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TMI Blog1979 (12) TMI 28X X X X Extracts X X X X X X X X Extracts X X X X ..... ich was or has been used for the purposes of business is destroyed and the moneys payable in respect of such building, machinery plant or furniture, as the case may be, together with the amount of scrap value, if any, exceed the written down value, so much of the excess as does not exceed the difference" between the actual cost and the written down value shall be chargeable to income-tax as income of the business or profession of the previous year in which the monies payable for the building, machinery, plant or furniture became due. The balance of the amount, namely, Rs. 4,95,044, which the assessee received from the insurance company, was assessed by the ITO as capital gains. To appreciate the points of law that arise in this reference it is necessary to set out at this stage some of the provisions of the Act. Section 2(14) of the Act defines " capital asset ". It says: " ' Capital asset' means property of any kind held by an assessee, whether or not connected with his business or profession, but does not include . ........" The significance of this definition in the context of the present reference is that excepting certain assets specified in s. 2(14) of the Act, pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d that the amount, namely, Rs. 4,95,044, represented realisation under an insurance policy and none of the provisions under s. 45 read with s. 2(47) of the Act was attracted and, therefore, the said amount was not taxable under capital gains. The Tribunal further says in the statement of the case that the ITO rejected the assessee's contention in the following words : " It is an inherent condition of all insurance against destruction and damage of assets that the damaged assets will become the property of the insurer when a claim is settled. In the instant case the assets involved which were mostly machinery and damaged machinery, etc., became the property of the insurer, vide assessee's letter No. ITX: KB dated 28-8-70. It can therefore be said with certainty that assets (though in damaged condition but they still remained assets) were transferred to the insurance companies. Assessee, therefore, received the sum in question out of a contractual obligation vis-a-vis the insurance company on the transfer of assets. Section 45 is, therefore, applicable to this case and the amount aforesaid is treated as capital gains of the assessee. " In the last para of the statement of the c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd take and keep possession of the building or premises where the loss or damage has happened; (b) take possession of or require to be delivered to them any property of the insured in the building or on the premises at the time of the loss or damage; (c) keep possession of any such property and examine, sort, arrange, remove, or otherwise deal with the same; (d) sell any such property or dispose of the same for account of whom it may concern. The powers conferred by this condition shall be exercisable by the insurers at any time until notice in writing is given by the insured that he makes no claim under the policy or, if any claim is made, until such claim is finally determined or withdrawn, and the insurers shall not, by any act done in the exercise or purported exercise of their powers hereunder, incur any liability to the insured or diminish their right to rely upon any of the conditions of this policy in answer to any claim. If the insured or any person on his behalf shall not comply with the requirements of the insurers or shall hinder or obstruct the insurers in the exercise of their powers hereunder, all benefits under this policy shall be forfeited. The i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s attached to the policy of insurance was entitled to take possession of the property which was salvaged from fire. In the opinion of the Tribunal this left-over property was an asset and its take over by the insurance company led to the extinguishment of the assessee's rights therein. This, according to the Tribunal, therefore, amounted to " transfer,',' as per its definition in s. 2(47) of the Act. It would, in the opinion of the Tribunal, not be correct to say that the burnt out remains could not be called a capital asset, the difference being only the change in the shape and size. The Tribunal has also said that there is another argument and that argument is that s. 2(47) defines " transfer " in relation to a capital asset as including besides others the extinguishment of any rights therein. Since the asset belonging to the assessee was destroyed by fire, it could be said that the rights of the assessee therein were extinguished and, therefore, there was a transfer in relation to that asset. In the opinion of the Tribunal it could not be denied that the compensation money which the insurance company had paid was in connection with the above extinguishment or transfer. Sectio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... into account are facts found by the Tribunal and no other authority. It is not possible for us, on the facts and in the circumstances of this case, to accept this argument of Mr. Roy. The said letter of the 28th August, 1970, has been specifically brought to our notice by the Tribunal's statement of the case and in that letter, as we have stated earlier, we find an admission on behalf of the assessee that the salvaged property was taken away by the insurer. In any event, the Tribunal has relied on condition No. 12 of the insurance policy and has found it as a fact that the left-over property was taken over by the insurance company. Condition No. 12 of that policy gives the insurer the right to take possession of, or require to be delivered to him, any property of the insured in the building or on the premises at the time of the loss or damage. It gives him the further right to remove the said property or otherwise deal with the same. The position in law has been clearly stated by several authorities. In Barwell's The Law of Insurance in British India (1940), the terms of cl. 12 have been elaborately considered along with similar other clauses. The learned author observes, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 502 and art. 774 at p. 503 of Halsbury's Laws of England, 2nd Edn., Vol. 18, read thus: "772. The amount for which the insurers are liable depends upon the extent to which the insured property is destroyed or damaged. It is, therefore, clear that they are directly interested in the steps taken to minimise the loss. It is the duty of the assured to minimise the loss; but it is not a sufficient protection to the insurers to rely upon this. They are, therefore, entitled to enter and remain on the premises where the fire is, and to take possession of any salvage there. Their powers in this respect are in practice amplified and extended by the express terms of the policy. 774. There are no rules as to notice of abandonment in fire insurance, but on payment of the loss in full the salvage is transferred to the insurers. " The authorities quoted above support, in our opinion, the ultimate conclusions which were reached by the Tribunal on the facts of the present case. The Tribunal construed condition No. 12 of the insurance policy and took the view that on payment of the policy money to the extent indicated above, the insurer became entitled to what remained of the capital assets ..... X X X X Extracts X X X X X X X X Extracts X X X X
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