TMI Blog2023 (11) TMI 799X X X X Extracts X X X X X X X X Extracts X X X X ..... rpretation of the said section by the Ld.CIT(A) to the effect that the transfer of the destroyed asset will be deemed in the year the assesses claim is finally settled in appeal by the Hon ble High Court. Section 45(1A) specifically deals with capital gains on assets destroyed on which insurance claims are received, deeming the capital gains in such circumstances attributable to the year in which claim is received. In the facts of the present case the asset/ building undoubtedly has been destroyed in an earthquake and the assessee has claimed compensation from the insurance company on the same, the receipt of which is subject matter of appeal before the Hon ble High Court. Therefore, capital gains is to be determined in accordance with section 45(1A) of the Act. For year in which the capital gain/loss is to be deemed to relate to as per the section we hold that it pertains to the year in which the claim of the assessee was initially rejected by the insurance company. Therefore, accepted position of the Revenue is that section 45(1A) of the Act is invoked on the settlement of the insurance claim of the assessee, and even if the claim is rejected, it isto be treated as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the claim of the assessee of capital loss relating to destroyed superstructure/ building, which loss was claimed by the assessee on transfer of land on which superstructure was constructed. The quantum of loss denied amounted to Rs. 8,86,15,790/-. 4. The facts pertaining to the issue being that during the impugned year, the assessee had sold land for a consideration of Rs. 5 crores, the impugned year being Asst. Year 2010-11. The said land was purchased on 27.6.1996 for Rs. 38,76,924/- and its indexed cost in the impugned year was Rs. 80,33,495/-. On the said land the assessee had constructed a building for running a hotel, and had incurred cost of Rs. 8,86,15,798/-. In the year 2001, this building was destroyed by earthquake. While computing the capital gains on transfer of land during the impugned year, the assessee claimed this cost of building destroyed of Rs. 8.86 crores as cost of improvement of land, and accordingly computed capital loss on transfer of property at Rs. 4,67,41,784/-. During assessment proceedings, the AO examined the issue and held that the land building are separate property, and therefore, the cost of building could not be treated as cost of imp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lls Vs. CIT, 1991] 191 ITR 647, which specifically dealt with the aspect of extinguishment of right in a destroyed asset holding that there was no transfer on destruction of asset, would still hold good. The ld.CIT(A) accordingly held that there was no transfer of building in year of destruction i.e. in 2001. However, on the aspect of transfer taking place in terms of section 45(1A) of the Act, he agreed with the AO that in terms of the said section transfer would take place in the year of receipt of insurance claim by the assessee, and since the matter was pending before Hon ble Court, section 45(1A) of the Act would be applicable only when the assesses appeal is finally decided by the Hon ble Court. Accordingly, the ld.CIT(A) also rejected the assessee s claim of loss on the destroyed asset in the impugned year. 7. Aggrieved by this order of the ld.CIT(A), the assessee is in further appeal before the Tribunal. 8. We have heard both the parties. The assesses plea before us is that the loss on the building destroyed of Rs. 8.86 Crs is allowable in the impugned year i.e A.Y 10-11. The Ld.CIT(A) has rejected this plea of the assessee as also the order of the AO holding th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t of the transfer of such capital asset. 9. This section specifically deals with capital gains on assets destroyed on which insurance claims are received, deeming the capital gains in such circumstances attributable to the year in which claim is received. This section was inserted in the Act by way of Finance Act,1999.The CBDT Circular No.779 dated 14thSeptember 1999, being Explanatory Notes on the provisions in the Finance Act,1999 relating to direct taxes explained the background leading to the insertion of the provision and the scope of the same as under: Taxing profits and gains arising from insurance claim received for damage or destruction of a capital asset as capital gains: Variuos courts have held that there is no transfer when the asset is destroyed as the asset has to exit in the process of transfer. The money received under insurance policy is compensation by virtue of contract of insurance and not consideration for transfer. It is proposed to provide that the profits and gains arising from the receipts of an insurance claim on account of destruction or damage of a capital asset as a result of fire, flood, earthquake, civil disturbance and war, etc. sha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on 45(1A) of the Act. Now coming to the aspect of the year in which the capital gain/loss is to be deemed to relate to as per the section we hold that it pertains to the year in which the claim of the assessee was initially rejected by the insurance company. Our reasoning for the same is as under. The AO in his order has reproduced the Memorandum explaining the provisions of section 45(1A) of the Act as inserted by the Finance Act, 1999, pointing out there from that it clearly states that it is a beneficial section to the assessee to claim loss from earthquake which was otherwise not possible. The relevant portion of the order of the AO at para 6.17 is reproduced hereunder: .. It is also important in this regard to quote the provisions of Memorandum explaining the provisions of section 45(1A), which clearly says that it is beneficial section for assessee to claim the loss from earthquake, which was otherwise not allowable as claimable in any year. The said part of Memorandum explaining the provisions of section 45(1A) as inserted by Finance Act, 1999 is as under: Taxing profits and gains arising from insurance claim received for damage or destruction of a capital ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed accordingly. The AO s reference to the Memorandum explaining the provision of section 45(1A) of the Act fortify our view mentioning that section 45(1A) is beneficial for the assessee to claim the loss on destroyed assets on the settlement of their insurance claim. 14. Having said so, in the facts of the present case, the insurance claim of the assessee was rejected,however, the assessee has filed an appeal to the Hon ble High Court, which is still pending. As per the AO and the ld.CIT(A), only on the settlement of the appeal by the Hon ble High Court, section 45(1A) of the Act will come into play. On this aspect, we are not in agreement with the Revenue authorities. In our view, the provisions of section 45(1A) are invoked in the first instance when the claim of the assessee was rejected by the insurance company. The settlement of the dispute of the assessee with the insurance company in appeal would relate back and be effective for the year in which the claim was initially settled by the insurance company. Therefore, we hold that for all purposes, the year in which assesses claim for insurance is rejected will invoke provision of section 45(1A) of the Act in the said year ..... X X X X Extracts X X X X X X X X Extracts X X X X
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