Case: Commissioner Of Income Tax Vs. United Provinces Electric Supply Co

At the instance of revenue, two questions were referred to the High Court by the Income-tax Appellate Tribunal under Section 256(1) of the Income Tax Act, 1961 (herein referred to as "the Act"). First question for which leave to appeal was granted by this Court is as underon the facts and in the circumstances of the case and on a proper interpretation of the provisions of the Indian Electricity Act, 1910, the Tribunal was right in holding that the addition of the sum of Rs. 1,29,35,557- under Section 41(2) of the Income-tax Act, 1961, in the assessment year 1965-66 was not justifiedHigh Court answered the said question in favour of the assessee and against the revenue by holding that Section 41(2) of the Act does not and cannot come into play till the price is finally ascertained and in the facts of the case as the price of the undertakings of the assessee had not been finally determined and only an ad hoc payment has been made which has been accepted under protest, it was not open for the revenue to intervene and proceed to assess the assessee under Section 41(2) of the Act. Hence thisaforesaid question arises for the assessment year 1965-66 i.e. relevant accounting year ending on 31.3.1965. Admittedly, the business of the respondent-assessee was of generating and of supply of electricity to the consumers. The assessee had two undertakings - one at Allahabad and the other at Lucknow. By exercising power under Section 6 of the Indian Electricity Act, 1910, the Government of U.P. purchased both the undertakings for the UP State Electricity Board (`Electricity Board for short). The possession of the undertakings was handed over to the Electricity Board w.e.f. 17.9.1964 and the Board paid Rs. 62,60,668- and Rs. 41,35,398- to the assessee as compensation for the compulsory purchase of the said undertakings respectively. Besides these payments, the Board also made certain adjustments in respect of assessees liabilities for loans and the final compensation paid to the assessee amounted to Rs. 3.35,8,552-. The assessee accepted the said amount without prejudice to its right to claim the compensation payable as provided under Section 7A of the Electricity Act, 1910. Thereafter, assessee went for arbitration for determining the compensation payable to it under the said Act. As the arbitrators failed to make any award, they referred the matter for decision to an umpire. It is alleged that Electricity Board moved the civil Court at Lucknow and obtained an order of stay of the proceedings before theIncome Tax Officer took the amount of Rs. 3,35,84,552- as sale proceeds of the depreciable assets of the assessee and as per the details given in his order computed the written down value of those assets at Rs. 2,06,48,985- and determined the profit of Rs. 1,29,35,557- under Section 41(2) of the Act and added the same to the income of the assessee. In appeal before the Appellate Assistant Commissioner, it was contended that no profit under Section 41(2) could be taxed in the assessment year under consideration because claim of the assessee for compensation was not settled during the year and that dispute was still pending before the arbitrators. The Appellate Asstt. Commissioner rejected the said contention. In further appeal, the Tribunal held as the compensation payable to the assessee was not settled and finalized, the ITO was not justified in making addition to the income of assessee under Section 41(2) in the year underHigh Court arrived at the conclusion that the assets of the assessee, namely, two undertakings had been sold within the meaning of Section 41(2) of the Act read with Section 32(1) thereof and the explanation therein. The High Court held that, "herein, Section 41(2) to that extent is attracted but an assessment under Section 41(2) can only be made after the price at which the assets of the assessee had been sold is determined. As the price is not finally determined, it cannot be said that the amount which has been received by the assessee in respect of his two undertakings is a price at which the same had been sold." The Court further held that Section 41(2) does not envisage that an assessee would be assessed piece-meal as and when the amount on account of price is received. Hence the question was answered in favour of the assessee as stated above.

Court's reasoning:
In our view, in the present appeal, we are only concerned with the limited question which was referred to the High Court, whetheron the facts andes of the case and oninterpretation of the provisions of the Indian Electricity Act, 1910, the provisions of Section 41(2) of the Act are applicable to the receipts of the amount by the assessee towards the compensation payable to him ? Therefore, additional question raised by the learned counsel for the appellant which depends upon facts, is not required to be dealt with or decided in this appeal. We also make it clear that we have not considered the effect of Section 7-A of the Indian Electricity Act, 1910 as amended by the U.P. Act 14 of 1976 as the said question was not there before the High Court. Further, we would make it clear that it would be open to the assessee to raise these contentions before the competentall the aforesaid cases dealt with by the High Courts, it is apparent that it was the contention of the asessee that the balancing charge is to be taxed in the year in which the undertaking is taken over. As against the revenue contended that when the compensation amount is determined the balancing charge is to be taxed. In the present case, the amount of compensation is determined and is paid. As there is dispute with regard to the determination of the market price, the matter is referred to the arbitrator. Presuming that it is ad hocnse that final compensation is not determined by the arbitrator or appellant authority still the payment is towards purchase price. Section 41(2) nowhere provides that such balancing charge would be taxable in which "moneys payable" are determined `finally by the Arbitrators or the Appellate authority or such other authority provided under the Acquisition Act. Further, it is not the case of the assessee that pending final determination of the purchase price he has not accepted the said amount. Pendency of litigation for getting additional amount in respect of `moneys payable has no relevancy so far as the taxability of accrual of income - compensation received - is concerned. Hence, in case where compensation amount and its receipt is admitted, which is business profit under Section 41(2), it is to be taxed in the previous year of its receipt.