COMMISSIONER OF INCOME-TAX, MADRAS vs. EXPRESS NEWSPAPERS LTD., MADRAS

CIVIL APPEAL No. 596/1963Supreme Court[1964] 8 S.C.R. 18907 May 1964Bench: 3 JudgesAuthor: K. SUBBA RAO, J.C. SHAH, S.M. SIKRI S.C.R. SUPREME COURT REPORTS COMMISSIONER OF INCOME16 pages
AI SummaryDismissed

What were the facts?

The assessee, Express Newspapers Ltd., acquired the right to print and publish newspapers and related assets from Free Press Company, which went into voluntary liquidation. Following the liquidation, Free Press Company sold its machinery to the assessee. The sale yielded a profit of Rs. 6,08,666, comprising Rs. 2,14,090 (difference between original cost and written-down value) and Rs. 3,94,576 (amount exceeding original cost). The Income-tax Officer assessed both amounts as income of the assessee. The Income-tax Appellate Tribunal upheld the assessment of capital gains but not the profit under Section 10(2)(vii). The High Court, on reference, ruled against the department on both counts. The Commissioner of Income-tax appealed to the Supreme Court.

What did the Supreme Court hold?

The Supreme Court held that the sale of machinery did not fall under the second proviso to Section 10(2)(vii) because the business had ceased to be carried on by the assessee, and the sale occurred during winding-up proceedings, not while the business was active. Therefore, the sum of Rs. 2,14,090 could not be assessed as business profit. Regarding the capital gains of Rs. 3,94,576, the Court ruled that Section 26(2) and its proviso deal exclusively with profits and gains of business (under the 4th head of Section 6) and do not extend to capital gains, which are a separate category of income. The Court affirmed that business profits and capital gains are distinct concepts under the Act. Consequently, the capital gains were not taxable in the hands of the assessee under Section 26(2). The appeal was dismissed.

What were the issues?

1. Whether the sum of Rs. 2,14,090, representing the difference between the original cost price and the written-down value of the machinery, is taxable as profit under the second proviso to Section 10(2)(vii) of the Income-tax Act, 1922, given that the sale occurred after the business was closed and during winding-up proceedings. The Revenue contended that this amount should be taxed as business profit. The assessee argued, and the High Court held, that the conditions for applying the proviso were not met. 2. Whether the capital gain of Rs. 3,94,576 is liable to be assessed in the hands of the assessee under Section 26(2) of the Income-tax Act, 1922. The Revenue argued for its inclusion, likely based on the successor liability. The assessee contended, and the High Court held, that capital gains are distinct from business profits and are excluded from the scope of Section 26(2).

Which sections of the Income-tax Act were involved?

Section 10(2)(vii),Section 26(2),Section 12B,Section 6

AI-generated summary — verify with the full judgment below

S S.C.R. SUPREME COURT REPORTS COMMISSIONER OF INCOME-TAX, MADRAS v. EXPRESS NEWSPAPERS LTD., MADRAS (K. SUBBA RAO, J. C. SHAH AND S. M. SIKRI. JJ.) 111con1e-tax-Sale of 111achiner)' after cfO.H! of busi111'.~s-A:no1111t i11 excess received 01·er written dow1t 1·11/11c a11d 01·er Ifie ori;;i11(/I cost price of n1aclli11ery-Whetlier 1axah!t1-IVherlier Stl(Tt'.\'.W!f !iahfr 1,., be assessed 011 capital gains-f/u·o111c-tax Act, 1922 ( 11 of 1922;, ss. 19(2) (vii) second pro1·iso, s. 26(2) 011d prvri!>·o.

The Free Press Company was a private limited conipany carrying on business ".\S printers and publishers of certain newspaper~. On • .\ugust 31, 1946, tl: Free Press Company transferred the right 10 print and publish the newspapers to the assessee company and let out i1s n1achinery and assets to the latter v,.·ith effect from Septen1ber l, ! 946. The as~cssee­ company al!cordingly started publishing nc\vspapers fro•n September 1, 1946. The Free Press Company \\·ent into voluntary liquidation on 01.'.:tober 31, 1946_. and the Liquidator, on November 1, 1946, confirn1ed the transfer of the assets made by the Free Press Con1pan;· to the assessee-company. On November

The order continues below.

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