Somnath Iyer, J.
1. The assessee is the Hubli Electricity Company Limited which was incorporated in the year 1924. It was supplying electricity to the city of Hubli under a licence granted under the Indian Electricity Act, 1910. By a notice issued by the Government of Bombay on January 28, 1944, that licence was revoked with effect from May 1, 1944, and under an order made by that Government on April 29, 1944, under clauses (d) and (g) of section 5 of the Indian Electricity Act, as it then stood before its amendment by Central Act 32 of 1959, the assessee was intimated that the Government of Bombay had elected to purchase the undertaking and called upon the assessee to sell it to the Government at a price to be determined under clause (b) of section 5 of the Act and to hand over possession on May 1, 1944.
2. When the assessee neglected to hand over possession, the Government of Bombay, by a further order made on May 3, 1944, under the Defence of Indian Rules, directed the assessee to hand over possession to a certain Mr. Raghavan, and Mr. Raghavan, who was an engineer of the Bombay State and who was authorised to take possession, took delivery of possession of the undertaking on May 3, 1944.
3. There was a controversy with respect to the compensation payable to the assessee. The compensation which the Bombay Government offered to pay was a sum of Rs. 6,76,364, but, under the award made on July 15, 1960, by an arbitrator appointed by the parties, the purchase price payable was Rs. 9,85,510. This sum of money was subsequently paid.
4. In respect of the assessment year 1961-62, the Income-tax Officer proposed to add to the income of the assessee a sum of Rs. 2,32,520 as capital gains under section 12B of the Indian Income-tax Act, 1922. He also proposed to include in the income, another sum of Rs. 2,97,779 under section 10(2) (vii), but, with that aspect of the matter, we are not concerned in this reference.
5. The contention of the assessee was that the sale of the undertaking was completed on May 3, 1944, when possession of the undertaking was taken over by the Government of Bombay and not on July 15, 1960, when the arbitrator made his award. If the sale was completed in the year 1944 when section 12B of the Act had not yet been introduced into it, there was no capital gain which could be taxed. But, the Income-tax Officer was of the opinion that there was a sale only on July 15, 1960, when the compensation payable by the Government of Bombay was determined, and not on May 3, 1944, when possession was delivered or taken over.
6. But, in the appeal preferred by the assessee, the Appellate Assistant Commissioner dissented from that view taken by the Income-tax Officer and so, that part of the assessment which related to capital gains was set aside. The further appeal preferred by the Income-tax Officer to the Appellate Tribunal was dismissed.
The question of law referred to this court under section 66(2) of the Act reads :
'Whether, on the facts and in the circumstances of the case, the sum of Rs. 2,32,520 is not liable to tax under section 12B of the Indian Income-tax Act, 1922, for the assessment year 1961-62 ?'
7. It is indisputable that if there was a sale of the undertaking on May 3, 1944, when possession was delivered, and not on July 15, 1960, when the arbitrator determined the amount of compensation, there was no capital gain which could be taxed under section 12B of the Act. No would the capital gain which was taxed relate to the assessment year 1961-62. The purchase made by the Bombay Government was a compulsory purchase made under section 5(d) of the Indian Electricity Act as it then stood. Section 5 of that Act contained provisions for a compulsory sale of the undertaking of a licensee when the licence is revoked. Clause (a) authorised the State Government to direct the licensee to sell the undertaking to a local authority. Clause (b) specified the process by which the price payable for the sale shall be determined. Clause (c) provided that if the public authority does not elect to make the purchase, the Government shall have the power to direct a sale to someone else. Clause (d) which created power in the State Government to exercise the option of purchasing the undertaking if no purchase had been effected under clause (b) or clause (c) reads :
'(d) Where no purchase has been effected under clause (b) or clause (c) within such time as the State Government may consider reasonable, or where the whole of the area of supply is not included in the area for which a single local authority is constituted, the State Government shall have the option of purchasing the undertaking and, if the State Government elects to purchase, the licensee shall sell the undertaking to the State Government upon the terms and the conditions similar to those set forth in clause (b).'
8. The option referred to in this clause was exercised by the Bombay Government on April 29, 1944, when the assessee was directed to sell the undertaking to it at a price which had to be determined as provided by clause (b).
9. It would be recalled that possession was delivered by the assessee to the Bombay Government on May 3, 1944, and, according to the statement of the case submitted to us, the Government of Bombay, after taking over possession, dismantled the installation and parts of the machinery.
10. The Appellate Assistant Commissioner was right in taking the view that in that situation the sale did not stand postponed until there was the determination by the arbitrator of the price payable by the Bombay Government. His conclusion that there was a sale on May 3, 1944, could be supported on at least two grounds. The first is that there could be no delivery of possession to the Government of Bombay if the assessee continued to own the undertaking. The Government of Bombay could not have insisted upon such delivery of possession if it had not become its owner. That there was such delivery of possession on May 3, 1944, is, in our opinion, an irrefragable ground which support the conclusion that at least on that date there had been a sale.
11. It is of importance to observe that the sum of Rs. 6,76,364 which the Government of Bombay offered to pay to the assessee as the price for the sale was, according to the statement of the case, 'the value of the undertaking as on the 3rd of May, 1944', and it is undisputed that the sum of Rs. 9,85,510 which the arbitrator directed the Bombay Government to pay to the assessee was the price of the undertaking as on May 3, 1944. If the Government of Bombay made an offer of the price as on May 3, 1944, and if the arbitrator also determined the market value of the undertaking as on that date, it becomes manifest that that date was the date of the purchase. That that is so is clear from the proviso to clause (b) of section 5 of the Indian Electricity Act which is equally application to a purchase by the Government under clause (d) and that proviso reads :
'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...'
12. So, it becomes clear that the sum of Rs. 9,85,510 which was determined by the arbitrator as the market value of the undertaking was the market value on the date of the purchase and that date was May 3, 1944.
13. So, our answer to the question referred to us should be in favour of the assessee and our answer is that the sum of Rs. 2,32,520 was not liable to tax under section 12B of the Indian Income-tax Act, 1922, for the assessment year 1961-62.
14. The assessee shall get his costs. Advocate's fee Rs. 250.