2014 (12) TMI 181 - HC - Income Tax

Taxability of compensation received appellant from the Insurance Company on account of destruction of Wind Mill u/s 50 Held that - In Neelamal Agro Industries Limited vs. CIT 2002 (8) TMI 57 - MADRAS High Court similar matter has been discussed and it has been held that when a thing was destroyed by fire the capital asset was no longer available for being owned, used or enjoyed by anyone - with the destruction of the asset, the rights of the assessee in that asset also would be destroyed - The destruction of such rights in an asset consequent upon the assets ceasing to exist was a situation which was not contemplated either in the definition of transfer or in the charging section and therefore the assessment as capital gains liable to tax arising out of the compensation amount received under the insurance on account of damage was not valid in law u/s 50 it has been provided that where the capital asset is an asset in respect of which a deduction on account of depreciation u/s 32(1) (i) has been obtained by the assessee in any previous year, the provisions of sections 48 and 49 shall apply subject to the modification that the written down value as defined in clause (6) of section 43 of the asset as adjusted shall be taken as the cost of acquisition of the asset. Applicability of provisions of section 41(2) Held that - The Tribunal committed an error in applying provisions of section 41(2) of the Act - section 41 was amended to provide for computation of depreciation and also the amount chargeable to income tax when such an asset is sold, discarded, demolished or destroyed in the previous year Decided in favour of assessee.

Summary

Issues:
1. Taxability of compensation received for destruction of Wind Mill under Section 50 of the Income-Tax Act, 1961.
2. Applicability of Section 41(2) of the Income Tax Act, 1961.

Analysis:

Issue 1: Taxability of compensation under Section 50:
The appellant, engaged in petrochemical manufacturing, received compensation for the destruction of a Wind Mill. The appellant contested the taxability of this compensation under Section 50 of the Income-Tax Act. The appellant argued that the Tribunal erred in holding the compensation as fully taxable under Section 50. The appellant highlighted that Section 45(1)(A), treating such transactions as transfers for capital gains tax, was effective only from 01.04.2000, and thus, the compensation should not have been taxed under Section 50 for the relevant assessment year. Furthermore, the appellant cited a decision by the Madras High Court, emphasizing that destruction of an asset resulting in the loss of rights in that asset was not envisaged in the definition of "transfer" or the charging section. The High Court concurred with the Madras High Court's decision, ruling that the compensation received for the destroyed asset should not be taxed as capital gains under Section 50.

Issue 2: Applicability of Section 41(2):
Regarding the applicability of Section 41(2) of the Act, the Tribunal incorrectly applied this provision. Section 41(2) addresses the taxation of excess amounts over the written down value of assets when moneys payable exceed the written down value. The High Court noted that Section 32 was amended to allow depreciation for power assets on a straight-line method, and Section 41 was amended to govern depreciation and taxation when assets are sold, discarded, or destroyed. The Tribunal's decision to uphold the CIT(A)'s conclusions, considering facts and laws not from lower authorities' orders, was deemed erroneous. The High Court held that Section 41(2) should not have been invoked in this case. Consequently, the High Court ruled in favor of the assessee, modifying the Tribunal's order and answering the issues in favor of the assessee against the revenue.

In conclusion, the High Court modified the Tribunal's order, ruling in favor of the assessee on both issues. The compensation received for the destruction of the Wind Mill was not taxable under Section 50, and the application of Section 41(2) was deemed incorrect in this scenario. The appeal was allowed in favor of the assessee to the extent mentioned in the judgment.