Skip to content


Akola Electrical Supply Co. Pvt. Ltd. Vs. Commissioner of Income-tax, Bombay City-i - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtMumbai High Court
Decided On
Case NumberIncome-tax Reference No. 7 of 1968
Judge
Reported in[1978]113ITR265(Bom)
ActsIncome-tax Act, 1961 - Sections 41 and 41(2)
AppellantAkola Electrical Supply Co. Pvt. Ltd.
RespondentCommissioner of Income-tax, Bombay City-i
Appellant AdvocateI.M. Munim, Adv.
Respondent AdvocateR.J. Joshi, Adv.
Excerpt:
direct taxation - computation - sections 41 and 41 (2) of income tax act, 1961 - whether applicant was entitled to deduct allowance of expenses incurred in previous year during assessment in computation of its total income or profit under section 41 (2) - claim depends upon language of section 41 (2) read with explanation - where money payable in respect of acquisition of undertaking become due and payable in previous year in which business for purpose of which plant and machinery was being used no longer in existence - provision of section 41 (2) shall apply as if business is in existence in previous year for bringing only balancing charge to tax - such legal fiction of considering business 'as in existence' cannot be extended to permit deduction of expenses incurred by assessee - held,.....kantawala, c.j. 1. the akola electrical supply co. pvt. ltd., the assessee, was granted a licence by the local government under the provision of section 3(1) of the indian electricity act, 1910, as applied t berar (hereinafter referred to as 'the electricity act') to supply electrical energy within the area in the manner manners mentioned in and on terms and conditions stated in the agreement of licence dated december 7, 1929. the terms of the licence, inter alia, provided that if the licensee failed to comply with the provisions contained therein or should in the opinion of the government the progress made during any portion of the said period of two years be unsatisfactory, the licence may be revoked and the security paid forfeited. another term of the licence confirmed the right to.....
Judgment:

Kantawala, C.J.

1. The Akola Electrical Supply Co. Pvt. Ltd., the assessee, was granted a licence by the local Government under the provision of section 3(1) of the Indian Electricity Act, 1910, as applied t Berar (hereinafter referred to as 'the Electricity Act') to supply electrical energy within the area in the manner manners mentioned in and on terms and conditions stated in the agreement of licence dated December 7, 1929. The terms of the licence, inter alia, provided that if the licensee failed to comply with the provisions contained therein or should in the opinion of the Government the progress made during any portion of the said period of two years be unsatisfactory, the licence may be revoked and the security paid forfeited. Another term of the licence confirmed the right to exercise the option given to the Government under section 7(1) of the 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 expire 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 the representative of the Board on December 6, 1959, along with stores and spares. As per the agreement possession was handed over and the same was acknowledged by a letter written by the Executive Engineer of the Board on December 7, 1959.

2. At a meeting of the board of directors of the assessee its secretary informed the board of directors that they had handed over to the Board possession of the undertaking including the distributing mains, works and certain civil assets of the company. Under the arrangement, the assessee was allowed to keep the manager's bungalow and guest house without liability to pay any compensation. As regards payment, it was pointed out that though the Board was not under any obligation to make any payment till the sale value was determined, as a measure of co-operation the Board agreed to make a provisional payment equivalent to 65% of the book value on receipt of all the assets. Accordingly, a sum of Rs. 3,47,126.06 representing 65% of the depreciated value of the assets was paid to the assessee as a provisional payment by a cheque drawn on the State Bank of India on June 7, 1961. Ultimately, by a letter dated March 31, 1962, the Board informed the assessee that the sale value of the assets was by mutual agreement fixed at Rs. 11.35 lakhs inclusive of solatium of Rs. 1.89 lakhs payable in terms of the licence.

3. In the previous year relevant to the assessment year 1962-63, besides the solatium of Rs. 1.89 lakhs the assessee received from the Board a further sum of Rs. 2,30,200 (Rs. 1,92,000 plus proportionate solatium of Rs. 38, 200) for the land which was transferred by the assessee to the Board. The cost of the said land to the assessee was Rs. 3,804.

4. In the accounting years ending March 31, 1961, and March 31, 1962, relevant to the assessment years 1961-62 and 1962-63, the assessee incurred expenditure of Rs. 47, 917 and Rs. 55,292 by way of establishment expenses, salaries and allowances paid to staff. The assessee claimed deduction of those expenses in the computation of its income-tax liability. The claim was made on the footing that negotiations were going on between the assessee and the Board during the relevant previous years as a result of which the sale price was finally settled in March, 1962, and the expenses which were claimed as deduction were incurred during such period under commercial expediency. It was also the 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.

5. 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 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)(vii) of the Indian Income-tax Act, 1922. He further took the view that the concept of legal fiction was only for the limited purpose of ascertaining and taxing the profits under section 41(2) and it could not be stretched beyond that for allowance of expenses, etc.

6. In the assessment year 1962-63, the assessee claimed that the solatium of Rs. 1.89 lakhs received by it form the Board was casual and non-recurring receipt or a capital receipt and was, in any view of the matter, not taxable in law. The said contention on behalf of the assessee was rejected by the Income-tax Officer. He held that solatium was only a part of the consideration received from the Board and was, therefore, a part of the sale proceeds of the assets handed over by the assessee to the Board and was taxable. The Income-tax Officer also determined the profits under section 41(2) of the Income-tax Act, 1961, corresponding to section 10(2)(vii) of the Indian Income-tax Act, 1922, at Rs. 5,95,218 and brought the said amount to tax for the assessment year 1962-63. In the appeals filed by the assessee, the Appellate Assistant Commissioner upheld the order of the Income-tax Officer as regards disallowance of establishment expenses for both the aforesaid years, rejected the contention of the assessee that the amount of Rs. 1.89 lakhs received by it as solatium was either casual or non-recurring receipt or a capital receipt and held that in the present case the provisions of section 41(2) of the Income-tax Act, 1961, were applicable for the assessment year 1962-63 and the amount under that section could be brought to tax even after the cessation of the business.

7. In further second appeals before the Tribunal, the Tribunal, confirmed the order of the taxing authorities as regards disallowance of establishment expenses for both the assessment years. The Tribunal took the view that under the provisions of section 41(2) of the Income-tax Act, 1961, it was only for the purpose of taxing the balancing charge that the business was deemed to be in existence in the relevant previous years and not for any other purpose. According to the Tribunal the expenditure incurred by the assessee on the establishment could not be considered as admissible when the business had ceased to exist long time ago. The Tribunal also confirmed that the sum of Rs. 1.89 lakhs was also rightly subjected to tax by the taxing authorities. 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.

8. 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 company was a casual or non-recurring 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) of the Income-tax Act, 1961, for the assessment year 1962-63

3. Whether, on the facts and in the circumstances of the case, the applicant has been rightly held liable to balancing charge under section 41(2) in respect of the sum of Rs. 5,95, 218 for the assessment year 1962-63 ?'

9. For the sake of convenience we will take up question No. 3 first. There is no controversy in the present case that the sum of Rs. 5,95,218 had been received by way of balancing charge as understood under section 41(2) of the Income-tax Act, 1961.

10. So far as this question is concerned, Mr. Munim on behalf of the assessee has urged that the undertaking that the assessee possessed was handed overto the Board on December 6, 1959, and having regard to the relevant provisions of the Electricity Act the undertaking together with its assets upon taking of such possession vested in the Board and the Board became the owner thereof. His submission is that since the Board became the owner of the property the sale is complete and moneys payable by way of price in respect thereof became due and payable on December 6, 1959, irrespective of the fact that the actual amount that may be payable for the price may be determined either by an agreement or as a result of arbitration proceedings at a much later date. He urged that merely because for quantification of the amount to be paid to the assessee some time was required that does not mean that notwithstanding the acquisition of the undertaking and the vesting of the assets thereof in the Board, the purchase price became due and payable at a later date, i.e., after December 6, 1959. His submission was that if proper regard be had to the relevant provisions of the Electricity Act and the provisions of section 41(2) of the Income-tax Act, 1961, it is quite clear that the sum of Rs. 5,95,218 which was admittedly received as balancing charge was not capable of being subjected to tax in the assessment year 1962-63. According to his submission, this amount became due and payable on December 6, 1959, when the undertaking together with its assets vested in the Board and cannot be subjected to tax in any, assessment year other than the assessment year 1960-61. In short, his submission 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 that the amount of balancing charge could only be subjected to tax under section 41(2) of the Income-tax Act, 1961, for the assessment year 1962-63, because the actual amount of purchase price was fixed in the month of march, 1962, and was received in that month. He submitted that this amount became due and payable only in March, 1962, when it was ascertained or quantified or fixed by agreement between the parties and to such a case the provisions of section 41(2) are directly applicable. So far as the alternative contention of Mr. Munim is concerned, he submitted that on a plain reading of the provisions of section 10(2)(vii) of the Indian Income-tax Act, 1922, it is not possible for anybody to rationally contend that it was open to the taxing authorities to tax the amount of the balancing charge in the assessment year 1960-61 simply because the undertaking together with its assets were taken charge of and vested in the Board on December 6, 1959. He submitted that if regard be had to the provisions of section 10(2)(vii) then it was not open to the taxing authorities to tax the amount of the balancing charge under that section for the assessment year 1960-61.

11. Before we actually deal with the relevant provisions of the indian income-tax Act, 1922, and the Income-tax Act, 1961, a brief reference may be made to the provisions of the Electricity Act. Section 5 of the Electricity Act contains provisions relating to the circumstances under which the licence of a licensee can be revoked and the transfer thereof to the Board can be effected. Section 6 of the Electricity Act provides for purchase of undertaking either as a result of revocation of the licence under section 5 or upon exercise of option to purchase on expire of the period of the licence. Under the scheme of the Electricity Act purchase can be effected authority. There is no controversy in the present case that the option of purchasing the undertaking was exercised by the Board by giving a proper statutory notice. Sub-section (6) of section 6 of the Electricity Act, prior to its amendment by the Maharashtra Act No. 63 of 1974, provided as under :

'6. (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.'

12. 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.'

13. The provisions of sub-section (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 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.'

14. At the end of sub-section (7) the following words were added -

'and interest at the Reserve Bank of India rate ruling at the time of the delivery of the undertaking less 1% on the purchase price of the undertaking for the period from the date of delivery of the undertaking to the date of payment of the purchase price.'

15. These amendments have been given retrospective operation from the inception. Section 7 of the Electricity Act provides for the vesting of the undertaking in the purchaser. Its provisions are as under :

'7. Where an undertaking is sold under section 5 or section 6, then completion of the sale or on the date on which the undertaking is delivered to the intending purchaser under sub-section (3) of section 5, or under sub-section (6) of section 6, as the case may be, whichever is earlier -

(i) the undertaking shall vest in the purchaser or the intending purchaser, as the case may be, free from any debt, mortgage or similar obligation of the licensee or attaching to the undertaking :

Provided that any such debt, mortgage or similar obligation shall attach to the purchase money in substitution for undertaking : (ii) the rights, powers, authorities, duties and obligations of the licensee under his licence shall stand transferred to the purchaser and such purchaser shall be deemed to be the licensee : Provided that were the undertaking is sold or delivered ot a state Electricity Borad or the state goverment, the licence shall case to have further operation.' Section 7A of the Electricity Act provides for determination of the purchase price. Under sub-section (1) the price of the undertaking shall be the market value of the undertaking at the time of purchase or where the undertaking has been delivered before the purchase under sub-section (3) of section 5, at the time of the delivery of the undertaking. In case of any difference or dispute regarding such purchase price, the same shall be determined by arbitration. Sub-section (2) provides how the market value is to be determined and what assets are to be taken into account and what assets are to be excluded therefrom. Sub-section (4) provides that where an undertaking of a licensee is purchased under section 6, i.e., upon exercise of option to purchase, the purchase price shall be the value thereof as determined in accordance with the provisions of sub-section (1) and (2) of section 7A, provided that there shall 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.

16. 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.

17. 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 purpose 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 value, so much of the excess as does not exceed the difference between the actual cost and the written down value shall be chargeable to income-tax as income of the business or profession of the previous year in which the moneys payable for the building, machinery, plant or furniture became due :

Provided that where the building sold, discarded, demolished or destroyed is a building to which Explanation 5 to section 43 applies, and the moneys payable in respect of such building, together with the amount of scrap value, if any, exceed the actual cost as determined under that Explanation, so much of the excess as does not exceed the difference between the actual cost so determined and the written down value shall be chargeable to income-tax as income of the business or profession of such previous year. Explanation. - Where the moneys payable in respect of the building, machinery, plant or furniture referred to in this sub-section become due in a previous year in which the business or profession for the purpose of which the building, machinery, plant or furniture was being used is no longer in existence, the provisions of this sub-section shall apply as if the business or profession is in existence in that previous year.'

18. Sub-section (3) and (4) are not relevant for the present purpose but Explanation to sub-section (4) is relevant and is as under :

'Explanation. - The expression 'moneys payable' and the expression 'sold' in sub-sections (2) and (3) shall have the same meanings as in sub-section (1) of section 32.'

19. Sub-section (5) contains provisions as regards writing off of the loss of the earlier years and its provisions are as under :

'(5) Where the business or profession referred to in this section is no longer in existence and there is income chargeable to tax under sub-section (1), sub-section (2), sub-section (2A), sub-section (3) or sub-section (4) in respect of that business or profession, any loss, not being a loss sustained in speculation business or under the head 'capital gains', which arose in that business or profession during the previous year in which it ceased to exist and which could not be set off against any other income of that previous year shall, so far as may be, be set off against the income chargeable to tax under the sub-sections aforesaid.'

20. In these provisions the expression 'moneys payable' and the expression 'sold' 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...'

21. 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 thereof, was divested of its ownership. Mr. Joshi on behalf of the revenue submitted that this question had been concluded by the decision of the Delhi High Court in the case of P. C. Gulati, Voluntary Liquidator, Panipat electric Supply Co. Ltd, v. Commissioner of Income-tax [1972] 86 501 and that with a view to preserve uniformity in respect of all-India taxation statute this court normally should not depart from the ordinary convention to follow such a decision irrespective of the fact whether the view taken therein is accepted by this court as correct or not. Before the Delhi High Court the crucial question that came up for consideration was whether the amount of balancing charge was chargeable to tax in the year in which the moneys in respect of the purchase price became due and payable or when the undertaking was taken possession of. That question had been directly considered by the Delhi High Court and no special reason is pointed out to us why we should depart from the normal or ordinary convention which is followed by all courts in respect of all-India taxation statute to preserve uniformity of opinion. We do not propose to go into the correctness of this decision and only relying upon the ordinary convention will like to follow the same to preserve uniformity in law. The facts of the case before the Delhi High Court as noted in the headnote are as under :

In 1934, the assessee-company obtained a licence under the Indian Electricity Act, 1910, to generate and distribute electricity in Panipat. Under clause 9 of the licence the Punjab Government had adoption to purchase its electrical undertaking at the expire of the period of the licence. The Government exercised the option, giving the requisite notice under the Act on July 4, 1952, and took possession of the undertaking on July 16, 1954. The assessee filed a suit for recovery of more than Rs. 13 lakhs as compensation. This suit was eventually compromised on April 7, 1962, the assessee agreeing to accept Rs.2 and half lakhs, one of the terms of the compromise being that the State Electricity Board would discharge a loan advanced by the Government to the assessee. For the assessment year 1963-64, the Income-tax Officer brought to tax as profit under section 41(2) of the Income-tax Act, 1961, the excess over the depreciated value of the assets. The question was whether the excess was rightly chargeable 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 die to the assessee remained inchoate and unknown till it was ascertained as 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 sold has to be taxed, is not the previous year in which the 'sale' took place or the previous year in which the money was 'received', but the previous year in which the money 'became due'. No amount can be said to be due, within the meaning of that section, till it has become ascertained. At page 512, the High Court observed :

'In applying a provision like the present, we have to make a reasonable construction based on the practical method by which the assessee can claim a deduction. If the property is compulsorily acquired for less than its written down value, the assessee has to get a deduction under section 32(2)(iii) of the Act. If the price exceeds the written down value the assessee has to be taxed on the excess, or, at least that part of the excess which does not exceed the difference between the actual cost and the written down value. There must be some point of time at which the assessee can say that the amount is now payable. He cannot say that the amount is payable on the date of the sale in the present case, because he does not know what the amount is. He cannot say that there is an excess or a deficit. He cannot, therefore, make an entry in his books of account showing the amount. Similarly, if he wishes to make a deduction under section 32(1)(iii) he cannot claim any deduction merely on the ground that the price may be less than the written down value. He does not know whether to ask for a deduction or whether he is liable to tax till the amount is actually ascertained. An amount can be said to be payable when a definite amount is ascertainable as being due. In the instant case, the suit filed by the company claimed an amount of over Rs. 13 lakhs, but the final payment received after the compromise was much less. No amount could be said to be due till it had become ascertained. This seems to be the only reasonable construction that can be made on the words 'became due' occurring in the provision we are called upon to construe.

22. Thus, the amount that was due to the assessee remained inchoate and unknown, till it was actually ascertained as a result of the compromise between the parties. As soon as it was determined, it became payable and, therefore, due. When the amount was ascertained the assessee was able to say that the amount to be paid exceeded the written down value. If the amount had been less than the written down value the assessee could then have said that he was entitled to a deduction under section 32(1)(iii) of the Act.' -(See- ).

23. 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.

24. 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, : [1975]2SCR42 . 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 even remotely concerned with the interpretation of the words 'when the moneys payable became due', nor are there any observations in this judgment which throw any light thereon.

25. It was, however, urged by Mr. Munim that as by the Maharashtra Act, No. 63 of 1974, the provisions of sub-sections (6) and (7) of section 6 of the Electricity Act are retrospectively amended so as to entitle the licensee to payment of interest at the rate therein prescribed on the purchase price of the undertaking for the period from the date of delivery of the undertaking to the date of payment of the purchase price, it is quite evident that the sale became complete when possession of the undertaking together with the asset was taken charge of and moneys became payable and due thereon. He, therefore, submitted that unless the moneys had become payable and due there could have been no provision for payment of interest from the date of taking delivery thereof and he, therefore, submitted that in view of the retrospective operation given to the provision of sub-sections (6) and (7) of section 6 of the Electricity Act by the Maharashtra Act, No. 63 of 1974, the decision of the Delhi High Court should not be regarded as applicable to this case. Here the Delhi High Court was not concerned with any provision which provided for payment of interest and after the amendment is made by the Maharashtra Act, No. 63 of 1974, one thing is clear that no provision for payment of interest could have been made unless the moneys became due and payable from the date of taking delivery. It is not possible for us to accept this contention. so far as payment of interest is concerned, there is a general principle of equitable consideration to the effect that the act of taking possession of any property generally implied an agreement to pay interest on the value of the property. The right to receive interest took the place of the right to retain possession. Reference in this connection can be had to the decision of the Supreme Court in the case of Satinder Singh v. Umrao Singh : [1961]3SCR676 . This was a case of land acquisition under the provisions of the East Punjab Acquisition and Requisition of Immovable Property (Temporary Powers) Act, 1948. In that case, the Punjab High Court had disallowed interest on the amount of compensation on the ground that there was no provision in the statute 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 tp 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 taken unless the statute clearly shows a contrary intention.' Thus, it is a general principle well recognised both in India as well as in England that the act of taking possession of an immovable property implies an agreement to pay interest on the value of the property. It is as a result of this recognition of this general principle that by the Maharashtra Act, No. 63 of 1974, the provision for payment of interest has been made in the statute. Such right to interest also existed irrespective of the said provision. Thus, it is not possible for us to take the view that simply because interest was payable as a result of the amendment introduced by the Maharashtra Act, No. 63 of 1974, the moneys in respect of the acquisition of the undertaking became due and payable on the date of delivery of possession thereof.

26. Coming to the alternative contention of Mr. Munim we have to consider whether the amount of balancing charge was capable of being subjected to tax in the assessment year 1960-61. Reliance was placed by him upon the provisions of section 10(2)(vii) of the Indian Income-tax Act, 1922. The relevant provisions of that section are as under :

'10. (1) The tax shall be payable by an assessee under the head 'profits and gains of business, profession or vocation' in respect of the profits or gains any business, profession or vocation carried on by him.

(2) Such profits or gains shall be computed after making the following allowances, namely :-......

(vii) in respect of any such building, machinery or plant which has been sold or discarded or demolished or destroyed, 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 :......

Provided further 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 :.......

Provided further that where any insurance, salvage or compensation moneys are received in respect of any such building, machinery or plant as aforesaid, and the amount of such moneys exceeds the difference between the written 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 :.....'

27. 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 the assessment year 1960-61, was it possible for the assessee to say the actual amount for which the undertaking together with the assets was sold to the Board. If it is not possible to specify the amount it will be impossible for any assessee or the taxing authorities to treat an imaginary figure as the profits of the previous year on the footing that the sale took place in that year. There is no controversy in the present case that the actual amount payable for acquisition of the undertaking and the assets was ascertained only in March, 1962. So the amount for which the undertaking together with the assets was sold became known or ascertained for the first time in March, 1962. At that time only whether there was deficiency or balancing charge could be ascertained and until the amount payable is ascertained nobody knows the price for which the undertaking together with the assets is sold. Thus, the alternative contention of Mr. Munim cannot be accepted. In our opinion, therefore, question No. 3 has to be answered in the affirmative and in favour of the revenue.

28. That takes us to question No. 1. That question relates to allowance of expenses incurred during the previous year relevant to the assessment years 1961-62 and 1962-63, respectively. It is the case of the assessee that in the previous year relevant to the assessment year 1961-62, the assessee incurred an expenditure of Rs. 47,917 and in the previous year relevant to the assessment year 1962-63, he incurred an expenditure of Rs. 55,292. The submission of Mr. Munim is that as under the provisions of section 41(2) of the Income-tax Act, 1961, by a legal fiction with a view to bring the balancing charge to tax the business is deemed to be in existence in the previous year in which the moneys became due and payable in respect of the acquisition of the undertaking, the expenses incurred in the intervening period should be allowed to be deducted, because as a result of this fiction the business continues to be in existence right up to the accounting year relevant to the assessment year 1962-63. Such a question will have to be considered having regard to the relevant provisions of the Indian Income-tax Act, 1922, in so far as it relates to the assessment year 1961-62, and to the Income-tax Act, 1961, in so far as it relates to the assessment year 1962-63. For the assessment year 1961-62, reliance was placed 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 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 the business is continued in the relevant previous year either actually or by legal fiction, the balancing charge cannot be subjected to tax. It is by legal fiction which is contained in the Explanation that business is treated as in existence in the relevant previous year in order to bring the balancing charge to tax. In effect, the Explanation provides that where moneys payable in respect of the acquisition of the undertaking become due and payable in a previous year in which the business for the purpose of which the building, machinery, plant, etc., was being used is no longer in existence, the provisions of this sub-section shall apply as if the business or profession is in existence in that previous year. This Explanation by a legal fiction treats the business in existence in the previous year for the purpose of bringing the balancing charge to tax even though there is cessation of operation. It is a well-settled principle that a legal fiction is to be limited for the purpose for which it has been created and cannot be extended beyond that legitimate frame. See the decision of this court in Arvind Bhogilal v. Commissioner of Income-tax : [1976]105ITR764(Bom) . The question that we have to consider is, what is the purpose for which the legal fiction is created in the present case; even under the Indian Income-tax Act, 1922, in the corresponding provisions prior to the amendment of section 10(2)(vii), second proviso, by section 11 of the Taxation Laws (Extension to Merged States and Amendment) Act, 1949 (Act No. 67 of 1949), there was no legal fiction and judicial opinion was clear on the point that, unless business continues to exist in the previous year in which the balancing charge arose, it cannot be subjected to tax. To get rid of this lacuna by the said Act No. 67 of 1949, in the second proviso to section 10(2)(vii) a legal fiction was created by adding the words 'whether during the continuance of the business or after the cassation thereof'. It is the same legal fiction which has been continued by the Explanation to section 41(2) of the Income-tax Act, 1961. Under this legal fiction the business is deemed to be in existence only for the purpose of bringing the balancing charge to tax and for no other purpose . This legal fiction cannot be extended so as to permit deduction of expenses incurred in the business. Reference was made by Mr. Munim to sub-section (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 (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.

29. Coming then to question No. 2, it deals with solatium of Rs. 1,89,000. Whether it can be treated as a casual or non-recurring 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] 59 ITR 392 (Punj). There it is clearly held that for the purposes of the second proviso to section 10(2)(vii) the amount for which the building, machinery or plant was actually sold included their fair market value as well as the addition of 20 per cent. thereof received by the assessee. Thus, in view of this decision, the sum of Rs. 1,89,000 will have to be regarded as a part of the sale price of the assets for the purpose of determining the liability under section 41(2). Accordingly, our answer to question No. 2 is that the solatium of Rs. 1,89,000 received by the assessee is a part of the sale price of the assets for the purpose of determining the liability under section 41(2) of the Income-tax Act, 1961, for the assessment year 1962-63.

30. The assessee shall pay the costs of the revenue.


Save Judgments// Add Notes // Store Search Result sets // Organizer Client Files //