. Match J.

496 SUPREME COURT REPoRTS [1962] stJt>i>.

THE FAZTLKA ELECTRIC >SUPPLY CO. LTD . v.

THE CO:IJMISS!ONER OF JNCO)IE-TAX, DELHI

("'. K. DA~, J. c. SHAH, .T.J.)

income Ta:r-.1Jsts81nent of }; xces8 anlount rtaliscd over 21,•riltc11 dou:n 1:uf-ue-Ellclric Supply Company-Term of license-Option for Gottrnment or local bodies to parcltasc the Company-Sale by Company, 1f sale or compulsory rzcqui,, if; on -India EIPdricity Ad 19/0JX of 1910), ,,., 3.7 Indian Income

1'ax Act 1922 (/ l of 1922), s. 10(2) (vii).

1'hc appellant carried on the business of generating and suppl)ing tlcctricity in the to\\111 of Fazilka in accordance with the tcrn1s of a license for fifteen vcars.

Clause 9(a) of the license gave the Government' an option to acquire the undertaking on expiration of fifteen years fron1 the date of the license. 'l'he said option was in accordance to sub. s. ( 1) of s. 7 of the Electricity Ar.t, 1910.

The Government of Punjab exercised its option and acquired lhe undertaking on a payment which \\aa in excess of the written down value of the building, machinery and plant of the undertaking.

For the assessrnent of the appcllanl for the rele\enl year, the Income rax Officer cOrnputed such excess realisation over the writ •en do\\'n \'i:due ;; s did not exceed the difference he tween the original cost and the written down value and held the said sum as taxable in the hands of the appellant by reason of the provisions ins. 10(2)(vii) of the Income Tax Act.

The appellant contended that no part of the excess was taxable since 1hc undcrlaking had not been voluntarily sold, but had been cornpulsorily acquired by the Govrrnment ; and on a proper construction of 1 he Electricity Act and the rules made thereunder, this so-called sale was really a compulsory acquisition of property and not a S>ie as legally understood. '

lleld, that from the provisions of the Electricity Act, 1910, read alongith thr. rules marle thereunder, it is manifest that the condition as to the option of purchase either by the local authority or Governrnent. is the result ofan agreement between the applicant who had applied for license and the Government who granted the lh:ense.

The true scope and effect of s. 7 of the Electricity Act is tha it is an enabling ::icction and merely provides for the optio11 of purchase to he exercised Cln the expiration of a certain period agreed to between rhe parties, and s. IO of the Act

3 s.c.:R.

SUPREME CobRT REPORTS 497

further provides that in an appropriate case Government may even forego the option. The scheme of the Electricity Act as indicated by the relevant provisions thereof and the rules made thcreuµder, shows beyond any doubt that the option of purchase is the result of a mutual agreement between the parties, the applicant for the license on one hand and the Government on the other.

Held, further, thats. 7 docs not provide for a compulsory purchase or compulsory acquisition without reference to and independent of any agreement by the licensee.

The expression "compulsory purchase" in the second proviso to sub-s. (1) of s. 7 is another enabling provision which enables a party to specify in the license such percentage as should be added to the value of the building, plant and machinery etc. when the option is exercised, notwithstanding the use of the expression "compulsory purchase" in the said second proviso, there is no compulsory purchase or compulsory acquisition in the sense in which that expression is ordinarily understood.

Sakalaguna Nayudu v. Chinna Munuswami Nayakar,

(1928) L. R. 55 I.A. 243, Calcutta Electric Supply Corporation

v. Commissioner of Income-tax, WMt Bengal, (1951) 19 I.T.R. 406.

CIVIL APPELLATE JURISDICTION : Civil Appeal No. 183 of 1961.

Appeal from the judgment and order dated' April 24, 1959. of the Punjab High Court in I.T.R.

No. 18 of 1954.

S. K. Kapur, Bislw, mbar Das and K.K. Jain, for the appellant. ·

K. N. Rajagopal Sa8tri and D. , Gupta, for the respondent. 1962, March 1.

The Judgment of the Court was delivered bJ

S. K. DAa, J.-On July 23, 1934 the then Government of the Punjab granted a licence under a. 3 of Indian Electricity Act, 1910 (IX of 1910) (hereinafter called the Electricity Act) to two persona named Harbhagwan Nanda and Harcharan . Dass for the generation and supply of electric energy

J96t

The Ft1;:, ilkti EJ1ctric

SupplJ Co. Lti.

v • . The Commissioner flf

Income-tax, Delhi.

DasJ.

1'ht Faillu1 J::lectric

Supp~ C•. /, Id.

Thi CommiJsiomr of

lnctmepw, D1thi

DIU J.

49S SUPREME COURT REPORTS [1962] SUPP.

in the town of .Fazilka.

The licence, which is markt•d annPxure 'A' nnd forms part oft.he >tMement of the case, contained a clause, viz. cl. !!(I)

which read 118 follows :

"9. (I) 'fht., option of purchase givt>n by sub-section (I) of section 7 of the (Elt>ctricity)

Act shall first be exercisable 011 the expiration of 15 years from the date of the notification of this licence 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 sub-&•ction (I) of section 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 to such value on account of compulsory purchase shall be 20 percent." Under this clause, read with a. 7 of Electricity Act, the Government ha<l an option of purchasing the undertaking on tho expiration of 15 years from the date of the license and on the expiration of eve, ry subsequent period of ten years. In 1935, 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 incorporafod, and it acquired the rights and previleges of the license known as the Fazilka Electric License, 1931.

The appellant carried on the busineBB 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 license, the Government of the Punjab exercised its option and acquired tho undertaking on July 23, 1949 on a total payment of Rs. 3,'l!..COO/-, which was in excess of the written down valut of the building, machinery and plant of tho 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 ins. 10(2)(vii) of the Indian Income-tax Aot, 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 haq 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.

Both the Income-tax Officer and the Appellate Assistant Commissioner repelled this contention of the appellant. On au 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 Tribunal's order ;

"Whether on the facts and in the circumstances of this case, and on a true interpretation of section 7(1) of the Indian Electricity Act and clause 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 section 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 Aot and having obtained such a certificate, has preferred the present appeal to this Court.

The Fari/k4 Electric

Su.pply Co. Ltt.

The Commissio1Ur of

Income-tax, Del hi

T1rt Fa.zilka EltCtric

Supply C.. f.td.

The Commissi01lt'r of

lncom•laJt, Del/11

Das J.

500 SUPREME oouitT REPoRTs [1962] sui>i>.

t:iection 10(1) of the Income-tax Act states that Income-tax shall be payable by an assesec undor the head "Profits and gains of business, profession or vocation" in respect of the profit or gains of any business, profession or vocation carried on by the assessce. Suh-sectiun (2) of the said section states that such profits or gains shall be computed after making certain allowances referred to in els.

(i} to (xv).

Clause (vii) relates to an allowance in respect of any building, machinl'fy or plant wbirh has been sold or discarded or demolished or des troy(,'<I, the allowance being the amount by which the written down value thereof exceeds the amount for which the building, machinery or plant. as the case may be, is actually sold or its scrap value ; the second proviso to the clause states that where the

amount for which any such building, machinery or plant is sold, whether during the continuance of the business or after the cessation thereof, exceeds the written down value, so much of the excess as does not exceed the difference between the original cost

and the written down value shall be deemed to be profits of the previous year in which the sale took place. It is not disputed before us that if what took place on .July, L3, 1949 in exercise of the option given to the Government under cl. 9 of the licenAe read with s. i and other provisions of the Electricity Act, was a sale within the meaning of clause (vii), then the amount which the Incometax Officer determined to be Hs. 77 , iOO/- would be taxable in the hands of the appellant as profits within the meaning of the said clause. Therefore, the answer to the question which was referred to the High Court depends on whether them was a sale of the

building, machinery and plant of the undertaking in question.

The learned Advocate for the appellant has contented before us that the High Court was in error in holding that there was a sale of the building, machinery and plant of the appellant's

undertaking. He has submitted that a sale involves mutual agreement and a contract of sale of goods is a contract whereby the seller transfer;; or agrees to transfer the property in goods to the buyer for a price. He .has argued that on a proper construction of the provisions of the Electricity Act and the rules made thereunder, the so-called sale in the present case was really a compulsory acquisition of property and not a sale as legally understood ; therefore, s. 10(2)(vii) of the Income-tax Act was not attracted to the transaction in question and the excess over the written down value could not be deemed to be profits in the hands of the appellant.

It is necessa.ry to read here some of the provisions of the Electricity Act and rules made thereunder. Section 3 of the Electricity Act states in effect that the State Government may; on application made in the prescribed form and on payment of the prescribed fee, grant to any person a license to supply (electric) energy in any specified area.

Sub-section (2) of s. 3 states that in respect of every such license and the grant thereof certain

proviions shall have effect : one of these provisions is that any person applying for a J icensc shall publish a notice of his application in the prescribed manner and with the prescribed particulars, and no license shall be granted until all objections received by the. State Government with referencs thereto have been considered by it ; another provision is that the provisions contained in the Schedule to to the Electricity Act shall be, deemed to be incorporated with and to form part of every license granted save in so far as they are expressly added to, varied or exempted by the license. Sections 5 and 7 deal with the purchase of the undertaking in certain circumstances and s. 10 empowers the State Government to vary the terms of purchase. Notwithstftnding ss. 5, 7 and 8, the State Government may, in any license to be granted under the Elecricity Act, vary te terms ad conditions upo~

The Faz.ilka Ele ctric

Supply Co. Ltd. v.

The Commissioner of lncomr.tax, De/hi

Das , f.

Tht Fa::ilka Efr.cl-ric

Sunry Co. Ltd. v.

The r.ouunis.1fontr of

fnc1mltu, Delli i --

502 SUPREME COURT REPORTS [1962] SUPP . . which, and the periods on the expiration of which, the licensee shall ho bound to sell his undertaking, or direct that subject to such conditions 11nd restrictions, if any, as it may think fit to impose, the provisions of the said sections or any of them shall not appl.v.

Xow, we may rP, ad s. 7 so far as it is relevant for our purpose.

"7. (!)Where a license 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 ehall, 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 tho license, have the option of purchasing the undertaking, and if th1i local authority, with the previous sanction of the State Go\ernmcnt, elects to purchase, the licensee shall sell the undertaking to the local aul hority 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 license not to form part of the undertaking for the purpose of purchase, such value to be, in case of difference of 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, duo 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 t.hereof, and to the circumstance that they are in such a position as to be ready for immediate working and to the suitability of the

ljarne for the urposee of the underta~ :

Provided also that there shall be added to such valu~ as aforesaid such percentage, if any, not exceedmg twenty per centum on that value as may be specified in the license, on account of compulsory purchase.

(2) Where-

( a) the local authority does not elect to purchase under sub-section (1), or

(b) the whole of the area of supply is not included in the area for which a single local authority is constituted ; or

( c) a license supplies energy from the same generating station to two or more areas . of supply, each controlled by its own local authority, and has been granted a license in respect of each area of supply,

the State Government shall have the like option upon the like terms and conditions.

(3)

(4)

(5)

x x x

x x

The section gives to the local authority and if the local authority does not elect to purchase, to the State Government, an option to purchase the undertaking. If neither is willing to exercise the option on the expiry of periods referred to therein then the license may be revoked on an application or by consent of the licensee.

In that case s. 8 lays down that tl; te licensee has the option to dispose of his undertaking to any other person within six months. If the licensee fails to do this, then the Government may remove the works at the cost of the licensee as laid down in s. 5 of the Electricity Act. ·

The Fll1:.ilka 11/ectric

Sup; ty Co, Ltd .

•• Tire Commissiorur of

lneume-tax, Delhi

Das J.

Tk .. F1U.ilka Ekttr i:

Supply Co. lid.

Tiu Co111mi1Mnt-r Gf

/ncnme-tnx, Delhi

Das.!.

504 SUPREME OOURT REPORTS [1962] SUPP

\Vo may now turn to tho rules in so far as they are relevant to the point under consideration.

The rules lay down that every application for a license shall be accompanied by copies of a draft license

as proposl'l.l by the 11pplicant, and the draft licenRC 8hall contain, among other particulars, tho proposed periods after which tho right to purchase is to take effect and a statement of any special terms of purchase or orders proposed to be made under s. 10 and any proposed modification of the Schedule to bo made under s. 3, sub-s.(2), ol. (f). The applic(tnt shall then publish a notice of his application by public advertisement, and such advertisement shall include inter alia the draft license. Where any person desires to have any amendment made in tho draft license, ho shall deliver a statement of the Sil.me.

The rules further provide for a local flnquiry if any person locally interested objects to'. the gmnt ; if a.nd when Government has approved of a draft license, either in its original form or in a modified form, a duty is cast on Government to inform the applicgnt of such approval and of tho form in which it is proposed to grant the licens1i and if the applirant is willing to accept the licen.e in the .form proposed, then Government shall on reenipt of an intimation in writing of such .qcceptance publish the liconso and notify that it has been granted.

If, therefore, the provisions of the Electricity Act arc read along with tho rules made thereunder, it bocomes manifest that the condition as t.o the option of purchase, either by the local authority or Government, is the result of an agrel.'mcnt between the applieant who has applied for the license and Government who grnts the license. Section 7 of the Electricity Aot is morcly an enabling provision which allows the parties t.o specify in the license the periods on tho expiration of which the right of option shall be cxcroiscd, su hjcct to the maximum periods mentioned therein.

The true scope and etfect of s. 7 is not what the appellant suggeeU!.

It merely provides for an option of purchase to be

I96Z exercised. on the expiration of certain periods Tho F..uks El . agreed to between the parties, and ~· 10 further - SupplJ co. Lff."' provides that in an appropriate case Government ~··c v; .• £ h .

Th' t' d ,,,. omm1mooerol may even orego t e opt10n.

IS sec 10n oes Inoom•'tax, Delhi not provide for a compulsory purchase or compul- -- sory acquisition without reference to and indepen- Dos J, dent of any agreement by the licensee. Our attention has been drawn to the use of the expression "compulsory purchase" in the. second proviso to sub-s. (I) of s. 7 and it has been argued that the use of that expression indicates the intention of the Legislature. The se ond proviso is another enabling provision which enables the parties to specify in the license 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. If the whole scheme of the Electricity Act and the rules made thereuuder, is kept in miud, it becomes obvious that notwithstanding the use of the expression "compulsory purcha>e" iu the second proviso to subs. (I) of s. 7, there is no compulsory purchase or compulsory acquisition in the sense in which that exp\ession is ordinarily understood. The High Court has rightly pointed out that the scheme of the Elctricity Act as indicated by the relevant provisions thereof and therules made thereunder, shows beyond any doubt that the option of purchase is the result of a mutual agreement between

Tht F•u1k• Euctric

Suplf; i C1. Ltd. • .. . 'The Co11U11is1ioner of

lncoMelox, D1/hi

DasJ.

506 SUPREME COURT REPORTS [1962] SUPP.

tho parties, the applicant for the license on one hand and Government on the other. The High Court rightly observed :

"The rules show that a draft license has to be sent by an applicant for license containing definite and specific terms on which the license is sought. This amounts to an offer.

The Government accepts it or rejects it. If it modifies it in any way, then the applicant or offerer must accept the modification. If the Government accopts the .offer with or without modification, then it grants a license.

In my view a license granted by the Govern - ment in such circumstances amounts to a contract between the parties."

On behalf of the appellant it ha~ been contended, somewhat faintly, that all the elements necessary to constitute a contract are not present here. We are unabl(! to agree.

There was an undertaking on the part of the applicant for the Iioense 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 paicl for the property were specified. There was consideration for the contract as the license was granted on thoso terms.

Therefore, all elements necessary for a contract were present, and the sale in pursuance thereof wn, s not a compulsory purchase or acquisition. (8cc Sakalar1una Nay11d1i

v. Chhinna Munusu•amy Nayafoi t').)

We are, therefore, of the l>pinion that the High Court correctly allJlwered the question referred to it.

There was a. sale in the present case of tho building, machinery and plant within the meaning

( \) ( 1928) L, R. 55 I.A. 243.

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 Calcutt, a Electric Supply Corporation

v. Commissioner of Income-wx, West Bengal (') 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.

In the result, the appeal fails and is dismissed with costs.

Appeal dismissed.

(1) [1951] 19 I.T.R. 406.

The F<U:.ilka E/ec!tic Supply Go. Lid,

The Commissioner OJ

lncnme•ta*, Delli.i -- DasJ