RAGHUVANSHI MILLS, LTD Vs. COMMISSIONER OF INCOME-TAX

JUDGEMENT

(1.) The question that arises in this reference is whether the two sums of Rs. 8,25,000 and Rs. 5,75,000 received by the assessee, the Raghuvanshi Mills, Ltd., Bombay, on September 8, 1944, and on December 22, 1944, respectively, are subject to tax.

(2.) The company came to receive these two sums in these circumstances. A fire broke out in the company's mills on January 18, 1944, with the result that the buildings, etc, were destroyed and there was a cessation of the manufacturing activities of the company. The company had taken out a policy with the South India Fire and General Insurance Company, Limited, and with other insurance companies of the nature known as "Consequential Loss Policies." These policies indemnified the company against any loss of profits which might result as a consequence of any fire that may break out, and it is not disputed before us that these two sums were received by the assessee company as an indemnity for the loss suffered by them of their profits because of the cessation of the company's activities as a manufacturing company.

(3.) Sir Jamshedji's contention is that these sums are not liable to tax because they do not represent the profits earned by the assessee but they have been received on an indemnity and they should be looked upon more as a windfall than as something earned during the course of the business of the company. In my opinion that contention is fallacious. These sums received by the company represent the profits which the company would have earned, but for the fact of the fire having broken out. They take the place of the profits which would normally have been earned by the company and clearly as profits which would also be available for distribution to the shareholders of the company. They do not represent a windfall because the company was careful and cautious enough in the course of its business to insure itself against the contingency of a fire breaking out. But it is unnecessary to labour this point because this very question was considered by the Privy Council in Rex V/s. B.C. Fir and Cedar Lumber Co. [1932] A.C. 441 and the conclusion they came to was the same as the conclusion reached by the Income-Tax Appellate Tribunal from which this reference has been preferred. In that case also the company was insured against loss of profits. A fire had broken out with the result that it made it impossible for the company to earn profits and the company received the amount of the policy from, the insurance company; arid their Lordships of the Privy Council took the view that the insurance receipt was the product of a revenue payment prudently made by the respondents to secure that the gains which might have been expected to accrue to them had there been no fire should not be lost, but should be replaced by a sum equivalent to their estimated amount. Their Lordships also took the view that the receipt was one of which it could fairly be said that it arose from the business of the respondents because, in their Lordships opinion, the receipt was inseparably connected with the ownership and conduct of the respondents business. Had the respondents not been insured under their main fire policies, these policies would not have been available to them. In the case before their Lordships, the policies were called "use and occupancy policies." Their Lordships also considered the argument advanced before us by Sir Jamshedji that the receipt should be looked upon as a windfall. They rejected that argument holding that it was an ordinary receipt in the sense, not that it would occur every year or regularly at stated intervals, but in the sense that in the case of a business prudently conducted it would ordinarily be received so often as the risk insured against materialized.