vil Appeal No 1106 NT of 1976
From the Judgment and Order dated 22nd23rd January 1976 of the Gujarat High Court in Income Tax Ref
No 122 of 1974
Joseph Vellappilly KJ John and Ms Deepa Dikshit for the Appellant
SC Manchanda Ranvir Chandra and Ms A Subhashini for the Respondent
J The appellantCompany 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 Rs281741 and gave it on hire to Ms Jasmine Mills Pvt Ltd Bombay at an annual rent of Rs33900
On August 11 1966 a fire broke out in the premises of Ms 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
Ms Jasmine Mills had insured along with its own machinery the assessee s machinery as well and on a settlement of the insurance claim Ms Jasmine Mills received a certain amount out of which it paid a sum of Rs632533 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 Rs262781
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 Section 412 of the Income Tax Act hereinafter referred to as the Act The IncomeTax Officer however subjected to tax also the additional amount of Rs350792 being the difference be tween the amount of Rs632533 received on account of the insurance claim and the original cost of the machinery ie Rs281741 treating the same as capital gains chargeable under Section 45 of the Act
The contention ad vanced 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
582 of capital asset as was contemplated by Section 45 read with Section 247 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 conten tion of the appellant and dismissed the appeal
The asses see 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
Section 45 was attracted only when there was a trans fer of the capital asset
Being aggrieved the Revenue applied for reference of the case to the High Court on thefollowing two questions i whether on the facts and in the circum stances 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 Section 247 of the Act ii whether on the facts and in the circum stances of the case the sum of Rs350792 being the excess of the cost of the machinery received from Ms Jasmine Mills Pvt Ltd was chargeable to tax as Capital gains under Section 45 of the Act The High Court answered the first question in the negative and consequently the second question in the affirmative
ie both questions in favour of the Revenue and against the assessee
This appeal has been filed by the assessee on a certifi cate granted by the
High Court
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
 there fore chargeable to the capital gains tax under the said section
It would be convenient to reproduce here the provisions of Section 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 sections 53 and 54 be chargeable to income tax under the head capital gains  and shall 583 be deemed to be the income of the previous year in which the transfer took place
Emphasis supplied Section 247 of the Act which defined transfer at the relevant time read  as fol lows 2
Definitions In this Act unless the context otherwise requires     47 transfer  in relation to a capital asset includes the sale exchange or relin quishment of the asset or the extinguishment of any rights therein or the compulsory acqui sition thereof under any law
 A reading of the two sections makes it abundantly clear that the profits or gains which are amenable to Section 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 volun tary 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 pre condition
Unless the asset exists in fact there cannot be a transfer of it
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 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 disappear ance 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 extin guishment 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 for on account of the transfer of the right or rights in 584 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 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 provi sions of Section 45 which relate to
transfer and not1 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 trans fer of any right in it in favour of the insurance company
It is by virtue of the contract of insurance or of indemni ty 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 liabil ity 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 whatev er 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 whatever is left of it does not change the nature of the insurance claim which is indemnity or compen sation 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 consid eration for the damaged property
In the present case the insurance was on reinstatement
basis which meant that the 585 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 recov er on the basis of the increased value of the machinery refer to Halsbury s Laws of England Fourth edition Vol 25 under the heading insurance in para 654  6
It is true that the definition of transfer in Section 247 of the Act is inclusive and therefore ex tends 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 expres sions imply the existence of the asset and of the transfer ee according to the rule of noscitur a sociis the expres sion  extinguishment of any rights therein would take colour from the said associated words and expressions and will have to be restricted t6 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
The High Court as stated earlier read the expres sion extinguishment of any rights in the assets as any extinguishment of right whether it resulted in or was on account of transfer
For the reasons which we have discussed earlier we find 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 Commissioner of Income Tax vs RM Amin 586 Gujarat 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 asses seeshareholder in his share which was an incorporeal proper ty had come about on account of receipt by  him of the amount representing the value of the shares
The amount received by the assessee shareholder does not represent any consideration received by him as a result of the extinguishment of his rights in the shares
The share merely represents the right to receive money on distribution of the net assets of the company in liquidation and it is by satisfaction of that right that the right is extinguished when such monies are received by the shareholder
The con sideration presumes quid pro quo and therefore transfer of the property or
of the rights in the property whether the property is corporeal or incorporeal
When the assets themselves are being distributed it is correctto say that to the extent of distribution they are wiped out
It is in that sense that the assets do not exist to the extent that they are distributed
When the company s assets are thus distributed is a sense the assets which are converted into money and which therefore exist in the form of money are transferred from the liquidator to the share holder
His rights in the assets come to an end when he receives his liquidated share of the asset
In such a case the assets do exist though in the converted form viz cash and what is transferred is also the converted form of the asset
With respect thereforeit is not correct to say that in such cases the capital asset does not exist and does not change hand as capital asset
That the receipt of his share in the asset brings about automatically the extin guishment of the shareholder s rights in the asset cannot however be gainsaid
The decision of the Gujarat High Court in RM Amin s case supra was appealed against and this Court while approving  the ratio of the said decision fur ther explained the nature of the money received by a share holder on the  liquidation of a company
This Court reiter ating its earlier view in the case of Commissioner Of In come tax vs Madurai Mills Co Ltd  held that the act of the liquidator in distributing the assets of the company does not result in the creation of new rights
It merely recognises the legal rights which were in exist ence prior to the distribution
The shareholder receives money in recognition and satisfaction of his 587 right and not by operation of any transaction which amounts to sale exchange relinquishment of asset or extinguishment of any of his rights in such asset
So also when a partner retires from the partnership what he receives is his share in the partnership which is worked out and realised
It does not represent consideration received  by him as a result of the extinguishment of his interest in the partnership assets
He has no share in any particular asset of the firm
Therefore there is no trans fer of interest in any particular asset of the firm on account of the receipt of his share by a retired partner
As held in Commissioner of Income tax vs Mohanbhai Pamabhai no part of the amount received by the assessee as a retired partner is assessable to capi tal gains tax under Section 45 9
The High Court has explained these two decisions by giving
reasons which do not appeal to us
The COurt has tried to distinguish them from the facts of the present Case pointing out firstly t hat there was no foundation either in law or in fact to believe that the amount which the assessee received from Ms Jasmine Mills was paid to it in satisfaction or in working out of its right if any to recover damages under law or contract for the loss or dam age  caused  to the machinery
We do not see any difficulty in holding that it was an amount received by the assessee as damages on account of the loss of its machinery
It is difficult to describe it otherwise
The second reason given by the High Court is with respect equally fragile
It is held that the alleged right if any of the assessee t9 recover damages was not an absolute statutory right but one which was subject to a contract to the contrary and even if there was no such contract it was merely an inchoate or contingent right in respect of which some investigation or legal proceeding and settlement or adjudication would be necessary for its  satisfaction or fulfilment
We do not agree with this reasoning as well
The facts clearly show that Ms Jasmine Mills as a bailee had insured the machin ery hired from the assessee since it was liable to make good the loss of the machinery to the assessee
This is implied under a contract of bailment unless it is provided to the contrary
Ms jasmine Mills further admittedly paid the insurance amount pro rata to the assessee
In the cir cumstances we are unable to appreciate the distinction sought to be made by the High Court
We are also unable to see how it would make any difference to the point involved in the present case whether the Jasmine Mills had insured the assessee s machinery as bailees or as agents of the assessee
588 There is further no dispute that the insurance policy con tained the reinstatement clause requiring the in surer to pay the cost of the machinery as on the date of the fire
As we have pointed out earlier in an insurance policy with the reinstatement clause the insurer is bound to pay the cost of the insured property as on the date of the destruction or loss and it matters very little if the amount so paid by the insurance company is invested for purchasing the de stroyed asset or for any other purpose
In the circumstances for the purposes of answering the question in hand it was not necessary to inquire whether the amount received by the assessee was spent in replacement of the machinery or not
For the reasons given above the decision ofthe Allahabad High Court in Commissioner of Income tax vs JK Cotton Spinning Weaving Mills Co Ltd which proceeds on the same reasoning as the impugned judg ment is also not a good law
InStead we approve of the conclusion reached by the Madras High Court in C Leo Macho do vs Commissioner of Income tax for the reasons given by us above 12
In the result the  appeal succeeds and the impugned decision is set aside
In the circumstances of the case however there will be no order as to costs
RP Appeal al lowed


Summary:
The appellant was tried for an offence under section 165A of the Indian Penal Code for having abetted K an Inspector in charge of checking paddy in the commission of an offence by the latter under section 161 of the Code
The prosecution case was that while the complainant was taking paddy for sale K demanded Rs 200as bribe and threatened him that unless the money was paid the paddy would be seized that at the instance of K the complainant handed over the bribe money to the appellant for being counted and that the latter after checking the money paid it to K
The Special judge who tried the case accepted the prosecution story and convicted K under section 161 of the Indian Penal Code and the appellant for abetment of the offence
On appeal the High Court was of the opinion that the evidence was not strong enough to prove payment to K and set aside his conviction but confirmed that of the appellant on the ground that money was taken by him for payment to K as illegal gratification and whether he actually paid it to him or not the offence fell under section 165A Held that the conviction of the appellant for abetment under section 165A of the Indian Penal Code must under the circumstances be set aside
On the facts found the appellant received the money in the presence of and for and on behalf of K and if K was acquitted on the ground that no offence under section 161 was committed then no question of intentionally aiding by any act or omission the commission of the offence arose
Consequently the appellant s conviction for the offence of abetment wag not maintainable
Dalip Singh vs State of Punjab   distinguished