The definition of "transfer" in Section 2(47) of the Income-tax Act, 1961 includes the extinguishment of any rights in a capital asset.

( 1 ) THE Income-tax Appellate Tribunal, Allahabad Bench, Allahabad, has under Section 256 (1) of the Income-tax Act, 1961 (hereinafter referred to as "the Act"), referred the following question to this court by means of its order dated September 21, 1976 :

"whether, on the facts and in the circumstances of the case, the compensation received by the assessee in a sum of Rs. 5,55,850 could be assessed as capital gains under Section 45 (1) of the income-tax Act, 1961?"

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( 2 ) THE assessee-company runs a cotton spinning and weaving mill and a rayon mill. There was a fire in the spinning department of the cotton mill on November 28/29, 1962. It follows the calendar year as its year for accounting. The assessee received a sum of Rs. 9,13,678 as compensation from the insurance company. According to the assessee, out of this sum, it received Rs. 7,26,976 in the previous year (assessment year 1964-65) and the balance amount of rs. 1,86,702 in the following year. The Income-tax Officer did not accept the assessees contentions and held that since the major part of the claim had been received during the previous year relevant to the assessment year 1964-65 and as the assessee follows the mercantile system of accounting, the entire amount receivable had become due in that year and was liable to be included in the income of that year. He further held that the excess realisation after considering depreciation was "capital gains" and not capital receipt as the assessee had received compensation money for the assets destroyed. He, therefore, brought to tax Rs. 2,35,683 as profit under Section 41 (2) of the Act and the balance amount of Rs. 6,77,995 as capital gains under section 45 of the Act. In the present reference, we are only concerned with the question of capital gains under Section 45 (1) of the Act. The Appellate Assistant Commissioner held that the compensation received for the assets destroyed by fire was not chargeable under the head "capital gains ".

( 3 ) THE Revenue filed an appeal against this order before the Appellate Tribunal. There was some dispute in respect of the actual amount but the amount which was finally settled before the tribunal was Rs. 5,55,850. The appellate court held that the view taken by the Appellate assistant Commissioner was absolutely correct and the destruction by fire was not covered by the definition of "transfer" given under Section 2 (47) of the Act. It further held that the word "transfer" in its ordinary and plain meaning postulated a bilateral act, that is, a voluntary act between two or more parties. The definition uses the words sale, exchange or relin-quishment of the rights therein or the compulsory acquisition thereof. It held, therefore, that the destruction by fire could not be covered by the expression "extinguishment of any right" in a capital asset. It further held that capital gains would not arise when a party acquires an actionable claim or when an actionable claim is satisfied. According to the Tribunal, in the receipt of compensation for an actionable claim which comes into existence because of destruction by fire, the transaction does not amount to an exchange. The Revenue being aggrieved against the said order, made an application under Section 256 (1) of the Act and the Appellate Tribunal by its order dated september 21, 1976, referred the aforesaid question of law to this court.

( 4 ) THE contention raised by learned standing counsel, Sri Markandey Katju, for the Revenue was that by virtue of the definition of the word "transfer" under Section 2 (47) of the Act, the case of the assessee would be covered by it. Section 2 (47) of the Act is quoted below :

"2. (47) transfer in relation to a capital asset, includs the sale, exchange or relinquishment of the asset or the extinguishment of any rights therein or the compulsory acquisition thereof under any law. "

( 5 ) HE urged that by virtue of this definition, the extinguishment of any right is included as amounting to