Radhey Radhey International of Jaipur, a toys manufacturing company was transporting two of its machines from unit "A" located at Ajmer to unit "B" located at Jaipur (which are at a distance of 150 KMs) on 1st September,

i) Section 45(1A) of the Income tax Act, 1961, overrides section 45(1) of the Income tax Act, 1961 and compensation received on Damage or Destruction of Capital Asset due to civil disturbances chargeable to Capital gains whether or not it is a transfer as per Section 2(47) of the Income tax Act, 1961. Receipt of insurance compensation in the form of money or any asset is to be treated as consideration and capital gain is chargeable to tax in the PY of receipt. The two qualifying conditions prescribed are (a) the compensation should have been received because of damage or destruction of capital asset; and (b) the damage or destruction is as a result of circumstances mentioned therein. As per the facts of the case, both the conditions are satisfied and therefore, the compensation is to be treated as consideration received for damages to the machine. ii) Receipt of amount as insurance compensation of ₹8 lakhs has to be treated as sales consideration for computing capital gains in accordance with the provisions of section 45(1A) of the Act towards the damages caused to the machines (Capital Assets). Accordingly, The amount of ₹8 lakhs is to be adjusted in the value of the block of assets. iii) As per provisions of section 43(6)(c) of the Income tax Act, 1961, the receipt of insurance compensation of ₹8 lakhs shall be deducted from Written Down Value (WDV) of the Block of Assets. If the written down value of the Block of assets in which damaged machines falls, is more than ₹8 lakhs, then the entire amount of ₹8 lakhs shall be deducted from written down value and if the opening written down value of the Block of assets plus actual cost of the assets put to use falling within the block plus expenditure in connection with the transfer, if any is less than ₹8,00,000 the difference shall be treated as short term capital gain by virtue of Section 50 of the Income Tax Act, 1961.