- In this reference under section 66(1) of the Indian Income-tax Act, 1922, at the instance of the Commissioner of Income-tax, Madhya Pradesh, Nagpur and Bhandara the question that the Appellate Tribunal has referred to us for opinion is :

"Whether, having regard to the language of section 12, the provision of the second proviso to section 10(2)(vii) could be applied in computing income assessable under section 12 Indian Income-tax Act ?"

The matter arises thus. The assesses, Messrs. Nandlal Bhandari and sons, Indore, which us a private limited company was the owner of a property known as "State Mill property". It was leased out to Nandlal Bhandari Mills Ltd. on a rent of Rs. 17,0000 per annum. This rent income was assessed under section 12 of the Act and the assessee was allowed in the past allowances under sub-section (3) of section 12. This property was sold on 1st August, 1955. In the assessment year 1956-57, the Income-tax Officer assessed the prop lease rent up to to 31st July, 1955, amounting to Rs. 11,900. He also held that there was a profit of Rs. 42,629 to the assessee on the sale of the property which was assessable under the second proviso the section 10(2) (vii) real with section 10(2) (vii) was inapplicable when allowance were claimed under sub-section (3) of section 12 in respect of the Income-tax Officer. In an appeal preferred by the assessee, the Appellate Assistant commissioner took the view that the sum of Rs. 42,629, which represented the amount of profit on sale of the property, was not assessable under the aforesaid proviso real with section 12(3). His reasoning was that under section 12(3) the assessee was entitled to allowances in accordance with the provisions of clause (iv) to (vii) of section 10(2) and was not made subject to any liability in respect of the profit mentioned in the second provision to section 10(2) (vii) and that clause (vii) read with section 12(3) did not deal with conditional allowance. Accordingly, the Appellate Assistant commissioner excluded the sum of Rs. 42,629 from the assessable income of the assessee. The order of the Appellate Assistant Commissioner was confirmed by the Appellate Tribunal, Bombay, in as appeal preferred by the department. The departments request for referring the question stated above was granted.

It was guided by the learned Advocate-General appearing for the department that having regard to the object and the scheme of depreciation allowances under (vi) and (via) and the balancing allowance under clause (vii), if an assessee was entitled under section 12(3) to allowances in accordance with clause (vii) of section 10(2) he was also chargeable to profits spoken of by the second proviso to clause (vii) of section 10(2). It was said that the depreciation allowances under Clauses (vi) and (via) and the balancing allowance under clause (vii) were for the purpose of enabling the assessee to recoup the entire capital cost of building, machinery or plant; that being so the substantive part of clause (vii) did not grant to the assessee any balancing allowance if the assessee was able to recover in full the written down value out of the sale price or the scrap value; that the object of clause (vii), being only to recoup the balance of the capital cost after deducting the total depreciation allowances, it was further provided by the proviso that, if the sale proceeds exceed the written down value, then such excess would be taxed as profits to the extent of the total depreciation allowances granted in the past; and that thus the second proviso took back from the assessee what was given to him by way of depreciation allowance in preceding years. Learned Advocate-General referred us to Ex parte Partington and Attorney-General for New South Wales v. Trethowan, and on the basis of these decisions proceeded to say that the second proviso was in restraint of the benefit given by clause (vii) and, therefore, if a person had been granted allowance in the past under clause (vii) the grant was subject to the liability imposed by the proviso and that, consequently, the applicability of that proviso could not be excluded in the grant of allowances under section 12(3) read with clause (iv) to (vii) of section 10(2). It was further raged that even if section 12(3) made no specific mention of the second proviso to section 10(2) (vii), the assessee would be liable to assessment in respect of the profits under that proviso as the definition of "income" given in section 2(6C) included any sum deemed to be profits under that proviso.

In our the judgment, having regard to the plain language of section 12(3), the submission put forward by the learned Advocate-General must be rejected notwithstanding the considerations of the object of clause (vii) and of the second proviso on which considerable stress was laid by him. It is well settled that in the construction of a taxing statute intendment or equitable principles cannot be imported. The meaning of a taxing provision must be ascertained from its language uninfluenced by considerations of the reason of the provision to use the often quoted expression,

"nothing is to be read in, nothing is to be implied. One can only fairly look at the language used."

Now, the material part of clause (vii) of section 10(2) reads as follows :

"10(2). Such profits or gains shall be computed after making following allowances, namely :......

(vii) in respect of any such building, machinery or plant which has been sold or discarded or demolished or destroyed, the amount by which the written down value thereof exceeds the amount for which the building, machinery or plant, as the case may be, is actually sold or its scrap value :

Provided that such amount is actually written off in the books of the assessee :

Provided further that where the amount for which any such building, machinery or plant is sold, whether 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 down value shall be deemed to be profits of the previous year in which the sale took place."

It is plain from the language of clause (vii) and the second proviso to it that whereas the clause deals with the grant of an allowance, the proviso is really a charging provision in computing the profits of a business under section 10. The proviso does not lay down any condition for the grant of an allowance under the substantive clause. It is quite true that ordinarily a proviso restricts rather than enlarges the meaning of the provision to which it is appended. But at times the legislature embodies a substantive provision in a proviso. The question whether a proviso is by way of an exception or condition to the substantive provision or whether it is in itself a substantive provision must be determined on the substance of the proviso and not its form. The decision in Rounder Urban District Council v. Taff Vale Railway Co. illustrates the position that sections, though framed as provisos to preceding sections, may exceptionally contain matter, which is in substance a fresh enactment, adding to and not merely qualifying what goes before. The decisions cited by the learned Advocate-General, namely, Ex parte Partington and Attorney-General for New South Wales v. Trethowan do not lay down any inflexible rule that a proviso must always be construed as qualifying, or as an exception to, the main provision. Here the language of the proviso is quite difference between the written down value of a building, machinery of plant in year of account and the price at which it is sold (the price not being in excess of the original cost) is deemed to be profit in the year of account and as such liable to be included in the assessable income in the year of assessment. The effect of the proviso is no doubt to take back what had been allowed by way of depreciation in preceding years. But it is one thing to say that the proviso has the above effect and quite different to say that the proviso lay down a condition under which depreciation allowance spoken of in clause (vii) can be disallowed or the amount allowed in the preceding years can be demanded back.

The true nature of the proviso has been explained by the Supreme Court in Commissioner of Income-tax v. National Syndicate. Hidayatullah J., delivering the judgment of the court, said in that case :

"These two cases deal with the second proviso to section 10(2) (vii). Clause (vii) deals with loss and the second proviso with profits; but the proviso is not an exact counterpart of the clause. The proviso enacts a fiction which the main clause does not enact. The reason for the introduction of the proviso appears to be this. Loss in business may take place in various ways. If the business requires more to run it than it produces, here is loss. Loss in business also take place if the equipment with which business is done is lost, destroyed, or depreciates or suffers in value. The law takes note of the loss, and, provided it has been computed and brought into the books of the business and written off, it can be claimed as a deduction. Profit in business, not the other hand, primarily means profit earned in the business. But if an allowance had been claimed as depreciation and had been allowed, and if the sale of the building, machinery or plant on which depreciation allowance was claimed in the past shows that there was, in fact, no depreciation but an accretion in value, the law deems that a profit had been made. The fiction thus converts that which may not be strictly profit of the business in a narrow sense, into a profit for purposes of assessment."

To the same effect are the observations of the Supreme Court in Commissioner of Income-tax v. Bipinchandra Maganlal. In regard to the allowance under clause (vii) to section 10(2), the Supreme Court has observed in that case :

"This allowance is, however, subject to an exception prescribed by the second proviso to clause (vii) sub-section (2), of section 10, that where the amount for which any building, machinery or plant is sold exceeds the written down value, so much of the excess as does not exceed the difference between the original cost and the written down value shall be deemed to be profit of the previous year in which the sale took place. In computing the profits and gains of the company under section 10 of the Act, for the purpose of assessing the taxable income, the difference between the written down value of the machinery in the year of account and the price at which it was sold (the price not being in excess of the original cost) was to be deemed to be profit in the year of account, and being such profit, it was liable to be included in the assessable income in the year of assessment. But this is the result of a fiction introduced by the Act. What in truth is a capital return is by a fiction regarded for the purposes of the Act as income. Because this difference between the price realised and the written down value is made chargeable to income-tax, its character is not altered, and it is not converted into the assessees business profits. It does not reach the assessee as his profits; it reaches him as part of the capital invested by him the fiction created by section 10(2) (vii), second proviso, notwithstanding."

In Commissioner of Income-tax v. Bipinchandra Maganlal the second proviso has no doubt been described as an exception. But the above observations make it very clear that the proviso cannot be regarded as an exception in the sense of prescribing a condition for the disallowance of the allowance or of its refund. This character of the proviso is reinforced by the definition of "income" in section 2(6C) which includes any sum deemed to be profits under the proviso in the definition of "income".

If as we think, clause (vii) deals with allowances in the computation of profits or gains of business and the second proviso with fictional profits which are liable to be included in the assessable income, then it is easy to see that the expression "he shall be entitled to allowances in accordance with the provisions of clauses........... and (vii) of sub-section (2) of section 10" used in sub-sections (3) and (4) of section 12 can have reference only to the allowance dealt with the clause (vii) and not to the liability of the assessment of fictional profits under the second proviso. A personas said to be "entitled" to a right and not to a liability. The proviso, read with section 2(6C), is really a charging provision in computing the profits of a business under section 10. It is noteworthy that sub-section (5) of section 12 makes a specific provision with regard to the inclusion of fictional profits under sub-section (2A) of section 10 in computing income, profits and gains under section 12. The absence of such an express provision with regard to fictional profits in the second proviso to section 10(2) (vii) only points to the conclusion that the legislature did not intend that these profits should be taken into account in computing income, profits and gains of an assessee under section 12. The same conclusion follows from the definition of "income" given in section 2(6C) which specifically includes "demand profits" under section 12(5) in income but says nothing about any deemed profits under sub-section (3) or (4).

In our opinion, on the language of sub-sections (3) and (4) of section 12 and of clause (vii) of section 10(2) and the second proviso to it, it is impossible to hold that, in computing income, profits and gains of an assessee under section 12, the aforesaid proviso applies when allowances are granted in accordance with section 10(2) (vii). It is unnecessary to speculate on the reason for making the second proviso to section 10(2) (vii) inapplicable in an assessment under section 12. It may well be for the fact that where an assessee lets on hire his machinery, plant, etc., and the letting amounts to a business, the case would fall under section 10; but where the letting does not amount to a business, the income is assessable under section 12.

For all these reasons, our answer to the question stated by the Tribunal is that the second proviso to section 10(2) (vii) has no applicability in computing the income, profits and gains of an assessee under section 12. The assessee shall have the costs of this reference. Counsels fee is fixed at Rs. 150.

Order accordingly.