Income Tax Appellate Tribunal - Cochin
Highland Produce Co. Ltd. vs Income-Tax Officer on 26 February, 1993
Equivalent citations: [1993]45ITD488(COCH)
ORDER
G. Santhanam, Accountant Member
1. Of these two appeals, one is by the assessee and the other is by the revenue.
2. The assessee is a company in which the public are substantially interested. It is engaged in plantation industry. There was a big fire in its estate on 29-1-1983 due to an apparent short circuit in the supply lines and as a result the factory building and machinery were destroyed or damaged. These were insured with United India Insurance Co. Ltd., for Rs. 42.50 lakhs. Soon after the accident, the qualified surveyors M/s. N. Velayudhan & Co. certified the damage/destruction and reported that the factory building had been totally destroyed in that out of a total area of 26481 sq.ft., 25268 sq.ft. was totally affected by fire. The balance of the area covered by switch rooms and office were also found to be unuseable and the surveyors felt that the entire structure had to be pulled down and reconstructed. As regards the machinery, the surveyors found that except for three items of machinery mentioned in page 15 of the survey report, rest of the machinery had been totally destroyed. The assessee company had a reinstatement clause in the insurance policy with United India Insurance Co. Ltd. On the basis of the commitment contained under the policy, the insurance company agreed to pay out all expenses incurred by it to reinstate the assets. Thus, the insurance company started releasing moneys to the assessee company in instalments and the first of such instalment was made only in April/May 1984. The total eligibility of the assessee under the cover-up insurance was in a sum of Rs. 27,05,313. Out of this, Rs. 10,45,032 was attributable to the building and Rs. 16,37,253 was attributable to plant and machinery. The Income-tax Officer has brought to tax not only the excess over the cost of such assets as capital gains arising under Section 45 of the Income-tax Act in a sum of Rs. 11,40,128, but also included under Section 41(2) of the Act the difference between the written down value of such assets and the cost thereof. Thus, a sum of Rs. 12,39,932 was brought to tax under Section 41(2) of the Act. The assessee appealed and contended before the first appellate authority that there was no transfer within the meaning of Section 2(47) of the IT Act read with Section 45 and, therefore, no capital gains arose on the destruction or damage caused to the assets due to unforeseen circumstances like fire engulfing the factory. It was further contended that in terms of the decision of the Supreme Court in the case of CIT v. Sirpur Paper Mills Ltd. [1978] 112 ITR 776 and of the Madras High Court in the case of Kasturi & Sons Ltd. v. CIT [1985] 152 ITR 541 when the insurance company pays moneys on account of the destruction or damage caused by fire there cannot arise any profit under Section 41(2) of the Act. The learned CIT (Appeals) after noticing these decisions held that only in the case of partial damage to the assets, the moneys received from the insurance company cannot be brought to tax under Section 41(2). He relied on the decision of the Calcutta High Court in the case of CIT v. Engg. Works of India (P.) Ltd. [1977] 108 ITR 11 for the proposition that so long as the asset was not fully damaged, it cannot be said that it was destroyed. Further, he noticed the decision of the same High Court in Marybong & Kyel Tea Estates Ltd.v. CIT [1981] 129 ITR 661 (All.) which held that on payment of the policy amount the insurer became entitled to what remains of the asset and, therefore, a transfer of capital asset took place in a changed shape and form and the gains arising therefrom could be assessable to capital gains. He also relied on the decision of the Gujarat High Court in CIT v. Vania Silk Mills (P.) Ltd. [1977] 107 ITR 300 for the proposition that in a fire accident there was extinguishment of rights in the property destroyed by fire and the rights of the insurer gets vested in the insurance company under the principle of subrogation and, therefore, there was transfer of assets. For these reasons he upheld the order of the Income-tax Officer bringing to tax the capital gains (on the assets damaged or destroyed by fire) in respect of the moneys received from the insurance company. However, he noticed from the surveyors' report that it was only the building that was totally destroyed and in the case of machinery only some of the several machines were destroyed and the value of the machinery not destroyed in the fire accident amounted to Rs. 7,40,843. Therefore, he held that the moneys received from the insurance company in regard to the building totally destroyed and in respect of the plant and machinery totally destroyed would be liable to computation under Section s 41 (2) and 45 of the Income-tax Act, 1961. There was another contention before the CIT (Appeals), viz., that the insurance moneys received were not received during the previous year but were received only in instalments in the future years and, therefore, nothing was liable to be taxed under Section 41 (2) or under Section 45 of the Income-tax Act in relation to the previous year ending on 31-12-1983, relevant to the assessment year 1984-85. This contention was repelled by the CIT (Appeals) on the ground that the moneys were paid under a policy on the happening of the event and such event had occurred in the relevant previous year and, therefore, the insurance moneys though received subsequent to the end of the previous year would attract the provisions of Sections 41(2) and 45 of the Act. For these reasons, he gave part relief to the assessee and sustained the order of the Income-tax Officer on principle thus negating the contention of the assessee that nothing is taxable under Section 41(2) or Section 45. The assessee is on appeal against the relief not granted.
3. We have heard rival submissions. The insurance moneys received by the assessee were split into two parts by the Income-tax Officer for purpose of invoking the provisions of Section 45 and the provisions of Section 41(2). Moneys received in excess over the cost of assets destroyed or damaged were brought to tax under Section 45 of the IT Act, as capital gains and the CIT (Appeals) sustained the same. There can be no capital gains arising on the destruction of a capital asset on account of an unforeseen calamity such as a fire accident. In sustaining the taxation of capital gains the learned CIT (Appeals) had placed reliance on the decision of the Gujarat High Court in the case of Vania Silk Mills (P.) Ltd. (supra). That decision was reversed by the Apex Court in its judgment dated 14-8-1991 in the case of Vania Silk Mills (P.) Ltd. v. CIT [1991] 59 Taxman 3. Therefore, we hold that no capital gains arose to the assessee in respect of the moneys received in excess of the cost of assets (building and machineries) destroyed by fire.
4. As for the taxability of the balance amount representing the difference between the cost of the assets destroyed and the written down value of such assets, the CIT (Appeals) held that it is only in the case of partial destruction or partial damage to the assets that the provision of Section 41(2) cannot be invoked. On the other hand, if the destruction was complete and total, the provisions of Section 41(2) would be attracted. In this connection, Sri N. Subbaiah, the learned Chartered Accountant vehemently contended that the several machineries held by the assessee in its tea manufacturing unit should all be considered as constituting one plant and machinery because even though each machinery has an independent existence of its own, its relevance to the purpose of the business arises only in the context of its placement along with other machineries. From the' stage of plucking of tea leaves, they undergo several processes and operations, each performed by a machine, one effecting the other and, therefore, it would be unrealistic to look upon each machinery de hors the other machinery in the setting of a tea industry. On the other hand, the learned senior departmental representative contended that the decision of the Supreme Court in Sirpur Paper Mills Ltd.'s case (supra) only dealt with the case of plant and machinery or buildings which were partially destroyed or damaged and, therefore, the assessee's reliance on the same is out of context.
5. We have carefully considered the rival submissions. In Sirpur Paper Mills Ltd.'s case (supra), the Supreme Court held that Section 41(2) postulated for its applicability that the plant or machinery, whether in whole or in part, should be sold, discarded, demolished or destroyed and that it could have no application to a case where the plant or machinery is merely damaged and by repairing the damage the plant or machinery is restored to working condition. The Supreme Court further held that in view of the concession made by the revenue that the amount received by the company from the insurer represented capital receipts and in view of the common ground between the parties that there was only a partial damage to the plant and machinery and as it was not the case of the revenue nor was it so found by the Tribunal, that leaving aside the whole of the plant and machinery, even a part of it was sold, discarded, demolished or destroyed, there was no scope for the applicability of Section 41(2) and in fact this provision was not even invoked before the Tribunal and therefore it was wholly unnecessary for the High Court to consider whether this proviso would be attracted when only a part of the plant and machinery is sold, discarded, demolished or destroyed. Thus, the Supreme Court decided the issue on a plane different from that on which the High Court of Andhra Pradesh rendered its decision though both the decisions had gone in favour of the taxpayer. However, the Supreme Court did not either approve or disapprove the interpretation of Section 41(2) as given by the High Court of Andhra Pradesh. Therefore, the decision of the Supreme Court cannot come either to the rescue of the assessee or the revenue in the case before us. However, the interpretation placed by the High Court of Andhra Pradesh on Section 41(2) which has neither been approved or disapproved by the Supreme Court in the same Sirpur Paper Mills Ltd.'s case (supra) can be availed of by the assessee. Their Lordships of the A. P. High Court analysed the provisions of Section 41(2) but left open the question whether Section 41(2) would be attracted in the case of destruction of not a part of a machinery, but one or more of the several machineries. This is evident from their observations at page 781 to the following effect :
We are not concerned in this case with a situation where two independent machineries which are separable have to work combinedly for the purpose of business. We, therefore, need not answer as to what would happen in such a case. We are concerned in this case with the part of the machinery which admittedly was inseparable and had no independent existence as a machinery. The context in which the words 'sold', 'discarded', 'demolished' or 'destroyed' are used and for the purpose for which they are used, to our mind clearly suggest that it is to the whole machinery that they apply and not to any part of the machinery.
In the light of the above, we deem it necessary to enquire into the fact whether the several machineries used by the assessee in its tea manufacturing business constituted plant and machinery as a whole or whether each of the machinery could be viewed in isolation from others. The assessee's business consists in growing tea and processing the same before the end-product is supplied. The tea processing flow chart is made part of the paper book furnished by the assessee. At page 16itis seen that there are about seven important functions or operations performed by several machines on the tea leaves plucked from the garden, namely, (1) withering troughs is a machine where chemical and physical changes take place, (2) Rotorvance is a machine which pre-conditions the leaves, (3) CTC Machine is used for sizing the leaves, (4) Fermenting machine reduces the moisture, (6) Sorting machine grades the leaves and (7) Packing machine eventually packs the manufactured tea. From the surveyors' report it is seen that machineries against Section Nos. (1), (2), (6) and (7) were totally damaged and machineries against Section Nos. (3), (4) and (5) were not at all damaged. These machines even though used in different places perform specific operations on the leaves plucked from the garden. Each of the operations leads to the subsequent operation and in the business of tea manufacture each such machine though separable has a meaning, purpose and relevance, only in the setting of other machineries performing the various other functions with which it has to work combinedly. Therefore, all the individual machineries have to be construed as forming as forming part ofthe tea plant and machinery and viewed in this light, destruction of one machine must be construed as only destruction of a part of the manufacturing plant and not otherwise. This particular issue was not before their Lordships of the Supreme Court and, therefore, the same was not decided in Sirpur Paper Mills Ltd.'s case (supra). But considering the operations that are performed on the raw material, the functions discharged by each such machinery, we have no hesitation in holding that each individual machinery used in a tea manufacturing plant should be considered only as part of the entire plant. Viewed in this context, the interpretation of Section 43(2) as given by the Andhra Pradesh High Court in Sirpur Paper Mills Ltd.'s case (supra) would equally apply to the facts of the case. Thus we reject the contention of the revenue so far as machineries are concerned.
6. In the case before the Supreme Court, the particular clause under which the assessee obtained moneys from the insurance company was not argued and, therefore, not considered. However, such a situation arose before the Madras High Court in Kasturi & Sons Ltd.'s case (supra). Their Lordships of the Madras High Court dealt with the legal effect under the law of insurance for the exercise of the option by the insurer for reinstatement of the assets destroyed. At page 545 it was observed as follows:
Generally, a policy of insurance of the kind we have is intended to serve as a cover against loss and risk and to obtain compensation on the happening of specified event, to which an element of uncertainty is attached. It is resorted to enable the insured to be placed in a position which he occupied prior to the incurring of the loss. The insured may be placed in such a position by the insurer by one of two methods (i) by the payment of money in order to balance the loss sustained by the insured as a result of the happening of the event, the risk against which had been insured, (ii) by restoration of the property damaged or destroyed and covered by the policy of insurance to a condition in which it was prior to its being affected and in the event of the property being affected by a total loss, by rebuilding or replacing the property. Ordinarily, therefore, the obligation of the insurer is only to compensate the assured by payment of money in terms of the policy of the insurance, though in such a case, the assured is at liberty to do whatever he likes with the money paid and cannot be required or directed to spend it on reinstatement, unless he is contractually or statutorily otherwise bound. The inclusion of a clause for the exercise of an option by the insurer to reinstate under the terms of a policy of insurance is meant for the benefit of the insurer, as by electing to reinstate, the insurer would be enabled to minimise the amount payable to the insured for the loss or damage suffered.... Thus, in the event of there being an election by the insurer to reinstate, there is a cessation of the obligation to make good the loss by money payment and the contract, though initially one of indemnity for repayment of money with reference to the particular risk covered, by the process of the exercise of election or option, becomes really a contract to reinstate in specie from its inception.
Their Lordships noted with approval the observations of Halsbury's Law of England, Fourth Edition, Volume 25, paragraph 662, to the effect that "if the insurers do not elect to reinstate, their obligation to make good the loss by a payment in money continues; but if they do, the obligation ceases and the contract becomes a contract to reinstate". On the touch stone of the legal effect of the contract of insurance, we proceed to examine the contract entered into by the assessee with the insurance company in terms of which moneys were paid. The insurance is with United India Insurance Co. Ltd. under Policy No. 72401/03/1/00071. The insurance was to cover (i) fire including fire resulting from explosion, (ii) lightening, (iii) explosion of boiler used for domestic purposes only and (iv) explosion of gas used for domestic purposes, etc. The insurance was extended to cover (1) riot and strike damage, (2) malicious damage risk, (3) storm and tempest risk, (4) aircraft damage risk as per clauses attached. The insurance was subject to Agreed Bank Clause as per clause attached. The insurance was subject to reinstatement value as per clause attached therein for items other than merchandises/stock-in-trade. As per the reinstatement value clause, applicable to building and machinery only, attached to and forming part of the fire policy, subject to special provisions contained in the policy, the amount payable to the insurer shall be the cost of replacing or reinstating on the same site of the same kind or type, but not superior to or more extensive than the insured property, when new. The total sum assured was Rs. 63,71,000 and period of insurance was from15-l-1983 to 15-1-1984.The fire took place on 29-1-1983 and the surveyors' report is found from pages 12 to 34 of the paper book. In the assessment part of their report, the surveyors have observed as follows:
Assessment:
The insurance for building, machinery and furniture is on reinstatement value basis and at present the insured have indicated that they would be going in for reinstatement. They have also claimed their loss for a total reinstatement of building and machinery.
The reinstatement of the property would take a minimum of 12 months and hence we have assessed the loss on indemnity basis, to meet the insured's request for an immediate payment. The assessment on the basis of 'Reinstatement' would be gone into after the completion of reinstatement.
Thus, the reinstatement clause has been invoked. That what the insurer paid to the assessee was only reinstatement value of the damaged or destroyed assets such as building and machinery in instalments is amply borne out by the materials on record. In its letter dated 13-4-1985, the insurer had stated as follows :
The full and final settlement under the captioned policy on reinstatement value basis can be considered after the other affected insured items are completely reinstated for which we have allowed time limit up to 30-6-1985 vide our letter Fcl. 390.85 dated 22-1-1985. On getting advice about reinstatement of Machinery and other affected items from you we shall depute the surveyor to assess the loss on reinstatement value basis for the final settlement under the policy.
On 16-10-1986, again the insurer had worked out the overall claim payable under the reinstatement clause at Rs. 27,05,313. This was because of the following :
The replacement value of the above works out to Rs. 38,06,646 whereas the same has been insured for Rs. 30,00,000 only. Hence applying average for under insurance the net amount payable comes to (Rs. 27,05,313).
The correspondence between the assessee and the insurance company also reveal that it was, upon the reinstatement of the assets damaged or destroyed - buildings and machineries that the final settlement was made. Further, it is seen from the policy that "the company will pay to the insured the value of the property at the time of the happening of its destruction or the amount of such damage or at its option reinstate or replace such property or any part thereof. Thus, it is a case of contract of insurance with the option for reinstatement. It is not a simple contract of indemnity under which the assessee was free to do whatever it liked with the moneys received from the insurance company. On the other hand, under reinstatement option, the asset is either reinstated or replaced, with the reinstatement value being quantified subject to the amount of policy and the application of average clause on such policy.
Therefore, applying the ratio laid down by the Madras High Court in Kasturi & Sons Ltd.'s case (supra) we hold that the provisions of Section 41(2) cannot be applied to the insurance moneys received by the assessee as it was not in respect of the assets damaged or destroyed, but as it was only in respect of the reinstatement of the assets (Buildings and Machineries) damaged or destroyed.
7. Another point that was agitated before us is as to when the insurance moneys, if at all such moneys attracted the provisions of Section 41(2), could be brought to tax under the other provisions. The learned CIT (Appeals) took the view that the moment fire occurred, the liability for the insurer to pay the money arose and the insured was entitled to receive such moneys from the insurance company and, therefore, the Assessing Officer was justified in bringing to tax the receipts in the previous year relevant to the assessment year in which the fire took place. We are unable to subscribe to this view. Section 41(2) provided for charging to income-tax moneys payable in respect of such assets in the previous year in which the moneys payable for the depreciable assets "became due". Thus, in P.C. Gulati v. CIT [1972] 86 ITR 501 (Delhi), it was held that the chargeability does not arise in the year in which the sale took place or in the year in which money was received but only in the year when the money "became due". In Akola Electric Supply Co. Ltd. v. CIT [1978] 113 ITR 265 (Bom.) it was held that it is only when the amount was acertained that the liability to tax arose. In another case, viz., CIT v. Rohtak Textile Mills Ltd. [1982] 138 ITR 195 (Delhi) [S.L.P. granted by the Supreme Court 149 ITR Statutes 131] it was held that in the case of take-over of electricity undertaking, Section 41(2) could not be invoked till the price was finalised. There are some more decisions to this effect such as CITv. Sheshappa Hegde [1984] 150 ITR 164 (Kar.) and Nagpur Electric Light & Power Co. Ltd. v. CIT [1988] 171 ITR 33 (Bom.). In the case of the assessee, the previous year ends on 31-12-1983. Though the surveyors' report is dated 9-6-1983, the first payment was made on 9-9-1983 with regard to the building but it was on depreciated value base without quantifying the amount payable under the reinstatement clause. The second payment was made only on 13-4-1985 in a sum of Rs. 7,45,032 and such payment was made upon the ascertainment of the claim on reinstatement basis. Therefore, the quantification of the amount due or payable was made only on 13-4-1985 which falls outside the previous year. The quantification of the reinstatement value of the machineries damaged would appear to have been done only subsequently as is evident from the letter of the insurance company dated 16-10-1986 (pages 45 and 46 of the paper book). Of course, the moneys were realised still later. Thus, even if it were held that the receipts were taxable under Section 41 (2) of the IT Act, in the light of the decisions cited supra, we hold that the insurance moneys were not due to the assessee in the previous year relevant to the assessment year 1984-85 and hence the same cannot be taxed in the assessment year 1984-85. For all these reasons, we set aside the order of the CIT (Appeals) and allow the appeal of the assessee on the above issues.
8. The assessee in its appeal objects to the disallowance of surtax liability claimed as deduction in computing its income. As the CIT (Appeals) had rejected the claim of the assessee only in the light of the decision of the Kerala High Court in A.V. Thomas & Co. Ltd 's case, We decline to interfere.
9. In the result, the assessee's appeal is partly allowed.
10. In the revenue's appeal, the first point at dispute is against the deletion of the disallowance made under Section 37(3A) of the Act, in a sum of Rs. 8,642. The Assessing Officer included the expenditure on motor cars and Jeep in respect of repairs, taxes and insurance for purpose of restriction under Section 37(3A). The first appellate authority deleted the disallowance for the reason that such expenditure did not fall within the purview of Section 37 of the IT Act as they have been specifically provided for in Sections 30 and 31 of the Act. The revenue is on appeal.
11. The issue is governed against the revenue in the case of A.V. Thomas & Co. Ltd. [IT Appeal No. 736 (Coch.) of 1987 dated 30-10-1992]. At page 6 of its order, the Tribunal held as follows:
Section 37 excludes expenditure mentioned in Sections 30 to 36. Repairs and insurance are governed by Section 31 and taxes are regulated under Section 30. Such expenditure cannot be construed as running and maintenance expenditure of motor cars described under Section 37(3A) of the Act.
Respectfully following our own decision, for the reasons stated therein, we uphold the order of the CIT (Appeals).
12. The second point at dispute is about the deletion of the disallowance made under Section 43B of the IT Act. The assessee has paid the provident fund contributions collected in the month of December 1983, only on 15th of the following month. This was brought to tax under Section 43B. In the light of the decision of the Tribunal in the case of N. Raghavan Pillai v. ITO 1991 KLJ (TC) 75, we hold that as the assessee has not paid the amount to the Government within the time allowed, Section 43B is not attracted. For this reason, we decline to interfere with the order of the CIT (Appeals).
13. In the result the revenue's appeal is dismissed.