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1965 Supreme(P&H) 94
PUNJAB & HARYANA HIGH COURT
Sonepat Light, Power And General Mills Ltd.
Versus
Commissioner Of Income-tax, Punjab.
Income tax Reference No. 31 of 1962,
Decided On : APRIL 8, 1965
The amount paid by the Government to the assessee under the second proviso to sub-section (1) of section 7 of the Electricity Act is not a solatium but is part of the sale price.
Headnote:
INCOME TAX - Section 10(2)(vii) - Interpretation - Compulsory purchase of undertaking under Electricity Act - Whether amount paid by Government to assessee under second proviso to section 7(1) of Electricity Act is solatium or part of sale price - Held, amount paid under second proviso is part of sale price.
Fact of the Case:
The assessee, a licensee under the Electricity Act, 1910, sold its undertaking to the Punjab Government during the assessment year 1956-57. The Income-tax Officer held that the provisions of section 10(2)(vii) of the Income-tax Act, 1922, were attracted and determined the taxable profits on the sale of the machinery, etc., at Rs. 98,415. The assessee contended that the sale in question amounted to compulsory acquisition and not to a sale as contemplated by section 10(2)(vii) of the Income-tax Act. The assessee also contended that a sum of 20% of the value of the machinery, etc., which had been computed in the sale price on account of the agreement contained in the second half of paragraph 9 of the licence and which had to be paid in pursuance of the second proviso to sub-section (1) of section 7 of the Electricity Act, was in the nature of a solatium and was not taxable because it was not paid in consideration of the sale but as compensation for cessation or sterilisation of the business of the assessee.
Finding of the Court:
The court held that the sale in question was not a compulsory acquisition but a sale as contemplated by section 10(2)(vii) of the Income-tax Act. The court also held that the amount paid by the Government to the assessee under the second proviso to sub-section (1) of section 7 of the Electricity Act was not a solatium but was part of the sale price.
Issues: 1. Whether the surplus realised by the assessee has been correctly assessed under section 10(2)(vii)? 2. Whether the solatium paid has been rightly included part of the sale price? 3. Whether the loss on the service lines has been rightly ignored in the computation of profits and losses under section 10(2)(vii)?
Ratio Decidendi: 1. The court held that the sale in question was not a compulsory acquisition but a sale as contemplated by section 10(2)(vii) of the Income-tax Act, relying on the judgment of the Supreme Court in Fazilka Electric Supply Co. Ltd. v. Commissioner of Income-tax. 2. The court held that the amount paid by the Government to the assessee under the second proviso to sub-section (1) of section 7 of the Electricity Act was not a solatium but was part of the sale price, relying on the scheme of section 10(2)(vii) of the Income-tax Act, the wording of section 7 of the Electricity Act, and the stipulation contained in paragraph 9 of the licence of the assessee.
Final Decision: All the three questions referred to us are, therefore, answered in favour of the Commissioner of Income-tax. The parties are, however, left to bear their own costs in this case.
1. This case raises the question of interpretation of section 10(2)(vii) of the Indian Income-tax Act, 1922, as amended by Central Act VIII of 1946 (hereinafter referred to as the Income-tax Act.)
2. The Sonepat Light, Power & General Mills Ltd., Sonepat (hereinafter referred to as "the assessee"), now in liquidation, started its business in 1941, under a licence dated April 23, 1935, under the Indian Electricity Act No. 9 of 1910 (hereinafter called "the Electricity Act"). Section 7(1) of the Electricity Act reads as follows :
"7. (1) Where a licence 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 shall, 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 the licence, have the option of purchasing the undertaking, and, if the local authority, with the previous sanction of the State Government, elects to purchase, the licensee shall sell the undertaking to the local authority 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 licence not to from part of the undertaking for the purpose of purchase, such value to be, in case of difference or 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, due regard being had to the nature and condition for the time being of such lands, buildings, works, materials and plant, and to the state or repair thereof, and to the circumstance that they are in such a position as to be ready for immediate working, and the suitability of the same for the purposes of the undertaking : Provided also that there shall be added to such value as aforesaid such percentage, if any, not exceeding twenty per centum on that value as may be specified in the licence, on account of compulsory purchase."
3. Clause (a) of sub-section (3) of section 7 is also relevant in the context of this case and is reproduced below :
"(3) Where a purchase has been effected under sub-section (1) or sub-section (2), - (a) the undertaking shall vest in the purchasers free from any debts, mortgages or similar obligations of the licensee or attaching to the undertaking : Provided that any such debts, mortgages or similar obligations shall attach to the purchase money in substitution for the undertaking."
4. In accordance with the requirements of section 7(1) of the Electricity Act the following provision was made in paragraph 9 of the licence granted to the assessee which was called "The Sonepat Electric Licence 1935" :
"9. (1) The option of purchase given sub-section (1) of section 7 of the Act, shall first be exercisable on the expiration of twenty years from the date of the notification of this licence and on the expiration of the sub-sequent period of ten years.
The percentage of the value to be determined in accordance with and for the purpose of sub-section (1) of section 7 of the Act of the 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 a compulsory purchase shall be twenty per cent."
5. In Pursuance of the agreement contained in the licence, the Punjab Government exercised its option to purchase the undertaking of the assessee during the financial year ending March 31, 1956, i.e., during the assessment year 1956-57. In making the income-tax assessment for the aforesaid year, the Income-tax Officer held that the provision of section 10(2)(vii) of the Income-tax Act were attracted and determined the taxable profits on the sale of the machinery, etc., at Rs. 98,415. This fig
