TMI Blog1993 (3) TMI 4X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. Shorn of details, the assessee, a manufacturer of radiators for automobiles, booked copper ingots from a corporation in the United States of America for being brought to Bombay where it was to be rolled into strips and sheets and then despatched to the assessee for being used for manufacture. While the ingots were at sea, hostilities broke out between India and Pakistan and the vessel carrying the goods was seized by the authorities in Pakistan. The claim of the assessee for the price paid by it for the goods was ultimately settled in its favour by the insurer in America. Meanwhile, the Indian rupee had been devalued and, therefore, in terms of rupees, the appellant firm got ₹ 3,43,556 as against their payment of ₹ 2,00,164 at the old rate. The difference was credited to profit on devaluation in the profit and loss account. The claim of the app ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... was part and parcel of the business carried on by the assessee and could not be described as extraneous to it. The High Court thus negatived the claim of the assessee for two reasons, one, the difference between the cost price and the sale price, and, the other, that it was a revenue receipt. In observing that (at page 908) : If the assessee had got the goods imported into India and had sold them at a higher rate which would have increased as a result of devaluation, then there can be no dispute that the assessee would be liable to tax on the difference between the sale price and the cost , the High Court oversimplified the issue. May be any profit or gain accruing to an assessee as a result of difference between the sale price and the cost price in a year is income. And by that yardstick, the devaluation surplus, irrespective of any other consideration, may be a receipt which, in common parlance, may be income. But liability to pay tax under the Act arises on the income accruing to an assessee in a year. The word income , ordinarily, in the normal sense, connotes any earning or profit or gain periodically, regularly or even daily in whatever manner and from whatever source ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... out by the proviso. In other words, the receipt should not only have been casual and non-recurring but it should not have been receipts arising from business . To put it the other way, if an income arose in the usual course of business, then it would not have been liable for exclusion even if it was casual or non-recurring in nature. Casual , as explained earlier, means accidental or irregular. But if the irregular or the accidental income arose as a result of business activity, then even if it was non-recurring, it may not have fallen outside the revenue net. The real test, therefore, was the nature and character of income which accrued to the assessee. The casual nature of it or non-recurring nature were only aids to decide whether the nature of income was in the course of business or otherwise. In Raghuvanshi Mills Ltd.'s case [1952] 22 ITR 484 (SC), it was held by this court that receipt, even if it was casual and non-recurring in nature, would be liable to tax if it arose from business. Business has been defined in clause (13) of section 2 of the Act as including any trade, commerce or manufacture or any adventure or concern in the nature of trade, commerce or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssee's servant's negligence, it was held (at page 219) It does not follow that if a loss is in any sense connected with the trade, it must always be allowed as a deduction ; for it may be only remotely connected with the trade or it may be connected with something else quite as much as or even more than with the trade. I think only such losses can be deducted as are connected with it in the sense that they are really incidental to the trade itself. The word from according to the dictionary means out of . The income thus should have accrued out of the business carried on by the assessee. An income directly or ancillary to the business may be an income from business, but any income to an assessee carrying on business does not become an income from business unless the necessary relationship between the two is established. What was lost on the seas was not raw material, but something which was capable of being converted into raw material. 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 f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ned by the assessee consequent on the settlement of the claim by the insurance company could be treated as a revenue receipt, it may be stated that taxability of profit or deduction for loss depends on whether profit or loss arises in the course of business. The courts have maintained a distinction between insurance against loss of goods and insurance against loss of profits. The latter is undoubtedly taxable as is clear from the decision in Raghuvanshi Mills [1952] 22 ITR 484 (SC) where any amount paid by the insurance company, on account of loss of profit was held taxable. But what happens where the insurance company pays any amount against loss of goods. Does it, by virtue of compensation, become profit and is it taxable as such. 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. Raghuvanshi Mills' decision [1952] 22 ITR 484 (SC) is an authority for the proposition where the very purpose of insurance itself is profit or gain. The result may be the same where the payment is made for goods in which the assessee carried on business. Any payment being an accretion from busine ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Kerala in CIT v. Union Engineering Works [1976] 105 ITR 311, held (at page 314) : In the instant case, the excess profit, as found by the Tribunal, was not a receipt arising from business ; nor was it, as admitted on both sides, capital gains. This was part of the compensation received by the assessee from the insurer for damage caused to its goods. The claim for compensation for damage caused to the goods had been settled with the insurer and the sum so settled did not include any excess profit. The excess profit arose entirely due to the devaluation. This excess amount was in the nature of a windfall, being the unexpected fruit of devaluation, and it cannot, therefore, be regarded as a receipt arising from business though it may be said in a sense to be a receipt in the course of business. We hold that the Tribunal had correctly held that the sum of ₹ 13,455.75 received by the assessee was not a receipt arising from its business within the meaning of section 10(3)(ii) of the Income-tax Act, 1961. We are of the view that, on the facts of that case, the High Court of Kerala was right in law in upholding the findings of the Tribunal while, on the facts found in the i ..... X X X X Extracts X X X X X X X X Extracts X X X X
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