- (1.) The appellant-Company, hereinafter referred to as the assessee, carries on the business of manufacture and sale of art-silk cloth. In the year 1957, it purchased machinery worth Rs. 2,81,741 and gave it on hire to M/s. Jasmine Mills Pvt. Ltd., Bombay at an annual rent of Rs. 33,900/ -. On August 11, 1966, a fire broke out in the premises of M/s. Jasmine Mills causing extensive damage to the machinery installed in their premises including the machinery hired by them from the assessee. The machinery belonging to the assessee became useless for any further use on account of the damage. M/ s. Jasmine Mills had insured along with its own machinery, the assessee's machinery as well, and on a settlement of the insurance claim, M/ s. Jasmine Mills received a certain amount out of which it paid a sum of Rs. 6,32,533/- to the assessee on account'of the destruction of its machinery. The difference between the actual cost of the machinery and its written-down value worked out to Rs. 2,62,781/-. The assessee in its income-tax return for the assessment- year 1967-68 (relevant accounting year being the year ending on 31st August, 1966). showed the said amount as profit chargeable to tax under S. 41(2) of the Income-tax Act (hereinafter referred to as the "Act'). The Income-tax Officer, however, subjected to tax also the additional amount of Rs. 3,50,792/ - being the difference between the amount of Rupees 6,32,533/- received on account of the insurance claim and the original cost of the machinery, i.e., Rs.2,81,741/-, treating the same as capital gains chargeable under S. 45 of the Act. The contention advanced by the assessee that the capital gains tax was not attracted to the amount received on account of the insurance claim since there was no transfer of capital asset as was contemplated by S. 45 read with S. 2(47) of the Act-, was negatived by the Income-tax Officer. The assessee appealed against the order to the Appellate Assistant Commissioner who also negatived the said contention of the appellant and dismissed the appeal. The assessee's contention was, however, upheld in the appeal before the Income-tax Appellate Tribunal, the Tribunal holding that the amount was not received on account of a transfer of the capital asset but on account of the damage to it and that S. 45 was attracted only when there was'a transfer of the capital asset. Being aggrieved, the.Revenue applied for reference of the case to the High Court on the following two questions: (i) whether on the facts and in the circumstances of the case the transfer was justified in law in holding that there was no transfer of capital asset by the assessee within the meaning of S. 2(47) of the Act (ii) whether on the facts and in the circumstances of the case the sum of Rupees 3,50,792/- being the excess of the cost of the machinery received from M/ s. Jasmine Mills Pvt. Ltd. was chargeable to tax as capital gains under S. 45 of the Act The High Court answered the first question in the negative, and consequently the second question in the affirmative, i.e., both questions in favour of the Revenue and against the assessee. This appeal has been filed by the assessee on a certificate granted by the High Court.
(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 S. 45 of the Act and is, therefore, chargeable to the capital. gains tax under the said section.
(3.) It would be convenient to reproduce here the provisions of S. 45 of the Act as they stood at the relevant time: "45. Capital gains - Any profits or gains arising from the transfer of a capital asset effected in the previous year shall, save as otherwise provided in Ss.53 and 54, be chargeable to income-tax under the head capital gains, and shall be deemed to be the income of the previous year in which the transfer took place." (Emphasis supplied) Section 2(47) of the Act which defined transfer at the relevant time read as follows: "2. Definitions - In this Act, unless the context otherwise requires,- ........................ (47) 'transfer', in relation to a capital asset, includes the sale, exchange or relinquishment of the asset or the extinguishment of any rights therein or the compulsory acquisition thereof under any law." A reading of the two sections makes it abundantly clear that the profits or gains which are amenable to S. 45 must arise from the transfer of the capital asset which is effected in the previous year. The transfer may be brought about by any of the modes of transfer which include sale, exchange, relinquishment of the asset or the extinguishment of the rights therein or the compulsory acquisition of the asset under any law. It may be of the asset itself or of any rights in it. It may further be the result of a voluntary act or a compulsory operation. Whatever the mode by which it is brought about, the existence of the asset during the process of transfer is a precondition. Unless the asset exists in fact, there cannot be a transfer of it.;