TMI Blog1988 (3) TMI 54X X X X Extracts X X X X X X X X Extracts X X X X ..... the assessment year 1976-77, the Income-tax Officer taking the original cost of the boat at Rs. 49,992, took the view that Rs. 50,008 were chargeable to capital gains tax and added this sum to the income of the assessee. The figure of Rs. 50,008 was arrived at by deducting from Rs.. 1 lakh received from the insurance company, the original cost of the boat. The order of the Income-tax Officer was confirmed by the Appellate Assistant Commissioner and the Tribunal. The Tribunal took the view that since the rights of the assessee stood extinguished as the boat had sunk in the sea, this extinguishment of the right in the capital asset amounted to transfer. In the light of the view taken by the Gujarat High Court in CIT v. R. M. Amin [1971] 82 ITR 194 and CIT v. Vania Silk Mills (P.) Ltd. [1977] 107 ITR 300, the Tribunal found that in the case of extinguishment of right, it was not necessary that the asset must continue in existence. Thus, according to the Tribunal, the assessee had obtained money on the extinguishment of all his rights in the capital asset and was, therefore, liable to pay capital gains tax. The correctness of this decision is put in issue in the question referred. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ne Mills on August 11, 1966, and the machinery taken on hire from the assessee was damaged to such an extent that it could not be put to use Jasmine Mills made an insurance claim and out of the amount received by it, paid a sum of Rs. 6,32,533 to the assessee on account of destruction of the machinery of the assessee. The written down value of the machinery of the assessee in the relevant year worked out to Rs. 2,62,781 and the excess amount of Rs. 3,50,792 was treated by the Income-tax Officer as capital gains chargeable under section 45 of the Act. The Tribunal had held that unless there was transfer of a capital asset effected by an assessee, section 45 would not be attracted and since there was no such voluntary act on the part of the assessee effecting a transfer, one of the conditions for levying the charge on capital gains was not satisfied. In the reference which arose out of the decision, the Gujarat High Court referred to the earlier decision of that court in CIT v. R. M. Amin [1971] 82 ITR 194" in which it was held that the expression " extinguishment of any rights therein " in section 2(47) which defined capital asset did not require that despite extinguishment of the r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eives that money in lieu of the capital asset and not in lieu of the premia paid to the insurance company and this amounts to a transfer within the meaning of section 2(47) and the amount received would be liable to be taxed as capital gains. If the decision in Vania Silk Mills (P.) Ltd.'s case [1977] 107 ITR 300 (Guj) is accepted as correct, then there can be no error in the view taken by the Tribunal. Learned counsel for the assessee has, however, pointed out that notwithstanding the very wide meaning of the term " transfer " given in section 2(47), destruction of the asset, in the instant case the fact of sinking in the sea, can by no stretch of imagination be said to amount to a transfer and the amount received by the assessee from the insurance company for the loss of the capital asset cannot be said to be consideration for the capital asset. Now, it is too late in the day to contend that total extinguishment of all rights in a capital asset will not be covered by the word " transfer " or that the transfer contemplated by the definition must necessarily be the result of a voluntary act of the owner of the capital asset. The concept of capital gains was dealt with by section 12 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as to whether divestiture of title under a law relating to compulsory acquisition of property would amount to a transfer or not did not survive after the enactment of the Income-tax Act, 1961. The Legislature has now expressly included compulsory acquisition of capital asset under any law within the definition of transfer. Section 2(47) of the Act reads as follows: "' Transfer ', in relation to a capital asset, includes the sale, exchange or relinquishment of the asset or the extinguishment of any rights therein or the compulsory acquisition thereof under any law." The definition of " transfer " is an inclusive definition and the definition becomes relevant only in relation to a capital asset. Section 45 of the Act reads as follows : "Any profits or gains arising from the transfer of a capital asset effected in the previous year shall, save as otherwise provided in sections 53, 54, 54B and 54D, be chargeable to income-tax under the head 'Capital gains', and shall be deemed to be the income of the previous year in which the transfer took place." The provisions of sections 46 and 47 are not relevant for our purpose. Section 48 which deals with the mode of computation and dedu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the asset as contemplated by section 2(47), the assessee who is the owner of the capital asset must either receive consideration for the transfer or the consideration must accrue to him as a result of the transfer of the capital asset. The capital gain contemplated by section 45 is to be worked out in the mode prescribed in section 48. Unless, therefore, it is established that consideration has either been received or has accrued to the assessee for the transfer as contemplated by section 2(47), the provisions relating to capital gains will not be attracted and there will not be any liability for capital gains tax. It is also important to bear in mind that section 45 refers to " the transfer of a capital asset effected in the previous year ". The concept of capital gains, therefore, contemplates that unless the transfer is effected by somebody or by some agency, it will not be a transfer for the purpose of section 45 of the Act. Having regard to the context in which the word " effected " is used in section 45, it is clear that it contemplates some agency by the act of which the transfer is brought about. The meaning of the word " effected ", which is relevant for our purpose, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... some agency and unless there is consideration for such extinguishment, by the mere fact that the asset stands destroyed either by fire or by sinking in the sea as in the instant case, there can be no transfer of the capital asset for the purpose of sections 45 and 48 of the Act. The mere fact that the definition of " transfer " is an inclusive definition does not mean that every extinguishment of the rights of the owner of the capital asset howsoever brought about will necessarily amount to a transfer. It is undoubtedly true that when a definition expressly includes things which are not covered within the ordinary meaning of the word, the intention of the Legislature is to give a wide meaning to the word itself and when we are dealing with an inclusive definition, it is inappropriate to put restrictive interpretation upon terms of wider denomination. But it is also true that notwithstanding the inclusive definition, when that definition is to be substituted for the word defined and used in a statutory provision, the extended meaning will be controlled by the other words used in the section, and if necessary, by the other provisions relevant for working out the main provision. As po ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... section 12B(1) so as to give rise to capital gain taxable under that section. The Gujarat High Court held that the word " transfer " standing by itself is a comprehensive word and would include not only transfer by act of parties, but also by operation of law. In support of this conclusion a passage from the Dictionary of English Law by Earl Jowitt was quoted and that passage reads as follows (at p. 718 of 80 ITR): " In the law of property, a transfer is where a right passes from one person to another, either (1) by virtue of an act done by the transferor with that intention, as in the case of a conveyance or assignment by way of sale of gift, etc. ; or (2) by operation of law, as in the case of forfeiture, bankruptcy, descent, or intestacy. Relying on this definition, it was observed as follows (at p. 718 of 80 ITR): " The word 'transfer' is not a term of art and has not a technical meaning. It is a word of the widest import and includes every act by which property may pass from one person to another. Transfer may be inter vivos, that is, by act of parties, or it may be by operation of law in invitum." It was argued before the Division Bench that the words sale, exchange, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lt of the transfer of the capital asset. " The normal concept of consideration contemplates a quid pro quo for something of which a person is divested, and in the light of what we have said earlier, voluntarily or involuntarily, through some agency. In cases of compulsory acquisition, the capital asset vests in the acquiring body and, though what is paid by the acquiring body is called compensation, it can also be described as consideration for the acquisition. But where moneys are paid by an insurance company consequent upon total destruction of the property and no transfer results from such destruction or extinguishment of all rights in the capital asset, the amount paid by the insurance company cannot, in our view, be described as a consideration as a result of the transfer of the capital asset. When something is said to be paid or received as a result of the transfer, there has to be a direct nexus between the transfer and the receipt. As we have already pointed out, if there was no transfer of the capital asset, the question of nexus between the payment made by the insurance company and the transfer does not arise in the instant case. The payment received in pursuance of a con ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ular Metal Works and Rolling Mills [1983] 142 ITR 361. That was case in which the question was whether the compensation received by the assessee from the insurance company when the insured goods were seized by the Pakistan authorities while in transit from Britain to India represented the price of the stock-in-trade and whether the excess amount received as a result of the change in the exchange rate should be treated as business income. Goods which were exported from England were in the course of transit requisitioned by the order of the Government of Pakistan. The assessee had consigned the goods to a transport company which made a claim for Rs. 2,05,539.62, which was the insured value of the goods, with the Custodian of Enemy Property, Bombay. The claim was ultimately settled by Lloyds Insurance Company for Rs. 3,21,46.6 at the rate of 4.8120 pounds equal to Rs. 100, the insured value of the consignment lost being taken at 15,469 pounds. The assessee received Rs. 1,14,710 in excess of the value of the stock-in-trade, the excess being due to the devaluation of the rupee during the period between the making of the claim and its settlement. The Income-tax Officer negatived the clai ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... an Indian statute that as far as possible, there must be uniformity of construction and if the provisions of law which fall for construction before the court have already been construed by another High Court or High Courts, unless there are compelling reasons to depart from that view, normally, that construction should be accepted. " Now, undoubtedly, in respect of construction of a provision of an Act like the Income-tax Act, uniformity of construction is extremely desirable. But that does not however mean that this court must always accept the construction placed upon particular statutory provision by other High Courts. If there are compelling reasons which make the view of other courts unacceptable, this court would be entitled to reconsider the matter. We shall presently show why we are not inclined to follow the decisions of the Gujarat High Court and the Allahabad High Court. With respect, we have to dissent from the view taken by the Gujarat High Court in Vania Silk Mills (P) Ltd.'s case [1977] 107 ITR 300. It is true that in Vania Silk Mills (P) Ltd.'s case, the Gujarat High Court rejected the contention that the transfer contemplated by section 2(47) of the Act must be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The learned author has pointed out that " the owner of a material object is he who owns a right to the aggregate of its uses ". When we consider the concept of extinguishment of any right in a capital asset which is effected by some agency and consideration is received or accrues as a result of the extinguishment of such a right, in the context of a capital asset which falls in the category of corporeal property, it is difficult to appreciate how a total extinction of the property by fire or otherwise can fall within the definition of " transfer ". In the case of corporeal property, even if there is extinguishment of rights of the owner, the property must continue to exist. Even where all rights in a corporeal property are extinct, then if it is by the act of a transferor who receives consideration, there must be transfer of these rights to somebody who may not necessarily be the person who gives consideration. In a case where all the rights are extinct, the only case which seems to be contemplated by the definition, read in the light of sections 45 and 48, it appears to us, is where the property as such exists, and is transferred to somebody. ID our considered view, the concept of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of a firm makes over capital assets which are held by him to a firm as his contribution towards capital, there was transfer of capital assets within the terms of section 45 of the Income-tax Act, 1961, because an exclusive interest of the partner in his personal assets is reduced, on their (assets) entry into the firm, into a share interest. It was held that though this would amount to " transfer ", the partner receives no consideration within the meaning of section 48, nor does any profit or gain accrue to him for the purpose of section 45. The following observations made in the context of the concept of " transfer are, in our view, relevant (p. 517): "In its general sense, the expression 'transfer of property' connotes the passing of rights in property from one person to another. In one case, there may be a passing of the entire bundle of rights from the transferor to the transferee. In another case, the transfer may consist of one of the estates only out of all the estates comprising the totality of rights in the property. In a third case, there may be a reduction of the exclusive interest in the totality of rights of the original owner into a joint or shared interest with ot ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
