Insurance receipts on damaged machinery: section 41(2) does not apply where assets are repaired and restored.

Insurance receipts relating to damaged or destroyed machinery are discussed in the context of whether they fall within section 41(2) or give rise to a surviving question of law. The text notes that excess proceeds for fully destroyed machinery do not escape tax consequences merely because the loss arose by fire rather than transfer, but on the facts no appealable question of law survived. It also states that insurance receipts for partly damaged machinery repaired and restored to working condition are not chargeable under section 41(2), because the provision applies to sale, discard, demolition, or destruction in the statutory sense, not mere damage followed by restoration.

---

---

Issues: (i) Whether the excess insurance amount received in respect of fully damaged machinery, offered to tax under section 45 and later retracted, gave rise to a question of law warranting leave to appeal. (ii) Whether the balance insurance receipt relating to partly damaged machinery was chargeable to tax as income under section 41(2).

Issue (i): Whether the excess insurance amount received in respect of fully damaged machinery, offered to tax under section 45 and later retracted, gave rise to a question of law warranting leave to appeal.

Analysis: The amount represented insurance proceeds received beyond the cost of the destroyed machinery. The governing principle drawn from settled authority was that where there is no transfer of a capital asset and the rights and property of the assessee are merely extinguished by fire, the receipt does not escape the tax consequences attached to capital assets merely because the machinery was destroyed rather than transferred in the ordinary sense.

Conclusion: The Department's challenge on this issue did not disclose any surviving question of law and was not fit for appeal.

Issue (ii): Whether the balance insurance receipt relating to partly damaged machinery was chargeable to tax as income under section 41(2).

Analysis: On facts materially similar to the issue already settled by the Supreme Court, the receipt arose from fire damage to machinery that was repaired and restored to working condition. The legal rule applied was that section 41(2) does not apply where machinery is merely damaged and is subsequently restored by repair, because the provision is attracted to sale, discard, demolition, or destruction in the statutory sense and not to mere damage with restoration.

Conclusion: The balance insurance amount was not chargeable under section 41(2), and no question of law survived for appeal.

Final Conclusion: Leave to appeal was declined and the Department's application was rejected, thereby bringing the matter to a close in favour of the assessee.

Ratio Decidendi: Insurance receipts attributable to damaged or destroyed machinery are not taxable under section 41(2) where the statutory conditions are not met, and no appeal lies where the proposed challenge raises no surviving question of law.

---