Sale consideration under licence-linked purchase option includes statutory uplift; surplus over written down value is taxable as business income.

Where an undertaking is purchased under a contractual option embedded in a licence, the transaction is treated as a sale for income-tax purposes rather than a compulsory acquisition in the ordinary sense, and the surplus over written down value is assessable under the deemed surplus provision. An additional 20 per cent payment under the licence and statutory scheme is part of the sale consideration, not separate solatium, because it forms part of the agreed price mechanism. The material also notes that the issue of loss on service lines was not pressed. The overall effect is that the amount received under the purchase arrangement is treated as taxable sale consideration.

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Issues: (i) Whether the surplus realised by the assessee was correctly assessed under section 10(2)(vii) of the Indian Income-tax Act, 1922; (ii) Whether the additional 20 per cent payment under the licence and Electricity Act was includible in the sale price or was merely solatium; (iii) Whether the loss on the service lines was rightly ignored in computing profits under section 10(2)(vii).

Issue (i): Whether the surplus realised by the assessee was correctly assessed under section 10(2)(vii) of the Indian Income-tax Act, 1922.

Analysis: The purchase of the undertaking under the Electricity Act was not a compulsory acquisition in the ordinary sense, but a sale pursuant to the contractual arrangement embodied in the licence. The machinery and plant were sold to the Government, and the statutory deeming provision in section 10(2)(vii) therefore applied to the excess of the sale amount over written down value.

Conclusion: The surplus was correctly assessed under section 10(2)(vii), in favour of the Revenue.

Issue (ii): Whether the additional 20 per cent payment under the licence and Electricity Act was includible in the sale price or was merely solatium.

Analysis: The additional amount was part of the agreed price mechanism under the licence and the statutory scheme. It was not an ex gratia payment independent of the sale, and the total amount received by the assessee represented the amount for which the assets were actually sold. The Court treated the fair market value and the added percentage as components of the sale consideration.

Conclusion: The additional 20 per cent payment was includible in the sale price and was not merely solatium, in favour of the Revenue.

Issue (iii): Whether the loss on the service lines was rightly ignored in computing profits under section 10(2)(vii).

Analysis: This question was not pressed before the Court and therefore did not require separate adjudication on merits.

Conclusion: The issue stood in favour of the Revenue.

Final Conclusion: All questions referred were answered against the assessee and the amount received under the purchase arrangement was treated as taxable sale consideration under the deeming provision.

Ratio Decidendi: Where assets are sold under a contractual purchase option embedded in a licence, the entire amount received under that arrangement forms the sale price for purposes of the deeming provision on surplus over written down value, and an agreed incremental payment linked to that sale is part of the consideration rather than a separate solatium.

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