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PETITIONER:

UNIVERSAL RADIATORS, COIMBATORE

Vs.

RESPONDENT:

COMMISSIONER OF INCOME TAX, TAMIL NADU

DATE OF JUDGMENT30/03/1993

BENCH:

SAHAI, R.M. (J)

BENCH:

SAHAI, R.M. (J)

THOMMEN, T.K. (J)

CITATION:

1993 AIR 2254 1993 SCR (2) 775

1993 SCC (2) 629 JT 1993 (3) 150

1993 SCALE (2)393

ACT:

Income Tax Act, 1961 : Sections 4 and 10(3).

Assessee--Manufacturer of automobile radiators--Copper

ingots booked from America--To be rolled in Bombay as and

sheets and despatched to assessee for manufacture--Ship

carrying goods seized by Pakistan--Insurance company paying

value of goods in dollars--Devaluation of Indian rupee--The

difference of the Indian rupee before devaluation and that

received after devaluation--Excess held a capital

receipt--Not business receipt--Receipt of casual

nature--Sterilization of stock in trade.

Words and Phrases--Meaning of 'Income'--'Casual'.

HEADNOTE:

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

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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 v. Commissioner of Income

Tax, Bombay City, (1952) 22 ITR 484, 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. v. Income Tax Officer, (1981)

129 ITR 295; S. G. Mercantile Corporation Pvt. Ltd. v.

Commissioner of Income Tax, (1972) 83 ITR 700; Commissioner

of Income Tax v. Calcutta National Bank, (1959) 37 ITR 171

and Commissioner of Income Tax, Mysore v. 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

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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 v. 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]

S. 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 v. Commissioner of Imcome Tax,

Ernakulam, (1986) 157 ITR 67, 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 v. 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 v. Union Engineering Works,

(1976) 105 ITR 311, approved. [786 G]

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JUDGMENT:

CIVIL APPELLATE JURISDICTION: Civil 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 v. Universal

Radiators, (1979) 120 ITR 906 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

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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 v.

Commissioner of Income Tax, Bombay city, (1952) 22 ITR 484

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

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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 v. Commissioner of Income Tax,

Madras, (1967) 63 ITR 458. 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. v. Income Tax Officer, (1981) 129 ITR 295 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. v. Commissioner of Income Tax (1972)

83 ITR 700 and Commissioner of Income Tax v. Calcutta

National Bank, (1959) 37 ITR 171. 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 v. 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

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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 v.

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 v. Commissioner of

Income Tar, Emakultam, (1986) 157 ITR 67 relied on behalf of

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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 v. 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 v. B. C Fir and Cedar Lumber Company, Ltd. 1932 AC 441,

Green (HM Inspector of Taxes) v. J. Gliksten & Son, Ltd

Reports of Tax Gases Vol.14 p.365, Commissioner of Income-

Tax, Bombay City-III v. 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 v.

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

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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 v.

Union Engineering Works, (1976) 105 ITR 311 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.

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N. V. K.

Appeal allowed.

788