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PETITIONER: RAGHUVANSHI MILLS LTD.

       Vs.

RESPONDENT: COMMISSIONER OF INCOME-TAX,BOMBAY CITY.

DATE OF JUDGMENT: 03/11/1952

BENCH: BOSE, VIVIAN BENCH: BOSE, VIVIAN MAHAJAN, MEHR CHAND DAS, SUDHI RANJAN HASAN, GHULAM

CITATION:  1953 AIR    4            1953 SCR  177  CITATOR INFO :  F          1959 SC 814  (16,18,45,48)  R          1965 SC1227  (6)  E&D        1992 SC1495  (17,22,23)

ACT: Income-tax-Moneys   received   under   "consequntial    loss policies"  --  Whether  income-Assessability-Definition   of income"-Exemption  of receipt not arising out  of  business- Indian Income-tax Act, (XI of 1922). ss (6C), 4 (3) (vii).

HEADNOTE: The  appellant  mills had insured its  building,  plant  and machinery with various insurance conapanies against fire and had  also taken out some -policies of the type known.  as  " consequential loss policies " which insured against loss  of profits, standing charges and agency commission.  The  mills were completely destroyed by fire and the appellant received certain sums of money under the consequential loss policies. Held, that sums of money received under these policies  were "income"-within  the  meaning-of  s. 2 (60)  of  the  Indian Income-tax Act, and as they were inseparably connected  with the ownership and conduct of the business of the company and arose I from it, they were not exempt under s. 4 (3)  (vii), and were therefore assessable to income-tax under the Indian Income-tax  Act. [Their Lordships, made it clear  that  they proceeded   the assumption that the whole sum was assignable to loss of profits and that they decided nothing about other moneys which may be distributable amongst other beads, e.g., standing charges or agency commission.] The  definition  of "income" in Shaw Wallace  &  Co.’s  case [(1932)  59  I.A.  206] as  a  "periodical  monetary  return ’coming  in’  with  some sort  of  regularity,  or  expected regularity,  from  definite  sources "  must  be  read  with reference  to the particular facts of that case and  is  not applicable to receipts, of this nature. The  King v. B.C., Fir and Cedar Lumber Co. [1932] A.C.  441 and  Commissioners  Of  Inland  Revenue  v.  Wi   WiIliams’s Executors  [1944] 26 Tax Cas. 23 applied.   Commissioner  of Income-tax, Bengal v. Shaw Wallace & Co. (1932) 59 I.A. 206, commented upon.

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Judgment o f the Bombay High Court affirmed.

JUDGMENT: CIVIL  APPELLATE JURISDICTION: Civil Appeal No. 55 of  1950. Appeal  by special leave from the Judgment and  Order  dated March  18. 1949, of the High Court of Judicature  at  Bombay (Chagla C. J. 178 and  Ten dolkar J.) in Income-tax Reference No. 5 of.  1948, arising  out  of  order dated September  27,  1947,  of  the Income-tax  Appellate Tribunal, Bombay Bench ’A’, in  I.T.A. No. 2205 of 1946-47. C.   K. Daphtary, Solicitor-General for India, (K.  T. Desai and A.M. Mehta, with him) for the appellant. M.   C. Setalvad, Attorney-General for India, (G.  N. Joshi, with him) for the respondent. 1952.  November 3. The Judgment of the Court ,Was  delivered by Bose, J. This is an appeal from the High Court at Bombay  in an  Income-tax Reference under section 66 (1) of the  Indian Income-tax Act of 1922. The  reference  was  made to the Bombay High  Court  by  the Bombay  Bench  of the Income-tax Appellate Tribunal  in  the following circumstances. The   appellant-assessee   is  a  company  known   its   the Raghuvanshi Mills Ltd., of Bombay.  The assessment year with which  we  are  concerned is  1945-46.   ’The  assessee  had insured  its  buildings, plant and  machinery  with  various insurance  companies  and  also  took  -out,  besides  those policies, four policies of a type known as a  "Consequential Loss  Policy." This kind of policy insures against  loss  of profit,  standing charges and agency commission.  The  total insured  against under, the latter heads was  Rs.  37,75,000 account  of  loss.of profits and standing charges,  and  Rs. 2,26,000    account of agency commission, making a total  of Rs. 40,00,000.   On  the 18th of January, 1944, a fire. broke out and  the mill  were  completely  destroyed.   The  various  insurance companies therefore paid the assessee company an   aggregate of Rs. 14,00,000   account in the year  with  which  we  are concerned under these policies.    This was paid in two sums as follows:- Rs.  8,25,0.00    8th  September, 1944,  and  Rs.  5,75,000 22nd  December, 1944.  These payments have been  treated  as part of the assessee’s ’income and the 179 company has been taxed accordingly.  The question is whether these sums are or are not liable to tax. Before  we  set  out  the  question  referred,  it  will  be necessary to state that the whole of this Rs. 14,00, 000 has been  treated  as paid   account of loss  of  profits.   The learned Solicitor-General, who appeared for the-)  appellant assessee, contended that that was wrong because the  portion of  it assignable to standing charges and agency  commission could not   any construction be liable to tax. This  contention is new and involves questions of  fact  and travels beyond the scope’ of the question referred.  We  are consequently not, able to entertain it. It has been  assumed throughout the proceedings, tight up to this Court, that the whole  of  the  Rs.  14,00,000 was  assignable  to  loss  of profits.  There is nothing   the record to show that it  was ever  split  up among the other heads or that  it  was  ever treated &a having been split up,either by the insurance com-

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panies or by the assessee, nor is there any material   which we  would be able to apportion it.  Our  decision  therefore proceeds    the assumption that the whole sum is  assignable to  loss  of profits and we make it clear  that  we  ’decide nothing about other moneys which may be distributable  among other heads. The question has been referred in these terms:- "Whether  in the circumstances of the case, the sum  of  Rs. 14,00,000  was  the  assessee company’s  income  within  the meaning  of Section 2(6C) of the Indian Income-tax  Act  and liable to pay income-tax under the Indian Income-tax Act." We  are  concerned  in  this  case  with  four  policies  of insurance  with  four different  insurance  companies.   The clauses  relevant to the present matter are the same in  all four  cases  though-  the  sum  insured  against  by.  -each insurance company differs.  They are as follows "POLICY NO.  C.L. 110018........... 180                     Rupees X Lacs only  Loss of Profits, Standing Charges and Agency Commission of the above Co.’s Mills, situate at Haines o Road,  Mahaluxmi; Bombay,  following              ..........  The  total amount declared for insurance is Rs.  40,00,000 and for 18 months’ benefits only as under:- Rs. 37,75,000   Loss of Profits and Standing Charges. Rs. 2,25,000      Agency Commission. Rs.  40,00,000 Out, of which this policy covers Rs.  X  lacs only. Schedule  attached to and forming part of Po licy No. C.  L. 10018.  The company will pay to the assured:- The loss of Gross Profit due to (a) Reduction in Output  and (b@) increase in Cost of Working and the, amount payable  as indemnity hereunder shall............ Definitions  of  those  two  terms  follow.   We  need   not reproduce talent.  Then come the following definitions:- "Gross profit.-The sum produced by adding to the Net  Profit the  amount of the Insured Standing Charges, or if there  be no  Net Profit the amount of the Insured  Standing  Charges, less  such  -a  proportion of any net trading  loss  as  the amount  of  the Insured Standing Charges bears  to  all  the Standing Charges of the business. Net profit.-The net trading profit (exclusive of all capital receipts  and accretions and all outlay properly  chargeable to  capital) resulting from the business of the  Insured  at the  premises  after due provision -has been  made  for  all Standing ’and other charges including depreciation. Insured   standing   charges.-Interest    Loans   and   Bank Overdrafts,  Rent  Rates and Taxes,  Salaries  to  Permanent Staff and Wages to Skilled Employees,                            181 Directors’   Fees,  Auditor’s  Fees,  Travelling   Expenses, Insurance Premiums, Advertising and Agency Commission. Period   of  indemnity.--The  period  beginning   with   the occurrence  of the fire and ending not later  than  eighteen consecutive  calendar  months thereafter  during  which  the results of the business shall be affected in consequence  of the fire. Rate  of  Gross Profit. The rate of gross  profit  per  unit earned    the output during the financial  year  immediately before   the  date  of  the  fire.........  to  which   such adjustments shall be made as may be necessary to provide for the  trend of the business and for variations in or  special circumstances affecting the business either before or  after the  fire or which would have affected the business had  the fire  not occurred so that the figures thus  adjusted  shall

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represent  as  nearly as may be reasonably  practicable  the result  which,  but for the fire, would have  been  obtained during the relative period after the fire.  " - The  underlined words show that the insurance in respect  of profits was to represent as ’nearly as possible the  profits which  would have been made, had the mills been  working  in its normal way. We  turn  next to the Income-tax Act.  Under section  3  the "total income of the previous year" is liable to tax subject to  the provisions of the Act.  Section 4 defines the  total income to include "all   income,  profits  and  gains  from  whatever   source derived." There are certain qualifications but they do not concern  us here. It will be seen that the taxable commodity, "total  income", embraces  three elements, "income", "profits"  and  "gains". Now  though  these  may  overlap in  many  cases,  they  are nevertheless separate and severable, and the simple question is whether the Rs. 14 lacs Here italicised. 24 182 fall  under  any  one  or  more  of  those  heads.   In  our opinion, it is "income" and so is taxable.     It was argued   behalf of the assessee that it can  not be called profits because the money is only pay able if  and when  there  is a loss or partial loss  and  that  something received from an outside source in circumstances like  these is  not money which is earned in the business and  if  there are  no earnings and no profits there cannot be any  income. But  that only concentrates   the word " ’  profits".   This may  not be a "profit" but it is something which  represents the  profits and was intended to take the place of them  and is  therefore  just  as  much income  as  profits  or  gains received  in  the  ordinary way.  Section 4  -is  so  widely worded  that everything which is received by a man and  goes to  swell the credit side of his total account is either  an income or a profit or a gain. No  attempt  has  been made in the Act  to  define  "income" except  to  say in section 2 (6C) that it  includes  certain things which would possibly not have been regarded as income but for the special definition.  That however does not limit the  generality of its natural meaning except as  qualifided in  the  section itself.  The words  which  follow,  namely, "from  a whatever source derived", show how wide the net  is spread.  So also in section 6. After setting out the various heads  of  taxable  income it brings  in  the  all-embracing phrase "income from other sources." There is however a distinction between "income" and "taxable income".  The Act does not purport to subject all sources of income  to tax, for the liability is expressly made  subject to the provisions of the Act and among the provisions are  a series of exceptions and limitations.  Most of them are  set out  in section 4 itself but none of them apply  here.   The nearest  approach  for  present purposes is  section  4  (3) (vii):- "Any  receipts.........  not  being  receipts  arising  from business............ which are of a casual and non-recurring nature."                            183 But the sting, so far as the assessee is concerned, lies  in the words "not being receipts arising from business." The  assessee  is a business company.  Its aim  is  to  make profits and to insure against loss.  In the ordinary way  it

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does this by buying raw material, manufacturing goods out of them and selling them so that   balance there is a profit or gain  to  itself.  But it also has other ways  of  acquiring gain,  as  do  all prudent businesses,  namely  by  insuring against  loss of profits.  It is indubitable that the  money paid in such circumstances is a receipt and in so far as  it represents  loss of profits, as opposed to loss  of  capital and so forth, it    is an item of income in any normal sense of the term.   It  is equally clear that the receipt is  in- separably connected  with the ownership and conduct  of  the business  and  arises.  from it.   Accordingly,  it  is  not exempt. This question was considered by the Supreme Court of  Canada which  decided  that  a  receipt of this  nature  is  not  a "profit" and so is not taxable [B.  C. Fir and Cedar  Lumber Co.  v.  The King(1)].  But the Court did  not  examine  the wider  position whether it is "income" and in any event  the decision  was  reversed   appeal to  the  Privy  Council(1). Their  Lordships  held it is "income".   This  was  followed later by the Court of Appeal in England and endorsed by  the House  of  Lords  in  Commissioners  of  inland  Revenue  v. William’s  Executors(1) In so far as these decisions do  not turn    the special wording of the Acts with which they  are respectively  concerned  and  deal -with  the  more  general meaning  of the word "income", we prefer the view  taken  in England. It  is  true  the Judicial Committee  attempted  a  narrower definition  in Commissioner of income-tax v. Shaw Wallace  & Co.(1), by limiting income to "a periodical monetary  return ’coming  in’  with  some sort  of  regularity,  or  expected regularity,  from  definite sources" but,  in  our  opinion, those remarks must be (I)  [1931] Canada L.R. 435. (2)  [I932] A. C. 441 at 448. (3)  (I944) 26 Tax Cas. 23. (4)  (1932) 59 I.A. 206. 184 read  with reference to the particular facts of  that  case. The  non-recurring  aspect  of  this  kind  of  receipt  was considered by the Privy Council in The King v. B. C. Fir and Cedar  Lumber Co.(1), and we do not think  $their  Lordships had  in  mind a case of this nature when they  decided  Shaw Wallace & Company’s case (2). The  learned Solicitor- General relies strongly    a  clause which  appears in three of the four policies with  which  we are  concerned.   That  is a clause which  states  that  the insured  must do all he can to minimise the loss in  profits and until he makes an endeavour to re-start the business the moneys  will not be paid.  This, he argued, shows  that  the money  was paid as an indemnity against the loss of  profits and was niether income nor profits, nor was it a gain within the meaning of the section.  We are unable to see how  these receipts  cease to be income simply because  certain  things must be done before the moneys can be claimed. In our opinion, the High Court was right in holding that the Rs. 14,00,000 is assessable to tax.  The appeal fails and is dismissed with costs. Appeal dismissed. Agent for the appellant: Bajinder Narain. Agent for the respondent: P. A. Mehta. (1) [1032] A.C. 441, at 448.   (2) [1932] 59 I.A. 206. 185