The Fazilka Electric Supply Co. Ltd. Vs.
The Commissioner of Income-Tax, Delhi [1962] INSC 79 (1 March 1962)
01/03/1962 DAS, S.K.
DAS, S.K.
SHAH, J.C.
CITATION: 1963 AIR 464 1962 SCR Supl. (3) 496
CITATOR INFO:
E 1969 SC 239 (12,13) R 1990 SC 123 (31) E
1990 SC 153 (17)
ACT:
Income Tax-- Assessment of Excess amount
realiesd over written down value--Electric Supply Company--Term of
license--Option for Government or local bodies to purchase the Company--Sale by
Company, if sale or compulsory acquisition--India Electricity Act 1910(IX of
1910), ss. 3.7 Indian Income Tax Act 1922 (11 of 1922), s. 10(2) (vii).
HEADNOTE:
The appellant carried on the business of
generating and supplying electricity in the town of Fazilka in accordance with
the terms of a license for fifteen years. Clause 9(a) of the license gave the
Government an option to acquire the undertaking on expiration of fifteen years
from the date of the license. The said option was in accordance to sub. s. (1)
of s. 7 of the Electricity Act, 1910. The Government of Punjab exercised its
option and acquired the undertaking on a payment which was in excess of the
written down value of the building, machinery and plant of the undertaking. For
the assessment of the appellant for the relevant year, the Income-Tax Officer
computed such excess realisation over the written down value as did not exceed
the difference between the original cost and the written down value and held
the said sum as taxable in the hands of the appellant by reason of the provisions
in s. 10(2) (vii) of the Income Tax Act.
The appellant contended that no part of the
excess was taxable since the undertaking had not been voluntarily sold, but had
been compulsorily acquired by the Government ; and on a proper construction of
the Electricity Act and the rules made there under, this so-called sale was
really a compulsory acquisition of property and not a sale as legally
understood.
Held, that from the provisions of the
Electricity Act, 1910, read along with the rules made there under, it is
manifest that the condition as to the option of purchase either by the local
authority or Government. is the result of an agreement between the applicant
who had applied for license and the Government who granted the license.
The true scope and effect of s. 7 of the
Electricity Act is that it is an enabling section and merely provides for the
option of purchase to be exercised on the expiration of a certain period agreed
to between the parties, and s. 10 of the Act 497 further provides that in an
appropriate case Government may even forego the option. The scheme of the
Electricity Act as indicated by the relevant provisions thereof and the rules
made there under, shows beyond any doubt that the option of purchase is the
result of a mutual agreement between the parties, the applicant for the license
on one hand and the Government on the other.
Held, further, that s. 7 does not provide for
a compulsory purchase or compulsory acquisition without reference to and
independent of any agreement by the licensee. The expression "compulsory
purchase" in the second proviso to sub-s. (1) of s. 7 is another enabling
provision which enables a part to specify in the license such percentage as
should be added to the value of the building, plant and machinery etc. when the
option is exercised, notwithstanding the use of the expression "compulsory
purchase" in the said second proviso, there is no compulsory purchase or
compulsory acquisition in the sense in which that expression is ordinarily
understood.
Sakataguna Nayudu v. Chinna Mununami Na
(1928) L. R. 55 I.A.
243, Calcutta Electric Supply Corporation v.
Commissioner of Income-tax, West Bengal, (1951) 19 I.T.R. 406.
CIVIL APPELLATE JURISDICTION : Civil Appeal
No. 183 of 1961.
Appeal from the judgment and order dated, April
24, 1959. of the Punjab High Court in I.T.R. No. 18 of 1954.
S. K. Kapur, Bishambar Das and K.K. Jain, for
the appellant.
K. N. Rajagopal Sastri and D. Gupta, for the
respondent.
1962, March 1. The Judgment of the Court was
delivered by S. K. DAS, J.-On July 23, 1934. the then Government of the Punjab
granted a license under s. 3 of Indian Electricity Act, 1910 (IX of 1910)
(hereinafter called the Electricity Act) to two persons named Harbhagwan Nanda
and Harcharan Dass for the generation and supply of electric energy 498 in the
town of Fazilka. The licence, which is marked annexure ,A' and forms part of
the statement of the case, contained a clause, viz. el. 9(1) of which read as
follows :
"9. (1) 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. The
percentage of the value to be determined in accordance with and for the purpose
of sub-section (1) of section 7 of the (Electricity) Act of lands, buildings,
works, materials and plant of the licensee therein mentioned to be added under
the second proviso of that sub-section to such value on account of compulsory
purchase shall be 20 percent." Under this clause, read with a. 7 of
Electricity Act, the Government bad an option of purchasing the undertaking on
the expiration of 15 years from the date of the license and on the expiration
of every subsequent period of ten years.
In 1935, about a year after the grant of the
license, a public limited company under the name and style of the Fazilka
Electric Supply Co. Ltd.. which is the appellant herein, was incorporated, and
it acquired the rights and privileges of the license known as the Fazilka
Electric License, 1934. The appellant carried on the business of generating and
supplying electricity in the town of Fazilka in accordance with the terms of
the license for 15 years.
On the expiration of 15 years from the date
of license, the Government of the Punjab exercised its option and acquired the
undertaking on July 23, 1949 on a total payment of Rs. 374,000/-, which was in
excess of the written down value of the building machinery and plant of the
undertaking. In connection with the assessment of the appellant for the year
1950-51, the 499 Income-tax Officer computed such excess realisation over the
written down value as did not exceed the difference between the original cost
and the written down value, at Rs. 77,700/- and held that this sum of Rs.
77,700/- was taxable in the hands of the appellant by reason of the provisions
in s. 10(2)(vii) of the Indian Income-tax Act, 1922. The appellant contended
that no part of the excess over the written down value, was taxable since the
undertaking had not been voluntarily sold, but had been compulsorily acquired
by the Government ; therefore, the transaction was.
not a sale within the meaning of the
provisions in s. 10 (2) (vii) of the Income-tax Act.
Both the Income-tax Officer and the Appellate
Assistant Commissioner repelled this contention of the appellant. On an appeal
to the Income-tax Appellate Tribunal, the Tribunal also held against the
appellant and came to the conclusion that there was a sale of the building
machinery and plant of the undertaking within the meaning of s. 10(2)(vii) of
the Income-tax Act. The appellant then moved the Tribunal for a reference of
the following question of law which it said arose out of the Tribunal's order ;
"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 License, 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 ?" The Tribunal referred the question to the High Court. The High
Court answered the question against the appellant. The appellant then asked for
a certificate under s. 66A(2) of the Income-tax Act and having obtained such a
certificate, has preferred the present appeal to this Court.
500 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 cls. (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 allowance being the amount by which the written down value thereof exceeds
the amount for which the building, machinery or plant, as the case may be, is
actually sold or its scrap value ; the second proviso to the clause states that
where the amount for which any such building, machinery or plant is sold,
whether during the continuance of the business or after the cessation thereof,
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. It is not
disputed before us that if what took place on July, 23, 1949 in exercise of the
option given to the Government under cl. 9 of the license read with s. 7 and
other provisions of the Electricity Act, was a sale within the meaning of
clause (vii), then the amount which the Income-tax, Officer determined to be
Rs. 77,700/- would be taxable in the hands of the appellant as profits within
the meaning of the said clause. Therefore, the answer to the question which was
referred to the High Court depends on whether there was a sale of the building,
machinery and plant of the undertaking in question.
The learned Advocate for the appellant has
contented before us that the High Court was in error in holding that there was
a sale of the building, machinery and plant of the appellants 501 undertaking.
He has submitted that a sale involves mutual agreement and a contract of sale
of goods is a contract whereby the seller transfers or agrees to transfer the
property in goods to the buyer for a price. He has argued that on a proper
construction of the provisions of the Electricity Act and the rules made there under,
the so-called sale in the present case was really a compulsory acquisition of property
and not a sale as legally understood ;
therefore, s. 10(2) (vii) of the Income-tax
Act was not attracted to the transaction in question and the excess over the
written down value could not be deemed to be profits in the hands of the
appellant.
It is necessary to read here some of the
provisions of the Electricity Act and rules made there under. Section 3 of the
Electricity Act states in effect that the State Government may, on application
made in the prescribed form and on payment of the prescribed fee, grant to. any
person a license to supply (electric) energy in any specified area.
Sub-section (2) of s. 3 states that in
respect of every such license and the grant thereof certain provisions shall
have effect : one of these provisions is that any person applying for a license
shall publish a notice of his application in the prescribed manner and with the
prescribed particulars and no license shall be granted until all objections
received by the State Government with reference thereto have been considered by
it ; another provision is that the provisions contained in the Schedule to the
Electricity Act shall be deemed to be incorporated with and to form part of
every license granted save in so far as they are expressly added to, varied or
exempted by the license.
Sections 5 and 7 deal with the purchase of
the undertaking in certain circumstances and a. 10 empowers the State
Government to vary the terms of purchase. Notwithstanding ss. 5, 7 and 8, the
State Government may, in any license to be granted under the Electricity Act,
vary the terms and conditions upon 502 which, and the periods on the expiration
of which, the licensee shall be bound to sell his undertaking, or direct that
subject to such conditions and restrictions, if any, as it may think fit to
impose, the provisions of the said sections or any of them shall not apply.
Now, we may read s. 7 so far as it is relevant for our purpose.
" 7. (1) Where a license has been
granted to any person not being a local authority, and the whole of the area of
supply is included in the area for which a single local authority is
constituted, the local authority shall, on the expiration of such period, not
exceeding fifty years, and of every such subsequent period not exceeding twenty
years, as shall be specific d in this behalf in the license, have the option of
purchasing the undertaking, and if the local authority, with the previous
sanction of the State Government, elects to purchase, the licensee shall sell
the undertaking to the local authority on payment of the value of all lands,
buildings, works, materials and plant of the licensee suitable to, and used by
him for, the purposes of the undertaking, other than a generating station
declared by the license not to form part of the undertaking for the purpose of
purchase, such value to be, in case of difference of dispute, determined by
arbitration :
Provided that the value of such lands,
buildings, works, materials and plant shall be deemed to be their fair market-
value at the time of purchase, due regard being had to the nature and condition
for the time being of such lands, buildings, works, materials and plant, and to
the state of repair thereof, and to the circumstance that they are in such a
position as to be ready for immediate working and to the suitability of the
same for the purposes of the undertaking :
503 Provided also that there shall be added
to such value as aforesaid such percentage, if any, not exceeding twenty per
centum on that value as may be specified in the license, on account of compulsory
purchase.
(2) Where- (a) the local authority does. not
elect to purchase under subsection (1), or (b) the whole of the area of supply
is not included in the area for which a single local authority is constituted ;
or (c) a license supplies energy from the same generating station to two or
more areas of supply, each controlled by its own local authority, and has been
granted a license in respect of each area of supply, the State Government shall
have the like option upon the like terms and conditions.
(3) x x x (4) x x x (5) x x x The section
gives to the local authority and if the local authority does not elect to
purchase, to the State Government, an option to purchase the undertaking. If
neither is willing to exercise the option on the expiry of period@ referred to
therein then the license may be revoked on an application or by consent of the
licensee. In that case s. 8 lays down that the licensee has the option to
dispose of his undertaking to any other person within six months. If the
licensee fails to do this, then the Government may remove the works at the cost
of the licensee as laid down in s. 5 of the Electricity Act.
504 We may now turn to the rules in so far as
they are relevant to the point under consideration. The rules lay down that every
application for a license shall be accompanied by copies of a draft license as
proposed by the applicant, and the draft license shall contain, among other
particulars, the proposed periods after which the right to purchase is to take
effect and a statement of any special terms of purchase or orders proposed to
be made under s. 10 and any proposed modification of the Schedule to be made
under s. 3, sub- s.(2), el. (f). The applicant shall then publish a notice of
his application by public advertisement, and such advertisement shall include
inter alia the draft license.
Where any person desires to have any
amendment made in the draft license, he shall deliver a statement of the same.
The rules further provide for a local enquiry
if any person locally interested objects to the grant ; if and when Government
has approved of a draft license, either in its original form or in a modified
form, a duty is cast on Government to inform the applicant of such approval and
of the form in which it is proposed to grant the license and if the applicant
is willing to accept the license in the form proposed, then Government shall on
receipt of an intimation in writing of such acceptance publish the license and
notify that it has been granted.
If, therefore, the provisions of the
Electricity Act are read along with the rules made there under, it becomes
manifest that the condition as to the option of purchase, either by the local
authority or Government, is the result of an agreement between the applicant
who has applied for the license and Government who grants the license. Section
7 of the Electricity Act is merely an enabling provision which allows the
parties to specify in the license the periods on the expiration of which the
right of option shall be exercised, subject to the maximum ,periods mentioned
therein. The true scope and effect of s. 7 is not what the appellant suggests.
505 It merely provides for an option of
purchase to be exercised on the expiration of certain periods agreed to between
the parties, and s. 10 further provides that in an appropriate case Government
may even forego the option. This section does not provide for a compulsory
purchase or compulsory acquisition without reference to and independent of any
agreement by the licensee. Our attention has been drawn to the use of the
expression "compulsory purchase" in the second proviso to sub-s. (1)
of a. 7 and it has been argued that the use of that expression indicates the
intention of the Legislature. The second proviso is another enabling provision
which enables the parties to specify in the license such percentage, it any not
exceeding twenty per centum, as should be added to the value of the building,
plant, machinery etc. when the option of purchase is exercised. No doubt, the
expression used in the proviso is "compulsory purchase" ; but in
substance what it provides for is that the parties may agree to increase the
market value of the building, plant etc. by a certain percentage when the
option of purchase is exercised and the price has to, be paid. The use of the
expression "if any" after the word ,,Percentage" shows that the
parties may agree not to increase the market value at all. If the whole scheme
of the' Electricity Act and the rules made there under, is kept in mind, it
becomes obvious that notwithstanding the use of the expression "compulsory
purchase" in the second proviso to sub-s. (1) of s. 7, there is no
compulsory purchase or compulsory acquisition in the sense in which that
expression is ordinarily understood. The High Court has rightly pointed out
that the scheme of the Electricity Act as indicated by the relevant provisions
thereof and the rules made there under, shows beyond any doubt that the option
of purchase is the result of a mutual agreement between 506 the parties, the
applicant for the license on one hand and Government on the other. The High
Court rightly observed :
" The rules show that a draft license
has to be sent by an applicant for license containing definite and specific
terms on which the license is sought. This amounts to an offer.
The Government accepts it or rejects it. If
it modifies it in any way, then the applicant or offered must accept the
modification. If the Government accepts the offer with or without modification,
then it grants a license. In my view a license granted by the Government in
such circumstances amounts to a contract between the parties." On behalf
of the appellant it had been contended, somewhat faintly, that all the elements
necessary to constitute a contract are, not present here. We are unable to
agree.
There was an undertaking on the part of the
applicant for the license to sell the undertaking to the local authority or
Government upon certain terms set out in the license, and the time at which the
option was to be exercised and the price which was to be paid for the property
were specified.
There was consideration for the contract as
the license was granted on those terms. Therefore, all elements necessary for a
contract were present, and the sale in pursuance thereof was not a compulsory
purchaser acquisition. v. Chhinna Munnuswamy Nayakar(1) We are, therefore, of
the opinion 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 (1) (1928) L. R. 55 I.A. 243.
507 of cl. (vii) of a. 10(2) of the
Income-tax Act. In view of this conclusion it is unnecessary to deal with a
somewhat larger question which was canvassed before us on behalf of the
respondent that s. 10(2)(vii) of the income-tax Act is attracted even to a
compulsory sale. Nor do we consider it necessary to examine the decisions
bearing upon the question whether a compulsory transfer to and vesting of
property in Government, constitute a sale within the meaning of the relevant
provisions of the Indian or English Statute.
It is sufficient to point out that Calcutta
Electric Supply Corporation v. Commissioner of Income-tax, West Bengal (1)
related to a transaction by which Government acquired the plant etc. and it was
held that such acquisition could not be regarded is a sale within the meaning
of s. 10(2)(vii) of the Income-tax Act.
In the result, the appeal fails and is
dismissed with costs.
Appeal dismissed.
(1) [1951] 19 I.T.R. 406.
Back