TMI Blog1989 (5) TMI 24X X X X Extracts X X X X X X X X Extracts X X X X ..... n of section 32(1A)(ii) came into force from April 1, 1971, and was not applicable to the year which ended on December 31, 1969. The Income-tax Officer further observed that the auditor was silent about this loss and there was no evidence to support this claim. He held that the loss was a capital loss and he disallowed the amount. Before the Appellate Assistant Commissioner, it was claimed that the loss was allowable under section 32(1)(iii) and when it was pointed out that this loss could not be allowed as the machinery had not been used in this year, it was submitted that the loss should be allowed as a short-term capital loss under section 45 of the Income-tax Act. It was contended that transfer included extinguishment of the rights in the capital asset and it should be held that the company's right to the machinery was extinguished by virtue of the loss of the machinery in the storm. The Appellate Assistant Commissioner, however, did not accept the claim of the assessee. He held that the loss could not be allowed under section 32(1)(iii). When the matter came up before the Tribunal, the assessee confirmed its claim of loss only as a short-term capital loss under section 45 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r, held that as sub-section (1A) has been inserted by the Taxation Laws (Amendment) Act, 1970, with effect from April 1, 1971, the present assessment year being 1970-71, the said sub-section has no application in this case. Subsequently, he pointed out that even the auditor is silent on this point and evidence in support of the claim was not produced. He, therefore, held that it was a capital loss. Before the Appellate Assistant Commissioner, the stand was changed. It was claimed that the loss was allowable under section 32 (1) (iii) as obsolescence allowance. It was pointed out by the Appellate Assistant Commissioner that the assessee was not entitled to such allowance because the machinery was not used in the relevant previous year. The assessee, thereafter, claimed the loss as a short-term capital loss under section 45 of the Income-tax Act. The Appellate Assistant Commissioner held that the loss on account of the destruction of machinery has to be considered under section 32 only. Moreover, even assuming that the loss could be considered under section 45 read with section 2(47), it is to be stated that there was no extinguishment of the right to the assessee by virtue of dest ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion 12B. As noticed already, section 12B as modified by the Finance Act, 1949, did not charge any 'capital gains' arising between April 1, 1948, and April 1, 1957. Indeed, section 12B was not operative in these years (1948-1957). During this period, 'capital gains', whether on the positive or the negative side could not be computed and charged under section 12B or any other provisions of the Act. In the instant case, the second condition, namely, 'the manner of computation laid down in the Act' which-to use the words of Stone C. J. (In re, B. M. Kamdar [1946] 14 ITR 10 (Bom) [FB] forms an integral part of the definition of "total income" was not satisfied. Thus, in the relevant previous year and the assessment year, or even in the subsequent year, capital gains or 'capital losses' did not form part of the 'total income' of the assessee which could be brought to charge, and were, therefore, not required to be computed under the Act." Reliance was also placed in the case of CIT v. Vania Silk Mills (P.) Ltd. [1977] 107 ITR 300 (Guj). There, the assessee let out machinery on hire. The machinery was insured by the hirer and was completely damaged by fire. The amount received by the hi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... set." Then, the Gujarat High Court proceeded to observe as follows : "The net effect of the transaction as a whole was that there was an extinguishment of the proprietary interest of the assessee in the capital asset, namely, the machinery, and that profit arose to it in consequence of the payment made for such extinguishment. On account of fire, the machinery was so extensively damaged that, for all practical purposes, it ceased to be useful as such. Since the entire machinery in the premises of the insured was covered by insurance, the insurer paid the value of the machinery to the insured and took away the damaged machinery. The insured, in its turn, paid the proportionate amount out of the compensation received from the insurer to the assessee and in the course of this transaction the bundle of proprietary rights which the assessee had in the machinery, including the rights to claim its possession back from the hirer on the termination of the contract of hire and to hold, enjoy and dispose it of, came to an end. There was thus a clear extinguishment of the rights of the assessee in the capital asset and consideration was received by it as result of such extinguishment. Ther ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing therefrom to that extent were assessable as capital gains. In Gujarat Mineral Development Corporation Ltd. v. CIT [1983] 143 ITR 822 (Guj) expenditure was incurred for the construction of an approach bridge for laying water pipes to the assessee's beneficiation plant. The bridge was washed away by floods. The assessee wrote off the expenditure and claimed it as a deduction, The Income-tax Officer disallowed it on the ground that it was a capital loss. The Appellate Assistant Commissioner affirmed the order of the Income-tax Officer. On further appeal before the Tribunal, the assessee contended that the amount should be allowed because it reduced the real income of the assessee. The assessee alternatively contended that the expenditure should be allowed as a short-term capital loss because of the extinguishment of the capital asset. The Tribunal rejected the contention of the assessee on the ground that no consideration was received by the assessee on the extinguishment of the capital asset. Affirming the decision of the Tribunal, it was held that the expenditure was not deductible as business loss or revenue loss under section 28/37 or as short-term capital loss under section ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r payment of the money under the insurance policy. There was extinguishment of the owner's rights in the assets concerned. Under section 2(47), transfer in relation to a capital asset includes the extinguishment of any rights therein. It does not use the expression "the extinguishment of the capital asset". Nor does it use the expression "the extinguishment of the capital asset or of any rights therein". The expression "extinguishment of any rights in the capital asset" may predicate the continued existence of the capital asset over which the rights of the owner are extinguished. It may also mean the destruction, annihilation, extinction, termination, cessation, etc., of any rights quantitative which the assessee has in a capital asset" (see Vania Silk Mills Ltd. [1977] 107 ITR 300 (Guj). Where the assets are damaged or destroyed, or become useless for all practical purposes, the rights therein may still continue, e.g., where the assets are insured, the owner of such assets has a right to claim the value of such asset from the insurance company. Upon payment of the insurance money, the rights of the owner in such assets are extinguished. There may be cases where there is extinguish ..... X X X X Extracts X X X X X X X X Extracts X X X X
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