M.S. Menon, C.J.
1. This is reference by the Income-tax Appellate Tribunal, Madras Bench, under Section 66 (1) of the Indian Income-tax Act, 1922. The assessment year concerned is 1960-61, and the accounting period, the Malayalam Year 1134, that is, the twelve months ended on 16-8-1959. The question referred is:
'whether on the facts and in the circumstances of the case, the sum of Rs. 49288/- was assessable as profit under the provisions of Section 10 (2) (vii) of the Indian Income-tax Act, 1922?'
2. Sub-section (1) of Section 10 of the Indian Income-tax Act, 1922, provides that 'the tax shall be payable by an assessee under the head 'profits and gains of business, profession or vocation' in respect of the profit or gains of any business, profession or vocation carried, on by him.' The relevant portion of Sub-section (2) of Section 10 is in the following terms :
'(2) such profits or gains shall be computed after making the following allowances, namely :--
(iv) In respect of insurance against risk of damage or destruction of buildings, machinery, plant, furniture, stocks or stores, used for the purposes of the business, prosession or vocation, the amount of any premium paid :
(v) in respect of current repairs to such buildings, machinery, plant or furniture, the amount paid on account thereof;
(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 that such amount is actually written off in the books of the assessee : Provided further that where the amount for which any such building, machinery or plant is sold, whether dining 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.'
3. One of the items of business carried on by the assessee was a bus service under the name and style of the Kumar Motor Service The six buses concerned in the service were sold during the accounting period and the whole of the bus service business was wound up during the said period.
4. The contention of the assessee before the Tribunal was that the sale of the buses represented a closing down or realisation sale and as a result the excess of the sale price of the six buses ower their written down value -- the Rs. 49,288/- mentioned in the question referred -- was not assessable to tax under the second proviso to Section 10 (2) (vii) of the Indian Income-tax Act, 1922. The Tribunal apparently accepted the contention that the sate was a closing down or realisation sale but held that the-excess was none-the-less taxable because of an amendment effected to the second proviso by Section 11 of the Taxation Laws Extension to Merged States and Amendment) Act, 1949.
5. The assessee cited before the Tribunal the decision of the Madras High Court in Commissioner of Income-tax v. Express Newspapers Ltd, : [1960]40ITR38(Mad) wherein that Court said that the second proviso to Section 10 (2) (vii) was not attracted to a closing down sale as such a sale was not an operation in furtherance of the business of an assessee but only a step for the realisation of the assets of that business in a process of winding up, and held :
'The sale of machinery was undoubtedly a closing down sale and the profit earned therein could not come in for assessment under Section 10 (2) (vii).'
The Tribunal refused relief to the assessee on the basis of this decision not because the sale of the buses was not a closing down or realisation sale; but because the Madras High Court was concerned with the second proviso as it stood prior to the amendment effected by Section 11 of the Taxation Laws (Extension to Merged States and Amendment) Act, 1949, and the said amendment, according to the Tribunal altered the position to the detriment of the assessee.
6. The second proviso to Section 10 (2) (vii), before the amendment, read as follows :
'Provided further that where the amount for which any such building machinery or plant is sold 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.'
What the amendment did was to substitute for the words 'is sold' the words 'is sold, whether during the continuance of the business or after the cessation, thereof.'
7. The decision of the Madras High Court was the subject of an appeal to the Supreme Court of India, Commissioner of Income-tax v. Express Newspapers Ltd., : [1964]53ITR250(SC) . In dealing with the appeal the Supreme Court quoted the second proviso as amended by Section 11 of the Taxation Laws (Extension to Merged States and Amendment) Act, 1949, dealt with it as follows :
''We are concerned with the second proviso to Section 10 (2) (vii) of the Act. The substantive clause grants a balancing allowance in respect of building, machinery or plant which has been sold or discarded or demolished or destroyed. The allowance represents the excess of the written down value over the sale price. Under the proviso, if the sale price exceeds the written down value, but does not exceed the original cost price, the difference between the original cost and the written down value shall be deemed to be profits of the year previous to that in which the sale takes place; that is to say, the difference between the price fetched at the sale and the written down value is deemed to he the escaped profits for which the assessee is made liable to tax. As the sale price is higher than the written down value, the difference represents the excess depreciation mistakenly granted to the assessee. To illustrate : assume that the original cost of a machinery or plant is Rs. 100 and depreciation allowed is Rs. 25; the written down value is Rs. 75. If the machinery is sold for Rs. 100, it is obvious that depreciation of Rs. 25 was wrongly allowed. If it had not been allowed that amount would have swelled the profits to that extent. When it is found that it was wrongly allowed that profit is brought to charge. The second proviso, therefore, in substance, brings to charge an escaped profit or Rain of the business carried on by the assesses. The cope of this proviso cannot he ascertained in vacuum. The conditions for its applicability can be ascertained only in its relation to the other related provisions. Under Section 3 of the Act, Income-tax shall be charged for any year in accordance with and subject to the provisions of the Act in respect of the total income of the previous year of every assesses; under Section 8, one of the beads of taxable income is 'profits and gains of business, profession or vocation'; under Section 10 (1), the tax under that head is payable in respect of profits or gains of any business carried on by the assesses during the accounting year. The main condition which attracts all the other sub-sections and clauses of the section is that the tax shall be payable by an assessee in respect of the profits or gains of business, etc., carried on by him. The crucial words are business earned on by him.' If the profits or gains were not earned when, the business was being can led on by the assessee during the accounting year, they would fall outside the provision of Section 10 (1), For instance, if the machinery was sold after the business was closed or when the business was under liquidation, it would not be appropriate to hold that the profits or gains earned by the sale were in respect of the business that was being carried on by the assessee. The second condition that attracts the second proviso is implicit in the adjective 'such' preceding 'building, machinery or plant' sold. The adjective 'such' refers back to Clauses (iv), (v), (vi) and (vii) of Section 10(2). Under Clause (iv) an allowance is allowed in 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 (v), (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. It brings in to charge the escaped profits under the guise of superfluous allowances if the machinery sold was used for the business during the accounting year when the business was being carried on.'; and held :
'Therefore, to bring the sale proceeds to charge' the following conditions shall be fulfilled ; (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 (3) 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.
8. It is common ground that of the three conditions, conditions (1) and (2) are satified in this case. The only contention of the assessee is that condition (ft) is not satisfied as the sale of the business was a closing down or realisation sale, a mere incident of the winding up process of the bus service business. We are inclined to accept this contention.
9. Apart from the business of conducting the bus service the assessee was also carrying on a taxi service under the name and style of the Kumar Taxi Service. During the accounting period the taxi service had only one ear, K L R 1772. That car was not-sold by the assessee and the taxi service was not wound up by him. Counsel for the Department contended that the non-sale of K L R 1772 and the non-winding up of the taxi service should affect our answer to the question. We do not think so. The taxi service business and the bus service business were two distinct items of business carried on by assessee--the assessment order in the case makes this quite clear --and the fact that the bus service alone was wound up and that the taxi service continued cannot possibly affect the answer to the question referred.
10. In the light of what is stated above we must answer the question referred in favour of the assessee and against the Department. We do so; but in the circumstances of the case without any Older as to costs.
11. A copy of this judgment under the seal of the High Court and the signature of the Registrar will be forwarded to the Appellate Tribunal as required by Sub-section (5) of Section 66 of the Indian. Income tax Act, 1922.