Tax impact of insurance money received for repairs, reconstruction of machineries

In J.R.Enterprises v.Asstt. CIT (2009) 24 DTR (Mum) (Trib) 311 the assessee who received insurance compensation capitalized the net expenditure on damaged assets. The AO on the other hand reduced the insurance compensation from the block of assets and thereby reduced the depreciation claim.

The assessee received insurance claim in respect of damages to tanks and terminals at Kandla. The assessee incurred expenditure of Rs.383 lakhs towards repairs, reconstruction and refurbishing of damaged tanks and terminals but received insurance amount of only Rs.125 lakhs from the insurance company. The assessee hence disclosed the balance amount of Rs.258 lakhs on the assets side of the balance sheet. In the subsequent year, the assessee received Rs.32.28 lakh and hence capitalized the net amount and thus increased the WDV of the block and depreciation claim. The AO disallowed the depreciation on the capitalized value and also reduced the insurance compensation of Rs.157 lakhs from the block value and reduced the claim of depreciation.

It may be noted that the assessee had received insurance compensation less than the expenditure incurred and hence the provisions of section 45(1A) could not be applied. The tribunal held that the assessee had capitalized the expenditure without legal support. So also the Revenue had adjusted the WDV of the block and thereby restricted the depreciation claim contrary to the provisions contained in the statute.

The tribunal hence held that the AO erred in restricting the depreciation claim by reducing the insurance compensation from the block value without the sanction of law. It disapproved the assessee’s action of increasing the block value and resultant claim of depreciation in violation of the definition of written down value contained in section 43(6)(c) of the Act.

The tribunal held that the assessee has some remedy through the provisions of section 31 or section 37 but declined to interfere on the matter. The tribunal in effect disapproved the action of both the assessee and the AO in this case.