Case: The Commissioner Of Income-Tax, Madras Vs. Kasturi And Sons Ltd

useless as everybody would resort to such practice and deprive the Revenue of the tax payableWe have already set out the relevant provisions in the policy of insurance giving an option to the insurer to replace or make good accidental loss or damage to the aircraft. The insurer exercised the option in this case. The effect of exercise of such option has been recognised to bring an end to the obligation to pay money and make the contract one to reinstate the subject-matter of insurance. It has been held that such a conversion relates back to the inception of the contract. The proposition was first laid down by Lord Campbell C. J., in Brown v. Royal Insurance Co. [1859] 1 E and E 853 in the following words: "The case stands as if the policy had been simply to reinstate the premises in case of fire ; because, where a contract provides for an election, the party making the election is in the same position as if he had originally contracted to do the act which he has elected to do." * 15. Till this date, the proposition remains undisturbed and it has been followed in several cases. Mr. K. Parasaran, learned senior counsel for the respondent, has placed before us xerox copies of the relevant pages in Halsburys Laws of England (4th edition), and several text books wherein Browns case [1859] 1 E & E 853, has been cited without reference to any contrary decision. In Halsburys Laws of England, fourth edition., volume 25, paras 634, 635 and 636, read as under: "634. Option as to reinstatement.---By the form of policy in general use, the insurers reserve to themselves the option of reinstating the property instead of making payment in money. This option is reserved for the insurers benefit and it is for them to elect whether to reinstate ; the assured is not entitled to require them to reinstate. Nor may he prevent them from reinstating if they elect to do so635. Exercise of option to reinstate.---An election for or against reinstatement is final once it is made, and cannot afterwards be withdrawn. No formal election is necessary ; an election by conduct is sufficient, provided that the conduct is clear and unequivocal. The insurers will be taken to have elected against reinstatement and in favour of a payment in money if the negotiations for a settlement have been conducted by the insurers throughout on the footing that the loss is to be made good by a payment in money, or if they have proceeded to arbitration for the purpose of ascertaining the amount to be paid under the policy. On the other hand, they are not bound, in the absence of specific provision, to exercise the option immediately ; they are entitled before exercising it to investigate the loss and to ascertain what its amount is likely to be. Therefore a merely provisional assessment of the amount, even if made in conjunction with the assured, does not debar them from electing to reinstate636. Effect of election to reinstate.---If the insurers do not elect to reinstate, their obligation to make good the loss by a payment in money continues I ; but if they do elect, the obligation ceases and the contract becomes a contract to reinstate". In the case of a building, this contract is sufficiently performed if the building is put substantially into the same state as before the fire." 16. It is not necessary for us to quote the passages in each text book. It is sufficient to give the references as follows (a) Chitty on Contracts, 27th edition, volume II, page 927 (b) Colinvauxs Law of Insurance, 6th edition, pages 191 and 192. At page 192, in para. 11.3 the relevant passage reads "The contract of insurance becomes enforceable, in fact, as a building contract---Davies J. in Marrell v. Irving Fire [1865] 33 NY 429." (c) General Principles of Insurance Law by E. R. Hardy Ivamy, 6th edition, page 485 (d) MacGillivray on Insurance Law, 9th edition, page 517 (para 21.4) (e) Modern Insurance Law by John Birds (4th edition, page 277) (f) The Law of Insurance Contracts by Malcolm A. Clarke (3rd edition) para 29.2 in page 791 17. Thus, there is no doubt that on the exercise of the option by the insurer over which the insured has no sway, the contract should be considered only as a contract for reinstatement and not as a contract for money. There is no question of any "money payable" under the contract. There is a fallacy in the contention that the money became payable on the occurrence of the accident and the exercise of the option thereafter by the insurer would not alter the nature of the contract. The contract itself gives the right to the insurer to exercise the option and the legal effect of such exercise is to make the contract one for reinstatement only from the inception. It is analogous to the "doctrine of relation back". Such exercise of option could only be after the occurrence of the accident and not at any time earlier. Consequently, the expression "moneys payable" in section 41(2) will not apply in this case 18. We are unable to accept the contention that the word "money" should be interpreted as "moneys worth". The reasons given by us earlier are sufficient and we need not add to them. The reason for introducing a fiction in section 41(2) of the Act as explained in Bipinchandra Maganlal and Co. Ltd.s case 1960 SC 318 (SC) quoted in Artex Manufacturing Co.s case 1997 SC 2846 (SC), that it is for the purpose of recoupment by the Revenue of the benefit allowed to the assessee in the previous years does not alter the situationIn the result, we do not find any error in the view expressed by the High Court in the judgment under appeal. We are in agreement with the reasoning and conclusion of the High Court in this case 19.

Decision (1 = appeal accepted, 0 = rejected): 0

Explanation:
0[ds]Thus, there is no doubt that on the exercise of the option by the insurer over which the insured has no sway, the contract should be considered only as a contract for reinstatement and not as a contract for money. There is no question of any "money payable" under the contract. There is a fallacy in the contention that the money became payable on the occurrence of the accident and the exercise of the option thereafter by the insurer would not alter the nature of the contract. The contract itself gives the right to the insurer to exercise the option and the legal effect of such exercise is to make the contract one for reinstatement only from the inception. It is analogous to the "doctrine of relation back". Such exercise of option could only be after the occurrence of the accident and not at any time earlier. Consequently, the expression "moneys payable" in section 41(2) will not apply in thisare unable to accept the contention that the word "money" should be interpreted as "moneys worth". The reasons given by us earlier are sufficient and we need not add to them. The reason for introducing a fiction in section 41(2) of the Act as explained in Bipinchandra Maganlal and Co. Ltd.s case 1960 SC 318 (SC) quoted in Artex Manufacturing Co.s case 1997 SC 2846 (SC), that it is for the purpose of recoupment by the Revenue of the benefit allowed to the assessee in the previous years does not alter the situationIn the result, we do not find any error in the view expressed by the High Court in the judgment under appeal. We are in agreement with the reasoning and conclusion of the High Court in this case