TMI Blog1991 (8) TMI 2X X X X Extracts X X X X X X X X Extracts X X X X ..... tlement of the insurance claim, Jasmine Mills received a certain amount out of which it paid a sum of Rs. 6,32,533 to the assessee on account of the destruction of its machinery. The difference between the actual cost of the machinery and its written down value worked out to Rs. 2,62,781. The assessee, in its income-tax return for the assessment year 1967-68 (relevant accounting year being the year ending on August 31, 1966), showed the said amount as profit chargeable to tax under section 41(2) of the Income-tax Act (hereinafter referred to as the "Act"). The Income-tax Officer, however, subjected to tax also the additional amount of Rs. 3,50,792 being the difference between the amount of Rs. 6,32,533 received on account of the insurance claim and the original cost of the machinery, i.e., Rs. 2,81,741, treating the same as capital gains chargeable under section 45 of the Act. The contention advanced by the assessee that the capital gains tax was not attracted to the amount received on account of the insurance claim since there was no transfer of capital asset as was contemplated by section 45 read with section 2(47) of the Act, was negatived by the Income-tax Officer. The assess ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hange or relinquishment of the asset or the extinguishment of any rights therein or the compulsory acquisition thereof under any law." A reading of the two sections makes it abundantly clear that the profits or gains which are amenable to section 45 must arise from the transfer of the capital asset which is effected in the previous year. The transfer may be brought about by any of the modes of transfer which include sale, exchange, relinquishment of the asset or the extinguishment of the rights therein or the compulsory acquisition of the asset under any law. It may be of the asset itself or of any rights in it. It may further be the result of voluntary act or a compulsory operation. Whatever the mode by which it is brought about, the existence of the asset during the process of transfer is precondition. Unless the asset exists in fact, there cannot be a transfer of it. When an asset is destroyed, there is no question of transferring it to others. The destruction or loss of the asset, no doubt, brings about the destruction of the right of the owner or possessor of the asset, in it. But, it is not on account of transfer. It is on account of the disappearance of the asset itself. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... surer and the assured secures it by paying his premium which is accordingly fixed. Even within the maximum limit, the insured cannot recover more than what he establishes to be his actual loss, whatever may be his estimate of the loss that he was likely to bear and whatever the premium he may have paid calculated on the basis of the said estimate. The fact that, while paying for the total loss of or damage to the property, the insurance company takes over such property or whatever is left of it, does not change the nature of the insurance claim which is an indemnity or compensation for the loss. The payment of the insurance claim is not in consideration of the property taken over by the insurance company, for one is not consideration for the other. It is incorrect to argue that the insurance claim is the value of the damaged property. The claim is assessed on the basis of the damage sustained by the property or the amount necessary to restore it to its original condition. It is not a consideration for the damaged property. In the present case, the insurance was on reinstatement basis which meant that the property was to be restored to the condition in which it was before the fire ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the reasons which we have discussed earlier, we find that that approach is not correct. For the same reasons, we are unable to accept the reasoning of the High Court that for a "transfer" within the meaning of section 45, the asset need not exist. We are afraid that the High Court's reliance on CIT v. R. M. Amin 1971] 82 ITR 194 (Guj) to hold that, for the transfer contemplated by section 45, the asset need not exist is not well merited. There, the High Court was concerned with a chose-in-action, viz., the shares, and the amount received by the assessee-shareholder on liquidation of the company representing his share in the assets of the company. The court there had pointed out that the extinguishment of the right of the assessee-shareholder in his share which, was an incorporeal property had come about on account of receipt by him of the amount representing the value of the shares. The amount received by the assessee-shareholder does not represent any consideration received by him as a result of the extinguishment of his rights in the shares. The share merely represents the right to receive money on distribution of the net assets of the company in liquidation and it is by satisf ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f interest in any particular asset of the firm on account of the receipt of his share by a retired partner. As held in CIT v. Mohanbhai Pamabhai [1973] 91 ITR 393 (Guj), no part of the amount received by the assessee as a retired partner is assessable to capital gains tax under section 45. The High Court has explained these two decisions by giving reasons which do not appeal to us. The court has tried to distinguish them from the facts of the present case pointing out, firstly, that there was no foundation either in law or in fact to believe that the amount which the assessee received from M/s. Jasmine Mills was paid to it in satisfaction or in working out of its right, if any, to recover damages under law or contract for the loss or damage caused to the machinery. We do not see any difficulty in holding that it was an amount received by the assessee as damages on account of the loss of its machinery. It is difficult to describe it otherwise. The second reason given by the High Court is, with respect, equally fragile. It is held that the alleged right, if any, of the assessee to recover damages was not an absolute statutory right but one which was subject to a contract to the con ..... X X X X Extracts X X X X X X X X Extracts X X X X
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