Holding

Insurance proceeds received as indemnity for loss or destruction of a capital asset are not a transfer of the asset and therefore are not chargeable to capital gains tax under Section 45.

Summary

Vania Silk Mills Ltd. purchased machinery in 1957 and hired it to Jasmine Mills, which insured the machinery. A fire in 1966 destroyed the machinery; the insurer paid the lendee, which in turn paid the appellant Rs 6,32,533 as insurance claim. The assessee treated the excess of the claim over the written‑down value as profit under s.41(2) and the excess over the original cost as capital gains under s.45. The tax officer taxed the latter as capital gains; the Income‑Tax Appellate Tribunal held otherwise, but the High Court reversed, holding the amount chargeable as capital gains. The Supreme Court held that insurance proceeds are an indemnity, not consideration for a transfer of the asset, and therefore do not fall within the definition of “transfer” in s.2(47) and s.45, so the amount is not chargeable to capital gains tax. The appeal was allowed, setting aside the High Court decision.

Issues considered

Whether the receipt of insurance proceeds for a destroyed capital asset constitutes a "transfer" of the asset within the meaning of Section 45 of the Income‑Tax Act, 1961.
Whether the excess amount over the original cost of the machinery is chargeable as capital gains under Section 45.

Legislation cited

Income Tax Act, 1961s. 2(47), s. 41(2), s. 45

Subjects

capital gains taxinsurance indemnitytransfer of capital assetSection 45Section 2(47)Section 41(2)destruction of assetreinstatement clause

Judgment

VANIA SILK MILLS (P) LTD.
A
v.
COMMISSIONER OF INCOME-TAX, AHMEDABAD

.L AUGUST 14, 1991

[K.N. SINGH AND P.B. SAWANT, JJ.] B

Income Tax Act, 1961: Ss. 2(47), 41(2), 45-Capital asset-
Destruction of-Money received as insurance claim-Nature of-
Whether chargeable to capital gains tax.

The appellant company purchased machinery worth Rs.2,81,741
in the year 1957 and gave it on hire to another company which insured c
the machinery. In the year 1966, a fire broke out in the lendee company
causing extensive damage to the machinery of the appellant. On a settle-
ment of the insurance claim the lendee company paid to the appellant a
snm of Rs.6,32,533 on account of the destruction of its machinery. The
difference between the actual cost of the machinery and its written D
down valne worked out to Rs.2,62, 781 which the appellant (the asses-
see) showed in its income tax return. for the relevant year as profit
chargeable to tax under s. 41(2) of the Income-Tax Act. The Income-
Tax Officer subjected to tax also the additional amount of Rs.3,50,792
the difference between the amount of insurance claim and· the original
cost of the machinery-treating the same as capital gains chargeable E
under section 45 of the Act, and rejected the case of the appellant that
the capital gains tax was not attracted to the amount received on
account of the insurance claim since there was no transfer of capital
asset as was contemplated bys. 45 read withs. 2(47) of the.Act.

The appeal of the assessee was dismissed by the Appellate F
Assistant Commissioner, but its claim was accepted by the Income Tax
Appellate Tribunal which held that the amount was not received on
account of transfer of the capital asset but on account of damage to it
and that s. 45 was attracted only when there was a transfer of the
capital asset.
G
The reference at the instance of the revenue was answered by the
High Court against t~e assessee. Aggrieved the assessee filed the appeal
"" before this Court on a certificate granted by the High Court.

On the question: whether the money received towards the insu-
ranee claim on account of the damage to or destruction of the capital H

577
578 SUPREME COURT REPORTS [1991] 3 S.C.R.

asset was so received on account of the transfer of the asset within the
A
meaning of s. 45 of the Act and was, therefore, chargeable to the capital
gains tax under the said section,

Allowing the appeal, this Court,

B HELD: 1.1 The money received under the insurance policy is by
way of indemnity or compensation for the damage, loss or destruction
of the property. It is not in consideration of the transfer of the property
or the transfer of any right in it in favour of the insurance company. It
is by virtue of the contract of insurance or of indemnity, and in terms of
the conditions of the contract. [584C-D I
c 1.2 In the case of damage, partial or complete, or destruction
or loss of property there is no transfer of it in favour of a third party.
The fact that while paying for the to\al loss of or damage to the pro-
perty, the insurance company takes over such property or whatever is
left of it, does not change the nature of the insurance claim which is
D indemnity or compensation for the loss. The payment of insurance
claim is not in consideration of the property taken over by the insurance
company, for one is not consideration for the other. The insurance
claim is not the value of the damaged property. The claim is assessed on
the basis of the damage sustained by the property or the amount neces-
sary to restore it to its original conditions. lt is not a consideration for
E the damaged property. [584C, F-G]

1.3 In the instant case, the amount received by the assessee was
the one received by it as damages on account of the loss of its machi-
nery. The lendee company, as a bailee, bad insured the machinery hired
from the assessee, since it was liable to make good the loss of the
F machinery to the assessee. This was implied under a contract of bail-
ment unless it was provided to the contrary. The Iendee company paid
the insurance amount pro rata to the assessee. [5870-G I

1.4 The insurance was on reinstatement basis which meant that
the property was to be restored to the condition in which it was, before
G the fire. The insurance company paid the amount for the restoration of ·"
the machinery which had to be on the basis of its value at the time of the
fire. The machinery in question was purchased in the year 1957 and the
fire broke out on August 11, 1966. Taking into consideration the ordi-
nary course of events, it was legitimate to presume that the cost of
machinery bad gone up during the intervening period and the assured
H .and, therefore, the assessee, was entitled to recover on the basis of the
SILK /\1ILLS v. C.I.T. 579

increased value of the machinery. [584H; 585A-B]
A
Halsbury's Laws of England, Fourth Edition, Vol. 25, referred
....__ to.

2.1 The capital gains is attracted by transfer and 11ot merely by
extinguishment of right howsoever brought about. The transfer may be B
effected by various modes and one of the modes is the ·extinguishment of
right on transfer of the asset itself or on account of the transfer of the
right or rights in it. The extinguishment of right or rights must in any
case be on account of its or their transfer in order to attract the provi-
sions of Section 45 which speaks about capital gains arising out of
"transfer" of asset and not on account of "extinguishment ofright" by
itself. [583G-H; 584A] c
If extinguishment of right or rights is not due.to transfer and is on
account of the destruction or loss of the asset, it is not a transfer and
does not attract the provisions of s. 45 which relate to transfer and not
to mere extinguishment of right but to one by transfer. Hence an exting- D
uishment of right not brought about by transfer is outside the purview
ofs. 45. [584A-B]

Whatever the mode by which a transfer is brought about, the
existence of the asset during the process of transfer is a pre-condition.
Unless the asset exists in fact; there cannot be a transfer of it. [583E] E

Transfer presumes both the existence of the asset and of the trans-
feree to whom it is transferred. [584C]

2.2 When an asset is destroyed there is no question of transfer-
ring it to others. The destruction or loss of the asset, no doubt, brings F
about the destruction of the right.of the owner or possessor of the asset,
iu it. But it .is not on account of transfer. It is ou account of the disap-
pearance of the asset. The extinguishment of right in the asset on
account of extinguishment of asset itself is not a transfer oftne rignt but
its destruction. By no stretch ofi.magination, the destruction of the right
on account of the destruction of the asset can be equated with the G
extinguishment of right on account of its transfer. [583E-G I

3.f Although the definition of "transfer" in Section 2(47) of the
Act is inclusive, and, therefore, extends to events and transactions
which may not otherwise be ''transfer" according to its ordinary,
popular and natural sense, yet it also mentions such transactions as H
580 SUPREME COURT REPORTS [1991] 3 S.C.R.

A sale, exchange etc. to which the word "transfer" would properly apply
in its popular and natural import. Since those associated words and
expressions imply the existence of the asset and of the transferee,
according to the rule of noscitur a sociis, the expression "extinguish-
ment of any rights therein" would take colour from the said associated
words and expressions, and will have to be restricted to the sense
B analogous to them. [585C-E]

If the legislature intended to extend the definition to any exting-
uishment of right, it would not have included the obvious instances of
transfer, viz. sale, exchange etc. Hence the expression "extinguishment
of any rights therein" will have to be confined to the extinguishment of
c rights on account of transfer and cannot be extended to mean any
extinguishment of right independent of or otherwise than on account of
transfer. [585E-F]

3.2 The High Court, was not correct in reading the expression
"extinguishment of any rights" in the assets as any extinguishment of
D right whether it resulted in or was on account of transfer nor was it
right in assuming that for "transfer" within the meaning of Section 45
the asset need not exist. It erred in ignoring the basic postulate that
Section 45 does not relate to extin~uishment of right but to transfer.
Having concentrated its attention on the words "extinguishment of
right" rather than on "transfer", the High Court, misdirected it<relf
E and proceeded on the basis that every extinguishment of right whether
by way of transfer or not, is attwacted by Section 45. [585F-G; 584B I

Commissioner of Income-Tax v. Madurai Mills Co. Ltd., [1973]
89 ITR 45 and Commissioner of Income-Tax v. Mohanbhai Pamabhai,
[1973] 91 ITR 393, referred to.
F
4. Whether the lendee company had insured assessee's machi-
nery as bailees or as agents of the assessee would make no difference. The
insurance policy contained the reinstatement clause requiring the insurer
to pay the cost of the machiner:1 as on the date of the fire. [587G-H; 588A]

G 5. ln an insurance policy with the reinstatement clause, the
· insurer is bound to pay the cost of the insured property as on the date of
destruction of loss, and it matters very little if the amount so paid by the
insurance company is invested for purchasing the destroyed asset or for
any other purpose. l588A-BJ
H C.Leo Macho do v. Commissioner of Income-Tax, [1988] 172 ITR
744, approved.
SILK MILLS v. C.I.T. ISAWANT, l.J 581

Income-tax Commissioner v. J.K. Cotton Spinning & Weaving A
Mills Co. Ltd., [1987] 164 ITR 18, disapproved.

CIVIL APPELLATE JURISDICTION: Civil Appeal No. 1106
(NT) of 1976.

From the Judgment and Order dated 22nd/23rd January 1976 of B
the Gujarat High Court in Income Tax Ref. No. 122 of 1974.

Joseph Vellappilly, K.J. John and Ms. Deepa Dikshit for the
Appellant.

S.C. Manchanda, Ranvir Chandra and Ms. A. Subhashini for the C
Respondent,

The Judgment of the Court was delivered by

SAWANT, J. The appellant/Company, hereinafter referred to
as the assessee, carries on the business of manufacture and sale of D
art-silk cloth. Jn the year 1957, it purchased machinery worth
Rs.2,81,741 and gave it on hire to M/s. Jasmine Mills Pvt. Ltd.,
Bombay at an annual rent of Rs.33,900. On August 11, 1966, a fire
broke out in the premises of M/s. Jasmine Mills causing extensive
damage to the machinery installed in their premises including the
machinery hired by them from the assessee. The machinery belonging E
to the assessee became useless for any further use on account of the
damage. M/s. Jasmine Mills had insured along with its own machinery,
the assessee's machinery as well, and on a settlement of the insurance
claim, M/s. Jasmine Mills received a certain amount out of which it
paid a sum of Rs.6,32,533 to the assessee on account of the destruction
of its machinery. The difference between the actual cost of the machi- F
nery and its written-down value worked out to Rs.2,62,781. The asses-
see in its income-tax return for the assessment year 1967-68 (relevant
accounting year being the year ending on 31st August, 1966) showed
the said amount as profit chargeable to tax under Section 41(2) of the
Income-Tax Act (hereinafter referred to as the "Act"). The Income-
Tax Officer, however, subjected to tax also the additional amount of G
Rs.3,50,79'.(. being the difference between the amount of Rs.6,32,533
received on account of the insurance claim and the original cost of the
machinery, i.e., Rs.2,81,741, treating the same as capital gains charge-
able under Section 45 of the Act. The contention advanced by the
assessee that the capital gains tax was not attracted to the amount
received on account of the insurance claim since there was no transfer H
582 SUPREME COURT REPORTS [1991) 3 S.C.R.

of capital asset as was ·contemplated by Section 45 read with Section
A
2( 47) of the Act, was negatived by the Jncome-Tax Officer.

The assessee appealed against the order to the Appellate
Assistant Commissioner who also negatived the said contention of the
appellant and· dismissed the appeal. The assessee's contention was,
B however, upheld ii1 the appeal before the Income-Tax Appellate Tri-
bunal, the Tribunal holding that the amount was not received on
account of a transfer of the capital asset but on account of \he damage
to it and that Section 45 was attracted only when there was a transfer of
the capital asset. Being· aggrieved, the Revenue applied for reference
of the case to the High Court on the following two questions:
c (i) whether on the facts and in the circumstances of the case the
transfer was justified in law in holding that there was no transfer
of capital ass.et by the assessee within the meaning of Section
2(47) of the Act?

D (ii) whether on the facts and in .the circumstances of the case the
sum of Rs.3,50,792 being the excess of the cost of the machinery
received from M/s. Jasmine Mills Pvt. Ltd. was chargeable to tax
as capital gains under Section 45 of the Act?

The High Court answered the first question in the negative, and conse-
E quently the second question in the affirmative, i.e., both questions in
favour of the Revenue and against the assessee.

This appeal has been filed by the assessee on a certificate granted
by the High Court. "'

F 2. The short question that falls for our consideration is whether the
money received towards the insurance claim on account of the damage
to or destruction of the capital asset is so received on account of the
transfer of the asset within the meaning of Section 45 of the Act and is,
therefore, chargeable to the capital gains tax under the said section.

G 3. It would be convenient to reproduce here the provisions of Section
45 of the Act as they stood at the relevant time:

"45. Capital gains-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 and 54, be charge-
H ·able to income-tax under the head 'capital gains', and shall
SILK MILLS v. C.I.T. {SAWANT, J.J 583

be deemed to be the income of the previous year in which
A
the transfer took place".
Emphasis supplied

L Section 2(47) of the Act which defined transfer at the relevant
time read as follows:
B
"2. Definitions-In this Act, unless the context otherwise
requires,-

(47) 'transfer', in relation to a capital asset, includes the
sal<;>, exchange or relinquishment of the asset or the exting- C
uishment of any rights therein or the compulsory acquisi-
tion thereof under any law."

A reading of the two sections makes· it abundantly clear that the
profits or gains which are amenable to Section 45 must arise from the
transfer of the capital asset which is effected in the previous year. The D
transfer may be brought about by any of the modes of transfer which
include sale, exchange, relinquishment of the asset or the extinguish-
ment of the rights therein or the compulsory acquisition of the asset
under any law. It may be of the asset itself or of any rights in it. It may
further be the result of a voluntary act or a compulsory operation.
Whatever the mode by which it is brought about, the existence of the E
asset during the process of transfer is a pre-condition. Unless the asset
exists in fact, there cannot be a transfer of it.

4. When an asset is destroyed there is no question of transferring
+ it to others. The destruction or loss of the asset, no doubt, brings about
the destruction of the right of the owner or possessor of the asset, in it. F
But it is not on account of transfer. It is on account of the disappea-
rance of the asset. The extinguishment of right in the asset on account
of extinguishment of th~ asset itself is not a transfer of the right but its
destruction. By. no stretch of imagination, the destruction of the right
o.n account of the destruction of the asset can be equated with the
extinguishment of right on account of its transfer. Section 45 speaks G
about capital gains arising out of "iransfer" of asset and not on
account of "extinguishment of right" by itself. The capital gains is
attracted by transfer and not merely by extinguishment of right
howsoever brought about. The transfer may be effected by various
modes and one of the modes is the extinguishment of right on transfer
of the asset itself or on account of the transfer of the right or rights in H
584 SUPREME COURT REPORTS [1991] 3 S.C.R.

it. The extinguishment of right or rights must in any case be on account
A
of its or their transfer in order to attract the provisions of Section 45. If
it is not, and is on account of the destruction or loss of the asset, as in
the present case, it is not a transfer and does not attract the provisions
of Section 45 which relate to transfer and not to mere extinguishment
of right but to one by transfer. Hence an extinguishment of right not
B brought about by transfer is outside the purview of Section 45. The
High Court erred in ignoring the basic postulate that Section 45 does
not relate to extinguishment of right but to transfer. Having con-
centrated its attention on the words "extinguishment of right" rather
than on "transfer", the High Court, with respect, misdirected itself
and proceeded on the basis that every extinguishment of right whether
by way of transfer or not, is attracted by Section 45.
c
5. Transfer presumes both the existence of the asset and of the
transferee to whom it is transferred. In the case of the damage, partial
or complete, or destruction or loss of the property, there is no transfer
of it in favour of a third party. The money received under the insu-
D rance policy in such cases is by way of indemnity or compensation for
the damage, loss or destruction of the property. It is not in considera-
tion of the transfer of the property or the transfer of any right in it in
favour of the insurance company. It is by virtue of the contract of
insurance or of indemnity, and in terms of the conditions of the con-
tract. Under an insurance contract, the assured cannot claim more
E amount than th.e sum insured. The sum insured is the maximum liabi-
lity of the insurer and the assured secures it by paying his premium
which is accordingly fixed. Even within the maximum limit, the
insured canhot recover more than what he establishes to be his actual
loss, whatever may be his estimates of the loss that he was likely to
bear and whatever the premium he may have paid calculated on the
F basis of the said estimate.

The fact that while paying for the total loss of or damage to the
property, the insurance company takes over such property or whatever
is left of it, does not change the nature of.the insurance claim which is
indemnity or compensation for the loss. The payment of insurance
G claim is not in consideration of the property taken over by the insu-
rance company, for one is not consideration for the other. It is incor- ....
rect to argue that the insurance claim is the value of the damaged
property. The claim is assessed on the basis of the damage sustained by
the property or the amount necessary to restore it to its original condi-
tion. It is not a consideration for the damaged property. In the present
H case, the insurance was on reinstatement basis which meant that the
SILK MILLS v. C.l.T. [SAWANT, J.[ 585

property was to be restored to the condition in which it was, before the
A
fire. The insurance company paid the amount for the restoration of the
machinery which had to be on the basis of its value at the time of the
'"'· fire. The machinery in question was purchased in the year 1957 and the
fire broke out on August 11, 1966. Although nothing has come on
record on the point, taking into consideration the ordinary course of
• events, it is legitimate to presume that the cost of machinery had gone
up during the intervening period and the assured and, therefore, the
B

assessee, was entitled to recover on the basis of the increased value of
the machinery (refer to Halsbury's Laws of England, Fourth edition,
VoL 25 under the heading Insurance, in para 654).

6. It is true that the definition of "transfer" in Section 2( 47) of
the Act is inclusive, and therefore, extends to events and transactions
c
which may not otherwise be "transfer" according to its ordinary,
popular and natural sense. It is this aspect of the definition which has
weighed with the High Court and, therefore, the High Court has
argued that if the words "extinguishment of any rights therein" are
substituted for the word "transfer" in Section 45, the claim or compen- D
sation received from the insurance company would be attracted by the
said section. The High Court has, however, missed the fact that the
deffnition also mentions such transactions as sale, exchange etc. to
which the word "transfer:' would properly apply in its popular and
natural import. Since those associated words and expressions imply
the existence of the asset and of the transferee, according to the rule of E
noscitur a sociis, the expression "extinguishment of any rights therein"
would takt colour from the said associated words and expressions, and
will have to be restricted to the sense analogous to them. If the legisla-
ture intended to extend the definition to any extinguishment ofright, it
would not have included the obvious instances of transfer, viz., sale,
exchange etc. Hence the expression "extinguishment of any rights F
therein" will have to be confined to the extinguishment of rights on
account of transfer and cannot be extended to mean any extinguish-
ment of right independent of or otherwise than on account of transfer.

7. The High Court, as stated earlier, read the expression ''.extin-
guishment of any rights" in the assets as any extinguishment of right G
'' whether it resulted in or was on account of transfer. For the reasons
which we have discussed earlier we find that that approach is not
correct. For the same reasons, we are unable to accept the reasoning of
the High Court that for "transfer" within the meaning of Section 45
.. the asset need not exist. We are afraid that the High Court's reliance
on Commissioner of Income-Tax v. R.M.• Amin, [1971] 82 !TR 194 H
586 SUPREME COURT REPORTS [1991] 3 S.C.R.

Gujarat to hold that for the transfer contemplated by Section 45, the
A
asset neet not exist is not well-merited. There, the High Court was
concerned with a chose-in-action, viz., the shares, and the amount
received by the assessee-shareholder on liquidation of the company
representing his share in the assets of the company. The Court there· """
had pointed out that the extinguishment of right of the assessee-
B shareholder in his share which was an incorporeal property had come
about on account of receipt by him of the amount representing the
value of the shares.

The amount received by the assessee-i;hareholder does not rep-
resent any consideration received by him as a result of the extinguish-
ment of his rights in the shares. The share merely represents the right
c to receive money on distribution of the net assets of the company in
liquidation and it is by satisfaction of that right, that the right is exting-
uished when such monies are received by the shareholder. The con-
sideration presumes quid pro quo and, therefore, transfer of the pro-
perty or of the rights in the !Jroperty, whether the property is corporeal
D or incorporeal.

Wheh the assets themselves are being distributed, it is correct to
say that to the extent of distribution, they are wiped out. It is in that
sense that the assets do not exist to the extent that they are distributed.
When the company's assets are thus distributed, is a sense the assets
E which are converted into money and which, therefore, exist in the
form of money are transferred from the liquidator to the shareholder.
His rights in the assets come to an end when he receives his liquidated
share of the asset. In such a case the assets do exist though in the
converted form, viz., cash and what is transferred is also the converted.
form of the asset. With respect, therefore, it is not correct to say that
F in such cases the capital asset does not exist and does not change hand
as capital asset. That the receipt of his share in the asset brings about
automatically the extinguishment of the shareholder's rights in the
asset cannot, however, be gainsaid. The decision of the Gujarat High
Court in R.M. Amin's case (supra) was appealed against and this
Court while approving the ratio of the said decision further explained
G the nature of the money received by a shareholder on the liquidation
of a company. This Court reiterating its earlier view in the c:ase of
Commissioner of Income-tax v. Madurai Mills Co. Ltd., [1973] 89 !TR
45, held that the act of the liquidator in distributing the assets of the
company does not result in the creation of new rights. It merely recog-
nises the legal rights which were in existence prior to the distribution.
H The shareholder receives money in recognition and satisfaction of his
SILK MILLS r. CI.T. [SAWANT, i.J 587

right and not by operation of any transaction which amounts to sale,
A
exchange, relinquishment of asset or extinguishment of any of his
rights in such asset.

8. So also when a partner retires from the partnership what he
receives is his share in the partnership 'which is worked out and
realised. It does not represent consideration received by him as a B
result of the extinguishment of his interest in the partnership assets.
He has no share in any particular asset of the firm. Therefore, there is
no transfer of interest in any particular asset of the firm on account of
the receipt of his share by a retired partner. As held in Commissioner
of Income-tax v. Mohanbhai Pamabhai, [1973] 91 ITR 393 (Gujarat)
no part of the amount received by the assessee as a retired partner is
assessable to capital gains tax under Section 45. c
9. The High Court has explained these two decisions by giving
reasons which do not appeal to us. The Court has tried to distinguish
them from the facts of the present case pointing out, firstly, that there
was no foundation either in law or in fact to believe that the amount D
which the assessee received from M/s. Jasmine Mills was paid to it in
satisfaction or in working out of its right, if any, to recover damages
under law or contract for the loss or damage caused to the machinery.
We do not see any difficulty in holding that it was an amount received
by the assessee as damages on account of the loss of its machinery. It is
difficult to describe it otherwise. The second reasr.n given by the High E
Court is, with respect, equally fragile. It is held that the alleged right,
if any, of the assessee to recover damages was not an absolute statu-
tory right but one which was subject to a contract to the contrary and
even if there was no such contract it was merely an inchoate or contin-
gent right in respect of which some investigation or legal proceeding
and settlement or adjudication would he necessary for its satisfaction F
or fulfilm~nt. We do not agree with this reasoning as well. The facts
clearly show that M/s. Jasmine Mills as a bailee had insured the
machinery hired from the assessee, since it was liable to make good the
loss of the machinery to the assessee. This is implied under a contract
of bailment unless it is provided to the contrary. M/s. Jasmine Mills
,' further admittedly paid the insurance amount pro rata to the assessee. G
In the circumstances, we are unable to appreciate the distinction
sought to be made by. the High Cour~.

10. We are also .unable to see how it would make any difference
to the point involved in the present case whether the Jasmine Mills had
insured the assessee's machinery as bailees or as agents of the assessee. H

/
588 SUPREME COURT REPORTS [ 1991] 3 S.C.R.

A There is further no dispute that the insurance policy contained the
reinstatement clause requiring the insurer to pay the cost of the
machinery as on the date of the fire. As we have pointed out earlier, in
an insurance policy with the reinstatement clause, the insurer is bound
to pay the cost of the insured property as on the date of the destrnction
or loss, and it matters very little if the amount so paid by the insurance
B company is, invested for purchasing the destroyed asset or for any
other purpose. Jn the circumstances, for the purposes of answer.ing the
question in hand, it was not necessary to inquire whether the amount
received by the assessee was spent in replacement of the machinery or
not.

c 11. For the reasons given above, the decision of the Allahabad
High Court in Commissioner of Income-tax v. J.K. Cotton Spinning &
Weaving Mills Co. Ltd., [1987] 164 ITR 81 which proceeds on the same
reasoning as the impugned judgment is also not a good law. Instead,
we approve of the conclusion reached by the Madras High Court in C.
Leo Machado v. Commissioner of Income-tax, [1988] 172 ITR 744 for
D the reasons given by us above.

12. In the result, the appeal succeeds and the impugned decision
is set aside. In the circumstances of the case, however, there will be no
order as to costs.

R.P. Appeal allowed.