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PETITIONER:

THE COMMISSIONER OF INCOME-TAX, MADRAS

Vs.

RESPONDENT:

KASTURI AND SONS LTD.

DATE OF JUDGMENT: 06/03/1999

BENCH:

D.P.Wadhwa, M.Srinivasan

JUDGMENT:

SRINIVASAN, J.

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/-. 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:

"7. 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.

8. The aircraft shall at all times remain the

property of the Insured who shall have no right of

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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."

3. The 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.

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 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:

"Whether, 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

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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.

Such 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"

7. Per 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.

Before 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:

"41 (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:

The 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:

(i) "moneys payable", in respect of any structure or

work, includes:

(a) any insurance or compensation moneys payable in

respect thereof;

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(b) where the structure or work is sold, the price for

which it is sold; ..."

9. The 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.

expressing the principle in the following words: "In a

taxing Act one has to look merely at what is clearly said.

There 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".

10. It 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.

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11. In 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:

"The 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.

The 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".

13. He has also referred to the judgment in Medical

Defence Union versus Dept.of Trade (1979) 2 W.L.R. 686.

The 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 Ltd.

claimed 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.

The 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.

The 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

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even be used against the appellant and it is not helpful to

him. 14. Reliance is placed upon the judgment of this

court in C.I.T. Gujarat Vs. Artex Manufacturing Co.

(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.

"In 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):

"...The 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".

The 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:

"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."

16. 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

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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 2 cl.2.

(**) Anderson v Commercial Union Assurance Co. (1885)

55 LjQB 146 at 149, CA per Bowen Lj.

(***) Bisset v Royal Exchange Assurance Co. (1821) 1

Sh.174, Ct. of Sess.

635. 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 Anderson.

**** A 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 Anderson.

636. 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

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building is put substantially into the same state as before

the fire.

* Rayner v Preston (1881) 18 Chl 1.C.A.

** Brown v Royal Insurance Co. (1859) 1 E.E 853 at

858 per Lord Compbell CJ."

17. 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 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:

"The 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.

19. 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 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.

20. 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. 21. The appeal fails and suffers

dismissal. There will be no order as to costs.