1993 (3) TMI 4 - SC - Income Tax

Whether Tribunal was right in law in holding that the devaluation surplus earned by the assessee consequent to the settlement of the claim by the insurance company is not assessable as revenue receipt - Whether Tribunal was right in holding that the profit earned by the assessee on account of devaluation of Indian currency was not in the course of carrying on the business or incidental to the business

Summary

Issues Involved:
1. Taxability of the excess amount received due to fluctuation in exchange rate.
2. Whether the devaluation surplus was a revenue receipt or a capital receipt.
3. Whether the payment received was incidental to the business or arose from business activities.

Detailed Analysis:

1. Taxability of the Excess Amount Received Due to Fluctuation in Exchange Rate:
The primary issue was whether the excess amount received by the assessee due to the devaluation of the Indian rupee was taxable. The assessee, a manufacturer of radiators, received compensation in dollars for copper ingots lost at sea, which, due to devaluation, resulted in a higher amount in rupees. The Income-tax Officer taxed this as income, but the Appellate Assistant Commissioner and the Tribunal considered it non-taxable, seeing it as a capital receipt and not arising from regular business activities. The High Court, however, held it taxable, viewing the transaction as part of the business.

2. Whether the Devaluation Surplus was a Revenue Receipt or a Capital Receipt:
The Tribunal and the Supreme Court found that the devaluation surplus was a capital receipt. The Tribunal noted that the goods were seized and sterilized, changing their character from stock-in-trade to something else. The Supreme Court agreed, stating that the ingots, not being directly usable as raw material in the assessee's business and having been lost before reaching Bombay, did not bear a direct nexus with the business. Thus, the surplus from devaluation was not income from business but a capital receipt.

3. Whether the Payment Received was Incidental to the Business or Arose from Business Activities:
The Supreme Court emphasized that for an income to be taxable under business income, it must arise directly from business activities. The ingots, intended to be converted into raw material, were lost before they could be used in the business. The compensation received was for the loss of goods, not for any business activity. The Court distinguished between insurance against loss of goods (capital receipt) and insurance against loss of profits (revenue receipt). Since the payment was for the loss of goods and the surplus arose due to devaluation, it was not taxable as business income.

Conclusion:
The Supreme Court concluded that the devaluation surplus was not taxable as it was a capital receipt and not arising from business activities. The High Court's decision was reversed, and the assessee's appeal was allowed, with costs awarded to the assessee. The questions referred to the High Court were answered in favor of the assessee and against the Department.