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Commissioner of Income-tax Vs. Vania Silk Mills (P.) Ltd. - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtGujarat High Court
Decided On
Case NumberIncome-tax Reference No. 122 of 1974
Judge
Reported in[1977]107ITR300(Guj)
ActsIncome Tax Act, 1922 - Sections 2(47) and 45
AppellantCommissioner of Income-tax
RespondentVania Silk Mills (P.) Ltd.
Appellant Advocate K.H. Kaji and; R.P. Bhatt, Advs.
Respondent Advocate K.C. Patel, Adv.
Cases ReferredState of Orissa v. Sudhansu Sekhar Misra
Excerpt:
direct taxation - capital gain - sections 2 (47) and 45 of income tax act, 1922 - assessee's machinery damaged - written down value of machinery was rs. 262781 - assessee received rs. 632533 as insurance claim - assessee returned rs. 262781 as profit chargeable to tax - income tax officer decided that rs. 35079 being difference between amount received as insurance claim and original value of machinery also subjected to tax - whether tribunal right in holding that there was no transfer of capital assets by assessee - further whether sum of rs. 350792 chargeable to tax as capital gain - assessee had not purchased new machinery - no material to show that entire amount was spent in replacement of capital asset - tribunal misdirected itself in holding that there was no transfer of capital.....p.d. desai, j. 1. an interesting question as to the true interpretation of the expression 'the extinguishment of any rights therein', that is, in a capital asset, occurring in section 2(47) of the income-tax act, 1961 (hereinafter referred to as ' the act'), which defines the word 'transfer' used in section 45 and other cognate sections, arises in this reference in the context of the following facts.2. the assessee is a private limited company carrying on business of manufacture and sale of art-silk cloth. in the year 1967, it purchased machinery worth rs. 2,81,741 and gave it on hire to messrs. jasmine mills pvt. ltd., bombay, at an annual rent of rs. 33,900. on august 11, 1966, fire broke out in the premises of messrs. jasmine mills pvt. ltd. causing extensive damage to the machinery.....
Judgment:

P.D. Desai, J.

1. An interesting question as to the true interpretation of the expression 'the extinguishment of any rights therein', that is, in a capital asset, occurring in Section 2(47) of the Income-tax Act, 1961 (hereinafter referred to as ' the Act'), which defines the word 'transfer' used in Section 45 and other cognate sections, arises in this reference in the context of the following facts.

2. The assessee is a private limited company carrying on business of manufacture and sale of art-silk cloth. In the year 1967, it purchased machinery worth Rs. 2,81,741 and gave it on hire to Messrs. Jasmine Mills Pvt. Ltd., Bombay, at an annual rent of Rs. 33,900. On August 11, 1966, fire broke out in the premises of Messrs. Jasmine Mills Pvt. Ltd. causing extensive damage to the machinery hired from the assessee and other machinery belonging to Messrs. Jasmine Mills Pvt. Ltd. The assessee's machinery was damaged to such an extent that it could not any longer be put to use as such. It appears that Messrs. Jasmine Mills Pvt. Ltd. has insured the assessee's machinery along with its own machinery and on a settlement of the insurance claim, it received certain amount out of which it paid a sum of Rs. 6,32,533 to the assessee on account of the destruction of its machinery. The difference between the actual cost of such machinery and its written down value worked out to Rs. 2,62,781 and in the course of proceedings for assessment to income-tax for the assessment year 1967-68 (the relevant previous year being the year ending December 31, 1966), the assessee returned the said amount of Rs. 2,62,781 as profit chargeable to tax under Section 41(2) of the Act. The Income-tax Officer, in addition to bringing the aforesaid amount to tax, also subjected to tax the additional amount of Rs. 3,50,792, being the difference between the amount of Rs. 6,32,533 received as aforesaid by the assessee from Messrs. Jasmine Mills Pvt. Ltd. and the original cost of Rs. 2,81,741 of the machinery in question, as 'capital gains' chargeable under Section 45 of the Act, The assessee carried the matter in appeal before the Appellate Assistant Commissioner who upheld the decision of the Income-tax Officer. It might be stated that the contention of the assessee before both those authorities was that the question of capital gain did not arise since no transfer of capital asset was effected within the meaning of Section 45 read with Section 2(47) of the Act but this contention was negatived by both the authorities. In further appeal before the Income-tax Appellate Tribunal, the same contention was advanced on behalf of the assessee and the Tribunal upheld it substantially on the grounds that, (i) in order that there could be a valid transfer of a capital asset, the asset must be in existence and since, in the present case, the machinery was damaged to such an extent that it had become useless, it had ceased to exist and, therefore, there was no transfer of a capital asset within the meaning of Section 45(ii) Messrs. Jasmine Mills Pvt. Ltd., as a bailee, was under a legal obligation to take proper and reasonable care of the machinery which it had taken on hire from the assessee and in view of the destruction of, or damage caused to the machinery, it was bound to pay the amount in question to the assessee and the payment was, therefore, not on account of the transfer of a capital asset within the meaning of Section 45, and (iii) unless the transfer of a capital asset is effected by an assessee, Section 45 would not be attracted and since, in the present case, there was no such voluntary act on the part of the assessee effecting transfer, one of the conditions for levying the charge of capital gains was not satisfied. On these three grounds, the Tribunal, disagreeing with the lower authorities, held that the amount of Rs. 3,50,792 could not have been taxed as capital gains and it accordingly directed the deletion of the said amount from the assessee's computed total income.

3. The revenue was obviously aggrieved by this decision and at its instance the Tribunal has referred the following two questions for our opinion :

'1. Whether, on the facts and in the circumstances of the case, the Tribunal was justified in law in holding that there was no transfer of capital asset by the assessee within the meaning of Section 2(47) of the Act ?

2. Whether, on the facts and in the circumstances of the case, the sum of Rs. 3,50,792 being the excess over the cost of machinery received from Messrs. Jasmine Mills Pvt. Ltd. was chargeable to tax as capital gains under Section 45 of the Act?'

4. The revenue fairly conceded before us that the transaction in the present case, which resulted in leaving in the hands of the assessee the surplus of Rs. 3,50,792 was not a sale, exchange or relinquishment of the capital asset in the shape of machinery nor was it compulsory acquisition thereof within the meaning of Section 45 read with Section 2(47). It was contended on its behalf, however, that the surplus was exigible to tax as profit arising from the extinguishment of the rights of the assessee in the said asset and, alternatively, as profit resulting from the transfer (as the said word is understood in its plain and natural meaning) of such asset under the said provision. According to the revenue, (1) the payment in question was made not in discharge of the legal obligation, if any, of Messrs. Jasmine Mills Pvt. Ltd. to make good the loss sustained by the assessee on account of the damage or destruction of the asset which was given on hire to it but by way of consideration for the extinguishment or transfer of the assessee's rights in the said asset; (2) in order to effectuate such extinguishment or transfer, it was not necessary that the capital asset in question must be in existence ; and (3) in any event, in the present case., the asset was in fact in existence though in a damaged condition and, therefore, even if there was such requirement, it was satisfied.

5. Now, two principal questions which arise on these submissions are :

(1) whether, on an overall view of the transaction in question, there was an extinguishment of the rights of the assessee in the machinery, and

(2) whether the amount subjected to tax was received by it as consideration for the extinguishment of such rights. If the revenue succeeds on these two questions, the other point, namely, whether or not there was a transfer of the asset within the ordinary signification of the said word, will not require to be determined. We will, therefore, turn our attention first to these two questions.

6. The questions posed above rest for their determination upon the true construction of Section 45 read with Section 2(47) of the Act. In order to correctly appreciate the import of the relevant provisions as they stand now, it would be useful to briefly refer to the legislative history. 'Capital gains' were charged for the first time by the Income-tax Act and Excess Profits Tax (Amendment) Act, 1947, which inserted Section 12B in the Act. Sub-section (1) of Section 12B, which is the only material provision for the purposes of this case, read at the material time as under :

'12B. (1) The tax shall be payable by an assessee under the head 'Capital gains' in respect of any profits or gains arising from the sale, exchange or transfer of a capital asset effected after the 31st day of March, 1946 ; and such profits and gains shall be deemed to be income of the previous year in which the sale, exchange or transfer took place.' It is worthy of note that the taxable event under this provision was the sale, exchange or transfer of a capital asset. This levy of capital gains was virtually abolished by the Indian Finance Act, 1949, which confined the operation of the section to capital gains arising before the 1st April, 1948.

Section 12B(1) as it stood at the relevant time came up for interpretation before the Bombay High Court in Provident Investment Co. Ltd. v. Commissioner of Income-tax : [1953]24ITR33(Bom) and it took the view that the word 'transfer' occurring in the said provision did not comprehend relinquishment of a capital asset and that, therefore, it did not subject to tax capital gains arising to an assessee by reason of the fact that he had relinquished some capital asset belonging to him or some rights vested in him. This decision was affirmed by the Supreme Court in Commissioner of Income-tax v. Provident Investment Co. Ltd : [1957]32ITR190(SC) .

7. In the meantime, however, the levy of 'capital gains' was again imposed by the Finance (No. 3) Act, 1956 (77 of 1956), and Section 12B was reintroduced in wider terms so as to bring within its ambit 'any profits or gains arising from the sale, exchange, relinquishment or transfer of a capital asset effected after 31st March, 1956', etc. The section was obviously recast with the end in view of setting at naught the decision of the Bombay High Court in Provident Investment Co. Ltd.'s case : [1953]24ITR33(Bom) and of subjecting to tax any profit or gain arising even from the relinquishment of a capital asset.

8. Then we come to the Act under consideration which came into force on and with effect from April 1, 1962. Several changes have been made in the Act so far as the levy of capital gains is concerned. Section 14 classifies 'capital gains' under a separate head of income and old Section 12B is split into eleven sections, namely, Sections 45 to 55. The levy of capital gains now is under section 45. section 46 deals with the special case of capital gains arising on distribution of assets by companies in liquidation and Sections 47 and 53 with transactions not regarded as transfer and exemptions, respectively. Sections 48 to 52 provide the machinery for computation and Sections 54 and 54A prescribe cases calling for relief. Section 56 defines certain words occurring in this fasciculus of sections.

9. Under section 45 it is provided that:

'45. Capital gains.--Any profits or gains arising from the transfer of a capital asset effected in the previous year shall, save as otherwise provided in 53 and 54, be chargeable to income-tax under the head 'capital gains', and shall be deemed to be the income of the previous year in which the transfer took place.'

10. It will be seen that the section uses only the word 'transfer' and that word is defined in Sub-section (47) of Section 2 which reads as under.

' 2. Definitions.--In this Act, unless the context otherwise requires,--

(47) 'transfer', in relation to a capital asset, includes the sale, exchange or relinquishment of the asset or the extinguishment of any rights therein or the compulsory acquisition thereof under any law.' The word 'transfer', which is separately defined by an inclusive definition, has an enlarged meaning and it takes in not only that which is comprehended by the ordinary signification thereof but also that which the definition says is included therein. The net is thus cast very wide and not only any profit or gain arising from 'every act by which property may pass from one person to another' (that being the natural meaning assigned to the word 'transfer' in Vadilal Soda Ice Factory v. Commissioner of Income-tax : [1971]80ITR711(Guj) but also that arising specially from the sale, exchange or relinquishment of a capital asset or the extinguishment of any rights therein or the compulsory acquisition thereof under any law is now subjected to tax under section 45.

11. It is against this background that the enactment in question will require to be interpreted, for, as earlier stated, it has been re-enacted in the present form in order to plug the lacuna which was found to exist in the old Section 12B(1) which was construed by the Bombay High Court as aforesaid. It was to cure this mischief of the profits or gains resulting from certain transactions, which the legislature intended to tax as capital gains but which escaped taxation, that the legislature has adopted the present legislative device or formula of defining the word 'transfer' by an inclusive definition which gives it an extended meaning and specifically brings within its wide ambit transactions such as relinquishment, extinguishment and acquisition.

12. Now, substituting the crucial words 'the extinguishment of any rights therein' for the word 'transfer' in section 45, the material part of the said section will read as under :

' Any profits or gains arising from the extinguishment of any rights in a capital asset effected in the previous year shall, save as otherwise provided in Sections 53 and 54, be chargeable to income-tax under the head 'Capital gains'..........'

13. On an analysis of the section recast as above, it would be apparent that the following conditions must be satisfied before bringing any transaction within its ambit; (i) there must be an extinguishment of any of the rights of the assessee in a capital asset; (ii) such extinguishment must have been effected in the previous year ; (i-ii) profit or gain must have arisen to the assessee from such an extinguishment ; and (iv) the exempting provisions of 53 and 54 must not be attracted to such a transaction. Let us proceed to critically examine the true import of the expression 'the extinguishment of any rights therein' bearing in mind this subject and context.

14. The word 'extinguishment' is the kingpin of this expression. It is a word of ordinary usage having the widest import. Usually it connotes the end of a thing, precluding the existence of future life therein (see Black's Law Dictionary, fourth edition, page 696). It has been variously defined as meaning a complete wiping out, destruction, annihilation, termination, cancellation or extinction and it is ordinarily used in relation to right, title, interest, charge, debt, power, contract, or estate (see Corpus Juris Secundum, volume 35, page 294). In Rawson's Pocket Law Lexicon, the meaning assigned to it is : 'the destruction or cessation of a right either by satisfaction or by the acquisition of one which is greater'. In Ramanlal Gulabchand Shah v. State of Gujarat : [1969]1SCR42 , the word 'extinguishment', which is employed in conjunction with the expression 'of any such rights' in Article 31A of the Constitution, was interpreted as meaning ' complete termination of the rights '.

15. The word 'extinguishment' is here used in a similar context, namely, in combination with the expression 'of any rights therein'. This expression again has a wide ambit and coverage. The word 'therein' refers to 'capital asset' mentioned earlier in the definition. So far as the expression 'any rights' is concerned, it was observed by this court in Commissioner of Income-tax v. R.M. Amin : [1971]82ITR194(Guj) , while interpreting this very provision :

' ......the word ' any ' is a word which ordinarily excludes limitationor qualification and it should be given as wide a construction as possible, unless, of course, there is any indication in the subject-matter or context to limit or qualify the ordinary wide construction of that word......Therebeing no contrary intention in the subject-matter, or context, the words 'any rights' must include all rights......'

16. It was there pointed out that where the capital asset consists of incorporeal property, such as a chose-in-action, the bundle of rights which constitutes such incorporeal property would be comprehended within the meaning of the words 'any rights'. It would thus appear that the expression. 'any rights therein ' is wide enough to take in all kinds of rights--qualitative and quantitative--in the capital asset.

17. The Tribunal, however, thought, and the assessee has adopted the same posture before us, that having regard to the subject and context, two limitations were required to be read in the phrase 'extinguishment of any rights therein', first, that since there could not be any transfer of a non-existing asset, if the capital asset is not in existence, there would be no question of transfer thereof, that is, of extinguishment of any rights therein and, secondly, that the words 'effected in the previous year' which occur in section 45, have to be read along with this provision and if they are so read, the extinguishment must have been brought about by a volitional act of the assessee. In our opinion, neither of these two suggested limitations is required to be read into this provision and this aspect is in fact covered by the decisions of this court.

18. In R.M. Amin's case : [1971]82ITR194(Guj) the question about the implication of the first limitation in the expression in question was raised and considered and in that context this court observed as under (at pages 200 to 202):

'When a right in a capital asset is extinguished and the right ceases to exist, it is difficult to assimilate this process to the juridical concept of transfer, for transfer as ordinarily understood postulates the continued existence of the subject-matter transferred so that what belonged to one prior to the transfer vests in another as a result of the transfer. Tocall extinguishment of a right in a capital asset as a transfer would be closing violence to the language but that is expressly authorised by the inclusive definition of 'transfer '. The question is to what extent does this artificial definition go and how much does it comprise The assessee contended that the crucial word in the expression 'extinguishment of any rights therein' was 'therein' : it postulated the continued existence of the capital asset in which the rights are extinguished. The argument was that it was only if the capital asset continued to exist that extinguishment of any rights in it could be regarded as ' transfer' within the meaning of the inclusive definition.......We do not think this argument is well founded. It seeks to readin the word ' therein ' much more than what it signifies. The word 'therein' undoubtedly refers to the capital asset mentioned earlier in the definition and what the expression ' extinguishment of any rights therein' contemplates is extinguishment of any rights in the capital asset. But the definition nowhere indicates that where the capital asset consists of incorporeal property such as a chose-in-action and the bundle of rights which constitutes such incorporeal property is extinguished so that such incorporeal property ceases to exist, the expression 'extinguishment of any rights therein' should have no application.......The word ' therein ' means nothingmore than 'in the capital asset' and all that the definition requires is that there must be extinguishment of rights in the capital asset. It does not go further and say that despite extinguishment of the rights in the capital asset, the capital asset must continue to exist.'

19. These observations succinctly show that there is nothing in the subject or context which compels the conclusion that in order that transfer, that is, extinguishment of rights could take place, the asset must continue in existence. Therefore, even in cases where the asset is so extensively damaged by fire, flood, earthquake and the like as to render it useless, the rights therein, if any, could still be wiped out, and if profit arises from such a transaction, there is nothing to preclude the applicability of this provision.

20. The question of the implication of the second limitation was considered by this court in Vadilal Soda Ice Factory's case : [1971]80ITR711(Guj) in the context of the word 'transfer' in Section 12B(1) of the 1922 Act as reintroduced by the Finance (No. 3) Act, 1956, and the relevant observations are as under (at page 718):

'Since the word 'transfer' standing by itself is a comprehensive word, it would include not only transfer by act of parties but also transfer by operation of law.......The word 'transfer' in Section 12B(1) would, therefore, ordinarily include transfer by operation of law, unless there is anything in the context which compels us to give a limited meaning to that word by confining it only to transfer by act of parties. We do not find anything in the section which militates against the broad general connotation of the word 'transfer'. It was suggested on behalf of the assessee that the words 'sale, exchange, relinquishment or transfer......effected after the31st day of March, 1946' postulated that there must be some one to effect the transfer and that indicated that transfer by operation of law was intended to be excluded from the scope and ambit of the section. But this suggestion is based on a misreading of the language used by the legislature. The legislature has deliberately used the past-participle 'effected' without indicating the causal agency so that transfer may be effected either by the assessee or as a result of operation of law.'

21. It is true that the decision was given in the context of Section 12B(1) and that it deals specifically with the case of transfer by operation of law. However, since the material words reappear in section 45, the ratio of the decision will apply with full force and the ratio is that a 'transfer' for the purposes of levy of capital gains would include not only transfer by virtue of an act done by the transferor with that intention, as in the case of a conveyance or assignment, but also transfer without any volitional act on his part. It is worthy of note that in the case of 'extinguishment', that is destruction or annihilation, which is a stronger word as compared to 'transfer' simpliciter, the concept of a voluntary act on the part of the owner of the asset is so inherently inconsistent that such a limitation, which so drastically curtails the natural meaning of the word, could never have been intended to be brought in having regard to the object and purpose and legislative history of the enactment,

22. It would thus appear that the Tribunal, with respect, fell into an error in importing these limitations in the provision under consideration and that its decision, in so far as it is based on those considerations, is vitiated in law. We must say in fairness to the Tribunal, however, that its attention was not drawn to the decisions of this court referred to above and that if those decisions were brought to its notice it would not possibly have taken the view that it did.

23. It was then urged, on behalf of the assessee that those transactions which are covered within the extended meaning of the word 'transfer' must still continue to bear the impress of 'transfer' as it is understood in ordinary parlance and in its legal concept, for the legislature cannot by adopting the device of an inclusive definition command that an act may be treated as 'transfer' although in reality it is not, and that since 'extinguishment', if construed so widely, does not bear such impress, it should be construed narrowly in order to be called 'transfer'. Now, in the first place, it is not open to the assessee to urge this point in view of the decisions in Vadilal Soda Ice Factory's case : [1971]80ITR711(Guj) and R. M. Amin's case : [1971]82ITR194(Guj) . In the next place, the argument is thoroughly misconceived. It is well-settled that the word 'includes' is often used in interpretation clauses in order to enlarge the meaning of the words or phrases occurring in the body of the statute and that when it is so used, those words and phrases must be construed as comprehending not only such things as they signify according to their nature and import, but also things which the interpretation clause declares that they shall include. When such definition expressly includes things which are not covered within the ordinary meaning of the word, it is clear that the intention of the legislature was to give a wide meaning to that word itself apart from the definition [see Commissioner of Income-tax v. Taj Mahal Hotel : [1971]82ITR44(SC) . The words used in an inclusive definition denote extension and they cannot be treated as restricted in any sense. When we are dealing with an inclusive definition, it would be inappropriate to put a restrictive interpretation upon terms of wider denomination (see State of Bombay v. Hospital Mazdoor Sabha : (1960)ILLJ251SC . An inclusive definition is a species of fiction and it is well settled that the only limitation on the power of a legislature to create a fiction is that it should not transcend its power by its creation (see Chandrana & Co. v. State of Mysore : [1972]2SCR344 . There is no limitation on the power of the legislature here to impose tax on income and since it is not in dispute (such a dispute is not even competent in this proceeding) that profits and gains arising from what the legislature has chosen to call 'transfer' are income, it is not permissible to read down the definition and to import any limitation therein against its apparent tenor. In our opinion, therefore, even on this contention the assessee must fail.

24. It was next urged that extinction of rights on account of destruction or demolition of a capital asset could not have been intended to be comprehended within the meaning of the expression in question and for this purpose reliance was placed upon Section 41(2) which levies what is popularly known as 'balancing charge' on so much of the surplus of the proceeds which accrue to the assessee, when any building, machinery, plant or furniture, which is owned and which was or has been used by him for the purposes of his business or profession, is sold, 'discarded, demolished or destroyed, as does not exceed the difference between the actual cost and the written down value of such asset. The argument in substance was that the legislature has already taxed profits arising out of the demolition or destruction of a capital asset to the extent that it thought fit under Section 41(2), and that it could not have intended to tax profits in excess of the amount so brought to tax, and that if it really intended to do so, it would have said so in so many words in Section 2(47) by specifically providing in the inclusive definition for the cases of demolition and destruction. We are unable to agree. In the first place, as stated earlier, 'extinguishment', in its ordinary meaning, takes in destruction or demolition and since there is nothing in the subject or context cutting down the wide operation of its meaning, it is futile to urge that a specific provision covering the cases of demolition or destruction was required to be made in Section 2(47). It is well settled that a construction which requires the legislature to indulge in tautology of language must, as far as possible, be avoided. In the next place, merely because the legislature has levied the 'balancing charges', it cannot be said that it could not have intended to levy capital gains on the excess profit arising out of the same transaction. Tax by way of capital gains under section 45 falls on a distinct receipt under a diferent head which has not been brought to tax under Section 41(2), Besides, under Section 41(2), the legislature takes back what it had given by way of depreciation allowance in the earlier years and it thereby subjects to tax as profit something which is strictly speaking not profit arising from the destruction or demolition. Under section 45, on the other hand, real profit arising from such transaction is brought to tax, since capital gain, broadly speaking, is the difference between the net consideration for the demolition or destruction and the original cost of acquisition and cost of improvement, if any, made in the asset. It is difficult to appreciate why such clear profit could not have been intended to be subjected to tax. In any case, it must be remembered that if the tax liability squarely arises on the plain words of a taxing provision, it cannot be evaded by placing a strained construction on the ground of supposed legislative intention. The argument based upon Section 41(2), therefore, is of no avail to the assessee.

25. It follows from the foregoing discussion that the legislature, in order to effectuate its intention, has deliberately chosen the language of widest amplitude by using the expression 'the extinguishment of any rights therein' in Section 2(47), It covers every possible transaction which results in the destruction, annihilation, extinction, termination cessation or cancellation, by satisfaction or otherwise, of all or any of the bundle of rights--qualitative or quantitative--which the assessee has in a capital asset, whether such asset is corporeal or incorporeal.

26. There is one aspect, however, which must be emphasised at this stage and it is that in order to subject any profit or gain received by or accruing to the assessee to the charge of 'capital gains', the sine qua non is that the receipt or accrual must have originated in a 'transfer' within the meaning of section 45 read with Section 2(47). This requirement clearly flows from the words 'any profits or gains arising from the transfer of a capital asset' in section 45, There must, therefore, be a causal nexus between the 'transfer', that is, the extinguishment of any rights in a capital asset and the profit or gain accruing to or received by the assessee. In other words, it is such extinguishment which must have occasioned the profit or gain and not any other independent transaction as a result of which some different rights are terminated by satisfaction or otherwise. However, merely because a transaction resulting in extinguishment consists of a series of steps, it would not necessarily follow that each step is a separate or disjointed transaction which successively extinguishes distinct rights. In such a case, on an overall view of the entire transaction, it must be ascertained whether each step is really a link in the chain and whether the cessation of any right in the asset and the profit that has accrued or has been received are still substantially connected with each other as cause and effect despite these several intermediate steps. This is really the ratio of the decision of the court in R. M. Amin's case : [1971]82ITR194(Guj) also in which this court read Section 48, which says that the income chargeable to tax as 'capital gains' shall be computed by deducting from the ' full value of the consideration received or accruing as a result of the transfer of the capital asset 'certain amounts therein mentioned, in order to appreciate the true meaning of the words' profits or gains arising from the transfer of a capital asset' in section 45, and applying the well-settled rule of interpretation that statute must be construed ex vigoenibus actus, and having considered its provisions observed (page 203):

'The transfer that is contemplated by section 45 read with Section 2(47) is, therefore, a transfer as a result of which consideration is received by the assessee or accrues to the assessee. Substituting the words 'extinguishment of any rights in the capital asset' for the words 'transfer of the capital asset', the transaction, in order to attract the charge of tax as capital gains, must, therefore, be such that consideration is received by the assessee or accrues to the assessee as a result of the extinguishment of the rights in the capital asset.'

27. On the plain language of section 45 itself and even by reading the said provision along with Section 48, therefore, it is manifest that the profit or gain must have been received by or accrued to the assessee as a result of the extinguishment of any rights in a capital asset and riot on account of extinction of some other distinct rights.

28. Let us now proceed to consider, against the aforesaid factual and legal background, whether the present transaction comes within the ambit and coverage of section 45 read with Section 2(47). From the statement of the case and orders of the taxing authorities, which form part of the case, the following facts clearly emerge:

(i) that the assessee's machinery was taken on hire by M/s. Jasmine Mills Pvt. Ltd.;

(ii) that the said machinery was insured by the hirer together with its own machinery;

(iii) that the insurance was on reinstatement basis;

(iv) that as a result of the fire which broke out in the premises of the hirer, extensive damage was caused to the machinery in such premises and it was rendered unfit for use as such ;

(v) that the insured, that is, the hirer, claimed and received certain amount from the insurer on account of the damage caused to the machinery ;

(vi) that the insurer, while paying the said amount, took over the damaged machinery;

(vii) that out of the amount received from the insurer as aforesaid, the hirer paid on a pro rata basis the sum of Rs. 6,32,533 to the assessee ; and

(viii) that the amount so received by the assessee exceeded the original cost of the machinery by Rs. 3,50,792.

29. The net effect of the transaction as a whole was that there was an extinguishment of the proprietary interest of the assessee in the capital asset, namely, the machinery, and that profit arose to it in consequence of the payment made for such extinguishment. On account of fire, the machinery was so extensively damaged that, for all practical purposes, it ceased to be useful as such. Since the entire machinery in the premises of the insured was covered by insurance, the insurer paid the value of the machinery to the insured and took away the damaged machinery. The insured, in its turn, paid proportionate amount out of the compensation received from the insurer to the assessee and in the course of this transaction the bundle of proprietary rights which the assessee had in the machinery, including the rights to claim its possession back from the hirer on the termination of the contract of hire and to hold, enjoy and dispose it of, came to an end. There was thus a clear extinguishment of the rights of the assessee in the capital asset and consideration was received by it as a result of such extinguishment. There is no material to show that the amount received by the assessee was relatable to some other transaction which extinguished an altogether different right and, therefore, no other conclusion than that there was a 'transfer' of the capital asset within the meaning of section 45 read with Section 2(47) and that profit arose out of such 'transfer' is possible.

30. It is true that the assessee had itself not insured the machinery nor had it paid any premia due under the policy of insurance and that the insurer had not made any payment directly to the assessee. However, by this transaction, the proprietary rights of the assessee in the machinery were completely terminated on receipt of the amount in question from M/s. 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 noprivity 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. It is well settled that a mere contract of hiring, without more, is a species of the contract of bailment, which does not create in the bailee a title in the goods hired (See Damodar Valley Corporation v. Stale of Bihar [1961] 12 STC 102 : [1977]1SCR118 . However, there is high authority for the proposition that a bailee has an insurablc interest in the goods bailed out to him and that he has an option to take out merely a 'policy of indemnity' covering him in respect only of his personal liability to the owner of the goods in case of loss or damage, or, to go in for a 'goods policy', that is to say, a policy insuring the owner's proprietary interest in the goods, and that under the latter kind of policy, on proof of conversion, destruction, etc., he would be entitled to recover the full value of the goods, or value thereof up to the limits expressed in the policy, and that on such recovery, he would hold in trust for the owner the amount attributable to his interest. [See Hephurn v. A. Tomlinson (Hauliers) Ltd. [1966] AC 451 ; 36 Comp Cas 438 (HL)]. In that case, Lord Rcid, with whom Lord Guest and Lord Wilberforce agreed, observed as under (at pages 466-467) (36 Comp Cas 438, 442):

'There can be no doubt that a bailee has an insurable interest in goods entrusted to him.......A bailee can if he chooses merely insure to cover his own loss or personal liability to the owner of the goods either at common law or under contract and if he does that of course he can recover no more under the policy than sufficient to make good his own personal loss or liability. But equally he can if he chooses insure up to his full insurable interest--up to the full value of the goods entrusted to him. And if he does that he can recover the value of the goods though he has suffered no personal loss at all. But in that case the law will require him to account to the owner of the goods who has suffered the loss or, as Lord Campbell says, he will be trustee for the owners.'

31. Lord Hodson, who delivered a concurring opinion, said with regard to a policy insuring the owner's proprietary interest in the goods (at page 472) (36 Comp Cas 438, 447) :

'Sufficient to say that at all material times such a policy would be illegal if the assured intended to retain the proceeds of his claim on the insurer for himself without holding the balance over and above his own interest in trust for the owner of the goods insured.'

32. Lord Pearce, who also delivered a concurring opinion, observed (at page 481) (36 Comp Cas 438,455):

'A bailee or mortgagee, therefore (or others in analogous positions), has, by virtue of his position and his interest in the property, a right to insure for the whole of its value, holding in trust for the owner or mortgagor the amount attributable to their interest. To hold otherwise would be commercially inconvenient and would have no justification in common sense.'

33. 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. Once this conclusion is reached, it becomes clear that though by virtue of its insurable interest M/s. 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 and that the money which it received on settlement of the insurance claim, to the extent that they were attributable to the assessee's interest, must be taken as having been recovered by it for the ultimate benefit of the assessee. It was merely a trustee for the assessee in respect of that part of the amount realised on the policy and the assessee was the beneficial owner thereof, right from the time the payment was made. Under the circumstances, the fact that there was no privity of contract between the insurer and the assessee and that there was an intervening agency can make no difference in the ultimate conclusion that the 'transfer', even if it is treated as in favour of the insurer, is covered by section 45 read with Section 2(47).

34. The Tribunal felt some difficulty, however, in reaching this conclusion because it thought that M/s. Jasmine Mills Pvt. Ltd. was under a legal obligation to take proper care of the machinery which it had taken on hire from the assessee and that since the machinery was destroyed on account of fire which occurred in its premises, it was bound to make good the loss to the assessee and, therefore, the payment was made to the assessee not as a result of the extinguishment of its rights in the machinery but for the satisfaction of a distinct liability which arose under the law of bailment. This aspect was emphasised before us on behalf of the assessee also and itwas urged : (i) that under Sections 151 and 152 of the Contract Act, the bailee, that is, the hirer in the prerent case, had to take such care of the goods hired as a man of ordinary prudence would and if any loss, destruction or deterioration of the thing bailed occurred, he was liable for damages for the loss of the thing bailed ; and (ii) that since, in the present case, the machinery was virtually destroyed while under bailment to M/s. Jasmine Mills Pvt. Ltd., this payment was made not as a result of the extinguishment of any of the rights of the assessee in the machinery but in satisfaction or discharge or working out of an independent right and obligation, namely, the bailor's right for damages for the loss of goods and the bailee's obligation to make good such loss. Strong reliance was placed in support of this argument on the decision of this court in R.M. Amin's case : [1971]82ITR194(Guj) and in Commissioner of Income-tax v. Mohanbhai Pamabhai [1973] 91 ITR 393 (Guj).

35. Now, it appears to us that the entire reasoning underlying the Tribunal's view and the assessee's submission proceeds on the misconception that it is to be held, as a matter of law, without further proof, that in all cases of loss or destruction of the thing bailed, the bailee is necessarily liable to the bailor. There appears to be no justification, however, for such an assumption and it proceeds on some misapprehension about the true legal position on this point. It is well-settled that it is open to a bailee to contract himself out of the obligation imposed by 151 (See Bombay Steam Navigation Co. Ltd. v. Vasudev Baburao Kamat AIR 1928 Bom 5 and Lakhaji Dollaji & Co. v. Boorugu Mahadeo Rajanna AIR 1939 Bom 101). Therefore, it is not as if the liability could be fastened on a bailee irrespective of a contract to the contrary. There is, in other words, no absolute statutory liability of a bailee in all cases and whether or not such liability was in existence will be a matter of fact to be proved in each case. Unless, therefore, it is shown that such liability was in existence, it would not be possible to deduce as a matter of law in all cases that the payment was necessarily received in discharge of the statutory liability to make good the loss suffered by the bailor on account of distribution of the thing bailed. In the present case, the relevant factual data is not on record. It is not known whether or not there was any clause in the contract of hire as a result of which the bailee had contracted himself out of the obligation imposed by 151. In our opinion, therefore, this assumption, namely, that the payment was necessarily received by the assessee in discharge of an independent liability and not on account of extinguishment of the assessee's rights in the machinery is, in the absence of relevant factual data, misconceived in law.

36. There is also another way in which the matter can be looked at. Section 148 of the Indian Contract Act, 1872, in so far as it isrelevant, provides that a 'bailment' is the delivery of goods by one person to another for some purpose, upon a contract that they shall, when the purpose is accomplished, be returned or otherwise disposed of according to the directions of the person delivering them. 151 enacts that in all cases of bailment, the bailee is bound to take as much care of the goods bailed to him as a man of ordinary prudence would, under similar circumstances, take of his own goods of the same bulk, quality and value as the goods bailed. Under Section 152, the bailee, in the absence of any special contract, is not responsible for the loss, destruction or deterioration of the thing bailed, if he had taken the amount of care described in 151. It is apparent on a combined reading of these sections that it is only in case of negligence that the bailee becomes responsible for the loss, destruction or deterioration of the thing bailed. The liability, in the absence of any special contract, does not arise if the bailee has taken as much care of the goods bailed to him as a man of ordinary prudence would, under similar circumstances, take of his own goods. Therefore, in a case where lire might have originated from causes over which the bailee had no control and could not have expected to have any control, or where the bailee has other good answer, there would be no liability to make good the loss. Besides, even if negligence is proved, the quantum of damages will have to be still established. At the most, therefore, upon the loss of goods, an inchoate or contingent right to recover damages would come into existence in favour of the bailor and in respect of it some investigation or legal proceeding and a process of quantification would be necessary. When a question arises, therefore, on competing claims, whether any payment received by the owner of the goods badly damaged in fire, is attributable to the satisfaction of such inchoate or contingent right, or to the extinguishment of his rights and interest in the property, in the absence of any evidence to show that the payment was received either upon adjudication or settlement of such inchoate or contingent right, no legal inference could be raised that the payment was necessarily made in satisfaction of such a right. In the present case, there is no material on record to show that the assessee had laid any claim for damages against M/s. Jasmine Mills Pvt. Ltd. and that there was any adjudication or settlement of such claim and it cannot, therefore, be inferred as a matter of law, that the payment was necessarily made in satisfaction of such claim, if any. On the contrary, the material on record points in the other direction, for, it shows that the payment was received by the assessee on a pro rata basis out of the amount received by M/s. Jasmine Mills Pvt. Ltd. in satisfaction of its insurance claim. The insurance policy covered also the assessee's proprietary interest in the machinery, as earlier observed. Even assuming, however, that the policy insured the bailee in respect only of his own lossor personal liability, the insurer could not have paid any money under the policy to indemnify M/s. Jasmine Mills Pvt. Ltd. unless a claim for damages was made by the assessee and it was adjudicated upon or settled and payment was made in consequence thereof to the assessee. Such is not the course of events here. In view of the circumstances abovementioned also, the conclusion is inevitable that it cannot be deduced as a matter of necessary legal inference that the payment in question was made in discharge of any other independent liability or satisfaction of a distinct right.

37. It would thus appear that even assuming without deciding that profit arising from the settlement or adjudication of a claim for damages against the bailee in the event of loss or destruction of the thing bailed would not be exigible to capital gains because it could not be said to have arisen from the extinguishment of the assessee's rights in the asset but on account of the satisfaction or working out of some distinct right, namely, the owner's right under law or contract to be compensated for the loss or destruction of goods bailed, there being no evidence in this case to establish that there was any such independent transaction and, in fact, with the material on record pointing in the direction of the transaction being one in which profit resulted from the extinguishment of the assessee's proprietary rights in the machinery, the only conclusion which can be properly reached is that the amount of Rs. 3,50,792 was rightly brought to tax as capital gain by the lower revenue authorities. We might mention, however, that there was some debate during the course of the hearing on the point whether the right to recover damages, being a chose-in-action, was itself a capital asset and whether the adjudication or settlement of such a right could be said to be a transaction resulting in the 'transfer' of an asset within the meaning of section 45 read with Section 2(47). Since, on the facts and in the circumstances of this case, such a question does not arise, we prefer not to express any opinion regarding the same.

38. The strongest reliance was placed on behalf of the assessee on the two decisions of this court earlier referred to and the case was almost entirely rested on those decisions. Having regard to the view which we are inclined to take on facts, those decisions cannot assist the assessee. However, since great emphasis was laid on those authorities, it becomes necessary to examine them in some detail and to discover their true ratio.

39. In R. M. Amin's case : [1971]82ITR194(Guj) , the assessee held, in the share capital of a private company in Uganda, 192 shares of certain aggregate face value. The said company went into voluntary liquidation and its assets were sold by the liquidator and, after payment of taxes and liabilities, the assessee became entitled to receive a certain amount as and by way of return of capital in respect of 192 shares held by him. The amount so received by the assessee was in excess of the aggregate face value of 192 shares held by him. Both the Income-tax Officer and, in appeal, the Appellate Assistant Commissioner, took the view that the surplus represented capital gain and that it was taxable as such under section 45 on the ground that it was profit or gain arising from the relinquishment of a capital asset or extinguishment of any rights therein within the meaning of Section 2(47). On appeal, the Income-tax Appellate Tribunal took the view that the surplus in the hands of the assessee did not arise from the relinquishment of any capital asset or from the extinguishment of any rights therein and that there was, therefore, no capital gain chargeable to tax under section 45. An alternative finding, with which we are not concerned in this case, was also given. The matter was brought to this court by way of reference by the revenue and the only contention raised on its behalf was that the transaction in question was 'the extinguishment of any rights therein' within the meaning of Section 2(47) and that the surplus was taxable as capital gains under section 45. It is in this context that the question as to the true connotation of the words 'the extinguishment of any rights therein' arose in that case.

40. The court first ascertained the nature of the capital asset in that case, namely, a share and observed that (See : [1971]82ITR194(Guj) :

'...it is in its true nature what the English law calls, a chose-in-action, which entitles its owner to certain rights in action as distinguished from rights in possession.'

41. It was then pointed out that a share represents the interest of the shareholder in the company and that that interest consists broadly of three distinct rights in action : (i) the right to dividend out of the profits of the company; (ii) the right to attend and vote at meetings and thereby indirectly participate in the management of the company ; and (iii) the right to share in the distribution of the net assets on a winding-up of the company. It was then observed : [1971]82ITR194(Guj) :

'Now, the first two rights arc available to a shareholder when the company is a going concern ; they come to an end when the company goes into liquidation. On a winding-up of the company the third right becomes operative and by virtue of this right the shareholder becomes entitled to his share on distribution of the net assets of the company after satisfaction of its liabilities pari passu according to the rights and interests of the shareholders in them. When the shareholder receives money or other assets, representing his share on distribution of the net assets of the company in liquidation, what he receives is in satisfaction of this right which belongs to him by virtue of his holding the share......and it is in realization or fulfilment of this right, by way of working it out, that moneys or other assets representing his share in the distribution are received by him. This right which inheres in him by virtue of his holding the share is entirely extinguished, but the extinguishment takes place because it is realised; it has fulfilled its purpose.'

42. The court then proceeded to construe the relevant words in Section 2(47) and made certain observations in that context which are earlier set out at appropriate places in the course of this judgment. At page 203, the requirement of a nexus between the extinguishment of rights and the amount sought to be taxed as capital gain was emphasised and it was thereafter observed (See : [1971]82ITR194(Guj) :

'The share merely represents the right to receive moneys on distribution of the net assets of the company in liquidation and that right is satisfied and, by satisfaction, extinguished when such moneys are received by the shareholder. Such moneys received by the shareholder do not represent any consideration received by him as a result of the extinguishment of his rights in the share. It is not the extinguishment of his rights in the share for which consideration is received by him ; it is rather because moneys representing his share in the distribution are received by him that his rights in the share are extinguished.'

43. In this view of the matter, it was there held that when a shareholder receives his share on final distribution of the net assets of the company in liquidation, there is no transfer of capital asset by him which would attract the charge of capital gains.

44. In Mohanbhai Pamabhai's case [1973] 91 ITR 393 the assessees and seven other persons carried on business in partnership but, as a result of some disputes, the assessee retired from the firm leaving the other seven as continuing partners of the firm. According to the terms and conditions of retirement, which were recorded in a document, each assessee received a certain amount in respect of his share in the partnership and this amount was worked out by taking the proportionate value of his share in the net partnership assets after deduction of liabilities and prior charges. The amount so received included, in its break-up, an amount representing his proportionate share in the value of the goodwill, which constituted one of the assets of the partnership. It is this latter amount which was brought to tax as capital gains under section 45 by the Income-tax Officer and the assessment was confirmed in appeal by the Appellate Assistant Commissioner. The Income-tax Appellate Tribunal, however, disagreed with the view of the lower authorities and held that since goodwill was a self-created asset which had cost nothing to the firm and its partners in terms of money, 'transfer' thereof was not within the ambit of section 45 and, therefore, the proportionate share in the value of the goodwill received by each assessee was not taxable as capital gain. On a reference, the Tribunal's view did not find favour with this court. However, it was contendedbefore this court on behalf of the assessee in support of the decision of the Tribunal that the proportionate share in the value of the goodwill was received by each assessee as part of the amount representing his share in the net partnership assets after deduction of liabilities and prior charges and this last-mentioned amount having been received by him in satisfaction of his share in the partnership and not by way of consideration for transfer of his interest in the goodwill or other assets of the firm, there was no transfer of capital asset which would attract liability to capital gains tax. It was in the context of this submission that reference was made to the well-settled legal position as regards the nature of the interest of a partner in a partnership and the legal consequences which flow when a partner retires from the firm. It was observed (See [1973] 91 ITR 393):

'These decisions clearly establish that the interest of a partner in the partnership is not interest in any specific item of the partnership property, ......it is a right to obtain his share of profits from time to time during the subsistence of the partnership and, on dissolution of the partnership or his retirement from the partnership, to get the value of his share in the net partnership assets which remain after satisfying the debts and liabilities of the partnership.......His share in the partnership is worked out by taking accounts in the manner prescribed by the relevant provisions of the partnership law and it is this and this only, namely, his share in the partnership which he receives in terms of money. There is in this transaction no element of transfer of interest in the partnership assets by the retiring partner to the continuing partners.......We must, therefore, hold it to be clear beyond doubt that, even if goodwill be assumed to be capital asset within the charging provision enacted in section 45, there was, in the present case, no transfer of interest of any assessee in the goodwill within the meaning of Section 2(47) when the assessee retired from the firm. Each assessee, undoubtedly, received certain amount on retirement, but this amount represented his share in the net partnership assets after deduction of liabilities and prior charges and it was received in satisfaction of his share in the partnership ; each of them realised his share in the partnership when the amount coming to his share was paid over to him.'

45. The decision was, however, not rested on this point alone and an alternative finding was also given, proceeding on the assumption that when a partner retires from the partnership his interest in the partnership assets is extinguished and there was, therefore, in that case 'transfer' of interest of each of the assessees in the goodwill when the assessee retired from the firm. In that context reference was made to R.M. Amin's case : [1971]82ITR194(Guj) and it was pointed out that where transfer consists in extinguishment of a right in the capital asset, there must be an element of consideration forsuch extinguishment, for then only it would be transfer exigible to capital gains tax. It was then observed (See [1973] 91 ITR 393):

' ......when a partner retires from a partnership and the amount of his share in the net partnership assets after deduction of liabilities and prior charges is paid to him, what he receives is his share in the partnership which is worked out and realised and it does not represent consideration received by him as a result of the extinguishment of his interest in the partnership assets. Moreover, it is not possible to say, in such a case, that any amount is received by the retiring partner as his share in any particular asset of the firm so that it may be said that a particular part of the amount was received as consideration for the extinguishment of the interest of the retiring partner in a particular partnership asset. What the retiring partner is entitled to get is not merely a share in the partnership assets ; he has also to bear his share of the debts and liabilities and it is only his share in the net partnership assets after satisfying the debts and liabilities that he is entitled to get on retirement.......It is, therefore, notpossible to predicate that a particular amount is received by the retiring partner in respect of his share in a particular partnership asset or that a particular amount represents consideration received by the retiring partner for extinguishment of his interest in a particular partnership asset.'

46. On both these grounds it was held in that case that when the assessees retired from the firm, there was no transfer of interest of any of the assessees in the goodwill of the firm and no part of the amount received by any of the assessees was assessable to capital gains tax under section 45.

47. Now, these two decisions, if they are read superficially, might seem to support the assessee, but on a closer examination it would be apparent that their ratio must be confined to a very limited class of cases, and further that they are clearly inapplicable on the facts and in the circumstances of the instant case. In the first place, as earlier stated, there is here no foundation either in law or in fact to believe that the amount which the assessee received from M/s. Jasmine Mills Pvt. Ltd. was paid to it in satisfaction or working out of its right, if any, to recover damages under law or contract, for the loss or damage caused to the machinery. The situation in this case is, therefore, not at all comparable with that obtaining in those two cases, where, admittedly, moneys were received in realisation of or working out of rights which inhered in the concerned assessee in his capacity as a share-holder in one case and as a partner in the other. In the next place, the alleged right, if any, of the assessee to recover damages, as found earlier, was not an absolute statutory right but one which was subject to a contract to the contrary and, even if there was no such contract, it was merely an inchoate or contingent right in respect of which some investigation or legal proceeding and settlement or adjudication would be necessary for its satis-faction or fulfilment. In those two cases, on the other hand, there was a crystallised and unqualified right in the concerned assessee from the very day the share was acquired or partnership came into existence to share in the distribution of the net assets on a winding up of the company (in the first case) and to get, on retirement from the partnership, the value of his share in the net partnership assets which remained after satisfying debts and liabilities (in the second case). In fact, the asset in each of those cases was an incorporeal asset which was made up of a bundle of well-defined rights and the rights above mentioned were the potent constituents of such bundle. It is this vital distinction in the nature of rights which makes all the difference. The observations made in those cases, even though they might appear at first sight to apply to a totally different situation by analogy or inference, must, therefore, be related and confined only to such or exactly similar or identical cases, if any. We cannot, in this connection, resist the temptation of citing that off-quoted passage from the decision of the Earl of Halsbury L.C. in Quinn v. Leathern [1901] AC 495 (HL), which was approvingly cited in State of Orissa v. Sudhansu Sekhar Misra : (1970)ILLJ662SC :

'...every judgment must be read as applicable to the particular facts proved, or assumed to be proved, since the generality of the expressions which may be found there are not intended to be expositions of the whole law, but governed and qualified by the particular facts of the case in which such expressions are to be found......a case is only an authority for what it actually decides. I entirely deny that it can be quoted for a proposition that may seem to follow logically from it. Such a mode of reasoning assumes that the law is necessarily a logical code, whereas every lawyer must acknowledge that the law is not always logical at all.'

48. It would thus appear that the rulings relied upon cannot assist the assessee in the, present case.

49. When confronted with this position, a final attempt was made on behalf of the assessee to save the sinking ship. It was urged that:

(1) M/s. Jasmine Mills Pvt. Ltd. must be taken to have insured the machinery as agents of the assessee ;

(2) the insurance policy contained a reinstatement clause under which it was obligatory, in case of damage or destruction, to reinstal machinery out of the insurance money ;

(3) M/s. Jasmine Mills Pvt. Ltd. realised the amount in question on the' settlement of the insurance claim as agents of the assessee and paid the same to the assessee;

(4) the assessee, therefore, was under an obligation to purchase new machinery and had in fact done so ; and

(5) the moneys having been received and utilised for replacement of capital asset, the transaction was not covered within the ambit of section 45.

50. The whole of this argument, in our opinion, is legally misconceived and has no foundation in fact. In the first place, M/s. Jasmine Mills Pvt. Ltd. had an insurable interest in the assessee's machinery as bailees and they must be taken to have insured the machinery in exercise of such right. There is nothing to show that they were at any time constituted the agents of the assessee and there is no place here for the introduction of a presumption that they must have acted as agents while insuring and receiving insurance money. Secondly, a reinstatement clause in an insurance policy does no more than confer upon the insurer the option of making good the loss by reinstatement, that is to say, by replacing what is lost or repairing what is damaged. The contract contained in the policy, nevertheless, remains a contract to pay a sum of money, subject to the right of the insurer, if he thinks fit, to substitute a different mode of discharging his liability. The clause is intended to benefit the insurer and to protect him from liability to pay the full pecuniary value of the loss, if the loss can be more cheaply made good otherwise. However, if he chooses to make good the loss by a payment in money, he cannot, after the payment, insist, in the absence of any contract or statute to that effect, that the insured shall himself expend money paid in reinstatement. In other words, when the insured has received from the insurer the sum payable under his policy, he may, as a rule, deal with it as he pleases; he cannot be compelled to expend it in reinstatement, unless he has entered into a special contract to do so or unless such duty is imposed upon him by statute. The existence of such contract, however, must be clearly established (See General Principles of Insurance Law by E.R. Hardy Ivamy, second edition, pages 405, 406 and 412 and the cases cited in the footnote below the commentary). It is not shown here that there was any such special contract nor was our attention drawn to any statutory provisions imposing such an obligation. Lastly, there is no material on record to support the submission that out of the amount received by the assessee from M/s. Jasmine Mills Pvt. Ltd. it has purchased new machinery and that the entire amount was spent in replacement of the capital asset. It would thus appear that assuming without deciding that the legal proposition contained in the fifth premise of the submission of the assessee is well-founded, there is in this case no foundation for applying the same.

51. From the foregoing discussion, it would appear that the Tribunal misdirected itself in law in holding that there was in this case no transfer of the capital asset by the assessee within the meaning of section 45 read with Section 2(47) and that the sum of Rs. 3,50,792 was not chargeable to tax as capital gain in the hands of the assessee. Accordingly, we answer the firstquestion referred to us in the negative, that is, in favour of the revenue and against the assessee, and the second question in the affirmative, that is, in favour of the revenue and against the assessee. The assessee will pay the costs of this reference to the Commissioner.

52. An oral application was made at this stage for a certificate under Section 261. In our opinion, this is a fit case for appeal to the Supreme Court as the questions referred to and resolved by us in this reference are substantial questions of law. Besides, in R. M. Amin's case : [1971]82ITR194(Guj) , which was heavily relied upon by both the sides before us and which has a direct bearing on some of the points decided in this case, a certificate has been granted by this court and the appeal is pending before the Supreme Court. It is in the fitness of things, therefore, to certify this case also as a fit one for appeal to the Supreme Court. Accordingly, we grant the certificate.


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