TMI Blog1993 (2) TMI 132X X X X Extracts X X X X X X X X Extracts X X X X ..... is whether the departmental authorities are justified in treating the amount of Rs. 1.65,000 under section 41(2) of the IT Act. 3. During the year of account, the vessel " M.V. Chopra " belonging to the assessee sank in the sea near Goa. The assessee received a sum of Rs. 10 lacs from the Insurance Company for the loss of the ship. The Income-tax Officer treated the amount as the business receipt of the assessee and taxed the same accordingly. On appeal by the assessee, the CIT (Appeals) took the view that the amount received from the Insurance Company for the loss of the ship cannot be treated as the business income of the assessee. He, therefore deleted the sum of Rs. 8,35,000 under the head ' business '. However, he took the view that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... se of C. Leo Machodo v. CIT [1988] 172 ITR 744. The judgment of the Madras High Court was expressly approved by the Hon'ble Supreme Court in the judgment cited above. It was held that where the Insurance Company paid compensation for the destruction or loss of an asset, there was no " transfer " within the meaning of section 2(47) of the Act and the provisions of section 45 were not attracted. It was held that the money received under the insurance policy in such case was by way of indemnity or compensation for the damage, loss or destruction of the property. It was further held that the compensation cannot be stated to be consideration for the transfer of the property or the transfer of any right in the property in favour of the Insurance ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rd " Income " and pointed out that it is an inclusive definition. He submitted that the amount received by the assessee from the Insurance Company was connected to the business of the assessee in the sense that it was in respect of the ship which was used by the assessee in its business. According to Mr. Lahiri, there was a nexus between the receipt of the insurance money and the business of the assessee, and, therefore the same was assessable as business income as was done by the ITO. He invited our attention to the decision of the Hon'ble Calcutta High Court in the case of Kesoram Industries Cotton Mills Ltd. v. CIT [1991] 191 ITR 518 in support of his contention. 10. We are unable to accept the contention of Mr. Lahiri. Admittedly t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ilised, it is really a hole in the assessee's capital asset, and any compensation received to fill-up the hole can only be a capital receipt. In the case of CIT v. Rai Bahadur Jairam Valji [1959] 35 ITR 148, the Hon'ble Supreme Court, speaking through His Lordship Justice Venkatarama Aiyar, referred to the observations of Lord Romer in Golden Horse Shoe Co.'s case and held that whenever a question arises as to whether payment of compensation is a capital or revenue receipt, it would have to be considered whether the asset in regard to which the compensation was paid was in the nature of capital asset in the hands of the assessee or whether it was only part of his stock-in-trade. The Hon'ble Supreme Court held in the case of CIT v. Vazir Sul ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vant. More relevance attaches to the nature of the receipt in the hands of the person who receives it though in trying to find out the quality of the receipt one may have to examine the motive out of which the payment was made." 11. Applying the above tests to the facts of the present case, we find that it cannot be stated that the ship that sank in the sea was the stock-in-trade of the assessee. It was the assessee's capital asset, and was part of its profit-making apparatus. In that sense, it was part of the assessee's fixed capital and did not form part of its circulating capital. The amount received from the Insurance Company was only by way of compensation for the loss or destruction of the capital asset, and, therefore, the same can ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Company cannot also be treated as a revenue receipt. The ratio of this decision is, therefore, in favour of the assessee's contention that the receipt cannot be treated as business income. 13. In the course of the arguments, Mr. Bajoria, the Ld. Counsel for the assessee referred to the provisions of section 41(2), and section 32(1)(iii) of the Act, to submit that the Legislature itself did not intend to bring to tax the receipt from the Insurance Company on the loss of the capital asset as income under the head ' Business '. He submitted that the Legislature has recognised the position that even in respect of a capital asset, such as building, machinery, plant or furniture owned by the assessee, and used for the purposes of business, th ..... X X X X Extracts X X X X X X X X Extracts X X X X
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