1966.
Appeal by special leave from the judgment and order, dated
September 17, 1964 of the Kerala High Court in Income-tax
Referred Case No. 62 of 1963.
R. N. Sachtlury, T. A. Ramachandran and R. D. Sharma, for
the appellanL
C. S. Venkateswara Tyer, Sardar Bahadur Saharya and Yougindra Khusa/ani, for respondent No. 2.

## Text

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531
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COMMISSIONER OF INCOME-TAX, KERALA
v.
K. B. KALIKUTTY AND ANR.
August 2, 1968
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(J. ·c. SHAH, V. RAMASWAM! AND A. N. GROVER, JJ.]
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Income Tax Act, 1922, s. 10(2)(vii), second proviso-as amended by
Act 67 of 1949-Scope of.
The assessee was running a business of plying buses and during its
previous year ending on August 16, 1959, the buses h:lli been plied for
part of the year but were sold the~eafter. The Income-tax. Offic~r assessed
the difference between the sale pnce Of the buses and their written down
value to tax as profit under the second proviso to
s.
10(2)(vii). In
appeal, the Appellate Assistant Commissioner rejected the assessee's contention that the business had been transferred as a whole and therefore
the profit in question could not be taxed. The Tribunal also dismissed
an appeal taking the view that the buses had been plied by the assessee
for part df the previous year and the profit on the sale of these buses was
taxable under the said provision.
However, the
High
Cou'ft, upon a
reference, held that the amount ·in question was not assessable as pro.fit
under s. 10(2) (vii) on the assumption that the whole of the bus service
business. had been wound up during the relevant period.
On appeal to this Court.
HELD : allowing the appeal :
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Even on the assumption that the sale of the buses was a closing down
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or a realization sale it would nonetheless be taxable since the sale was
made after the amendment of the second proviso to s. 10(2) (vii) by Act
67 of 1949. [533 F-0]
According to the law laid down by this Court the view of the High
Court would have been sustainable if the sale in the present case had been
effected during the assessment year prior to the amendment o'f the proviso
by Act 67 of 1949. The critical words which were inserted by that proviso namely, "whether during the continuance of the busines·s or after
the cessation thereof', must be given their proper meaning.
It is quite
plain that if the building, machinery or plant is sold during the continuance of the 'business or after the business ceases, the sale proceeds would
be liable to tax in accordance with the pro:viso.
When the legislature
clearly provided that the proviso would apply even if the sale was made
after the cessation Qlf the busineS"s, it is difficult to conceive that it was
intended to exclude from the ambit of the proviso a sale made for the
purpose C\f closing down the business or effecting its cessation. [535 F-H]
Commissioner of Income-tax, Madras v. Express Newspapers Ltd.,
Madras, f1964] 8 S.C.R. 189, 195; Commissioner of Income-tax, Kera/a
v. West Coast Chemicals and lndus·tries Ltd., 46 I.T.R. 135; Co1n1nissioner
of Inr:ome-tax, Kera/a v. R. R. Ramakrishna Pillai, 66 I.T.R. 725
and
The Liquidators of Pursa Limited v. Commissioner of Income-tax, Bihar,
[1954], S.C.R. 767; distinguished.
Commissioner of Income-tax v. Ajax Products Ltd., [1965] 1 S.C.R.
700; referred to.
Ll3Sup.Cl/68-3
532
SUPRE:ME COURT REPORTS
[ 1969] I S.C.R.
Civ1L APPELLATE JuR1smcnoK :· Civil Appeal No. 714 of
A
1966.
Appeal by special leave from the judgment and order, dated
September 17, 1964 of the Kerala High Court in Income-tax
Referred Case No. 62 of 1963.
R. N. Sachtlury, T. A. Ramachandran and R. D. Sharma, for
the appellanL
C. S. Venkateswara Tyer, Sardar Bahadur Saharya and Yougindra Khusa/ani, for respondent No. 2.
The Judgment of the Court was delivered by
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Grover, J. The sole question for determination in this appeal c
by special leave is whether on a true interpretation and construction of the second proviso to s. 10 ( 2) (vii) of the Income Tax
Act 1922, sale of the assets of an assessce effected for the purpose
of closing down the business would be covered by that proviso
and would be assessable as profit.
The assessee was running the business of plying buses in the
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name of Kumar Motor Service.
During the assesscc's previous
year which was the year ending August 16, 1959 the buses had
been plied for part of the year but they were sold between August
16, 1958 and January 13, 1959. Two of the buses had been sold
for Rs. 78,000 and the other four for Rs. 35,000, the total consideration received being Rs. 1,13,000. The assessee claimed a
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payment of Rs. 2,000 a~ brokerage.
The Income Tax Officer
fixed a sum of Rs. 25,000 as the route value and held this amount
to be a capital gain assessable to tax. On the balance of Rs. 86,000
he worked out the profits in the following manner :-
Sale price of 6 buses :
Rs. 86,000
Written down value of six
F
buses
Rs. 36,712
Rs. 49,288
The Income Tax Officer consequently
assessed
the
sum
of
Rs. 49,288 as profit under the second proviso to s. 10(2)(vii).
Before the Appellate Assistant Commissioner
in
appeal
the
asscssee contended that the business had been transferred as a
whole and therefore no profit could be taxed under the aforesaid
provision.
This contention was rejected by the Appellate Assistant Commissioner on the ground that the transaction was only
of sale of buses, along with the route value and this constituted
sale of major assets but the business as such was not transferred
'or handed over to any party. Before the Income Tax Appellate
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C.I.T. v . . KALIKUTTY (Grover,'/.)
533
TribWJal the determination of Rs. 86,000 as the value of six
buses was not disputed and the only point agitated related to the
assessability of the amount of Rs. 49,288 as business profit under
the second proviso. The tribunal was of the opinion !hat the
buses had been plied by the assessee for part of the previous year
and the profit on the sale of these buses was taxab'.e under the .s~d
provision. The tribunal in its appellate order noticed the declSlon
of this Court in Commissioner of Income Tax, Madras v. Express
Newspapers Ltd., Madras(') in which the question arose wheth~r
the second proviso would apply where the sale had been made Ill
the process of winding up of a company but distinguished it on
the groWJd that this Court in that case considered the second
proviso as it stood before the amendment made by s. 11 of the
Taxation Laws (Extension to Merged States and Amendment)
Act, 1949 (67 of 1949). The decision of this Court in Commissioner of Income Tax, Kerala v.
West Coast Chemicals and
Industries Ltd.( 2 ) was also held by the tribunal to be inapplicable
to the facts of the present case.
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The assessee moved the tribunal for making a reference t<>
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the High Court and the following question was referred :
"Whether on the facts and in the circumstances of
the case, the sum of Rs. 49,288 was assessable as profit
under the provisions of section 10 ( 2) (vii) ?".
Although the tribunal had given no finding that the whole of the
bus service business had been wound up during the relevant period,
the High Court proceeded to answer the question on that assumption. It is difficult to see how the High Court was justified in
saying that the tribunal had apparently accepted the contention
that the sale was a closing down or a realization sale.
In such
a situation we might have followed the course which commended
itself in Commissioner of Income Tax, Kera/a v. R. R. Ramakrishna Pillai('); but we are of the opinion that even on the
assumption that the sale of the buses was a closing down or a realization sale ·it would nonetheless be taxable since the sale was
made after the amendment of the second proviso by Act 67 of
1949. The High Court in the present case referred to the observations in the Commissioner. of Income Tax v. Express Newspapers Ltd., Madras(') and to the three conditions laid down
therein for bringing the sale proceeds to charge under the second
proviso.
The High Court thought that the third condition was
not satisfied as the sale of the buses was a closing down or a
realization sale which was a mere incident of the winding up
process of the business. It was consequently held that the question
(1)
[19641 8 S.C.R. 189, 195.
(2)
46 I.T.R. 135
(3) 66 I. T. R. 725.
534
SUPREME COURT REPORTS
(1969] I S.C.R.
referred must be answered in favour of the assessee and againsl
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the Revenue.
Now the second proviso was in the following terms :
"S. 10 ............................. .
(2) .............................. .
Proviso ( 1 ) ...................... : .. .
( 2) Provided further that where the amount
for
which any such building, machinery or plant is sold
(whether during the continuance of the business or after
the cessation thereof), exceeds the written down value,
so much of the excess as does not exceed the diffcrenc~
between the original cost and the written down value
shall be deemed to be profits of the previous year in
which the sale took place;"
The words within brackets did not exist before the amendment
wade by Act 67 of 1949 and were inserted by that Act. In The
Liquidators of P11rsa Limited v. Commissioner of Income Tax.
/Jihar( 1 ) the controversy arose out of the proceedings relating to
the assessment of Pursa Limited for the assessment year 1945-46.
Attempts had been made from 1942 onwards to sell the ~ntirc
business of the company but without success. In December 1943
an agreement was executed whereby the assesscc agreed to sell
all the lands, buildings, machinery, plant etc., used in connection
with the sugar factory which was being run by the company. On
the date of the sale the company possessed sugar stocks valued at
Rs. 6 lakhs which the company continued to sell up to June 1944.
The company went into voluntary liquidation on June 20, 1945.
The Income Tax Officer held that the profits of the sale of ni:ichinery and plant were liable to assessment under s. 10(2) (vii).
The Appellate Asstt. Commissioner and the Income Tax Appellate
Tribunal affirmed that ordc.r.
After the matter had been taken
to the High Court it came finally in appeal to this Court. It was
held that the intention of the company was to discontinue its
busine.'5 and the sale of the machinery and plant was a step in the
process of the winding up of the business culminating
in
the
voluntary liquidation of the company and even if the sale 0f the
stock of sugar be regarded a~ carrying on of husincss of the company and not a realisation of its assets with a view to winding uo.
the machinery or plant not having been used at all. s. 10(2) (vii)
would have no application to the sale o~ any such machinery or
plant. The controversy in Commissioner of Income Tax, Kera/a
v. West Coast Chemicals and Industries Lrd.(') arose out of the
assessment of the company for the accounting year ending April
30, 1944. The assessee company had entered into an agreement
(!) Jl9541 S.C.R. 767.
(2) 46 l.T.R. IJl
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C.I.T. v. KALIKUTTY (Grover, J.)
535
in I 943 for the sale of the lands, buildings, plant and machinery
of a match factory with a view .to close down the business. The
purchaser made default in payment and a few months later a fresh
agreement was entered into between· the parties for the sale of
the property mentioned in the first agreement and also chemicals
and paper used for manufacture which had not been included in
the first agreement. The Department sought to assess the profits
derived from the sale of the chemicals and paper as profits from
the business. The assessee contended that it was a realisation sale
and this amount was not liable to tax.
It was held that on the
facts of that sale the sale of chemicals and materials used in the
manufacture of matches was only a winding up sale to close down
the business and to realise all the assets. Therefore the tax liability was not attracted. In Commissioner of Income Tax, Madras
v. Express Newspapers Ltd., Madras(') a decision on which the
High Court relied a great deal in the present case the question
again arose out of the assessment made before the amendment
made in 1949, the accounting year being 1946-47.
Reference
was made by Subba Rao, J., (as he then was)
delivering the
judgment of this Court to the decision in the case of The Liquidators of Pursa Limited( 2 ) as also to other decisions and after
an examination of the relevant provisions the following three
conditions were laid down for bringing the sale proceeds to charge
under the second proviso to s. 10(2)(vii) :
" ( 1 ) During the entire previous year or a part of
it the business shall have been carried on by the assessee;
( 2) the machinery shall have been used in the
business; and
( 3) the machinery shall have been sold when the
business was being carried on and not for the purpose of
closing it down or winding it up."
There can be no doubt that according to the law laid down
by this Court the view of the High Court would have been sustainable if the sale in the present case had been effected during the
assessment year prior to the amendment of the proviso by Act 67. of
1949.
The critical words which were inserted by that proviso
namely, "whether during the continuance of the business or after
the cessation thereof'', must be given their proper meaning.
It is
quite plain that if the building, machinery or plant is sold during
the continuance of the business or after the business ceases the
sale proceeds would be liable to tax in accordance with that proviso. The only question therefore is whether when a sale is made
for the purpose of closing down the business or effecting its cessation the proviso would be inapplicable.
When the legislature
clearly provided that the proviso would apply even if the sale
(!) 1954 8 S.C.R 189.
(2) [!954j S.C.R. 767
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SUPREME COURT REPORTS
(1969] l S.C.R.
was made after the cessation of the business it is difficult to conceive that it was intended to exclude from the ambit of the proviso
realisa\ion sales of the nature contemplated in the previous decisions of this Court.
Such a result would be illogical.
Even if
logic is not necessarily to govern the interpretation of a taxing
provision, the rule of reasonable interpretation cannot be ignored.
lndeed this Court in a recent judgment Commissioner of Income
Tax v. Ajax Products Ltd.(') clarified the position ahout the effect
of the amendment made in 1949 in the proviso and reference was
made to the three conditions for the applicability of the second
proviso before the amendment which were laid down in the pre-.
vious decision of this Court. It was then observed :
"the words whether during the continuance of the
business or after the cessation thereof were not present
in the unamended proviso.
In the two decisions cited
earlier, in the absence of such words, this Court held
that to attract the said proviso the machinery shall have
been sold before the business was closed down.
This
clause omits that condition for the exigibility of the tax".
The above observations clearly show that the amending words in
the proviso eliminated the third condition which had been laid
down for its applicability in the previous decision namely, that
the machinery shall have been sold when the business was being
carried on and not for the purpose of closing it down or winding
it up.
Once that condition disappears as a result of the amendment only the first two conditions remain and all that has to be
seen is whether during the entire previous year or a part of it the
business has been carried on by the assessee and that the machinery has been used in the business.
Both these
conditions,
according to the finding given by the tribunal, exist in the present
case. The result would be that the profits arising out of the sale
of buses in question as determined by the Income Tax Officer
would he chargeable to tax in accordance with the second proviso
to:;. 10(2)(vii).
The answer to the question referred in the present case has
to be in the affirmative and against the assesscc.
The appeal is
consequently allowed with costs and the answer returned by the
High Court is discharged.
We arc informed at the Bar that K. B. Kalikutty one of the
legal representatives of the assessee had died before Special
Leave was granted.
It will be open to the Tribunal to decide
the effect of death of the said legal representative and to nonimpleadment of the legal representatives of the deceased at the
hearing under section 66(5) of the Act.
R.K.P.S.
Appeal allowed.
(I) [19651 I S.C.R. 700.
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