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PETITIONER:

THE COMMISSIONER OF INCOME-TAX, WEST BENGAL-I, CALCUTTA.

Vs.

RESPONDENT:

UNITED PROVINCES ELECTRIC SUPPLY COMPANY

DATE OF JUDGMENT: 17/04/2000

BENCH:

M.B.Shah, D.P.Wadhwa,

JUDGMENT:

Shah, J.

At the instance of revenue, two questions were

referred to the High Court by the Income-tax Appellate

Tribunal under Section 256(1) of the Income Tax Act, 1961

(herein referred to as the Act). First question for which

leave to appeal was granted by this Court is as under: -

Whether, on the facts and in the circumstances of the

case and on a proper interpretation of the provisions of the

Indian Electricity Act, 1910, the Tribunal was right in

holding that the addition of the sum of Rs.1,29,35,557/-

under Section 41(2) of the Income-tax Act, 1961, in the

assessment year 1965-66 was not justified?

The High Court answered the said question in favour of

the assessee and against the revenue by holding that Section

41(2) of the Act does not and cannot come into play till the

price is finally ascertained and in the facts of the case as

the price of the undertakings of the assessee had not been

finally determined and only an ad hoc payment has been made

which has been accepted under protest, it was not open for

the revenue to intervene and proceed to assess the assessee

under Section 41(2) of the Act. Hence this appeal.

The aforesaid question arises for the assessment year

1965-66 i.e. relevant accounting year ending on 31.3.1965.

Admittedly, the business of the respondent-assessee was of

generating and of supply of electricity to the consumers.

The assessee had two undertakings one at Allahabad and the

other at Lucknow. By exercising power under Section 6 of

the Indian Electricity Act, 1910, the Government of U.P.

purchased both the undertakings for the UP State Electricity

Board (Electricity Board for short). The possession of

the undertakings was handed over to the Electricity Board

w.e.f. 17.9.1964 and the Board paid Rs.62,60,668/- and

Rs.41,35,398/- to the assessee as compensation for the

compulsory purchase of the said undertakings respectively.

Besides these payments, the Board also made certain

adjustments in respect of assessees liabilities for loans

and the final compensation paid to the assessee amounted to

Rs.3,35,84,552/-. The assessee accepted the said amount

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without prejudice to its right to claim the compensation

payable as provided under Section 7A of the Electricity Act,

1910. Thereafter, assessee went for arbitration for

determining the compensation payable to it under the said

Act. As the arbitrators failed to make any award, they

referred the matter for decision to an umpire. It is

alleged that Electricity Board moved the civil court at

Lucknow and obtained an order of stay of the proceedings

before the umpire.

The Income Tax Officer took the amount of

Rs.3,35,84,552/- as sale proceeds of the depreciable assets

of the assessee and as per the details given in his order

computed the written down value of those assets at

Rs.2,06,48,985/- and determined the profit of

Rs.1,29,35,557/- under Section 41(2) of the Act and added

the same to the income of the assessee. In appeal before

the Appellate Assistant Commissioner, it was contended that

no profit under Section 41(2) could be taxed in the

assessment year under consideration because claim of the

assessee for compensation was not settled during the year

and that dispute was still pending before the arbitrators.

The Appellate Asstt. Commissioner rejected the said

contention. In further appeal, the Tribunal held as the

compensation payable to the assessee was not settled and

finalized, the ITO was not justified in making addition to

the income of assessee under Section 41(2) in the year under

consideration.

The High Court arrived at the conclusion that the

assets of the assessee, namely, two undertakings had been

sold within the meaning of Section 41(2) of the Act read

with Section 32(1) thereof and the explanation therein. The

High Court held that, hence, Section 41(2) to that extent

is attracted but an assessment under Section 41(2) can only

be made after the price at which the assets of the assessee

had been sold is determined. As the price is not finally

determined, it cannot be said that the amount which has been

received by the assessee in respect of his two undertakings

is a price at which the same had been sold. The Court

further held that Section 41(2) does not envisage that an

assessee would be assessed piece-meal as and when the amount

on account of price is received. Hence the question was

answered in favour of the assessee as stated above.

At the time of hearing of the appeal, Mr. K.N.

Shukla, Sr. Advocate appearing for the revenue submitted

that compensation amount is determined by the State and paid

to the assessee, hence under Section 41(2) it would be

assessable and taxable income as provided therein. It is

his contention that merely because assessee has filed an

application for enhancement of the compensation, it would

not mean that the assessee has not received the

compensation. According to his submission, it would be the

income of the assessee during the relevant accounting year

and, therefore, the order passed by the ITO was in

accordance with the law. As against this, Mr. Joseph

Vellapally, Sr. Advocate appearing for the assessee

submitted that the amount received by the assessee is not

full and final payment towards the compensation. It is only

ad hoc payment made by the State Government. That amount

cannot be taken into consideration for the purpose of

Section 41(2) of the Act. He relied upon the various

decisions of the High Court in support of his contention.

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For deciding the rival contention raised by the

learned counsel for the parties, we would first refer to

Section 41(2), which was in force at the relevant time. It

reads as under: 41. Profits chargeable to tax.

(1)

(2) Where any building, machinery, plant or furniture

which is owned by the assessee and which was or has been

used for the purposes of business or profession is sold,

discarded, demolished or destroyed and the moneys payable in

respect of such building, machinery, plant or furniture, as

the case may be, together with the amount of scrap value, if

any, exceed the written down value, so much of the excess as

does not exceed the difference between the actual cost and

the written down value shall be chargeable to income-tax as

income of the business or profession of the previous year in

which the moneys payable for the building, machinery, plant

or furniture became due:

Explanation: For the purposes of this sub-section,

the expression moneys payable and the expression sold

shall have the same meanings as in sub-section (1A) of

section 32.

Explanation to Section 32(1A) is :

Explanation: For the purposes of this clause,--

(i) moneys payable, in respect of any structure or

work, includes

(a) any insurance or compensation moneys payable in

respect thereof;

(b) where the structure or work is sold, the price for

which it is sold; and

(ii) sold shall have the meaning assigned to it in

the Explanation to clause (iii) of sub-section (1).

Explanation (2) to clause (iii) of sub-Section (1) of

Section 32 gives following meaning to expression sold:

sold includes a transfer by way of exchange or a

compulsory acquisition under any law for the time being in

force but does not include a transfer, in a scheme of

amalgamation, of any asset by the amalgamating company to

the amalgamated company where the amalgamated company is an

Indian company;

Section 41 is under the heading Computation of

Business Income. The entire section makes it abundantly

clear that income arising as provided therein is to be

considered as income of business or profession and is

chargeable to income tax as income of business or

profession. Once it is held to be a business income unless

provided otherwise it would be taxable in the previous year

in which the same is received. Section 41(2) provides the

method of calculating balancing charge. It inter alia

states that where any building, machinery, plant or

furniture is sold and moneys payable in respect of such

building, machinery, plant of furniture exceed the written

down value, so much of the excess as does not exceed the

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difference between actual cost and the written down value is

chargeable to income tax as income of the business of the

previous year in which the moneys payable became due.

Explanation to the phrase moneys payable is wide enough

and includes any compensation moneys payable in respect

thereof. Similarly, the explanation sold includes a

compulsory acquisition under any law for the time being in

force. Hence, in case of acquisition of property under any

law, the balancing charge under Section 41(2) is taxable to

income-tax as income of the business of the previous year in

which moneys payable became due. Question would be when

moneys payable become due. Determination of compensation

and its payment by the authority would certainly mean that

moneys payable became due. Receipt of the compensation

payable in respect of acquisition is a stage subsequent to

its becoming due. In the present case, income has accrued

and is actually received. The amount received is

compensation amount in respect of acquisition of the

property and is to be accounted for the purpose of income

tax as income of the business of the previous year. For the

market value determined by the authority if there is no

difference or dispute, whatever amount is determined and

paid would be compensation payable for the acquisition.

That determination of the amount of compensation would mean

moneys payable became due. However, in case of dispute

or difference for the determination of the market value the

matter is required to be determined by the arbitrator under

Section 7A of the Indian Electricity Act but this would not

mean that whatever the amount is determined and paid by the

authority would cease to be compensation moneys payable.

Pendency of proceeding for additional moneys payable would

not be relevant so far as taxability of the compensation

amount received is concerned. If additional amount is

received in the subsequent year it would be a business

income of that year. In the present case, presuming that

the assessee is entitled to have additional amount than what

is paid by the acquiring authority, yet for the purpose of

tax, moneys payable became due and are paid and received.

In case he gets any additional amount that would be taxable

subsequently as profits in accordance with the provisions of

the Act. This interpretation would be in-conformity with

sub-sections (1) and (4) of Section 41. Sub- section (1)

deals with allowance or deduction made in respect of loss,

expenditure or trading liability incurred by the assessee

and subsequently the assessee has obtained any amount in

respect of such loss, expenditure or some benefit in respect

of such trading liability by way of remission or cessation

thereof, the amount obtained by him or the value of benefit

accruing to him is deemed to be profits and gains of

business or profession and accordingly chargeable to

income-tax as the income of that previous year. Receipt of

such amount may or may not be in the same year. It can be

during more than one subsequent year. In such a case, it

would be taxable in the previous year in which it is

received. Similarly, sub-section (4) provides for deduction

allowed in respect of bad debt or part of debt and if the

amounts of such bad debt or part thereof is subsequently

recovered then it is to be taxed as profit as provided

therein. This recovery of debt may not be in the same year.

Further, considering the fact that this is to be deemed to

be business profit, such receipt is to be taxed as income in

the year in which it is received. In such situation, there

is no question of piece-meal assessment as it is to be taxed

when the amount on account of trading loss, bad debt or

compensation is received.

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The learned counsel for the assessee submitted that

till the compensation amount is finally ascertained and

determined, the amount received by the assessee is to be

treated as ad hoc amount and after receipt of the

ascertained final amount it would be taxable as a business

income in the previous year in which the said amount is

determined as in that year moneys payable became due. He

submitted that there is a marked variation from the language

of Section 10(2)(vii) of the 1922 Act. In the earlier Act,

the balancing charge was chargeable in the year of sale.

However, under the 1961 Act, the balancing charge is taxable

only in the year of final determination of sale price. For

this purpose, he referred to the Notes on Clauses to the

Income Tax Bill, 1961 to contend that there is material

change in the new provision. Clause 41(2) of the said Notes

reads as under: This corresponds to the provisions

contained in the second and fourth provisos to the existing

section 10(2)(vii). The changes made here are verbal and

seek to clarify that where the monies payable for sale or

destruction are not determined in the year in which the

sale, destruction etc. took place, the profit will be

assessable in the assessment year in the previous year of

which that sum is determined. The Explanation clarifies

that the provisions of this sub-section will apply even if

the business or profession is not in existence in the year

in which the sums fall to be assessed

The aforequoted object does not in any way advance the

submission made by the learned counsel for the respondent.

It is specifically stated that changes made are verbal and

seek to clarify that in case moneys payable for sale are not

determined in the year in which the sale took place, the

profit will be assessable in the assessment year in the

previous year of which that sum is determined. This object

nowhere talks of final determination of compensation and

this would not mean that as the assessee has the right to

move the arbitrator for enhancement of the compensation, the

compensation amount determined by the authority is not to be

taken into account till the proceedings for enhancement are

finalized. The moneys payable as per the explanation

includes any compensation moneys payable in respect thereof.

Hence, when compensation moneys payable is determined or

fixed even though it is not received it would amount to

moneys payable. Under the Explanation as quoted above, the

expression moneys payable is defined to include

compensation moneys payable in respect thereof. As

discussed above, once the compensation is determined by the

authority and is received by the assessee under protest and

the dispute is referred to the arbitrator for its

enhancement, it would not cease to be compensation moneys

paid to the assessee. The amount so received by the

assessee represents compensation in respect of acquisition

of building, plant, machinery or furniture.

The learned counsel for the assessee further submitted

that as held by this Court in CIT, Bombay v. Bipinchandra

Maganlal & Co. Ltd. [(1961) 41 ITR 291] capital receipts

are taxed under the head, Profits and gains from business

or profession by virtue of deeming fiction, but the

receipts do not become business profits. He, therefore,

submitted that notional receipt of profit is in the nature

of capital receipt and as there is no provision or procedure

in the Act for taxing it again after receipt of additional

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amount, it should be held that the amount becomes taxable

only when the compensation is finally determined. In the

said case, the Court dealt with similar provision Section 10

(2)(vii) of Income Tax Act, 1922 and observed that such

income is notionally regarded as profit in the year in which

the asset is sold and by a fiction it is regarded for the

purpose of Act as income. The relevant part of the

observation is as under: -

What in truth is a capital return is by a fiction

regarded for the purposes of the Act as income. Because

this difference between the price realized and the written

down value is made chargeable to income-tax, its character

is not altered, and it is not converted into the assessees

business profits. It does not reach the assessee as his

profits: it reaches him as part of the capital invested by

him, the fiction created by section 10(2)(vii), second

proviso, notwithstanding. The reason for introducing this

fiction appears to be this. Where in the previous years, by

the depreciation allowance, the taxable income is reduced

for those years and ultimately the asset fetches on sale an

amount exceeding the written down value, i.e., the original

cost less depreciation allowance, the Revenue is justified

in taking back what it had allowed in recoupment against

wear and tear, because in fact the depreciation did not

result. But the reason of the rule does not alter the real

character of the receipt. Again, it is the accumulated

depreciation over a number of years which is regarded as

income of the year in which the asset is sold. The

difference between the written down value of an asset and

the price realized by sale thereof though not profit earned

in the conduct of the business of the assessee is notionally

regarded as profit in the year in which the asset is sold,

for the purpose of taking back what had been allowed in the

earlier years.

From the aforesaid observations, it is apparent that

for the purpose of tax, the difference between the written

down value of an asset and the price realized by sale

thereof, though no profit is earned in conduct of the

business of the assessee, is notionally regarded as profit

in the year in which the asset is sold. Once it is held to

be a business profit, then there is no question of treating

it as a capital receipt and taxing it accordingly. Further,

once it is a business profit as per the provision of the Act

it is to be taxed on its accrual and it cannot be said that

there is no provision for taxing the receipt of additional

amount at a subsequent stage. As stated earlier,

sub-sections (1) and (4) apparently contemplate receipt of

amount as stated therein to be taxed in the year in which it

is received and such recovery may be in one or more

subsequent years.

Learned counsel further submitted that for the

calculation of the deemed profit, it is necessary to know

both the sale consideration of each asset as well as its

written down value and in the year under consideration, the

sale price of each individual asset is not known.

Therefore, Section 41 cannot be applied by taking the

overall compensation and reducing therefrom the overall

written down value of depreciable assets as has been done by

the I.T.O. He submitted that balancing charge has to be

calculated with respect of each individual asset. In

support of his contention, he referred to the decision of

this Court in C.I.T., Gujarat vs. Artex Manufacturing Co.,

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{(1997) 6 SCC 437 : 227 ITR 278}.

In our view, in the present appeal, we are only

concerned with the limited question which was referred to

the High Court - whether on the facts and in the

circumstances of the case and on interpretation of the

provisions of the Indian Electricity Act, 1910, the

provisions of section 41(2) of the Act are applicable to the

receipts of the amount by the assessee towards the

compensation payable to him? Therefore, additional question

raised by the learned counsel for the appellant which

depends upon facts, is not required to be dealt with or

decided in this appeal. We also make it clear that we have

not considered the effect of Section 7A of the Indian

Electricity Act, 1910 as amended by the UP Act 14 of 1976 as

the said question was not there before the High Court.

Further, we would make it clear that it would be open to the

assessee to raise these contentions before the competent

authority.

Learned counsel further submitted that various High

Courts have held that balancing charge can only be brought

to tax in the year in which compensation is finally

determined. For this purpose, he referred to Akola Electric

Supply Co. Pvt. Ltd. v. Commissioner of Income Tax,

Bombay City [(1978) 113 ITR 265]. In the said case, the

Bombay High Court held that though taking over the

possession might have vested the undertaking in the

Electricity Board without a price being settled, the

transaction became sale only when the price became settled

and it was only after the price had been settled that it

became due to the assessee; the moneys payable became due

only when they were ascertained. These observations are

made in the background of the fact that under the provisions

of Section 7 of the Electricity Act, the property was

acquired by the Bombay State Electricity Board and the

possession was handed over on December 7, 1959 and as

regards the payment, it was pointed out that the Board was

not under obligation to make any payment till the sale value

was determined. However as a measure of cooperation, Board

agreed to make a provisional payment equivalent to 65 per

cent of the book value on receipt of all assets. The

provisional payment was made through a cheque on June 7,

1961. Ultimately by letter dated March 31, 1962, the sale

value was fixed by mutual agreement. In that context, a

question with regard to the taxability of balancing charge

under Section 41(2) for the assessment year 1962-63 was

determined by the High Court. In that case, assessee raised

a contention that moneys payable became due when the vesting

took place and the Board became owner of the Undertaking and

its assets. Against that revenue contended that money

payable became due after their determination. The Court

negatived the said contention and accepted the contention of

the revenue by referring to the decision rendered by the

Delhi High Court in P.C. Gulati, Voluntary Liquidator,

Panipat Electricity Supply Co. Ltd. v. CIT [(1972) 86 ITR

501 (Delhi)] and held that moneys payable became due when

they were ascertained and not on the date of possession of

the properties. In C.I.T., Delhi-II v. Rohtak Textile

Mills Ltd., [(1982) 138 ITR 195 (Delhi)], the Delhi High

Court followed its earlier decision and the decision

rendered by the Bombay High Court.

In CIT, Karnataka v. Sheshappa Hegde [(1984) 150 ITR

164, Karnataka] the assessee had purchased two motor

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vehicles in 1973 and 1975. They were acquired by the

Government under the Contract Carriage (Acquisition) Act,

1976 which came into force on January 30, 1976 and the

vehicles were taken over on the same day. For the

assessment year 1976-77, the assessee filed a revised return

claiming loss which included the cost of vehicle taken over

by the Government. The Court held that the year of

taxability under S. 41(2) is the year of receipt or the

year in which it becomes due.

The learned counsel for the assessee further referred

to the decision in Okara Electric Supply Company Ltd. v.

CIT [(1985) 154 ITR 493]. In that case also, the Court

followed P.C. Gulati and Akola Electricity Supply Co.

cases (supra). The Court considered the fact that on

January 4, 1959, Government took over all the assets of the

Undertaking. A sum of Rs. 60,000/- was paid to the

assessee in that regard on June 3, 1959. There was a

dispute about the valuation of the assets acquired and

ultimately by Memorandum dated November 18, 1963, the assets

were revalued at Rs.2,02,781/-, but finally its valuation

was determined in the accounting year 1966-67, i.e. between

April 1, 1965 and October 26, 1965. In the light of that

fact Court arrived at the conclusion that on the

determination of the amount, the balancing charge would be

includible in the assessment year 1966-67.

In CIT v. The Central Indian Electric Supply Co.

Ltd. [(1993) 114 CTR (MP) 160], the Undertaking was taken

over by the M.P. Electricity Board. The assessee was

entitled to the market value of its undertaking taken over

or purchased under the Act. The assessee for the accounting

year in question, i.e. 1970-71 submitted a return showing

its income as nil, although along with the return it had

enclosed a balance-sheet showing therein the written down

value of its assets acquired by the Board as also the

compensation actually received by it from the Board.

Revenue contended that the amount had become due for payment

only when the decree in terms of the award was passed by the

District Judge and the same having been passed in the

relevant year, it was the case of income accruing to the

assessee and could be brought to tax in the assessment year

in question. The Court held that in the two expressions

payable and due there is difference only of degree and

time. The money is payable immediately on the date of

acquisition or sale under the Act, but it becomes due for

payment at some future date, if there is a dispute about the

price. In the event of dispute about the price,

quantification of the price is done only through the award

of the arbitrator. The Court thereafter observed: -

the price due for payment to the assessee on the

date of the passing of the decree was taxable in the

relevant succeeding assessment year to the financial year,

in which the decree was passed even though the amount under

the decree may not have been actually paid or received by

the assessee. In the scheme of IT Act, the taxable event is

on accrual of income and not on actual receipt thereof.

Pendency of litigation in respect of an amount or price due

has no relevancy so far as the taxability of such accrued

income is concerned. The likelihood of the income being

reduced in the subsequent assessment year as a result of the

litigation may give rise to resort to other remedies

available in the Act for rectification and refund of the

tax, but on that ground it cannot be held that no income had

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accrued to the assessee for the relevant assessment year.

We find great support for our decision from the decision of

the Supreme Court in the case of Kesoram Industries & Cotton

Mills Ltd. vs. CWT {(1966) 59 ITR 767 SC)}. As for the

wealth-tax so also the income-tax. The liability to pay

income-tax arise in the relevant financial year on accrual

of income in that year and if the income is ascertainable

and quantified, it can be brought to tax in the relevant

assessment year.

We agree with the observation of Madhya Pradesh High

Court that Pendency of litigation in respect of an amount or

price due has no relevancy so far as the taxability of such

accrued income is concerned. The likelihood of the income

being reduced in the subsequent assessment year as a result

of the litigation may give rise to resort to other remedies

available in the Act for rectification and refund of the

tax, but on that ground it cannot be held that no income had

accrued to the assessee for the relevant assessment year.

In CIT v. National Electric Supply and Trading

Corporation Ltd. [(1996) 222 ITR 60, Delhi], the Government

purchased the Undertaking on February 20, 1949 and the

compensation was paid in the year 1949-50 and 1951-52. The

Undertaking demanded additional compensation. The matter

was compromised and the additional amount was paid on

October 29, 1968. Applying the decisions in Okara Electric

Supply Co. Ltd. and P.C. Gulati (supra), the Court held

that the year of inclusion of the balancing charge would be

when the moneys payable became due and the moneys payable

could be held to have become due only when the same was

ascertained.

From all the aforesaid cases dealt with by the High

Courts, it is apparent that it was the contention of the

assessee that the balancing charge is to be taxed in the

year in which the undertaking is taken over. As against the

revenue contended that when the compensation amount is

determined the balancing charge is to be taxed. In the

present case, the amount of compensation is determined and

is paid. As there is dispute with regard to the

determination of the market price, the matter is referred to

the arbitrator. Presuming that it is ad hoc payment in the

sense that final compensation is not determined by the

arbitrator or appellate authority still the payment is

towards purchase price. Section 41(2) nowhere provides that

such balancing charge would be taxable in which moneys

payable are determined finally by the Arbitrators or the

Appellate authority or such other authority provided under

the Acquisition Act. Further, it is not the case of the

assessee that pending final determination of the purchase

price he has not accepted the said amount. Pendency of

litigation for getting additional amount in respect of

moneys payable has no relevancy so far as the taxability

of accrual of income -compensation received- is concerned.

Hence, in case where compensation amount and its receipt is

admitted, which is business profit under Section 41(2), it

is to be taxed in the previous year of its receipt.

In the result, appeal is allowed. The impugned

judgment and order of High Court is quashed and set aside.

The question referred is answered in favour of the revenue

and against the assessee and it is held that tribunal erred

in holding that addition of the sum of Rs.1,29,35,557/-

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under Section 41(2) of the Income-tax Act, 1961 in the

assessment year 1965-66 was not justified.

Ordered accordingly. The parties shall bear their

respective costs.