VANIA SILK MILLS (P) LTD. versus COMMISSIONER OF INCOME-TAX, AHMEDABAD

Citation: [1991] 3 S.C.R. 577 · Decided: 14-08-1991 · Supreme Court of India · Bench: K.N. SINGH · Disposal: Appeal(s) allowed

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Judgment (excerpt)

VANIA SILK MILLS (P) LTD. 
A 
v. 
COMMISSIONER OF INCOME-TAX, AHMEDABAD 
.L 
AUGUST 14, 1991 
[K.N. SINGH AND P.B. SAWANT, JJ.] 
B 
Income Tax Act, 1961: Ss. 2(47), 41(2), 45-Capital asset-
Destruction of-Money received as insurance claim-Nature of-
Whether chargeable to capital gains tax. 
The appellant company purchased machinery worth Rs.2,81,741 c 
in the year 1957 and gave it on hire to another company which insured 
the machinery. In the year 1966, a fire broke out in the lendee company 
causing extensive damage to the machinery of the appellant. On a settle-
ment of the insurance claim the lendee company paid to the appellant a 
snm of Rs.6,32,533 on account of the destruction of its machinery. The 
difference between the actual cost of the machinery and its written D 
down valne worked out to Rs.2,62, 781 which the appellant (the asses-
see) showed in its income tax return. for the relevant year as profit 
chargeable to tax under s. 41(2) of the Income-Tax Act. The Income-
Tax Officer subjected to tax also the additional amount of Rs.3,50,792 
the difference between the amount of insurance claim and· the original 
cost of the machinery-treating the same as capital gains chargeable E 
under section 45 of the Act, and rejected the case of the appellant 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 bys. 45 read withs. 2(47) of the.Act. 
The appeal of the assessee was dismissed by the Appellate F 
Assistant Commissioner, but its claim was accepted by the Income Tax 
Appellate Tribunal which held that the amount was not received on 
account of transfer of the capital asset but on account of damage to it 
and that s. 45 was attracted only when there was a transfer of the 
capital asset. 
G 
The reference at the instance of the revenue was answered by the 
"" 
High Court against t~e assessee. Aggrieved the assessee filed the appeal 
before this Court on a certificate granted by the High Court. 
On the question: whether the money received towards the insu-
ranee claim on account of the damage to or destruction of the capital 
H 
577 
A 
578 
SUPREME COURT REPORTS 
[1991] 3 S.C.R. 
asset was so received on account of the transfer of the asset within the 
meaning of s. 45 of the Act and was, therefore, chargeable to the capital 
gains tax under the said section, 
Allowing the appeal, this Court, 
B 
HELD: 1.1 The money received under the insurance policy is by 
c 
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. [584C-D I 
1.2 In the case of damage, partial or complete, or destruction 
or loss of property there is no transfer of it in favour of a third party. 
The fact that while paying for the to\al loss of or damage to the pro-
perty, the insurance company takes over such property or whatever is 
left of it, does not change the nature of the insurance claim which is 
D 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. The insurance 
claim is not the value of the damaged property. The claim is assessed on 
the basis of the damage sustained by the property or the amount neces-
sary to restore it to its original conditions. lt is not a consideration for 
E the damaged property. [584C, F-G] 
1.3 In the instant case, the amount received by the assessee was 
the one received by it as damages on account of the loss of its machi-
nery. The lendee company, as a bailee, bad insured the machinery hired 
from the assessee, since it was liable to make good the loss of the 
F 
machinery to the assessee. This was implied under a contract of bail-
ment unless it was provided to the contrary. The Iendee company paid 
the insurance amount pro rata to the assessee. [5870-G I 
1.4 The insurance was on reinstatement basis which meant that 
the property was to be restored to the condition in which it was, before 
G 
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

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