If any person receives any money or other assets under an insurance from an insurer on account of damage to or destruction of any capital asset as a result of
i) flood, typhoon, hurricane, cyclone, earthquake or other convulsion of nature or
ii) riot or civil disturbance or
iii) accidental fire or explosion or
iv) action by an enemy or action taken in combating an enemy (whether with or without a declaration of war)
then, the value of money and/ or the fair market value of assets received would be treated as full value of consideration and income under Capital Gains is calculated accordingly, for the previous year in which such money and/ or other asset was received.
Sub-section (1A) of section 45 has been inserted in the Act by the Finance Act, 1999 to over come the decision of the Supreme Court in the case of Vania Silk Mills (P.) Ltd. 191 ITR 647 and to provide that money received from an insurer will be chargeable to capital gain. Whether the aforesaid newly inserted provisions will be applicable to assets forming part of a block of assets on which depreciation is allowable.
The written down of the block of assets, as has been defined in sub-section (6) of section 43 of the Act, is required to be calculated by adding to the written down value as on the opening date of the previous year, the actual cost of the assets acquired during the year and by reducing the ‘moneys payable’ in respect of items sold, discarded, demolished or destroyed during the previous year. In view of above noted position, it is proposed that the scope of the provisions of sub-section (1A) of section 45 would be limited to assets which are not depreciable assets and do not form part of block of assets.
In the computation of written down value ‘money payable ’ in respect of an asset sold, discarded, demolished or destroyed is required to be reduced from the written down value of the block. The term ‘moneys payable’ has been defined in the Explanation below to sub-section (4) of section 41, which is also applicable to the provisions of section 43(6) of the Act, and the same includes any insurance, salvage or compensation monies payable in respect of an asset. In accordance with this definition of the term ‘money payable’, any compensation received from an insurer on destruction of an asset is required to be reduced from the computation of written down value of the block of assets and accordingly, depreciation will be allowable to the assessee on the reduced amount of written down value. Further, in cases where money received from an insurer exceeds the written down value of the block of assets, the excess amount would be chargeable as short-term capital gain as per the provisions of section 50 and in a case where money received from the insurer falls short of the written down value, the difference is allowable as depreciation under clause (iii) of section 32(1) of the Act.
In view of the above-mentioned provisions of the Act applicable to assets forming part of a block of assets, it is quite clear that there would be no implication of the provisions of sub-section (1A) of section 45 to depreciable assets.
It is a well-settled principle of legal interpretation that a special provision will supercede a general provision and therefore, when there are special provisions regarding treatment of moneys received from insurance claim in determination of written down value of the block of assets, it cannot be said that the provisions of sub section (1A) of section 45 will be applicable to such assets. Further, it is also a golden rule of interpretation that the Legislature is always supposed to be aware of the existing provisions and the new provisions inserted cannot be interpreted in such a manner, which makes the existing provisions redundant, and impractible. Hence, in case the applicability of the provisions of section 45(1A) is restricted to the non-depreciable assets, the existing provisions as well as the aforesaid provisions of sub-section (1A) can co-exist without any difficulty and both the provisions will have full effect. If it is considered that the provisions of sub-section (1A) of section 45 will be applicable to depreciable assets also and moneys received from the insurance claim will be chargeable to tax as capital gain, then what would be the amount which is to be reduced from the written down value of the block of assets and on what amount is depreciation to be calculated? How can effect be given to the existing provisions of sections 43(6), 41(4), Explanation and section 32(1)(iii) of the Act? What would be the cost of acquisition of the asset on which insurance claim has been received? Would it be the original cost, which has already been added to the written down value of the block of assets in an earlier year and might have been fully depreciated or adjusted? Therefore it would be impracticable to give effect simultaneously to the existing provisions and provisions of section 45(1A) and also to correctly calculate the written down value, depreciation allowable and capital gain chargeable. In case any attempt is made by the department to apply the new sub-section to depreciable assets, it will only lead to litigation.
As Per Section 45(1A), of the Income Tax Act, 1961-
45(1A). Capital gains.
Notwithstanding anything contained in sub-section (1), where any person receives at any time during any previous year any money or other assets under an insurance from an insurer on account of damage to, or destruction of, any capital asset, as a result of—
(i) Flood, typhoon, hurricane, cyclone, earthquake or other convulsion of nature; or
(ii) Riot or civil disturbance; or
(iii) Accidental fire or explosion; or
(iv) Action by an enemy or action taken in combating an enemy (whether with or without a declaration of war),
then, any profits or gains arising from receipt of such money or other assets shall be chargeable to income-tax under the head “Capital gains” and shall be deemed to be the income of such person of the previous year in which such money or other asset was received and for the purposes of section 48, value of any money or the fair market value of other assets on the date of such receipt shall be deemed to be the full value of the consideration received or accruing as a result of the transfer of such capital asset.
Explanation.—For the purposes of this sub-section, the expression “insurer” shall have the meaning assigned to it in clause (9) of section 2 of the Insurance Act, 1938 (4 of 1938).