HIGH COURT OF DELHI CIT v. Sportking India Ltd.

Allowability of deduction under section 80-IA of IT Act, 1961 qua insurance claim received by an industrial undertaking for loss of goods destroyed by fire



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; 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


HIGH COURT OF DELHI
CIT
v.

Sportking India Ltd.

ITA NO. 1232/2008

AUGUST 19, 2009

Relevant Extracts :

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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 ex pression “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.

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.

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 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.

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