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TMI Blog1977 (8) TMI 35X X X X Extracts X X X X X X X X Extracts X X X X ..... e Electricity Act. Such option was to be exercised on expiration of 30 years computed from the date of notification of the licence. The licence further provided that in case the Government exercised the option to purchase, the purchase value would be determined in the manner laid down in the first proviso to section 7(1) of the Electricity Act. Under the second proviso to section 7(1), 20% was fixed as the amount to be added to the value of lands, buildings, works, materials and plant, determined under the first proviso to section 7(1) on account of the compulsory purchase. The period of 30 years expired on December 6, 1959. By a notice dated November 27, 1957, the local Government represented by the Bombay State Electricity Board (hereinafter referred as "the Board") intimated to the assessee that in exercise of the powers conferred on it under section 7(1) of the Electricity (Supply) Act of 1948 read with section 7 of the Electricity Act, it had exercised the option to purchase the assessee's undertaking on the expiry of the assessee's licence on December 6, 1959. After discussions between the Board and the assessee it was agreed that the assessee should hand over its assets to t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he case of the assessee that the Explanation to section 41(2) of the Income-tax Act, 1961, created a legal fiction of the continuance of the business and once such fiction came into existence, it should be carried to its logical conclusion and for all purposes the business should be deemed to have been in existence during the relevant accounting years. On this ground the assessee claimed deduction of the establishment expenses either under section 10 of the Indian Income-tax Act, 1922, or against the profit determined under section 41(2) of the Income-tax Act, 1961. In the assessment of the assessee for the assessment years 1961-62 and 1962-63 for which the relevant accounting years ended on March 31, 1961, and March 31, 1962, respectively, the Income-tax Officer rejected the claim of the assessee for deduction of the establishment expenses. He took the view that the assessee's business came to an end by termination of the licence and that no expenditure could be allowed under the head "business" unless and until the business was being carried on in the relevant accounting years and that commercial expediency did not enter into the computation of the profit under section 10(2)(v ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uthorities. So far as taxing the balancing charge of Rs. 5,95,218 was concerned, the Tribunal took the view that it could be subjected to tax under section 41(2) of the Income-tax Act, 1961, for the assessment year 1962-63 as the moneys were due and payable and actually received in March, 1962. Such balancing charge, according to the Tribunal, was liable to be brought to tax even after the cessation of the business because under that section a fiction was created that the business was in existence in the relevant previous year for the purpose of bringing to tax the balancing charge. Out of this order of the Tribunal the following three questions are referred to us for our determination at the instance of the assessee: "1. Whether, on the facts and in the circumstances of the case, the applicant was entitled to deduct a sum of Rs. 47,917 and Rs. 55,292 being the expenses incurred by the applicant during the assessment years 1961-62 and 1962-63, respectively, in the computation of its total income or in the computation of profit under section 41(2) in the respective assessment years under the Income-tax Act ? 2. Whether the solatium of Rs. 1,89,000 received by the assessee-c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion so far as this thing is concerned is that the taxing authorities and the Tribunal were in error in taking the view that simply because the amount of the purchase price was fixed and received in March, 1962, it became chargeable to tax for the assessment year 1962-63. Alternatively, he contended that if a particular amount is capable of being subjected to charge for the year 1960-61, when the Indian Income-tax Act, 1922, was in force, then simply because it was not subjected to charge in that year, it cannot be again subjected to tax in the subsequent year merely because it is capable of falling within the provisions of section 41(2) of the Income-tax Act, 1961. As regards this alternative contention his submission is that in view of the provisions of section 10(2)(vii) of the Indian Income-tax Act, 1922, it was open to the taxing authorities to charge this amount for the assessment year 1960-61 and they having failed to do so, it cannot be subjected to tax under section 41(2) of the Income-tax Act, 1961, for the assessment year 1962-63. Mr. Joshi, on the other hand, on behalf of the revenue submitted that the taxing authorities and the Tribunal were right in taking the view tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Electricity Board, the State Government or the local authority, as the case may be, on the expiration of the relevant period referred to in sub-section (1) pending the determination and payment of the purchase price." Sub-section (7), prior to the amendment, provided as under: "6. (7) Where an undertaking is purchased under this section, the purchaser shall pay to the licensee the purchase price determined in accordance with the provisions of sub-section (4) of section 7A." The provisions of sub-sections (6) and (7) of section 6 were amended retrospectively by the Maharashtra Act No. 63 of 1974. After amendment the above sub-section (6) of section 6 of the Electricity Act was substituted by the following sub-section: "(6) Where a notice exercising the option of purchasing the undertaking has been served upon the licensee under this section, the licensee shall deliver the undertaking to the State Electricity Board, the State Government or the local authority, as the case may be, on the expiration of the relevant period referred to in sub-section (1) pending the determination and payment of the purchase price and interest." At the end of sub-section (7) the following w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... all be added to such value such percentage, if any, not exceeding twenty per centum of that value as may be specified in the licence on account of compulsory purchase. It is pursuant to these provisions that possession of the undertaking was delivered on December 6, 1959, and after negotiations initially the first payment of 65% of the written down value was made and later on the balance of the price was fixed and paid in March, 1962, inclusive of the 20% solatium. The first contention that we have to consider in relation to question No. 3 is whether having regard to the language of section 41(2) of the Income-tax Act, 1961, the amount of the balancing charge was assessable in the assessment year 1962-63. Section 41 provides for profits chargeable to tax. Sub-section (2) thereof is as under: "41. (2) Where any building, machinery, plant or furniture which is owned by the assessee and which was or has been used for the purposes of business or profession is sold, discarded, demolished or destroyed and the moneys payable in respect of such building, machinery, plant or furniture, as the case may be, together with the amount of scrap value, if any, exceed the written down valu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... shall have the same meanings as in sub-section (1) of section 32 of which the relevant provisions are as under: "Explanation.--For the purposes of this clause,-- (1) 'moneys payable' in respect of any building, machinery, plant or furniture includes-- (a) any insurance, salvage or compensation moneys payable in respect thereof; (b) where the building, machinery, plant or furniture is sold, the price for which it is sold ...... (2) 'sold' includes a transfer by way of exchange or a compulsory acquisition under any law for the time being in force..." The argument of Mr. Munim on behalf of the assessee is that for the purpose of the Explanation to section 41(2), what is required to be determined is when did the moneys payable in respect of the undertaking become due and his submission is that if regard be had to the meaning given in Explanation to section 32(1), such moneys payable became due when the vesting took place and the Board became the owner of the undertaking and its assets. His submission is that in such a case the price for which it is sold is due and payable on the date of such vesting, that is, the date on which the licensee, who was earlier the owner th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e under section 41(2) for the assessment year 1963-64. The Delhi High Court held that the provision of law by which the Government acquired the undertaking was somewhat different from the ordinary law in the Transfer of Property Act, 1882. Though taking over of possession might have vested the undertaking in the Government without a price being settled, the transaction became a "sale" only when the price became settled and it was only after the price had been settled that it became due to the assessee. The High Court also held that the second proviso to section 10(2)(vii) did not make the amount taxable in the assessment year 1955-56. According to the High Court, the amount due to the assessee remained inchoate and unknown till it was ascertained as a result of the compromise. As soon as it was determined it became payable and due within the meaning of section 41(2). Therefore, the amount became due to the assessee only in the previous year relevant to the assessment year 1963-64, and the excess was assessable to tax for that assessment year. According to the Delhi High Court, under section 41, the point of time at which the excess realised over the written down value of assets sol ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... then have said that he was entitled to a deduction under section 32(1)(iii) of the Act."--(See [1972] 86 ITR 501, 512 (Delhi)). In this case the Delhi High Court has clearly taken the view that the moneys payable became due when they were ascertained. There is no controversy in the present case that the amount was ascertained only in March, 1962, even though the possession of the undertaking together with the assets was taken on December 6, 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. It was urged by Mr. Munim that this decision of the Delhi High Court ought not to be regarded as good law in view of the decision of the Supreme Court in the case of Godhra Electricity Co. Ltd. v. State of Gujarat, AIR 1975 SC 32. This was a case where the Supreme Court was merely concerned with the constitutionality of sections 6, 7 and 7A of the Electricity Act as violating or contravening the fundamental rights contained in article 19(1)(f) of the Constitution of India. There is nothing in this judgment to indicate that the Supreme Court was ev ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... under which the property was acquired permitting payment of interest. Notwithstanding this statutory provision, the Supreme Court took the view that the act of taking possession of immovable property generally implied an agreement to pay interest on the value of the property. The Supreme Court has referred to several English decisions and pointed out that this principle has been uniformly accepted. In Swift Co. v. Board of Trade [1925] AC 520, it has been held by the House of Lords that "on a contract for the sale and purchase of land it is the practice of the Court of Chancery to require the purchaser to pay interest on his purchase money from the date when he took, or might safely have taken, possession of the land". Reference was, inter alia, made to a decision of the Privy Council in the case of Inglewood Pulp and Paper Co. Ltd. v. New Brunswick Electric Power Commission [1928] AC 492, where their Lordships of the Privy Council took the view that "upon the expropriation of land under statutory power, whether for the purpose of private gain or of good to the public at large, the owner is entitled to interest upon the principal sum awarded from the date when possession was tak ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... itten down value and the scrap value no amount shall be allowable under this clause and so much of the excess as does not exceed the difference between the original cost and the written down value less the scrap value shall be deemed to be profits of the previous year in which such- moneys were received:........" Relying upon the language of the second proviso above referred to, the argument of Mr. Munim is that in view of the said provisions it was open to the taxing authorities when they passed the assessment order for the year 1960-61, to include the amount of the balancing charge as a part of the profits of that year. He submitted that this proviso is wide enough to permit inclusion of the amount of the balancing charge as the profits of the previous year irrespective of the fact whether the purchase price is quantified or not. 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d by Mr. Munim upon the language of the second proviso to section 10(2)(vii) of the Indian Income-tax Act, 1922. He submitted that in view of the said proviso, the assessee would be entitled to the expenses incurred in the relevant accounting year relating to assessment year 1961-62, because of the legal fiction. It may, however, be said that when the attention of Mr. Munim was drawn to the language of the second proviso to clause (vii) of section 10(2) of the Indian Income-tax Act, 1922, he fairly conceded that that proviso will have no application in the present case because no balancing charge arose at any time during the accounting year relevant to the assessment year 1961-62. Then we will have to consider whether the expenses incurred in the accounting year relevant to the assessment year 1962-63 are permissible to be deducted. Such a claim depends upon the language of section 41(2) read with the Explanation. The operative part of sub-section (2) of section 41 merely provides that the amount of the balancing charge shall be chargeable to income-tax as income of the business of the previous year in which the moneys payable became due. It is, however, not disputed that unless th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ection (5) of section 41 of the Income-tax Act, 1961, whereunder set-off is permissible under the circumstances therein mentioned. He urged that its provisions are of no assistance in interpreting the provisions of section 41(2) because, but for the provisions contained in sub-section (5), a claim for set-off could not have been permissible in any of the cases which are covered by that section. Thus, as the legal fiction in the Explanation to section 41(2) is restricted to subjecting the balancing charge to tax it is not possible for us to extend its scope so as to permit the deduction of the expenses incurred as claimed by the assessee. Thus, our answer to question No. 1 is in the negative and in favour of the revenue. Coming then to question No. 2, it deals with solatium of Rs. 1,89,000. Whether it can be treated as a casual or nonrecurring receipt or a capital receipt or a part of the sale price of the assets for the purpose of determining the liability under section 41(2). An identical question arose before the High Court under section 10(2)(vii) of the Indian Income-tax Act, 1922, in the case of Sonepat Light Power and General Mills Ltd. v. Commissioner of Income-tax [1966] ..... X X X X Extracts X X X X X X X X Extracts X X X X
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