1965 (10) TMI 21 - SC - Income Tax

Whether the sum of 27, 06, 593 was assessable as a profit of the assessee-company of the previous year relevant to the assessment year 1949-50 in accordance with the fourth proviso to section 10(2)(vii) of the Indian Income-tax Act ? Held that - Prima facie the allowances 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. In the present case the compensation to the extent mentioned in the proviso received only in the accounting year was by fiction treated as profit. There is therefore no scope for holding that the expression received means receivable . For the aforesaid reasons 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. Appeal dismissed.

Issues Involved: Assessability of compensation received for loss of building and machinery due to fire under the fourth proviso to section 10(2)(vii) of the Indian Income-tax Act, 1922.

Issue-wise Detailed Analysis:

1. Facts of the Case:
The respondent, a joint stock limited company, experienced a fire on August 6, 1948, resulting in the destruction of its stock-in-trade, machinery, and buildings. The company received Rs. 65 lakhs from the insurance company in full settlement of its claim, with Rs. 27,06,593 attributed to the loss of building and machinery. The company did not include this amount in its return for the assessment year 1949-50, as it received the amount on March 27, 1950. The Income-tax Officer included the amount in the taxable income for the assessment year 1949-50, arguing it became receivable on December 13, 1948. On appeal, the Appellate Assistant Commissioner and the Income-tax Appellate Tribunal held that the amount could only be assessed when actually received. The High Court upheld this view, leading to the present appeal by the revenue.

2. Revenue's Contention:
The revenue argued that since the company maintained its accounts on a mercantile basis, the profits and gains should be computed accordingly. The claim was accepted by the insurance company on December 13, 1948, making it part of the taxable income for that year.

3. Company's Contention:
The company argued that there is a distinction between commercial accounting and statutory allowances under section 10(2) of the Act. While profits on a mercantile basis are computed on accrual, the compensation amount under the third proviso to section 10(2)(vii) could only be taxed when actually received.

4. Legal Provisions and Interpretation:
Section 13 of the Act mandates that income, profits, and gains be computed according to the method of accounting regularly employed by the assessee. Section 10(2)(vii) deals with allowances for loss of building, machinery, or plant. The fourth proviso introduces a fiction that compensation exceeding the difference between the written down value and the scrap value is deemed to be the profits of the previous year in which such money is received. The court emphasized that this fiction cannot be enlarged to imply that "receivable" means "received."

5. Commercial Accountancy vs. Statutory Allowances:
The court distinguished between commercial profits and assessable income. Commercial profits are the basis for taxable income, but assessable income is determined after making statutory allowances. The compensation for loss of capital assets is not included in commercial profits but is treated as profit by statutory fiction.

6. Judicial Precedents:
The court referred to Gresham Life Assurance Society Ltd. v. Styles, Calcutta Co. Ltd. v. Commissioner of Income-tax, and Keshav Mills Ltd. v. Commissioner of Income-tax to elucidate the meaning of "profits." It also discussed the distinction between mercantile and cash systems of accounting. The court cited Commissioner of Income-tax v. Ajax Products Ltd. and Commissioner of Income-tax v. Bipinchandra Maganlal & Co. Ltd. to highlight the difference between commercial accountancy and statutory allowances. The decision in Green v. Gliksten & Son Ltd. was distinguished as it dealt with stock-in-trade, not capital assets.

7. Conclusion:
The court concluded that the compensation received for the loss of machinery and buildings by fire could not be assessed during the assessment year 1949-50 as it was not actually received in the accounting year. The appeal was dismissed with costs.

Final Judgment:
The appeal fails, and the decision of the lower authorities is upheld. The compensation amount could not be assessed during the assessment year 1949-50 as it was received only on March 27, 1950. The appeal is dismissed with costs.

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