Full Judgment Text
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PETITIONER:
RAGHUVANSHI MILLS LTD.
Vs.
RESPONDENT:
COMMISSIONER OF INCOME-TAX,BOMBAY CITY.
DATE OF JUDGMENT:
03/11/1952
BENCH:
BOSE, VIVIAN
BENCH:
BOSE, VIVIAN
MAHAJAN, MEHR CHAND
DAS, SUDHI RANJAN
HASAN, GHULAM
CITATION:
1953 AIR 4 1953 SCR 177
CITATOR INFO :
F 1959 SC 814 (16,18,45,48)
R 1965 SC1227 (6)
E&D 1992 SC1495 (17,22,23)
ACT:
Income-tax-Moneys received under "consequntial loss
policies" -- Whether income-Assessability-Definition of
income"-Exemption of receipt not arising out of business-
Indian Income-tax Act, (XI of 1922). ss (6C), 4 (3) (vii).
HEADNOTE:
The appellant mills had insured its building, plant and
machinery with various insurance conapanies against fire and
had also taken out some -policies of the type known. as "
consequential loss policies " which insured against loss of
profits, standing charges and agency commission. The mills
were completely destroyed by fire and the appellant received
certain sums of money under the consequential loss policies.
Held, that sums of money received under these policies were
"income"-within the meaning-of s. 2 (60) of the Indian
Income-tax Act, and as they were inseparably connected with
the ownership and conduct of the business of the company and
arose I from it, they were not exempt under s. 4 (3) (vii),
and were therefore assessable to income-tax under the Indian
Income-tax Act. [Their Lordships, made it clear that they
proceeded the assumption that the whole sum was assignable
to loss of profits and that they decided nothing about other
moneys which may be distributable amongst other beads, e.g.,
standing charges or agency commission.]
The definition of "income" in Shaw Wallace & Co.’s case
[(1932) 59 I.A. 206] as a "periodical monetary return
’coming in’ with some sort of regularity, or expected
regularity, from definite sources " must be read with
reference to the particular facts of that case and is not
applicable to receipts, of this nature.
The King v. B.C., Fir and Cedar Lumber Co. [1932] A.C. 441
and Commissioners Of Inland Revenue v. Wi WiIliams’s
Executors [1944] 26 Tax Cas. 23 applied. Commissioner of
Income-tax, Bengal v. Shaw Wallace & Co. (1932) 59 I.A. 206,
commented upon.
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Judgment o f the Bombay High Court affirmed.
JUDGMENT:
CIVIL APPELLATE JURISDICTION: Civil Appeal No. 55 of 1950.
Appeal by special leave from the Judgment and Order dated
March 18. 1949, of the High Court of Judicature at Bombay
(Chagla C. J.
178
and Ten dolkar J.) in Income-tax Reference No. 5 of. 1948,
arising out of order dated September 27, 1947, of the
Income-tax Appellate Tribunal, Bombay Bench ’A’, in I.T.A.
No. 2205 of 1946-47.
C. K. Daphtary, Solicitor-General for India, (K. T. Desai
and A.M. Mehta, with him) for the appellant.
M. C. Setalvad, Attorney-General for India, (G. N. Joshi,
with him) for the respondent.
1952. November 3. The Judgment of the Court ,Was delivered
by
Bose, J. This is an appeal from the High Court at Bombay in
an Income-tax Reference under section 66 (1) of the Indian
Income-tax Act of 1922.
The reference was made to the Bombay High Court by the
Bombay Bench of the Income-tax Appellate Tribunal in the
following circumstances.
The appellant-assessee is a company known its the
Raghuvanshi Mills Ltd., of Bombay. The assessment year with
which we are concerned is 1945-46. ’The assessee had
insured its buildings, plant and machinery with various
insurance companies and also took -out, besides those
policies, four policies of a type known as a "Consequential
Loss Policy." This kind of policy insures against loss of
profit, standing charges and agency commission. The total
insured against under, the latter heads was Rs. 37,75,000
account of loss.of profits and standing charges, and Rs.
2,26,000 account of agency commission, making a total of
Rs. 40,00,000.
On the 18th of January, 1944, a fire. broke out and the
mill were completely destroyed. The various insurance
companies therefore paid the assessee company an aggregate
of Rs. 14,00,000 account in the year with which we are
concerned under these policies. This was paid in two sums
as follows:-
Rs. 8,25,0.00 8th September, 1944, and Rs. 5,75,000
22nd December, 1944. These payments have been treated as
part of the assessee’s ’income and the
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company has been taxed accordingly. The question is whether
these sums are or are not liable to tax.
Before we set out the question referred, it will be
necessary to state that the whole of this Rs. 14,00, 000 has
been treated as paid account of loss of profits. The
learned Solicitor-General, who appeared for the-) appellant
assessee, contended that that was wrong because the portion
of it assignable to standing charges and agency commission
could not any construction be liable to tax.
This contention is new and involves questions of fact and
travels beyond the scope’ of the question referred. We are
consequently not, able to entertain it. It has been assumed
throughout the proceedings, tight up to this Court, that the
whole of the Rs. 14,00,000 was assignable to loss of
profits. There is nothing the record to show that it was
ever split up among the other heads or that it was ever
treated &a having been split up,either by the insurance com-
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panies or by the assessee, nor is there any material which
we would be able to apportion it. Our decision therefore
proceeds the assumption that the whole sum is assignable
to loss of profits and we make it clear that we ’decide
nothing about other moneys which may be distributable among
other heads.
The question has been referred in these terms:-
"Whether in the circumstances of the case, the sum of Rs.
14,00,000 was the assessee company’s income within the
meaning of Section 2(6C) of the Indian Income-tax Act and
liable to pay income-tax under the Indian Income-tax Act."
We are concerned in this case with four policies of
insurance with four different insurance companies. The
clauses relevant to the present matter are the same in all
four cases though- the sum insured against by. -each
insurance company differs. They are as follows
"POLICY NO. C.L. 110018...........
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Rupees X Lacs only
Loss of Profits, Standing Charges and Agency Commission of
the above Co.’s Mills, situate at Haines o Road, Mahaluxmi;
Bombay, following ..........
The total amount declared for insurance is Rs. 40,00,000
and for 18 months’ benefits only as under:-
Rs. 37,75,000 Loss of Profits and Standing Charges.
Rs. 2,25,000 Agency Commission.
Rs. 40,00,000 Out, of which this policy covers Rs. X lacs
only.
Schedule attached to and forming part of Po licy No. C. L.
10018. The company will pay to the assured:-
The loss of Gross Profit due to (a) Reduction in Output and
(b@) increase in Cost of Working and the, amount payable as
indemnity hereunder shall............
Definitions of those two terms follow. We need not
reproduce talent. Then come the following definitions:-
"Gross profit.-The sum produced by adding to the Net Profit
the amount of the Insured Standing Charges, or if there be
no Net Profit the amount of the Insured Standing Charges,
less such -a proportion of any net trading loss as the
amount of the Insured Standing Charges bears to all the
Standing Charges of the business.
Net profit.-The net trading profit (exclusive of all capital
receipts and accretions and all outlay properly chargeable
to capital) resulting from the business of the Insured at
the premises after due provision -has been made for all
Standing ’and other charges including depreciation.
Insured standing charges.-Interest Loans and Bank
Overdrafts, Rent Rates and Taxes, Salaries to Permanent
Staff and Wages to Skilled Employees,
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Directors’ Fees, Auditor’s Fees, Travelling Expenses,
Insurance Premiums, Advertising and Agency Commission.
Period of indemnity.--The period beginning with the
occurrence of the fire and ending not later than eighteen
consecutive calendar months thereafter during which the
results of the business shall be affected in consequence of
the fire.
Rate of Gross Profit. The rate of gross profit per unit
earned the output during the financial year immediately
before the date of the fire......... to which such
adjustments shall be made as may be necessary to provide for
the trend of the business and for variations in or special
circumstances affecting the business either before or after
the fire or which would have affected the business had the
fire not occurred so that the figures thus adjusted shall
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represent as nearly as may be reasonably practicable the
result which, but for the fire, would have been obtained
during the relative period after the fire. " -
The underlined words show that the insurance in respect of
profits was to represent as ’nearly as possible the profits
which would have been made, had the mills been working in
its normal way.
We turn next to the Income-tax Act. Under section 3 the
"total income of the previous year" is liable to tax subject
to the provisions of the Act. Section 4 defines the total
income to include
"all income, profits and gains from whatever source
derived."
There are certain qualifications but they do not concern us
here.
It will be seen that the taxable commodity, "total income",
embraces three elements, "income", "profits" and "gains".
Now though these may overlap in many cases, they are
nevertheless separate and severable, and the simple question
is whether the Rs. 14 lacs
Here italicised.
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fall under any one or more of those heads. In our
opinion, it is "income" and so is taxable.
It was argued behalf of the assessee that it can not
be called profits because the money is only pay able if and
when there is a loss or partial loss and that something
received from an outside source in circumstances like these
is not money which is earned in the business and if there
are no earnings and no profits there cannot be any income.
But that only concentrates the word " ’ profits". This
may not be a "profit" but it is something which represents
the profits and was intended to take the place of them and
is therefore just as much income as profits or gains
received in the ordinary way. Section 4 -is so widely
worded that everything which is received by a man and goes
to swell the credit side of his total account is either an
income or a profit or a gain.
No attempt has been made in the Act to define "income"
except to say in section 2 (6C) that it includes certain
things which would possibly not have been regarded as income
but for the special definition. That however does not limit
the generality of its natural meaning except as qualifided
in the section itself. The words which follow, namely,
"from a whatever source derived", show how wide the net is
spread. So also in section 6. After setting out the various
heads of taxable income it brings in the all-embracing
phrase "income from other sources."
There is however a distinction between "income" and "taxable
income". The Act does not purport to subject all sources of
income to tax, for the liability is expressly made subject
to the provisions of the Act and among the provisions are a
series of exceptions and limitations. Most of them are set
out in section 4 itself but none of them apply here. The
nearest approach for present purposes is section 4 (3)
(vii):-
"Any receipts......... not being receipts arising from
business............ which are of a casual and non-recurring
nature."
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But the sting, so far as the assessee is concerned, lies in
the words "not being receipts arising from business."
The assessee is a business company. Its aim is to make
profits and to insure against loss. In the ordinary way it
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does this by buying raw material, manufacturing goods out of
them and selling them so that balance there is a profit or
gain to itself. But it also has other ways of acquiring
gain, as do all prudent businesses, namely by insuring
against loss of profits. It is indubitable that the money
paid in such circumstances is a receipt and in so far as it
represents loss of profits, as opposed to loss of capital
and so forth, it is an item of income in any normal sense
of the term. It is equally clear that the receipt is in-
separably connected with the ownership and conduct of the
business and arises. from it. Accordingly, it is not
exempt.
This question was considered by the Supreme Court of Canada
which decided that a receipt of this nature is not a
"profit" and so is not taxable [B. C. Fir and Cedar Lumber
Co. v. The King(1)]. But the Court did not examine the
wider position whether it is "income" and in any event the
decision was reversed appeal to the Privy Council(1).
Their Lordships held it is "income". This was followed
later by the Court of Appeal in England and endorsed by the
House of Lords in Commissioners of inland Revenue v.
William’s Executors(1) In so far as these decisions do not
turn the special wording of the Acts with which they are
respectively concerned and deal -with the more general
meaning of the word "income", we prefer the view taken in
England.
It is true the Judicial Committee attempted a narrower
definition in Commissioner of income-tax v. Shaw Wallace &
Co.(1), by limiting income to "a periodical monetary return
’coming in’ with some sort of regularity, or expected
regularity, from definite sources" but, in our opinion,
those remarks must be
(I) [1931] Canada L.R. 435.
(2) [I932] A. C. 441 at 448.
(3) (I944) 26 Tax Cas. 23.
(4) (1932) 59 I.A. 206.
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read with reference to the particular facts of that case.
The non-recurring aspect of this kind of receipt was
considered by the Privy Council in The King v. B. C. Fir and
Cedar Lumber Co.(1), and we do not think $their Lordships
had in mind a case of this nature when they decided Shaw
Wallace & Company’s case (2).
The learned Solicitor- General relies strongly a clause
which appears in three of the four policies with which we
are concerned. That is a clause which states that the
insured must do all he can to minimise the loss in profits
and until he makes an endeavour to re-start the business the
moneys will not be paid. This, he argued, shows that the
money was paid as an indemnity against the loss of profits
and was niether income nor profits, nor was it a gain within
the meaning of the section. We are unable to see how these
receipts cease to be income simply because certain things
must be done before the moneys can be claimed.
In our opinion, the High Court was right in holding that the
Rs. 14,00,000 is assessable to tax. The appeal fails and is
dismissed with costs.
Appeal dismissed.
Agent for the appellant: Bajinder Narain.
Agent for the respondent: P. A. Mehta.
(1) [1032] A.C. 441, at 448. (2) [1932] 59 I.A. 206.
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