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TMI Blog1978 (1) TMI 1X X X X Extracts X X X X X X X X Extracts X X X X ..... ffice is at Hyderabad. The mill, however, is at Sirpur which came to be known as Khagaznagar. During the year ending on June 30, 1961, relevant to the assessment year 1962-63, there were two fire accidents in the assessee's factory one on December 6, 1960, which affected the paper machine shop No. III; the other was on March 21, 1961, in the boiler house. The machinery and the plant were covered by fire insurance. The company in all received a sum of Rs. 13,12,772 as compensation for the loss occurred on the occasion of both the fire accidents. Out of the said amount Rs. 11,92,146 related to paper machine shop No. III. Out of this amount Rs. 9,41,070 related to the buildings, plant and machinery. The assessee spent a sum of Rs. 1,57,713 in repairing the damages to the above assets and put all of them in working condition. The assessee credited the entire sum of Rs. 13,12,772 to the profit and loss account for the year ending June 30, 1961. The assessee for the year 1962-63 claimed before the Income-tax Officer the balance of Rs. 7,83,207 left after incurring expenditure on repairs, as a capital receipt as, according to it, it pertained to the fixed assets of the company. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ious year in which the moneys payable for the building, machinery, plant or furniture became due : Provided that where the building sold, discarded, demolished or destroyed is a building to which Explanation 5 to section 43 applies, and the moneys payable in respect of such building, together with the amount of scrap value, if any, exceed the actual cost as determined under that Explanation, so much of the excess as does not exceed the difference between the actual cost so determined and the written down value shall be chargeable to income-tax as income of the business or profession of such previous year. Explanation.--Where the moneys payable in respect of the building machinery, plant or furniture referred to in this sub-section become due in a previous year in which the business or profession for the purpose of which the building, machinery, plant or furniture was being used is no longer in existence, the provisions of this sub-section shall apply as if the business or profession is in existence in that previous year." Now, section 41(2) is a necessary corollary to section 41(1) in respect of allowed depreciation. According to it, if, in respect of any building, machinery, p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... along with it can be said to have been used but it was used only along with the other parts and not independent of them. Second : Now, the word " sold " used in this provision can relate only to the whole machinery and not to any part of it, however important it may be. It may be that separate parts of such machinery can be sold, but then we do not say that the machinery is sold. What we say is that a part of the machinery is sold and not the machinery. Similarly, if a part is damaged or found unworkable we replace it. We may have discarded that part but it is substituted by another part. Therefore, in such cases we do not say machinery is discarded. We only say that a part of the machinery having been found damaged is replaced. The same reasoning perhaps would apply to the words " destroy " or " demolish " used in section 41(2). The word " destroy " is a word in common usage, with well-defined non-technical meaning. As used in law, it does not in all cases necessarily mean complete annihilation or total destruction. But in the context and under particular circumstances the word many times has been defined as meaning totally obliterated and done away with as also made complet ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r which actual cost of a part can be determined; the provision is to determine the actual cost of the machinery as a whole. It is thus impossible to take a notional actual cost of the destroyed or damaged part of machinery and then work out its depreciation which could have been allowed in order to find out whether there is any excess amount left which can be charged to income-tax under this section. Neither this section nor any other postulates such a procedure. Likewise the term " written down value " is also defined in section 43(6). According to this provision it means " in the case of assets acquired before the previous year, the actual cost to the assessee less all depreciation actually allowed to him under this Act ........" How is it possible to determine firstly the actual cost of the part damaged, and, secondly to determine all depreciation which was actually allowed to the assessee in case of a part of the machinery when neither its actual cost was at any time determined nor any actual depreciation was allowed to the assessee on such a part previously. It cannot be in doubt that the depreciation " actually allowed " under the Act can mean only that amount which has bee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be discarded and it is clear that all machinery cannot become obsolete or unusable and be discarded at one and the same time ...... In the context of machinery or plant to be discarded, obviously, the clause can have no meaning if it is confined to the whole of the machinery or plant." It is upon this analogy that the High Court came to the conclusion that the word ' building ' is used in the same context. We, therefore, think that necessarily in the context in which the word ' building ' is used it must also include part of the building ". The second ground in support of that conclusion assigned was "obviously, where a case is contemplated of destruction of a building, machinery or plant, the provision would make no sense if we were to confine its operation to the whole or total destruction of the building, machinery or plant. On the other hand, having regard to the fact that this is a business allowance and granted as a balancing payment to an assessee running a business, it would be available to the assessee even though part of the building, machinery or plant was destroyed. The first thing to be noted is the difference in content and Language of section 10(2)(vii) of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... amount of Rs. 7,83,207 represents really the business profit. We do not find any force in this contention also. To attract section 14 read with the relevant provision the income must arise from profits and gains of business. Surely, it cannot be argued and in fairness we must say that it was not argued that to set fire to the assets and get compensation from the insurance company can be said to be part of the business of the assessee. The Tribunal, in our view, rightly rejected such an approach. Section 56 also cannot be said to be attracted obviously because it is not an income from any other source. The hard fact is that a part of the asset was damaged by the fire for which compensation was received. The compensation, therefore, replaces the asset and is a substitute for the part of the asset damaged. It could not be doubted that if machinery was sold damaged or destroyed, the compensation received would be asset and not profit or gain in the business. The same thing applies to a part of the machinery damaged or destroyed. Merely because the assessee saved some amount out of compensation by adopting a device to repair the machinery instead of substituting it, we fail to see how ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tain sum from the insurance company representing the replacement value of the destroyed timber but only a small part of the timber in fact was replaced. The balance did not appear in the profit and loss account, but appeared as reserve in the balance-sheet. It was held that the whole sum received was a trading receipt to be taken into account in computing the profits assessable to income-tax. It will be immediately evident that the injury was to the trade and not to the capital. Similar is the case with Ensign Shipping Co. Ltd. v. Commissioners of Inland Revenue [1928] 12 TC 1169 (CA). In the circumstances of that case it was rightly held to be a trading receipt. We do not think A. W. Walker and Co. v. Commissioners of Inland Revenue [1920] 12 TC 297 (KB) decides in any manner anything contrary to what we have said above. Rex v. B. C. Fir and Cedar Lumber Co. [1932] AC 441 also is a case which does not come closer to the facts of the instant case so as to provide a parallel. Money received by manufacturer under fire policies insuring them in respect of loss of net profits that could have accrued had there been no interruption of business caused by fire is held to be income ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... with most of these articles. It is sufficient to mention that article I relates to the first phase of technical assistance ; article II concerns itself with the second phase of technical assistance. The finding of all the tax authorities is that the agreement was determined immediately after the conclusion of the first phase. This finding was not challenged on any ground before us. The first phase incorporated in article I read as under : Section 1 " Kimberly shall conduct in the United States such technical, engineering, research, designing and development services as in its judgment are required to enable the existing mill of Sirpur to manufacture in an efficient and economical manner quality papers and increase its production. " Section 2 " Kimberly shall furnish to Sirpur in India, at Sirpur's expense, qualified technicians who shall put into practice for Sirpur in India the services performed by Kimberly for Sirpur under section 1 of this article. Such number of technicians shall be furnished on a permanent basis as are deemed necessary by Kimberly. On a temporary basis Kimberly shall furnish such additional technicians as are deemed necessary in its judgment to effec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ent can be said to have been a deductible revenue expenditure. Now, under section 37(1) of the Act any expenditure laid out or expended wholly and exclusively for the purposes of the business or profession shall be allowed in computing the income chargeable under the head " Profits and gains of business or profession ". Whether a particular outlay by a businessman can be set against income or must be regarded as capital outlay has proved to be always a difficult question. It has led to a long string of cases in India as well as in England. Although decisions in this respect appear to take conflicting views, they can perhaps be reconciled but it seems more difficult to reconcile all the reasonings they give. In these circumstances, the true view appears to be that while each case is found to turn upon its own facts, and no infallible criterion emerges, nevertheless the decisions are useful as illustrations and as affording indications of the kind of considerations which may relevantly be borne in mind in approaching the problem. It is neither possible nor perhaps desirable to lay down any rigid test, for determining such a question. In a rough and broad way one can, however, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ry on research for a certain definite purpose and effectively apply the fruits of the research to the existing mills to increase efficiency and production by effecting economy in the production. That was the limited purpose of phase 1. When once it is found that the payments so far made to Kimberly were meant only for the above purpose under the first phase then there is no difficulty in reaching the conclusion that the amount has not been spent once and for all achieving the purpose for all time to come. Increasing efficiency and production is a thing which is a continuous process like effecting economy. Various devices can even afterwards be employed to achieve further efficiency, enlarge further the production and effect yet more economy. It was nobody's case that the use of this technical know-how increases the efficiency and production to a saturation limit or the economy thus effected has now got into a blind lane. There is bound to be continuous expenditure on this very process in order to keep up the tempo of quality production. Thus technical know-how has not at all brought into existence an asset or an advantage of enduring character to the assessee's trade. The trade is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r of the assessee and against the department. We then proceed to consider the fourth question. It relates to the accounting year 1964-65. The assessee claimed deduction of Rs. 4,413 as expenditure incurred on the foreign tour of G. P. Birla who is the chairman of the board of directors of the company. It was urged before the Income-tax Officer that he had gone to USA to discuss and finalise with Kimberly the question relating to the modernisation of the assessee-company and its expansion programme. The Income-tax Officer concluded that the foreign tour expenditure brought benefit of a very enduring nature. He, therefore, disallowed the claim. The Appellate Assistant Commissioner for the same reason disallowed the claim after agreeing with the view of the Income-tax Officer. The Tribunal felt that the expansion scheme had proved abortive. What resulted from the foreign tour was the utilisation of the technical know-how in the day to day production of the assessee's mill. The Tribunal, therefore, allowed only Rs. 503 out of the claim said to have been incurred for running the existing business. The Tribunal, however, upheld the disallowance of the balance. It was common groun ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... th December, 1960, and the other on 21st March, 1961. The assessee carried on the business of manufacturing different varieties of paper in the factory and as a result of these two fires considerable damage was caused in the factory of the assessee. The first fire caused damage to the building, plant and machinery in paper machine shop No. III and the second fire in the boiler house. The building, plant and machinery were all covered by fire insurance and in respect of the loss caused, the assessee received an aggregate sum of Rs. 13,12,772 by way of compensation. This amount of Rs. 13,12,772 included a sum of Rs. 9,41,070 in respect of damage caused to the building, plant and machinery of paper machine shop No. III. The assessee spent a sum of Rs. 1,57,813 in carrying out repairs to the building, plant and machinery of paper machine shop No. III and restoring the same to working condition. This left a balance of Rs. 7,83,207 in the hands of the assessee and in the assessment of the assessee for the assessment year 1962-63, the question arose whether this amount was liable to be included in the total income of the assessee as a revenue receipt. The Income-tax Officer took the view ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gly held that the sum of Rs. 7,83,207, being capital receipt, was not assessable to tax. This led to an application by the revenue for a reference and on the application, the following two questions were referred by the Tribunal for the opinion of the High Court : " 1. Whether, on the facts and in the circumstances of the case, the receipt of Rs. 7,83,207 being part of the amounts received from the insurance companies by the assessee was a capital receipt or revenue receipt ? 2. If it is held to be capital receipt, whether on the facts and in the circumstances of the case the said sum of Rs. 7,83,207 is deductible from the written down value of the plant and machinery as at the commencement of the accounting year relevant for the assessment year 1962-63 ? " The revenue reiterated its contention before the High Court that the sum of Rs. 7,83,207 received by the assessee represented revenue receipt in its hands, but this contention was rejected by the High Court and it was held that this amount was in the nature of capital receipt. The revenue then contended that even if this amount represented capital receipt in the hands of the assessee, it was exigible to capital tax by reas ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d. It can have no application where the plant or machinery is merely damaged and by repairing the damage it is restored to working condition. Here, it was clearly found by the Tribunal, and that was in fact common ground between the parties, that the plant and machinery was partly damaged by fire and after repairing this damage, the plant and machinery was recommissioned for the factory. It was not the case of the revenue, nor was it so found by the Tribunal, that leaving aside the whole of the plant and machinery, even a part of it was sold, discarded, demolished or destroyed. There was, therefore, no scope for the applicability of section 41, sub-section (2), and in fact this provision was not even invoked before the Tribunal by the revenue. What the revenue did was merely to invoke the analogy of section 41, sub-section (2), and the Tribunal rightly held that in the absence of specific provision in the Act, the amount received by the assessee in respect of damage to the plant and machinery could not be brought to tax. It will, therefore, be seen that on the facts found by the Tribunal, section 41, sub-section (2), had no application at all and it was wholly unnecessary for the H ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ction. The appeals before the Tribunal in respect of the assessment years 1965-66,1966-67 and 1967-68, came to be heard after the decision given by it in the appeal in respect of the assessment year 1961-62, but before Reference Case No. 93 of 1970 came to be decided by the High Court. The Tribunal, following its earlier decision in the appeal in respect of the assessment year 1961-62, held in each of the appeals before it that the expenditure incurred by the assessee on the maintenance of the guest house was not in the nature of entertainment-expenditure and was hence allowable as admissible expenditure. The revenue, being aggrieved by the order of the Tribunal, applied for a reference in each assessment year and on the application of the revenue the following question of law was referred by the Tribunal for the opinion of the High Court. " Whether, on the facts and in the circumstances of the case, the amount expended by the assessee for the maintenance of a guest house at Sirpur for each of the assessment years 1965-66, 1966-67 and 1967-68 is not entertainment expenditure? " The High Court, following its earlier decision in Reference Case No. 93 of 1970, agreed with the view ..... X X X X Extracts X X X X X X X X Extracts X X X X
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