Holding

Section 41(2) applies and the compensation becomes taxable as business income in the year the moneys payable become due, even if the amount is under dispute.

Summary

The United Provinces Electric Supply Co. (assessee) had its electricity undertakings compulsorily acquired by the Uttar Pradesh Government under the Indian Electricity Act, 1910. The government paid Rs. 3,35,84,552 as compensation, which the assessee accepted under protest while pending arbitration for the final amount. The Income‑Tax Officer treated the compensation as sale proceeds of depreciable assets and, under Section 41(2) of the Income‑Tax Act, 1961, added a balancing charge of Rs. 1,29,35,557 to the assessee’s income for the assessment year 1965‑66. The assessee argued that, because the compensation was not finally determined, the addition was unjustified; the Tribunal and High Court agreed with the assessee. The Supreme Court held that once compensation is determined, the moneys payable become due and are taxable as business profit under Section 41(2), irrespective of any pending litigation, and that any further amount received later would be taxed in the year of receipt. Consequently, the Court allowed the revenue’s appeal, set aside the High Court judgment, and upheld the addition of the balancing charge.

Issues considered

The applicability of Section 41(2) of the Income‑Tax Act, 1961 to compensation received on compulsory acquisition when the amount is determined but subject to pending arbitration.
Whether pendency of litigation or dispute over the final compensation amount affects the taxability of the accrued income.

Legislation cited

Electricity Act, 1910s. 6, s. 7A
Income Tax Act, 1961s. 32(1A), s. 41(2)

Subjects

Income TaxSection 41(2)Balancing chargeCompulsory acquisitionCompensationAccrual of incomePending litigationBusiness profitAssessment yearIndian Electricity Act

Judgment

)....

~
A COMMISSIONER OF INCOME-TAX WEST BENGAL-I, CALCU'ITA ...-
'
v.
UNITED PROVINCES ELECTRIC SUPPLY COMPANY

APRIL 17, 2000

B [D.P. WADHWAAND M.B. SHAH, JJ.]

Income Tax Act, 1961-Section 41(2)-Business Profit-Ta:xability- ---
Accrual of income-Balancing charge-Compulsory acquisition of business
undertaking-Compensation received-Pendency of litigation in respect of an
c amount or price due-Whether relevant so far as ta:xability of accrued income
is concerned-Held, No-Additional income can be taxed at a subsequent
stage.
;..
The respondent-assessee was carrying on the business of generating
and supply of electricity to the consumers. The Government of Uttar
D Pradesh by exercising power under Section 6 of the Indian Electricity Act,
1910, purchased the undertakings of the assessee. The possession of the two
undertakings was handed over to the Electricity Board and the Board paid
Rs. 3,35,84,552 to the assessee as final compensation for the compulsory
,J..
purchase of the undertakings. The assessee accepted the amount without
E prejudice to its right to claim the compensation payable and thereafter
went for arbitration for determining the compensation payable to it under
· the Electricity Act. The Income-tax Officer taking the amount of Rs. •
3,35,84,552 as sale proceeds of depreciable assets of the assessee, deter-
mined the profit of Rs. 1,29,35,557 under Section 41(2) of the Income-tax
Act, 1961 and added the same to the income of the assessee. In appeal, the
F assessee contended that no profit under Section 41(2), could be taxed in the
assessment year under consideration as claim of the assessee for compensa-
tion was not settled during the year and that dispute was still pending
before the arbitrators. The Tribunal accepting the assessee's case held as
the compensation payable to the assessee was not settled and finalised, the
G ITO was not justified in making addition to the income of the assessee
under Section 41 (2) in the year under consideration. In reference, the High
..,....
Court he~d 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 instance case as the price of the undertak-
H ings of the assessee had not been finally determined and only an ad hoc
22
C.l.T. v. UNITED PROVINCES ELECTRIC SUPPLY CO. 23

,J.. payment had been made which had been accepted under protest, it was not A
open for the Revenue to intervene and assess the assessee under Section
41(2) of the Act. Hence this appeal. The limited question raised for consid-
eration was whether on the facts and in the circumstances of the case, the
provisions of Section 41(2) of the Act are applicable to the receipt of the
amount by the assessee towards the compensation payable to him.
B
Allowing the appeal, the Court

HELD : 1.1. In case of acquisition of property under any law, the
balancing charge under Section 41(2) of the Income Tax Act is taxable to
income-tax as income of the business of the previous year in which moneys
payable-became due. Determination of compensation and its payment by
c
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 D
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. The determination of the amount of compensation
·""'- would mean 'moneys payable' became 'due'. However, in case of dispute or
E
difference for the determination of the market value the matter is required
to be determined by the arbitrator under Section 7A of the Indian Electric-
ity 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 rel-
evant so far as taxability of the compensation amount received is con- F
cerned. 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 become due
and are paid and received. In case he gets any additional amount, that G
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 of the Act. [29-A-H]

1.2. Once the compensation is determined by the authority and is
received by the assessee under protest and the dispute is referred to the H
24 SUPREME COURT REPORTS [2000) 3 S.C.R.

A arbitrator for its enhancement, it would not cease to be compensation .t._
moneys paid to the assessee. The amount so received by the assessee
represents compensation in respect to acquisition of building, plant,
machinery or furniture.(31-D]

1.3. For the purpose of tax, the difference between the written down
B value of an asset and the price realised 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 itis a business profit as per the provision of the
c 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.
Sub-sections (1) and (4) apparently contemplate receipt of amount as stated
therein to the taxed in the year in which it is received and such recovery
may be in one or more subsequent years. (32-E-F]

D 1.4. 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
--*-
E
relevant assessment year. (35-G-H]

1.5. In the present case, the amount of compensation was determined
and was 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
F 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 Arbi-
trators or the Appellate authority or such other authority provided under
the Acquisition Act. Fur!_ber~s flotthe case of the assessee that pending
G 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 com-
pensation amount and its receipt is admitted, which is business profit under
H Section 41(2), it has to be taxed in the previous year of its receipt. [36-C-F]

~-
'
- C.l.T. v. UNITED PROVINCES ELECTRIC SUPPLY CO. [SHAH, J.] 25
~· CIT, Born. v. BipinchandraMaganlal & Co. Ltd., (1961) 41 ITR 291 SC; A
~ AKola Electric Supply Co. Pvt. Ltd. v. CIT, Born. (1978) 113 ITR 265 and
Okara Electric Supply Company Ltd. v. CIT, (1985) 154 ITR 493, distin-
guished.

C!Tv. Central Indian Electric Supply Co. Ltd., (1993) 114 CTR MP 160,
B
approved.

P.C. Gulati, Voluntary Liquidator, Panipat Electric Supply Co. Ltd. v.
CIT, (1972) 86 ITR 501; CIT, Delhi v. Rohtak Textile Mills Ltd., (1982) 138
ITR 195 (Delhi); CIT, Kar v. Sheshappa Hegde, (1984) 150 ITR 164 and CI,
Guj v. Artex Manufacturing Co., [1997] 6 SCC 437, referred to. c
CIVIL APPELLATE JURISDICTION: Civil Appeal No. 6325of1995.

--\- From the Judgment and Order dated 8.8.86 of the Calcutta High Court
in I.T.R. No. 365 of 1977.
D
K.N. Shukla, Joseph Vellapally, S.N. Terdol, B.S. Ahuja, Ms. Neera
f'
Gupta, D.N. Misra, Ms. Sushma Suri, Arvind Kumar Sharma, Tarun Gulati
and Ms. Meera Mathur for the appearing parties .
....
The Judgment of the Court was delivered by E

... 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: -
F
"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? G
-_,,-
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
H
26 SUPREME COURT REPORTS [2000] 3 S.C.R.
A 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.,
B
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 GovernmentofU.P. purchased both the undertakings
c for the UP State Electricity Board ('Electricity Board' for short). The posses-
sion 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
D in respect of assessee' s liabilities for loans and the final compensation paid to
the assessee amounted to Rs. 3,35,84,552. The assessee accepted the said
amount 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
E 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
F 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
G
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 finalised, the ITO was not justified in making addition to the income of
H assessee under Section 41(2) in the year under consideration.
C.I.T. v. UNITED PROVINCES ELECTRIC SUPPLY CO. [SHAH, J.] 27

The High Court arrived at the conclusion that the assets of the assessee, A
namely, two UJ.1.dertakings 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
B
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. C

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 tJ1e 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
D
merely because assessee has filed an application for enhatt1.:ement 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 E
received by the assessee is not full and final payment towards the compensa-
tion. 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. F
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. G

(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, demol- H
28 SUPREME COURT REPORTS [2000] 3 S.C.R.
A ished 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
B
business or profession of the previous year in which the moneys
payable for the building, machine1y, plant or furniture became
due:

Explanation: For the purposes of this sub-section, the expression
c "moneys payable" and the expression "sold" shall have the same
meanings as in sub-section (lA) of section 32."

Explanation to Section 32( IA) is :

"Explanation: For the purposes of this clause,_
D (i) "moneys payable", in respect of any structure or work, in-
cludes-

(a) any insurance or compensation moneys payable in respect
thereof;
E (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)."
F 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
G
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
H is to be considered as income of business or profession and is chargeable to
J.,

C.l.T. v. UNITED PROVINCES ELECTRIC SUPPLY CO. [SHAH, J.] 29

income tax as income of business or profession. Once it is held to be a business A
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, machineiy,
plant of furniture exceed the written down value, so much of the excess as does
not exceed the difference between' actual cost and the written down value is
B
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 .!hereof. Similarly, the explanation "sold" includes a compulsory
acquisition under any law for the time being in force. Hence, in case of C
acquisition of ptope1ty 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. Determinatiott of compensation and its payment by the
authority would certainly mean that moneys payable became due. Receipt of D
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 acqui-
sition 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 E
determined and paid would be compensation payable for the acquisition. That
determination of the amount of compensation would mean 'moneys payabl~'
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 F
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 subse-
quent 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 G
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 provi-
sions 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 H
30 SUPREME COURT REPORTS [2000] 3 S.C.R.
A 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
B
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
C 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 t~ed when the amount on account of u·ading loss, bad debt or
D compensation is received.

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
E 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
p 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
G 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
H apply even if the business or profession is not in existence in the year
I'
C.l.T. v. UNITED PROVINCES ELECTRIC SUPPLY CO. [SHAH, J.] 31

~
in which the sums fall to be assessed" A
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 B
is determined. This object nowhere talks of final determination of compensa-
tion 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 c
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 compensa-
tion is determined by the authority and is received by the assessee under D
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.
E

... The learned counsel for the assessee further submitted that as held by
this Court in CIT, Bombay v. Bipinchandra Maganlal & Co. lJd., (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 F
the Act for taxing it again after receipt of additional 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 G
regardedfor 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 realised and the written down value is made chargeable to H
32 SUPREME COURT REPORTS [2000] 3 S.C.R.
A income-tax, its character is not altered, and it is not converted into
the assessee' s 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
B
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
c 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 realised 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,
D
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
E realised 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
F
additional amount at a subsequent stage. As stated earlier, sub-sections (1) and
(4) apparently contemplate receipt of amount as stated tl1erein to be taxed in
the year in which it is received and such recovery may be in one or more
subsequent years.

G Learned counsel further submitted that for the calculation of the
'deemed profit', it is necessary to know both tlle sale consideration of each
asset as well as its written down value and in the year und~r consideration,
t11e sale price of each individual asset is not known. TI1erefore, Section 41
cannot be applied by taking the overall compensation and reducing therefrom
the overall written down value of deprf<ciable assets as has been done by the
H
C.I.T. v. UNITED PROVINCES ELECTRIC SUPPLY CO. [SHAH, J.] 33
J_
_...,,,
......_
l.T.O. He submitted that balancing charge has to be calculated with respect of A
each individual asset. In support of his contention, he referred to the decision
of this Court in C./.T., Gujarat v. Arlex Manufacturing Co., [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
B
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 c
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
t- 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.
D
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 E
"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
F
of the fact that under the provisions of Section 7 of the Electricity Act, tl1e
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 G
~
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
witll 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, H
34 SUPREME COURT REPORTS [2000) 3 S.C.R.
;.,,_~ ,.
A 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
B
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.J.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.
c
In CIT, Kamataka v. SheshappaHegde, (1984) 150 ITR 164, Kamataka
the assessee had purchased two motor 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
D 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.
,.Jr.
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
E
also, the Court followed P. C. Gulati and Ako la 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
~
F 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.
G 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
H return it had enclosed a balance-sheet showing therein the written down value
C.I.T. v. UNITED PROVINCES ELECTRIC SUPPLY CO. [SHAH, J.] 35

·- 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
A

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
B
"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: -
c
" ... 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 D
"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 tax.ability 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, E
but on that ground it cannot be held that no income had accrued to
the assessee for the relevant assessment year. We find great support
for our decision from the decision of the Supreme Comt in the case
of Kesoram Industries & Cotton Mills Ltd. v. CWT, (1966) 59 ITR
767 SC. As for the wealth-tax so also the income-tax. The liability F
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 G
so far as the tax.ability 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. H
36 SUPREME COURT REPORTS [2000] 3 S.C.R.
A In C/Tv. National Electric Supply and Trading Corporation ud. (1996)
222 ITR 60, Delhi, the Government purchased the Undertaking on February
20, 1949 and the compensation was paid in the years 1949-50 and 1951-52..
The Undertaking demanded additional compensation. The matter was compro-
mised and the additional amount was paid on October 29, 1968. Applying the
decisions in Okara Electric Supply Co. fJd. and P.C. Gulati (supra), the Court
B
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
C 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 cotnpen-
sation 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.
D 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
E under the Acquisition Act. Further, it is not the case of the assessee that
pending final detennination 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
F 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
G in holding that 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.

Ordered accordingly. The parties shall bear their respective costs.

R.A Appeal allowed.

H