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TMI Blog1987 (1) TMI 126X X X X Extracts X X X X X X X X Extracts X X X X ..... -------- -------- 3,59,500 3,38,500 -------- -------- 2. We are concerned with amount of compensation pertaining to machinery. The assessee credited Rs. 70,834 in the profit and loss account being an excess amount received from insurance company and offered for taxation. However, during the assessment proceeding, the stand taken by the assessee was that no part of the amount relating to machinery was assessable to tax because the machinery had been partially damaged and had not been destroyed with the result that provisions of section 41(2) of the Income-tax Act, 1961 ('the Act') were not applicable. The ITO disbelieved the version of partial damage to the machinery. He found that the assessee had deducted written down value of machinery (Rs. 47,417.67) which had been burnt in fire from the opening balance to arrive at the machinery used for the purposes of depreciation which indicated that according to the assessee's books the machinery had been destroyed and not partially damaged. 3. The ITO further observed that according to the auditors the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... me that there was destruction and not partial damage and for that reason the assessee had written off the entire written down value of the machinery. He accordingly confirmed the conclusion of the ITO that this was a case of destruction as distinguished from partial damage and as such provisions of section 41(2) were attracted. He then considered the alternative submission of the assessee to the effect that assessable profits under section 41(2) would be confined to the difference between original cost and written down value and accepted the same. He directed the balance to be assessed as capital gains after verifying whether they were long-term capital gains or short-term capital gains. The assessee is now in further appeal before us. 6. Shri Dastur, the learned counsel for the assessee contended before us that provisions of section 41(2) were not attracted at all because this was not a case where the machinery in question had been destroyed. According to him, this was a case where machinery in question had been partially damaged and the said machinery had been used again after repairs on which amount of Rs. 15,657 had been sent. He relied on decision in CIT v. Sirpur Paper Mill ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ve meant that said machinery had been damaged in fire. We are unable to agree. As already stated, the said machinery has been removed from the stock itself which is indicate of the fact that the same had been destroyed and not merely damaged. Damaged machinery would not go out of the stock. It is the destroyed machinery which would be deleted from the stock by adjustment entry. This view is confirmed by other entries in the same schedule. There are three more items in the column entitled 'Sales/Adjustments during the year'. The other three are: Rs. Furniture and fixture 27,000 Officer equipment 2,070 Air cooler 1,250 Admittedly these items represent items treated as destroyed. For these items also the word used is 'burnt'. It is thus clear that contemporaneous entries in the accounts indicate complete destruction of machinery in question and not partial damage. 9. Another circumstance is the large amount received by the assessee as compensation. As observed by the Commissioner (Appeals) it is improbable ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o use in 1979 after spending Rs. 15,657 on repairs. We are unable to accept this submission. Normally a reserve is created out of accumulated profits. In the present case, the assessee created reserve by debiting machinery account and showed that machinery worth Rs. 47,417.67 was used in this year. We asked the learned counsel for the assessee as to why the assessee could have kept the machinery idle in the accounting years 1977 and 1978 if the machines could have been put in working condition by spending merely Rs. 15,657 particularly when the assessee had already received over Rs. 1 lakh as compensation from the insurance company. There was no satisfactory explanation. The conduct of keeping machinery idle for two years in these circumstances would have been wholly unnatural when the assessee was in the process of carrying out a lucrative business. Mere fact that the ITO did not inquire above item while completing assessment to claim that his version of partial damage as distinguished from destruction should be accepted. 11. The Commissioner (Appeals) has examined the details of expenditure of Rs. 15,657 and found that alleged repairs were of ordinary nature and machinery which ..... X X X X Extracts X X X X X X X X Extracts X X X X
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