Vadilal Soda Ice Factory v. Commissioner Of Income-Tax, Gujarat Ii.

1. The reference under section 66 (1) of the Income-tax Act, 1922, is made at the instance of the assessee. It arises out of assessment to income-tax made on the assessee for the assessment year 1961-62, the corresponding account year being Samvat year 2016, that is, 1st November, 1959, to 20th December, 1960. The assessee is a registered firm and, prior to its compulsory acquisition by the State, the assessee owned an ice factory situate on leasehold land in Kalupur area. The land together with the ice factory standing on it was compulsorily acquired by the State for expansion and remodelling of the Ahmedabad Railway Station under the provisions of the Land Acquisition Act, 1894, and, consequent on such compulsory acquisition, the assessee had to shift the site of the ice factory to another locality in Gomtipur area. The proceedings for determining the amount fixing the amount of compensation was made by him on 5th October, 1960, during the previous year relevant to the assessment year 1961-62. The total compensation payable to the assessee was fixed at Rs. 4,62,092 which was very much more than the original cost of acquisition to the assessee. The assessee in its return for the assessment year 1961-62 did not dispute that the compulsory acquisition had resulted in capital gain but, according to it, the extent of the capital gain was only Rs. 81,301. The assessee sought to exclude, in computing the capital gain, Rs. 37,202 being the amount of solatium awarded under section 23 of the Land Acquisition Act, 1894, and Rs. 31,620, made up of Rs. 16,200 representing compensation on account of extra cost of transport which the assessee would have to incur by reason of shifting the site of the ice factory from its present location to Gomtipur area and Rs. 15,420 representing compensation on account of lower selling price which the assessee would be able to realise by reason of the quality of ice being affected due to inferior quality of water available at the new site. The assessee also contended that two sums of Rs. 7,000 and Rs. 50,000, one representing compensation for loss of contracts and the other representing compensation for loss of profits, were not revenue receipts and were, therefore, not includible in the total income of the assessee. There was also a sum of Rs. 5,310 received by the assessee as compensation for salary which had to be paid to the employees who could not be discharged immediately on the acquisition of the ice factory. This amount too, according to the assessee, did not represent revenue receipt; the contention of the assessee was that it was part of capital gain. These were some of the contentions taken by the assessee before the Income-tax Officer but they were all rejected and the Income-tax Officer included the sums of Rs. 37,202 and Rs. 31,620 in the full value of the consideration for computation of capital gain and treated the sums of Rs. 7,000, Rs. 50,000 and Rs. 5,310 as revenue receipts includible in the taxable income of the assessee. The assessee carried the matter in appeal to the Appellate Commissioner and, in the appeal, a further contention was raised by the assessee that compulsory acquisition did not amount to sale or transfer of the property within the meaning of section 12B and profits or gains arising to the assessee from such compulsory acquisition were not taxable as capital gains under that section. This contention was negatived by the Appellate Assistant Commissioner who held that, though compulsory acquisition may not amount to sale, it certainly involved transfer of the property from the assessee to the State and was, therefore, comprised within the plain natural meaning of the word "transfer" in section 12B. The other contentions raised by the assessee were also rejected and the view taken by the Income-tax Officer in regard to the disputed items was confirmed. This led to a further appeal to the Tribunal but the Tribunal also took the same view and rejected the appeal. The assessee thereupon applied for a reference and, on the application, certain questions of law arising out of the order of the Tribunal were referred for the opinion of this court.

2. The first question raises the point whether compulsory acquisition of property amounts to transfer within the meaning of section 12B (1) so as to give rise to capital gain taxable under that section. Section 12B (1) provides that tax shall be payable by an assessee under the head "Capital gains" in respect of any profits and gains, arising from the sale, exchange, relinquishment or transfer of a capital asset effected after the 31st day of March, 1946, and such profits and gains shall be deemed to be income of the previous year in which the sale, exchange, relinquishment or transfer of a capital asset was effected during the year of account. The profits or gains arising to the assessee as a result of compulsory acquisition of the land together with the ice factory cannot, therefore, be brought to charge under section 12B (1) unless it can be shown that compulsory acquisition falls within any one of the following for legal concepts, namely, sale, exchange, relinquishment or transfer. Now, obviously, compulsory acquisition of property cannot be regarded as sale since consensual relation is an essential element in the concept of sale. If we may quote the words of Viscount Simonds in John Hudson & Co. Ltd. v. Kirkness :

"To say of a man who had his property taken from him against his will and been awarded compensation in the settlement of which he has had no voice, to say of such a man that the has sold his property appears to me to be as far from the truth as to say of a man who has been deprived of his property without compensation that he has given it away. Alike in the ordinary use of language and in its legal concept a sale connotes the mutual assent of two parties."

It was for this reason that though before the revenue authorities the contention of the assessee was that compulsory acquisition of the ice factory and the land beneath it amounted to sale within the meaning of section 12B (1), this contention was not pressed at the time of the application for reference and the first question before us is confined only to the point whether such compulsory acquisition amounted to transfer within the meaning of that section. It is to this limited question, therefore, that we must now address ourselves.

3. The word "transfer" is not a term of art and has not a technical meaning. It is a word of the widest import and includes every act by which property may pass from one person to another transfer made by inter vivos, that is, by act of parties, or it may be by operation of law in invitum. Earl Jowitt, in The Dictionary of English Law, says in regard to "transfer" :

"In the law of property, a transfer is where a right passes from one person to another, either, (1) by virtue of an act done by the transferor with that intention, as in the case of a conveyance or assignment by way of sale or gift, etc.; or (2) by operation of law, as in the case of forfeiture, bankruptcy, descent, or intestacy."

4. Since the word "transfer" standing by itself is a comprehensive word, it would include not only transfer by act of parties but also transfer by operation of law. Section 2(d) of the Transfer of Property Act makes it clear that nothing contained in that Act shall be deemed to effect any transfer by operation of law save as provided by section 57 and Chapter IV of that Act. The word "transfer" in section 12B (1) would, therefore, ordinarily include transfer by operation of law, unless there is anything in the context which compels us to give a limited meaning to that word by confining it only to transfer to act of parties. We do not find anything in the section which militates against the broad general connotation of the word "transfer". It was suggested on behalf of the assessee that the words "sale, exchange, relinquishment or transfer... effected after the 31st day of March, 1946" postulated that there must be some one to effect the transfer and that indicated that transfer by operation of law was intended to be excluded from the scope and ambit of the section. But this suggestion is based on a misreading of the language used by the legislature. The legislature has deliberately used the past-participle "effected" without indicating the causal agency so that transfer may be effected either by the assessee or as a result of operation of law. Now, if the word "transfer" as used in section 12B (1) includes transfer by operation of law, compulsory acquisition of property would undoubtedly come within the scope and ambit of that section. When there is compulsory acquisition of property, the right, title and interest in the property passes from the owner to the State and the State becomes vested with the full ownership of the property consisting of the totality of right, title and interest in the property and there is, therefore, clearly transfer of property from the owner to the State. The assessee contended, relying on section 16 of the Land Acquisition Act, 1894, that when the collector takes possession of the property after making an award, the property vests absolutely in the State free from all encumbrances and, therefore, the legal effect which results is that the right, title and interest of the owner as also of the encumbrancers is extinguished and new rights in the property are created in favour of the State. But this contention proceeds on a misapprehension of the change which takes place in jural rights and interests in the property as a result of compulsory acquisition. Compulsory acquisition divests all persons having right, title or interest in the property of such right, title and interest and vests the property wholly in the State. No right, title and interest remains outstanding in any person, whether he be the owner or encumbrances. There is thus clearly transfer of the right, title and interest of the owner or encumbrancers in the property to the State and though such transfer takes place by reason of a unilateral act on the part of the State, it is clearly comprised within the plain natural connotation of the word "transfer" as used in section 12b (1). compulsory acquisition of property must, therefore, beheld to amount to transfer within the meaning of section 12B (1) and profits or gains arising to the assessee from such compulsory acquisition must beheld to be taxable as capital gains under that section. This view which we are taking is clearly supportable on a plain natural construction of the language used in section 12B (1) and does not need any authority to support it. But we find there are at least three decisions, one of the Madhya Pradesh High Court in Commissioner of Income-tax v. Shrikrishan Chandmal, and the other two of the Madras High Court in Wilfred Pereira Ltd v. Commissioner of Income-tax and commissioner of Income-tax v. United India Life Assurance Co. Ltd., where the same view has been taken. We must, therefore, answer the first question in the affirmative.

5. The second question referred to us relates to the amount of Rs. 37,202, awarded to the assessee under section 23(2) of the Land Acquisition Act, 1894. The controversy between the parties is whether this amount received by the assessee is liable to be taken into account in computing capital gain resulting from compulsory acquisition of the land and the ice factory standing on it. The assessee contended that it is not liable to be taken into account since it is not part of the compensation for the capital asset, namely, the land together with the ice factory but it represents compensation given in consideration of the compulsory nature of the acquisition. This contention is not well founded for it proceeds on a wrong assumption as if the amount awarded under section 23(2) of the Land Acquisition Act, 1894, which is commonly known as solatium is by way of compensation for something other than the property acquired by the State. The amount of solatium provided under section 23(2) of the Land Acquisition Act, 1894, is undoubtedly given in consideration of the compulsory nature of the acquisition but it still represents consideration for the property acquired. It is because the transfer of the property is involuntary, i.e., against the will of the owner, that section 23(2) says that in addition to the market value of the property the State shall pay to the expropriated owner a sum of 15 per cent. of such market value. The additional amount directed to be given because of the compulsory nature of the acquisition goes to augment the compensation for the property acquired and it is, therefore, as much part of the compensation of the property acquired as the market value of the property under the first clause of section 23. The amount of solatium would, therefore, form part of the consideration received by the expropriated owner for the compulsory acquisition of the property and it would have to be taken into account in computing capital gain arising to the assessee from such compulsory acquisition. The second question must also, therefore, be answered in the affirmative.

6. So far as the third question is concerned, it relates to the extra sums of Rs. 16,200 and Rs. 15,420 awarded to the assessee on account of extra cost of transport which would have to be incurred by the assessee by reason of shifting of the site to another locality and lower price which the assessee would be able to realise by reason of inferior quality of water being available at the new site. This question is, however, not pressed by the assessee and it is, therefore, not necessary to answer it.

7. The fourth question seeks to challenge the decision of the Tribunal in regard to two sums of Rs. 7,000 and Rs. 50,000 received by the assessee as compensation for loss of contracts and loss of profits. The assessee contends that these two amounts represent capital receipts and non revenue receipts and are, therefore, not includible in the total income of the assessee. But this contention stands completely answered by the decision of the Supreme Court in Commissioner of Income-tax v. Shamsher Printing Press. There, a sum of Rs. 57,435 was paid by the Government to the assessee by way of compensation on account of loss of profits arising due to the requisition of its printing press. The question was whether this amount was capital receipt or revenue receipt : if former, it would be subject to tax. The Supreme Court held that since this amount was received by the assessee as compensation for loss of profits, it was a revenue receipt liable to tax. Similarly, in the present case too, the sums of Rs. 7000 and Rs. 50,000 being received by the assessee as compensation for loss of contract and loss of profits must be held to be revenue receipts and the view taken by the Tribunal that they were taxable as revenue receipts must be upheld. The fourth question must also, therefore, be answered in the affirmative.

8. So far as the fifth and last question is concerned, the learned Advocate-General appearing on behalf of the revenue stated before us that if the salary paid to employees who could not be discharged immediately on the acquisition of the ice factory by the State, for which compensation of Rs. 5,310 was awarded to the assessee, was not allowed as a deduction by way of business expenditure in the assessment of the assessee to income-tax, the revenue would delete the addition of Rs. 5,310 in the taxable income of the assessee. On this Statement being made by the learned Advocate-General, Mr. Thakore, learned advocate appearing on behalf of the assessee, did not press this question and hence it is not necessary to answer it.

9. The result, therefore, is that questions Nos. 1, 2 and 4 are answered in the affirmative and questions Nos. 3 and 5 are not answered as they are not pressed on behalf of the assessee. The assessee will pay the costs of the reference to the Commissioner.