COMMISSIONER OF INCOME TAX Vs. MOON MILLS LTD

JUDGEMENT

(1.) THIS is a reference under s. 66(1) of the Indian IT Act. The only question involved in this case is whether the word "received" in the fourth proviso to s. 10(2)(vii) of the Act means "receivable" in the case of an assessee who keeps his accounts on the mercantile system.

(2.) THE facts of this case lie within a very narrow compass. A fire broke out in the mills of the assessee on August 6, 1948, destroying substantial portions of its stock intrade, machinery and buildings. THE said assets were covered by several insurance policies of the General Assurance Society Limited : (1) in respect of general specification, (2) specific stock policies and (3) consequential loss policies for an aggregate sum of Rs. 1,48,92,390. Reinsurance had been effected by the said insurance company with other companies. THE assessee preferred a claim on the in surance company, which appointed assessors to survey the same. On 27th Nov., 1948, the assessee company wrote to the insurance com pany offering to accept Rs. 65,00,000 in full settlement of all its claims with stipulation that the offer should be accepted within fifteen days of the said date and the amount should be paid by 15th Jan, 1949. THE offer was accepted by the insurance company on 7th Dec., 1948, and confirmed in a final meeting of the company held on 13th Dec., 1948. Whatever be the reason the assessee did not receive payment of its claim before 27th March , 1950. THE assessee who observed the mercantile system of accounting, took of Rs. 9,93,938 representing the estimated value of stock destroyed and Rs. 3,75,000 for consequential loss into its profit and loss account for the calendar year 1948. It however, kept out Rs. 27,06,593 determined under s. 10(2)(vii) as compensation for loss suffered in respect of building and machinery from the PandL a/c for the year 1948, on the ground that the compensation had actually not been received until 27th March 27, 1950. According to the ITO the "deemed profit" also should have been taken into account in the calendar year 1948, as in the case of stock destroyed and onsequential loss policies. THE ITO's contention was that as the mercantile system of book keeping was observed by the assessee the "deemed profit" became receivable and the insurance company became the assessee's debtor on 13th Dec., 1948. THE assessee's contention, however, is that the compensation received for destruction of the machinery and buildings was not a revenue receipt but represented a capital receipt and in normal circumstances would not be taken into account in computing its profits and that as it was only be a fiction of the law that the excess indicated in the proviso to s. 10(2)(vii) became profit it could assume that character in the words of the section only when it was actually received. THE question of law referred to this Court is :

(3.) SEC. 13 of the Act, however, lays down the computation is to take place in terms of s. 10 and 12. Consequently, the provisions of s. 10 must complied with. Under s. 10(1) an assessee has to pay tax in respect of profits and gains of any busi ness, profession or vocation carried on by him. Sub s. (2) enume rates allowanced admissible for the purposes of computation of profits and gains. Ordinarily moneys received by way of compensation from and insurance company for loss capital assets would not figure at all in the computation of income and profits but inasmuch as an assessee is entitled to allowances for depreciation year after year the Legisla ture thought that the entire amount of compensation should not be left untouched. SEC. 10(2)(vii) permits allowances as follows :