1999 (7) TMI 20 - HC - Income Tax

Court rules surplus amount from insurance for lost raw materials taxable as trading receipt. Accounting method not decisive.

Commissioner Of Income-Tax Versus Needle Industries (India) Ltd.

Commissioner Of Income-Tax Versus Needle Industries (India) Ltd. - [2000] 245 ITR 556, 162 CTR 337, 108 TAXMANN 524 Issues Involved:1. Whether the surplus amount received by the assessee from the insurance company towards the loss of raw materials, stores, etc., due to fire constitutes a trading receipt or a capital receipt.2. The relevance of the method of accounting followed by the assessee in determining the nature of the receipt.3. The applicability of Section 2(14) of the Income-tax Act in defining 'capital asset.'Detailed Analysis:Issue 1: Nature of the Surplus Amount Received from InsuranceThe primary issue was whether the surplus amount of Rs. 1,09,274 received by the assessee from the insurance company, due to the loss of raw materials, stores, etc., in a fire, should be considered a trading receipt or a capital receipt. The Income-tax Officer initially held that this surplus was incidental to the assessee's business and thus taxable. However, the Tribunal reversed this decision, stating that the difference between the replacement value and the book value of the goods lost could not be taken as trading receipt. The Tribunal emphasized that the goods lost were not treated as stock-in-trade by the assessee.Upon review, the court found that the amount received from the insurer was indeed a trading receipt. The court referenced the Supreme Court decision in Raghuvanshi Mills Ltd. v. CIT, which held that money received under a fire insurance policy by a business company is taxable as income. Additionally, the court cited the House of Lords decision in Green (H. M. Inspector of Taxes) v. J. Gliksten and Son Limited, which established that insurance money received for destroyed stock should be treated as trading receipt.Issue 2: Method of AccountingThe Tribunal had concluded that the method of accounting followed by the assessee, which excluded the expenditure of raw materials from its manufacturing account except to the extent actually consumed, was a key factor. The Tribunal considered this method of accounting as a question of fact, asserting that it could not be challenged once accepted.However, the court disagreed with the Tribunal's reliance on the method of accounting to determine the nature of the receipt. The court emphasized that the true character and quality of the receipt must be considered, as established in the Supreme Court case of P. H. Divecha (Deceased) v. CIT. The court held that the method of accounting adopted by the assessee could be discarded if it did not allow proper deduction of income, referencing the Supreme Court decision in Investments Limited v. CIT.Issue 3: Applicability of Section 2(14) of the Income-tax ActSection 2(14) of the Income-tax Act defines 'capital asset' and excludes stock-in-trade, consumable stores, or raw materials held for business purposes. The court noted that the raw materials held by the assessee were essential for manufacturing needles and therefore could not be regarded as capital assets. The Tribunal's failure to consider this definition led to an erroneous conclusion.The court concluded that the raw materials held by the assessee were for business purposes and not capital assets. Consequently, the surplus amount received from the insurance company was part of the business income and taxable. The court also noted that the amount had been appropriated in the profit and loss account and utilized for paying dividends, indicating its nature as business income.Conclusion:The court answered the referred question in favor of the Revenue, stating that the Tribunal was wrong in deleting the addition of Rs. 1,09,274 being the surplus amount received by the assessee towards the loss of raw materials, stores, etc., due to fire from the insurance company. The amount was deemed a trading receipt and thus taxable. There was no order as to costs.