1. These cross-references under the I.T. Act, 1961 (the 'Act', for short), at the instance of the Commissioner of Income-tax and the assessed, raise inter-connected questions for decision. The references arise out of the assessments of Rohtak Textile Mills for the assessment years 1963-64 and 1965-66, the relevant previous years being the preceding financial years.
2. The assessed-company now know as Rohtak Textile Mills, was previously known as South Punjab Electricity Corporation Ltd. and was running certain electricity undertakings. The disputes in these references arise as a result of the take-over of some of these undertakings by the Punjab state. Electricity Board (PSEB), on the expiry of the period of their licenses, under the provision of the Indian Electricity Act, 1910 (Act VII of 1910).
3. The assessed's electricity undertakings at Hansi, Bhiwani and Hissar were taken over by the PSEB in the financial year 1962-63. The ITO, while completing the assessment for the assessment year 1963-64, observed that the 'title over these three undertakings vested in the PSEB with effect from April 7, 1962', and that the PSEB 'also fixed the purchase consideration which the assessed-company is adopting'.
4. The assessed raised a plea that this was not a case of 'sale' of the undertakings and that, thereforee, no profits under s. 41(2) or capital gains under s. 45 of the Act became assessable in its hands. The assessed's objections to the levy of capital gains tax on this event were set out in a letter to the ITO dated October 31, 1967. It was pointed out that for the levy of tax on capital gains two conditions had to be fulfillled : (1) the transfer must have taken place in the previous year; and (2) profits and gains must have risen from the transfer. It was conceded that the first condition had been satisfied but not the second. This was because 'the determination of price has not been complete'. The PSEB had taken over the assets on a particular day and had left the matter of the fixation of the compensation which had yet to be done. The matter was under negotiations with the Board and in case of the company was not satisfied with the conclusion of the Board, the matter might have to be referred to arbitration and even purchase further in courts, if necessary. The Board had no doubt made an initial payment which had been taken in the accounts as part compensation received and the books adjusted accordingly. But this was only an interim payment and, more ever, was subject to some claims made by the PSEB later. In 1966, the PSEB had written to say that no compensation was payable to the assessed in respect of the cost of service lines it had put up with the contributions received from consumers since though the consumer's contributions would also vest in them, they may, at the appropriate time, be liable to return such contributions to the customers. If this claim were to succeed, then the amount of compensation already shown was liable to be reduced by Rs. 11.88 lakhs. In brief, the contention was that till the actual which the PSEB was liable to pay in the respect of the assets was determined the right to collect the same from the board could not be said to have accrued to the assessed and consequently no profits or gains could be said to have risen in respect of the transaction. Alternatively, it was submitted that the full value of the consideration should be taken at the compensation received less Rs. 11.88 lakhs. The ITO rejected this contention observing that there was a sale and 'simply because the determination of the purchase price is postponed that is not enough to nullify the same'. He, thereforee, directed the assessed to furnish the necessary particulars and the assessed submitted computations of the profit under s. 41(2) at Rs. 23,22,234 (comprising of Rs. 2,30,114 and Rs. 2,120) and of the long-term capital gains on land at Rs. 2,46,275. The ITO brought these two sums to tax accordingly in the assessment year 1963-64. The ITO brought these two sums to tax accordingly in the assessment years 1963-64. The ITO also disallowed Rs. 11,340 which was the expenditure incur for the valuation of the assets of the three undertakings as not incidental to business.
5. Similar was the position in the assessment years 1965-66. The Rohtak undertaking had been taken over during the relevant previous year. The ITO recorded that the PSEB took over the undertaking on May 21, 1964, and paid a compensation of Rs. 12 lakhs. The assessed claimed that as no sale deed had been executed in regard to the immovable assets 'profits or capital gains accruing out this transaction should not be subjected to tax this year'. The ITO rejected this contention and, accepting the statement of computation of profits and gains furnished by the assessed, brought to tax a sum of Rs. 2,30,637 under s. 41(2) and a sum of Rs. 1,42,522 as the capital gain on land. The basis of these computations is also set out in the assessment order and can be explained as under :
Rs.(a) Market value of all assets as per PSEB 36,96,017Less : Liabilities of allthe company (Rs. 24,97,112)minus securitydeposits and energybills (amounting to Rs. 6,97,596)17,99,516------------Sale price 18,96,501-------------This comprised of Rs. 5,54,360 in respect ofland and the balance of Rs. 13,42,141 inrespect of all other assets of theundertaking.(b) Cost of all assets 22,51,318Less : Cost of land 4,11,838---------Cost of assets other than land 18,39,480----------(c) W.D.V. of all assets 15,23,342Less : Cost of land 4,11,838---------W.D.V. of assets other than land 11,11,504(d) Profits under section 41(2)Sale proceeds of assets other than land as in(a) above 13,42,141Less : W.D.V. of assets other than land as in(c) above 11,11,504---------Profits under section 41(2) in respect ofassets other than land 2,30,637---------The sale proceeds being less than the original cost-see (b)above-here are no capital gains in respect of these assets.(e) Sale proceeds of land as per (a) above 5,54,360Original cost of land 4,11,838--------------Capital gains on land @ 1,42,522--------------
6. @There being no depreciation on land, there are no profits assessable under s. 41(2) in regard thereto.
7. The ITO also disallowed the valuation expenses of Rs. 12,391 as in the earlier year.
8. The assessed preferred appeals to the AAC. The additional and disallowance made in the assessments were confirmed by the AAC. The appellate order for 1963-64 contains no discussion at all, expect reference to Fazilka Electric Supply case  46 ITR 27. The appellate order for 1965-66 refers to a contention by the assessed that there had been no effective sale at all as there was no registered sale deed and rejects the same on the ground that 'where the properties are taken over by way of compulsory acquisition there is no need for executing a sale deed'. It is pointed out that the date of transfer in the present case was the date when the PSEB took over the appellant's undertakings, viz., May 21, 1964. As this date fell in the relevant previous year, the assessment was clearly justified. Before the AAC it was claimed that s sum of Rs. 57,940 was deductible by way of expenditure against the profits under s. 41(2) and capital gains under s. 45 taxed by the ITO in assessment years 1963-64. The AAC rejected this contention observing that the expenditure of Rs. 57,940 had been incurred in connection with the transfer of agricultural and that, since the surplus on sale of agricultural land could not be assessed by the ITO, the claim for deduction of Rs. 57,940 was rightly disallowed. In the appeal for the assessment year 1965-66, the assessed claimed that it had incurred expenditure on valuation of assets to the tune of Rs. 33,251 consisting of Rs. 12,392 incurred in the previous year relevant to the assessment year 1965-66 and Rs. 28,859 in the next previous year and that the entire amount should have been allowed. But the AAC did not accept this contention as he was of opinion that the expenditure on valuation was not at all connected with the transfer of the capital assets to the PSEB.
9. There were further appeals by the assessed to the Income-tax Appellate Tribunal (ITAT). These appeals were disposed of by separate orders dated 15th and 16th September, 1972. The Tribunal held in favor of the assessed on the issue of assessability of profits under s. 41(2) in view of the decision of this court in P. G. Gulati, Voluntary Liquidator, Panipat Electric Supply Co. Ltd. v. CIT : 86ITR501(Delhi) , but held against the assessed on the issue of capital gains in view of the different and specific language of s. 45 of the Act. On the questions relating to the deductibility of the expenditure on valuation, that ITAT agreed in principle with the assessed that such expenditure was incidental to the transfer and hence allowable. However, the Tribunal found that the expenditure actually incurred on this account was only Rs. 11,340 in the previous year relevant to the assessment year 1963-64 and Rs. 12,391 in the subsequent previous year. To this extent it allowed the assessed's claim. But the balance of the claims viz., Rs. 46,600 in 1963-64 and Rs. 20,859 in 1965-66 was held not to relate to the previous year in question had hence not allowable in those years. In the view of the Tribunal, they could be allowed 'if at all, only when the assessed's claim for higher amount of consideration is ultimately settled one way or the other'.
10. The assessed and the department having thus succeeded only in part before the ITAT, both of them have come up in reference before us, the assessed contesting the decision regarding the applicability of s. 45 and the department aggrieved by the deletion of the inclusion under s. 41(2). Four questions have been referred to us, two of which are at the instance of the assessed and two at the instance of the Revenue. These question are :
'(i) Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the surplus of Rs. 2,32,234 was not chargeable to tax under section 41(2) of the Income-tax Act, 1961, during the period relevant to the assessment year 1963-64
(ii) Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that the surplus of Rs. 2,30,637 was not chargeable to tax under section 41(2) of the Income-tax Act, 1961, during the accounting period relevant to the assessment year 1965-66
(iii) Whether, on the facts and in the circumstances of the case, the amounts of Rs. 2,30,114 and Rs. 2,120 were includible in the assessed's total income as long-term capital gains in the previous year relevant to the assessment year 1963-64 and Rs. 1,42,522 as long term capital gains in the previous year relevant to 1965-66 assessment year
(iv) Whether, on the facts and in the circumstances of the case, the assessed was entitled to a deduction of Rs. 46,600 in addition to expenditure of Rs. 11,340 allowed by the Tribunal, while determining the assessed's capital gains for the year 1963-64 and Rs. 20,859 for 1965-66 assessment year ?'
11. Before proceeding to deal with these questions, it may be convenient to refer to certain factual clarifications made by the Tribunal on the principal of application of ss. 41(2) and 45 :
(i) On the take-over of the three electricity undertakings on April 8, 1962, the PSEB determined the amount payable to the assessed at Rs. 19,34,735 out of which Rs. 3,83,958 pertained to land and the balance of Rs. 15,50,777 to the other assets. The original cost of the land was of Rs. 1,37,683 and the written down value of the other assets was Rs. 13,20,663. It was on the basis of these figures that the s. 41(2) profit of Rs. 2,30,114 (to which was added a sum of Rs. 2,120 in respect of some other asset), and the capital gains of Rs. 1,37,683 on land had been calculated.
(ii) The compensation of Rs. 19 lakhs due according to the PSEB was paid in two installments of Rs. 15 lakhs and Rs. 4 lakhs. The actual dates of payment are not available from the paper before us. But, subsequently, the Board claimed that the amount due to the assessed was only Rs. 13.34 lakhs and that Rs. 5.93 lakhs had been paid in excess. It was proposed that the sum of Rs. 5.93 lakhs would be adjusted against the amount payable to the company for the take over of the Rohtak under-taking.
(iii) The Rohtak undertaking was taken over on May 21, 1964. According to the PSEB, the assessed was entitled to an amount of Rs. 18,96,501 out of which Rs. 6,97,596 related to consumer deposits and energy bills. The PSEB paid the balance of Rs. 12 lakhs, Rs. 9,25,000 on March 31, 1965, and Rs. 2,75,000 on March 31, 1966. As already mentioned, the ITO computed the profits under ss. 41(2) and 45 on the basis of the compensation figure of Rs. 18,96,501. It would appear from the fact that the PSEB paid the assessed Rs. 12 lakhs, that it had not adjusted, while paying these amounts, its claim for recovery of Rs. 5.94 lakhs out of the compensation for the three undertakings taken over on April 8, 1962.
12. So far as the first two questions relating to the assessability of profits under s. 41(2) are concerned the view taken by the Tribunal is in consonance with the decision of this court in R. C. Gulati, Voluntary Liquidator, Panipat Electric Supply Co. Ltd. v. CIT : 86ITR501(Delhi) and of the Bombay High Court in Akola Electricity Supply Co. P. Ltd. v. CIT : 113ITR265(Bom) . Before referring to these decision it is necessary to set out the relevant portion of s. 41(2) as it would become necessary later on to contrast this provision with that pertaining to the charge of capital gains which is the subject-matter of the third question. Section 41(2) reads as follows :
'41. (2) Where any building, machinery, plant or furniture which is owned by the assessed 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 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.....'
13. An Explanationn below sub-s. (4) of s. 41 clarifies that the expressions 'moneys payable' and 'sold' in sub-ss. (2) and (3) shall have the same meanings as in sub-s. (1) of s. 32. According to the Explanationn to s. 32(1), 'moneys payable' in respect of any building, machinery, plant or furniture include, where the building, machinery, plant or furniture is sold, the price for which it is sold. Clause (2) of that Explanationn also provides that the expression 'sold' would include a transfer by way of exchange or a compulsory acquisition under any law for the time being in force.
14. On the above provisions, in a case of the present type, two questions arise. The first is as to whether it could be said that the assets in question have been sold, this obviously not being a case where they have been discarded, demolished or destroyed. The second question is regarding the previous year in which the moneys payable for the assets in question became due. So far as the first question us concerned, the present case has throughout proceeded on the footing that this is a case of sale of the assets in question and it is, thereforee, unnecessary to consider that issue, particularly in view of the definition of the expression 'sold' set out above. The second question is as to when the moneys payable in respect of the sale became due to the assessed. In the context of the second question it may be pointed out that under the 1922 Act the corresponding provision was contained in s. 10(2)(vii). Under the second proviso to that provision excess in the event of a sale was 'deemed to be profits of the previous year in which the sale took place'. However, where it was not a case of sale but one of receipt of compensation moneys on discardment, demolition or destruction the excess was 'deemed as profits of the previous year in which money were received' as per the fourth proviso to s. 10(2)(vii). Under the 1961 Act, however, the previous year in which the balancing charge - as the charge under s. 41(2) is called - is to be levied is not the previous year in which the sale took place but the previous year in which the moneys payable become due. The new Act has deliberately made a departure from the corresponding language of the old Act and this has to be borne in mind in considering the issues before us.
15. On behalf of the assessed it is contended that the expression 'moneys payable... became due' envisages that the consideration in respect of the sale has been quantified and ascertained and the assessed has acquired the right to receive a specified sum of money. It is contend that until the moneys are so determined and remain inchoate and unknown either because they have not been ascertained in accordance with the procedure prescribed under the relevant enactment or because there is a dispute between the parties regarding the same, it cannot be said that moneys have become payable or that the moneys payable have become due to the assessed. This aspect of the matter had been considered by this court in the Panipat case : 86ITR501(Delhi) . In that case, the Panipat Electric Supply Co. Ltd. obtained a license in 1934 under the Indian Electricity Act, 1910, to generate and distribute electricity in Panipat. Under clause 9 of the license the Punjab Govt. had an option to purchase its electrical undertakings at the expiry of the period of the license. 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 assessed filed a suit for recovery of more than Rs. 13 lakhs as compensation. This suit was eventually compromised on April 7, 1962, the assessed agreeing to accept Rs. 2 1/2 lakhs, one of the terms of the compromise being that the State Electricity Board would discharge a loan advanced by the Government to the assessed. For the assessment years 1963-64, the ITO brought to tax, as profit under s. 41(2) of the I.T. Act 1961, the excess over the depriciated value of assets and the question for consideration for the court was whether the excess was rightly chargeable in the said assessment year under s. 41(2). The argument for the assessed was that the sale of the undertaking had taken place on 16th July, 1954, when the Government had acquired the company's assets and that, thereforee, the balancing charge, if any, should have been taxed in the assessment year 1955-56. On the other hand, it was department's contention that since litigation was going on regarding the compensation payable to the assessed and since it was only after the compromise in 1962 that the amount was ascertained and paid to the company, the amount had been properly subjected to tax in the assessment years 1963-64. The Tribunal and, on a reference the High Court accepted the contention urged on behalf of the department.
16. The assessed's contention in Panipat's case : 86ITR501(Delhi) was that as soon as the undertaking was acquired by the Govt. of Punjab assessed got a right to get compensation for the same and hence the compensation amounts had become due to the assessed. It was urged that, thereforee, s. 41(2) should apply. It was not necessary that the amount of compensation should have been ascertained on the date of sale itself. On the other hand it was urged on behalf of the department that in the context of s. 41 and s. 32 of the Act, the expression 'moneys payable' would only refer to the payability after ascertainment of the amounts due to the assessed. It was pointed out that where assets used in a business are parted with or sold, the assessed would be either entitled to a relief by way of further deduction under s. 32(1)(iii) or liable to a charge under s. 41(2), depending upon the amount which was received by him. The view urged by the department upon the amount which was received by this court. It was pointed out that when s. 41(2) is analysed it merely states that when an asset is sold and the price received for the same is more than its written down value the excess would become chargeable to income-tax. In applying a provision like the one in question, a reasonable and practical construction must be adopted on the basis of which the assessed has either to be charged or to be give further relief. There must be some point of time at which the assessed can say that the amount is now payable. He cannot say that the amount is payable on the date of sale because he does not know what the amount is. He cannot say whether there is an excess or a deficit. He cannot make any entry in his books of account. He does not know whether he is liable to pay tax or is to claim a further deduction. The court, thereforee, came to the conclusion that the moneys payable in respect of the take over of the undertaking the assessed could be said to have become due only after it was ascertained on the basis of the compromise in 1962. Having come to this conclusion the court added (p. 513) :
'If we view the acquisition of the undertaking by the Government of Punjab as a sale the rights and obligations of the buyer and seller have to be ascertained by reference to section 54 and 55 of the Transfer of Property Act, 1882. A sale is defined in section 54 as 'a transfer of ownership in exchange for a price paid or promised or part-paid and part promised'. A sale thereforee, requires a price which may be paid or promised or part-paid or part promised. The parties in the present case were never ad idem about the price till the compromise between the parties. The provisions of law by which the Government of Punjab acquired the undertaking were somewhat different from the ordinary law contained in the Transfer of Property Act, 1882, and hence it came about that the Government took possession of the undertaking even before any price was settled. It may be that this taking over of possession vested the undertaking in the Government without the price being settled, but it is impossible to say that the sale as contemplated by the Transfer of Property Act, 1882, took place without the price has been settled. The transaction only becomes such a sale when the price has been settled. It was only after this price had been settled that the same became due to the assessed. Hence, it can properly be said on this reasoning that the price became due to the assessed after the compromise and hence the amount in question was to be assessed to tax in the assessment year 1963-64.'
17. In other words the court came to the conclusion that the transaction became a sale only when the price had been settled and that only after this price had been settled the same became due to the assessed. The stand of the department was, thereforee, upheld.
18. The Bombay High Court followed the above decision in Akola Electric Supply Co. P. Ltd. v. CIT : 113ITR265(Bom) . Here the assessed had been granted a license under s. 3(1) of the Electricity Act to supply electricity within an area in the manner mentioned in and on terms and conditions stated in the agreement of license. The terms of the license confirmed the right to exercise the option to purchase the undertaking given to the Government under s. 7(1) of the Electricity Act. In accordance with this provision the State Electricity Board purchased the undertaking in December, 1959, and the assessed handed over possession of its assets to the Board in that month. Ultimately, the Board informed the assessed in March, 1962, that the sale price was fixed by mutual agreement at Rs. 11.35 lakhs including a solarium of Rs. 1.89 lakhs for the license. The balancing charge amounting to Rs. 5,95,218 and the solarium were sought to be assessed in the assessment year 1962-63. The assessed claimed that its assets had been handed over to the Board in December, 1959, and so the balancing charge was assessable in the assessment year 1960-61. On behalf of the Revenue, however, reliance was placed on the decision of this court in P. C. Gulati's case : 86ITR501(Delhi) , and it was contended that with a view to preserve uniformity in respect of an all India taxation statute, the court should not depart from the ordinary convention of following such a decision irrespective of the fact whether the view taken therein was acceptable to the court as correct or not. Accepting this argument the court observed (p. 275) :
'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 the courts in respect of all-India taxation statue 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.'
19. The court then proceeded to set out the facts and decision in the Delhi case and summarised the position as follows (p. 276) :
'In this case the Delhi High Court had 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 6th December, 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.'
20. Dealing with an alternative contention urged on behalf of the assessed that the balancing charge must have been subjected to tax in assessment year 1960-61 under the second proviso to s. 10(2)(vii) of the 1922 Act the court observed (p. 279) :
'Such a contention, in our opinion, cannot be accepted. The first condition essential before the second proviso can be invoked is that the conditions 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 assessed 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 assessed 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 the year. There is no controversy in the present case that the actual amount payable for acquisition of the undertaking for which the undertaking together with the assets was sold became known or ascertained for the first time 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 Mr. Munim cannot be accepted.'
21. It appears to us that the above decisions clearly apply to the facts the present case. Mr. Misra, learned counsel for the Revenue, sought to distinguish the above decisions. He pointed out that in the present case the assessed had received a sum of Rs. 19 lakhs in two Installments in regard to the take over of the undertakings at Hansi, Bhiwani and Hissar and, similarly, towards the compensation in respect of the Rohtak undertaking, a sum of Rs. 12 lakhs had been paid by the Board in two Installments on March 31, 1965, and March 31, 1966. He, thereforee, contended that at least to this extent there was no uncertainty regarding the moneys payable to the assessed and that, thereforee, the provisions of s. 41(2) became attracted in the two respective assessment years. In our opinion, this contention is not acceptable. It has been found in respect of the three undertakings taken over in April, 1962, that though the Board had paid a sum of Rs. 19 lakhs that was not final, and the price was still a matter of negotiation between the parties particularly in view of the Board's claim that the assessed had been overpaid and the compensation should be reduced to the tune of Rs. 5.93 lakhs. The matter, it is found, was likely to go before the arbitrators. So far as the Rohtak undertaking was concerned, a sum of Rs. 12 lakhs and been paid in two installments but the Tribunal has found that the assessed which had received the evaluation report only in November, 1966, did not accept the Board's valuation and the matter was pending before the arbitrators. On facts, thereforee, despite the payments made towards the price by the Board, this is also a case where the price payable had not been agreed or adjudicated upon during the relevant previous year and so the moneys payable in respect of the assets could not be said to have become due in the respective previous years with which we are concerned. The case is not distinguishable in principle from the Gulati : 86ITR501(Delhi) and Akola : 113ITR265(Bom) cases. We, thereforee, follow the view which has already in holding that the profits under s. 41(2) in respect of the respective transactions were not taxable in the assessment years under consideration. The first two question are, thereforee, answered in the affirmative and in favor of the assessed.
22. Now we come to the third question which relates to the assessability of capital gains on the transactions in the present case. There is no dispute that capital gains tax is chargeable on the transactions. The only question is regarding the year in which the capital gains tax will be assessable. As already mentioned the Tribunal has decided this point against the assessed and held that the principle of the decision in the case of Panipat Electric Supply Co. : 86ITR501(Delhi) , cannot apply in the context of s. 45 of the Act. It is thereforee, first necessary to refer to provisions of s. 45. This section is in the following terms :
'45 Capital gains - (1) Any profits or gains arising from the transfer of capital asset effected in the previous year shall, save as otherwise provided in section 53, 54 and 54B, be chargeable to income-tax under the head 'Capital gains', and shall be deemed to be the income of the previous year in which transfer took place.'
23. It will at once be seen that the Tribunal was right in pointing out that there is a basic difference the provisions of s. 41(2) and s. 45 in this respect. As pointed out by the earlier decision of this court, s. 41(2) concentrates not as much on the date of the sale or the transfer which attracts charge; the emphasis under that sub-section is on the time at which the moneys payable in respect of the transfer become due. On the other hand, so far as s. 45 is concerned, the statutory language is quite clear that the capital gains are to be deemed to be the income of the previous year in which the transfer of the asset took place. This language corresponds to that of the second proviso to s. 10(2)(vii) of the 1922 Act. The question to be considered is, thereforee, whether the transfer in issue in this case took place in the relevant previous years.
24. The Tribunal has observed in para. 5 of the appellate order relating to the assessment year 1963-64 as follows :
'Now in the present case there is no dispute about the point of time at which the transfer took place. The transfer took place on 8th April, 1962, which clearly falls within the accounting period relevant to the assessment years 1963-64.'
25. Similarly the order for the assessment year 1965-66 proceeds on the footing that the transfer was effected on May 21, 1964, when the undertaking was taken over by the Punjab Electricity Board.
26. Shri Bishamber Lal, learned counsel for the assessed, contended that the Tribunal's finding that the 'transfers' took place during the relevant previous year is erroneous. He submitted that in arriving at the above conclusion, the Tribunal failed to appreciate the true scope and effect of the relevant provisions of the Indian Electricity Act. An electricity undertaking may be sold in the circumstances set out in s. 5 or s. 6 of the Act. Section 5 deals with the situation created by the revocation of a license by the State Government. Section 6 confers on the state Electricity Board, the State Government and a local authority an option of purchasing the undertaking of a licensee on the expiry of the period of his license. The detailed procedure prescribed by these sections is immaterial for our present purpose. It is only necessary to mention that under these provisions the State Govt. may require the licensee to sell the undertaking to the State Govt., the State Electricity Board, a local authority or a purchaser designated by it and it shall be obligatory on the licensee to sell the undertaking to such person. The sale in pursuance of this direction will take place in the normal course and the price payable to the licensee will be determined in accordance with s. 7A. Section 5(3), however, provides that where the State Govt. issues any notice to the licensee to sell the undertaking,
'it may be such notice require the licensee to deliver, and thereupon the licensee shall deliver on a date specified in the notice the undertaking to the designated purchaser pending the determination and payment of the purchase price of the undertaking.'
and adds a proviso that the purchaser should pay the licensee interest on the purchase price determined from the date of delivery of the undertaking to the date of payment of the purchase price. Similarly, when the licensee is served with a notice exercising the option to purchase the undertaking under s. 6,
'the licensee shall deliver the undertaking to (such person) on the expiration of the relevant period.... pending the determination and payment of the purchase price'
which, as stated earlier, will be determined in accordance with s. 7A. It is pointed out that ss. 5 and 6 envisage a sale of undertaking by the licensee to a designated purchaser for a price to be determined in due course on the date of the market value in accordance with s. 7 (sic). These steps will take some (in many cases, considerable) time but public interest requires a continuity of supply of electric energy to the consumers. That is why that above provision envisage the delivery of the undertaking to the designated purchaser on a specified date (which may be earlier than the date of actual sale) under s. 5 and the date of expiry of the license under s. 6. In other words it is urged the date of delivery of the undertaking to the State Electricity Board or other designated purchaser should not be confounded with the date on which the sale i.e., the transfer to ownership of the undertaking is to become effective. Section 7 and 7A are referred to in order to reinforce this distinction. Section 7, in so far as is relevant, provides that :
'Where an undertaking is sold under section 5 or section 6, then upon the completion of the sale or in the date on which the undertakings is delivered to the intending purchaser',
(under s. 5(3) or s. 6(6), as the case may be), whichever is earlier,
'the undertaking shall vest in the purchaser or intending purchaser',
as the case may be, free from encumbrances and the rights, powers, duties and authorities of the licensee shall stand transferred to the purchaser who shall be deemed to be the licensee. Section 7A defines the purchase price for a sale under s. 5 as the market value of the undertaking 'at the time of purchase to where the undertaking has been delivered before the purchase... at the time of the delivery of the undertaking'. The position is the same for a purchase under s. 6, except that a solarium is added in such cases. The argument of Shri Bishambar Lal was that there is a clear distinction spelt out be these provisions between the physical take-over of the undertaking on its delivery by the licensee to the would-be purchaser on the one hand and an actual sale or transfer of title in pursuance of the option exercised that is also envisaged by these provisions. Learned counsel contended that delivery of possession of the undertaking to the future vendee and its vesting in possession in him are provided for in the statue even in anticipation of the actual sale and its completion in view of the fact that the business of the undertaking involves the supply of a very essential commodity and it is absolutely imperative that a continued and uninterrupted supply of electrical energy to the consumers must be achieved in public interest. The statue still envisages that a sale had to take place in the normal course in pursuance of the exercise of option by the PSEB. Learned counsel contended, relying upon certain observations in the Panipat case : 86ITR501(Delhi) , that such a sale was not and would not be complete until the price was determined in consideration of which the sale was to be effected.
27. Interesting as these arguments are, we do not think we can permit the learned counsel for the assessed to raise this contention as, in our opinion, it does not arise out of the order of the Tribunal and is further contrary to the basis on which the case has proceeded all along. Shri Bishambar Lal contends that the question regarding the date on which the transfer took place in only question of law to be decided on an interpretation of the provisions of the Electricity Act and does not involve any investigation of facts. This is not strictly accurate because the Tribunal had no occasion to consider whether a sale deed had been executed in favor of the PSEB in respect of these undertakings and, if so, on what dates or, if not, on what other factual and legal basis the sale in favor of the PSEB could be said to have taken place. That apart, before a question of law can be decided by a High Court in an income-tax reference, it should be a question of law which arises out of the order of the Tribunal and which has been referred by the Tribunal to the High Court for its decision. In the present case we are unable to find any trace of an argument before the Tribunal that the 'sale' in the present case took place outside the accounting years under consideration. The assessment order of 1963-64 records that the title over the three undertakings vested in the State Electricity Board with effect from 7th April, 1962, and from the ITO's narration it appears that this was not disputed. For the assessment year 1965-66, the assessed seems to have objected that the sale could not be said to have been complete in respect of the immovable properties as no sale deed had been executed. In a letter addressed to the ITO dated October 31, 1967, with reference to the assessment year 1963-64, the assessed pointed out that s. 45 postulated two conditions before the profit could be subjected to capital gains tax : (1) that the transfer must have taken place during the previous year; and (2) that profits or gains must have risen from the transfer. The assessed conceded that the former condition had been satisfied and proceeded only to contend that the former condition had been satisfied and proceeded only to contend that since the amount of compensation was the subject-matter of the dispute between the parties no profits or gains could be said to have arisen from the transfer. Before the AAC there was no controversy on this question at all. As has been pointed out, before the Tribunal again, the matter proceeded on the footing that the transfer had taken place during the relevant previous year. In the statement of case also it has been mentioned that the electricity undertakings were taken over by the Electricity Board on 8th April, 1964 in regard to the first three undertakings and on May 21, 1964, in regard to the last undertaking. It is significant in this context that under s. 45 read with s. 2(47), capital gains may arise not only in the event of a sale but even in the event of a 'transfer' taking place. There can be no doubt that where an undertaking is delivered to a purchaser or would-be purchaser under ss. 5 or 6 of the Electricity Act, it vests in the latter from the date. Thereafter, there is no question of the licensee getting back the undertaking or any rights therein under any circumstances. His only right will be to have the compensation or price determined and paid to him in accordance with law. It can, thereforee, be well contended that on such delivery as is contemplated by ss. 5 and 6 there is a transfer of the undertaking by the operation of law. This may itself be construed as the sale : vide CIT v. Liquidators, Hubli Electricity Co. Ltd. : 73ITR157(KAR) . Or it may be that a sale in the legal sense in pursuance of the provisions may or can be considered complete only later on, as and when a sale deed is executed or on the ascertainment and determination of the sale price (as indicated by the observations of this court in Panipat case : 86ITR501(Delhi) . But more often than not, a transfer having become effective in law on delivery, the parties would consider such formalities as the execution of a registered deed totally superfluous and so no 'sale', stricto sensu may at all become complete. (From a reply received by the ITO from the PSEB, this is indeed what appears to have happened in this case). However, we express no opinion on the various points sought to be raised by Sri Bishamber Lal as they do not arise out of the order of the Tribunal and as it has been common ground all along that transfers had taken place in the relevant previous years and this is sufficient for the purposes of s. 45. In these circumstances the objection of Sri Misra, learned counsel for the department, that it is not open to the assessed now to contend that the transfer had not taken place during the previous year with which we are concerned is well founded and has to be upheld.
28. Once it is found that a transfer taken place in the previous year, it is clear on the language of s. 45 that the capital gains arising from the transfer are liable to tax as the deemed income of that previous year. It is clear also that for bringing such capital gains to tax the department cannot be asked to wait until the compensation or price payable is finally determined. All that is necessary is that, by the end of the previous year in question, the assessed must have received or become entitled to receive moneys in excess of the actual cost of the assets. The assessment so made may be liable to modification in the somewhat unusual and unlikely event of the price being reduce subsequently (a threat of which seems to be present in the instant case in regard to the transfers relevant for the assessment years 1963-64), or in the event of the amount being subsequently enchanced, an eventuality which occurs perhaps, in almost every case of such acquisition. If there are any difficulties in the way of the assessed or Revenue (by way of limitation or otherwise) in having such modifications effected, these difficulties can be solved by necessary amendments to the statue (for example see s. 155(7A), (8A), (9) and (10)) but cannot preclude the department from completing the assessment on such materials as may be available by the time of the assessment. The principle is well established and we shall only refer to certain decisions cited by Sri P. N. Misra on behalf of the Revenue on this aspect. In CIT v. Chunilal V. Mehta & Sons P. Ltd : 82ITR54(SC) , the assessed was the managing agent of a company and was entitled to continue as such for a period of 21 years on certain conditions as to remuneration. Under clause 14 of the agreement if it was deprived of its managing agency for any reason other than those specified in clause 15, it was entitled to receive compensation or liquidated damages of a sum equal to an aggregate monthly salary at not less than Rs. 6,000 p.m. for the unexpired period out of 21 years. In April, 1951, the shares of the company were acquired by a group of shareholders and the company passed a resolution terminating the managing agency of the assessed. This was on April 23, 1951. The managing company was prepared to pay Rs. 2,34,000 as compensation calculated at Rs. 6,000 p.m. but the respondent refused to accept that amount and instituted a suit claiming Rs.28,00,000 as compensation for unlawful termination of the managing agency. Eventually, the suit was decreed only for the sum of Rs. 2,34,000 offered by the company initially. This amount was received by the assessed in December, 1955, and credited in the profit & loss account for that year. The question was whether amount accrued or arose to the assessed on 23 April, 1951, to whether it was liable to pay tax on the amount under s. 10(5A) for the assessment year 1956-57. The Supreme Court held that the assessed was entitled to a sum liquidated damages under the agreement which became due to the assessed in April, 1951, though it was actually received only in December, 1955. The fact that the respondent was claiming an exorbitant sum to which he was not entitled did not convert its right into a contingent right. The right to get compensation arose in April, 1951, and the compensation was, thereforee, not taxable in the assessment year 1956-57. In regard to liabilities, a similar principle was enunciated by the Supreme Court in the case of Kedarnath Jute Mfg. Co. Ltd : 82ITR363(SC) . Reference may also be made to the decisions of the Gujarat High Court in Addl. CIT v. New Jehangir Vakil Mills Co. Ltd. : 117ITR849(Guj) and of the Kerala High Court in Shah Vrajlal Madhavji v. CIT : 95ITR614(Ker) . In the Gujarat case, the assessed's lands had been acquired in the previous year relevant to assessment year 1968-69, and the assessed had received compensation of Rs. 1,74,807. The assessed, however, claimed a compensation of Rs. 5,10,891 and sought a reference to the district judge and the ITO sought to complete the capital gains on this footing. The High Court held that the ITO should assess the capital gains on the basis of the compensation received and later take steps to recompute the capital gains in case the amount of compensation was varied in further proceedings. The converse question arose in the Kerala case. There the land of the assessed was acquired under the Land Acquisition Act. The Land Acquisition Officer awarded compensation on April 5, 1962. On a reference, the subordinate judge increased the compensation to Rs. 1,30,216 by an order dated January 15, 1965. The ITO took the price of the acquisition at Rs. 1,30,216 and deducting Rs. 39,349, being the book value of the property, determined the capital gains at Rs. 90,867 and passed a fresh order of assessment. On appeal, the assessed contended that the decision of the subordinate judge had been appealed against by the state before the High Court contending that the quantum of compensation awarded by the Land Acquisition Officer, viz., Rs. 38,525, should be restored and to this extent the acquisition price should be reduced. It was held by the Kerala High Court that the authorities were justified in taking the quantum as determined by the subordinate judge and imposing tax on that basis. Merely because there was a possibility of the quantum determined by the subordinate judge being varied in appeal by the High Court or in further appeal by the Supreme Court, where such an appeal would lie, it was not necessary for the I.T. authorities, either not to assess at all the income which had arisen during the year, or to keep the assessment open till the matter is finally decided by the High Court of the Supreme Court. It was held that the sum of Rs. 90,867 was validly assessed and that the assessed should pursue his remedies under the Act if the amount of compensation was reduced subsequently. Applying these principles, we have to hold that the ITO was correct in computing the capital gains on the basis of the price or compensation paid to the assessed. We need hardly say that the assessment will be subject to modification, within the limits permitted by the statutory provisions, in the event of the price getting modified subsequently for one reason or another. Sri Bishamber Lal referred to a decision of this court dated March 24, 1981, in R. Dalmia v. CIT : 133ITR169(Delhi) . But that was case concerning the concept of accumulated profits for the purposes of deemed dividend under s. 2(6A)(e) of the 1922 Act and we do not think it is of any help to the assessed in the present case in view of the specific provision in s. 45 deeming the capital gains, whenever arising in fact, as the income of the previous year in which the transfer takes place. In the result, we answer the third question in the negative and in favor of the Revenue.
29. We now turn to question No. 4. It appears to us that the answer to this question must clearly follow the conclusion in respect of question No. 3. It is not in dispute that the amount of Rs. 57, 940 was expenditure incurred in connection with the transfer of the three undertakings which were taken over in that assessment year. Similarly, the amount of Rs. 33,250 was the amount incidental to the transfer of the Rohtak undertaking. If, as we have held the entire amount of capital gains is assessable only in the year in which the transfer took place it follows, it from the language of s. 48 of the Act that all expenditure incidental to the transfer must be deducted in computing the amount of capital gains whether it was expenditure incurred in that previous year or not. The concept of the expenditure being relatable to the year in which it was incurred will not be quite appropriate in the context of computation of the capital gains in view of the language of s. 45 read with s. 48. That being so, the Tribunal, while holding that the capital gains were taxable should have also held that the entire expenditure in relation to the transfers in question would be deductible in computing the capital gains. We, thereforee, answer the fourth question referred to us in the affirmative and in favor of the assessed.
30. To sum up, we answer question Nos. (1) and (2) and (4) in the affirmative and in favor of the assessed. Question No. (3) is answered in the negative and in favor of the department. The reference is disposed of accordingly. As neither side has succeeded fully, we make no order as to costs.