Case: Vr. M. Sm. Karuppan Chettiar and Others Vs. Commissioner of Income Tax, Madras

Facts which are material are briefly these. The assessee is a firm carrying on business in real estates at Kualakangsar in the Federated States of Malaya. Some of the properties belonging to the assessee and which constituted itssuffered damage during the second world war. On August 14, 1947, the Government of India notified a scheme to give relief to Indian nationals doing business in the Federated States of Malaya who had sustained loss when the territory was under Japanese occupation. An assessee who opted for the scheme was entitled to have his losses incurred or suffered during five years relevant to the assessment years47 to be aggregated and to set off the losses against his profits for the two years relevant to the assessment years2, and to claim refund of any excess tax for those two years after adjustment. Under the scheme, losses suffered by the assessee in Malaya during the war period were allowed to be set off against the assessment years42 and the assessee obtained the benefit of Rs. 65, 197 and Rs. 1, 29, 028 in the two years in reduction of tax liability. The Government of Malaya set up a war damage commission to compensate persons whose properties had sustained damage due to war conditions, and under the scheme devised by the Government of Malaya the assessee received compensation amounting to $14, 169 and $5, 479 in the previous years relevant to the assessment yearsx Officer, Tiruchirappalli, in proceedings for assessment years57 brought to tax the amounts received by the assessee as war damages from the Government of Malaya. The order of theOfficer was confirmed by the Appellate Assistant Commissioner. TheAppellate Tribunal confirmed the order of the Appellate Assistant Commissioner, subject to a slight modification, which is not material for the purpose of this appeal. Thereafter, at the instance of the assessee, the Tribunal referred the questions, which have been already set out, to the High Court for their opinion

Reasoning: It was for the first time argued before the High Court that since the assets lost or damaged retained a certain value in the books of account, only the difference between the amounts received by the assessee and the book value of the assets should be brought to tax. Even if that contention was open to the assessee, in our judgment, when the assessee put forward the claim for compensation under the scheme framed by the Central Board of Revenue that its entire property had been lost through enemy action and it obtained relief under the special scheme on that basis, the value of the assets must after receipt of compensation be taken to be nil, and the assessee by not writing off the value in his books of account on and after accepting the benefits of the special scheme could not invest those assets for the purpose of assessment to tax with any book value which was liable to be taken into account. Compensation received in replacement of those assets by the assessee from the war damage commission must therefore be treated in its entirety as profit liable to tax