Is car theft claim settlement taxable?

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Atush Jain

Asst. Professor

162 Points Joined August 2016

Respected experts, My car was stolen in May 2015, the insurance claim was settled after 8 months of mental torture and harrasment. My car was 14 months old when it was stolen, I had renewed the policy after 12 months and the idv was 80% of initial ex showroom price. I had done some partial payment of my car loan hence idv was more than my loan outstanding amount with the bank. The insurance company had a weird requirement of receving loan closure documents before the claim could be settled which bank was not comfortable with. I had no choice but to close the loan by arranging for the loan outstanding amount and then finally received the whole of claim settlement amount in my account. Could you please help me understand if this claim settlement amount of idv would be taxable as per IT laws. Logically the idv of a car can never be more than the depreciation value of the car. but wanted some expert suggestions on this matter. Regards:- Sachin Matta

Replies (3)

Dhirajlal Rambhia

SEO Sai Gr. Hosp.

208169 Points Joined July 2016

In one of the decisions, the Supreme Court had held that insurance claim received on account of destruction of a shed is not chargeable to tax as the destruction does not amount to a transfer of an asset. Thereafter Section 45(1A) of the Income Tax Act 1961 (the Act) has been inserted in the Act and in case the following two conditions are satisfied, any profit or gain arising from the receipt of such insurance amount shall be chargeable to income tax under the head 'capital gain'. The conditions required to be satisfied are:

The compensation is received because of damage or destruction of any asset.
The damage or destruction is a result of four categories of circumstances, viz, (i) flood, typhoon, hurricane, cyclone, earthquake or other convulsion of nature; or (ii) riot or civil disturbance; or (iii) accidental fire explosion; or (iv) action by an enemy or action taken in combating an enemy (whether with or without a declaration of war).

If the aforesaid two conditions are satisfied, then Section 45(1A) of the Act would be attracted and such insurance amount would be treated as full value of consideration received or accruing as a result of transfer of the capital asset for the purpose of computing capital gain under Section 48 of the Act. Therefore, in case the depreciated value of Car as on the date of theft was A and insurance amount received was A+B, then excess amount B would be chargeable to tax under head capital gain.

Guest

So, as theft does not come within the two conditions (the asset is not destroyed/ damaged), the insurance amount received will not be taxable. But will the insurance claim received deducted from the block of assets? or will it be non taxable capital receipt?