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Commissioner of Income-tax (Central), Calcutta Vs. Moon Mills Ltd. - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtSupreme Court of India
Decided On
Judge
Reported inAIR1966SC870; [1966]59ITR574(SC); [1966]2SCR393
ActsIncome Tax Act, 1961 - Sections 145
AppellantCommissioner of Income-tax (Central), Calcutta
RespondentMoon Mills Ltd.
Cases ReferredMadras v. Ajax Products Ltd.
Excerpt:
.....by assessee from insurance company in 1950 - surplus of claim over value of assets assessed as income of 1948-49 by income-tax authority under section 13 of act - respondent claimed it to be assessable in 1950 following provision of section 10 (2) (7) - surplus in question whether to be assessed following provisions of section 13 of act or section 10 (2) (7) - on appeal high court accepted contention of respondent - appeal preferred before supreme court - observed generally income to be assessed in year of accrual following provisions of section 13 - section 10 (2) (7) is special provision and exception to section 13 - under scheme of section 10 (2) (7) surplus claim to be assessed only on receipt - surplus assessable as income in 1950. - labour & services promotion: [tarun..........policies, and (iii) consequential loss policies, for an aggregate sum of rs. 1,48,92,390. the company received rs. 65 lakhs from the insurance company in full settlement of its claim under the said policies. the said amount was received by the company only on march 27, 1950. out of the said amount, the sum of rs. 27,06,593 represented the loss in respect of the building and machinery - rs. 4,24,205 in respect of the building and rs. 22,82,388 in respect of the machinery. for the assessment year 1949-50, the company did not include the said amount in its return as was received by it only on march 27, 1950. the income-tax officer, on the ground that the said amount became receivable by the company on december 13, 1948 included the same in the taxable income of the assessee company for.....
Judgment:

Subba Rao, J.

1. The Income-tax Appellant Tribunal, Calcutta Bench, referred the following question under section 66(1) of the Indian Income-tax Act, 1922, hereinafter called the Act, for the decision of the High Court of Calcutta :

'Whether, on the facts in the circumstances of this case, the sum of Rs. 27,06,593 was assessable as a profit assessee-company of the previous relevant to the assessment year 1949-50 in accordance with the forth

proviso to section 10(2)(vii) of the Indian Income-tax Act ?'

2. The facts leading up to the said reference may briefly be stated Messrs. Moon Mills Ltd., the respondent herein, hereafter referred to as the company, is a joint stock limited company and it owns a factory at Bombay. On August 6, 1948, a fire broke out in the factory premises of the assessee resulting in the destruction of the stock-in-trade, machinery and building. The assets of the company were covered by several insurance policies issued by the General Assurance Society Ltd. in respect of (i) general specific policies, (ii) specific stock policies, and (iii) consequential loss policies, for an aggregate sum of Rs. 1,48,92,390. The company received Rs. 65 lakhs from the insurance company in full settlement of its claim under the said policies. The said amount was received by the company only on March 27, 1950. Out of the said amount, the sum of Rs. 27,06,593 represented the loss in respect of the building and machinery - Rs. 4,24,205 in respect of the building and Rs. 22,82,388 in respect of the machinery. For the assessment year 1949-50, the company did not include the said amount in its return as was received by it only on March 27, 1950. The Income-tax Officer, on the ground that the said amount became receivable by the Company on December 13, 1948 included the same in the taxable income of the assessee Company for the assessment year 1949-50. On appeal, the Appellate Assistant Commissioner came to the conclusion that the said amount could only be assessed to tax under the fourth proviso to Clause (vii) of sub-s. (2) of S. 10 of the Act when the Company actually received it. On appeal preferred by the Revenue against the said Order, the Income-tax Appellate Tribunal agreed with that view. Thereafter, the Appellate Tribunal referred the aforesaid question to the High Court for its decision and the said Court upheld the view of the Appellate Tribunal. The Revenue on a certificate issued by the High Court has preferred the present appeal.

3. Learned Solicitor-General, on behalf of the revenue, contended that the company maintained its accounts on mercantile basis and, therefore, the profits and gains of its business should, under section 13 of the Act, be computed in accordance with the said method of accounting. If so computed the argument proceeded, the claim made by the company for the said compensation amount having been finally accepted by the insurance company in its meeting held on December 13, 1948, the company acquired a right to receive the same on that date, with the result that it became the part of the taxable income of the company during the accounting year.

4. Mr. A. V. Viswanatha Shastri, learned counsel for the company, contented that there was a real distinction the computation profits on the principal of the commercial accounting and the working out of the statutory of commercial accounting and the working out of the statutory allowances under the section 10(2) of the Act, while under the former when an assessee maintained the accounts on mercantile basis, irrespective of receipt or realisation, profits must be computed on the accrual basis, under third proviso to the section 10(2) (vii) of the Act the compensation amount could be brought to tax only when it was actually received in terms of the said proviso.

5. The solution to those the two conflicting contentions depend upon the clear appreciate of the scope of section 13 and section 10(2) (vii) of the Act. They read :

'13. Income, profits and gains shall be computed for the purpose of the sections 10 and 12, in accordance with the method of accounting regularly employed by the assessee.'

'10. (1) The tax shall be payable by an assessee under the head 'profits and gains of business, profession or vocation' in respects of the profits or gains of any business, profession or vocation carried on by him.

(2) Such profits or gains shall be computed after making the following allowances .... : ...'

6. Section 13 ex facie is only concerned with the computation of the profits of the business on the principal of accountancy adopted by the assessee. It deals with commercial profits and not assessable income. Though the commercial profit is the basis for ascertaining the taxable income, the later can be arrived at only after making the statutory allowance provided under the section 10(2) of the Act. In Gresham Life Assurance Society Ltd. v. Styles, the expression 'profits' has been succinctly defined. Halsbury L. C. said therein that 'the word 'profits', I think, is to be understood in its natural and proper sense - in the sense which no commercial main would misunderstand'. Lord Herschell observed : 'When we speak of the profits and gains of a trade we mean that which he has made by his trading.' This court, in Calcutta Co. Ltd. v. Commissioner of Income-tax, said much to the same effect when it said that the expression 'profits and gains' is to be understood in its commercial sense. This court, in Keshav Mills Ltd. v. Commissioner of Income-tax, Bombay : [1953]23ITR230(SC) , explained how in a commercial sense the profits and loss are ascertained. Dealing with two main systems of accounting, it observed:

7. 'The mercantile system of accounting or what is otherwise known as the double entry system is opposed to the cash system of the book-keeping under which a record is kept of actual cash receipts and actual cash payments, entries being made only when money is actually collected or disbursed. That system brings into credit what is due, immediately it becomes legally and before it is actually received and it brings into debit expenditure the amount for which a legal liability has been incurred before it is actually disbursed. The profits or gains of the business which are thus credited are not realised but having been earned are treated as received though in fact there is nothing more than an accrual or arising of the profits at the stage. They are books profits. Receipt being not the sole test of chargeability and profits and gains that have accrued and arisen or deemed to have accrued or arisen being also liable to be charged for income-tax, the assessability of these profits which are thus credited in the books of account arises not because they are received but because they have accrued or arisen.'

8. It is, therefore, clear that profits have to be ascertained within the meaning of section 13 of the Act on the basis of the system maintained by the assessee, whether mercantile, cash or any other system.

9. In either system of accountancy, compensation paid by the an insurance company in respect of the loss of capital assets is not brought into account for ascertaining the profits and loss of the company. In Batliboi's book on Advanced Accounting, 21st edition, at page 1062, an illustration is given to the explain how the necessary entries will have to be made in the accounts in respect of claims under insurance arising from destruction of stock, fixtures, plant, building, etc., as also claims relating to the loss relating from fire. It will be seen from illustration 207 that while the item of compensation received for stock destroyed or damaged is carried to profit and loss account, the item relating to compensation received for loss by fire in respect of building and machinery is to be entered into building account and plant and machinery account. It is stated therein, being the loss of fixed assets represented by the building and plant and machinery destroyed by fire, it is transferred to a special account.

10. Section 10(2) of the Act deals with statutory allowance as distinguished from deductions that will be made in commercial practice for ascertaining the profits of a business. The relevant part of clause (vii) of section 10(2) of the Act reads :

'... in respect of any such building, machinery or plant which has been sold or discarded or demolished or destroyed, the amount by which the written down value thereof exceeds the amount for which the building machinery or plant, as the case may be is, actually sold or its scrap value...

Provided further that where any insurance, salvage or compensation moneys are received in respect of any such building, machinery or plant which has been discarded or demolished or destroyed, and the amount of such moneys does not exceed the written down value, the amount allowance under this clause shall be the amount, if any, by which the difference between the written down value and the scrap value exceeds the amount of such moneys : Provided further that where any insurance, salvage or compensation moneys are received in respect of any such building, machinery or plant as aforesaid, and the amount of such moneys exceeds the difference between the written down the value and the scrap value no amount shall be allowable under this clause and so much of the excess as does not exceed the difference between the original cost and the written down value less the scrap value shall be deemed to be profits of the previous year in which such moneys were received...'

11. Under this clause where any building, machinery or plant is discarded demolished or destroyed, an allowance is given in respect of amount by which the written down the value of the said building, machinery or plant exceeds the amount for which it is sold or it scarp value. But the forth proviso introduces a fiction that in case any insurance, salvage or compensation money received in respect of the said property exceeds the difference between the written down value and the scrap value so much of the excess as mentioned therein will be deemed to be the profits of the previous year in which such moneys are received. Though in fact the said compensation represented a capital asset, to the extent mentioned in the proviso, the compensation is deemed to be the profit of the previous year in which such money is received. The proviso, therefore, introduces a fiction. What is not a profit in the previous year is deemed to be a profit in that year. The previous year is that year in which such moneys were received. The fiction is an indivisible one. It cannot be enlarged by importing another fiction, namely, that if an amount was receivable during the previous year it must be deemed to have been received during that year. In dealing with the scope of the fiction in S. 10 (2) (vii), proviso 2, this Court in Commissioner of Income-tax, Madras v. Ajax Products Ltd. : [1965]55ITR741(SC) , observed:

'Though the surplus contemplated by the proviso is not in the technical sense of the term of the profits of the previous year, it is deemed to be the profits of the previous year.'

'The same idea is developed thus :

'The fiction in the second proviso is a limited one. The surplus is deemed to be the profits of the previous year. As we have pointed out earlier, it adequately serves the purpose of the section... To sustain the argument of the revenue, it has to be enlarged in its scope. Many words have to be read into it which are not there. We cannot accept this argument.' So too, in the instant case, the fiction serves the purpose, if the said compensation was deemed to be the profit of the previous year or of the year in which it was received. This functions cannot be enlarged by giving the expression 'received' a technical meaning which it may bear in the mercantile of accountancy.

Further, the various clauses in section 10(2) of the Act use different word for fixing the date of the realization of the income, such as, 'paid', 'sold', 'received', etc. While the legislature gave an extended meaning to the expression 'paid' in section 10(5) of the Act, no definitions of other expressions are given in the Act. Section 10(5) of the Act says that in sub-section (2) 'paid' means 'actually paid or incurred according to the method of accounting upon the basis of which the profits or gains are computed under this section'. If the concept of the mercantile system of accountancy were incorporated by implication in the various clauses of section 10(2), the definition 'paid' in section 10(5) would be redundant. We cannot attribute redundancy to the legislature unless for compelling reasons. On the other hand, the definition of the expression 'paid' is a clear indication that in the case of the other terms the legislature intended to give those expressions their natural meanings.

The distinction between the scope of commercial accountancy for the purpose of ascertaining the trading profits and that of the statutory allowance is brought out by this court in Commissioner of Income-tax v. Bipinchandra Maganlal & Co. Ltd. Shah J., speaking for the court, made the following observations.

There is no definable relation between the assessable income and the profits of a business concern in a commercial sense. Computation of income for purpose of assessment of income-tax is based on a variety of artificial rules and takes into account several fictional receipts, deductions and allowance.'

12. If the contention advanced on behalf of the revenue is accepted. This distinction is effaced. The decision of House of Lord in which is relied upon by the learned counsel for the revenue, does not support this contention. There, the company's timber, its stock-in-trade, was destroyed by fire. It received from the insurers a large sum of money as compensation towards the said loss. A part of the said amount was not entered in the profit and loss account but as shown as a reserve in the balance-sheet. The House of the Lords held that the whole sum recovered was a trading receipt to be taken into account in computing the profits assessable to income-tax under Case 1 of the Schedule D and to corporation profits tax. In the context of those facts, Lord Buckmaster observed :

'What was happened has been this that the timber which the appellants held has been converted into cash. It is a quite true it had been converted into cash through the operation of the fire, which is no part of their trade, but loss due to it is protected though the usual trade insurances, and the timber had thus been realised. It is now represented by money, whereas formerly it was represented by wood. If this result in a gain, as it has done, it appears to me to be an ordinary gain - a gain which has taken place in the course of their trade...'

Viscount Dunedin puts the same idea in different words thus :

'The whole point is that the business of the company is to buy timber and to sell timber, and when they sell timber they turn it into money. This particular timber was turned into money, not because it was sold but because it was burned and they had an insurance policy over it. The whole questions comes to be whether that is a turnover in the ordinary course of their business. I think it was... The result of this fire was that they got rid of so much timber and got the insurance money at that figure, and that seems to me precisely in the same position as if they got rid of it by giving it to a customer.'

13. Lord Warrington of Clyffe stated much to the same effect, though he emphasized the commercial method. He said :

'... the normal commercial method of dealing with moneys recovered by a trader under a policy of insurance, in respect of stock destroyed by fire, was to include the actual amount received in the amount as an ordinary trading receipt in the same way as the proceeds of an ordinary sale of stock.'

14. These observations were made in the context of destruction by fire of stock-in-trade. The house of Lords unanimously held that the compensation received was only a trading receipt, for it represented the timber which was the part of the stock-in-trade loss by fire. Far from helping the revenue, this decision brings out with clarity the distinction between the loss by fire of stock-in-trade and of capital assets. The compensation received from an insurance company towards the loss of capital assets does not represented profit in a commercial sense : it was made a profit by fiction under the Act.

15. The legal position may be stated thus : the profit and a loss of the business concern in ascertain on commercial principles. Section 13 of the Act, subject to the proviso, imposes a duty on a revenue to compute the profits of a business in accordance with the methods of accounting adopted by an assessee under the said principles. But the concept of assessable income under the Act is different from profit and loss in the commercial sense. Though profit and loss ascertained under the system adopted by an assessee in the basis, the assessable income is arrived at by adopting rules, some artificial, incorporated in section 10(2) of the Act. Prima facie, the allowance deductions and deemed profits shall be ascertained in terms of the statutory provisions, unless the statute itself accepts the principles of commercial accountancy in a particular case.

16. In the present case, the compensation to the extent mentioned in the proviso received only in the accounting year was by friction treated as profit. There is therefore no scope for holding that the expression received means 'receivable'.

17. For the aforesaid reason, we hold that, as the compensation for the loss of machinery and buildings by fire was not actually received by the company during the accounting year, the said amount could not be assessed during the assessment year.

18. In the result, the appeal fails and is dismissed with costs.

19. Appeal dismissed.


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