1999 (3) TMI 6 - SC - Income Tax

Insurer's aircraft replacement option makes Section 41(2) Income-tax Act inapplicable as no money payable under contract

Commissioner of Income-Tax Versus Kasturi And Sons Ltd.

SC held that Section 41(2) of Income-tax Act does not apply when insurer exercises option to replace damaged aircraft instead of paying money. Court ruled ... Applicability of Section 41(2) of the Income-tax Act to insurance replacement - Meaning of word 'moneys payable' - policy to replace the damaged aircraft with an aircraft of same make and type - HELD THAT:- It is contended that if an assessee who receives the money in kind instead of actual cash, is excluded from the ambit of section 41(2), the section would be rendered useless as everybody would resort to such practice and deprive the Revenue of the tax payable. 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. 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. We 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 section 41(2) of the Act as explained in Bipinchandra Maganlal and Co. Ltd.'s case [1960 (11) TMI 13 - SUPREME COURT] quoted in Artex Manufacturing Co.'s case [1997 (7) TMI 7 - SUPREME COURT], 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. In 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. The appeal fails and suffers dismissal. Issues Involved:1. Applicability of Section 41(2) of the Income-tax Act to insurance replacement.2. Interpretation of 'moneys payable' under Section 41(2) of the Income-tax Act.3. Legal effect of the insurer's option to replace the insured property.Issue-wise Detailed Analysis:1. Applicability of Section 41(2) of the Income-tax Act to Insurance Replacement:The primary issue was whether the replacement of a damaged aircraft by the insurer, instead of a monetary payout, would attract the provisions of Section 41(2) of the Income-tax Act. The Income-tax Officer applied Section 41(2) and calculated profits based on the difference between the original cost and the written-down value of the aircraft. The Appellate Assistant Commissioner upheld this view, interpreting that 'moneys payable' included any amount received from an insurance company in any form. However, the High Court concluded that the expression 'moneys payable' could not be applied to this case since the insurer opted for replacement, not a monetary payout.2. Interpretation of 'Moneys Payable' under Section 41(2) of the Income-tax Act:The High Court and the Supreme Court both focused on the interpretation of 'moneys payable.' The term is defined in the Explanation to Section 32(1A) to include insurance or compensation moneys payable. The principle of strict construction of taxing statutes was emphasized, stating that the term 'money' should be understood in its ordinary sense, referring to actual money or cash, not to any other benefit or equivalent. The court rejected the argument that 'money' could be interpreted as 'money's worth,' maintaining that the statutory language must be adhered to strictly.3. Legal Effect of the Insurer's Option to Replace the Insured Property:The court examined the legal implications of the insurer's option to replace the aircraft. The insurance policy allowed the insurer to replace or make good the accidental loss or damage. The insurer exercised this option, converting the contract from a monetary payout to a reinstatement contract. The court referenced legal principles and precedents, including Brown v. Royal Insurance Co. and Halsbury's Laws of England, which support the view that once the insurer opts to replace, the contract is treated as one for reinstatement from its inception. This doctrine of 'relation back' implies that no money is payable under the contract, negating the applicability of Section 41(2).Conclusion:The Supreme Court affirmed the High Court's judgment, concluding that the insurer's exercise of the option to replace the aircraft transformed the contract into one for reinstatement, not for the payment of money. Thus, the expression 'moneys payable' in Section 41(2) did not apply, and the appeal by the Revenue was dismissed. The court emphasized the necessity of strict interpretation of fiscal statutes and upheld the principle that 'money' should be understood as actual cash, not as any equivalent or benefit.