1976 Supreme(Guj) 177

IN THE HIGH COURT OF GUJARAT
B.J. Divan, P.D. Desai, JJ.
Commissioner of Income-Tax, Gujarat-II – Petitioner
Versus
Vania Silk Mills (P) Ltd. – Respondent
Income-Tax Reference No 122 of 1974
Decided On : 23-01-1976

The expression "the extinguishment of any rights therein" in section 2(47) of the Income-tax Act, 1961 covers every possible transaction which results in the destruction, annihilation, extinction, termination cessation or cancellation, by satisfaction or otherwise, of all or any of the bundle of rights-qualitative or quantitative-which the assessee has in a capital asset, whether such asset is corporeal or incorporeal.

Headnote:

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? Whether, on the facts and in the circumstances of the case, the sum of Rs. 3,50,792 being the excess over the cost of machinery received from Messrs. Jasmine Mills Pvt. Ltd. was chargeable to tax as capital gains under section 45 of the Act?

Fact of the Case:

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 Messrs. Jasmine Mills Pvt. Ltd., Bombay, at an annual rent of Rs. 33,900. On August 11,1966, fire broke out in the premises of Messrs. Jasmine Mills Pvt. Ltd. causing extensive damage to the machinery hired from the assessee and other machinery belonging to Messrs. Jasmine Mills Pvt. Ltd. The assesssee's machinery was damaged to such an extent that it could not any longer be put to use as such. It appears that Messrs. 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 assessment 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 section 41 (2) of the Act. The Income-tax Officer, 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 Messrs. Jasmine Mills Pvt.Ltd. and the original cost of Rs. 2,81,741 of the machinery in question as "capital gains" chargeable under section 45 of the Act. The assessee carried the matter in appeal before the Appellate Assistant Commissioner who upheld the decision of the Income tax Officer. 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 capital asset was effected within the meaning of section 45 read with section 2(47) of the Act but this contention was negatived by both the authorities. In further appeal before the income-tax Appellate 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 section 45, (ii) Messrs. 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 section 45, and (iii) unless the transfer of a capital asset is effected by an assessee, section 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.

Finding of the Court:

The Tribunal misdirected itself in law in holding that there was in this case no transfer of the capital asset by the assessee within the meaning of section 45 read with section 2(47) and that the sum of Rs. 3,50,792 was not chargeable to tax as capital gain in the hands of the assessee.

Issues: 1. 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? 2. Whether, on the facts and in the circumstances of the case, the sum of Rs. 3,50,792 being the excess over the cost of machinery received from Messrs. Jasmine Mills Pvt. Ltd. was chargeable to tax as capital gains under section 45 of the Act?

Ratio Decidendi: The legislature, in order to effectuate its intention, has deliberately chosen the language of widest amplitude by using the expression "the extinguishment of any rights therein" in section 2(47). It covers every possible transaction which results in the destruction, annihilation, extinction, termination cessation or cancellation, by satisfaction or otherwise, of all or any of the bundle of rights-qualitative or quantitative-which the assessee has in a capital asset, whether such asset is corporeal or incorporeal.

Final Decision: The first question referred to us in the negative, that is, in favour of the revenue and against the assessee, and the second question in the affirmative, that is, in favour of the revenue and against the assessee.