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TMI Blog1984 (7) TMI 59X X X X Extracts X X X X X X X X Extracts X X X X ..... or damage to the aircraft. Clause (7) of the general conditions of the policy of insurance provided that in the event of the insurance company exercising its option to replace the aircraft, the replacement shall, unless and otherwise mutually agreed, be by an aircraft of the same make and type and in reasonably like condition. Clause (8) was to the effect that at all times, the aircraft shall remain the property of the insured, who shall have no right of abandonment to the insurance company and that in the event of payment of the total loss or replacement of the aircraft by the insurance company under the terms of the policy, the insurance company, may, at its option, elect to take over the remains of the aircraft as salvage. On December 25, 1967, the aircraft met with an accident and became a total wreck. Exercising its option in accordance with the terms of the policy of insurance, the insurance company purchased a similar aircraft for Rs. 3,50,000 and after incurring an additional expenditure of Rs. 25,000, made it available to the assessee in the place of the damaged one. In the course of the reassessment proceedings initiated for the assessment year 1969-70, the assessee claim ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e with the terms of the policy of insurance, still, it would be compensation money payable for damages to the aircraft attracting s. 41(2) of the Act. Consequently, the inclusion and the assessment of the profits at Rs. 1,58,122 under s. 41(2) of the Act was upheld. Aggrieved by this, the assessee has come up before us on a reference under s. 256(1) of the Act on the following question of law : " Whether, on the facts and in the circumstances of the case, there was any profit assessable under section 41(2) of the Income-tax Act, 1961, by the insurance company exercising its option under the policy to replace the damaged aircraft with an aircraft of same make and type?" Mr. T. Raghavan, the learned counsel for the assessee, contended that the exercise of the option by the insurer under the policy of, insurance to replace the damaged aircraft resulted in the assessee securing an aircraft similar to or same as the one damaged in more or less the same condition, as if no loss of the aircraft at all had been sustained by the assessee and no moneys were payable or paid to the assessee by the insurance company, which could be subjected to tax treatment under s. 41(2) of the Act. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion was exercised by the insurer resulting in the total replacement of the damaged aircraft by another of the same type and condition in specie. While the stand of the Revenue is that a transaction of this type would be subject to the provisions of s. 41(2) of the Act, the assessee contends that no moneys were payable or paid at all within the meaning of s. 41(2) of the Act as to be brought within the net of income taxation. Generally, a policy of insurance of the kind we have is intended to serve as a cover against loss and risk and to obtain compensation on the happening of specified event, to which an element of uncertainty is attached. It is resorted to enable the insured to be placed in position which he occupied prior to the incurring of the loss. The insured may be placed in such a position the insurer by one of two methods (i) by the payment of money in order to balance the loss sustained by the insured as a result of the happening of the event, the risk against which had been insured, (ii) by restoration of the property damaged or destroyed and covered by the policy of insurance to a condition in which it was prior to its being affected and in the event of the property be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... reinstate the loss or damaged property. Once the insurer has made his election, he is bound by it. If he has elected to reinstate, the contract is treated as if it had always been contract to reinstate without the option of payment." In MacGillivray Parkington on Insurance Law (Seventh Edition), at pages 693-695, it has been stated that the usual form of reinstatement clause gives the insurer an option to pay a money indemnity or restore the assured in specie the property damaged or destroyed, that the clause for reinstatement is for the benefit of the insurer and if he elects to pay, the assured cannot insist on reinstatement, but, on the other hand, when once the insurer has made his election, he is bound by it and cannot change his mind thereafter and when the insurer so elects to reinstate the property damaged, the contract ceases to be a contract of indemnity and becomes contract to reinstate, as if the insurer had originally agreed to reinstate. Hardy Ivamy on General Principles of Insurance Law (Third Edition), at page 432, sets out the legal effect of election to reinstate as under: " The insurers, by exercising their option, substitute a different mode of dischargi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rge their liability. One mode looked to the compensation of the insured by the payment of damages for his loss, the other to the restoration of the subject of insurance to its former condition. It could not have been contemplated by the parties that both methods of performance were to be pursued. The selection by the insurers of one of those alternatives necessarily constituted an abandonment of the other. The election of the privilege of restoration involves the rejection, not only of the right to discharge its liability by the payment of damages to the insured, but also those provisions of the contract having reference to that method of performance. " R. D. Margo in his book on Aviation Insurance, at pages 221-22, has summarised the position thus : " In the case of accidental loss of or damage to an aircraft, the insurers usually reserve to themselves the option of either paying for, replacing or repairing the insured aircraft. The insurers may either make a cash payment to the insured in respect of the damage to his aircraft or replace the aircraft (if it is a total or constructive total less), or attend to the repair of the aircraft themselves. Once the insurers have elec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ess within the meaning of s. 41(2) of the Act. On the terms of the policy of insurance in this case and the undisputed exercise of the option by the insured, there was no question of moneys having become payable by the insurer to the assessee in respect of the loss or damage to the aircraft owned by the assessee and used by it in its business. We are, therefore, unable to accept the contention of the learned counsel for the Revenue that the replacement of the damaged aircraft should be viewed as the discharge of a liability for payment of money or as arising out of two related transactions like the payment of money by the insurer to the insured and the purchase of an aircraft by the insured with that money. We had pointed out earlier that even assuming that money payment is made by the insurer to the insured, there was no obligation cast on the insured to buy another aircraft. We are, therefore, of the view that the expression " moneys payable " occurring in s. 41(2) of the Act cannot be made applicable to the case on hand. We may now briefly refer to the decision in Brown and others against the Royal Insurance Company (Registered) (Ellis Ellis' Reports, Volume 1, 853) to which ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the learned counsel for the assessee with reference to a policy of fire insurance being one for payment of money was made. This decision did not deal with a case of an election to reinstate and the consequences flowing therefrom. Besides, the decision relied on does not lay down that reinstatement in specie of an asset destroyed or damaged by the insurer tantamounts to payment of money or the discharge of a liability to pay money. Reference was also made by the learned counsel for the Revenue to CIT v. T. S. Rajam [1980] 125 ITR 207, to support the tax treatment under s. 41(2) of the Act on the ground that fictionally, a balancing charge is treated as a business income chargeable to tax and, therefore, the amounts were properly subjected to tax treatment by the Revenue. We have carefully perused the decision relied on by the learned counsel for the Revenue and we are unable to discern any fictional basis as well to justify or sustain the assessment under s. 41(2) of the Act. There is nothing in s. 41(2) of the Act to indicate that even in the case of the replacement in specie of a damaged or destroyed plant or machinery, such replacement ought to be considered fictionally to have b ..... X X X X Extracts X X X X X X X X Extracts X X X X
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