1970 Supreme(P&H) 50

PUNJAB & HARYANA HIGH COURT
Mehar Singh and R.S.Narula JJ.
Hoshiarpur Electric Supply Co.
Versus
Commissioner Of Income-tax
Income tax Reference No. 9 of 1965,
Decided On : FEBRUARY 26, 1970

Headnote:

ELECTRICITY ACT - SECTION 7 - SALE OF UNDERTAKING - DEEMED DATE OF SALE - PUNJAB ELECTRICITY (AMENDMENT) ACT, 1959 (32 OF 1959) - SECTION 4 - FIXED DATE OF PURCHASE - INTEREST ON BALANCE OF SALE PRICE - SECOND PROVISO TO SECTION 4 - INCOME TAX ACT, 1922 (11 OF 1922) - SECTION 10(2)(VII) - SECOND PROVISO - PROFITS ON SALE OF ASSETS - DEPRECIATION - CONTINUITY OF PARTNERSHIP - INDIAN PARTNERSHIP ACT, 1932 (9 OF 1932) - SECTIONS 3, 4, 31 TO 38, 42.

Fact of the Case:

The assessee, a partnership firm, was engaged in the business of generation and distribution of electricity in the town of Hoshiarpur and its suburbs under a license granted by the Punjab State Government under Section 3 of the Indian Electricity Act, 1910 (Act 9 of 1910). The license contained an option clause allowing the State Government to purchase the undertaking on the expiry of fifteen years from its date, and thereafter, on the expiry of every subsequent period of twenty years. The partnership underwent several changes in its constitution over the years, with partners joining, leaving, and being replaced. In 1953, the State Government exercised its option to purchase the undertaking, and the purchase was completed on February 24, 1955. The assessee claimed that the sale of the undertaking was not completed until August 24, 1955, six months after the specified date under Section 4 of the Punjab Electricity (Amendment) Act, 1959 (32 of 1959), and therefore, the profits from the sale were not taxable in the assessment year 1955-56. The assessee also claimed that it was not liable to be assessed to tax in respect of depreciation allowed to it since its inception in 1930, as the partnership had undergone several changes in its constitution.

Finding of the Court:

The court held that the sale of the undertaking was completed on February 24, 1955, when the State Government took over the whole of the undertaking and paid part of the price to the assessee. The court rejected the assessee's argument that the sale was not completed until August 24, 1955, as the Punjab Government had not fixed a 'fixed date of purchase' under Section 4 of the Punjab Electricity (Amendment) Act, 1959. The court also held that the assessee was liable to be assessed to tax in respect of depreciation allowed to it since its inception in 1930, as the partnership had continued as a unit of assessment throughout, despite changes in its constitution. The court relied on the decisions of the Supreme Court in Fazilka Electric Supply Company Ltd. v. Commissioner of Income-tax, [1962] 46 I.T.R. 127 (S.C.) and Commissioner of Income-tax v. A.W. Piggies and Company, [1953] 24 I.T.R. 405, 408, 409 ; [1954] S.C.R. 171 (S.C.) to support its findings.

Issues: 1. Whether the taking over of the assessee's electricity undertaking by the Government was a sale or not? 2. If it was a sale, whether it took place within the previous year relevant to the present assessment year 1955-56? 3. Whether, on the facts and in the circumstances of the case, the amount of 20 per cent. added to the fair market value formed part of the sale consideration? 4. Whether, on the facts and in the circumstances of the case, the assessee is liable to be assessed to tax in respect of depreciation allowed to it right from its inception in 1930?

Ratio Decidendi: 1. The sale of the undertaking was completed on February 24, 1955, when the State Government took over the whole of the undertaking and paid part of the price to the assessee. 2. The sale took place within the previous year relevant to the assessment year 1955-56. 3. The amount of 20 per cent. added to the fair market value formed part of the sale consideration. 4. The assessee is liable to be assessed to tax in respect of depreciation allowed to it since its inception in 1930.

Final Decision: The court answered all four questions in the affirmative, holding that the sale of the undertaking was completed on February 24, 1955, that the sale took place within the previous year relevant to the assessment year 1955-56, that the amount of 20 per cent. added to the fair market value formed part of the sale consideration, and that the assessee was liable to be assessed to tax in respect of depreciation allowed to it since its inception in 1930.