Judgment Case ID: 7053

Judgment:
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 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 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 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) (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 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 S.G. 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 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 vs 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 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 Vol.14 p.365	 Commissioner of Income Tax	 Bombay City III vs 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 vs 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 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 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.

Summary:
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 vs Commissioner of Income Tax	 Bombay City	 	 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. vs Income Tax Officer	 ; section G. Mercantile Corporation Pvt. Ltd. vs Commissioner of Income Tax	 ; Commissioner of Income Tax vs Calcutta National Bank	 and Commissioner of Income Tax	 Mysore vs 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 vs 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] section 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 vs Commissioner of Imcome Tax	 Ernakulam	 	 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 vs 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 vs Union Engineering Works	 	 approved. [786 G]