Appeal No 5897 of 1983
From the Judgment and Order dated 2571979 of the Madras High Court in Tax Case No 5476 Reference No 3576 TA Ramachandran and Janki Ramachandran for the Appellant
J Ramamurthy P Parmeswaran NP Ranbir Chandra NP TV Ratnam and Ms A Subhashini NP for the Respondent
The Judgment of the Court was delivered by RM 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 vs Universal Radiators 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 103 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 343556 as against their payment 780 of Rs 200164 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  iiWhether 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 vs Commissioner of Income Tax Bombay city 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 iireceipts 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 vs Commissioner of Income Tax Madras 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
vs Income Tax Officer 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 SG Mercantile Corporation Pvt Ltd vs Commissioner of Income Tax and Commissioner of Income Tax vs Calcutta National Bank 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 vs 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 103 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 vs Woodifield Surveyor of Taxes 5 Tax Cases p215 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 vs Commissioner of Income Tar Emakultam 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 vs 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 vs B C Fir and Cedar Lumber Company Ltd  Green HM Inspector of Taxes vs J Gliksten  Son Ltd Reports of Tax Gases Vol14 p365 Commissioner of Income Tax Bombay City III vs Popular Metal Works  Rolling Mills 1983 ITR Vol
142 p361
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 vs William s Executors 26 Tax Cases p23 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 vs Union Engineering Works 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 Rs1345575 received by the assessee was not a recipt arising from its business within the meaning of section 103ii 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 ie in favour of assessee and against the department
The assessee shall be entitled to its costs
N V K Appeal allowed


Summary:
On 1741962 A  and his mother B  sold their agricultural lands measuring 3 acres and 25 acres respectively by executing two sale deeds in favour of Respondent No1 and his father for Rs10000 and Rs75000 respectively
On the same day the respondents vendees taking Rs500 back executed two separate agreements in favour of A  and B  giving them the right of repurchase at any time after 1741969 but before 1641972
On 411963 A  and B  executed agreements of sale in favour of the appellant for a consideration of Rs130000 in all
The appellant paid Rs 30000 till April 1963 to A  and B 
The appellant latter paid Rs 12500 to A  and Rs87500 to B  and the registered deeds of agreement of sale were executed by A  and B 
Again a sum of Rs1000 was paid to A  and Rs 4000 was paid to B  by the appellant A  and B  handed over the agreements executed by the respondent No1 and his father in favour of A  and B  to the appellant
Respondent No 1 s father died leaving behind his widow and son respondent No1
They refused to execute the reconveyance deed
The appellant in the Court of Subordinate Judge filed two suits for specific performance of the agreements of re conveyance delivery of possession and mesne profits one suit against the respondent No1 his 889 mother and A  and the other one against the respondent No1 his mother and B 
In the first suit the appellant deposited the amount of Rs9900 in the Court for payment to respondent No1 and his mother and Rs1600 for payment to A  and in the other suit he deposited Rs74500 for payment to respondent No1 and his mother and Rs9000 to B 
The suits were decreed ex parte
As IV and B  did not rile any application for setting aside the ex parte decree the decree passed against them became final
Respondent No1 and his mother filed an application to set aside the ex parte decree and the Court set aside the decree and allowed them to contest the suits
The suits were decreed against the respondent No1 and his mother against which they riled appeals in the High Court
The High Court setting aside the decree and judgments of the trial Court allowed the appeals riled by the respondent No1 and his mother
The plaintiff aggrieved against the judgments of the High Court preferred the present appeals by special leave before this Court
Allowing the appeals this Court HELD101
A combined reading of the documents Exhibits A3 A4 A10 and A11 leaves no manner of doubt that A  and B  had made an agreement to sell the properties in favour of the plaintiff and had also given a right to make the payment of such amount to respondent No1 and his father which they were entitled under the terms and conditions of Exhibits A3 and A4 the agreements of resale made in favour of A  and B  respectively
The plaintiff had filed a suit for specific performance of the agreement for sale impleading B  and respondent No1 and his father as defendants in one case and A  and respondent No1 and his father in another case and had also deposited the amount of consideration in the Court which clearly proved that the plaintiff was always ready and willing to perform his part of the contract
There was no ground or justification for the High Court to dismiss the suits filed by the plaintiff
894 E G 890 102The High Court was wrong in taking the view that it was only IV and B  who were entitled to get reconveyance from respondent No1 and his father and the plaintiff was not entitled to enforce such right by a suit for specific performance against respondent No1 and his father
894 H 103The High Court further erred in holding that the restriction of the period during which the plaintiff could have got the sale deeds executed in his favour was two years while A  and B  under Exhibits A3 and A4 could have exercised such rights within a period of three years and such difference in the period deprived the plaintiff of his right to enforce the agreement of specific performance
895 B 104The plaintiff was exercising the right of specific performance of agreement of sale within the stipulated period of two years and it is unable to accept the reasoning of the High Court as to how the period of three years granted in favour of Al and B  in any manner affected or took away the right of the plaintiff to bring a suit for specific performance
895 C 105Under the terms and conditions laid down in Exhibits A3 and A4 the right of repurchase was not given as personal to Al and B  and they were entitled to assign such right and the plaintiff having got such right under Exhibits A10 and A11 was entitled to enforce such contract by riling a suit for specific performance
The plaintiff in the present case also falls within the meaning of representative in interest as contemplated under Clause b of Section 15 of the 
On such assignment the plaintiff appellant acquired a valid title to claim specific performance
896 C Sakalaguna vs Munnuswami AIR 1928 PC 174 VisHweshwar vs Durgappa AIR 1940 Bombay 339 and Sinnakaruppa vs Karuppuswami AIR 1965 Madras 506 approved
895 F