Cit, Udaipur v. M/S. Hindustan Zincltd.,Udaipur

IN THE HIGH COURT OF JUDICATURE FOR RAJASTHAN ATJODHPUR JUDGMENT CIT, Udaipur Vs. M/s. Hindustan ZincLtd.,Udaipur D.B. INCOME TAX APPEAL NO.6/2003against the order dated 22.11.2001 passed in ITA No.1232(JP)/94 for assessment year 1979-80. Date of judgment : 4[th] January, 2007 PRESENT HON'BLE MR. JUSTICE RAJESH BALIAHON'BLE MR. JUSTICE CHATRA RAM JAT Mr. K.K. Bissa for the appellant.Mr. Anjay Kothari for the respondents. ________ BY THE COURT:- (PER HON'BLE RAJESH BALIA, J.) This appeal is directed against the order ofthe Income Tax Appellate Tribunal, Jodhpur Bench,Jodhpur dated 22[nd] Nov., 2001 for the assessment year1979-80 the relevant previous year of which ended on31[st] March, 1979. The question that was framed forconsideration in this appeal as substantial question oflaw at the time of admission reads as under:- “Whether in the facts and circumstances ofthe case, the Tribunal was justified indeleting the amount received from theInsurance Company indemnifying theassessee for the loss caused on account ofloss of machinery which was destroyed in firewith reference to provisions of capital gainsby ignoring the provisions of Section 41(2),which relates to computation of income,otherwise then by way of capital gains? During the previous year ending on 31[st]March, 1979, the assessee had received Rs.5,89,055/-as an insurance claim on account of loss of certainmachinery which was destroyed in fire. The AssessingOfficer made additions of this amount chargeable underSection 41(2) of the Income Tax Act as balancing charge. The appeal against the assessment order dated 20[th] January, 1983 was dismissed by CIT (Appeals)vide order dated 8[th] March, 1994. Significantly theAssessing Officer did not refer to the cost of acquisitionof the destroyed machine, depreciation if any allowed thereon or written down value of the machine destroyedin fire. However, the CIT (Appeals) in her order hascategorically found that written down value or the cost ofacquisition assets was not known though on principleshe noticed that the insurance claim should have beenreduced from the cost of assets and the written downvalue should have been adjusted. Be that as it may, in further appeal, the Tribunal vide its order dated 22[nd] Nov., 2001 allowed theassessee's appeal in this regard by holding that Section41 (2) of the Act is not applicable unless the machine orthe capital assets on which depreciation has beenclaimed is destroyed as a consequence of an act oromission on the part of the assessee. Since the loss ofmachinery was due to fire was not caused by the act ofthe assessee, the Section 41(2) is not attracted. It wasalso opined that since no transfer of the assets wasinvolved in any sense of the term which has beendestroyed by fire, the question of levy of tax on capitalgains or on any money received above cost of acquisitionalso would not arise inasmuch as for the purpose of levy of capital gains, transfer of assets by any means knownto law must take place. In the process, Tribunal has alsoheld that extinguishing of right does not amount totransfer. At the outset, we may notice that learned counsel for the appellant has brought to our notice thedecision of the Supreme Court rendered inCommissioner of Income Tax Vs. Mrs. Grace Collis andothers 248 ITR 323 to urge that even extinguishment ofright is one of the mode of transfer of assets and,therefore, the Tribunal has erred in holding that nocapital gains can be said to have arisen out ofextinguishment of the right in machinery in the presentcase and, therefore, applicability of capital gains underSection 45 was attracted. This contention is stated to be rejected. It is of capital gains, transfer of assets by any means knownto law must take place. In the process, Tribunal has alsoheld that extinguishing of right does not amount totransfer. At the outset, we may notice that learned counsel for the appellant has brought to our notice thedecision of the Supreme Court rendered inCommissioner of Income Tax Vs. Mrs. Grace Collis andothers 248 ITR 323 to urge that even extinguishment ofright is one of the mode of transfer of assets and,therefore, the Tribunal has erred in holding that nocapital gains can be said to have arisen out ofextinguishment of the right in machinery in the presentcase and, therefore, applicability of capital gains underSection 45 was attracted. This contention is stated to be rejected. It is not a case which relates to extinguishment of right ofassessee in assets followed with creation of right inanother assets as it happens in the case of a scheme ofamalgamation or merger of the companies which was the case before the Supreme Court whereas as a result ofamalgamation two companies the existing shareholderof amalgamating company is allotted shares of theamalgamated company in lieu of extinguishing of itsrights in the company which has ceased to exist. Thisprovides altogether different case study. In case ofamalgamation or reassessment of two or morecompanies right to the assessee to the assets is notdestroyed altogether but he cease to be a share holderof a company which has merged into another and in lieuof his existing right in merged company he is allottedshare in the new company which comes into existence asa result of merger. This in ultimate analysis amounts toexchange, which was in all circumstances, the SupremeCourt in the case of Commissioner of Income Tax Vs.Mrs. Grace Collis and others 248 ITR 323 had held thatextinguishment of any right of capital assets is notexcluded from the definition of transfer given under theIncome Tax Act and the definition of transfer in theIncome Tax Act includes extinguishing right of holder ofshare in the amalgamated company. Apparently this case offers no parallel withthe facts of the present case in which the instance is notconfined to extinguishment of the right of the assesseein a particular assets to be substituted by another but isa case where the asset itself is destroyed andextinguished. Section 45 as was existing during the period in question had no application to a case wherecompensation or damages were received for an assetswhich has been destroyed and which could not havebeen transferred in any sense of the terms. In fact, neither the Assessing Officer nor the CIT (Appeals) had sought to tax the amount receivedfrom the insurance company by way of a capital gainsnor it was the claim raised before the Tribunal andTribunal was not required to go into such question. The contention that receipt from insurance company was liable to be considered under theprovisions of Section 45, is to be rejected. The reference may be made in thisconnection to subsequent amendment made in Section45 by inserting Sub-Section (1A) w.e.f. 1.4.2000 videFinance Act, 1999. By this new provision a legal fictionwas created that where any person receives, at any time,during any previous year any money or other assetsunder an insurance from an insurer on account ofdamage or destruction of any capital assets as a result ofaccident, fire or other contingencies stated therein thenany profits or gains arising from receipt of such moneyor other assets shall be chargeable to Income Tax underthe head capital gains and shall be deemed to be theincome from such previous year in which such assets ormoney was received. Since the provisions are prospectively inoperation w.e.f. 1.4.2000, it has no bearing on thecomputation of total income for the year 1978-80 withwhich we are concerned. Coming to the second aspect of the matter Since the provisions are prospectively inoperation w.e.f. 1.4.2000, it has no bearing on thecomputation of total income for the year 1978-80 withwhich we are concerned. Coming to the second aspect of the matter whether the money received from insurance companywas liable to be subjected to consideration under Section41(2) of the Income Tax Act, we are of the opinion thatthe answer must be emphatic yes. There is nojustification to sustain the view taken by the Tribunalthat unless the machinery or asset is sold, demolished ordestroyed consequent to an act or application on thepart of the assessee, the provision is not attracted toSection 41 (2) of the Act of 1961. Sub-section 2 ofSection 41 of the Income Tax Act reads as under:- “(2) Where any building, machinery, plant orfurniture which is owned by the assessee andwhich was or has been used for the purposesof business or profession is sold, discarded,demolished or destroyed and the moneyspayable in respect of such building,machinery, plant or furniture, as the casemay be, together with the amount of scrapvalue, if any, exceed the written down value,so much of the excess as does not exceedthe difference between the actual cost andthe written down value shall be chargeable toincome-tax as income of the business orprofession of the previous year in which the moneys payable for the building, machinery,plant or furniture became due: Provided that where the building sold,discarded, demolished or destroyed is abuilding to which Explanation 5 to 43 applies,and the moneys payable in respect of suchbuilding, together with the amount of scrapvalue, if any exceed the actual cost asdetermined under the Explanation, so muchof the excess as does not exceed thedifference between the actual cost sodetermined and the written down value shallbe chargeable to income-tax as income ofthe business or profession of such previousyear: We may notice that a second proviso wasinserted in the aforesaid provision w.e.f. 1.4.1981 whichis not relevant for the present purpose and the sub-section as a whole was omitted from the statute bookw.e.f. 1.4.1988 vide Taxation Laws (Amendment andMiscellaneous Provisions) Act, 1986, and the provision inmodified form has been reintroduced w.e.f.1.4.1998.Since the present case relates to assessment year 1979-80 when sub-section (2) of Section 41 was operative in the aforesaid form, the present case shall be governedby the aforesaid provisions. A perusal of Sub-section (2) of Section 41 makes it clear that it has been devised to tax whateveramount is recovered by the assessee from the building,machinery, plant or furniture which were used for thepurpose of business or profession as a result of its sale,discard, demolish or 'destruction to the extent it relates torecovery of any claim to deduction' in respect of suchbuilding machinery, plant or furniture that has beenallowed to the assessee while computing his incomechargeable to tax for earlier years. It is one of thecardinal principle of the Income Tax, which is embodiedin Section 41 and its various provisions, that whereverany deduction has been allowed to the assessee andsubsequently if wholly or any part of such expenses orclaim have been recovered by the assessee in any way tothat extent the earlier claim to deduction becomesunjustified and must be brought to tax. It is to giveeffect to this principle that this provision has beenenacted. In simple term, though the term 'balancing charge' has not been used in statute but has been coinedby the judicial pronouncement as a principle that in thematter of capital assets on which depreciation has beencharged at its cost of acquisition to the profit and lossaccount resulting in reduction of net profit chargeable totax and by adjusting the depreciation amount againstthe cost of acquisition, the written down value comesdown on receiving of any sum over and above its WDV asan outcome of its sale or scrap of such capital assetsused in the business of the assessee, but not exceedingthe cost of acquisition is to be taxed as balancing chargeof depreciation allowed and recovered. Therefore, if onthe destruction of assets any money is received from theinsurance company, which is a subject of contract ofindemnity, it acquires the character of recovering theloss and, therefore, to the extent the recovery from theinsurance claim is in excess of written down value that isto say the cost of acquisition reduced by depreciationactually allowed as deduction is liable to be broughtback to tax as revenue receipt. We are, therefore, of the opinion that the Assessing Officer as well as the CIT (A) were right, theamount received from the insurance company was liableto be dealt with under Section 41(2). However, the two essential conditions foroperating section 41 (2) are to determine the cost ofacquisition of assets so sold, discarded or demolished ordestroyed and its written down value if depreciation inrespect of which has been allowed or any otherdeduction in respect of such assets is allowed resultingin reduction of its cost of acquisition for the purpose ofcomputation of income tax per year has to bedetermined. Any amount received over and above costof acquisition is not liable to be dealt with under Section41(2). If no deduction in respect of such assets hasbeen claimed and the cost of acquisition has not beenreduced to the written down value then nothing becomeschargeable to Section 41(2). So also if the recovery isless than its WDV, nothing become includible in incomeu/s 41(2). But if any amount is received in respect ofsuch asset over and above its written down value uptoits cost of acquisition is to be included in taxable income for the relevant assessment year. We are constrained to observe that whileAssessing Officer has not at all applied its mind andreferred to any such finding about the cost of acquisitionor written down value so as to work out the balancingcharge liable to be taxed as profit of the businessrelating to the previous year in question, the CIT (A)though has noticed that it is not known what is cost ofacquisition or written down value but has not made anyattempt to record a finding about its OAWDV or anydeduction claimed in respect of such assets by way ofdepreciation. That would have been matter of record. Inthe absence of such determination, while amountreceived could not have been brought to tax underSection 41(2) as balancing charge. The very fact that theentire amount received from the Insurance Companywithout reference to the cost of machinery destroyed orits written down value has been added as profits of theassessee relating to assessment year 1979-80 goes toshow that no application of mind has been applied.Since the method of depreciation which could result in reduction of the cost of the assets to Zero is notapplicable to the deduction on account of depreciationby Income Tax Act, there could not have been Zerowritten down value in respect of the assets in questionwhich has been destroyed by fire, therefore, the entireamount could not have been brought to the tax underSection 41(2) in absence of the finding about the cost ofacquisition, it cannot be said that the amount receivedfrom the insurance was less than the cost or writtendown value. Therefore, the addition as such could nothave been sustained. If such amount is not computablethen too by applying the principle laid down by theSupreme Court in M/s Grace Colice's where thecomputation of a sum is not practicable, it cannot beincluded in computation of total income. Hence, inabsence of any finding about the cost of acquisition andthe written down value of the machine destroyed, theadditions made in the income of the assessee as profitsand gains from his business on account of insuranceclaim received during the year of loss of machine by firecannot be sustained. No material has also been placedbefore us to hold a further inquiry into the cost of acquisition and the written down value. In that view of the matter, the order ofTribunal setting aside the additions made does notrequire to be interfered with. However, it needs to beremitted back to Assessing Officer to hold an enquiryinto the cost of acquisition of the machine destroyed,any claim of deduction on account of depreciation, ifany, allowed and find the WDV and then consider theissue whether any sum is includible in income u/s 41(2)of the Income Tax Act. No costs. Appeal is disposed of with these directions. , J. [ RAJESH BALIA ], J. babulal/