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HIGH COURT OF CALCUTTA
Harries, Banerjee
CALCUTTA ELECTRIC SUPPLY CORPN. LTD. - Appellant
Versus
COMMR. OF INCOME-TAX - Respondent
Ref. Under, Income-Tax 3 Of 1950
Decided On : JANUARY 16, 1951
INCOME TAX - Profits and gains of business - Sale of machinery or plant - Compulsory acquisition of plant by Government under Defence of India Rules - Whether amounts received by assessee taxable as profits under Section 10 (2) (vii), Income-tax Act - 'Sale' - Meaning and interpretation - Compulsory acquisition not a 'sale' - Profits not taxable.
Fact of the Case:
The assessee, an electric supply company, had a standby electricity generating plant at Bhatpara. During World War II, the Government requisitioned the plant under Rule 83, Defence of India Rules, and paid the assessee an amount as compensation. The assessee claimed that the amount received was not taxable as profits under Section 10 (2) (vii) of the Income-tax Act, as the plant was not sold or discarded but compulsorily acquired by the Government. The taxing authorities and the Appellate Tribunal held that the amount was taxable.
Finding of the Court:
The court held that the compulsory acquisition of the plant by the Government under Rule 83, Defence of India Rules, was not a 'sale' within the meaning of Section 10 (2) (vii) of the Income-tax Act. The court observed that the word 'sale' in its ordinary meaning implies a voluntary transaction between two persons, a buyer and a seller, and that a compulsory acquisition is a transaction often against the will of one of the parties who is deprived of his property and who is compelled to accept for that property something which he frequently regards as wholly inadequate. The court further held that the profit made by the assessee as a result of the compulsory acquisition of the plant was not taxable as it was not a profit arising from a sale or discard of the plant.
Issues: Whether the compulsory acquisition of the plant by the Government under Rule 83, Defence of India Rules, was a 'sale' within the meaning of Section 10 (2) (vii) of the Income-tax Act.
Ratio Decidendi: The court held that the compulsory acquisition of the plant by the Government under Rule 83, Defence of India Rules, was not a 'sale' within the meaning of Section 10 (2) (vii) of the Income-tax Act. The court observed that the word 'sale' in its ordinary meaning implies a voluntary transaction between two persons, a buyer and a seller, and that a compulsory acquisition is a transaction often against the will of one of the parties who is deprived of his property and who is compelled to accept for that property something which he frequently regards as wholly inadequate. The court further held that the profit made by the assessee as a result of the compulsory acquisition of the plant was not taxable as it was not a profit arising from a sale or discard of the plant.
Final Decision: The court answered the question submitted in the negative, holding that the assessee was not liable to pay tax on the profits arising from the compulsory acquisition of the plant by the Government.
( 1 ) THIS is a Reference made at the instance of the assessees by the Income-tax Appellate Tribunal, Calcutta Bench, Under Section 66 (1), Income-tax Act, in which the following question is framed for the opinion of the Ct. :"whether the sum of Rs. 3,27,840/- received by the Appct. Co. from the Govt. of India in the circumstances of this case is taxable as profits Under Section 10 (2) (vii), Income-tax Act?"
( 2 ) THE assessees are the well known Electric Supply Co. which provide this city with electricity. The assessees had a standby electricity generating plant at Bhatpara about sixteen miles from Calcutta. The plant was not in use, but it was kept as a standby or reserve in the event of the main generating plant breaking down.
( 3 ) IT appears that the Govt. during the War desired to acquire this plant, but the Co. did not want to sell. Eventually the Govt. , on 10-4-1942 served a requisition order upon the assessees under the provisions of Rule 83, Defence of India Rules. A letter accompanied the requisition order in which it was stated that the price to be paid for the plant requisitioned was to be determined by Govt. and the writer had been instructed to make art advance payment of Rs. 5,00,000/- without prejudice to any subsequent negotiations. The Co. were informed that arrangements had been made to issue a cheque for this amount without delay. The Govt. also informed the assessees that it was intended to dismantle this plant and they asked the assessees for their co-operation.
( 4 ) ON 29-4-1942 the assessees replied and pressed Govt. to allow them to retain this plant. They regarded the Govt. decision as a decision to deprive them of the Bhatpara Power Station and they requested Govt. to re-examine the position and to rescind the order depriving them of the plant. On May 2 or 4 the Govt. replied that they could not reconsider their decision and the plant would have to be removed.
( 5 ) FROM these letters it is quite clear that the assessees so far from desiring to sell declined to sell and treated the whole transaction as one depriving them against their will of the property in this particular plant.
( 6 ) THE amount which the Co. eventually received as price or compensation for this plant exceeded the written down value of the plant by Rs. 3,27,840/- and the taxing authorities claimed that this amount must be regarded as profits for the assessment year 1943-44. On the other hand, the assessees claimed that this amount could not be regarded as profits Under Section 10 (2) (vii), Income-tax Act, but the taxing authorities assessed the amount to tax and that view was upheld by the Appelpellate Tribunal. As I have stated, the Appelpellate Tribunal on being requested framed the question set out earlier in this judgment for the opinion of the Ct.
( 7 ) SECTION 10, Income-tax Act, provides:"the tax shall be payable by an assessee under the head 'profits and gains of business. . . . . . . . ' in respect of the profits or gains of any business. . . . carried on by him. "
( 8 ) SUB-SECTION (2) provides that such profits or gains shall be computed after making certain allowances and one of these allowances is set out in Section 10 (2) (vii ). This sub-section has subsequently been amended. But it is common ground that the sub-section read as follows during the year 1942-43 when this acquisition was made: (2) "such profits or gains shall be computed after making the following allowances, namely: ( (vii) "in respect of any. . . . . . machinery or plant which has been sold or discarded. . . . , the amount toy which the written down value "of machinery or plant" exceeds the amount for which the. . . . machinery or plant. . . . . . is actually sold or its scrap value: provided that such amount is actually written off in the books of the assessee: provided further that where the amount for which any such. . . . machinery or plant is sold exceeds the written down value. . . . the excess. . . . shall be deemed to
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