Agricultural income

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Querist : Anonymous

Querist : Anonymous (Querist)

21 January 2012 INSURANCE CLAIM RECEIVED ON DAMAGE OF AGRICULTURAL LAND IS EXEMPT OR NOT ,WITH REASON

CA. Vikash Dwivedi

CA. Vikash Dwivedi (Expert)
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21 January 2012 if it is rural agri land then no need to be anxious.

Insurance claim recd over and above damage/ loss is treated as Cap Gain.

CA PARAS BAFNA

CA PARAS BAFNA (Expert)
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21 January 2012 I am having a different view.
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When there is no transfer ( sale, exchange, relinquishment,acquisition etc... ) capital gains will not arise.
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Even though the land is damaged, yet it exists. The owner remains the same. For calculating Capital Gains Computational mechanism of Section 48 should also be workable. What cost of acquisition will be taken ? Section 55(2) also do not prescribe for cost of acquisition in such cases.
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This is mere a capital receipt and it can not be taxed as capital gains.
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CA Hardik Bunha

CA Hardik Bunha (Expert)
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21 January 2012 agree with paras bafna.

CA. Vikash Dwivedi

CA. Vikash Dwivedi (Expert)
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21 January 2012 Paras sir with due regards, if land is rural agri land then it is not a Cap asset there is no question of CG.

CA Nikhil Jhanwar

CA Nikhil Jhanwar (Expert)
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21 January 2012 Taking case of non-agri land, I have query.....it is true that even after damage land exists and there is no transfer

Under section 45(1A) when insurance claim is received on damage or destruction of capital asset, then it is treated as deemed transfer for the purpose of capital gains.

So whether, this Section will have any implication on damage of land?

CA PARAS BAFNA

CA PARAS BAFNA (Expert)
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22 January 2012 @ CA. Vikash Dwivedi,
Yes sir, you are right. In case of rural land, capital gains will not arise if it is transferred as it is not a capital asset.
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My view differs partially on the second comment due to the following reasons-

Insurance Company never pays any amount in excess of damages assessed by it.

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The insured person always thinks that whatever he had received is just a part of the damage/loss suffered.
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The situation of profit on damages due to insurance receipts is a hypothetical situation, specially when the amount of damages suffered is based on presumptions.
To show damages in Rupee terms is practically difficult for an assessee. Further, it is also not prudent for him to get valued his damages at lower scale and
to show insurance amount at higher scale , so as to pay taxes thereon.

CA PARAS BAFNA

CA PARAS BAFNA (Expert)
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22 January 2012 @CA Nikhil Jhanwar,

I would like to briefly discuss Section 45(1A)-
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This section is thankful to the case of Vania Silk Mills and alike cases in which insurance claims received by the assessees
could not be taxed due to the inherent flaw in the provisions of Section 45(1) vis-a-vis section 2(47).
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I may say it as a preventive exercise to stop leakage of revenue in case of insurance claims arising in certain circumstances.
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The specific circumstances in which the damage/ destruction to a capital asset takes place as given in Section 45(1A) are
(1) Flood....(ii) riot.....(iii) .....(iv).....
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It is to be noted that in normal circumstances 45(1A) has got no applicability, other provisions will work.
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Further, I am of the view that the damage/ destruction to the capital asset should be such in nature that the capital asset can not be revived back near to its original condition.
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For example--
Machine damaged (in 45(1A)circumstance)....claim received.... machine got repaired .
It does not seem logical that machine is
subjected to deemed transfer specifically when it is showing its existence by its production.
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Further, I am of the view that claims received as such are not treated as capital gains. Any profit or Gain arising from such claims is taxable and for that computational mechanism of Section 48 has to be followed.
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I take a simple example.
Maximum Mark (=claim)= 10 .
You have got (=Profit/Gain)= 7.
You can not say that your performance is 10 out of 10 when you got only 7.
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Coming to your query, if land has become lake or mountain, Section 45(1A) will attract on receiving insurance claim.
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You have to (by sitting near the lake/mountain) compute capital gains by deducting the Cost of Acquisition from the deemed Sales consideration.
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In my view 45(1A) does not override on the theory of "transfer" in computation of capital gains. It just add one more feather
in the cap of Section 2(47) by including the extinguishment of rights on the extinguishment of asset itself, in the definition of transfer.
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CA Nikhil Jhanwar

CA Nikhil Jhanwar (Expert)
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22 January 2012 Thanks......SIr it was very well though out view.....