TMI Blog1982 (3) TMI 40X X X X Extracts X X X X X X X X Extracts X X X X ..... si, Bhiwani and Hissar were taken over by the PSEB in the financial year 1962-63. The ITO, while completing the assessment for the assessment year 1963-64, observed that the " title over these three undertakings vested in the PSEB with effect from April 7, 1962 ", and that the PSEB " also fixed the purchase consideration which the assessee-company is adopting ". The assessee raised a plea that this was not a case of " sale " of the undertakings and that, therefore, no profits under s. 41(2) or capital gains under s. 45 of the Act became assessable in its hands. The assessee's objections to the levy of capital gains tax on this event were set out in a letter to the ITO dated October 31, 1967. It was pointed out that for the levy of tax on capital gains two conditions had to be fulfilled : (1) the transfer must have taken place in the previous year ; and (2) profits or gains must have arisen from the transfer. It was conceded that the first condition had been satisfied but not the second. This was because " the determination of price has not been complete ". The PSEB had taken over the assets on a particular day and had left the matter of the fixation of the compensation, which ha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as no sale deed, had been executed in regard to the immovable assets " profits or capital gains accruing out of this transaction should not be subjected to tax this year ". The ITO rejected this contention and, accepting the statement of computation of profits and gains furnished by the assessee, brought to tax a sum of Rs. 2,30,637 under s. 41(2) and a sum of Rs. 1,42,522 as the capital gain on land. The basis of these computations is also set out in the assessment order and can be explained as under: Rs. (a) Market value of all assets as per PSEB 36,96,017 Less : Liabilities of the company (Rs. 24,97,112) minus security deposits and energy bills (amounting to Rs. 6,97,596) 17,99,516 ---------------- Sale price 18,96,501 ---------------- This comprised of Rs. 5,54,360 in respect of land and the balance of Rs. 13,42,141 in respect of all the other assets of the undertaking. (b) Cost of all assets 22,51,318 Less: Cost of land 4,11,838 ---------------- Cost of assets other than land 18,39,480 --------------- (c)W.D.V. of all assets 15,23,342 Less : Cost of land 4,11,838 --------------- W.D.V. of assets other than land 11,11, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r and that the entire amount should have been allowed. But the AAC did not accept this contention as he was of opinion that the expenditure on valuation was not at all connected with the transfer of the capital assets to the PSEB. There were further appeals by the assessee to the Income-tax Appellate Tribunal (ITAT). These appeals were disposed of by separate orders dated 15th and 16th September, 1972. The Tribunal held in favour of the assessee on the issue of assessability of profits under s. 41(2) in view of the decision of this court in P. C. Gulati, Voluntary Liquidator, Panipat Electric Supply Co. Ltd. v. CIT [1972] 86 ITR 501, but held against the assessee on the issue of capital gains in view of the different and specific language of s. 45 of the Act. On the questions relating to the deductibility of the expenditure on valuation, the ITAT agreed in principle with the assessee that such expenditure was incidental to the transfer and hence allowable. However, the Tribunal found that the expenditure actually incurred on this account was only Rs. 11,340 in the previous year relevant to the assessment year 1963-64 and Rs. 12,391 in the subsequent previous year. To this extent, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 3,83,958 pertained to land and the balance of Rs. 15,50,777 to the other assets. The original cost of the land was Rs. 1,37,683 and the written down value of the other assets was Rs. 13,20,663. It was on the basis of these figures that s. 41(2) profit of Rs. 2,30,114 (to which was added a sum of Rs. 2,120 in respect of some other asset), and the capital gain of Rs. 1,37,683 on land had been calculated. (ii) The compensation of Rs. 19 lakhs due, according to the PSEB was paid in two instalments of Rs. 15 lakhs and Rs. 4 lakhs. The actual dates of payment are not available from the paper before us. But, subsequently, the Board claimed that the amount due to the assessee was only Rs. 13.34 lakhs and that Rs. 5.93 lakhs had been paid in excess. It was proposed that the sum of Rs. 5.93 lakhs would be adjusted against the amount payable to the company for the take-over of the Rohtak undertaking. (iii) The Rohtak undertaking was taken over on May 21, 1964. According to the PSEB, the assessee was entitled, to an amount of Rs. 18,96,501 out of which Rs. 6,97,596 related to consumer deposits and energy bills. The PSEB paid the balance of Rs. 1 lakhs, Rs. 9,25,000 on March 31, 1965, and R ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ions, in a case of the present type, two questions arise. The first is as to whether it could be said that the assets in question have been sold, this obviously not being a case where they have been discarded, demolished or destroyed. The second question is regarding the previous year in which the moneys payable for the assets in question became due. So far as the first question is concerned, the present case has throughout proceeded on the footing that this is a case of sale of the assets in question and it is, therefore, unnecessary to consider that issue, particularly in view of the definition of the expression " sold " set out above. The second question is as to when the moneys Payable in respect of the sale became due to the assessee. In the context of the second question it may be pointed out that under the 1922 Act the corresponding provision was contained in s, 10(2)(vii). Under the second proviso to that provision the excess in the event of a sale was " deemed to be profits of the previous year in which the sale took place ". However, where it was not a case of sale but one of receipt of compensation moneys on discardment, demolition or destruction the excess was " deemed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t the sale of the undertaking had taken place on 16th July, 1954, when the Government had acquired the company's assets and that, therefore, the balancing charge if any, should have been taxed in the assessment year 1955-56. On the other hand, it was the department's contention that since litigation was going on regarding the compensation payable to the assessee and since it was only after the compromise in 1962 that the amount was ascertained and paid to the company, the amount had been properly subjected to tax in the assessment year 1963-64. The Tribunal and, on a reference, the High Court accepted the contention urged on behalf of the department. The assessee's contention in Panipat's case [1972] 86 ITR 501 (Delhi) was that as soon as the undertaking was acquired by the Govt. of Punjab the assessee got a right to get compensation for the same and hence the compensation amounts had become due to the assessee. It was urged that, therefore, s. 41(2) should apply. It was not necessary that the amount of compensation should have been ascertained on the date of sale itself, On the other hand, it was urged on behalf of the department that in the context of s. 41 and s. 32 of the Act ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ny price was settled. It may be that this taking over of possession vested the undertaking in the Government without the price being settled, but it is impossible to say that the sale as contemplated by the Transfer of Property Act, 1882, took place without the price being settled. The transaction only becomes such a sale when the price has been settled. It was only after this price had been settled that the same became due to the assessee. Hence, it can properly be said on this reasoning that the price became due to the assessee after the compromise and hence the amount in question was to be assessed to tax in the assessment year 1963-64. In other words the court came to the conclusion that the transaction became a sale only when the price had been settled and that only after this price had been settled the same became due to the assessee. The stand of the department was, therefore, upheld. The Bombay High Court followed the above decision in Akola Electric Supply Co. P. Ltd. v. CIT [1978] 113 ITR 265. Here the assessee had been granted a licence under s. 3(1) of the Electricity Act to supply electricity within an area in the manner mentioned in and on terms and conditions sta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arch, 1962, even though the possession of the undertaking together with the assets was taken on 6th December, 1959. Since it was ascertained in March, 1962, the amount of balancing charge as contemplated by section 41(2) of the Income-tax. Act 1961, became chargeable to tax in the assessment year 1962-63." Dealing with an alternative contention urged on behalf of the assessee that the balancing charge must have been subjected to tax in assessment year.1960-61 under the second proviso to. s. 10(2)(vii) of the 1922 Act the court observed (p. 279.) "Such a contention in our opinion, cannot be accepted. The first condition essential before the second proviso can be invoked is that the amount for which any building, machinery or plant is sold must be known. Neither on December 6, 1959, nor at any time prior to March 31, 1960, the purchase price was ascertained in the present case. At no time prior to the assessment year 1960-61, was it possible for the assessee to say the actual amount for which the undertaking together with the assets was sold to the Board. If it is not possible to specify the amount it will be impossible for any assessee or the taxing authorities to treat an imagi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dicated upon during the relevant previous year and so the moneys payable in respect of the assets could not be said to have become due in the respective previous years with which we are concerned. The case is not distinguish able in principle from the Gulati (86 ITR 501) and Akola (113 ITR 265) cases. We, therefore, follow the view which has already been taken by this court and hold that the Tribunal was right in holding that the profits under s. 41(2) in respect of the respective transactions were not taxable in the assessment years under consideration. The first two questions are, therefore, answered in the affirmative and in favour of the assessee. Now we come to the third question which relates to the assessability of capital gains on the transactions in the present case. There, is no dispute that capital gains tax is chargeable on the transactions, The question is regarding the year in which the capital gains tax will be assessable. As already mentioned, the Tribunal has decided this point against the assessee and held that the principle of the decision in the case of Panipat Electric Supply Co. (1972] 86 ITR 50l (Delhi), cannot apply in the context of s. 45 of the Act. It i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vernment. Section 6 confers on the State Electricity Board, the State Government and a local authority an option Of purchasing the undertaking of a licensee on the expiry of the period of his licence. The detailed procedure prescribed by these sections is immaterial for our present purpose. It is only necessary to mention that under these provisions the State Govt. may require the licensee to sell the undertaking to the State Govt., the State Electricity Board, a local authority or a purchaser designated by it and it shall be obligatory on the licensee to sell the undertaking to such person. The sale in pursuance of this direction will take place in the normal course and the price payable to the licensee will be determined in accordance with s. 7A. Section 5(3), however, provides that where the State Govt. issues any notice to the licensee to sell the undertaking, " it may by such notice require the licensee to deliver, and thereupon the licensee shall deliver on a date specified in the notice the undertaking to the designated purchaser pending the determination and payment of the purchase price of the undertaking." and adds a proviso that the purchaser should pay the licensee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... elt out, by these provisions between the physical take-over of the undertaking on its delivery by the licensee to the would be purchaser on the one hand and an actual sale or transfer of title in pursuance of the option exercised that is also envisaged by these, provisions. Learned counsel contended that delivery of possession of the undertaking to the future vendee and its vesting in possession in him are provided for in the statute even in anticipation of the actual sale and its completion in view of the fact that the business of the undertaking involves the supply of a very essential commodity and it is absolutely imperative that a continued and uninterrupted supply of electrical energy to the consumers must be achieved in public interest. The statute still envisages that a sale had to take place in the normal course in pursuance of the exercise of option by the PSEB. Learned counsel contended, relying upon certain observations in the Panipat case [1972] 86 ITR 501 (Delhi), that such a sale was not and would not be complete until the price was determined in consideration of which the sale was to be effected. Interesting as these arguments are, we do not think we can permit the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oting that the transfer had taken place during the relevant previous year. In the statement of case also it has been mentioned that the electricity undertakings were taken over by the Electricity Board on 8th April, 1964, in regard to the first three undertakings and on May 21, 1964, in regard to the last undertaking. It is significant in this context that under s. 45 read with s. 2(47), capital gains may arise not only in the event of a sale but even in the event of a " transfer " taking place. There can be no doubt that where an undertaking is delivered to a purchaser or would be purchaser under ss. 5 or 6 of the Electricity Act, it vests in the latter from that date. Thereafter, there is no question of the licensee getting back the undertaking or any rights therein under any circumstances. His only right will be to have the compensation or price determined and paid to him in accordance with law. It can, therefore, be well contended that on such delivery as is contemplated by ss. 5 and 6 there is a transfer of the undertaking by the operation of law. This may itself be construed as the sale: vide CIT v. Liquidators, Hubli Electricity Co. Ltd. [1969] 73 ITR 157 (Mys). Or it may be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... statute (for example see s. 155(7A), (8A), (9) and (10)) but cannot preclude the department from completing the assessment on such materials as may be available by the time of the assessment. The principle is well established and we shall only refer to certain decisions cited by Sri P. N. Misra on behalf of the Revenue on this aspect. In CIT v. Chunilal V. Mehta Sons P. Ltd. [1971] 82 ITR 54 (SC), the assessee Was the managing agent of a company and was entitled to continue as such for a period of 21 years on certain conditions as to remuneration, Under cl. 14 of the agreement if it was deprived of its managing agency for any reason other than those specified in cl. 15, it was entitled to receive compensation or liquidated damages of a sum equal to an aggregate monthly salary at not less than Rs. 6,000 p.m. for the unexpired period out of 21 years. In April, 1951, the shares of the company were acquired by group of shareholders and the company passed a resolution terminating the managing agency of the assessee. This was on April 23, 1951. The managing company was prepared to pay Rs. 2,34,000 as compensation calculated at Rs. 6,000 p.m. but the respondent refused to accept that a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e capital gains at Rs. 90,867 and passed a fresh order of assessment. On appeal, the assessee contended that the decision of the subordinate judge had been appealed against by the State before the High Court contending that the quantum of compensation a warded by the Land Acquisition Officer, viz., Rs. 38,525, should be restored and to this extent the acquisition price should be reduced. It was held by the Kerala High Court that the authorities were justified in taking the quantum as determined by the subordinate judge and imposing tax on that basis. Merely because there was a possibility of the quantum determined by the subordinate judge being varied in appeal by the High Court or in further appeal by the Supreme Court, where such an appeal would lie, it was not necessary for the I.T. authorities, either not to assess at all the income which had arisen during the year, or to keep the assessment open till the matter is finally decided by the High Court or the Supreme Court. It was held that the sum of Rs. 90,867 was validly assessed and that the assessee should pursue his remedies under the Act if the amount of compensation was reduced subsequently. Applying these principles, we ha ..... X X X X Extracts X X X X X X X X Extracts X X X X
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