A) ABSTRACT / HEADNOTE

The landmark judgment of The Liquidators of Pursa Ltd. v. Commissioner of Income-tax, Bihar ([1954] SCR 767) is a significant decision interpreting the scope of Section 10(2)(vii) of the Income-tax Act, 1922, particularly in the context of the treatment of capital gains arising from the sale of business assets during the winding-up process of a company. The case involved the central question of whether surplus income earned from the sale of plant and machinery by the liquidated company could be taxed under Section 10(2)(vii), second proviso, when those assets were not used during the accounting year.

The Supreme Court delved into the essential requirement under the section that the machinery must have been “used” during the relevant accounting year to attract the deeming provision of profits. It firmly ruled that merely retaining the assets without utilizing them in the production process does not suffice. Therefore, the Court overturned the High Court’s ruling which had affirmed taxability on the surplus from such sale.

The judgment carefully distinguishes between carrying on business and realization of assets during liquidation. It holds that the sale of machinery in this case was not an operational transaction of a running business but rather a winding-up measure, and thus could not be taxed under the impugned section. The ruling relies on settled principles and authoritative decisions such as Commissioners of Inland Revenue v. Fraser (24 Tax Cases 498) and Commissioner of Income-tax v. Shaw Wallace & Co. (L.R. 59 I.A. 206). The decision clarified important aspects of capital gains taxation and highlighted when a finding of fact by a Tribunal may be interfered with.

Keywords: Income-tax Act, Section 10(2)(vii), plant and machinery, liquidation, capital gains, use of assets, realisation of assets, winding-up, carrying on business, Supreme Court of India

B) CASE DETAILS

i) Judgement Cause Title: The Liquidators of Pursa Limited v. Commissioner of Income-tax, Bihar

ii) Case Number: Civil Appeal No. 33 of 1953

iii) Judgement Date: 9th February 1954

iv) Court: Supreme Court of India

v) Quorum: Mehr Chand Mahajan C.J., S. R. Das J., Ghulam Hasan J., Jagannadhadas J.

vi) Author: S. R. Das J.

vii) Citation: [1954] SCR 767

viii) Legal Provisions Involved: Section 10(1) and Section 10(2)(vii) of the Income-tax Act, 1922 Link to Section

ix) Judgments Overruled by the Case: None

x) Case is Related to which Law Subjects: Taxation Law, Corporate Law, Liquidation Law, Interpretation of Statutes

C) INTRODUCTION AND BACKGROUND OF JUDGEMENT

The appeal before the Hon’ble Supreme Court arose from a dispute between the liquidators of Pursa Ltd., a sugar manufacturing company, and the Commissioner of Income-tax, Bihar, concerning the assessment year 1945–46. The company, incorporated under the Indian Companies Act in 1905, had ceased business operations and sold its assets, including machinery and plant, to Dalmia Jain & Co. Ltd. during the accounting year. The Income-tax authorities sought to tax the surplus derived from the sale under the second proviso to Section 10(2)(vii) of the Income-tax Act, 1922, by deeming it as “profits” of the business carried on by the assessee.

The company disputed this position, asserting that it had ceased its operational business before the sale, and since the machinery was not used in the accounting year, the section could not apply. The issue traveled from the Income-tax Tribunal to the High Court and finally reached the Supreme Court through a special leave petition granted to the assessee.

D) FACTS OF THE CASE

The assessee company, Pursa Ltd., was engaged in sugarcane cultivation and sugar manufacturing. Negotiations for selling the company’s sugar factory began in 1943 and culminated in an agreement with Dalmia Jain & Co. Ltd.. A written agreement dated 7th December 1943 was executed to sell all lands, buildings, machinery, and plant for ₹28,00,000. On 10th December 1943, possession was handed over. During this time, the machinery was not used for production or manufacturing purposes but was maintained in trim only.

The company retained sugar stock worth ₹6,00,000, which it sold over a period extending up to June 1944. The company was put into voluntary liquidation on 20th June 1945, following complications in the transfer of some landed properties. The Income-tax Officer, relying on Section 10(2)(vii), second proviso, added a surplus of ₹13,05,144 to the company’s income as taxable profits.

The Tribunal upheld this view, but the Supreme Court was called upon to decide whether the Tribunal’s findings were legally sustainable and whether the provision could apply when the machinery was not used during the accounting year.

E) LEGAL ISSUES RAISED

i) Whether the surplus of ₹13,05,144 arising from the sale of plant and machinery was taxable as “profits” under the second proviso to Section 10(2)(vii) of the Income-tax Act, 1922, even though the machinery had not been used during the accounting year?

F) PETITIONER / APPELLANT’S ARGUMENTS

i) The counsels for the Appellant contended that the plant and machinery were not used at all during the accounting year. Hence, the machinery does not qualify under Section 10(2)(vii). They emphasized that the provision is only applicable when the assets were used for business during the year in question. They also argued that the sale was part of liquidation, not part of a business carried on.

They relied upon the reasoning in Commissioner of Income-tax v. Shaw Wallace & Co., L.R. 59 I.A. 206, where the Privy Council held that mere realization of assets is not “business” [1]. They also cited Commissioners of Inland Revenue v. Fraser, (24 Tax Cases 498), which held that a mere isolated act of sale or realization does not amount to “carrying on business” [2].

G) RESPONDENT’S ARGUMENTS

i) The counsel for the Respondent (Revenue) contended that the company had not been liquidated during the accounting year. They maintained that the sale occurred while the company was still a going concern, and therefore, the profit was part of its business income. They asserted that the company continued business operations until June 1944 by selling its sugar stocks and incurring business-related expenses. They also contended that the mere fact of non-use of the machinery does not exempt it from taxability if the company was otherwise operational.

H) RELATED LEGAL PROVISIONS

i) Section 10(1): Tax is payable in respect of profits or gains of any business, profession, or vocation carried on by the assessee Link.

ii) Section 10(2)(vii), Second Proviso: Where sale proceeds of plant/machinery exceed the written down value, the excess shall be deemed to be profits of the previous year in which the sale occurred.

I) JUDGEMENT

a. RATIO DECIDENDI

i) The Supreme Court ruled that the essential precondition for invoking the second proviso to Section 10(2)(vii) is actual user of the plant/machinery in the relevant accounting year. Since the assessee did not use the machinery during the period, the deeming fiction could not apply. The Court further held that the sale of plant and machinery was not a business operation but part of realisation of assets during winding-up. Thus, it cannot be taxed under the said section.

b. OBITER DICTA 

i) The Court observed that even though the company sold sugar stocks and incurred expenses, such activities did not establish that the machinery was used or that the business involving its usage continued. It also clarified that the Tribunal’s findings can be interfered with if there is misapplication of legal principles.

c. GUIDELINES 

• Mere ownership or sale of business assets during liquidation does not imply “carrying on business.”

• For Section 10(2)(vii) to apply, actual use of the asset during the accounting year is mandatory.

• Courts may intervene in Tribunal findings if:

  • They misconstrue statutory language.

  • There is no evidence for the findings.

  • The findings contradict established facts.

J) CONCLUSION & COMMENTS

The judgment in The Liquidators of Pursa Ltd. v. Commissioner of Income-tax, Bihar is a defining precedent that restricts the arbitrary application of taxation provisions on realisation transactions undertaken during company liquidation. It protects companies from tax liability on capital gains where the assets were not used in the accounting year and the sale was a wind-up measure, not part of the ongoing business. The ruling emphasizes judicial oversight over factual findings where legal misinterpretations are evident and reiterates the sanctity of proper statutory interpretation in tax jurisprudence. It remains a cornerstone judgment for tax litigation involving liquidation and asset realisation scenarios.

K) REFERENCES

a. Important Cases Referred

[1] Commissioner of Income-tax v. Shaw Wallace & Co., L.R. 59 I.A. 206

[2] Commissioners of Inland Revenue v. Fraser, (24 Tax Cases 498)

b. Important Statutes Referred

• Income-tax Act, 1922, Section 10(1), Section 10(2)(vii) Link to Indian Kanoon