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Issues Involved:
1. Compulsory acquisition and transfer of capital assets. 2. Period of transfer of capital assets. 3. Capital gains arising during a specific period. 4. Accumulated profits in the accounting period. 5. Loan or advance payment to the assessee. 6. Treatment of loan as dividend. 7. Disallowance of interest income. 8. Inclusion of income arising to the wives of the assessee. Issue-wise Detailed Analysis: 1. Compulsory Acquisition and Transfer of Capital Assets: The court examined whether 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. It was concluded that the acquisition was not a compulsory acquisition but a sale under an agreement, as held by the Supreme Court in Fazilka Electric Supply Co. Ltd. v. CIT [1962] 46 ITR 127. Therefore, it was a voluntary sale effective from 25th November, 1942. 2. Period of Transfer of Capital Assets: The court analyzed whether the transfer of the capital asset took place any time between April 1, 1946, and March 31, 1948. It was determined that the transfer did not occur within this period. The court noted that this question should have been ascertained in the assessment proceedings of the company concerned. 3. Capital Gains Arising During a Specific Period: The court considered whether capital gains amounting to Rs. 2,05,58,423 arose to the company during the period from April 1, 1946, to March 31, 1948. It was held that the capital gains did not arise during this period. The court emphasized that capital gains could only be included at the time they are ascertained, which in this case was in 1954. 4. Accumulated Profits in the Accounting Period: The court examined whether the amount of Rs. 2,05,58,423 or any part thereof formed part of the accumulated profits possessed by the company in the accounting period relevant to the assessment year 1961-62. It was concluded that there were no accumulated profits of the company during the period 1st April, 1945, to 31st March, 1948. The court noted that the company did not possess the amount, as it was held by the Custodian of Evacuee Properties in Lahore. 5. Loan or Advance Payment to the Assessee: The court considered whether an amount of Rs. 45 lakhs was paid by the company to the assessee by way of advance or loan or was paid on behalf of or for the benefit of the assessee. It was found as a fact that the sum of Rs. 45 lakhs paid to the assessee was a loan or advance, and this was a question of fact, so the court did not answer this question. 6. Treatment of Loan as Dividend: The court examined whether the amount of Rs. 45 lakhs debited to the account of the assessee in the books of the company should be treated as a dividend under the provisions of section 2(6A)(e). It was held that the sum of Rs. 45 lakhs could not be treated as a dividend, as the company did not possess the accumulated profits. 7. Disallowance of Interest Income: The court considered whether the amount of Rs. 2,15,250 out of the interest claimed was rightly disallowed in computing the assessee's income. It was concluded that the question of deduction of interest had to be examined by reference to the position of loans, investments, and unproductive expenditure at the beginning and the end of the year. The court answered the question in the affirmative, in favor of the department and against the assessee, based on the inadequacy of the material available to determine how the interest was to be spread over the business and other expenditures. 8. Inclusion of Income Arising to the Wives of the Assessee: The court examined whether the income of Rs. 10,501 arising to the wives of the assessee should be included in the total income of the assessee by invoking section 16(3) of the Act. It was held that the income derived by Shrimati Dinesh Nandini should be excluded from tax altogether in the hands of the assessee. In the case of Shrimati Asha Devi, only the amount arising out of an investment of Rs. 88,100 should be taxed, and the remaining amount should be excluded. Conclusion: The court concluded that the compulsory acquisition was not a compulsory acquisition but a voluntary sale. The transfer of capital assets did not take place between April 1, 1946, and March 31, 1948. The capital gains did not arise during this period, and there were no accumulated profits of the company during the relevant period. The sum of Rs. 45 lakhs paid to the assessee was a loan or advance and could not be treated as a dividend. The interest disallowance was upheld due to inadequate material. The income arising to the wives of the assessee was partially excluded from the assessee's total income. The court awarded costs to the assessee, with counsel's fee of Rs. 550.
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