1991 (8) TMI 2 - SC - Income Tax

Assessee purchased machinery and gave it on hire at rent - said machinery got burned - hirer paid insurance money to assessee - that insurance money even if exceeds cost of machinery, it cannot be said that capital gains were arose

Summary

Issues Involved:
1. Whether there was a transfer of capital asset by the assessee within the meaning of section 2(47) of the Income-tax Act.
2. Whether the sum received from Jasmine Mills Pvt. Ltd. was chargeable to tax as capital gains under section 45 of the Income-tax Act.

Detailed Analysis:

1. Transfer of Capital Asset:
The primary issue was whether the money received from the insurance claim due to the destruction of the machinery constituted a "transfer" of a capital asset under section 2(47) of the Income-tax Act. Section 2(47) defines "transfer" to include the sale, exchange, relinquishment of the asset, or the extinguishment of any rights therein.

The court clarified that for a transaction to be considered a transfer, the asset must exist during the process of transfer. In cases of destruction, the asset ceases to exist, and hence, there can be no transfer. The court emphasized that the extinguishment of rights due to the destruction of the asset does not equate to a transfer. The High Court erred by focusing on the "extinguishment of right" rather than the "transfer" of the asset. Therefore, the court concluded that the destruction of the machinery did not constitute a transfer of a capital asset.

2. Chargeability to Capital Gains Tax:
The second issue was whether the sum of Rs. 3,50,792 received as an insurance claim was chargeable to tax as capital gains under section 45 of the Act. Section 45 states that any profits or gains arising from the transfer of a capital asset shall be chargeable to income-tax under the head "Capital gains."

The court held that the insurance money received was by way of indemnity or compensation for the damage, loss, or destruction of the property, not in consideration of the transfer of the property or any rights therein. The court further noted that the insurance claim was assessed based on the damage sustained by the property or the amount necessary to restore it to its original condition, rather than being a consideration for the damaged property.

The court also discussed the rule of noscitur a sociis, explaining that the expression "extinguishment of any rights therein" should be restricted to the sense analogous to associated words like sale, exchange, etc., which imply the existence of the asset and the transferee. The court concluded that the insurance claim received was not a result of a transfer but was compensation for the loss of the asset, and hence, it did not attract the provisions of section 45.

Conclusion:
The court found that the High Court misdirected itself by equating the extinguishment of rights due to destruction with the transfer of the asset. The appeal was allowed, and the impugned decision was set aside. The court held that the amount received from the insurance claim was not chargeable to tax as capital gains under section 45, as there was no transfer of the capital asset.