COMMISSIONER OF INCOME-TAX VS NATIONAL ELECTRIC SUPPLY AND TRADING CORPORATION LTD.
1998 P T D 2381
[222 I T R 60]
[Delhi High Court (India)]
Before K. Shivashankar Bhatt and K. Ramamoorthy, JJ
COMMISSIONER OF INCOME-TAX
versus
NATIONAL ELECTRIC SUPPLY AND TRADING CORPORATION LTD.
Income-tax Reference No. 11 of 1978, decided on 06/12/1994.
Income-tax---
----Business---Income---Balancing charge---Year in which amount is assessable ---Assessee's undertaking purchased by Government and compensation paid in financial years 1949-50 and 1951-52---Demand for additional compensation---Compromise and payment of additional amount in October, 1968---Profit under S.41(2) assessable in assessment year 1969-70---Indian Income Tax Act, 1961, S.41.
Section 41(2) of the Income Tax Act, 1961, merely states that when a building, machinery, plant or furniture is sold and the price received for the same is more than its written down value, the excess becomes chargeable to income-tax. In case this excess exceeds the difference between the actual cost and the written down value that part of the excess has to be disregarded, but the remaining excess has to be charged as income pertaining to the previous year in which the "Moneys payable", i.e. the price became due. The price cannot become due till it becomes ascertained.
The assessee-company was granted a licence by the Government of Punjab in 1934 to engage in the business of generation and distribution of electricity for a period of 15 years with an option to purchase the undertaking after the expiry of the said licence. The Government exercised its option on the date of the expiry of licence, i.e., on February 20. 1949, and purchased the undertaking. The Government fixed the compensation for the undertaking at Rs.1,88,640 and paid it in the financial years 1949-50 and 1951-52. The company demanded additional compensation and the matter was referred to arbitrators. The arbitrator determined the purchase price of the undertaking at Rs.4,80,000 and also determined the interest on the unpaid amount of compensation at Rs.2,29,000 for the period August, 1949, to September, 1967. The Government did not accept the award. Finally, there was a compromise. The assessee agreed to forgo a sum of Rs.5,000 out of the interest awarded by the arbitrator and the balance amount of Rs.2,24,000 on account of interest and the amount according to the award of the arbitrator was paid by the Punjab State Electricity Board by cheque, dated October 29, 1968. The Income-tax Officer, while completing the assessment for the assessment year in question, i.e., .1969-70, held that the profit estimated under section 41(2) of the Act would have to be taxed during the earlier year on accrual basis. In other words, he held that the said amount was not taxable during the assessment year 1969-70. The Commissioner of Income -tax held under section 263 that for the purpose of section 41(2) the monies payable became due only when the matter was settled which was during the assessment year in question, i.e., 1969-70. The Tribunal restored the order of the Income-tax Officer. On a reference:
Held. that the profit under section 41(2) amounting to Rs.57,175 was taxable in the assessment year 1969-70.
Gulati (P.C.), Voluntary Liquidator, Panipat Electric Supply Co. Ltd. v. CIT (1972).86 ITR 501 (Delhi) applied.
Okara Electric Supply Co. Ltd. v. CIT (1985) 154 ITR 493 (Delhi) ref.
Rajendra and R.K. Chaufla for the Commissioner.
Nemo for the Assessee.
JUDGMENT
K. SHIVASHANKAR BRAT, J.---In respect of the assessment year 1969-70, at the instance of the Revenue, the following question has been referred for our consideration under section 256 of the Income Tax Act:
"Whether, on the facts and in the circumstances of the case, the Tribunal was correct in law in holding that profit under section 41(2) amounting to Rs.57,175 was not taxable in the assessment year 1969-70 and in cancelling the order of the Additional Commissioner of Income-tax passed under section 263 of the Income Tax Act, 1961?"
The relevant facts could be repeated from the statement of the case referred to us as follows:
(i) The assessee-company was granted a licence by the Government of Punjab in 1934 to engage in the business of generation and distribution of electricity in Moga Town for a period of 15 years with an option to purchase the undertaking after the expiry of the said licence. The Government exercised its option on the date of expiry of the licence, i.e., on February 20, and purchased the undertaking under section 7 of the Indian Electricity Act, 1910 (as adopted by the Punjab State). The Government fixed the compensation for the undertaking at Rs.1,88,640 and the amount was paid to the company as under :
Rs.
| Financial year 1949-50 | 1,49,000 |
| Financial year 1951-52 | 39,640 |
(ii) The company was not satisfied with the compensation fixed by the Government and the latter appointed Shri D. D. Dhawan as sole arbitrator who enhanced the amount of compensation from Rs.1,88,640 to rupees 2,46,801. The additional amount of Rs. 58,161 was received by the company as under:
Rs.
| Financial year 1958-59 | 56,833.62 |
| Financial year 1960-61 | 1,326.62 |
| | 58,160.24 |
| Amount deducted by the Government being cost of arbitration fee | 2,464.16 |
(iii) The company still not satisfied with the appointment of Shri D.D. Dhawan as sole arbitrator, took the matter to the Supreme Court and the Supreme Court, finally appointed Justice B.P. Sinha, retired Chief Justice, as sole arbitrator, who gave his award on September 17, 1967. According to this award, Justice Sinha determined the purchase price of the undertaking at Rs. 4,80,000 and also determined the interest on the unpaid amount of compensation at Rs.2,29,000 for the period August, 1949 to September, 1967. The Government did not accept the award of Justice Sinha and filed a petition in the Court of Senior Sub-Judge, Ferozepur, which was, however, dismissed by the said Court and the award was made the rule of Court vide its judgment, dated June 1, 1968. The Government did not accept the said judgment and went in appeal to the High Court. Thereafter, the parties compromised and the company for-went a sum of Rs.5,000 out of interest awarded by the arbitrator and the balance amount of Rs.2,24,000 on account of interest and the amount as per award of arbitrator was paid by the Punjab State Electricity Board by cheque, dated October 29, 1968.
The Income-tax Officer while completing the assessment for the assessment year in question, i.e., 1969-70, held that the profit estimated under section 41(2) shall have to be taxed during the earlier year on accrual basis. In other words, he held that the said amount was not taxable during the assessment year 1969-70.
This order was reversed by the Additional Commissioner under section 263 of the Act who held that for the purpose of section 41(2) of the Act, the monies payable became due only when the matter was settled which was during the assessment year in question, i.e., 1969-70. The Appellate Tribunal did not agree with this view. Hence, the Appellate Tribunal restored the order of the Income-tax Officer. Consequently, the present reference at the instance of the Revenue.
The Income-tax Appellate Tribunal distinguished the decision of this Court in P.C. Gulati, Voluntary Liquidator, Panipat Electric Supply Co. Ltd. v. CIT (1972) 86 ITR 501 on the ground that though the compensation was ascertained but no amount was paid by the Government at the time of requisition unlike the present case and therefore, the Court held that the money became payable only when it was actually ascertained. We do not think the Appellate Tribunal was justified in this approach. The ratio of the decision has been overlooked by the Appellate Tribunal. At page 511, this Court after pointing out that the contention of the Revenue was well- founded, proceeded to observe as follows:
"When the section now in question, i.e., section 41(2), is analysed, it merely states that when a building, machinery, plant or furniture is sold and the price received for the same is more than its written down value, the excess becomes chargeable to income-tax. In case this excess exceeds the difference between the actual cost and the written down value that part of the excess has to be disregarded, but the remaining excess has to be charged as income pertaining to the previous year in which the moneys payable', i.e., price, became due. The words that need to be construed here are: ' became due'. The question to be asked is: when did the price become due? On applying Mr. Jain's contention based not he parallel of accrued income, the price became due when the property was taken over by the Government. According to Mr. Sharma, the price cannot become due till it becomes ascertained.
In applying a provision like the present, we have to make a reasonable construction based on the practical method by which the assessee can claim a deduction. If the property is compulsorily acquired for less than its written down value, the assessee has to get a deduction under section 32(1)(iii) of the Act. If the price exceeds the written down value the assessee has to be taxed on the excess, or, at least that part of the excess which does not exceed the difference between the actual cost and the written down value. There must be some point of time at which the assessee can say that the amount is now payable. He cannot say that the amount is payable on the date of the sale in the present case, because he does not know what the amount is. He cannot say that there is an excess or a deficit. He cannot, therefore, make an entry in his books of account showing the amount. Similarly, if he wishes to make a deduction under section 32(1)(iii) he cannot claim any deduction merely on the ground that the price may be less than the written down value. He does not know whether to ask for a deduction or whether he is liable to tax till the amount is actually ascertained. An amount can be said to be payable when a definite amount is ascertainable as being due."
The Bench also pointed out that the amount that was due to the assessee remained inchoate and unknown till it was actually ascertained as a result of the compromise between the parties.
The same reasoning should govern the present case also. The fact that same some amount was offered by the Government earlier is irrelevant. This further made clear by another decision in Okara Electric Supply Co. Ltd. v. CIT (1985) 154 ITR 493 (Delhi). In the said case various amounts were paid for the acquisition on several dates, however, this Court held that the money became payable, i.e., the balancing charge, having determined in the previous year relevant to the particular assessment year, it was in that year the question of its inclusion in the total income of the assessee would come up for consideration. The Bench also clearly stated that the year of inclusion of the balancing charge as per section 41(2) had to be on the basis when the money payable became due and not on the basis of the date of sale of the assets and that the money payable could be held to have become due only when the same was ascertained. In view of these two decisions of this Court, it is unnecessary for us to consider the question further. The question referred to us is accordingly answered in the negative and in favour of the Revenue.
Reference answered accordingly.
M.B.A./1514/FCReference answered.