Case: Mangalore Electric Supply Co. Ltd Vs. The Commissioner Of Income Tax, West Bengal

The appellant, the Mangalore Electric Supply Co. Ltd., was carrying on the business of distribution of electricity in Mangalore, South Kanara District, under a licence granted by the Government of Madras in favour of Messrs. Octavious Steel & Co. Ltd. The licensee had assigned its rights to the appellant with the previous consent of the State Government. Under section 4 ofthe Madras Electricity Supply Undertakings (Acquisition) Act, 1954, the State Government had the power to take over any electricity undertaking, declaring that it shall vest in the Government on the date specified therein. In exercise of that power, the Government of Madras passed an order declaring that the appellants undertaking would vest in the Government on December 31, 1956, which date was later advanced to October 15, 1956. The appellants undertaking was accordingly acquired by the Government and its properties were taken over on the date of vesting. Mangalore was then a part of the State of Madras Section 5 of the Acquisition Act, 1954, provided for payment of compensation to a licensee whose undertaking was taken over by the Government. Three modes of fixation of compensation were provided for by that section, called Basis A, Basis B and Basis C. Section 6 gave to the undertaking concerned the option to choose any one of these three modes. According to Basis A, the licensee was entitled by way of compensation to the payment of an amount equal to 20 times the average net annual profits of the undertaking during the period of five consecutive accounting years immediately preceding the date of vesting. The appellant opted for compensation on Basis A, one of the consequences of which, as provided by the Act, was that the entire property belonging to the undertaking, including the fixed assets, vested in the State Government under section 6. Applying Basis A, the appellant was paid compensation in the sum of Rs. 18, 42, 312In the course of the appellants assessment for the assessment year 1957-58, corresponding to the accounting year commencing on April 1, 1955, and ending on October 14, 1956, the Income-tax Officer considered the question whether the compensation received by the appellant for the acquisition of its undertaking was in the nature of a capital gain within the meaning of section 12B of the Indian Income-tax Act, 1922. Deducting a sum of Rs. 6, 46, 710, representing the value of fixed assets, from the compensation paid by the State Government to the appellant, the Income-tax Officer treated the sum of Rs. 11, 95, 602 as capital gains which was liable to be brought to tax. The appellant appealed to the Appellate Assistant Commissioner contending that the compulsory acquisition of its undertaking was not a "transfer" within the meaning of section 12B(1) and, therefore, it was not liable to capital gains tax. That argument was rejected by the Appellate Assistant Commissioner whose judgment was confirmed, in a further appeal, by the Income-tax Appellate Tribunal. On the application of the appellant, the Tribunal referred the following question for the opinion of the Highon the facts and in the circumstances of the case, the acquisition underthe Madras Electricity Supply Undertakings (Acquisition) Act, 1954, came within the scope of section 12B of the Indian Income-tax Act, 1922, so as to render liable any surplus arising from such acquisition to tax under section 12B of the Actappellant had asked the Tribunal to refer for the opinion of the High Court four other questions. The Tribunal having declined to do so, the appellant applied to the High Court under section 256(2) ofthe Income-tax Act, 1961, requesting it to call for a reference from the Tribunal. The High Court agreed and called for a reference on the four points, the third and fourth out of which were not pressed by the appellant when the reference was heard by the High Court. Before the High Court the appellant limited its argument to the following twoWhether, on the facts and in the circumstances of the case, and on a proper interpretation ofthe Madras Electricity Supply Undertakings (Acquisition) Act, 1954, the Tribunal was justified in law in holding that no part of the compensation was attributable to the goodwill of the companyWhether the Tribunal was justified in law in not determining the amount of compensation attributable to the goodwill and in further not determining the capital gains, if any, arising out of such acquisitionits judgment dated November 19, 1971, the High Court answered both the questions against the appellant but granted to it a certificate of fitness to appeal to this court, which has given rise to Civil Appeal No. 2006 of 1972.

Reasoning: We will take up Civil Appeal No. 2160 of 1972 first for our consideration. It involves for consideration the decision of the question whether the compulsory acquisition of property falls within the scope of section 12B of the Indian Income-tax Act, 1922, so as to render any surplus arising from such acquisition liable to tax under thatfind it impossible to accept this submission. In the first place, if it was intended that voluntary transfers alone should fall within the meaning of the section, it was unnecessary for the legislature to use the expression "transfer", an expression acknowledged in law as having a wide, connotation and amplitude. Earl Jowitt, in The Dictionary of English Law, says:"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." Roland Burrows on Words and Phrases, volume V, contains a statement under the caption "Transfer on Sale" at page 331, that even a transfer of land under compulsory powers is a transfer "on sale". It is unnecessary for us to consider the question whether a compulsory acquisition of property is a "sale" within the meaning of section 12B(1) and indeed, it is needless, for the present purpose to go that far. We are concerned with the narrower question whether a compulsory acquisition of property can amount to a "transfer" within the meaning of section 12B(1) and upon that question it is important to bear in mind that the word transfer is comprehensive and is regarded generally as comprehending within its scope transfers both of the voluntary and involuntary kinds. Without more, therefore, there is no reason for limiting the operation of the word "transfer" to voluntary acts of transfer so as to exclude compulsory acquisitions of propertyThe argument that the word "transfer" must be construed ejusdem generis with the words, sale, exchange or relinquishment, has to be rejected because as stated in Craies on Statute Law (7th edition, pageHigh Court of Madhya Pradesh in Commissioner of Income-tax v. Shrikrishan Chandmal [1963] 47 ITR 833  , the High Court of Madras in Wilfred Pereira Ltd. v. Commissioner of Income-tax [1964] 53 ITR 747     and Commissioner of Income-tax v. United India Life Assurance Company Ltd. [1966] 62 ITR 610     and the High Court of Gujarat in Vadilal Soda Ice Factory v. Commissioner of Income-tax [1971] 80 ITR 711     have taken the same view, namely, that the word "transfer" which occurs in section 12B(1) of the Indian Income-tax Act, 1922, is an expression of wide comprehension and includes within its sweep both voluntary and involuntaryjudgment of the High Court dated August 25, 1971, leading to Civil Appeal No. 2160 of 1972 must, therefore, be affirmed and the appeal dismissedIn regard to Civil Appeal No. 2006 of 1972, the case of the appellant before the Income-tax Officer was only this that the compulsory acquisition of its undertaking did not amount to a "transfer" within the meaning of section 12B(1) of the Act of 1922. No case was made out that, alternatively, goodwill is not a capital asset. The appellant did not contend before the Appellate Assistant Commissioner also that goodwill is not a capital asset and, therefore, at least to the extent to which compensation was attributable to the goodwill the capital gains tax was not attracted. The appellant did contend before the Tribunal that, apart from its tangible assets, the State Government had taken over the goodwill attaching to the business and the appellants right to the management of that business and the amount referable to these items had to be deducted in computing the capital gains. The Tribunal answered this contention by holdinggoodwill as understood in law had no real significance in the present case and could not have been acquired by the Government;(b) it was not one of the assets shown in the balance-sheet;(c) there was no proof to show that the Government actually took over any goodwill;(d) if the case of the appellant was that even if it was not shown in the balance-sheet, payment therefor had to be evaluated or apportioned, the appellant should have produced proof regarding the evaluation of the goodwill;(e) the appellant had not placed any materials before the Tribunal to show whether any interference was called for in the matter of computation having regard to the value of goodwill as on January 1, 1954; and(f) the right of management was not independent of the business acquired and there were no materials to show that this right could have any value placed upon it in the fixation of compensationThe High Court was in our opinion right in taking the view that in the light of these circumstances the appellants contention, that goodwill should be valued separately and a part of the compensation attributable to it should be deducted from the compensation, could not be accepted. Even assuming for the purposes of argument that the two relevant questions, on which the High Court called for a reference from the Tribunal involved the consideration of any legal principle, the questions are mixed questions of law and fact because, unless it is found that the goodwill, in fact, had some value, it cannot be decided whether any part of the compensation is attributable to the goodwill of theThat there is no substance in this contention is clear from the order of the Tribunal dated October 9, 1968, by which it refused to refer for the opinion of the High Court the question regarding the evaluation of the goodwill. The Tribunal observes in its order that during the hearing of the appeal it had not expressed any view of the kind attributed to it by the appellant and that no assurance was held forth to the appellant that the question as regards goodwill would be left for determination to the Income-tax OfficerSince the question as to whether a part of the compensation is attributable to the goodwill of the appellants business is a mixed question of law and fact and since not only was the question not raised by the appellant before the Income-tax Officer or the Appellate Assistant Commissioner but, having raised it before the Tribunal, the appellant placed no material before it on the basis of which goodwill could be evaluated and a part of the compensation properly apportioned to the goodwill of the business, we cannot allow the appellant to raise the contention involved in the two questions. On those questions, therefore, the judgment of the High Court, for the reasons mentioned by us, has to be affirmed. Civil Appeal No. 2006 is also, therefore, dismissed.