S. Ranganathan, J.
(1) These cross-references under the Income-tax 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 known 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 the these undertakings by the Punjab State Electricity Board (PSEB), on the expiry of the period of their licenses, under the provisions 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 Income-tax Officer (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 7-4-1962' and that the Pesb '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 section 41(2) or capital gains under section 45 of the Act became assessable in its hands. The assessed's objections to the levy of capital gains on this event were set out in a letter to the Ito dated 31-10-1967. It was pointed out that for the levy of tax on capital gaints two conditions had to be fulfillled : (1) the transfer must have taken place in the previous year; and (2) profits or gains must have arisen 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 the company was not satisfied with the conclusion of the Board, the matter might have to be referred to arbitration and even pursued 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, moreover, 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 consumers' 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 price which the Pseb was liable to pay in 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 would be said to have arisen 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 prices 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 profits under section 41(2) at Rs. 21,32,234 (comprising of Rs. 2,30,114 and Rs. 2,120.00 ) 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 also disallowed Rs. 11,3401- which was the expenditure incurred for the valuation of the assets of the three undertakings, as not incidental to business.
(5) Similar was the position in the assessment year 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 21-5-1964 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 of this transation 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. 2.30,637.00 under section 41(2) and a sum of Rs. 1.42,5221- 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 : (a) Market value of all assets as per Pseb Rs. 36,96.017.00 Less : Liabilities of the company (Rs. 24.97.112) minus security deposits and energy bills (amounting to Rs 6.97.596) Rs. 17,99,516.OO Sale price Rs. 18.96.501.00 This comprised of Rs. 5,54,360.00 in respect of land and the balance of Rs. 13,42,141- in respect of all the other assets of the undertaking. (b) Cost of all assets Rs. 22.51.318 Less : Cost of land Rs. 4.11.838 Cost of assets other than land Rs. 18.39.480 (c) W.D.V. of all assets Rs. 15.23.342 Less : Cost of land Rs. 4.11.836 W.D.V. of assets other than land Rs. 11.11.504 (d) Profits under section 41(2)* Sale proceeds of assets other than land as in (a) above : Rs. 13,42,141 Less : W.D.V. of assets other than as in (c) above : Rs. 11.11.504 Profits under section 41(2) in respect of assets other than land Rs. 2.30,637 The sale proceeds being less than the original cost see (b) above- there are no capital gains in respect of these assets. (e) Sale proceeds of land as per (a) above. Rs. 5.54,360 Original cost of land. Rs. 4.11,838 Capital gainson land Rs. l.42,532 There being no depreciation on land, there are no profits asseseable under section 41(2) in regard thereto. The Ito also disallowed valuation expenses of Rs. 12,3911- as in the earlier year.
(6) The assessed preferred appeals to the Appellate Assistant Commissioner (AAC). The additions and disallowances made in the assessments were confirmed by the AAC. The appellate order for 1963-64 contains no discussion at all, except a reference to Fazilka Electric Supply case : 46ITR127(SC) . 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 of expecting a sale deed'. It is pointed but the date of transfer in the present case was the rate when the Pseb took over the appellant's undertakings viz. 21-5-64. As this date fell in the recant previous year, the assessment was clearly justified. Before the Aac it was claimed that a sum of Rs. 57,940.00 was deductible by way of expenditure against the profits under section 41(2) and capital gains under section 45 taxed by the Ito in assessment year 1963-64. The Aac rejected this contention observing that the expenditure of Rs. 57,9401- had been incurred in connection with the transfer of agricultural land and that, since the surplus on sale of agricultural land could not be assessed by the Ito the claim for deduction of Rs. 57,940.00 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. 33,251.00 , consisting of Rs. 12,3 92.00 incurred in the previous year relevant for assessment year 1965-66 and Rs. 20,8591- 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 all connected with the transfer of the capital assets to the PSEB.
(7) 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 section 41(2) in view of the decision of this court in Gulati v. Cit (1972-86 Itr 501) but held against the assessed on the issue of capital gains in view of the different and specific language of section 45 of the Act. On the questions relating to the deductibility of the expenditure on valuation, the 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. 11,340.00 in the previous year relevant for assessment year 1963-64 and Rs. 12,391.00 in the subsequent previous year. To this extent, it allowed the assessed's claim. But the balance of the claims viz. Rs. 46,0001- in 1963-64 and Rs. 20,859.00 in 1965-66 was held not to relate the previous years in question and hence not allowable in these 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'.
(8) 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 section 45 and the Department aggrieved by the deletion of the inclusion under section 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 questions arc :
'(I)Whether on the facts and in the circumstances of the case, the Tribunal was right in holding that the surplus of Rs. 2,32,234.00 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. 2,30,637.00 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 amounts of Rs. 2,30,114.00 and Rs. 2,1201- were includible in the assessed's total income as long term capital gains in the previous year relevant to assessment year 1963-64 and Rs. 1,42,522.00 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. 46,6001- in addition to expenditure of Rs. 11.340.00 allowed by the Tribunal, while determining the assessed's capital gains for the year 1963-64 and Rs. 20,8591- for 1965-66 assessment year ?'
(9) Before proceeding to deal with these question, it may be convenient to refer to certain factual clarifications made by the Tribunal on the principal issues of application of sections 41(2) and 45 :
(I)On the take-over of the three electricity undertakings on 8-4-1962 the Pseb determined the amount payable to the assessed at Rs. 19,34,735.00 out of which Rs. 3,83,958.00 pertained to land and the balance of Rs. 15,50,777.00 to the other assets. The original cost of the land was Rs. 1,37,683.00 and the written down value of the other assets was Rs. 13,20,663.00 . It was on the basis of these figures that section 41(2) profit of Rs. 2,30,114.00 ( to which was added a sum of Rs. 2,120.00 in respect of some other asset) and the capital gain of Rs. 1,37,683.00 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 papers 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 undertaking.
(III)The Rohtak undertaking was taken over on 21-5-1964. According to the Pseb, the assessed was entitled to an amount of Rs. 18,96,501.00 out of which Rs. 6,97,5961- related to consumer deposits and energy bills. The Pseb paid the balance of Rs. 12 lakhs. Rs. 9,25,000.00 on 31-3-1965 and Rs. 2,75,000.00 on 31-3-1966. As already mentioned the Ito computed the profits under sections 41(2) and 54 on the basis of the compensation figure of Rs. 18,96,501.00 . 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 payable for the three undertakings taken over on 8-4-1962.
(10) So far as the first two questions relating to the assessability of profits under section 41(2) are concerned. the view taken by the Tribunal is in consonance with the decisions, of this court, in Gulati (Voluntary Liquidator. Panipat Electric Supply Co. Ltd.) v. Commissioner of Income Tax : 86ITR501(Delhi) and, of the Bombay High Court, in Akola Electricity Supply Co. Pvt. v. Commissioner of Income Tax : 113ITR265(Bom) . Before referring to these decisions it is necessary to set out the relevant portion of section 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 discurded, demelished 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, as 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 :'
ANexplanation below sub-section 4 of Section 41 clarifies that the expressions 'moneys payable' and 'sold' in sub-section (2) shall have the same meanings as in subsection 1 of section 32. According to the Explanationn to Section 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 exchanges as a compulsory acquisition under any law for the time being in force.
(11) 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 is 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 Section 10(2)(vii). Under the second proviso to that provision the 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 such moneys were received' as per the fourth proviso to Section 10(2)(vii). Under the 1961 Act. however, the previous year in which the sale took place but the previous under Section 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 corres- ponding language of the old Act and this has to be borne in mind in considering the issues before us.
(12) 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 required the right to receive a specified sum of money. It is contended 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 has 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 Government had an option to purchase its electrical undertaking 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. 21/2 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 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 and the question for consideration for the court was whether the excess was rightly, chargeable in the said assessment year under Section 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 the 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 year 1963-64, The Tribunal and, on reference, the High Court accepted the contention urged on behalf of the department.
(13) The assessed's contention in Panipat's case was that as soon as the undertaking was acquired by the Government of Punjab the 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 Section 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 context of Section 41 and Section 32 of the Act the expression 'moneys payable' would only refer to a payability after ascertainment of the amounts due to the assessed. It was pointed out that where assets used in a business or parted with or sold the assessed would be either entitled to a relief by way of further deduction under Section 32(1)(iii) or liable to a charge under Section 41(2), depending upon the amount which was received by him. The view urged by the department was accepted by this court. It was pointed out that when Section 41(2) is analysed it merely states that when an asset is sold and the price received for the same as 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 which the assessed has either to be charged or to be given 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 this hooks 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 of the assessed could be said to have become due only after it was ascertained on the basis of compromise in 1962. Having come to this conclusion the Court added;
'IF we view the acquisition of the undertaking by the Government of Punjab as a sale, the rights and obligations of the buyer and the seller have to be ascertained by reference to sections 54 and 55 of the Transfer of Property Act. 1882. A sale is defiined 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-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 being 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 assessed after the compromise and hence the amount in question was to be assessed to tax in the assessment year 1963-64.'
INother 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.
(14) The Bombay High Court followed the above decision in Akola Electric Supply Co. Pvt. Ltd. v. Commissioner of Income Tax : 113ITR265(Bom) . Here the assessed had been granted a license under Section 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 Section 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 1.98 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 Gulati's case 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 was correct or not. Accepting the argument the Court observed :
'BEFOREthe Delhi High Court the crucial question that came up for consideration was whether the amount 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.'
THECourt then proceeded to set out the facts and decision in the Delhi case and summarised the position as follows:
'INthis 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 to- gether 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.'
DEALINGwith 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 Section 10(2)(vii) of the 1922 Act the court observed :
'SUCHa 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 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 as 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 on ascertained for the first time in March, 1962.. At that time only whether there was deficiency or balancing charge could be ascertained and until til 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.'
(15) It appears to us that the above decisions clearly apply to the facts of 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 takeover 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 31-3-1965 and 31-3-1966. 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 Section 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 negotiations 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 arbitrators. So far as the Rohtak undertaking was concerned, a sum of Rs. 12 lakhs had 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 Broad's valuation and the matter was pending before 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 and Akola cases. We thereforee, follow the view which has already been taken by this Court and hold that the Tribunal was right in holding that the profits under Section 41(2) in respect of the respective transactions were not taxable in the assessment years under consideration. The first two questions are, thereforee, answered in the affirmative and in favor of the assessed.
(16) 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. cannot apply in the context of section 45 of the Act. It is, thereforee, first necessary to refer to the provisions of section 45. This section is in the following terms :
'45Capital gains (1) Any profits or gains arising from the transfer of a capital asset effected in the previous year shall, save as otherwise provided in section 53, 54 and 54B, changeable to income tax under the head 'Capital gains' and shall be deemed to be the income of the previous year in which the transfer took place.'
(17) It will at once be seen that the Tribunal was right in pointing out that there is a basic difference between the provisions of section 41(2) and section 45 in this respect. As pointed out by the earlier decision of this Court, section 41(2) concentrates not so 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 section 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 asset took place. This language corresponds to that of the second proviso to section 10(2) (vii) of the 1922 Act. The question to be considered is thereforee, whether the transfers in issue in this case took place in the relevant previous years.
(18) The Tribunal has observed in paragraph 5 of the appellate order relating to the assessment year 1963-64 as follows :
'NOWin 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 year 1963-64.'
SIMILARLYthe order for the assessment year 1965-66 proceeds on the footing that the transfer was effected on 21-5-1964 when the undertaking was taken over by the Punjab Electricity Board.
(19) Shri Bishambar Lal learned counsel for the assessed contended that the Tribunal's finding that the 'transfers took place during the relevant previous years 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 Section 5 or Section 6 of the Act. Section 5 deals with the situation created by the revocation of a licensee 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 Government may require the Licensee to sell the undertaking to the State Government, the State Electricity Board, a local authority or a purchaser designated by 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 Section 7A. Section 5(3) however provides that where the State Government 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 providing 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 is 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 Section 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 Section 7-A. It is pointed out that Section 5 & 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 Section 7. 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 the above provisions 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 Section 5 and the date of expiry of the license under Section 5. 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. transfer of ownership of the undertaking is to becomes effective. Section 7 & 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 on the date on which the undertaking is delivered to the purchaser.' [under Section 5(3) or 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 Section 5 as the market value of the undertaking 'at the time of purchase or 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 Section 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 by 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 the possession of the undertaking to the future vendee and its vesting in possession in him are provided for in the statute 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 statute 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 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.
(20) Intersting as these arguments are, we do not think we can permit the Learned counsel turn 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 is only a 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 for 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 31-10-1967 with reference to assessment year 1963-64 the assessed pointed out that Section 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 arisen from the transfer. The assessed conceded 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 Appellate Assistant Commissioner there was no controversy on this question at all. As has already 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 the 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 21-5-1964 in regard to the last undertaking. It is significant in this context that under Section 45 read with Section 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 Section 5 or 6 of the Electricity Act, it vests in the letter from that date. Thereafter there is no question of the licenses getting back the undertaking or any rights therein under any circumstances. His only right will be to have the compensation or price determined and said to him in accordance with law. It can, thereforee, be well contented that on such delivery as is contemplated by Sections 5 and 6 there is a transfer of undertaking by operation of law. This may itself be construed as the sale : vide Commissioner of Income Tax v. 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 assertainment and determination of the sale price (as indicated by the observations of this Court in the Panipat case). But, more often than not a transfer having become affective 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 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 purposes of Section 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 years with which we are concerned is well-founded and has to be upheld.
(21) Once it is found that, a transfer had taken place in the previous year, it is clear on the language of Section 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 some- what unusual and unlikely event of the price being reduced subsequently (a threat of which seems to be present in the instant case in regard to the transfers relevant for the assessment year 1963-64) or in the event of the amount being subsequently enhanced, an eventually 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 statute (for example see Section 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 aggregate monthly salary at not less than Rs. 5.000 p.m. for the unexpired period out of 21 years. In April, 1961 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, 1961. 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 deemed only for the sum of Rs. 2,34,00 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 the amount accrued or arose to the assessed on 23rd April, 1951 or whether it was liable to pay tax on the amount under Section 10(5A) for the assessment year 1956-57. The Supreme Court held that the assessed was entitled to a sum as liquidated damages under the agreement which became due to the assessed in April, 1951 though it was actually received only in December, 1953. 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 Additional Commissioner of Income Tax v. New Jahangir Vakil Mills Co. Ltd. : 117ITR849(Guj) and of the Kerala High Court in Shah Vrajlal Madhavji v. Commissioner of Income Tax : 95ITR614(Ker) . In the Gujarat case, the assessed's lands had been acquired in the previous year relevant for 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 compute 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 5-4-62. 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. 38,525.00 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 detremined 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 income-tax 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 or 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 24-3-1981 in : 133ITR169(Delhi) (Lalmia v. CIT). But that was a case concerning the concept of accumulated profits for the purposes of a deemed dividend under Section 2(6A)(a) 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 Section 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.
(22) 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. 57,940.00 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 tarnsfer 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 from the language of Section 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 Section 45 read with Section 48. That being so the Tribunal while holding 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.
(23) To sum up, we answer questions 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.