Punjab-Haryana High Court
Cit vs Khemka Container (P) Ltd. on 26 August, 2004
Equivalent citations: [2005]144TAXMAN109(PUNJ, HAR)
Author: Adarsh Kumar Goel
Bench: Adarsh Kumar Goel
ORDER Adarsh Kumar Goel, J.
At the instance of revenue, following question of law has been referred by the Income Tax Appellate Tribunal, Delhi Bench E, Delhi (hereinafter referred to as, the Tribunal), for the opinion of this court under section 256(1) of the Income Tax Act, 1961 (hereinafter referred to as, the Act), in respect of assessment year 1988-89 :
"1. Whether, on the facts and in the circumstances of the case, the learned Tribunal was right in giving deduction under section 80I amounting to Rs. 1,50,733 received as compensation from insurance company against loss of raw material in fire ?
2. Whether, on the facts and in the circumstances of the case, the learned Tribunal was right in deleting the addition made by the assessing officer being 1/6th of car maintenance and depreciation amounting to Rs. 12,763 and Rs. 17,241, respectively ?"
2. During the relevant year, the assessee received an amount of Rs. 1,50,733 towards insurance claim on account of loss of raw material in fire. The assessee included the said amount in profits and claimed deduction under section 80I of the Act. The assessing officer as well as the first appellate authority rejected this claim but the Tribunal on further appeal, held that the amount received had close connection with the profit derived from the industrial undertaking. It was observed that raw material which was lost in fire would have been used in generating income for the industrial undertaking and, therefore, compensation received for such raw material could be held to be profit derived from industrial undertaking.
3. Learned counsel for the revenue submitted that the expression "derived from industrial undertaking" used in section 80I of the Act could not include an amount received on account of insurance claim.
4. Learned counsel for the revenue relied upon a judgment of the Apex Court in Pandian Chemicals Ltd. v. CIT (2003) 262 ITR 278 (SC), judgment of the Calcutta High Court in CIT v. Andaman Timber Industries Ltd. (2000) 242 ITR 204 (Cal), judgment of the Gauhati High Court in North East Gases (P) Ltd. v. CIT (1996) 220 ITR 372 (Gau) and judgment of the Apex Court in CIT v. Sterling Foods (1999) 237 ITR 579 (SC).
5. We have heard learned counsel for the revenue, perused the record and also the case law cited at the Bar.
6. In Pandian Chemicals (supra), the Apex Court rejected the contention that receipt of refund of deposit with the Electricity Board could be treated as income "derived from" an industrial undertaking. It was observed :
"...It is clear, therefore, that the words derived from in section 80HH of the Income Tax Act, 1961, must be understood as something which has direct or immediate nexus with the appellants industrial undertaking. Although electricity may be required for the purposes of the industrial undertaking, the deposit required for its supply is a step removed from the business of the industrial undertaking. The derivation of profits on the deposit made with Electricity Board cannot be said to flow directly from the industrial undertaking itself."
7. Similarly, in Sterling Foods (supra), the question was whether income derived by the assessee by sale of import entitlements was profit and gain "derived from" its industrial undertaking of processing sea food. Answering the question in favour of the revenue, the Apex Court observed:
"We do not think that the source of the import entitlements can be said to be the industrial undertaking of the assessee. The source of the import entitlements can, in the circumstances, only be said to be the export promotion scheme of the Central Government whereunder the export entitlements become available. There must be, for the application of the words derived from, a direct nexus between the profits and gains and the industrial undertaking. In the instant case, the nexus is not direct but only incidental. The industrial undertaking exports processed sea food. By reason of such export, the export promotion scheme applies. Thereunder, the assessee is entitled to import entitlements, which it can sell. The sale consideration therefrom cannot-in our view, be held to constitute a profit and gain derived from the assessees industrial undertaking."
8. In North East Gases (supra), the question was whether income derived from interest could be treated as income derived from an industrial undertaking. It was held that, since source of income did not emerge from the running of the undertaking, the income is not held to be income "derived from" industrial undertaking.
9. In Andaman Timber Industries Ltd. (supra), the question was whether transport subsidy received by the assessee could be held to be income derived from industrial undertaking. Question was answered in favour of the revenue.
10. Following the aforesaid decisions and in particular, decisions of the Apex Court in Pandian Chemicals (supra) and Sterling Foods (supra), we are clearly of the view that amount of insurance claim received by the assessee cannot be held to be income derived from industrial undertaking so as to quality for deduction under section 80I of the Act. We, however, make it clear that the amount of Rs. 1,50,733 is the amount received from the insurance company in respect of the claim of raw material destroyed in fire. However, while computing the profits of the industrial undertaking for the purposes of deduction under section 80I, what has to be excluded is not the gross receipt but the income arising out of this receipt. Such income can only be computed by deducting the cost of raw material destroyed in fire from the gross receipt of insurance claims. The raw material had been admittedly purchased during the year under consideration and its cost debited in the purchase account of the year.
11. Accordingly, question is answered in the negative, i.e., in favour of the revenue and against the assessee. However, in view of the observations made above, the Tribunal will compute the profit attributable to the receipt of insurance claim and exclude only such profit out of the total income for working out the deduction under section 80I of the Act.