COMMISSIONER OF INCOME-TAX, CALCUTFA vs. M/S. MOON MILLS LTD.

CIVIL APPEAL No. 839/1964Supreme Court[1966] 2 S.C.R. 39326 October 1965Bench: 3 JudgesAuthor: K. SUBBA RAO, J.C. SHAH, S.M. SIKRI9 pages
AI SummaryDismissed

What were the facts?

The assessee, M/s. Moon Mills Ltd., suffered a fire loss to its stock-in-trade, machinery, and buildings on August 6, 1948. The assessee received Rs. 65 lakhs from the insurance company in full settlement. A sum of Rs. 27,06,593 represented the loss in respect of buildings and machinery. This amount was received on March 27, 1950. The assessee did not include this amount in its return for assessment year 1949-50. The Income-tax Officer included it for assessment year 1949-50, considering it receivable in December 1948. The Appellate Assistant Commissioner, the Income-tax Appellate Tribunal, and the High Court all ruled in favor of the assessee, holding that the amount was taxable only upon actual receipt.

What did the Supreme Court hold?

The Tribunal held that the compensation for the loss of machinery and buildings by fire could not be assessed during the assessment year 1949-50 because it was not actually received by the assessee during that accounting year. The Court reasoned that while section 13 of the Act mandates computing profits according to the assessee's accounting method (mercantile basis), the concept of assessable income differs from commercial profit and loss. Section 10(2)(vii), fourth proviso, introduces a fiction where insurance money received in respect of destroyed capital assets is deemed profit in the year of receipt. This fiction cannot be enlarged to include amounts merely receivable. The definition of 'paid' in section 10(5) indicates that other terms like 'received' should be given their natural meaning. Therefore, 'received' does not mean 'receivable'. The appeal was dismissed.

What were the issues?

1. Whether the sum of Rs. 27,06,593 was assessable as a profit of the assessee company for 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, 1922, when the assessee maintained its accounts on a mercantile basis and the claim was accepted in December 1948, thereby creating a right to receive the amount? Assessee's contentions: The compensation amount could only be brought to tax under the fourth proviso to section 10(2)(vii) when it was actually received. There is a distinction between computing profits on commercial accounting principles (mercantile basis) and statutory allowances under section 10(2). Revenue's contentions: The assessee maintained its accounts on a mercantile basis. Therefore, profits and gains should be computed accordingly. Since the claim was accepted in December 1948, the assessee acquired a right to receive the amount, making it part of the taxable income for the accounting year.

Which sections of the Income-tax Act were involved?

Section 10(2)(vii),Section 13,Section 10(5)

AI-generated summary — verify with the full judgment below

•. - - A COMMISSIONER OF INCOME-TAX, CALCUTfA B c D E F G H 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 as- sessment year 1949-50. The Income-tax Officer, on the ground that the said amount became receivable by the assessee in December 1948, in- cluded 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

The order continues below.

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