COMMISSIONER OF INCOME TAX Vs. GURUSWAMY K N

JUDGEMENT

(1.) THIS is a reference made by the Tribunal, Madras Bench, at the instance of the CIT. Bangalore, under s. 66(1) of the Indian IT Act, 1922 (to be hereinafter referred to as the "Act") in I.T. As. Nos. 6585 to 6587 of 1961-62 on its file. The learned judge set out the statement of case which ran as follows :

(2.) THE assessee derived income from securities, from properties, money-lending business and petrol business. He also conducted a beer tavern. THE accounting years concerned in these appeals are the year ending on June 30, 1954, June 30, 1955, and June 30, 1956. In the year ending on June 30, 1953, the assessee had abkari contract. During the years under reference the assessee had no such abkari contract. THE assessee had maintained a fleet of lorries for transporting toddy from the palm groves to the various shops which were spread over a wide area. Depreciation was allowed on these lorries up to and inclusive of the asst. yr. 1954-55. In the year ending on June 30, 1954 (asst. yr. 1955-56), the assessee sold four lorries. In the asst. yr. 1956-57, the assessee sold two lorries and in the asst. yr. 1957-58, eleven lorries. Out of the four lorries sold in the asst. yr. 1955-56, there was a loss in the sale of one amounting to Rs. 786. In regard to the other three lorries the difference between the written down value and the sale proceeds amounted to Rs. 7,414. Out of the two lorries sold in the asst. yr. 1956-57, there was a loss in the sale of one and in regard to the other, there was a difference of Rs. 2,500 between the written down value and the sale proceeds. In the asst. yr. 1957-58, the difference between the written down value and the sale proceeds amounted to Rs. 22,594. Copy of the assessment order is annexure "A" and forms part of the case. THEre is no dispute about these figures. In the asst. yrs. 1955-56 and 1956-57, the ITO disregarded the losses but brought to tax the sums of Rs. 7,414 and Rs. 2,500 as profits assessable under the second proviso to s. 10(2) (vii). Similarly, the sum of Rs. 22,594 was brought to tax. Copies of the orders of the ITO are annexures "B" and "B-1" and form part of the case. THE assessee appealed to the AAC, against the assessment of the sum mentioned above. THEre were other points, but we are not concerned with them in these references. It was contended that the provisions of s. 10(2)(vii) did not apply when the sale took place after cessation of the business and when the source of income had been lost. THE decision of the Supreme Court in Liquidators of Pursa Ltd. vs. CIT (1954) 25 ITR 265 was relied upon by the assessee. THE AAC observed that the decision above referred to related to a case before the amendment of the relevant section and that in view of the introduction of the words in the section by the amendment viz., "Whether during the continuance of the business or after the cessation thereof", the ITO was justified in including the profits under s. 10(2)(vii). Copy of the order of the AAC is annexure "C" and forms part of the case. THEre were further appeals to the Tribunal. It upheld the contention of the assessee. After referring to a passage in the decision of the Supreme Court in Liquidators of Pursa Ltd. vs. CIT (supra) it observed that "the Supreme Court held that two conditions were necessary to bring into operation the liability under s. 10(2)(vii), second proviso, and those were; (i) that the assessee must have been carrying on a business; and (ii) that the assessee must have used the asset for any part of the accounting year in the said business. THE amendment made in 1949 dispensed with the first requirements viz., the need to carry on business. It may be mentioned that even after the cessation of the business the sale of an asset would attract the liability. However, no amendment has been made so as to dispense with the user of the asset in any part of the relevant account year. We have, therefore, to hold that as those assets were not used during the relevant years, the conditions of the second proviso to s. 10(2)(vii) were not satisfied so as to bring into operation the liability contemplated therein. This position has been laid down by the Madras High Court in the decision in Ajax Products Ltd. vs. CIT (1961) 42 ITR 141.

(3.) INTERPRETING the second proviso, as it stood prior to its amendment in 1949, the Supreme Court in the above decision laid down that in order to attract the applicability of that proviso, two requirements have to be established, namely : (1) the assets sold should have been used for the purpose of carrying on the business at some time during the relevant accounting year. and (ii) that it should have been sold during the continuance of the business,. After the amendment in 1949, the second requirement has now become unnecessary. But it is still necessary that the assets sold should have been used for the purpose of carrying on the business at least for sometime during the relevant accounting year.