TaxTMI 
TaxTMI 
1972 (4) TMI 3
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....trical undertaking belonging to the assessee at the expiry of the period of the licence under the provisions of section 7(1) of the Indian Electricity Act, 1910, on giving the requisite notice. Such a notice was given on 4th July, 1952, and the Government took possession of the undertaking on the midnight of 16th July, 1954. The assessee-company, being aggrieved, filed a suit for the recovery of Rs. 13,88,371.25. This suit was eventually compromised and the assessee agreed to accept a sum of Rs. 2,50,000 in full and final settlement of its claim against the Government. One of the terms of the compromise was that the Punjab State Electricity Board would pay a sum of Rs. 1,35,033 to the Punjab State Government (in addition to the amount of Rs. 2,50,000), on behalf of the assessee-company on account of the balance of the loan advanced by the Government to the assessee, which was outstanding on the date of the take-over. This compromise was effected on 7th April, 1962. At the time of making the assessment for the assessment year 1963-64, the Income-tax Officer added a sum of Rs. 1,81,772 as profit under section 41(2) of the Income-tax Act, 1961, as representing the difference between t....
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....osition was put to counsel for the parties, they agreed that the real controversy in this case was as to whether the amount in question could be charged to tax in the previous year relating to the assessment year 1963-64 and not as to whether the sale took place in 1954. The difference between the two propositions becomes more obvious by reference to section 41(2) of the Income-tax Act, 1961. The said sub-section reads as hereunder : "Where any building, machinery, plant or furniture which is owned by the assessee and which was or has been used for the purposes of business or profession is sold, discarded, demolished or destroyed and the moneys payable in respect of such building, machinery, plant or furniture, as the case may be, together with the amount of scrap value, if any exceed the written down value, so much of the excess as does not exceed the difference between the actual cost and the written down value, shall be chargeable to income-tax as income of the business or profession of the previous year in which the moneys payable for the building, machinery, plant or furniture became due : Provided that where the building sold, discarded, demolished or destroyed is a buildin....
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....and the written down value shall be deemed to be profits of the previous year in which the sale took place : Provided further that where any insurance, salvage or compensation moneys are received in respect of any such building, machinery or plant which has been discarded or demolished or destroyed, and the amount of such moneys does not exceed the written down value, the amount allowable under this clause shall be the amount, if any, by which the difference between the written down value and the scrap value exceeds the amount of such moneys: Provided further, that where any insurance, salvage or compensation moneys are received in respect of any such building, machinery or plant as aforesaid, and the amount of such moneys exceeds the difference between the written down value and the scrap value no amount shall be allowable under this clause and so much of the excess as does not exceed the difference between the original cost and the written down value less the scrap value shall be deemed to be profits of the previous year in which such moneys were received : Provided further that for the purposes of this clause, the original cost of a building, the written down value of which ....
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....ice, which was the subject-matter of litigation, did not alter the date of the sale. He has also cited Fazilka Electric Supply Co. Ltd. v. Commissioner of Income-tax ; which is a decision of the Supreme Court concerned with the acquisition of a similar undertaking on 23rd July, 1949. In that case an amount of Rs. 77,000 was estimated by the Income-tax Officer as being the amount subject to tax under section 10(2)(vii) of the, Act of 1922. It was held by the Supreme Court that there was a sale within the meaning of the second proviso to section 10(2)(vii). On an analysis of the facts of the case, it appears that in that case the High Court found that the price had been fixed in accordance with the licence and that the compulsory acquisition under section 7(1) of the Indian Electricity Act, 1910, was a sale within the meaning of section 10(2)(vii). It was held by the Supreme Court as follows : "On behalf of the appellant it has been contended, somewhat faintly, that all the elements necessary to constitute a contract are not present here. We are unable to agree. There was an undertaking on the part of the applicant for the licence to sell the undertaking to the local authority or Go....
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.... consideration is, as to whether the amount in question is taxable in the assessment year 1963-64 as held by the Tribunal. This depends on the meaning to be given to the words "became due" occurring at the end of section 41(2) of the Income-tax Act, 1961. The rival contentions of the parties on this point are that the counsel for the assessee contends that the amount became due in July, 1954, though the exact liability was unascertained on the date of the acquisition by the Government of Punjab. On the other hand, counsel for the revenue contends that the amount cannot be said to have become due till the amount was ascertained. He contends that it was only after the compromise in the suit that the amount could be said to be due. In support of the contention that the amount became payable on the date of the sale within the meaning of section 41(2) of the Act, Mr. K. K. Jain has referred to the decision of the Supreme Court in E. D. Sassoon & Co. Ltd. v, Commissioner of Income-tax and relied on certain passages therein. He contends that the policy of the Act is to make income taxable when it is received, accrues or arises. These three are distinctive terms. Lord Justice Fry's judgme....
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....o are entitled to receive it on the date on which it is actually received or became receivable." The judgment in E. D. Sassoon & Co. Ltd.'s case, already referred to, was also referred to in this judgment, and if was, pointed out that the test for ascertaining whether profits had accrued or arisen was whether the person who was entitled thereto had a right to claim such profits. Mr. Jain contends that, in view of this decision of the Supreme Court, the right to get compensation for the acquisition accrued to the assessee on the date of the sale and the computation of the actual amount did not delay the payability of the amount to the date of ascertainment. In other words, his contention is that the amount to be taxed under section 41(2) of the Act accrued to the assessee on the date of the taking over of the undertaking on 16th July, 1954, and was always a liability of the Punjab Government, in spite of the fact that the actual amount was not ascertained till the compromise in April, 1962. Mr. Jain has also referred to the judgment in Commissioners of Inland Revenue v. Newcastle Breweries Ltd. In that case a large stock of rum belonging to the assessee was taken possession of by ....
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....s received at the time of sale, which was certainly not the final amount receivable by the assessee. In this sense, the actual profit remained unascertained till the final decision of the war compensation court in November, 1921, which led to the payment of the balance of the price to the assessee in January, 1922. Mr. G. C. Sharma, learned counsel for the revenue, has submitted that concepts relating to ordinary income should not be applied in construing section 41(2) of the Act. He pointed out that this is a special provision which has as its object the inclusion of certain sums which are not ordinarily income in the taxable income of an assessee, When the capital assets of an assessee have been subjected to depreciation over a number of years, an assessee enjoys the benefit of deductions under the relevant provisions of the Income-tax Act, viz., section 10(2)(vi) of the Act of 1922, and section 32 of the Act of 1961. Having enjoyed this benefit he is subjected to tax under section 10(2)(vii) or section 41 of the two Acts, if he eventually obtains more than the depreciated value of the assets at a later date. On the other hand, he gets an additional benefit if the property is di....
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.... is well-founded. When the section now in question, i.e., section 41(2), is analysed, it merely states that when a building, machinery, plant or furnitue is sold and the price received for the same is more than its written down value, the excess becomes chargeable to income-tax. In case this excess exceeds the difference between the actual cost and the written down value that part of the excess has to be disregarded, but the remaining excess has to be charged as income pertaining to the previous year in which the "moneys payable", i.e., price, became due. The words that need to be construed here are : "became due". The question to be asked is : When did the price become due? On applying Mr. Jain's contention based on the parallel of accrued income, the price became due when the property was taken over by the Government. According to Mr. Sharma, the price cannot become due till it becomes ascertained : In applying a provision like the present, we have to make a reasonable construction based on the practical method by which the assessee can claim a deduction. If the property is compulsorily acquired for less than its written down value, the assessee has to get a deduction under sect....