THE FAZILKA ELECTRIC SUPPLY CO. LTD . vs. THE COMMISSIONER OF INCOME-TAX, DELHI

CIVIL APPEAL No. 183/1961Supreme Court1962 INSC 7701 March 1962Bench: 2 JudgesAuthor: S.K. DAS, J.C. SHAH12 pages
AI SummaryDismissed

What were the facts?

The appellant, Fazilka Electric Supply Co. Ltd., held a license for generating and supplying electricity for fifteen years. Clause 9(a) of the license, in accordance with Section 7 of the Electricity Act, 1910, granted the Government an option to acquire the undertaking upon expiration of the license term. The Government of Punjab exercised this option and acquired the undertaking on July 23, 1949, for Rs. 3,75,000. This amount exceeded the written-down value of the undertaking's assets. For the assessment year 1950-51, the Income-Tax Officer treated the excess realization over the written-down value, up to the difference between original cost and written-down value (Rs. 77,700), as taxable under Section 10(2)(vii) of the Indian Income-Tax Act, 1922. The appellant contended that this was a compulsory acquisition, not a sale, and therefore not taxable under the said section.

What did the Supreme Court hold?

The Supreme Court held that the transaction was a sale and not a compulsory acquisition. The Court reasoned that the Electricity Act, 1910, and its rules demonstrate that the option of purchase by the Government or local bodies is a result of an agreement between the applicant for the license and the Government granting it. Section 7 of the Electricity Act is an enabling provision allowing parties to agree on purchase options at specified periods. The use of the term "compulsory purchase" in the second proviso to Section 7(1) does not signify a compulsory acquisition in the ordinary sense but rather an agreed-upon mechanism for determining the purchase price, including a potential addition to the value of assets. The Court found that all elements of a contract were present, including an undertaking to sell, specified terms, and consideration (the grant of the license). Therefore, the sale in pursuance of this agreement was not a compulsory purchase. The High Court's answer to the reference question was upheld. The Court did not decide whether Section 10(2)(vii) would apply to a compulsory sale, as it found the present transaction to be a sale.

What were the issues?

1. Whether, on the facts and circumstances of the case, the transaction by which the Government acquired the undertaking could be regarded as a sale within the meaning of Section 10(2)(vii) of the Income-Tax Act, 1922, considering the provisions of Section 7(1) of the Electricity Act, 1910, and Clause 9 of the Fazilka Electric License, 1934? Assessee's contention: The appellant argued that the acquisition was compulsory, not a voluntary sale, and thus did not fall within the ambit of Section 10(2)(vii) of the Income-Tax Act. They relied on the interpretation that the transaction was a compulsory acquisition of property, not a sale in the legal sense. Revenue's contention: The revenue contended that the transaction constituted a sale, and the excess realization over the written-down value was taxable. They relied on the Income-Tax Officer, Appellate Assistant Commissioner, and Income-Tax Appellate Tribunal's findings.

Which sections of the Income-tax Act were involved?

Section 10(2)(vii),Section 7(1),Section 66A(2)

AI-generated summary — verify with the full judgment below

1162 . Match J. 496 SUPREME COURT REPoRTS [1962] stJt>i>. THE FAZTLKA ELECTRIC >SUPPLY CO. LTD . v. THE CO:IJMISS!ONER OF JNCO)IE-TAX, DELHI ("'. K. DA~, J. c. SHAH, .T.J.) income Ta:r-.1Js~·ts81nent of };xces8 anlount rtaliscd over 21,•riltc11 dou:n 1:uf-ue-Ellclric Supply Company-Term of license-Option for Got·trnment or local bodies to parcltasc the Company-Sale by Company, 1f sale or compulsory rzcqui,,if;on -India EIPdricity Ad 19/0JX of 1910), ,,., 3.7 Indian Income 1'ax Act 1922 (/ l of 1922), s. 10(2) (vii). 1'hc appellant carried on the business of generating and suppl)ing tlcctricity in the to\\111 of Fazilka in accordance with the tcrn1s of a license for fifteen vcars.

Clause 9(a) of the license gave the Government' an option to acquire the undertaking on expiration of fifteen years fron1 the date of the license. 'l'he said option was in accordance to sub. s. ( 1) of s. 7 of the Electricity Ar.t, 1910. The Govern- ment of Punjab exercised its option and acquired lhe under- taking on a payment which \\·aa in excess of the written down value of the building, machinery and plant of the undertaking.

For the assessrnent of the appcllanl for th

The order continues below.

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