AI OCR 
TaxTMI 
TaxTMI 
TaxTMI 
1965 (10) TMI 21
X X X X Extracts X X X X
X X X X Extracts X X X X
....the assessee resulting in the destruction of the stock-in-trade, machinery and buildings. The assets of the company were covered by several insurance policies issued by the General Assurance Society Ltd. in respect of (i) general specification policies, (ii) specific stock policies, and (iii) consequential loss policies, for an aggregate sum of Rs. 1,48,92,390. The company received Rs. 65 lakhs from the insurance company in full settlement of its claim under the said policies. The said amount was received by the company only on March 27, 1950. Out of the said amount, the sum of Rs. 27,06,593 represented the loss in respect of the building and machinery---Rs. 4,24,205 in respect of the buildings and Rs. 22,82,388 in respect of the machinery. For the assessment year 1949-50, the company did not include the said amount in its return as it was received by it only on March 27, 1950. The Income-tax Officer, on the ground that the said amount became receivable by the company on December 13, 1948, included the same in the taxable income of the assessee-company for the assessment year 1949-50. On appeal, the Appellate Assistant Commissioner came to the conclusion that the said amount could ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ces ... " Section 13 ex facie is only concerned with the computation of the profits of the business on the principles of accountancy adopted by the assessee. It deals with commercial profits and not with assessable income. Though the commercial profit is the basis for ascertaining the taxable income, the latter can be arrived at only after making the statutory allowances provided under section 10(2) of the Act. In Gresham Life Assurance Society Ltd. v. Styles, the expression " profits " has been succinctly defined. Halsbury L. C. said therein that " the word 'profits', I think, is to be understood in its natural and proper sense---in a sense which no commercial man would misunderstand ". Lord Herschell observed : " When we speak of the profits and gains of a trader we mean that which he has made by his trading. " This court, in Calcutta Co. Ltd. v. Commissioner of Income-tax, said much to the same effect when it said that the expression " profits and gains " is to be understood in its commercial sense. This court, in Keshav Mills Ltd. v. Commissioner of Income-tax, explained how in a commercial sense the profits and loss are ascertained. Dealing with the two main systems of accou....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ountancy, while the compensation for loss incurred in respect of stock is an item of profit and loss account, that incurred in respect of building and machinery is outside it. It is so because what is destroyed is a capital asset. Section 10(2) of the Act deals with statutory allowances as distinguished from deductions that will be made in commercial practice for ascertainingthe profits of a business. The relevant part of clause (vii) of section 10(2) the profits of a business of the Act reads : "... in respect of any such building, machinery or plant which has been sold or discarded or demolished or destroyed, the amount by which the written down value thereof exceeds the amount for which the building, machinery or plant, as the case may be, is actually sold or its scrap value ... Provided further that where any insurance, salvage or compensation moneys are received in respect of any such building, machinery or plant which has been discarded or demolished or destroyed, and the amount of such moneys does not exceed the written down value, the amount allowable under this clause shall be the amount, if any, by which the difference between the written down value and the scrap va....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... revenue, it has to be enlarged in its scope. Many words have to be read into it which are not there. We cannot accept this argument." So too, in the instant case, the fiction serves the purpose, if the said compensation was deemed to be the profits of the previous year or of the year in which it was received. This fiction cannot be enlarged by giving the expression " received " a technical meaning which it may bear in the mercantile system of accountancy. Further, the various clauses in section 10(2) of the Act use different words for fixing the date of the realization of the income, such as, " paid ", " sold ", " received ", etc. While the legislature gave an extended meaning to the expression " paid " in section 10(5) of the Act, no definitions of the other expressions are given in the Act. Section 10(5) of the Act says that in sub-section (2) " paid " means " actually paid or incurred according to the method of accounting upon the basis of which the profits or gains are computed under this section ". If the concepts of the mercantile system of accountancy were incorporated by implication in the various clauses of seetion 10(2), the definition of " paid " in section 10(5) wo....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... is to buy timber and to sell timber, and when they sell timber they turn it into money. This particular timber was turned into money, not because it was sold, but because it was burned and they had an insurance policy over it. The whole question comes to be whether that is a turnover in the ordinary course of their business. I think it was ... The result of this fire was that they got rid of so much timber and got the insurance money at that figure, and that seems to me precisely in the same position as if they got rid of it by giving it to a customer." Lord Warrington of Clyffe stated much to the same effect, though he emphasized the commercial method. He said : " ...... the normal commercial method of dealing with moneys recovered by a trader under a policy of insurance, in respect of stock destroyed by fire, was to include the actual amount received in the accounts as an ordinary trading receipt in the same way as the proceeds of an ordinary sale of stock." These observations were made in the context of destruction by fire of stock-in-trade. The House of Lords unanimously held that the compensation received was only a trading receipt, for it represented the timber which w....