03 July 2012
due to fire raw material is burnt.Insurance received but not full so we transferred remaining amount to loss due to fire weather this amount is allowed as per income tax??what is the case if instead of raw material any capital assets is burnt.weather loss on capital assets is allowed as per income tax?? Please help me
04 July 2012
7.5 SCOPE AND YEAR OF CHARGEABILITY [SECTION 45] (i) General Provision [Section 45(1)] - Any profits or gains arising from the transfer of a capital asset effected in the previous year (other than exemptions covered under this chapter) shall be chargeable to Income-tax under this head in the previous year in which the transfer took place. (ii) Receipts from insurance parties [Section 45(1A)] - Where any person receives any money or other assets under any insurance from an insurer on account of damage to or destruction of any capital asset, as a result of flood, typhoon, hurricane, cyclone, earthquake or other convulsion of nature, riot or civil disturbance, accidental fire or explosion or because of action by an enemy or action taken in combating an enemy (whether with or without declaration of war), then, any profits or gains arising from receipt of such money or other assets shall be chargeable to income-tax under the head “Capital gains” and shall be deemed to be the income of the such person for the previous year in which money or other asset was received.
04 July 2012
Question 31 The assessee was a company carrying on business of manufacture and sale of art-silk cloth. It purchased machinery worth Rs.4 lakhs on 1-5-2006 and insured it with United India Assurance Ltd against fire, flood, earthquake etc., The written down value of the asset as on 01.04.2010 was Rs.2,08,800. The insurance policy contained a reinstatement clause requiring the insurance company to pay the value of the machinery, as on the date of fire etc., in case of destruction of loss. A fire broke out in August, 2010 causing extensive damage to the machinery of the assessee rendering them totally useless. The assessee company received a sum of Rs.6 lakhs from the insurance company on 15th March, 2011. Discuss the issues arising on account on the transactions and their tax treatment. (Cost inflation index for financial year 2006-07 and 2010-11 are 519 and 711 respectively) Answer Under section 45(1A) provision, where any person receives any money or other assets under an insurance from an insurer on account of damage to or destruction of capital asset, then, any profits and gains arising form the receipt of such money or other assets, shall be chargeable to income tax under the head “Capital Gains” and shall be deemed to be the income of such person of the previous year in which such money or asset was received. For the purpose of section 48, the money received or the market value of the asset shall be deemed to be the full value of the consideration accruing as a result of the transfer of such capital asset. Since the asset was destroyed and the money from the insurance company was received in the previous year, there will be a liability to capital gains in respect of the insurance moneys received by the assessee. The written down value of the asset as Rs.2,08,800 as on 01.04.2010 the computation of capital gain and tax implication is given below: chargeable under the head “Capital gains”. For the purpose of section 48, the moneys received shall be deemed to be the full value of the consideration accruing or arising. Under section 50 the capital gains in respect of depreciable assets had to be computed in the following manner: Full value of the consideration Rs.6,00,000 Less: Written down value as on April 1st, 2010 Rs.2,08,800 Short term capital gains Rs.3,91,200
04 July 2012
Question 24 Credit in P&L A/c - Surplus from insurance compensation received for loss of plant and machinery by fire 2,00,000
The following additional information is also available : (ii) The book value of the plant and machinery, which was insured against fire, was Rs.4,20,000. The written down value of plant and machinery block under section 43(6) as on 31st March, 2010 was Rs.1,85,000.
Answer - B. Capital Gains As per section 45(1A), where any money is received under an insurance from an insurer on account of damage to or destruction of any capital asset due to fire, any profit arising on receipt of such money is to be taxed as capital gains. For the purpose of section 48, the value of money received shall be deemed to be the full value of consideration received or accruing as a result of transfer of such capital asset. Amount received from insurance company (4,20,000 + 2,00,000) 6,20,000 It is assumed that the surplus of Rs.2 lakhs credited to profit and loss account represents the surplus over the book value of plant and machinery. Less: WDV of the block as at 1st April 1,85,000 Short term capital gains 4,35,000 (Capital gains from transfer of a depreciable capital asset is deemed to be a short-term capital gain u/s 50)
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