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The Bombay High Court in the case of CIT v. Hade Navigation (P.) Ltd. (107TAX372) redefined the law laid down by the Supreme Court in the case of Vania Silk Mills v. CIT (191ITR647/59TAX3). In this case the assessee received compensation from the insurance company for the ship destroyed. Following the Supreme Court ruling the Court held that the extinguishment of right in the asset on account of the extinguishment of the asset itself is not a transfer of the right in the asset but its destruction. By no stretch of imagination can the destruction of the right on account of the destruction of the asset be equated with the extinguishment of right on account of transfer within the meaning of section 2(47) of the Act. The difference between the amount received by the assessee on the destruction of the asset and the cost thereof, therefore, would not be chargeable to tax under section 45 of the Act.


However, w.e.f. 1.4.2000 such sums accruing on account of any damage or natural calamity will now be chargeable as capital gains under the deeming provisions of section 45(1A) in the year in which such sum is actually received or at the fair market value of the asset replaced.

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