Ashok Leyland Ltd. vs Commissioner of Income Tax

R. Jayasimha Babu, J.—The question referred is :

As to whether the Tribunal was right in law in holding that there is no justification to interfere with the order of the CIT ?

The assessment year is 1986-87.

The assessee-company is engaged in the manufacture of trucks. For the asst. yr. 1986-87 it filed a revised return admitting a loss of Rs.

3,03,19,667. The AO framed the assessment determining the business loss at Rs. 86,86,547. The CIT while going through the assessment record

found that a sum of Rs. 4,87 crores received by the assessee from the insurance company had been allowed by the ITO without proper scrutiny

and verification, as a capital receipt not subject to tax even though that sum had been accounted for by the assessee in its P&L a/c as an item of

revenue, The CIT, therefore, initiated action u/s 263 of the IT Act.

The assessee in its reply submitted to the CIT stated that there was a severe cyclone in Madras on 11th and 12th of Nov., 1984, and that as a

consequence the assessee''s factory was totally inundated, the building, stocks and machinery suffered damage. The assessee claimed

compensation from its insurer. The compensation it received in respect of the stock, work-in-progress and repairs to machinery were created by

the assessee as revenue receipts in its P&L a/c and as also for the purpose of Income Tax. However, the sum received by it for the damage

caused to the machinery, which continued to be used even after the damage suffered, was though treated as income in the P&L a/c and also used

for the purpose of distributing dividend, was however, not treated as an item of revenue for the purpose of Income Tax as in the view of the

assessee that receipt was in the capital field. It was also the case of the assessee that it had treated that sum as falling within the capital field by

relying upon the opinion furnished to it by a firm of chartered accountants.

This sum of Rs. 4.87 crores which the assessee had received from its insurer for the partial damage suffered by the machinery which was

continued to be used was, it was felt by the CIT, a matter which would have to be thoroughly probed by the ITO before deciding as to whether it

formed part of the income of the assessee. In his order the CIT also noted that the assessee had not filed before him the copy of the insurance

policy. According to the details furnished by the assessee to the CIT, 357 machines had suffered damage.

The assessee-company aggrieved by that order of the CIT appealed to the Tribunal which declined to interfere with the order.

Learned counsel for the assessee submitted before us that the amount received by the assessee for the damage caused to its machineries, which

machineries were still usable and were in fact being used, was a capital receipt and that, that capital receipt fall outside the scope of Section 41(2)

of the IT Act. Reliance was placed by counsel on the decision of the apex Court in the case of Vania Silk Mills (P) Ltd. Vs. Commissioner of

Income Tax, Ahmedabad [OVERRULED], . That decision was considered by a larger Bench of the apex Court in the case of Commissioner of

Income Tax, Cochin Vs. Mrs. Grace Collis and Others, of the report, the Court after referring to the decision in the Vania Silk Mills'' case

observed that,

...........the definition in Section 2(47) of the Act contemplates the extinguishment of rights in a capital asset distinct and independent of such

extinguishment consequent upon the transfer thereof.

The law stated in that decision is indeed the law that had been followed by the CIT for holding that the assessee''s claim with regard to the amount

received from its insurer for the damage to its machinery was an amount which was prima facie liable to be taxed.

Learned counsel also relied on the decision of the apex Court in the case of MALABAR INDUSTRIAL CO. LTD. Vs. COMMISSIONER

OF INCOME TAX, wherein the Court emphasised that for the exercise of jurisdiction u/s 263 of the Act, it was necessary that the order of

assessment be not merely erroneous but also be prejudicial to the interest of the Revenue. Counsel submitted that the order made by the AO

having been made after the opinion received by the assessee from its consultant had been placed before him cannot be regarded as having been

made by him in a casual manner or without proper examination of facts, and cannot be regarded as an erroneous order and that it also cannot be

regarded as one causing prejudice to the Revenue, as in the submission of the counsel that order was in conformity with the law laid down in the

case of Vania Silk Mills (supra).

The order of assessment in the record does not at all show any application of mind by the AO to this receipt of Rs. 4.87 crores from the insurer.

This amount is not even referred to in the order of assessment. The reference is only to an adjustment statement. That adjustment statement is not

annexed to the assessment order. It is a statement filed by the assessee which has been implicitly accepted by the AO. As to whether this receipt

should be treated as taxable income in the hands of the assessee or excluded altogether from the computation on the ground that it is a capital

receipt which did not have the character of a capital gain, is not anywhere discussed. Admittedly, the assessee had treated this amount as income in

its P&L a/c and on its own showing it has used a part of this amount for payment of dividends. It was, therefore, necessary for the AO to have

examined in depth this claim of the assessee and his failure to do so is not only erroneous but also prejudicial to the Revenue. The CIT was,

therefore, right in exercising his power of revision u/s 263 and directing the AO to examine this aspect thoroughly and in accordance with law,

The order of the Tribunal declining to interfere with that order of the CIT cannot be faulted. We, therefore, answer the question referred to us in

favour of the. Revenue and against the assessee.