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In the case of CIT v. Needle Industries (India) Ltd.(108TAX524) the assessee is reimbursed for the loss of raw materials by the insurance company, destroyed in fire. Reversing the Madras Tribunal decision the High Court held that the fact that the assessee charged to the manufacturing account only the value of the raw materials actually consumed in the manufacture did not in any way alter the fact that the raw materials held by it were held for the purpose of business. The Court held that as the definition of capital assets u/s 2(14) excludes from its purview raw materials held for the purpose of business the money received from the insurance company was a trading receipt liable to tax to the extent of the excess of the value of the goods that were lost. The Court further reiterated the law that the manner in which the assessee treated the assets in its accounts is not of any materiality for the purpose of deciding as to whether any particular asset is capital asset or not u/s 2(14). Further the Kerala High court in the case of CIT v. Cochin Refineries Ltd. (109Tax313) held that the insurance company does not attract the provisions of section 41(2) in cases of reinstatement ab initio of assets. In this case the insurance company had requested the assessee to undertake the work and had entrusted the work to the assessee itself for rebuilding and/or repairing the assets on its behalf. The court held that in this case there was no question of payment of money at all as the liability to make payment to cover the loss sustained by the insured would cease on the exercise of the option rendering the contract one for reinstatement ab initio which would mean that the contract between the insurer and the insured would be deemed in law to have always been from the inception one for reinstatement only and not for payment of money.


However in computing admissible deductions u/s 80-I, IA and HH only net insurance income are to be excluded meaning. The HC in 36ITR12 directed to allow expenses after verifying the nexus with insurance receipt. In the contrary claim for deduction u/s 80HHC held admissible on insurance monies vide 330ITR62. Even insurance monies are considered as part of operation profits for international transfer pricing vide 315ITR (AT) 150.

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