1999 (3) TMI 6 - SC - Income Tax

Respondent have business of publishing a newspaper purchased a aircraft for the purpose of quicker transport of the newspaper - aircraft met with an accident - insurer purchased a similar aircraft made it available to the respondent in the place of the damaged one - Such exercise of option by insurer could only be after the occurrence of the accident and not at any time earlier - hence the expression money payable in s. 41(2) will not apply - profit not assessable u/s 41(2)

Summary

Issues Involved:
1. Applicability of Section 41(2) of the Income-tax Act to insurance replacement.
2. Interpretation of "moneys payable" under Section 41(2) of the Income-tax Act.
3. Legal effect of the insurer's option to replace the insured property.

Issue-wise Detailed Analysis:

1. Applicability of Section 41(2) of the Income-tax Act to Insurance Replacement:
The primary issue was whether the replacement of a damaged aircraft by the insurer, instead of a monetary payout, would attract the provisions of Section 41(2) of the Income-tax Act. The Income-tax Officer applied Section 41(2) and calculated profits based on the difference between the original cost and the written-down value of the aircraft. The Appellate Assistant Commissioner upheld this view, interpreting that "moneys payable" included any amount received from an insurance company in any form. However, the High Court concluded that the expression "moneys payable" could not be applied to this case since the insurer opted for replacement, not a monetary payout.

2. Interpretation of "Moneys Payable" under Section 41(2) of the Income-tax Act:
The High Court and the Supreme Court both focused on the interpretation of "moneys payable." The term is defined in the Explanation to Section 32(1A) to include insurance or compensation moneys payable. The principle of strict construction of taxing statutes was emphasized, stating that the term "money" should be understood in its ordinary sense, referring to actual money or cash, not to any other benefit or equivalent. The court rejected the argument that "money" could be interpreted as "money's worth," maintaining that the statutory language must be adhered to strictly.

3. Legal Effect of the Insurer's Option to Replace the Insured Property:
The court examined the legal implications of the insurer's option to replace the aircraft. The insurance policy allowed the insurer to replace or make good the accidental loss or damage. The insurer exercised this option, converting the contract from a monetary payout to a reinstatement contract. The court referenced legal principles and precedents, including Brown v. Royal Insurance Co. and Halsbury's Laws of England, which support the view that once the insurer opts to replace, the contract is treated as one for reinstatement from its inception. This doctrine of "relation back" implies that no money is payable under the contract, negating the applicability of Section 41(2).

Conclusion:
The Supreme Court affirmed the High Court's judgment, concluding that the insurer's exercise of the option to replace the aircraft transformed the contract into one for reinstatement, not for the payment of money. Thus, the expression "moneys payable" in Section 41(2) did not apply, and the appeal by the Revenue was dismissed. The court emphasized the necessity of strict interpretation of fiscal statutes and upheld the principle that "money" should be understood as actual cash, not as any equivalent or benefit.