TaxTMI 
TaxTMI 
2025 (7) TMI 685
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....unt as 'profits' under Section 41(1) of the Act? After noticing that the income is not taxable under one head, whether it is permissible to shift the same to another head, for bringing the same to taxation? 2) The Assessee has challenged Orders passed by the Income Tax Appellate Tribunal (ITAT), which has dismissed the appeals preferred by it by upholding the orders passed by the Commissioner of Income Tax (Appeals) and the Assessing Officer. The Appeals arise out of the assessments made in respect of the following Assessment Years:- Income Tax Appeal No. Assessment Year 541 of 2003 1988-1989 535 of 2003 1990-1991 540 of 2003 1991-1992 175 of 2005 1995-1996 3) The Appeals have been admitted by formulating the following solitary question of law in each of them:- ITXA 541/2003 Whether on the facts and in the circumstances of the case as well as in law, the Tribunal was right in holding that the receipt of claim of Rs. 7,00,000/- from the Insurance Company by the appellant firm on death of the mares was chargeable to tax under Section 41(1) of the Act ? ITXA 540/2003 Whether on the facts and in the circumstances of the case as well as in law, the Tribunal was ri....
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....reated as plant by the Assessee, the depreciation is stated to be not allowed in view of provisions of Section 43(3) of the Income Tax Act, 1961. Therefore, the revenue income generated upon sale, lease of a horse, the same was offered for taxation. During the year ending 31 October 1987, relevant to Assessment Year 1988-89, two mares namely, 'Certainty' and 'Gracian Flower' died, the costs of which in the Books of Accounts of the Assessee was Rs. 40,000/- and Rs. 30,000/- respectively. Both the horses were insured with M/s. New India Assurance Co. Ltd. at Rs. 6,00,000/- and Rs. 1,00,000/- respectively on the basis of the market value of the said two mares. Accordingly, the Insurance Company sanctioned the insurance claim and paid Rs. 6,00,000/- and Rs. 1,00,000/- respectively to the Assessee. However, the Assessing Officer on its own, allowed Rs. 40,000/- and Rs. 30,000/- being debited to the Profit & Loss Account under Section 36(1)(vi) of the Act which provides for deduction. In the same year, the Assessee had debited to its Profit & Loss Account, an amount of Rs. 3,60,902/- being the loss on disposal of assets (Mares and Stallions). 5) In the Assessment Order, the Assessing O....
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....ause under the former heading, the income is not chargeable to tax. In support reliance is placed on the judgment of Hon'ble Apex Court in Nalinikant Ambalal Mody Versus. Commissioner of Income-tax [1996] 61 ITR 428. (v) Reliance in placed on judgments of this Court in Commissioner of Income Tax Versus. Pfizer Ltd. [2011] 330 ITR 62 (Bombay) and Somaiya Organo Chemicals Ltd Versus. Commissioner of Income-tax (2016) 388 ITR 423 holding that receipt under insurance claim would be treated in the like manner as if the receipt had arisen on the sale of assets. (vi) That the Assessing Officer himself has held that insurance receipt is not chargeable to tax under the head 'capital gains'. Therefore, death of a horse cannot amount to 'transfer' under Section 2(47) of the Act. Reliance is placed on judgment of the Apex Court in Vania Silk Mills (P.) Ltd. Versus. Commissioner of Income-tax6 and of Madras High Court in Neelamalai Agro Industries Ltd. Versus. Commissioner of Income-tax [2003] 259 ITR 651 (Madras). (vii) An insurance contract is one of indemnity, which indemnifies the insured against the loss of asset insured. If what is insured is the capital asset, the loss therefrom....
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....e impugned orders passed by the ITAT. 8) The Appeals are opposed by Mr. Sharma, the learned counsel appearing for the Revenue. He has canvassed the following broad submissions while opposing the Appeals:- (i) There are concurrent findings recorded by the adjudicating authority, by the First and the Second Appellate Authorities and in absence of any element of perversity, the view taken by the three authorities, being a plausible view, the same cannot be interfered by this Court. Tax under the Act is chargeable on income of Assessee after allowing loss/expenditure as given under the Act and therefore to the extent of loss, the income of the Assessee is reduced and the tax is charged on such reduced income. However, in a case where the Assessee obtains any amount, in respect of such loss, the amount so obtained is added in the income of the Assessee as per the mandate of Section 41(1) of the Act. (ii) The Assessee had claimed a debit upon death of the mare in the Profit and Loss Account and therefore after receipt of the insurance claim, provisions of Section 41 of the Act would apply by treating the same as deemed profit of the Assessee. (iii) It is immaterial as to whether....
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.... issue for consideration is whether the loss of capital asset, which is recouped in the form of insurance claim can be shifted from the head 'Capital Gain' under Section 45 of the Act to the head 'Profits and Gains of business or profession' under Section 41(1) of the Act? 11) Before proceeding further, we must note the cardinal principle of taxation that the heads of income provided in various sections of the Income Tax Act are mutually exclusive and where any item of income falls specifically under one head, it is to be charged for taxation under that head alone and no other. To paraphrase, the income derived from different sources falling under a specific head has to be computed for the purposes of taxation in the manner provided by the appropriate section and no other. Thus, it is impermissible for the Revenue to impose tax on income forming part of particular head and governed by particular section, by shifting the same under another head for the purpose of applicability of another section of the Act. If the department finds that an income under a particular head does not become liable to tax on account of provision of a Section governing that head, it is impermissible to shi....
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....as income. It is only capital gains chargeable under section 45 which has been treated as income under section 2(24). If the argument of the Department is accepted then all capital gains whether chargeable under section 45 or not, would come within the definition of the word "income" under section 2(24). Further, under section 2(24)(vi), the Legislature has not stopped with the words "any capital gains". On the contrary, the Legislature has advisedly stated that only capital gains which are chargeable under section 45 could be treated as income. In other words, capital gains not chargeable to tax under section 45 fall outside the definition of the word "income" in section 2(24). It is true that section 2(24) is an inclusive definition. However, in this case, we are required to ascertain the scope of section 2(24)(vi) and for that purpose we have to read the sub-section strictly. We cannot widen the scope of sub-section by saying that the definition as a whole is inclusive and not exhaustive. In the present case, the words "chargeable under section 45" are very important. They are not being read by the Department. These words cannot be omitted. In fact, the prior history shows....
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....come Tax Act, 1922 are mutually exclusive and where any item of income falls specifically under one head, it has to be charged under that head and no other. In other words, income derived from different sources falling under a specific head has to be computed for the purposes of taxation in the manner provided by the appropriate section and no other. It has been further held by this Court in East India Housing and Land Development Trust Ltd. v. CIT [(1961) 42 ITR 49 (SC)] that if the income from a source falls within a specific head, the fact that it may indirectly be covered by another head will not make the income taxable under the latter head. (See also CIT v. Chugandas and Co. [(1965) 55 ITR 17 : (1964) 8 SCR 332]) (emphasis and underlining added) 15) In our view, therefore the Revenue has grossly erred in shifting the amount of insurance claim received by the Assessee from the head 'capital gains' to another head 'Profits and gains of business or profession' for the purpose of bringing the same to taxation under Section 41(1) of the Act. This is the first folly committed by the Department in the present case. 16) As observed above, the Revenue itself has treated the horse....
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.... that falls for our consideration is whether the money received towards the insurance claim on account of the damage to or destruction of the capital asset is so received on account of the transfer of the asset within the meaning of Section 45 of the Act and is, therefore, chargeable to the capital gains tax under the said section. 4. When an asset is destroyed there is no question of transferring it to others. The destruction or loss of the asset, no doubt, brings about the destruction of the right of the owner or possessor of the asset, in it. But it is not on account of transfer. It is on account of the disappearance of the asset. The extinguishment of right in the asset on account of extinguishment of the asset itself is not a transfer of the right but its destruction. By no stretch of imagination, the destruction of the right on account of the destruction of the asset can be equated with the extinguishment of right on account of its transfer. Section 45 speaks about capital gains arising out of "transfer" of asset and not on account of "extinguishment of right" by itself. The capital gains is attracted by transfer and not merely by extinguishment of right howsoever brought ....
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....the nature of the insurance claim which is indemnity or compensation for the loss. The payment of insurance claim is not in consideration of the property taken over by the insurance company, for one is not consideration for the other. It is incorrect to argue that the insurance claim is the value of the damaged property. The claim is assessed on the basis of the damage sustained by the property or the amount necessary to restore it to its original condition. It is not a consideration for the damaged property. In the present case, the insurance was on reinstatement basis which meant that the property was to be restored to the condition in which it was, before the fire. The insurance company paid the amount for the restoration of the machinery which had to be on the basis of its value at the time of the fire. The machinery in question was purchased in the year 1957 and the fire broke out on August 11, 1966. Although nothing has come on record on the point, taking into consideration the ordinary course of events, it is legitimate to presume that the cost of machinery had gone up during the intervening period, and the assured and, therefore, the assessee, was entitled to recover on the....
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....e amount received by the assessee shareholder on liquidation of the company representing his share in the assets of the company. The Court there had pointed out that the extinguishment of right of the assessee shareholder in his share which was an incorporeal property had come about on account of receipt by him of the amount representing the value of the shares. (emphasis added) 20) The above position is reiterated by the Madras High Court in Division Bench judgment in Neelamalai Agro Industries Ltd. (supra) where there was a fire accident in the factory of the Assessee who received compensation from the insurance company. The Apex Court proceeded to regard insurance receipt as 'transfer' under Section 2(47) of the Act and brought to tax, part of the said compensation claimed under Section 45 of the Act. The issue before the Madras High Court was whether an extinguishment of right in capital asset on account of destruction would amount to transfer. The Madras High Court referred to the judgment in Vania Silk Mills (P.) Ltd. (supra). Reliance was placed by the Revenue on the judgment in Commissioner of Income-tax Versus. Grace Collins [2001] 248 ITR 323 (SC). However, the Madra....
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....herein" and the definition of "transfer" in section 2(47) of the Act. The court did not approve limiting the effect of the words "extinguishment of any rights therein" in the definition of "transfer" in section 2(47) of the Income-tax Act, to extinguishment on account of transfers. The court held, (page 330): "As we read it, therefore, the expression does include the extinguishment of rights in a capital asset independent of and otherwise than on account of transfer." 20. In the case of Mrs. Grace Collis, [2001] 248 ITR 323 (SC), the court did not have occasion to go into the question as to whether the destruction of a capital asset which as a consequence brings about the extinguishment of the rights of the assessee-owner in such asset, would amount to transfer. The court did not hold that Vania Silk Mills Pvt. Ltd.'s case, [1991] 191 ITR 647 (SC) was wrongly decided, or that the definition of "transfer" in section 2(47), particularly, the use of the words "extinguishment of any rights therein" would cover cases of destruction of the capital asset. Cases such as the destruction of the capital asset in a fire, or its complete loss as in the case of sinking of a vessel in t....
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....and on the same footing as the income that would have been realized by the assessee on the sale of the stock-in-trade. In these circumstances, we are clearly of the view that the insurance claim on account of the stock-in-trade does not constitute an independent income or a receipt of a nature similar to brokerage, commission, interest, rent or charges. Hence, such a receipt would not be subject to a deduction of ninety per cent. under clause (1) of Explanation (baa). 22) Thus, following the ratio of the judgments in Vania Silk Mills (P.) Ltd., Pfizer Ltd and Neelmalai Agro Industries Ltd., the money received towards insurance claim on account of damage to or destruction of capital asset cannot be treated as transfer of capital assets so as to attract tax under the provisions of Section 45(1) of the Act. 23) Having realized that the insurance receipt cannot be taxed as capital gain under Section 45 of the Act, the Assessing Officer has taken recourse to the provisions of Section 41(1) of the Act for the purpose of bringing the insurance receipt to tax. Sub-section (1) of Section 41 reads thus :- 41. Profits chargeable to tax. (1) Where an allowance or deduction has been mad....
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.... in another year. In the present case, the insurance receipt is assessed by the Assessing Officer in the same year in which the deduction was granted. Section 41(1) essentially applies to a situation where deduction is made by the Assessee in respect of loss, expenditure or trading liability and subsequently the Assessee secures an amount in respect of such loss or expenditure, the amount obtained by such person becomes 'profits' and accordingly can be charged to income tax. 26) It is strenuously contended on behalf of the Revenue that the expression used under Section 41(1) is 'any amount' and that even insurance receipt would be covered by the expression 'any amount'. It is contended that the Assessee claimed deduction or loss of horses and thereafter secured insurance claim for death of the very same horses and that therefore the case is clearly governed by Section 41 of the Act. This submission on behalf of the Revenue appears to be totally unfounded as no deduction is allowable under Section 36(1)(vi) of the Act in respect of the two horses for which insurance claim is received. The value of two horses, 'Certainty' and 'Gracian Flower' was Rs. 40,000/- and Rs. 30,000/- respec....