JUDGMENT

CHANDRACHUD, CJI. :— The appellant, the Mangalore Electric Supply Company Limited, was carrying on the business of distribution of electricity in Mangalore, South Kanara District, under a licence granted by the Government of Madras in favour of Messrs Octorious Steel & Company Limited. The licensee had assigned its rights to the appellant with the previous consent of the State Government. Under S. 4 of the Madras Electricity Supply Undertakings (Acquisition) Act, 1954, the State Government had the power to take over any electricity undertaking, declaring that it shall vest in the Government on the date specified therein. In exercise of that power, the Government of Madras passed an order declaring that the appellants undertaking would vest in the Government on Dec. 31, 1956. which date was later advanced to Oct. 15, 1956. The appellants undertaking was accordingly acquired by the Government and its properties were taken over on the date of vesting. Mangalore was then a part of the State of Madras.

2. Section 5 of the Acquisition Act, 1954, provided for payment of compensation to a licensee whose undertaking was taken over by the Government. Three modes of fixation of compensation were provided for by that section, called Basis A, Basis B and Basis C. Section 6 gave to the undertaking concerned the option to choose any one of these three modes. According to Basis A, the licensee was entitled by way of compensation to the payment of an amount equal to 20 times the average net annual profits of the undertaking during the period of five consecutive accounting years immediately preceding the date of vesting. The appellant opted for compensation on Basis A, one of the consequences of which, as provided by the Act, was that the entire property belonging to the undertaking, including the fixed assets, vested in the State Government under S. 6. Applying Basis A, the appellant was paid compensation in the sum of Rs. 18,42,312/-.

3. In the course of the appellants assessment for the assessment year 1957-58, corresponding to the accounting year commencing on April 1, 1955 and ending on Oct. 14, 1956, the Income-tax Officer considered the question whether the compensation received by the appellant for the acquisition of its undertaking was in the nature of a capital gain within the meaning of S. 12-B of the Indian Income-tax Act, 1922. Deducting a sum of Rs. 6,46,710/-, resenting the value of fixed assets, from the compensation paid by the State Government to the appellant, the Income-tax Officer treated the sum of Rs. 11,95,602/- as capital gains which was liable to be brought to tax. The appellant appealed to the Assistant Commissioner contending that the compulsory acquisition of its undertaking was not a transfer within the meaning of S. 12-B (1) and therefore it was not liable to capital gains tax. That argument was rejected by the Assistant Commissioner whose judgment was confirmed in a further appeal by the Income-tax Appellate Tribunal. On the application of the appellant, the Tribunal referred the following question for the opinion of the High Court:

"Whether, on the facts and in the circumstances of the case, the acquisition under the Madras Electricity Supply Undertakings (Acquisition) Act, 1954 came within the scope of S. 12-B of the Indian Income-tax Act, 1922 so as to render liable any surplus arising from such acquisition to tax under S. 12-B of the Act?"

By its judgment dated August 25, 1971, the High Court upheld the view taken by the Tribunal but granted to the appellant a certificate of fitness to file an appeal to this Court. That has given rise to Civil Appeal No. 2160 of 1972.

4. The appellant had asked the Tribunal to refer for the opinion of the High Court four other questions. The Tribunal having declined to do so, the appellant applied to the High Court under S. 256 (2) of the Income-tax Act, 1961, requesting it to call for a reference from the Tribunal. The High Court agreed and called for a reference on the