SRINIVASAN J. - The assessee is a registered firm carrying on business in the Federated Malay States. During the war, some of the properties, admittedly the stock-in-trade of the assessees business, suffered damage. In computing the profits and the loss of such businesses which sustained losses during the war period, the Central Board of Revenue formulated a special scheme according to which all the losses claimed by the assessee during the war period were allowed to be set off successively against the assessments of 1942-43 and 1941-42. It is common ground that in pursuance of this scheme the assessee obtained reductions of his tax liability in respect of losses computed at Rs. 65,197 and Rs. 1.29,028 during those two years.
In the post-war year, a War Damages Commission was constituted in the Federated Malay States and person whose properties had suffered damage as a result of the war were granted compensation. During the period relevant to the assessment years 1954-55 and 1956-57, the assessee received compensation amount of 14,169 dollars and 5,479 dollars respectively. These amounts were brought to assessment by the Income-tax Officer in the respective accounting years. The assessee appealed against the assessment. The Appellate Assistant Commissioner pointed out that the assessee had failed to produce any relevant records to show the various heads under which the compensation had been granted. He observed that the compensation could be of different types, such as for loss of stock-in-trade, rubber stock, implements, damages of properties, rubber gardens, etc., and that unless these particulars were known, it was not possible to say whether the receipt was of a capital in nature or not. He further held that the appellant was admittedly a dealer in properties and that even assuming that a part of the compensation covered damages to house properties or rubber gardens, the receipt could only be of a trading nature; in any even, since no details were produced by the assessee, the assessments were upheld. In the further appeals to the Tribunal, the same contentions were reiterated. The Tribunal accepted the view that since the loss had been allowed for in the scheme period and was evidently treated as a revenue loss, its recuperation by the grant of compensation in the subsequent year must equally be treated as a revenue receipt. It also held that the assessee, having received the benefit under the special scheme, could not be heard to say that the amount received later in respect of the very same loss was anything other than income.
On the application of the assessee, the following two questions were referred for the determination of this court :
'1. Whether the war damage receipts of 13,889 dollars and 5,479 dollars constitute income of the assessee for assessment in the years 1954-55 and 1956-57 respectively ?
2. Whether replantation dividend receipts of 20,272 dollars and 14,408 dollars constitute income of the assessee for assessment in the years 1954-55 and 1956-57 respectively ?'
At the outset it may be emphasised that the assessee was a dealer in properties and the loss occasioned as a result of the war was in fact taken into account in assessing the liability of the assessee. This loss was however set off against the assessment year 1942-43 firstly and any remaining loss was carried backwards to the assessment year 1941-42. We have stated earlier the precise amounts in respect of which allowance was granted under this head under the special scheme in respect of those two assessment years. Whether in making the claim the assessee treated the entirety of the stock-in-trade as lost or not, learned counsel for the assessee was not able to state. He pleaded that no records were available which would show under what heads the claim to loss during the war period had been made and was allowed. But what he contends is that any allowance granted under the special scheme was an allowance de hors the Income-tax Act and was not one that was computed under section 10 of the Act. According to him, therefore, no allowance had in fact been granted to him for the losses in the computation of his income from business under section 10 of the Act, so that this subsequent receipt from the War Damages Commission cannot be taken into account at all. In the alternative, it is urged that the whole of the receipt cannot in any event be taxable as it might include a receipt attributable to a capital loss. We have already pointed out that in the absence of any details whatsoever of the loss as it was claimed under the special scheme, it is impossible to say whether any loss even of a capital nature was taken into account in granting relief to the assessee under the special scheme. This argument base upon the need for splitting up this receipt into capital and revenue does not therefore arise now.
According to the learned counsel for the assessee, all the balances outstanding were retained in the books of the assessee notwithstanding the allowance for the loss in the scheme period. He claims for the war years onwards the value of the assets continued to be carried on in the books of the assessee without being written off. If that is so it is urged that only the difference between what was received from the War Damages Commission and the book value of assets should be treated as income in his hands. The question is whether this is correct.
It is no doubt true that in a decision of this court in Muthiah Chettiar v. Commissioner of Income-tax : 35ITR339(Mad) , it was held that from a purely legal point of view the special scheme under which certain reliefs were given to the assessee were brought into existence an agreement between the assessee and the Government. But the liability of the assessee to pay any tax was created solely by the Indian Income-tax Act and cannot be rested upon any provision in the agreement. It was also held that to the extent to which the law of Malaya revived debts and enabled the assessee to receive further payments, those payments must be properly allocated between the principal and the interest while the interest alone should be treated as a receipt of income nature, how the principal could not be brought to tax on the basis of any clause in the special scheme. In London Investment and Mortgage Co. V. Inland Revenue Commissioners : 34ITR43(Cal) , the court of Appeal held that any compensation received under the War Damage Act in respect of the circulating capital of a trader could not be taken out of the category of a trading receipt and that the principle that where a trader sells or disposes his circulating capital, the proceeds were to be treated as a trading receipt, was not confined to cases where the circulating capital was lost but applied prima facie to cases of receipts which represented what had been lost by the destruction of the stock-in-trade. This decision was affirmed in appeal by the House of Lords in London Investment & Mortgage Co. Ltd. v. Worthington (1958) 38 Tax. Cas. 86.. If, therefore, the compensation received by the assessee was in respect of his trading assets or circulating capital, it must be brought to tax as a trading receipt. We have already pointed out that no material was produced by the assessee to establish that any part of this receipt covered a loss of capital nature.
The further argument of the assessee is that since the lost or damaged assets retained a certain value in his books of account, only the difference between the amounts received by him and the book value of the assets should be brought to tax. Here again, we are unable to agree with the assessee. While the authority of the decision of this court in Muthiah Chettiar v. Commissioner of Income-tax : 35ITR339(Mad) establishes that the taxability of any receipt must be rested upon the provisions of the Indian Income-tax Act, and cannot be maintained on any of the provisions of the special scheme, there is no doubt that in evaluating the book value of the assets, the principles on which the special scheme was intended to be worked can be relied upon. If, as we hold, the assessee put forward the claim that the entirety of the properties had been lost through enemy action and obtained relief under the special scheme on that basis, it should necessarily follow that the value of the relevant assets was taken to be nil at that time. The mere circumstances that the assessee did not write off the value in his books of account on and after his acceptance of the benefits of the special scheme does not mean that those assets continued to carry any value whatsoever. The book value of the relevant assets was accordingly nil and when in replacement of these assets the assessee obtained compensation from the War Damages Commission, the entirety of that amount has, therefore, to be treated as profit liable to tax.
The second question relates to the replantation dividend receipts. This question came up for out consideration in two earlier cases - T. C. Nos. 115 of 1959 and 36 of 1959 [Meenakshi Achi v. Commissioner of Income-tax  50 I.T.R. 206.. The contention that was then put forward by the assessee was that this constituted a capital receipt. On a consideration of the relevant statute of Malaya which granted this replantation dividend to the assessee, we held that it was a receipt which was assessable to income-tax. Learned counsel for the assessee concedes that this decision is against him.
In the result, we answer both the questions against the assessee who will pay the costs of the department. Counsels fee Rs. 250.