THE LIQUIDATORS OF PURSA LIMITED vs. COMMISSIONER OF INCOME-TAX, BIHAR.

CIVIL APPEAL No. 33/1953Supreme Court[1954] 1 S.C.R. 76809 February 1954Bench: 4 JudgesAuthor: MEHR CHAND MAHAJAN, SUDHI RANJAN DAS, GHULAM HASAN, B. JAGANNADHADAS12 pages
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What were the facts?

The assessee, Pursa Ltd., was assessed for income tax for the assessment year 1945-46, relating to the accounting year October 1, 1943, to September 30, 1944. The company, which grew sugarcane, manufactured sugar, and dealt in sugar, had its shareholders and directors in the UK. In mid-1943, the company commenced negotiations to sell its factory and assets with the objective of winding up. An offer was received on August 9, 1943, and accepted by shareholders on October 8, 1943, after the accounting year began. A memorandum of agreement was executed on December 7, 1943, for the sale of lands, buildings, machinery, plant, and stores as of August 9, 1943. The Income-tax Appellate Tribunal referred two questions to the High Court. The High Court, by a majority, answered the first question (regarding the surplus from the sale of plant and machinery) in the affirmative, against the assessee, and the second question (regarding profit on the sale of stores) in the negative, in favour of the assessee. The assessee appealed to the Supreme Court against the High Court's decision on the first question.

What did the Supreme Court hold?

The Supreme Court held that the surplus of Rs. 13,05,144 arising from the sale of plant and machinery was not chargeable under section 10(2)(vii) of the Income-tax Act. The Court found that the Tribunal had misdirected itself in law by overlooking the crucial fact that the machinery and plant were not used for the purpose of business during the accounting year. The Court reasoned that the second proviso to section 10(2)(vii) applies only to machinery and plant used in the accounting year. In this case, the sale of the machinery and plant was a step in the process of winding up the company's business and not an operation in furtherance of the business. The Court noted that the High Court could intervene because the Tribunal had misunderstood statutory language and made findings without evidence or inconsistent with evidence. The ratio decidendi is that for the second proviso to section 10(2)(vii) to apply, the machinery or plant must have been used in the accounting year, and a sale of assets during winding up is distinct from an ordinary business operation. The appeal was allowed, and the respondent was directed to pay costs.

What were the issues?

1. On the facts and in the circumstances of this case, is the surplus of Rs. 13,05,144 arising out of the sale of the plant and machinery chargeable under section 10(2)(vii) of the Income-tax Act? Assessee's contentions: - The machinery and plant sold were not used for the purpose of business during the accounting year. - Consequently, the second proviso to section 10(2)(vii) is not applicable. - The sale of machinery and plant was a realization of assets during the winding up of the business, not an operation in furtherance of the business. - The Tribunal misdirected itself in law regarding the meaning and import of section 10 of the Act. - The Tribunal's findings were not supported by evidence and were inconsistent with the facts. Revenue's contentions: - The judgment does not explicitly record the revenue's contentions regarding the first question. However, the High Court's majority decision and the Tribunal's original finding suggest the revenue argued for the chargeability of the surplus under section 10(2)(vii).

Which sections of the Income-tax Act were involved?

Section 10(2)(vii),Section 10(1),Section 66(1)

AI-generated summary — verify with the full judgment below

S.C.R. SUPREME COURT REPORTS 767 "Any law of the State enacted not more than eighteen months before the commencement of this Constitution may within three months from such com- mencement be submitted to the President for his certification ; and thereupon, if the President by pub- lic notification so certifies, ,it shall not be called in question in any court on the ground that it contra- venes the provisions of clause (2) of this article or has contravened the provisions of sub-section (2) of section 299 of the Government of India Act, 1935."

It is not disputed that the Madras Act XXVI of 1948 does fulfil all the requirements mentioned above.

Consequently, it is not possible for us to allow the ap- pellants to raise the contentions which the learned counsel on their behalf wants to raise. The result is that the appeals would stand dismissed, but in the circumstances of this case we shall make no order as to costs.

Appeals dismissed.

Agent for the appellants : S. Subramanian.

Agent for the respondents : R. H. Dhebar. THE LIQUIDATORS OF PURSA LIMITED v. COMMISSIONER OF INCOME-TAX, BIHAR. [MEHR CHAND MAHAJAN C.J., s. R. DAS, GHULAM HASAN and JAGANNADHADA

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