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Babulal Kanji Vs. Commissioner of Income-tax, Bombay. - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtMumbai
Decided On
Case NumberReference under Section 66(1) of the Indian Income-tax Act (XI of 1922) by the Income-tax Appellate
Reported inAIR1947Bom59; [1946]14ITR662(Bom)
AppellantBabulal Kanji
RespondentCommissioner of Income-tax, Bombay.
Excerpt:
.....well-known book on life assurance, where at page 1 the learned author says :the contract of life insurance may be further defined to be that in which one party agrees to pay a given sum upon the happening of a particular event contingent upon the duration of human life, in consideration of the immediate payment of a smaller sum or certain equivalent periodical payments by another. i think in the peculiar circumstances of this case it may very well be that it is, but the question referred to us does not embrace any such sum and i am unwilling as a general proposition to lay down about it anything that might be taken as a precedent. i should like to draw attention to two more facts in this connection. a week, he must be poor and, therefore, the provision in the policy to pay him a..........policy.' in another division against the marginal note, 'to whom payable' are the words, 'to the life assured if alive at the date of maturity or else to his nominee, executors, administrators or legal heirs at earlier death.' against the marginal note, 'events in which payable,' is 'survivance of the life assured to the date of maturity or his earlier death.' then under a separate heading 'details of premium,' is marginal note, 'special provisions,' and, 'this policy is issued subject to the conditions that a compulsory loan of a ninety-five per cent. of the premium will be taken by the assured within a week of the payment of each premium on the security of the policy as stipulated in privileges and conditions overleaf under the heading loans.' turning to the back of the policy, there.....
Judgment:

STONE, C.J. - This is a reference under Section 66 of the Indian Income-tax Act and the question referred to us is, whether, upon the facts found by the Tribunal, the sum of Rs. 5,276 is a permissible deduction under Section 15(1) of the Indian Income-tax Act. The sum of Rs. 5,276 represents the larger sum of Rs. 5,813, being the total annual premium of the policy of insurance to which I am about to refer. The sum of Rs. 5,813 has been scaled down to Rs. 5,276, because the assessee has another insurance policy and the premiums on the two policies added together exceed the total exemption allowed by the Income-tax Act. The question as framed in this reference in substance raises two questions of law for our consideration, first, has there has been an insurance on the life of the assessee, and, if so, secondly, what was the amount of the annual premium paid in the accounting year, which is 1942-43, for effecting such insurance. The relevant section of the Act provides :-

'15. (1) The tax shall not be payable in respect of any sums paid by an assessee to effect an insurance on the life of the assessee or on the life of a wife or husband of the assessee or in respect of a contract for a deferred annuity on the life of the assessee' and so on.

The important words are 'paid by an assessee to effect an insurance on the life of the assessee.' So that the first question I have formulated demands a consideration whether the policy in this case effects an insurance contingent on the duration of human life. The policy, which is called a 'Businessmans own policy without profits,' commences by reciting that 'Whereas the person named and descried in the schedule hereunder (hereinafter called the assured) has proposed an assurance on his life with the Tropical Insurance Company Limited.' Then under the heading of 'Details of sum assured' we find the sub-heading 'Date of maturity,' and underneath that, 'in the event of the death of the assured before maturity' and then is set out in a table the sums which will be paid at the end of the first year, second year, third year and the fourth year, with a proviso in the same portion of the policy 'Provided that the above amounts shall be payable only after deducting the loan and interest and current years premium (if any) then standing against the policy.' In another division against the marginal note, 'To whom payable' are the words, 'To the life assured if alive at the date of maturity or else to his nominee, executors, administrators or legal heirs at earlier death.' Against the marginal note, 'Events in which payable,' is 'Survivance of the life assured to the date of maturity or his earlier death.' Then under a separate heading 'Details of premium,' is marginal note, 'Special provisions,' and, 'This policy is issued subject to the conditions that a compulsory loan of a ninety-five per cent. of the premium will be taken by the assured within a week of the payment of each premium on the security of the policy as stipulated in privileges and conditions overleaf under the heading Loans.' Turning to the back of the policy, there are set out various numbered paragraphs headed, 'Privileges and Conditions.' Paragraph No. 8, which is called, 'Paid-up value,' provides : 'Since the payment of loan is made compulsory, the policy does not acquire paid-up value' and then comes a very important paragraph, paragraph 9, 'Loans' :

'A compulsory loan of 95 per cent. of the premium will have to be taken by the assured within a week of the payment of each premium on the security of policy only. Loan will be subject to an interest of 6 1/4 per cent. per annum payable half-yearly on 30th June and 31st December each year.

Failure to raise loan or pay premia or interest will make the policy null and void.'

By paragraph 11 the assured agrees that,

'If at any time due to non-payment of interest, the amount of loan with interest accumulation exceeds the surrender value of the policy at the time, the policy shall become liable to forfeiture without notice and in security of the said advance of Rs..... interest and expenses.'

A curious feature of this policy is, that taking into account the interest on the compulsory loan at six and a quarter per cent. per annum, the assured, in any eventuality, pays out more than he can possibly receive. At the end of five years, assuming that the assured survives, the policy matures, and the assured will have paid Rs. 968-12-0 in premium for every Rs. 1,000 insured and in addition he will have paid Rs. 57-6-0 by way of interest on the compulsory loans making together the sum of Rs. 1,026-2-0. For this outlay he will receive the sum of Rs. 1,000. Similar results will be found to prevail, if calculations are made at any previous periods up to the maturity of the policy.

We have been referred to the definition in Mr. Bunyons well-known book on Life Assurance, where at page 1 the learned author says :-

'The contract of life insurance may be further defined to be that in which one party agrees to pay a given sum upon the happening of a particular event contingent upon the duration of human life, in consideration of the immediate payment of a smaller sum or certain equivalent periodical payments by another.'

That definition was quoted with approval in the case of Joseph v. Law Integrity Insurence Company, Limited, in which case Cozens-Hardy, M.R., said :-

'I therefore think that these policies are life policies within the meaning of the passage in Bunyon on Life Assurance which I have read. Their effect is to constitute an agreement by the defendant company to pay a given sum on the happening of the particular event contingent on the duration of the life.'

It is to be observed that the element upon which Mr. Setalvad for the Commissioner relies, namely that the sum assured must be larger than the sum or sums paid and which finds support in Mr. Bunyons definition is omitted from that passage, and also that when the facts of Josephs case and also those in the Irish case of Flood v. Irish Provident Assurance Co. Ltd., quoted in the footnote in Josephs case at page 597, are examined it will be found that the sums paid to effect the insurance in those cases were larger than the sums assured. In Josephs case the payments made under that policy in the first five years amounted to Pounds 6-10-0, whilst the sum assured at the end of the five years was only Pounds 6 : see also National Standard Life Assurance Corporation, In re.

But apart from the authorities, the terms of the policy which we have to consider itself afford a clear indication as to the nature of the policy. The recital, as I have already mentioned, describes it as an assurance on the life of the assured and the policy matures on death. Both these features are the clearest indications that the policy is of life insurance within the meaning of Section 15 of the Act.

That, however, does not dispose of the whole matte since the question remains as to what is the sum or sums paid by the assessee to effect this life insurance. Looking at the substance of the transaction, it is clear that the assessees income is not diminished by more than five per cent. of the premium which he has to pay each year, the balance, viz., ninety-five per cent. being taken up under the compulsory loan. In my opinion this second question as to the amount paid to effect the policy can be examined in the light of an English decision, viz., the case of Hunter v. Rex. In that case the Earl of Halsbury, L.C., with characteristic terseness says this :-

'My Lords, it appears to me that this judgment ought to be affirmed. The whole point is that the exemption or deduction, or whatever it is to be called, it is to be allowed to the assured if the premium has been paid by him; and the whole reason I give for my judgment is that it has not been paid by him.'

Lord Robertson, at page 164, after agreeing with the motion proposed, said :-

'The whole argument of the appellant has been that, in a question between the assured and the insurance company, he must be held to have paid the larger sum. But in point of fact, in a question of the extent by which his income was diminished during the year by the payment, there can be no doubt that it was only by Pounds 33 and not by Pounds 66.'

In that case there was a loan on half of the premium, that is to say, Pounds 33, though the loan did not have to be taken up compulsorily. That authority must be applied with the caution that we are considering the Indian Income-tax Act and that the whole structure and schemes of the English Income Tax Acts are quite different. But in my opinion the principle we have to consider in this case is the same, since it cannot be said that the ninety-five per cent. of the premia, which are the subject-matter of the compulsory loans and which render the policy null and void if they are not raised as loans, are sums paid by the assessee to effect the insurance. Accordingly, in my opinion the question should be answered by saying that only the five per cent. of the total premium, which is not the subject-matter of the compulsory loan, is a permissible deductions under Section 15(1) of the Act. A further point has been taken in this Court, viz., that the amount of interest paid each year on the compulsory loan is also a permissible deduction. I think in the peculiar circumstances of this case it may very well be that it is, but the question referred to us does not embrace any such sum and I am unwilling as a general proposition to lay down about it anything that might be taken as a precedent. Assessee to get three-fourths of the costs.

KANIA, J. - The question submitted for the Courts opinion is to be determined in the light of Section 15(1) of the Indian Income-tax Act. It is there provided that the tax shall not be payable in respect of any sums paid by an assessee to effect an insurance on the life of the assessee. The rest of the section is not material to the present discussion. The relevant provisions of the policy of insurance, in respect of which the question is submitted for our opinion, have been set out in the judgment of the learned Chief Justice. I should like to draw attention to two more facts in this connection. The premium agreed to be paid is uniform for five years and is fixed at Rs. 193-12-0 per thousand. The second point which is made clear by the express terms of the policy is that in the event of the death of the assured before maturity, in the first year, the company agreed to pay Rs. 190 for every one thousand rupees. If a similar contingency happened in the second year it agreed to pay Rs. 387, in the third year Rs. 595 and in the fourth Rs. 810. These figures show that if death occurred during the first two years, apart from the question of loan, the assured will get less than the premium paid by him. On the other hand, if death occurred during the third or fourth years, his representatives would get more than the premia paid by the assessee.

Having regard to the terms of this policy of insurance, it appears that two questions have to be determined under Section 15(1) of the Indian In come-tax Act. The first is whether there is an insurance on the life of the assessee. The second is what sum, if any, he has paid in the accounting year to effect such life assurance.

It appears to have been argued before the Tribunal, as it was also argued before us, that this is not a contract of a life insurance. In support of that contention it was pointed out that because of the compulsory provision to take a loan and pay interest thereon, in no circumstances the assured received from the insurance company more than what he paid at any time. It was therefore contended that under no circumstances the interest of the company was adversely affected under the scheme and therefore the company took no risk, and there was no contract of insurance. In support of this contention the statement in Bunyons Life Assurance about a policy of insurance was relied upon. The statement runs as follows :-

'The contract of life insurance may be further defined to be that in which one party agrees to pay a given sum upon the happening of a particular event contingent upon the duration of human life, in consideration of the immediate payment of a smaller sum or certain equivalent periodical payments by another.'

A reference to the statement in Bunyon discloses that the learned author had quoted these words from the judgment of Tindal, C.J., in Paterson v. Powell. In that case the contract was in these terms :-

'In consideration of forty guineas Pounds 100, and according to that rate for every greater or less sum, received of... we have hereunto subscribed our names... and will pay, or cause to be paid unto the said... the sum and sums of money, which we have hereunto respectively subscribed, without any abatement whatever.'

The question was whether this was a policy of insurance and if so void under 14 Geo. III, c. 4. In describing the effect of the transaction contained in the document, the learned Chief Justice observed that it was a contract to pay a larger sum in consideration of payment of smaller sums. On going through the judgment it is clear that the learned Chief Justice had not expressed the view that payment of a smaller sum was a necessary ingredient to make it a contract of insurance. The question as to what would be required to constitute a contract of insurance came to be fully considered in Prudential Insurance Company v. Inland Revenue Commissioners. In a carefully considered judgment which, except on the point, has been accepted by the highest judicial authority, Channell, J., observed as follows :-

'The Attorney-General says that to constitute a contract of insurance it must be a provision against something -against some loss or disadvantageous event. Mr. Danckwerts says that may be true as regards marine and fire policies which are indemnities against loss, but it is not true as regards life polices, for a policy of life insurance is not a contract of indemnity. But the question is whether that makes any real difference, and it seems to me that we must inquire a little further into the nature of a contract of insurance. Where you insure a ship or a house you cannot insure that the ship shall not be lost or the house burnt, but what you do insure is that a sum of money shall be paid upon the happening of a certain event. That I think is the first requirement in a contract of insurance. It must be a contract whereby for some consideration, usually but not necessarily for periodical payments called premiums, you secure to yourself some benefit, usually but not necessarily the payments of a sum of money, upon the happening of some event. Then the next thing that is necessary is that the event should be one which involves some amount of uncertainty. There must be either uncertainty whether the event will ever happen or not, or if the event is one which happen at some time there must be uncertainty as to the time at which it will happen.'

This definition given by Mr. Justice Channell is accepted by the House of Lords. The learned Judge then continued as follows (p. 663) :-

'The remaining essential is that which was referred to by the Attorney-General when he said the insurance must be against something. A contract which would otherwise be a mere wager may become an insurance by reason of the assured having an interest in the subject-matter - that is to say, the uncertain event which is necessary to make the contract amount to an insurance must be an event which is prima facie adverse to the interest of the assured. The insurance is to provide for the payment of a sum of money to meet a loss or detriment which will or may be suffered upon the happening of the event.'

In this case before the learned Judge he was of the view that in respect of a person agreeing to pay 6d. a week, he must be poor and, therefore, the provision in the policy to pay him a certain sum in the event of his attaining a certain age was a contract against his interest. He stated as follows (p. 664) :-

'The reaching of that age, with its attendant disadvantages, is to my mind an event which is sufficiently adverse to the interest of a poor person to make it a proper subject against which to insure.'

This observation was considered in Gould v. Curtis. Cozens-Hardy, M.R., who was a party to Joseph v. Law Integrity Insurance Company, Limited, in which the definition of a policy of life assurance given by Mr. Justice Channell was approved, was faced with the question of the element of the adverse interest of the assessee to constitute a policy of life assurance. In the course of argument Lord Justice Buckley pointed out that in Prudential Insurance Co. v. Inland Revenue Commissioners, Mr. Justice Channell had stated that a contract of insurance must be a contract for the payment of a sum of money, or for some corresponding benefit to become due on the happening of an event, which event must be of a character more or less adverse to the interest of the person effecting the insurance. The reply given by counsel was that this was dissented from in the Irish case reported in the note to Joseph v. Law Integrity Insurance Company, Limited. In the course of his judgment Cozens-Hardy, M.R., while approving of the passage previously cited in Josephs case, dealt with the question of adverse interest in the following terms (p. 92) :-

'It has been suggested that this cannot be a contract of insurance because the continuance of life is not an event which can be fairly said to be adverse to the interests of the insurer. This is based really upon a passage in the judgment of Channell, J., in the Prudential Companys case. He was there dealing with an argument which had been addressed to him by counsel. Dealing with the case of an insurance by a man who was of the artisan class, with small weekly payments, he pointed out that a payment made to a man in that class when he attains sixty-five, or whatever the age might be, is one which may be fairly said to contemplate an adverse event to the man who probably might not then be able so well to maintain himself and his wife. If, however, the learned Judge intended to lay down that there cannot be a contract of insurance unless the event is of a character more or less adverse to the interests of the person effecting the assurance, with the greatest possible respect to the learned Judge, I do not think that is accurate. I do not think it is true to say that there can be no insurance except the event covered by the contract is one which is in its nature adverse to the assured.'

The result of these authorities, therefore, is that, while the contract must be that, in consideration of a sum of money paid in one sum or by different instalments, the company agrees to pay another sum on the happening of a contingent event, and which event must be connected with the life of the assured, the factor of the contract being necessarily disadvantageous to the assessee, is not a necessary ingredient. In the present case, therefore, the contention, that because in no event the assessee can receive more from the insurance company than what he pays, there is no policy of insurance is unsound. In my opinion, that argument is not relevant to decide the question whether the contract is one of life insurance or not. In the present case the other essential ingredients, according to the judgment of Mr. Justice Channell, are found in the policy. I am therefore clearly of the opinion that the policy of assurance is a life insurance policy.

That leaves for consideration the second question according to the words of Section 15(1) of the Indian Income-tax Act. The question is, in the accounting year, what sums were paid by the assessee to effect the insurance. We are concerned only with the year in question and the terms of the policy contained in the document before us. It was argued on behalf of the assessee that he paid the premium to effect an insurance on his life and therefore under Section 15(1) of the Indian Income-tax Act that whole amount was exempt from taxation. It was argued that the provision relating to loan was an independent transaction which had nothing to do with effecting the insurance. The fact of the insurance company giving a full receipt for the payment of the premium and the fact of the compulsory loan being taken within a week were strongly relied upon in this connection. While those two factors have to be taken into consideration, it seems equally clear that the contract of insurance contains reciprocal terms and the term to pay the premium is not the only condition made by the assured for obtaining the policy on his life. The different clauses must be read as forming part of one promise to pay the sum on which the assured obtains a policy on his life. I do not think there can be any doubt on that question. If authority is needed, the same is found in Hunter v. Rex. In that case the agreement between the assured and the company was that the premium was to be paid by half the amount being paid in cash and the company giving credit to the assured for the other half and on which the assured agreed to pay four per cent. interest. It must be noticed that the contract in that case provided for this loan being a voluntary transaction. The assured was not obliged to take the loan at all. If, however, he took the loan, the payment of premium was to be worked out as stated above. On those facts the Court came to the conclusion that the assured paid half the premium. He did not pay the other half to obtain the policy of insurance. It may be noticed that Lord Davey in delivering judgment also took into consideration the question of the loan being recalled. Lord Davey observed (p. 163) :-

'It may be that the insured was liable to be sued for that Pounds 33 [being half the premium of the year]; but he was willing to run that risk, no doubt, for the sake of obtaining the very favourable terms which were offered to him by the insurance company, who were not likely to injure their business by taking such a step.'

In the present case, therefore, we have to consider what sum the assured had agreed to pay to effect insurance on his life in the year in question. As a life insurance policy may cover a period of five or ten years and the premium may be payable every year, it seems to me that the word 'effect' in Section 15(1) must include also maintaining an insurance on the life of the assessee. The question, therefore, is what sum was paid by the assessee in the accounting year to maintain the insurance on his life. We are concerned with the policy before us and the payments made under the same. The premium paid at the rate of Rs. 193-12-0 per one thousand rupees is clearly to be considered as a payment made to effect the insurance. But the contract does not end there. The contract provides that the insurance company must give a loan to the assured of 95 per cent. of the premium. Although clause 9 of the privileges and conditions does not in terms say that the company has to give the loan, it provides that failure to raise the loan or pay premium or interest will make the policy null and void. Raising the loan requires the consent of two parties, the person asking for the loan and the person giving the loan. As this is made a condition of the subsistence of the policy, it seems clear that the company initially agreed to give the loan also. Clause 8 of the same privileges and conditions further supports this construction. It says : 'Since the payment of loan is made compulsory, the policy does not acquire paid-up value.' It therefore not only envisages the grant of a loan but the subsistence of the loan throughout the period. Even if it is argued that there being no express words showing that the loan must continue throughout the period and therefore the company had a right to call back the loan, the contract contained in this policy is in any event for the payment of a premium followed by a refund of ninety-five per cent. thereof by the company to the assured within a week. Thus the net balance of five per cent. of the premia only is left in the hands of the company.

In respect of the loan the further provision is that failure to pay interest will make the policy void. The interest can be payable only if a loan is subsisting and to the extent it is subsisting. Under the express terms of clause 9 it seems to me therefore that in respect of this policy payment of interest, as the payment of premium, are both made conditions for the subsistence of the policy, and therefore if in addition to the five per cent. premium, which remains in the hands of the company, the assured has to pay and in fact has paid interest on the loan to the company, it will be a payment made by the assured to effect or maintain the insurance on his life. In that view calculations will have to be made and exemption granted. We are not concerned with the actual amounts for which exemption has to be granted. It is sufficient to express the opinion that on the wording of this policy the answer to the question, what sum is paid by the assured to maintain the life insurance policy in the year in question, is the premium, less the loan, plus the interest paid by him during the accounting year. The limit of Rs. 6,000 is fixed by the Act and the necessary adjustments will have to be made on that basis.

Reference answered accordingly.


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