TMI Blog1981 (3) TMI 57X X X X Extracts X X X X X X X X Extracts X X X X ..... disallowance of certain interest income and the inclusion of some income arising in favour of the wives of the assessee in his total income under s. 16(3) of the Act, Before referring to the essential facts of the case, it may be useful here to set out the questions which have been referred to us. They are: " 1. Whether, on the facts and in the circumstances of the case, the compulsory acquisition of the Lahore Electric Supply Undertaking under the Indian Electricity Act, 1910, resulted in a transfer of capital assets within the meaning of section 12B of the Indian Income-tax Act, 1922 ? 2. If the answer to question No. 1 is in the affirmative, whether, on the facts and in the circumstances of the case, the transfer of the capital asset represented by the undertaking belonging to the company took place any time in the period from April 1, 1946, to March 31, 1948 ? 3. If the answer to question No. 2 is in the affirmative, whether, on the facts and in the circumstances of the case, capital gains amounting to Rs. 2,05,58,423 arose to the company any time during the period from April 1, 1946, to March 31, 1948 ? 4. If the answer to question No. 3 is in the affirmative, w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... peared in the accounts of M/s. South Asia Industries (P.) Ltd., as a capital reserve. This included an amount of Rs. 2,05,58,422 which was described as being " difference in Pakistan claims and block assets transferred ". On the other side of the balance-sheet, there was debit of Rs. 1,39,87,072 due from the Govt. of West Pakistan. There was note that the company was declared an evacuee by the Custodian of Evacuee Properties of Lahore in which an appeal had been filed. Shortly put, this entry is really a reflection of the acquisition of the company's assets in Lahore by the Govt. of Punjab. The difference of Rs. 2,05,58,422 just mentioned was on account of the difference between the book value of the assets taken over and the compensation computed to be payable to the company in question. If that money had been received by the company, probably there will be no problem in this case. In fact, the company did receive some amount, but not all the amount. It had still to get Rs. 1,39,87,072, which was vested in the Custodian of Evacuee Properties at Lahore. The other amounts had been received by the company under an agreement dated 2nd June, 1945. The history of how this sum came to be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... they arose in the period 1st April, 1946, to 31st March, 1948, or if they arose after 1st April, 1956 if there are other capital gains, which the company had or are to be deemed to have, arisen either before 1st April, 1946, or between the period 31st March, 1948, and 1st April, 1956, then they are not to be included in the term " accumulated profits ". The interpretation of this section has led the ITO, the AAC and the Tribunal to analyse this question while dealing with the assessee's case. We have been of the view that the question whether the accumulated profits include capital gains is really inter-connected with the definition of " capital gains " in s. 12B of the Indian I.T. Act, 1922. The definition of " capital gains " has also been undergoing a change. There were no capital gains chargeable before s. 12B was enacted. The section was first inserted by the Income-tax and Excess Profits Tax (Amendment) Act, 1947, which taxed capital gains arising after 31st March, 1946. In 1949, the Indian Finance Act provided that capital gains could not be charged except when they arose before 1st April, 1948. .The result was that-capital gains arising between 31st March, 1946, and 1st ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re on 25th November, 1942. The Government had the option to purchase the undertaking on giving a two years' notice. If they had not given the notice, then the licence would be renewed up to 1962. Notices were actually given to terminate that licence some time in 1942. The company contended that the notices were ineffective as they had not been served and they filed a suit in the court. The Government then issued a requisition order under the Defence of India Rules. The suit filed by the company was transferred to the Lahore High Court and in that court the requisition order under the Defence of India Rules was also challenged. On 14th January, 1943, the Lahore High Court held that the acquisition order was ultra vires. An appeal was taken to the Federal Court. On 15th March, 1943, the Government issued an order under r. 81(3) of the Defence of India Rules taking over the control of the undertaking. On 17th April, 1944, the Lahore High Court decided the suit against the company and held that the notices issued by the Government were valid. The effect of these notices would be to terminate the licence on 25th November, 1942. Then there were certain agreements between the Government a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as held by the Supreme Court in Fazilka Electric Supply Co. Ltd. v. CIT [1962] 46 ITR 127, that the taking over of assets belonging to the electric supply company was a sale and in such a case the excess realised by the sale would be taxable under s. 10(2)(vii). It would follow that this excess which is taxable could be determined only after the sale price had been determined. In the Bombay High Court decision in Akola Electric Supply Co. P. Ltd. v. CIT [1978] 113 ITR 265, it was held that although the possession vested in the board at an earlier date, the transaction became a sale only when the price was settled because it was only then that it became due to the assessee. This judgment also relied on an earlier judgment of this court in P. C. Gulati, Voluntary Liquidator, Panipat Electric Supply Co. Ltd. v. CIT [1972] 86 ITR 501. In that case the Government had acquired an electric supply undertaking and possession was taken in 1954. A suit for compensation was filed which resulted in a compromise in 1962. The question was whether the sale took place in 1954 or in 1962. It was held that the amount due to the assessee remained inchoate and unknown till it was ascertained as a resul ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for the department wished us to ask for supplementary statement. We, however, find that there has been no attempt to place on record the assessments of any of the years of the Lahore Electric Supply Co. Ltd. The whole contention raised for the department has been based on the balance-sheet of the Lahore Electric Supply Co. Ltd. as it appears on 31st March, 1960. Turning now to that balance-sheet, some interesting facts are disclosed. Although the reserves and surplus show an amount of Rs. 2,09,00,000 out of which a sum of Rs. 2,05,58,422.77 is the difference between the Pakistan claims and block assets, a sum of Rs. 1,39,87,072 is shown on the other side as being with the Custodian of Evacuee Properties, Lahore. The Tribunal and the authorities below have treated this as belonging to the company. We asked learned counsel for the department whether all the other displaced persons in India whose property had vested under the Custodian of Evacuee Properties in Pakistan were being treated as holding these assets which were held by the Custodian. We found that this was not being done in the case of any other assessee. As we have indicated, if this question had arisen in the case of M/ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fits if the Custodian of Evacuee Property in another country possesses an amount which is to be paid to the company. This does not appear to be possession in any sense of the word. Therefore, it clearly appears to us that the sum of Rs. 1,39,87,072 which the company possessed was not with it. It may also be mentioned that this sum of Rs. 1,39,87,072 was only ascertained in 1954. It could be shown in the balance-sheet for 1959-60 because 1954 was six years earlier, but certainly it could be difficult to say that this money had come to the company in 1946, because it was not even known at that time. The other sum of rupees one crore odd, the remainder of which appears on the left hand side of the balance-sheet as part of the sum of Rs. 2,09,00,000 odd was received by the company in 1945. This was before the capital gains tax was revived for the first time. At that time, i.e., when it was received, it could not be taxed as a capital gain. It could, therefore, not form part of the accumulated profits. The question, therefore, boils down to this, that the company did receive a sum of rupees one crore as compensation for the acquisition of its assets or transfer of the same. But, this wa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as whether this was a compulsory acquisition or not. It was held by the Supreme Court in Fazilka Electric Supply Co. Ltd. v. CIT [1962] 46 ITR 127, that an acquisition made under the conditions of the licence was not a compulsory purchase but a sale under an agreement. That contention would also govern the present case. We would, therefore, come to the conclusion that prima facie this is not a case of compulsory acquisition. However, as this decision is being recorded in the case of a shareholder and not of the company, it is subject to the reservation that the company might be able to establish that this was a case of compulsory acquisition dependent on certain facts and circumstances which are not now before us. For the purpose of this case, however, it must be held to be a voluntary sale, which in terms of the agreement would be effective from 25th November, 1942. We would accordingly find that the questions framed relating to this matter have to be answered thus. We would hold on question No. 1 that the compulsory acquisition was not a compulsory acquisition and was, therefore, a sale as held by the Supreme Court in the case of Fazilka Electric Supply Co. Ltd. [1962] 46 ITR 1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eet of the assessee. Even a reference to annex. " N ", which is the balance-sheet of the assessee, does not show how the loans amounting to Rs. 58 lakhs are to be divided amongst the assets. This point was also not raised in any great detail before us. So, we would answer the question referred to us in the affirmative, in favour of the department and against the assessee. Our answer, however, is based on the inadequacy of the material available to us for determining how the interest is to be spread over the business expenditure and the other expenditure of the assessee. Turning now to 8th and the last question, which concerns the income of Rs. 10,501 arising to the wives of the assessee, the problem is whether this amount is to be included in the total income of the assessee by invoking s. 16(3) of the Act. Section 16(3) states that if income arises from assets directly or indirectly transferred to the wife by the husband otherwise than for adequate consideration, the income is to be included in the husband's income. The contention of the assessee was that the income received by the wives was out of savings effected from money given to them for household expenses. The income was ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erived an income of Rs. 10,104. The obvious result would be that the amount which could be included in the husband's income would be the income arising from the investment of Rs. 88,100, and the remaining amount could not be assessed in the hands of the present assessee. However, if the amount is assessed in the name of the wife also, it would mean the tax on the amount is being recovered from two persons which is opposed to the general rule for construing taxation statutes. Though there appears to be no direct case on the point, it seems apparent that in this case either Shrimati Asha Devi should not have been taxed at all or, if she was to be taxed, then the present assessee cannot be assessed for the same income which had already been taxed. Unfortunately, the provisions of s. 16(3) are silent on the question of double taxation nor has this point been expressly referred to in the Tribunal's judgment. So, after having mentioned the point, we would say that out of the income of the wives, the income derived by Shrimati Dinesh Nandini has to be excluded from tax altogether in the hands of the assessee, and in the case of Shrimati Asha Devi, only the amount arising out of an investm ..... X X X X Extracts X X X X X X X X Extracts X X X X
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