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TMI Blog1990 (9) TMI 141X X X X Extracts X X X X X X X X Extracts X X X X ..... e, in the previous year relevant to the asst. year under appeal, was dewatering the construction site at Maharani Barrage, Tripura and at Bhim Barrage,Bihar. On26-4-1983and on15-6-1984, there were floods at the sites and the assessee suffered loss. At Maharani site, the loss and damage to equipment was estimated at Rs. 5,77,995 and at Bhim Barrage, the loss and damage to equipments was claimed at Rs. 12,64,449. The insurance company had settled the claim of loss and damage to equipments at Maharani Barrage at Rs. 3,24,978 and of Bhim Barrage at Rs. 8,43,958. The insurance company paid Rs. 3,05,000, towards the Maharani Barrage claim. The assessee had treated the claim receipt as compensation and not taxable and the loss of the equipments in the two floods, representing the written down values of the equipments of Rs. 2,40,976 was claimed as a deduction from the income. The IAC(Asst.) was of the view that the loss cannot be allowed as a deduction, but did not exclude the amount of compensation received from the insurance company and credited to the Profit & Loss A/c, while computing the total income of the assessee. The assessee had felt aggrieved and preferred appeals on both these ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e of restoration. He pleaded that, the insurance policy is taken against various risks such as damage or loss due to fire, flood, riot etc. and the insurance company is paid premium as service charges etc. When any damage occurs to any equipment due to flood as-is in the instant case, the insurance company carries out a survey of the damage and on the basis of a surveyor's report, settles the claim of the insured. While doing so, it takes into account several matters such as the age of the equipment etc. and on the basis of the insured value of the equipment, after reducing therefrom, the depreciation for the no. of years of usage at the rates which are recognised by them as reasonable and also the worn out parts, arrive at the cost that would be necessary for the restoration of the equipment. The actual expenses are always very much higher. The compensation for such loss is merely to provide financial cushion and has no relation to the actual expenses incurred. He pleaded that, the compensation received towards the loss of the equipments is on the same footing as the financial compensation and is not in the nature of income. He pleaded that section 41(2) uses the terms ' Sold, dis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... excess is capital pins. On the issue of extinguishment of right and its taxability as income and capital, he placed reliance on Madras High Court in C. Leo Machodo v. CIT [1988] 172 ITR 744 and on Calcutta High Court in Darjeeling Consolidated Tea Co. Ltd. v. CIT [1990] 183 ITR 493. 5. We have considered the rival submissions and also the various materials placed on our record. At the outset, we may observe that, section 32(1)(iii) and section 41(2) of the Act are in the nature of exact opposites to each other. The former is for allowing of terminal depreciation allowance, i.e., allowing of deduction of the balance value of assets remaining after it is sold, discarded, demolished or destroyed. The latter represents the excess over the written down value but less than the actual cost or to put it in other words, it represents the extent of depreciation as allowed in the computation of the income of the assessee. In both the sections the emphasis is on the four words or circumstances, viz., " sold, discarded, demolished or destroyed ". If the situation falls in any one of these four categories, then the section would become operative and not otherwise. 5.1 In the instant case, some ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... kin to compensation for loss of capital, hence its receipt is capital in nature. The compensation so received does not result in any income in the hands of the assessee, merely because, the amount is not repayable to the insurer. The compensation is towards the damage to the profit making apparatus, i.e., capital asset and is, therefore, its receipt is obviously capital in nature. The compensation has the relation to the capital asset for the purposes of identification only and it in no way either enhances or reduces the capital value of the asset. It is somewhat similar to the cancellation of an agency contract, whereby, the agent loses his profit making apparatus, and for such a loss, the compensation is paid by the principal and therefore, is on capital account and hence not taxable. The identical is the situation where for the lost goods, the insurer compensates the insured. In either situation, the insurer does not derive any benefit by compensating the insured. The insurer in order to refurbish his loss on account of the compensation paid to the insured, has to necessarily incur additional expenditure of hiring of equipments for salvaging the equipments washed away by the flo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ch receipts which can be said to fall in any one of the kinds defined as income under section 2(24) of the Act. Therefore, the compensation from the insurer towards partial damage of equipments and towards loss of equipment is not an income within the meaning of section 41(2) of the Act. Section 32(1)(iii) provides for allowing of the balance value of the asset remaining in the books after adjusting of the value realized when the asset is sold, discarded, demolished or destroyed. In the instant case, the equipment is lost or misplaced and is not traceable but it does not involve any sale, destruction, demolition or discard. Therefore, the write off of the balance value in the books of the equipments lost in floods, cannot be allowed as a deduction. Section 45 would attract only when the transaction results in a transfer or sale, exchange, relinquishment of any right or extinguishment of any right. We have observed above, that, by paying the compensation to the insured, the insurance company does not get any specific right on the equipment, except the right to dispose it off with the sole view of recovering the parting of the finances in favour of the assessee. The right to dispose, ..... X X X X Extracts X X X X X X X X Extracts X X X X
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