JUDGMENT
1. The Tribunal, Allahabad, has referred the following question of law under Section 256(2) of the IT Act, 1961, hereinafter referred to as the Act, for opinion to this Court :
"Whether, on the facts and in the circumstances of the case, the Tribunal was, in law, justified in upholding the order of the CIT(A) who had erred in law in not deciding the matter in the light of the provisions of Section 41(2) of the IT Act, 1961, in respect of compensation received for the units of the building and the items of machinery completely destroyed in the firm (sic) ?"
2. Briefly stated, the facts giving rise to the present reference are as follows :
The reference relates to the asst. yr. 1984-85. The respondent/assessee is a private limited company. The accounting period for the assessment year under consideration ended on 31st Dec., 1983. A fire broke out in the month of August, 1983, in the respondent/assessee's mill. As a result of the damage to the flour mill, building and plant and machinery by fire, the respondent-company received compensation of Rs. 18,16,499 from insurance company as under :
The assessing authority assessed the entire compensation to tax as revenue receipt under Section 41 of the Act, whereas the respondent had claimed it as capital receipt. An expenditure of Rs. 5,84,013 was allowed by the AO as revenue expenditure. Feeling aggrieved by the assessment order, the respondent filed an appeal before the CIT(A). The CIT(A) had partly allowed the appeal by holding that as a result of receipt of compensation loss the actual expenditure incurred for repair and restoration would constitute capital receipts. Thus, a relief of Rs. 6,98,742 was allowed after deducting Rs. 11,17,757 on repairs and restoration of machinery and building. The Revenue, feeling aggrieved, preferred an appeal before the Tribunal. The Tribunal has upheld the decision of the CIT(A) and had held that the ratio of the judgment of the Hon'ble Supreme Court in CIT v. Sirpur Paper Mills Ltd. was applicable. It did not accept the contention of the Revenue that the building along with the plant and machinery were completely destroyed in the fire and in respect of. such damage the compensation received should have been brought to tax under Section 41(2) of the Act..
3. We have heard Shri A.N. Mahajan, learned standing counsel for the Revenue. Nobody has appeared on behalf of the respondent/assessee and have perused the report of the surveyor, which has been made part of the statement of case and also the order of the Tribunal.
4. Sri A.N. Mahajan, learned standing counsel, submitted that from the report of the surveyor it would be seen that the entire plant and machinery installed in the second floor (third storey), third floor (fourth storey) and fourth floor (fifth storey) were burnt and reduced to scrap. Thus, the plant and machinery installed in these floors had been completely destroyed and any amount received by the respondent towards compensation is to be brought to tax in terms of Section 41(2) of the Act. According to him the Tribunal has misdirected itself in holding that it was a case of partial damage, both with regard to machines and the buildings.
5. Having heard the learned standing counsel, we find that the Tribunal has dealt with the matter in the following words :
"We have given careful consideration to the facts of the case and the rival submissions. As the crux of the controversy is the extent of damage to the plant and machinery and building it would be appropriate to note at this stage the report of the surveyors on this issue. It reads, inter alia, as below--
6. Benefit of Damage :
The fire was very serious in nature and caused the following damages :
(a) Building There was extensive damage to the upper three storeys (3rd, 4th and 5th) of the milling section of the insured's mill building. The wooden doors and windows were gutted. The walls had developed serious cracks at certain places and required to be pulled down in portions. The fifth storey was the worst affected and required to be completely pulled down. The AC sheets of the roof had burnt and the steel framework had twisted and bucked. The RCC floors had sagged, steel connuns had gone out of plumb, walls at places had cracked, the plaster got dislodged. The 1st and 2nd storeys were practically saved.
Due to the black partition wall between the wheat cleaning and milling sections, the fire could not spread to the wheat cleaning section and it was totally saved.
(b) Plant and machinery Ground floor (1st storey) No machinery, except the lower portions of the elevators, were installed in this floor. The elevators on the upper floors were completely burnt, whereas the sections of those elevators on the ground floor were only partially damaged.
First floor (2nd storey) Thirteen roller mills, two grinders and accessories were installed in this floor. There was minor damage to the roller mills and grinders, but the wooden elevators, air and pressure pipes were burnt.
Second floor (3rd storey) In this floor, 2 polish metal purifiers, 2 wooden indigenous purifiers, 2 centrifugal dressing machines and one bran finisher, with worm conveyers, air and pressure pipes and other accessories were installed. This floor was very badly affected and the entire machinery and accessories were burnt and reduced to scrap.
Third floor (4th storey) Flour high efficiency polish planshifters, fan pressure dust collector, arc bleacher, worm conveyers, air and pressure pipes, etc. were installed in this floor. This entire machinery and accessories installed in this floor were destroyed and reduced to scrap.
Fourth floor (5th storey) One centrifugal machine, pulleys, gears and motors of elevators were installed in this floor. This floor was the worst affected. The entire machineries installed therein were burnt and reduced to scrap.
From the narration given above it is clear that first and second storeys of the building were practically saved. The worst damage was on the 5th storey and third and fourth storeys were also extensively damaged. So far as the wheat cleaning section was concerned, it was totally saved. There is, therefore, considerable merit in the assessee's submission that so far as the building was concerned, it would be wrong to say that it was a case of total destruction of the building of the factory.
10. So far as the extent of damage to plant and machinery is concerned, it was not too extensive, but so far as the second storey was concerned, the damage to the roller mills and grinder was minor. On the third storey, the entire machinery and accessories were burnt and reduced to scrap. Similar was the position with regard to the machine installed on the 4th storey and the 5th storey. These machines installed on 2nd, 3rd and 4th floors were reduced to scrap but the machines installed on the 1st floor, i.e., the second storey were not badly damaged. The damage to machinery of the factory had also thus, not total, but only partial though the part damage was more than the part which remained undamaged.
11. Coupled with the above report is the fact of repairs and replacement, the details of which have been placed on record by the assessee. It is again on record to state that no new machines were purchased for the restoration of the mill, except the following :
12. So far as the expenditure on purchase of new machines is concerned, CIT(A) has held it to be a revenue expenditure and has been allowed by the ITO himself. It cannot, therefore, be said that the aforesaid amount represented acquisition of new machinery. It was in fact the replacement of the old machinery. As noted above the said details have been placed on record by the assesses and we have gone through them. On the basis of such details, it is not possible to hold that what was achieved by the assessee by incurring the said expenditure was the restoration of altogether a new building or new machine. Ptima facie, the assessee carried on extensive repairing of the burnt machines and building and brought it to working condition. It was thus clearly a case of partial damage, both with regard to machines and the buildings. This being so, the learned CIT(A) was in our opinion justified in holding that the ratio of the aforesaid judgment of the Hon'ble Supreme Court applied to the facts of the present case. Accordingly, we confirm his order."
6. Thus, from the perusal of the order of the Tribunal, we find that it had taken note of the surveyor's report that the entire plant and machinery installed on the second, third and fourth floor of the building were completely damaged and reduced to scrap. Under Section 41(2) of the Act, where any building, machinery, plant or furniture which is owned by the assessee and in respect of which depreciation has been claimed under Clause (i) of Sub-section (1) of Section 32 and has been used for the purpose of business, is sold, discarded, demolished or destroyed, then in that event money payable in respect of such items together with the amount of scrap value, if any, exceeds the written down value, then the difference between the actual cost and the written down value is to be charged to income-tax as income of the business of the previous year in which the money payable became due. In the case of CIT v. Sirpur Papers Mills (supra), the apex Court has held that if certain plant and machinery or building has been destroyed in full, then in that event alone the provisions of Section 41(2) would be attracted and if the result of the fire is less than the total destruction and the building is repaired and brought to its original state and working is again started in the factory, it would not fall under the term 'destroyed' for the purpose of Section 41(2) of the Act. Same would be the position with regard to the machinery also. Applying the principles laid down by the apex Court in the aforesaid case to the facts of the present, we find that according to the own case of the respondent/assessee, which is duly supported by the surveyor's report and relied by the Tribunal, the entire building and machinery installed in the second, third and fourth floor of the respondent's mill had been completely destroyed and reduced to scrap. Thus, the amount of compensation referable to the plant and machinery installed on these floors would clearly attract the provisions of Section 41(2) of the Act.
7. In view of the foregoing discussion, we are of the considered opinion that the Tribunal was not justified in upholding the order of the CIT(A) that the provisions of Section 41(2) would not be applicable.
We, accordingly, answer the question referred to us in the negative, i.e., in favour of the Revenue and against the assessee. However, there shall be no order as to costs.