P C GULATI Vs. COMMISSIONER OF INCOME TAX

JUDGEMENT

(1.) The question which we are called upon to answer in the reference has been framed by the Tribunal in the following terms:-

(2.) The Panipat Electric Supply Co. Ltd., which is the assessee in this case, obtained a licence to generate and distribute electricity in Panipat on 20th July, 1934. The licence was for fifteen years but was renewed for a period of five years. In terms of clause 9 of the licence the Government of Punjab had an option to purchase the Electrical Undertaking belonging to the assessee at the expiry of the period of the licence under the provisions of Section 7(1) of the Indian Electricity Act, 1910 on giving the requisite notice. Such a notice was given on 4th July, 1952, and the Government took possession of the Undertaking on the midnight of 16th July, 1954. The assessee-company being aggrieved filed a suit for the recovery of Rs. 13,88,371.25. This suit was eventually compromised and the assessee agreed to accept a sum of Rs. 2,50,000.00 in full and final settlement of its claim against the Government. One of the terms of the compromise was that the Punjab State Electricity Board would pay a sum of Rs. 1,35,033.00 to the Punjab State Government in addition to the amount of Rs. 2,50,000.00, on behalf of the assessee-company on account of the balance of the loan advanced by the Government to the assesee, which was outstanding on the date of the take-over. This compromise was effected on 7th April, 1962. At the time of making the assessment for the assessment year 1963-64, the Income Tax Officer added a sum of Rs. 1,81,772.00 as profit under Section 41(2) of the Income-Tax Act, 1961, as representing the difference between the sale price of the assets of the assessee and the depreciated value of the said assets.

(3.) The assessee appealed to the Appellate Assistant Commissioner, who rejected the appeal. A further appeal was taken to the Income-Tax Appellate Tribunal which partly succeeded. The Tribunal came to the conclusion that the assets which were taken over by the Government included stores of the value of Rs. 24,000.00 which had not been subjected to depreciation and the assessee was also entitled to get a deduction for the legal expenses incurred to get a better price for its assets. These expenses were calculated to be Rs. 31,875.00 and the Tribunal allowed this deduction on the basis of the Supreme Court's decision in Shree Meenakshi Mills Ltd. v. Commissioner of Income-tax, Madras, 63, 1. T. R. 207, (1). After allowing these two deductions the Tribunal estimated the profit chargeable to tax under Section 41(2) of the Act as being Rs. 1,25,892.00. The assessee-company then sought a reference to this Court which has been made by the Tribunal under Section 256(1) of the Income-tax Act, 1961.