Raghuvanshi Mills Ltd. v. Commissioner of Income-Tax, Bombay City

Judgment

CIVIL APPELLATE JURISDICTION: Civil Appeal No. 55 of 1950. Appeal by special leave from the Judgment and Order elated March 18, 1949, of the High Court of Judicature at Bombay (Chagla C. J. Nov.$. Raghuvanshi Mills.Ltd. Commissioner of Income~tax, Bombay City. Bote J, (19.53] and Tendolkar 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 LT.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. 'l'he 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. 'l'he 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 kuown as the Raghuvanshi Mills T"td., of Bombay. Tbe assessment year with which we are concerned is 1945-46. Tbe assessee had insured its buildings, plant and machinery with various insurance companies and also took out, besides those policies, four policies of a type knowt~ as a "Consequential I"oss Policy."' This kind of policy insures against loss of profit, standing charges and agency commission. 'l'he total insured against under the latter beads was Rs. 37, 75,000 on account of. loss of profits and standing charges, and Rs. 2,25,000 on account of agency commission, making a total of Rs. 40,00,000.

On the 18tb of January, 1944, a fire broke out and the mills were completely destroyed. 'l'he various insurance companies therefore pa\d the assessee company an aggregate of Rs, 14,00,000 on account-in the year with which we are concerned under tbese policies. This was paid in two sums· as follows:- Rs. 8,25,000 on 8th September, 1944, and Rs. 5,75,000 on 22nd December, 1944. These payments bave been treated as part of tbe assessee's income and the ;t-- S.C.R. com"pany has been taxed accordingly. The question 195'13 is whether these sums are or are not liable to tax. Raghuvrmshi Before we set out the question referred, it wiil be llfills Ltd necessary to state that the who le of this Rs. 14,00,000 0 . v~ fi onunissionsr of has been treated as pa1 on account o oss o pro ts.

Jncome-t<W The learnid Solicitor-General, who appeared for the Bombay Cit;. appellant assessee, contended that that was wrong because the portion of it assignable to standing BossJ. charges and agency commission could not on any - construction be liable to tax. 'l1his contention is new and involves questions of fact and travels beyond the scope of the question referred. \Ve are consequently not able to entertain it. It has been assumed throughout the proceedings, right up to this Court, that the whole of the Rs. 14,00,000 was assignable to loss of profits. There is nothing on the record to show that it was ever split up among the other heads or that it was ever treated as having been split up, either by the insurance companies or by the assessee, nor is there any material' on which we would be able to apportion it.

Our desiision · therefore proceeds on 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 (60) of the Indian Income-tax A-ct 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. 'fhe 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. O.L. 10018 ... , ... ,, ..... ,, [1953] 195• Rupees X La~s only Baghuvanshi On I.JOSS of Profits, Standing Charges and Agency Mills Ltcl.

Contmission of the above Co. 's Mills, situate at Haines Road, Mahaluxmi, Bombay, following fire ................. . Commissioner of The total amount declared for insurance is I nco1ne-taa::, Bombay City. Rs. 40,00,000 and for 18 months' benefi~s only as under:- Bose J. Rs. 37,75,000 On I;oss of Profits and Standing Charges. Rs. 2,25,000 On Agency Commission. Rs. 40,00,000 Rs. X lacs only. Out of which this policy covers Schedule attached to and forming part of Policy No. C. L. 10018. The company will pay to the assured:- The loss of Gross Profit due to (a) R-eduction 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 them.

Then come the following definitions :- "Gross proftt.-'fhe 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 proftt.-The net trading profit (exclusive of all capital receipts and accretions and all outlay properly chargeable to capital) resulting frorri 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 on Loans and Bank Overdrafts, Rent Rates and Taxes, Salaries to Permanent Staff and Wages to Sk:illed Employees, S.C.R. Directors' Fees, Auditor's Fees, Travelling Expenses, Insurance Premiums, Advertising and Agency Commission. R'1.ghuva.n«-hi '1fills Ltd. Period of indemnity. --The period beginning with Commissioner of the occurrence of the fire and ending not later than Income-tax, Bombay Oitw e1g teen consecu 1ve ca en ar mont s t erea ter during which the results of the business shall be Bose J. affected in consequence of the fire. --3t Rate of Gross Profit.-The rate of gross profit per unit earned on 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 represent as nearly as may be reasonably practicable the result whiclu, but for the fire, would have been obtained during the relative period (ff ter 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 *!fore italicised. 21 [1953] falls under any one or more of those heads. In our opinion, it is "income" and so is taxable. Raghuvanshi Mills Lm.

It was argued on behalf of the assessee that it cannot 'be called profits because the money is only pay- Oomm·issioner of able if and when there is a loss or partial loss and Income-tam, that something received from an outside source in Bombay City. t l'k th t h' h · circums ances 1 e ese 1s no money w 1c 1s earne Bose J. in the business and if there are no earnings and no profits there cannot be any income. But that only concentrates on 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 p.rofits 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 (60) that it includes certain things which would possibly not havebeen regarded as income but for the special definition. That. however does not limit the generality of its natural meaning except as qualified in the section itself. The words which follow, namely, "from 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 betwee1i "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." S.C.R. SUPREME COUR'r REPOR'rS But the sting, so far as the assessee is concerned, lies in the words "not being receipts arising from Ra!Jhuvan8hi business." Mills Ltd. 'fhe assessee is a business company. Its aim is to make profits and to insure against loss. In the ordi- GommissioMr of 't d th' b b t · 1 lnconUJ·tax, nary way I oes is y uy111g raw ma ena , manu- Bombay City. facturing goods out of them and selling them so that on 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 insepar!j>bly 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 on appeal to th€l Privy Council(2). 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( 3). In so far as these decisions do not turn on 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 n,ttempted a nar- ' rower definition in Commissioner of Income-tax v. Shaw Wallace cf: Co. (4), by limiting income to "a periodical monetary return 'corning in' with some sort of regularity, or expected regularity, from definite sources" but, in our opinion, those remarks must be 11) [1931] Canada L.R. 4)5. (2) [1932] A.C. 441 at 448. (3) (1944) 26 Tax Cas, 23. (4) (1932) 59 I.A. 206. Bose J. i84 8UPREME COURT REPOkl'8 [1953] 19s2 read with reference to the particular facts of that case. The non-recurring aspect of this kind of receipt Baahuvnnshi was considered by the Privy Council in The King v · Mill:. Ltd. B. a. Fir and Cedar Lumber Co.(1), and we do not think Courn>issioner of their Lordships had in mind a case of this nature Inc0nic-tnx, when they decided Shaw Wallace if: Compnny's case(2). liombay Ody. The learned Solicitor-General relies strongly on a Bo'" J. 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 endea- ' vour to re-start the business the moneys will not be paid. 1'his, he argued, shows that the money was paid as an indemnity against the loss of profits and was neither 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 c.laimed. 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: Rajinder Narain. Agent for the respondent : P. A. l'tfehta. Ir) f 1932J A.C. 441, at HS. (2) [1932] 59 I.A. 206. r t