- (1.) This appeal by special leave is directed against a judgment of the High Court of Andhra Pradesh in an Income-tax Reference made at the instance of the Commissioner of Income-tax. There were five questions referred to the High Court for its opinion, but out of them only three survive for consideration in these appeals and hence we will state only so much of the facts as bear on these questions.
(2.) The first two questions relate to the assessment year 1962-63 for which the relevant account year is the year ending 30th June, 1961. During this accounting year there were two accidental fires in the factory of the assessee, one on 6th December, 1960 and the other on 21st March, 1961. The assessee carried on the business of manufacturing different varieties of paper in the factory and as a result of these two fires considerable damages was caused in the factory of the assessee. The first fire caused damage to the building, plant and machinery in Paper Machine Shop No. III and the second fire in the Boiler House. The building, plant and machinery were all covered by fire insurance and in respect of the loss caused, the assessee received an aggregate sum of Rs. 13,12,772/- by way of compensation. This amount of Rs, 13,12,772/- included a sum of Rupees 9,41,070/- in respect of damage caused to the building, plant and machinery of Paper Machine Shop No. III. The assessee spent a sum of Rs. 1,57,813/- in carrying out repairs to the building, plant and machinery of Paper Machine shop No. III and restoring the same to working condition. This left a balance of Rs. 7,83,207/- in the hands of the assessee and in the assessment of the assessee for the assessment year 1962-63 the question arose whether this amount was liable to be included in the total income of the assessee as a revenue receipt. The Income-tax Officer took the view that this sum of Rs. 7,83,207/- went to reduce the cost of the capital assets of the assessee and he, therefore, diminished the written down value of the plant and machinery of Paper Machine Shop No. III with the result that the quantum of depreciation and development rebate allowed to the assessee was reduced. This view was rejected by the Appellate Assistant commissioner in the appeal preferred by the assessee, but what he held was that the sum of Rs. 7,83,207/- was not capital receipt in the hands of the assessee, but it partook of the nature of income from business and was, therefore, liable to tax. The assessee carried the matter in further appeal to the Tribunal. It was common ground between the parties at the hearing of the appeal before the Tribunal that the machinery or plant was partly damaged by fire and this damage has been repaired and the machinery and plant was recommissioned for the assessee's business of paper making. The Revenue, realising that S. 41, sub-sec. (2) of the Income-tax Act, 1961 would be attracted only if the plant or machinery is "sold, discarded, demolished or destroyed" and not where the plant or machinery is merely damaged, did not urge before the Tribunal that the sum of Rs. 7,83,207/- received by the assessee was eligible to tax under S. 41, sub-sec (2). The Revenue merely invoked the analogy of the provision in S. 41, sub-s. (2) and contended that if the capital assets, instead of being demolished or discarded, are damaged by fire and then the assessee restores them to their original condition by repairing the damage, the compensation money received from the Insurance Companies in excess of the actual costs of repairs must necessarily be treated as a receipt incidental to the business of the assessee and hence liable to be taxed as income from business. This argument was negatived by the Tribunal which took the view that the entire sum of Rs. 7,83,207/- represented receipt of capital nature and in the absence of any specific provision of the Act it was not possible to say "how the surplus amount in this case, namely, Rs, 7,83,207/- representing the difference between compensation money received from the Insurance Companies for the damage caused to its capital assets and actual expenses incurred for restoring them for use would amount to revenue profits or business profits". The Tribunal accordingly held that the sum of Rupees 7,83,207/- being capital receipt was not assessable to tax. This led to an application by the Revenue for a Reference and on the application, the following two questions were referred by the Tribunal for the opinion of the High Court : 1. Whether on the facts and in the circumstances of the case, the receipt of Rs. 7,83,207/- being part of the amounts received from the Insurance Companies by the assessee was a capital receipt or revenue receipt 2. If it is held to be capital receipt, whether on the facts and in the circumstances of the case the said sum of Rs. 7,83,207/- is deductible from the written down value of the plant and machinery as at the commencement of the accounting year relevant for the assessment year 1962-63 The Revenue reiterated its contention before the High Court that the sum of Rs. 7,83,207/- received by the assessee represented revenue receipt in its hands, but this contention was rejected by the High Court and it was held that this amount was in the nature of capital receipt. The Revenue then contended that even if this amount represented capital receipt in the hands of the assessee, it was eligible to capital tax by reason of S. 41, sub-s. (2). This contention was clearly a new contention sought to be urged for the first time before the High Court and it did not arise out of the order of the Tribunal, nor was it covered by either of the two questions referred to the High Court. But even so the High Court entertained this contention and on an interpretation of S. 41, sub-s. (2) came to the conclusion that provision had no application where a part of the plant or machinery was sold, discarded, demolished or destroyed and it was only where the whole of the plant or machinery, of which the actual cost could be predicated and in respect of which depreciation was allowable under the Act, was sold, discarded, demolished or destroyed that provision could apply. The High Court took the view that since in the present case the whole of the plant or machinery was admittedly not destroyed by fire, but was merely damaged, S. 41, sub-s (2) had no application and hence the sum of Rs. 7,83,207/- was not assessable to tax under that provision. The High Court accordingly answered both the questions referred to it against the revenue. The Revenue thereupon preferred Civil Appeal No. 884 of 1974 with special leave obtained from this Court.
(3.) So far as the first question is concerned, it was not disputed on behalf of the Revenue that the sum of Rupees 7,83,207/- received by the assessee represented capital receipt in its hands and this question must accordingly be held to have been rightly answered by the High Court against the Revenue. But even if this be the position, contended the Revenue, the amount of Rs. 7,83,207/- was chargeable to tax under section 41, sub-section (2). The Revenue submitted that the High Court was in error in taking the view that section 41, sub-section (2) has application only where the whole, and not merely a part, of the plant and machinery is sold, discarded, demolished or destroyed, and urged that though in the present case only a part of the plant and machinery was damaged, section 41, sub-section (2) was attracted and the entire sum of Rs. 7,83,207/- was exigible to tax. Now, it is difficult to see how this argument can at all be sustained on the facts found by the Tribunal. Section 41, sub-section (2) postulates for its applicability that the plant or machinery, whether whole or part, is sold, discarded, demolished or destroyed. It can have no application whether the plant or machinery is merely damaged and by repairing the damage it is restored to working condition. Here, it was clearly found by the Tribunal, and that was in fact common ground between the parties, that the plant and machinery was partly damaged by fire and after repairing this damage, the plant and machinery was recommissioned for the factory. It was not the case of the Revenue, nor was it so found by the Tribunal that leaving aside the whole of the plant and machinery, even a part of it was sold, discarded, demolished or destroyed. There was, therefore, no scope for the applicability of section 41, sub-section (2) and in fact this provision was not even invoked before the Tribunal by the Revenue. What the Revenue did was merely to invoke the analogy of section 41, sub-section (2) and the Tribunal rightly held that in the absence of specific provision in the Act, the amount received by the assessee in respect of damage to the plant and machinery could not be brought to tax. It will, therefore, be seen that on the facts found by the Tribunal, section 41, sub-section (2) had no application at all and it was wholly unnecessary for the High Court to consider whether this provision the plant and machinery is sold, discarded demolished or destroyed. It may be pointed out that in fact the question of applicability of section 41, sub-section (2) was not covered by the second question and no question was referred to the High Court raising the issue as to chargeability of the amount of Rs. 7,83,207/- to tax under section 41, sub-section (2) since that was an issue raised before the Tribunal. We cannot, therefore, countenance the argument of the Revenue that section 41, sub-section (2) applied in the present case and the amount of Rs. 7,83,207/- was assessable to tax under that provision. Both the questions referred by the Tribunal to the High Court must accordingly be answered against the Revenue.;