Insurance Claim Received On Dead Horses Is Capital Receipt, Not Taxable As Income U/S 41(1): Bombay High Court

The Bombay High Court held that insurance claim received on dead horses is capital receipt, not taxable as income under Section 41(1) Of Income Tax Act. The bench opined that horses in respect of which the insurance claim was received were Assessee's capital assets and that therefore insurance receipt arising therefrom could only have been considered as capital receipt, not chargeable to tax. The question before the bench consists of Chief Justice Alok Aradhe and Justice Sandeep V. Marne was whether the receipt towards insurance claim in respect of dead horses can be treated as 'profits' for the purpose of taxation under Section 41(1) of the Income Tax Act, 1961. Section 41(1) Of Income Tax Act, 1961, says that the benefit which accrues in respect of loss or expenditure or which accrues by way of remission or cessation of trading liability will be taxable under the head “Profits and Gains of business or profession” only when an allowance or deduction has been made with respect to such loss or trading liability. Section 45 Of Income Tax Act, 1961, deals with the taxation of capital gains arising from the transfer of a capital asset. It states that any profit or gain from such a transfer is considered income of the previous year in which the transfer occurred and is taxable under 'Capital Gains. The Assessee was carrying on the business of breeding, rearing and selling racehorses since the year 1967. During the relevant assessment year, the horses of the assessee died. Both the horses were insured with the insurance company. Accordingly, the Insurance Company sanctioned the insurance claim. In the Assessment Order, the Assessing Officer held that the Assessee ought not to have added such loss on the death of mares while computing the total income chargeable to tax as loss on death of an animal is an allowable deduction under Section 36(1)(vi) of the Act. The Assessing Officer further held that the insurance claim received by the Assessee from the Insurance Company for death of the horses was to be deemed as income of the Assessee under Section 41(1) of the Act. The said findings recorded by the Assessing Officer have been upheld in Appeal by Commissioner of Income Tax (Appeals) [CIT (A)] and Income Tax Appellate Tribunal. The assessee contended that insurance claim paid upon the destruction of property is a capital receipt which is not chargeable to tax. According to the assessee, horses with respect to which the claim was received was treated by the Assessee as capital assets and therefore the receipt arising therefrom could only have been considered as capital receipt. The revenue argued that the Assessee had claimed a debit upon death of the mare in the Profit and Loss Account and therefore after receipt of the insurance claim, provisions of Section 41of the Act would apply by treating the same as deemed profit of the Assessee. The bench stated that the Revenue has grossly erred in shifting the amount of insurance claim received by the Assessee from the head 'capital gains' to another head 'Profits and gains of business or profession' for the purpose of bringing the same to taxation under Section 41(1) of the Act. After treating the horses as 'capital assets' of the Assessee, the insurance receipt would obviously become capital gain for the Assessee, which can only be taxed under the provisions of Section 45 of the Act. The Revenue however found that it was not possible to tax the said 'capital gain' under Section 45 of the Act and therefore decided to treat the income as 'profit' under Section 41(1) of the Act, observed the bench. In view of the above, the bench allowed the appeal and directed the revenue to treat the entire amounts of insurance claim received by the Assessee for death of horses as capital receipt governed only by provisions of Section 45(1) of the Act. Case Title: M/s. Poonawalla Estate Stud & Agricultural Farm v. Commissioner of Income Tax Case Number: INCOME TAX APPEAL NO. 541 OF 2003 Counsel for Appellant/Assessee: P.J. Pardiwalla Counsel for Respondent/Revenue: Akhileshwar Sharma Click Here To Read/Download The Order

Insurance Claim Received On Dead Horses Is Capital Receipt, Not Taxable As Income U/S 41(1): Bombay High Court

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