ORDER
Per Shri V. Balasubramanian, Vice President - In 1936 a licence for the supply of electrical energy to Anand town was granted by the Government of Bombay to Crompton Ltd., under the Indian Electricity Act, 1910. In 1937 under the same terms and conditions the licence was acquired by the present assessee, the Anand Electric Supply Co. Ltd. The company worked the undertaking until 16-2-1975 when it was taken over by the Gujarat Electricity Board. The relevant portions of the notification of the Government of Gujarat are :
'AND WHEREAS the said licence under his letter dated 9th January, 1975 has approached the Government of Gujarat under section 4(2) of the Indian Electricity Act, 1910, for revoking the said license.
AND WHEREAS in the opinion of the Government of Gujarat public interest permits the revocation of the said license.
AND WHEREAS the said licensee has agreed to hand over the assets of his undertaking to the Gujarat Electricity Board, who has shown willingness to take over the same on terms and conditions mutually agreed to by the Board and the said licensee.
Now, therefore, in exercise of the power conferred by sub-section (2) of section 4 of the Indian Electricity Act, 1910, the Government of Gujarat hereby revokes the said license with effect from the mid-night of 14/15th February, 1975 on the following terms and conditions :
(i) The undertaking when delivered by the licensee to the Board shall vest in the Board free from any debt, mortgage or similar obligation of the said licensee or attaching to the undertaking as provided under section 7 of the Indian Electricity Act, 1910.
(ii) The Board shall pay to the said licensee by way of purchase price the market value of the undertaking at the time of purchase plus a sum equivalent to 10 per cent of the total of such value. The market value of the undertaking for this purpose shall be the value of all lands, buildings, works materials and plant of the licensee suitable to end used by the licensee for the purpose of the undertaking. Other than service lines and/or other capital work of any part thereof which have been constructed at the expense of the consumers, due regard being had to the nature and condition for the time being of such land, buildings, works materials, and plant and the state of repair thereof and to circumstances that they are in such position as to be ready for immediate working and to the suitability of the same for the purpose of the undertaking;
(iii) The Board shall deduct from the purchase price of the undertaking so arrived at the amount of the such statutory reserves as are shown in the licensees accounts as audited and certified by the Government Auditor up to the date on which the undertaking is delivered by the licensee to the Board and as are required to be handed over to the Board under the provisions of the Sixth Schedule to the Electricity (Supply) Act, 1948.'
The Gujarat State Electricity Board fixed the total consideration for the transfer at Rs. 23,15,038. The Schedule of calculation was worked out as under :
Sl.No.
Particulars
Amount in
Rs.
1.
Distribution line
18,68,723
2.
Service lines
13,12,482
3.
Meters
1,28,362
4.
Transformers
3,92,618
5.
Sub-stations
2,34,049
6.
Cables
1,13,661
40,19,800
18,49,593
Less : Value of assets created out of consumers contribution
21,70,207
Settled at
22,00,000
10 per cent solatium
2,20,000
Value of furniture
10,898
Total
24,30,898
(The difference between the two figures is on account of some adjustment).
2. The ITO found that the original cost of these assets came to Rs. 31,02,608 and depreciation on these assets had been granted in the earlier assessments to the extent of Rs. 9,07,738 leading to a written down value of these assets of Rs. 7,11,626. The assessee-company had received a sum of Rs. 14,83,144 by way of consumers contribution. The assessee did not return the surplus realised on taking over of the undertaking by the Gujarat Electricity Board on the plea that it was not taxable either as business income under section 41(2) of the Income-tax Act, 1961 (the Act), or capital gain or otherwise. Before the ITO it was argued that the value realised was for the business taken over as a going concern and was not the aggregate of the values of different assets. The ITO held that the excess of consideration received over the written down value was income under section 41(2). He rejected the contentions raised before him with regard to the assessability of the compensation for surrender of license and goodwill, the adoption of the value as on 1-1-1954 as the cost in respect of assets acquired prior to 1-1-1954, the consideration of the consumers contribution in its entirety and at any rate that prior to 31-2-1961 and lastly the claim that the capital gains, if any, were entirely on the long-term basis and nothing could be taxed as short-time capital gain. In effect the ITO taxed a sum of Rs. 9,07,736 as profit under section 41(2), Rs. 6,72,490 as capital gains including Rs. 43,389 as short-term capital gains. The sum of Rs. 6,72,490 was worked out on the basis that the cost of the assets sold for Rs. 23,15,032 was Rs. 16,19,864 (the original cost of Rs. 31,02,508 minus the consumers contributions of Rs. 14,83,144). The small difference in figures is due to some adjustment.
3. On appeal, the Commissioner (Appeals) upheld the order of the ITO except for the concession that the capital gains should be treated entirely as long-term capital gains since between the date of purchase and sale of these assets, a period of more than three years had elapsed. It is against this order of the Commissioner (Appeals) that the present appeal is laid before the Tribunal.
4. The learned counsel for the assessee has challenged the inclusion of the sum of Rs. 9,07,738 as income under section 41(2) on the ground that there was no separate sale or transfer of individual assets. What was transferred was the undertaking as a whole. There was a transaction for which a slump price was paid. The entire undertaking being transferred as a whole to the Gujarat State Electricity Board, there was a transfer of a single indivisible asset giving rise to no liability on the ground of balancing charge. There was no scope, according to the counsel, for saying that the individual assets of the assessee-company were transferred as such individually to the Gujarat State Electricity Board when the business as a whole was transferred. Reliance is placed, in this connection, on the decision of the Supreme Court in the case of CIT v. Mugneeram Bangur & Co. (Land Department) : [1965]57ITR299(SC) , and the decision of the Gujarat High Court in the case of Artex Manufacturing Co. v. CIT : [1981]131ITR559(Guj) . Explaining the point further, it is pointed out that even though for the purposes of working out the consideration being paid for the entire business transferred, account was taken of some of the items constituting the assets of the business. They were not individually itemised so as to lead to a liability under section 41(2). In the case of an electricity company there was a contribution from consumers and for the purpose of working the actual cost for granting depreciation, this was deducted.
This was a legal fiction whose effect must be restricted to the computation of depreciation only and not for any other purpose. The determination of the cost in this manner for the purpose of computation of capital gain was not correct. The cost as defined in section 43(1) of the Act as available for the limited purposes of sections 28 to 41 of the Act which cannot be imported for computing capital gains under section 45 of the Act. The definitions of actual cost and written down value obtaining in clauses (1) and (6) of section 43 are for the specific purpose of computing business income. Capital gains in the case of a depreciable asset is to be computed under section 50 of the Act, according to which, the cost of acquisition off assets shall be the written down value as defined in section 43(6) but as adjusted. For the purpose of section 50 one has to lift the definition of written down value from section 43(6) and plant the same there. The artificial meaning given in section 43(1) was, therefore, not relevant. Reference is made, in this connection, to the Madras and the Calcutta High Courts decisions in the cases of CIT v. South Madras Electric Supply Corpn. Ltd. : [1977]109ITR426(Mad) and Riverside (Bhatpara) Electric Supply Co. Ltd. v. CIT : [1977]109ITR399(Cal) , respectively. Reference was also made to the Bombay High Courts decision in the case of CIT v. Bombay Suburban Electric Supply Co. (P.) Ltd. : [1977]106ITR752(Bom) , where the company was granted development rebate on the actual cost incurred by the assessee and not the actual cost as reduced by the portion of the cost met by the Government. According to the learned counsel, the consumers contributions should not, therefore, be taken into account in computing the capital gains. The net effect of such treatment of the receipts of the assessee would be, in fact, to bring to tax the consumers contributions received in the earlier years in the year under appeal which is not warranted by law. Reference is made, in this connection, to the decision of the Supreme Court in the case of Hoshiarpur Electric Supply Co. v. CIT : [1961]41ITR608(SC) . At any rate, the entire amount was to be taxed only as long-term capital gains and not partly as section 41(2) profit, partly as short-term capital gains and partly as long-term capital gains. It is also pointed out that the solatium received of Rs. 2,20,000 included in the receipts was not to be taxed at all in the right of the Supreme Courts decision in the case of CIT v. B. C. Srinivasa Setty : [1981]128ITR294(SC) .
5. For the department it is pointed out that there was no case of slump sale involved in the present transaction. The consideration for each individual item was fixed. Section 41(2), therefore, clearly applied. Reference is made in this connection to the analogous case of General Engg. Corpn. decided by the Tribunal in IT Appeal No. 64 of 1980 dated 3-4-1981, as in that case there was no handing over of the entire undertaking but only the taking over of some of the assets. The agreements is both these cases are by and large the same. As regards the computation of capital gain, it is pointed out that section 50 applies for working out the cost. Sections 48 and 49 of the Act should be subject to the provisions of this section. The consumers contributions have been deducted for the purpose of working out depreciation and there is no reason why it should not be also for the purposes of both section 41(2) as well as capital gains. The fiction referred to by the assessee, according to the learned counsel for the department, is extended by section 50(1) read with section 55 of the Act. In fact, the assessee itself has deducted Rs. 18,00,000 as value of the assets created out of the consumers contributions. This, amount, therefore, necessarily pertains to those assets. Both the capital gains as well as the profit under section 41(2) were, therefore, clearly assessable in the case. The solatium received was also taxable. In fact, according to the learned counsel, this was only a method of arriving at the extra consideration paid for the assets. It arose out of the business and could fall under section 41(2) or capital gains, as the case may be, depending on the relative position of the written down value of the assets.
6. The decision cited by the learned counsel for the assessee with regard to the consideration received for a slump sale do lay down that in respect of such a sale, the consideration for the individual items not being satisfied, no profit under section 41(2) can be computed. No exception, therefore, can be taken to this part of the assessees argument. The important point to be noted in the present case is that the circumstances surrounding the transaction and the transaction itself does not favour of a slump sale as was contemplated in those decisions or as is claimed by the assessee. This is a factual finding. Under the Indian Electricity Act while it is competent for the Government to take over either for itself or for its Electricity Boards or Government companies the undertaking worked by a private party, the provisions of the Indian Electricity Act also provide that the taking over should be only of valuable assets and not the liabilities, infructuous assets or other encumbrances. Even though, therefore, in a general sense the erstwhile private parties are supposed to surrender their electricity undertaking to the Government or its instrumentalities. In effect the useful assets of the erstwhile companies only are taken over by the Government. Apart from the clear provisions to this effect in the Indian Electricity Act, nothing has been brought to our notice to indicate even circumstances which justify a departure from this position of wisdom obtaining under the Electricity Act. Private parties have been working electricity undertakings over a long time in several parts of the country and for various reasons have ramshackle plants, own out machineries, outdated and unutilisable assets, etc., and also encumbrances attached to these all of which together constitute the electricity undertakings of these parties. Nationalisation of these undertakings could certainly not have been a means of thrusting these useless assets on the Government. Hence, the provisions in the Indian Electricity Act.
7. As a matter of fact the notification of the Government extensively reproduced in paragraph 1 of this order makes this clear. The agreement the assessee has entered into with the Government also makes this clear, e.g. clause (i) of the notification dealing with the revocation of the license states that the undertaking when delivered by the licensee to the Board shall vest in the Board free from any debt, mortgage or similar obligation. Clause (ii) dealing with the market value of the undertaken refers to all lands, buildings, works, materials and plant of the licensee. The agreement between the company and the Electricity Board, dated 21-11-1975, refers to the taking over of the assets of the company only in clause 2. Clause 3 of the agreement specifies that the Board has to take over the works free from any debt, mortgage, encumbrance or similar obligation. These two clauses are reproduced below :
'2. All the assets of the company taken over by and vested in the Board (hereinafter for brevity's sake referred to as the works) consist of -
(a) All the plant and machinery of the undertaking consisting of transformers and its associated equipments, sub-stations, plant and L. T. and H. T. distribution system complete together with service connections, meters allied equipments, fixtures, etc., of the undertaking as shown in the joining inventory taken by the representative of the company and the Board;
(b) All the civil works constructed by the company at Old Gamdivat Road, Polson sub-station, sub-station in Polson Dairy compound, sub-station at Anand Press compound, on the premises and lands of the consumers for housing the transformers and accessories;
(c) All furnitures, fixtures and other office or power house equipment shown in the list attached with the joint inventory;
3. The Board has taken over the works free from any debt, mortgage, encumbrance or similar obligation.'
8. All through reference is made to the taking over of the undertaking of the erstwhile company but the definition of works obtaining in clause 2 of the agreement, dated 21-11-1975, refers only to the assets such as plant, machinery, civil works, sub-stations, transformers, furnitures, fixtures, etc., A combined reading of clauses 2 and 3 with the other provisions in the notification issued by the Government as well as the provisions of the Indian Electricity Act itself leave us with no doubt as to what was taken over by the Electricity Board from the assessee-company. Only the assets were taken over and no liability, no other encumbrances. It would not, therefore, be correct to say that the electricity undertaking as a whole was taken over in a slump sale for a consolidated price. This view is further strengthened by the fact that even in the computation of the consideration to be paid, separate values have been allocated to the different assets such as distribution lines, service lines, meters, transformers, sub-stations and cables, but no reference is made to debts, encumbrances, sundry debtors, etc. In the analogous General Engineering Corporation also the same position obtained, the taking over being under the same provisions of law. All the assets and liabilities were not taken over and the value of each asset which was taken over for determining the total amount of the consideration was available. This factual finding obtains in para 18 of the Tribunals decision in IT Appeal No. 64 of 1980 dated 3-4-1981. Since there is no slump sale and the assets have been taken over at stipulated prices, the application of section 41(2) cannot be ruled out. It would, however, require to be decided as to what profit is worked out on this basis and whether the profit worked out by the ITO is the correct profit.
9. The consideration received consists of two parts, one, the actual price for the assets taken over and the other, 10 per cent solatium. If the solatium is also part of the consideration for the assets taken over and is only regarded as a method of arriving at the price at which the assets were sold, its nature would be the same as the price of the assets. Actually it would appeal that the price of the assets have been fixed and since the transaction is the result of a compulsory purchase as it were, the solatium is granted to the seller. In other words, the 10 per cent solatium is granted to the assessee-company because it was forced to sell these assets against its wish or as a part of nationalisation. This being so, the amount of solatium cannot be regarded as constituting the price of the assets, its assessability has to be determined by applying other norms than as capital gains or as under section 41(2).
10. For the application of section 41(2) itself, the actual cost has to be determined. Even where the asset acquired is a depreciable asset, section 50 which provides for the computation of the cost of acquisition at clause (2) also refers to the adoption of the fair market value of the asset as on 1-1-1954. In the case of a depreciable asset when under the provisions of section 49 read with sub-section (2) of section 55, the fair market value of the asset as on 1-1-1954 is to be taken into account at the option of the assessee, the case of acquisition shall be the fair market value as on 1-1-1954 reduced by the amount of depreciation, if any, allowed after the said date and adjusted. Thus, even in the case of depreciable asset in existence as on 1-1-1954 if the assessee were to exercise its option, the fair market value as on 1-1-1954 has to be determined and the necessary adjustment as to depreciation made. There cannot be any doubt as to giving the assessee the benefit of this provision as to exercising the option. The assets taken over in the present case and to which the provisions of section 41(2) would apply, are distribution lines, service lines, meters, transformers, etc. The schedule relating to the transaction gives the amount of consideration fixed for these items as a group but it is not clear from the schedule as to which of these assets were in existence as on 1-1-1954 and what its market value on that date was. Apparently the company has been in existence right from 1937 and some of these items could be in existence on 1-1-1954. The assessee having exercised its option to take the market value as on 1-1-1954, we do not see any reason how that option exercised can be ignored. In other words, even though the total consideration for the assets is given as a group in the schedule in working out the capital gains, the price as on 1-1-1954 has to be taken.
11. On the contrary the assessee has received certain amounts by way of consumers contributions at the time when it gave connections to the consumers. While the factum of receipt of this amount is beyond dispute of both the parties, the material produced before us does not indicate the exact norms on which the contribution was made. In fact, it is not clear as to what are the items in respect of which the contribution was made, what was the basis on which the contribution was made, whether it has any relation to the cost of the asset, such a service lines, etc., supplied to the consumers, etc. In the absence of complete details, it is not possible to arrive at a correct conclusion as to the extent of contribution in respect of any individual asset. This has several aspects. In the first place if the contribution is made for an asset which was in existence prior to 1-1-1954, in view of the assessees exercising the right of adopting the market value as on 1-1-1954, the contribution made by the consumers will have absolutely no effect in determining the cost of acquisition of these assets. This is for the purposes of capital gains. Whether it will have an effect on determining the profit under section 41(2) is another matter. Even apart from the existence of the assets as on 1-1-1954, the other problem relevant is as to the exact manner and the extent to which the contributions made by the consumers are relevant to the individual items. Prima facie we do not see any reason why a contribution should be made by a consumer towards transformers, sub-stations, etc., which are also assets sold by the assessee-company. Even in respect of items like meters or cables, this difficulty arises since in most of the cases the meters are hired out by the company and the contribution made by the consumers may have absolutely no relevance to the meter established at the consumers place. Thus, if a residential consumer had contributed certain amounts for taking an electric connection to his place, possibly lump sum depending on the points, etc., he is likely to utilise, would have been recovered from him (sic), or it may be not even based on his consumption but on other criteria like the place from which the power has to be drawn, the abundance of power in a particular locality, etc. It is not impossible that in a particular case the company has spent Rs. 50 or Rs. 100 for service lines for connection but a recovery of Rs. 500 is made from a private consumer and in another case a substantial amount on distribution lines, extensions from the mains have to be made and the consumer pays just a nominal amount. This latter could happen in a case of a newly established factory in and out of way place where several previous connections might not have been given. What we want to stress is that unless a well defined connection and relation between the assets now sold and the consumers contributions received is established, it will not be proper to straightaway reduce or partially or otherwise adjust the consumers contributions either for the purpose of section 41(2) profit or for capital gains.
12. What the assessee has done in the schedule is that out of an overall amount of Rs. 40,19,800 the value of six groups of items to deduct (sic) a sum of Rs. 18,49,593 the value of assets created out of consumers contributions. As pointed out above, the pitfalls in this computation are this existence or non-existence of the very asset at the time of the take over, for which a contribution was made by the consumer; the extent of contribution made by a consumer even if that asset exists today; the relevance of the contribution at all to the cost of the asset - in a particular case the company may not have any new assets to be purchased for giving a connection and still a consumers contributions may be collected as a matter of general principle, etc. Merely deducting a lump sum of Rs. 18,49,593, which is perhaps the sum total of the consumers contributions collected for a period for all types of indifferent assets and connections, from the overall value of the assets entering into the present take over transaction would, to say the least, be a clear distortion of what has happened. In ascertaining the original cost of any asset, the actual contribution made, if any, by the consumer for the particular asset in existence has to be computed. If a contribution has been made towards asset and part of it has been lost or otherwise disposed of prior to take over, that has also to be adjusted. There is also substance in the assessees claim that these contributions having been received over the year without any particular specified relation to the cost of the assets utilised for that particular consumer, deduction of the consumers contribution in a lump sum figure would amount actually in assessing that amount itself even though received in several years past in the current year. How this can be done is absolutely beyond any legal explanation. In our view, no provision of the Act can justify this.
13. Again there is a further question of the value itself fixed for these assets. The schedule to the take over gives the amount at Rs. 40,19,800. A valuation made by consulting engineer prior to take over put the price at Rs. 59.7 lakhs. How that price, if it could be called a market price, had been reduced to Rs. 40,19,800 is not known. Perhaps, we can assume that this reduction is by a process of negotiating for the price. Even then, how the distribution of this price over the various groups of items such as distribution lines, service lines, meters, etc., is done also is a difficult question. In order to apply the provisions of section 41(2) or assess the capital gains, it is necessary to fix the consideration received for each individual item and also the cost of acquisition of that item. Any difficulty in fixing these figures or even impossibility in doing so, may not make the provisions of section 41(2) or capital gains inapplicable, but the process has to be gone through and a correct computation made. In our view this has not been done in the present case.
14. Thus, while affirming the liability of the assessee to taxing under section 41(2) and also assessment to capital gains, we have to remit the matter back to the ITO for fixing the amount with specific directions as under : By going in detail into the factual position, the consideration for each individual existing item of asset should be fixed. Whether this asset was in existence as on 1-1-1954 should be found out to make the adjustment for the assessees option for the market value as on 1-1-1954 exercise. The extent of depreciation granted on this asset after 1-1-1954 and with regard to the market value as on 1-1-1954 should be ascertained. This has to be done for the purpose of the profit under section 41(2). With regard to the capital gains, the Commissioner (Appeals) has held that all items should be treated as long-term capital gains. This may not be entirely true, if certain assets held by the assessee for less than 3 years are also to be included in the assets transferred. The ITO should take out these assets and would be justified in treating them for short-term capital gains but since the department has not come up on appeal on this, the capital gains assessable even on the short-term basis should be restricted to the figure already assessed. With regard to the balance of assets, the extent of consumers contribution received as going towards the cost of the asset in respect of each individual asset existing on the date of the take over, should be computed and then only after adjusting the profit under section 41(2) and otherwise the long term capital gain determined. The assessee should be given an opportunity to present all the details.
15. The last issue relates to the assessability of the solatium amount of Rs. 2,20,000. It is the contention of the assessee that this amount is not to be taxed at all in the light of the decision of the Supreme Court in the case of B. C. Srinivasa Setty (supra). If support of this, the assessee has also relied on an article titled Assessment of Solatium, by B. R. Abrol, published in [1981] 22 CTR (A & T) 81.
16. These contentions of the assessee overlook the decision of the Gujarat High Court in the case of Vadilal Soda Ice Factory v. CIT : [1971]80ITR711(Guj) , wherein it has been held that solatium is given in consideration of the compulsory nature of the acquisition, but it still represents consideration for the property acquired and that, therefore, it should also be taken into account in computing the capital gains. Apparently, the learned author, who has written the article, has overlooked this decision of the Gujarat High Court.
17. Further, in the present case, it is seen that the purchase price for the undertaking of the assessee was the market value of the undertaking at the time of purchase plus a sum equivalent to 10 per cent of the total of such value. This is clear from clause 2 of the notification of the Government of Gujarat dated 7-2-1975. Similarly, in the agreement, dated 21-11-1975, between the assessee-company and the Gujarat State Electricity Board, in clause 8, it is stated as follows :
'8. The consideration for the works payable by the Board to the company in terms of the said notification is fixed by mutual negotiations as per joining inventory taken up to 11th October, 1973 at Rs. 22,00,000 (Rupees twenty two lakhs plus a sum equivalent to 10 per cent of such value.'
Thus, it would be clear from the facts mentioned above that this amount of Rs. 2,20,000 representing 10 per cent solatium is part of the purchase price or consideration paid to the assessee for taking over the various assets comprised in the undertaking or works as described in the agreement. This amount represents the solatium paid to the assessee under the proviso to section 7(1) of the Indian Electricity Act, 1910. This solatium is paid to the assessee because of the compulsory nature of the acquisition of the undertaking of the assessee as a result of the revocation of the license granted to the assessee, though at its own request. It is very much a part of the consideration or the purchase price for the taking over of the undertaking, which in the present case, only comprised of the assets specified in the schedule to the notification, which have already been set out in paragraph 1 supra. We are, therefore, unable to agree with the learned counsel for the assessee that this solatium amount of Rs. 2,22,000 is not taxable at all. On the contrary, it forms part and parcel of the purchase consideration, which has to be taken into account for the purpose of determining the profit chargeable under section 41(2) and the capital gains taxable under the Act on the transfer of the various assets, as indicated above. The decision of the Supreme Court on which reliance is placed, is not applicable to the facts of the present case and it is not, therefore, necessary to discuss the same.
18. In the result, the appeal should be treated as partly allowed.