Compulsory acquisition and capital gains tax: a business undertaking acquired as a going concern was held to be a capital asset.

Compulsory acquisition of an electricity undertaking by the State was treated as a transfer within section 12B of the Indian Income-tax Act, 1922, because the term "transfer" was wide enough to include transfer by operation of law, not only by agreement. The resulting gains were therefore chargeable to capital gains tax against the assessee. An undertaking acquired as a going concern was also held to be a capital asset under section 12B read with section 2(4A), since "property of any kind" covered a business undertaking. The references were answered in favour of the Revenue.

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Issues: (i) Whether compulsory acquisition of an electricity undertaking by the State amounted to a transfer liable to capital gains tax under section 12B of the Indian Income-tax Act, 1922; (ii) Whether an undertaking acquired as a going concern constituted a capital asset within the meaning of section 12B read with section 2(4A) of the Indian Income-tax Act, 1922.

Issue (i): Whether compulsory acquisition of an electricity undertaking by the State amounted to a transfer liable to capital gains tax under section 12B of the Indian Income-tax Act, 1922.

Analysis: Section 12B brought to tax gains arising from sale, exchange, relinquishment or transfer of a capital asset. The Court held that compulsory acquisition is not outside the scope of transfer merely because it occurs by statute and not by agreement. The expression 'transfer' was treated as wide enough to include transfer by operation of law, and the earlier authorities on compulsory acquisition were followed.

Conclusion: Yes. Compulsory acquisition constituted a transfer and the resulting gains were chargeable to capital gains tax, against the assessee.

Issue (ii): Whether an undertaking acquired as a going concern constituted a capital asset within the meaning of section 12B read with section 2(4A) of the Indian Income-tax Act, 1922.

Analysis: The definition of 'capital asset' in section 2(4A) extended to 'property of any kind'. A business undertaking was treated as property, and the acquisition of the undertaking as a going concern did not exclude it from that wide definition. The Court therefore rejected the contention that acquisition of the whole undertaking fell outside the capital gains provision.

Conclusion: Yes. An undertaking acquired as a going concern was a capital asset, against the assessee.

Final Conclusion: The references were answered in favour of the Revenue and against the assessees, affirming the charge of capital gains on the compulsory acquisition of the undertakings.

Ratio Decidendi: Compulsory acquisition by statutory process can amount to a transfer within capital gains provisions, and a business undertaking as a going concern is property falling within the wide statutory meaning of capital asset.

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