2. Under section 41(2) of the Act, in respect of any asset which is owned by the assessee and used for the purposes of business or profession,in respect of which depreciation is claimed under the Act, when it is sold or otherwise transferred and the moneys payable in respect of such asset together with the scrap value, if any, exceed the written down value, so much of the excess moneys upto the actual cost would be chargeable as income from the business or profession of the previous year in which moneys payable for the asset became due.

3. The facts of the case are as follows The assessee was in the business of generating and supply of electricity to consumers. The assessee had two undertakings - one at Allahabad and the other at Lucknow.

The government of Uttar Pradesh purchased both the undertakings for the Uttar Pradesh State Electricity Board ("UPSEB"). The UPSEB paid compensation to the assessee for the compulsory purchase of the said undertakings which was accepted by the assessee without prejudice to its right to claim the compensation payable as provided under section 7A of the Electricity Act, 1910.

Thereafter, the assessee went for the arbitration for determining the compensation payable to it under the said Act. As the arbitrators failed to make any award, they referred the matter for decision to an umpire. In the mean time the UPSEB moved the civil court and stayed the proceedings of the umpire.

4. The assessing officer ("AO") assessed the compensation received from the UPSEB and determined the profits under section 41(2) of the Act and added the same to the income of the assessee.

It was the assessee's contention that no profit under section 41(2) would be taxable in the assessment year under consideration because the claim of the assessee for compensation was not settled during the year and that a dispute was still pending before the arbitrators.

5. The High Court held in favour of the assessee on the ground that " an assessment under section 41(2) can only be made after the price at which the assets of the assessee had been sold is determined.

As the price is not finally determined, it cannot be said that the amount which has been received by the assessee in respect of its two undertakings is the price at which the same had been sold." Hence, the appeal to the Supreme Court by the department.

6. Referring to the provisions of section 41(2), the Supreme Court held that the entire section makes it abundantly clear that income arising as provided therein is to be considered as income of business or profession and is chargeable to income-tax as such.

In the case of acquisition of property under any law, the balancing charge under section 41(2) is taxable to income-tax as income of the business of the previous year in which moneys payable became due.

The question would be - when the money became due. In the case under hand, the income had accrued and was actually received. The amount received was the compensation amount in respect of the acquisition of property and was to be acounted for the purpose of income-tax as income from business of the previous year.

For the market value determined by the authority, if there is no difference or dispute, whatever amount is determined and paid, would be compensation payable for the acquisition. That determination of the amount of compensation would mean "moneys payable" became "due".

However, in the case of a dispute or difference in the determination of the market value, the matter was required to be determined by the arbitrator under section 7A of the Electricity Act.

Pendency of proceedings for additional money payable would not be relevant so far as taxability of compensation amount received was concerned. If additional amount is received in the subsequent year, it would be a business income of that year.

7. The Court stated that this interpretation would be in conformity with sub-sections (1) & (4) of section 41. It referred to these provisions to show that there can be more than one year of taxability under these sub-sections and hence sub-section (2) should also be interpreted in a similar manner.

8. The Court brushed aside the plea of the counsel for the assessee that section 41(2) would come into play only in the year that the compensation amount is finally ascertained and determined that the amount received by the assessee is to be treated as ad-hoc amount till the final determination.

9. The Court agreed with the observations of the Madhya Pradesh High Court in CIT vs. Central India Electric Supply Co. Ltd., (114 CTR 160 (MP)), to the effect that pendency of litigation in respect of amount or price due has no relevancy so far as the taxability of such accrued income is concerned.

The likelihood of income being reduced in the subsequent year as a result of litigation may give rise to resort to other remedies available in the Act for rectification and refund of the tax.

However, on that ground it could not be held that no income had accrued to the assessee for the relevant assessment year.

10. The Court ultimately summed up by saying that presuming that the compensation was an ad-hoc payment in the sense that final compensation was not determined by the arbitrator or appellate authority, still the payment was towards purchase price. Section 41(2) nowhere provides that such balancing charge would be taxable in the year in which "moneys payable" are determined "finally" by the arbitrators or the appellate authority or such other authority provided under the Acquisition Act.

Further, it was not the case of the assessee that pending final determination of the purchase price, he had not accepted the said amount.

Pendency of litigation for getting additional amount in respect of "moneys payable" has no relevancy so far as the taxability of accrual of income - compensation received - is concerned. Hence, in a case where compensation amount and its receipt is admitted, which is business profit under section 41(2), it is to be taxed in the previous year of its receipt.

11. This decision pre-empts an assessee from on the one hand actually receiving moneys which are otherwise taxable under section 41(2) and on the other hand claiming that the said moneys are ad-hoc payments taxable in a subsequent year when disputes are settled.

(The author is a Mumbai-based chartered accountant)