(1991) 191 ITR 647 (SC)
Meaning of transfer; capital gains — charging section
No, on the law as it then stood. Destruction of an asset is not a transfer; the asset ceases to exist rather than passing to anyone, and insurance money is paid under the policy rather than as consideration for a transfer.
Where an asset is destroyed and the owner receives insurance money, does the destruction amount to a transfer giving rise to capital gains?
Machinery belonging to the assessee was destroyed by fire. The insurer paid a sum under the policy which exceeded the written down value of the machinery. The Revenue treated the receipt as consideration arising from a transfer of the asset and assessed the excess as a capital gain, reasoning that the owner's rights in the machinery had been extinguished and money had been received in their place.
The matter reached the Supreme Court, where the scope of the extinguishment limb of the definition of transfer fell for consideration in the context of destruction of an asset.
For the assessee
A transfer contemplates the asset passing from one person to another. Where property is destroyed, nothing passes; it simply ceases to exist. The insurance money is paid under a contract of indemnity because the insured event occurred, not as the price of the asset.
For the Revenue
The owner's rights in the machinery were extinguished by the fire, and extinguishment of rights falls within the definition of transfer. Money was received in consequence, and the excess over written down value represents a gain.
The Court held that the extinguishment contemplated by the definition is extinguishment that results from a transfer — that is, where rights come to an end because the asset or rights in it pass to another. Destruction of an asset is different in kind: the subject matter ceases to exist altogether and no person acquires anything. The Court reasoned that the words defining transfer, read as a whole, are concerned with transactions by which property moves between persons, and that an event such as fire is not a transaction at all. As to the insurance money, it held that the payment is made because the contingency insured against occurred and is measured by the indemnity the policy provides; it is not consideration for parting with the asset, there being no counterparty acquiring it. The receipt accordingly fell outside the charge.
The outcome was specifically reversed by Parliament, which introduced a provision deeming money or assets received from an insurer on damage or destruction to give rise to capital gains in the year of receipt. That deeming treatment continues under the IT Act 2025, so an insurance receipt on destruction is chargeable today. Read Vania Silk Mills as the reason that provision exists, and for its analysis of the extinguishment limb, which Grace Collis later revisited.