Case: The Fazilka Electric Supply Co. Ltd Vs. The Commissioner Of Income-Tax, Delhi

1. On July 23, 1934 the then Government of the Punjab granted a license under S. 3 of the Indian Electricity Act, 1910 (IX of 1910) (hereinafter called the Electricity Act) to two persons named Harbhagwan Nanda and Harcharan Dass for the generation and supply of electric energy in the town of Fazilka. The license, which is marked annexure A and forms part of the statement of the case, contained a clause. viz. Cl. 9(l) which read as follows(1) The option of purchase given by sub-sec. (1) of S. 7 of the Electricity) Act shall first be exercisable on the expiration of 15 years from the date of the notification this license and on the expiration of every subsequent period of 10 years. The percentage of the value to be determined in accordance with and for the purpose of subject sub-sec. (1) of S 7 of the Electricity) Act of lands, buildings works, materials and plant of the licensee, therein mentioned to be added under the second proviso of that sub-section such value on account of compulsory purchase shall be 20 perthis clause, read with S. 7 of the Electricity Act, the Government had an option of purchasing the undertaking on the expiration of 15 years from the date of the license and on the expiration of every subsequent period of ten years. In 1435, about a year after the grant of the license, a public limited company under the name and style of the Fazilka Electric Supply Co. Ltd., which is the appellant herein, was incorporated, and it acquired the rights and privileges of the license known as the Fazilka Electric License, 1934. The appellant carried on the business of generating and supplying electricity in the town of Fazilka in accordance with the terms of the license for 15 years. On the expiration of 15 years from the date of licence, the Government of the Punjab exercised its option and acquired the undertaking on July 23, 1949 on a total payment of Rs. 3,74,000, which was in excess of the written down value of the building, machinery and plant of the undertaking. In connection with the assessment of the appellant for the year 1950-51, the Income-tax Officer computed such excess realisation over the written down value as did not exceed the difference between the original cost and the written down value, at Rs. 77,700 and held that this sum of Rs. 77,700 was taxable in the hands of the appellant by reason of the provisions in S. 10(2)(vii) of the Indian Income-tax Act, 1922. The appellant contended that no part of the excess over the written down value was taxable since the undertaking had not been voluntarily sold, but had been compulsorily acquired by the Government; therefore, the transaction was not a sale within the meaning of the provisions in S. 10(2) (vii) of the Income-tax Act.2. Both the Income-tax Officer and the Appellate Assistant Commissioner repelled this contention of the appellant. On an appeal to the Income-tax Appellate Tribunal, the Tribunal also held against the appellant and came to the conclusion that there was a sale of the building, machinery and plant of the undertaking within the meaning of S. 10 (2). (vii) of the Income-tax Act. The appellant then moved the Tribunal for a reference of the following question of law which it said arose out of the Tribunals order:Whether on the facts and in the circumstances of this case, and on a true interpretation of S. 7(1) of the Indian Electricity Act and Cl. 9 of the Fazilka Electric License, 1934, the transaction, by which the Government acquired the undertaking, could be regarded as a sale within the meaning of S. 10 (2) (vii) of the Income-tax Act?"The Tribunal referred the question to the High Court. The High Court answered the question against the appellant. The appellant then asked for a certificate under S. 66A (2) of the Income-tax Act and having obtained such a certificate, has preferred the present appeal to this Court.

Court's reasoning:
This section does not provide for a compulsory purchase or compulsory acquisition without reference to and independent of any agreement by thethe whole scheme of the Electricity Act and the rules made thereunder, is kept in mind, it becomes obvious that notwithstanding the Use of the expression "compulsory purchase" in the second proviso to sub-section (1) of S. 7, there is no compulsory purchase or compulsory acquisitions in the sense in which that expression is ordinarily understood. The High Court has rightly pointed out that the scheme of the Electricity Act as indicated by the relevant provisions thereof and the rules made thereunder, shows beyond any doubt that the option of purchase is the result of a mutual agreement between the parties, the applicant for the licence on one hand and Government on theare unable to agree. There was an undertaking on the part of the applicant for the license to sell the undertaking to the local authority or Government upon certain terms set out in the license, and the time at which the option was to be exercised and the price which was to be paid for the property were specified. There was consideration for the contract as the license was granted on those terms. Therefore, all the elements necessary for a contract were present, and the sale in pursuance thereof was not a compulsory purchase or acquisition. (see Sakalaguna Nayudu v. Chinna Munuswamy Nayakar, 55 Ind App 243: (AIR 1928 PC 174  ).9. We are, therefore, of the opinion that the High Court correctly answered the question referred to it. There was a sale in the present case of the building, machinery and plant within the meaning of cl. (vii) of S. 10(2) of the Income-tax Act. In view of this conclusion it is unnecessary to deal with a somewhat larger question which was canvassed before us on behalf of the respondent that S. 10(2) (vii) of the Income-tax Act is attracted even to a compulsory sale. Nor do we consider it necessary to examine the decisions bearing upon the question whether a compulsory transfer to and vesting of property in Government, constitute a sale within the meaning of the relevant provisions of the Indian or English Statute. It is sufficient to point out that Calcutta Electric Supply Corporation v. Commissioner of Income-tax, West Bengal, (1951) 19 ITR 406  : (AIR 1951 Cal; 151) related to a transaction by which government acquired the plant etc. and it was held that such acquisition could not be regarded as a sale within the meaning of S. 10(2) (vii) of the Income-tax Act.