KASTURI Vs. COMMISSIONER OF INCOME TAX

JUDGEMENT

(1.) AN interesting question relating to the applicability of s. 41(2) of the I.T. Act, 1961 (hereinafter referred to as "the Act"), with reference to the exercise of an option to reinstate in terms of a policy of aviation insurance leading to the replacement in specie of an aircraft, arises for consideration in this reference under s. 256(1) of the Act.The assessee is a public limited company engaged in the business of publishing a newspaper "The Hindu". To ensure quicker and speedier transport and delivery of the newspaper published, it owned and employed a Dakota aircraft insured with the British Aviation Insurance Limited, Calcutta, for Rs. 4, 00, 000. One of the terms and conditions of the policy of insurance was that subject to the terms and conditions and the limits of the policy, the insurance company, at its option, will pay or replace or make good, the accidental loss or damage to the aircraft. Clause (7) of the general conditions of the policy of insurance provided that in the event of the insurance company exercising its option to replace the aircraft, the replacement shall, unless and otherwise mutually agreed, by an aircraft of the same make and type and in reasonably like condition. Clause (8) of was to the effect that at all times, the aircraft shall remain the property of the insured, who shall have no right of abandonment to the insurance company and that in the event of payment of the total loss replacement of the aircraft by the insurance company under the terms of the policy, the insurance company, may, at it option, elect to take over the remains of the aircraft as salvage. On December 25, 1967, the aircraft met with an accident and became a total wreck. Exercising its option in accordance with the terms of the posity of insurance, the insurance company purchased a similar aircraft for Rs. 3, 50, 000 and after incurring an additional expenditure of Rs. 25, 000, made it available to the assessee in the place of the damaged one. In the course of the assessment proceedings initiated for the assessment year 1969-.70, the assessee claimed that the exercise of an option by the insurance company in terms of the policy of insurance resulting in the replacement of the aircraft damaged in an accident by another aircraft of the same make, type and condition could not attracted the application of s. 41(2) of the Act, as no money were either payable or paid by the insurance company and, therefore, no assessable profit under s. 41(2) of the Act would at all arise.

(2.) THE ITO viewed the transaction resulting in the replacement of the damaged aircraft by another as one of purchase of an aircraft by the insurance company for sum of Rs. 3, 50, 000 and making it over to the assessee after incurring further expenditure in which the insurance company had acted on behalf of the assessee. Proceeding to work out the profits assessable under s. 41(2) of the Act, viz., the difference between the original cost and the written down value, the ITO assessed such profits at Rs. 1, 58, 122. THE assessee, in its appeal filed before the AAC, contended that no moneys were payable or paid to it having regard to the terms of the policy of insurance pursuant to which the reinstatement of the aircraft had taken place and, therefore, no assessable business profits under s. 41(2) of the Act could, at all, arise.

(3.) THUS, in the event of there being an election by the insurer to reinstate, there is a cessation of the obligation to make good the loss by money payment and the contract, though initially one of indemnity for repayment of money with reference to the particular risk covered by the process of the exercise of election or option, becomes really a contract to reinstate in specie from its inception. However, in the event of the insurer not electing to reinstate, the liability of the insurer to make good the loss by payment of money continues.