TMI Blog1986 (7) TMI 55X X X X Extracts X X X X X X X X Extracts X X X X ..... previous year (assessment year 1964-65) and the balance amount of Rs. 1,86,702 in the following year. The Income-tax Officer did not accept the assessee's contentions and held that since the major part of the claim had been received during the previous year relevant to the assessment year 1964-65 and as the assessee follows the mercantile system of accounting, the entire amount receivable had become due in that year and was liable to be included in the income of that year. He further held that the excess realisation after considering depreciation was " capital gains " and not capital receipt as the assessee had received compensation money for the assets destroyed. He, therefore, brought to tax Rs. 2,35,683 as profit under section 41(2) of the Act and the balance amount of Rs. 6,77,995 as capital gains under section 45 of the Act. In the present reference, we are only concerned with the question of capital gains under section 45(1) of the Act. The Appellate Assistant Commissioner held that the compensation received for the assets destroyed by fire was not chargeable under the head " Capital gains ". The Revenue filed an appeal against this order before the Appellate Tribunal. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ital gains. For this, he placed reliance on two decisions, namely, Marybong Kyel Tea Estates Ltd. v. CIT [1981] 129 ITR 661 (Cal) and the case of CIT v. Vania Silk Mills (P.) Ltd. [1977] 107 ITR 300 (Guj). In Marybong Kyel Tea Estates Ltd.'s case [1981] 129 ITR 661 (Cal), no doubt, it was held that the capital asset was damaged by fire and the amount paid by the insurance company was assessable as capital gains. However, this decision is based on slightly different facts. In that case, reliance was placed on condition No. 12 of the insurance policy according to which on the happening of any loss or damage to any property insured, the insurer was entitled to take possession or require to be delivered to them any property of the insured in the building or on the premises at the time of the loss or damage. On the facts, it was held there that originally the asset belonged to the assessee and part of it remained after the fire in a changed form and shape and that which remained was transferred to the insurer and as a result of this transfer, the assessee received compensation which was assessed to capital gains. In our case, there are no such facts nor any such condition as condi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the capital asset and thus it conceives only of cases where there is extinguishment of right in the property and not the extinguishment of the property itself. Therefore, he urged that in case of extinguishment of the property by fire, the property itself is extinguished which is a capital asset and thus it would not be covered under this definition. He further urged that since there is no transfer of any capital asset, there could be no capital gains chargeable from the assessee. His main thrust was that in the case of insurance of the goods, the assessee actually paid the premium and received the compensation from the insurance company not on account of extinguishment of the asset but on account of the said premium, and therefore, it could not be a sum receivable in lieu of the capital asset. He relied on the case of Deepchand Nayak v. Madhya Pradesh State Road Transport Corporation, AIR 1977 MP 42. It was held in that case that " transfer " must carry with " from " and " to ". If either of them is wanting, there can be no transfer. We are of the view that the said decision does not help the assessee inasmuch as it merely referred to the word " transfer " in general terms in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... empt to apply the above reasoning to the present case. According to him, even in this case, the compensation paid by the insurance company did not result in the creation of new rights as the assessee merely received the amount in lieu of his existing right. We are of the view that this argument is untenable. In that case, the Supreme Court interpreted the word " transfer " on different facts. That was a case of redistribution of the share money invested by the shareholder during voluntary liquidation. In that case, the share which formed the capital assets was only redistributed to the shareholders in the voluntary liquidation of the company. In the present case, there is no investment of any capital asset by the assessee with the insurance company. Similarly, there could be no question of either redistribution or receipt back of its right which it had invested at the happening of a contingency under the insurance and thus it could not be said that this decision in any way helps the assessee. In the present case, there is a separate transaction of contract between the assessee and insurance company and in lieu of this transaction, it received the compensation. In the case of R. M. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e as real the consequences and incidents which, if the putative state of affairs had in fact existed, must inevitably have flowed from or accompanied it ...... The statute says that you must imagine a certain state of affairs. It does not say that, having done so, you must cause or permit your imagination to boggle when it comes to the inevitable corollaries of that state of affairs ...... .." As such, if under section 2(47) of the Act, the Legislature contemplated a transfer, may be imaginary, in a case of extinguishment of a right and if that includes extinguishment of the asset itself by fire or destruction, it would still be a case of transfer. The extinguishment of right may be by extinguishment of the property. It cannot be doubted that the right is also extinguished in a property when it ceases to exist. The definition which only speaks of extinguishment of the right in property, in our opinion, would also include a case where there is extinguishment of that property also. The aforesaid view of Lord Asquith found the approval of the Supreme Court in the case of Bengal Immunity Co. Ltd. v. State of Bihar [1955] AIR 1955 SC 661, at p. 680. The aforesaid passage lends support ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ht. In our considered opinion, the words " extinguishment of any rights therein " included the case of extinguishment of such right even where there is extinguishment of the capital asset also. A right in any property could be extinguished even when the property ceases to exist. It cannot be doubted that when capital asset ceases, the right is also extinguished therein. We have no hesitation in holding that it covers cases where there is extinguishment of the capital asset also. Looking from another angle, for argument's sake even if it is accepted that it only covers cases where there is only extinguishment of the right and not the asset, the argument on behalf of the assessee could not be accepted. The money received by the assessee as compensation is, in fact, in lieu of his capital asset which was extinguished and thus the form of the capital asset is only changed, from one which existed before the fire and later when the compensation was received, i. e., from machinery to cash. In order to support his argument that the word " transfer " should be given the meaning which is ordinary, popular and in its natural sense, he has relied on the case of CGT v. N. S. Getti Chettiar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... insured and the premium amount is only the consideration for the contract under the policy. The agreement into which the insurance company enters with the person who is insured, is really in the form of a trade or business. In the changing socioeconomic order, with the fact of scientific advancement in the hazards of business and trade, the facets of business have also changed. Insurance company on this fertility has sprouted its crops by insuring different trades and businesses with the object of gain in its business. In some cases, there may be loss to it on account of occurring of the contingencies stipulated under the policy but, in other cases, there may be benefit due to continuous long payment of premium under the policy, on account of non-happening of the contingency and even where payment is stipulated after long payment of premium as in cases of life insurance, the amount received is always less than what is actually paid. Thus, premium is in fact in lieu of business which the insurance company enters into with the objective of gain therein. Similarly, the business community with the hazards of trades and businesses vis-a-vis loss by fire, destruction, riot and death of w ..... X X X X Extracts X X X X X X X X Extracts X X X X
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