9911796707
TMI Blog1983 (4) TMI 70X X X X Extracts X X X X X X X X Extracts X X X X ..... s undertaking to the Gujarat Electricity Board, who has shown willingness to take over the same on terms and conditions mutually agreed to by the Board and the said licensee. Now, therefore, in exercise of the power conferred by sub-section (2) of section 4 of the Indian Electricity Act, 1910, the Government of Gujarat hereby revokes the said license with effect from the mid-night of 14/15th February, 1975 on the following terms and conditions : (i) The undertaking when delivered by the licensee to the Board shall vest in the Board free from any debt, mortgage or similar obligation of the said licensee or attaching to the undertaking as provided under section 7 of the Indian Electricity Act, 1910. (ii) The Board shall pay to the said licensee by way of purchase price the market value of the undertaking at the time of purchase plus a sum equivalent to 10 per cent of the total of such value. The market value of the undertaking for this purpose shall be the value of all lands, buildings, works materials and plant of the licensee suitable to end used by the licensee for the purpose of the undertaking. Other than service lines and/or other capital work of any part thereof which ha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t the excess of consideration received over the written down value was income under section 41(2). He rejected the contentions raised before him with regard to the assessability of the compensation for surrender of license and goodwill, the adoption of the value as on 1-1-1954 as the cost in respect of assets acquired prior to 1-1-1954, the consideration of the consumers' contribution in its entirety and at any rate that prior to 31-2-1961 and lastly the claim that the capital gains, if any, were entirely on the long-term basis and nothing could be taxed as short-time capital gain. In effect the ITO taxed a sum of Rs. 9,07,736 as profit under section 41(2), Rs. 6,72,490 as capital gains including Rs. 43,389 as short-term capital gains. The sum of Rs. 6,72,490 was worked out on the basis that the cost of the assets sold for Rs. 23,15,032 was Rs. 16,19,864 (the original cost of Rs. 31,02,508 minus the consumers' contributions of Rs. 14,83,144). The small difference in figures is due to some adjustment. 3. On appeal, the Commissioner (Appeals) upheld the order of the ITO except for the concession that the capital gains should be treated entirely as long-term capital gains since betw ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nder section 50 of the Act, according to which, the cost of acquisition of assets shall be the written down value as defined in section 43(6) but as adjusted. For the purpose of section 50 one has to lift the definition of 'written down value' from section 43(6) and plant the same there. The artificial meaning given in section 43(1) was, therefore, not relevant. Reference is made, in this connection, to the Madras and the Calcutta High Courts' decisions in the cases of CIT v. South Madras Electric Supply Corpn. Ltd. [1977] 109 ITR 426 and Riverside (Bhatpara) Electric Supply Co. Ltd. v. CIT [1977] 109 ITR 399, respectively. Reference was also made to the Bombay High Court's decision in the case of CIT v. Bombay Suburban Electric Supply Co. (P.) Ltd. [1977] 106 ITR 752, where the company was granted development rebate on the actual cost incurred by the assessee and not the actual cost as reduced by the portion of the cost met by the Government. According to the learned counsel, the consumers' contributions should not, therefore, be taken into account in computing the capital gains. The net effect of such treatment of the receipts of the assessee would be, in fact, to bring to tax th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... wn value of the assets. 6. The decision cited by the learned counsel for the assessee with regard to the consideration received for a slump sale do lay down that in respect of such a sale, the consideration for the individual items not being satisfied, no profit under section 41(2) can be computed. No exception, therefore, can be taken to this part of the assessee's argument. The important point to be noted in the present case is that the circumstances surrounding the transaction and the transaction itself does not favour of a slump sale as was contemplated in those decisions or as is claimed by the assessee. This is a factual finding. Under the Indian Electricity Act while it is competent for the Government to take over either for itself or for its Electricity Boards or Government companies the undertaking worked by a private party, the provisions of the Indian Electricity Act also provide that the taking over should be only of valuable assets and not the liabilities, infructuous assets or other encumbrances. Even though, therefore, in a general sense the erstwhile private parties are supposed to surrender their electricity undertaking to the Government or its instrumentalities. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n in Polson Dairy compound, sub-station at Anand Press compound, on the premises and lands of the consumers for housing the transformers and accessories ; (c) All furnitures, fixtures and other office or power house equipment shown in the list attached with the joint inventory ; 3. The Board has taken over the works free from any debt, mortgage, encumbrance or similar obligation. " 8. All through reference is made to the taking over of the undertaking of the erstwhile company but the definition of 'works obtaining in clause 2 of the agreement, dated 21-11-1975, refers only to the assets such as plant, machinery, civil works, sub-stations, transformers, furnitures, fixtures, etc.', A combined reading of clauses 2 and 3 with the other provisions in the notification issued by the Government as well as the provisions of the Indian Electricity Act itself leave us with no doubt as to what was taken over by the Electricity Board from the assessee-company. Only the assets were taken over and no liability, no other encumbrances. It would not, therefore, be correct to say that the electricity undertaking as a whole was taken over in a slump sale for a consolidated price. This view is f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... alue of the asset as on 1-1-1954 is to be taken into account at the option of the assessee, the cost of acquisition shall be the fair market value as on 1-1-1954 reduced by the amount of depreciation, if any, allowed after the said date and adjusted. Thus, even in the case of depreciable asset in existence as on 1-1-1954 if the assessee were to exercise its option, the fair market value as on 1-1-1954 has to be determined and the necessary adjustment as to depreciation made. There cannot be any doubt as to giving the assessee the benefit of this provision as to exercising the option. The assets taken over in the present case and to which the provisions of section 41(2) would apply, are distribution lines, service lines, meters, transformers, etc. The schedule relating to the transaction gives the amount of consideration fixed for these items as a group but it is not clear from the schedule as to which of these assets were in existence as on 1-1-1954 and what its market value on that date was. Apparently the company has been in existence right from 1937 and some of these items could be in existence on 1-1-1954. The assessee having exercised its option to take the market value as on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be not even based on his consumption but on other criteria like the place from which the power has to be drawn, the abundance of power in a particular locality, etc. It is not impossible that in a particular case the company has spent Rs. 50 or Rs. 100 for service lines for connection but a recovery of Rs. 500 is made from a private consumer and in another case a substantial amount on distribution lines, extensions from the mains have to be made and the consumer pays just a nominal amount. This latter could happen in a case of a newly established factory in and out of way place where several previous connections might not have been given. What we want to stress is that unless a well defined connection and relation between the assets now sold and the consumers' contributions received is established, it will not be proper to straightaway reduce or partially or otherwise adjust the consumers' contributions either for the purpose of section 41(2) profit or for capital gains. 12. What the assessee has done in the schedule is that out of an overall amount of Rs. 40,19,800 the value of six groups of items to deduct (sic) a sum of Rs. 18,49,593 the value of assets created out of consumer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... it is necessary to fix the consideration received for each individual item and also the cost of acquisition of that item. Any difficulty in fixing these figures or even impossibility in doing so, may not make the provisions of section 41(2) or capital gains inapplicable, but the process has to be gone through and a correct computation made. In our view this has not been done in the present case. 14. Thus, while affirming the liability of the assessee to taxing under section 41(2) and also assessment to capital gains, we have to remit the matter back to the ITO for fixing the amount with specific directions as under : By going in detail into the factual position, the consideration for each individual existing item of asset should be fixed. Whether this asset was in existence as on 1-1-1954 should be found out to make the adjustment for the assessee's option for the market value as on 1-1-1954 exercise. The extent of depreciation granted on this asset after 1-1-1954 and with regard to the market value as on 1-1-1954 should be ascertained. This has to be done for the purpose of the profit under section 41(2). With regard to the capital gains, the Commissioner (Appeals) has held that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... id notification is fixed by mutual negotiations as per joint inventory taken up to 11th October, 1973 at Rs. 22,00,000 (Rupees twenty-two lakhs plus a sum equivalent to 10 per cent of such value. " Thus, it would be clear from the facts mentioned above that this amount of Rs. 2,20,000 representing 10 per cent solatium is part of the purchase price or consideration paid to the assessee for taking over the various assets comprised in the undertaking or works as described in the agreement. This amount represents the solatium paid to the assessee under the proviso to section 7(1) of the Indian Electricity Act, 1910. This solatium is paid to the assessee because of the compulsory nature of the acquisition of the undertaking of the assessee as a result of the revocation of the license granted to the assessee, though at its own request. It is very much a part of the consideration or the purchase price for the taking over of the undertaking, which in the present case, only comprised of the assets specified in the schedule to the notification, which have already been set out in paragraph 1 supra. We are, therefore, unable to agree with the learned counsel for the assessee that this solati ..... X X X X Extracts X X X X X X X X Extracts X X X X
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