Okara Electric Supply Company Ltd. v. Commissioner Of Income-Tax.

Goel, J.:— By this reference, the Income-tax Appellate Tribunal (Delhi Bench D), has referred the following question of law for the opinion of this court:

“Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was legally correct in holding that Rs. 1,34,390 was income assessable under section 41(2) of the Income-tax Act, 1961, in respect of the assessment year 1966-67?”

2. The assessee is a limited company which had been running an electric supply undertaking. The assessment year, concerned is 1966-67 of which the relevant previous year ended on March 31, 1966. The assessee was granted by the Government of East Punjab sanction, to engage in the business of electic supply energy by a notification dated May 26, 1948. The State Government had the option to acquire the undertaking at any time after October 26, 1950, provided not less than one year's notice in writing of its election to acquire was served upon the supplier by the Provincial Government. The price to be paid to the supplier for such lands, buildings, works, materials and plants as may be acquired by the Provincial Government was to be the fair market value at the time of the purchase. In case of difference, such value was to be determined by arbitration. The Provincial Government was to pay the price of the property acquired within a period of six months after the price had been determined. The assessee company was served with such a notice on January 3, 1,958. On January 4, 1959, the Government took over all the assets of the undertaking. A sum of Rs. 60,000 only was paid to the assessee company in that regard on June 3, 1959. There was a dispute about the valuation of the assets acquired. Ultimately by a memorandum dated November 18, 1963, the Chief Engineer, Punjab State Electricity Board, evaluated the assets of the undertaking at Rs. 2,02,781. Against this, the company had received Rs. 60,000 on June 3, 1959, and a further gum of Rs. 35,215 o, n January 8, 1963. A sum of Rs. 70,388 was due to the Government from the company on account of sale of power consumer?, deposit and contingency reserve. The Chief Engineer, therefore, proposed in the memorandum that the assessee be paid Rs. 40,000 if it agreed to close the case and give a receipt in final settlement. Subsequently on January 2, 1965, at a meeting of the directors of the assessee company, it was resolved that the offer of the Punjab State Electricity Board amounting to Rs. 40,000 be accepted provided they also refunded to the company Rs. 15,382 on account of contingency reserves previously deducted by them. Thereafter a sum of Rs. 40,000 was received by the company on October 26, 1965. The assessee company credited the said sum of Rs. 60,000 received on June 3, 1959, and the sum of Rs. 35,215 received on January 8, 1963, to suspense account. In the accounting year relevant to the assessment year 1966-67, the assessee adjusted the sum of Rs. 82,237 to the profit and loss account. This was arrived at after deducting from the amount of Rs. 2,05,626 which it received from the Punjab Government as compensation for the acquisition of its assets, a sum of Rs. 1,23,389 which was the depreciated value of the assets for the assessment year 1966-67. The ITO took the view that the balancing charge under s. 41(2) of the Act of 1961 was liable to be included in the assessee's total income for the assessment year 1966-67. He determined this balancing charge at Rs. 1,34,390 by deducting from the compensation amount of Rs. 2,05,626, a sum of Rs. 71,263, which according to him was the cost of assets.

3. The AAC on appeal by the assessee held that the sum of Rs. 1,34,390 could not be included in the assessment of the assessee for the assessment year 1966-67, because, according to him, the year of sale was to be the year in which the assets were taken over on acquisition and not the year in which the final payment was received or was determined or the entries were passed in the books. He accordingly excluded the inclusion of Rs. 1,34,390 from the income of the assessee for the assessment year 1966-67.

4. The Revenue took the matter in appeal to the Tribunal for the assessment year 1966-67. The ITO, however, taking cue from the said appellate order of the Assistant Commissioner for the assessment year 1966-67, reopened the assessment of the assessee for the assessment year 1959-60 on the ground that by reason of the failure of the assessee to disclose fully and truly the material facts regarding the assessment for that year, income for that year had escaped assessment with reference to the balancing charge in respect of the assets taken over by the Government. The ITO then revised the assessment for the assessment year 1959-60 by adding a sum of Rs. 1,34,390 to the income of the assessee. This assessment was upheld by the AAC on appeal by the assessee. He, however, directed the ITO to verify from the records the original cost of the assets and also the written down value and to verify the figure of profit under s. 10(2)(vii) of the Act of 1922. Against this order of the AAC for the assessment year 1969-70, the assessee preferred a second appeal to the Tribunal.

5. Both the appeals, i.e, one by the Department against the order of the AAC for the assessment year 1966-67 and that of the assessee for the assessment year 1959-60, were heard and disposed of by the Tribunal by its combined order. At the hearing of the appeals before the Tribunal, inconsistent pleas were raised on behalf of both the sides. On behalf of the assessee, it was contended that so far as the assessment year 1959-60 was concerned, this being a case of compulsory acquisition of the property, the taking over of the assets of the company by the Government did not amount to sale as contemplated by s. 10(2)(vii) of the I.T Act of 1922 and further no addition could be made in the assessment year 1959-60 as no money was payable in the accounting period relevant to that assessment year as per the provisions of s. 41(2) of the Act of 1961. For the assessment year 1966-67 in question, the argument advanced on behalf of the assessee before the Tribunal was that the amount was not includible in that year because although the final amount of compensation was received in the previous year relevant to the assessment year 1966-67, the amount of compensation payable had become due in the previous year relevant to the assessment year 1965-66, and prior to April 1, 1965, on which date the previous year relevant to the assessment year 1966-67 commenced.

6. So far as the assessment year 1959-60 was concerned, it was contended on behalf of the Department that the amount was includible in that year as the taking over of the assets of the assessee company, by the Government amounted to a sale within the provisions of s. 10(2)(vii) of the Act of 1922 and further the money had become due to the assessee as soon as the undertaking was transferred, which transfer admittedly took place in the previous year relevant to the assessment year 1959-60. For the assessment year 1966-67, it was contended that the balancing charge was clearly includible in the total income of the assessee for that year as the amount of compensation payable to the assessee clearly became due to the assessee in the previous year relevant to that year.

7. The Tribunal did not approach the matter so as to find out as to when, i.e, in which assessment year, the question of inclusion of the balancing charge came for consideration by the ITO. The Tribunal dealt with the cases of the two assessment years, i.e, 1959-60 and 1966-67, separately. For the assessment year 1959-60, it was held that the assessment for that year was validly reopened by the ITO under s. 147 read with s. 297(2)(d)(ii) of the Act of 1961. The Tribunal further took the view that as the assessment for the assessment year 1959-60 was reopened by invoking s. 297(2)(d)(ii), the question as to in which assessment year the balancing charge was includible had to be determined with reference to s. 41(2) of the Act of 1961. The Tribunal, then, on the view, that the amount of compensation became due only in the previous year relevant to the assessment year 1966-67 held that the balancing charge was not includible in the assessment year 1959-60. In the assessment year 1966-67, it was held that the amount of balancing charge became due to the assessee on the amount of compensation being ascertained in the previous year relevant to the assessment year 1966-67 and on that basis, the Tribnnal reversed the appellate order of the AAC for the assessment year 1966-67 and held that the amount was includible in the total income of the assessee for that year.

8. Shri K.P Bhatnagar, learned counsel for the assessee, submitted that the assessment for the assessment year 1959-60 had been held by the Tribunal to have been validly reopened with the aid of s. 297(2)(d)(ii) of the Act of 1961, and that the question as to in which assessment year the balancing charge was includible had to be decided with reference to the provisions of s. 10(2)(vii) of the Act of 1922 and not with reference to s. 41(2) of the Act of 1961. It was submitted that the question as to in which particular year a particular income is includible in the total income of an assessee is a question of substantive law and s. 297(2)(d)(ii) in so far as it states that “all the provisions of this Act shall apply accordingly “refers only to the procedural provisions of the Act of 1961 and not to the substantive provisions which create new rights or liabilities. It was, therefore, contended that the Tribunal was thus in error in holding that the requirements of s. 41(2) of the Act of 1961 were to be satisfied in determining the year in which the balancing charge was includible. Shri Bhatnagar submitted that on the Tribunal's coming to the conclusion that the assessment for the assessment year 1959-60 was rightly reopened and the acquisition of the property being a sale, as contemplated by s. 10(2)(vii) of the Act of 1922, the balancing charge was includible in the total income of the assessee for the assessment year 1959-60. Shri Bhatnagar cited some case law in support of his above contention. It was next submitted by Shri Bhatnagar that if it be held that the year of inclusion of the balancing charge has to be determined with reference to s. 41(2) of the new Act, the sale of the assets having taken place in the previous year relevant to the assessment year 1959-60, the amount of compensation was to be deemed to have become due to the assessee in that previous year, even though the same was paid or even ascertained subsequently. Shri Bhatnagar contended that the sale price becomes due and is payable to the seller on the date on which the sale takes place, i.e, the date on which the property gets transferred from the buyer to the seller. It was submitted that in that view of the matter also, the year in which the balancing charge was includible was the year in which the sale took place, i.e, the previous year relevant to the assessment year 1959-60.

9. Shri K.K Wadhera, learned counsel for the Revenue, on the other hand, submitted that the question of the inclusion of the balancing charge comes in for consideration only when the money payable in respect of the property sold becomes known and the same is includible in the assessment year relevant to the previous year in which such money payable becomes due on ascertainment as per the provisions of s. 41(2) of the Act of 1961. It was submitted that as per the finding of the Tribunal, the full amount of compensation was determined only in the previous year relevant to the assessment year 1966-67, the Tribunal was thus right in holding that the entire amount of balancing charge was includible for the assessment year 1966-67 only. Shri Wadhera also submitted that the assessee company was taken over by the Government in accordance with the terms of the grant of sanction by the Government to the assessee and that acquisition did not amount to a sale as contemplated by s. 10(2)(vii) of the Act of 1922. He went on to say that “sale” can take place only by a voluntary act of the seller and the purchaser as per contract between the parties and the present being a case of acquisition by the Government by invoking its statutory rights, the transaction did not amount to a sale. However, after the coming into force of the Act of 1961, the transaction in question was a “deemed sale” in view of the provisions of the Explanation to s. 41(4) read with s. 32(1) of the Act of 1961. The transaction not being a sale as contemplated by s. 10(2)(vii), the question of the balancing charge being includible for the assessment year 1959-60 did not arise for that reason also. It was next submitted by Shri Wadhera that even under s. 10(2)(vii) of the old Act, the balancing charge was includible in the total income of an assessee only in the year in which the money payable was ascertained as the sale could be deemed to have taken place only then and that the change of the language in the corresponding s. 41(2) of the Act of 1961 made the matter clear by stating that the money payable was to be includible in the previous year in which such money became due as against the year of sale as was provided for under s. 10(2)(vii) of the Act of 1922.

10. We have given the matter our careful consideration. The Tribunal in para. 12 of its order has observed that the only reasonable inference that could be drawn was that the settlement Avas arrived at during the period between April 1, 1965, and October 26, 1965, and the money due on the transfer of the assets became payable some time during that period. This is a finding of fact arrived at by the Tribunal and, in our opinion, the question referred does not seek to challenge this finding of fact by the Tribunal. Sri Bhatnagar submitted that there was no material before the Tribunal to arrive at that finding. His attention was, however, drawn to certain facts appearing on the record. Firstly, the ITO in his assessment order observed that it was proved that the assets were taken over on January 4, 1959, but at that time the sale price had not become quantified/and it was only in the year underassessment, i.e, 1966-67, that the amount of compensation became a determinate entity. The assessee did not challenge this finding of the ITO either in the grounds of appeal before the Appellate Tribunal, a copy of which is appended in the paper book, or in the course of arguments in appeal before the AAC. The Tribunal also noted the submission on behalf of the Department before it that the money payable became due just before they were actually paid, namely, on October 26, 1965. The Tribunal took note of the fact that there was a complete blockade between the date of the resolution dated January 2, 1965, of the board of directors of the assessee company and the actual date of receipt of the amount “of compensation, i.e, October 26, 1965. It was further noted that it was stated on behalf of the assessee before it that the assessee did not accept that the balancing charge was taxable even for the assessment year 1965-66. Here the Tribunal was referring to the assessment year 1965-66 inasmuch as that could be the only other year in which the amount of compensation could be said to have been ascertained. On pointing out this position regarding the year of ascertainment of the amount of compensation, Shri Bhatnagar did not pursue his submission that the money payable could not be said as having been ascertained in the previous year relevant to the assessment year 1966-67 in question.

11. Now, the money payable, i.e, the balancing charge, having been determined in the previous year relevant to the assessment year 1966-67 in question, it was in this year that the question of its inclusion in the total income of the assessee came up for consideration. The I.T Act, 1961, had come into force long before that on the repeal of the old Act of 1922. Thus the basis as to how and in which year the balancing charge was includible was clearly to be determined with reference to s. 41(2) of the Act of 1961, and there was no question of the Revenue looking back to the provisions of the old repealed act of 1922 in that regard. That being so, the year of inclusion of the balancing charge as per s. 41(2) has to be on the basis when the money payable became due and not on the basis of the date of sale of the assets. We find force in the submission of Shri Wadhera that for inclusion of the balancing charge under s. 41(2), the money payable can be held to have become due only when the same is ascertained even though in some cases the sale may be deemed to have taken place prior to that. Thus assuming that the transaction in question was a sale even according to the provisions of s. 10(2)(vii) of the old Act and that the sale had taken place in the previous year relevant to the assessment year 1959-60, the fact still remained that the amount of compensation not having been determined nor being ascertainable prior to the previous year relevant to the assessment year 1966-67, there was no question of the same having become due on any date prior to the date of the ascertainment. The amount in question thus became due in the previous year relevant to the assessment year 1966-67, and was rightly held by the Tribunal as includible in the total income of the assessee for the assessment year 1966-67 in question. An identical question came up for consideration before a Division Bench of this court in the case Gulati, Voluntary Liquidator, Panipat Electric Supply Co. Ltd. v. CIT [1972] 86 ITR 501. We reproduce below the portion of the judgment at page 512, wherein the point was dealt with by the court:

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

12. The Bombay High Court in the case of Akola Electric Supply Co. Pvt. Ltd. v. CIT [1978] 113 ITR 265, in a similar case of acquisition of assets of an electricity undertaking, followed the said decision of this court and held that even for invoking the proviso to s. 10(2)(vii), it was necessary that the amount for which the building, machinery or plant was sold must be known. In that case, the electricity undertaking was purchased by the State Electricity Board in 1959. The possession of the undertaking together with the assets was taken over on December 6, 1959. The amount payable was, however, ascertained only in March, 1962. On these facts, it was held that since the money payable was ascertained in March, 1962, the amount of balancing charge as contemplated under s. 41(2) of the Act of 1961 became chargeable to tax in the assessment year 1962-63. Another Bench of this court also dealt with a similar matter in the case of Addl. Commissioner Of Income-Tax…Petitioner v. Rohtak Textiles Mills Ltd.… [1982] 138 ITR 195. In that case, the assessee was running a certain electrical undertaking at four places. Three of them were taken over by the Electricity Board on April 7, 1962, relating to the assessment year 1963-64, and the fourth in May, 1964, i.e, in the previous year relevant to the assessment year 1965-66. For the former, the Board paid a compensation of Rs. 19 lakhs and for the latter Rs. 12 lakhs. The assessee was not satisfied with the conclusion of the Board in the matter of compensation and damages by way of arbitration and thereafter resort to courts was still available to the assessee. It was found that the price payable was not agreed to or adjudicated upon during the relevant previous years. It was held that the profits under s. 41(2) in respect of the respective transactions were not taxable in the assessment years 1963-64 and 1965-66, despite the fact that payments were made towards the price by the Board. This was a case where the price payable had not been agreed to or adjudicated upon during the relevant previous years and so the monies payable in respect of the assets could not be said to have become due in the respective previous years. The decision in the case of Gulati [1972] 86 ITR 501 (Delhi) was followed. Another Bench of this court in the case of Dalmia v. CIT [1982] 133 ITR 169, considered the question as to when a transfer of assets can be said to take place for determination of the year for the levy of capital gains tax under s. 45 of the Act. It was held that capital gains could arise to the company, which was also a case of the taking over of electricity undertaking only when the price of the assets acquired by the Government was ascertained by an agreement and capital gains could not arise at an earlier date because they were not known and they had to be included only at the time they were ascertained. We find ourselves in complete agreement with the aforesaid view as taken by a Bench of this court in the case of Gulati [1972] 86 ITR 501 and later followed in the case of Rohtak Textile Mills Ltd. [1982] 138 ITR 195, and respectfully follow the same. Shri Bhatnagar was unable to cite a single authority in which a contrary view may have been taken on the aforesaid proposition, viz., as to when the money payable in respect of an asset which is sold or acquired becomes due, when the same is not ascertained or is not ascertainable at the time of the acquisition or sale of the assets, but is ascertainable only subsequently. There is also no merit in the submission of Shri Bhatnagar that even though the sale price may be ascertainable subsequently, it is to be deemed to become due on the date on which the sale takes place and that, therefore, the date of sale in every case is to be held as the date on which the sale price becomes due. Shri Bhatnagar was unable to refer to us any provision in the Transfer of Property Act or to any judgment in support of this contention. In any case, the words “becomes due” as occurring in s. 41(2) have to be construed in the context of that provision. As pointed out earlier, the provisions of s. 41(2) are not workable if the aforesaid words are construed as suggested by Shri Bhatnagar. Shri Bhat-nagar's submission drawn to a logical conclusion would mean that on the sale price being ascertained in a particular year, the same shall be includible in the prior year of sale, if according to the provisions of the Transfer of Property Act, the sale took place in that prior year and that may be so done by reopening the assessment for that prior year subject to the law of limitation in that regard. Surely, there is nothing in s. 41(2) to warrant such an interpretation of that provision. As pointed out already above, the question of inclusion of the balancing charge would come in for consideration only in the year in which the sale price of the property is ascertained. That was done in the assessment year 1966-67 only.

13. There was scope for the argument as raised by Shri Bhatnagar if the case was to be decided under the provisions of s. 10(2)(vii) of the old Act of 1922, as that provision talked of the “year of sale” for inclusion of the balancing charge. However, it was to remove the doubt and the ambiguity as to the year in which balancing charge has to be included that the relevant words “the previous year in which the sale took place” were substituted by the words “the previous, year in which the moneys payable for the building, machinery, plant or furniture became due” in the new Act of 1961. Thus, under the new Act of 1961, there is no scope for the said argument of Shri Bhatnagar. In conclusion, we answer the question referred to us in the affirmative, i.e, in favour of the Revenue and against the assessee. In the circumstances of the case, the parties are left to bear their own costs of the reference.