1968 (10) TMI 23 - HC - Income Tax

Capital gains - assessee is a Electricity Company taken over by the Government - controversy regarding the amount of compensation which was referred to arbitration and the award was given on July 15, 1960 - Delivery of the undertaking was being given on May 3, 1944 - Since, however section 12B of the Act was not introduced in the year 1944, no capital gains could be charged to tax

Summary

Issues:
- Determination of capital gains tax liability on the sale of an undertaking by the assessee.
- Interpretation of the date of sale for tax purposes.
- Application of section 12B of the Indian Income-tax Act, 1922.
- Assessment of compensation for compulsory purchase of the undertaking by the Government of Bombay.
- Consideration of possession delivery as a factor in determining the date of sale.
- Analysis of the valuation date for the market value of the undertaking.

Analysis:
The judgment pertains to the Hubli Electricity Company Limited, which had its license revoked by the Government of Bombay in 1944, leading to a compulsory purchase of the undertaking. The controversy arose regarding the capital gains tax liability on the sale of the undertaking. The Income-tax Officer proposed to add a specific amount as capital gains for the assessment year 1961-62. The key contention was whether the sale occurred in 1944 when possession was taken over by the government or in 1960 when the compensation amount was determined by an arbitrator.

The court analyzed the provisions of the Indian Electricity Act, specifically section 5, which outlined the process for compulsory sale of a licensee's undertaking upon license revocation. The clause (d) of section 5 empowered the State Government to purchase the undertaking if no other purchase had been made within a reasonable time. In this case, the Government of Bombay exercised this option on April 29, 1944, directing the assessee to sell the undertaking.

The court emphasized the significance of possession delivery as a crucial factor in determining the date of sale. It noted that possession was handed over to the government on May 3, 1944, and the dismantling of the installation subsequently took place. The court opined that the sale was not postponed until the compensation amount was determined by the arbitrator in 1960. The valuation date for the market value of the undertaking was deemed to be May 3, 1944, as per the offer made by the Government of Bombay and the arbitrator's decision.

Based on the analysis, the court concluded that the sale of the undertaking occurred in 1944 when possession was delivered, and thus, there was no capital gain liable for taxation under section 12B of the Indian Income-tax Act, 1922, for the assessment year 1961-62. Therefore, the sum proposed as capital gains was not deemed taxable. The judgment favored the assessee, who was also awarded costs including advocate's fee.