CIT KERALA Vs. KALIKUTTY

JUDGEMENT

(1.) THE sole question for determination in this appeal by special leave is whether on a true interpretation and construction of the second proviso to S. 10 (2) (vii) of the Income tax Act 1922, sale of the assets of an assessee effected for the purpose of closing down the business would be covered by that proviso and would be assessable as profit. S. 10 (2)

(2.) THE assessee was running the business of plying buses in the name of Kumar Motor Service. During the assessee's previous year which was the year ending August 16, 1959 the buses had been plied for part of the year but they were sold between August 16, 1958 and January 13, 1959. Two of the buses had been sold for Rs. 78,000/- and the other four for Rs. 35,000/-, the total consideration received being Rs. 1,13,000/ -. THE assessee claimed a payment of Rs. 2,000/- as brokerage. THE Income tax Officer fixed a sum of Rs. 25,000/-as the route value and held this amount to be a capital gain assessable to tax. On the balance of Rs. 86,000/- he worked out the profits in the following manner: THE Income tax Officer consequently assessed the sum of rs. 49,288/- as profit under the second proviso to S. 10 (2) (vii ). Before the appellate Assistant Commissioner in appeal the assessee contended that the business had been transferred as a whole and therefore no profit could be taxed under the aforesaid provision. This contention was rejected by the Appellate assistant Commissioner on the ground that the transaction was only of sale of buses, along with the route value and this constituted sale of major assets but the business as such was not transferred or handed over to any party. Before the Income tax Appellate Tribunal the determination of Rs. 86,000/- as the value of six buses was not disputed and the only point agitated related to the assessability of the amount of Rs. 49,288/- as business profit under the second proviso. THE tribunal was of the opinion that the buses had been plied by the assessee for part of the previous year and the profit on the sale of these buses was taxable under the said provision. THE tribunal in its appellate order noticed the decision of this court in Commissioner of Income tax, Madras v. Express Newspapers Ltd, Madras 1964 (2) SCR. 189,195 in which the question arose whether the second proviso would apply where the sale had been made in the process of winding up of a company but distinguished it on the ground that this court in that case considered the second proviso as it stood before the amendment made by S. 11 of the Taxation Laws (Extension to Merged States and amendment) Act, 1949 (67 of 1949 ). THE decision of this court in Commissioner of Income tax, Kerala v. West Coast Chemicals and Industries Ltd. 46 ITR. 135 was also held by the tribunal to be inapplicable to the facts of the present case.

(3.) 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 effected 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 clearly 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 cannot be ignored. Indeed this court in a recent judgment in Commissioner of income Tax v. Ajax Products Ltd 1965 (1) SCR. 700 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 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 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 finding 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 s. 10 (2) (vii ).