Sale under Income tax law: exercise of a licence option with agreed terms creates a contract of sale and triggers taxability.

Whether transfer on exercise of a licence option amounted to a "sale" under the Income tax Act turned on whether the licence terms embodied offer and acceptance. The court reasoned that a statutory licence containing a definite option to purchase, fixed period and agreed valuation mechanism constituted an irrevocable contractual offer; exercise of that option completed a contract of sale rather than a compulsory acquisition. Because mutual assent and an agreed price existed and were acted on, the transfer was treated as a sale and the excess over written down value was taxable under section 10(2)(vii).

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Issues: (i) Whether the transfer of the undertaking to the Government on exercise of the option under clause 9 of the Fazilka Electric Licence and section 7(1) of the Indian Electricity Act, 1910, amounted to a "sale" within the meaning of section 10(2)(vii) of the Income-tax Act.

Analysis: The licence was granted following statutory rules requiring a draft licence containing definite terms to be proposed by the applicant and accepted, with the licence terms incorporating the option to purchase under section 7(1). The statutory scheme and rules show the licence process involves offer and acceptance; the licence terms (including clause 9 fixing the period for exercise of option and the method for valuation) were the result of bargaining and were accepted by the licensee. The option to purchase fixed by the licence created an irrevocable contractual offer to sell the undertaking on the terms specified; on exercise of that option the contract of sale became complete. "Compulsory purchase" or "compulsory sale" as used in statutory language does not equate to "compulsory acquisition" in the sense of an acquisition without mutual assent. Authority and precedent establish that a bargain or mutual assent is an essential element of sale; where such mutual assent exists through the licence terms and agreed valuation mechanism, the transaction is contractual. The acceptance by the licensee of the price fixed and the Government's performance of the licence terms also operate as ratification of any formal defect.

Conclusion: The transaction constituted a sale within the meaning of section 10(2)(vii) of the Income-tax Act; accordingly the excess realized over written down value was taxable under that provision.

Ratio Decidendi: Where a statutory licence incorporates definite, agreed terms creating an option to purchase and those terms result from offer and acceptance, exercise of the option effects a contract of sale rather than a compulsory acquisition; such a transaction falls within the statutory meaning of "sale" for income-tax purposes under section 10(2)(vii) of the Income-tax Act.

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