C. Leo Machodo vs Commissioner of Income Tax

M.N. Chandurkar, C.J.—The question which falls for consideration in this reference at the instance of the assessee reads as follows :

whether, on the facts and in the circumstances of the case, the assessee is not liable to be assessed to capital gains tax in respect of the sum of Rs.

1 lakh received by the assessee from the United India Fire and General Insurance Co., on November 25, 1974, on the loss of the boat No. TTN

39 ?

The Assessee was carrying on the business of boats and during the relevant accounting year, a boat belonging to the assessee being boat No.

TTN 39 met with an accident on August 17, 1974, and got sunk in the sea. The boat was insured with the United India Fire and General Insurance

Company and in accordance with the contract of Insurance, the assessee received a sum of Rs. 1 lakh from the insurance company on November

25, 1974.

In the assessment proceedings for the assessment year 1976-77, the Income Tax officer taking the original cost of the boat at Rs. 49,992, took

the view that Rs. 50,008 were chargeable to capital gains tax and added this sum to the income of the assessee. The figure of Rs. 50,008 was

arrived at by deducting from Rs. 1 lakh received from the insurance company, the original cost of the boat. The order of the Income Tax Officer

was confirmed by the Appellate Assistant Commissioner and the Tribunal.

The Tribunal took the view that since the rights of the assessee stood extinguished as the boat had sunk in the sea, this extinguishment of the right

in the capital asset amounted to transfer. In the light of the view taken by the Gujarat High Court in Commissioner of Income Tax, Gujarat II Vs.

R.M. Amin. (Legal representative of the Late Chunibai Amin), and Commissioner of Income Tax Vs. Vania Silk Mills (P.) Ltd., , the Tribunal

found that in the case of extinguishment of right, it was not necessary that the asset must continue in existence. Thus, according to the Tribunal, the

assessee had obtained money on the extinguishment of all his rights in the capital asset and was, therefore, liable to pay capital gains tax. The

correctness of this decision is put in issue in the question referred.

It was contended on behalf of the assessee that when the definition of ""transfer"" u/s 2(47) of the Income Tax Act, 1961 (hereinafter referred to

as ""the Act""), referred to the extinguishment of any rights in a capital asset, such extinguishment must result from some act of the transferor or the

transferee. According to learned counsel, if the extinguishment of the right of the holder of the capital asset does not arise as a result of any act

either of the transferor or of the transferee or by operation of law, there is no transfer within the meaning of section 2(47) of the Act. It was argued

that the concept of the transfer u/s 2(47)of the act contemplates that the asset must continue to exist. It was further contended that the

compensation which is received by the assessee for the loss of the boat cannot be construed as consideration for the transfer of a capital asset

because it is paid in accordance with the contract of insurance and consequently there is no liability to capital gains tax.

It was contended by Mr. Rajan, on the behalf of the Revenue, that the definition of ""transfer"" in section 2(47) of the Act was an inclusive

definition intended to include what would not normally fall with in the concept of a transfer. Thus, according to learned counsel, when the asset is

destroyed, there is extinguishment of the right in the asset and when the insurance company pays compensation for the loss of the capital asset, in

accordance with the contract of insurance, there is a substitution of a new asset in the form of cash in the place of the damaged or the lost asset. It

is pointed out that having regard to the two decisions of the Gujarat High court referred to above which have construed the word ""transfer"" as

including extinguishment of the rights of the assessee consequent upon the destruction of the capital asset and a similar view having been taken by

the Allahabad High Court in Commissioner of Income Tax Vs. J.K. Cotton Spinning and Weaving Mills Co. Ltd., , this court must follow those

decisions having regard to the ratio of the decision in Sundaram Industries Ltd. Vs. Commissioner of Income Tax, .

In Commissioner of Income Tax Vs. Vania Silk Mills (P.) Ltd., , the facts were that the assessee-company which had purchased machinery

worth Rs. 2,81,741 had given it on hire to Jasmine Mills at an annual rent of Rs. 33,900. A fire broke out in the Jasmine out in the Jasmine Mills on

August 11, 1966, and the machinery taken on hire from the assessee was damaged to such an extent that it could not be put to use. Jasmine Mills

made an insurance claim and out of the amount received by it, paid a sum of Rs. 6,32,533 to the assessee on account of destruction of the

machinery of the relevant year worked out to Rs. 2,62,781 and the excess amount of Rs. 3,50,792 was treated by the Income Tax Officer as

capital gains chargeable u/s 45 of the Act. The Tribunal had held that unless there was a transfer of a capital asset effected by an assessee, section

45 would not be attracted and since there was no such voluntary act on the part of the assessee effecting a transfer, one of the conditions for

levying the charge on capital gains was not satisfied. In the reference which arose out of the decision, the Gujarat High Court referred to the earlier

decision of that court in Commissioner of Income Tax, Gujarat II Vs. R.M. Amin. (Legal representative of the Late Chunibai Amin), , in which it

was held that the expression ""extinguishment of any rights therein"" in section 2(47) which defined capital asset did not require that despite

extinguishment of the rights in the capital asset, the capital asset must continue to exist. The court took the view that the expression ""extinguishment

of any rights therein"" in section 2(47) covered every possible transaction which result in the destruction, annihilation, extinction, termination,

cessation or cancellation, by satisfaction or otherwise, of all or any of the bundle of rights - qualitative or quantitative - which the assessee has in a

capital asset, whether such asset is corporeal or incorporeal. The bench quoted with approval the following observations in Commissioner of

Income Tax, Gujarat II Vs. R.M. Amin. (Legal representative of the Late Chunibai Amin), (headnote) :

The transfer that is contemplated by section 45 read with section 2(47) is, therefore, a transfer as a result of which consideration is received by

the assessee or accrued to the assessee. Substituting the words ''extinguishment of any rights in the capital asset'' for the words ''transfer of the

capital asset'', the transaction, in the order to attract the charge of tax as capital gains, must, therefore, be such that consideration is received by the

assessee or accrues to the assessee as a result of the extinguishment of the rights in the capital asset.

After referring to these observations, the bench took the view that on the plain language of section 45 itself and even by reading the said

provision along with section 48, therefore, it is manifest that the profit or gain must have been received by or accrued to the assessee as a result of

the extinguishment of any rights in a capital asset and not on account of extinction of some other distinct rights. On the fact of that case, the Division

Bench took the view that when the machinery was destroyed by fire, there was a clear extinguishment of the rights of the assessee in the capital

asset and consideration was received by it as a result of such extinguishment. Therefore, according to the Division Bench, ""there was a transfer of

the capital asset within the meaning of section 45 read with section 2(47) and that profit arose out of such transfer...

A similar view is taken by the Allahabad High Court in Commissioner of Income Tax Vs. J.K. Cotton Spinning and Weaving Mills Co. Ltd., ,

following the decision of the Gujarat High Court in Commissioner of Income Tax Vs. Vania Silk Mills (P.) Ltd., . It was held that when an

assessee receives money from an insurance company as compensation for the extinguishment of his capital asset, he receives that money in lieu of

the capital asset and not in lieu of the premia paid to the insurance company and this amounts to a transfer within the meaning of section 2(42) and

the amount received would be liable to be taxed as capital gains. If the decision in Commissioner of Income Tax Vs. Vania Silk Mills (P.) Ltd., is

accepted as correct, then there can be error in the view taken by the Tribunal. Learned counsel for the assessee has, however, pointed out that

notwithstanding the very wide meaning of the term ""transfer"" given in section 2(47), destruction of the asset, in the instant case the fact of sinking in

the sea, can by no stretch if imagination be said to amount to a transfer and the amount received by the assessee from the insurance company for

the capital asset. Now, it is too late in the day to contend that total extinguishment of all rights in a capital asset will not be covered by the word

transfer"" or that the transfer contemplated by the definition must necessarily be the result of a voluntary act of the owner of the capital asset. The

concept of capital gains was dealt with by section 12B(1) in the Indian Income Tax Act, 1922, as reintroduced by the Finance (No. 3) Act, 1956.

The provision in section 12B(1) was construed by the Supreme Court in The Mangalore Electric Supply Co. Ltd. Vs. The Commissioner of

Income Tax, West Bengal, , where the question which fell for consideration before the supreme Court was that the word ""transfer"" in section

12B(1) could mean only a voluntary transfer and could not include compulsory acquisition of property. The material part of section 12B(1) of the

1922 Act read as follows :

The tax shall be payable by an assessee under the head ''capital gains'' in respect of any profits or gains arising from the sale, exchange,

relinquishment or transfer of a capital asset effected after the 31st day of March, 1956, and such profits and gains shall be deemed to be income of

the previous year in which the sale, exchange, relinquishment or transfer took place...

The assessee in that case was an electric supply company in respect of which the State Government had made an order u/s 4 of the Madras

Electricity Supply Undertakings (Acquisition) Act, 1954, declaring that the undertakings would vest in the Government on December 31, 1956.

The question was whether the amount paid by way of compensation for the acquisition of the electricity undertaking was in the nature of a capital

gain within the meaning of section 12B(1) of the 1922 Act. The argument advanced on behalf of the assessee before the Supreme Court was that a

compulsory divestiture of title against the volition of the owner cannot amount to transfer, howsoever lawful the act may be as a statutory

acquisition of property. It was argued that the word ""transfer"" occurred in the collocation of three other words ""sale"", ""exchange"" and

relinquishment"" which are essentially volitional or voluntary acts, leading to the conclusion that the word ""transfer"" must take its colour from the

three other words in association with which it is used and, therefore, ""transfer"" must mean a voluntary transfer and did not include compulsory

acquisition of property. The court held that if an existing title is extinguished and a new one is created, there was within the meaning of section

12B(1) transfer of a capital asset and the fact that the divestiture if title takes place under a law relating to compulsory acquisition of property

would make no difference to that position.

The controversy as to whether divestiture of title under a law relating to compulsory acquisition of property would amount to a transfer or not

did not survive after the enactment of the Income Tax Act, 1961. The Legislature has now expressly included compulsory acquisition of a capital

asset under any law within the definition of transfer. Section 2(47) of the Act as follows :

''Transfer'', in relation to a capital asset, includes the sale, exchange or relinquishment of the asset or the extinguishment of any rights therein or the

compulsory acquisition thereof under any law.

The definition of ""transfer"" is an inclusive definition and definition becomes relevant only in relation to a capital asset. Section 45 of the Act

reads as follows :

Any profits or gains arising from the transfer of a capital asset effected in the previous year shall, save as otherwise provided in sections 53, 54,

54B and 54D, be chargeable to Income Tax under the head ''capital gains'', shall be deemed to be the income of the previous year in which the

transfer took place.

The provisions of sections 46 and 47 are not relevant for our purpose. Section 45 which deals with the mode of computation and deductons

reads as follows :

The income chargeable under the head ''Capital gains'' shall be computed by deducting from the full value of the consideration received or

accruing as a result of the capital asset the following amounts namely : -

(i) expenditure incurred wholly and exclusively in connection with such transfer;

(ii) the cost of acquisition of the capital asset and the cost of any improvement thereto.

Section 45, 49, 50 and 51 deal with certain aspects relevant for the determination of the cost of acquisition of the capital asset contemplated

by section 45. Section 52 provides for the kind of cases of acquisition of a capital asset from an assessee by a person who is directly or indirectly

connected with the assessee and the Income Tax Officer has reason to believe that the transfer was effected with the object of avoidance or

reduction of the liability to tax of the assessee u/s 45. In such a case, the full value of the consideration for the transfer shall be taken to be the fair

market value of the capital asset on the date of the transfer. Sub-section (2) of section 52 provides for a case where the full value of the

consideration declared by the assessee in respect of the transfer is less by an amount of not less than 15% with reference to the market value on

the date of the transfer. Section 53 provides for a capital gain arising from the transfer of one or more capital assets being buildings or lands

appurtenant thereto, the income of which is chargeable under the head ""Income from house property"" and the full aggregate value of the

consideration for which the transfer is made does not exceed Rs. 25,000. The proviso is not relevant for our purpose. What is relevant is that the

scheme of at least the provisions of sections 52 and 53 relating to capital gains tax contemplates that the transfer of a capital assets as

contemplated by the definition results in acquisition of the capital asset by the transferee.

Now, so far as the definition of ""transfer"" is concerned, it is undoubtedly a very wide definition and that definition includes extinguishment of

any rights in the capital asset or the compulsory acquisition thereof under any law. That definition cannot be read in isolation, but it has to be read

along with section 45 and the substantive provision in section 45 which positively requires that for the transfer of the asset as contemplated by

section 2(47), the assessee who is the owner of the capital asset must either receive consideration for the transfer or the consideration must accrue

to him as a result of the transfer of the capital asset. The capital gain contemplated by section 45 is to be worked out in the mode prescribed in

section 45. Unless, therefore, it is established that consideration has either been received or has accrued to the assessee for the transfer as

contemplated by section 2(47), the provisions relating to capital gains will not be attracted and there will not be any liability for capital gains tax. It

is also important to bear in mind that section 45 refers to ""the transfer of capital asset effected in the previous year"". The concept of capital gains,

therefore, contemplates that unless the transfer is effected by somebody or by some agency, it will not be a transfer for the purpose of section 45

of the Act.

Having regard to the context in which the word ""effected"" is used in section 45, it is clear that it contemplates some agency by the act of which

the transfer is brought about. The meaning of the word ""effected"", which is relevant for our purpose, given in the Concise Oxford Dictionary, sixth

edition, is ""bring about; accomplish; cause to exist or occur"". It is, therefore, implicit in section 45 that a sale, exchange or relinquishment of the

asset or the extinguishment of any rights in the capital asset or the compulsory acquisition of the capital asset must be the result of the act of some

agency. There is no difficulty in so far as the sale, exchange or relinquishment of the asset is concerned, because it is the owner of the capital asset

who can bring about the sale, exchange or relinquishment of the asset. In so far as the compulsory acquisition of the asset is concerned, the

definition itself says that it could be under any law which means that by giving an artificial meaning to the word ""transfer"", acquisition of a capital

asset under a law providing for such compulsory acquisition is treated as transfer of the capital asset. The only other part of the definition of

transfer"" is ""the extinguishment of any right therein"". Since the definition has already provided for relinquishment which would be a voluntary act of

the owner of the capital asset, extinguishment of the rights in the capital asset must result from, some act other than the act of reliquishment of the

capital asset. We are not in this case concerned with relinquishment of rights in an incorporeal asset. We are not concerned with extinguishment of

rights in a corporeal property. In so far as the capital asset which is in the nature of corporeal property is concerned, such extinguishment of the

rights in the capital asset must, in our view, necessarily be brought about by the action of some agency other than the transferor and for such

extinguishment, there must also be consideration. Such agency may not be an individual. This extinguishment of the right may result from a contract

with the owner in which case it will be a voluntary act or the only other which can deprive the owner of his right in the capital asset will be

Legislature. Such a law may be different from a law providing not for acquisition but for extinguishment of rights of the owner. Therefore, reading

the word ""transfer"" in the light of the use of the word ""effected"" in section 45, it appears to us that in the case of corporeal property, unless the

owner of the capital asset is divested of his right by the process of extinguishment resorted to by some agency and unless there is consideration for

such extinguishment, by the mere fact that the asset stands destroyed either by fire or by sinking in the sea as in the instant case, there can be no

transfer of the capital asset for the purpose of sections 45 and 48 of the Act. The mere fact that the definition of ""transfer"" is an inclusive definition

does not mean that every extinguishment of the rights of the owner of the capital asset howsoever brought about will necessarily amount to a

transfer. It is undoubtedly true that when a definition expressly includes things which are not covered within the ordinary meaning of the word, the

intention of the Legislature is to give a wide meaning to the word itself and when we are dealing with an inclusive definition, it is in appropriate to

put a restrictive interpretation upon terms of wider denomination. But it is also true that notwithstanding the inclusive definition, when that definition

is to be substituted for the word defined and used in a statutory provision, the extended meaning will be controlled by the other words used in the

section, and if necessary, by the other provisions relevant for working out the main provision. As pointed out earlier, section 45 refers to the

transfer of a capital asset being effected and, therefore, notwithstanding the inclusive definition of the word ""transfer"", we must read that definition in

section 45 in light of the use of the word ""effected"". In so far as the present controversy is concerned, section 45 will be read as follows :

Any profits or gains arising from the extinguishment of any rights in a capital asset effected in the previous year....shall be chargeable to Income

Tax under the head ''capital gains'' and shall be deemed to be the income of the previous year in which the transfer took place.

It must, therefore, be established that the extinguishment of the rights of the assessee was effected by some agency.

We may usually refer to the decision of the Gujarat High Court in Vadilal Soda Ice Factory Vs. Commissioner of Income Tax, Gujarat II, in

which the Division Bench was construing the provisions of section 12B of the 1922 Act which at the material time did not refer to any compulsory

acquisition. In that case, land together with an ice factory standing on it belonging to the assessee was acquired by the State under the provisions of

the Land acquisition Act. The total compensation was assessed at Rs. 4,62,092. The assessee did not dispute that the compulsory acquisition had

resulted in capital gains, but sought to exclude the solatium amount awarded u/s 23 of the Land acquisition Act and sum of Rs. 31,620 representing

compensation on account of extra cost of transport which the assessee would have to incur by reason of shifting the site of the ice factory and Rs.

15,420 representing compensation on account of the lower selling price which the assessee would be able to realise by reason of the quality of ice

being affected due to inferior quality of water available at the new site. These were contentions raised with regard to the quantum. But the main

contention was that compulsory acquisition did not amount to sale or transfer of the property within the meaning of section 12B and, therefore, the

profits or obtains arising to the assessee from the compulsory acquisition were not taxable as capital gains. This contention was rejected even by

the Tribunal. When the matter came by way of reference to the Gujarat High Court, the question was whether compulsory acquisition of property

amounts to transfer within the meaning of section 12B(1) so as to give rise to capital gain taxable under that section. The Gujarat High Court held

that the word ""transfer"" standing by itself is a comprehensive word and would include not only transfer by act of parties, but also by operation of

law. In support of this conclusion, a passage from the Dictionary of English Law by Earl Jowitt was quoted and that passage reads as follows (at

80 ITR 718 :

In the law of property, a transfer is where a rights passes from one person to another, either (1) by virtue of an act done boy the transferor with

that intention, as in the case of a conveyance or assignment by way of sale or gift, etc.; or (2) by operation of law, as in the case of forfeiture,

bankruptcy, descent, or intestacy.

Relying on this definition, it was observed as follows (at p. 718 of 80 ITR) :

The word ''transfer'' is not a term of art and has not a technical meaning. It is a word of the widest import and includes every act by which

property may pass from one person to another. Transfer may be inter vivos, that is, by act of parties, or it may be by operation of law in invitum.

It was argued before the Division Bench that the words sale, exchange, relinquishment or transfer used in section 12B(1) postulated that there

must be some one to effect the transfer and that indicated that transfer by operation of law was intended to be excluded from the scope and ambit

of the section. This argument was rejected in the following words (at p. 718 of 80 ITR) :

The Legislature has deliberately used the past participle ''effected'' without indicating the causal agency so that transfer may be effected either by

the assessee or as a result of operation of law.

Compulsory acquisition of property was a therefore held to amount to a transfer within the meaning of section 12B(1) of the 1922 Act.

What is important for our purpose is that the Division Bench took the view that there has to be a causal agency so that the transfer is effected

and the only other mode by which transfer was possible as envisaged by the Division Bench was by operation of law. With respect, we concur

with the view taken by the Division Bench that the transfer contemplated by section 2(47) of the Act has to be brought about by some agency and

that the only other mode apart from the act of the parties which can bring about or effect a transfer would be by operation of law. It is not,

therefore, possible to accept the argument of learned counsel for the Revenue that merely because there is total destruction of the property, it

would amount to a transfer, thought there is extinguishment of the rights in the capital asset.

Similarly, we must reject the alternative contention advanced on behalf of the Revenue that if at all it is necessary that there has to be a

transferee, then it is the insurance company which is the transferee of the capital asset. The argument is merely to be mentioned to be rejected.

There is no capital asset in existence because the boat has sunk in the sea and in the absence of any terms of the contract of insurance being

brought on record, one cannot assume that the boat which has been sunk vested in the insurance company.

The other question which becomes material for the decision of the present reference is whether the compensation paid in pursuance of the

contract of insurance can be considered as consideration. The money which is received by the assessee is not by way of consideration for

extinguishment of any rights. Section 45 of the Act refers to ""the full value of the consideration received or accruing as a result of the transfer of the

capital asset."" The normal concept of consideration contemplates a quit pro quo for something of which a person is divested, and in the light of

what we have said earlier, voluntarily or involuntarily, through some agency. In cases of compulsory acquisition, the capital asset vests in the

acquiring body and, though what is paid by the acquiring body and, though what is paid by the acquiring body is called compensation, it can also

be described as consideration for the acquisition. But where moneys are paid by an insurance company consequent upon total destruction of the

property and no transfer results from such destruction or extinguishment of all rights in the capital asset, the amount paid by the insurance company

cannot, in our view, be described as a consideration as a result of the transfer of the capital asset. When something is said to be paid or received

as are result of the transfer, there has to be a direct nexus between the transfer and receipt. As we have already pointed out, if there was no

transfer of the capital asset, the question of nexus between the payment, made by the insurance company and the transfer does not arise in the

instant case. The payment received in pursuance of a contract of indemnity cannot be considered to be payment received in pursuance of contract

of indemnity cannot be considered to be payment as a result of the transfer of property. It is well-established that a contract of insurance is a

contract of indemnity. established that a contract of insurance is a contract of indemnity. In Halsbury''s Laws of England, fourth edition, Vol. 25,

under the heading ""Insurance"" in paragraph 3, it is observed as follows :

Most contracts of insurance belong to the general category or contracts of indemnity in the sense that the insurer''s liability is limited to the actual

loss which is in fact proved. The happening of the event does not itself entitle the assured to payment of the sum stipulated in the policy; the event

must in fact result in a pecuniary loss to the assured, who then becomes entitled to be indemnified subject to the limitations of his contract. He

cannot recover more than the sum insured, for that sum is all that he has stipulated for by his premiums and it fixed the maximum liability of the

insurers. Even within that limit, however, he cannot recover more than what he establishes to be the actual amount of his loss. The contract being

one of indemnity, and of indemnity only, he can recover the actual amount of his loss and no more, whatever may have been his estimate of what

his loss would be likely to be, and whatever the premiums he may have paid, calculated on the basis of that estimate.

When a person who has insured his goods or property receives compensation from the insurance company, it is a compensation for the

pecuniary loss which the person has suffered. To equate such amount received by way of compensation for the pecuniary loss with consideration

for transfer of a capital asset, in our view, is not at all warranted, having regard to the peculiar nature of the principle of indemnity on which

contracts of insurance are based. We are, therefore, of the considered view that the amount received by the assessee in pursuance of the contract

of indemnity cannot be considered as consideration for the transfer of a capital asset as contemplated by section 45 read with section 45 of the

Act.

It was sought to be argued on behalf of the Revenue that in the hands of the assessee, the old asset in the form of the boat is now substituted in

the form of compensation and, therefore, it must be held that there was a transfer of the capital asset. Some reference was made in support of this

proposition to the decision of the Bombay High Court in Commissioner of Income Tax, Bombay City-III Vs. Popular Metal Works and Rolling

Mills, . That was a case in which the question was whether the compensation received by the assessee from the insurance company when the

insured goods were seized by the Pakistan authorities while in transit from Britain to India represented the price of the stock-in-trade and whether

the excess amount received as a result of the change in the exchange rate should be treated as business income. Goods which were exported from

England were in the course of transit requisitioned by the order of the Government of Pakistan. The assessee had consigned the goods to a

transport company which made a claim for Rs. 2,05,539.62, which was the insured value of the goods, with the Custodian of Enemy Property,

Bombay. The claim was ultimately settled by Lloyds Company for Rs. 3,21,461.16 at the rate of pound 4.8120 equal to Rs. 100, the insured

value of the consignment lost being taken at pound 15,469. The assessee received Rs. 1,14,710 in excess of the value of the stock-in-trade, the

excess being due to the devaluation of the rupee during the period between the making of the claim and its settlement. The Income Tax Officer

negatived the claim of the assessee that the excess amount was a casual receipt or, alternatively, a capital gain and could not be taxed a profit. The

Appellant Assistant Commissioner confirmed the order of the Income Tax Officer. The Tribunal, however, held that since the excess amount

resulted from the devaluation of the Indian currency in terms of sterling, the excess could not be taxed as profit as the excess was not a trading

receipt because the assessee was not a dealer in foreign exchange and, therefore, the excess amount was to be treated as capital gains. When the

matter came up in reference to the Bombay High Court, it was held that the character of the receipt was the same as that of the amount which the

assessee-company would have received by the sale of stock-in-trade to its customers and the recovery of compensation for the stock-in-trade lost

on account of being seized by the Government of Pakistan was in connection with the business transaction of the assessee, viz., as a dealer in

stock-in-trade, and the excess receipt was assessable to tax as business profit.

Relying on this decision, it was contended on behalf of the Revenue that just as in that case the amount received by way of insurance was

treated as being in substitute for the stock-in-trade, here also the compensation paid by the insurance company should be treated as a substitute for

the boat lost. This argument must be rejected. In the case before the Bombay High Court, the question was whether the receipt was in the nature

of business profit or not. In the instant case, the question is whether when the asset is wholly destroyed and there is no element of transfer involved

even having regard to the extended definition of the term, the compensation could be treated as consideration accruing as a result of transfer. There

is no similarity between the facts of the present case and facts of the case before the Bombay High Court - Commissioner of Income Tax, Bombay

City-III Vs. Popular Metal Works and Rolling Mills, .

It was then contended on the authority of the decision of this court in Sundaram Industries Ltd. Vs. Commissioner of Income Tax, that since

two courts, viz., the Gujarat High Court and the Allahabad High Court, have taken the view in favour of the Revenue, the same principle must be

followed by this court also. In that case, this court has observed that ""it is an accepted principle in the matter of construction of an Indian statute

that as far as possible, there must be uniformity of construction and if the provisions of law which fall for construction before the court have already

been construed by another High Court or High Courts, unless there are compelling reasons to depart from that view, normally, that construction

should be accepted."" Now, undoubtedly, in respect of construction of a provision of an Act like the Income Tax Act, uniformity of construction is

extremely desirable. But that does not however mean that this court must always accept the construction placed upon a particular statutory

provision by other High Court. If there are compelling reasons which make the view of other courts unacceptable, this court would be entitled to

reconsider the matter.

We shall presently show why we are not inclined to follow the decisions of the Gujarat High Court and the Allahabad High Court. With

respect, we have to dissent from the view taken by the Gujarat High Court in Commissioner of Income Tax Vs. Vania Silk Mills (P.) Ltd., . It is

true that in Vaina Silk Mills (P) Ltd.''s case, the Gujarat High Court rejected the contention that the transfer contemplated by section 2(47) of the

Act must be understood as it is understood in ordinary parlance and that it is not open to the Legislature to adopt the device of an inclusive

definition to treat an act which in reality is not transfer as a transfer, in view of the decision in Vadilal Soda Ice Factory''s case [1970] 80 ITR 711

and Commissioner of Income Tax, Gujarat II Vs. R.M. Amin. (Legal representative of the Late Chunibai Amin), . Now, there can be no doubt as

held by the Gujarat High Court in the two cases, viz., Vadilal Soda Ice Factory and R. M. Amin''s case, that ""transfer"" is a word of the widest

import and includes every act by which the property may pass from one person to another. Even in the decision in Vadilal Soda Ice Factory Vs.

Commissioner of Income Tax, Gujarat II, , as we have already pointed out, the Division Bench of the Gujarat High Court proceeded on the

footing that there has to be a causal agency so that the transfer as contemplated by section 2(47) is effected and the Division Bench referred to the

transfer being brought about by an act done by transferor or by operation of law. That decision, therefore, is not in any way inconsistent with the

view which we taken that where rights in an incorporeal property are sought to be extinguished, some act on the part of some agency is necessary

and this agency may be the transferor himself or the Legislature which expresses its will through the law and as a result of the operation of law

made by the Legislature, rights in property are extinguished. Even in Commissioner of Income Tax, Gujarat II Vs. R.M. Amin. (Legal

representative of the Late Chunibai Amin), , undoubtedly, the Division Bench of the Gujarat High Court observed that the use of the word ""therein

in the phrase ""extinguishment of any rights therein"" mean nothing more than ""in the capital asset"" and all that the definition requires is that there must

be extinguishment of rights in the capital asset. It was pointed out that the definition did not go further and say that despite extinguishment of the

rights in the capital asset, the capital asset must continue to exist. Now, while it may not be possible to dispute this statement of the law in respect

of incorporeal property, it may not be applicable equally to the case of corporeal property. As pointed out in Salmond on Jurisprudence, 12th

edition, 1966 Edition, at page 413, all property is either corporeal or incorporeal, and ""corporeal property is the right of ownership in material

things; incorporeal property is any other proprietary right in rem"". The learned author has pointed out that ""the owner of a material object is he who

owns a right to the aggregate of its uses"". When we consider the concept of extinguishment of any right in a capital asset which is effected by some

agency and consideration is received or accrues as a result of the extinguishment of such a right, in the context of a capital asset which falls in the

category of corporeal property, it is difficult to appreciate how a total extinction of the property by fire or otherwise can fall within the definition of

transfer"". In the case of corporeal property, even if there is extinguishment of rights of the owner, the property must continue to exist. Even where

all rights in a corporeal property are extinct, then if it is by the act of a transferor who receives consideration, there must be transfer of these rights

to somebody who may not necessarily be the person who gives consideration. In a case where all the rights are extinct, the only case which seems

to be contemplated by the definition, read in the light of section 45 and 48, it appears to us, is where the property as such exists, and is transferred

to somebody. In our considered view, the concept of extinguishment of property resulting in the total destruction of the capital asset cannot be

acceptable in the case of corporeal property having regard to the definition of transfer read in the light of section 45 and 48 of the Act. The

decision in Commissioner of Income Tax, Gujarat II Vs. R.M. Amin. (Legal representative of the Late Chunibai Amin), must, therefore, be

restricted to the case of incorporeal property. Since the decision in Commissioner of Income Tax Vs. Vania Silk Mills (P.) Ltd., proceeds on the

ratio of the two earlier decisions of the Gujarat High Court and specially the decision in Commissioner of Income Tax, Gujarat II Vs. R.M. Amin.

(Legal representative of the Late Chunibai Amin), , which, as we have already observed, must be restricted to the extinguishment of rights in

incorporeal property, we are not inclined to apply that ratio in the case of corporeal property. We are also unable to concur with the view of the

Gujarat High Court that when Vania Silk Mills received a part of the amount from out of the amount paid by the insurance company to Jasmine

Mills Private Limited, then the transaction of payment by Jasmine Mills Private Limited, then the transaction of payment by Jasmine Mills to Vania

Silk Mills must be considered as a transfer in favour of Jasmine Mills Private Limited. For the reasons which we have stated for not agreeing with

decision in Vania Silk Mills case, we are, with respect, inclined to dissent from the decision of the Allahabad High Court in J. K. Cotton Spg. &

Wvg. Mills Co. Ltd.''s case [1978] 164 ITR 18. As we have already pointed out, in the case of a capital asset which consists of corporeal

property, we are unable to imagine how there can be any transfer of property which has been completely destroyed, as, in our view, the artificial

definition that the extinguishment of rights amounts to a transfer will not be attracted in the case of destruction of corporeal property.

It is true that in respect of property which is insured, receipt of compensation in respect of the property which is insured and destroyed would

be capital receipt if the asset destroyed was a capital asset. We, however, fail to appreciate how the fact that in the hands of the original owner of

the capital asset, the compensation partakes of the character of ""capital"" is material for reaching the conclusion that there is transfer of capital asset.

In this context it is useful to refer to the observations of the Supreme Court in Sunil Siddharthbhai Vs. Commissioner of Income Tax, Ahmedabad,

Gujarat, . The question in that case was whether when a partner of a firm makes over capital assets which are held by him to a firm as his

contribution towards capital, there was transfer of capital assets within the terms of the section 45 of the Income Tax Act, 1961, because an

exclusive interest of the partner in his personal assets is reduced, on their (assets) entry into the firm, into a share interest. It was held that though

this would amount to ""transfer"", the partner receives no consideration with in the meaning of section 45, nor does any profit or gain accrue to him

for the purpose of section 45. The following, observations made in the context of the concept of ""transfer"" are, in our view, relevant (p. 517) :

In its general sense, the expression ''transfer of property'' connotes the passing of rights in property from one person to another. In one case, there

may be a passing of the entire bundle of rights from the transferor to the transferee. In another case, the transfer may consists of one of the estates

only out of all the estates comprising the totality of rights in the property. In a third case, there may be a reduction of the exclusive interest in the

totality of rights of the original owner into a joint or shared interest with other persons. An exclusive interest in property is a larger interest than a

share in that property. To the extent to which the exclusive interest is reduced to a shared interest it would seem that there is a transfer of interest.

Therefore, when a partner brings in his personal asset into the capital of the partnership firm as his contribution to its capital, he reduces his

exclusive rights in the asset to shared rights in it with the other partners of the firm"".

In the same case, the Supreme Court quoted with approval the earlier observations made in Commissioner of Income Tax, Bangalore Vs.

B.C. Srinivasa Setty, , where it was observed that the charging section the computation provisions under each head of income constitute an

integrated code and when there is a case to which the computation provisions cannot apply at all, it is evident that such a case was not intended to

fall within the charging section.

In Sunil Siddharthbhai Vs. Commissioner of Income Tax, Ahmedabad, Gujarat, , therefore, it is clearly held that transfer of property cannot

the passing of the rights in property from one person to another. This proposition will apply with full force in the case of a capital asset which

consists of corporeal property. In order that there should be a transfer of capital asset even within the extended meaning of total extinction of the

rights in the capital asset, in our view, the rights in the capital asset which is corporeal property must vest in someone or the other. Equally, there

must be consideration for such transfer.

As already pointed out, in the instant case, we are unable to hold that there was any ""transfer"" as contemplated by section 45 read with section

45 of the Income Tax Act, 1961, when the boat sank in the sea. Further, the insurance amount received by the assessee cannot, in our view, be

considered as ""consideration"".

Accordingly, we answer the reference in the affirmative and in favour of the assessee. The Revenue is directed to pay the costs of the assessee.

Costs are fixed at Rs. 1,000.