Purolator Of India Ltd. vs Deputy Commissioner Of Income ...
1993 Latest Caselaw 669 Del

ORDER

N. S. CHOPRA, A. M. :

The assessed is in appeal against order dt. 8th Aug., 1989 of the learned CIT(A). First grievance of the assessed is that the CIT(A) erred in confirming the action of the Assessing Officer in bringing to tax an amount of Rs. 6,52,732 under s. 41(2) of the IT Act. The relevant facts are that the assessed is a limited company engaged in the manufacture of automobiles filters with units at Delhi, Gurgaon and Parwanoo. The account period of the assessed is 31st May, 1985. On 19th Dec. 1983, assesseds unit at Gurgaon suffered a fire. The assesseds claim was settled by the insurance company at Rs. 11,22,975 in the account period relevant to the assessment year under appeal. The assessed credited a sum of Rs. 6,52,732 to its P&L account and took the balance of Rs. 4,70,242 to its balance sheet as capital receipt. The Assessing Officers attempt to bring to charge the sum of Rs. 6,52,732 under s. 41(2) of the Act was resisted by the assessed on the ground that the amount did not fall within the meaning of s. 41(2). The Assessing Officer, however, rejected the assesseds contention and brought the amount to charge under s. 41(2).

2. In appeal, the assessed also did not meet with success when the learned CIT(A) rejected the contention of the assessed that the ratio of Madras High Court in the case of Kasturi & Sons vs. CIT (1985) 152 ITR 541 (Mad) squarely applicable on the fats and in the circumstances of the case. The learned CIT(A) noted that the facts of the assesseds case were distinct form those prevailing in the case of Kasturi & Sons(supra). The learned CIT(A) noted that the assesseds furniture had got gutted in the fire and its claim was settled by insurance company by paying in cash while in the case of Kasturi & Sons (supra) such claim was settled by specie, i.e., when the destroyed aircraft was replaced by another aircraft by the insurance company and the Hon'ble Madras High Court in Kasturi & Sons (supra) held that the provisions under s. 41(2) are not attracted. The learned CIT(A) noted that even though the assesseds claim for insurance with regard to furniture gutted in the fire was under the reinstatement policy yet the assessed had been paid cash by the insurance company and the insurance company itself had not replaced the assesseds gutted furniture by new furniture. He did not accept the contention of the assessed that the amount was paid to the assessed under the reinstatement policy and the assessed, in fact, had replaced the gutted furniture with the money received from the insurance company.

3. Shri Ajay Vohra, the learned Authorised Representative submitted that the learned CIT(A) misread and mis-interpreted the facts. Shri Vohra invited our attention to his paper book in particular to pages 26 to 28 representing letters of the National insurance company addressed to the assessed and submitted that the assets destroyed were insured for reinstatement value and the claim made by the assessed was also settled on reinstatement value basis. He submitted that no doubt the assessed was paid the amount by the insurance company but only for the purpose of getting the gutted items replaced. According to Shri Vohra, the mere fact that the insurance company paid the amount in cash to the assessed did not adversely affect the assesseds case. According to Shri Vohra, the insurance company made the assessed a medium to discharge its own responsibilities of reinstating the gutted items. Shri Vohra also invited our attention to assesseds letter dt. 31st Dec., 1984 addressed to surveyor of the insurance company submitting that the assets in the nature of furniture and fixture including plant and machinery amounting to Rs. 6,63,000 have also been reinstated. According to Shri Vohra, the ratio in the case of Kasturi & Sons (supra) was fully applicable on the facts and in the circumstances of the case. The learned Departmental Representative supported the order of the learned CIT(A) and submitted that the facts of assesseds case are distinct from the case of Kasturi & Sons (supra) where admittedly specie was replaced by specie by the insurance company while in the case of the assessed a destroyed specie has been compensated in cash. According to the learned Departmental Representative the provision of s. 41(2) are fully applicable on the facts and in the circumstances of the case.

4. We have heard both the parties and have also perused the relevant record. In our view, the submissions made by Shri Vohra deserve to be accepted. The only difference in the case of the assessed and in the case of Kasturi & Sons (supra) is that while the assessed was paid cash by the Insurance Company in settlement of its claim of items gutted, in the case of Kasturi & Sons (supra) the destroyed items i.e., the aircraft was replaced by another aircraft. The fact, however, is that the money paid by the insurance company to the assessed was under the reinstatement policy as the assets in question were insured for reinstatement value. There is no dispute that the amounts paid by the insurance company were actually utilised for reinstating the gutted items. The mere fact, therefore, that the assessed was paid cash would not adversely affect the assesseds claim that the provisions of s. 41(2) are not attracted looking to the relevant facts and the circumstances of the case. In our view, the ratio of Hon'ble Madras High Court in the case of Kasturi & Sons (supra) is fully applicable on the facts and in the circumstances of the case. We may also fruitfully refer to the order of the Tribunal, Cochin Bench in Highland Produce Co. Ltd. vs. ITO (1993) 47 TTJ (Coch) 13 : (1993) 45 ITD 488 (Coch) wherein it has been held that where the reinstatement clause has been invoked what the insurer pays to the assessed is only reinstatement value of the damaged or destroyed assets. It has been held that the provisions of s. 41(2) are inapplicable to the insurance money received as it would not in respect of assets damaged/destroyed but was only in respect of reinstatement of such assets. We, therefore, allow relief of Rs. 6,52,732.

5. The next grievance of the assessed is that the learned CIT(A) erred in holding that there was a transfer within the meaning of s. 2(47) r/w s. 45 of the Act and accordingly in confirming the levy of tax on an amount of Rs. 4,72,243.

6. As indicated above, the assessed had received a sum of Rs. 11,22,975 from insurance company by way of settlement of its claim for his assets destroyed in a fire. While it took Rs. 6,52,732 to its profit and loss account, it treated the balance amount of Rs. 4,72,243 as capital receipt and took the same to its balance sheet. The Assessing Officer did not accept the claim of the assessed and following the judgment of Hon'ble Gujarat High Court in the case of CIT vs. Vania Silk Mills (1977) 107 ITR 300 (Guj) as also Allahabad High Court judgment in the case of CIT vs. J. K. Cotton & Spinning Mills Ltd. (1987) 164 ITR 18 (All) held that there was a transfer of assets to the insurance company when its claim for fire insurance was settled as also extinguishment of assesseds right in the assets. He accordingly held the sum of Rs. 4,70,243 as liable to capital gain under s. 45. The assessed also did not meet with success before the learned CIT(A) who rejected the contention of the assessed that amount involved was capital in accordance with the ratio of Madras High Court in the case of C. Leo Machado vs. CIT (1988) 38 Taxman 296 (Mad) and Supreme Court in the case of CIT vs. Rasiklal Maneklal (HUF) (1988) 177 ITR 198 (SC). The learned CIT(A) followed the decisions of Gujarat High Court and Allahabad High Court in the case of Vania Silk Mills (supra) and J. K. Cotton & Spinning Mills Ltd. (supra). He, therefore, dismissed assesseds appeal on this issue.

7. Shri Vohra, the learned Authorised Representative, submitted that the authorities below were in error in disallowing assesseds claim that the amount involved represented capital receipt and the provisions of s. 45 are not attracted. Shri Vohra submitted that the judgment of Hon'ble Gujarat High Court in the case of Vania Silk Mills (supra) has been reversed by the Hon'ble Supreme Court in the case of Vania Silk Mills vs. CIT (1991) 191 ITR 647 (SC) wherein the judgment of the Allahabad High Court relied upon by the CIT(A) in the case of J. K. Cotton & Spinning Mills (supra), has been overruled.

8. The learned Departmental Representative submitted that the facts involved in the case are distinct from the ratio in the case of Vania Silk Mills (supra). She submitted that in the case of the assessed, it continued to have right in the assets, inasmuch as, even the destroyed assets were taken over by the insurance company thus involving transfer within the meaning of s. 2(47) of the Act. The learned Departmental Representative also invites our attention to the ratio of Hon'ble Calcutta High Court judgment in the case of Marybong & Kyel Tea Estates Ltd. vs. CIT (1981) 129 ITR 661 (Cal). In reply, Shri Vohra submitted that the assets in question were not taken over by the insurance company but only their value adjusted against the insurance claim settled by the insurance company. He submitted that such assets continued to be with the assessed and the insurance company did not take over such assets. Shri Vohra has invited our attention to letter dt. 17th June, 1985 from the National Insurance Co. to the assessed to the effect that "no assets or part thereof has been physically taken over by us and value of salvage has been adjusted at the time of loss assessment".

9. We have heard both the parties and have also perused the relevant record. The ratio of Calcutta High Court in the case of Marybong & Kyel Tea Estates Ltd. (supra) is not applicable on the facts and in the circumstances of the assesseds case as in the case of the assessed, the salvaged property was admittedly not taken over by the insurance company. The ratio of the Hon'ble Supreme Court in the case of Vania Silk Mills (supra) is fully applicable on the facts and in the circumstances of the case. Respectively, following the ratio of the Supreme Court (supra), we hold that the amount of Rs. 4,70,243 is capital receipt in the hands of the assessed and, therefore, not chargeable to tax. This ground of appeal is allowed.

10. The next ground of appeal is that the CIT(A) erred in disallowing expenditure on repair amounting to Rs. 1,61,537. The assessed is also running its business in rented premises at Sarojini Nagar being used as administrative office-cum-godown. The assesseds claim of Rs. 1,61,537 as expenditure on repair on these premises was disallowed by the Assessing Officer as capital.

11. In appeal also, the assessed was not successful when the CIT(A) noted that the assessed was in litigation with the landlord and very occupation of the assessed of the premises involved was in doubt and uncertain and in the circumstances "how it can be said that a prudent businessman would like to spend such a huge sum on renovation of the premises, whose occupation is in hands is doubtful". Shri Vohra, learned Authorised Representative for the assessed submitted that authorities below misread the facts. He submitted that the claim was disallowed on surmises and conjectures. It was submitted that the expenditure was incurred for repairs of existing premises involving relaying of the floors and plastering of walls and toward services. He submitted that no assets of enduring nature came into existence as a result of these repairs and expenditure was incurred out of sheer business necessity for conducting the business efficiently. The learned Departmental Representative supported the orders of the authorities below.

12. We have heard both the parties. We have also gone through the details of the expenditure claimed. A perusal of relevant details reveals that the expenditure is towards replacement of existing floors, roofing and plastering of walls. The expenditure in our view does not constitute capital expenditure. The expenditure incurred is towards relaying of floors and roof so as to restore the same to their original condition. In the circumstances, we hold the same as revenue. This ground of appeal is accordingly allowed.

13. The next grievance of the assessed is that the learned CIT(A) erred in disallowing foreign travel expenses amounting to Rs. 17,201 holding it to be capital in nature. The Assessing Officer disallowed this claim of the assessed on the ground that the amount stood spent in preparation of the feasibility report for setting up of a project in Indonesia. The disallowance was upheld by the learned CIT(A). Shri Vohra submitted that the assessed is already in the business of manufacture of Automotive filter. To study the possibility of setting up a plant for manufacturing automotive filter in Indonesia (sic) was undertaken by the assessed which also involved foreign travel on which the assessed incurred an expenditure of Rs. 17,201. He submitted that the expenditure involved is allowable as revenue having been incurred for the purpose of existing business. The learned Departmental Representative, however, submitted that the expenditure was not incurred on expansion of the existing business but on a new business, i.e., setting up of a new factory. She places reliance on Trade Wings Ltd. vs. CIT (1990) 185 ITR 267 (Bom).

14. We have heard both the parties and have also perused the relevant record including the paper book filed Shri Vohra. The assessed received a proposal from a Singapore party for setting up a filter manufacturing facility in Indonesia under a license arrangement. It deputed vice-president of the Company Shri Ravi Chawla for discussion and evaluation of the proposal and also took necessary permission from RBI for release of foreign exchange. In this connection, relevant details at pages 48 to 53 of the paper book may be fruitfully referred to containing correspondence between the assessed and M/s Automotive Corporate Services (P) Ltd. (on behalf of M/s Construction Machinery Asia PTE Ltd.), correspondence with RBI as also foreign exchange released by the RBI. Since the purpose of the foreign visit was to establish an automotive filter manufacturing plant, the line in which the assessed is already engaged in, we are of the view that the nature of the claim is revenue. It is allowed. On facts the ratio of Bombay High Court in (1990) 185 ITR 267 (Bom) as relied upon by the learned Departmental Representative is not applicable.

15. The last grievance of the assessed is that the CIT(A) erred in disallowing Rs. 23,250 under r. 6B of the IT Rules.

16. We have heard both the parties and have also perused the relevant details contained. There is no material on record to indicate that the presentation of article the cost of which has been disallowed at Rs. 23,250, carried any advertisement for the assessed. On a consideration of relevant facts and circumstances, we are of the view that the provisions of r. 6B are not attracted. The assesseds claim is allowed.

17. In the result, the appeal is fully allowed.