1993 (3) TMI 4 - SC - Income Tax

Devaluation surplus on insurance for lost imported copper ingots held capital receipt, not taxable as business income

SC held that the devaluation surplus received by the assessee on settlement of an insurance claim for loss of imported copper ingots was a capital receipt ... Nature of devaluation surplus - revenue receipt Or capital receipt - difference between the cost price and the sale price - Whether the excess amount paid to the assessee due to fluctuation in exchange rate was taxable either because the payment being related to trading activity, it could not be excluded under section 10(3) of the Act, even if it was casual and non-recurring in nature or it was stock-in-trade, and, therefore, taxable as revenue receipt or in any case the compensation for the loss of goods could not be deemed anything but profit. - HELD THAT:- The assessee carried on the business of manufacturing radiators and not ingots. They were imported to be converted into strips and sheets at Bombay. The link which could create direct relationship between the finished goods and raw material was snapped even before it reached Bombay. Payment made for loss of such goods did not bear any nexus with the assessee's business. May be that if it had reached, it could have been, after conversion into strips and sheets, used as raw material. But so long as it did not reach Bombay and was not converted into raw material, the connection it bore with the assessee's business was remote. The necessary nexus between ingots and radiators which could have resulted in income from ingots never came into being. Thus any devaluation surplus arising out of payment paid for loss of ingots could not be treated as income from business of the assessee. Assuming that it was stock-in-trade, it was held by this court in CIT v. Canara Bank Ltd. [1966 (10) TMI 33 - SUPREME COURT] that if stock-in-trade, gets blocked and sterilised and no trading activity could be carried on with it, then it ceased to be stock-in-trade, and any devaluation surplus arising on such capital due to exchange rate would be capital and not revenue. Applying the ratio of this case, the copper ingots, even if assumed to be stock-in-trade, were blocked and sterilised due to hostilities between India and Pakistan, and, therefore, they ceased to be stock-in-trade and any surplus arising due to exchange ratio in the circumstances was a capital receipt only. Whether devaluation surplus earned by the assessee consequent on the settlement of the claim by the insurance company could be treated as a revenue receipt, - Taxability of the amount paid on settlement of a claim by the insurance company depends both on the nature of the payment and the purpose of insurance. The assessee did not carry on the business of buying and selling ingots. The compensation paid to the assessee was not for any trading or business activity, but the just equivalent in money of the goods lost by the assessee which it was prevented from using. The excess arose on such payment in respect of goods in which the assessee did not carry on any business, due to fortuitous circumstances of devaluation of currency, but not due to any business or trading activity, the amount could not be brought to tax. Both this appeal succeeds and is allowed. Issues Involved:1. Taxability of the excess amount received due to fluctuation in exchange rate.2. Whether the devaluation surplus was a revenue receipt or a capital receipt.3. Whether the payment received was incidental to the business or arose from business activities.Detailed Analysis:1. Taxability of the Excess Amount Received Due to Fluctuation in Exchange Rate:The primary issue was whether the excess amount received by the assessee due to the devaluation of the Indian rupee was taxable. The assessee, a manufacturer of radiators, received compensation in dollars for copper ingots lost at sea, which, due to devaluation, resulted in a higher amount in rupees. The Income-tax Officer taxed this as income, but the Appellate Assistant Commissioner and the Tribunal considered it non-taxable, seeing it as a capital receipt and not arising from regular business activities. The High Court, however, held it taxable, viewing the transaction as part of the business.2. Whether the Devaluation Surplus was a Revenue Receipt or a Capital Receipt:The Tribunal and the Supreme Court found that the devaluation surplus was a capital receipt. The Tribunal noted that the goods were seized and sterilized, changing their character from stock-in-trade to something else. The Supreme Court agreed, stating that the ingots, not being directly usable as raw material in the assessee's business and having been lost before reaching Bombay, did not bear a direct nexus with the business. Thus, the surplus from devaluation was not income from business but a capital receipt.3. Whether the Payment Received was Incidental to the Business or Arose from Business Activities:The Supreme Court emphasized that for an income to be taxable under business income, it must arise directly from business activities. The ingots, intended to be converted into raw material, were lost before they could be used in the business. The compensation received was for the loss of goods, not for any business activity. The Court distinguished between insurance against loss of goods (capital receipt) and insurance against loss of profits (revenue receipt). Since the payment was for the loss of goods and the surplus arose due to devaluation, it was not taxable as business income.Conclusion:The Supreme Court concluded that the devaluation surplus was not taxable as it was a capital receipt and not arising from business activities. The High Court's decision was reversed, and the assessee's appeal was allowed, with costs awarded to the assessee. The questions referred to the High Court were answered in favor of the assessee and against the Department.