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Civil Appeal No. 1098 of 1963, decided on 8th October 1964.
Balancing charge-Business discontinued prior to accounting year-Excess realised over written down value whether assessable as profits-Scope of amendment of provisions in 1949-Interpretation of statutes-Charging provision-Fiction Proviso-Indian Income-tax Act, 1922, S. 10 (2) (vii) prov. 2.
In order that the amount realised up to the original cost in excess of the written down value on the sale of a building, machinery or plant used in a business might be deemed to be profits under the second proviso to section 10 (2)(vii) of the Indian Income-tax Act, 1922 (before its amendment in 1949), the following three conditions had to be satisfied : (i) during the entire previous year or a part thereof, the business should have been carried on by the assessee; (ii) the building, machinery or plant should have been used in the business; and (iii) the building, machinery or plant should have been sold when the business was being carried on and not for the purpose of closing it down or winding it up. The insertion of the words "whether during the continuance of the business or after the cessation thereof" in the proviso by the amendment of 1949 only removed one of the conditions for the exigibility of the excess to tax, viz., the third condition. After the amendment the excess realised is deemed to be profits notwithstanding that the sale took place after the business ceased; but the amendment did not introduce a further Action that the business must also be deemed to have the sale took place. Therefore, even afters the 1945 amendment, it is necessary that during the whole or a part of the previous year the business should have been carried on by the assessee to order that the excess realised on the sale of the building, machinery or plant could be treated as profits of the business under the second proviso to section 10 (2)(vii).
The assessee-company, which adopted the calendar year as its accounting period, went into voluntary liquidation on October 30, 1954. Its business was carried on by the liquidator till the middle of December, 1954, when it was completely closed down. On March 10, 1955, the liquidator sold the plant, machinery and buildings for a sum of Rs. 10 lakhs, made up of Rs. 1,00,000 for the land, Rs. 1,31,732 for the buildings and Rs. 7,68,268 for the machinery. The Appellate Assistant Commissioner accepted the valuation of the buildings given by the chartered engineer and took the values fixed in the sale deed as genuine. The Appellate Tribunal rejected that valuation on the grounds that it must have been obtained in connection with the floatation of the transferee-company for the purpose of its prospectus or statement in lieu of prospectus, and that some of the buildings found useless for the transferee-company had been left out in the valuation, and assuming that the building cost had gone up steadily since 1939, estimated the value of the buildings in 1955 at Rs. 2,32,963. The Tribunal further applied the second proviso to section 10 (2) (vii) in regard to the excess realised over the written down value of the building and machinery. On a reference, the High Court substituted the value accepted by the Appellate Assistant Commissioner and further held that the second proviso to section 10 (2) (vii) was not applicable. On appeal :
Held, (i) that as there was nothing on the record to show that the valuation certificate of the chartered engineer was issued in connection with the floatation of the transferee-company, or that any particular building was omitted from the estimate and that those omitted had any marketable value at all, and the estimate made by the Tribunal was a pure guess unrelated to the material placed before it, the High Court was entitled to go behind the finding of the Tribunal and substitute the figures adopted by the Appellate Assistant Commissioner.
(ii) That, as in the calendar year 1955 no business was carried on, the second proviso to section 10(2)(vii) as amended in 1949 did not apply and the excess over the written down value of the machinery could not be assessed as profits under that proviso.
The subject is not to be taxed unless the charging provision clearly imposes the obligation.
If the words of a statute are precise and unambiguous they must be accepted as declaring the express intention of the Legislature.
A proviso must be considered harmoniously with the main enactment.
Fiction should not be stretched beyond the purpose for which they were enacted.
Ajax Products Ltd. v. Commissioner of Income-tax (1961) 42 I T R 141 affirmed.
[Case-Law referred to]
C. K. Daphtary, Attorney-General for India, S. V. Gupte, Solicitor-General of India and K. N. Rajagopala Sastri, Senior Advocate (R, H. Dhebar and R. N. Sachthey with them) for Appellant.
R. Venkatram and R. Gopalakrishnan for Respondent.
R. Gopalakrishnan for the Intervener.
This appeal by special leave is directed against the judgment of the High Court of Judicature at Madras in Tax Case No. 74 of 1959.
The facts may briefly be stated. The respondent-assessee, the Ajax Products Ltd. now under liquidation, was a public limited company incorporated in 1939 to carry on the business in the manufacture and sale of steel and abrasives products. On October 30, 1954, the company, at an extraordinary general body meeting, made a resolution to go into voluntary liquidation and the liquidator appointed by the said resolution carried on the business till the middle of December 1954, when the business was completely closed down. On March 10, 1955, the liquidator executed a sale deed to Carborundum Universal Limited transferring to the latter the plant, machinery and buildings for a sum of Rs. 10,00,000. The said amount was made up of : (1) Rs. 1,00,000 being the value of the land, (2) Rs. 1,31,732 being the value of the buildings, and (3) Rs. 7,68,268 being the value of plant and machinery. The books of the assessee-company showed that the original cost of the buildings was Rs. 3,46,034, that its written down value was Rs. 1,08,321, that the cost of the machinery was Rs. 3,90,148 and its written down value, Rs. 90,098. The total amount of the depreciation allowed in the past for both the buildings and machinery amounted to Rs. 5,36,034. The sale resulted in the excess realisation of Rs. 23,411 over the written down value of the buildings. In the case of the machinery the sale price exceeded the difference between the cost and the written down value and that excess was Rs. 3,00,050:
The relevant assessment year is 1956-57 and the corresponding accounting year is the calendar year 1955. The Income-tax Officer held that the sale was the result of collusion between the vendor and the vendee. He came to the conclusion that the assessee had realized the full original cost of the buildings and machinery and, on that basis, he treated the sum of Rs. 5,36,034 which was allowed as depreciation in respect of buildings and machinery in the previous years as profits within the meaning of the second proviso to section 10 (2) (vii) of the Indian Income tax Act, 1922. On appeal, the Appellate Assistant Commissioner held that the valuation fixed in the sale deed executed by the assessee in favour of Carborundum Universal Limited was genuine and, on that basis determined the profits liable to tax at a sum of Rs.3,23,461. He rejected the contention of the assessee that the second proviso to section 10 (2) (vii) was not applicable to his case. Against the order of the Appellate Assistant Commissioner, both the assessee and the Income-tax Officer preferred appeals to the Income-tax Tribunal. The Tribunal estimated the value of the buildings at a sum of Rs. 2,32,963 which gave a profit on sale of Rs. 1,25,000 instead of Rs. 23,411 showed by the assessee. Agreeing with the Appellate Assistant Commissioner, it accepted the figure of Rs. 3,00,050 shown by the assessee as profit on the sale of plant and machinery. In the result, it held that a sum of Rs. 4,25,050 was liable to tax under the second proviso to section 10 (2) (vii). It also rejected the contention of the assessee that the said proviso was not applicable to its case. On the application filed by the assessee, the Tribunal referred to the High Court the following two questions:
"(1) Whether the assessee was properly assessed on Rs. 4,25,050 as profits under the proviso to section 10 (2) (vii) of the Act and
(2) Whether there were materials for the Tribunal estimating the sale value of the building at Rs. 2,32,963 "
The Divisional Bench of the High Court held that the estimate of the sale value of the buildings by the Tribunal was not based upon any material and therefore could not stand. On that finding, it substituted the figure of Rs. 3,23,461 for the figure of Rs. 4,25,050 in question No. 1. It further held that as the said machinery and buildings were not used for the purpose of the business of the assessee during any part of the accounting year, the said profits were not liable to tax under the second proviso to section 10 (2) (vii) of the Act. In the result, it answered the two questions in favour of the assessee. Hence, the present appeal has been filed.
Mr. Rajagopala Sastri learned counsel for the revenue raised before us two points : (1) that the High Court had no jurisdiction to set aside the finding of fact arrived at by the Tribunal to the effect that the profit on sale of the buildings was Rs. 1,25,000; and (2) that the second proviso to section 10 (2) (vii) after its amendment by Act LXVII of 1949, brings to charge the said deemed profits irrespective of the facts whether the buildings and the machinery were used for the business in the previous year or not.
To appreciate the first contention, it would be necessary to notice the reasons given by the Appellate Tribunal for differing from the findings of the Appellate Assistant Commissioner and coming to the conclusion which it did in respect of the sale price of the buildings. The Appellate Assistant Commissioner accepted the valuation of the buildings given by the chartered engineer. The Tribunal rejected that estimate on the following grounds: (1) the valuation certificate of the buildings and machinery must have been obtained by the vendee-company in connection with its floatation for the purpose of its prospectus or statement in lieu of prospectus; (2) some of the buildings found useless for vendee's purpose had a been left out in the valuation. After rejecting the certificate on the said grounds, it assumed that the building cost had gone up steadily since 1939 and on that basis it surmised that the value of the buildings in 1955 would be Rs. 2,32,963. It would at once be noticed that both the reasons given and the conclusion arrived at by the Tribunal were based on surmises. There is nothing on the record to disclose that the valuation certificate was issued in connection with the floatation of the company; nor is there any material to suggest that any particular building was omitted from the estimate and that those omitted had any marketable value at all. What is more, the estimate of the value given by the Tribunal was a pure guess unrelated to the material placed before it. The High Court in dealing with this matter observed:
"There was however no basis for the finding of the Tribunal that the assessee should have made a profit of Rs. 1,25,000 by the sale of the buildings the position was that the Tribunal did not reject the genuineness of the valuation made by the experts, and it had no material either for the estimates it purported to make, the estimate either of the sale value or of the profits realised by the sale of the buildings."
As the finding of the Tribunal was not based upon any evidence, the High Court was certainly entitled to go behind that finding and answer the question referred to it in the negative.
The second question raised before us turns upon the relevant provisions of the Income-tax Act. The relevant provisions read:
"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 profits 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---
(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 down value shall be deemed to be profits of the previous year in which the sale took place . .."
It may be noticed that in the second proviso, the words "whether during the continuance of the business or after the cessation thereof" were introduced by Act LXVII of 1949. The argument of Mr. Rajagopala Sastri may be summarised as follows: The second proviso to section 10 (2) (vii) is a substantive charging section through couched in the form of proviso and under the said proviso as amended, whenever a sale takes place after the cessation of the business, the surplus must be deemed to be the profits of the year previous to the year in which the sale took place; and for the purpose of the proviso, the business must also be deemed to have been conducted by the assessee during the said previous year. By fiction, the argument proceeded, all the necessary conditions to the exigibility of tax are introduced, though in fact none exists. For the assessee, Mr. Venkatram contended that the amendment only released one of the conditions of taxability, namely, that the sale shall not have been held after the cessation of the business.
The respondent in Special Leave Petition (Civil) Nos. 916-918 of 1964 has filed an application for intervention in this appeal on the ground that the High Court has decided his case following the judgment under appeal. We allowed him to intervene. Mr. Gopalakrishnan appeared for the intervener and supported the arguments advanced on behalf of the respondent in this appeal.
Before we advert to the arguments of the learned counsel for the revenue, it would be convenient to notice the scope of the decisions of this Court dealing with the construction of the said proviso before its amendment. The leading case on this subject is Liquidators of Pursa Limited v. Commissioner of Income-tax ((1954) 25 I T R 265). There, the question was whether the surplus made by the company on the sale of plant and machinery could be brought into charge as profits under the second proviso to section 10 (2) (vii) of the Act before the said amendment. This Court held that the said surplus was not taxable as the plant or machinery was not used in the accounting year and also for the reason that the said assets were sold in the process of gradual winding up of the company, i.e., after the cessation of the business. The same question again fell to be considered in a recent decision of this Court in Commissioner of Income-tax v. Express Newspapers Ltd. ((1964) 53 I T R 250 (S C)). This Court, after considering the earlier decisions, laid down at page 255 the following three conditions for the applicability of the second proviso:
"(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
(5) 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."
It is therefore clear that if the amendment was not there, the present case is directly covered by the said two decisions as the plant and machinery were not used during the accounting year and were sold only after the cessation of the business.
Would the amendment make any difference in the application of the proviso The rule of construction of a taxing statute has been pithily stated by Rowlatt, J. in Cape Brandy Syndicate v. Inland Revenue Commissioner ((1921) 1 K B 64, 71) thus :
In a taxing Act one has to look merely at what is clearly said. There is no room for any intendment. There is no equity about a tax. There is no presumption as to a tax. Nothing is to be read in, nothing is to be implied. One can only look fairly at the language used."
To put it in other words, the subject is not to be taxed unless the charging provision clearly imposes the obligation. Equally important is the rule of construction that if the words of a statute are precise and unambiguous, they must be accepted as declaring the express intentions of the Legislature. Giving a close scrutiny to the second proviso, it will be clear that by giving the nature of meaning to every word used therein, it clearly fits in within the scheme of the entire section. The key expressions in the proviso are: (1) "such building", (2) "whether during the continuance of the business or after the cessation thereof" and (3) "deemed to be the profits of the previous year". The words "such building" have already been given an authoritative interpretation by this Court in the aforesaid two decisions. In the latter decision (Express Newspapers case) at page 254, it is observed thus:
"The adjective such' refers back to clauses (iv), (v), (vi) and (vii) of section 10 (2). Under clause (iv) an allowance is allowed m 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 (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."
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 words, this Court held that to attract the said proviso the machinery shall have been sold before the business was closed down. This clause omits that condition for the exigibility of the tax.
The third expression "shall be deemed to be profits of the previous year", in its ordinary connotation, carries a natural meaning with it. Though the surplus contemplated by the proviso is not in the technical sense of the term profits of the previous year, it is deemed to be the profits of the previous year. It is a limited fiction for a specific purpose. What are not profits in commercial practice are treated as profits for the purpose of the proviso. This fiction was in existence even before, the amendment. The two decisions of this Court cited earlier laid down the scope of the fiction. In the Express Newspapers' case it was new that having regard to section in of the Act, the main condition which attracts all the other subsections and clauses of the section is that the tax shall be payable by an assessee in respect of profits or gains of the business carried on by him. If the business was carried on by him during the accounting year, this Court held that the said surplus, if the other conditions laid down by the proviso were complied with, would be deemed to be the profits of the previous year. One of the important expressions in the proviso is "previous years". Previous year is defined in section 2 (11) (b) to mean, in the case of any person, business or company or class of persons, business or company, such period as may be determined by the Central Board of Revenue or by such authority as the Board may authorise in this behalf. In the present case, the previous year is the calendar year preceding the assessment year. Deemed profits must, therefore, relate to the calendar year preceding the assessment year. By giving the natural meaning to every expression used in the proviso, we reach the result, namely, that the surplus mentioned in the said proviso is not exigible to tax unless the assessee did business during the accounting year preceding the assessment year and unless such buildings or machinery yielding surplus were used for the business in the said year or at any rate part of the year, though they were sold after the cessation of the business. To illustrate, an assessee did business during some part of the accounting year 1955, but closed it in October of that year. He used the machinery during some part of the year for the business. He sold it in December. The price realised yielded a surplus within the meaning of the proviso. During the assessment year 1956-57, the said surplus could be brought into charge notwithstanding the fact that the machinery was sold after the cessation of the business. Before the amendment, the said surplus could not be taxed as the sale was subsequent to the cessation of the business. By giving the natural meaning to every expression in the proviso, the proviso serves the purpose intended by the Legislature.
Now, let us consider the argument advanced by the learned counsel for the revenue. In support of the contention that after the amendment, the proviso conferred a power on the taxing authorities to tax the said surplus even though the assessee did not in fact conduct business during the previous year and though in fact the machinery was not used in the said business during a part of the whole of the accounting year, it is said that the proviso is a charging section, that though it is couched in the form of a proviso it is really a substantive section imposing a charge on the assessee in respect of the said surplus.
The function of a proviso has been considered by this Court in Commissioner of Income-tax v. Indo-Mercantile Bank Ltd. ((1959) 36 I T R 1). It is neatly summarised in the headnote thus:
"The proper function of a proviso is that it qualifies the generality of the main enactment by providing an exception and taking out as it were, from the main enactment, a portion which, but for the proviso, would fall within the main enactment. Ordinarily, it is foreign to the proper function of a proviso to read it as providing something by way of an addendum or dealing with a subject which is foreign to the main enactment. It is a fundamental rule of construction that a proviso must be considered with relation to the principal matter to which it stands as a proviso. Therefore, it is to be construed harmoniously with the main enactment."
There may be cases in which the language of the statute may be so clear that a proviso may be construed as a substantive clause. What whether a proviso is construed as restricting the main provision or as a substantive clause, it cannot be divorced from the provision to which it stands as a proviso. It must be construed harmoniously with the main enactment. So construed, we have already stated earlier the result that flows from such a construction.
The second contention is that the fiction introduced in the proviso is wide in its scope and if fully worked out, all the conditions laid down in the proviso would be satisfied. If by invoking the fiction, the argument proceeded, there must be deemed to have been a business during the year preceding the assessment year, by the same fiction, the buildings, must be deemed to have been used in that business during that year. For enlarging the scope, of the fiction, reliance is placed upon the decision of this Court in Additional Income-tax Officer, Circle I, Salem v. E. Alfred ((1962) 44 I T R 442 (S C)). There, the legal representative on of assessee was assessed to tax after notice under section 24-B(2) of the Act. As he made a default in the payment of the tax, penalties were imposed upon him under section 46 (1) of the Act. Under section 24-B, the Income-tax Officer may proceed to assess the total income of the deceased person as if such legal representative was the assessee. It was argued that after the assessment was made on the legal representative, the fiction came to an end and thereafter, he remained a mere debtor to the Department, and, therefore, section 46 (1) could not be applied to him. Dealing with that argument, Hidayatullah, J., speaking for the Court, said:
"When a thing - is deemed to be something else, it is to be treated as if it is that thing, though in fact, it is not . . . It is in this sense that the legal representative becomes an assessee by the fiction, and it is this fiction, which has to be fully worked out, without allowing the mind to boggle' . . . "
The above decision is of no help to the appellant. There, the statute treated him as an assessee and as he made a default as an assessee, he became liable for the penalty under section 46(1). The statutory fiction was given full effect.
This Court in Commissioner of Income-tax v. Amar Chand N. Shroff ((1963) 48 I T R 59 (S C)) rightly administered a caution that fictions should not be stretched beyond the purpose for which they were enacted.
In that case, the question arose whether under section 24-B of the Act the Income-tax Officer could levy tax on receipts by the legal representative of the deceased person in the years of assessment succeeding the year of accounting being the previous year in which such person died. Under section 24-B the legal personality of the deceased assessee was extended for the duration of the entire previous year in the course of which he died and therefore the income received by him before his death and that received by his heirs and legal representatives after his death but in that previous year became assessable in the relevant assessment year. The Court held that the section was enacted to bring to tax, after the death, income received during his lifetime. In that context, Kapur, J., speaking for the Court, observed at page 66 thus:
"By section 24-B the legal representatives have, by fiction of law, become assessees as provided in that section but that fiction cannot be extended beyond the object for which it was enacted. As was observed by this Court in Bengal Immunity Co. Ltd. v. State of Bihar (1955) 2 S C R 603, 646, legal fictions are only for a definite purpose and they are limited to the purpose for which they are created and should not be extended beyond that legitimate field. In the present case the fiction is limited to the case provided in the three subsections of section 24-B and cannot be extended further than the liability for the income received in the previous year."
The fiction in the second proviso is a limited one. The surplus is deemed to be the profits of the previous year. As we have pointed out earlier, it adequately serves the purpose of the section. It was given a limited meaning under the earlier decisions. To sustain the argument of the revenue, it has to be enlarged in its scope. Many words have to be read into it which are not there. We cannot accept this argument.
It is said that the words "previous year" need not necessarily be an accounting year wedded to the assessment year and it can be given a different meaning if the context demands it. This Court in Dhandhania Kedia and Co. v. Commissioner of Income-tax ((1959) 53 I T R 400) approved of the observations of Mahajan, J. in Commissioner of Income-tax v. K. Srinivasan and K. Gopalan ((1953) 23 I T R 87). The observations of Mahajan, J. are to the following effect:
"For purposes of the charging sections of the Act unless otherwise provided for it is co-related to a year of assessment immediately following it, but it is not necessarily wedded to an assessment year in all cases and it cannot be said that the expression previous year' has no meaning unless it is used in relation to a financial year. In a certain context, it may well means a completed accounting year immediately preceding the happening of a contingency."
Be that as it may, in the present case in the context as we have already indicated, there is no reason to give the expression a meaning different from that it bears under the definition.
If the argument advanced on behalf of the revenue were accepted, it would lead to some anomalies. By the fiction, it the business must be deemed to be in existence during the previous year and that the buildings sold must be deemed to have been used for the business during that year, the amendment was not necessary. If it existed, there could not have been a cessation of it during the previous year. On that reasoning the judgment in Pursa's case would have been the other way. If the argument was correct there would be no time-limit for the assessment of the surplus. Whenever a building was sold, whatever might be the time lag, by fiction, the business, as well as the user of the building in that business would be in the previous year by the year of assessment. We cannot accept a contention yielding such a result unless it is so clearly expressed. Indeed, the expressed intention of the Legislature is the other way. We therefore hold that the amendment only removed one of the conditions for the exgibility of the said surplus to tax, namely the cessation of the business and in other respects, the construction put upon the proviso by the earlier decisions of this Court is still good law. In our view, the answers given by the High Court to the questions propounded are correct.
In the result, the appeal fails and is dismissed with costs.
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