The Commissioner Of Income ... vs Sportking India Limited
2009 Latest Caselaw 3240 Del

*             IN THE HIGH COURT OF DELHI AT NEW DELHI

+                                ITA No. 1232/2008

                                 Reserved on        : July 15, 2009
                                 Date of decision   : August 19, 2009


        THE COMMISSIONER OF INCOME TAX-III       ...Appellant.
                     Through: Mr. Sanjeev Sabharwal, Mr. Mohan
                              Prasad Gupta, Mr. Arvind Kumar Verma,
                              Advocates



                    VERSUS

    SPORTKING INDIA LIMITED                 ....Respondent
                  Through: Mr. Kaanan Kapoor, Advocate
CORAM:
HON'BLE MR. JUSTICE A.K.SIKRI
HON'BLE MR. JUSTICE VALMIKI J.MEHTA

     1. Whether the Reporters of local papers may be allowed to see
        the judgment?


     2. To be referred to the Reporter or not?      yes


     3. Whether the judgment should be reported in the Digest?          yes

    %                      JUDGMENT

VALMIKI J.MEHTA, J.

1. The assessee company is an industrial undertaking within the meaning of

the expression in Section 80-IA of the Income Tax Act, 1961 (hereinafter

referred to as "the Act"). For the assessment year 1998-99 an assessment was

drawn under Section 143(3) of the Act. Assessing Officer (AO) subsequently

ITA-1232/2008 Page 1 issued notices on the ground of income escaping assessment for the reason that

the Assessing Officer felt that the assessee company was not entitled to the

benefit of Section 80-IA.

2. The facts are that on account of loss of goods which were destroyed by

fire, the assessee company was given an insurance claim of Rs. 39,35,841/-.

The Assessing Officer was of the view that the amount received from the

Insurance Company is not "derived from" the manufacturing activity of the

assessee company and consequently the assessee was not entitled to the benefit

of Section 80-IA. The order of the Assessing Officer was, however, set aside by

the CIT(A) and which order was confirmed by the ITAT resulting in the

Revenue being in appeal in this Court under Section 260-A of the Act. The

substantial question of law which has been framed in this case is as under:

"Whether in the facts and circumstances of the case, learned ITAT/CIT(A) erred in deleting the disallowance made by the Assessing Officer on account of Assessee's claim for deduction under Section 80IA in respect of insurance claim received?"

3. Section 80-IA as it stood at the relevant time for the concerned

assessment year reads as under:

"80-IA. Deduction in respect of profits and gains from industrial undertakings, etc. in certain cases--(1) Where the gross total income of an assessee includes any profits and gains derived from any business of an industrial undertaking......................."

ITA-1232/2008 Page 2

4. The issue, therefore, which falls for consideration is, whether the

insurance claim which has been received cannot be considered while making

deductions in respect of the profits and gains from an industrial undertaking

under Section 80-IA. The matter boils down to the meaning of the expression

"derived from any business of an industrial undertaking" as appearing in Section

80-IA.

5. At the outset, while determining the meaning to be attributed to this

expression, one must keep in mind that Section 80-IA is a part of fasciculus of

provisions whereby benefits are granted to certain industrial undertakings,

businesses etc. including those which are located in certain special

locations/areas. The object is generation of new investment and employment

with respect to particular industries in certain areas and in certain locations

besides generation of revenue for the government and industries from whom

plant etc. will be purchased by the new industrial undertaking. The object of the

provision is further made clear from Sub-section (2) of Section 80-IA whereby

such businesses are not considered for taking advantage of the deduction under

Section 80-IA if either it is formed from splitting up of an existing business or

by use of machinery or plant previously used and so on. The object is clearly to

give fillip to the economy and to investment. This object will have to be kept in

view while interpreting the provisions of Section 80-IA.

ITA-1232/2008 Page 3

6. We find that for a similar provision of Section 80-IB, two decisions have

been rendered by two Division Benches of this Court in the judgments reported

as Commissioner of Income Tax vs. Eltek SGS (P) Ltd., (2008) 300 ITR 6

(Delhi) and Commissioner of Income Tax vs. Dharam Pal Prem Chand Ltd.

(2009) 221 CTR (Del) 133. In the Eltek SGS (P) Ltd. case duty drawback was

held to be profits/gains derived from an industrial undertaking and hence

eligible for deductions under Section 80-IB. In the case of Dharam Pal Prem

Chand Ltd. refund of excise duty was held to be profits and gains derived from

an industrial undertaking within the meaning of an expression under Section 80-

IB.

7. In fact, the Supreme Court way back in 1952 in the judgment reported as

Raghuvanshi Mills Ltd. vs. Commissioner of Income Tax, (1952) 22 ITR

484 held that where the assessee had taken policy known as "consequential loss

policy" against loss of profit and its mills were completely destroyed by fire the

amount received under the policy was held to be inseparably connected with the

conduct of the business and hence was held to be a Revenue receipt. Para 18 is

relevant and is re-produced herein:-

"18. The assessee is a business company. Its aim is to make profits and to insure against loss. In the ordinary way it does this by buying raw material, manufacturing goods out of them and selling them so that on balance there is a profit or gain to itself. But it also has other ways of acquiring gain, as do all prudent businesses, namely by insuring against loss of profits. It is indubitable that the money paid in such circumstances is a receipt and insofar ITA-1232/2008 Page 4 as it represents loss of profits, as opposed to loss of capital and so forth, it is an item of income in any normal sense of the term. It is equally clear that the receipt is inseparably connected with the ownership and conduct of the business and arises from it. Accordingly, it is not exempt."

8. Similarly, in the case of Commissioner of Income Tax vs. Needle

Industries (India) Ltd., (200) 162 CTR (Mad) 337 a Division Bench of the

Madras High Court held that the amount received from an insurer on account of

loss of raw materials etc. in the fire, was held to be a trading receipt to the extent

the amount received exceeded the book value of the goods and the same

constituted taxable income.

9. At this stage, it may be stated that the fact that there was a fire in the unit

of the assessee company is an undisputed fact. It is not as if the event is

questionable. If that be so, there is no reason why keeping in account the intent

of the provision of Section 80-IA and the fact that an industrial undertaking has

already been established and is running, (i.e. investment done, machinery

purchased, employment and revenue generated etc.) a restricted interpretation be

given to the expression "derived from any business of an industrial

undertaking". As held by the Supreme Court in the case of Raghuvanshi Mills

Ltd. definitely a nexus to the business is there in case the goods of a business

are destroyed and for which an insurance amount is claimed.

ITA-1232/2008 Page 5

10. We also note with approval the following passage in the judgement of the

ITAT which shows that the net effect of the profit and loss account is nil in the

facts and circumstances of the present case:

"Moreover, the said receipts on account of insurance claim, in our opinion, are in the nature of reimbursement of loss actually incurred by the assessee as a result of goods damaged by fire and there being no element of profit involved therein, the same cannot be treated as any income separately earned by the assessee so as to exclude them for the purpose of computing deduction u/s 80IA. As rightly contended by the learned counsel for the assessee, although the expenditure incurred on the cost of goods damaged by fire is debited in the profit & loss account by the assessee and the insurance claim received on account of such goods lost in fire is credited in the profit & loss account as per the guideline for proper presentation and disclosure, the net effect is that both these transactions get nullified having no bearing ultimately on the profit shown in the profit & loss account. In our opinion, the exclusion of the amount of insurance claim received by the assessee and credited in the profit & loss account for computing deduction u/s 80IA thus is not justifiable from this angle also."

Therefore, there is no reason why amount received from the insurance company

by the assessee company should not be taken into account in determining the

profits and gains of an industrial undertaking of the types specified under

Section 80-IA.

11. The counsel for the Revenue has placed strong reliance on the judgments

reported as Pandian Chemicals Ltd. vs. Commissioner of Income-Tax, 270

ITR 448 and Vania Silk Mills P. Ltd. vs. Commissioner of Income-Tax, 191

ITR 647.

ITA-1232/2008 Page 6 The case of Pandian Chemicals has held that sale of scrap is not a revenue

receipt derived from business though the same was held eligible by the Madras

High Court in the earlier cases of CIT vs. Sundaram Clayton Ltd., 133 ITR

34 and CIT vs. Wheels India Ltd., 141 ITR 745. So far as the judgment of

Pandian Chemicals holds that the profit amount received from the insurance

company is not a revenue receipt, the same would be at divergence with the

view of the Supreme Court in the case of Raghuvanshi Mills Ltd. (supra). We

note that the Pandian Chemicals case does not refer to the decision of the

Supreme Court in Raghuvanshi Mills Ltd. case which clearly holds that the

amount received from an Insurance Company on account of loss of profit is very

much a revenue receipt.

So far as the Supreme Court decision in the case of Vania Silk Mills P. Ltd.,

the same cannot be applied to the facts of the present case inasmuch as the said

decision turned upon the meaning of the word "transfer" as occurring in Section

45 of the Act for the purpose of determining capital gains. The decision dealt

with the issue that if the machinery is damaged by fire then, it cannot be said

that there is transfer within the meaning of Section 45 of the Act merely because

the scrap has to be given to the Insurance Company which realises proceeds

from the sale of the scrap. On the facts of the case it was, therefore, held the

money received under the insurance policy in such case was not a consideration

ITA-1232/2008 Page 7 for transfer of the property and hence was not a capital gain within the meaning

of Section 45 of the Act.

12. In view of the above, we accept the contention of the assessee and reject

the contention of the Revenue and answer the question of law framed by holding

that ITAT/CIT(A) did not err in deleting the disallowance made by the

Assessing Officer on account of assessee's claim for deduction under Section

80-IA in respect of the insurance claim receipt. The appeal is accordingly

dismissed.

                                                   VALMIKI J.MEHTA, J




                                                         A.K. SIKRI, J

August 19, 2009
dkg




ITA-1232/2008                                                             Page 8