TMI Blog1993 (2) TMI 137X X X X Extracts X X X X X X X X Extracts X X X X ..... ure had to be pulled down and reconstructed. As regards the machinery, the surveyors found that except for three items of machinery mentioned in page 15 of the survey report, rest of the machinery had been totally destroyed. The assessee company had a reinstatement clause in the insurance policy with United India Insurance Co. Ltd. On the basis of the commitment contained under the policy, the insurance company agreed to pay out all expenses incurred by it to reinstate the assets. Thus, the insurance company started releasing moneys to the assessee company in instalments and the first of such instalment was made only in April/May 1984. The total eligibility of the assessee under the cover-up insurance was in a sum of Rs. 27,05,313. Out of this, Rs. 10,45,032 was attributable to the building and Rs. 16,37,253 was attributable to plant and machinery. The Income-tax Officer has brought to tax not only the excess over the cost of such assets as capital gains arising under section 45 of the Income-tax Act in a sum of Rs. 11,40,128, but also included under section 41(2) of the Act the difference between the written down value of such assets and the cost thereof. Thus, a sum of Rs. 12,39, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the fire accident amounted to Rs. 7,40,843. Therefore, he held that the moneys received from the insurance company in regard to the building totally destroyed and in respect of the plant and machinery totally destroyed would be liable to computation under sections 41(2) and 45 of the Income-tax Act, 1961. There was another contention before the CIT (Appeals), viz., that the insurance moneys received were not received during the previous year but were received only in instalments in the future years and, therefore, nothing was liable to be taxed under section 41(2) or under section 45 of the Income-tax Act in relation to the previous year ending on 31-12-1983, relevant to the assessment year 1984-85. This contention was repelled by the CIT (Appeals) on the ground that the moneys were paid under a policy on the happening of the event and such event had occurred in the relevant previous year and, therefore, the insurance moneys though received subsequent to the end of the previous year would attract the provisions of sections 41(2) and 45 of the Act. For these reasons, he gave part relief to the assessee and sustained the order of the Income-tax Officer on principle thus negating the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that the decision of the Supreme Court in Sirpur Paper Mills Ltd.'s case only dealt with the case of plant and machinery or buildings which were partially destroyed or damaged and, therefore, the assessee's reliance on the same is out of context. 5. We have carefully considered the rival submissions. In Sirpur Paper Mills Ltd.'s case, the Supreme Court held that section 41(2) postulated for its applicability that the plant or machinery, whether in whole or in part, should be sold, discarded, demolished or destroyed and that it could have no application to a case where the plant or machinery is merely damaged and by repairing the damage the plant or machinery is restored to working condition. The Supreme Court further held that in view of the concession made by the revenue that the amount received by the company from the Insurer represented capital receipts and in view of the common ground between the parties that there was only a partial damage to the plant and machinery, and as it was not the case of the revenue nor was it so found by the Tribunal, that leaving aside, the whole of the plant and machinery, even a part of it was sold, discarded, demolished or destroyed, there was ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is made part of the paper book furnished by the assessee. At page 16 it is seen that there are about seven important functions or operations performed by several machines on the tea leaves plucked from the garden, namely, (1) withering troughs is a machine where chemical and physical changes take place, (2) Rotorvance is a machine which pre-conditions the leaves, (3) CTC Machine is used for sizing the leaves, (4) Fermenting machine reduces the moisture, (6) Sorting machine grades the leaves and (7) Packing machine eventually packs the manufactured tea. From the surveyors'report it is seen that machineries against S. Nos. (1), (2), (6) and (7) were totally damaged and machineries against S. Nos. (3), (4) and (5) were not at all damaged. These machines even though used in different places perform specific operations on the leaves plucked from the garden. Each of the operations leads to the subsequent operation and in the business of tea manufacture each such machine though separable has a meaning, purpose and relevance, only in the setting of other machineries performing the various other functions with which it has to work combinedly. Therefore, all the individual machineries have ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nce, though in such a case, the assured is at liberty to do whatever he likes with the money paid and cannot be required or directed to spend it on reinstatement, unless he is contractually or statutorily otherwise bound. The inclusion of a clause for the exercise of an option by the insurer to reinstate under the terms of a policy of insurance is meant for the benefit of the insurer, as by electing to reinstate, the insurer would be enabled to minimise the amount payable to the insured for the loss or damage suffered....... Thus, in the event of there being an election by the insurer to reinstate, there is a cessation of the obligation to make good the loss by money payment and the contract, though initially one of indemnity for repayment of money with reference to the particular risk covered, by the process of the exercise of election or option, becomes really a contract to reinstate in specie from its inception. " Their Lordships noted with approval the observations of Halsbury's Law of England, Fourth Edition, Volume 25, paragraph 662, to the effect that "if the insurers do not elect to reinstate, their obligation to make good the loss by a payment in money continues ; but if ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... home out by the materials on record. In its letter dated 13-4-1985, the insurer had stated as follows : " The full and final settlement under the captioned policy on reinstatement value basis can be considered after the other affected insured items are completely reinstated for which we have allowed time limit up to 30-6-1985 vide our letter Fcl, 390.85 dated 22-1-1985. On getting advice about reinstatement of Machinery and other affected items from you we shall depute the surveyor to assess the loss on reinstatement value basis for the final settlement under the policy. " On 16-10-1986, again the insurer had worked out the overall claim payable under the reinstatement clause at Rs. 27,05,313. This was because of the following : " The replacement value of the above works out to Rs. 38,06,646 whereas the same has been insured for Rs. 30,00,000 only. Hence applying average for under insurance the net amount payable comes to (Rs. 27,05,313). " The correspondence between the assessee and the insurance company also reveal that it was upon the reinstatement of the assets damaged or destroyed--buildings and machineries--that the final settlement was made. Further, it is seen from ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... it was held that in the case of takeover of electricity undertaking, section 41(2) could not be invoked till the price was finalised. There are some more decisions to this effect such as CIT v. Sheshappa Hegde [1984] 150 ITR 164 (Kar.) and Nagpur Electric Light Power Co. Ltd. v. CIT [1988] 171 ITR 33 (Bom.). In the case of the assessee, the previous year ends on 31-12-1983. Though the surveyors' report is dated 9-6-1983, the first payment was made on 9-9-1983 with regard to the building but it was on depreciated value base without quantifying the amount payable under the reinstatement clause. The second payment was made only on 13-4-1985 in a sum of Rs. 7,45,032 and such payment was made upon the ascertainment of the claim on reinstatement basis. Therefore, the quantification of the amount due or payable was made only on 13-4-1985 which falls outside the previous year. The quantification of the reinstatement value of the machineries damaged would appear to have been done only subsequently as is evident from the letter of the insurance company dated 16-10-1986 (pages 45 and 46 of the paper book). Of course, the moneys were realised still later. Thus, even if it were held that the ..... X X X X Extracts X X X X X X X X Extracts X X X X
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