Case: Commissioner Of Income-Tax, Calcutta Vs. M/S. Moon Mills Ltd

actually paid or incurred according to the method of accounting upon the basis of which the profits or gains are computed under this section. If the concepts of mercantile system of accountancy were incorporated by implication in the various clauses of S. 10 (2), the definition of paid in Section 10 (5) would be redundant. We cannot attribute redundancy to the Legislature unless for compelling reasons. On the other hand, the definition of the expression paid is a clear indication that in the case of the other terms the Legislature intended to give those expressions their natural meanings. 11. The distinction between the scope of commercial accountancy for the purpose of ascertaining the trading profits and that of the statutory allowances is brought out by this Court in Commissioner of Income-tax, Bombay City v. Bipinchandra Maganlal and Co. Ltd., 1961-41 LTR 290: (AIR 1961 SC 1040 ). Shah, J., speaking for the Court, made the following observations: There is no definable relation between the assessable income and the profits of a business concern in a commercial sense. Computation of income for purposes of assessment of income-tax is based on a variety of artificial rules and takes into account several fictional receipts, deductions and allowances. If the contention advanced on behalf of the Revenue is accepted, this distinction is effaced. The decision of the House of Lords in Green (H. M. Inspector of Taxes) v. J. Gliksten and Son, Ltd., (1929) 14 Tax Cas 364 at p. 384, which is relied upon by the learned counsel for the Revenue, does not support his contention. There, the Companys timber, its stock-in-trade, was destroyed by fire. It received from the insurers a large sum of money as compensation towards the said loans. A part of the said amount was not entered in the profit and loss account but was shown as a reserve in the balance sheet. The House of Lords held that the whole sum recovered was a trading receipt to be taken into account in computing the profits assessable to income-tax under Case 1 of Schedule D and to Corporation Profits Tax. In the context of those facts, Lord Buckmaster observed: What has happened has been this, that the timber which the Appellants held has been converted into cash. It is quite true it has been converted into cash through the operation of the fire, which is no part of their trade, but loss due to it is protected through the usual trade insurance, and the timber has thus been realised. It is now represented by money, whereas formerly it was represented by wood. If this results in a gain, as it has done, it appears to me to be an ordinary gain-a gain which has taken place in the course of their trade . . . . Viscount Dunedin puts the same idea in different words thus: The whole point is that the business of the Company is to buy timber and to sell timber, and when they sell timber they turn it into money. This particular timber was turned into money, not because it was sold, but because it was burned and they had an insurance policy over it. The whole question comes to be whether that is a turnover in the ordinary course of their business. I think it was . . . . . . . . the result of this fire was that they got rid of so much timber and got the insurance money at that figure, and that seems to me precisely in the same position as if they got rid of it by giving it to a customer. Lord Warrington of Clyffe stated much to the same effect, though he emphasized the commercial method. He said: . . . . . the normal commercial method of dealing with moneys recovered by a trader under a policy of insurance, in respect of stock destroyed by fire, was to include the actual amount received in the accounts as an ordinary trading receipt in the same way as the proceeds of an ordinary sale of stock. These observations were made in the context of destruction by fire of stock-in-trade. The House of Lords unanimously held that the compensation received was only a trading receipt, for it represented the timber which was part of the stock-in-trade lost by fire. Far from helping the Revenue, this decision brings out with clarity the distinction between loss by fire of stock-in-trade and of a capital asset. The compensation received from an insurance company towards the loss of capital asset does not represent profit in a commercial sense: it was made a profit by fiction under the Act. 12. The legal position may be stated thus: The profit and loss of a business concern is ascertained on commercial principles Section 13 of the Act, subject to the proviso, imposes a duty on the Revenue to compute the profits of a business in accordance with the methods of accounting adopted by an assessee under the said principles. But the concept of assessable income under the Act is different from profit and loss in a commercial sense. Though profit and loss ascertained under the system adopted by an assessee is the basis, the assessable income is arrived at by adopting rules, some artificial, incorporated in S. 10 (2) of the Act. Prima facie, the allowances, deductions and deemed profits shall be ascertained in terms of the statutory provisions, unless the statute itself accepts the principles of commercial accountancy in a particular case. 13. In the present case, the compensation to the extent mentioned in the proviso received only in the accounting year was by fiction treated as profit. There is, therefore, no scope for holding that the expression received means receivable. 14. For the aforesaid reasons, we hold that, as the compensation for the loss of machinery and buildings by fire was not actually received by the Company during the accounting year, the said amount could not be assessed during the assessment year.

Decision (1 = appeal accepted, 0 = rejected): 0

Explanation:
0[ds]12. The legal position may be stated thus: The profit and loss of a business concern is ascertained on commercial principles Section 13 of the Act, subject to the proviso, imposes a duty on the Revenue to compute the profits of a business in accordance with the methods of accounting adopted by an assessee under the said principles. But the concept of assessable income under the Act is different from profit and loss in a commercial sense. Though profit and loss ascertained under the system adopted by an assessee is the basis, the assessable income is arrived at by adopting rules, some artificial, incorporated in S. 10 (2) of the Act. Prima facie, the allowances, deductions and deemed profits shall be ascertained in terms of the statutory provisions, unless the statute itself accepts the principles of commercial accountancy in a particular case13. In the present case, the compensation to the extent mentioned in the proviso received only in the accounting year was by fiction treated as profit. There is, therefore, no scope for holding that the expression received means receivable14. For the aforesaid reasons, we hold that, as the compensation for the loss of machinery and buildings by fire was not actually received by the Company during the accounting year, the said amount could not be assessed during the assessment year.