Compensation received for loss of capital assets is not assessable as profit of the previous year under Section 10 (2) (vii), proviso 4 of the Indian Income-tax Act, 1922.

Judgement

SUBBA RAO, J.:- The Income-tax Appellate Tribunal Calcutta 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 Rupees 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-tax Act."

2. 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 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 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 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.

3. Learned Solicitor-General, 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 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.

4. Mr. A. V. Viswanatha Sastri, learned counsel for the Company, 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 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.

5. The solution to those two conflicting contentions depends upon 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 Ss. 10 and 12, in accordance w