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Issues Involved:
1. Interpretation of the expression "the extinguishment of any rights therein" in Section 2(47) of the Income-tax Act, 1961. 2. Whether the receipt of Rs. 3,50,792 by the assessee is chargeable to tax as capital gains under Section 45 of the Act. Detailed Analysis: Issue 1: Interpretation of "the extinguishment of any rights therein" in Section 2(47) The court examined the legislative history of Section 2(47) and Section 45 of the Income-tax Act, 1961, noting that the term "transfer" has an inclusive definition that extends beyond its ordinary meaning to include "the extinguishment of any rights therein." The court emphasized that this inclusive definition was designed to cover a wide range of transactions, including those that result in the destruction, annihilation, or termination of rights in a capital asset. The court rejected the Tribunal's view that for a transfer to occur, the capital asset must be in existence and that the extinguishment must be brought about by a volitional act of the assessee. The court cited previous judgments to support the interpretation that the word "extinguishment" does not require the continued existence of the asset and can occur without a voluntary act by the owner. The court also clarified that the term "any rights" in the capital asset is broad and includes all kinds of rights-qualitative and quantitative. Therefore, the extinguishment of any of these rights could constitute a transfer under Section 2(47). Issue 2: Chargeability of Rs. 3,50,792 as Capital Gains The court analyzed whether the amount of Rs. 3,50,792 received by the assessee was chargeable to tax as capital gains under Section 45. The court noted the following facts: - The assessee's machinery was taken on hire by M/s. Jasmine Mills Pvt. Ltd. - The machinery was insured by the hirer along with its own machinery. - A fire caused extensive damage to the machinery, rendering it unusable. - The insurer paid the hirer, who then paid Rs. 6,32,533 to the assessee. - The amount received by the assessee exceeded the original cost of the machinery by Rs. 3,50,792. The court concluded that the transaction resulted in the extinguishment of the assessee's proprietary rights in the machinery. The payment received by the assessee was considered as arising from this extinguishment, thus constituting a "transfer" under Section 2(47). The court rejected the argument that the payment was made to discharge a legal obligation under the law of bailment, noting that there was no evidence to support such a claim. The court also dismissed the argument that the payment was received in satisfaction of an independent right to recover damages, stating that there was no material on record to show that the assessee had laid any claim for damages against M/s. Jasmine Mills Pvt. Ltd. The court emphasized that the payment was received on a pro-rata basis out of the insurance claim, indicating that it was attributable to the extinguishment of the assessee's rights in the machinery. Conclusion The court held that the Tribunal erred in law by not considering the extinguishment of rights in the machinery as a transfer under Section 2(47). Consequently, the amount of Rs. 3,50,792 was rightly chargeable to tax as capital gains under Section 45. The court answered both questions in favor of the revenue and against the assessee. The court also granted a certificate for appeal to the Supreme Court, noting that the questions involved were substantial questions of law.
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