THE COMMISSIONER INCOME TAX vs. M/S IMERIAL AUTO INDUSTRIES

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ITA/278/2004HC Punjab & HaryanaPHHC01051422200429 March 2012Bench: MR. JUSTICE M.M. KUMAR,MR. JUSTICE ALOK SINGH4 pages
AI SummaryDismissed

What did the High Court hold?

The High Court held that for issue 1, the destruction of an asset by fire does not amount to a 'transfer' as defined under Section 2(47) of the Income Tax Act, 1961. Relying on the Supreme Court judgments in Mary Bong & Kyel Tea Industries Ltd. and Vania Silk Mills (P) Ltd., the Tribunal correctly held that the loss incurred due to fire is a revenue loss in the normal course of business and is an allowable deduction under Section 37(1). The Court found no infirmity in the Tribunal's reasoning and answered the question against the revenue. For issue 2, the High Court noted that the CIT(A) and the Tribunal had concurrently found that the insurance policies were issued to the partnership firm, with the firm as the beneficiary, and were purchased to keep the business alive. Therefore, the expenditure was for the benefit of the business. As there were concurrent findings of fact in favour of the assessee, the Court found no reason to take a contrary view and answered the question in favour of the assessee.

What were the facts?

The appeal by the Commissioner of Income Tax, Faridabad, challenges the Income Tax Appellate Tribunal's (ITAT) order dated 14.8.2003 for the assessment year 1994-95. The assessee, M/s Imperial Auto Industries, claimed a loss of ₹1,90,278 due to a fire in its factory on 16.12.1993. The total loss was ₹7,49,544, with ₹5,59,226 received from the insurance company. The Assessing Officer (AO) disallowed the balance amount, which was upheld by the CIT. The ITAT allowed this as a revenue loss. Separately, the assessee paid ₹2,22,830 as premium on life insurance policies taken on the lives of its partners. The AO disallowed this, but the CIT(A) and ITAT allowed it as an expenditure for the benefit of the business.

What were the issues?

1. Whether the Hon'ble Income Tax Appellate Tribunal was right in allowing the loss on account of destruction of assets by treating the same as revenue loss after the change in the Income Tax Act, 1961, providing for adjustment of the loss against other assets of the block with effect from assessment year 1988-89. (Question of law) 2. Whether the Hon'ble Income Tax Appellate Tribunal was right in allowing insurance premium paid on the life of two partners of the firm before the introduction of change brought about by the Finance Act, 1961, allowing the amount of insurance money on maturity or on death of keyman becoming taxable in the hands of the recipient i.e., the firm in this case, which was effective from 1.10.1996. (Question of law) Assessee's contentions: For issue 1, the assessee argued that destruction of an asset by fire does not constitute a 'transfer' under Section 2(47) of the Income Tax Act, 1961. Therefore, the loss is a revenue loss and allowable under Section 37(1). For issue 2, the assessee argued that the insurance policies were taken for the benefit of the business to ensure its continuity, not for the benefit of the partners, and thus the premium paid is an allowable business expenditure. Revenue's contentions: The revenue contended that the loss on destruction of assets should be treated as a capital loss and adjusted against the block of assets as per the provisions effective from AY 1988-89. For issue 2, the revenue's disallowance was based on the AO's finding that it was not covered under Section 36(1) or 37 of the Act.

Which sections of the Income-tax Act were involved?

Section 2(47),Section 37(1),Section 36(1)

AI-generated summary — verify with the full judgment below

ITA No.278 of 2004 (O&M) -1- IN THE HIGH COURT OF PUNJAB AND HARYANA AT CHANDIGARH ITA No.278 of 2004 (O&M) Date of decision: 29.03.2012 The Commissioner of Income Tax, Faridabad ....Appellant Versus M/s Imperial Auto Industries, Faridabad ....Respondent CORAM: HON'BLE MR. JUSTICE M.M. KUMAR HON'BLE MR. JUSTICE ALOK SINGH Present: - Mr. Tejinder K. Joshi, Advocate, for the appellant-revenue. Mr. S.K. Mukhi, Advocate, for the respondent-revenue. 1.Whether to be referred to the Reporters or not? 2.Whether the judgment should be reported in the Digest? ***** ALOK SINGH, J. 1. Present appeal is filed against the judgment and order dated 14.8.2003 passed by ITAT (Delhi Bench CN DLI) in ITA No.1037/Del/1998 and ITA No.1038/Del/1998 for the assessment year 1994-95. 2. Present appeal was admitted on the following substantial questions of law: - “1. Whether the Hon'ble Income Tax Appellate Tribunal was right in allowing the loss on account of destruction of assets by treating the same as revenue loss after the change in the Income Tax Act, 1961 providing for adjustment of the loss against other assets of the block with effect from assessment year 1988-89. 2. Whether the Hon'ble Income Tax Appellate

ITA No.278 of 2004 (O&M) -2- Tribunal was right in allowing insurance premium paid on the life of two partners of the firm before the introduction of change brought about by the Finance Act, 1961 allowing the amount of insurance money on maturity or on death of keyman becoming taxable in the hands of the recipient i.e, the firm in this case which was effective from 1.10.1996.” Question No.1 3. Brief facts of the present case, inter alia, for the purpose of deciding question No.1, are that assessee is engaged in the manufacture and sale of automotive components; loss of ` 1,90,278/- on account of fire was claimed; due to short circuit, fire broke out in the factory premises of the assessee on 16.12.1993; assessee suffered a total loss of ` 7,49,544/-; assessee received a sum of ` 5,59,226/- from the insurance company and the balance amount was debited to profit and loss account; at the time of assessment, the A.O. disallowed the same, which was upheld by the CIT. 4. Learned Tribunal in the impugned order has held that any capital gain or capital loss arises only when there is a transfer of assets within the meaning of Section 2(47) of the Act; the definition of 'transfer' includes the sale exchange or relinquishment of the assets or the extinguishments of any rights therein; in the instant case there is no relinquishment of the assets as due to fire, the asset is lost which could be the extinguishments of the assets. Learned Tribunal, while relying on the judgments of Hon'ble the Supreme Court in the case of Mary Bong & Kyel Tea Industries Ltd., 91 Taxman 11 and in the case of Vania

ITA No.278 of 2004 (O&M) -3- Silk Mills (P) Ltd., 191 ITR 657, has held that where the asset is destroyed it will not amount to transfer of the assets. Therefore, claim received from the insurance company against the loss suffered by the assessee due to fire would be revenue loss incurred in the normal course of business and allowable deduction under Section 37(1) of the Act and cannot be treated as capital gain. 5. We do not find any infirmity in the observations made by learned Tribunal. The judgment of Hon'ble the Apex Court in the case of Vania (supra) has full application in the present case. Therefore, question No.1 stands answered against the revenue and in favour of the assessee. Question No.2 6. Brief facts of the present case, inter alia, for the purpose of deciding question No.2, are that premium of ` 2,22,830/- paid to the insurance company on the life policy taken on the lives of the partners was found not covered either under Section 36(1) or 37 of the Act by the Assessing Officer. However, learned Commissioner of Income Tax (Appeals) as well as learned Tribunal has found that policy has been issued to the partnership firm and the beneficiary is the firm. The policies have been purchased to keep the partnership business alive and not to be disturbed even if there is a death of any of the partners. Thus, the policies have been effected for the benefit of business and not for the benefit of the partners. Therefore, the expenditure incurred by the assessee on the insurance policy is allowable expenditure. 7. Since, Commissioner (Appeals) as well as learned Tribunal have recorded concurrent finding of fact in favour of the assessee, we do

ITA No.278 of 2004 (O&M) -4- not find any reason to take contrary view. Therefore, question No.2 also stands answered in favour of the assessee and against the revenue. 8. Appeal stands dismissed accordingly. (M.M. Kumar) Judge (Alok Singh) Judge March 29, 2012 R.S.

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