[Citation -1984-LL-0516-3]

Citation 1984-LL-0516-3
Respondent Name AIR INDIA
Court ITAT
Relevant Act Income-tax
Date of Order 16/05/1984
Assessment Year 1974-75, 1978-79
Judgment View Judgment
Keyword Tags extinguishment of any right • personal liability • pre-existing right • insurance company • insurance policy • lump sum payment • insurance claim • insurance money • estimated cost • capital asset • original cost • capital gain • cash payment • take over • premia
Bot Summary: 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. 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 there is no question of transfer. 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. Now the difference between abandonment and subrogation has been brought out by Halsbury para 332: In a case of total loss, the rights given by subrogation must be distinguished from those resulting from abandonment. 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 passed to the underwriters on abandonment. The right of the assured to recover damages from a third person is not one of those rights which are incident to the property in the ship. The Gujarat High Court in the case of Vania Silk Mills Ltd. 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.

We find it convenient to dispose of both these appeals together. These are departmental appeals against findings of Commissioner (Appeals), in respect of assessments for years 1974-75 and 1978-79. 2 to 7. [These paras are not reproduced here as they involve minor issues.] 8. last ground is whether capital gains could be levied in respect of insurance received when one of aircrafts crashed and was total loss. aircraft 'Emperor Ashoka' on its routine flight from Bombay, crashed on 1-1-1978. original cost was Rs. 19,62,87,972. From insurance company, assessee had received Rs. 35,19,98,972. ITO was of opinion that there was transfer and capital gains would be exigible. On appeal, Commissioner (Appeals) accepted assessee's submission that no capital gains would arise. department is on further appeal. 9. We have been referred to decision of Gujarat High Court in case of CIT v. Vania Silk Mills (P.) Ltd. [1977] 107 ITR 300 as well as decision of Calcutta High Court in case of Marybong & Kyel Tea Estates Ltd. v. CIT [1981] 129 ITR 661. Basing on these two decisions, department's contention is that amount received from insurance company would be taxable to capital gains. Shri Palkhivala, learned counsel for assessee, submitted that point at issue is already covered by Tribunal's decision for assessment year 1971-72 wherein under similar circumstances, Tribunal has held that no capital gains would arise. He then pointed out certain distinguishing features of assessee's case from decided cases before Gujarat and Calcutta High Courts. He submitted that for reasons given, Tribunal's decision given earlier should be followed. 10. We are, however, unable to accept Shri Palkhivala's submissions. Although point was decided by Tribunal in year 1971-72, subsequent to appeal, two High Court decisions point out that department's stand could b e reasonable. There are no other High Court decisions brought to our notice which is in favour of assessee on this point. We have considered Shri Palkhivala's submissions in detail below. We have come to finding that capital gain has to be assessed in this case. 11. Now, submissions of Mr. Palkhivala, learned counsel for corporation, could be summarised as follows: 11.1 only part of section 2(47) of Income-tax Act, 1961 ('the Act') defining transfer would be 'relinquishment' or 'extinguishment' of rights in capital asset. There is no relinquishment because that postulates continued existence of asset. So also expression "extinguishment of rights'. expression is not synonymous with extinguishment of capital asset or any right therein. Since capital asset itself has been destroyed, none of rights therein could survive. Therefore, there is no transfer. CIT v. R.M. Amin [1977] 106 ITR 368 (SC) is cited as authority. 11.2 terms of insurance contract specifically excludes abandonment. In case of loss, assessee cannot abandon damaged aircraft to insurance company. Therefore, insurance company does not get any right over damaged lost aircraft. This is also pointer against 'transfer of capital asset'. 11.3 contract of insurance is indemnity contract to make good loss or damage. But law of indemnity has built-in ceiling that assured would not be financially better off or worse off as result of loss. Therefore, assessee cannot be said to have any financial gain as result of indemnity contract. 11.4 There are various methods of providing indemnity to insured, viz., cash payment, repairs, replacement and reinstatement. It is insurer who has right to select which method would be adopted. When sum insured is paid, i.e., when cash payment method is adopted, amount payable would be under what is known as 'hull policies' in marine insurance parlance. sum fixed for payment is fixed by agreement based on fair value to insured. sum assured under contract was for Rs. 35 crores which was estimated cost of replacement of aircraft in event of total loss. As matter of fact, entire proceeds were utilised only for buying similar aircraft. 11.5 similar issue had arisen before Tribunal for 1971-72. aircraft 'Nandadevi' had crashed. excess receipt was held by Tribunal not to constitute capital gains. 11.6 There are two decisions, one by Gujarat High Court and another b y Calcutta High Court which were delivered subsequent to Tribunal's decisions. Both cases are easily distinguishable on facts. 11.7 Apart from this, insurance money is received pursuant to contract and not because of extinguishment of any rights--Babubhai M. Sanghvi v. CIT [1974] 97 ITR 213 (Bom.) and CIT v. R.M. Amin [1971] 82 ITR 194 (Guj.). 11.8 There is intrinsic evidence within statute that receipt of insurance claim is regarded as special transaction. See clause (1) of Explanation to section 32(1)(iii) of Act. Authority cited was CIT v. Chugandas & Co. [1960] 38 ITR 241, 262 (Bom.) as affirmed by Supreme Court in CIT v. Chugandas & Co. [1965] 55 ITR 17. 12. We can consider each of submissions. Taking up first submission in order to attract capital gains, there should be transfer. That transfer must be within definition in section 2(47). expressions which could be considered are 'relinquishment' and 'extinguishment'. Now submission that asset should continue to exist and assessee's right alone should be extinguished has been considered and rejected by Gujarat High Court in R.M. Amin's case. See their discussion at pages 201-202. As far as expression 'relinquishment' is concerned, Bombay High Court has referred to it in case of CIT v. Rasiklal Maneklal (HUF) [1974] 95 ITR 656. They have accepted contention that property must continue to exist. However, expression 'extinguishment' has not been considered by Bombay High Court in that case or any High Court, other than Gujarat High Court in R.M. Amin's case. Therein they have held that it is not necessary that asset should continue to exist. Since expression 'extinguishment' is applicable to facts of case, we cannot say that submission is acceptable. 13. We had also perused Supreme Court decision in R.M. Amin's case. There is no discussion therein which would throw any light on this submission made before us. In that case, Supreme Court was concerned with monies received by shareholder on liquidation of company. Supreme Court pointed out that when monies are received on liquidation, it is only in satisfaction of pre-existing right of shareholder and, therefore, there is no question of transfer. 14. We next consider whether under terms of insurance contract, there is any transfer or extinguishment of any right. insurance contract we consider here is in nature of indemnity contract, to make good loss or damage. assured cannot of course be better or worse off. But these principles of indemnity contract govern sum to be assured. It cannot have any impact on any other matter, least of all on taxing provisions. If asset insured had for certain other reasons like scarcity or inflation, increased in value and total loss is indemnified, assured has every right to receive sum for which asset was insured. Whether excess thus received is taxable or not has to be considered under taxing provisions only. In certain cases where asset is transferred and another asset is acquired, Legislature in their wisdom had made provisions for exemption from capital gains. See section 54 of Act for instance. Where there is no such provision, as in section 54, it would be difficult to import it on assumption and on basis of principles governing indemnity contract. 15. We may also consider submissions based on clause in insurance contract that assessee cannot abandon damaged/lost aircraft to insurer. Now one fundamental principle in insurance, whether marine or aviation, is right of subrogation. This right is defined in Halsbury's Laws of England, Fourth edition, Vol. 25 as follows: "Where insurer pays for total loss, . . . of subject-matter insured, he thereupon becomes entitled to take over interest of assured in whatever may remain in subject-matter so paid for, and he is thereby subrogated to all rights and remedies of assured in and in respect of subject-matter is from time of casualty causing loss." [Emphasis supplied] 16. Under this principle, insurer steps into shoes of assured and gets all rights assured had in asset. This is transfer and this transfer takes place at 'the time of casualty causing loss'. It is because of this principle that department claims there is transfer under section 2(47). 17. Now this position is sought to be got over by referring to abandonment clause. Now difference between abandonment and subrogation has been brought out by Halsbury para 332: "In case of total loss, rights given by subrogation must be distinguished from those resulting from abandonment. By virtue of abandonment, insurers become entitled to property in thing insured and to all rights incident to property; whereas by subrogation they become entitled to rights and remedies which may not depend upon ownership of thing insured. Thus, where owners of insured ship have been paid as for total loss, property in what remains of ship, and all rights incident to property, are transferred to underwriters as from time of disaster in respect of which total loss is paid. For instance, right to receive payment of freight accruing due, but not earned, at time of disaster is one of those rights incident to property in ship, and it, therefore, passed to underwriters on abandonment. right of assured to recover damages from third person is not, however, one of those rights which are incident to property in ship. It passes from assured to underwriters, in case of payment for total loss, only on principle of subrogation; and it is on this principle that it passes likewise to underwriters who have satisfied claim for partial loss." 18. It would be clear from above that even if there is no abandonment, insurer has some rights, however trifling in value they may be. assessee does not continue to have those rights. insurer succeeds to them. 19. We can at this stage consider insurance contract. First sentence of clause 8 says: 'In case of loss or damage assured may not abandon damaged aircraft to corporation'. But certain other rights assured has not been abandoned. addendum to policy insurer has waived rights of subrogation against 'Boeing Aircraft Company in connection with Boeing 747 Purchase and Training Agreements'. (The other terms of addendum are not relevant.) Boeing Aircraft Company is also considered as joint assured and, therefore, rights of subrogation are waived. 20. Having considered insurance contract and general principles underlining therein, we cannot say there is no transfer either because of general principles of indemnity or because of abandonment clause. 21. fifth submission is that issue is already decided by Tribunal for year 1971-72 holding that there is no capital gain. We have gone through decision carefully. operative part of order is in para 6, wherein earlier order of Tribunal is quoted. Going through extract of that order, we find that point therein was decided by referring to 'reinstatement value clause attached to and forming part of insurance policy'. However, in case of total destruction, Tribunal, while disposing of appeal of 1971-72, observed at end of para 7, after considering Gujarat High Court decision in R.M. Amin's case: "In view of those observations, it is possible that in case of total destruction compensation received by assessee may result in taxable capital gains". Apart from above observation in their order, order of Tribunal for 1971-72 has to be considered and followed only if it is not inconsistent to High Court decisions pronounced subsequently and we find that line of thinking of High Court to be somewhat different than Tribunal. Gujarat High Court in case of Vania Silk Mills (P.) Ltd. has held that term extinguishment of any right covers every possible transaction which results in destruction, extinction, termination, cessation or cancellation by satisfaction or otherwise of all or any rights--qualitative or quantitative--which assessee has. net is cast very wide indeed by this observation. It would be very difficult in face of such sweeping statement to single out case of insurance policy and say there is no transfer. 22. In course of hearing, Shri Palkhivala submitted that Gujarat High Court decision turned on peculiar facts of case. terms and conditions of insurance was not before them and so they assumed it to be good policy, i.e., policy insuring assessee's interest and not indemnity policy. submission is, had they considered indemnity policy, ruling would have been different. Now, passage where facts are considered is quoted below: ". . . In present case, insurance policy is not on record of case. However, established facts and circumstances, namely (1) that insurer paid claim even without proceedings taken by assessee against bailee, claiming and proving and recovering damages for loss of machinery bailed; (2) that entire machinery in premises of bailee, that is, machinery of assessee as well as that of bailee, was insured and lump sum payment was received on settlement of insurance claim and out of that amount payment on pro rata basis was made by bailee to assessee; and (3) that it was policy on reinstatement basis, under which insurer had option of making good 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 irresistible conclusion that it must have been 'goods policy', that is, policy insuring assessee's proprietary interest in machinery, and not merely 'policy of indemnity' covering bailee in respect only of its personal liability . . ." 23. High Court was actually considering issue whether bailee's liabilities alone were insured or whether assessee's (that is owner of asset) interest in asset was also insured. This discussion is on this point. 24. In order to understand this and why their Lordships gave finding that it is 'goods policy', submission made before them should be noticed. In that case, goods insured were given on hire to third party and third party had insured goods. When it was destroyed by fire, payment received from insurance company was passed on to assessee. It was this peculiar fact, i.e., absence of privity of contract with insurer, was sought to be emphasised by assessee. High Court noted: "It is true that assessee had itself not insured machinery nor had it paid any premia . . . However, by this transaction, proprietary rights of assessee in machinery were completely terminated on receipt of amount in question from Jasmine Mills Pvt. Ltd., and transaction could, therefore, be treated as 'transfer' in favour of latter. Even if 'transfer' is treated as having been effected in favour of insurer, fact that there was no privity of contract between assessee and insurer would not make any difference in conclusion arrived at, if problem is looked at from proper legal angle . . ." Then, they go on to consider interest of bailee in goods bailed to him when they gave finding on basis of reasoning recorded at page 316 which is extracted above. They came to conclusion that 'though by virtue o f its insurable interest, Jasmine Mills Pvt. Ltd., insured assessee's proprietary interest in machinery at its own cost, it must be considered as having done so for benefit of assessee Thus, entire discussion was on nature of bailee's interest--the interest of third party, Jasmine Mills Pvt. Ltd. It was to meet submission that insurance company covered only third parties' interest in goods, that High Court pointed out that it covered assessee's interest and not merely to indemnify loss that might arise to third party on account of fire and on that account it was 'goods policy'. 25. Once observations are understood in proper context, we do not find it helpful to assessee. We may also note that policy considered by Gujarat High Court also contained clause for reinstatement. It was presence of this reinstatement clause which persuaded Tribunal for year 1971-72 to hold against levy. According to Gujarat High Court, this clause does not make any such difference in problem before us. 26. Calcutta High Court has also taken similar view in Marybong & Kyel Tea Estates Ltd.'s case. They have quoted Gujarat High Court's view with approval. 27. Since findings of Tribunal are inconsistent with findings of two High Courts on this point, it is not open to us to follow earlier ruling of Tribunal. 28. We will now consider certain basic legal propositions submitted. It is said that insurance money is received pursuant to contract and it has nothing to do with any rights in any asset. It is merely determining point of time and condition under which money would be received. It has to be considered de hors of rights of insurer. This proposition is as attractive as it is simple. But, having regard to authorities quoted above, it is not within our province to accept it. 29. second proposition is that receipt from insurance is regarded as special transaction and not as transfer: this would be evident from clause (1) of Explanation to section 32(1)(iii). We are unable to consider this proposition also for reasons mentioned above. 30. For same reasons, we hold that capital gains for assessment year 1974-75 in respect of machinery destroyed was also properly brought to tax. 31. In result, both appeals are partly allowed. *** INCOME TAX OFFICER v. AIR INDIA
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