Madras H.C : Whether the Tribunal was right in law in holding that there is no justification to interfere with the order of the CIT ?

High Court Of Madras

Ashok Leyland Ltd. vs. CIT

Sections 263

Asst. Year 1986-87

R. Jayasimha Babu & K. Raviraja Pandian, JJ.

Tax Case No. 450 of 1997

30th September, 2002

Counsel Appeared

P.P.S. Janardhanaraja, for the Applicant : J. Naresh Kumar, for the Respondent



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 under 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-inprogress 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 s. 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. CIT (1991) 98 CTR (SC) 153 : (1991) 191 ITR 647 (SC). That decision was considered by a larger Bench of the apex Court in the case of CIT vs. Mrs. Grace Collis & Ors. (2001) 166 CTR (SC) 201 : (2001) 248 ITR 323 (SC). At p. 330 of the report, the Court after referring to the decision in the Vania Silk Mills’ case observed that, “………..the definition in s. 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. CIT (2000) 159 CTR (SC) 1 : (2000) 243 ITR 83 (SC) wherein the Court emphasised that for the exercise of jurisdiction under 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 under s. 263 and directing the AO to examine this aspect thoroughly and in accordance with law.

9. 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.

[Citation : 260 ITR 599]

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