<NAME>, J.

1. This is an appeal by special leave from a judgment of <ORG> at Bombay, dated January 25, 1944, which affirmed an order of Mr. <NAME>, Magistrate of the 1st Class, Jalgaon City, dated June 22, 1943, acquitting the respondent who had been charged under Rule 38(5) of the Defence of India Rules for having, on January 26, 1943, made, published and distributed copies of a leaflet which contained prejudicial reports within the meaning of Rule 34(7) read with Rule 34(6)(e) and (g) of the Defence of India Rules, and having thus contravened Rule 38(1)(c).

2. The Defence of India Rules, which were made by the Central Government under Section 2 of the Defence of India Act, 1939 (Act XXXV of 1939)-so far as material-provide as follows:

34.(6) 'prejudicial act' means any act which is intended or is likely-

(e) to bring into hatred or contempt, or to excite disaffection towards, His Majesty or the Crown Representative or the Government established by law in British India or in any other part of His Majesty's dominions;

(g) to cause fear or alarm to the public or to any section of the public;

34.(7) 'prejudicial report' means any report, statement or visible representation, whether true or false, which, or the publishing of which, is, or is an incitement to the commission of, a prejudicial act as defined in this rule;

88.(1) No parson shall, without lawful authority or excuse,

(c) make, print, publish or distribute any document containing, or spread by any other means whatsoever, any prejudicial report;

(5) If any person contravenes any of the provisions of this rule, he shall be punishable with imprisonment for a term which may extend to live years or with fine or with both.

3. The document which formed the subject-matter of the charge was admittedly made and published by the respondent at Jalgaon City on January 26, 1943, and he admittedly distributed printed copies thereof. It consisted of a leaflet addressed "To all the patriots," and it will be sufficient to quote some of the statements in the leaflet:

Unprecedented calamity has befallen our nation and the whole of our country has been undergoing sufferings. The Imperialists have by their barbarous policy turned the entire country into a cremation ground. When we were in great need of the national leaders for the purpose of the national defence, the bureaucracy has declared <ORG> unlawful and have detained all the leaders in jail.

By reason of firings and arrests several villages in Khandesh have been made desolate and on account of this great calamity the people are losing their moral courage (day by day) and the whole of the country is putting on moribund appearance. The people in Khandesh have been harassed by the inequitable collective fines. As the Government is unable to solve the food problem, the cry of hunger is heard everywhere; and a situation has arisen everywhere in which serious food riots are expected. By depriving the mills of the coal 50 thousand families of the workers have been thrown into the ditch of hunger.

But the Imperialists do not stop even at this. They are making ceaseless efforts to create a split between the people and the patriots. They have been trying to strengthen their hold by creating disputes and differences among the people by various ways such as creating a split between the owner and the worker on the question of clearness allowance and coal, between the merchants and consumers on the question of food grains and between the Muslims and the non-Muslims on the question of collective fines. The disunion among the people is their last resort.

If we blindly carry on sabotage activities simply because the Imperialists are not transferring power to us the Japanese Imperialism may dominate over us. Therefore in order to face both these calamities we must achieve this great task of bringing about unity on the burning questions before the public such as national defence and self-determination and must take over the control of national defence.

4. After a trial, the learned Magistrate acquitted the respondent. He pointed out that it was nowhere suggested in the leaflet that the work of national defence should be snatched away from Government forcibly, that the national leaders should be freed by using force or that national government should be formed by resorting to unconstitutional methods, but that, on the contrary, the public was exhorted to achieve national unity for all the above purposes, not to resort to sabotage, and to take part in the campaign of achieving worldwide freedom. In the absence of any incitement to public disorder, he held himself bound to acquit, in view of the decision of <ORG> in Niharendu <NAME> v. <NAME> [1942] F.C.R. 38 to which their Lordships will refer later.

5. On appeal by the <ORG>, the decision of the Magistrate was affirmed by <ORG> and the appeal was dismissed; the learned Judges held themselves bound by the decision of <ORG> in <NAME>'s case. The charge of having committed a prejudicial act within the meaning of Rule 34(6)(g) was not pressed and may be disregarded. The learned Judges, at the request of the <ORG>, certified for the purpose of Section 205 of the Government of India Act, 1935, that the case does not involve a substantial question of law as to the interpretation of the Government of India Act or any Order in Council made thereunder. Thereafter the <ORG> obtained special leave to appeal against the decision of <ORG> on an undertaking "that no further proceedings in connection with the said charges would be taken against the respondent in any event so long as that undertaking does not prejudice the reality of the appeal." The respondent has not appeared in the appeal, which has been heard ex parte.

6. The purpose of this appeal is to challenge the soundness of the decision in <NAME>'s case, which their Lordships will therefore consider in some detail. In consequence of a speech made at Calcutta, <NAME> was convicted by the Additional Chief Presidency Magistrate of offences under Rule 34(6), sub-paras. (e) and (k), of the Defence of India Rules. The conviction was upheld by <ORG>, from which <NAME> appealed to <ORG>, which allowed the appeal and acquitted the appellant on the ground that the speech of the appellant did not constitute a prejudicial act within the meaning of Rule 34(6)(e). <ORG> did not deal with sub-para. (k) of Rule 34(6). The judgment of the Court was delivered by Sir <NAME>, who said, in reference to sub-para. (c), that the prejudicial act was Described in precisely the same language as is used to describe the offence of sedition in Section 124A of the Indian Penal Code. We were invited to say that an offence described merely us a 'prejudicial act' in the Defence of India Rules ought to be regarded differently from an offence described as 'sedition' in the Code , even though the language describing the two things is the same. We cannot accept this argument. Sedition is none the less sedition because it is described by a less offensive name; and in our opinion the law relating to the offence of sedition as defined in the Code is equally applicable to the prejudicial act denied in the Defence of India Rules. We do not think that the omission in the Rules of the three 'Explanations' appended to the section of the Code affects the matter. These are added to remove any doubt as to the true meaning of the <ORG>; they do not add to or subtract from the section itself; and the words used in the Rules ought to be interpteted as if they had been explained in the same way.

7. The learned Chief Justice then proceeds to consider the meaning of sedition in English law, as defined and explained by decision of the Courts, and states the principle to be derived therefrom as follows:

Public disorder or the reasonable anticipation or likelihood of public disorder, is thus the gist of the offence. The acts or words complained of must either incite to disorder or must be such as to satisfy reasonable men that that is their intention or tendency.

8. The learned Chief Justice then applied that test to the appellant's speech, and found that it contained no incitement, or, intention or tendency to incite, to public disorder, and the conviction was set aside.

9. Their Lordships are unable to accept the test laid down by the learned Chief Justice, as applicable in India.

10. Their Lordships agree, for the purposes of the present appeal, that there is no material distinction between Rule 34(6), sub-para. (e) and Section 124A of the Indian Penal Code, though it might be suggested that the words "an act which is intended or likely to bring" in the rule are wider than the words "brings or attempts to bring" in the Code . They further agree with the learned Chief Justice that the omission in the rule of the three explanations in the Code should not lead to any difference in construction.

11. The word "sedition" does not occur either in Section 124A or in the rule; it is only found as a marginal note to Section 124A , and is not an operative part of the section, but merely provides the name by which the crime defined in the section will be known. There can be no justification for restricting the contents of the section by the marginal note. In England there is no statutory definition of sedition; its meaning and content have been laid down in many decisions, some of which are referred to by the Chief Justice, but these decisions are not relevant when you have a statutory definition of that which is termed sedition, as we have in the present case.

12. Their Lordships are unable to find anything in the language of either Section 124A . or the rule which could suggest that "the acts or words complained of must either incite to disorder or must be such as to satisfy reasonable men that that is their intention or tendency." The first explanation to Section 124A provides, "The expression 'disaffection' includes disloyalty and all feelings of enmity." This is quite inconsistent with any suggestion that "excites or attempts to excite disaffection" involves not only excitation of feelings of disaffection, but also exciting disorder. Their Lordships are therefore of opinion that the decision of <ORG> in <NAME>'s case proceeded on a wrong construction of Section 124A of the Indian Penal Code and of sub-para. (e) of Rule 34(6) of the Defence of India Rules.

13. In that view, their Lordships are of opinion that there should have been a conviction in the present case, for they have no difficulty in agreeing with the learned Judges, of <ORG> in this case, who have both stated that, if disorder were not an essential element, there are undoubtedly passages in the' leaflet which hold the <ORG> up to hatred or contempt, and which would have led them to convict.

14. In <ORG> three decisions of this <ORG> were referred to, but the learned' Judges preferred the decision of <ORG> in <NAME>'s case, as the same sub-paragraph of Rule 34(6) was the subject of decision and it was the latest case; it is unnecessary to consider whether the learned Judges had sufficient ground for distinguishing these decisions such as would avoid the binding nature of decisions of this <ORG>. In the opinion of their Lordships, the principle of decision in these three cases is inconsistent with the decision of <ORG> in <NAME>'s case, and it is regrettable that <ORG> did not pay attention to these cases, two of which are Indian.

15. In Queen-Empress v. <NAME> (1892) I.L.R. 22 Bom. 112, 528 the charge was under Section 124A as it then stood, confined to disaffection, without any reference to hatred or contempt, <NAME>, in an admirable charge to the jury, which was subsequently approved, by this <ORG>, said (p. 135):

The offence consists in exciting or attempting to excite in others certain bad feelings towards the Government. It is not the exciting or attempting to excite mutiny or rebellion, or any sort of actual disturbance, great or small. Whether any disturbance, or outbreak was caused by these articles, is absolutely immaterial. If the accused intended by the articles to excite rebellion or disturbance, his act would doubtless fall within Section 124A and would probably fall within other sections of the Penal Code . But even if he neither excited nor intended to excite any rebellion or outbreak Or forcible resistance, to the authority of the Government, still if he-tried to excite feelings of enmity to the Government, that is sufficient to make him guilty under the section. I am aware that some distinguished persons have thought that there can be no offence against the section unless the accused either counsels or suggests rebellion or forcible resistance to the Government. In my opinion, that view is absolutely opposed to the express words of the section itself, which as plainly as possible makes the exciting or attempting to excite certain feelings, and not the inducing or attempting to induce to any course of action such as rebellion or forcible resistance, the test of guilt. I can only account for such a view by attributing it to a complete misreading of the explanation attached to the section and to a misapplication of the explanation beyond its true scope.

16. In refusing leave to appeal, inter alia, on the ground of misdirection as to the proper construction of Section 124A , the <ORG> expressly approved of the charge. It is sufficient for their Lordships to adopt the language of <ORG> as exactly expressing their view in the present case.

17. <CITATION> it was pointed out by the Board that Section 4 of the Indian Press Act of 1910, which was under consideration in that case, was closely similar in language to Section 124A of the Penal Code, which had been the subject of careful consideration in <NAME>'s case above referred to.

18. In Wallace-Johnson v. The King (1919) I.L.R. 43 Mad. 146, s.c. 21 Bom. L.R. 867, P.C., under Sub-section (8) of Section 326 of the Criminal Code of the Gold Coast, "seditious intention" was defined as an intention "to bring into hatred or contempt or to excite disaffection against...<ORG> as by law established." It was held by this Board that the words were clear and unambiguous, and that incitement to violence was not a necessary ingredient of the crime of sedition as thereby defined.

19. In conclusion, their Lordships will only add that the amendments of Section 124A in 1898, the year after <NAME>'s case, by the inclusion" of hatred or contempt and the addition of the second and third explanations, did not affect or alter the construction of the section laid down in <NAME>'s case, and, in their opinion, if <ORG>, in <NAME>'s case, had given their attention to <NAME>'s case, they should have recognised it as an authority on the construction of Section 124A by which they were bound.

20. Their Lordships are accordingly of opinion that the appeal should be allowed and that the judgments and orders of the Courts below should be set aside, and that it should be declared that it is not an essential ingredient of a prejudicial act as defined in sub-para. (e) of Rule 34(6) of the Defence of India Rules that it should be an act which is intended or is likely to incite to public disorder. Their Lordships will humbly advise His Majesty accordingly. There will be no order as to costs.


PETITIONER: COMMISSIONER OF INCOME-TAX, <NAME> Vs. RESPONDENT: <ORG>, <NAME> DATE OF JUDGMENT: 07/05/1964 BENCH: <NAME>, K. BENCH: <NAME>, K. SHAH, J.C. SIKRI, S.M. CITATION: 1965 AIR 33 1964 SCR (8) 188 CITATOR INFO : RF 1965 SC 568 (14) F 1965 SC1358 (11,14,16) D 1966 SC 47 (7) APR 1967 SC 193 (3,18) R 1968 SC 9 (16) RF 1969 SC 869 (4) R 1975 SC2299 (6333) R 1978 SC1099 (5,7) ACT: Income-tax-Sale of machinery after close of business-Amount in excess received over written down value and over the original cost price of machinery-Whether taxable-Whether successor liable to be assessed on capital gains- Income-tax Act , 1922 , ss. 10(2) (vii) second proviso, s. 26(2) and proviso. HEADNOTE: <ORG> was a private limited company Carrying On business as printers and publishers of certain newspapers. On August 31, 1946, <ORG> transferred the right to print and publish the newspapers to the assessee company and let out its machinery and assets to the latter with effect from September 1, 1946. The assessee company accordingly started publishing newspapers from September 1, 1946. <ORG> went into voluntary liquidation on October 31, 1946, and the Liquidator, on November 1, 1946, confirmed the transfer of the assets made by <ORG> to the assessee- company. On November 1, 1946 the aforesaid machinery was sold yielding a profit of Rs. 6,08,666. That sum was made up of, of price machinery Rs. 2,14,090, (ii) the amount in excess over the original cost priceRs. 3,94,576. In assessing the assessee to income-tax for the accounting year 1946-47 the Income-tax Officer included the said two items in the total income of the assessee-company. The first item was assessed as profit under proviso to s. 10(2)(vii) of the Incometax Act and the second item was assessed as capital gains. The matter went up to <ORG>. On a reference <ORG> held that the assessee was not liable to tax in respect of the said two items. Held: (i) The second proviso to s. 10(2)(vii) of the Act would only apply to the sale of such machinery which was used for the purpose of business during the accounting year. In order to bring the sale proceeds to charge under the second proviso 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. On the facts of this case it was held that the sale of the machinery in the instant case having taken place after the business was closed and during the winding up proceedings therefore it would fall outside the scope of the said proviso and thus the first item i.e. the sum of Rs. 2,14,090 could not be assessed to income-tax. 190 <CITATION> - tax, Bihar,  S.C.R. 767 and <CITATION> . (in liquidation), <ORG>,  Supp. 3 S.C.R. 960, relied on. <CITATION> ,  2 S.C.R. 229, explained. (ii) Both the sub-s. (2) of s. 26 and the proviso deal only with profits under the 4th head mentioned in s. 6 and, so construed, it excludes capital gains. The profits and gains of business and capital gains are two distinct concepts in the Income-tax Act : the former arises from the activity which is called business and the latter accrues because capital assets are disposed of at a value higher than what they cost the assessee. Therefore under s. 26(2) of the Act the assessee being the successor could not be liable to income-tax-in respect of Rs. 3,94,576 (the second item) which represented the capital gains because capital gains are excluded from the purview of s. 26(2) of the Act. <CITATION> ,  S.C.R. 79, referred to. JUDGMENT:

CIVIL APPELLATE JURISDICTION: Civil Appeal No. 596 of 1963. Appeal from the judgment dated March 1, 1960 of <ORG> in Case Referred No. 11 of 1955.

<NAME> and <NAME>, for the appellant.

<NAME> and <NAME>, for the respondent.

May 7, 1964 The Judgment of the Court was delivered by SUBBA RAO, J.-This appeal by special leave is preferred against the order of <ORG> in a reference made to it by <ORG> under S. 66(1) of the Income-tax Act, 1922, hereinafter called the Act.

The facts leading up to the reference and relevant to the present enquiry are as follows. <ORG>, hereinafter called <ORG>, was a private limited company carrying on business as printers and publishers of certain newspapers, namely, "<ORG>", "<ORG> and "<ORG>" at Madras, "<ORG>" and "<ORG>" at Calcutta and "<ORG>" and "Morning Standard" at Bombay. ,On August 31, 1946, <ORG> passed a resolution transferring to <ORG>, 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 <ORG>. The assessee company accordingly started publishing newspapers from September 1, 1946. On October 31, 1946, <ORG> 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 <ORG> in the assessee's books. The profit of <ORG> 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. 3,94,576/-, and assessed each to tax. <ORG> 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. <ORG> referred the following two questions, among others, for the decision of <ORG> under s. 66(1) of the Incometax Act:-

"4. Whether <ORG> 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 <ORG> is liable to be assessed in the hands of <ORG>, under section 26(2) of the Act?"

The reference was heard by <ORG> of <ORG>, consisting of <NAME> and <NAME>, <ORG>., 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 <ORG>. The argument in the appeal proceeded on the basis of the following facts. During the accounting year 1946-47 <ORG> 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. <ORG> went into voluntary liquidation on October 31, 1946, and the liquidator, on November 1, 1946, confirmed the transfer of the assets made by <ORG> to the assessee-company. Therefore, on November 1, 1946, the aforesaid machinery was sold yielding a profit of Rs. 6,08,666/- to <ORG> being the difference between the written down value and the sale price of the machinery. Broadly stated, the machinery was sold by <ORG> during the accounting year after it closed down its business and after it went into voluntary liquidation. On those facts learned counsel for the <ORG> 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 <ORG> is assessable in the hands of the assessee- company, who succeeded to the said business, under s. 26(2) of the Act.

Learned counsel for the respondent contended that neither the conditions laid down in s. 10(2)(vii) of the Act nor those laid down in s. 26(2) thereof attracted the said two items of income and, therefore, they were not assessable in the hands of the assessee-company.

The first question turns upon the relevant provisions of s. 10 of the Act. To have a clear view of the scope of the relevant provisions it will be convenient to read them at one place.

(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, profession 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 further that where the amount for which any such building, machinery or plant is sold, whether during 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 51 S.C.-13 down value shall be deemed to be profits of the previous year in which the sale took place:

We are concerned with the second proviso to s. 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 be 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 gain of the business carried on by the assessee. The scope of this proviso cannot be ascertained in vacuum. The conditions for its applicability can be ascertained only in its relation to the other related provi- sions. Under s. 3 of the Act income-tax shall be charged for any year in accordance with and subject to the provi- sions of the Act in respect of the total income of the previous year of every assessee; under s. 6 , one of the heads of taxable income is "profits and gains of business, profession or vocationl,; under s. 10(1) , the tax under that head is payable in respect of profit or gains of any business carried on by the assessee 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 profit or gains of any business etc. carried on by him. The crucial words are-."business carried on by him". If the profit or gains were not earned when the business was being carried on by the assessee during the accounting year, they would fall outside the provision of s. 10(1) . For instance, if the machinery sold after the business was closed or when the business was under liquidation, it would not be appropriate to hold that the profit 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 cls. (iv), (v), (vi) and (vii) of s. 10(2) . Under cl. (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. Therefore, to bring the sale proceeds to charge the following condition.,, 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. If these were the conditions for the applicability of the said proviso, the sale of the machinery in the instant case having taken place after the business was closed and during the winding up proceedings, it would fall outside the scope of the said proviso and therefore the first item is not assessable to tax This point directly arose for consideration in <ORG> v. Commissioner of <ORG>, Bihar(1). There, the assessee-company carried on the business of growing sugarcane and manufacturing and selling sugar. In the year 1943 it negotiated for the sale of the factory and other assets with the object of winding up the company. It received a firm offer on August 9, 1943, and concluded the agreement of sale on December 7, 1943. Between August 9, 1943, and December 7, 1943, it never used the machinery and plant for the purpose of manufacturing sugar or for any other purpose except that of keeping them in trim and running order. In the assessment of the company to income-tax for the accounting period from October 1, 1943, to September 30, 1944, the income-tax authorities treated the surplus made by the company on the sale of the buildings, plant and machinery as profits under proviso (2) to s. 10(2)(vii) of the Act. This Court held that the said amount was not taxable. This Court rejected the contention of the <ORG> that the said excess was taxable on two grounds, namely, (1) "the sale of the machinery and plant was not an operation in furtherance of the business carried on by the company but was a realisation of its assets in the process of gradual winding up of its business which eventually. culminated in the voluntary liquidation of the company; (2) "even if the sale of the stock of sugar be regarded as carrying on of business by the company_and not a realisation of its assets with a view to winding up, the machinery or plant not being used in the accounting year at all and in any event not having had connection with the carrying on of that limited business during the accounting year, s. 10(2)(vii) could have no application to the sale of any such machinery or plant". Learned counsel for the <ORG> contends that the main reason for the decision was that the machinery or the plant was not used in the accounting year for the business and that the second reason, namely, that the assets were sold in the process of gradual winding up of the com-

pany was only an observation and that the decision was not based upon the said observation. But a careful perusal of the judgment discloses beyond any reasonable doubt that the decision was based upon both the grounds. As in the present case the machinery was sold not for the business but only for closing it up during the liquidation proceedings, this decision directly covers the present case. This question again fell to be considered by this <ORG> in <CITATION> (1). There, <ORG>, a Bombay firm, acquired on January 11, 1945, a tailoring business as a going concern for Rs. 89,321/-which includedthe consideration paid for sewing machines and a motor lorry. Soon after the purchase the respondent found it difficult to continue the business, and therefore it closed its business in August, 1945. Between August 16, 1945, and February 14, 1946, sewing machines and the motor lorry were sold at a loss. The respondent closed its account books on February 28, 1946, showing the two losses and writing them off. For the assessment year 1946-47, the respondent claimed a deduction under s. 10 (2) (vii) of the Indian Income-tax Act . The question fell to be considered on a construction of the provisions of s. 10(2) (vii) of the Act. This <ORG>, speaking through Hidayatullah, J., held that the loss was a business loss, though the machines and the motor lorry were sold after the business was closed down, as the said machines and lorry were used for the purpose of the business during a part of the accounting year and were sold during the accounting year. This <ORG>, after noticing the decision under appeal and that of this <ORG> in <CITATION> - tax, Bihar (2), and the amendment introduced in the second proviso to s. 10 (2) (vii) of the Act, observed:

"But it is to be noticed that no such amendment was made in el. (vii) to exclude loss over buildings, machinery or plant after the closure of the business. It is thus clear that the principles which govern the proviso cannot be (1) [1961] 2 S.C.R. 229 (2) [1954] S.C.R. 767 used to govern the main clause, because profit or loss arise in different ways in business. The two rulings do not, therefore, apply to the facts here."

It is contended that the principle accepted by this decision is in conflict with that laid down in the case of <ORG>). It is said that the con- dition that the sale of the machinery at a loss should have been before the closing of the business is impliedly laid down by s. 10(1) of the Act which applies equally to cl. (vii )as well as to the second proviso thereto, and that if the condition need not be fulfilled in the case falling under the substantive part of cl. (vii) of s. 10(2) of the Act, it will be incongruous to apply it to a case falling under the second proviso before it was amended. So stated there is some plausibility in the argument. But this <ORG> in express terms made a distinction between the scope of the substantive part of cl. (vii) and that of the second proviso thereto and expressly distinguished those rulings on the ground that they would not apply to the construction of the substantive part of cl. (vii). When this <ORG> expressly confined the scope of the decision to the substantive part of cl. (vii) without disturbing the validity of the decisions governing the second proviso, it is not proper that we should rely upon it in preference to a direct decision on the second proviso to cl. (vii) of s. 10(2) of the Act before it was amended. This <ORG> in <CITATION> . (in liquidation), Alleppy(2) held that a winding up sale was not trading or doing business. There. chemicals and other raw-materials were sold not in the course of ordinary trading but only in realisation sale after the company had been wound up. This <ORG>, speaking through Hidayatullah, J., posed the following question, "The question, therefore, is whether there can be said to be a sale in the carrying on of the business in respect of the chemicals and other raw materials."

(1) [1954] S.C.R. 767 (2) [1962] Supp. 3 S.C.R. 960, 965.

After referring to the passages in Halsbury's Laws of Eng- land, 3rd Edn., Vol. 20, pp. 115-117, wherein it was stated that "mere realisation of assets is not trading" and that there was distinction between sales forming part of the trading activities and those where the realisation was not an act of trading, the learned Judge observed that the said distinction was a sound one. The learned Judge, on a consideration of other decisions, also accepted as correct the distinction made between a sale of the entire stock as part of trading and the sale of a part of the stock as a winding up sale. Then the learned Judge applied the principles to the facts of the case and held that it was im- possible to infer that the chemicals and raw materials were sold in the ordinary way of business or that the assessee company was carrying on a trading business. This decision again accepts the distinction between a sale held in the ordinary way of business and that held for the purpose of winding up the business and that in the latter case the profits accrued are not trading profits. This case no doubt did not turn upon the provisions of the second proviso to cl. (vii) of s. 10(2) of the Act, but the principle accepted therein is the basis for the application of s. 10 of the Act and that will apply to all provisions of s. 10 , unless an exception is made in a particular provision. For the fore- going reasons we hold that the first item is not liable to tax and <ORG> has given the correct answer to the first question submitted to it.

The second item relates to capital gains. That represents the excess of the price obtained on the sale of the machinery over its original cost price. It is conceded that it does not represent profits and gains of business, but it falls under the heading "capital gains". But it is argued that, as the <ORG> wag wound up and, therefore, could not be found., the assessee, who had succeeded to it, would be liable to be assessed for the said capital gains under the proviso to s. 26(2) of the Act. To appreciate the contention some of the relevant provisions of the Act may be read:

Section 6 .-Save as otherwise provided by this Act, the following heads of income, profits and gains, shall be chargeable to income-tax in the manner hereinafter appearing, namely:-

(v) Profits and gains of business, profession or vocation. (vi) Capital gains.

Section 10 .-(1) 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. (2) Such profits or gains shall be computed after making the following allowances, namely:-

Section 12B .-(1) The tax shall be payable by an assessee under the head "Capital gains" in respect of any profits or gains arising from the sale, exchange, relinquishment or transfer of a capital asset effected after the 31st day of March, 1956, and such profits and gains shall be deemed to be income of the previous year in which the sale, exchange, relinquishment or transfer took place: Section 24 .-(2A) Notwithstanding anything con- tained in sub-section (1), ",here the loss sustained is a loss falling under the head "Capital gains," such loss shall not be set off except against any profits and gains falling under that head.

(2B) Where an assessee sustains a loss such as is referred to in sub-section (2A) and the loss cannot be wholly set off in accordance with the provisions of that sub-section, the portion not so set off shall be carried forward to the following year and set off against capital gains for that year, and if it cannot be so set off, the amount thereof not so set off shall be carried forward to the following year and so on, so however that no such loss shall be carried forward for more than eight years: Provided that where the loss sustained by an assessee, not being a company, in any previous year does not exceed five thousand rupees, it shall not be carried forward.

Section 26 .-(2) Where a person carrying on any business, profession or vocation has been succeeded in such capacity by another person, such person and such other person shall, sub- ject to the provisions of sub-section (4) of section 25 , each be assessed in respect of his actual share, if any, of the income, profits and gains of the previous year:

Provided that, when the person succeeded in the business, profession or vocation cannot be found, the assessment of the profits of the year, in which the succession took place up to the date of succession, and for the year preceding that year shall be made on the person succeeding him in like manner and to the same amount as it would have been made on the person succeeded or when the tax in respect of the assessment made for either of such years assessed on the person succeeded cannot be recovered from him, it shall be payable by and recoverable from the person succeeding, and such person shall be entitled to recover from the person succeeded the amount of any tax so paid.

A conspectus of the said sections discloses a clearcut scheme. Though income-tax is only one tax levied on the total income, s. 6 enumerates six heads whereunder the income of an assessee falls to be charged. This Court in <CITATION> -

tax, West Bengal(1) laid down that ss. 7 to 12 are mutually exclusive and where an item of income falls specifically under one head it is to be charged under that head and no other. The expression "Income, profits and gains" in s. 6 is a composite concept which takes in all the six heads of income mentioned therein. The 4th head is "profits and gains of business, profession or vocation" and the 6th head is "capital gains". Section 10 taxes the profits and gains of a business, profession or vocation carried on by an assessee; it also enumerates the different kinds of allowances that can be made in computing the profits. Under s. 10(1), as we have already pointed out, the necessary condition for the application of the section is that the assessee should have carried on the business for some part of the accounting year. Section 26(2) indicates the manner of assessment of the income, profits and gains of any business, profession or vocation. This section does not provide for the assessment of income under any other head. It only says that if there is a succession to a person carrying on business during an accounting year, the person succeeded and the person succeeding can each of them be assessed in respect of his actual share. The proviso deals with a case where the person succeeded cannot be found; in that event, the assessment of the profits of the year in which the succession took place upto the date of the succession and for the year preceding that year shall be made on the person succeeding him. If an assessment has already been made in respect of the said years on the person succeeded, it can be recovered from the person succeeding. But both sub-s. (2) and the proviso deal only with income, profits and gains of 'the business, that is to say, for the assessment made in respect of profit and gains under the 4th head of s. 6 . Now turning to s. 12B , it provides for capital gains. Under that section the tax shall be payable by the assessee under the head capital gains in respect of any profits or gains arising from, the sale of a capital asset effected during the Prescribed period. It says further that such profits or gain shall be deemed to be income of the previous year in which the sale etc. took place. This deeming clause does not lift the, capital gains from the 6th head in s. 6 and place it (1)  S.C.R 79 (4)  32 I.T R. 688.

under the 4th head.. It only introduces a limited fiction, named that capital gains accrued will be deemed to be income of the previous year in which the sale was effected. The fiction does not make them the profit or gains of the business. It is well settled that a legal fiction is limited to the purpose for which it is created and should not be extended beyond its legitimate field. Sub-sections (2A) and (2B) of s. 24 provide for the setting off of the loss falling under the head "capital gains" against any capital gains falling under the same head. Such loss cannot be set off against an income falling under any different head. These three sections indicate beyond any doubt that the capital gains are separately computed in accordance with the said provisions and they are not treated as the profits from the business. The profits and gains of business and capital gains are two distinct concepts in the Income-tax Act : the former arises from the activity which is called business and the latter accrues because capital assets are disposed of at a value higher than what they cost the assessee. They are placed under different heads; they are derived from different sources; and the income is computed under different methods. The fact that the capital gains are connected with the capital assets of the business cannot make them the profit of the business. They are only deemed to be income of the previous year and not the profit or gains arising from, the business during that year. If that be the scheme of the Act, the contention of the learned counsel for the <ORG> can easily be answered. He asks that if s. 26(2) deals with only profits and gains of the business, why should the <ORG> use the word "income" therein? As we have indicated, the expression "income, profits and gains" is a compendious term to connote the income from the various sources mentioned in s. 6 ; therefore, the use of such an expression does not efface the distinction between the different heads, but only describes the income from the business. The expression ;,profits" in the proviso makes it clear that the income, profits and gains in sub-s. (2) of s. 26 only refer to the profits under the 4th head in s. 6 . On the other hand, if the interpretation sought to be put upon the expression "income" in sub-s. (2) of s. 26 by the <ORG> is accepted, then the absence of that word in the proviso destroys the argument. But the more reasonable view is that both the sub-section and the proviso deal only with the profits under the 4th head men- tioned in s. 6 and, so construed, it excludes capital gains. The argument that sub-s. (2) of s. 26 read with the proviso thereto indicates that the total income of the person succeeded is the criterion for separate assessment under sub-s. (2) and for assessment and realisation under the proviso is on the assumption that sub-s. (2) and the proviso deal with all the heads mentioned in s. 6 of the Act. But if, as we have held, the scope of sub-s. (2) of s. 26 is only limited to the income from, the business, the share under sub-s. (2) and the assessment and realisation under the proviso can only relate to the income from the business. The argument is really begging the question itself. In the result we agree with <ORG> in regard to the answer it has given in respect of the second question. In this view no other question arises for our consideration. In the result, the appeal fails and is dismissed with costs. Appeal dismissed.


<NAME>, J.

1.These Writ Petitions under Article 32 of the Constitution and Petitions for special leave to appeal under Article 136 of the Constitution may be disposed of by a common order since they raise the same questions. In exercise of the powers conferred by <CITATION> of the Essential Commodities Act, 1955 and delegated to it by <ORG> by its Order No. GSR 1088 dated November 15, 1958, <ORG> (<ORG>), <ORG> made the Madhya Pradesh Foodstuffs (Distribution) Control Order 1960. The undoubted object of the Order was to provide for better distribution of foodstuffs to such class of consumers as required a regular supply of such foodstuffs. Detailed provision was made for the issue of 'family cards', the registration of the holders of such 'family cards' with "appointed retailers", the appointment of "appointed retailers", the supply of foodstuffs to 'appointed retailers' by the <ORG>, the sale of foodstuffs by 'appointed retailers' to consumers etc. "Family card" was defined as meaning "a card or document issued to the head of a family under or in pursuance of the provisions of this order." "Appointed retailer" was defined to mean "a retail dealer appointed or deemed to be appointed under the provisions of Clause 3 in respect of any foodstuff." "<ORG>. scheme" was defined to mean "the scheme for distribution of foodstuffs to consumers through fair price shops set up by the <ORG> in this behalf." Clause 3 of the Order made provision for the appointment of "appointed retailers" by the Collector for purposes of distributing foodstuffs under the <ORG> scheme. Clause 4 of the Order prohibited an "appointed retailer" from supplying any foodstuffs in respect of which he held his appointment, except under and in accordance with the provision of the Order. Pursuant to the Madhya Pradesh Foodstuffs (Distribution Control) Order 1960, several persons were appointed as "appointed retailers." The petitioners were so appointed and many of them claimed that they were unemployed graduates at the time of their appointment as "appointed retailers." Things went on, according to the <ORG> very badly, till the <ORG> moved in the matter, first, by sending urgent wireless messages to all Collectors on October 28, 1980 and following it up very soon thereafter, on October 30, 1980, by amending the Madhya Pradesh Foodstuffs (Distribution Control) Order 1960. The wireless message was as follows :

No. 6494/4755/XXIX/180 Dated October, 1980. Government has declined to exclude the appointment of approved Retailer i.e. <ORG> from the purview of Madhya Pradesh Foodstuffs (Distribution) Control Order, 1960 stop These appointments will until further orders of the Collectors stop Gazette notification to their except issuing today stop New arrangements will be effective from first November 1980 from which date existing shops will be deemed to be continuing to operate under the Collectors' authority stop Since Collectors will now be free to Cancel Suspend and appoint new Retailers government desire that in all new appointment stop Cooperative Societies be given first priority and cases of others be determined on merit i.e. persons who would be interested and be able to do this business stop It may be necessary to insist on food grains and sugar dealers licencers from new retailers at least in urban areas and within a month or so in rural areas when formal appointments are made stop Till present retailers are substituted formerly present ones will continue stop Please complete this process within a week stop Detailed instructions will follow stop.

2. By the amendment made on October 30, 1980, in the Madhya Pradesh Foodstuffs (Distribution Control) Order, the definition of "appointed retailer" was deleted and an expression "fair price shop" was newly defined to mean a shop set up by the <ORG> under the <ORG> scheme. All the clauses of the Order dealing with "appointed retailers" were deleted. The provisions of the Order relating to "family cards" were however retained. The holder of a "family card" was required to get the card registered with the "fair price shop" in the prescribed manner for the purpose of obtaining foodstuffs for his family. In the Order, as it stood originally, there were provisions for appeal and revision against orders of suspension or revocation of the appointment of "appointed dealers." These clauses also went the way of the other clauses relating to "appointed retailers." Thereafter the <ORG> of Madhya Pradesh promulgated a scheme known as the Madhya Pradesh Food-stuffs (Civil Supply Distribution) Scheme, 1981. The scheme cast a duty upon the Collector to establish 'fair price shops.' It was proposed that there should be a 'fair price shop' in each area with a population of 2000 so that no consumer may have to travel more than five kilo meters to purchase foodstuffs. The fair price shops were to be run by agents appointed by the Collector. It was made clear that the agents were to have no right of legal ownership over the fair price shops.' In the allotment of 'fair price shops', cooperative societies were to be given first preference. If there was a cooperative society in an area, and if such society expressed, in writing, its unwillingness to run the fair price shop, the fair price shop could be allotted to other persons. The allotted was to be a person with satisfactory financial resources and in a position to discharge the duties and obligations of a fair price shop. He should not have been adjudged insolvent. He should bear good character and should not have been convicted of a criminal offence. Every fair price shop was expected to stock specified items of foodstuffs in such quantities as would be sufficient for one and half month's supply to consumers. The opening and closing hours of the shop were to be regulated by the Collector. The shop had to be kept open for at least eight hours every day. The fair price shop was to be paid a commission and transport and other incidental expenses at the rates to be determined by the <ORG>.

3. The vital change brought about by the amendment and the new scheme was the abolition of the system of 'appointed retailers' and their replacement by 'fair price shops' which were to be run by the agents appointed under the new scheme, preference in the matter of appointment of agents being given to cooperative societies.

4. Writ Petitions were filed immediately in <ORG> of Madhya Pradesh by erstwhile 'appointed retailers' questioning the validity of the wireless message, the amendment of the Madhya Pradesh Foodstuffs (Distribution Control) Order and the Madhya Pradesh Foodstuffs (Civil Supplies Public Distribution) Scheme. A Division Bench of <ORG> (<NAME>, C.J., and <NAME>, J) dismissed the Writ Petitions by their judgment dated April 13, 1981. Most of the submissions made before us were also made before <ORG> and were rejected by the learned Chief Justice in a well considered judgment. Some of the applicants before <ORG> have filed petitions for special leave to appeal to this Court and some others have directly moved this Court under Article 32 , of the Constitution.

5. <NAME>, learned Counsel for the petitioners in Special Leave Petition Nos. 4234-35 of 1981 urged that the preference to be shown to cooperative societies in the matter of appointment of agents to run fair price shops was discriminatory. He sought to place reliance on the decision of this Court in <NAME> v. State of Assam <NAME> learned Counsel for the petitioners in the remaining cases made several submissions : (1) The wireless message dated October 28, 1980, was without any legal authority as the Madhya Pradesh Foodstuffs (Distribution Control) Order 1960 had not even been amended by that date; (2) The amendment of the Madhya Pradesh Foodstuffs (Distribution Control) Order 1960 was invalid as it was not approved by a legislation within six months; (3) The amendment was invalid as the concurrence of the Central Government had not been obtained; (4) The amendment and the schemes were also invalid as they were not laid before the <ORG>; (5) There was a violation of the principles of natural justice as the amendment took away the right of the existing 'appointed retailers' without hearing them; (6) The scheme was invalid as it was made pursuant to delegation of delegated powers; (7) There was an unlawful creation of monopoly in favour of cooperative societies. We do not find any substance in any of the submissions made by the counsel.

6. <NAME>, who presented the case for the State of Madhya Pradesh with ability and clarity drew our attention to the history of the scheme of distribution of foodstuffs in the State of Madhya Pradesh and pointed out, with reference to the counter-affidavit filed on behalf of the State of Madhya Pradesh, how the well intentioned efforts of the Government to distribute foodstuffs in a fair and equitable manner were foiled and frustrated by the "appointed retailers." It appears from the counter-affidavit that many serious irregularities were being committed with impunity and without hindrance, under the 1960 Scheme and because of the provision for appeals and revisions, erring traders could not be brought to book in time. In the past few months, there was a tremendous increase in flagrant violations of the 1960 Control Order. Shops were opened well after the appointed time and closed well before the appointed time. Consumers found it difficult to obtain their rations easily. Traders would hoard foodstuffs and refuse to sell them to the consumers. They would not maintain sufficient stocks and they would not lift stocks from Government godowns in time. The situation was getting so much out of control that in July 1980 the Chief Minister called a conference of responsible officials including the Director of <ORG> and the Collectors of the Districts. There was considerable discussion, in the course of which the Collectors of the Districts drew the attention of the Chief Minister to the plight of the poor consumers and the abuse to which the existing system had lent itself at the hands of the retailers. Thereafter a conscious and responsible decision was taken to scrap the existing system of distribution of foodstuffs through 'appointed retailers' and so introduce a system of distribution of foodstuffs by authorised agents who were preferably to be cooperative societies. The impugned wireless message was therefore, issued by the Government to the Collectors incorporating the decision of the Government. It was rightly conceded by <NAME> that the wireless message should have properly come after the amendment of the Control Order but in the circumstances of the case no harm was done as no action was taken pursuant to the wireless message until after the Control Order was amended. This circumstance, we may mention here, meets one of the submissions of the learned Counsel for the petitioners that the wireless message should have been issued after the amendment of the Control Order.

7. The Original Order of 1960 was made by State Government pursuant to the powers delegated to it by <ORG> by notification No. GSR 1088 dated November 15, 1958. GSR No. 1088 dated November 15, 1958 required that the concurrence of <ORG> should be obtained by <ORG> in respect only of orders made in relation to matters covered by Clause (a) and (d) of <CITATION> of the Essential Commodities Act. GSR 1088 of November 15, 1958, was later superseded by other notifications. The notification in force on the date of the amendment of the Control Order was GSR 800 dated June 9, 1978, under which concurrence of <ORG> was necessary only when the orders related to matters specified in Clause (a), (c) and (f) of <CITATION> of the Essential Commodities Act or in regard to distribution or disposal of foodstuffs to places outside the State or in regard to regulation of transport of any foodstuffs under Clause (d). The Control Order of 1960 and the amendment dated October 30, 1980 do not relate to any of these matters and the concurrence of <ORG> was therefore unnecessary. It may be that the concurrence of <ORG> was obtained by <ORG> before the 1960 Control Order was made but that was really unnecessary. Merely because concurrence of <ORG> was needlessly obtained on an earlier occasion, <ORG> was not obligated to obtain the concurrence of <ORG> whenever again there was an amendment of the Control Order.

8. The submission that the amendment was invalid because it had not been placed before the <ORG> within six months is totally misconceived. The amendment was not an Ordinance and it was not required to be placed before the <ORG> within six months. We are also not able to appreciate why the amendment should have been placed before the <ORG>. What is required to be placed before the <ORG> under <CITATION> , Sub- section 6 of the Essential Commodities Act is an order made by <ORG> or by any officer or authority of <ORG>. An order made by the State Government in exercise of the powers delegated to it by <ORG> under Section 5 is not required to be placed before <ORG>.

9. It was submitted that the amendment of the Control Order had the effect of doing away with 'appointed retailers' and as this was being done without notice to them, there was a violation of the principles of natural justice. The amendment of the Control Order was a legislative function and there was therefore no question of affording an opportunity to those who were to be affected by it: <ORG> Delhi and Ors. v. The State of Haryana and Ors.

10. One of the submissions of the learned Counsel was that the formulation of the scheme was an exercise of power by the delegate of a delegate and, therefore, void. We see no force in this submission. The basic assumption underlying the argument was that the scheme was formulated by the <ORG> pursuant to some power purported to be vested in the <ORG> under the Madhya Pradesh Foodstuffs (Distribution Control) Order 1960 and that the <ORG> would otherwise have no power to formulate such a scheme. The assumption is not well founded. In the first place the Madhya Pradesh Foodstuffs (Distribution Control) Order 1960 as amended in 1980 defines 'fair price shop' as a "shop set up by the <ORG> under the <ORG> scheme" and the '<ORG> scheme' as "the scheme for distribution of foodstuffs to consumers through fair price shops set up by the <ORG> in this behalf." There is no other provision in the Order authorising the setting up of fair price shops or the making of a scheme for setting up fair price shops. On the other hand the State <ORG> has undoubted competence to make a scheme for setting up fair price shops and to set up fair price shops in pursuance thereof, in exercise of its executive power under Article 162 of the Constitution. The executive power of the State <ORG> under Article 162 of the Constitution is coextensive with the legislative power of the State legislature. Entry 33 (b) of List III (Concurrent List) is "trade and commerce in, and the production, supply and distribution of foodstuffs, including edible oil-seeds and oils." The <ORG>, therefore, has the undoubted right to make a scheme for the distribution of foodstuffs, with-out being vested with any special authority under any order made under the Essential Commodities Act . As already mentioned by us the Madhya Pradesh Foodstuffs (Distribution Control) Order 1960 does not purport to vest any such power in the <ORG>. It must, therefore, be taken that the Madhya Pradesh Foodstuffs (Civil Supply Distribution) Scheme, 1981, was made in exercise of the executive power of the <ORG> and not in exercise of any power delegated by a delegate under the Essential Commodities Act .

11. Finally we come to the argument which was strenuously pressed before us namely that the scheme was discriminatory inasmuch as preference was to be shown to cooperative societies in the matter of allotment of fair price shops and thus a monopoly was sought to be created in favour of cooperative societies. Before we proceed to discuss the matter further we must refer to the statement made by the Learned Advocate General before <ORG> and repeated before us by the learned Counsel for the <ORG> that the expression 'cooperative society' in Clause 2 of the scheme meant only a consumers' cooperative society and no other. The learned Counsel for the petitioners urged that the scheme itself used the expression 'cooperative society' and not 'consumers' cooperative society' and therefore there was no reason to think that the expression cooperative society was intended to be confined to consumers' cooperative societies only. According to the learned Counsel not only consumer's cooperative societies but other societies also have been allotted fair price shops in actual practice. We are of the view that in the context of the scheme the expression 'cooperative society' was meant to include consumers' cooperative societies only and no other. If any society other than a consumer's cooperative society has been allotted a fair price shop, we are assured by the learned Counsel for the <ORG> that steps would be taken for cancellation of such allotment. We will proceed on the basis that the preference proposed to be given by the scheme in the matter of allotment of fair price shops was to consumers cooperative societies only.

12. Earlier, we have referred to the abuses which had grown up in the prevailing system of distribution of foodstuffs under the Madhya Pradesh Foodstuffs (Distribution Control) Order 1960. The system had deteriorated and become completely unworkable and rotten to a breaking point. An absolute and thorough overhaul of the system had become compulsive if the population of Madhya Pradesh were to receive a regular supply of their rations. It was in those circumstances that the <ORG> came to the conclusion that distribution of foodstuffs through cooperative societies (consumer's cooperative societies), would be the best method of distribution by which the goods could be delivered i.e. rations could be supplied to the consumers. No one can doubt the positive and progressive role which cooperative societies are expected to and do play in the economy of our country and, most surely, in the fair and effective distribution of essential articles of food. There certainly was a reasonable classification and a nexus with the object intended to be achieved, which was a fair and assured supply of rations to the consumer. The fundamental right of traders like the petitioners to carry on business in food stuffs was in no way affected. They could carry on trade in foodstuffs without hindrance as dealers; only, they could not run fair price shops as agents of the <ORG>. No one could claim a right to run a fair price shop as an agent of the <ORG>. All that he could claim was a right to be considered to be appointed as an agent of the <ORG> to run a fair price shop. If the <ORG> took a policy decision to prefer cooperative societies for appointment as their agents to run fair price shops, in the light of the frustrating and unfortunate experience gathered in the last two decades, we do not see how we can possibly hold that there was any discrimination.

13. The learned Counsel for the petitioners placed strong reliance on <CITATION> . 1 An examination of what was decided in that case shows that it does not help the petitioners. The Assam Foodgrains Licensing and Control Order was made in exercise of the powers conferred by <CITATION> of the Essential Commodities Act. The Order provided that no one could do wholesale business in paddy and rice except under a licence. In granting or refusing a licence the licensing authority was required to have regard, among other matters to the matters enumerated in Sub-clauses (a) to (e) of Clause (5). One such matter (Sub-clause (e)) was "whether the applicant is a cooperative society." The Government issued directions to all licensing authorities that rights of monopoly procurement had been given to <ORG>. The petitioner's application for a licence was rejected because of the Government's directions. <ORG> held "the duty of the licensing authority was to pass orders in accordance with Clause 5 of the Control Order, 1961. Instead of doing that it passed an order in accordance with the instructions given to it on behalf of <ORG>, instructions which appear to us to be not in consonance with Sub-clause (e) of Clause 5, because Sub-clause (e) contemplates a preference to cooperative societies in certain circumstances, but not a monopoly in their favour." It is apparent that the question before us is altogether different from the question considered by the <ORG> in <NAME> case. In that case the Control Order prescribed the matters to be considered in deciding whether a licence should be granted or not. The license was refused on a ground extraneous to the matters prescribed by the Control Order. It was not the Control Order that was found to be wrong but its administration. That was expressly stated by the <ORG> who observed:

It was open to the licensing authority to give preference to cooperative societies, if it was of the opinion that granting a license to a cooperative society in a particular locality would facilitate the objects of <CITATION> of the Act. This is not what the licensing authority did. He repeatedly refused a license to the petitioner, for the only reason and purpose of granting a monopoly to cooperative societies. In other words, the discrimination that has been made by the licensing authority is really in the administration of the law. It has been administered in a discriminatory manner and for the purpose of achieving an ulterior object, namely, the creation of a monopoly in favour of cooperatives, an object which, clearly enough, is not within Sub-clause (e) of Clause 5 of the Control Order, 1961.

In the present case, apart from defining the expressions "fair price shop" and "<ORG> scheme", the Control Order has given no indication of the lines on which the <ORG> scheme was to be drawn or of the guidelines to regulate the allotment of fair price shops. The scheme, as already found by us, was formulated outside the Control Order and in exercise of the <ORG>'s executive power. The appointment of agents to run fair price shops was to be made under the scheme and in accordance with the guidelines prescribed by the scheme. There could, therefore, be no question of the fair price shops not being allotted in consonance with the Control Order. On the other hand, there are several observations in the judgment which are in fact opposed to the contention of the petitioners. It was said (at p. 949):

We are of the view that by reason of the position which cooperative societies may occupy in the village economy of a particular area, it cannot be laid down as a general proposition that Sub-clause (e) of Clause 5 of the Control Order, 1961, is unrelated to the objects mentioned in <CITATION> of the Essential Commodities Act, 1955. There may be places or areas where cooperative societies are in a better position for maintaining or increasing supplies of rice and paddy even for securing their equitable distribution and availability at fair prices. We must, therefore, repel the very broadly stated contention of the learned Counsel for the petitioner that Sub-clause (e) of Clause 5 of the Control Order, 1961, can have no relation whatsoever to the two objects mentioned in <CITATION> . of the Essential Commodities Act , 1955.... Sub-clause (e) of Clause 5, we have already stated, enables the licensing authority to give preference to a cooperative society in certain circumstances; but it does not create a monopoly in favour of cooperative societies. The preference given has a reasonable relation to the objects of the legislation set out in <CITATION> of the Act; therefore, Sub-clause (e) of Clause 5 of the Control Order, 1961, cannot be held to be bad on the ground of class legislation, but the passing of an order under the sub-clause for a purpose not contemplated by it will amount to discrimination and denial of the guarantee of equal protection of the law.

14. We are, therefore, unable to agree with the submission of the petitioners that the preference to be shown to cooperative societies creates a monopoly in their favour and is discriminatory. In the result the Writ Petitions and Special Leave Petitions are dismissed.


PETITIONER: <NAME>,SHAHIBAG HOUSE, <NAME> Vs. RESPONDENT: COMMISSIONER OF INCOME TAX,<NAME> DATE OF JUDGMENT: 24/01/1997 BENCH: S.C. AGRAWAL, SUHAS C. SEN ACT: HEADNOTE: JUDGMENT:

J U D G M E N T SEN, J.

In this case the question of law is:

Whether, on the facts and in the circumstances of the case, the <ORG> was justified in holding that the assessee was liable to pay tax in respect of capital gains on receipt of the amount equal to the fact value of the preference shares of <ORG> on the company redeeming its preference shares?

<ORG> answered the question in the affirmative and against the assessee. <ORG> granted a certificate of fitness for appeal under Section 261 of the Income Tax Act in view of the fact that they had taken a view contrary to the view adopted by <ORG> on this question.

The facts of the case, as stated in the judgment of <ORG>, are as under:-

"The assessee is an individual and the assessment year under reference is assessment year 1969-70, the year of account being the calendar year 1968. The assessee held 297 redeemable preference shares of <ORG> Universal Corporation Private Limited a company incorporated under the Companies Act (hereinafter referred to as the "<ORG>"). The face value of such of these preference shares was Rs. 1,000/- and, therefore, the total face value of these shares came to Rs.2,97,000/-. The assessee had purchased these shares for Rs.2,68,550/-. The <ORG> decided to redeem the preference shares and the assessee received Rs.2,97,000/- face value of the shares held by her in the year of account relevant to the assessment year under reference. Thus the value of the shares received by the assessee exceeded the value which he had paid for these shares by Rs.30,450/-. <ORG>r, assessing the assessee sought to tax this amount of difference as capital gains under Section 45 of the Act. The assessee resisted the action proposed by the Income Tax Officer by contending that redemption of her preference shares by the <ORG> would not amount to transfer within the meaning of Section 2(47) of the Act and consequently the difference between the value received by her from the <ORG> on redemption of shares and the price which she had paid for the shares was not exigible to tax. In other words, according to the assessee even if there was any profit or gain, as a result of redemption on shares by the <ORG>, such profit or gain could not be said to have arisen from the transfer of a capital asset. <ORG>, however, rejected the contentions raised on behalf of the assessee and brought capital gains arising out of the redemption of the shares to tax."

The Appellate Assistant Commissioner as well as the Tribunal upheld the view taken by the Income Tax Officer.

It has been contended by Mr. <NAME> appearing on behalf of the appellant that there is no question of applicability of Section 45 of the Income Tax Act in this case because no `transfer' of the preference shares had taken place because of the redemption of the shares. The capital received by the Company had been returned to the shareholder. The money was not paid by the Company to the shareholder because of any sale, exchange or relinquishment of the capital asset or extinguishment of any right therein. Our attention was invited to the definition of `transfer' and it was contended that redemption of shares did not come within the mischief of Section 2(47) .

Sections 2(47) and 45(1) are as follows:-

"2(47). `transfer', in relation to a capital asset, includes,-

(i) the sale, exchange or relinquishment of the asset; or

(ii) the extinguishment of any rights therein; or

(iii) the compulsory acquisition thereof under any law; or

(iv) in a case where the asset is converted by the owner thereof into, or is treated by him as, stock-in-trade of a business carried on by him, such conversion or treatment; or

(v) any transaction involving the allowing of the possession of any immovable property to be taken or retained in part performance of a contract of the nature referred to in section 53A of the Transfer of Property Act, 1882 ; or

(vi) any transaction (whether by way of becoming a member of, or acquiring shares in, a co-operative society, company or other association of persons or by way of any agreement or any arrangement or in any other manner whatsoever) which has the effect of transferring, or enabling the enjoyment of, any immovable property;

Explanation. - For the purposes of sub-clauses (v) and (vi), `immovable property' shall have the same meaning as in clause (d) of section 269UA ;

order to get this amount the assessee had to give up abandon or surrender the shares held by her. The meaning of the word `relinquish' as given in Webster's Comprehensive Dictionary, International Edition 1984, is "1. To give up; abandon; surrender. 2. To cease to demand; renounce; to relinquish a claim. 3. To let go (a hold or something held)." The assessee in this case has given up the shares and has received in lieu thereof a sum of money. This, in our view, comes clearly within the mischief of Section 2(47)(i) .

That apart, in court view the transaction amounts to "sale".

Under the provisions of the Companies Act , 1956 the share capital of a company limited by shares may be of two kinds - (a) equity share capital and (b) preference share capital. Section 85 of the Companies Act has defined "preference share capital" to mean that part of the share capital of the company which fulfils both the following requirements:-

(a) as respects dividends, it carries or will carry a preferential right to be pair a fixed amount or an amount calculated at a fixed rate, which may be either free of or subject to income-tax; and

(b) with regard to capital, it carried or will carry, on a winding up or repayment of capital, a preferential right to be repaid the amount of the capital paid up or deemed to have been paid up, whether or not there is a preferential right to the payment of either or both of the following amounts namely:-

(i) any money remaining unpaid, in respect of the amounts specified in clause (a), up to the date of the winding up or repayment of capital; and

(ii) any fixed premium or premium on any fixed scale, specified in the memorandum or articles of the company.

Section 85(2) of the Companies Act has defined "equity share capital" to mean "all share capital which is not preference share capital." Section 80 of the Companies Act lays down that a company limited by shares may, if so authorised by its articles, issue preference share which are, or at the option of the company are to be liable, to be redeemed. This section, however, lays down that preference shares must not be redeemed except out of profits of the company which would otherwise be available for dividend or out of the proceeds of a fresh issue of shares made for the purposes of the redemption. They cannot be redeemed unless they are fully paid. The premium, if any, payable on redemption must have been provided for out of the profits of the company or out of the company's share premium account before they are redeemed.

There are other provisions in Section 80 which are not necessary for the purpose of this case. But, it has to be noted that it has been specifically provided in sub-section (3) that the redemption of preference shares shall not be treated as reduction of the amount of the authorised share capital. The balance sheet of the company which has issued redeemable preference shares must specify any part of the issued capital of the company that consists of such shares, the earliest and latest dates on which the company has power to redeem them, whether they must be redeemed in any event or are liable to be redeemed at the option of the company, and whether any (and, if so, what) premium is payable on redemption.

The other provision of the Companies Act which is important in this connection is Section 77 which is as under:-

"77. Restrictions on purchase by company, or loans by company for purchase, of its own or its holding company's shares.-

(1) No company limited by shares, and no company limited by guarantee and having a share capital, shall have power to buy its own shares, unless the consequent reduction of capital is effected and sanctioned in pursuance of sections 100 to 104 or of section 402 (2) ... ...

(3) ... ...

(4) ... ...

(5) Nothing in this section shall affect the right of a company to redeem any shares issued under Section 80 or under any corresponding provision in any previous companies law."

This section clearly implies that redemption of its preference shares by a company would have come within the bar of purchasing its own shares by a company. This specific provision of sub-section (5) was necessary to get over the bar. The company redeemed its preference shares only by paying the preference shareholders the value of the shares and taking back the preference shares. In effect, the company has bought back the preference shares from the shareholders. It may have been done at a date set by the terms of the issue. When a preference share is redeemed by a company, what a shareholder does in effect is to sell the share to the company,. Such a transaction is nothing but sale of the preference shares by the shareholders to the company. That is why after specifically laying down in Section 77(1) that no company shall have the power to buy its own shares, it was necessary to specify in sub-section (5) that this provision shall not affect the right of a company to redeem any shares issued under Section 80 . If redemption of preference shares did not amount to sale, it would not have been necessary to specifically provide that the restriction imposed upon a company in respect of buying its own shares will not apply to redemption of shares issued under Section 80 .

Therefore, in my judgment, the redemption of preference shares by the company will squarely come within the phrase "sale, exchange or relinquishment of the asset".

There can be no dispute that the shares held by a member in a company is movable property transferable in the manner provided in the Article of Association of the company. There can also be no dispute that the shares can be held by a member as stock-in-trade or capital assets. In the instant case, the preference shares were held as capital assets. The excess amount received by the shareholder on redemption of these shares will have to be treated as capital gain in view of the provisions of Section 2(47) read with Section 45 of the Income Tax Act.

I shall not refer to the various cases that were cited at the bar.

In the case of <CITATION> , 106 ITR 368, the company went into voluntary liquidation. The assessee as a shareholder received an amount from the liquidator which was in excess of the amount that he had paid for those shares. It was held that there was no transfer of any capital asset within the mewing of Section 2(47) of the Income Tax. Act. When a shareholder receives money representing totality of rights in the property. In the third case, there may be reduction of the exclusive interest in the totality of the rights of the original owner into a joint or a share interest with others. An exclusive interest in property was a larger interest than a share in that property. To the extent to which the exclusive interest was reduced to share interest, there was a transfer of property.

This again, has no bearing on the question whether redemption of preference shares will come within the mischief of Section 2(47) of the Income Tax Act.

<ORG> in <CITATION> , 165 ITR 620, dealt with the question which has now arisen in this case. There the question was whether the amount received by the assessee on redemption of preference shares was liable to tax under the head "capital gains". After referring to the meaning given to "transfer" by Section 2(47) of the Income Tax Act, the Court held:

"Here, a regular "sale" itself has taken place. That is the ordinary concept of transfer. The company paid the price for the redemption of the shares out of its fund to the assessee and the transaction was clearly a purchase. As rightly observed by the <ORG>, if the company had purchased a valuable right, the assessee had sold a valuable right. "Relinquishment" and "extinguishment" which are not in the normal concept of transfer but are included in the definition by the extended meaning attached to the word are also attracted in the transaction. The shares were assets and they were relinquished by the assessee and thus relinquishment of assets did take place. The assessee by virtue of his being a holder of redeemable cumulative preference shares had a right in the profits of the company, if and when made, at a fixed rate of percentage.

Quite obviously, this was a valuable right and this right had come to an end by the company's redemption of shares. Thus, the transaction also amounted to "extinguishment" of right. Under the circumstances, viewed from any angle, there is no escape from the conclusion that section 2(47) was attracted and that the amount of Rs.50,000 received by the assessee was liable to be taxed under the head "Capital gains".

The view taken by <ORG> accords with the view taken by <ORG> in the judgment under appeal. In the judgment under appeal, it was pointed out that the genesis of reduction or redemption of capital both involved a return of capital by the company. The reduction of share capital or redemption of shares is an exception to the rule contained in Section 77(1) that no company limited by shares shall have the power to buy its own shares. When it redeems its preference shares, what in effect and substance, it does is to purchase preference shares. <ORG> was placed on the passage from <ORG> on the Companies Act s, 14th Edn., Vol. , at p. 181:

"Every return of capital, whether to all shareholders or to one, is pro tanto a purchase of the shareholder's rights. It is illegal as a reduction of capital, unless it be made under the statutory authority, but in the latter case is perfectly valid."

Reference was also made to Pennington's company Law, 4th Edn., p 192:

"The general rule is that a company cannot issue shares on terms that it shall or may redeem them at an agreed future date, because the redemption would amount to a purchase by the company of its own shares, which is illegal."

We are of the view that <ORG> has come to a right decision in this case. The redemption of preference shares in the facts of this case will squarely come within the meaning of the phrase "sale, exchange or relinquishment of the asset".

We were also referred to a decision of Madras High Court which was a case of reduction of share capital and also the decision in <CITATION> ), 177 IIR 198, which again was a case of amalgamation of two companies. In the facts of that case, it was held that there was neither any exchange nor any relinquishment of an asset by the assessee. Consequently, there was no transfer within the meaning of Section 12B of the Indian Income Tax Act, 1922.

The case of <CITATION> , 191 ITR 647, is also not of any assistance for the purpose of this case. That was a case where insurance money was paid for loss of machinery. It was held that the amount received in replacement of machinery could not be treated as capital gain because payment of insurance claim was not in consideration for machinery taken over. This was not a case of extinguishment of right in the property on account of destruction or loss of asset.

Mr. <NAME> also strenuously argued that this is not a case where the extinguishment of any right in the preference shares had taken place. The preference share itself stood extinguished by redemption. Therefore, clause (ii) of Section 2(47) could not be invoked in the facts of this case to bring the surplus amount received by the assessee to tax as capital gains under Section 45 of the Income Tax Act.

In court vies, the case squarely comes within clause

(i) of Section 2(47) . Therefore, it is not necessary to express any opinion on the last contention of Mr. <NAME>.

The appeal is dismissed. The judgment under appeal dated 18/22-8-1992 is affirmed. There would be no order as to costs.