# M/S. KILLICK NIXON & COMPANY v. COMMISSIONER OF INCOME· TAX, BOMBAY

- **Citation:** [1967] 3 S.C.R. 971
- **Court:** Supreme Court of India
- **Decided:** 1967-05-05
- **Bench:** J. C. Shah, S. M. Sikri, V. Ramaswami
- **Source:** https://unisonlegal.in/judgment/supreme-court-of-india/m-s-killick-nixon-company-v-commissioner-of-income-tax-bombay-4081
- **Pages:** 10

## Headnote

Indian Income-tax Act (11 of 1922), ss. 12B (2), 3rd provilo, and
L5(3) and 32(4)-Tribunal disposing of apper.1-Duty to consider evl·
dence-Scope of s. 12B (2) 3rd proviso a·nd s. 25(3).
The assessee-firm sold its assets to two companies and discontinued
its business with effect from !st February 1948. For t'he assessment year
1949-50 the income-tax department sought to assess, under s. 12B of
the Indian Income-tax Act, 1922, the capital gains made by the ' lSessee.
Capital gains under the section are computed, in a case (a) where there
is no dispute about the market value of the asset on the date of transfer
and (b) where the assessee has exercised the option under tbe
third
proviso to the section to adopt the value of the asset on !st January
1939 as its actual cost, by deducting from the market value of the asset
on the date of transfer the value of the asset on January !, !!139. In the
present case the department ac:epted the market value of the assets on
February I, 1948, the date of transfer, and estimated tbe value of the
assets on !st January 1939, at a certain figure and brought to tax the
difference between the two, rejecting the assessee's claim under s. 25(3)
to the be,1efit of exempt:on from taxability arising from discontinuance
of the business.
The Appellate Tribunal confirmed the order.
It rejected the contention of the assessee that the evidence on the record
showed that the market value of some of the assets on !st January 1939
exceeded the value as estimated by the department and that· therefore
the capital gains to be taxed would be much le'.\S, by merely recording
a bare conclusion that the value of the assets on !st January 1939 could
not be more than the
estimated
value
without
considomng
the
evidence.
The High Court, on reference, (I) held against the assessee that it
was not entitled to the benefit under s. 25(3), and (2) held against the
department that the Tribunal misdirected itiielf in not considering the
evidence produced before the Income-tax Authorities regarding the valu·
ation on !st January 1939. The assessee and the
Commissioner
of
Income-tax appealed to this Court.
HELD : (I) It is only income earned by carrying on business that
is entitled to exemption under s. 25 (3). Capital gains, though by the
d~finition in s. 2(6C) are income and liable to tax by virtue of s. 6 read
w1tb s. 12B, not being income which arises from a trading activity are
not entiiled to such ex-•mption. [980B-C]
'
Commissioner of Income-tax, Bombay City I v. Chugandas & Co.
[1964)"1! S.C.R. 332 and Commissioner of Income-tax, Madras v. Express
Newspapers Ltd. [1964) 8 S.C.R, 189, referred to.
[Whether an .assessee was entitled to exemption under s. 25 ( 3) in
respect of a receipt, such as capital gains, which was not chargeable as
income under the Income-tax Act 7 of 1918, not decided.) [979E)
.
(2) Under the. scheme of the Income-tax Act, the Appellate Tribunal
" the final authority on questions of fact. While the onus lies upon the
972
SUPREME COURT REPORTS
[1967] 3 <;C.R.
assessee to prove the mrrrket value of the assets on January 1, ~939 the
Tribunal, in disposing of the appeal under s. 33(4) of the Act, is bound
to hear the parties and consider the entire evidence produced .before the
Income-tax Authorities. In the present case, therefore, the Tribunal had
to determine, on a consideration of all the evidence, the value of the
assets of the assessee on !st January 1939. [977E-G]
C1v1L APPELLATE Jumso1cnoN : Civil Appeals Nos. 19191920 of 1966.
Appeals from the judgment and order dated October 12, 13,
1962 of the Bombay High Court in Income-tax Reference No. 2.1
of 1959.
S. T. Desai, O. P. Malhotra, and 0. C. Mathur, for the appel·
B
!ant (in C.A. No. 1919 of 1966) and the respondent (in C.A.
C
No. 1920 of 1966).
D. Narsaraju and R. N. Sachthe,v, for the appellant (in C.A.
No. 1920 of· 1966) and the respondent (in C.A. No. 1919 of
1966.

## Text

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M/S. KILLICK NIXON & COMPANY
v.
COMMISSIONER OF INCOME· TAX, BOMBAY
May 5, 1967
[J. C. SHAH, S. M. SIKRI AND V. RAMASWAMI, JJ.]
Indian Income-tax Act (11 of 1922), ss. 12B (2), 3rd provilo, and
L5(3) and 32(4)-Tribunal disposing of apper.1-Duty to consider evl·
dence-Scope of s. 12B (2) 3rd proviso a·nd s. 25(3).
The assessee-firm sold its assets to two companies and discontinued
its business with effect from !st February 1948. For t'he assessment year
1949-50 the income-tax department sought to assess, under s. 12B of
the Indian Income-tax Act, 1922, the capital gains made by the ' lSessee.
Capital gains under the section are computed, in a case (a) where there
is no dispute about the market value of the asset on the date of transfer
and (b) where the assessee has exercised the option under tbe
third
proviso to the section to adopt the value of the asset on !st January
1939 as its actual cost, by deducting from the market value of the asset
on the date of transfer the value of the asset on January !, !!139. In the
present case the department ac:epted the market value of the assets on
February I, 1948, the date of transfer, and estimated tbe value of the
assets on !st January 1939, at a certain figure and brought to tax the
difference between the two, rejecting the assessee's claim under s. 25(3)
to the be,1efit of exempt:on from taxability arising from discontinuance
of the business.
The Appellate Tribunal confirmed the order.
It rejected the contention of the assessee that the evidence on the record
showed that the market value of some of the assets on !st January 1939
exceeded the value as estimated by the department and that· therefore
the capital gains to be taxed would be much le'.\S, by merely recording
a bare conclusion that the value of the assets on !st January 1939 could
not be more than the
estimated
value
without
considomng
the
evidence.
The High Court, on reference, (I) held against the assessee that it
was not entitled to the benefit under s. 25(3), and (2) held against the
department that the Tribunal misdirected itiielf in not considering the
evidence produced before the Income-tax Authorities regarding the valu·
ation on !st January 1939. The assessee and the
Commissioner
of
Income-tax appealed to this Court.
HELD : (I) It is only income earned by carrying on business that
is entitled to exemption under s. 25 (3). Capital gains, though by the
d~finition in s. 2(6C) are income and liable to tax by virtue of s. 6 read
w1tb s. 12B, not being income which arises from a trading activity are
not entiiled to such ex-•mption. [980B-C]
'
Commissioner of Income-tax, Bombay City I v. Chugandas & Co.
[1964)"1! S.C.R. 332 and Commissioner of Income-tax, Madras v. Express
Newspapers Ltd. [1964) 8 S.C.R, 189, referred to.
[Whether an .assessee was entitled to exemption under s. 25 ( 3) in
respect of a receipt, such as capital gains, which was not chargeable as
income under the Income-tax Act 7 of 1918, not decided.) [979E)
.
(2) Under the. scheme of the Income-tax Act, the Appellate Tribunal
" the final authority on questions of fact. While the onus lies upon the
972
SUPREME COURT REPORTS
[1967] 3 <;C.R.
assessee to prove the mrrrket value of the assets on January 1, ~939 the
Tribunal, in disposing of the appeal under s. 33(4) of the Act, is bound
to hear the parties and consider the entire evidence produced .before the
Income-tax Authorities. In the present case, therefore, the Tribunal had
to determine, on a consideration of all the evidence, the value of the
assets of the assessee on !st January 1939. [977E-G]
C1v1L APPELLATE Jumso1cnoN : Civil Appeals Nos. 19191920 of 1966.
Appeals from the judgment and order dated October 12, 13,
1962 of the Bombay High Court in Income-tax Reference No. 2.1
of 1959.
S. T. Desai, O. P. Malhotra, and 0. C. Mathur, for the appel·
B
!ant (in C.A. No. 1919 of 1966) and the respondent (in C.A.
C
No. 1920 of 1966).
D. Narsaraju and R. N. Sachthe,v, for the appellant (in C.A.
No. 1920 of· 1966) and the respondent (in C.A. No. 1919 of
1966.
The Judgment of the Court was delivered by
Shah, J.
These are cross appeals from the order passed by
the High Court of Bombay recording answers to que5tions submitted in a reference under s. 66 of the Indian Income-tax Act.
J 922.
Messrs Killick Nixon & Co.-hereinafter called "the assessee"
-was a firm which carried on diverse trading activities in Bombay.
The assessee agreed to sell on November 28, 1947 to a
Company called "Ki!lick Industries Ltd.;', the benefit of managing
agency contracts held by it, shares of limited Company (including
240 shares of the Cement Agencies Ltd.) and debentures, and
book and other debts in consideration of 79 ,993 shares of the
face value of.Rs. 100/- each of Killick fndustries Ltd.
and
Rs. 700/- in cash. By another agreement dated January 29, 1948
the assessee agreed to sell to "Killick Nixon & Co. Ltd." goodwill
of the business of the assessee freehold and leasehold hereditaments, plant and machinery, stock. in trade and book debts,
Government securities and shares and full benefit of all shippiniz
and general agencies, distributorships etc. in consideration of 9 .. 996
shares in the Vendce Company of the face value of Rs. 100/-
each and Rs. 400/- in cash., The assessee was dissolved and it'•
business was dhcontinued with effect from February I, 1948.
Tn a proceeding for assessment to tax payable by the assessee
for the year 1949-50 (the relevant previous year being the year
ending June 30, 1948) the Income-tax Officer assessed the capital
gains made by th~ assessee, on the transfer of its capital assets
to the two Companies. at Rs. 32,01,747/-. Tn appeal, the AppealI>
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KILLICK NIXON & CO. V. C.I.T. (Shah, J.)
97;1
late Assistant Commissioner modified the order.
He was of the
view that the assessee had made capital gains amounting to
Rs. 25,40,737 /- by sale of shares to the two com11anies and other
assets transferred to Killick Nixon & Co. Ltd. and had suffered
a capital loss of Rs. 4,00,530/-, being the difference between the
market value of the managing agencies,
240 shares of the
Cement Agencies Ltd. and the goodwill on January l, 1939
estimated at Rs. 5 J ,40,802/- and the market value of those
assets on February 1, 1948 estimated at Rs. 47,40,272-/.
Debiting the loss against th~ capital gains made by sale of shares, the
Appellate Assistant Commissioner brought to tax an amount of
Rs. 21,06,455/-. The Appellate Assistant Commissioner re.iected the claim of the assessee to the benefit of s. 25 (3) & ( 4) of
the Income-tax Act, 1922. The Appellate Tribunal confirmed
the order passed by the Appellate Assistant Commissioner.
The Tribunal drew up a statement of the case and referred
two questioru; numbered (I) & (2) below to the High Court of
Judicature at Bombay. Two more questions numbered (3) &
( 4) were submitted pursuant to the order made by the
High
Court 1mder s. 66(2) of the Act. The questions were :
·• ( 1 ) Whether on the facts and circumstances of the
case, the assessee firm is entitled to the benefit contained
under s. 25 ( 3) in respect of capital gains assessed to tax
under s. 12B of the Incomo-tax Act?
( 2) Whether on the facts and in the circumstances
of the case, the asses.see firm is liable to pay capital
gains in respect of profits and gains arising from the
sale of its assets to the limited companies ?
( 3) Whether s. 12B of the Indian Income-tax Act,
1922, at all applied to the applicant's case ?
( 4) Whether on the facts and in the circumstances
of the case, the Tribunal misdirected itself in law and
or acted without evidence or in disregard of the most
material evidence on record in making the valuation of
the applicant's assets on first day of January one thousand nine hundred and thirtynine ?"
The High Court answered the first question in the negative, and
the second, the third and the fourth questions in the affirmative.
The assessee has appealed against the answers recorded on the·
first three questions; against the order recording the answer on
the fourth question, the Commissioner has appealed.
The appeal filed by the Commissioner may first be considered.
The assessee contended before the Tribunal,
relying upon the
evidence on record, that the value of the managing agencies, 240
974
SUPREME COURT REPORTS
[ 1967] 3 S.C.R.
shares of the Cement Agencies Ltd. and the goodwill on January
l, 1939 considerably exceeded Rs. 51,40,802/·. The Tribunal
observed in paragraph-IO of its judgment:
A
· "We do not think it is necessary to deal with in
detail the evidence produced before the Income-tax
authorities in respect of the valuation as on 1-1-1939.
The stand taken by the assessee, in our opinion, is incomistent.
A unifom1 method must be adopted both
as on the date of the transfer and as on 1-1-1939. It is
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not open to the assessee to value an asset by applying
one method on 1-2-1948 and another on 1-1-1939."
The Tribunal then observed that since the assets were transferred
to a company in which the partners of the assessee were interested,
and the transfer was made for a consideration which was
less
than the market value, it was not open to the assessee to contend
C
that the market value of the assets on January 1, 1939 should be
taken into account; that the assessee was not entitled to reduce
the capital gain by adopting the valuation of those assets which
had a market quotation and in respect of assets which had no
market quotation by adopting the sale price; and that "if the goodwill of the business on January 1, 1939 was worth Rs. 8 lakhs
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its value on February l, 1948 should be higher." The Tribunal
recorded its conclusion that :
"For the purpose of this appeal, it is enough to say
that if the value . of the assets in question was
Rs. 46,40,279/- on 1-2-1948, it could not be higher
than Rs. 51,40,802/- as on 1-1-1939. Speaking for ourE
selves, we think, the Income-tax authorities by allowing
the Joss of Rs. 4 lakhs have taken a liberal view of the
whole question."
The Tribunal also observed :
"The valuation placed by the Department, in our
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opinion, is reasonable.
Even if the business was to be
valued as a whole, it could not affect the assessment
made.
The valuation has to be done on the same basis
both on 1-1-1939 and J-2,194R"
The High Court in dealing with the questions referred observed
that under the third proviSo to s. 12B(2), of the Income-tax Act.
1922 the assessee was entitled to substitute the fair market value
of the assets as on January 1, 1939, if the capital assets had been
held by the assessee before January 1, 1939 in place of the cost
of the assets for the purpose of detennining the capital gain, and
that it was conunon ground that the full value of the consideration
for which the assets were transferred was Rs. 1,16,75,108/-.
The
High Court then observed :
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K!Ll,ICK NIXON & co. v. c.r.T. (Shah, J.)
975
"ft is clear beyond any doubt that the assessee was
entitled to take the fair market value of the three
a·ssets, viz. the managing agencies, 240 shares of the
Cement Agencies Limited and the goodwill of its business as 011 1-1-1939 for the purpose of the computation
of the capital gains and the said capital gains, if any,
had to be detennined by deducting the ·said v;iluation as
on 1-1-1939 from the full value of the consideration,
which the assessee had received and which, it was common ground between the parties, was Rs. 1,16,75,108/-.
The Appellate Assistant Commissioner had proceeded
to determine the value of its assets as on 1-1-1939. As
t1gainst the said valuation arrived at by the Appellate
Assistant Commissioner, the asscssee has rais~d ob.iections before the Tribunal which ob.iections the Tribunal
had to consider on their merits.
In so far as the
Tribunal has failed to do so and has proceeded on the
erroneous view, which it has taken that it was not necessary to deal in detail with the evidence produced before
the Income-tax authorities, the Tribunal has clearly
misdirected itself and had also
not applied its mind
properly to the material on record."
Section 128 which was introduced in the Indian Income-tax
Act, 1922 with effect from the 31st day of March, 1947, omitting
parts not material reads as follows :
"(l) 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 or transfer of a
capital asset effei:ted after the 31st day of March 1946;
and such profits and gains shall be deemed to be income
of the previous year in which the sale, exchange or
transfer took place :
..
( 2) The amount of a capital gain shall be computed after making the following deductions from the
full value of the consideration for which the sale, exchange or transfer of the capital as<et is 1iiade, namely;
( i) expenditure incurred solely in connection with
such sale, exchange or transfer;
(ii) the .actual cost to.the assessee of the capital
~sset, mcludmg any exp~nditure of a capital nature
mcurr~d and borne by bun in making any additions or
alterat10ns th:reto, but ·excluding any expenditure in
respe.c~ of which _any allowance is admissible under anv
prov1s10n of sections 8, 9, 10 and 12.
976
SUPREME COURT .RRl'ORTS
[1967] 3 S.C.R
Provided that where a person who acquires a capital
asset from the assessee, whether by sale, exchange or
transfer, is a person with whom the assessee is directly
or indirectly connected, and ·the Income-tax Officer has
reason to believe that the sale, exchange. or transfer was
effected with the object of avoidance or reduction of the
liability of the assessee under this section, the full value
qf the consideration for which. the sale, exchange or
transfer is made shall, with the prior approval of the
Inspecting Assistant Commissioner of Income-tax, be
tliken to be the fair market value of the capital asset on
the date on Which the sale, exchange or transfer took
place:
Provided further
. . . . .
Provided further that where the capital asset became
tl)e property of the assessee before the 1st day of January 1939, he may, on proof' of the fair market value
thereof on the said date to the satisfaction of the
Income-tax Officer, substitute for the actual cost such
fair market value which shall be deemed to be the actual
cost to him of the asset, and which shall be reduced
by the amount of depreciation, if any, allowed to the
assessee after the said date and increased or diminished,
as the. case may be, by any adjustment made under
clause (vii) of sub-section (2) of section 10;"
Computation of the capital gains tinder s. 12B is to be made by
deducting from the market value of the consideration of the ·sale,
exchange or transfer, expenditure incurred in connection with
such sale, exchange or transfer and the actual cost to the assessee
of the capital asset or at his option, where the capital asset became
the property of the assessee before January l, 1939, the fair
market value of the asset on January l, 1939. It is open t<> the
Incom&"tax Officer, if it appears to him, that with the object of
avoiding ot reducing of the liability of the assessee to pay tax,
the full value of the consideration for which the sale, exchange or
transfer is made is understated and the person acquiring the
capital asset is a person with whom the assessee is directly or
indirectly connected, to determine the fair market value of the
capital a~set on the date on which the sale, exchange or transfer
took place.
The difference between proviso one and proviso three
may be noticed .. By virtue of the first proviso the Incometax Officer is, in the conditions set . out therein, entitled to
determine the fair market value of the asset at the date of the
sale. exchange or transfer. Under the third proviso, ·t!ie asseSjiee
when he has exercised the option to adopt the value on January
1, 1939 is, for computation of the actual cost to him of an a~set
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KlLLiCK NIXON &: co. v. C.I.T. (Shah, I.)
977
transferred, required to prove the fair markeb value of the asset
on January 1, 1939, when the asset transferred belonged to him
before that date.
There was no dispute in the present case about the market
value at the date of the transfer of the assets conveyed.
The
first proviso therefore did not come into play.
The dispute
related to the value to the assessee on January 1, 1939 of three
assets, viz., the managing agencies, 240 shares of the Cement
Agencies Ltd. and the goodwill. The capital gain or loss had to
be determined by deducting from the market value of the asset on
February 1, 1948 the fair market value of those assets on January l, 1939, proved by the assessee to the satisfaction of the
Income-true Officer.
The Appellate Assistant Commissioner estimated the value of
the three assets on January l, 1939 at Rs. 51,40,802/-. The
assessee contended that· the evidence on the record showed that
the market value exceeded the estimated value. It is true that the
onus lay upon the assessee to prove the fair market value of the
assets on January 1, 1939 to .the satisfaction of the Income-tax
Officer and therefore of the Tribunal. The Tribunal did not consider the evidence and disposed of the claim of the assessee after
observing that the value of the assets could not exceed the amount
at which it was estimated by the Appellate Assistant Commissioner.
U oder the scheme of the Income-true Act, the ·Tribunal is the
final authority on questions of fact.
The Tribunal in deciding
an appeal is bound to consider all the evidence, and the arguments raised before it by the parties.
The Tribunal apparently
did not consider the evidence : it merely recorded a bare conclusion without setting out any reasons in. ~upport thereof.
It' is
th~refore not possible to say whether the Tribunal considered the
evidence and the contentions raised by the assessee :it cannot be
assumed merely because a conclusion is recorded that the Tribunal
~onsidere? the evidence.
The High Court was, therefore right
m r7cordmg an answer in the affirmative on the fourth qu~stion
It ~~l(~)e the duty of the Tribunal in disposing of the appeal unde~
s. .
of the Income-true Act to hear the parti
d
d
mme on a consideration of the evidence the val~e a~f t~ threterassets on January 1 1939 i th J'gh
f
e
ee
s. 12B(2).
•
n
e 1 to the third proviso to
In the appeal filed by the
has not challen ed h fi d'
assessee, counsel for the assessee
(3) and
th. g
t e n mg recorded on questions Nos (2) &
no mg more need be
· d •
·
Counsel claimed that by virtue ~;~ ~~ (~P~t fuf ~°J~ q~estions.
~a:ic~ctth I~ ~ssessee is exempted from paying t:X ~n
1:e ;:~[;;
e usmess was closed.
Reliance is placed upon s. 25 (3)
978
SUPREME COURT o&EPOllT~
[1967] 3 S.C.R
of the Jndiun Income-tax Act.
It provides.
insofar as
it
1,
ma~rial :
"Where any business, profession or vocation
on
which u1x was at any time charged under the provisions
of the ll\dhm Income-tax Act. 1918. (VI! of 1918), b
discontinued, then, unless there has been a succession
by virtue of which the provisions of sub-section ( 4)
have been rendered applicable, no tax shall be payable
in respect of the income, profits and gains of the period
between the end of the previous year and the date of
such discontinuance . . . . "
rt b common ground that the assessee was assessed to
tax in
respect of the income from business under the Indian Income-tax
Act 7 of 1918 and the case is not one of succession by virtue
of which the provisions of sub-s. ( 4) of s. 25
are
rendered
applicable.
Prima facie, the assessee was entitled to the benefit
o~ s. 25 (3) i.e. it was exempted from payment of tax in respect
of the income, profits and gains earned by carrying on business
for the period between the end of the previous year and the date
of discontinuance of the business.
This Court observed in Commissioner of fllcome-tax, Bombay City I v. Chugantlas anti Co. ( 1 )
that the exe111ption under s. 25 ( 3) is not restricted only to income on which tax was payable under the head "Profits and gains
of business. profession or vocation" under the Act of
1918.
Counsel for the assessee contended that even though under the
Act of 1918 capital gain was not charged
to tax under the
Income-tax Act, 1922, as amended i11 1947, si11ce capital gains
ea.med by the assessee form part of the income of the assess~
a~ defined in s. 2 ( 6C) of the Act, and are on that account exigible
to tax as income of the business, the assessee is .entitled to the
benefit of exemption prescribed by s. 25 ( 3) of the Act.
Counsel for the Commissioner contended that on income
earned from business which is discontinued, the assessee is entitled to exemption from payment of tax for the period during
-which the business was carried on in the year in which the business was discontinued.
He conceded that income which qualifies
for exemption is income earned by carrying on business and not
merely income computed for purposes of tax under s. 10 of the
Act, but he contended that the exemption does
not apply to
receipts which are not earned by carrying on the business. and
are only fictionally deemed. income for th~ purp?sc of the Tncom7tax Act.
He said that in any even~ cap1t11l gams cannot be said
to be income resulting from the activity styled "business", and on
that account capital gains are not admissible to exemption under
s. 25 (3) of the Act.
(t)[!964J 8S.CR. 33~~SSLl.R. 17
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KIL!.ICK NIXON & CO. v. C.I.T. (Shah, J.1
9;9
Clwgandas & Company's case(') has, in our judgment, no
application to the present case.
In that case the assessee firm
was charged to tax on its income from business under the Indian
Income-tax Act, 1918.
The assessee firm discontinued iLs business on June 30, 1947, and in respect of interest on securitic'
which formed part of the assessee's business income, exemption
was claimed under s. 25 ( 3). This Court accepted the contention of the assessee. It was observed at p. 338 :
"When, therefore, section 25 ( 3) enacts that
tax
was charged at any time on any business, it is intended
that the tax was at any time charged on the owner or
any business.
If that condition be fulfilled in respect
of the income of the business under the Act of 1918.
the owner or his successor-in-interest qua the business,
will be entitled to get the benefit of the exemption
under it if the business is discontinued.
The section
in terms refers to tax charged on any business, i.e., tax
charged on any person in respect of income earned by
carrying on the business.
Undoubtedly,
it is not all
income earned by a person who conducted any business.
which is exempt under sub-section (3) of section 25 :
non-business income will certainly not qualify for the
privileges.''
It is not necessary for the purpose of these appeals to decide
whether an assessee is entitled to exemption under s. 25(3) in
respect of a receipt which was not chargeable as inco.me under
the Act of 1918, for, in our view, capital gains though they arr
income within the meaning of s. 2(6C) as incorporated by Act
7 of 1939, and modified by Act XXII of 1947, are not income
earned from trading activity carried on by an assessee, and therr
fore cannot be admitted to exemption under s. 25(3).
In Commissioner of lncome·tax, Madms v. Express Nell's·
papers Ltd. (') this Court expounded the true nature of capital
gaias at p. 202 :
·
"Under that section ( s. 128) the tax shall be payable by the assessee under the head 'capital gains' in
respe~t of any profits or gains arising from the sale of
a capital asset effected during the prescribed period. lt
says f~rther that such profits or gains shall be deemed
to be mcome of the previous year in which the sale etc.,
took J?lace. This deeming clause does not lift the capital gams from the sixth head in section 6 and place it
___ under the fourth head.
lt only introduces a limited
tli 11964] 8S.C.R. 332: s51.r.R. 17
(2i[l964]8S.C. R.189:53 l.T.R.250
!180
SUPRBMB COURT RBPOllT~
[1967) 3 .S.C R
fiction, namely, that capital · gains "accrued will be
deemed to be income of the previous year in which the
sale was effected.
This fiction does not make them
the profits or gains of the buSines.~."
Ca pita! gaim by the definition under s. 2 ( 6C) are income, and
they are liable to tax by virtue of s. 6 read withs. 12B; and if they
are not income arising from a trading activity, the benefit of
exemption from taxability arising from the discontinuance of the
business will not, in our judgment, be available in respect of that
head of income.
It is only income which is earned by carrying on
business which is entitled to exemption under s. 25 (3) and capital
gains not being income which arise from trading activity, they
are not entitled to exemption.
Both the appeals therefore fail and are dismissed with costs.
V .P .S.
A ppea/s dismissed.
A
B
c
·'