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
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 section 661 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 India Madras Ltd hereinafter called the Free Press Company was a private limited company carrying on business as printers and publishers of certain newspapers namely Indian Express Dhinamani and Andhra Prabha at 191 Madras Eastern Express and Bharat at Calcutta and Sunday Standard and Morning Standard at Bombay
On August 31 1946 the Free Press Company passed a resolution transferring to the Express Newspapers Limited a new company formed on or about April 22 1946 hereinafter called the assessee company the right to print and publish 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 assessee company accordingly started publishing newspapers from September 1 1946
On October 31 1946 the Free Press Company 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 company
On November 1 1946 the liquidator ascertained the value of the assets over the liabilities taken over by the assessee company as per the balance sheet at Rs 1936000and this amount was credited to the account of the two directors of the Free Press Company in the assessee s books
The profit of the Free Press Company was worked out to be Rs 608666 being the difference between the written down 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 down price of the machinery  Rs 214090  ii the amount in excess over the original cost price 
Rs 394576 
The Income tax Officer included the said two items in the total income of the assessee company under the following heads i profit under proviso to section 102 vii 
Rs 214090  and ii capital gains under section 12B 
Rs 394576  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 section 661 of the Incometax Act 4
Whether Free Press Company made a business profit of Rs 214090 under proviso to section 102vii of the Act 192 6
Whether the capital gain made by the Free Press Company is liable to be assessed in the hands of the Express Company under section 262 of the Act The reference was heard by a Division Bench of the High Court consisting of Rajagopalan and Ramachandra Iyer JJ who by their 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 47 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 608666 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 Company during the accounting year after it closed down its business and after it went into voluntary liquidation
On those facts learned counsel for the Revenue raised before us the following two contentions 1 The first item of Rs 214090  representing the surplus over the written down value of the machinery was assessable in accordance with the proviso to section 10 2 vii of the Act and 2 the second item of Rs 394576  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 section 262 of the Act
Learned counsel for the respondent contended that neither the conditions laid down in section 102vii of the Act nor those laid down in section 262 thereof attracted the said two items of income and therefore they were not assessable in the hands of the assessee company
193 The first question turns upon the relevant provisions of section 10 of the Act
To have a clear view of the scope of the relevant provisions it will be convenient to read them at one place
Section 10 1 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 profession 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 exceeds the amount for which the building machinery or plant as the case may be is actually sold or its scrap value 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 difference between the original cost and the written 51 SC 13 194 down value shall be deemed to be profits of the previous year in which the sale took place We are concerned with the second proviso to section 102 vii of the Act
The substantive clause grants a balancing allowance in respect of building machinery or plant which has been sold or discarded or demolished 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 the original cost price the difference between the original cost and the written down value shall be deemed to be profits of the year previous to that in which the sale takes place that is to say the difference between the price fetched at the sale and 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 assessee
To illustrate assume that the original cost of a machinery or plant is Rs 100 and depreciation allowed is Rs 25  the written down value is Rs 75
If the machinery is sold for Rs 100  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 be ascertained only in its relation to the other related provi sions
Under section 3 of the Act income tax shall be charged for any year in accordance with and subject to the provi sions of the Act in respect of the total income of the previous year of every assessee under section 6 one of the heads of taxable income is profits and gains of business profession or vocationl under section 101 the tax under that head is payable in respect of profit or gains of any business carried on by the assessee during the accounting year
The 195 main condition which attracts all the other sub sections and clauses of the section is that the tax shall be payable by an assessee in respect of the profit or gains of any business etc
carried on by him
The crucial words are business carried on by him
If the profit or gains were not earned when the business was being carried on by the assessee during the accounting year they would fall outside the provision of section 101
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 the business that was being carried on by the assessee
The second condition that attracts the second proviso is implicit in the adjective such preceding building machinery or plant sold
The adjective such refers back to cls
iv v vi and vii of section 102
Under cl
iv an allowance is allowed in regard to any premium paid in respect of insurance against risk of damage or destruction of buildings machinery plant etc
used for the purpose of the business profession or vocation
Under this clause allowance is allowed only in respect of the machinery used for the purpose of the business
Clauses v vi and vii refer to such buildings machinery plant etc that is to say such buildings _machinery plant etc
used for the purpose of the business
The result 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 profits 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 on
Therefore to bring the sale proceeds to charge the following condition
 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 place after the business was closed and during the winding up 196 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 The Liquidators of Pursa Limited vs Commissioner of Incometax Bihar1
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 of the factory and other assets with the object of winding up the company
It received a firm offer on August 9 1943 and concluded the agreement of sale on December 7 1943
Between August 9 1943 and December 7 1943 it never used the machinery and plant for the purpose of manufacturing sugar or for any other purpose except that of keeping them in trim and running order
In the assessment of the company to income tax for the accounting period from October 1 1943 to September 30 1944 the 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 section 102vii 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 1 the sale of the machinery and plant was not an operation in furtherance of the business carried on by the company but was a realisation of its assets in the process of gradual 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 carrying 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 limited business during the accounting year section 102vii could have no application to the sale of any such machinery or plant
Learned counsel for the Revenue contends that the main reason for the decision was that the machinery or the plant was not used in the accounting year for the business and that the second reason namely that the assets were sold in the process of gradual winding up of the com 197 pany was only an observation and that the decision was not based upon the said observation
But a careful perusal of the judgment discloses beyond any reasonable doubt that the decision was based upon both the grounds
As in the present case the machinery was sold not for the business 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 II vs The National Syndicate Bombay1
There the National Syndicate a Bombay firm acquired on January 11 1945 a tailoring business as a going concern for Rs 89321 which includedthe consideration paid for sewing machines and 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 respondent closed its account books on February 28 1946 showing the two losses and writing them off
For the assessment year 1946 47 the respondent claimed a deduction under section 10 2 vii of the Indian Income tax Act
The question fell to be considered on a construction of the provisions of section 102 vii of the Act
This Court speaking through Hidayatullah J held that the loss was a business loss though the machines and the motor lorry were sold after the business was closed down as the said machines and lorry were used for the purpose of the business during a part of the accounting year and were sold during the accounting year
This Court after noticing the decision under appeal and that of this Court in The Liquidators of Pursa Limited vs Commissioner of Income tax Bihar 2 and the amendment introduced in the second proviso to section 10 2 vii of the Act observed But it is to be noticed that no such amendment was made in el
vii to exclude loss over buildings machinery or plant after the closure of the business
It is thus clear that the principles which govern the proviso cannot be 1  2  199 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 Limited1
It is said that the con dition that the sale of the machinery at a loss should have been before the closing of the business is impliedly laid down by section 101 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 section 102 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 decisions 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 section 102 of the Act before it was amended
This Court in K M section Reddy Commissioner of Income tax Kerala vs The West Coast Chemicals and Industries Ltd in liquidation Alleppy2 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 1  2 1962 Supp
3 SCR 960 965 199 After referring to the passages in Halsbury s Laws of Eng land 3rd Edn Vol 20 pp 115 117 wherein it was stated that mere realisation of assets is not trading and that there was distinction between sales forming part of the trading activities and those where the realisation was not an act of trading 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 and held that it was im possible 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 cl
vii of section 102 of the Act but the principle accepted therein is the basis for the application of section 10 of the Act and that will apply to all provisions of section 10 unless an exception is made in a particular provision
For the fore going reasons we hold that the first item is not liable to tax and the High Court has given the 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 wag 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 section 262 of the Act
To appreciate the contention some of the relevant provisions of the Act may be read Section 6
Save as otherwise provided by this Act the following heads of income profits and 200 gains shall be chargeable to income tax in the manner hereinafter appearing namely v Profits and gains of business profession or vocation
vi Capital gains
Section 10 1 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 profession or vocation carried on by him
2 Such profits or gains shall be computed after making the following allowances namely Section 12B 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 of March 1956 and such profits and gains shall be deemed to be income of the previous year in which the sale exchange relinquishment or transfer took place Section 24 2A Notwithstanding anything con tained in sub section 1 here the loss sustained is a loss falling under the head Capital gains such loss shall not be set off except against any profits and gains falling under that head
2B Where an assessee sustains a loss such as is referred to in sub section 2A and the loss cannot 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 201 following year and set off against capital gains for that year and if it cannot be so set off the amount thereof not so set off shall be carried forward to the following year and so on so however that no such loss shall be carried forward for more than eight years Provided that where the loss sustained by an assessee not being a company in any previous year does not exceed five thousand rupees it shall not be carried forward
Section 26 2 Where a person carrying on any business profession or vocation has been succeeded in such capacity by another person such person and such other person shall sub ject to the provisions of sub section 4 of section 25 each be assessed in respect of his actual share if any of the income profits and gains of the previous year Provided that when the person succeeded in the business profession or vocation cannot be found the assessment of the profits of the year in which the succession took place up to the date of succession and for the year preceding that year shall be made on the person succeeding him in like manner and to the same amount as it would have been made on the person succeeded or when the tax in respect of the assessment made for either of such years assessed on the person succeeded cannot be recovered from him it shall be payable by and recoverable from the person succeeding and such person shall be entitled to recover from the person succeeded the amount of any tax so paid
A conspectus of the said sections discloses a clearcut scheme
Though income tax is only one tax levied on the total income section 6 enumerates six heads whereunder the income of an assessee falls to be charged
This Court in United Commercial Bank Ltd vs Commissioner of Income 202 tax West Bengal1 laid down that sections 7 to 12 are mutually exclusive and where an item of income falls specifically under one head it is to be charged under that head and no other
The expression Income profits and gains in section 6 is a composite concept which takes in all the six heads of income mentioned therein
The 4th head 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 can be made in computing the profits
Under section 101 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 262 indicates the manner of assessment of the income profits and gains 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 there 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 succession 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 section
2 and the proviso deal only with income profits and gains of the business that is to say for the assessment made in respect of profit and gains under the 4th head of section 6
Now turning to section 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 the Prescribed period
It says further that such profits or gain shall be deemed to be income of the previous year in which the sale etc
took place
This deeming clause does not lift the capital gains from the 6th head in section 6 and place it 1  4 203 under the 4th head
It only introduces a limited fiction named that capital gains accrued will be deemed to be income of the previous year in which the sale was effected
The fiction does not make them the profit or gains of the business
It is well settled that a legal fiction is limited to the purpose for which it is created and should not be extended beyond its legitimate field
Sub sections 2A and 2B of section 24 provide for the setting off of the loss falling under the head capital gains against any capital gains falling under the same 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 tax 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 assessee
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 during 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 if section 262 deals with only profits and 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 section 6 therefore 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 the proviso makes it clear that the income profits and gains in sub section
2 of section 26 only refer to the profits under the 4th head in section 6
On the other hand if the interpretation 204 sought to be put upon the expression income in sub section
2 of section 26 by the Revenue is accepted then the absence of that word in the proviso destroys the argument
But the more reasonable view is that both the sub section and the proviso deal only with the profits under the 4th head men tioned in section 6 and so construed it excludes capital gains
The argument that sub section
2 of section 26 read with the proviso thereto indicates that the total income of the person succeeded is the criterion for separate assessment under sub section
2 and for assessment and realisation under the proviso is on the assumption that sub section
2 and the proviso deal with all the heads mentioned in section 6 of the Act
But if as we have held the scope of sub section
2 of section 26 is only limited to the income from the business the share under sub section
2 and the assessment and realisation under the proviso can only relate to the income from the business
The argument is really begging the question itself
In 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 question arises for our consideration
In the result the appeal fails and is dismissed with costs
Appeal dismissed


Summary:
The Free Press Company was a private limited company Carrying On business as printers and publishers of certain newspapers
On August 31 1946 the Free Press Company transferred the right to print and publish the newspapers to the assessee company and let out its machinery and assets to the latter with effect from September 1 1946
The assessee company accordingly started publishing newspapers from September 1 1946
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
On November 1 1946 the aforesaid machinery was sold yielding a profit of Rs 608666
That sum was made up of of price machinery Rs 214090 ii the amount in excess over the original cost priceRs
394576
In assessing the assessee to income tax for the accounting year 1946 47 the Income tax Officer included the said two items in the total income of the assessee company
The first item was assessed as profit under proviso to section 102vii 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 section 102vii of the Act would only apply 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 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
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 was closed and during the winding up proceedings therefore it would fall outside the scope of the said proviso and thus the first item ie the sum of Rs 214090 could not be assessed to income tax
190 The Liquidators of Pursa Limited vs Commissioner of Income tax Bihar  and K M section Reddy Commissioner of Income tax Kerala vs West Coast Chemicals and Industries Ltd in liquidation Alleppy 1962 Supp
3 SCR 960 relied on
Commissioner of Income tax Bombay Circle II vs The National Syndicate Bombay   explained
ii Both the sub section
2 of section 26 and the proviso deal only with profits under the 4th head mentioned in section 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 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 assessee
Therefore under section 262 of the Act the assessee being the successor could not be liable to income tax in respect of Rs 394576 the second item which represented the capital gains because capital gains are excluded from the purview of section 262 of the Act
United Commercial Bank Ltd vs Commissioner of Income tax West Bengal   referred to