Bombay High Court
M/S Poonawalla Extate Stud And Agri Farm vs Commissioner Of Income-Tax on 9 July, 2025
2025:BHC-OS:10360-DB
Neeta Sawant ITXA-541-2003+3 others-FC
IN THE HIGH COURT OF JUDICATURE AT BOMBAY
ORDINARY ORIGINAL CIVIL JURISDICTION
INCOME TAX APPEAL NO. 541 OF 2003
WITH
INCOME TAX APPEAL NO. 535 OF 2003
WITH
INCOME TAX APPEAL NO. 540 OF 2003
M/s. Poonawalla Estate Stud &
Agricultural Farm ...Appellant
: Versus :
Commissioner of Income Tax ....Respondent
Alongwith
INCOME TAX APPEAL NO. 175 OF 2005
M/s. Poonawalla Estate Stud &
Agricultural Farm ...Appellant
: Versus :
Dy. Commissioner of Income Tax,
Special Region-4 ....Respondent
Mr. P.J. Pardiwalla, Senior Advocate with Mr. B .V. Jhaveri and Ms.
Bhargavi Raval, for Assessee-Appellant.
Mr. Akhileshwar Sharma, for the Revenue-Respondent.
Page No.1 of 28
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CORAM : ALOK ARADHE, CJ. &
SANDEEP V. MARNE, J.
Judgment Reserved On : 3 July 2025.
Judgment Pronounced On : 9 July 2025.
Judgment (Per: Sandeep V. Marne, J.)
1) These four Appeals are filed raising a common issue as to
whether the receipt towards insurance claim in respect of dead horses
can be treated as 'profits' for the purpose of taxation under Section 41(1)
of the Income Tax Act, 1961 (the Act) ? The horses, being treated as
capital assets by the Revenue, whether the amount of insurance claim
received towards loss of such capital assets, which would ideally be
taxable only under Section 45 of the Act as capital gain, 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
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3) The Appeals have been admitted by formulating the following
solitary question of law in each of them :-
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 ?
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.4,00,000/- from the Insurance Company by the
appellant firm on death of the mare was chargeable to tax under
Section 41(1) of the Act?
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. 19 lac from the insurance company by the appellant
firm on death of the mares was chargeable to tax under Section
41(1) of the Act?
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. 75,000/- from the Insurance Company by the
appellant firm on death of the mares was chargeable to tax under
Section 41(1) of the Act?
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4) Thus same question of law has been framed in each of the four
Appeals, which needs to be answered by deciding the issues broadly
set out in the opening paragraph of the judgment. Since common
question of law of permissibility to tax the insurance claim received
against dead horses as 'profits' under Section 41(1) of the Act arise for
consideration in all four Appeals, for ease of reference, facts of Income
Tax Appeal No.541 of 2003 are discussed as under :-
The Assessee was carrying on the business of breeding, rearing
and selling racehorses since the year 1967. At its Stud Farm, there were
several mares and stallions. When a male horse or female horse was
born, it was being treated as a stock in trade till it attained the age of 2
years. The value of such horses was determined by the Assessee on the
basis of expenditure incurred on feeding, medical treatment, training
etc. After the horse crossed the age of 2 years, it was either sold or was
given on lease for horse racing or transferred to the Plant for being used
for breeding activities. The horses have racing life of about 3 to 5 years
whereafter they are mainly used for breeding and therefore such horses
are treated as Plant and Machinery and accordingly in the Books of
Accounts, the costs of such horses were added to the total of cost of
livestock plant. Therefore, all expenses incurred on a horse till attaining
the age of 2 years formed part of costs of such horse. After the horse
was transferred to the Plant, the 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
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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 Rs.3,60,902/- being
the loss on disposal of assets (Mares and Stallions).
5) In the Assessment Order, the Assessing Officer held that
the Assessee ought not to have added such loss on the death of mares
while computing the total income chargeable to tax as loss on death of
an animal is an allowable deduction under Section 36(1)(vi) of the Act.
Accordingly, the said loss of Rs.3,60,902/- was allowed under Section
36(1)(vi) while computing the total income which included Rs.40,000/-
being the costs of Mare-Certainty for which the Assessee had received
insurance claim of Rs.6,00,000/-. The cost of Mare-Gracian Flower of
Rs.30,000/- was not allowed in Assessment Year 1988-89 as the same
had remained to be debited to the Profit & Loss Account. The details of
amount of Rs. 3,60,902/- are as under :-
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Name of the horse Cost
Mare 'Argentina' Rs. 50,000/-
Mare 'Certainty' Rs. 40,000/-
Mare 'Tribute' Rs. 1,00,000/-
Stallion 'Gombos' Rs. 1,60,902/-
Mare 'Shrimati' Rs. 10,000/-
Rs. 3,60,902/-
6) The Assessing Officer further held that the insurance claim
received by the Assessee from the Insurance Company for death of the
Mares-Certainty and Gracian Flower was to be deemed as income of the
Assessee under Section 41(1) of the Act. The said findings recorded by
the Assessing Officer have been upheld in Appeal by Commissioner of
Income Tax (Appeals) [CIT (A)] and Income Tax Appellate Tribunal.
Aggrieved by the decision of ITAT, the Appellant has filed the present
Appeal under Section 260-A of the Act.
7) Mr. Pardiwalla, the learned Senior Advocate appearing for
the Assessee has made following submissions :-
(i) Insurance claim paid upon the destruction of property is a
capital receipt which is not chargeable to tax.
(ii) The horses with respect to which the claim was received was
treated by the Assessee as capital assets and therefore the
receipt arising therefrom could only have been considered as
capital receipt.
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(iii) That only those capital receipts which are chargeable under
Section 2(24)(vi) read with Section 45 of the Act are chargeable
to tax. In support, reliance is placed on judgments in Cadell
Wvg. Mill Co. (P.) Ltd. Versus. Commissioner of Income-tax 1
and Commissioner of Income-tax Versus. D. P. Sandhu Bros.
Chembur (P.) Ltd.2
(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-tax3.
(v) Reliance in placed on judgments of this Court in
Commissioner of Income Tax Versus. Pfizer Ltd.4 and
Somaiya Organo Chemicals Ltd Versus. Commissioner of
Income-tax5 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.
[2001] 249 ITR 265 (Bombay)
[2005] 273 ITR 1 (SC)
[1996] 61 ITR 428
[2011] 330 ITR 62 (Bomba)
(2016) 388 ITR 423
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Commissioner of Income-tax6 and of Madras High Court in
Neelamalai Agro Industries Ltd. Versus. Commissioner of
Income-tax7.
(vii) An insurance contract is one of indemnity, which indemnifies
the insured against the loss of asset insured. If what is insured
is the capital asset, the loss therefrom can only be capital loss
which is sought to be recouped by insurance receipt. Such
receipt can therefore only be a capital receipt. Provision for
making capital asset chargeable to tax resulting out of
damage, destruction thereof was made for the first time by
insertion of sub-section (1A) in Section 45 by Finance Act, 1999
w.e.f. 1 April 2000. That the said provision was not available at
the relevant time for the Assessment Years and that it was
therefore impermissible to treat insurance receipt towards
destruction of capital assets chargeable to tax. In any event,
Section 45(1A) applies only where the damage/destruction is
attributable to only events enumerated therein and does not
cover damage/destruction arising out of unspecified event.
(viii) As capital receipt is not chargeable to tax under the head
'capital gains' it cannot be brought to tax under Section 41(1)
which falls under the head 'Profit and Gains of business or
profession'.
(ix) Without prejudice it is submitted that the case does not satisfy
the conditions laid down under Section 41(1) of the Act which
[1991] 191 ITR 647 (SC)
[2003] 259 ITR 651 (Madras)
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can only be pressed into service if an allowance is granted in a
year and subsequently an amount is received in another year.
In the present case, insurance receipt is sought to be assessed
in the same year in which the deduction could be granted and
therefore Section 41 of the Act has no application.
(x) Again without prejudice, it is submitted that out of the six
horses that died during the relevant previous year, insurance
claim was received only in respect of the two horses and
therefore no deduction was allowable under Section 36(1)(vi)
as the amount realised in respect of such animals, being
insurance receipt, was more than their respective costs. As no
deduction is allowable, there is no question of invocation of
Section 41(1) of the Act. So far as the other four horses are
concerned, their costs would be allowable under Section 36(1)
(vi) and since no insurance claim was received qua their
deaths, nothing can be brought to tax under Section 41(1) of
the Act.
(xi) Without prejudice to the submission that Section 41(1) cannot
be invoked, it is submitted that even if the 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.
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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 in
the Profit and Loss Account and therefore after receipt of the
insurance claim, provisions of Section 41 of the Act would
apply by treating the same as deemed profit of the Assessee.
(iii) It is immaterial as to whether a mare is a plant or a machinery
or whether it is a capital asset. For deciding the controversy in
hand, the limited issue is, applicability of provisions of Section
41(1) of the Act. What was lost, was allowed to be deducted
from the income of the Assessee and consequently the amount
obtained in lieu of such loss would naturally be deemed to be
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the income of the Assessee under the provisions of Section 41
of the Act.
(iv) In this case, mares were not held as Plant and Machinery. The
manner in which the Mares were used in the Assessee's
business, it cannot be said to be stock and trade of the Assesse.
However, there is specific provision in the Act under Section
36(1)(vi) under which if an animal dies or becomes
permanently incapable of further use, the difference between
the actual cost of the animal and the amount realised in
respect of the carcasses of such animal is allowed as deduction
under Section 36(1)(vi) of the Act. Consequently, the amount
obtained in lieu of such dead animal has to be treated as an
income as per the mandate of Section 41.
On above broad submissions, Mr. Sharma would urge this Court not to
interfere in the concurrent findings recorded by the Assessing Officer
and first and second Appellate Authorities. He would pray for
dismissal of the Appeals.
9) Rival contentions of the parties now fall for our
consideration.
10) After going through the orders passed by the assessing
officer and by the first and second appellate authorities, it is seen that
what has been done in the present case is to shift the income of the
Assessee under the head 'capital gains' to the head 'profits and gains of
business or profession' for the purpose of applicability of provisions of
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Section 41(1) of the Act after realising that the said income was not
chargeable to tax under Section 45 of the Act. There is no dispute to the
position that the Mares were being treated as Livestock Plant and hence
considered as capital assets of the Assessee. Their capital value was
Rs.40,000/- for Mare 'Certainty' and Rs.30,000/- for Mare 'Gracian
Flower' in the books of accounts. Upon death of the said two Mares,
there occurred 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
head for the purpose of applicability of another section of the Act. If the
department finds that an income under a particular head does not
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become liable to tax on account of provision of a Section governing that
head, it is impermissible to shift that income to another head merely
because the Department thinks that the very same income, upon its
shift to another head, can be taxed under another Section of the Income
Tax Act. These principles have been reiterated in several judgments and
we proceed to make reference to few of them.
12) In Cadell Wvg. Mill Co. (P.) Ltd. Versus. CIT (supra) the issue
before the Division Bench of this Court was whether the surrender
value of tenancy rights, if not chargeable to tax as capital gains under
Section 45, would be liable to be taxed as 'income from other sources'
under Section 56. The Assessee had surrendered tenancy in respect of
the property and received certain consideration towards surrender of
tenancy. Since nothing was paid towards acquisition of tenancy rights,
the receipt of amount towards surrender of tenancy rights was not
chargeable to tax as 'capital gain' under Section 45 of the Act. Therefore,
the Department proceeded to tax such income by shifting it to another
head 'income from other sources' and proceeded to tax the income
under the provisions of Section 56 of the Income Tax Act. The Division
Bench did not approve the approach and held in paras-10 and 12 as
under :-
10. The short point which arises for determination is: whether the
surrender value of a tenancy right, if not chargeable to tax as capital
gains under section 45, is liable to be taxed as "income from other
sources" under section 56 of the Act?
12. We find merit in the submissions advanced on behalf of the
assessee. Both the parties before us have proceeded on the basis that
the tenancy right is a capital asset. This is clear from the submissions
advanced on both sides. Even the Tribunal has proceeded on the basis
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that if the tenancy right is a property, then the consideration received
for transfer thereof would not be chargeable as revenue receipt. It is
well-settled that all receipts are not taxable under the Income-Tax Act.
Section 2(24) defines "income". It is no doubt an inclusive definition.
However, a capital receipt is not income under section 2(24) unless it
is chargeable to tax as capital gains under section 45. 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
by saying that the definition as a whole is inclusive and not
exhaustive. In the present case, the words "chargeable under section
45" are very important. They are not being read by the Department.
These words cannot be omitted. In fact, the prior history shows that
capital gains were not chargeable before 1946. They were not
chargeable between 1948 and 1956. Therefore, whenever an amount
which is otherwise a capital receipt is to be charged to tax, section
2(24) specifically so provides. .....
13) So far as the issue of permissibility to shift the income
falling under one head for being taxed under another head, the
Division Bench held in para-14 of the judgment as under:-
14. It is essential also to bear in mind that income which falls-under
one specified head could not be brought to tax under any other head.
In the present matter, the Department did apply section 45. They did
apply the head, viz., "Capital gains". However, when it came to
computation, the Department found that cost of acquisition cannot be
computed. Hence, it is now sought to be argued that such capital
gains would constitute "income from other sources" under section 56.
In the case of United Commercial Bank Ltd. v. CIT, [1957] 32 ITR 688
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(SC), it has been held that income which falls under one specific head
could not be brought to tax under any other head. If for any reason,
the computation machinery fails, it is not open to the Department to
apply the residuary clause.
(emphasis added)
14) The view expressed by the Division Bench in Cadell Wvg.
Mill Co. (P.) Ltd that the income falling under one specified head
cannot be brought to tax under another head has been affirmed and
reiterated by the Apex Court in CIT Versus. D. P. Sandhu Bros.
Chembur (P.) Ltd. (supra). The Apex Court has discussed the ratio of
judgments in United Commercial Bank Ltd. Versus. CIT 8, East India
Housing and Land Development Trust Ltd. Versus. CIT9 and
CIT Versus. Chugandas and Co.10 and has held as under :-
13. Were it not for the inability to compute the cost of acquisition
under Section 48, there is, as we have said, no doubt that a monthly
tenancy or leasehold right is a capital asset and that the amount
received on its surrender was a capital receipt. But because we have
held that Section 45 cannot be 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)
[1957] 32 ITR 688 (SC)
(1961) 42 ITR 49 (SC)
(1965) 55 ITR 17
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15) In our view, therefore the Revenue has grossly erred in
shifting the amount of insurance claim received by the Assessee from
the head 'capital gains' to another head 'Profits and gains of business or
profession' for the purpose of bringing the same to taxation under
Section 41(1) of the Act. This is the first folly committed by the
Department in the present case.
16) As observed above, the Revenue itself has treated the
horses as 'capital assets'. This position is affirmed by all the three
Authorities. It would be relevant to quote the finding recorded by the
ITAT in this regard which is as under:
The fact that the Revenue authorities allowed deduction u/s. 36(1)(vi)
only means that they are treated as capital asset of the assessee.
17) After treating the horses as 'capital assets' of the Assessee,
the insurance receipt would obviously become capital gain for the
Assessee, which can only be taxed under the provisions of Section 45 of
the Act. The Revenue however found that it was not possible to tax the
said 'capital gain' under Section 45 of the Act and therefore decided to
treat the income as 'profit' under Section 41(1) of the Act. This is clearly
impermissible for the reasons discussed above.
18) We now proceed to deal with the manner in which the
receipt under an insurance claim is required to be treated for the
purpose of Income Tax Act. As observed above, the Revenue itself has
treated the horses as 'capital asset' of the Assessee. Therefore, if a
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capital is lost on account of death of a horse, any amount received
towards insurance claim of such loss would obviously be on capital
account.
19) Section 45 of the Act deals with capital gains and sub-
section (1) thereof provides that any profits or gains arising from
'transfer' of capital assets effected in the previous year shall be
chargeable to income tax under the head 'capital gains'. The issue
therefore is whether insurance receipt consequent to death of a horse
would amount to 'transfer' within the meaning of Section 45 of the Act.
The term 'transfer' has been defined under Section 2(47) of the Act. It is
contended by the Assessee that insurance receipt on death of a horse
would not be covered by definition of the term 'transfer' in relation to
capital asset. Death of a horse cannot be treated as 'transfer' under
Section 2(47) of the Act as a transfer presumes both existence of asset, as
well as transferee to whom it is transferred. This position is well settled
by the judgment in Vania Silk Mills (P.) Ltd. (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
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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 destruction of the asset can be equated
with the extinguishment of right on account of its transfer. Section 45
speaks about capital gains arising out of "transfer" of asset and not on
account of "extinguishment of right" by itself. The capital gains is
attracted by transfer and not merely by extinguishment of right
howsoever brought about. The transfer may be effected by various
modes and one of the modes is the extinguishment of right on transfer
of the asset itself or on account of the transfer of the right or rights in
it. The extinguishment of right or rights must in any case be on
account of its or their transfer in order to attract the provisions of
Section 45. If it is not, and is on account of the destruction or loss of
the asset, as in the present case, it is not a transfer and does not attract
the provisions of Section 45 which relate to transfer and not to mere
extinguishment of right but to one by transfer. Hence an
extinguishment of right not brought about by transfer is outside the
purview of Section 45. The High Court erred in ignoring the basic
postulate that Section 45 does not relate to extinguishment of right but
to transfer. Having concentrated its attention on the words
"extinguishment of right" rather than on "transfer", the High Court,
with respect, misdirected itself and proceeded on the basis that every
extinguishment of right whether by way of transfer or not, is attracted
by Section 45.
5. Transfer presumes both the existence of the asset and of the
transferee to whom it is transferred. In the case of the damage, partial
or complete, or destruction or loss of the property, there is no transfer
of it in favour of a third party. The money received under the
insurance policy in such cases is by way of indemnity or
compensation for the damage, loss or destruction of the property. It is
not in consideration of the transfer of the property or the transfer of
any right in it in favour of the insurance company. It is by virtue of the
contract of insurance or of indemnity, and in terms of the conditions of
the contract. Under an insurance contract, the assured cannot claim
more amount than the sum insured. The sum insured is the maximum
liability of the insurer and the assured secures it by paying his
premium which is accordingly fixed. Even within the maximum limit,
the insured cannot recover more than what he establishes to be his
actual 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
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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 the
year 1957 and the fire broke out on August 11, 1966. Although nothing
has come on record on the point, taking into consideration the
ordinary course of events, it is legitimate to presume that the cost of
machinery had gone up during the intervening period, and the
assured and, therefore, the assessee, was entitled to recover on the
basis of the increased value of the machinery (refer to Halsbury's
Laws of England, 4th edn., Vol. 25 under the heading 'Insurance', in
para 654).
6. It is true that the definition of "transfer" in Section 2(47) of the Act
is inclusive, and therefore, extends to events and transactions which
may not otherwise be "transfer" according to its ordinary, popular
and natural sense. It is this aspect of the definition which has weighed
with the High Court and, therefore, the High Court has argued that if
the words "extinguishment of any rights therein" are substituted for
the word "transfer" in Section 45, the claim or compensation received
from the insurance company would be attracted by the said section.
The High Court has, however, missed the fact that the definition also
mentions such transactions as sale, exchange etc. to which the word
"transfer" would properly apply in its popular and natural import.
Since those associated words and expressions imply the existence of
the asset and of the transferee, according to the rule of noscitur a
sociis, the expression "extinguishment of any rights therein" would
take colour from the said associated words and expressions, and will
have to be restricted to the sense analogous to them. If the legislature
intended to extend the definition to any extinguishment of right, it
would not have included the obvious instances of transfer, viz., sale,
exchange etc. Hence the expression "extinguishment of any rights
therein" will have to be confined to the extinguishment of rights on
account of transfer and cannot be extended to mean any
extinguishment of right independent of or otherwise than on account
of transfer.
7. The High Court, as stated earlier, read the expression
"extinguishment of any rights" in the assets as any extinguishment of
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right whether it resulted in or was on account of transfer. For the
reasons which we have discussed earlier we find that that approach is
not correct. For the same reasons, we are unable to accept the
reasoning of the High Court that for "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-in-
action, 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 Madras High Court
was whether an extinguishment of right in capital asset on account of
destruction would amount to transfer. The Madras High Court referred
to the judgment in Vania Silk Mills (P.) Ltd. (supra). Reliance was
placed by the Revenue on the judgment in Commissioner of Income-tax
Versus. Grace Collins11. However, the Madras High Court held that the
view taken in Vania Silk Mills (P.) Ltd. was not overruled by the Apex
Court in Grace Collins and that Vania Silk Mills (P.) Ltd. continues to
be the authority in support of the proposition that extinguishment of
right in capital asset on account of its destruction does not amount to
[2001] 248 ITR 323 (SC)
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transfer. The Division Bench of the Madras High Court held in
Neelamalai Agro Industries Ltd. as under :-
16. The extinguishment of rights in the capital asset referred to in the
definition of "transfer" in section 2(47) of the Act, therefore, would clearly
apply to a case where the rights in the shares in the amalgamating company
are extinguished on amalgamation to be replaced by shares in the
amalgamated company, which after amalgamation is the owner of the assets
transferred to it as a consequence of the amalgamation, and which will
thereafter have the ownership, use and benefit of those assets.
17. The case of amalgamation of companies and the extinguishment of rights
of the shareholder in the amalgamating company is no way comparable to
the destruction of the assets which as a consequence brings about the
extinguishment of the rights of the assessee-owner in such assets.
18. In the case of Mrs. Grace Collis, [2001] 248 ITR 323 (SC), at page 330 of the
reports, the court noticed the submission made by counsel for the Revenue
thus:
"Learned counsel for the Revenue submitted that having held that the
payment in settlement of the insurance claim was not in consideration of
the transfer to the insurer of the damaged machinery and that, therefore,
there was no transfer within the meaning of section 45, it was unnecessary
for this court in Vania Silk Mills Pvt. Ltd.'s case, [1991] 191 ITR 647 to go
on to consider the definition in section 2(47) and the meaning to be
attached to the expression 'extinguishment of any rights therein'. In his
submission, the decision in Vania Silk Mills Pvt. Ltd.'s case, [1991] 191 ITR
647 (SC) was to this extent obiter dicta."
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
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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 hold that Vania Silk Mills Pvt. Ltd.'s case, [1991] 191 ITR 647
(SC) was wrongly decided, or that the definition of "transfer" in section 2(47),
particularly, the use of the words "extinguishment of any rights therein"
would cover cases of destruction of the capital asset. Cases such as the
destruction of the capital asset in a fire, or its complete loss as in the case of
sinking of a vessel in the sea, cannot be regarded as having been brought
within the fold of definition of "transfer" in section 2(47), by reason of what
has been said and laid down in the case of Mrs. Grace Collis, [2001] 248 ITR
323 (SC).
21. It is well settled that the words and expression used in a judgment are not
to be read as statutory provisions. Situations which did not arise for
consideration and were, in fact, not considered are not to be regarded as
having been considered. It is significant that the argument advanced for the
Revenue before the court in the case of Mrs. Grace Collis, [2001] 248 ITR 323
(SC) was not that the case of Vania Silk Mills Pvt. Ltd., [1991] 191 ITR 647 (SC)
was wrongly decided. On the other hand, the argument before the court was
that though that decision on facts was correct, certain observations which
were not necessary for the case and which the Revenue considered to be
erroneous had been made, and were required to be overruled. The law laid
down in Vania Silk Mills Pvt. Ltd.'s case, [1991] 191 ITR 647 (SC), that
extinguishment of rights in a capital asset as a necessary consequence of
destruction of the asset does not amount to transfer, has not been overruled
by the apex court in the case of Mrs. Grace Collis, [2001] 248 ITR 323.
(emphasis added)
21) In CIT Versus. Pfizer Ltd. (supra) the Apex Court held that
receipt under insurance claim would be treated in the like manner as if
receipt arises on the sale of the asset. The Apex Court held in para-11 as
under :-
11. In the present case, the insurance claim, it must be clarified, related
to the stock-in-trade and it is only an insurance claim of that nature
which forms the subject-matter of the appeal. Now, it cannot be
disputed that if the stock in trade of the assessee were to be sold,
the income that was received from the sale of goods would constitute
the profits of the business as computed under the head of profits and
gains of business or profession. The income 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
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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 provisions of Section 45(1) of the Act.
23) Having realized that the insurance receipt cannot be taxed as
capital gain under Section 45 of the Act, the Assessing Officer has taken
recourse to the provisions of Section 41(1) of the Act for the purpose of
bringing the insurance receipt to tax. Sub-section (1) of Section 41 reads
thus :-
41. Profits chargeable to tax.
(1) Where an allowance or deduction has been made in the assessment for
any year in respect of loss, expenditure or trading liability incurred by the
assessee (hereinafter referred to as the first-mentioned person) and
subsequently during any previous year,--
(a) the first-mentioned person has obtained, whether in cash or in any
other manner whatsoever, any amount in respect of such loss or
expenditure or some benefit in respect of such trading liability by way
of remission or cessation thereof, the amount obtained by such person
or the value of benefit accruing to him shall be deemed to be profits
and gains of business or profession and accordingly chargeable to
income-tax as the income of that previous year, whether the business
or profession in respect of which the allowance or deduction has been
made is in existence in that year or not; or
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(b) the successor in business has obtained, whether in cash or in any
other manner whatsoever, any amount in respect of which loss or
expenditure was incurred by the first-mentioned person or some
benefit in respect of the trading liability referred to in clause (a) by
way of remission or cessation thereof, the amount obtained by the
successor in business or the value of benefit accruing to the successor
in business shall be deemed to be profits and gains of the business or
profession, and accordingly chargeable to income-tax as the income of
that previous year.
24) Section 41 provides for taxation of 'profits'. We have
already held that it is impermissible to shift the insurance receipt as a
part of 'capital asset' from the realm of Section 45 by treating it as
'profits' merely because the tax becomes leviable under Section 41. The
heading 'capital gains' governed by the provisions of Section 45 is
mutually exclusive from the heading 'profits and gains of business or
profession' governed by Section 41 of the Act. Following these principles,
it was impermissible for the Revenue to treat insurance receipts on loss
of horses 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
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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 horses and
thereafter secured insurance claim for death of the very same horses
and that therefore the case is clearly governed by Section 41 of the Act.
This submission on behalf of the Revenue appears to be totally
unfounded as no deduction is allowable under Section 36(1)(vi) of the
Act in respect of the two horses for which insurance claim is received.
The value of two horses, 'Certainty' and 'Gracian Flower' was
Rs.40,000/- and Rs.30,000/- respectively in the books, whereas the
Assessee received higher value towards insurance receipt (Rs.6,00,000/-
and Rs.1,00,000/- respectively). It is only in respect of the four horses
where no insurance claim was received, deduction would be allowable
under Section 36(1)(vi). In case of the two horses, 'Certainty' and
'Gracian Flower' for whom insurance claim is received, the capital cost
in the Books of Accounts got replaced by the amount claimed under
insurance claim and there was no question of seeking any deduction in
income under Section 36(1)(vi) of the Act. In our view therefore, the
insurance claim received towards death of the two horses could not be
charged to tax under Section 41(1) of the Act, even independent of the
principle of impermissibility to shift income of Assessee from one head
to another for the purpose of taxation.
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27) We are therefore of the view that the horses in respect of
which the insurance claim was received were Assessee's capital assets
and that therefore insurance receipt arising therefrom could only have
been considered as capital receipt, not chargeable to tax.
28) Also of relevance is the fact that the Legislature made a
provision by inserting sub-section (1A) to Section 45 to cover the
amount received under insurance claim on destruction of capital asset
to tax. Sub-section (1A) of Section 45 reads thus :-
45. Capital Gains
(1) ....
(1A) Notwithstanding anything contained in sub-section (1), where any
person receives at any time during any previous year any money or other
assets under an insurance from an insurer on account of damage to, or
destruction of, any capital asset, as a result of--
(i) flood, typhoon, hurricane, cyclone, earthquake or other convulsion
of nature; or
(ii) riot or civil disturbance; or
(iii) accidental fire or explosion; or
(iv) action by an enemy or action taken in combating an enemy
(whether 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
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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 introduction of the said amount.
30) Going further, it is seen that provisions of sub-section (1A) of
Section 45 apply only where the destruction occurs on account of one of
the four specified events. It is therefore highly doubtful whether
destruction of capital asset of livestock on account of death of the
animal would really be covered by the provisions of sub-section (1A) of
Section 45. However, since the said provision under Section 45(1A) was
not even available during the relevant Assessment Year, in our view, the
issue of applicability of the said provision in case of destruction of asset
of livestock on account of death of an animal is left open to be decided
in an appropriate case.
31) The questions of law in each of the Appeals are accordingly
answered in the negative.
32) Accordingly, the Appeals succeed and we proceed to pass
the following order:
(I) The orders passed by the Assessing Officer, CIT(A) and ITAT
are set aside to the extent of bringing to taxation the amount
of insurance claim received by the Assessee on account of
death of its horses.
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(II) The Revenue is directed to treat the entire amounts of
insurance claim received by the Assessee for death of horses
as capital receipt governed only by provisions of Section 45(1)
of the Act.
33) With the above directions, all the four Appeals are allowed
and disposed of.
[SANDEEP V. MARNE, J.] [CHIEF JUSTICE]
Digitally
signed by
NEETA
NEETA SHAILESH
SHAILESH SAWANT
SAWANT Date:
2025.07.09
19:05:05
+0530
9 July 2025
