By TIOL News Service

AHMEDABAD, DEC 03, 2014: THE issue before the Bench is - Whether compensation received from an insurance company on account of destruction of a capital asset can be taxed u/s 50. NO is the answer.

Facts of the case

The assessee company is engaged in the business of manufacturing of petrochemicals and job work. The assessee had filed its return disclosing total income at Rs. 1,95,54,060/-. Subsequently, it had filed revised return and disclosed revised income at Rs. 2,23,68,340/-. The AO however, assessed the total income of the assessee at Rs. 5,69,39,830/-. On appeal, the CIT(A) partly allowed the appeal of assessee but sustained the addition made by the AO though on different ground. On further appeal, the Tribunal confirmed the addition made by the CIT(A). On appeal before the High Court, the counsel for assessee submitted that the Tribunal had erred in law in holding that the compensation received by the assessee on account of depreciation of Wind Mill from the Insurance Company was fully taxable u/s 50. He submitted that the Tribunal erred in law in not appreciating that section 45(1)(A) which could have treated such transaction as transfer for the purpose of capital gains tax came into the statute book only with effect from 01.04.2000 and therefore for the year under consideration such compensation could not have been taxed u/s 50. However, the counsel for revenue supported the orders passed by the Tribunal as well as the CIT(A) and contended that the same having been passed after considering the facts on record, did not call for any interference by this Court.

Having heard the parties, the High Court held that,

++ it is noted that the Madras High Court in the case of Neelamal Agro Industries Ltd., has held that when a thing was destroyed by fire, the capital asset was no longer available for being owned, used or enjoyed by anyone. With the destruction of the asset, the rights of the assessee in that asset also would be destroyed. The destruction of such rights in an asset consequent upon the assets ceasing to exist was a situation which was not contemplated either in the definition of "transfer" or in the charging section and therefore the assessment as capital gains liable to tax arising out of the compensation amount received under the insurance on account of damage was not valid in law. In fact the Act inserted section 50A to provide for the working of the cost of acquisition for the purposes of computation of capital gains in respect of such assets. It has been provided that where the capital asset is an asset in respect of which a deduction on account of depreciation u/s 32(1)(i) has been obtained by the assessee in any previous year, the provisions of sections 48 and 49 shall apply subject to the modification that the written down value as defined u/s 43(6) of the asset as adjusted shall be taken as the cost of acquisition of the asset;

++ it is observed that the Tribunal committed an error in applying provisions of section 41(2). Section 41(2) was inserted in the Act to provide that where the moneys payable in respect of such assets together with the amount of scrap value if any exceeds the written down value so much of the excess as does not exceed the difference between the actual cost and the written down value, shall be chargeable to income tax, as income of the business of the previous year in which the moneys payable become due. Section 32 was amended to provide for allowance of depreciation in the case of assets of an undertaking engaged in generation or generation and distribution of power on straight line method. Section 41 was amended to provide for computation of depreciation and also the amount chargeable to income tax when such an asset is sold, discarded, demolished or destroyed in the previous year. Therefore, the Tribunal ought not to have invoked the provisions of section 41(2) in the present proceedings. Accordingly, the order of the Tribunal confirming the order of the CIT(A) is set aside.

(See 2014-TIOL-2110-HC-AHM-IT)