Insurance claim rejection triggers capital loss deduction under section 45(1A), not final settlement

ITAT held that capital loss on building destroyed in earthquake is allowable under section 45(1A) in the year insurance claim was rejected, not when finally settled by HC. Tribunal ruled that rejected insurance claim constitutes zero receipt, triggering section 45(1A) computation. Assessee entitled to claim capital loss against capital gains in the assessment year when insurance company rejected the claim, not awaiting final court settlement.

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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.

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