Raghuvanshi Mills Ltd vs Commissioner of Income Tax, Bombay

Rewritten Version Notice: This is a rewritten version of the original judgment.

Court: Supreme Court of India

Case Number: Civil Appeal No. 55 of 1950

Decision Date: 3 November 1952

Coram: Vivian Bose, Mehr Chand Mahajan, Ghulam Hasan

Raghuvanshi Mills Ltd. brought a petition before the Supreme Court of India against the Commissioner of Income Tax, Bombay. The judgment was delivered on 3 November 1952. The Bench consisted of Justice Vivian Bose, Justice Mehr Chand Mahajan and Justice Ghulam Hasan. The case is reported in the 1953 volume of the All India Reporter at page 4 and in the 1953 Second Report of the Supreme Court at page 177. Subsequent citations include the 1959 Supreme Court report at page 814, the 1965 Supreme Court report at page 1227, and the Economic & Development report of 1992 at page 1495. The statutory provisions examined were those contained in the Indian Income-Tax Act of 1922, specifically sections 6C, 4(3)(vii) and the definition of income in section 2(60). The principal issue concerned whether sums of money received under policies described as “consequential loss policies” were to be treated as assessable income for tax purposes, and whether any exemption under section 4(3)(vii) applied.

The headnote explains that the mill had insured its premises, plant and machinery with several insurers against fire and had also entered into four consequential loss policies that covered loss of profits, standing charges and agency commission. When the mill was totally destroyed by fire, the insurer paid certain amounts under those consequential loss policies. The Supreme Court held that the amounts received under these policies fell within the meaning of “income” under section 2(60) of the Income-Tax Act because they were inseparably linked to the ownership and operation of the business and arose directly from it; consequently, they could not be exempted under section 4(3)(vii) and were therefore assessable to income tax. The Court noted that it had proceeded on the assumption that the entire sum was attributable to loss of profits, and it did not decide how any other amounts, such as those for standing charges or agency commission, might be allocated. The Court further observed that the definition of “income” articulated in Shaw Wallace & Co. (1932) 59 I.A. 206, which described income as a periodic monetary return with some regularity from definite sources, had to be applied in light of the specific facts and was not appropriate for receipts of this nature. The Court also referred to the authorities King v. B.C., Fir and Cedar Lumber Co. [1932] A.C. 441 and Commissioners of Inland Revenue v. Williams’s Executors [1944] 26 Tax Cas. 23, and commented on Commissioner of Income-Tax, Bengal v. Shaw Wallace & Co. (1932) 59 I.A. 206. The judgment of the Bombay High Court, which had affirmed the decision, was also mentioned. Procedurally, the appeal was Civil Appeal No. 55 of 1950, taken by special leave from the order dated 18 March 1949 of the Bombay High Court (then composed of Chief Justice Chagla and Justice Tendolkar) in Income-Tax Reference No. 5 of 1948, which arose from the order dated 27 September 1947 of the Income-Tax Appellate Tribunal, Bombay Bench ‘A’, in ITA No. 2205 of 1946-47. Counsel for the appellant included the Solicitor-General for India, assisted by two junior counsel, while the Attorney-General for India, assisted by a junior counsel, represented the respondent.

The judgment was delivered by Justice Bose. The matter before the Court was an appeal from the High Court at Bombay concerning an income-tax reference made under section 66(1) of the Indian Income-tax Act of 1922. The reference had been sent to the Bombay High Court by the Bombay Bench of the Income-tax Appellate Tribunal. The appellant-assessee was the company Raghuvanshi Mills Ltd., located in Bombay, and the assessment year under consideration was 1945-46.

Raghuvanshi Mills Ltd. had taken insurance for its buildings, plant and machinery with several insurers. In addition to those ordinary policies, the company had obtained four policies described as “Consequential Loss Policies.” Those policies were intended to cover loss of profit, standing charges and agency commission. The total amount insured against loss of profit and standing charges was Rs 37,75,000, while the amount insured against agency commission was Rs 2,26,000, making the aggregate sum insured under these heads Rs 40,00,000.

On 18 January 1944 a fire broke out and completely destroyed the mill. As a result of the fire the various insurance companies paid the assessee an aggregate of Rs 14,00,000 in the year that is the subject of the reference. The payment was made in two instalments: Rs 8,25,000 on 8 September 1944 and Rs 5,75,000 on 22 December 1944. The revenue authorities treated the entire amount received as part of the assessee’s income and taxed the company accordingly.

The principal question before the Court was whether the sum of Rs 14,00,000 was liable to income-tax. It was necessary to note that the whole amount had been characterised as compensation for loss of profits. The solicitor-general appearing for the appellant assessees argued that the portion of the compensation that related to standing charges and agency commission should not be subject to tax. The Court observed that this argument introduced a new factual issue that went beyond the matters referred by the Tribunal, and therefore could not be entertained. Throughout the proceedings, and up to the present Court, it had been assumed that the entire Rs 14,00,000 was attributable to loss of profits.

The record contained no evidence that the amount had ever been divided among the different heads of loss, nor was there any material showing that the insurers or the assessee had apportioned the sum. Consequently the Court proceeded on the assumption that the whole payment was assignable to loss of profits and expressly stated that it would not pass any decision regarding any other monies that might be distributed among other heads.

The reference presented to the Court asked whether, under the facts of the case, the sum of Rs 14,00,000 constituted income within the meaning of section 2(6C) of the Indian Income-tax Act and was therefore liable to tax under that Act. The Court’s analysis and subsequent decision were to be based on the assumption that the entire amount was compensation for loss of profits.

In this case the facts concerned four separate insurance policies, each issued by a different insurance company, but all containing the same substantive clauses. The only variation among the policies lay in the amount of cover that each insurer agreed to provide. The policies were identified as follows: “POLICY NO. C.L. 110018 … Rupees X Lacs only – Loss of Profits, Standing Charges and Agency Commission of the above Company’s Mills, situated at Haines o Road, Mahaluxmi; Bombay, …”. The total sum declared for insurance across the four policies amounted to Rs 40,00,000, and the benefit period covered eighteen months. The breakdown of the declared sums was Rs 37,75,000 for loss of profits and standing charges, Rs 2,25,000 for agency commission, making a total of Rs 40,00,000, of which the policy under discussion covered Rs X Lacs only. A schedule attached to and forming part of Policy No. C.L. 10018 stipulated that the insurer would pay the assured the loss of gross profit arising from (a) reduction in output and (b) increase in cost of working, and set out the amount payable as indemnity. The policy then defined the relevant terms. “Gross profit” was defined as the sum obtained by adding to the net profit the amount of the insured standing charges, or, where there was no net profit, the amount of the insured standing charges, less a proportion of any net trading loss corresponding to the ratio of the insured standing charges to all standing charges of the business. The “rate of gross profit” was defined as the rate of gross profit per unit earned by the output during the financial year immediately preceding the fire, with adjustments allowed for business trends, variations, or special circumstances before or after the fire, or those that would have affected the business had the fire not occurred, so that the adjusted figures would represent, as nearly as practicably possible, the result that would have been obtained during the period after the fire. The language thus shows that the insurance was intended to compensate for profits that the mills would have earned had they continued to operate normally. The Court then examined the provisions of the Income-Tax Act. Section 3 makes the total income of the previous year liable to tax subject to the Act’s provisions, and Section 4 defines total income to include “all income, profits and gains from whatever source derived”. Although there are certain qualifications to this definition, they were not relevant to the present matter. Accordingly, total income comprises three distinct elements: income, profits and gains. While these elements may overlap, they remain separate and severable. The central question therefore was whether the sum of Rs 14 lacs, highlighted in the appeal, fell under any of these heads. The Court held that the amount constituted “income” and was therefore taxable. The assessee had argued that the amount could not be called profit because it was payable only upon loss or partial loss and that it represented an external receipt not earned in the ordinary course of business, but the Court rejected this submission.

The Court noted that the assessee argued the receipt could not be termed profits because it was payable only when a loss or partial loss occurred. It further contended that money received from an external source in such circumstances was not earnings of the business and that, in the absence of earnings or profits, there could be no income. The Court replied that this argument merely focused on the word “profits” without addressing the substance of the receipt. Even if the receipt was not a profit in the strict sense, it represented the profit that would have been earned and was intended to substitute for that profit. Consequently, the Court held that the receipt was as much income as profits or gains obtained in the ordinary course of business. The Court observed that Section 4 of the Act is broadly worded so that every amount received by a person, which increases the credit side of his total account, constitutes either income, profit or gain. The Act does not attempt to define “income” except in Section 2(6C), which lists certain items that would not ordinarily be regarded as income but are included by special definition. That limited definition does not constrain the ordinary meaning of income, which remains general except as qualified by the provisions of the section itself. The phrase “from whatever source derived” in Section 4 demonstrates the expansive reach of the definition. Similarly, Section 6, after enumerating various heads of taxable income, includes the all-encompassing term “income from other sources”. The Court further distinguished the notion of “income” from that of “taxable income”, noting that the statute does not automatically tax every source of income. Tax liability is expressly subject to the provisions of the Act, which contain several exceptions and limitations, many of which are listed in Section 4. None of those exceptions applied to the present receipt, and the provision most closely relevant was Section 4(3)(vii), which excludes “any receipts … not being receipts arising from business … which are of a casual and non-recurring nature”.

The Court observed that the decisive factor for the assessee was the phrase “not being receipts arising from business”. The assessee is a business company whose purpose is to earn profits and to insure against loss. In the ordinary course it purchases raw material, manufactures goods, and sells them, thereby generating profit or gain. Like prudent enterprises, it also seeks gain by insuring against loss of profits. The Court held that the insurance payment received under these circumstances is undeniably a receipt, and because it substitutes for loss of profits rather than loss of capital, it qualifies as income in the ordinary sense of the term. It further determined that the receipt is inseparably linked to the ownership and conduct of the business and therefore arises from the business itself. Accordingly, the Court concluded that the receipt was not exempt from tax under the Act. The Court then referred to a decision of the Supreme Court of Canada, which had considered the same question.

In the earlier Canadian case, the court observed that a receipt of this kind did not constitute a “profit” and therefore was not taxable, as noted in B. C. Fir and Cedar Lumber Co. v. The King (1). However, that court did not consider the broader question of whether such a receipt could be classified as “income.” On appeal to the Privy Council, the decision was reversed, and the Privy Council held that the receipt was indeed “income” (1). This view was subsequently adopted by the Court of Appeal in England and later endorsed by the House of Lords in Commissioners of Inland Revenue v. William’s Executors (1). While these decisions interpret the general meaning of the word “income,” they do not alter the specific wording of the statutes under which they were decided, and the present Court therefore favours the English approach.

The Judicial Committee in Commissioner of Income-Tax v. Shaw Wallace & Co. (1) attempted a narrower definition of income, describing it as “a periodical monetary return ‘coming in’ with some sort of regularity, or expected regularity, from definite sources.” The present Court considers that description to be applicable only in light of the particular facts of that case, as indicated by the citations [1931] Canada L.R. 435 (2) [1932] A.C. 441 at 448 (3) (1944) 26 Tax Cas. 23 (4) (1932) 59 I.A. 206. The Privy Council’s earlier consideration of the non-recurring nature of such receipts in The King v. B. C. Fir and Cedar Lumber Co. (1) suggests that the Lordships did not have a case like the present one in mind when deciding Shaw Wallace & Co. (2).

The learned Solicitor-General placed great reliance on a clause found in three of the four insurance policies at issue. That clause requires the insured to take all possible steps to minimise the loss of profits and stipulates that payment will be deferred until the insured makes an effort to restart the business. The Solicitor-General argued that this condition demonstrates that the payment is an indemnity against loss of profits and therefore should not be treated as income, profit, or a gain within the meaning of the relevant tax provision. The Court, however, is unable to accept the proposition that the receipt ceases to be income merely because certain conditions must be satisfied before the money can be claimed.

Consequently, the Court agrees with the High Court’s finding that the sum of Rs. 14,00,000 is assessable to tax. The appeal is dismissed with costs. The agents appearing for the parties were Bajinder Narain for the appellant and P. A. Mehta for the respondent. (1) [1932] A.C. 441, at 448. (2) [1932] 59 I.A. 206.