1. In the two references, R.A. Nos. 15 and 16 of 1972-73, arising out of I.T.A. Nos. 325 and 331 of 1969-70, relating to the assessment year 1964-65, the following three questions have been referred for our opinion under Section 256(1) of the I.T. Act, 1961 :
" (1) Whether, on the facts and in the circumstances of the case, the Tribunal was light in holding that the sum of Rs. 39,341 representing retrenchment compensation, was not an allowable deduction either under Section 28(i) or under Section 37 of the I.T. Act, 1961 ?
(2) Whether, on the facts and in the circumstances of the case, there was sale within the meaning of Section 41(2) of the I.T. Act, 1961, even though no sale deed was executed or registered on the date when the undertaking was taken over and stood vested in the Board ?
(3) Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the sum of Rs. 23,534 was a part of the purchase price and would, therefore, go into computation in working out the profit under Section 41(2) of the I.T. Act ? "
2. The facts in the context of which the aforesaid three questions are to be considered are not in dispute and can be stated thus :
The assessee, a limited company (hereinafter referred to as the " asses-see-company "), had supply of electricity as its business. The Punjab State Electricity Board (hereinafter referred to as " the board "), exercised its option to purchase from the assessee-company the said undertaking, vide the board's letter, by way of a notice, No. 5015/LB-3(32)61 dated January 16, 1962, under Sub-section (1) of Section 6 of the Indian Electricity Act, 1910, as amended by the Indian Electricity (Amendment) Act, 1959 (hereinafter to be referred to as " the act "), read with sub-clause (1) of clause 9 of the Bhatinda Electric-Licence 2003 (Bikrami) on the expiry of the period of licence on 7th and 8th June, 1963 (midnight falling between 7th and 8th June, 1963). The assessee-company was required by the said notice to deliver the aforesaid undertaking including the land, building, works, material, equipment, machinery and plants, etc., pending determination and the payment of the purchase price in accordance with law. The said notice also notified to the assessee-company that the undertaking shall vest in the board as its absolute property as laid down in Section 7 of the Act (as amended) and the licence of the company shall cease to have any further operation. The assessee-company, in view of the impending transfer of its undertaking in question, served notice of termination of services of its employees on May 6, 1963, stating therein that the assessee-company shall not require their services after the expiry of the licence, i.e., midnight of 7th and 8th June, 1963, and their services would stand terminated from June 8, 1963. It was further mentioned that the said notice be treated as one month's notice under the provisions of the Industrial Disputes Act, 1947 (hereinafter referred, to as the "Industrial Disputes Act"), The period of the said one month's notice expired on June 6, 1963. The assessee's said undertaking was duly taken over on the midnight of 7th and 8th June, 1963, and a token payment of Rs. 1,50,000 was made to the assessee-company at the time of taking over of the said undertaking. The taking over of the said undertaking was expressed in the following language ;
" Consequent upon the expiry of the Bhatinda Electric Licence No. 1992 (Bikrami) the assets (as per joint enumeration) of the undertaking of the Modi Electric Supply Co. Ltd., Bhatinda, have been handed over by the company to the Punjab State Electricity Board on the midnight falling between the 7th and 8th June, 1963. Token payment of Rs. 1.50 lakhs (one lakh and fifty thousand) made by cheque by the Board to the company."
3. The assessee-company paid on July 6, 1953, Rs. 39,341 to its employees by way of retrenchment compensation in pursuance of their services being terminated by notice dated May 6, 1963.
4. Coming now to the question posed, it may be observed that the matters involved are not res integra as the subject-matter of each question stands covered by an authoritative decision of the Supreme Court and what the learned counsel for the assessee-company has sought to do is to point out certain features which according to the learned counsel made the ratio of those decisions inapplicable to the present case. We, however, are of the opinion that the questions are squarely covered and there are no such distinguishing features as to take the matter away from the cover of the ratio of those decisions as would be presently shown.
5. Coming now to the first question, the learned counsel for the assessee-company vehemently canvassed that the sum of Rs. 39,341 paid by the assessee-company to its employees by way of retrenchment compensation was truly an expenditure laid out for the purpose of business. The learned counsel lays stress on the fact that the assessee-company was still within its rights to resort to the expediency of retrenching its employees by following the procedure enacted under Section 25F of the Industrial Disputes Act. It was maintained on behalf of the assessee-company that the reasons which impelled the assessee-company to take those steps are totally immaterial and that even if the reason was the impending transfer of the assessee-company's undertaking on the midnight of 7th and 8th June, 1963, which circumstance would have entitled its employees to such a retrenchment compensation as is envisaged under Section 25FF of the Industrial Disputes Act, that would not change the character of the expenditure in question so long it was incurred when the business was still a going concern.
6. What reasons prompt an employer to retrench all or any of its employees are very much germane to the exercise of that power both in the context of the Industrial Disputes Act as also in the context of the provisions of Section 41(2) of the I.T. Act. The reason in both cases is to be one which is dictated by the business interest, i.e., it is the desire not to carry on the business that has to prompt the employer to take the drastic step of retrenching any or all of its employees. Where such is not the case, the employer may not succeed in retrenching any of its employees. If that would be the case there would be no question of payment of retrenchment compensation and consequently of deduction of that amount under Section 41(2) of the I.T. Act. Surely, retrenchment of all the employees of a concern cannot be for the reason of carrying on of the business. The reason for taking such a step would be the closure of the business. That being the case, any expenditure incurred by the assessee-company by way of retrenchment compensation would not be an expenditure laid out for the purpose of business. Any expenditure by way of retrenchment compensation on account of the closure of the business would be an expenditure envisaged by Section 25FFF of the Industrial Disputes Act, the payment whereof is concurrent with the closure of the business, and the same cannot be considered a payment during the course of business. In the present case, the business of the assessee-company came to a close on the midnight of 7th and 8th June, 1963, as a result of transfer of its undertaking by way of purchase by the Board in which case the right to the payment of retrenchment compensation accrued to its employees in terms of Section 25FF of the Industrial Disputes Act on the midnight of 7th and 8th June, 1963, which coincided with the closure of the business.
7. Since the step of the assessee-company of retrenching its employees would have proved an infructuous one in the context of the Industrial Disputes Act and consequently the amount of retrenchment compensation would not have been considered as an expenditure laid out for the purpose of the business, the attempt on the part of the assessee-company in the present case to pay to its employees before the midnight of 7th and 8th June, 1963, to what they would have been entitled to be paid on the midnight of 7th and 8th June, 1963, in accordance with the provisions of Section 25FF of the Industrial Disputes Act, is merely an abortive attempt to shift the expenditure from the capital account to the revenue account. We are, therefore, clearly of the view that the Tribunal rightly disallowed the claim of the assessee-company following the ratio of the Supreme Court decision in CIT v. Gemini Cashew Sales Corporation [1967] 65 ITR 643.
8. The learned counsel for the assessee-company fairly conceded that, the decision of the Supreme Court in Fazilka. Electric Supply Co. Ltd. v. CIT [1962] 46 ITR 127 and Hoshiarpur Electric Supply Co. v. CIT [1971] 79 ITR 164, a Bench decision of our own High Court, truly cover the subject-matter of, question No. 2 against the assessee-company and he refrained from contesting the decision of the Tribunal in regard to the subject-matter of question No. 2.
9. As regards the subject-matter of question No. 3, it may be observed that the learned counsel for the assessee-company merely contended that the ratio of the decision of the Bench of this court in Sonepat Light, Power and General Mills Ltd. v. CIT [1966] 59 ITR 392, would no longer be applicable as the old provisions dealing with the payment of purchase price and the fixation thereof, for the undertaking transferred either under Section 5 or Section 6 of the Electricity Act, have since undergone a change.
10. Before taking notice of the old provisions and the new provisions relevant to the point, it would be desirable to notice the view expressed by this court on the point. In Sonepat Light, Power and General Mills Ltd.'s case [1966] 59 ITR 392 (Punj), as in the present case, the undertaking of the assessee-company (electricity company) was purchased by exercising option in terms of the licence and the provisions of Section 6(3) of the Act. One of the questions that was referred by the Tribunal for the opinion of the High Court in that case was whether the solatium paid had been rightly included as part of the sale price. It was argued on behalf of the assessee-company that it was only the fair market value of the machinery, etc., referred to in the first proviso to Section 7(1) of the Act which should be treated as " amount " for which the machinery had been " actually sold " within the meaning of Section 10(2)(vii) of the I.T. Act, which provision is equivalent to Section 28(1) of the present Act; and that the additional stipulated amount paid by virtue of the agreement contained in para. 9 of the licence, in pursuance of the second proviso to Sub-section (1) of Section 7 of the Act, was in the nature of a solatium for the cessation of the business of the assessee and could not be computed as part of the sale price and was, therefore, not taxable under the deeming provisions of Clause (vii) of Sub-section (2) of Section 10 of the I.T. Act. This court first highlighted the fact that the expression "solatium " had not been used either in the second proviso to Section 7(1) of the Act or in para. 9 of the licence granted to the assessee under the Act and, then, dealing with the first contention, repelled the same broadly with the following observations (p. 398) :
" It appears to us that the relevant part of Section 7(1) of the Electricity Act merely provides a mode and furnishes the criteria on the basis of which the sale price for the machinery, etc., payable by the Government to the assessee has to be determined. It was admitted before us by the learned counsel for both the sides that the sale price of the respective parts of the undertaking, i.e., power house, buildings, sub-station, etc., is inclusive of the fair market value and the 20 per cent. thereof and that the break-up of the figures is not available with them. Even the statement of depreciable assets and profit under Section 10(2)(vii) of the Income-tax Act for the assessment year in question signed by the voluntary liquidator of the assessee and accepted by the Income-tax Appellate Tribunal, Delhi, shows that the total amount has been shown as sale price and the so-called solatium has not been calculated or provided separately. The relevant words used in Section 10(2)(vii) of the Income-tax Act are :
' In respect of any such building, machinery or plant which has been sold, the amount by which the written down value thereof exceeds the amount for which the building, etc., is actually sold. ' After the judgment of the Supreme Court in the Fazilka Electric Company's case [1962] 46 ITR 127 (SC) it is settled that the machinery, plant, etc., were sold by the assessee to the Government. The question which then arises is what is the amount for which those things were actually sold. We think that to ask that question is to answer it. It is the total amount which the assessee received from the Government on account of the sale which is the amount for which the sale took place. It is nobody's case that the so-called solatium was payable independently of or without the sale of the property in question in any circumstance whatsoever.
In the judgment of the Supreme Court in the Fazilka Electric Supply Company's case [1962] 46 ITR 127 (SO), the following observation appears to be not only relevant but significant :
' The second proviso is another enabling provision which enables the parties to specify in the licence such percentage, if any, not exceeding twenty per centum, as should be added to the value of the building, plant, machinery, etc., when the option of purchase is exercised. No doubt, the expression used in the proviso is " compulsory purchase "; but in substance what it provides for is that the parties may agree to increase the market value of the building, plant, etc., by a certain percentage when the option of purchase is exercised and the price has to be paid. The use of the expression "if any " after the word " percentage " shows that the parties may agree not to increase the market value at all.' (Underlining* by us).
The underlined sentences in the above-said observations of their Lordships of the Supreme Court further indicate :
(i) that the result of addition of the stipulated amount upto 20 per cent. is to fix a higher market value of the property sold ; and
(ii) that the payment of the so-called solatium is also not compulsory under the statute as in the case of compulsory acquisition under the Land Acquisition Act, but is subject to an agreement between the parties and the statute only lays down the maximum outside limit of 20 per cent. within which the Government and the licensee may agree to the payment of any amount or no such amount at all.
The Supreme Court judgment further shows that the licence under the Electricity Act is in the nature of a contract between the parties and that there is, in fact, no compulsory purchase in the sense in which that expression is ordinarily understood. This would show that the total amount paid by the Government to the assessee, in pursuance of Section 7 of the Electricity Act, and paragraph 9 of the ' agreement ', is the sale price.
It may also be noticed in this connection that in case of difference between the parties as to the value to be paid to the licensee under Section 7(1), it has to be decided by statutory arbitration. The additional sum of 20 per cent. over and above the normal market value is part of the consideration for the agreed sale provided in the licence itself and the assessee can compel its payment in appropriate proceedings ; it is not in the nature of art ex gratia payment.
' Purchase money ' in Section 7(3) of the Electricity Act would include each of the amounts mentioned in the first and second provisos to Section 7(1) of that Act. It cannot be argued that the creditors of the assessee can reach that part of the amount which is paid under the first proviso but not the sum of 20 per cent. thereon paid in pursuance of an agreement under the second proviso. This also strengthens the view we are taking.
We think that it is not correct to call the amount paid by the Government to the assessee under the second proviso to Sub-section (1) of Section 7 of the Electricity Act as "solatium" and that in fact the amount which may become payable and did in this case become payable under that provision is a part of the amount paid for the sale of the undertaking.
We, therefore, hold that the word ' amount ' used in Section 10(2)(vii) of the Income-tax Act includes the total amound paid by the Government to the assessee by virtue of paragraph 9 of the licence and in pursuance of Section 7 of the Electricity Act, including what is called ' their fair market value ' under the first proviso and the added value up to 20 per cent. by virtue of the second proviso to Sub-section (1) of Section 7 of the Electricity Act. "
11. With respect we entirely concur in the view aforesaid. The old provisions of Section 7(1) oi the Act are in the following terms :
" 7. (1) Where a licence has been granted to any person not being a local authority, and the whole of the area of supply is included in the area for which a single local authority is constituted, the local authority shall, on the expiration of such period, not exceeding fifty years, and of every such subsequent period, not exceeding twenty years, as shall be specified in this behalf in the licence, have the option of purchasing the undertaking, and, if the local authority, with the previous sanction of the State Government, elects to purchase, the licensee shall sell the undertaking to the local authority on payment of the value of all lands, buildings, works, materials and plant of the licensee suitable to, and used by him, for the purposes of the undertaking, other than a generating station declared by the licence not to form part of the undertaking for the purpose of purchase, such value to be, in case of difference or dispute, determined by arbitration :
Provided that the value of such lands, buildings, works, materials and plant shall be deemed to be their fair market value at the time of purchase, due regard being had to the nature and condition for the time being of such lands, buildings, works, materials and plant, and to the state of repair thereof, and to the circumstance that they are in such a position as to be ready for immediate working, and to the suitability of the same for the purposes of the undertaking :
Provided also that there shall be added to such value as aforesaid such percentage, if any, not exceeding twenty per centum on that value as may be specified in the licence, on account of compulsory purchase. "
12. Section 7A, which is the provision on the point, after amendment, reads as under :
" (1) Where an undertaking of a licensee, not being a local authority, is sold under Sub-section (1) of Section 5, the purchase price of the undertaking shall be the market value of the undertaking at the time of purchase or where the undertaking has been delivered before the purchase under Sub-section (3) of that section, at the time of the delivery of the undertaking, and if there is any difference or dispute regarding such purchase price, the same shall be determined by arbitration.
(2) The market value of an undertaking for the purpose of Sub-section (1) shall be deemed to be the value of all lands, buildings, works, materials and plant of the licensee suitable to, and used by him, for the purpose of the undertaking, other than (i) a generating station declared by the licensee not to form part of the undertaking for the purpose of purchase, and (ii) service lines or other capital works or any part thereof which have been constructed at the expense of consumers, due regard being had to the nature and condition for the time being of such lands, buildings, works, materials and plant and the state of repair thereof and to the circumstance that they are in such position as to be ready for immediate working and to the suitability of the same for the purpose of the undertaking, but without any addition in respect of compulsory purchase or of goodwill or of any profits which may be or might have been made from the undertaking or of any similar consideration.
(3) Where an undertaking of a licensee, being a local authority, is sold under Sub-section (1) of Section 5, the purchase price of the undertaking shall be such as the State Government, having regard to the market value of the undertaking at the date of delivery of the undertaking, may determine.
(4) Where an undertaking of a licensee is purchased under Section 6 the purchase price shall be the value thereof as determined in accordance with the provisions of Sub-sections (1) and (2) :
Provided that there shall be added to such value such percentage, if any, not exceeding twenty per centum of that value as may be specified in the licence on account of compulsory purchase."
13. The learned counsel for the appellant highlighted the expression
" the purchase price of the undertaking shall be the market value of the undertaking at the time of purchase or............at the time of delivery of the undertaking"
occurring in
sub-section (1) of section 7a and urged that anything paid to the assessee beyond the market value would not represent the purchase price of the undertaking.
14. We do not think that the amendment which the relevant provision has undergone, has at all changed the position with regard to the reckoning of the purchase price of an undertaking purchased under Section 6 of the Act.
15. While the old provisions dealt with the fixation of the purchase price of the undertaking uniformly without going into the distinction whether the undertaking purchased was owned by a local authority or the purchase was effected under Section 5 or Section 6, the amended Section 7A, dealt with the very question, sought to provide separately regarding the purchase price and its fixation for the undertaking, (i) owned by a local authority, and (ii) the undertaking which was purchased under Section 5, and (iii) the undertaking that was purchased under Section 6 of the Act. While for the private undertaking purchased under Section 5, the purchase price was to be the market value thereof at the relevant time as worked out under Section 7A(2) and for the undertaking owned by a local authority sold under Section 5(1), the purchase price for its undertaking was to be the one which the State Government having regard to the market value thereof at the relevant time might determine, the purchase price of an undertaking which was purchased under Section 6 of the Electricity Act was to be the value thereof as determined in accordance with the provisions of Sections 7A(1) and 7A(2) of the Act plus such amount as may be specified in the licence but not exceeding 20 per cent. of the market value determined in accordance with the provisions of Sub-sections (I) and (2) of Section 7 of the Act. Thus, from a perusal of the provisions of Sub-section (4) of Section 7 of the Act, it would be clear that the purchase price of an undertaking purchased under Section 6 of the Electricity Act is not the market, value thereof as in the case of an undertaking purchased under Section 5(1) of the Act but it is equivalent to a value determined in accordance with the provisions of Sub-section (4) of Section 7A. Reference to Sub-sections (1) and (2) in Sub-section (4) of Section 7A is merely to provide the mode for the determination of the value which is to be the purchase price of the undertaking and, therefore, the expression
" the purchase price of the undertaking shall be the market value of the undertaking at the time of purchase or at the time of the delivery of the undertaking"
occurring in Section 7A(1), which was highlighted by the learned counsel for the assessee-company, would not in any way support the contention that the purchase price of the undertaking purchased under Section 6 of the Act would be equal only to the market value thereof.
16. In the result, we answer all the three questions referred for opinion in the affirmative and against the assessee and dispose of the references accordingly. The parties are left to bear their own costs.
Kulwant Singh Tiwana, J.
17. I agree.