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Issues: Interpretation of the term "received" in the fourth proviso to section 10(2)(vii) of the Indian Income Tax Act for an assessee following the mercantile system of accounting.
Analysis: The case involved a dispute regarding the treatment of compensation received by an assessee for loss of capital assets due to a fire incident. The primary issue was whether the compensation should be considered as profit in the year it was offered by the insurance company or in the year it was actually received. The Income Tax Officer contended that under the mercantile system of accounting, the compensation became receivable when the offer was accepted, making it taxable in the year of offer. However, the assessee argued that the compensation was a capital receipt and should only be considered as profit when actually received. The central question referred to the court was whether the compensation amount was assessable as profit for the relevant assessment year under the Income Tax Act. The court analyzed the provisions of the Income Tax Act, specifically section 10(2)(vii) which deals with allowances for compensation received for destroyed assets. The court emphasized that under the mercantile system of accounting, income is recognized when it becomes legally due, even if not physically received. Referring to previous judgments, the court highlighted that profits are not solely based on actual receipt but also on accrual or arising of profits. It was noted that the legislature intended to tax the entire compensation amount to prevent undue tax benefits. However, the court stressed that the fiction of deeming the excess compensation as profit should only apply when the amount is actually received, as per the provisions of the Act. The court further discussed the interpretation of the term "paid" in section 10(5) of the Act, emphasizing that the word "received" in section 10(2)(vii) should have a similar meaning if intended by the legislature. The court rejected the argument that the interpretation of "paid" was unnecessary, stating that the scope of taxing non-trading receipts should be limited. Ultimately, the court upheld the assessee's argument that the compensation should only be treated as profit when actually received, ruling in favor of the assessee and directing that the costs of the reference be borne by the assessee. In a concurring opinion, Justice Asim Kumar Ray agreed with the negative answer to the question posed in the reference, affirming the decision that the compensation amount should not be considered as profit until actually received. The judgment provided clarity on the treatment of compensation under the Income Tax Act for assessee following the mercantile system of accounting, emphasizing the importance of actual receipt in determining taxable profits.
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