1962 (3) TMI 4 - SC - Income Tax

Whether on the facts and in the circumstances of this case, and on a true interpretation of section 7(1) of the Indian Electricity Act and clause 9 of the Fazilka Electric Licence, 1934, the transaction, by which the Government acquired the undertaking, could be regarded as a sale within the meaning of section 10(2)(vii) of the Income-tax Act ? Held that - The High Court correctly answered the question referred to it. There was a sale in the present case of the building, machinery and plant within the meaning of clause (vii) of section 10(2) of the Income-tax Act. Appeal dismissed.

Issues Involved:
1. Interpretation of section 10(2)(vii) of the Indian Income-tax Act, 1922.
2. Whether the transaction by which the Government acquired the undertaking was a sale within the meaning of section 10(2)(vii) of the Income-tax Act.
3. Applicability of the provisions of the Indian Electricity Act, 1910, particularly section 7 and clause 9 of the Fazilka Electric Licence, 1934.
4. Determination of whether the acquisition was a compulsory purchase or a sale.

Detailed Analysis:

1. Interpretation of section 10(2)(vii) of the Indian Income-tax Act, 1922:
Section 10(1) of the Income-tax Act states that income-tax shall be payable by an assessee under the head "Profits and gains of business, profession or vocation" in respect of the profit or gains of any business, profession, or vocation carried on by the assessee. Sub-section (2) of the said section states that such profits or gains shall be computed after making certain allowances referred to in clauses (i) to (xv). Clause (vii) relates to an allowance in respect of any building, machinery, or plant which has been sold or discarded or demolished or destroyed. The second proviso to the clause states that where the amount for which any such 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 profits of the previous year in which the sale took place.

2. Whether the transaction by which the Government acquired the undertaking was a sale within the meaning of section 10(2)(vii) of the Income-tax Act:
The appellant contended that the transaction was not a sale within the meaning of section 10(2)(vii) of the Income-tax Act, arguing that the acquisition was compulsory and not voluntary. The Income-tax Officer, Appellate Assistant Commissioner, and the Income-tax Appellate Tribunal all held against the appellant, concluding that there was a sale of the building, machinery, and plant of the undertaking within the meaning of section 10(2)(vii) of the Income-tax Act. The High Court also answered the question against the appellant, leading to the present appeal.

3. Applicability of the provisions of the Indian Electricity Act, 1910, particularly section 7 and clause 9 of the Fazilka Electric Licence, 1934:
Section 3 of the Electricity Act allows the State Government to grant a licence for the supply of electric energy. Section 7 provides that the local authority or the State Government has the option to purchase the undertaking on the expiration of specified periods. Clause 9 of the Fazilka Electric Licence, 1934, specified that the option of purchase given by sub-section (1) of section 7 of the Electricity Act shall first be exercisable on the expiration of 15 years from the date of the notification of this licence and on the expiration of every subsequent period of 10 years.

4. Determination of whether the acquisition was a compulsory purchase or a sale:
The appellant argued that the acquisition was a compulsory purchase and not a sale. However, the court found that the option of purchase was the result of a mutual agreement between the applicant for the licence and the Government. The court held that the scheme of the Electricity Act and the rules made thereunder indicated that the option of purchase was not a compulsory acquisition but a sale resulting from a contractual agreement. The court observed that all elements necessary for a contract were present, including consideration, as the licence was granted on the terms specified.

Conclusion:
The court concluded that the High Court correctly answered the question referred to it. The transaction by which the Government acquired the undertaking was indeed a sale within the meaning of clause (vii) of section 10(2) of the Income-tax Act. Consequently, the appeal was dismissed with costs. The court did not find it necessary to address the larger question of whether section 10(2)(vii) of the Income-tax Act applies to a compulsory sale or to examine related decisions. The appeal was dismissed, affirming the High Court's judgment.

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