Comilla Electric Sup­ply Ltd. Vs. Commissioner of Income Tax, Chittagong Zone, 42 DLR (AD) (1990) 112

Case No: Civil Appeal No. 1 of 1981

Judge: Badrul Haider Chowdhury,

Court: Appellate Division ,,

Citation: 42 DLR (AD) (1990) 112

Case Year: 1990

Appellant: Comilla Electric Sup­ply Ltd.

Respondent: Commissioner of Income Tax

Subject: Income Tax, Fiscal Law,

Delivery Date: 1982-11-11

 
Supreme Court
Appellate Division
(Civil)
 
Present:
F.K.M.A. Munim C J
Ruhul Islam J
Badrul Haider Chowdhury J
Shahabuddin Ahmed J
Chowdhury A.T.M. Masud J
 
Comilla Electric Sup­ply Ltd.
..……………….....Appellant
Vs.
The Commissioner of Income Tax, Chittagong Zone, Chittagong
…………................Respondent
 
Judgment
November 11, 1982.
 
The Income-Tax Act, 1922 (XI of 1922),
Section 10(2)(vii)
In 1962 Amendment, it said for the purpose of sub-section(1) the business will "be deemed to be carried on by Assessee in the year in which the sale, exchange, or acquisition, as the case may be, took place". Thus by a deeming clause the amount of compensation after computation of the difference between original cost and written down value "shall be deemed to be profit of the previous year." The tax shall be payable by an assessee under the head 'business'. The Income Tax Authority was perfectly correct in making the assessment…… (11 & 16)
 
Cases Referred to—
Cal­cutta Electric Supply Corporation Ltd. V. CIT (West Bengal) (1951) XIX ITR, 406; Liquida­tors of Pursa Ltd. V. Commr. of Income Tax AIR 1954 SC 253; I. T. Comm. V. Ex­press News Paper Ltd. AIR 1956 SC 33.
 
Lawyers Involved:
Shaukat Ali Khan, Advocate instructed by A. Baset Majumder, Advocate-on-Record— For the Appellant.
A.M. Mahmudur Rahman, Advocate instructed by Md. Sajjadul Huq, Advocate-on-Record— For the Respondent.
 
Civil Appeal No. 1 of 1981
 
JUDGMENT
 
Badrul Haider Chowdhury J.
 
1. This ap­peal by special leave arose out of a judgment and or­der of the High Court Division in an application No. 36 of 1974 under section 66 of the Income Tax Act.
 
2. The appellant, namely, Comilla Electric Supply Ltd. has been carrying on the business of generating and supply of electricity under a licence from the Government in the town of Comilla. The appellant carried on business upto 31-8-63. Thereaf­ter the then Water and Power Development Authority (WAPDA) took over all the assets of the Compa­ny on payment of compensation of Tk. 7,37,031/-The appellant received money and the price was de­cided as per valuation mutually agreed upon. During the Assessment year 1964-65 the Assessee appellant submitted income tax return showing loss of Tk. 63,751/- but the Income Tax Officer, Circle II, Chittagong did not accept the same and made assessment on a total income of Tk. 4,42,289/- which included Tk. 4,28,599/- as profit under section 10(2) (vii) of Income Tax Act arising out of the aforesaid sale.
 
3. The appellant preferred appeal against the aforesaid assessment but without any success. There­after he filed further appeal before the Income Tax Appellate Tribunal which was also dismissed. An application under section 66 (1) of the Income Tax Act was preferred before the High Court Division for its decision on the question raised. The High Court Division by its order dated 1-9-80 rejected the appli­cation holding that there was a sale of the assets of the assessee appellant. Leave was granted to consider the question whether the transaction could be treated as a sale within the meaning of section 10 (2) (vii) of the Income Tax Act.
 
4. The Income Tax Officer assessed the profit in the following manner:
 
Original Cost ... Tk. 7,41,240/-
Sale price ... Tk. 5,71,882/-(721703-159621)
W. D.V. ... Tk. 1,43,263/-
Tk. 4,28,599/-
Depreciation allowed upto 31-12-1962 Tk. 597,957/-
(Original Cost minus W.D.V.-i.e Tk. 7,41,240/-minusTk. 1,43,283/-)
 
On appeal the Appellate Assistant Commission­er has confirmed the assessment.
 
5. The Appellate Tribunal considered the con­tention of the appellant Assessee that the transaction was not voluntary but was under the compulsion of the aforesaid circumstances namely "while the assessee company was conducting its business of the gen­eration and supply of electricity in the town of Comilla, EPWAPDA started parallel electric line. For want of spare parts, etc. the assessee company was facing difficulty in meeting the demands of its cus­tomers. The assessee protested against said parallel line but that was of no avail. It became difficult for the assessee to run business. The Assessee company was put to the dilemma whether to stop the business running at loss or hand over the same to WAPDA which was willing to purchase the same. In the cir­cumstances the assessee agreed to hand over its as­sets to WAPDA at aforesaid value".
 
6. The Tribunal considered that the property of the assessee company "was not acquired under the law of Acquisition", Then the Tribunal recorded the following observation:
 
"Sale in section 10(2) (vii) has not been in the specific meaning of section 54 of the Transfer of Property Act. As has been held in afore­said ruling the words 'sale' and 'sell' in the In­come Tax Act are to be taken in their aforesaid ordinary meaning. The transaction in the instant case has been sale in the ordinary meaning of this word as interpreted in said ruling."
 
The ruling under discussion was the case of Cal­cutta Electric Supply Corporation Ltd. V. CIT (West Bengal) reported in (1951) XIX ITR, 406. With this observation the appeal was dismissed by the Tribu­nal.
 
7. The High Court Division while considering the contention of the appellant noticed that the As­sessee Company never challenged the transaction on the ground that it was "a transaction under involun­tary circumstances and as such was voidable in its nature". Therefore, the view was taken that such question cannot be considered in this proceeding. Having considered this proposition the High Court Division then observed:
 
"In this connection it may be mentioned that the expression "sold" meaning a sale as mentioned in section 10(2) (vii) of the Income Tax Act has not been defined anywhere in the Act itself nor has it been said anywhere that in order to derive a benefit thereunder such sale must be accompanied by the manner of sale con­templated in the second paragraph of section 54 of the Transfer of Property Act. For omission to comply with such provision of section 54 of the Transfer of Property Act, a sale is not vitiated at all and it can be perfected otherwise by the pro­vision of section 53(A) of the Transfer of Prop­erty Act mentioned herein".
 
In this view of the matter the application was rejected by the High Court Division.
 
8. It is unfortunate the law relevant for the pur­pose of disposal of the reference was not correctly vi­sualised either by the High Court Division or by the Tribunal though section 10(2) (vii) was considered by them. Section 10 of the Income Tax Act is in the following terms:
 
"10. (1) Subject to the provisions of this Act, the tax shall be payable, by an assessee un­der the head business, profits and gains of busi­ness, professions or vocation in respect of prof­its or gains of any business, profession or vocation carried on by him".
 
Then the manner of computation is given in sub-section (2) which is as under:
 
"(2) Subject to the provisions of this Act, such profits or gain shall be computed after making the allowances, namely,"
 
Then as many as 18 types of allowances are giv­en by the Act. We are concerned with clause (vii) This clause (vii) has little history which must be re­counted for proper understanding of the issue. In­come Tax Act, 1922 was further amended by the In­dian Amendment Act (Amendment), 1946 (Act No. VIII of 1946) vide section 3. Section 10 of the Act was amended and for original clause VII a new clause was substituted which is as under:
 
"(vii) In respect of any such building, ma­chinery or plant which has been sold or discarded or demolished or destroyed, 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; Provided that such amount is ac­tually written off in the books of the assessee. Provided further that where the amount for which any such building, machinery or plant is sold 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", (empha­sis added).
 
9. Then again this clause VII was replaced by a new clause and substituted with two new provisos by the Finance Act, 1962 (Act 1 of 1962).
 
"(vii) in respect of any such building ma­chinery or plant which has been sold, transferred by way of exchange, or is compulsorily acquired by a competent authority under any law for the time being in force, of discarded or demolished or destroyed in the previous year, the amount by which the written down value thereof exceeds the amount for which the building, machinery or plant is actually sold, transferred or compul­sorily acquired, as the case may be or its scrap value;
Provided that such amount is actually writ­ten off in the books of the assessee;
Provided further that where the amount for which such building, machinery or plant is sold, transferred or compulsorily acquired, 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, transfer or compulsory acquisition, as the case may be, took place and the business, profession or voca­tion in which such building, machinery or plant has been used, shall, for the purpose of subsection (1). be deemed to be carried on by the as­sessee in the year in which the sale, exchange or acquisition, as the case may be, took place." (emphasis added.)
 
10. It will be at once noticed that there is sea-change in the law itself. In 1946 there was no com­pulsory acquisition and therefore in the second provi­so there was only one deeming clause so far as it re­lates to the profit but in 1962 in the wake of compulsory acquisition, the Legislature thought it fit to amend the law and inserted the expression "compulsory acquisition by a competent authority under any law for the time being in force." The appellant Company, Comilla Electric Supply Ltd. ad­mittedly was a licensee under the Electricity Act and they were generating and transmitting electrical en­ergy in the town of Comilla. After the promulgation of the EPWAPDA Ordinance, 1958 power was con­ferred upon the authority for transmission of electric energy in the whole province vide clause (c) in the Ordinance. Section 8(2) (f) reads—The generation, transmission, distribution of power; and the con­struction, maintenance and operation of power hous­es and grids. Section 11 (1) (c) are in the following terms:
 
"May require the owner of any controlled power generating station in a grid area
(i) to supply to the grid all or part of the power generated at the station at such rates as may be determined by the Provincial Govern­ment by general or special order; in case of dispute this will be referred to arbitration;
(ii) to take from the grid all or part of the power required for distribution to consumers, or
(iii) to close down the station on payment of reasonable compensation".
 
This power was conferred upon such authority and armed with such power the Authority started erecting distribution line in the town of Comilla. Precisely this contingency was apprehended by the appellant company and the Tribunal recorded the ap­prehension of the Assessee company as under:
 
"The assessee protested against said parallel line but that was of no avail. It became difficult for the assessee to run business. In the circumstances the assessee agreed to hand over its assets to WAPDA at aforesaid val­ue."
 
The Tribunal recorded the contention of the Ad­vocate of the appellant that "the transaction was not voluntary but was under the compulsion of the afore­said circumstances". Precisely that was the situa­tion. It was an involuntary acquisition, no doubt, only thing is that the assessee did not challenge such acquisition nor could it be so challenged under the law.
 
11. Now the only question is whether the com­pensation that was awarded is taxable. Clause VII as was substituted in 1962 has been quoted above. It will be noticed that when in 1946 clause (vii) spoke about only one fiction i.e. deemed to be profit. In 1962 Amendment, it said for the purpose of sub-section (1) the business will "be deemed to be carried on by Assessee in the year in which the sale, ex­change, or acquisition, as the case may be, took place". Thus by a deeming clause the amount of compensation after computation of the difference be­tween original cost and written down value "shall be deemed to be profit of the previous year" and for the purpose of sub-section (1) which says: "Profits and gains of business, profession or vocation in respect of the profits or gains of any business, profession or vocation carried on by him, the tax shall be payable by an assessee under the head 'business'.
 
12. Mr. Shaukat Ali Khan forcefully argued that the assessee had no business during the Assess­ment year. To meet such argument, the Legislature took resort to a legal fiction by saying "for the pur­pose of sub-section (1) be deemed to be carried on by the Assessee in the year in which the sale or ex­change or acquisition, as the case may be, took place". Thus two legal fictions were introduced (i) so far as the profit is concerned it will be deemed to be profit after the computation in the manner laid down, (ii) so far as the business is concerned it will be deemed for the purpose of sub-section (1) that the as­sessee carried on the business. Sub-section (1) is not uncontrolled but "subject to the provision of the Act". Clause vii being a provision of the Act with the two provisos have saddled the assessee with im­position of tax which has been acquired by compe­tent authority under the law, namely, EPWAPDA Ordinance, 1958 (EP Ordinance 1 of 1958).
 
13. Mr. Khan relied on a number of decisions of the Indian Supreme Court. In the case of Liquida­tors of Pursa Ltd. V. Commr. of Income Tax AIR 1954 SC 253, the Court no doubt, considered sec­tion 10(2) (vii) of the Act. In that case the court considered the assessment year 194546. The relevant accounting year covered the period between 1-10-1943 to 30-9-1944. The Court considered the provi­sion of section as was amended by Act 6 of 1939 which was:
 
"10. (1) The tax shall be payable by an asses­see under the head 'Profits and gains of business, profession or vocation in respect of the profits or gains of any business, profession or vocation carried on by him.
2) such profits or gains shall be computed after making the following allowances, namely;
(i) .............................................
(ii) ...............................................
(iii) .................................................
(iv) in respect of issuance against risk of damage or destruction of buildings, machinery, plant, furniture, stocks or stores used for the purpose of the business, profession or vocation, the amount of any premium paid:
(v) in respect of current repairs to 'such’ build­ings, machinery, plant or furniture, the amount paid on account thereof;
(vi) in respect of depreciation of 'such' build­ings, machinery, plant or furniture being the property of the assessee, a sum equival­ent to such percentage on the original cost thereof to the assessee as may in any case or class of cases be prescribed:
(vii) in respect of any machinery or plant which has been sold or discarded, the amount by which the written down value of the ma­chinery or plant exceeds the amount for which the machinery or plant is actually sold or its scrap value; Provided that such amount is actually written off in the books of the assessee:
Provided further that where the amount for which any 'such' machinery or plant is sold exceeds the written down value, the excess shall be deemed to be profits of the previ­ous year in which the sale took place".
 
Same was the position in I. T. Comm. V. Ex­press News Paper Ltd. AIR 1956 SC 33. There the accounting year was 1946-47. The Court considered section 10(2) (vii) which was exactly in the same terms as quoted above.
 
14. The law is completely different and our law was very radically changed in 1962 as mentioned above. In the Indian enactment there was no provi­sion for compulsory acquisition as has been the case in our law in 1962. Therefore, these decisions are of no assistance to the appellant.
 
15. The learned Counsel also referred to a Privy Council decision reported in 1927. A.C. 327. This decision has no manner of application. Their Lordships were considering the provisions of Land and Income Tax Act, 1916 which has no provision similar to clause VII of our enactment.
 
16. In view of the above provision the Income Tax Authority was perfectly correct in making the assessment.
 
In the result, therefore, this appeal is dismissed with costs.
 
Ed.