2023 (11) TMI 799 - AT - Income Tax

Capital loss on account of destruction of superstructure building - Asset/ building destroyed in an earthquake - scope of term transfer u/section 2(47) - year of allowability of claim - applicability of section 45(1A) - AO stated that as per section 45(1A) it is only on receipt of insurance claim that transfer of the destroyed asset is to be deemed and gains computed and in the facts of the present case, he noted that since the assessee s claim was rejected by the insurer and matter was pending before the Hon ble High Court, there was no case of any capital loss being returned in terms of section 45(1A) in the impugned year - CIT(A) has applied section 45(1A) of the Act to the issue and held that the loss is allowable in the year the insurance claim is settled by the Hon ble High Court HELD THAT - We are in agreement with the CIT(A) that the computation of capital gains in the present case is governed by section 45(1A) of the Act, but at the same time we do not agree with the interpretation 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 Zero receipt of insurance claim, and capital gain or loss to be computed accordingly. 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. 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. Receipt of insurance claim, as per the ld.CIT(A), is to be treated as zero and the assessee accordingly is entitled to compute his capital loss and claim the same in the said year. We hold, therefore, that the capital loss of the assessee on the destroyed building is to be computed in terms of section 45(1A) of the Act, and as per the facts and circumstances of the case, it pertains to the Asst. Year when its insurance claim was rejected by the Insurance Company. The assessee is, therefore, entitled to claim capital loss on account of destroyed building in the said Asst. Year. AO is directed to treat the capital loss on account of destroyed building as pertaining to the Asst. Year in which his claim for insurance was rejected by the Insurance Company and allow set off of the same against the capital gain on sale of land, if within the period specified in the Statute .

Summary

Issues Involved:

1. Rejection of the assessee's claim of capital loss on account of the destruction of superstructure/building.
2. Applicability of Section 45(1A) of the Income Tax Act, 1961.
3. The year in which the capital loss should be recognized.

Summary:

1. Rejection of the assessee's claim of capital loss on account of the destruction of superstructure/building:

The assessee claimed a capital loss of Rs. 8,86,15,790/- due to the destruction of a building by an earthquake in 2001, which was to be set off against the capital gain from the sale of land in the Asst. Year 2010-11. The AO rejected this claim, stating that the land and building are separate properties and the cost of the destroyed building could not be treated as a cost of improvement of the land. The AO held that the building was transferred in the year it was destroyed (2001) under section 2(47) of the Act, relying on the decision in CIT Vs. Grace Collis & Ors., 248 ITR 323.

2. Applicability of Section 45(1A) of the Income Tax Act, 1961:

The AO also considered Section 45(1A), which deems the transfer of an asset destroyed on receipt of insurance claim. Since the assessee's insurance claim was rejected and was pending before the High Court, the AO concluded that no capital loss could be recognized in the impugned year. The ld.CIT(A) agreed with the AO that Section 45(1A) would apply only when the insurance claim is finally decided by the High Court, thus rejecting the assessee's claim of loss in the impugned year.

3. The year in which the capital loss should be recognized:

The Tribunal agreed with the ld.CIT(A) that the computation of capital gains is governed by Section 45(1A) but disagreed with the interpretation that the transfer of the destroyed asset would be deemed in the year the insurance claim is settled by the High Court. The Tribunal clarified that Section 45(1A) deems the transfer of a destroyed asset on receipt of insurance claim, and the capital gain or loss is to be computed in the year of receipt of such claim. The Tribunal held that the year in which the insurance claim was initially rejected by the insurance company should invoke the provisions of Section 45(1A). Therefore, the capital loss on the destroyed building should be computed in the year the insurance claim was rejected, and the AO was directed to allow the set-off of the loss against the capital gain on the sale of land if within the period specified in the Statute.

Conclusion:

The appeal of the assessee was dismissed with directions to the AO to treat the capital loss on the destroyed building as pertaining to the year in which the insurance claim was rejected and to allow the set-off against the capital gain on the sale of land if within the specified period.