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income-tax Officer Vs. Air India - Court Judgment

LegalCrystal Citation
CourtIncome Tax Appellate Tribunal ITAT Mumbai
Decided On
Reported in(1984)10ITD120(Mum.)
Appellantincome-tax Officer
RespondentAir India
.....transfer. cit v.r.m. amin [1977] 106 itr 368 (sc) is cited as an authority.11.2 the terms of the insurance contract specifically excludes abandonment. in case of loss, the assessee cannot abandon the damaged aircraft to the insurance company. therefore, the insurance company does not get any right over the damaged lost aircraft. this is also a pointer against 'transfer of the capital asset'.11.3 the contract of insurance is an indemnity contract to make good the loss or damage. but the law of indemnity has a built-in ceiling that the assured would not be financially better off or worse off as a result of the loss. therefore, the assessee cannot be said to have any financial gain as a result of the indemnity contract.11.4 there are various methods of providing indemnity to the insured,.....
1. We find it convenient to dispose of both these appeals together.

These are departmental appeals against the findings of the Commissioner (Appeals), in respect of the assessments for the years 1974-75 and 1978-79.

2 to 7. [These paras are not reproduced here as they involve minor issues.] 8. The last ground is whether capital gains could be levied in respect of the insurance received when one of the aircrafts crashed and was a total loss.

The aircraft 'Emperor Ashoka' on its routine flight from Bombay, crashed on 1-1-1978. The original cost was Rs. 19,62,87,972. From the insurance company, the assessee had received Rs. 35,19,98,972. The ITO was of opinion that there was a transfer and capital gains would be exigible. On appeal, the Commissioner (Appeals) accepted the assessee's submission that no capital gains would arise. The department is on further appeal.

9. We have been referred to the decision of the Gujarat High Court in the case of CIT v. Vania Silk Mills (P.) Ltd. [1977] 107 ITR 300 as well as the decision of the Calcutta High Court in the case of Marybong & Kyel Tea Estates Ltd. v. CIT [1981] 129 ITR 661. Basing on these two decisions, the department's contention is that the amount received from the insurance company would be taxable to capital gains. Shri Palkhivala, the learned counsel for the assessee, submitted that the point at issue is already covered by the Tribunal's decision for the assessment year 1971-72 wherein under similar circumstances, the Tribunal has held that no capital gains would arise. He then pointed out certain distinguishing features of the assessee's case from the decided cases before the Gujarat and Calcutta High Courts. He submitted that for the reasons given, the Tribunal's decision given earlier should be followed.

10. We are, however, unable to accept Shri Palkhivala's submissions.

Although the point was decided by the Tribunal in the year 1971-72, subsequent to appeal, two High Court decisions point out that the department's stand could be reasonable. There are no other High Court decisions brought to our notice which is in favour of the assessee on this point. We have considered Shri Palkhivala's submissions in detail below. We have come to a finding that the capital gain has to be assessed in this case.

11. Now, the submissions of Mr. Palkhivala, the learned counsel for the corporation, could be summarised as follows : 11.1 The only part of Section 2(47) of the Income-tax Act, 1961 ('the Act') defining transfer would be 'relinquishment' or 'extinguishment' of the rights in the capital asset. There is no relinquishment because that postulates the continued existence of the asset. So also the expression "extinguishment of the rights'. The expression is not synonymous with extinguishment of the capital asset or any right therein. Since the capital asset itself has been destroyed, none of the rights therein could survive. Therefore, there is no transfer. CIT v.R.M. Amin [1977] 106 ITR 368 (SC) is cited as an authority.

11.2 The terms of the insurance contract specifically excludes abandonment. In case of loss, the assessee cannot abandon the damaged aircraft to the insurance company. Therefore, the insurance company does not get any right over the damaged lost aircraft. This is also a pointer against 'transfer of the capital asset'.

11.3 The contract of insurance is an indemnity contract to make good the loss or damage. But the law of indemnity has a built-in ceiling that the assured would not be financially better off or worse off as a result of the loss. Therefore, the assessee cannot be said to have any financial gain as a result of the indemnity contract.

11.4 There are various methods of providing indemnity to the insured, viz., cash payment, repairs, replacement and reinstatement. It is the insurer who has the right to select which method would be adopted. When the sum insured is paid, i.e., when cash payment method is adopted, the amount payable would be under what is known as 'hull policies' in marine insurance parlance. The sum fixed for payment is fixed by agreement based on a fair value to the insured. The sum assured under the contract was for Rs. 35 crores which was the estimated cost of replacement of the aircraft in the event of total loss. As a matter of fact, the entire proceeds were utilised only for buying a similar aircraft.

11.5 A similar issue had arisen before the Tribunal for 1971-72. The aircraft 'Nandadevi' had crashed. The excess receipt was held by the Tribunal not to constitute the capital gains.

11.6 There are two decisions, one by the Gujarat High Court and another by the Calcutta High Court which were delivered subsequent to the Tribunal's decisions. Both cases are easily distinguishable on facts.

11.7 Apart from this, insurance money is received pursuant to a contract and not because of extinguishment of any rights-Babubhai M.Sanghvi v. CIT [I974] 97 ITR 213 (Bom.) and CIT v. R.M. Amin [1911] 82 ITR 194 (Guj.).

11.8 There is intrinsic evidence within the statute that receipt of insurance claim is regarded as a special transaction. See Clause (1) of Explanation to Section 32(1)(iii) of the Act. Authority cited was CIT v. Chugandas & Co. [1960] 38 ITR 241, 262 (Bom.) as affirmed by the Supreme Court in CIT v. Chugandas & Co. [1965) 55 ITR 17.

12. We can consider each of the submissions. Taking up the first submission in order to attract capital gains, there should be a transfer. That transfer must be within the definition in Section 2(47).

The expressions which could be considered are 'relinquisbment' and 'extinguish-ment'. Now the submission that the asset should continue to exist and the assessee's right alone should be extinguished has been considered and rejected by the Gujarat High Court in R.M. Amin's case (supra). See their discussion at pages 201-202. As far as the expression 'relinquish -ment' is concerned, the Bombay High Court has referred to it in the case of CIT v. Rasiklal Maneklal (HUF) [1974] 95 ITR 656. They have accepted the contention that the property must continue to exist. However, the expression 'extinguishment' has not been considered by the Bombay High Court in that case or any High Court, other than the Gujarat High Court in R.M. Amin's case (supra).

Therein they have held that it is not necessary that the asset should continue to exist. Since the expression 'extinguishment' is applicable to the facts of the case, we cannot say that the submission is acceptable.

13. We had also perused the Supreme Court decision in R.M. Amin's case (supra). There is no discussion therein which would throw any light on this submission made before us. In that case, the Supreme Court was concerned with the monies received by the shareholder on the liquidation of the company. The Supreme Court pointed out that when monies are received on liquidation, it is only in satisfaction of a pre-existing right of a shareholder and, therefore, there is no question of transfer.

14. We next consider whether under the terms of the insurance contract, there is any transfer or extinguishment of any right. The insurance contract we consider here is in the nature of an indemnity contract, to make good the loss or damage. The assured cannot of course be better or worse off. But these principles of an indemnity contract govern the sum to be assured. It cannot have any impact on any other matter, least of all on taxing provisions. If the asset insured had for certain other reasons like scarcity or inflation, increased in value and the total loss is indemnified, the assured has every right to receive the sum for which the asset was insured. Whether the excess thus received is taxable or not has to be considered under the taxing provisions only.

In certain cases where an asset is transferred and another asset is acquired, the Legislature in their wisdom had made provisions for.

exemption from capital gains. See Section 54 of the Act for instance.

Where there is no such provision, as in Section 54, it would be difficult to import it on assumption and on the basis of principles governing indemnity contract.

15. We may also consider the submissions based on the clause in the insurance contract that the assessee cannot abandon the damaged/lost aircraft to the insurer. Now one fundamental principle in insurance, whether marine or aviation, is the right of subrogation. This right is defined in Halsbury's Laws of England, Fourth edition, Vol. 25 as follows : Where the insurer pays for a total loss, . . . of the subject-matter insured, he thereupon becomes entitled to take over the interest of the assured in whatever may remain in the subject-matter so paid for and he is thereby subrogated to all rights and remedies of the assured in and in respect of the subject-matter as from the the time of casualty causing the loss. (p. 182) 16. Under this principle, the insurer steps into the shoes of the assured and gets all the rights the assured had in the asset. This is a transfer and this transfer takes place at 'the time of casualty causing the loss'. It is because of this principle that the department claims there is a transfer under Section 2(47).

17. Now this position is sought to be got over by referring to the abandonment clause. Now the difference between abandonment and subrogation has been brought out by Halsbury (supra) para 332 : In a case of total loss, the rights given by subrogation must be distinguished from those resulting from abandonment. By virtue of abandonment, the insurers become entitled to the property in the thing insured and to all rights incident to the property ; whereas by subrogation they become entitled to rights and remedies which may not depend upon the ownership of the thing insured. Thus, where the owners of an insured ship have been paid as for a total loss, the property in what remains of the ship and all rights incident to the property, are transferred to the underwriters as from the time of the disaster in respect of which the total loss is paid. For instance, the right to receive payment of freight accruing due, but not earned, at the time of the disaster is one of those rights incident to the property in the ship and it, therefore, passed to the underwriters on abandonment. The right of the assured to recover damages from a third person is not, however, one of those rights which are incident to the property in the ship. It passes from the assured to the underwriters, in case of payment for a total loss, only on the principle of subrogation ; and it is on this principle that it passes likewise to the underwriters who have satisfied a claim for a partial loss.(p. 184) 18. It would be clear from the above that even if there is no abandonment, the insurer has some rights, however trifling in value they may be. The assessee does not continue to have those rights. The insurer succeeds to them.

19. We can at this stage consider the insurance contract. First sentence of Clause 8 says : 'In case of loss or damage the assured may not abandon the damaged aircraft to the corporation'. But certain other rights the assured has not been (sic) abandoned. The addendum to the policy the insurer has waived the rights of subrogation against 'Boeing Aircraft Company in connection with Boeing 747 Purchase and Training Agreements'. (The other terms of addendum are not relevant.) The Boeing Aircraft Company is also considered as a joint assured and, therefore, the rights of subrogation are waived.

20. Having considered the insurance contract and the general principles underlining therein, we cannot say there is no transfer either because of the general principles of indemnity or because of the abandonment clause.

21. The fifth submission is that the issue is already decided by the Tribunal for the year 1971-72 holding that there is no capital gain. We have gone through the decision carefully. The operative part of the order is in para 6, wherein an earlier order of the Tribunal is quoted.

Going through the extract of that order, we find that the point therein was decided by referring to the 'reinstatement value clause attached to and forming part of the insurance policy'. However, in a case of total destruction, the Tribunal, while disposing of the appeal of 1971-72, observed at the end of para 7, after considering the Gujarat High Court decision in R.M. Amin's case (supra) : "In view of those observations, it is possible that in a case of total destruction the compansation received by an assessee may result in taxable capital gains". Apart from the above observation in their order, the order of the Tribunal for 1971-72 has to be considered and followed only if it is not inconsistent to the High Court decisions pronounced subsequently and we find that the line of thinking of the High Court to be somewhat different than the Tribunal. The Gujarat High Court in the case of Vania Silk Mills (P.) Ltd. (supra) has held that the term extinguishment of any right covers every possible transaction which results in the destruction, extinction, termination, cessation or cancellation by satisfaction or otherwise of all or any rights- qualitative or quantitative-which an assessee has. The net is cast very wide indeed by this observation. It would be very difficult in the face of such sweeping statement to single out the case of an insurance policy and say there is no transfer.

22. In the course of hearing, Shri Palkhivala submitted that the Gujarat High Court decision turned on the peculiar facts of the case.

The terms and conditions of the insurance was not before them and so they assumed it to be a good policy, i.e., a policy insuring the assessee's interest and not an indemnity policy. The submission is, had they considered an indemnity policy, the ruling would have been different. Now, the passage where the facts are considered is quoted below : . . . In the present case, the insurance policy is not on record of the case However,the established facts and circumstances, namely (1) that the insurer paid the claim even without proceedings taken by the assessee against the bailee, claiming and proving and recovering damages for loss of the machinery bailed ; (2) that the entire machinery in the premises of the bailee, that is, the machinery of the assessee as well as that of the bailee, was insured and a lump sum payment was received on settlement of the insurance claim and out of that amount payment on a pro rata basis was made by the bailee to the assessee ; and (3) that it was a policy on reinstatement basis, under which the insurer had the option of making good the loss by payment in money or by reinstatement, that is to say, by replacing what is lost or repairing what is damaged (see General Principles of Insurance Law by E.R. Hardy Ivamy, Second edition, page 405) are only consistent with and lead to the irresistible conclusion that it must have been a 'goods policy', that is, a policy insuring the assessee's proprietary interest in the machinery and not merely a 'policy of indemnity' covering the bailee in respect only of its personal liability . . .(p. 316) 23. The High Court was actually considering the issue whether the bailee's liabilities alone were insured or whether the assessee's (that is the owner of the asset) interest in the asset was also insured. This discussion is on this point.

24. In order to understand this and why their Lordships gave a finding that it is a 'goods policy', the submission made before them should be noticed. In that case, the goods insured were given on hire to a third party and the third party had insured the goods. When it was destroyed by fire, the payment received from insurance company was passed on to the assessee. It was this peculiar fact, i.e., the absence of privity of contract with the insurer, was sought to be emphasised by the assessee. The High Court noted : It is true that the assessee had itself not insured the machinery nor had it paid any premia . . . However, by this transaction, the proprietary rights of the assessee in the machinery were completely terminated on receipt of the amount in question from Jasmine Mills Pvt. Ltd. and the transaction could, therefore, be treated as a 'transfer' in favour of the latter. Even if the 'transfer' is treated as having been effected in favour of the insurer, the fact that there was no privity of contract between the assessee and the insurer would not make any difference in the conclusion arrived at, if the problem is looked at from the proper legal angle . . .(p.

314) Then, they go on to consider the interest of a bailee in the goods bailed to him when they gave a finding on the basis of the reasoning recorded at page 316 which is extracted above. They came to the conclusion that 'though by virtue of its insurable interest, Jasmine Mills Pvt. Ltd., insured the assessee's proprietary interest in the machinery at its own cost, it must be considered as having done so for the benefit of the assessee . . .'. Thus, the entire discussion was on the nature of the bailee's interest-the interest of the third party, Jasmine Mills Pvt. Ltd. It was to meet the submission that the insurance company covered only the third parties' interest in the goods, that the High Court pointed out that it covered the assessee's interest and not merely to indemnify the loss that might arise to the third party on account of fire and on that account it was a 'goods policy'.

25. Once the observations are understood in the proper context, we do not find it helpful to the assessee. We may also note that the policy considered by the Gujarat High Court also contained a clause for reinstatement. It was the presence of this reinstatement clause which persuaded the Tribunal for the year 1971-72 to hold against the levy.

According to the Gujarat High Court, this clause does not make any such difference in the problem before us.

26. The Calcutta High Court has also taken a similar view in Marybong & Kyel Tea Estates Ltd.'s case (supra). They have quoted the Gujarat High Court's view with approval.

27. Since the findings of the Tribunal are inconsistent with the findings of the two High Courts on this point, it is not open to us to follow the earlier ruling of the Tribunal.

28. We will now consider certain basic legal propositions submitted. It is said that the insurance money is received persuant to a contract and it has nothing to do with any rights in any asset. It is merely determining the point of time and the condition under which the money would be received. It has to be considered de hors of the rights of the insurer. This proposition is as attractive as it is simple. But, having regard to the authorities quoted above, it is not within our province to accept it.

29. The second proposition is that receipt from insurance is regarded as a special transaction and not as a transfer : this would be evident from Clause (1) of Explanation to Section 32(1)(iii). We are unable to consider this proposition also for the reasons mentioned above.

30. For the same reasons, we hold that the capital gains for the assessment year 1974-75 in respect of the machinery destroyed was also properly brought to tax.

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