KARVALVES LIMITED Vs. COMMISSIONER OF INCOME TAX

JUDGEMENT

(1.) THESE two references are connected cases. The parties in both the cases are the same. Income-tax Reference No. 72 of 1987 is a reference made by the Income-tax Appellate Tribunal (in short, "the Tribunal"), at the instance of an assessee, who was the appellant before it in I. T. A. No. 318/(Coch.) of 1983. Income-tax Reference No. 117 of 1987 is a reference made by the Tribunal at the instance of the Revenue which was the appellant before it in I. T. A. No. 360/ (Coch.) of 1983. Income-tax Application No. 318/(Coch.) of 1983 and I. T. A. No. 360/(Coch.) of 1983, both related to the assessment year 1971-72 of the same assessee and were heard together and disposed of by a common judgment by the Tribunal on January 31, 1986. The assessee as well as the Revenue filed R. A. No. 125/(Coch.) of 1986 and R. A. No. 131/(Coch.) of 1986, respectively, praying that the Tribunal may be pleased to refer certain questions of law, specified in the respective reference applications for the decision of this court. Accordingly, the Tribunal has referred four questions of law in I. T. R. No. 72 of 1987 at the instance of the assessee. At the instance of the Revenue, the Tribunal has referred two questions of law in I. T. R. No. 117 of 1987. Since the parties involved in both the references are the same and they relate to the same assessment year 1971-72, we heard the above references together and a common judgment is delivered in the said referred cases.

(2.) THE four questions of law referred at the instance of the assessee to this court for decision in I. T. R. No. 72 of 1987 are as follows :

(3.) WE heard counsel for the assessee, Mr. C.M. Devan, as also counsel for the Revenue, Mr. P.K.R. Menon. The broad facts of this case are as follows : The Kerala State Electricity Board, by their letter dated March 7, 1969, exercised its option to purchase, the Ernakulam electrical undertaking and required the assessee-company to sell the undertaking to the Board at the expiry of the period of the running licence. The assessee immediately thereafter served notice to its employees intimating that their service would not be required after the undertaking vests in the Kerala State Electricity Board. It was so done before the undertaking was taken over by the Board. The undertaking vested in the Kerala State Electricity Board on December 3, 1970. The determination of the purchase price by the Board in the sum of Rs. 71,22,600 plus solatium at 20 per cent. was not accepted by the assessee-company. There was a dispute regarding the compensation amount payable. The assessee-company claimed Rs. 1,30,69,200 including solatium as compensation. In view of the dispute, the matter was referred to arbitration. The joint arbitrators passed an award on August 22, 1978, and determined the purchase price due to the licensees (assessee) at Rs. 88,97,000 excluding solatium. The award was filed in the Sub-Court, Ernakulam, and the court, in O. P. No. 67 of 1978, by judgment and decree dated October 28, 1978, directed the Board to pay the assessee a sum of Rs. 88,97,000 excluding solatium with interest at 6 per cent. on the balance due. Neither the award nor the decree passed by the court contained any break-up of the compensation amount in respect of plant, machinery, land, buildings, etc. The initial order passed by the Income-tax Officer dated March 27, 1974, was long before the award passed by the arbitrators and it did not reckon the realities of the situation. There were further proceedings by way of appeals and, finally, a fresh assessment order was passed by the Income-tax Officer dated September 26, 1981, whereby the total, income of the assessee was determined at Rs. 56,61,650. It was this fresh order of assessment which was taken in appeal by the assessee, wherein the Commissioner of Income-tax (Appeals), by order dated February 19, 1983, allowed the appeal filed by the assessee in part. So far as these references are concerned, we are only concerned with the relief afforded by the Commissioner, to the extent he held that the retrenchment compensation of Rs. 3,31,534 should be deducted from the full value of the consideration for the purpose of capital gains.