Commissioner of Income-Tax, Madras Vs. Kasturi
and Sons Ltd.  INSC 55 (6 March 1999)
M.Srinivasan SRINIVASAN, J.
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/-. 2. 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 following terms:
Section 1 Loss or Damage to Aircraft Subject 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 "the aircraft") including standard
component parts thereof temporarily detached in connection with overhaul or
repair while in the custody or control of the Insured (unless other similar
component parts have been substituted) whilst the aircraft is In flight Taxying
On the ground Moored" Conditions 7 and 8 of the "General
Conditions" read as follows:
In 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 condition.
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
respondent's aircraft met with an accident on 25.12.67 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 damaged one. 4. The assessment of the respondent for the year 1969-70 which
was completed on 31.1.72 was reopened by the Income-tax Officer under S.147(b)
of the Income-tax Act (hereinafter referred to as the `Act'). In the
reassessment proceedings, the I.T.O. applied the provisions of S.41 (2) of the
Act and worked out the profits at the difference between the original cost and
the written down value, viz.
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 I.T.O., 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 "money 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 Tribunal. 5. At the instance of the assessee, the matter was
referred to the High Court for answering the following question:
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
exercising its option under the policy to replace the damaged aircraft with an
aircraft of same make and type?" The High Court after a detailed
consideration of the matter concluded that the expression "money
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 on Special Leave. 6. The learned Attorney
General appearing for the appellant formulated his propositions in the
following manner: " A contract of insurance is in essence a contract for
money and money only. On the occurrence of the accident, money became payable
under the said contract. If instead of money being paid,if the insured gets the
money's worth by payment in specie it does not alter the character of the
contract which continues to be one of insurance.
payment in specie being the money's worth would only amount to a substituted
mode of discharge. Once the money become payable under the contract on the
occurrence of the accident, the exercise of the option by the Insurer to
discharge his liability by payment in a different mode other than money will
not alter the situation that money was payable under the contract. In as much
as Section 41 (2) of the Act uses the expression "moneys payable" and
not "moneys paid", there is no doubt as to the applicability of the
Section to the case"
contra, Shri K. Parasaran, learned senior counsel appearing for the assessee
has contended that when a fiscal statute uses advisedly a specific expression,
it is not for the Court to substitute the same by another expression even if it
may be considered to be equivalent to the expression used by the Legislature.
When the contract of insurance contains a specific provision for the exercise
of an option by the Insurer without any reference to the Insurer and with
regard to which the Insurer had no say whatever, the moment such option is
exercised, the contract should be treated only as one providing for replacement
of the aircraft from the inception thereof. In that event, it cannot be
considered to be a contract for payment of money at any time. Consequently,
when the contract is one for replacement of aircraft from its inception, there
was no money payable under the contract to the Insurer at any time because of
the legal effect of the option exercised by the Insurer. Hence, Section 41 (2)
of the Act has no application to the present case and the view taken by the
High Court is in accordance with law and unassailable. 8.
proceeding to consider the respective contentions, it is necessary to advert to
the relevant provisions in the Act at the relevant time. Section 41 (2) in so
far as it is relevant is in the following terms:
(2) Where any building, machinery, plant or furniture which is owned by the assessee
and which was or has been used for the purposes of business or profession is
sold, discarded, demolished or destroyed and the moneys payable in respect of
such building, machinery, plant or furniture, as the case may be, together with
the amount of scrap value, if any, exceed the written down value, so much of
the excess as does not exceed the difference between the actual cost and the written
down value shall be chargeable to income-tax as income of the business or
profession of the previous year in which the moneys payable for the building,
machinery, plant or furniture became due:
expression "moneys payable" found in the sub-section has been defined
to have the same meaning as in sub-section (1A) of Section 32 (vide Explanation
2 to Section 41 (2A)). The Explanation to Section 32 (1A) defines "moneys
payable" in the following terms:
"moneys payable", in respect of any structure or work, includes:
insurance or compensation moneys payable in respect thereof;
the structure or work is sold, the price for which it is sold; ..."
principle that a taxing statute should be strictly construed is well settled.
In Principles of Statutory Interpretation by Justice G.P. Singh, Sixth edition
1966, the law is stated thus:- "The well-established rule in the familiar
words of LORD WENSLEYDALE, reaffirmed by LORD HALSBURY and LORD SIMONDS, means:
"The subject is not to be taxed without clear words for that purpose; and
also that every Act of Parliament must be read according to the natural
construction of its words". In a classic passage LORD CAIRNS stated the
principle thus: "If the person sought to be taxed comes within the letter
of the law he must be taxed, however great the hardship may appear to the
judicial mind to be. On the other hand, if the Crown seeking to recover the
tax, cannot bring the subject within the letter of the law, the subject is
free, however apparently within the spirit of law the case might otherwise
appear to be. In other words, if there be admissible in any statute, what is
called an equitable, construction, certainly, such a construction is not
admissible in a taxing statute where you can simply adhere to the words of the
statute". VISCOUNT SIMON quoted with approval a passage from ROWLATT, J.
the principle in the following words: "In a taxing Act one has to look
merely at what is clearly said.
is no room for any intendment. There is no equity about a tax. There is no
presumption as to tax. Nothing is to be read in, nothing is to be implied. One
can only look fairly at the language used". Relying upon this passage LORD
UPJOHN said: "Fiscal measures are not built upon any theory of taxation".
is obvious that the Legislature has deliberately used the word `moneys'.
Wherever the Legislature intended to refer to payment in kind other than cash
or money, it has taken care to provide specifically therefor. For example in
Section 41(1) itself, the Legislature has used the expression "Whether in
cash or in any other manner whatsoever". There are several sections in the
Act which refer to benefits other than cash though the value thereof can be
ascertained in terms of cash or benefits which are convertible in cash. See
Sections 17, 23(3), 28(iv), 40A(2a), 93(3)(c)(i). For example, Section 28(iv)
speaks of the value of any benefit or perquisite whether convertible into money
not, arising from business or profession. In Section 93(4)(c), `benefit' is
defined as a payment of any kind for the purposses of the section. A converse
case arose before the Calcutta High Court in Commissioner of Income-tax, West
Bengal-II versus Kanan Devan Hills Produce Company Ltd. 1979 Vol.119 ITR 431 in
which the words "which results directly or indirectly in the provision of
any benefit or amenity or perquisite whether convertible into money or
not" in cl. (c) (iii) of Section 40 of the Act came up for interpretation
and the Division Bench of the High Court held that those words excluded cash
paid directly to an employee as there was no question of convertibility to
money where cash was paid. When the Legislature has instead of using any word
such as `benefit' used only the term `money', it can refer only to money as
understood in the ordinary common parlance.
Shorter Oxford English Dictionary, `money' has been defined as a "Current
coin; metal stamped in pieces as a medium of exchange and measure of value. b.
Hence, anything serving the same purposes as coin, late ME. c. In mod. use
applied indifferently to coin and to such promissory documents representing
coin (esp. bank-notes) as are currently accepted as a medium of exchange".
Hence, the word `money' used in Section 41(2) of the Act has to be interpreted
only as actual money or cash and not as any other thing or benefit which could
be evaluated in terms of money. 12. The learned Attorney General has argued
that a contract of insurance is only a contract for payment of money and money
only, In support of this contention he has drawn our attention to Rayner vs.
Preston 1880-81 18 Chancery Division L.R.page 1. Brett Lord Justice observed:
subject-matter of insurance is a different thing from the subject-matter of the
contract of insurance. The subject-matter of insurance may be a house or other
premises in a fire policy, or may be a ship or goods in a marine policy. These
are the subject-matter of insurance, but the subject-matter of the contract is money,
and money only.
only result of the policy, if an accident which is within the insurance
happens, is a payment of money. It is true that under certain circumstances in
a fire policy there may be an option to spend the money in rebuilding the
premises, but that does not alter the fact that the only liability of the
insurance company is to pay money. The contract, therefore, is a contract with
regard to the payment of money and it is contract made between two persons, and
two persons only, as a contract".
has also referred to the judgment in Medical Defence Union versus Dept.of Trade
(1979) 2 W.L.R. 686.
question in that case was whether the contract was a Contract of Insurance at
all. The relevant facts in that case were as follows: The Medical Defence Union
that it was not an insurance company carrying on any class of insurance
business within the meaning of the Insurance Companies Act, 1974. The members
were paying subscription to the company and their membership was governed by
contract with each of them . Among its objects were the conduct of the legal
proceedings on behalf of members, indemnifying them against claims for damages
and costs and giving advice on various problems including employment,
defamation and professional and technical matters. The articles gave power to the
Council of Union at its discretion (1) to undertake the conduct or defence of
any matter or proceedings concerning a member's professional character or
interests, and (2) to grant to any member from Union funds or indemnity
regarding any action, proceeding, claim or demand concerning his professional
character or interest. In every case, an indemnity could be granted, restricted
or declined in the Council's absolute discretion.
question was whether the contract between each member and the union was a
contract of insurance for the purposes of the Act of 1974. The same was
answered in the negative.
Court observed that one of the three elements of a contract of insurance was
that the assured would become entitled to something on the occurrence of some
event; that that "something" must normally be of the nature of money
or its equivalent and not some other benefit. It should be noticed that though
the court was prepared to extend "money" to "eqivalent of
money" it refused to extend the meaning of the expression `money' to
`benefit'. Thus the decision can even be used against the appellant and it is
not helpful to him. 14. Reliance is placed upon the judgment of this (1997) 6
S.C.C. 437. The Bench referred to the provisions of Section 41(2) of the Act and
while analysing the rationale of the section quoted the following passage found
in an earlier judgment reported in 41 I.T.R. 290.
CIT v. Bipinchandra Maganlal & Co. Ltd. this Court has thus explained the
reason for introducing the fiction in the second proviso to Section 10(2)(vii):
reason for introducing this fiction appears to be this. Where in the previous
years, by the depreciation allowance, the taxable income is reduced for those
years and ultimately the asset fetches on sale an amount exceeding the written
down value, i.e., the original cost less depreciation allowance, the Revenue is
justified in taking back what it had allowed in recoupment against wear and
tear, because in fact the depreciation did not result. But the reason of the rule
does not alter the real character of the receipt. Again, it is the accumulated
depreciation over a number of years which is regarded as income of the year in
which the asset is sold. The difference between the written down value of an
asset and the price realized by sale thereof though not profit earned in the
conduct of the business of the assessee is notionally regarded as profit in the
year in which the asset is sold, for the purpose of taking back what had been
allowed in the earlier years".
Bench proceeded to refer to the position in law prior to the amendment
introduced by Act 67 of 1949 and the subsequent position. Learned Attorney
General has urged that when the Section intended recoupment of the benefit
allowed to the assessee in the previous years by the Revenue it does not matter
whether the benefit is received by the assessee in terms of money or actual
cash or any kind. It is contended that if an assessee who receives the money in
kind instead of actual cash, is excluded from the ambit of S.41 (2), the
Section would be rendered useless as everybody would resort to such practice
and deprive the Revenue of the tax payable. 15. We 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 versus Royal
Insurance Co. (1859)1 E & E 853 in the following words:
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."
Till this date, the proposition remains undisturbed and it has been followed in
several cases. Mr.
learned senior counsel for the respondent has placed before us xerox copies of
the relevant pages in Halsbury's Laws of England, (4th ed.) and several text
books wherein Brown's case has been cited without reference to any contrary
decision. In Halsbury's Laws of England, Fourth Edn. Vol.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 so. (***) (*) In a fire policy the option is embodied in the
undertaking of the insurers: see 20 Forms & Precedents (5th Edn.) 29, Form
v Commercial Union Assurance Co. (1885) 55 LjQB 146 at 149, CA per Bowen Lj.
v Royal Exchange Assurance Co. (1821) 1 Sh.174, Ct. of Sess.
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 reinstate. (*****) * Sutherland v Sun Fire Office (1852) 14 Dunl
775, Ct. of SEss.
Scottish Amicable Heritable Securities Association v Northern Assurance Co.
(1883) II R 287, Ct. of Sess.
Sutherland v Sun Fire Office (1852) 14 Dunl 775 at 777. Ct. of SEss, per lord
time may, however, be specified within which the option is to be exercised: Bisset
v Royal Exchange Assurance Co. (1821) 1 Sh 174, Ct. of Sess.
Sutherland v Sun Fire Office (1852) 14 Dunl 775 at 777, Ct. of Sess, per Lord
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; (*) 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
v Preston (1881) 18 Chl 1.C.A.
Brown v Royal Insurance Co. (1859) 1 E.E 853 at 858 per Lord Compbell CJ."
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 edn.
Vol.II Paged 927. (b) Colinvaux's Law of Insurance 6th edn. pages 191 &
192. At page 192 in Para 11.3, the relevant passage reads:
contract of insurance becomes enforceable, in fact , as a building contract -
Davies J. in Marrell vs. Irving Fire (1865) 33 N.Y. 429" (c) General
Principles of Insurance Law by E.R. Hardy Ivamy 6th edn. - page 485. (d) Mac Gillivray
on Insurance Law 9th edn. Page 517 (Para 21.4.). (e) Modern Insurance Law by
John Birds (4th edn.) P.277. (f) The Law of Insurance Contracts by Malcolm by
A. Clarke (3rd edn.) Para 29.2. in Page 791. 18. 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 S.41
(2) will not apply in this case.
are unable to accept the contention that the word `money' should be interpreted
as `money's worth'. The reasons given by us earlier are sufficient and we need
not add to them. The reason for introducing a fiction in S.41 (2) of the Act as
explained in Bipinchandra Maganlal & Co.Ltd. (41 I.T.R. 290) quoted in Artex
Manufacturing Co.(1997) 6 S.C.C. 437 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 situation.
the result, we do not find any error in the view expressed by the High Court in
the judgment under appeal.
in agreement with the reasoning and conclusion of the High Court in this case.
21. The appeal fails and suffers dismissal. There will be no order as to costs.