1988 (3) TMI 54 - HC - Income Tax

Summary

Issues Involved:

1. Liability to Capital Gains Tax on Insurance Compensation
2. Definition and Scope of "Transfer" u/s 2(47) of the Income-tax Act, 1961
3. Interpretation of "Consideration" in Context of Capital Gains

Summary:

1. Liability to Capital Gains Tax on Insurance Compensation:

The primary issue was whether the assessee is liable to be assessed to capital gains tax on the sum of Rs. 1 lakh received from the insurance company for the loss of boat No. TTN 39. The Income-tax Officer, Appellate Assistant Commissioner, and Tribunal held that the amount was chargeable to capital gains tax, considering the extinguishment of the assessee's rights in the capital asset as a transfer. The Tribunal relied on the Gujarat High Court's decisions in CIT v. R. M. Amin and CIT v. Vania Silk Mills (P.) Ltd., which held that the extinguishment of rights in a capital asset amounts to a transfer even if the asset does not continue to exist.

2. Definition and Scope of "Transfer" u/s 2(47) of the Income-tax Act, 1961:

The assessee contended that the definition of "transfer" u/s 2(47) requires the extinguishment of rights to result from some act of the transferor, transferee, or by operation of law. The Revenue argued that the inclusive definition of "transfer" covers the extinguishment of rights due to the destruction of the asset, and the compensation received substitutes the lost asset. The court examined the definition and concluded that the word "transfer" must involve an act by some agency, either the owner or by operation of law, leading to the extinguishment of rights. The court rejected the notion that mere destruction of the asset constitutes a transfer.

3. Interpretation of "Consideration" in Context of Capital Gains:

The court addressed whether the compensation received from the insurance company could be considered "consideration" for the transfer of a capital asset. It was held that the compensation paid under a contract of indemnity for the destruction of the property does not qualify as consideration for the transfer of a capital asset. The court emphasized that the payment received from an insurance company is for indemnifying the pecuniary loss suffered and not for the transfer of the capital asset.

Decision:

The court concluded that there was no "transfer" of the capital asset within the meaning of section 45 read with section 2(47) of the Income-tax Act, 1961, when the boat sank in the sea. Consequently, the insurance amount received by the assessee cannot be considered as "consideration" for the transfer of a capital asset. Therefore, the assessee is not liable to be assessed to capital gains tax on the sum received from the insurance company. The reference was answered in the affirmative, in favor of the assessee, with costs fixed at Rs. 1,000 to be paid by the Revenue.