BUDGET 2011 - INCOME TAX PERSPECTIVE

Section /Schedule	Head	Amendment/New Provision	Effective date
Part III to Schedule I	Advance taxes & TDS u/s 192	Advance taxes for the FY 2011-12 and TDS u/s 192 from salary shall be made at the following rates: ·   In case of Individuals, HUF, AOP/BOI & Artificial juridical person: Slab of Income Rate of Income tax Upto Rs. 180,000# Nil Rs. 180,001 to Rs. 500,000@   10% RS. 500,001 to Rs. 800,000 20% Rs. 800,001 & above 30% Surcharge irrespective of the total income Nil # In case of individual being woman resident in India and below the age of 60 years at any time during the PY, the basis exemption limit is Rs. 190,000. #In case of individual, being resident in India, who is age of 60 years [Senior Citizen Age Criteria Reduced from 65 Years to 60 Years] or more  but less than 80 Years at any time during the PY, the basic exemption limit is Rs. 2,50,000. @ In case of individual, being resident in India, who is age of 80 years or more at any time during the PY, the basic exemption limit is Rs. 5,00,000. In case of Partnership firms [Including LLP], the rate of tax shall be 30%. Surcharge shall be NIL. In case of companies, the rate of taxes shall be same as specified in the Finance Act 2010. Further, Surcharge has been reduced to 5% in case of domestic companies [and reduced to 2% in case of non domestic companies continues], if total income of the company exceeds Rs. One crore. Education cess and SHEC shall be continued to be levied in all cases.	1-4-2011
2(15)	Definition of Charitable purpose	The term ‘Charitable Purpose” has been amended as follows: “advancement of any other object of general public utility” included in definition is not a charitable purpose if the activity involves carrying of trade, commerce or business or rendering any service in relation thereto for consideration irrespective of nature of use or application, or retention of income from such activity. However, if total receipts from aforesaid activity do not exceed Rs. 25 Lakhs [Earlier Rs. 10 Lakhs] in the PY, the said activity shall continue to be charitable in nature.	1-4-2011
10(45)	Exemption from Perquisities	Notified Special Allowances and Perquisites received by Serving or retired chairman and members of the Union Public Service Commission	Retrospective 1-4-07
10(47), 115A and 194LB	Exemption of Infra Debt Fund	Income of Notified Infrastructure Debt Funds shall be Exempt from tax subject to following Conditions: # It shall file its Return of Income. # Interest received by Non Resident shall be taxed u/s 115A @ 5% of Gross Amount #TDS shall be made u/s 194LB @ 5% on interest paid to non resident.	1-6-2011
35(2AA)	Contribution to approved institutions for scientific research	Deduction eligibility has been increased from 175% to 200%	1-4-2011
35AD	Investment linked deduction	100% deduction shall be allowed in respect of any capital expenditure [other than on land, goodwill or financial instrument] incurred for the purposes of specified business: The list of specified business has been extended to include : Production of Fertilizer in India Developing and Building Affordable Housing Project under notified schemes. Loss from business of Hotels & hospitals specified u/s 35AD shall be allowed to be set off u/s 73A against profit of another specified business whether or not claiming deduction u/s 35AD.	1-4-2011
36	Deduction  of Contribution to NPS	Contribution not exceeding 10% of salary of employee made to NPS by Employer on account of Employee allowed as deduction	1-4-2011
80CCE	Deduction above Rs. 1 Lakh	Contribution made by Central Government or Employer to pension scheme specified u/s 80CCD shall be excluded from the limit of Rs. 1,00,000/- specified for 80C, 80CCC and 80CCD	1-4-2011
80CCF	Deduction in respect of investment in LT Infra Bonds	Deduction is allowed to Individual & HUF only in respect of investment in notified long term infrastructure bonds to the extent of Rs. 20,000/-. This deduction is over and above the limit of Rs. 1,00,000/- specified u/s 80CCE. Deduction Extended for further period of One Year.	1-4-2011
80IA(4)	Deduction for Power Generating Units	Terminal date for setting up of generation or distribution of power or transmission or distribution thereof or undertaking substantial renovation or modernization of existing network has been extended to 31.3.2012	1-4-2011
115BBD	Rate of Tax for Dividend	Dividend received by Indian Company from its Foreign Subsdiary Company shall be taxable @ 15% of Gross Amount without allowing any deduction in respect thereof	1-4-2011
115JB	MAT	-         Rate of MAT is increase to 18.5% of Book Profits. MAT to be made applicable to developer of SEZ and Units in SEZs  in the Income Tax Act as well as SEZ Act	1-4-2011
115O	Dividend Distribution Tax	Exemption from DDT to SEZ Developers and Units in SEZ has been removed	1-6-2011
115R(2)	Tax on Distribution by MF	Mutual Fund shall be liable to pay additional income tax @ 30% on distributed income [from Money Market Mutual Funs or Liquid Fund or any debt fund] , if recipient is any person other than individual or HUF.	1-6-2011
139(1C)	Filing of Return of Income	Salaried persons not having any other source of income and whose tax liability has been discharged by way of TDS u/s 192, are not required to file their return of income.	1-6-2011
XII BA	AMT	-         Alternate Minimum Tax [AMT] @ 18.5% to be levied on Adjusted Total Income of LLP. -         Adjusted Total Income shall be Total Income of the LLP before giving effect to provisions of Chapter XII BA and Deduction u/c VI-A - deduction relating to incomes and deduction u/s 10AA. -         Tax credit shall be allowed in respect of AMT Paid for a period of 10 Years.	1-4-2011

INCOME TAX BUDGET 2011 HIGHLIGHTS

The budget  2011 proposed following changes in relation to Income Tax:

1. The age for the purposes of recognizing senior citizen under the Act has been reduced to 60 Years from 65 Years.

2. The Basic Exemption Limit has been raised as follows:

For Senior Citizens (=> 80 Years): rs. 5,00,000

For Senior Citizens (=>60 < 80 Years) - Rs. 2,50,000

For Woman Assessees: Rs. 1,90,000

For others: Rs. 1,80,000

Slab rates remain unchanged

3. Surcharge on Domestic Companies reduced to 5% and Other Companies to 2%

4. The limit for regarding a receipt from trade, commerce or business as non charitable has been raised from Rs. 10 Lakhs to Rs. 25 Lakhs [From Ay 2012-13].

5.Weighted Deduction for Approved Scientific Research U/s 35 (2AA) has been raised from 175% to 200% [from AY 2012-13]

6. DDT to be applicable to SEZ Units w.e.f. 1.6.11

7. MAT to be applicable to SEZ Units w.e.f. AY 2012-13

8. Exemption to Power Sector u/s 80IA(4) extended till 31.3.2012.

9. MAT Increased to 18.5%. Alternate Minimum Tax @ 18.5% levied on LLP.

10. Salaried Class not having any other source of Income are not required to file their return of income w.e.f 1.6.11 subject to provision of s. 139(1C)

Rejection of Claim U/s 197 - Whether Order appealable u/s 264?

Income tax - TDS - Does rejection of application u/s 197 amount to an 'Order' maintainable u/s 264? - YES, rejection does not lie in absolute discretion of AO - reasons must be indicated: Bombay HC THE issue before the High Court is that whether rejection of an application u/s 197 for lower TDS rate or no TDS certificate amounts to an 'order'. Whether such an 'order' as per Sec 264 is maintainable. And the answer to the first question is that the rejection of an application u/s 197 does amount to an 'Order' u/s 264, and the same is maintainable for revisionary proceedings. Facts of the case Petitioner is a consortium consisting of an Indian company and a Malaysian company - awarded a contract for the design, development, construction, commissioning, operation and maintenance of the Mumbai Monorail Project by MMRDA - petitioner is assessable as an AOP - files an application u/s 197, requesting the Revenue to deduct tax at the rate of 0.11% from the payments made to it under the contract - AO rejects the application on two grounds (i) The calculation mechanism provided in Rule 28AA fails as figures for three previous years are unavailable; and (ii) No eTDS returns were filed by the assessee The Petitioner moves the Commissioner of Income Tax (TDS), in revision under Section 264 - the Commissioner rejected the Revision Application holding that where the AO rejects an application under Section 197, no approval of the Commissioner is necessary. The Commissioner cites two reasons for the rejection. Firstly, if the benefit of a lower rate for withholding tax is not granted under Section 197 to the assessee, no hardship or prejudice would be caused to the assessee as a result of the rejection of the application because, the assessee would be entitled to get a refund of excess tax paid, if any, together with interest. The second reason is that when the Assessing Officer rejects an application under Section 197, he does not pass an ‘order’ as envisaged in Section 264 and consequently, a revision under Section 264 is not maintainable. Having heard the parties the High Court has held that, ++ it would be far fetched to accept the view that the rejection of an application must lie in the absolute discretion of the Assessing Officer or that the Assessing Officer is not bound to indicate reasons or a basis for the rejection of the application. The fact that Parliament has empowered the Board to frame Rules under subsection 2A, having due regard to the convenience of assessees and the interests of the Revenue specifying the cases and circumstances under which an application can be made and the conditions subject to which such a certificate may be granted is sufficient to indicate that the exercise of powers by the Assessing Officer is intended to be structured in accordance with the provisions of Section 197 and the Rules framed by the Board under subsection 2A. ++ The Assessing Officer cannot be heard to urge that though an assessee fulfills all the requirements which are stipulated in Rule 28AA or, as the case may be, in Rule 29B, he possesses an unguided discretion to reject the application; ++ the Assessing Officer when he rejects an application is bound to furnish reasons which would demonstrate an application of mind by him to the circumstances which are mandated both by the Statute and by the Rules to be taken into consideration; ++ the expression “order” for the purposes of Section 264 has a wide connotation. Subsection (1) of Section 264 provides that in the case of any order other than an order to which Section 263 applies, passed by an authority subordinate to him, the Commissioner may either of his own motion or on application by the assessee for revision, call for the record of any proceeding under the Act in which any such order has been passed and after making an enquiry, pass such order thereon not being an order prejudicial to the assessee as he thinks fit. Parliament has used the expression “any order”; ++ hence, any order passed by an authority subordinate to the Commissioner, other than an order to which Section 263 applies, is subject to the revisional jurisdiction under Section 264. A determination on an application under Section 197 requires an order to be passed by the Assessing Officer after application of mind. The Commissioner was, therefore, manifestly in error when he held that there was no order which would be subject to his revisional jurisdiction under Section 264; ++ The Assessing Officer in the present case, was in error in coming to the conclusion that the mechanism that is contemplated under Rule 28AA would break down in the case of the assessee on the ground that the financial statements of the assessee in the previous three years were not available. In this case, sub clause (ii) would not apply and the rate would be computed under subclause (i); ++ The failure of the assessee, if any, to file eTDS returns may result in independent consequences which are provided in law. That however, cannot justify the rejection of the application made by the assessee for the determination of withholding of tax at a lower rate on payments which are to be received by the assessee. ++ The Commissioner has rejected the application of the assessee on the ground that a revision was not maintainable under Section 264. The Commissioner also observed that in the event that the assessee has paid excess tax, it would be entitled to a refund of the tax paid together with interest and hence, no prejudice would be caused to the assessee. The entire approach of the Commissioner is, with respect, specious; ++ The Assessing Officer was required, in the first instance, to apply his mind to the fact that the conditions for the grant of a certificate under Section 197 are duly fulfilled. If those conditions are duly fulfilled, it would be impermissible for the Assessing Officer to reject the application merely on a whim and on caprice and for the Commissioner to hold that no prejudice would be caused to the assessee since tax would be refunded later together with interest. The application filed by the assessee has been rejected in a rather cavalier manner and without application of mind; ++ the Revision Application is restored to the CIT for a fresh determination.

Depreciation - a interesting facet

Depreciation – a non cash expenditure allowed under Income Tax Act, 1961 following block concept. Under the block concept, all the assets falling within the same class and subject to same rate of depreciation are clubbed together and considered as single asset. Any alterations to the value of the block have to be strictly in accordance with the provisions of Chapter IV D of Income Tax Act, 1961.

As per section 32 of Income Tax Act, 1961, a assessee is entitled to claim depreciation on fixed assets only if the following conditions are satisfied:

1. Assessee must be owner of the asset – registered owner need not be necessary.

2. The asset must be used for the purposes of business or profession.

3. The asset must be used during the previous year.

The use of the asset during the previous year may be active use or passive [ie., kept ready for use]. I shall elaborate this topic at later part of this article.

As per the provisions of section 43(6) of the Income Tax Act, the WDV of block of assets as at start of the year has to be adjusted as follows so as to arrive at closing WDV:

• It has to be increased by actual cost [as per section 43(1)] of any asset falling within in the block acquired during the previous year.

• Thereafter, It shall be reduced by ‘moneys payable’ in respect of asset sold/discarded/demolished or destroyed during the previous year.

It has been held in Ashok Betelnut Case [mad.] that moneys payable represents gross sale consideration where as the contrary has been held in the case of Essar Shipping Limited case.

No deletion is permitted from the value of the block except when the asset is sold, discarded, demolished or destroyed. e.g., in case of theft of an asset, no deletion is permitted from the block of asset since the asset is neither sold nor demolished nor destroyed nor discarded.

• Further, scrap value, if any of any asset has to be reduced.

The question of deduction of scrap value from the block arises only when the asset is not sold.

Now lets analyse a interesting concept arising in relation to claiming of depreciation. In earlier part of this article, I have laid down the essential for claiming depreciation. One of the requirements was that asset must be used during the previous year. For the purposes of Income Tax Act, a previous year is a distinct unit. In case an asset is discarded by the business but not sold, section 43(6) permits the scrap value of the asset to be reduced from the block in the previous year in which such asset is discarded. The assessee is entitled to claim depreciation on the residual value of such discarded asset [ie., Opening WDV of such asset less scrap value] even though such discarded asset is not used for the purposes of business or profession in such year and subsequent years.

In case of CIT v. Yamaha Motor India Private Limited (2009) 226 CTR (Del) 304, the assessee claimed depreciation on discarded assets which were written off during the previous year. The AO disallowed the claim on the ground that the assets were not used for the purposes of business during the previous year. It was held that that the term ‘used’ appearing in section 32(1) comprise of both active use and passive use. Further, the expression ‘used for the purposes of business’ used in section 32(1) has to be read harmoniously with the term “discarded” meaning thereby that the assessee is entitled to claim depreciation as far as discarded asset is concerned if the asset has been used for the purposes of business in earlier years. Adopting a realistic approach and harmonious construction, the expression ‘used for the purposes of business’ appearing in section 32 when used in respect of discarded asset would mean that the use in the business need not necessarily be in the relevant previous year but in earlier previous years. Any other interpretation would lead to an incongruous situation because on the one hand the depreciation is allowed on discarded asset after allowing inter alia adjustment for scrap value, yet, on the other hand use would be required of the discarded machinery which use is not possible.

To conclude, the decision of the delhi high court is logical considering the existing provisions of the Act as regards allowability of depreciation on discarded asset. Either the Act must permit the residual value of the discarded asset to be written off completely in the year in which the asset is discarded or the interpretation adopted in the aforesaid judgement has to be accepted.

Concept of Deemed Dividend

Deeming fiction – a fiction resorted to by parliament for defying the law of literal interpretation. Whether it be Central Excise Act, 1944 [concept of deemed manufacture u/s 2(f)(iii)] or Income Tax Act, 1961 [concept of deemed dividend u/s 2(22)(e)], the weapon of deemed concept is adopted either for plugging the loopholes in the Act, or to depart from the natural and ordinary meaning of a so called ‘revenue yielding’ term used in the Act so that the government is not deprived of the revenue from any alluring activity which cannot be other wise brought into the tax net in ordinary sense.

Everything said and done, whenever the law infuses the deemed concept in any provision of law, the same shall be subject to rule of strict construction.

Section 2(22)(e) is one such deeming provision which covers within its ambit the receipt of certain securities or money from a closely held company under certain situation and subject to fulfilment of certain conditions and subject to certain exceptions.

As per clause (e) of section 2(22), any payment made by a closely held company by way of loans or advance shall be deemed to be dividend taxable u/s 56 provided the following conditions are satisfied:

• Payment is made to a shareholder having substantial interest [i.e., holding >10%] of voting power in the company and is beneficial holder of equity shares; and/or

• Payment is made to a concern in which aforesaid substantial shareholder is a member or partner and in which he has substantial interest [i.e., holding or owning >20%]; and/or

• Payment is made on behalf of or for the individual benefit of such substantial shareholder; and

• The company must possess accumulated profits.

The exceptions to the same is discussed in later part of this article.

Now, lets discuss some intricate queries arising out of the aforesaid definition.

Q 1. What kinds of advances are covered within the scope of section 2(22)(e)?

It has been held by Rajasthan High Court in re CIT v. Raj Kumar (2009) 23 DTR (Del) 304 that the word ‘advance’ has to be read in conjunction with the word ‘loan’ i.e., a payment shall be construed as a loan or advance if it involves following attributes–

• Positive act of lending coupled with acceptance by the other side of the money as a loan;

• Generally carries interest

• Obligation of repayment is inherent.

Considering the rule of construction viz., noscitur a sociis and keeping in view the intent of introducing the provisions [i.e., to plug the evasion of tax by payment of dividends in the guise of loans & advances to the principal shareholders], any advance which does not carry with it the obligation of repayment cannot fall within the four corners of the deeming provision. Consequently, trade advances made in then ordinary course of business that are adjusted against supply of goods/services do not fall within the ambit of section 2(22)(e).

Q 2. In whose hands will the payment deemed to be dividend if the loans or advances are made to concern or person on behalf of or for the benefit of substantial shareholder?

It is general principle that a payment can be taxed as dividend only in the hands of a shareholder. The same cannot be taxed as such in the hands of a non shareholder. This view has been reiterated by Rajasthan High Court in re CIT v. Hotel Hilltop (2008) 217 CTR (Raj.) 527 wherein it was held that the essential requirement of section 2(22)(e) is that payment should be made on behalf of or for the individual benefit of substantial shareholder. Thus, the provision is intended to attract the liability of tax on the person on whose behalf or for whose benefit the amount is paid by the company.

In re CIT v. Bhaumik Colour P. Ltd (2009), the special bench of Mumbai tribunal held that the inclusive definition of section 2(22)(e) enlarges the scope of the term dividend by including loans & advances. The legal fiction created by the said section is operative only so long as the deemed dividend is taxed in the hands of the shareholder. If the legal fiction is extended to loans & advance to a non shareholder, the very term ‘dividend’ will lose its identity.

One of the exceptions to section 2(22)(e) is that dividend shall not include any dividend paid by the company which is set off by the company against the whole or any part of the sum previously paid by it and treated as dividend within the meaning of sub clause (e) to the extent it is so set off.

In the event of the payment of loan or advance by a company to a concern being treated as dividend and taxed in the hands of the concern then the benefit of set off cannot be allowed to the concern, because the concern can never receive dividend from the company which is only paid to the shareholder, who has substantial interest in the concern. The above provision, further, contemplate that deemed dividend be taxed in the hands of shareholder only.

Q 3. One of the exceptions to section 2(22)(e) is that dividend shall not include any loans or advance made to a shareholder or the said concern by the company in the ordinary course of its business, where lending money is substantial part of the business of the company. Elaborate?

The term ‘substantial’ appearing in the aforesaid exception is not defined. But the same is defined in explanation 3(b) to section 2(22)(e) as not less than 20% of the income of such concern. Following the judgement of supreme court in CIT v. Venkateshwara Hatcheries (237 ITR 174) wherein it was held that the definition in one section can be used for understanding the meaning of the word in another section if the context justifies it, it can be concluded the definition of term ‘substantial’ used in the aforesaid section means 20% or more of the income of a concern.

Thus, if the income from money lending is 20% or more of the total income of the closely held company and the turnover of the loan funds to total funds of the company is above 20%, any loans or advance made by the said company to its principal shareholder cannot be deemed to be dividend. The same was upheld by Delhi Tribunal in Mrs. Rekha Modi v. ITO (2007) (13 SOT 512) and the same was not further challenged by the revenue.

Further, in deciding whether the company is engaged in money lending business, factual position only for the relevant previous year in question has to be considered i.e., the year in which the loan or advance has been given to principal shareholder holding 10% or more of voting power. The same has been upheld in the aforesaid judgement of the tribunal.

SECTION 43(6) V. SECTION 45(1A)

Taxability of a receipt is governed by section 2(24) of the Income Tax Act (hereinafter referred to as “Act”) which define the term “Income”. In ordinary parlance, the term income connotes a receipt arising regularly or with some sort of expected regularity. It is well accepted principle that a capital receipt shall not come under the net of Income tax unless otherwise specifically provided in the Act. Section 45 of the Income Tax Act is an enabling provision which enables taxation of capital gains. If a capital receipt fails to satisfy the conditions of section 45 r. w. 48 [held in re B C Srinivas shetty] of the Act, the same cannot be subject to taxation.

I shall try to focus the provisions of section 45(1A) which was enacted to nullify the judgement of Supreme Court in Re Vania Silk Mills Private Limited [1991]. As per the provisions of section 45, a capital receipt shall be subject to taxation only if the same has arisen pursuant of “transfer” of a capital asset. The term ‘Transfer’ has been defined in a inclusive manner in section 2(47) which, inter alia, includes extinguishment of rights in an asset. In the case mentioned supra, the Supreme Court held that capital gains arising on destruction of asset shall not be subject to taxation since the destruction of asset does not amount to transfer.

To nullify the aforesaid judgement, sub section (1A) of section 45 was introduced which provided for the taxation of capital gains arising pursuant to receipt of insurance compensation subject to satisfaction of following two conditions:

1. Compensation is received because of ‘damage’ to or ‘destruction’ of any capital asset.

2. the damage or destruction is a result of four categories of circumstances:

a. flood, typhoon, hurricane cyclone, earthquake or any other convulsion of nature; or

b. riot or civil disturbance; or

c. accidental fire explosion; or

d. action by an enemy or action taken in combating an enemy.

The insurance compensation received shall be treated as a capital receipt and, consequently, shall not be subject to taxation if aforesaid conditions are not satisfied, e.g., theft of a machinery or destruction of machinery on account of road accident. In case of theft of machinery, there is no damage or destruction of property and, therefore, the first condition mentioned supra itself fails. Further, in order to hold a transaction as ‘transfer’, there must be indentified transferor and transferee which is not possible in case of theft.

In case of road accident, though the asset is destroyed, the reason for destruction being other than those mentioned in condition two supra. The compensation received, in these cases, will, therefore, have to be dealt with as per the judgement in re vania silk mill case.

The objective of this article is to demonstrate the impact of following cases in determining WDV of block of assets.

CASE 1: DAMAGE TO AN ASSET – INSURANCE COMPENSATION RECEIVED:

In case of any expenditure incurred to restore the asset to its working condition, the normally accepted principle is that the expenditure is revenue in nature since it does not increase the performance of the asset beyond the previously assessed standard of performance. If any insurance money is received as a re imbursement for such expenditure incurred, the normal accounting practice followed by many is to reduce the expenditure incurred by the amount so received and to debit/credit the profit/loss account with the balance.

What should have been the treatment of such compensation received for the purposes of Income Tax Act?

Damage to an asset may tantamount to extinguishment of rights [in part] in the asset thereby resulting in transfer as contemplated in section 45(1A). But, how shall the cost of the asset transferred be arrived at u/s 48 especially when the asset is restored to working condition after carrying out necessary current repairs. It is judicially accepted [e.g., in re B C Srinivas Shetty case (SC)] that provisions of section 45 has to be read with section 48 and if the latter fails for any reason, the charging section itself fails. The Assessing officer is not allowed to make conjectures or surmises for the purposes of arriving at the cost of the asset transferred. The taxability of such receipt is a ‘?’ requiring solution.

As far as depreciable asset is concerned, the taxability of the same has to be arrived based on the provisions of section 50 r. w. section 43(6). If the insurance compensation so received exceeds the WDV of the block of the said asset, section 50 shall come into motion resulting in short term capital gain. If the compensation is less than the WDV of the block, it is undisputed that the compensation so received is a capital receipt not subject to taxation.

The next question that arises is whether the said insurance money so received can be reduced from the block of assets. The answer is ‘No’. Section 43(6) enables deletion of value from the block only if the asset, whether in whole or in part, is ‘sold or discarded or demolished or destroyed’. It is not applicable where the assets are merely damaged and by repairing the damage is restored to working condition. Thus, the insurance money is not taken in consideration while computing the WDV of block irrespective of fact whether any expenditure is incurred for restoration or the expenditure so incurred exceeds the insurance money.

Now what shall happen to the expenditure incurred? As discussed supra, the said expenditure is revenue in nature. In my opinion, the assessee can claim the same as deduction although the same would amount availment of double benefit by the assessee.

One can always argue the possibility of section 41 being attracted in case of insurance money received to recompense the expenditure incurred on restoration of machinery.

CASE 2: THEFT OF PROPERTY – COMPENSATION RECEIVED:

In case of theft of property, there is no question of destruction of asset involved as it is known that asset is in existence though not in the possession of the assessee. Hence, section 45(1A) fails. If the judgement of vania silk mills is applied, the insurance compensation so received shall be treated as capital receipt not subject to taxation.

In case of depreciable assets, no deletion is required to be made from the block of assets since theft do not fit under any of the situation contemplated in section 43(6), i.e., neither the asset is sold nor discarded nor demolished nor destroyed. The assessee is allowed to claim depreciation on the block provided the block do not cease to exist on happening of theft – else the provision of section 50 shall come into operation.

A question may, however, loiter in mind that doesn’t theft results in extinguishment of rights of the assessee in the said asset? If yes, the provision of section 45 would apply. Next question that arises is that if the compensation is not received in the same previous year in which theft has taken place, how will the computation of capital gains for the purposes of section 45 be made in the assessment for said previous year?

Disregarding these anomalies, the assessee can move forward to claim the benefit of judgement made in vania silks mill case because the provisions of section 45(1A) failed to nullify the said judgement in its entirety.

CASE 3: DESTRUCTION OF A ASSET IN ROAD ACCIDENT:

In case of destruction of asset in a road accident, the provisions of section 45(1A) shall not apply since the destruction took place in circumstances other than those mentioned in condition 2 mentioned supra. Applying the rationale of the judgement of vania silks mill case, the aforesaid receipt shall be treated as capital receipt not subject to taxation.

If the asset so destroyed is a depreciable asset, then the insurance money so received shall be reduced from the WDV of the block of the assets since the conditions mentioned in the provisions of section 43(6) are satisfied. However, if the insurance compensation exceeds the WDV of the block, then the excess shall not be subject to taxation. Similarly, if the block ceases to exist pursuant to such destruction, the excess compensation shall not be subject to taxation u/s 50 r.w. section 45(1A) for reasons mentioned supra. In this case also, the anomalies enumerated above shall arise.

The aforesaid interpretation/treatment/opinion is arrived at based on my knowledge and understanding of law and judicial pronouncements. I welcome the comments of readers on the aforesaid issue.