Case Note & Summary
The dispute arose from an income tax assessment for the assessment year 1949-50 regarding the taxability of insurance compensation received for assets destroyed by fire. The Revenue, as appellant, challenged the assessee's exclusion of Rs 27,06,593 from taxable income, while the assessee contended that the amount was received after the accounting year and therefore not assessable in that year. The context involved a fire on August 6, 1948, at the assessee's Bombay factory, which destroyed stock-in-trade, machinery, and buildings. The assessee had insured its assets with the General Assurance Society Ltd. under various policies for an aggregate sum of Rs 1,48,92,390. The insurance company ultimately paid Rs 65 lakhs in full settlement of the claim, but the payment was made only on March 27, 1950. Out of this amount, Rs 27,06,593 represented compensation for the loss of buildings and machinery, comprising Rs 4,24,205 for buildings and Rs 22,82,388 for machinery. Although the insurance company accepted the claim on December 13, 1948, the assessee did not include this sum in its return for assessment year 1949-50 because actual receipt occurred later. The Income-tax Officer included the amount on the ground that it became receivable in December 1948, treating it as taxable income for that year. The Appellate Assistant Commissioner allowed the assessee's appeal, holding that the amount could be assessed only when actually received under the fourth proviso to Section 10(2)(vii). The Income-tax Appellate Tribunal and the Calcutta High Court on reference upheld this view. The Revenue then appealed to the Supreme Court. The core legal issue was whether the expression 'received' in the fourth proviso to Section 10(2)(vii) meant actual receipt or included amounts that had accrued or become receivable, particularly when the assessee followed the mercantile system of accounting under Section 13. The Revenue argued that since the assessee maintained mercantile accounts, profits and gains should be computed on accrual basis, and the acceptance of the claim in December 1948 conferred a right to receive the amount, making it taxable in assessment year 1949-50. The assessee contended that there is a distinction between computation of profits under Section 13 and working out statutory allowances under Section 10(2); the fourth proviso expressly required actual receipt. The Supreme Court analysed the interplay between Section 13 and Section 10(2)(vii). It held that Section 13 deals with computation of commercial profits according to the method of accounting regularly employed, but assessable income is determined after applying statutory allowances under Section 10(2), which are artificial rules. Commercial accounting principles treat compensation for loss of capital assets as a capital receipt, not as trading profit. The fourth proviso to Section 10(2)(vii) introduces a fiction deeming excess insurance, salvage or compensation moneys received in respect of destroyed building, machinery or plant to be profits of the previous year in which such moneys are received. This fiction operates only on actual receipt and cannot be enlarged by importing another fiction that an amount receivable during the previous year must be deemed received. The Court further noted that the definition of 'paid' in Section 10(5), which incorporates the mercantile system of accountancy, indicates that in the case of other terms such as 'received' in Section 10(2), the Legislature intended their natural meanings. Therefore, the expression 'received' means actually received, not receivable. Accordingly, the Supreme Court dismissed the Revenue's appeal and confirmed that the sum of Rs 27,06,593 was not assessable for assessment year 1949-50.
Headnote
A) Income Tax - Computation of Business Profits - Accounting Method - Section 13, Income-tax Act, 1922 - Profits and gains must be computed in accordance with method of accounting regularly employed by assessee; commercial profits are basis but not identical to assessable income because statutory allowances under Section 10(2) are artificial rules. Held that compensation for loss of capital assets is not commercial profit and is outside profit and loss account. (Paras 1-8) B) Income Tax - Depreciation and Insurance Compensation - Fourth Proviso to Section 10(2)(vii), Income-tax Act, 1922 - Where insurance, salvage or compensation moneys are received in respect of destroyed building, machinery or plant, the excess over written down value and scrap value is deemed to be profits of the previous year in which such moneys are received. The proviso introduces a fiction treating capital receipt as taxable income only on actual receipt. Held that the fiction cannot be enlarged by importing another fiction deeming receivable as received. (Paras 1-8) C) Statutory Interpretation - Meaning of 'Received' - Section 10(2)(vii) and Section 10(5), Income-tax Act, 1922 - The expression 'received' in fourth proviso to Section 10(2)(vii) means actual receipt, not accrual or receivable; definition of 'paid' in Section 10(5) incorporating mercantile system indicates other terms like 'received' are to be given natural meaning. Held that receipt and accrual are distinct, and actual receipt is indispensable for the proviso to apply. (Paras 1-8) D) Income Tax - Assessment Year 1949-50 - Insurance Compensation for Destroyed Building and Machinery - Sum of Rs 27,06,593 not assessable in assessment year 1949-50 because actual receipt occurred on March 27, 1950, after the accounting year, despite claim acceptance in December 1948 and mercantile accounting. Held that under fourth proviso, taxability triggered by actual receipt, so Revenue's appeal dismissed. (Paras 1-8)
Issue of Consideration
Whether sum of Rs 27,06,593 received by assessee on March 27, 1950 from insurance company for destruction of building and machinery was assessable as profit of previous year relevant to assessment year 1949-50 under fourth proviso to Section 10(2)(vii) of Income-tax Act, 1922; and whether expression 'received' includes amounts receivable or accrued under mercantile system of accounting.
Final Decision
Supreme Court dismissed the Revenue's appeal, confirming that the sum of Rs 27,06,593 was not assessable as profit for the previous year relevant to assessment year 1949-50 under fourth proviso to Section 10(2)(vii) of Income-tax Act, 1922 because the amount was actually received on March 27, 1950, after the accounting year, and the expression 'received' in the proviso did not mean 'receivable'.
Law Points
- Profits and gains of business must be computed in accordance with method of accounting regularly employed by assessee under Section 13
- Income-tax Act
- 1922
- commercial profits are basis but not equivalent to assessable income
- statutory allowances under Section 10(2) are artificial rules
- fourth proviso to Section 10(2)(vii) deems excess insurance
- salvage or compensation moneys received in respect of destroyed building
- machinery or plant to be profits of previous year in which such moneys are received
- expression 'received' in proviso means actual receipt
- not receivable
- fiction introduced by proviso cannot be enlarged by deeming receivable as received
- definition of 'paid' in Section 10(5) indicates that other terms like 'received' are given natural meaning
- compensation for loss of capital asset is not commercial profit
