Income Tax Appellate Tribunal - Hyderabad
Srinivasa Cystine Limited vs The Jcit (Assts.) on 27 September, 2004
Equivalent citations: [2005]92ITD460(HYD), (2005)93TTJ(HYD)622
ORDER
D. Manmohan, Judicial Member
1. This appeal is directed against the order of the CIT(A)-II Hyderabad and it pertains to the assessment year 1996-97. Rs. 6,34,997/- received by the assessee from Inasurance Corporation was claimed as income not-forming part of total income, under Section 10B of the Act. The AO as well as CIT(A) having rejected the claim of the assessee, an appeal was preferred before the Appellate Tribunal contending, inter alia, that the amount received from the insurance Corporation forms part of the income derived from the industrial undertaking.
2. facts giving rise to the issue are stated in brief. The assesses is a 100% Export Oriented Unit and it is engaged in the 'manufacture of L-Cystine and other Amino Acids from Human Hair Waste. In respect of the previous year relevant to the assessment year 1996-97, the assessee, filed a return of income claiming that the impugned sum does not form part of total income, sine it is income derived from 100% Export oriented undertaking and thus falls for consideration Under Section 10B of the Act. The AO observed that the expression "derived" carries a narrow meaning when compared-to-the-expression 'attributable to', as has been observed by the Hon'ble Supreme Court in the case of Cambay Electric Supply Industrial Com. Ltd. v. CIT (113 ITR 84), and thus held that the income received by the assessee from the insurance Corporation is 'attributable' to the assessee's Export Oriented Unit; In other words, the immediate and effective source of earning this income has no direct nexus with the running of the Export undertaking. Therefore, the impugned income was excluded for the purpose of considering the exemption allowable Under Section 10B of the Act and was accordingly brought to tax.
3. Aggrieved, it was contended before the first appellate authority that" out of the sum of Rs. 6,34,997/-, Rs. 5,09,608 is received against the insurance claim on damage of goods sold in transit. It was submitted that the finished products were sold to a German party. While they were in transit to Madras Port the products were damaged and the insurance claim was settled for the above amount Since the sale of goods and dispatch were directly related to export business of the Company, insurance claim and receipt thereof have direct nexus with the export business of the undertaking.
4. Similarly, a sum of Rs. 1,21,180/- was received from insurance Corporation towards raw material damaged. Caustic Soda Lye was purchased by the Company and the same was damaged in transit Cost of purchase was debited to P & L A/c and the claim received from the insurance was credited to the Profit & Loss A/c as income. It was therefore submitted that the net effect is nil and as such no income accrues to the assessee on account of this claim.
5. Insurance claim of miscellaneous expenditure of Rs. 4,209/- pertained to the claim on account of damage to finished goods and this does not result in any profit or income to the assessee.
6. Learned CIT(A) did not agree with the submissions of the assesses. He observed that the impugned sums were received from the insurance Department as a consequence of lodging certain' claims in respect of damaged goods and there is no export income involved in such receipts; it can at best be said to be attributable to assessee's industrial activity but cannot be said that the above income was derived from export business since the direct source is the insurance claim. Placing reliance on the decision of Hon'ble. Supreme Court in the case of Cambay Electric Supply Industrial Company Limited (supra), the learned CIT(A) upheld the action of the AO.
7. Further aggrieved, assessee is in appeal before us. Learned counsel appearing on behalf of the assesses strongly relied upon the order of the ITAT Delhi Bench in the case of DCIT v. Metro Tyres Limited (79 ITD 557) to submit that Section 10B as it stood at the relevant period uses the expression "derived by an assesses from 100% Export Oriented Undertaking" whereas the section as amended by the finance Act used the expression derived by 100% Export Oriented Undertaking from the export of articles or things .......". In contrast to the substituted version, the section which is applicable to the assessment year 1996-97 does not impose a condition that the income should be derived from the export of articles or things meaning thereby, there need not be a direct nexus between the income derived and the export of the articles, so long as the income is derived by 100% Export Oriented Undertaking. He further submitted that the observations of the Apex Court in the case of Cambay Electric Supply Company (supra) with regard to the term 'derived from' cannot be considered as obiter dictum inasmuchas the Court was not concerned with the meaning of such expression and thus it can at best be said to be a casual observation which has no binding force. At any rate, the Court was neither called upon to explain the meaning of term 'derived from' nor the Court expressed a specific opinion on such issue except stating that the expression 'derived from' might carry a different meaning in the circumstances. It was submitted that the reliance placed upon the decision of Apex Court by the tax authorities is based upon incorrect understanding of the decision of Supreme Court overlooking the fact that there is no specific observation with regard to the meaning of the expression 'derived from'. Learned counsel emphasized upon the fact that Section 10B speaks of income derived from 100% Export Oriented Undertaking and it nowhere stated that the income should be from the export of the goods or articles. He has also referred to the following decisions to submit that the expression derived was the subject matter of consideration by the Apex Court and the observations therein would throw light upon correct the meaning to be ascribed to the expression 'derived'.
i) 16 ITR 325 (SC)- CIT v. Raja Bahadur Kamakhaya Narayan Singh and Ors.
ii) 27 ITR 1 (SC)- Mrs. Bacha F. Guzdar Bombay v. CIT.
8. On he other hand, learned DR submitted that the expression 'derived' indicate that there should be a direct nexus between the 'export' and the income whereas, in the instant case the income earned by the assesses is a degree away from industrial undertaking and thus it cannot be said to be 'profits' or gains derived from Export Oriented Undertaking'. Learned DR submitted that insurance claim is against loss of goods or articles, which is never intended to include profit that could have been earned by the assessee if they were sold. Thus, upon settlement of insurance claim, what is received by the assessee is only the value of the goods and thus the same cannot, by any stretch of imagination, be said to be "profits or gains derived from Export Oriented Undertaking". Placing reliance upon the decision of Ahmedabad Bench 'A' in the case of DCIT v. Mira Industries (87 ITD 475 at 516) learned DR submitted that the amount received in settlement of insurance claim should not be treated as income derived from Export Oriented Undertaking inasmuch as the term 'derived from' gets a narrow meaning in contrast to the term 'attributable to'. It was thus submitted that the amount received from the Insurance Corporation can be said to be attributable to the industrial undertaking or Export Oriented Undertaking but cannot be said to have been derived from the Export Oriented Undertaking. He thus strongly supported the orders of the tax authorities.
9. Joining the issue learned counsel submitted that the term business is narrower than the expression 'undertaking'. In the process of running an export oriented undertaking the assessee has to insure the raw materials so as to protect itself from unexpected losses and thus the income can be said to have been derived from the export "oriented" undertaking though it may not be classified as income derived from the. business of 'exports'. He further submitted that the decision cited by the learned DR is distinguishable on facts inasmuchas the Allahabad Bench of ITAT was concerned with a case of taxability of deemed income Under Section 41(2) of the Act whereas in the assessee's case it was not a deemed income. He further submitted that the expenditure towards purchases or production was debited to Profit & Loss A/c and what is reimbursed by the insurance company is only the actual cost incurred by the assessee and thus there is no accrual of income, which can be taxed.
10. We have carefully considered the rival submissions and perused the record. Section 10B(1), as it stood at the material point of time reads as under:
"Subject to the provisions of this section, any profits and gains derived by an assessee from a hundred per cent export-oriented undertaking to which this section applies shall not be included in the total income of the assessee"
A plain reading of provision indicate that only 'profits and gains' should be excluded while computing the total income of the assessee. It is not the case of the assessee that in settlement of the insurance claim the assesses made a profit; it merely receives the value of the goods/property lost In our considered opinion in order to consider a receipt Under Section 10B of the Act the primary requisite is that it should be a profit or gain. It may be noticed that in the decision cited by the assessee as well as the revenue the subject matter of interpretation was the expression 'derived' whereas neither party has ever raised an issue as to whether the sum derived should be profits or gains. At the threshold, in order to fall for consideration Under Section 10B of the Act a sum. received should satisfy the first condition that it should be profits or gains' derived by the assesses. Either in commercial parlance or in common parlance when a person receives money from the insurance company, it cannot be claimed that he had made profits out of the loss or destruction of the property but it merely refers to it as compensation for the loss. Such being the case, amounts received from the Insurance Corporation should not be taken into account Under Section 10B of the Act so as to exclude the same from the total income of the assessee.
11. In the case of Raghuvanshi Mills Limited, Bombay (22 1TR 484 (SC), the Apex Court had an occasion to consider the nature of receipt with reference to the insurance receipts. The Court was concerned with a particular type of policy known as "consequential loss policy" whereby the assessee is insured against loss of profit. Though there were other kinds of policies the Court proceeded on the footing that the sum received by the assessee was assignable to loss of profits. The relevant observations of the Court are extracted for immediate perusal.
"It has been assumed throughout the proceedings, right up to this Court, that the whole of the Rs. 14,00,000 was assignable to loss of profits. There is nothing on the record to show that it was ever split up among the other heads or that it was ever treated as having been Split up either by the insurance companies or by the assessee, nor is there any material on which we would be able to apportion it. Our decision therefore proceeds on the assumption that the whole sum is assignable to loss of profits and we make it clear that we-decide nothing about other moneys which may be distributable among other heads."
"The underlined words show that the insurance in respect of profits was to represent as nearly as possible the profits which would have been made had the mills been working in its normal way"
12. The Court then proceeded to consider the question as to the nature of the amount received i.e., whether it is 'income', 'profit', 'gains'. The relevant observations are reproduced for immediate reference.
"It will be seen that the taxable commodity, "total income", embraces three elements, "income", "profits", and "gains". Now though these may overlap in many cases, they are nevertheless separate and severable, and the simple question is whether the Rs.14 lacs falls under any one or more of those heads. In our opinion, it is "income" and so is taxable.
"It was argued on behalf of the assesses that it cannot be called profits because the money is only payable if and when there is-a loss or partial loss and that something received from an outside source in circumstances like these is not money which is earned in the business and if there are no earnings and no profits there cannot be any income. But that only concentrates on the word "profits". This may not be a "profit" but it is something which, represents the profits and was intended to take the place of them and is therefore just as much income as profits or gains received in the ordinary way. Section 4 is so widely worded that everything which is received by a man and goes to swell the credit side of his total account is either an income or a profit or a gain."
"This question was considered by the Supreme Court of Canada which decided that a receipt of this nature is not a "profit" and so is not taxable (B.C Fir and Cedar Lumber Co. v. The King). But the Court did not examine the wider position whether it is "income" and in any event the decision was reversed on an appeal to the Privy Council. Their Lordships held it is "income". This was followed later by the Court of Appeal in England and endorsed by the House of Lords in Commissioners of Inland Revenue v. William's Executors. In so far these decisions do not turn on the special wording of the Acts with which they are respectively concerned and deal with the more general meaning of the word "income", we prefer the view taken in England".
As could be seen from the observation? of the Court, the expression "income" is different from the expression "profits or gains". Even in a case where the sum is assignable to reimbursement of loss of profit; the Court Observed that it is not 'profit' but 'income'.
13. Reverting to the facts of the case on hand, the impugned sum is assignable to loss of goods etc., and not loss of profit and thus the receipt cannot be called as "profit or gain". Section 10B of IT Act, 1961 concerns with "any profits and gains" and not "any income". Section 2(24) of the Act defines 'income'. The expression "income has a wider meaning than the term "profits and gains". Receipt in the from of 'profits & gains' would be 'income' but income of every kind cannot he considered as profits & gains. Thus, looking at from any angle, the impugned receipt cannot be considered Under Section 10B of the Act .
14. Having held that the amount received on the settlement of insurance claims do not fall within the expression 'profits or gains' derived by an assessee from 100% Export Oriented Undertaking'; the ancillary question that arises, as to whether such receipt is taxable as income of the assessee? The case of the assessee, as could be seen from para-3 of the CIT(A)'s order, is that the expenditure towards purchase of raw material and processing it into finished products was debited to Profit & Loss A/c and the claim received from the insurance was credited to P & L A/c as income and thus the net effect is nil and as such no income accrues to the assessee. It may be noticed here that if expenditure is debited to the Profit & Loss A/c the corresponding receipt has to be treated as income. Admittedly, in the instant cace the assessee having debited the purchase cost etc., to the P & L A/c the sum received from the Insurance Corporation deserves to be treated as income as per the standard accounting practice. However, the AO cannot take into consideration the income, alone for the purpose of taxation; It is only the net receipt, which deserves to be considered for taxation. If the assessee is able to identify that the amount debited to P & L A/c has a direct nexus with the Insurance claim, such expenditure has to be necessarily deducted from the income and the net income, if any, has to be brought to tax. No doubt, the onus is on the assesses to prove its case. There may be a need to recast the P & L A/c. It may also be noticed that if the expenditure is incurred in an earlier year which was debited to P & L A/c and returns were filed accordingly, any recovery of such cost in a later year would be assessable Under Section 41 of the Act as the deemed income, since the expenditure is already allowed as deduction in an earlier year. In such an event of the matter, the assessee may not be able to avail the benefit of netting. So far as the current year's expenditure is concerned, it is lot the assessee to prove its case. With these observations, we uphold the view of the tax authorities that a sum of Rs. 6,34,997 cannot be taken into consideration for computing the exemption Under Section 10B of the Act and direct the AO to give the assessee a reasonable opportunity of being heard in order to arrive at the net income (amount received from the Insurance Corporation).
15. In the result, the appeal filed by the assessee company is party allowed.