Appeal No 280 of 1959
Appeal by special leave from the judgment and order dated the 22nd August 1956 of the former Bombay High Court in Income tax Reference No 17 of 1956
B Ganapathy Iyer and D Gupta for the Appellant
Sanat P Mehta section N Andley J B Dadachanji Rameshwar Nath and P L Vohra for the Respondent 1960
November 1
The Judgment of the Court  was delivered by HIDAYATULLAH J The Commissioner of Incometax Bombay Circle II has filed this appeal after obtaining special leave against the judgment of the High Court of Bombay in an Income tax reference 231 under section 662 of the Income tax Act
The National Syndicate Bombay referred to in this judgment as the respondent was a firm consisting of three partners
This firm acquired on January 11 1945 a tailoring business as a going concern from one Chambal Singh for Rs 89321 
Included in this amount was the consideration paid for sewing machines Rs 72000 and a motor lorry Rs 8000
The assessment concerns the year of account of the respondent January 11 1945 to February 28 1946
The business of the respondent was to prepare garments for Government departments and during the war years this appears to have been a profitable business
Immediately after the respondent acquired this business the last war came to an end and the respondent found it difficult to continue the business
It therefore closed its business in August 1945
Between August 16 1945 and February 14 1946 sewing machines were sold at a loss of Rs 41998
The motor lorry was also sold on February 141946 at a loss of Rs 3700
The respondent closed its account books on February 28 1946 showing the two losses and writing them off
For the assessment year 194647 the respondent claimed a deduction of Rs 45698 under section 102vii of the Indian Income tax Act
The Income tax Officer disallowed this deduction holding that the loss was of a capital nature and that inasmuch as the business of the respondent was not carried on after August 1945 section 102vii was not applicable
This order of assessment was confirmed by the Appellate Assistant Commissioner who also held that the loss represented capital loss as the machines and the motor lorry were sold after the closure of the business
On appeal the Appellate Tribunal Bombay also confirmed the order holding that the sales of machines and the motor lorry were made in the course of the winding up of the assessee s business after the business had been stopped and that therefore the deduction could not be claimed under section 102Xvii
The respondent asked the Tribunal to refer the questions of law arising from its order but the request was refused
It then moved the High Court and 232 obtained an order under section 662 of the Income tax Act and the following two questions were referred  1 Whether the Tribunal was justified in law in holding that the Petitioner had carried on its business only till twenty eighth day of August one thousand nine hundred and forty five  2 Whether on the facts and circumstances of the case the Income tax Appellate Tribunal was justified in law in not allowing the sum of Rs 41998 Rupees forty one thousand nine hundred and ninety eight on sale of machines and Rs 3700 Rupees three thousand and seven hundred on the sale of lorry as a deduction from the total income of the applicant The High Court answered the first question in the affirmative holding that there was evidence on which the Tribunal could reach the conclusion that the business had in fact been continued only till August 28 1945
On the second question the High Court was of the opinion that the business having been carried on for at least a part of the account year section 102vii was applicable and that therefore this allowance had to be made under that clause
The High Court therefore answered the question in the negative
The High Court refused to grant a certificate to appeal to this Court but the Commissioner of Income tax applied for and obtained special leave and this appeal has been filed
Before we deal with the question whether section 102 vii of the Indian Income tax Act is applicable to the facts of this case we may mention that during the course of the argument Mr section P Mehta counsel for the respondent sought to re open the first question
According to him there was no evidence on which the Tribunal or the High Court could reach the conclusion that the business of the respondent had come to a close in August 1945
We however did not permit him to raise this contention partly because in our opinion such a contention could not be allowed to be raised at this stage in an appeal by the Department and partly because in our opinion there were adequate materials for the High Court to have based its conclusion
Inasmuch as we were in agreement 233 with the High Court on the question of the applicability of section 102vii we also felt that no useful purpose would be served in examining the matter to find out whether the business had in fact closed on August 28 1945 or had continued till the end of the account year
We are really concerned in this appeal with the interpretation of section 102vii and its applicability to the facts of the case
It may be assumed for the purposes of this case that the business did in fact close down on August 281945 even though some in comings and outgoings were taking place for the rest of the year and the books of account were not finally closed till February 28 1946
The Commissioner contends that an allowance could only be claimed if the sale of machines etc took place when the business was being continued and not if the business had come to a close
The respondent on the other hand submits that section 102vii would be applicable in a case where the business continued for a part of the account year even though the sale of the machinery plant etc took place after the closure of the business during the course of the account year
Section 102vii reads as follows  102
Such profits or gains shall be computed after making the following allowances namely 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 that such amount is actually written off in the books of the assessee
The Commissioner emphasises the word  such  in the clause and states that this takes us back to cl
iv where the words  used for the purposes of the business occur
It is therefore contended that if the business itself comes to an end before the sale takes place the sale is not during the continuance of the 30 234 business but is during the course of the winding up of the business and the condition precedent to the application of section 10 is that the business must be is carried on  by the person claiming the benefit of sub section
Reference in this context is made to the first sub section of section 10 where it is provided that the tax shall be payable by an assessee under the head  Pro fits and gains of business  in respect of the profits or gains of any business etc  carried on by him 
 The Department relies upon a decision of this Court reported in The Liquidators of Pursa Limited vs Commissioner of Income tax Bihar 1
The respondent also relies upon the same ruling and contends that it supports the case set up by it
The respondent also relies on a recent decision of the Madras High Court in Commissioner of Income tax vs Express Newspapers Ltd 2
These two cases were decided under the second proviso to section 102vii before its amendment in 1949
The second proviso reads  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 down value shall be deemed to be profits of the previous year in which the sale took place
 The words underlined above were inserted by section 11 of the Taxation Laws Extension to Merged States and Amendment Act 1949
In both the cases the business had admittedly closed down before the sales took place and it was held applying the proviso as it was before the amendment of 1949 that such receipts were not taxable
The amendment now renders these cases obsolete
Reliance is however placed on certain observations in these oases and it is contended that the same reasoning must be applied to a case of loss as to a case of profits
We shall therefore refer briefly to them
In The Liquidators of Pursa Limited vs Commissioner of Income tax Bihar 1 the year of assessment 235 was 1945 46 which corresponded to the accounting year October 1 1943 to September 30 1944
Pursa Limited were manufacturers of sugar and sold the business on August 9 1943 including buildings machinery and plant but excluding manufactured sugar worth about Rs 600000
This sugar was sold till June 1944 but throughout the accounting period the machinery plant or buildings were not used
Pursa Limited went into voluntary liquidation on June 20 1945
In the sale of the buildings machinery and plant there was an excess such as is described in the second proviso and that amount of excess was sought to be taxed
This was negatived by this Court on two grounds
They were a  If the machinery and plant have not at all been used at any time during the accounting year no allowance can be claimed under clause vii in respect of them and the second proviso also does not come into operation  and b  that the intention of the company was to discontinue its business and the sale of the machinery and plant was a step in the process of winding up of its business
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
Counsel differ as to the ratio of the case
The Commissioner contends that the ratio is that no sale whether at a loss or at a profit can be said to fall within respectively cl
vii or the second proviso if it takes place after the closure of business and during the process of winding up while the respondent contends that the real ratio was that during the account year the machinery and plant were not at all used
No doubt this Court did give two reasons for its decision but the primary consideration was the second ratio quoted above
This is clear from the following passage towards the end of the judgment  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 236 machinery or plant not being used during the accounting period at all and in any event not having had any connection with the carrying on of that limited business during the accounting year section 102vii can have no application to the sale of any machinery or plant Learned Counsel for the respondent relies upon the passage last quoted and urges that where the buildings machinery or plant have been used for a part of the accounting period the ruling cannot apply and draws attention to the words  at all  used twice in the judgment
He argues that if the machinery or plant had been used for a part of the accounting year the result would have been different
It is not possible to say how the case would have been decided in the changed circumstances but it is obvious that the case is distinguishable on more than one ground
The proviso is in a language different from cl
vii as a fiction is introduced and such  profits  are taxed to take back what had been given away for depreciation which did not really take place
But more of it later
Express Newspapers Ltd case 1 is also distinguishable
In that case the Free Press of India Madras Ltd resolved on August 31 1946 to transfer the right of printing and publishing its daily newspapers to Express Newspapers Ltd They rented out their machinery etc to the new Company which took possession on September 1 1946
The year of account ended on December 31 1946
The Free Press went into voluntary liquidation on October 31 1946 and on November 1 1946 its building machinery and plant were sold to the new Company at a price which exceeded the written down value by Rs 608666 made up of Rs 214090 being the excess of the original cost price over the written down value and Rs 394576 being the excess over the original cost price
One question among others was whether the second proviso to section 10 2vii
applied
The Madras High Court ob
served  1 237  in the present case the sale of the machinery took place during the year of account and it was used by Free Press Company for at least a part of the year
This would be sufficient to attract liability
The learned counsel for the assessee is on a firmer ground when he contended that the sale being made in the process of winding up of the company section 102vii will not apply
The second proviso to section 102vii would be invoked only where the sale was one made in the course of business carried on by the predecessor
Where the sale is a closing down sale that profit could not be brought to tax
In Liquidators of Pursa Ltd V Commissioner of Income tax 1 the Supreme Court held that where in a case the sale of machinery and plant was a step in the process of winding up of its business the intention of the company having been to discontinue the business such sale was not an operation in furtherance of the business carried on by the company but was only a realisation of its assets in the process of gradual winding up of its business which eventually terminated in the voluntary liquidation of the company and provision of section 102vii would not apply
In the present case the formation of the new company was to take over the business of the old company
The lease of the machinery the transfer of the right to carry on the business of publishing newspapers and the ultimate sale of the machinery were part of the same scheme for winding up the Free Press Company
The sale of machinery was undoubtedly a closing down sale and the profit earned therein could not come in for assessment under section 102vii
 These two cases deal with the second proviso to section 102Xvii
Clause vii deals with loss and the second proviso with profits but the proviso is not an exact counterpart of the clause
The proviso enacts a fiction which the main clause does not enact
The reason for the introduction of the fiction in the proviso appears to be this Loss in business may take place in various ways
If the business requires more to run it than it produces there is loss
Loss in 1  238 business may also take place if the equipment with which business is done is lost destroyed or depreciates or suffers in value
The law takes note of the loss and provided it has been computed and brought into the books of the business and written off it can be claimed as a deduction
Profit in business on the other hand primarily means profit earned in the business
But if an allowance had been claimed as depreciation and had been allowed and if the sale of the building machinery or plant on which depreciation allowance was claimed in the past shows that there was in fact no depreciation but an accretion in value the law deems that a profit has been made
The fiction thus converts that which may not be strictly profit of the business in a narrow sense into a profit for purposes of assessment
Formerly it was a matter of doubt whether even this accretion could be deemed a profit when the business had closed down but now the legislature has amended the law by saying that this fictional profit must be brought to tax irrespective of the fact that the sale took place  during the continuance of the business or after the cessation thereof But it is to be noticed that no such amendment was made in cl
vii to exclude loss over buildings machinery or plant after the clospre of the business
It is thus clear that the principles which govern the proviso cannot be 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
We must thus restrict ourselves to the scheme of the Indian Income tax Act and the clause in question
The scheme of the Income tax Act as was pointed out by Lord Porter in Indian Iron  Steel Co Ltd vs Commissioner of Income tax Bengal 1 is that income
tax is assessed and paid in the next succeeding year upon the results of the year before
It is the income of the previous year which is brought to tax in the succeeding year which is called the year of assessment
For the purpose of assessment the Indian Income Tax Act divides the sources of income profits 1  336 239 and gains into six heads in section 6
The fourth head is  Profits and gains of business profession or vocation 
Sections 7 8 9 10 12 12A and 12B lay down  the rules of computation under the different heads
Profits and gains of business are dealt with in section 10
The first subjection of that section provides  The tax shall be payable by an assessee under the head I Profits and gains of business  in respect of the profit or gains of any business carried on by him In Commissioner of Income tax vs Shaw Wallace  Co Ltd 1 it was pointed out by the Judicial Committee that the words  carried on by him  were  an essential constituent of that which is to produce the taxable income it is to be the profit earned by a process of production 
It was further pointed out that  business  had been defined in the Income tax Act to  include any trade commerce or manufacture or any adventure or concern in the nature of trade commerce or manufacture  and that it involved  a fundamental idea of the continuous exercise of an activity
 It was however pointed out that the source was not necessarily one which was expected to be continuously productive but one whose object was the production of a definite return excluding anything in the nature of a mere windfall and that capital  in most cases was hardly more than an element in the process of production
We agree with this analysis of the Income tax Act and indeed these observations were also applied in the Pursa Limited case 2 to which we have already referred
It thus follows that capital may in the process of production depreciate get used up or lost
The Income tax Act while taxing income profits or gains takes note of and makes allowance for such eventualities
If the profits or gains of a business for a particular year are to be taxed they must be computed for the whole year taking into account losses incurred during the same year
Now the first condition precedent appears to be that the business must have been 1 1932 LR 59 IA 206
2  240  carried on by the assessee 
This is to be found in the first sub section of section 10
The second condition is that the building machinery or plant must have been  used for the purposes of the business 
This is to be found in of
iv of the second sub section of section 10
The third condition is that the sale etc should have taken place during the year of account
This follows from the nature of the tax which is assessed and levied on the profits of the working of the previous year
The fourth condition is that the loss should have been brought into the books of the assessee and written off
This is provided by the first proviso
There is no other condition to be found expressly in the section or in the Act
It is nowhere stated that the business of the assessee should have been carried on for the whole year or that the machinery or plant should have been used for the whole of the accounting period
There are no words which would show that if the assessee works only for a part of the year and then sells out the loss that he incurs is not a business loss or that he must pay tax on the small profit that he might have made and bear the lose in addition
We have shown above that the case of profit referred to in the second proviso stands on a different footing altogether since profit and loss arise in different ways
The law has thus treated the two subjects differently and the legislature has amended the proviso but not the clause
In view of what we have said above we are of opinion that the judgment of the High Court was correct in all the circumstances of this case and this appeal must be dismissed with costs
Appeal dismissed


Summary:
The respondent stocked bunker coal  at Candle Island in the State of Madras
They sold the coal to steamers calling at the port of Cochin in the State of Travancore Cochin and delivered it there
The respondent was assessed to sales tax on such sales for the year 1951 52 and 1952 53
 The respondent contended that no sales tax could be levied on these sales since they were either sales  in the course of export  or in the course of inter State trade exempt from sales tax under sub cl
1 b or cl
2 of article 286 of the Constitution and in the alternative that they were exempt from tax under a notification dated February 5 1954 issued by the appellant State under which sales failing within the Explanation to article 2861a made during the period 4 1 1951 to 31 3 1953 were exempted from liability to pay tax
Held that the sales were exempt from tax under the Government Notification
The coal was delivered to the actual consumer i e the steamships in Travancore Cochin and they were at liberty to consume it wherever they desired either within the State or outside the choice depending on its convenience and necessity
The delivery was for consumption within the State and the sales fell within the Explanation to Aft 2861a
Though the sales were in the course of inter State trade which were covered by the ban on taxation imposed by article 2862 the levy was validated by the Sales Tax Validation Act 1956
M P V Sundararamier  Co vs The State of Andhra Pra desh   relied on
The sales were not made in the course of export and were not covered by the ban imposed by article 2861b
For article 2861b to apply it was not sufficient that the goods merely moved out of the territory of India but it was further necessary that the goods should be intended to be transported to a destination beyond India
The concept of export  in article 286 postulated the existence of two termini between which the goods were intended to be transported
220 Burmah Shell Oil Storage  Distributing Co of India Ltd vs The Commercial Tax Officer CA 751 of 957  CA 10 of 1958 Unreported followed