Insurance claim treatment

Company receives an insurance claim of Rs. 2 crores as a reinstatement value of the lost machinery. The written down value of that machinery was Rs. 1 Crore and the whole block of machinery was Rs. 4 crores.
At the yearend company was in the process to reinstate the new machinery in respect of which the insurance claim was received. The Value of the Capital work in process as on 31.03.2022 of the new machine was Rs. 2.50 crore.
My question is that
1. Whether the amount of Insurance claim of Rs. 2.00 crore will reduce from the wdv of the machinery i.e Rs.1 crore and surplus will be reduced from the Capital work in process of the machinery i.e Rs. 2.50 crore.
2. Or Whether all the amount of the Insurance claim of Rs. 2 crore will reduce from the wdv of the whole block i.e Rs. 4 crore.
Kindly guide the treatment as per company law and income tax act.

Hi Sukhveer! Let’s break down the accounting and tax treatment of the insurance claim received on the lost machinery, considering both Company Law (Accounting Standards) and Income Tax Act perspectives.

Facts Recap:

Written Down Value (WDV) of lost machinery = Rs. 1 crore
Total WDV of block of machinery = Rs. 4 crore
Insurance claim received = Rs. 2 crore
Capital Work in Progress (CWIP) for new machinery = Rs. 2.50 crore (work in progress for reinstatement)

1. Treatment under Company Law / Accounting Standards (AS/Ind AS)

Relevant Standards:

AS 4 / Ind AS 16 on Property, Plant & Equipment (PPE)
Ind AS 37 / AS 29 on Provisions, Contingent Liabilities & Contingent Assets (for insurance claims)

Treatment:

The block of assets method applies for depreciation (under Companies Act and Accounting Standards).
On loss/destruction of an asset, the insurance claim is recognized as income when virtually certain (Ind AS 37).
The insurance claim reduces the carrying amount of the asset lost, i.e., reduces WDV of that specific machinery or the block.
The difference between insurance proceeds and WDV is recognized as gain or loss in the P&L.

Now, since the machinery was lost and an insurance claim received:

The WDV of lost machinery (Rs. 1 crore) will be written off.
The insurance claim of Rs. 2 crore will be recorded.
The surplus Rs. 1 crore (2 crore - 1 crore) is a gain.
The CWIP of new machinery (Rs. 2.5 crore) is a separate capital expenditure and should not be reduced by insurance proceeds.

So, the insurance claim does NOT reduce CWIP. The CWIP is capitalized cost of new machinery being installed.

Summary for Company Law:

Particulars	Amount (Rs.)
WDV of lost machinery written off	1 crore
Insurance claim received	2 crore
Profit on insurance claim (income)	1 crore (2 cr - 1 cr)
CWIP for new machinery	2.5 crore (unaffected)

2. Treatment under Income Tax Act

Relevant Sections:

Section 32: Depreciation on block of assets
Section 28: Income chargeable under the head "Profits and gains of business or profession"
Section 41(4): Amount received on sale/disposal of depreciable asset

Tax Treatment:

The insurance proceeds for lost machinery are treated as income under business profits (Section 28), but adjusted for depreciation.
The WDV of lost machinery (1 crore) will be reduced from block.
The insurance claim (2 crore) is income and taxable.
The surplus of Rs. 1 crore (2 cr - 1 cr) is treated as business income and taxable.
The CWIP is not reduced by insurance claim; it is capital expenditure on new asset.
If the machinery is replaced, depreciation on new machinery can be claimed.

In brief:

Aspect	Accounting	Income Tax
Insurance claim treatment	Reduces WDV of lost machinery; surplus shown as income	Treat entire claim as income; reduce WDV of lost machinery
Treatment of CWIP	No reduction; separate asset under construction	No reduction; new capital expenditure
Tax implication of surplus	Recognized profit	Taxable business income