Case: Vania Silk Mills Private Limited Vs. Commissioner of Income Tax, Ahmedabad

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 assessees 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 August 31, 1966) showed the said amount as profit chargeable to tax under Section 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 Rs 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 Section 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 not transfer of capital asset as was contemplated by Section 45 read with Section 2(47) of the Act, was negatived by the Income Tax Officer2. 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 assessees 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 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 tribunal was justified in law in holding that there was no transfer of capital asset by the assessee within the meaning of Section 2(47) of the Act ?(ii) whether on the facts and in the circumstances of the case the sum of Rs 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 Section 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 assessee3. This appeal has been filed by the assessee on a certificate granted by the High Court

Reasoning: 11. It is true that the definition of "transfer" in Section 2(47) of the Act is inclusive, and therefore extends 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 right 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 right 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 ofThe 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 the right, that the right is extinguished when such monies are received by the shareholder. The consideration presumes quid pro quo and, therefore, transfer of the property or of the right in the property, whether the property is corporeal orWe 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 assessees machinery as bailees or as agents of the assessee. There is further no dispute that the insurance policy contained the reinstatement clause requiring the insurer to pay the cost of the machinery as no 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 destroyed 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 not18. For the reasons given above, the decision of the Allahabad High Court in CIT v. J.K. Cotton Spinning & Weaving Mills Co. Ltd. ( 1987 (164) ITR 18 : 1987 TaxLR 75) which proceeds on the same reasoning as the impugned judgment is also not a good law. Instead, we approve of the conclusion reached by the Madras High Court in C. Leo Machodo v. CIT ( 1988 (172) ITR 744 : 1988 Tax(LT) 1008 (Mad)) for the reasons given by us above