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

The respondent is a public limited company carrying on business of publishing a newspaper "The Hindu". It purchased a Dakota aircraft at a cost of Rs. 3, 31, 455 for the purpose of ensuring quicker and speedier transport and delivery of the newspaper, The aircraft was insured with the British Aviation Insurance Ltd., Calcutta, for a sum of Rs. 4, 00, 000 The terms of the insurance policy enabled the insurer to opt for replacement of the aircraft in the event of loss or damage thereto in an accident. The relevant clauses in the policy are in the followingILOSS OR DAMAGE TO AIRCRAFTSubject to the terms conditions and limits hereof the company will at their option pay or replace or make good accidental loss of or damage to the aircraft as described in the Schedule hereto (hereinafter referred to as "theincluding standard component parts thereof temporarily detached in connection with the overhaul or repair while in the custody or control of the insured (unless other similar component parts have been substituted) whilst the aircraft isIn flightTaxyingOn the groundMoored"7 and 8 of the "General conditions" read asIn the event of the company exercising their option under section 1 to replace the aircraft the replacement shall unless otherwise mutually agreed be by an aircraft of the same make and type and in reasonably like condition8. The aircraft shall at all times remain the property of the insured who shall have no right of abandonment to the company. In the event of payment of a total loss or replacement of the aircraft by the company under the terms of the policy the company may at their option elect to take over the remains of the aircraft as salvage."respondents aircraft met with an accident on December 25, 1967, and became a total wreck. The insurer exercised its option in terms of the policy and purchased a similar aircraft for Rs. 3, 50, 000 and after incurring an additional expenditure of Rs. 25, 000 made it available to the respondent in the place of the damagedassessment of the respondent for the year 1969-70, which was completed on January 31, 1972, was reopened by the Income-tax Officer under section 147(b) of the Income-tax Act (hereinafter referred to as the "Act"). In the reassessment proceedings, the Income-tax Officer, applied the provisions of section 41(2) of the Act and worked out the profits at the difference between the original cost and the written down value, viz., Rs. 1, 58, 122. He rejected the contention of the assessee that in view of the exercise of the option of the insurer to replace the aircraft, no money was payable to the assessee under the policy of insurance and thus the provisions of section 41(2) of the Act were not attracted. Aggrieved by the order of the Income-tax Officer, the assessee preferred an appeal before the Appellate Assistant Commissioner who took the view that Explanation to section 41(2) read with Explanation to section 32(1) of the Act made it clear that the expression "moneys payable" used in the section included any amount received from an insurance company in any form. In that view of the matter, the Appellate Assistant Commissioner dismissed the appeal of the assessee. On further appeal to the Tribunal, the latter opined that the insurer had an option to replace the aircraft and exercised it. Notwithstanding the same, it remained to be a contract of insurance to pay money and the exercise of the option was only to substitute the mode of discharge of the liability under the said contract. According to the Tribunal, the subject-matter of the contract remained one for payment of money which would attract the provisions of section 41(2) of the Act. Consequently, the order of the Income-tax Officer as affirmed by the appellate authority was upheld by the TribunalAt the instance of the assessee, the matter was referred to the High Court for answering the following question (see 1984 MAD 181,on the facts and circumstances of the case, there was any profit assessable under section 41(2) of the Income-tax Act, 1961, by the insurance company execising its option under the policy to replace the damaged aircraft with an aircraft of same make and type ?"High Court after a detailed consideration of the matter concluded that the expression "moneys payable" occurring in section 41(2) of the Act could not be made applicable to the present case. Holding that on the exercise of the option by the insurer, the contract could not be considered to be one for payment of money, the High Court answered the reference in favour of the assessee and against the Revenue. It is the said judgment of the High Court which is in challenge in this appeal filed by special leave

Reasoning: 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