JUDGMENT S.H. KAPADIA, J.

1. This civil appeal is directed against the judgment of Delhi High Court in Income tax Reference under Section 256(1) of the Income Tax Act, 1961 ("1961 Act") for the assessment year 1970-71.

2. The issue which arises for determination in this civil appeal is whether transfer of Banking Undertaking on the facts and circumstances of this case gave rise to taxable capital gains under Section 45 of the 1961 Act.

3. Punjab National Bank Ltd. was set up in 1895 in an area which now falls in Pakistan. It was nationalized as Punjab National Bank (PNB) by Banking Companies (Acquisition and Transfer of Undertakings) Act, 1970. On 19.7.1969 PNB Ltd. on nationalization vested in Punjab National Bank. PNB Finance Ltd. is the appellant herein. On nationalization it received compensation of Rs. 10.20 cr. This compensation was calculated on the basis of capitalization of last 5 years profits. The said compensation was received during the accounting year ending 31.12.1969 corresponding to the assessment year 1970-71.

4. During the assessment year 1970-71, appellant had to compute capital gains under Section 48 by deducting from the sale consideration the cost of acquisition as increased by the cost of improvement and expenses incurred in connection with the transfer. Under the law then prevailing, assessee could index the cost of acquisition by applying cost inflation index which became indexed cost of acquisition.

5. Incidentally, it may be noted that by an amendment to Section 50B inserted by the Finance Act, 1999 w.e.f. 1.4.2000, cost of acquisition is now notionally fixed in case of "slump" sale. Under the said arrangement, assessee is required to draw up his Balance Sheet as on the date of transfer for its undertaking and net worth of that date is now required to be taken into account. Under the said amendment, net worth consists of written down value (WDV) of depreciable assets and the book value of the current assets minus liabilities taken over. Therefore, after 1.4.2000 cost of acquisition is notionally fixed in case of slump sale. However, no such formula existed during assessment year 1970-71. At that time, assessee had to deduct either cost of acquisition or fair market value as on 1.1.1954 from the sale price (compensation) of Rs. 10.20 cr. [see Section 55(2)(i)]. This option was conferred on the assessee solely for its benefit. However, Section 55(2) only triggered if there existed the figures of "cost of acquisition" and "fair market value" as on 1.1.1954 so that the choice could be exercised. At that time, it was open to the assessee to contend that he would exercise the option only after both the figures of original cost and fair market value of the asset as on 1.1.1954 was available. In short, it is only after 1.4.2000 that computation machinery came to be inserted in Section 48 which deals with mode of computation.

6. Any surplus on transfer of capital asset is chargeable to tax under Section 45 in the previous year in which the transfer took place (i.e. in this case on 18.7.1969). This is the mandate of Section 45. The full value of consideration received by the assessee in this case was Rs. 10.20 cr.

7. A Return was filed in this case by the assessee showing an income of Rs. 2,03,364. In the covering letter with which the Return of Income was filed by the assessee it was noticed by the AO that the assessee had opted for having the value ascertained of the banking undertaking as on 1.1.1954. The letter was dated 30.9.1970. In para 5 of that letter, the assessee stated as follows:

"Assuming, while denying, that the provisions of Section 45 are applicable, the Company exercises its option for substitution of the fair market value of such Undertaking as on 1st January, 1954 in accordance with Section 49 & 50 of the Income Tax Act, 1961."

8. It was argued by the assessee before the AO that the option under Section 55(2)(i) was to be exercised only if it was advantageous to the assessee. The assessee