# COMMISSIONER OF INCOME-TAX, MADRAS v. EXPRESS NEWSPAPERS LTD., MADRAS

- **Citation:** [1964] 8 S.C.R. 189
- **Court:** Supreme Court of India
- **Decided:** 1964-05-07
- **Case number:** Civil Appeal No. 596 of 1963
- **Bench:** K. Subba Rao, J. C. Shah, S. M. Sikri
- **Source:** https://unisonlegal.in/judgment/supreme-court-of-india/commissioner-of-income-tax-madras-v-express-newspapers-ltd-madras-3247
- **Pages:** 16

## Headnote

111con1e-tax-Sale of 111achiner)' after cfO.H! of
busi111'.~s-A:no1111t
i11
excess received 01·er written dow1t 1·11/11c a11d 01·er Ifie ori;;i11(/I cost
price of n1aclli11ery-Whetlier 1axah!t1-IVherlier Stl(Tt'.\'.W!f !iahfr 1,.,
be assessed 011 capital gains-f/u·o111c-tax Act, 1922 ( 11 of 1922;,
ss. 19(2) (vii) second pro1·iso, s. 26(2) 011d prvri!>·o.
The Free Press Company was a private limited conipany carrying on
business ".\S printers and publishers of certain newspaper~. On • .\ugust 31,
1946, tl:
Free Press Company transferred the right 10 print and publish
the newspapers to the assessee company and let out i1s n1achinery and
assets to the latter v,.·ith effect from Septen1ber l, ! 946. The as~cssee
company al!cordingly started publishing nc\vspapers fro•n September 1,
1946.
The Free Press Company \\·ent into voluntary liquidation on
01.'.:tober 31, 1946_. and the Liquidator, on November 1, 1946, confirn1ed
the transfer of the assets made by the Free Press Con1pan;· to the
assessee-company. On November l, 1946 the aforesaid
tn.:i.chit~i:ry was
sold yielding a profit of Rs. 6,08,666. That sun1 wus made up of.
(i) the difference between the original cost price rtnd the written down
of price machinery
R'i. 2.14,090. (ii) the an1ount in l'X( C'>S over rhe
original cost price . . J~s. 3,94,576. In assessing the assessee to incomctax for the accounting year 1946-47 the Income-tax Officer included. the
said two items in the total income of the assessee-con1pany. The first
item was assessed as profit under proviso to s. 10(2) (vii) of the Incometax Act and the second item was assessed as capital ,gains.
The matter
went up to the High Court. On a reference the High Court held that
the assessee was not liable to tax in respect of the said two items.
Held: (i) The second proviso to s. 10(2)(vii) of the Act wduld
only aprly to the sale of such machinery which was used for the purpose
of business during the accounting year. In order to bring the sale
proceeds to charge under the second proviso the foUowing conditions
shall be fulfilled: (I) During the entire previous year or a part of it
the business sha11 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.
On the facts of
this case it was held that the sale of the machinery in the instant case
having taken place after the business \Vas closed and during the '\vinding
up proceedings therefore it would fall outside the scope of the said
proviso and thus the first item i.e. the sun1 of Rs. '.!,14.090 could not
be assessed to income-tax.
1964
.\fay 7
190
SUPl<EME COURT REPORTS
[1g64]
1964
The Liquidator9 of Pnrsa Lilnited v. Comniissioner of Income-tax,
Bihar, [19541 S.C.R. 76i an<l K.
Af.
S.
Reddy,
Con1n1issioner
of
1
C.!:T.
lncon1e-tax, Kerala v. West Coast Chemicals and Industries Ltd. (in
Express
News- liquidation), Alleppy, [1962] Supp. 3 S.C.R. 960, relied on.
papers Ltd.
I
Co111n1issioner of lnco1ne-tax, Bonibay Circle fl v.
The National
Syndicate, Bombay, [1961] 2 S.C.R. 229, explained.
(ii) Both the sub-s. (2) of s. 26 and the proviso deal only with
profits under the 4th bead mentioned in s. 6 and, so construed, it
excludes capital gains. The profits and gains of business and capital
gains are two distinct concepts in the Income-tax Act: the former arises
front the activity which is called business and the latter accrues because
capital assets are disposed of at a value higher than what they cost
the assessee. Therefore under s. 26(2) of the Act the assessee being
the successor could not be liable to income-tax ·in respect of Rs. 3,94,576
(the second item) which represented the capital gains because capital
gains are excluded from the purview of s. 26(2) of the Act.
United Conunercial Baok Ltd. v. Commissioner of lncome•tax1 We.st
Be11g11/, [1958] S.C.R. 79, referred to,

## Text

S S.C.R.
SUPREME COURT REPORTS
COMMISSIONER OF INCOME-TAX, MADRAS
v.
EXPRESS NEWSPAPERS LTD., MADRAS
(K. SUBBA RAO, J. C. SHAH AND S. M. SIKRI. JJ.)
111con1e-tax-Sale of 111achiner)' after cfO.H! of
busi111'.~s-A:no1111t
i11
excess received 01·er written dow1t 1·11/11c a11d 01·er Ifie ori;;i11(/I cost
price of n1aclli11ery-Whetlier 1axah!t1-IVherlier Stl(Tt'.\'.W!f !iahfr 1,.,
be assessed 011 capital gains-f/u·o111c-tax Act, 1922 ( 11 of 1922;,
ss. 19(2) (vii) second pro1·iso, s. 26(2) 011d prvri!>·o.
The Free Press Company was a private limited conipany carrying on
business ".\S printers and publishers of certain newspaper~. On • .\ugust 31,
1946, tl:
Free Press Company transferred the right 10 print and publish
the newspapers to the assessee company and let out i1s n1achinery and
assets to the latter v,.·ith effect from Septen1ber l, ! 946. The as~cssee
company al!cordingly started publishing nc\vspapers fro•n September 1,
1946.
The Free Press Company \\·ent into voluntary liquidation on
01.'.:tober 31, 1946_. and the Liquidator, on November 1, 1946, confirn1ed
the transfer of the assets made by the Free Press Con1pan;· to the
assessee-company. On November l, 1946 the aforesaid
tn.:i.chit~i:ry was
sold yielding a profit of Rs. 6,08,666. That sun1 wus made up of.
(i) the difference between the original cost price rtnd the written down
of price machinery
R'i. 2.14,090. (ii) the an1ount in l'X( C'>S over rhe
original cost price . . J~s. 3,94,576. In assessing the assessee to incomctax for the accounting year 1946-47 the Income-tax Officer included. the
said two items in the total income of the assessee-con1pany. The first
item was assessed as profit under proviso to s. 10(2) (vii) of the Incometax Act and the second item was assessed as capital ,gains.
The matter
went up to the High Court. On a reference the High Court held that
the assessee was not liable to tax in respect of the said two items.
Held: (i) The second proviso to s. 10(2)(vii) of the Act wduld
only aprly to the sale of such machinery which was used for the purpose
of business during the accounting year. In order to bring the sale
proceeds to charge under the second proviso the foUowing conditions
shall be fulfilled: (I) During the entire previous year or a part of it
the business sha11 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.
On the facts of
this case it was held that the sale of the machinery in the instant case
having taken place after the business \Vas closed and during the '\vinding
up proceedings therefore it would fall outside the scope of the said
proviso and thus the first item i.e. the sun1 of Rs. '.!,14.090 could not
be assessed to income-tax.
1964
.\fay 7
190
SUPl<EME COURT REPORTS
[1g64]
1964
The Liquidator9 of Pnrsa Lilnited v. Comniissioner of Income-tax,
Bihar, [19541 S.C.R. 76i an<l K.
Af.
S.
Reddy,
Con1n1issioner
of
1
C.!:T.
lncon1e-tax, Kerala v. West Coast Chemicals and Industries Ltd. (in
Express
News- liquidation), Alleppy, [1962] Supp. 3 S.C.R. 960, relied on.
papers Ltd.
I
Co111n1issioner of lnco1ne-tax, Bonibay Circle fl v.
The National
Syndicate, Bombay, [1961] 2 S.C.R. 229, explained.
(ii) Both the sub-s. (2) of s. 26 and the proviso deal only with
profits under the 4th bead mentioned in s. 6 and, so construed, it
excludes capital gains. The profits and gains of business and capital
gains are two distinct concepts in the Income-tax Act: the former arises
front the activity which is called business and the latter accrues because
capital assets are disposed of at a value higher than what they cost
the assessee. Therefore under s. 26(2) of the Act the assessee being
the successor could not be liable to income-tax ·in respect of Rs. 3,94,576
(the second item) which represented the capital gains because capital
gains are excluded from the purview of s. 26(2) of the Act.
United Conunercial Baok Ltd. v. Commissioner of lncome•tax1 We.st
Be11g11/, [1958] S.C.R. 79, referred to,
CIVIL APPELLATE JURISDICTION: Civil Appeal No. 596
of 1963.
Appeal from the judgment dated March 1, 1960 of the
Madras High Court in Case Referred No. 11 of 1955.
K. N. Rajagopal Sastri and R. N. Sachthey, for the
appellant.
R. Ganapathy Iyer and R. Gopalakrishnan. for the
respondent.
May 7, 1964 The Judgment of the Court was delivered
by
Subba Rao J.
SUBBA RAo, J.-This appeal by special leave is preferred against the order of the Madras High Court in a reference made to it by the Income-tax Appellate Tribunal
under s. 66 ( l) of the Income-tax Act, 1922, hereinafter
called the Act.
The facts leading up to the reference and relevant to
the present enquiry are as follows. The Free Press of Tndia
(Madras) Ltd., hereinafter called the Fre.e Press Company,
was a private limited company carrying on business
as
priaters and publishers
of certain
newspapers,
namely,
"Indian Express", "Dhinamani" and "Andhra Prabha" at
S S.C.R.
· SUPREME COURT. REPORTS
191
Madras, "Eastem Express" and "Bharat" at Calcutta and
1964
"Sunday Standard" and ''Morning Stal\dard" at Bombay.
c.r.i.
On A~gust 31, 1946, the Free Press Company passed a
•·
resolution transferring to the Express Newspapers Limited, Exp;::,,, !::,ws·
a ne\'I company formed on or about April 22, 1946, here-
-
· f
II d h
h
· h
·
d Suhha Rao J
ma ter ca e t e assessee-company, t e ng t to pnnt an
·
pc1blis!t the said newspapers
from
September 1,
1946.
letting out its machinery and assets
and authorizing the
assessee-company to collect the book debts and pay off the
liabilities of the Free Press
Company.
The
asscsseecornp:my accordingly started publishing
newspapers from
September J, 1946. On October 31, 1946. the Free Press
Com;:o~ny resolved at a General Body Meeting to wind up
the company voluntarily.
The liquidator appointed thereunder was directed not to carry on the business of the comp::my.
On November 1, 1946, the
liquidator ascertained
th~ \:-Jue of the assets over the liabilities taken over by the
assessee-company as per the bal«.ice-sheet at Rs. 19,36.000/-
and tl1is amount was credited to the 'account of the
two
direc:ors of the Free Press Company in the assessee's books.
The profit of the Free Press Company was worked out to
be Rs. 6.08,666, being the difference between the written
dcwn value and the sale price of the machinery. That sum
was made up of, (i) the difference between the original cost
price and the written dowri price of the machinery .... '
R~. 2.14,090/-, (ii) the amount in excess over the original
cost rricc ... Rs. 3,94,576/-. The Income-tax Officer included the said two items in the' total income of the assesseecompany under the following heads, (i) profit under proviso to s. l0(2)(vii) .... Rs. 2.14,090/-. and (ii) capital
gains under s. 12B .... Rs. 3,94,576/-, and assessed each to
tax.
The Income-tax
Appellate
Tribunal
upheld
the
validity of the inclusion of the item under capital gains in
the total income of the assessee but decided against
the
inclusion of the first item. The Appellate Tribunal referred
the following two questions, among others. for the decision
of the High Court of Madras under s. 66 (1) of the Incometax Act:-
"4. Whether Free Press Company made a business
profit of Rs. 2,14,090/-
under proviso to
section 10 ( 2 )(vii) of the Act?"
1'64
CJ.T.
v.
llxp1"u
Ntw1paptrs Ltd.
192
SUPREME COURT REPORTS
"6. Whether the capital gain made by the Free
Pres& Company is liable to be assessed in the
hands of the Express Company, under section
26(2) of the Act?"
Subba Rao 1.
The reference was heard by a Division Bench of the High
Court, consisting of Rajagopalan and Ramachandra Iyer,
JJ., who by th.cir judgment answered the two questions in
the negative and against the
department.
The present
appeal is preferred against the said judgment of the High
Court.
The argument in the appeal proceeded on the basis of
the following facts.
During the accounting year 1946-4 7
the Free Press Company did not do the business of printing
and publishing newspapers from_ September 1, 1946, and
thereafter the assessee-company alone was carrying on the
said business.
The Free Press Company went into voluntary liquidation on October 31, 1946, and the liquidator,
on November 1, 1946, confirmed the transfer of the assets
made by the Free Press Company to the assessee-company.
Therefore, on November 1, 1946, the aforesaid machinery
was sold yielding a profit of Rs. 6,08,666/-
to the. Free
Press Company being the difference
between the written
down value and the sale price of the machinery. Broadly
stated, the machinery was sold by the Free Press Comp2ny
during the accounting year after it closed down its business
and after it went into yoluntary liquidation. On those
facts learned counsel for the Revenue raised before us the
following two contentions:
( 1)
The first
item of
Rs. 2,14,090/-, representing the surplus over the written
down value of the machinery was assessable in accordance
with the proviso to s. 10(2) (vii) ·of the Act; and (2) the
second item of Rs. 3,9.4,576/-, representing the
capital
gains made by the Free Press Company is assessable in the
hands of the assessee-company, who succeeded to the said
business, under s. 26(2) of the Act.
Learned counsel for the respondent contended that
neither the conditions laid down in s. 10(2) (vii) of the
Act nor those laid down in s. 26(2) thereof attracted the
said two items of income and,
therefore, they were
not
~sse"3ble in the hands of the assessee-company.
b S.C.R
SUPREME COURT REPORTS
193
The first question turns upon the relevant provisions ot
1964
s. IO of the Act. To 'have a clear view of the scope of the
C.l.T.
relevant provisions it will be convenient to read them
at
v.
Express
New,..
one place.
papm Ltd.
Section 10.-(l) The tax shall be payable by an
assessee under the head "Profits and gains of
business, profession or vocation" in respect of
the profit or gains of any business, pr0fession
or vocation carried on by him.
! 2) Such profits or gains shall be computed after
making the following allowances, namely:--
•
•
•
*
(iv) in respect
of
insurance against
risk
of
damage
or
destruction of
buildings,
machinery, plant, furniture, stocks or stores,
used for the purposes of the business, profession or vocation.
the amount of any
premium paid:
(v) in respect of current repairs to such buildings,
machinery, plant
or furniture, the amount
paid on account thereof:
(vii) in respect of any such building. machinery
or plant which has been sold or discarded or
demolished or destroyed,
the amount by
which the written down value thereof exceed1
the amount for which the building, machinery
or plant, a:1 the case may be. is actually sold
or its scrap value:
•
*
•
Provided further that where the amount for whicl1
any such building, machinery or plant is
sold, whether during the continuance of the
business or after the cessation
thereof.
exceeds the writte!l down value, so much of
the excess as does not exceed the difference
between the original cost and the
written
~I S.C.-13
S11bha Rao I.
1964
CJ.T.
v.
194
SUPREME COURT REPORTS
&prU8
New.-
down value shall be deemed to be profits of
the previous year in which the sale took
place:
papen Lid.
Subbn Rao J.
•
•
•
We are concerned with the second proviso to s. 10 ( 2 J l vii)
of the Act. The substantive clause grants a balancing allowance in respect of building, llllichine_ry 01 plant which has
been sold or discarded or demoli'lhed or destroyed.
The
allowance represents the excess of the written down value
over the sale price.
Under the proviso, if the sale price
exceeds the written-down value, but does not exceed
th·!
original cost price, the difference between the original cos•
and the written down v;tlue shall be deemed to be profits of
the year previous to that in which the sale t::kes place; that
is to say, the difference between the price fetched at the
sate am! the written down
value is deemed to be the
escaped profits for which the assessee is made liable to tax
As the sale price is higher than the written down value,
the difference represents the excess depreciation mistakenly
granted to the assessec.
To illustrate:
assume that
the
original mst of a machinery or plant is Rs. 100/· and
depreciation allowed is Rs. 25/-; the written down vaiue is
Rs. 75.
If the machinery is sold
for Rs. lOO/-,
it is
obvious that depreciation of Rs. 25/- was 'wrongly allowed.
If it had not been allowed that amount would have swelled
the profits to that extent.
When it is found that it was
wrongly allowed that profit
is brought to charge.
The
second proviso, therefore, in substance, brings to charge an
escaped profit or gain of the business carried on by the
assessee.
The scope of this proviso cannot be ascertained
in vacuum.
The conditions for its applicability
can he
ascertained only in its relation to the other related
provi···
sions.
Under s. 3 of the Act income-tax shall be chareed
for any year in accordance with and subject to the pr~vi.
sions of the Act in respect of the total income of the
previous year of everv assessee:
under s. 6. one of the
heads of taxable income is "profits and gains of busines>,
profession or vocation"; under s. 10( 1), the tax under th3t
head is payable in respect of profit or gains of any busine>'·
carried on by the assessee during the accounting year. Th<:
S S.C.R.
SUPREME COURT REPOl~TS
195
main condition which attracts all the other sub-sections and
19U
clauses of the section is that the tax shall be payable by an
c.1x.
assessce in respect of the profit or gains of any business E
9 • N
etc. carried on by him.
The crucial words are "business xp=,. £14-:--
canied on by him". If the profit or gains were not earned
Sub~a Rtll> I.
when the business was being carried oil by the asscsse~
durin_g -the accounting year, they would fall. outside
th~
prmi1ion of s. 10(1). For instance, if the machinery sold
after the business was closed or when the business was
under liquidation, it would not be appropriate to hold that
the profit or gains earned by the sale were in respect of th~
bUBiness that was befug c11rried on by the assessee.
Th.,
second condition that attracts the second proviso is implicit in the adjective "sucq" preceding "building, machiner)
or. plant" sold.
The adjective "such" refers back to els.
(iv), (v), (vi) and (vii) of s. 10(2). Under cl. (iv) an
anovlance is allowed in regard to any premium paid
in
respect of insurance l!gainst risk of damage or destruction
of buildings, machinery, plant etc. used for .the purpose c\
the business, profession
or vocation.
Under this clausr
allowance is allowed only in re,<;pect of the machinery used
for the purpose of the business. Clauses (v), (vi) and
(vii) refer to su_ch buildings, machinery, plant etc.; that j,
to say, such buildings, _machinery,
plant etc. _used
for
the purpose of the business. The resuit is that the second
proviso will only apply to the sale of such machinery which
was used for
the purpose of the business during the
accounting year. It brings in to charge the escaped profit~
under the guise of superfluous allowances if the machinery
sold was used for the business during the accounting year
when the business was being carried c:_>n.
Therefore.
to
brlng the sale proceeds to charge the following conditions
shall be fulfilled: (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. If these
were the
conditions for the applicability of the said proviso. the sale
of the machinery in the instant case having taken
placl.'
after the business was closed and during the winding
UP'
1964
<:.J:r .
...
/llJqlHa
Nn11-
~Lid.
~bl>o Roe J.
196
SUPREME COURT REPORTS
[11:)64.]
proceedings, it would fall outside the scope of the said
proviso and therefore the first item is not assessable to tax.
This point directly arose for consideration in Tire
Liquidators of Pursa Limited v. Commissioner of lncometax, Bihar('). There, the assessee-company carried on the
business of growing sugarcane and manufacturing and selling sugar. In the year 1943 it negotiated for the sale ot
the factory and other assets with the object of winding up
the company. It received a firm offer on August 9, I 943,
and concluded the agreement of sale on December 7, 1943.
Between August 9, 194~, and December 7, 1943, it never
used the machinery and p1ant for the purpose of manufacturing sugar or for any other purpose except that of
keeping them in triln and running order. In the assessment of the co,Qlpany to income-tax for the accounting
period from October l, 1943, to September 30, 1944, tbe
income-tax authorities treated the surplus made by the
company on the sale of the buildings, plant and machinery
as profits under proviso (2) to s. 10(2)(vii) of the Act.
This Court held that the .said amount was not taxable.
This Court rejected the contention of the Revenue that the
said excess was taxable on two grounds, namely, ( I ) "the
sale of the machinery and plant was not an operation
ic11
furtherance of the busin~ carried on by the company but
was a realisation of its assets in the process of gradu::il
winding up of its business which eventually. culminated in
the voluntary liquidation of the company; (2) "even if the
sale of the stock of sugar be regarded as carryinl!; on
of
business by the company_ and not a realisation of its assets
with a view to winding up, the machinery or plant not being
used in the accounting year at all and in any event not
having had connection with the carrying on of that lim.ited
business during the accounting year, s. 10(2) (vii) could
have no application to the sale of any such machinery or
plant". Learned couns~ for the Revenue contends ttist
the main reason for the decision was that the machinery -0r
the plant was not used in the accounting year for the bvsiness and that the second reason, namelv, that the
assets
were sold in the process of gradual winding up of the COM·
(I) [r954) S.C.R. 767
~· S.C.R.
SUPREME COUl\.T REPORTS
pany was only an observation and that the decision was not
!964
based upon the said observation. But a careful perusal of
c1.r.
tlie judgment discloses beyond any reasonable doub.t that F.xP'"# "· N._
the decision was based upon both the grounds.
As m the
pqer-1 UL
present case the machinery was sold not for the business
Suboo llDlJ 1.
but only for closing it up during the liquidation proceedings, this decision directly covers the present case. This
question again fell to be considered by this Court in The
Commissioner of Income-tax,
Bombay Circle ll v.
The
Natimia/ Syndicate,
Bombay(').
There,
the National
Syndicate, a Bombay firm, acquired on January 11, 1945.
a tailoring business as a going concern for Rs. 89,321/-
which included the consideration paid for sewing machines
znd a motor lorry. Soon after the purchase the respondent
found it difficult to continue the business, and therefore it
closed its business in August, 1945. Between August
16.
1945, and February 14, 1946, sewing machines and
the
motor lorry were sold at a loss. The relipondent closed it<
<Jf~ount books on February 28. 1946, showing the two
losses and writing
them off.
For the assessment year
:I 946-47, the respondent claimed a deduction under s .. to
(2) (vii) of
the Indian Income-tax Act.
The question
fell to be considered on a construction of the provisions of
,;, !0(2)(vii) of the Act.
This Court, sp.eaking through
Hidayalullah, J., held
that the loss
was a business Joss.
t.'iough the machines and the motor lorry were sold after
the business was clo~ed down, as the said machines
and
Jorry were used for the purpose of the business during a
part of the acc~mnting year and· were sold
during
the
accounting vear.
This Court, after noticin!!- the decision
under appeal and that of this Court in The Liquidat,,,.,,. nf
Pursa Limited v. Commi.rsinner nf Income-tax, Bih,,r(2 ),
and the amendment introduced in the second
proviso to
s. 10(2) (vii) of the Act, observed:
"But it is to be noticed that no such amendment
was made in cl.
(vii) to exclude loss over
buildin!!-s. machinery or plant after the closure
of the business.
It is thus
clear that the
principles which govern the proviso cannot be
-----
(1) [1961) 2 S.C.R. 229
(2) [1954J S.C.R. 767
lilU
C.l.T.
Y.
,,,,...
. N.w1-
;o,.,. Lid.
Subba Rao J.
198
SUPREME COURT REPORTS
[1964]
used to govern the main clause, because profit
or loss arise in different ways in business. The
two rulings do not, therefore, apply to the facts
here."
It is contended that the principle accepted by this decision
is in conflict with that laid down in the case of The
Liquidators of Pursa Limited('). It is said that the condition that the sale of the machinery at a loss should have
been before the closing of the business is lmpliedly laid
down by s. I 0( I) of the Act which applies equally to cl
(vii ) as well as to the second proviso thereto, and that if
the condition need not be fulfilled in the case falling under
the substantive part of cl. (vii) of s. 10(2) of the Act, it
will be incongruous to apply it to a case falling under the
second proviso before it was amended.
So stated there is
some plausibility in the argument. But this Court in express terms made a distinction between the scope of the
substantive part of cl. (vii) and that of the second proviso
thereto and expressly distinguished
those rulings on
the
ground that they would not apply to the construction of the
substantive part of cl. (vii).
When this Court expressly
confined the scope of the decision to the substantive part of
cl. (vii) without disturbing the validity of the decision.'
governing the second proviso, it is not proper that we
should rely upon it in preference to a direct decision on the
second proviso to cl. (vii) of s. 10(2) of the Act before it
was amended. This Court in K. M. S. Reddy, Commissioner of Income-tax, Kera/a v. The West Coast Chemicals
and Industries Ltd. (in liquidation), Alleppy(") held that a
winding up sale was not trading or doing business.
There.
chemicals and other raw-materials were sold not in the
course of ordinary trading but only in realisation sale after
the company had been wound up.
This Court, speaking
through Hidayatullah, J., posed the following question:
"The question, therefore, is whether there can be said
to be a sale in the carrying on of the business
in respect of the chemicals and other raw
materials."
·--·---------
(I) [1954) S.C.R. 767
(2) (1962] Supp. 3 S.C.R. 960, 965.
'
,/· · ...
8 S.C.R.
• SUPREME COURT REPORTS
199
After referring to the 'passages in Halsbury's Laws ··of Eng-
- 1964
land; 3rcf-Edn., Vol. 20, -pp. 115-117, wherein it was
CJ.T.
stated that '·mere re21isnion of assets is -not trading" and E
v. N
. . .
-
I
f
.
. -- f h
xpres•
•w ...
that there v .•·.c-·'-'' -,-1,.>n between sa es orrmng part o t e
papeTJ Ltd,
trading acii"11.i~ a.1..i ·1.i1ose where the realisation \Vas not
Subba Rao J •
.anact of trading,
0 the learned Judge observed that the said
distinction was a sound one. The learned Judge, on · a
consideration of other decisions,
also accepted as correct
the distinction made between a sale of the entire stock as
part of trading· and the sale of a part of the stock as
a
winding up sale.
Then-the learned Judge applied _ the
principles to the facts of the case l!nd held that it was impossible to infer that the chemicals and raw materials were
sold in the ordinary way- of business or that the assessee
company was carrying on a trading business. This decision
again accepts the distinction between a sale· held· in - the ._
ordinary way of business and that held for the purpose of
winding up the business and that in the latter case
the
profits accrued-are not trading profits. This case no doubt
did not turn upon the provisions of the second proviso · to
d. (vii) of s. 10(2) of the Act, but the principle accepted therein is the basis for the application of s. IO of the Act
and that will -apply to all provisions of s. 10, unless
an
exception is made in a particular provision. For the foregoing reasons we hold that the first item is not liable to
tax and the High Court bas given th_e correct answer to the
first question submitted to it:
The second - item
relates to
capital gains. ·That
represents the excess of the price obtained on the sale of
the machinery over its original cost price. It is conceded
that it does not represent_ profits and gains of business, but ,
it falls under the heading "capital gains". But it is, argued
that. as the Free Press Company was wound up and, therefore, could not be found, the assessee, who had succeeded
to it. would be liable to be assessed for the said capital
gains under the proviso to s. 26(2) of the Act. ;ro appreCiate the contention some of the relevant provisiqns of the ·
Act may be read:
·
Section 6.~ave as otherwise provided by this Act,
the following head' of in<.ome,
profits
and
!
/-
/
/
1964
C.T.T.
v . .-'
ExpreS3
New34
paper.r Ltd,.:
Subba Rao 1.
200
gains, shall be chargeable to income-tax in the
manner hereinafter. app~~ring, namely:-~
•
•
,
(v). Profits and gains of business,
'vocation:
*
•
•
(vi). Capiial gains.
.
. ' . .
.
.
profession or
*
Section 10.-.. ( 1) The tax shall
be payable by an
assessec under the head·. "Profits and gains of
. business, profession or vocation" ,in respect of
•the profit oJ" gains of any business, profession
or vocation carried on by hi~..
·
(2} Such profits or gains shall be computed
after
making ·the "following allowances, namely:-
•
•
•
•
Section 128.-· (I) 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 of
March, 1956, and such profits and gains shall
be deemed t~ · be income of the previous year
in which the sale, exchange, relinquishment or
transfer. took place:
·
·
·
-Section 24.-. -(2A) Not\\ithstanding anything con-
. · tained in ·sub-section ( 1), where the lo>s sustained is a Joss falling under the head
"Capital
gains.~· such. loss. shall not be set ofI except .
against any profits and gains falling under that
head.
(2Bi Where an assessee sustains a loss such as is
referred'to iri sub;seetion. (2A)' and the
los~
rnnnot be wholly set off· in accordance with
the· provisions ·of that sub-section, the . portion
not so·set off shall be·carried forward to the
;
' \
\
_J
_.}
1
'
8 S.C.R
SUPH.EME COURT REPORTS
201
following year and set off ag:.iinst capjtc.1 gain..,
1964
for that year, and if it cannot be so set otf, the
C.l.T.
amount thereof not so set off shall be carried
v.
f
d t
h f II
.
d
E:i:press
Ntw~
orwar
o t e o owmg year an
so on.
so
P"P'" ltd.
however that no such loss shall be carried forward for more than eight years:
Provided that where
the
loss
sustained
by
an
assesscc. not being a company, in any previou:;
year does not exceed five thousand rupees, it
shall not be carried forward.
Section 26.-(2) Where a person carrying un any
business. profession
or vocation
bas
beer:
succeeded in such cap2city by ~!nothi.:r pi:rson.
such person and such other person shul\ .. :.ubject to the provisions
of sub-section ( 4 l
of
section 25, each be asscc>sed in rc:.p:xt of
hi<
actual share. if any, of the income. p;-ofit·; anc!,
gains of the previous year:
Provided that. when the person
succeeded in
the
business. ptofl!Ssion
or
vocation cannot
h¢
found. the assessment of the profits of the year.
in which the succession
took place up to rhc
date of succession, and for the year precedini~
that year shall be made on the person succecdin!! him in like manner and to the sanJ<; amount
:"~it would have been made on
the
person
succeeded or when the tax in re,pect of the
assessment
made for
either of
such
ye:m
a%essed on the person
succeeded cnnnot he
recovered from him, it shall be payable by and
recoverable from
the person succecdin.~. ~nd
such nerson shall be entitled to recover from
the nerson succeeded the amount of env 1:1' '"
paid.
A con<1'cctus
of the said sections
disclos~s
~
clearcut
scheme.
Though income-tax is onlv one tax levied on the
rnt:il income. s. 6 enumerates six heads
whe•eundcr
the
inc0me of an asse<s~e falls to be chareed.
This Court in
United Commercial Rank Lid. v. Crmimi<iin:'<>• ,., fnf'<'1WSul>lw P.·i· · J
202
SUPREME COURT REPORJS
196'
tax, West Bengal(') laid down th~t ss./ to··12 a;.; mutuallv
c.1.T.
exclusive and where an item of income falls
specifica11;-
v.
under one head it is to be. charged under that head and -no.
:Iizpreu
News- oth r
Th
· · "' ·.
·
f. •
· " ·
6 ·
P<ZIHn Ltd.
e .
e expressmn mcome. rir;. .t< ""<I gams m s.
·is a composite concept which
0 '.:~"' ,the six heads of·'
~•bba Rao I
•
·
'
mcome mentioned therein.
i .. ~· -.L~·· · --! is "profits and·
gains of business, profession or vocation"' and the 6th head
· is "capital gains". Section 10 taxes the profits and gains of
a business, profession or vocation carried on by an assessee;
it also. enumerates. the different kinds
of allowances that
cau be made in computing the profits.
Under s. 10(1), as
we have already pointed out, ·the necessary condition
for
the application of the section is that the assessee should have
carried on the business for some part of the accounting
year. Section 26(2) indicates the manner of assessment of
the income, profits and g_ains of any business, profession or
vocation. This section does not provide for the assessment
of income under any other head. - It only says that if th~re
is a succession to a person carrying on business during an
accounting year, the person succeeded and the person
succeeding can each of them be assessed in respect of his
actual share. The proviso deals with a case where the person ·
succeeded cannot be found; in that event, the assessment of the profits of the year in which the succession
took place upto the date of the succe5'ion and for the year
preceding that year shall be made on the person succeeding
him. If an assessment has already been made in respect of
the said years on the person succeeded, it can be recovered
·from the person succeeding.
But both sub-s. (2) and the
proviso. deal only with income, profits and gains of the
business, that is to say, for_ the assessment made fo respect
of profit and gains , under the 4th head of s. 6. Now ..
turning to s. 12B, it provides for capital gains. Under that
section the tax shall be payable by the assessee. ·under the
head capital gains in respect of any profits or gains arising
from the sale of a capital· asset effected during
th~ prcsc.ribed period. It says further that such profiN or gains_
shall be deemed to be income of the previous year in which ·
·the sale etc. took place. This deeming dame does not Jiff.
·the capital gains from the 6th head in s. 6 ant!. place it
(1) [1958] S.C.R. 79
(~)[r957) 31 l.T R. fn.
·,S S.C.R.
SUPREME COURT REPORTS
Ullder the 4th head. It only introduces a limited fiction,
lHf
named that capital gains accrued will be deemed to be
c.1.r.
income of the previous year in which the sale was effected. E
Y. N
l'he fiction does not make them the profit or gains of the
xp:;.,~,, Lt~
business.
It is well settled that a legal fiction is limited
Subba Rao J.
to the purpose for which it is created and should not be
extended beyond its legitimate field.
Sub-sections (2A)
and (2B) of s. 24 provide for the setting off of the Joss
falling under the head "capital gains" against any capital
gains falling under the 5ame head. Such loss cannot be set
off against an income falling under any different head.
These three sections indicate beyond any doubt that the
capital gains are separately computed in accordance with
the said provisions and they are not treated as the profits
from the business. The profits and gains of business and
capital gains are two distinct concepts in the Income-taic
Act: the former arises from the activity
which is
called
business and the latter accrues because capital assets are
disposed of at a value higher
than what
they
cost the
asses.see.
They are placed under different heads; they are
derived from different sources; and the income is computed under different methods.
The fact
that the
capital
gains are connected with the capital assets of the business
cannot make them the profit of the business.
They are
only deemed to be income of the previous year and not
the profit or gains arising from
the business
<luring that
year.
If that be the scheme of the Act, the contention of the
learned counsel for the Revenue can easily be answered.
He asks that ifs. 26(2) deals with only profits aml gains of
the business, why should the Legislature use
the word
"income" therein? As we have indicated, the expression
"income, profits and gains" is a compendious term to connote the income from the various sources mentioned in s. 6;
tlaetefore, the use of such an expression does not efface the
distinction between the different heads, but only describes
the income from the business.
The expression "profits" in
1he proviso makes it clear that the income, profits and gains
in sub-s. (2) of s. 26 only refer to the profits under the 4th
head in s. 6.
On the other hand, if the interpretation
20.J.
SUPREME COURT REPORTS
1964
sought to be put upon the expression "income~ in su!J:.s.' (2)
CJ.T;
o( s. 26 by the Revenue is . accepted, then the absence· of
Express v'. Newstli.~! _word in the ?rov!-5° destroys the· argume?t.
Bu! ·the.
papers Lldi'
more reasonable .view IS that both the sul>-section and·. the
Subba-~ao J.
p~ov_is() deal only with ·the profits uncl~r ihe 4th head men"
tioJ'led in s. 6 and, so construed, it cxcludci capital g:tlns:·
'fl1e argument that sub-s:. (2) of s. 26 re..:d v,ith the prbviso
theretO _indicates that the
total · · income · of the· person ·
st1cceeded. is the !=r!_terion· f_?r' separate .assessment ·~-~,.: __ ..- ·
sub-s. (2) and for assessment and realisaticm-unoer the·
···pf.ovis0 is on. the assumption.that·ruO:S.-(2) and the proviso_
deal with all the h~uds n1entionect in s. 6 of the Act; ·nut.
if,· as;ve.hav(fbeld, the scope of sul>-s.-(2)of s. 26 fa· only·
---- ··fonrted to the income from the· busirtess, ; the" share' under
----
suJ;s. (2) and the assessment and realisation•· under the
1964
l\fay 7
pro.visa can only relate to the inrome · ,from the businCs.5.
The argument is really begging the question itself. ·Jn the'
result we agree with the High Court in regard to" the answer
it has given in respect of the second question.
In. this
view
no other ' questidn" arises . for·· oor
consideiatiOn: ·
,
In the result, the appeal fails
and is dismissed
with ·
costs.
.
Appeal 'dismin.ed:
COMMISSIONER OF INCOME~TAX, MADRAS
v.
KUMBAKONAM MUTUAL' BENEFiT FUNn LTD.
I
•;
• .
•
._ •
.' • '.
•
~
'
;
/
.
' •
.
.
(K. SUBBA RAo, J. C. SHAH ANDS. M. SIKRI, J.J.)
Mutual Btnefit Socfety2-company engd:;id ·ili'"bmillng bU°sine.U restrldeii"J
to ml'mbers-Not e,,•ery member-made ·deposit} or_ loaii.J-.P~
mainly earned fr~1n l~n.s to m~mber;-All me"m.be~$ enlitlM.llt.;
diVidend~Whe.tfi~, · r~quiren?e;.tt"' of ·'mUf~i,Y·' 1>et;:een· 'cOnt~.c;;-· -
,.-.,.---
.·
- ,
••!
'·
· "';,; -, '"-
.,.
P. -
.
'
• '<'
I '·•·.'I
arid · · partici,,Dtors · satisfied~Ther_tfore. · w~tller company
eic1"pt
,,;,a;r· i. •1ocziiwi;'1.Coine-i;._,, ;1c;;-1m
· ·
·
~
;,_._-'
·
(_
1'
·1·-· .;
·ii··;.-' h,
;~ ,; j._A
.•.
I
·, /1'.:.,_
,,~,-
.The ~Ssee~ Kumb3.kon3.in ~tutual Be1:iefit Fund;. _Ltd. •. carried_. on,:
ruiokini' buSiDcSS ·wbiCh. 'wis-- reStncted i.o! its s?iareholdd.t! In ·the"COum .
. . ·' '
.
.
. .
.
.