Case: Commissioner Of Income-Tax, Kerala Vs. K. B. Kalikutty And Anr

to the High Court it came finally in appeal to this Court. It was held that the intention of the company was to discontinue its business and the sale of the machinery and plant was a step in the process of the winding up of the business culminating in the voluntary liquidation of the company and even if the sale of the stock of sugar be regarded as carrying on of business of the company and not a realisation of its assets with a view to winding up, the machinery or plant not having been used at all, Section 10 (2) (vii) would have no application to the sale of any such machinery or plant. The controversy in (1962) 46 ITR 135 (SC) arose out of the assessment of the company for the accounting year ending April 30, 1944. The assessee company had entered into an agreement in 1943 for the sale of the lands, buildings, plant and machinery of a match factory with a view to close down the business. The purchaser made default in payment and a few months later a fresh agreement was entered into between the parties for the sale of the property mentioned in the first agreement and also chemicals and paper used for manufacture which had not been included in the first agreement. The Department sought to assess the profits derived from the sale of the chemicals and paper as profits from the business. The assessee contended that it was realisation sale and this amount was not liable to tax. It was held that on the facts of that sale the sale of chemicals and material used in the manufacture of matches was only a winding up sale to close down the business and to realise all the assets. Therefore the tax liability was not attracted. In (1964) 8 SCR 189 = (AIR 1965 SC 33 ) a decision on which the High Court relied a great deal in the present case the question again arose out of the assessment made before the amendment made in 1949, the accounting year being 1946-47. Reference was made by Subba Rao, J., (as he then was) delivering the judgment of this Court to the decision in the case of Liquidators of Pursa Ltd., 1954 SCR 767 =(AlR 1954 SC 253) as also to other decisions and after an examination of the relevant provision the following three conditions were laid down for bringing the sale proceeds to charge under the second proviso to Section 10 (2) (vii) :"(1) During the entire previous year or a part of it the business shall have been carried on by the assessee;(2) the machinery shall have been used in the business; and(3) the machinery shall have been sold when the business was being carried on and not for the purpose of closing it down or winding it up."6. There can be no doubt that according to the law laid down by this Court the view of the High Court would have been sustainable if the sale in the present case had been affected during the assessment year prior to the amendment of the proviso by Act 67 of 1949. The critical words which were inserted by that proviso namely, "whether during the continuance of the business or after the cessation thereof", must be given their proper meaning. It is quite plain that if the building, machinery or plant is sold during the continuance of the business or after the business ceases the sale proceeds would be liable to tax in accordance with that proviso. The only question therefore is whether when a sale is made for the purpose of closing down the business or effecting its cessation the proviso would be inapplicable. When the legislature dearly provided that the proviso would apply even if the sale was made after the cessation of the business it is difficult to conceive that it was intended to exclude from the ambit of the proviso realisation sales of the nature contemplated in the previous decisions of this Court. Such a result would be illogical. Even if logic is not necessarily to govern the interpretation of a taxing provision, the rule of reasonable interpretation cannot be ignored. Indeed this Court in a recent judgment Commr. of Income-tax v. Ajax Products Ltd., (1965) 1 SCR 700 = (AIR 1965 SC 1358 ) clarified the position about the effect of the amendment made in 1949 in the proviso and reference was made to the three conditions for the applicability of the second proviso before the amendment which were laid down in the previous decision of this Court. It was then observed :the words whether during the continuance of the business or after the cessation thereof were not present in the unamended proviso. In the two decisions cited earlier, in the absence of such word, this Court held that to attract the said proviso the machinery shall have been sold before the business was closed down. This clause omit that condition for the exigibility of the tax."The above observations clearly show that the amending words in the proviso eliminated the third condition which had been laid down for its applicability in the previous decision namely, that the machinery shall have been sold when the business was being carried on and not for the purpose of closing it down or winding it up. Once that condition disappears as a result of the amendment only the first two conditions remain and all that has to be seen is whether during the entire previous year or a part of it the business has been carried on by the assessee and that the machinery has been used in the business. Both these conditions, according to the findings given by the tribunal, exist in the present case. The result would be that the profits arising out of the sale of buses in question as determined by the Income-tax Officer would be chargeable to tax in accordance with the second proviso to Section 10 (2) (vii).

Decision (1 = appeal accepted, 0 = rejected): 1

Explanation:
1[ds]5. The words within brackets did not exist before the amendment made by Act 67 of 1949 and were inserted by that Act. In Liquidators of Pursa v. Commr. of Income-tax, Bihar, 1954 SCR 767  =(AIR 1954 SC 253  ) the controversy arose out of the proceedings relating to the assessment of Pursa Limited for the assessment year 1945-46. Attempts had been made from 1942 onwards to sell the entire business of the company but without success. In December 1943 an agreement was executed whereby the assessee agreed to sell all the lands, buildings, machinery, plant etc., used in connection with the sugar factory which was being run by the company. On the date of the sale the company possessed sugar stocks valued at Rs. 6 lakhs which the company continued to sell up to June 1944. The company went into voluntary liquidation on June 20, 1945. The Income-tax Officer held that the profits of the sale of machinery and plant were liable to assessment under Section 10 (2) (vii). The Appellate Assistant Commissioner and the Income-tax Appellate Tribunal affirmed that order. After the matter had been taken to the High Court it came finally in appeal to this Court. It was held that the intention of the company was to discontinue its business and the sale of the machinery and plant was a step in the process of the winding up of the business culminating in the voluntary liquidation of the company and even if the sale of the stock of sugar be regarded as carrying on of business of the company and not a realisation of its assets with a view to winding up, the machinery or plant not having been used at all, Section 10 (2) (vii) would have no application to the sale of any such machinery or plant. The controversy in (1962) 46 ITR 135 (SC) arose out of the assessment of the company for the accounting year ending April 30, 1944. The assessee company had entered into an agreement in 1943 for the sale of the lands, buildings, plant and machinery of a match factory with a view to close down the business. The purchaser made default in payment and a few months later a fresh agreement was entered into between the parties for the sale of the property mentioned in the first agreement and also chemicals and paper used for manufacture which had not been included in the first agreement. The Department sought to assess the profits derived from the sale of the chemicals and paper as profits from the business. The assessee contended that it was realisation sale and this amount was not liable to tax. It was held that on the facts of that sale the sale of chemicals and material used in the manufacture of matches was only a winding up sale to close down the business and to realise all the assets. Therefore the tax liability was not attracted. In (1964) 8 SCR 189   = (AIR 1965 SC 33  ) a decision on which the High Court relied a great deal in the present case the question again arose out of the assessment made before the amendment made in 1949, the accounting year being 1946-47. Reference was made by Subba Rao, J., (as he then was) delivering the judgment of this Court to the decision in the case of Liquidators of Pursa Ltd., 1954 SCR 767  =(AlR 1954 SC 253)   as also to other decisions and after an examination of the relevant provision the following three conditions were laid down for bringing the sale proceeds to charge under the second proviso to Section 10 (2) (vii)During the entire previous year or a part of it the business shall have been carried on by the assessee;(2) the machinery shall have been used in the business; and(3) the machinery shall have been sold when the business was being carried on and not for the purpose of closing it down or winding it up.There can be no doubt that according to the law laid down by this Court the view of the High Court would have been sustainable if the sale in the present case had been affected during the assessment year prior to the amendment of the proviso by Act 67 of 1949. The critical words which were inserted by that proviso namely, "whether during the continuance of the business or after the cessation thereof", must be given their proper meaning. It is quite plain that if the building, machinery or plant is sold during the continuance of the business or after the business ceases the sale proceeds would be liable to tax in accordance with that proviso. The only question therefore is whether when a sale is made for the purpose of closing down the business or effecting its cessation the proviso would be inapplicable. When the legislature dearly provided that the proviso would apply even if the sale was made after the cessation of the business it is difficult to conceive that it was intended to exclude from the ambit of the proviso realisation sales of the nature contemplated in the previous decisions of this Court. Such a result would be illogical. Even if logic is not necessarily to govern the interpretation of a taxing provision, the rule of reasonable interpretation cannot beabove observations clearly show that the amending words in the proviso eliminated the third condition which had been laid down for its applicability in the previous decision namely, that the machinery shall have been sold when the business was being carried on and not for the purpose of closing it down or winding it up. Once that condition disappears as a result of the amendment only the first two conditions remain and all that has to be seen is whether during the entire previous year or a part of it the business has been carried on by the assessee and that the machinery has been used in the business. Both these conditions, according to the findings given by the tribunal, exist in the present case. The result would be that the profits arising out of the sale of buses in question as determined by the Income-tax Officer would be chargeable to tax in accordance with the second proviso to Section 10 (2) (vii).