Commissioner of Income Tax vs Poddar Industrial Corporation

The following two questions have been referred for the opinion of this Court:

Whether, on the facts and in the circumstances of the case, the Tribunal was legally justified in holding that the stock left with the assessee was not a capital asset and the profits arising on the sale of such stock could not be taxed as capital gains ?

Whether even assuming that the profits on sale of the stock left with the assessee were taxable u/s 176(3A) of the Income Tax Act, 1961, the Tribunal was legally justified in holding that the legal fiction created by the aforesaid Sub-section would extend to the allowability of deduction for expenses incurred in relation to the business which had ceased to exist before the commencement of the previous year relevant to assessment year 1981-82 ?

The Tribunal has held in its order that the plant and machinery of the assessee was sold by the National Small Industries Corporation in satisfaction of its dues. Thereafter, the assessee was left with certain goods and raw materials. The Tribunal held that such raw materials would not constitute a "capital asset". The department not being satisfied with the decision, sought the reference by way of the first question, quoted above.

"Capital asset" according to the definition given in Section 2(14) of the Income Tax Act, 1961 excludes stock-in-trade, consumable stores and raw materials. Nothing has been shown to us as to why raw materials in this case should be treated as a capital asset in violation of the aforesaid definition.

Sri Shambhu Chopra has argued that what was left with the assessee was not raw material.

Findings of fact are not re-examined in the reference under the Income Tax Act. We, therefore, on the first question referred above, hold that the Tribunal was legally justified in holding that the stock left with the assessee was not a capital asset and the profits arising on the sale of such stock could not be taxed as capital gains.

So far as the second question is concerned, reliance has been placed by Sri Shambhu Chopra on a decision of Kerala High Court in the case of Commissioner of Income Tax Vs. Kar Valves Limited, and a decision of the Madras High Court in the case of P.V. Gajapathi Raju Vs. Commissioner of Income Tax, . Neither of these two decisions has taken into account the earlier decision of the Supreme Court in the case of Commissioner of Income Tax, Bangalore Vs. J.H. Gotla, Yadagiri, or the decision of this Court in Commissioner of Income Tax Vs. Rampur Timber and Turnery Co. Ltd., , under both of which the deduction of expenses has been permitted to be allowed even when the business has been discontinued.

Therefore, following the decisions of the Supreme Court and of this Court, the second question referred above, is also answered against the department and in favour of the assessee. It is held that the Tribunal was legally justified in allowing deduction of the expenses.

Reference is answered accordingly.