# [1966] 2 S.C.R. 393

- **Citation:** [1966] 2 S.C.R. 393
- **Court:** Supreme Court of India
- **Decided:** 1965-10-26
- **Case number:** Civil Appeal No. 839 of 1964
- **Bench:** K. SUBBA RAo, J. C. Shah, S. M. Sjk!.U
- **Source:** https://unisonlegal.in/judgment/supreme-court-of-india/1966-2-s-c-r-393-3566
- **Pages:** 9

## Headnote

Income-tax Act (11 of 1922), s. 10(2) (vii), 41/i proviso-Capiial
asset destroyed by fire-Right to receive insurance a111ount-lf an1011nt
taxable.
As a result of a fire breaking -out and destroying its &tock-in-trade,
machinery and buildings, the assessee \received Rs. 65 lakhs from the
Insurance Company in full settlement of its claim. Though the Insurance
Company finally accepted the claim on 13th December 1948, the amount
was paid only on 27th March 1950. Out of that amount, a sum of
Rs. .27 lakhs and odd represented the loss in respect of buildings and
machinery, and it was not included in the return of assessee for the assessment year 1949-50. The Income-tax Officer, on the ground that the
said amount became receivable by the
assessee in December
1948, included it in the taxable income for the assessment year 1949-50.
The
Appellate Assistant Commissioner allowed the assessee.'s appeal holding
that the amount could only be' assessed to tax under the 4th proviso to
s. 10(2) (vii) of the Income tax Act, 1922, when the, assessee actually
received the amount.
The Appellate Tribunal and the High Court on a
reference, agreed with the Appellate Assistant Commissioner.
In bis appeal to tills Court, the Commissioner contended that the
asses.see maintained its accounts on mercantile basis and therefore, its
profits and gains should be computed in accordance with that method of
accounting; and if so computed, the assessee acquired a right to receive
the amount in Decembe.r, 1948 with the result that it became a part
of the taxable income of the assessee during the accounting year.
HELD : As the compensation for the loss of machinery and buildings
by fire was not actually received by the assessee during the accounting
year the said amount could not be assessed during the assessment year.
[401 HJ
The pro.fit and loss of a business concern is ascertained on commercial
principles. Section 13 of the Act imposes a duty ou the Re>venue to compute the profits of a business in accordance with the method of accounting adopted by an assessee under the said principles.
But the concept
of assessable income under the Act is different from profit and loss in
a commercial sense.
Though profit and loss ascertained under the system
adopted by an assessee is the basis, the assessable incon1e is arrived at
by adopting some artificial rules incorporated in s. 10(2). Under the
4th proviso to s. 10(2) (vii), when insurance money is received in respect
of any building, macbine"Y or plant which has been destmyed, and it
exceeds the difference between the written down value and the scrap
value, so much of the exce6S as mentioned therein will be. deemed to be
!he profits of the previous y~ar in whlch such money is received.
Though
m fact the s~1d compensahon represents a capital asset, because compensation received from an insurance company towards loss of a capital
asset d~ not represent profit in a commercial sernse, to the extent mentioned in the proviso. the compensation is deemed to be the profits of
the previous year in which such money is received. The proviso therefore,
39 4
SUPREME COURT REPORTS
[1966] 2 S.C.R.
introduces a fiction that what is not a profit in the previous year is
A
deemed to be a profit in that year. Since the fiction serves the purpose of
section it cannot be enlarged by importing another fiction, namely that if an
amount was receivable during lhe previous year it must be deemed ro
have been received during lhat ye'ar.
Further, the definition of the expression "paid" in s. 10(5) incorporating the concepts of mercantile system of accoun:ancy into it, iSi a clear indication that in the case of the
other terms such as "received" etc., in s. 10(2), the Legislature intended
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to give those expressions their natural meanings.
There is,
therefore,
no scope for holding that the expression "received" means "receivable".
[398 E-H; 399 D-G; 401 E, F]

## Text

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COMMISSIONER OF INCOME-TAX, CALCUTfA
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v.
M/S. MOON MILLS LTD.
October 26, 1965
[K. SUBBA RAo, J. C. SHAH AND S. M. SJK!.U, JJ.]
Income-tax Act (11 of 1922), s. 10(2) (vii), 41/i proviso-Capiial
asset destroyed by fire-Right to receive insurance a111ount-lf an1011nt
taxable.
As a result of a fire breaking -out and destroying its &tock-in-trade,
machinery and buildings, the assessee \received Rs. 65 lakhs from the
Insurance Company in full settlement of its claim. Though the Insurance
Company finally accepted the claim on 13th December 1948, the amount
was paid only on 27th March 1950. Out of that amount, a sum of
Rs. .27 lakhs and odd represented the loss in respect of buildings and
machinery, and it was not included in the return of assessee for the assessment year 1949-50. The Income-tax Officer, on the ground that the
said amount became receivable by the
assessee in December
1948, included it in the taxable income for the assessment year 1949-50.
The
Appellate Assistant Commissioner allowed the assessee.'s appeal holding
that the amount could only be' assessed to tax under the 4th proviso to
s. 10(2) (vii) of the Income tax Act, 1922, when the, assessee actually
received the amount.
The Appellate Tribunal and the High Court on a
reference, agreed with the Appellate Assistant Commissioner.
In bis appeal to tills Court, the Commissioner contended that the
asses.see maintained its accounts on mercantile basis and therefore, its
profits and gains should be computed in accordance with that method of
accounting; and if so computed, the assessee acquired a right to receive
the amount in Decembe.r, 1948 with the result that it became a part
of the taxable income of the assessee during the accounting year.
HELD : As the compensation for the loss of machinery and buildings
by fire was not actually received by the assessee during the accounting
year the said amount could not be assessed during the assessment year.
[401 HJ
The pro.fit and loss of a business concern is ascertained on commercial
principles. Section 13 of the Act imposes a duty ou the Re>venue to compute the profits of a business in accordance with the method of accounting adopted by an assessee under the said principles.
But the concept
of assessable income under the Act is different from profit and loss in
a commercial sense.
Though profit and loss ascertained under the system
adopted by an assessee is the basis, the assessable incon1e is arrived at
by adopting some artificial rules incorporated in s. 10(2). Under the
4th proviso to s. 10(2) (vii), when insurance money is received in respect
of any building, macbine"Y or plant which has been destmyed, and it
exceeds the difference between the written down value and the scrap
value, so much of the exce6S as mentioned therein will be. deemed to be
!he profits of the previous y~ar in whlch such money is received.
Though
m fact the s~1d compensahon represents a capital asset, because compensation received from an insurance company towards loss of a capital
asset d~ not represent profit in a commercial sernse, to the extent mentioned in the proviso. the compensation is deemed to be the profits of
the previous year in which such money is received. The proviso therefore,
39 4
SUPREME COURT REPORTS
[1966] 2 S.C.R.
introduces a fiction that what is not a profit in the previous year is
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deemed to be a profit in that year. Since the fiction serves the purpose of
section it cannot be enlarged by importing another fiction, namely that if an
amount was receivable during lhe previous year it must be deemed ro
have been received during lhat ye'ar.
Further, the definition of the expression "paid" in s. 10(5) incorporating the concepts of mercantile system of accoun:ancy into it, iSi a clear indication that in the case of the
other terms such as "received" etc., in s. 10(2), the Legislature intended
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to give those expressions their natural meanings.
There is,
therefore,
no scope for holding that the expression "received" means "receivable".
[398 E-H; 399 D-G; 401 E, F]
Case law referred to.
CIVIL APPELLATE JURISDICTION : Civil Appeal No. 839 of
1964.
Appeal from the judgment and order dated January 16, 1962
of the Calcutta High Court in Income-tax Reference No. 63 of
1957.
S. V. Gupte, Solicitor-General, R. Ganapathy Iyer, R. H.
c
Dhebar and R. N. Sachthey, for the appellant.
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A. V. Viswanatha Sastri, S. Murthy and B. P. Maheshwari,
for the respondent.
The Judgment of the Court was delivered by
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Subba Rao, J.
The Income-tax Appellate Tribunal, Calcutta
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Bench, referred the following question under s. 66(1) of the Indian
Income-tax Act, 1922, hereinafter called the Act, for the decision
of the High Court of Calcutta :
+,;,'.
"Whether on the facts and in the circumstances of
this case the sum of Rs. 27,06,593 was assessable as a
profit of the assessee company of the previous year
relevant to the assessment year 1949-50 in accordance
with the fourth proviso to section 10(2)(vii) of the Indian
Income-tax Act."
The facts leading up to the said reference may briefly be
stated.
Messrs. Moon Mills Ltd., the respondent herein, hereafter referred to as the Company, is a joint stock limited company
and it owns a factory at Bombay. On August 6, 1948, a fire broke
out in the factory premises of the assessee resulting in the 'de·
struction 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 re~pect of .W
general specification policies, (ii) specific stock pohc1es, and (111)
consequential loss
policies,
for
an
aggregate
sum
of
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C.I.T. v. MOON MILLS (Subba Rao, !.)
395
A 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 buildings and
machinery-Rs. 4,24,205 in
respect of the l:Juildings
and
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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, 194.8, included the
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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 only be
assessed to tax under the fourth proviso to cl. (vii) of sub-s. ( 2)
of s. 10 of the Act when the Company actually received it. On
appeal preferred by the Revenue against the said Order,
the
D Income-tax Appellate Tribunal agreed with that view. Thereafter,
the Appellate Tribunal referred the aforesaid question to the High
Court for its decision and the said Court upheld the view of the
Appellate Tribunal. The Revenue on a certificate issued by the
High Court has preferred the present appeal.
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Learned Solicitor Gen.era!, on behalf of the Revenue, contended
that the Company maintained its accounts on mercantile basis and,
therefore, the profits and gains of its business should, under s. 13
of the Act, be computed in accordance with the said method of
accounting. If so computed, the argument proceeded, the claim
made by the Company for the said compensation amount having
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been finally accepted by the Insurance Company in its meeting held
on December 13, 1948, the Company acquired a right to receive
the same on that date, with the result that it became a part of the
taxable income of the Company during the accounting year.
Mr. A. V. Viswanatha Sastri, learned counsel for the Company,
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contended that there was a real distinction between the computation of profits on the principles of commercial accounting and the
working out of the statutory allowances under s. 10(2) of the Act:
while under the former when an assessee maintained the accounts
on mercantile basis, irrespective of receipt or realization, profits
must be computed on the accrual basis, under the third proviso
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to s. 10(2) (vii) of the Act the compensation amount could be
brought to tax only when it was actually received in terms of the
said proviso.
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SUPREME
COURT REPORTS
[1966] 2 S.C.R.
The solution to these two conflicting contentions depends upon
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a clear appreciation of the scope of s. 13 and s. 10(2) (vii) of the
Act. They read :
Section 13. "Income, profits and gains shall be computed, for the purposes of sections 10 and 12, in accordance with the method of accounting regularly employed
by the assessee."
Section 10. (1) The tax shall be payable by an assesse.e_]lnder the head "Profits and gains of business, profession or vocation" in respect of the profit or gains of
any business, profession or vocation carried on by him.
(2) Such profits or gains shall be computed after
making the following allowances :
Section 13 ex facie is only concerned with the computation of the
profits of the business on the principles of accountancy adopted by
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the assessee. It deals with commercial profits and not with assessD
able 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 s. 10(2) of the
Act. In Gresham Life Assurance Society v. Styles (Surveyor of
Taxes('). the expression "profits" has been succinctly defined.
Halsbury, L. C., said therein that "the word 'profits', I think, is to
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be understood in its natural 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 had made by his trading". This Court in Calcutta Co.
Ltd. v. Commissioner of Income-tax, West Benga/(2 ) said much
to the same effect when it said that the expression "profits and
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gains" is to be understood in its commercial sense. This Court in
Kesav Mills Ltd. v. Commissioner of Income-tax, Bombay(') explained how in a commercial sense the profits and loss are ascertained. Dealing with two main systems of accounting, it observed:
"The mercantile system of accounting or what is
otherwise known as the double entry system is opposed
to the cash system of book keeping under which a record
is kept of actual cash receipts and actual cash payments,
entries being made only when money is actually collected
or disbursed. That system brings into credit what is due,
immediately it becomes legally due and before it is
(!) (1892) 3 T.C. 185, 188, 194.
(2) [1960] I S.C.R. 185.
(3) [1953] S.C.R. 950, 958.
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C.I.T. V. MOON MILLS (Subba Rao, J.)
397
actually received and it brings into debit expenditure the
amount for which a legal liability has been incurred
before it is actually disbursed. The profits or gains of the
business which are thus credited are not realised but having been earned are treated as ,received though in fact
there is nothing more than an accrual or arising of the
profits at that stage.
They are book profits.
Receipt
being not the sole test of chargeability and profits and
gains that have accrued or arisen or are deemed to have
accrued or arisen being also liable to be charged for
income-tax the assessability of these profits which are
thus credited in the books of account ·arises not because
they are received but because they have accrued or
arisen."
It is, therefore, clear that profits have to be ascertained within the
meaning of s. 13 of the Act on the basis of the system maintained
by an assessee, whether mercantile, cash or any other system.
In either system of accountancy, compensation paid by an insurance company in respect of loss of capital assets is not brought
into account for ascertaining the profit and loss of the company.
In Batliboi's book on Advanced Accounting,. 21st Edn., at p. 10€i2,
an illustration is given to explain how the necessary entries will have
to be made in the accounts in respect of claims under insurance
arising from destruction of stock, fixtures, plant, building, etc.,
as also claims relating to loss resulting from fire. It will be seen
from illustration 207 that while th.e item of compensation received
for stock destroyed or damaged is carried to profit and loss account,
the item relating to compensation received for Joss by fire in respect
of building and machinery is to be entered into building account
and plant and machinery account. It is stated therein, being the
loss of fixed assets represented by buildings and plant and machinery
destroyed by fire, it is transferred to a special account. This example indicates that in commercial accountancy, while the compensation for loss incurred in respect of stock is an item of profit and
G loss account, that incurred in respect of building and machinery is
outside it. It is so because what is destroyed is a capital asset.
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Section 10(2) of the Act deals with statutory allowances as
distinguished from deductions that will be made in commercial practice for ascertaining the profits of a business. The relevant part of
cl. (vii) of s. 10(2) 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
.398
SUPREME COURT REPORTS
(1966] 2 S.C.R .
thereof exceeds the amount for which the building,
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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 value exceeds the amount of such
moneys:
Provided further that where any insurance, salvage
<Jr compensation moneys are received in respect of any
such building, machinery or plant as aforesaid, and the
amount allowable under this clause shall be the amount,
the written down value and the scrap value no amount
shall be allowable under this clause and so much of the
excess as does not exceed the difference between the original cost and the written down value less the scrap value
shall be deemed to be profits of the previous year in
which such moneys were received :
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Under this clause where any building, machinery or plant is dis-
·carded, demolished or destroyed, an allowance is given in respect
of the amount by which the written down value of the said building, machinery or plant exceeds the amount for which it is sold or
its scrap value. But the 4th proviso introduces a fiction that in F
case any insurance, salvage or compensation money received in respect of the said property exceeds the difference between the written
down value and the scrap value, so much of the excess as mentioned therein will be deemed to be the profits of the previous year
in which such money is received.
Though in fact the said compensation represents a capital asset, to the extent mentioned in the.
proviso the compensation is deemed to be the profits of the previous year in which such money is received. The proviso, therefore,
introduces a fiction.
What is not a profit in the previous year is
deemed to be a profit in that year. The previous year is that year
in which such moneys were received. The fiction is an indivisible
one. It cannot be enlarged by importing another fiction, namely,
that if an amount was receivable during the previous year it must be
·deemed to have been received during that year. In dealing with the
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C.I.T. V. MOON MILLS (Subba Rao, J.)
399
A scope of the fiction ins. 10(2) (vii), proviso 2, this Court in Commissioner of Income-tax, Madras v. Ajax Products Ltd.(') observed;
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"Though the surplus contemplated by the proviso is
not in the technical sense of the term profits of the previous year, it is deemed to be the profits of the previous
year."
The same idea is developed thus :
"The fiction in the second proviso is a limited one.
The surplus is deemed to be the profits of the previous
year. As we have pointed out earlier, it adequately serves the purpose of the section ...... To sustain the argument of the 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 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 ins. 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 s. 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-s. (2) "paid" means "actually
paid or incurred according to the method of accounting upon the
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basis of which the profits or gains are computed under this section".
If the concepts of mercantile system of accountancy were incorporated by implication in the various clauses of s. 10(2), the definition of "paid" ins. 10(5) would be redundant. We cannot attribute redundancy to the Legislature unless for compelling reasons.
On the other hand, the definition of the expression "paid" is a clear
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indication that in the case of the other terms the Leglisature intended to give those expressions their natural meanings.
The distinction between the scope of commercial accountancy
for the purpose of ascertaining the trading profits and that of the
statutory allowances is brought out by this Court in Commissioner
of Income-tax, Bombay City v. Bipinchandra Magan 1al & Co.
Ltd.(2) Shah, J., speaking for the Conrt, made the following reservations :
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(!) [1965] 1 S.C.R. 700.
(2) [1961] 2 S.C.R. 493.
L2Sup Cl./66-12
400
SUPREME COURT REPORTS
[1966] 2 S.C.R.
"There is no definable relation between the assessable
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income and the profits of a business concern in a com- ·
mercial sense.
Computation of income for purposes of
assessment of income-tax is based on a variety of artificial
rules and takes into account several fictional receipts,
deductions and allowances."
If the contention advanced on behalf of the Revenue is accepted,
this distinction is effaced. The decision of tho House of Lords in
Green (H.M. Inspector of Taxes) v. J. G/iksten & Son, Lrd.('),
which is relied upon by the learned counsel for the Revenue, does
not support his contention.
There, the Company's timber, its
stock-in-trade, was destroyed by fire. It received from the insurers
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a large sum of money as compensation towards the said loss.
A
part of the said amount was not entered in the profit and Joss
account but was shown as a reserve in the balance sheet.
The
House of Lords held that the whole sum recovered was a trading
receipt to be taken into account in computing the profits assessable to income-tall: under Case 1 of Schedule D and to Corporation
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Profits Tax. In the context of those facts,
Lord Buckmaster
observed:
"What has happened has been this, that the timber
which the Appellants held has been converted into cash.
It is quite true it has been converted into cash through
the operation of the fire, which is no part of their trade,
but loss due to it is protected through the usual trade
insurance, and the timber has thus been realised. It is
now represented by money, whereas formerly it was represented by wood. If this results in a gain, as ·it has
done, it appears to me to be an ordinary gain-a gain
which has taken place in the course of their trade .... ".
Viscount Dunedin puts the same idea in different words thus :
"The whole point is that the business of the Company is to buy timber and to sell timber, and when they
sell timber they turn it into money. This particular titnber 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 tlieir 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
(I) (1929) 14 T.C. 364, 384.
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C.I.T. v. MOON MILLS (Subba Rao, J.)
401
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 thm1 ah
he emphasized the commercial method. He said :
'
"'
" .... the normal commercial method of_ dealing with
moneys recovered by a trader under a policy of insurance,
m 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 was part of the stock-in-trade lost by fire.
Far
from helping the Revenue, this decision brings out with clarity the
distinction between loss by fire of stock-in-trade and of a capital
asset. The compensation received from an insurance company towards the loss of capital asset does not represent profit in a commercial sense : it was made a profit by fiction under the Act.
The legal position may be stated thus : °The profit and Joss of
a business concern is ascertained on commercial principles. Section I 3 of the Act, subject to the proviso, imposes a duty on the
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Revenue to compute the profits of a business in accordance with
the method of accounting adopted by an assessee under the said'
principles. But the concept of assessable income under the Act isc
different from profit and loss in a commerical sense. Though profit
and Joss ascertained under the system adopted by an assessee i~
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the basis, the assessable income is arrived at by adopting rules,
some artificial, incorporated ins. 10(2) of the Act.
Prima facie,
the allowances, deductions and deemed profits shall be ascertained
in terms of the statutory provisions, unless the statute itself accepts
the principles of commercial accountancy in a particular case.
In the present case, the compensation to the extent mentioned in
the proviso received only in the accounting year was by fiction
treated as profit.
There is, therefore, no scope for holding that
the expression received" means "receivable" .
For the aforesaid reasons, we hold that. as the comp~nsation
for the loss of machinery and buildings by fire was not actually
received by the Company during the accounting year, the said
amount could not be assessed during the assessment year.
In the result, the appeal fails and is dismissed with costs.
Appeal dismissed_