AMARTAARA LTD Vs. COMMISSIONER OF INCOME TAX

JUDGEMENT

(1.) THIS reference is made by the Tribunal under S. 256(1) of the IT Act, 1961, at the behest of the assessee. It concerns asst. year 1978 -79, corresponding to the previous year ending 31st Aug., 1977. Accordingly, the following question of law has been referred to the High Court under S. 256 (1) :

(2.) THE assessee Amartaara Ltd. is a public limited company. The assessee, along with two other companies, as associate companies, had taken out five (5) policies of insurance under which loss or damage by fire to their buildings, plant and machinery, stock -in -trade, etc. was covered. On 15th Aug., 1976, there was a fire in the factory of the assessee and the building, machinery and stock - in -trade were destroyed. On 19th Aug., 1976, the insurance company addressed a letter to the assessee and to their associate companies, stating that the insurance company had appointed M/s Mahesh Mehta to survey and assess the loss suffered by the assessee and that on receipt of the survey report, the insurance company shall proceed to settle the claim of the assessee. In the meantime, the assessee was directed to forward the police report and the fire brigade report. On 29th Oct., 1976, the assessee addressed a letter to the insurance company to pay at least Rs. 12.50 lakhs on -account. They also submitted the police report and the fire brigade report to the insurance company. However, the insurance company paid to the assessee, Rs. 8.50 lakhs on 17th Dec., 1976, on -account. By letter dt. 24th Sept., 1977, the insurance company made it clear to the assessee that the claim made by the assessee was fraudulent and false. By the said letter they were called upon to refund the on -account payment made to the assessee. They also repudiated their liability under cl. 13 of the insurance policy on the ground of collusion between the assessee and the surveyor. On 22nd Dec., 1977, the assessee instituted on the original side of the High Court, Suit No. 242 of 1979 for a decree against the insurance company for Rs. 16.44 lakhs with further interest at 18 per cent p.a. from the date of the suit till payment. In para 6 of the plaint, the assessee contended that the insurance company was fully satisfied of the loss suffered by the assessee, but the ascertainment of the quantum was likely to take time and, therefore, payment by the insurance company to the assessee amounting to Rs. 8.50 lakhs was in part -payment of the loss suffered by the assessee due to the said fire. In the same paragraph, according to the assessee, the insurance company had admitted and accepted the validity of the assessee's claim, but pending quantification, Rs. 8.50 lakhs was paid by the insurance company for minimum loss suffered by the assessee. Therefore, the suit was filed by the assessee for recovery of the balance amount of Rs. 13.31 lakhs with interest at 18 per cent p.a. In the said suit, the insurance company has filed a written statement with their counter -claim. As stated above, the fire took place on 15th Aug., 1976. As stated above, Rs. 8.50 lakhs was received by the assessee on 17th Dec., 1976. Although the fire took place on 15th Aug., 1976, i.e., during the asst. year 1977 -78, the ITO accepted the contention of the assessee that till the insurance company accepted its liability to pay payment, the receipt cannot be brought to tax on accrual basis. Accordingly, the ITO brought to tax Rs. 8.50 lakhs in the assessment year in question i.e., 1978 -79 as the amount of Rs. 8.50 lakhs was received by the assessee during the asst. year 1978 -79. Accordingly, vide assessment order dt. 14th Aug., 1980, receipt of Rs. 8.50 lakhs received by the assessee was treated as income for asst. year 1978 -79. It was held by the ITO that Rs. 8.50 lakhs was received towards total damage suffered by the assessee and their associate companies. Accordingly, on pro rata basis, the ITO held that Rs. 7.75 lakhs was received by the assessee herein and that amount was treated as "income" and it was brought to tax accordingly. Being aggrieved, the assessee carried the matter in appeal to CIT(A). The order of ITO was confirmed. Being aggrieved the matter was carried in appeal to the Tribunal which took the view that by payment of Rs. 8.50 lakhs, the insurance company had acknowledged their liability to pay the assessee and their associates. That, Rs. 8.50 lakhs was paid on -account. That, by such payment on -account, the insurance company had acknowledged its liability to pay the assessee and their associates. That, subsequent quantification for pendency of the suit in the High Court was irrelevant. That, s. 41(2) of the Act was not invoked by the Department. Consequently, the Tribunal accepted the case of the Department. Being aggrieved, the matter has come by way of reference to this Court. The assessee had filed suit No. 242 of 1979, which was unconditionally withdrawn by the assessee on 31st July, 1998. Arguments

(3.) THE short question which arises for determination in this reference is whether receipt of Rs. 8.50 lakhs was taxable as income if so, whether it was taxable in the asst. year 1978 -79 ? We are confining our judgment to the facts of this case. At the very outset, we may also clarify that no evidence has been led by the assessee giving apportionment of the loss suffered by them on account of damage to plant, machinery and building on one hand and damage to stock -in -trade on the other hand. As stated hereinabove, it has been vehemently urged on behalf of the assessee in the reference that payment of Rs. 8.50 lakhs was "on -account" payment. That, it was an ad hoc payment. That, by such payment, the insurance company has not admitted its liability to compensate the assessee and, therefore, no income accrued to the assessee. This was the argument of the assessee before the CIT(A) and the Tribunal also. In support of their case, the assessee had relied upon the suit instituted by them in the High Court, being suit No. 242 of 1979. The plaint has been annexed to the paper book (minus the insurance policy). However, vide para 6 of the plaint, the assessee averred that payment of Rs. 8.50 lakhs by the insurance company was in part -payment of the loss suffered by the assessee. That the insurance company was fully satisfied of the loss suffered by the assessee. That, only ascertainment of the quantum was deferred. That, by payment of Rs. 8.50 lakhs the insurance company had admitted and accepted the validity of the assessee's claim. That, Rs. 8.50 lakhs was paid on account of minimum loss suffered by the assessee. In the circumstances, it is assessee's own case in the plaint, relied upon by the assessee before the Department in the assessment proceedings, that Rs. 8.50 lakhs was in part -payment of the loss suffered by them and that the insurance company had accepted the validity of their claim by making such payment. This fact is very important, particularly when the assessee chose to rely upon the plaint in support of their case before the Department. The question as to whether a receipt was taxable as income was required to be proved by the Department. However, in this case, that burden stands discharged when the assessee has relied upon the plaint in the suit in which they have averred that Rs. 8.50 lakhs was paid on account of minimum loss suffered by them and that by such payment, the insurance company had admitted and accepted the validity of the claim of the assessee. It has been urged before us repeatedly by the assessee that income accrues when the insurance company accepts their liability. On their own showing in para 6 of the plaint, according to the assessee on payment of Rs. 8.50 lakhs the insurance company had accepted their liability. In the circumstances, in the assessment year in question income accrued to the assessee. In fact, for the earlier year the assessee had contended before the ITO that the insurance company had not accepted their liability nor had the insurance company paid any compensation in that earlier year and, therefore, it was argued by the assessee for the earlier year that income had not accrued, either on accrual basis or on receipt basis. This argument was accepted by the ITO for the earlier year. However, in the asst. year 1978 -79, Rs. 8.50 lakhs was received and it is the case of the assessee that this amount, paid by the insurance company, amounted to acceptance of the liability by the insurance company. It is now well settled that receipt of compensation in such matters could be on capital account or on revenue account. One has to go by the facts of each case. We are confining our judgment to the facts of this case. Accordingly, we answer the above question in the affirmative i.e., in favour of the Department and against the assessee. Conclusion