1. Government exercise of option to purchase electricity undertaking under Indian Electricity Act, 1910 — Taxability of excess realization under Section 10(2)(vii), Indian Income-tax Act, 1922. (Para 1 , 2 )
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1962 Supreme(SC) 85
SUPREME COURT OF INDIA
1963 AIR(SC) 464 : 1962 (Supp3) SCR 496
Before:- J.C.Shah : S.R.Dass
Fazilka Electric Supply Company Limited
Versus
Commissioner Of Income-tax, Delhi
Case No. : 183 of 1961
Date of Decision : 3/1/62
Advocates Appeared: Das Bishambar : Gutpa D. : Jain K.K. : Kapur S.K. : Sastri K.N.Rajagopal
Advocates:
BISHAMBAR DAS, D.GUTPA, K.K.JAIN, K.N.RAJAGOPAL SASTRI, S.K.KAPOOR
BISHAMBAR DAS, D.GUTPA, K.K.JAIN, K.N.RAJAGOPAL SASTRI, S.K.KAPOOR
A transfer of an undertaking by a licensee to the government pursuant to an option clause in a license is a contractual sale, not a compulsory acquisition, provided the license terms were mutually agreed upon, making any excess over the written down value taxable as profits.
Headnote:(A) Indian Income-tax Act, 1922 - Section 10(2)(vii) - Indian Electricity Act, 1910 - Sections 3 and 7 - Sale of undertaking - Taxability of excess realization over written down value - Where a license for the supply of electric energy contains a clause giving the government an option to purchase the undertaking after a specified period, such an arrangement is the result of a mutual agreement between the applicant and the government - The process of granting the license, involving a draft license and subsequent approval, amounts to a contract - The exercise of the option to purchase under such a contract constitutes a sale within the meaning of the Income-tax Act, and not a compulsory acquisition in the ordinary sense. (Paras 7, 8)
(B) Contract - Elements - Where there is an undertaking to sell on specified terms, a specified time for exercise of option, and consideration in the form of the grant of the license, all elements of a contract are present. (Para 8)
Facts of the case:
A company held a license to generate and supply electricity. The license included a clause allowing the government to purchase the undertaking after 15 years. Upon the expiration of this period, the government exercised the option and paid an amount exceeding the written down value of the assets. The tax authorities treated the excess as profits taxable under the Income-tax Act. The assessee contended that the acquisition was compulsory and not a sale, and therefore not taxable.
Findings of Court:
The court found that the option of purchase was a result of a mutual agreement between the parties. The license granted by the government constitutes a contract. Consequently, the transfer of the undertaking was a sale within the meaning of the Income-tax Act.
Issues: Whether the transaction by which the government acquired the undertaking under the option clause of the license could be regarded as a sale within the meaning of Section 10(2)(vii) of the Income-tax Act.
Ratio Decidendi: The scheme of the Electricity Act and the rules for granting licenses indicate that the terms of purchase are agreed upon by the applicant and the government. The grant of the license serves as consideration for the agreement to sell the undertaking upon the exercise of the option. Therefore, the transaction is a contractual sale rather than a compulsory acquisition.
Result: Appeal fails and is dismissed with costs.
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Table of Contents
2. Whether the acquisition of an undertaking via a license option constitutes a voluntary sale or a compulsory acquisition, thereby exempting it from tax under the Income-tax Act. (Para 4 )
3. The license process involves an offer and acceptance of terms, making the option to purchase a contractual agreement rather than a compulsory acquisition. (Para 3 , 5 , 6 , 7 )
4. A license granted upon agreed terms, including an option for purchase, constitutes a contract, and the subsequent exercise of that option is a sale. (Para 7 , 8 )
5. Appeal dismissed; the transaction was held to be a sale within the meaning of Section 10(2)(vii) of the Income-tax Act. (Para 9 , 10 )
6. Does the exercise of a purchase option under a license granted under the Indian Electricity Act, 1910, constitute a sale?
Yes. The court held that the option of purchase is the result of a mutual agreement between the applicant and the government. The license process, involving the submission and acceptance of a draft license, constitutes a contract, making the subsequent purchase a sale. (Para 6 , 7 , 8 )
7. Does the term compulsory purchase in Section 7 of the Indian Electricity Act, 1910, imply a compulsory acquisition?
No. The court clarified that the expression compulsory purchase in the second proviso to Section 7(1) is an enabling provision allowing parties to agree on a percentage increase over market value, rather than a compulsory acquisition in the ordinary legal sense. (Para 7 )
8. What elements constitute a contract in the context of a government-granted license with a purchase option?
The necessary elements include an undertaking by the applicant to sell the undertaking on specified terms and price, and consideration provided in the form of the government granting the license. (Para 8 )
S. R.DASS, J.
(1) ON 23/07/1934. the then government of the Punjab granted a license under s. 3 of 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 licence, which is marked Annx. ,A and forms part of the statement of the case, contained a clause, viz. el. 9(1) of which read as follows : `9. (1) The option, of purchase given by subsection (1) of section 7 of the (Electricity) Act shall first be exercisable on 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 Ss. (1) 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 Ss. to such value on account of compulsory purchase shall be 20 percent.` Under this clause, read with a. 7 of Electricity Act, the government bad 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 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 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 license, the government of the Punjab exercised its option and acquired the undertaking on 23/07/1949 on a total payment of Rs. 3,74,000.00 , 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. 77,700.00 and held that this sum of Rs. 77,700.00 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 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 Act and having obtained such a certificate, has preferred the present appeal to this court.
(3) SECTION 10(1) of the Income-tax Act states that Income
