1996 PLP 556 (PTD)

DR. B.P. SARAF, J.

By this reference under section 256(1) of the Income Tax Act, 1961, made at the instance of the Department, the Income Tax Appellate Tribunal has referred the following question of law to this Court for opinion: "Whether, on the facts and in the circumstances of the case, the Income Tax Officer was justified in passing the order under section 155(5) of the Act for the purpose of withdrawing the development rebate granted for the year 1969-70?" This reference pertains to the assessment year 1969-70. The material facts of the case are as under: .The assessee owned a plant known as PAN plant the value of which was Rs. 1,81,54,

060. This plant also comprised a PAN -reactor the value of which. was Rs. 15,60,

408. This PAN-reactor was destroyed by fire in the year 1973 relevant to the assessment year 1974-75. The assessee received compensation for the loss from the United Fire and General Insurance Company. In the assessment for the assessment year 1969-70, the assessee had been allowed development rebate under section 33 of the Income Tax Act, 1961, at the rate of 33 per cent on the cost of the PAN plant amounting to Rs.1,81,54,

060. In the year 1973, the PAN-reactor having been destroyed by fire and the assessee having received compensation for the loss on that ground from the insurance company, the Income Tax Officer was of the view that the destruction of the PAN-reactor in fire within eight years from the installation thereof amounted to "transfer" within the meaning of section 34(3)(b) of the Act which provides for withdrawal of the development rebate by taking resort to subsection (5) of section 155 of the Act if the machinery is sold or otherwise transferred by the assessee to any person at any time before the expiry of eight years from the end of the previous year in which it was acquired or installed. The Income Tax Officer, therefore, initiated proceedings for withdrawal of the development rebate under subsection (5) of section 155, read with section 34(3)(b) of the Act and withdrew the development rebate allowed to the assessee on the cost of the entire plant amounting to Rs.1,81,54,

060. The assessee appealed to the Commissioner of Income-tax (Appeals), who held that the destruction of assets by fire cannot be said to be a transfer of assets by the assessee to any person within the meaning of section 34(3)(b) of the Act so as to empower the Revenue to withdraw the development rebate allowed to the assessee. The Revenue went in appeal to the Tribunal. The Tribunal agreed with the Commissioner (Appeals) and held that there was no transfer in the instant case as the machinery itself had been destroyed by fire and the payment by the insurance company was compensation for the loss and not on account of any transfer of any assets by the assessee to the insurance company. Aggrieved by the order of the Tribunal, the Revenue sought for reference to this Court and accordingly the Tribunal has referred the question set out above for our opinion. We have carefully considered section 34(3)(b) of the Act which provides that if any ship, machinery or plant is sold or otherwise transferred by the assessee to any person at any time before the expiry of eight years from the end of the previous year in which it was acquired or installed, any allowance made under section 33 or under the corresponding provisions of the Indian Income-tax Act, 1922 (11 of 1922), in respect of that ship, machinery or plant shall be deemed to have been wrongly made for the purposes of this Act, and the provisions of subsection (5) of section 155 shall apply accordingly. Subsection (5) of section 155, so far as is relevant, reads as under: "(5) Where an allowance by way of development rebate has been made wholly or partly to an assessee in respect of a ship, machinery or plant installed after the 31st day of December, 1957, in any assessment year under section 33 ... and, subsequently-- (i) at any time before the expiry of eight years from the end of the previous year in which the ship was acquired or the machinery or plant was installed, the ship, machinery or plant is sold or otherwise transferred by the assessee to any person other than the Government... the development rebate originally allowed shall be deemed to have been wrongly allowed, and the Income Tax Officer may, notwithstanding anything contained in this Act, re-compute the total income of the, assessee for the relevant previous year and make the necessary amendment; and the provisions of section 154 shall, so far as may be, apply thereto, the period of four years specified in subsection (7) of that section being reckoned from the end of the previous year in which the sale or transfer took place or the money was so utilized. From a plain reading of the above provision, it is clear that the development rebate allowed to an assessee under section 33 can be withdrawn if the machinery is "sold or otherwise transferred by the assessee to any person" within the stipulated period. The only question that arises for consideration is whether destruction of an asset by fire and payment of compensation by the insurance company on account thereof to the assessee can be termed as "transfer" within the meaning of section 34(3)(b) of the Act. The answer, in our opinion, has to be in the negative. Because till the destruction took place the machinery was owned by the assessee. Once it was destroyed by fire, no machinery was available which could be transferred by the assessee to any third party. In such a situation, it is difficult to accept that the destruction of machinery amounted to transfer thereof to a third person. For transfer, the asset must exist on the date when the transfer is said to have taken place. In the event of destruction, the third party, viz., insurance company, does not come into the picture till the destruction has taken place. After the destruction, there is nothing available to transfer. Hence, it is difficult to hold that in the case of destruction or damage, complete or partial or loss of the property, there can be any transfer 6y the assessee in favour of the third party. We are supported in our above conclusion by the decision of the Supreme Court in Vania Silk Mills (Pvt.) Ltd. v. C.I.T. (1991) 191 ITR 647, where dealing with the definition of "transfer" contained in section 2(47) in the context of section 45 of the Income Tax Act, it was held that in case of damage, partial or complete or destruction or loss of the property, there was no transfer of it in favour of a third party. The money received under the insurance policy in such cases was by way of indemnity or compensation for the damage, loss or destruction of the property. It was not in consideration of the transfer of the property in favour of the insurance company, it was by virtue of the contract of insurance or of indemnity, and in terms of the conditions of the contract. Even the fact that while paying for the total loss or damage to the property the insurance company took away such property or whatever was left of, would not change the nature of -the insurance claim which was indemnity or compensation for the loss because the payment by the insurance company was not in consideration of the property taken over by it. In view of the above, we answer the question referred to us in the negative and in favour of the assessee. In the facts and circumstances of the case, there shall be no order as to costs. M.B.A./1057/F Reference answered.