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PETITIONER: THE FAZILKA ELECTRIC SUPPLY CO.  LTD.

       Vs.

RESPONDENT: THE COMMISSIONER OF INCOME-TAX, DELHI

DATE OF JUDGMENT: 01/03/1962

BENCH: DAS, S.K. BENCH: DAS, S.K. SHAH, J.C.

CITATION:  1963 AIR  464            1962 SCR  Supl. (3) 496  CITATOR INFO :  E          1969 SC 239  (12,13)  R          1990 SC 123  (31)  E          1990 SC 153  (17)

ACT: Income  Tax--  Assessment  of Excess  amount  realiesd  over written   down  value--Electric  Supply   Company--Term   of license--Option  for Government or local bodies to  purchase the   Company--Sale  by  Company,  if  sale  or   compulsory acquisition--India Electricity Act 1910(IX of 1910), ss. 3.7 Indian Income Tax Act 1922 (11 of 1922), s. 10(2) (vii).

HEADNOTE: The  appellant  carried on the business  of  generating  and supplying  electricity in the town of Fazilka in  accordance with the terms of a license for fifteen years.  Clause  9(a) of the license gave the Government an option to acquire  the undertaking on expiration of fifteen years from the date  of the  license.  The said option was in accordance to sub.  s. (1) of s. 7 of the Electricity Act, 1910. The Government  of Punjab exercised its option and acquired the undertaking  on a  payment which was in excess of the written down value  of the  building, machinery and plant of the undertaking.   For the  assessment of the appellant for the relevant year,  the Income-Tax Officer computed such excess realisation over the written down value as did not exceed the difference  between the  original cost and the written down value and  held  the said sum as taxable in the hands of the appellant by  reason of  the provisions in s. 10(2) (vii) of the Income Tax  Act. The  appellant  contended  that no part of  the  excess  was taxable since the undertaking had not been voluntarily sold, but  had been compulsorily acquired by the Government ;  and on  a  proper construction of the Electricity  Act  and  the rules  made  thereunder, this so-called sale  was  really  a compulsory acquisition of property and not a sale as legally understood. Held, that from the provisions of the Electricity Act, 1910, read  alongwith  the rules made thereunder, it  is  manifest that  the condition as to the option of purchase  either  by the  local  authority  or Government. is the  result  of  an agreement between the applicant who had applied for  license and the Government who granted the license.

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The true scope and effect of s. 7 of the Electricity Act  is that  it is an enabling section and merely provides for  the option  of purchase to be exercised on the expiration  of  a certain  period agreed to between the parties, and s. 10  of the Act 497 further provides that in an appropriate case Government  may even  forego the option.  The scheme of the Electricity  Act as  indicated  by the relevant provisions  thereof  and  the rules  made  thereunder,  shows beyond any  doubt  that  the option  of  purchase  is the result of  a  mutual  agreement between  the parties, the applicant for the license  on  one hand and the Government on the other. Held,  further, that s. 7 does not provide for a  compulsory purchase or compulsory acquisition without reference to  and independent   of  any  agreement  by  the   licensee.    The expression  "compulsory purchase" in the second  proviso  to sub-s.  (1)  of  s. 7 is another  enabling  provision  which enables a part to specify in the license such percentage  as should  be  added to the value of the  building,  plant  and machinery etc. when the option is exercised, notwithstanding the use of the expression "compulsory purchase" in the  said second   proviso,  there  is  no  compulsory   purchase   or compulsory acquisition in the sense in which that expression is ordinarily understood. Sakataguna Nayudu v. Chinna Mununami Na (1928) L. R. 55 I.A. 243, Calcutta Electric Supply Corporation v. Commissioner of Income-tax, West Bengal, (1951) 19 I.T.R. 406.

JUDGMENT: CIVIL APPELLATE JURISDICTION : Civil Appeal No. 183 of 1961. Appeal from the judgment and order dated, April 24, 1959. of the Punjab High Court in I.T.R. No. 18 of 1954. S.   K.  Kapur,  Bishambar  Das  and  K.K.  Jain,  for   the appellant. K.   N. Rajagopal Sastri and D. Gupta, for the respondent. 1962, March 1. The Judgment of the Court was delivered by S.   K. DAS, J.-On July 23, 1934. the then Government of the Punjab  granted a license under s. 3 of  Indian  Electricity Act,  1910 (IX of 1910) (hereinafter called the  Electricity Act)  to  two persons named Harbhagwan Nanda  and  Harcharan Dass for the generation and supply of electric energy 498 in  the  town  of Fazilka.  The  licence,  which  is  marked annexure  ,A’ and forms part of the statement of  the  case, contained a clause, viz. el. 9(1) of which read as follows :               "9. (1) The option, of purchase given by  sub-               section (1) of section 7 of the  (Electricity)               Act   shall  first  be  exercisable   on   the               expiration  of 15 years from the date  of  the               notification  of  this  licence  and  on   the               expiration  of every subsequent period  of  10               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               (Electricity) Act of 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 compulsory purchase shall be 20 percent." Under  this clause, read with a. 7 of Electricity  Act,  the Government  bad an option of purchasing the  undertaking  on the expiration of 15 years from the date of the license  and

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on  the expiration of every subsequent period of ten  years. In  1935,  about a year after the grant of  the  license,  a public  limited  company  under the name and  style  of  the Fazilka  Electric  Supply Co. Ltd.. which is  the  appellant herein,  was  incorporated, and it acquired the  rights  and privileges  of  the license known as  the  Fazilka  Electric License,  1934.   The appellant carried on the  business  of generating and supplying electricity in the town of  Fazilka in  accordance with the terms of the license for  15  years. On the expiration of 15 years from the date of license,  the Government  of the Punjab exercised its option and  acquired the  undertaking on July 23, 1949 on a total payment of  Rs. 374,000/-, which was in excess of the written down value  of the  building  machinery and plant of the  undertaking.   In connection with the assessment of the appellant for the year 1950-51, the 499 Income-tax Officer computed such excess realisation over the written down value as did not exceed the difference  between the  original  cost  and  the written  down  value,  at  Rs. 77,700/- and held that this sum of Rs. 77,700/- was  taxable in the hands of the appellant by reason of the provisions in s.  10(2)(vii)  of  the Indian Income-tax  Act,  1922.   The appellant  contended  that no part of the  excess  over  the written  down value, was taxable since the  undertaking  had not  been  voluntarily  sold,  but  had  been   compulsorily acquired by the Government ; therefore, the transaction was. not a sale within the meaning of the provisions in s. 10 (2) (vii) of the Income-tax Act. Both  the  Income-tax Officer and  the  Appellate  Assistant Commissioner repelled this contention of the appellant.   On an appeal to the Income-tax Appellate Tribunal, the Tribunal also  held against the appellant and came to the  conclusion that there was a sale of the building machinery and plant of the  undertaking within the meaning of s. 10(2)(vii) of  the Income-tax Act.  The appellant then moved the Tribunal for a reference  of  the following question of law which  it  said arose out of the Tribunal’s order ;               "Whether on the facts and in the circumstances               of this case, and on a true interpretation  of               section 7(1) of the Indian Electricity Act and               clause  9  of the  Fazilka  Electric  License,               1934, 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 ?" The  Tribunal referred the question to the High Court.   The High Court answered the question against the appellant.  The appellant  then asked for a certificate under s.  66A(2)  of the  Income-tax Act and having obtained such a  certificate, has preferred the present appeal to this Court. 500 Section  10(1) of the Income-tax Act states that  Income-tax shall be payable by an assessee under the head "Profits  and gains of business, profession or vocation" in respect of the profit  or gains   of any business, profession  or  vocation carried  on  by the assessee.  Sub-section (2) of  the  said section states that such profits or gains shall be  computed after  making certain allowances referred to in cls. (i)  to (xv).   Clause (vii) relates to an allowance in  respect  of any  building,  machinery or plant which has  been  sold  or discarded  or demolished or destroyed, the  allowance  being the  amount by which the written down value thereof  exceeds the  amount for which the building, machinery or  plant,  as the  case may be, is actually sold or its scrap value ;  the

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second  proviso to the clause states that where  the  amount for  which  any such building, machinery or plant  is  sold, whether during the continuance of the business or after  the cessation  thereof, exceeds the written down value, so  much of the excess as does not exceed the difference between  the original cost and the written down value shall be deemed  to be  profits  of  the previous year in which  the  sale  took place.  It is not disputed before us that if what took place on  July,  23, 1949 in exercise of the option given  to  the Government  under  cl. 9 of the license read with s.  7  and other  provisions of the Electricity Act, was a sale  within the  meaning  of  clause (vii), then the  amount  which  the Income-tax,  Officer determined to be Rs. 77,700/- would  be taxable in the hands of the appellant as profits within  the meaning  of the said clause.  Therefore, the answer  to  the question  which  was referred to the High Court  depends  on whether  there  was a sale of the  building,  machinery  and plant of the undertaking in question. The learned Advocate for the appellant has contented  before us  that the High Court was in error in holding  that  there was  a  sale  of the building, machinery and  plant  of  the appellants 501 undertaking.   He has submitted that a sale involves  mutual agreement  and  a contract of sale of goods  is  a  contract whereby  the  seller  transfers or agrees  to  transfer  the property  in goods to the buyer for a price.  He has  argued that  on  a  proper construction of the  provisions  of  the Electricity Act and the rules made thereunder, the so-called sale in the present case was really a compulsory acquisition of  property  and  not  a  sale  as  legally  understood   ; therefore,  s.  10(2) (vii) of the Income-tax  Act  was  not attracted to the transaction in question and the excess over the written down value could not be deemed to be profits  in the hands of the appellant. It  is necessary to read here some of the provisions of  the Electricity Act and rules made thereunder.  Section 3 of the Electricity  Act states in effect that the State  Government may,  on  application  made in the prescribed  form  and  on payment  of  the  prescribed fee, grant  to.  any  person  a license  to supply (electric) energy in any specified  area. Sub-section (2) of s. 3 states that in respect of every such license and the grant thereof certain provisions shall  have effect : one of these provisions is that any person applying for  a license shall publish a notice of his application  in the  prescribed manner and with the  prescribed  particulars and  no  license  shall  be  granted  until  all  objections received by the State Government with reference thereto have been  considered  by  it ; another  provision  is  that  the provisions  contained in the Schedule to to the  Electricity Act shall be deemed to be incorporated with and to form part of  every  license  granted  save in  so  far  as  they  are expressly  added  to,  varied or exempted  by  the  license. Sections  5 and 7 deal with the purchase of the  undertaking in  certain  circumstances  and a.  10  empowers  the  State Government  to vary the terms of purchase.   Notwithstanding ss. 5, 7 and 8, the State Government may, in any license  to be  granted  under the Electricity Act, vary the  terms  and conditions upon 502 which,  and  the  periods on the expiration  of  which,  the licensee  shall be bound to sell his undertaking, or  direct that subject to such conditions and restrictions, if any, as it  may  think  fit to impose, the provisions  of  the  said sections  or any of them shall not apply.  Now, we may  read

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s. 7 so far as it is relevant for our purpose.               "  7. (1) Where a license 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  specifie d               in this behalf in the license, 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               license  not to form part of  the  undertaking               for the purpose of purchase, such value to be,               in  case of difference of 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  of repair  thereof,  and to the circumstance that they  are  in such a position as to be ready for immediate working and  to the  suitability  of  the  same  for  the  purposes  of  the undertaking :  503 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 license,  on account of compulsory purchase.               (2) Where-               (a)   the  local authority does. not elect  to               purchase under subsection (1), or               (b)   the  whole of the area of supply is  not               included in the area for which a single  local               authority is constituted ; or               (c)   a license supplies energy from the  same               generating  station  to two or more  areas  of               supply,  each  controlled  by  its  own  local               authority,  and has been granted a license  in               respect of each area of supply, the  State  Government shall have the like option  upon  the like terms and conditions. (3)  x    x    x (4)  x    x    x (5)  x    x    x The  section gives to the local authority and if  the  local authority   does  not  elect  to  purchase,  to  the   State Government,  an  option  to purchase  the  undertaking.   If neither  is willing to exercise the option on the expiry  of period@ referred to therein then the license may be  revoked on  an application or by consent of the licensee.   In  that case  s.  8 lays down that the licensee has  the  option  to dispose  of his undertaking to any other person  within  six months.   If  the  licensee  fails  to  do  this,  then  the Government may remove the works at the cost of the  licensee as laid down in s. 5 of the Electricity Act.

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504 We may now turn to the rules in so far as they are  relevant to  the point under consideration. The rules lay  down  that every  application  for a license shall  be  accompanied  by copies of a draft license as proposed by the applicant,  and the  draft license shall contain, among  other  particulars, the proposed periods after which the right to purchase is to take effect and a statement of any special terms of purchase or  orders proposed to be made under s. 10 and any  proposed modification  of  the Schedule to be made under s.  3,  sub- s.(2),  el. (f).  The applicant shall then publish a  notice of  his  application  by  public  advertisement,  and   such advertisement  shall include inter alia the  draft  license. Where  any person desires to have any amendment made in  the draft  license,  he shall deliver a statement of  the  same. The rules further provide for a local enquiry if any  person locally  interested  objects  to the grant  ;  if  and  when Government  has approved of a draft license, either  in  its original  form  or  in a modified form, a duty  is  cast  on Government  to inform the applicant of such approval and  of the form in which it is proposed to grant the license and if the  applicant is willing to accept the license in the  form proposed, then Government shall on receipt of an  intimation in writing of such acceptance publish the license and notify that it has been granted. If,  therefore,  the provisions of the Electricity  Act  are read  along  with  the rules  made  thereunder,  it  becomes manifest  that the condition as to the option  of  purchase, either  by the local authority or Government, is the  result of  an agreement between the applicant who has  applied  for the license and Government who grants the license.   Section 7  of  the Electricity Act is merely an  enabling  provision which  allows  the  parties to specify in  the  license  the periods on the expiration of which the right of option shall be  exercised,  subject to the  maximum  ,periods  mentioned therein.  The true scope and effect of s. 7 is not what  the appellant suggests.  505 It merely provides for an option of purchase to be exercised on  the expiration of certain periods agreed to between  the parties,  and s. 10 further provides that in an  appropriate case  Government may even forego the option.   This  section does  not  provide for a compulsory purchase  or  compulsory acquisition  without  reference to and  independent  of  any agreement by the licensee.  Our attention has been drawn  to the  use  of  the expression "compulsory  purchase"  in  the second proviso to sub-s. (1) of a. 7 and it has been  argued that  the use of that expression indicates the intention  of the  Legislature.   The second proviso is  another  enabling provision  which  enables  the parties  to  specify  in  the license   such percentage,it any,not exceeding  twenty per centum,   asshould be added to the value of the building, plant,  machinery  etc.  when  the  option  of  purchase  is exercised.  No doubt, the expression used in the proviso  is "compulsory  purchase" ; but in substance what  it  provides for  is  that the parties may agree to increase  the  market value  of the building, plant etc. by a  certain  percentage when  the option of purchase is exercised and the price  has to,  be paid.  The use of the expression "if any" after  the word  ,,Percentage" shows that the parties may agree not  to increase  the market value at all.  If the whole  scheme  of the’ Electricity Act and the rules made thereunder, is  kept in mind, it becomes obvious that notwithstanding the use  of the  expression "compulsory purchase" in the second  proviso to  sub-s. (1) of s. 7, there is no compulsory  purchase  or

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compulsory acquisition in the sense in which that expression is  ordinarily  understood.   The  High  Court  has  rightly pointed  out  that  the scheme of  the  Electricity  Act  as indicated  by the relevant provisions thereof and the  rules made  thereunder, shows beyond any doubt that the option  of purchase is the result of a mutual agreement between 506 the  parties, the applicant for the license on one hand  and Government on the other.  The High Court rightly observed :               "  The rules show that a draft license has  to               be sent by an applicant for license containing               definite  and  specific  terms  on  which  the               license is sought.  This amounts to an  offer.               The  Government accepts it or rejects it.   If               it modifies it in any way, then the  applicant               or  offerer must accept the modification.   If               the  Government  accepts  the  offer  with  or               without   modification,  then  it   grants   a               license.  In my view a license granted by  the               Government in such circumstances amounts to  a               contract between the parties." On  behalf of the appellant it hag been contended,  somewhat faintly,  that  all the elements necessary to  constitute  a contract  are,  not present here.  We are unable  to  agree. There  was an undertaking on the part of the  applicant  for the  license to sell the undertaking to the local  authority or Government upon certain terms set out in the license, and the  time  at which the option was to be exercised  and  the price which was to be paid for the property were  specified. There was consideration for the contract as the license  was granted  on those terms.  Therefore, all elements  necessary for  a  contract  were present, and the  sale  in  pursuance thereof   was  not  a  compulsory   purchaser   acquisition. v.Chhinna Munnuswamy Nayakar(1) We  are,  therefore,  of the opinion  that  the  High  Court correctly answered the question referred to it.  There was a sale  in  the present case of the  building,  machinery  and plant within the meaning (1)  (1928) L. R. 55 I.A. 243.  507 of  cl. (vii) of a. 10(2) of the Income-tax Act.In  view  of this conclusion it is unnecessary todeal with a somewhat larger question which wascanvassed before us on  behalf of the respondentthat s.   10(2)(vii)  of the  income-tax Act  is  attracted  even to a compulsory sale.   Nor  do  we consider it necessary to examine the decisions bearing  upon the question whether a compulsory transfer to and vesting of property in Government, constitute a sale within the meaning of the relevant provisions of the Indian or English Statute. It is sufficient to point out that Calcutta Electric  Supply Corporation  v. Commissioner of Income-tax, West Bengal  (1) related  to a transaction by which Government  acquired  the plant  etc. and it was held that such acquisition could  not be regarded is a sale within the meaning of s. 10(2)(vii) of the Income-tax Act. In the result, the appeal fails and is dismissed with costs. Appeal dismissed. (1)  [1951] 19 I.T.R. 406. 508