COMMISSIONER OF INCOME TAX Vs. VANIA SILK MILLS PRIVATE LIMITED

JUDGEMENT

(1.) AN interesting question as to the true interpretantion of the expression "the extinguishment of any rights therein", that is in a capital asset, occurring in S. 2 (47) of the IT Act, 1961,(hereinafter referred to as "the Act"), which defines the word "transfer" used in S. 45 and other cognate sections, arises in this reference in the context of the following facts.

(2.) THE assessee is a private limited company carrying on business of manufacture and sale of art silk cloth. In the Year 1967, 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, fire broke out in the premises of M/s Jasmine Mills Pvt. Ltd. causing extensive damage to the machinery hired from the assessee and other machinery belonging to M/s Jasmine Mills Pvt. Ltd. The assessee's machinery was damaged to such an extent that it could not any longer be put to use as such. It appears that M/s Jasmine Mills Pvt. Ltd. has insured the assessee's machinery along with its own machinery and on a settlement of the insurance claim, it received 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 such machinery and its written down value worked out to Rs. 2,62,781 and in the course of proceedings for assessment to Income tax for the asst. year 1967 68 (the relevant pervious year being the year ending December 31, 1966), the assessee returned the said amount of Rs. 2,62,781 as profit chargeable to tax under S. 41 (2) of the Act. The ITO, in additional to bringing the aforesaid amount to tax, also subjected to tax in additional amount of Rs.3,50,792, being the difference between the amount of Rs. 6,32,533 received as aforesaid by the assessee from M/s Jasmine Mills Pvt.Ltd. and the original cost of Rs. 2,81,741 of the machinery in question as "captial gains" chargeable under S. 45 of the Act. The assessee carried the matter in appeal before the AAC who upheld the decision of the ITO. It might be stated that the contention of the assessee before both those authorities was that question of capital gain did not arise since no transfer of captial asset was effected within the meaning of S. 45 r/w S. 2(47) of the Act but this contention was negatived by both the authorities. In further appeal before the Tribunal the same contention was advanced on behalf of the assessee and the Tribunal upheld it substantially on the grounds that, (i) in order that there could be a valid transfer of a capital asset, the asset must be in existence and since, in the present case, the machinery was damaged to such an extent that it had become useless, it had ceased to exist and, therefore, there was no transfer of a capital asset within the meaning of S. 45, (ii) M/s Jasmine Mills Pvt. Ltd., as a bailee, was under a legal obligation to take proper and reasonable care of the machinery which it had taken on hire from the assessee and in view of the destruction of, or damage caused to the machinery, it was bound to pay the amount in question to the assessee and the payment was, therefore, not on account of the transfer of a capital asset within the meaning of S. 45, and (iii) unless the transfer of a capital asset is effected by an assessee, S. 45 would not be attracted and since, in the present case, there was no such voluntary act on the part of the assessee effecting transfer, one of the conditions for levying the charge of capital gains was not satisfied. On these three grounds, the Tribunal, disagreeing with the lower authorities, held that the amount of Rs. 3,50,792 could not have been taxed as capital gains and it accordingly directed the deletion of the said amount from the assessee's computed total income.

(3.) THE Revenue fairly conceded before us that the transaction in the present case, which resulted in leaving in the hands of the assessee the surplus of Rs. 3,50,792 was not a sale, exchange or relinquishment of the capital asset in the shape of machinery nor was it compulsory acquisition thereof within the meaning of S. 45 r/w S. 2(47). It was contended on its behalf, however, that the surplus was exigible to tax as profit arising from the extinguishment of the rights of the assessee in the said asset and, alternatively, as profit resulting from the transfer (as the said word is understood in its plain and natural meaning) of such asset under the said provision. According to the Revenue, (1) the payment in question was made not in discharge of the legal obligation, if any, of M/s Jasmine Mills Pvt. Ltd. to make good the loss sustained by the assessee on account of the damage or destruction of the asset which was given on hire to it but by way of consideration for the extinguishment or transfer of the assessee's rights in the said asset ; (2) in order to effectuate such extinguishment or transfer, it was not necessary that the capital asset in question must be in existence ; and (3) in any event, in the present case, the asset was in fact in existence though in a damaged condition and, therefore, even if there was such requirement, it was satisfied.