Bombay High Court
Nagpur Electric Light And Power Co. Ltd. vs Commissioner Of Income-Tax on 23 January, 1987
Equivalent citations: [1988]171ITR33(BOM)
JUDGMENT Bharucha, J.
1. The assessee was a company carrying on the business of generating and supplying electric energy in Nagpur and Wardha. It did so under a licence granted under the provisions of Indian Electricity Act, 1910. The Maharashtra State Electricity Board served upon it a notice exercising the option to purchase the Wardha undertaking conferred by the licence. The possession of Wardha undertaking was conferred by the licence. The possession of the Wardha undertaking was delivered by the assessee to the Board on the midnight of March 11, 1967/March 12, 1967.
2. On May 22, 1967, an agreement was arrived at between the assessee and the Board which recorded the exercise of the option. The agreement stated that the assesee would sell and the Board would purchase the assessee's assets which are broadly classified into lands, buildings, plant and machinery, furniture and fixtures, stores and materials, etc. The purchase price, the agreement stipulated, would be determined at the market value in accordance with the provisions of section 7A(4) of the Electricity Act. "On account payment" was provided for by the agreement. The assessee received from the Board a sum of Rs. 4,43,134 as an "on account" payment and this was mentioned in its directors' report to the shareholders for the year ending March 31, 1967. On September 9, 1970, the assessee wrote to the Board stating that it was claiming Rs. 20,44,887 for the Wardha undertaking. As against the offer of the Board for Rs. 16,79,399, it offered to accept the sum of Rs. 18,62,143, i.e, it offered to split the difference. Adding 20 per cent. solatium to this sum of Rs. 18,62,143 the amount payable was Rs. 22,34,572. By its letter dated September 9, 1970, the Board informed the assessee that it was agreeable to so split the difference on the fulfillment of certain conditions with which we are not here concerned. The letter recorded that a sum of Rs. 15.58,458.61 would be the balance payable by the board to the assessee, taking into account the "on account" payment made and the amounts transferable to the Board under the provisions of law.
3. In making the assessment of the assessee for the assessment year 1967-68 the Income-tax officer included in the total income the income chargeable under section 41(2) of the Income-tax Act, 1961 (hereinafter referred as "the Act"), as well as the income chargeable as a capital gain in relation to the transfer to the Board of the Wardha undertaking. He held that the solatium was includible in the purchase price; that the difference between the amount of the consideration (original cost) and the written down value of the assets was taxable as income under section 41(2) of the Act; and, further that the difference between the balance of consideration (sale price) and the original cost of the assets was taxable as a capital gain. In the assessment order there was an error in the quantum which the Income-tax Officer corrected by an order under section 154 of the Act.
4. The assessee appealed to the Appellate Assistant Commissioner. The Appellate Assistant Commissioner held that the transfer to the Board of the Wardha undertaking was of business in its entirety with all assets, liabilities, obligations and rights; that it did not take place in the assessment year 1967-68 but in the assessment year 1971-72; and that the income arising therefrom was taxable only as a capital gain and not under section 41(2) of the Act.
Against the Appellate Assistant Commissioner order, the taxing authorities appealed to the Tribunal. The Tribunal noted four broad controversies :
(1) with regard to the identity of the property which changed hands;
(2) with regard to the character of the transaction;
(3) in which year or years was the income, if any, taxable; and (4) with regard to the amount of such income, if any.
5. The Tribunal held that it was not the business of the Wardha undertaking as a going concern which was transferred by the assessee to the Board; that the transaction between the parties was in nature of a sale ; and that the amount of sale price was inclusive of solatium ; and that the only income includible in the assessee's assessment for the assessment year 1967-68 was the capital gain relating to the sale and transfer of the movable property, whether depreciation was allowed on such property or was not so allowable, which delivered to the Board on March 11, 1967/ March 12, 1967.
At the instance of the assessee, the following question arising out of the Tribunal's judgment are referred to us :
"
1. Whether, on the facts and in circumstances of the case, it was the business of Wardha undertaking of the assessee that was taken over by the Maharashtra Board as a going concern for the consideration of Rs. 22,34,572 ?
2. Whether, on the facts and in the circumstances of the case, the property which was transferred from the assessee to the Maharashtra State Electricity Board consisted of the assets mentioned in the agreement dated May 22, 1967 between the said two parties in relation to which the consideration of Rs. 22,34,572 ultimately became payable ?
3. Whether, on the facts and in the circumstances of the case, the sum of Rs. 3,22,429 being 'solatium' which is the amount equal to 20 per cent. of the valuation of the assets is includible in the sale price for the purpose of determining the taxable capital gain ?
4. Whether, on the facts and in the circumstances of the case, any capital gains from the delivery of possession of movable assets on March 11, 1967/ March 12, 1967 are taxable in the assessment year 1967-68 ?"
It is not disputed by counsel that the answer to be given to the third question is governed by the judgment of this court in Akola Electric Supply Co. (P) Ltd. v. CIT [1978] 113 ITR 265 (Bom). That question is accordingly, answered in affirmative and in the favour of the Revenue.
6. In regard to the other three questions, the real point to be considered is whether what was transferred by the assessee to the Board was the business of the Wardha undertaking as a going concern or whether there was a sale of the various assets of that undertaking.
7. The provisions of section 4(2) with the Explanation thereto and section 45(1) of the Act may first be noted :
"41. Profits chargeable to tax. - ...
(2) Where any building, machinery, plant or furniture which is owned by the assessee and which was or has been used for the purpose of business or profession is sold, discarded, demolished or destroyed and the money 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, 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 : ...
Explanation. - Where the moneys payable in respect of the building, machinery, plant or furniture referred to in this sub-section become due in a previous year in which the business or profession for the purpose of which the building, machinery, plant, or furniture was being used is no longer in existence, the provisions of this sub-section shall apply as if the business or profession is in existence that previous year."
"45. Capital gains - (1) Any profits or gains arising from the transfer of capital assets effected in the previous year shall, save as otherwise provided in sections 5, 54, 54B and 54D, be chargeable 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."
8. Mr. Ghate, learned counsel for the assessee, drew our attention to the provisions of sections 6, 7, and 7A of the Electricity Act. It is not necessary to quote these provisions, but to emphasis only that section 6 confers the options of purchasing "the undertaking" and sections 7 and 7A talk of sale of "the undertaking". Mr. Ghate pointed out that the expression "undertaking" had been given the meaning of a "going concern with all rights, liabilities and assets as distinct from the various rights, liabilities and assets as distinct from the various rights and assets which composed it" by the Supreme Court in Rustom Cavasjee Cooper v. Union of India [1970] 40 Comp Cas 325 (SC).
9. Mr. Ghate relied upon the judgment of the Supreme Court in CIT v. Mugneeram Bangur and Co. . This was a case in which a firm, which carried on the business of buying land, developing it and then selling it, sold the business pursuant to an agreement, as a going concern, with its goodwill and stock-in-trade, to a company promoted by the partners of the firm, the company undertaking to discharge all debts and liabilities. The consideration was of the amount of Rs. 34,99,300 and the schedule to the agreement indicated how it was arrived at. The schedule set out the value of the land, goodwill, motorcars, lorries, furniture, fixtures, etc. The Tribunal held that the sum of Rs. 2,50,000, although shown as the value of the goodwill, was really the excess value of the land, which was the stock-in-trade, and that although the sale was that of the business as a going concern, the value of its stock-in-trade could be traced. The supreme Court held that the sale was a sale of the whole concern and no part of the price attributable to the cost of the land and no part of the price was attributable to the costs of the land and no part of the price was taxable. The mere fact that in the schedule to the agreement, the price of the land was stated did not lead to the conclusion that a part of the slump price was necessarily attributable to the land sold. There was no evidence that any attempt had been made to evaluate the land on the date of the sale. As the vendors were transfering the concern to a company constituted by the vendors themselves, no effort would ordinarily have been made to evaluate as on the date of sale. What had been put in the schedule was the cost of price as it stood in the books of the vendors. In view of the Supreme Court Judgement, the sale was of the whole concern and no part of the slump price was attributable to the cost of the land and no part of it was taxable.
10. Relying upon the aforesaid material and judgments, Mr. Ghate submitted that the transfer by the assessee to the Board was of Wardha undertaking as a going concern and no part of the consideration therefor could be attributable to any particular asset or be taxes under section 41(2) of the Act.
11. The position in law in regard to an electric company whose undertaking has been "compulsorily purchased" under the terms of its licence and the Electricity Act is concluded by the judgment of the supreme court in Fazilka Electric Supply Co. Ltd. v. CIT and, following this judgment, the Punjab High Court in Sonepat Light Power and General Mills Ltd v. CIT [1966] 59 ITR 392 has decided in several matters that the provisions of section 41(2) are attracted.
12. In case of Fazilka Electric Supply Co. Ltd. [1962] 46 ITR 127, The question before the Supreme court was, "Whether, on the facts and in circumtances of this case, and on a true interpretation of section 7(1) of the Indian electricity Act and clause 9 of the Fazilka Electric Licence, 1934, the transaction, by which the Government acquired the undertaking could be regarded as a sale within the meaning of section 10(2)(vii) of the Indian Income-tax Act, 1922 ?" Sub-section (1) of section 10 of the Indian Income-tax Act, 1922, stated that the Income-tax would be payable by an assessee in respect of the profits or any gains of any business, profession or vocation carried on by assessee. Sub-section (2) stated that such profits or gains would be computed after making certain allowances referred to in clauses (i) to (xv). Clause (vii) related to an allowance in respect of any building, machinery or plant was actually sold or its scrap value. It was not disputed before the Supreme Court that if there was a sale within the meaning of that clause. The Supreme Court noted the provisions of the Electricity Act and the rules made thereunder. It stated that if the provisions of the Electricity Act and were read along with the rules made thereunder, it became manifest that the condition as to the option of purchase, either by the local authority or the Government, was the result of agreement between the licensee and the Government. Section 7 was merely an enabling provision which allowed the parties to specify in the licence the period on the expiration could be exercised, subject to the maximum periods mentioned pulsory acquisition without reference to and independent of any agreement by the licensee. No doubt, the expression "compulsory purchase" had been used in the section, but, in substance, what it provided for was that the parties could agree to increase the market value of the building, plant etc. by a certain percentage when the option of purchase was exercised and the price so calculated had to be paid. If the whole scheme of the Electricity Act and the rules made thereunder was kept in mind, it became obvious that notwithstanding the use of the expression "compulsory purchase" in the second proviso to sub-section (1) of section 7, there was no compulsory purchase or compulsory acquisition in the sense in which that expression was ordinarily understood. There was a sale of building, machinery and plant within the meaning of section 10(2)(vii).
13. This decision was first followed in the case of Sonepat Light, Power and General Mills Ltd v. CIT [1966] 59 ITR 392, by the Punjab High Court and had been followed repeatedly since. The Punjab and Haryana High Court in the most recent case of Modi Electric Supply Co. v. CIT [1980] 126 ITR 403 held that upon the compulsory purchase under the Electricity Act of the assessee's undertaking supplying electricity, there had been a sale within the meaning of section 41(2), regardless of the fact that there was no sale deed executed on the date upon which the take-over had been effected.
14. Having regard to the Judgement in Fazilka Electric Supply Co. Ltd.'s case and the judgments of the Punjab High Court to which we have adverted, we are unable to take a view that would answer the questions posed to us in favour of the assessee.
15. In the result, the first question is answered in the negative and in favour of the Revenue; the second question is answered in the affirmative and in favour of the Revenue. The third question is answered in the affirmative and in favour of the Revenue; and the fourth question is answered in the affirmative and in favour of the Revenue.
16. No order as to costs.