- (1.) This appeal by special leave is preferred against the order of the Madras High Court in a reference made to it by the income-tax Appellate Tribunal under S. 66 (1) of the Incometax Act, 1922, hereinafter called the Act.
(2.) The facts leading up to the reference and relevant to the present enquiry are as follows. The Free Press of India (Madras) Ltd., hereinafter called the Free Press Company, was a private limited company carrying on business as printers and publishers of certain newspapers, namely, "Indian Express", "Dhinamani" and "Andhra Prabha", at Madras, "Eastern Express " and "Bharat" at Calcutta and "Sunday Standard" and "Morning Standard" at Bombay. On August 31, 1946, the Free Press Company passed a resolution transferring to the Express Newspapers Limited, a new company formed on or about April 22, 1946, hereinafter called the assessee-company, the right to print and publish the said newspapers from September 1, 1946, letting out its machinery and assets and authorizing the assessee-company to collect the book debts and pay off the liabilities of the Free Press Company. The assessee-company accordingly started publishing newspapers from September 1, 1946. On October 31, 1946, the Free Press Company resolved at a General Body Meeting to wind up the company voluntarily. The liquidator appointed thereunder was directed not to carry on the business of the company. On November 1, 1946, the liquidator ascertained the value of the assets over the liabilities taken over by the assessee-company as per the balance-sheet at Rs. 19,36,000 / - and this amount was credited to the account of the two directors of the Free Press Company in the assessee's books. The profit of the Free Press Company was worked out to be Rs. 6,08,666/ being the difference between the written down value and the sale price of the machinery. That sum was made up of, (i) the difference between the original cost price and the written down price of the machinery.... Rs. 2,14,090/-, (ii) the amount in excess over the original cost price.. ...Rs. 3,94,576 /-. The Income-tax Officer included the said two items in the total income of the assessee-company under the following heads, (i) profit under proviso to S. 10 (2)(vii) .. Rs. 2,14,090/-, and (ii) capital gains under S. 12B Rs. 394,576 /- and assessed each to tax. The Income-tax Appellate Tribunal upheld the validity of the inclusion of the item under capital gains in the total income of the assessee but decided against the inclusion of the first item. The Appellate Tribunal referred the following two questions, among others, for the decision of the High Court of Madras under S. 66(1) of the Income-tax Act : "4. Whether Free Press Company made a business profit of Rs. 2,14,090/- under proviso to Section 10(2)(vii) of the Act - "6. Whether the capital gain made by the Free Press Company is liable to be assessed in the hands of the Express Company, under Section 26(2) of the Act - The reference was heard by a Division Bench of the High Court, consisting of Rajagopalan and Ramchandra Iyer, JJ., who by their judgment answered the two questions in the negative and against the department. The present appeal is preferred against the said judgment of the High Court.
(3.) The argument in the appeal proceeded on the basis of the following facts. During the accounting year 1946-47 the Free Press Company did not do the business of printing and publishing newspapers from September 1, 1946, and thereafter the assessee-company alone was carrying on the said business. The Free Press Company went into voluntary liquidation on October 31, 1946, and the liquidator, on November 1, 1946, confirmed the transfer of the assets made by the Free Press Company to the assessee-company. Therefore, on November 1, 1946, the aforesaid machinery was sold yielding a profit of Rs. 6,08,666/- to the Free Press Company being the difference between the written down value and the sale price of the machinery. Broadly stated, the machinery was sold by the Free Press Company during the accounting year after it went into voluntary liquidation. On those facts learned counsel for the Revenue raised before us the following two contentions : (1) The first item of Rs. 2,14,090 / -, representing the surplus over the written down value of the machinery was assessable in accordance with the proviso to S. 10(2) (vii) of the Act; and (2) the second item of Rs. 3,94,576 /representing the capital gains made by the Free Press Company is assessable in the hands of the assessee-company, who succeeded to the said business, under S. 26(2) of the Act.;