TaxTMI 
TaxTMI 
2025 (7) TMI 685
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...., can be taxed by treating the claim amount 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....
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....expenses incurred on feeding, medical treatment etc. was being claimed as a revenue expenditure. Though the horses were treated 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....
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....). (iv) All heads of income under the Act are mutually inclusive and that if an income falls in one head, it cannot be assessed under another head merely because 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)....
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.... said provision was to be applied, the addition could not have exceeded the expenses sought to be allowed by the Assessing Officer. On above broad submissions, Mr. Pardiwalla would pray for setting aside the 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 i....
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....loss in capital account of the Assessee. The Insurance Company allowed the claims submitted by the Assessee and disbursed amount of Rs. 6,00,000/- in respect of the Mare-Certainty and Rs. 1,00,000/- in respect of the Mare-Gracian Flower. The 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 hea....
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....5. It is for this reason that under section 2(24)(vi) that the Legislature has expressly stated, inter alia, that income shall include any capital gains chargeable under section 45. Under section 2(24)(vi), the Legislature has not included all capital gains 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 ....
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....applied, it is not open to the Department to impose tax on such capital receipt by the assessee under any other section. This Court, as early as in 1957 had, in United Commercial Bank Ltd. v. CIT [(1957) 32 ITR 688 : 1958 SCR 79] held that the heads of income provided for in the sections of the Income 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 h....
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..... (supra) in which the issue before the Apex Court was whether money received towards insurance claim on account of damage/destruction of capital asset would be on account of 'transfer' of the asset within the meaning of Section 45. The Apex Court held in paras-2, 4, 5, 6 and 7 as under :- 2. The short question 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 destructi....
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.... loss, whatever may be his estimates of the loss that he was likely to bear and whatever the premium he may have paid calculated on the basis of the said estimate. The fact that while paying for the total loss of or damage to the property, the insurance company takes over such property or whatever is left of it, does not change 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....
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....transfer" within the meaning of Section 45 the asset need not exist. We are afraid that the High Court's reliance on CIT v. R.M. Amin [(1971) 82 ITR 194 (Guj)] to hold that for the transfer contemplated by Section 45, the asset need not exist is not well merited. There, the High Court was concerned with a chose-inaction, viz., the shares, and the 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 ....
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.... 19. It is only to the extent of that obiter dicta, that the decision rendered in the case of Mrs. Grace Collis, [2001] 248 ITR 323 (SC) can be said to be at variance with the decision rendered in the case of Vania Silk Mills Pvt. Ltd., [1991] 191 ITR 647 (SC). In the case of Mrs. Grace Collis, [2001] 248 ITR 323 (SC), the court considered the terms "extinguishment of any rights therein" 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 ho....
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....me emanating from the sale would not be susceptible to a reduction of ninety per cent. for the simple reason that it would not constitute a receipt of a nature similar to brokerage, commission, interest, rent or charges. A contract of insurance is a contract of indemnity. The insurance claim in essence indemnifies the assessee for the loss of the stock-in-trade. The indemnification that is made to the assessee must stand 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 ....
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....orses as profits under Section 41 of the Act. 25) Even if it is assumed that provisions of Section 41 of the Act can be invoked in the facts of the present case, the receipt towards insurance claim would still be outside the purview of Section 41(1) of the Act as the same does not satisfy the conditions laid down therein. Section 41(1) can be pressed into service only if an allowance is granted in one year and subsequently the amount is received 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 hor....
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....ether with or without a declaration of war), then, any profits or gains arising from receipt of such money or other assets shall be chargeable to income-tax under the head "Capital gains" and shall be deemed to be the income of such person of the previous year in which such money or other asset was received and for the purposes of section 48, value of any money or the fair market value of other assets on the date of such receipt shall be deemed to be the full value of the consideration received or accruing as a result of the transfer of such capital asset. Explanation.-For the purposes of this sub-section, the expression "insurer" shall have the meaning assigned to it in clause (9) of section 2 of the Insurance Act, 1938 (4 of 1938). 29) However, the said provision came to be introduced by Finance Act, 1999 w.e.f. 1 April 2000 and the same has no application to the present case. Thus, insurance claim received towards destruction of capital asset has been brought to taxation for the first time from 1 April 2000. This is yet another reason for holding that the amount received by the Assessee towards insurance claim on death of the horses cannot be brought to tax before in....