Contractual sale under electricity licence purchase option treated as taxable transfer, not compulsory acquisition, for income tax purposes.

Where an electricity licence contains an agreed option enabling the Government to purchase the undertaking on specified terms, exercise of that option is treated as a contractual sale rather than compulsory acquisition. The licence conditions, read with the Indian Electricity Act, 1910 and the rules made under it, show that the purchase period and valuation terms form part of the bargain governing the licence. On that basis, acquisition of the building, machinery and plant falls within section 10(2)(vii) of the Income-tax Act, 1922, and the excess over written down value is taxable as deemed profits.

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Issues: Whether the acquisition of the electricity undertaking by the Government under the licence and the Indian Electricity Act, 1910 constituted a sale of the building, machinery and plant within the meaning of section 10(2)(vii) of the Income-tax Act, 1922.

Analysis: The licence conditions, read with the relevant provisions of the Indian Electricity Act, 1910 and the rules made thereunder, showed that the purchase option and the price payable were part of the agreed terms on which the licence was granted. The statutory scheme permitted the parties to settle the periods of purchase and the terms of valuation within the limits prescribed by the Act, and the exercise of the option arose from that contractual arrangement. The transaction therefore did not amount to a compulsory acquisition in the legal sense; it was a sale pursuant to the licence and the mutual undertaking embodied in it.

Conclusion: The acquisition was a sale within section 10(2)(vii) of the Income-tax Act, 1922, and the excess realised over the written down value was taxable as deemed profits.

Ratio Decidendi: Where a licence to supply electricity incorporates an agreed option of purchase on specified terms, the exercise of that option constitutes a contractual sale and not a compulsory acquisition for purposes of section 10(2)(vii) of the Income-tax Act, 1922.

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