PETITIONER: UNIVERSAL RADIATORS, COIMBATORE Vs. RESPONDENT: COMMISSIONER OF INCOME TAX, TAMIL NADU DATE OF JUDGMENT30/03/1993 BENCH: SAHAI, R.M. (J) BENCH: SAHAI, R.M. (J) THOMMEN, T.K. (J) CITATION: 1993 AIR 2254 1993 SCR (2) 775 1993 SCC (2) 629 JT 1993 (3) 150 1993 SCALE (2)393 ACT: Income Tax Act, 1961 : Sections 4 and 10(3). Assessee--Manufacturer of automobile radiators--Copper ingots booked from America--To be rolled in Bombay as and sheets and despatched to assessee for manufacture--Ship carrying goods seized by Pakistan--Insurance company paying value of goods in dollars--Devaluation of Indian rupee--The difference of the Indian rupee before devaluation and that received after devaluation--Excess held a capital receipt--Not business receipt--Receipt of casual nature--Sterilization of stock in trade. Words and Phrases--Meaning of 'Income'--'Casual'. HEADNOTE: The appellant assessee a manufacturers 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. The Indian Rupee In the meanwhile had been devalued and, therefore, in terms of rupees the appellant firm got Rs. 3,43,556/- as against their payment of Rs. 2,00,164/- at the old rates. The differnece was credited to profit on devaluation in the Profit and Loss Account. The claim of the appellant that the difference being a causal receipt and non-recurring In nature, and as such was not liable to tax, was not accepted by the IncomeTax Officer. The Appellate Assistant Commissioner rejected the appeal of the assessee, being of the opinion that the receipt was one which did not arise directly from carrying on business by the assessee but was the incidental 776 to it, and not finding any merit in the submission that the ultimate realisation was in the nature of capital gains and not revenue recipt. In further appeal by the assessee, the Tribunal held that when the goods were seized by the Pakistan authorities the character of the goods changed and it became sterilized and, therefore, it ceased to be stock-intrade of the assessee, that the devaluation surplus was in nature of capital receipt and not a profit made by the assessee in the course of business, that the money which came to the assessee was as a result of the settlement of the insurance claim and, therefore, the profit that resulted from it could not be considered in the normal course of business. The High Court in its advisory jurisdiction at the instance of the' Department negatived the claim of the assessee for two reasons, one the difference in the cost price and the sale price, and the other that it was revenue receipt, and did not agree with the Tribunal as according to it if the assessee had got the goods imported into India and sold them it would have got higher amount as a result of devaluation, and held that there could be no dispute that the assessee was liable to pay tax on the difference of the sale price and the cost. It further held that the nature of the amount which came in the hands of the assessee was a revenue receipt, and did not agree that the payment made to the assessee was otherwise than for business, as the whole transaction was part and parcel of the business carried on by the assessee and could not be described as extraneous to it. In the assesses appeal to this Court, on the question whether the excess amount paid to the assessee due to fluctuation in exchange rate was taxable or not. Allowing the appeal, this Court, HELD : 1. The word 'income', ordinarily in normal sense, connotes any earning or profit or gain periodically, regularly or even daily in whatever manner and from whatever source. It is thus a word of very wide import. Section 2(24) of the Income Tax Act is legislative, recognition of its elasticity. Its scope has even widened from time to time by extending it to varied nature of income. Even before it was defined as including profits, gains, dividends and contributions received by a trust it was held to be a word, 'of broadest connotation' which could not be understood in restricted or technical sense.' [781 D-E] 777 Raghuvanshi Mills Ltd., Bombay v. Commissioner of Income Tax, Bombay City, (1952) 22 ITR 484, referred to. [781 E] 2. 'Casual' means accidental or irregular. If the irregular or the accidental income arose as a result of business activity, them even if it was non-recurring, it may not have fallen outside the revenue net. The real test, is therefore, what was the nature and character of the income which accrued to the assessee. The causal nature of it or non-recurring nature were only aids to decide if the nature of income was in the course of business or otherwise. [782 F] Barendra Prasad Ray and Ors. v. Income Tax Officer, (1981) 129 ITR 295; S. G. Mercantile Corporation Pvt. Ltd. v. Commissioner of Income Tax, (1972) 83 ITR 700; Commissioner of Income Tax v. Calcutta National Bank, (1959) 37 ITR 171 and Commissioner of Income Tax, Mysore v. Canara Bank Ltd. (1967) LXIII ITR 328, referred to. [782 G, H, 783 B] 3. An income which was casual in nature could be brought In the revenue net only if it arose from business. In other words the receipt or profit of the nature covered by Section 10(3) could be brought to tax if it was the result of any business activity carried on by the assessee. [783 D] In the instant case, the assessee carried on business of manufacturing radiators and not ingots. The ingots were imported to be converted into strips and sheets at Bombay. The link which could create direct relationship between the finished goods and the raw material was snapped even before it reached Bombay. Payment made for loss of such goods did not bear any nexus with the assessee's business. May be that if it would have reached, it could have been 'after conversion into strips and sheets used as raw material. But so long as it did not reach Bombay and was not converted into raw material, the connection it bore with the assessee's business was remote. And any payment made in respect of it could not be said to accrue from business. [783 E] Strong and Company of Romsey, Limited v. Woodifieid (Survevor of Taves), 5 Tax Cases p.215, referred to. [783 F] 4. 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 778 between the two is established. [784 B] In the Instant case, what was lost 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 from business of the assessee. [784 C] S. Income from goods purchased for business is not an income from business. In the instant case buying ingots by the assessee was not a part of its trading activity. [784 F] State Bank of India v. Commissioner of Imcome Tax, Ernakulam, (1986) 157 ITR 67, distinguished. [784 F] 6. Taxability on 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. Taxability of the amount paid on settlement of claim by the insurance company depends both on the nature of payment and purpose of insurance. [785 D-E] 7. Any payment being accretion from business, the excess or surplus accruing for any reason may be nothing but profit. But where payment is made to compensate for loss of use of any goods in which the assessee does not carry on any business or the payment is a just equivalent of the cost incurred by the assessee, but excess accrues due to fortuitous circumstances or is a windfall, then the accrual may be a receipt, but it would not be income arising from business, and, therefore, not taxable under the Act. [785 F- G] Commissioner of Inland Revenue v. William's Executors, 26 Tax Cases p.23, referred to. [785 H] In the instant case, the assessee did not carry on business of buying and selling of ingots. The compensation paid to the assessee was not for any trading or business activity, but just equivalent in money of the goods lost by the assessee which it was prevented from using. The excess arose on such payment in respect of goods in which the assessee did not carry on any business. Due to fortuitous circumstances of devaluation of currency, but not due to any business or trading activity the amount could not 779 be brought to tax. [786 C-D] Commissioner of Income Tax v. Union Engineering Works, (1976) 105 ITR 311, approved. [786 G] JUDGMENT:
CIVIL APPELLATE JURISDICTION: Civil Appeal No. 5897 of 1983.
From the Judgment and Order dated 25.7.1979 of the Madras
High Court in Tax Case No. 54/76 (Reference No. 35/76.)
T.A. Ramachandran and Janki Ramachandran for the Appellant.
J. Ramamurthy, P. Parmeswaran (NP), Ranbir Chandra (NP),
T.V. Ratnam and Ms. A. Subhashini (NP) for the Respondent.
The Judgment of the Court was delivered by
R.M. SAHAI, J. Legal issues that arise for consideration in
this appeal, directed against the decision of the High Court
in Commissioner of Income Tax, Tamil Nadu v. Universal
Radiators, (1979) 120 ITR 906 on questions of law referred
to it in a reference under the Income Tax Act (in brief ‘the
Act’) are, if the excess amount paid to the assessee due to
fluctuation in exchange rate was taxable either 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,
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 assessee for being used for manufacture.
While the ingots were at sea, hostilities broke out between
India and Pakistan and, the vessel carrving 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 Rs. 3,43,556 as
against their payment
780
of Rs. 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 appellant that the difference
being a casual receipt and non-recurring in nature, it was
not liable to tax, was not accepted by the Income Tax
Officer. In appeal the Appellate Assistant Commissioner was
of opinion that the receipt was one which did not arise
directly from carrying on business by the assessee but was
incidental to it. But he did not find any merit in the
submission that the ultimate realisation was in nature of
capital gains and not revenue receipt. In further appeal
the Tribunal held that when the goods were seized by the
Pakistan authorities the character of the goods changed and
it became sterlised and, therefore, it ceased to be
stock-in-trade of the assessee. The Tribunal held that the
devaluation surplus was in nature of. capital receipt and
not a profit made by the assessee in course of business. It
further found that the money which came to the assessee was
as a result of the settlement of the insurance claim and,
therefore, the profit that resulted from it could not-be
considered to have arisen in normal course of business.
When the matter came to the High Court, in its advisory
jurisdiction, at the instance of the department, on the
following questions of law,
(i) Wether, on the facts and in the
circumstances of the case, the Appellate
Tribunal was right in law, in holding that the
devaluation surplus earned by the assessee
consequent to the settlement of the claim by
the insurance company is not assessable as
revenue receipt for the assessment year 1967-
68 ?
(ii)Whether on the facts and in the
circumstances of the case, the Appellate
Tribunal was right in holding that the profit
earned by the assessee on account of
devaluation of Indian Currency was not in the
course of carrying on of the business or
incidental to the business ?
It did not agree with the Tribunal as according to it if the
assessee had got the goods imported into India and sold them
it would have got higher amount as a result of devaluation.
Therefore, it held that there could be no dispute that the
assessee was liable to pay tax on difference of the sale
price and the cost. The High Court further held that the
nature of the amount which came in the hands of the assessee
was revenue receipt. It
781
did not agree that the payment made to the assessee was
otherwise than for business, as the whole transaction 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 assessee for two
reasons, one, the difference in the cost price and the sale
price, and the other, that it was revenue receipt. In
observing that, ‘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 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 normal sense, connotes any
earning or profit or pin periodically, regularly or even
daily in whatever manner and from whatever source. Thus it
is a word of very wide import. Clause (24) of Section 2 of
the Act is legislative recognition of its elasticity. Its
scope has been widened from time to time by extending it to
varied nature of income. Even before it was defined as
including profits, gains, dividends and contributions
received by a trust it was held to be a word, ‘of broadest
connotation’ which could not be ‘understood in restricted or
technical sense’. The wide meaning of the word was
explained by this Court in Raghuvanshi Mills Ltd., Bombay v.
Commissioner of Income Tax, Bombay city, (1952) 22 ITR 484
and it was emphasised that the expression, ‘from whatever
source derived’ widened the net. But exigibility to tax is
not the same as liability to pay tax. The former depends on
charge created by the Act and latter on computation in
accordance with the provisions in the Act and the rules.
Surplus in consequence of devaluation of the currency was
undoubtedly receipt, but the liability to pay tax on it
could arise only if it was income for purposes of the Act
and was not liable to be excluded from computation under any
of the provisions of the Act or the rules framed thereunder.
Section 10 of the Act provided for exclusion of certain
income from computation. One of its subsection, which is
relevant for this appeal, during the period under dispute,
stood as under,
In computing the total income of a previous
year of any
782
person, any income failing within any of the
following clauses shall not be included
(3) any receipts which are of a casual and
non-recurring nature, unless they are
(i)
(ii)receipts arising from business or the
exercise of a profession or occupation; or
(iii)
In substantive clause, an income which was casual and non-
recurring in nature was excluded from being charged as
income of the assessee. Due to use of word, ‘and’,
existence of both the conditions was mandatory. Absence of
any disentitled the assessee from claiming any benefit under
the clause. C Casual’ according to dictionary means
‘accidental or irregular’. this meaning was approved by this
Court in Ramanathan Cheuiar v. Commissioner of Income Tax,
Madras, (1967) 63 ITR 458. Non-recurring is one which is
not likely to occur again in a year. But an income even
after satisfying the two conditions may still not have been
liable to be excluded if it fell in one of the exceptions
carved out by the proviso. In other words, the receipt
should not only have been casual and non-recurring only 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 if
the nature of income was in the course of business or
otherwise. In Raghuvanshi Mills Ltd. (Supra) it was held by
this Court that a 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
manfacture or any adventure or concern in the nature of
trade, commerce or manufacture’. In Barendra Prasad Ray and
Ors. v. Income Tax Officer, (1981) 129 ITR 295 it has been
held, by this Court, that the expression,
783
‘business’ is of very wide import and it means an activity
carried on continuously and systematically by a person by
the application of his labour and skill with a view to
earning the income. The width of the definition has been
recognised, by this Court, even in S.G. Mercantile
Corporation Pvt. Ltd. v. Commissioner of Income Tax (1972)
83 ITR 700 and Commissioner of Income Tax v. Calcutta
National Bank, (1959) 37 ITR 171. And even a single venture
has been held to amount to business and the profit arising
out of such a venture has been held to be taxable as income
arising from business. In Commissioner of Income Tax,
Mysore v. Canara Bank Ltd., (1967) LXIII ITR 328 it was
held, by this Court, that where money was lying idle and the
blocked balance was not employed for internal operation or
for business by the bank the profit accruing to the assessee
on the blocked capital due to fluctuation in exchange rate
could not be held to be income arising out of business
activity or trading operation. The ratio reflects the
rationale implicit in sub-section (3) of Section 10 of the
Act. An income which was casual in nature could be brought
in the revenue net only if it arose from business. In other
words the receipt or profit of the nature covered by Section
10(3) could be brought to tax if it was result of any
business activity carried on by the assessee.
The assessee carried on business of manufacturing radiators
and not ingots. They were imported to be converted into
strips and sheets at Bombay. The link which could create
direct relationship between the finished goods and raw
material was snapped even before it reached Bombay. Payment
made for loss of such goods did not bear any nexus with the
assessee’s business. May be that if it would have reached,
it could have been after conversion into strips and sheets
used as raw material. But so long it did not reach Bombay
and was not converted into raw material, the connection it
bore with the assessee’s business was remote. And any
payment made in respect of it could not be said to accrue
from business. In Strong and Company of Romsay, Limited v.
Woodifield (Surveyor of Taxes), 5 Tax Cases p.215, a
converse case where the assessee claimed deduction of
certain payments made to a customer, for the injury caused
to him by falling off a chimney due to the assessee’s
servant’s negligence, it was held,
“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
784
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 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 from business of the. assessee.
For deciding the next aspect, namely, if the excess payment
due to devaluation could be treated as revenue receipt, two
questions arise, one, if the ingots were stock-in-trade and
other the effect in law of its being blocked or sterlised.
Stock-in-trade is goods or commodity in which the assessee
deals in course of business activity. Good or commodity may
be capital or revenue depending on. if it is bought or sold
or is used or exploited by the assessee. Since the ingots
by itself were not raw material and were not usable by the
assessee for the business of manufacturing radiators, unless
they were converted into strips and sheets, they could not
be treated as stock-in-trade. The buying of the ingots by
the assessee was not a part of its trading activity. Income
from goods purchased for business is not an income from
business. Ratio in State Bank of India v. Commissioner of
Income Tar, Emakultam, (1986) 157 ITR 67 relied on behalf of
department is not helpful’ as the Bank of Cochin, as part of
its banking business, had been purchasing cheque payment
orders, mail transfers, demand drafts etc. drawn in foreign
currencies which were sold or en- cashed through assessee
correspondent banks in foreign currencies concerned and
proceeds credited to the current account of the assessee and
therefore the foreign exchange was held to be stock-in-trade
of the assessee, and any increase in value of foreign
currency resulting in excess credited to the a’ssessee’s
account as a result of devaluation was held to be in
consequence of assessee’s business activity.
785
Even assuming it was stock-in-trade, it was held by this
Court in Commissioner of Income Tax v. Canara Bank Lid,
(supra) that stock-intrade, if it gets blocked and sterlised
and no trading activity could be carried-with it, then it
ceased to be stock-in-trade, and any devaluation surplus
arising on such capital due to exchange rate would be
capital and not revenue. Applying the ratio of this case,
the copper ingots, which even if assumed to be stock-in-
trade, were blocked and sterlised due to hostilities between
India and Pakistan, and, therefore, it ceased to be stockin-
trade and any surplus arising due to exchange ratio in the
circumstances was capital receipt only.
Coming to the issue whether devaluation surplus earned by
the assessee consequent on the settlement of the claim by
the insurance company could be treated as revenue receipt,
it may be stated that taxability on profit or deduction for
loss depends on whether profit or loss arises in 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 (supra) 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
taxable as such. Taxability of the amount paid on
settlement of claim by the insurance company depends both on
the nature of payment and purpose of insurance. Raghuvanshi
Mills’ decision is an authority for the proposition where
the very purpose of insurance itself is profit or gain.
Result may be the same where the payment is made for goods
in which the assessee carried on business. Any payment
being accretion from business, the excess or surplus
accruing for any reason may be nothing but profit. (see the
King v. B. C Fir and Cedar Lumber Company, Ltd. 1932 AC 441,
Green (HM Inspector of Taxes) v. J. Gliksten & Son, Ltd
Reports of Tax Gases Vol.14 p.365, Commissioner of Income-
Tax, Bombay City-III v. Popular Metal Works & Rolling Mills
(1983) ITR Vol. 142 p.361. But where payment is made to
compensate for loss of use of any goods in which the
assessee does not carry on any business or the payment is a
just equivalent of the cost incurred by the assessee, but
excess accrues due to fortuitous circumstances or is a
windfall, then the accrual may be a receipt, but it would
not be income arising from business, and, therefore, not
taxable under the Act. In Commissioner of Inland Revenue v.
William’s Executors, 26 Tax Cases p.23,
786
the distinction was explained thus,
“A manufacturer can, of course, insure his
factory against fire. The receipts from that
insurance will obviously be capital receipts.
But supposing he goes further, as the
manufacturer did in that case, and insures
himself against the loss of profits which he
will suffer while his factory is out of
action; it seems to me it is beyond question
that sums received in respect of that
insurance against loss of profits must be of a
revenue nature.”
The assessee did not carry on business of buying and selling
ingots. The compensation paid to the assessee was not for
any trading or business activity, but just equivalent in
money of the goods lost by the assessee which it was
prevented from using. The excess arose onsuch payment in
respect of goods in which the assessee did not carry on any
business. Due to fortuitous circumstances of devaluation of
currency, but not due to any business or trading activity
the amount could not be brought to tax.
The Appellate Tribunal in the instant case had found,
“the profit on account of devaluation is not
business profit or income as it has nothing to
do with the business or trading activity of
the assessee. The profit arose since the clai
m
was settled by the Insurance Company and the
Indian rupee was devalued. Even without
paying for the goods contracted for, the
assessee by an extraordinary set of fortuitous
circumstances earned a profit which by its
very nature is causal and non-recurring. In
this view of the matter the profit cannot be
charged to tax.”
The High Court of Kerala in Commissioner of Income Tax v.
Union Engineering Works, (1976) 105 ITR 311 held :
“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 the compensation for
damage caused to the goods had.-been
787
settled with the insurer, and the sum, so
settled did am 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 can not,
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 Rs.13,455.75 received by the
assessee was not a recipt 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 instant
case, the High Court, of Madras was wrong in law in
reversing the well-considered order of the Tribunal.
For reasons stated by us this appeal suceeds and is allowed.
Both the questions referred by the Tribunal to the High
Court are answered in the affirmative, i,e, in favour of
assessee and against the department. The assessee shall
be entitled to its costs.
N. V. K.
Appeal allowed.
788