Judgment:
1. This is an appeal of the assessee challenging the order dated 23-11-1989 of the Commissioner of Income-tax (Appeals) as erroneous and incorrect.
2. The facts of the case are briefly these: The assessee, a resident having the status of Private Limited Company and the accounting period ending with 31-3-1985 for the assessment year in question filed on 30-9-1985 its return declaring an income of Rs. 1,33.880. The assessment was originally completed on 31-3-1986 determining the income at Rs. 2,87,364. The assessee-company was carrying on the business of manufacturing and selling of ice-cream cones. It suffered damage by fire to its factory in May 1984. A sum of Rs. 13.95 lakhs was received towards imported plant & machinery as compensation from the Insurance Company which was credited to the Insurance Claim Reserve Account. The assessee-company. opened a separate account for machinery maintenance reserve account and repair expenditure of machinery amounting to Rs. 4,29,846 was debited therein. The net credit balance of Rs. 9,65,154 being the difference between the amount received from the Insurance Company and the amount spent on repairs was taken to the capital reserve account. The assessee-company claimed before the Assessing Officer that the cost of plant and machinery was the written down value of Rs. 10.71 lakhs as on 1-4-1984 plus enhancement by the amount of repairs of machinery amounting to Rs. 4.29 lakhs making thus a total of Rs. 15.01 lakhs. The Assessing Officer accepted this claim and after deducting the compensation amount arrived at the cost of assets as Rs. 1,06,489. The Revisionary Officer opined that the Assessing Officer failed to apply Section 41(1) and (2) where any machinery was destroyed and the money payable amounting in this case to Rs. 13.95 lakhs in respect of such machinery exceeds the amount of scrap value then such excess shall be brought to tax. He also pointed out that no investment allowance was due as the asset was not existing on the last day of the accounting period and also that the nature of repairs was also not gone into by the Assessing Officer. He, therefore, felt that the plea of the assessee that there was neither capital gain nor assessable income in respect of compensation received from the Insurance Company was accepted by the Assessing Officer without calling for details and also without verifying the extent of destruction or damage to the machinery as to whether it is whole or in part. Hence, considering that the assessment order is erroneous in law and prejudicial to the interests of Revenue, the assessment was set. aside by the Commissioner of Income-tax under Section Section 263 who directed the Assessing Officer to redo the same in accordance with law, by his revisionary order dated 9-3-1988. The appeal against it by the assessee before the Tribunal is dismissed as not pressed for as prayed by the assessee on the ground that the assessee's appeal against the appellate order of the Commissioner, challenging the reassessment order made pursuant to the revisionary order may be decided on merits. The reassessment order was passed on 23-3-1989 determining the taxable income of the assessee company at Rs. 7,64,080 as against the originally assessed income at Rs. 2,87,364 in turn as against the income returned by the assessee at Rs. 1,33,880. The reassessing Officer held that the assessee made a profit of Rs. 3,23,357 under Section 41(2) of the Act and did not incur expenses ofRs. 2,65,065 on repairs thus disallowing it under either of the heads as capital or revenue, the repair charges of Rs. 1,64,781 as capital expenditure, the depreciation amounting to Rs. 1,95,215 on plant and machinery as claimed by the assessee is not allowable and the interest under Sections 139(8) and 215/217 of the Act is chargeable. On appeal it was partly allowed by the Appellate Officer, while confirming inter alia, the assessability of the amount of Rs. 3,23,357 under Section 41(2) of the Act as income. Hence, the instant second appeal by the assessee before us.
3. The learned Counsel for the assessee submitted that: The Appellate Officer erred in fact and in law in upholding the reassessment order with reference to the applicability of Section 41(2) of the Act making the addition of Rs. 3,23,357 and in construing the reports of the Insurance Surveyor and of the Chief Engineer of the Austrian Company manufacturing the machine. The finding of the Appellate Officer that the cone manufacturing machine was damaged/destroyed wholly and not in part was not correct. It is based on the misinterpretation of the Surveyors Report obtained by him and which was also not confronted to the assessee. The Appellate Officer further erred in not adjudicating upon the ground claiming allowance of repair charges of Rs. 1,64,781 as business expenditure instead of capital expenditure as held by the Assessing Officer. The Appellate Officer furthermore erred in fact and on law in upholding reassessment order in not allowing depreciation amounting to Rs. 1,95,215. The Appellate Officer has also erred in fact and on law in not allowing full relief with reference to the ground relating to charging of interest under Sections 139(8) and 215/217 of the Act. R'(sic) 'ian.ce is also placed on the following decisions :- (a) CIT v. Engg. Works of India (P.) Ltd. [1977] 108 ITR 11 at 13 (Cal.) (b) CIT v. Sirpur Paper Mills Ltd. [1978] 112 ITR 776 (SC) at 778, 785 and 795.
(c) CIT v. Bengal Assam Steamship Co. Ltd. [1986] 161 ITR 576 28 Taxman 432 (Cal.) at 582.
The emphasis particularly is that if a machinery damaged is restored to original level then there is nothing which could being in the mischief of Section 41(2) of the Act. Only actual physical destruction alone is contemplated and not otherwise for taxability under Section 41(2) of the Act. Unless all parts of the machinery are wiped off, Section 41(2) cannot be brought into play. If the Revenue concedes that the machinery has been put back to use then there is no case for the Department. The relevant insurance papers filed in the paper Book may be seen. The concerned report obtained by "the Assessing Officer and relied upon by him has not been given to me for confrontation. Now I got a copy of the same at my expense from the insurance company. If a loss is considered to be a constructive total loss, then Section 41(2) cannot be attracted. The question that has to be rightly analysed is as to whether there is a total physical loss of the machinery. In the instant case the machinery has been put back in its working condition and it has been with the assessee and been used by it after repairs. Purchase of parts of the machinery costed more than the purchase of the machine itself. The instant case is identical with the decision in Sirpur Paper Mills Ltd. 's case (supra) whose ratio squarely applies to this case.
Though the Assessing Officer did not apply this decision in favour of the assessee, the Appellate Officer seems to have applied it but not effectively. The machinery has also been allowed depreciation from year to year up to this date. Thus, the orders impugned are challenged by supporting the original assessment order.
4. On the other hand, the learned representative for the revenue countered that : Section 41(2) clearly attracts the instant case justifying the taxability of the income. In Sirpur Paper Mills Ltd. 's case (supra), it was not a case where the machine was destroyed but damaged and that therefore that case is not applicable to the instant case. The Supreme Court has in that case considered the word 'destroy' but not the word 'discarded'. The word 'discarded' indicates "dispensing with, letting go of, getting rid of" as given in the Webster's Dictionary at page 644 which is filed now. Hence the Tribunal has now to interpret the word 'discarded'. Pages 5 and 6 of the Appellate order may be seen. In other words, the orders impugned are effectively supported by the Department praying to dismiss the appeal of the assessee.
5. We have heard the rival submissions besides going through the facts of the case on record and the orders of the authorities below including the Paper Book filed on behalf of the assessee. We have also duly and carefully examined the issues in question in the light of various case laws relied upon by the assessee. The stand of the assessee is that profit under Section 41(2) cannot be attracted as the plant and machinery against which the insurance claim was received was not wholly destroyed but only partly damaged. The assessee has also incurred expenditure on the repairs of the plant and machinery by using indigenous skill. The assessee claims that it started production in January 1985. Thus, the assessee demonstrates that in November 1984 only the machinery was damaged in part but not fully destroyed. We have also perused in this connection on the admissibility of the assessee's claim, the decision in the case of Sirpur Paper Mills Ltd. (supra). The Appellate Officer has raised the question that for the applicability of the aforesaid decision it must be answered as to whether the whole of the machinery was damaged or destroyed or only a part of it. It has not been convincingly demonstrated before us that the assessee has claimed before the Insurance Company mentioning that the machinery insured was wholly destroyed by fire and looting. The Assessing Officer himself has mentioned in his order that the extent of damage on the basis of the bill was not 100%. The special claim report is also quoted in the appellate order stating that according to the Chief Engineer of the British firm who are the manufacturers of the machine and who examined the plant and machinery and had discussions on loss with the Engineers that the machinery suffered extensive damage and not wholly damaged and that the cost of rectification of the machine was more than the sum insured. The report of the said Chief Engineer also is extracted in the appellate order stating that he has opened the machinery and checked in detail and that the machinery needs extensive replacement parts of two items mentioned therein. The important and relevant portion of it is that to carry out the replacement of the damaged components to be imported by the assessee, it will have to be carried out by his factory trained engineers so that the machinery could be put back into proper and safe operation. It is also emphasized therein that the machinery being in badly damaged and burnt condition the machinery would need extensive servicing. It is also stated therein that the cost of components will be at the assessee's account and if the machinery is sent back to Austria for necessary rectification, it is likely to cost even more than the present value of similar new machines because of transportation, handling and additional stripling of the machines involved. When a careful perusal of the said reports as extracted in the order impugned is bad, we are unable to appreciate the finding therein that the machinery was fully destroyed. In our view it is not fully destroyed but only damaged partly and if at all a major portion thereof. Otherwise, the question of replacement of parts and extensive servicing to put back the machinery into proper and safe operation as mentioned in the reports would not arise. Further, the report dated 4-1-1985 of the consulting Engineer also states at page 3 thereof that the Chief Engineer inspected the damaged machine in his presence and according to him and in view of the apparent damages observed, the machine was considered as reparable. The assessee's letter dated 5-11-1984 addressed to the police station also states only extensive damage to machinery etc., besides its telegram stating only substantial damage to its plant. We, therefore, opine that the plant and machinery even though considerably damaged it cannot be said to be a total physical loss on the ground that most of it was reparable and that is what the assessee did by using the indigenous technical talents available and also by getting the local moulds. It appears that the machinery was repaired in a record time of five weeks and started functioning and produced 5590 cases containing 2000 cones each for the period from 18-1-1985 to 31-3-1985 against 5514 cases were sold, as evidenced by the statements showing details of production and sales date-wise supported by Photostat copies of sales-tax order dated 23-3-1989 of the Sales tax Officer confirming the sales stated. Hence these facts substantiate that the machinery was not wholly damaged but only partly and which was put to use immediately after repairs.
6. The decision in the case of CITv. Vania Silk Mills (P.) Ltd. [ 1977] 107 ITR 300 (Guj.) is not applicable to the instant case, the assessee urged before us. In fact on being appealed against this decision, it has been reversed by the Hon'ble Supreme Court (sic) damage caused by fire making machinery useless, the insurance amount received from the insurance company in excess of cost of machinery is not liable to capital gains tax and that whether the amount received spent in replacement of machinery or not is not relevant and that the payment of instance claim is not consideration for taking over damaged machinery.
As has been urged by the assessee, we are of the opinion that the decision in the case of Sirpur Paper Mills Ltd. (supra) applies to the instant case. This decision held that Section 41 (2) postulates for its applicability that the plant or machinery, whether in whole or in part, should be sold, discarded, demolised or destroyed; it could have no application to a case where the plant or machinery is merely damaged and by repairing the damage is restored to working condition. It continued that since the plant and machinery was only partly damaged by fire and after repairing the damage it was commissioned, there was no scope for applicability of Section 41(2). In the absence of specific provision in the Act, the amount received by the assessee in respect of damage to plant and machinery could not be brought to tax and the Revenue could not seek to tax the amount by resorting to the analogy of Section 41(2). Under these circumstances, it would be superfluous to discuss about the case of Bengal Assam Steamship Co. Ltd. (supra) relied upon which is in favour of the assessee on the same point under Section 41(2). Similarly so, the decision in the case of Engg. Works of India (P.) Ltd. (supra) on the point under Section 41(2) would also be redundant as this is also in favour of the assessee.
7. Therefore, by applying the ratio decidendi of the said judgments to the similar issue involved in the facts and circumstances of the instant case, we are inclined to allow this ground of appeal of the assessee by setting aside the orders impugned and directing the Assessing Officer to grant relief in this regard.
8. The next grievance of the assessee is that the holding of repair charges of Rs. 1,64,781 by the Assessing Officer as capital expenditure is totally wrong and also contradictory to the finding of the Assessing Officer himself that the plant and machinery was completely destroyed in fire. The assessee's charge against the Appellate Officer is also that the latter has not adjudicated this issue of claiming the said amount as business expenditure instead of capital expenditure. Out of the amount of Rs. 13.95 lakhs received by the assessee company from the insurance company and credited to the insurance claim reserve account, the assessee company opened separate account for machine maintenance reserve account and repair expenditure of machinery was debited which amounted to Rs. 4,29,846. Out of this claim for repair expenditure a sum of Rs. 2,65,065 was found by the Assessing Officer as not to fall during the period relevant to the assessment year in question. Hence the differences between these amounts coming to Rs. 1,64,781 was worked out as expenditure and would be capitalised to plant and machinery account besides allowing depreciation on it, according to the Assessing Officer. The assessee could not get relief on this ground before the Appellate Officer who has said that no comments are necessary on this ground in view of this being covered by his decision against the assessee on the grounds pertaining to assessability of Rs. 3.24 lakhs as profits under Section 41(2) of the Act and the claim of expenses on repairs for Rs. 1,64,781. The reassessment order simply states by mentioning the bill number and date the claim of repairs of Rs. 2,65,065 does not fall during the period relevant to the assessment year in question. On the other hand the records reveal the fact that the assessee enclosed to the Commissioner photocopies of the balance-sheet and profit and loss account for the year ending 31-3-1985 and also copy of machinery maintenance reserve account in which account repair expenses have been debited and that the repairs were carried out earlier and the party's bills were adjusted only on 31-3-1985 and also that since the liability had accrued earlier the adjustments were made rightly on the close of the accounting year. In support of this, the assessee has enclosed along with its letter dated 25-2-1988 to the Commissioner photocopy of the delivery challan no. 30 dated 5-1-1985 under which 30 sets of moulds were supplied to the assessee on 5-1-1985 and which was fixed on 10-1-1985. In addition to this, the assessee has, to prove that immediately after survey was carried out it commenced repairing its plant, also enclosed the photocopy of the letter dated 7-12-1984 to Arun Engineering Works, the latter's letter dated 11-12-1984 and also the minutes of the meeting between Mr. Amar Swarna and Mr. Rajeev Khanna. While so, no discussion about or finding on these aspects or any reason has been made or given either in the reassessment order or in the appellate order. In this view of the matter, we are inclined to hold that the assessee has case on this ground also in its favour.
9. The assessee's another letter dated 26-10-1989 to the Commissioner further reveals that the details of expenses along with photocopies of bills as well as challans were enclosed showing that the parts were not only purchased but installed also prior to the close of the accounting year and the production could be commenced because it was installed before which was accepted even by the insurance company. In support thereof it appears that production slips and sales bills as well as list of parts that were found damaged and missing were produced before the Commissioner. Assessee's another letter dated 2-11-1989 addressing the Commissioner also states that in a record time of five weeks, the machinery was repaired and started functioning proving to the extent that 5590 cases containing 2000 cones each were produced from 18-1-1985 to 31-3-1985 against which 5514 cases were sold, supported by enclosed statements with details of production and sales date-wise, besides producing sales-tax orders dated 23-3-1989 confirming the sales mentioned in the statement.
10. Thus we are convinced on the assessee's stand on a careful analysis of all these aspects and consequently set aside the order impugned on the point of repair charges of Rs. 1,64,781 also and direct the Assessing Officer to grant relief on this issue too.
11. The next grievance of the assessee is that depreciation amounting to Rs. 1,95,215 has not been allowed to it unjustly. Pursuant to our decision taken on the first two grounds on the aspects of assessability under Section 41(2) of the Act and of allowance of repair charges in favour of the assessee, we are of the opinion on the logical examination of the issue that the allowance of depreciation amounting to Rs. 1,95,215 has also to go in favour of the assessee. We thus set aside the orders impugned on this ground also and direct the Assessing Officer to grant the relief prayed for herein.
12. The last grievance of the assessee is that it has not been given relief in full relating to charging of interest under Sections 139(8) and 215/217. This ground being consequential, the Assessing Officer is now directed to modify it accordingly and as per law.