Law:

Section:

Section 263 of the Income-tax Act, 1961 - Revision - Of orders prejudicial to interests of revenue - Assessment year 1986-87 - After damages suffered by severe cyclone, assessee received compensation from insurer in respect of stock, work-in-progress and repairs of machinery - ITO allowed insurance money as a capital receipt not to be included in total income, whereas same was accounted by assessee in its profit and loss account as revenue receipt and was partly used for payment of dividends - Whether Assessing Officer was required to examine claim of assessee and his failure to do so was not only erroneous but also prejudicial to interest of revenue - Held, yes - Whether, therefore, Commissioner was right in exercising his power of revision and directing Assessing Officer to examine said aspect thoroughly and in accordance with law - Held, yes FACTS The Commissioner while examining assessment record found that a sum of Rs. 4.87 crores was received by the assessee from the insurance company. The amount had been allowed by the ITO without proper scrutiny and verification as a capital receipt not subject to tax even though that sum had been accounted for by the assessee to its profit and loss account as an item of the revenue. The Commissioner, therefore, initiated action under section 263. The assessee submitted that there was a severe cyclone in Madras in November 1984 and that as a consequence, the assessee's factory was totally inundated, the building, stocks and machinery suffered damage. The assessee claimed compensation from its insurer. The compensation it received in respect of the stock, work-in-progress and repairs to machinery was treated by it as revenue receipt in its profit and loss account and as also for the purpose of income-tax. The sum received by it for the damage caused to the machinery, which continued to be used even after the damage suffered, was treated as income in the profit and loss account and also used for the purpose of distributing dividend. However, it was not treated as an item of revenue for the purpose of income-tax as in the view of the assessee that receipt was in the capital field. It was ordered by the Commissioner that…

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