TMI Blog1965 (10) TMI 21X X X X Extracts X X X X X X X X Extracts X X X X ..... 6-10-1965 - Judge(s) : K. SUBBA RAO., J. C. SHAH., S. M. SIKRI JUDGMENT The judgment of the court was delivered by SUBBA RAO J.---The Income-tax Appellate Tribunal, Calcutta Bench, referred the following question under section 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 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, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... en an assessee on mercantile basis, irrespective of maintained the accounts receipt or realisation, profits must be computed on the accrual basis, under the third proviso to section 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. The solution to those two conflicting contentions depends upon a clear appreciation of the scope of section 13 and section 10(2)(vii) of the Act. They read : " 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. " " 10. (1) The tax shall be payable by an assessee under the head 'profits and gains of business, profession or vocation' in respect of the profits 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 the assessee. It deals with commercial profits and not with assessable income. Though the commercial ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s 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 edition, at page 1062, 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 or stock, fixtures, plant, building, etc., as also claims relating to loss resulting from fire. It will be seen from illustration 207 that while the item of compensation received for stock destroyed or damaged is carried to profit and loss account, the item relating to compensation received for loss 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 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 1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iction. 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 scope of the fiction in section 10(2)(vii), proviso 2, this court, in Commissioner of Income-tax v. Ajax Products Ltd., observed : 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... serve 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-tax under Case 1 of Schedule D and to corporation 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 insurances, 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 timber was turned into money, not because it was sold, but because it was burned and they had an insurance policy over it. ..... 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