April 24

SUPRE:ME COURT REPORTS [1964]

COMMISSIONER OF INCOME-TAX, MADRAS v.

MIR MOHD. ALI, BUS OWNER, VELLORE IK. SUBBA RAO, J. C. SHA!-1 AND s. M. StKRI, JJ.]

Income Tax-Depreciation allowance-Replacement of petrol engine in a bus by new Diesel engine-If amounts to installation of machin.ery-"Installation of mJchinery" Meaning of-Indian Income-tax Act, 1922 (11 of 1922), ss. 10(2)(vi). 10(2)(vial.

The assessee, who was the owner of a fleet of buses, replaced the petrol engines in two of his buses by new Diesel engines incurring an expenditure of Rs. 18,544/- in this connection, during the year of account ending with March 31,

1950. For the relevant assessment year he claimed depreciation allowance under the second para of cl. (vi) and cl. (via) of s. 10(2) of the Indian Income-tax Act, 1922, apart from the normal depreciation under the first para of cl. (vi), but he was allowed only 25 per cent depreciation under the first para of cl. (vi) on the ground that he was not entitled to extra depredation under s. 10(2) (vi) or s. 10(2)(via) because the engine was only part of an equipment and could not by itself become machinery and that when an engine was fixed in a motor vehicle it could not be said to be installed within the meaning of those sub-sections.

Held: (per Subba Rao and Sikri, JJ.) (i) The assessee was entitled to extra depreciatiLon under ss. 10(2)(vi) and 10(2)

(via) of the Indian Income-tax Act, 1922, in respect of the diesel oil engine fitted to the motor vehicles in replacement of the esting engines.

(ii) The definition of "machinery" given by the Privy Council in the case of Corporation of Calcutta v. Chairman, Cossipore and Chitpore Municipality \1922) L.R. 48 I.A. 435, is applicable, and according to that definition a diesel engine is clearly "machinery". And when an engine is fixed in a vehicle it is installed within the meaning of the expression in els. (vi) and (via).

Per Shah, J. (dissenting)-Replacement of a petrol engine by a new diesel engine in a 1notor car cannot be said to be installation of machinery. To be installed, the machinery must for the purpose of the business be. brought into service as a self-contained unit, and it would be difficult to regard the introduction of a mere part, which has no independent use in the business conducted by the assessee, as machinery installed for the purpose of the second para of cl. (vi) of s. 10(2).

CIVIL APPELLATE JURISDICTION: Civil Appeal No. 145 of 1963. Appeal from the judgment and order dated November 16. '1959, of the Madras High Court in Case Reference No. 82 of'1956. S. K. Kapur and R. N. Sachthey, for the appellant.

S. Swaminathan and R. Gopa/akrishnan, for the respondent.

S. T. Desai, J. B. Dadachanji, 0. C. Mathur and Ravin- 1961

der Narain, for the intervenor.

Cammi., ioner of lncome-t<n. JJ!adra• April 24, 1964. The judgment of SUBBA RAO and SJKRI v. .

JJ was delivered by S1KRI J. SHAH J. delivered a dissentingMir Molid.Afi, n •• . . 0u'11er, 1 rllort Op1mon. Sikri, J, SJKRI, J .-This is an appeal by the Commissioner of Income Tax, Madras, against the judgment of the High Court, dated November 16, 1959, on a certificate granted by the High 0'ourt under s. 66A(2) of the Indian Income Tax Act, 1922.

The respondent. Mir Mohd. Ali, hereinafter referred to as the assessee, is a bus owner and transport operator at Vellore, North Arcot District. He had a fleet of buses, and during the year of account ending with March 31, 1950

(relevant to assessment year 1950-51) he replaced the petrol engines in two of his buses (MDJ 583 and MDJ 723) by new Diesel engines. incurring an expenditure of Rs. 18,544/- in this connection. Before the Income Tax Officer, apart from claiming normal depreciation under the first paragraph of cl. (vi) of s. 10(2), he also claimed depreciation under the second paragraph of cl. (vi) and cl. (via) of the Indian Income Tax Act, 1922. The Income Tax Officer only allowed 25 per cent depreciation under the first paragraph of cl. (vi). The assessee appealed unsuccessfully to the Appellate Assistant Commissioner on this point. There were other points involved in the appeal but as we are not concerned with them in this appeal, they are not being mentioned. On further appeal, the Appellate Tribunal held that "the

assessee is not entitled to extra depreciation under s. 10(2>

(vi) or s. 10(2)(via) because however important the engfoe might be for running of a motor, it is after all part of an equipment and it cannot by itself become "machinery" for the purpose of claiming extra depreciation, as envisaged in these sub-sections. We have to hold that the "installation of the new engines is only a capital addition, for the above reasons the assessee was rightly refused the extra depreciation he claims". The Income Tax Appellate Tribunal, on the application of the assessee, referred the following question to the High Court:

"Whether extra depreciation is admissible under the provisions of section 10(2)(via) of the Income Tax Act, in respect of a diesel oil engine fitted to a motor vehicle in replacement of the existing engine."

We may mention that another question regarding disallowance of interest had also been referred to the High Court but we are not concerned with that in the present appeal.

1964 As the High Court felt that there had been an acci- Commt .. ion<r of dental slip in framing the question, it amended the questian Income-ta.•, Mad,.. and the amended question reads: ...

Jlir .11/oii.d.A.li, Bu"

Owner, VeUore "Whether extra depreciation i:s admissible under the provisions of s. 10(2)(vi) and section 10(2)(via) of the Income Tax Act in respect of the diesel oil engines fitted to the motor vehicles in replacement of the existing engines".

8ikri, J.

The High Court answered this question in the affirmative i.e., in favour of the assessee. The Commissioner of Income Tax, on obtaining a certificate under s. 66A(2) of the Income Tax Act, has filed this appeal.

Before attempting to answer the question, it is necessary to set out the relevant provisions of the Inoome Tax Act. The relevant provisions, as in force at the relevant time, were:

"s. 10(2) Such profits or gains shall be computed after making the following allowances, namely: -

(iv) in respect of insurance against risk of damage or destruction of buildings, machinery, plant, furniture, stocks or stores, used for the purposes of the business, profession or vocation, the amount of any premium paid;

(v) in respect of current repairs to such buildings, machinery, plant or furniture, the amount paid on account thereof;

(vi) in respect of depreciation of such buildings, machinery, plant, or furniture being the property of the assessee, a sum equivalent, where the assets are ships other than ships ordinarily plying on inland waters, to such percentage on the original cost thereof to the assessee as may in any case or class of cases be prescribed and in any other case, to such percentage on the written down value thereof as may in any case or class of cases be prescribed; and where the buildings have been newly erected, or the machinery or plant being new has been installed, after the 31st day of March, 1945, a further sum (which shall however not be deductible in determining the written down value for the purposes of this clause) in respect of the year of erection or installation equivalent,-

(a) in the case of buildings the erection of which is begun and completed between the !st day

'1 S.C.R.

&UPREME COURT REPORTS 849

of April 1946 and the 31st day of March 1952 1964 (both dates inclusive), to fifteen per cent of Commiasioner of the cost thereof to the assessee; Income-tax, Madraa y.

(b) in the case of other buildings, to ten per cent Mir Mohd-Ali, B .. of the cost thereof to the assessee; Owner_:_!<llore

(c) in the case of machinery or plant, to twenty per cent of the cost thereof to the assessee:

Provided that-

(via) in respect of depreciation of buildings newly erected, or of machinery or plant being new which has been installed, after the 3 lst day of March, 1948, a further sum (which shall be deductible in determining the written down value) equal to the amount admissible under clause (vi) (exclusive of the extra allowance for double or multiple shift working of the machinery or plant and the initial depreciation allowance admissible under that clause for the first year of erection of the building or the installation of the machinery or plant) in the assessments for such of the five years commencing on the !st day of April, 1949, and ending with the 31st day of Mar9h, 1954:

Provided that where, in respect of such machinery or plant, the assessee establishes that the market value of similar machinery or plant on the 3 lst day of March, 1953, is lower than the original cost, then, subject to the provisions of clause (vi), there shall be made in the assessment for the year commencing next after that date a further allowance (which shall be deductible in determining the written down value) of an amount by which the written down value of the machinery or plant as on that date (without deduction of the initial depreciation admissible in the first year) would have exceeded the corresponding written down value thereof as on the same date -if the market price of the machinery or plant had been taken as the actual cost of the assessee;

(vii) in respect of any such building, machinery or plant which has been sold or discarded or demolished or destroyed, the amount by which the written down value thereof exceeds the amount

Sikri, J.

SUPRI<.£IE COURT REPORTS [1964]

l!J6J

l'oJ1nui&>ci11111 r of /t1t'OJ1tt-lf/.r, Jl11dr1t"

for which the building, machinery or plant. as the case may be. is actually sold or its scrap value: Jlir Aloltd. A.ti: JJ11 . ..,

Ot1wtr. rdlor• Provided that.. ......... .

Sikri. .f. (51 In sub-section (2) ........ .'plant' includes vehicles, books. scientific apparatus and surgical equipment purchased for the purpose of the business, profession or vocation; ...... "

The point at issue before us has been considered by three High Courts. The Bombay and Andhra Pradesh High Courts have held against the assessee while in the judgment under appeal. the Madras High Court has held in favour of the assessee. The High Court of Andhra Pradesh, in the case of B. Srika11tiah v. Commissioner of Income-Tax Andhra Prades/1\'l. followed the Bombay case and expressly dissented from the Madras case.

In the judgment under appeal (reported as Mr. Mo/id.

Ali v. Commissioner of Income-Tax, Madrm('), the High Court arrived at the conclusion by the following steps:

(al Machinery must be given the same meaning with reference to each of the statutory provisions, in s. I0(2)(vi) and s. I 0(2)(vial;

(b) A diesel engine is machinery by the test laid down in the case of Corporation of Calcutta v.

Chairma11, Cossipore and Chitpore Municipality(');

(c) Machinery does not cease to be machinery merely because it )las to be used in conjunction with one or more machines. Nor does it cease to be machinery merely bec.ause it is, for instance, installed as part of a manufacturing or industrial plant;

(d) The statutory provision for depreciation is in the alternative. Whether it is plant or whether it is machinery without its being itself a plant, the assessee is entitled to claim the statutory allowance for depreciation.

The question then is: Which is the correct view? First. the history of para two of cl. (vi) may be noticed. The object of the Income Tax (Amendment) Act. 1946 (VIII of

1946), which first inserted the provisions regarding extra depreciation. was to encourage the modernisation and .rehabilitation of industry and trade. The Second World War

(') (1961) 41 I.T.R. 518. (') (1960l 38 I.T.R. 413.

( 3 ) (1922) LL.R. 49 Cal. 190. .:

• nad ended recently and during the long war machinery and :!_Ii.!_ plant had not only not been replaced or modernised but CmnmisM<>n" of had been subjected to excessive wear and tear and needed Income-tax, Madras rehabilitation. During the War. there had also been great .fir Mo/J. Ali, Bus advance in technology.

Owner, I' ellote

It is then pertinent to point out that the word 'ma chinery'. occurs in els. (iv), (v), (vi) and (via) of s. 10(2).

Prima facie the same meaning must be given to the word 'machinery' in all these clauses. If a machine is machinery for purposes of giving an allowance in respect of insurance or for repairs or in respect of normal depreciation or for the purpose of para one of cl. (vi), it must also be machinery for the purpose of second para of cl. (vi) and cl. (via).

But it is said that the scheme of para two of cl. (vi) and

cl. (via) is different from that of para one of cl. (vi) inasmuch as before it can qualify for extra depreciation, the machinery must be new and must be installed, and the rate of depreciation is provided in the Act itself. Keeping in view this scheme, it is urged that the word 'machinery' must be given a restricted meaning in para two of cl. (vi) and

cl. (via), and the meaning suggested is that it must be a

"self contained unit capable of being put to use in the busi ness, profession or vocation for the benefit of which it was installed". That this is the true meaning, it is further said, is evidenced by the definition of the word 'plant' in s. 10(5). It is argued that this definition indicates that for purposes of para two of cl. (vi) and cl. (via), 'plant', including a vehicle should be viewed as a unit and component parts thereof are excluded from its purview, and 'machinery' should also be considered in the same light

Let us now examine these contentions. First. we do not think that there is anything in the scheme of the second para of cl. (vi) and cl. (via) that throws any light on the construe tion of the word 'machinery' in these clauses. It is true that the machinery must be new and it must be installed and the rate of allowance is prescribed in the Act itself. But the requirement that the machinery must be new does not tell us what is 'machinery'. Assuming for the present that a diesel engine is machinery, if an assessee buys and instals a secondhand diesel engine, he . will not be given the extra allowance under the second para of cl. (vi), and the ground would be that the engine is not new and not that because it is second-hand, it is not machinery. Similarly, if it is purchased but not installed, the ground of refusal would be that it has not been installed and not that because it has not been

intalled. it has ceased to be machinery. Suppose a new machmery 1s purch~S:d but not installed, it would not qualify for extra deprecmtmn on the ground that it has not been

S-ikri, ,/.

1964 installed and not because it has ceased to be machinery due OommiBrion" of to its non-installation. The fact that. the rate of depreciation Inc.,,.._iax, MadrM is provided for in the Act has also no bearing on the ques-

Mir Mo;:;: Ali, s., tion of the construction of the word 'machinery'. This fact

Owner, Vellore only indicates that the legislature had made up its mind as Bikri, J. to the extent of encouragement to be given to industry and, therefore, it did not consider it necessary to delegate this to the rule-making authority.

The definition of the word 'plant' in s. 10(5) equally does not throw any light on the meaning of the word 'machinery'. The word 'plant' is of wide import, but even so it may be argued that vehicles, books, scientific apparatus and surgical equipment are not 'plant' in all businesses, professim, is and vocations. The legislature settled this possible contr<'iversy, but without throwing any light on the true meaning of the word 'machinery'.

What then is the test for determining whether a mechanical contrivance is machinery for the purposes of second para of cl. (vi) and cl. (via)? The Privy Council in the case of Corporation of Calcutta v. Chairman, Cossipore and Chitpore Municipality(') hazarded the following definition of 'machinerv':

"The word 'machinery', when used in ordinary language prima facie, means some mechanical contrivances which, by themselves or in combination with one or more other mechanical contrivances, by the combined movement and inter-dependent operation of their respective parts generate power. or evoke, modify, apply or direct natural forces with the object in each case of effecting so definite and specific a result."

They had already observed that the word 'machinery' must mean more than a collection of ordinary tools. The Privy Council case was not a tax case but prima facie the ordinary meaning of the word 'machinery'-and the word 'machinery' is an ordinary and not a technical word-must, unless there is something in the context, prevail in the Indian Income Tax Act also.

According to the above definition, a diesel engine is clearly 'machinery'. Indeed, r. 8 of the Income Tax Rules treats aero-engines separately from aircraft. It is true that this rule cannot be used to interpret the clauses in the Act but it does show that components of an aircraft, -, vhich are machinery, can be treated separately.

(') (1922) IL.R. 49 Cal. 190.

Further, when the assessee purchased the diesel engines, 1964 they were not 'plant' or part of a plant, because the>' had Oomm;88;0,.., of not been installed in any vehicle. They were, accordmg tOJncomc-tax. Madras the definition given by the Privy Council, machinery. TheyM_ M, v1. Al•- B , ir Ori'. , us were not yet part of a plant, and, accordmg to the Act, 20 Owner, rel/ore per cent of the cost thereof was allowable to the assessee.

All the conditions required by the Act are satisfied. If we look at the point of time of purchase and installation, what was purchased and installed was machinery.

The learned counsel next contended that the assessee is not entitled to extra depreciation because a diesel engine cannot be said to be installed. He urges that the word 'installed' is wholly inappropriate to cover the fixing of a diesel engine in a motor vehicle. We are of the opinion that there is no force in this contention_ As observed by the Bombay Hi£h Court in the case of Commissioner of Income-Tax v.

Sa; mpur Mills Ltd.(') the expression 'installed' did not necesariiy mean 'fixed in position' but was also used in the sense of 'inducted or introduced'; or to use the language of the Madras High Court in the case of Commissioner of Income-

Tax, Jfatlras v. Sri Ram Vilas Services (Pvt) Ltd.('), installed would certainly mean 'to place an apparatus in position for service or use'. We are of the opinion that when an engine is fixed in a vehicle it is installed within the meaning of the expression in els. (vi) and (via)_

Accordingly, we hold that the High Court was correct in answering the question referred to it in the affirmative.

The appeal, therefore fails and is dismissed with costs.

SHAH, J.- I am unable to hold that the respondent is entitled to the allowance under s. 10(2)(vi) paragraph 2. in respect of the diesel engines claimed by him.

Sction 10 of the Indian Income-tax Act provides that tax shall be payable on the profits and gains of an assessee under the had 'profits and gain of business, profession or

vocation". By sub-s. (2) in the computation of taxable profits certain allowances prescribed therein are permissible. We are primarily concerned in this appeal with the initial allow- :mce permissible under the second paragraph of cl. (vi) of

~ sub-s. (2). But els. (iv). (v), (vi). (vi)(a) and (vii) are inter-related and it may be necessary briefly to refer to those provisioris By cL (iv) allowance for premium paid in respect of insurance against risk of damage or destruction of buildings, machinery. plant. furniture. stocks or stores, used for the purposes of the business. profession or vocation is admissible. Under cL (v) an amounr paid on account of any current repairs to such buildings, .machinery, plant or furniture is

('), (1959) 36 LT.R 580.

(') (]960) 38 I.T.R 25.

Sikri, J.

S!wli, J.

SUPUE:ME COURT REPORTS (196lJ

l!!tU an admissible allowance. Oause (vi) recognises by the first

0.,,,,,.,,.,;,,,.,, of paragraph a right to normal depreciation of a percentage on lnco.,,.1,, x, Mwlrn• the prescribed valuation of such buildings, machinery, plant

11. M ,.;· 41' B or furniture, which are the property of the assessees. The "o:,.,.: v, ion,,., second paragraph at the material time stood as follows:

Shah, J. "and where the buildings have been neY<lY erected, or the machinery or plant being new has been installed. after the 31st day of March, 1945. a further sum (which shall however not be deductible in determining the written down value for the purposes of this clause) in respect of the year of erection or installation equivalent, etc. etc." Clause (vi)(a) which was inserted by Act 67 of 1949 permitted a further depreciation allowance in respect of buildings newly erected or of machinery or plant being new which had been erected or installed after March 31, 1948, in not more than five successive assessments, for the financial years next following the previous year in which such buildings were erected; or machinery or plant installed. Clause (vii) permitted as an allowance the difference betY<een the written down value and the sale price or scrap value of such buildings, machinery or plant which had been sold, discarded, demolished or destroyed.

All these clauses dealt with allowances in respect of assets of the specified description and used for the purpose of business, profession or vocation. The depreciation aTiowance permitted under the first paragraph of cl. (vi) which may be called the normal allowance is in respect of all buildings, machinery, plant and furniture of the assessee used for the purpose of his business. By the second paragraph of cl. (vi) an initial allowance in the year in which buildings have been newly erected or the machinery or plant being new has been installed after March 31, 1945, is allowable. Use of the definite article "the" in the second paragraph indicates that the buildings, machinery or plant referred to in that paragraph must also be used for the purpose of the busines. profession or vocation of the assessec. However to qualify for the initial allowance under paragraph two, the buildings must be newly erected or the machinery or plant being new must have been installed, after March 31, 1945.

Two rival views are pressed upon us in support of the respective cases of the Commissioner and the assesse~ '.'s to the meaning of the second paragraph. The Comm1ss10ner contends that the buildings, machinery or plant for which the initial allowance is admissible must be a self-contained unit capable of being put to use in the business, profession or vocation for the benefit of which it is erected or installed.

It is submitted that the second paragraph of cl. (vi) was en-

...

acted with the object of giving a fillip to industry which had 1961 be7n . starved _during the war_ yrs of ne:-v machinery and Cumn•i"•i,,., r of bu!ldmg act1V1ty. But the buildmgs, machinery, or plant to focomda.r. Madr,,. qualify for the initial allowances were not intended to be in . '"· . f I' dd. · · Mir Mohd. Al'- Bv• the nature o rep acement, a 1t10n, or repair to extstmg 0""'" Ve/lore units : they had to be buildings newly erected or machinery ' or plant being new installed. On behalf of the assessee it Shah, J. was contended that the Legislature has not put any restriction of the nature suggested on behalf of the Commissioner and, therefore, any building or a part thereof newly erected or any new machinery or plant or a part thereof installed, qualified for the benefit of the initial allowance.

The question to be decided is one about the intention of the Legislature. Can it be said that when to an existing building a room even a floor is added, that the additional construction is a building newly erected? In my view, that does not appear to be the intention. Such an addition to an existing structure, becomes a part of the structure, and cannot be said to be a building newly erected. If every alteration or addition in an existing building is covered by the second paragraph of cl. (vi) mere repairs falling within the words of

cl. (vi) may also qualify for initial allowance. If a mere addition to a building cannot be regarded as such an erection as is contemplated by the second paragraph of cl. (vi), it would be difficult to hold that the machinery or plant would include part of machinery or plant.

Counsel for the assessee concedes that replacement of a petrol engine by a diesel engine in a motor transport vehicle is not installation of plant. The question is whether it is installation of machine. In my view replacement. of a petrol engine by a new diesel engine in a motor-car cannot be said to be installation of machinery within the meaning of the relevant clause. To be installed the machinery being new must for the purpose of the business be brought into service as a self-contained unit. If the argument of the assessee is sound. every bolt, nut, rod or flywheel which constitute a part of machinery would qualify for the initial allowance and the difference between the allowance for repairs and initial allowance may be obliterated. Counsel for the assessee also did not, as I understood him, contend that replacement of a mere part of machinery was installation of machinery within the meaning of the second paragraph of cl. (vi). The Legislature has not given any definition for that expression, and the expressi.gn "machinery" is otherwise somewhat difficult to define. The Judicial Committee in Corporation of Calcutta v. Cossipore and Chitpore Municipality(') when it was called upon to consider whether a tank supported on

(.;\ L. R. 48 I.A. 435.

JVGl columns, and which could be filled by pumping from a rec0,,.,,;.,, fow, of servor belogig to the C:orporation could be regarded as '"""""'""· Jfodms machinery w1thm the meanmg of the Bengal Municipal Act,

JI . ,, ;;· ,1. B 1884, observed at p. 445: ir ..t.tOti(v. ~"1 t, US Own•,, Vdlo" "If their Lordships were obliged to run the hazard st.,•h, .1. of the attempt (to define machinery) they would be inclined to say that the word 'machinery' when used in ordinary language, prima facie means some m.chanical contrivances which, by themselves or in combination with one or more other mechanical contrivance, by the combined movement and inter-dependent operation of their respective parts generate power, or evoke, modify, apply or direct natural forces with the object in each case of effecting so definite and specific a result."

But we 11re n.ot called upon in this case to decide whether a diesel engine is in the abstract machinery: the question is whether a diesel engine, which is used for replacing a petrol engine, in a vehicle used by a transport operator for the purpose of his business is machinery installed within the meaning of s. I 0(2)(vi) paragraph 2. Whether "machinery" is some contrivance for supplying motive power to another contrivance which directly produces an article or is a mechanical contrivance which produces or assists in the production of an article, it would be difficult to regard introduction of a mere part, which has no independent use in the business conducted by the assessee, as machinery installed for the purpose of the second paragraph oi cl. (vi). The Legislature has provided for the normal depreciatiqn by paragraph 1 of

cl. (vi) and in respect of newly installed machinery it has provided for the initial allowance, the object being to induce i.ndustrialists to start new industries or to extend their existing industries by erecting new buildings, or installing new machinery or plant.

A diesel engine by itself may undoubtedly be used in a business other than that of a transport operator, for instance. for working a pump to draw underground water and may for that purpose be regarded as a self-contained unit But that is not decisive of the question whether in the business "' of a transport operator a diesel engine used to replace a petrol engine may be regarded as machinery installed. Machinery installed within the meaning of paragraph 2 of s !0(2)(vi) is qualified by the expression "used for the purposes of the business'', and therefore unss as a self-contained unit the machinery is used for the purposes of the business, initial _depreciation would not be admissible in respect thereof. That it may be capable of being used in another

. 7 S.C.R.

SUPRE:'.IIE GOURT UEPORTS 857

business by th~ same or another assessee as a self-contained 1964 - unit is irrelevant in considering its admissibility for initial Cummi."i""" of allowance in the business in which it is actually used.

Income.tux, Mudras

It would be fruitless to refer to the schedule under rule 8 fir Mohd. Ali, Buo of the Income-tax Rules for computing the allowance in res- Ouna, Vtllore pect of the depreciation under s. 10(2)(vi). The schedule Sha/•, J. catalogues different items in respect of which depreciation is admissible at the rates prescribed. But whether a particular item is admissible for initial allowance in the second paragraph must depend upon two factors-(i) that it is in respect of the year of erection or installation that the initial allowance is permissible; and (ii) the building or the machinery is used for the purposes of the business. If it is a predicate of admissibility to initial allowance that the machinery must be new and a self-contained unit in the particular business in the carrying on of which the initial allowance is claimed, the fact that in certain conditions that machinery may be regarded as self-contained for the purpose of another business in which it is used, would furnish no guide in ascertaining whether initial allowance is permissible as a deduction in the assessment of taxable income of the business in which it is actually used.

In my view the appeal should be allowed and the question referred for opinion should be answered in the negative.

ORDER In accordance with the opinion of the majority the appeal is dismissed with costs.

Appeal dismissed.

COMMISSIONER OF INCOME-TAX, MADRAS

MIR MOHD. ALI, BUS OWNER, VELLORE

Meaning of-Indian Income-tax Act, 1922

ss. 10(2)(vi)

March 31,

1950

s. 10(2)

Indian Income-tax Act, 1922

s. 10(2)

s. 10(2)(via)

Sikri, JJ.

ss. 10(2)(vi) and 10(2)

Indian Income-tax Act, 1922

L.R. 48 I.A. 435

s. 10(2)

Madras High Court

R. N. Sachthey

S. Swaminathan

R. Gopa

S. T. Desai

der Narain

SUBBA RAO

SJKRI

s. 66A(2)

Indian Income Tax Act, 1922

Mir Mohd. Ali

Vellore

Arcot District

March 31, 1950

s. 10(2)

Indian Income Tax Act, 1922

s. 10(2>

(vi)

s. 10(2)(via)

Income Tax Appellate Tribunal

section 10(2)(via)

s. 10(2)(vi)

section 10(2)(via)

s. 66A(2)

s. 10(2)

31st day of March, 1945

st day of April, 1949

31st day of Mar9h, 1954

3 lst day of March, 1953

High Court of Andhra Pradesh

Madras

s. 10(2)

s. 10(5)

Bikri

s. 10(5)

Bombay Hi£h Court

SHAH

s. 10(2)(vi)

Income-tax Act

S!wli

Shah

March 31, 1948

March 31, 1945

L. R. 48 I.A. 435

fir Mohd. Ali

Buo of the Income-tax Rules

s. 10(2)(vi)


April :!.J.

858 SUPRE:.\ll~ COURT REPOHTS

(I 964]

SILLA CHANDRA SEKHARAM v.

RAMCHANDRASAHU

[K. SUBBA RAO, K. C. DAS GUPTA AND RAGHUBAR DAYAL,

JJ.]

Specific Performance-Perfection of title after contract to sell-Applicability of s. IB(a)-'Subsequentlu to the sale or lease. meaning of-Specific Relief Act, 1877 (Act I of 1877), s. 18(a). / The respondent executed an agreement to sell his house in order to meet family necessities for a certain sum on the condition that he and his mother would execute a sale deed in favour of the appellant. On the failure of the execution of the sale-deed the appellant instituted a suit for specific performance of the contract. The trial court hel<l that the sale was not for legal necessity and therefore decreed the suit in part directing that the respondent would execute the sale deed for the alienation of his interest in the enuire house and that the appellant would be entitled to get possession of the same jointly with the respondent's mcther. The appellant appealed to the High Court and <luring its pendency the respondent's mother died and therefore the onlv question urged on behalf of the appellant was that the respondent. having perfected his title to the entire house. be made to sell the same. The High Court did not agree with the contention and held that s. 18(a) of the Specific R-elief Act did not apply to the facts of thc case as it comes into operation subsequent to the sale having takenplace. On appeal by special leave.

Held: The High C0urt was wrong in not applying the provisions of s. 18(a) of the Act to the facts of the case.

The expression 'subsequently to the sale or lease' in s. 18(a) means subsequently to the contract to sell or let. This clause cannot be restricted in •its application to cases ,, here actual sale or lease of property had taken place.

Kaluanpur Lime Works Ltd. v. State of Bihar. [1954] S C.R. 958. referred to.

CivIL APPELLATE JURISDICTION: Civil Appeal No. 398 of 196~. Appeal by special leave from the judgment and decree dated January 7. 1959. of the Orissa High Court in Appeal from Original Decree No. 57 of 1953.

B. R. L. /yengal', S. K. Mehta and K. L. Mehta. for the appellant.

K. Bhimsankaram. B. Parthasarthy, J. B. Dadachanji,

0. C. Mathur and Ral'inde,. Narain, for the respondent.

April 24. 1964. The judgment of the Court was delivered by

R>gk1<bar ])nyal • .I.

RAGHUBAR DAYAL, J.-This appeal. by special leave, raises the question of the correct interpretation of s. !R(a) of the Specific Relief Act. 1877 (Act I of 18771. hereinafter called the Act. ·

7 s.c.u. ::lUPREME COURT REPORTS 859

d d II

]:'J(j.J Ramchandra, respon ent, execute an agreement to se _ the house in suit to the appellant. on February 21, 1951. s; u,, 1·1mnh• The agreement stated that he was in sole possession and ens, u''.""'" joyment of the house which was his paternal property, that 11,,,,,,.,,,~; d"' Sahu he was the Managing Member and Karla of the family and - that for meeting family necessities and discharging certain 11""1" 1""' LJ,,,,,, z, 1• loans he agreed to sell his undisputed house for Rs. 6,000 /- on condition that he and hi~ mother would execute a deed of sale in favour of the appellant with respect to the house within a period of one year from the date of the execution of the deed of agreement Ramchandra did not execute the sale deed and the appellant instituted the suit for specific performance of the contract.

The trial Court held that the sale was not to be for legal necessit." and therefore decreed the suit in part, on the appellant's depositing a sum of Rs. 6,000 /- less .the sum of Rs. 300/- paid before the Sub-Registrar at the time of the execution of the agreement to sell and less the amount of costs granted to the appellant against Ramchandra within a month and directed that defendant No. 1 would execute the sale deed for the alienation of his interest in the entire house as covered by the agreement and that the plaintiff would be entitled to get possession of the same jointly with defendant No. 2, mother of Ramchandra.

The appellant went up in appeal to the High Court against the dismissal of his suit with respect to the sale of half the house. During the pendency of the appeal Ramchandra's mother died and therefore the only question urged on behalf of the appellant at the hearing of the appeal was that Ramchandra, respondent, having perfected his title to the entire house, be made to sell the same. The High Court did not agree with the contention and held that s. 18(a) of the Act did not apply to the facts of the case as it comes into operation subsequent to the sale having taken place. The High Court therefore dismissed the appeal. It is against this order that this apeal has been filed.

Section 18(a) of the Act reads: )

"Where a person contracts to sell or let certain property, having only an imperfect title thereto, the purchaser or lessee (except as otherwise provided by this Chapter) has the following rights: -

(a) if the vendor or lessor has subsequently to the sale or lease acquired any interest in the property, the purchaser or lessee may compel him to make good the contract out of such interest;"

1964 The question is whether the expression 'subsequently to the Silla C!tandra sale or lease' means 'subsequently to the contract to sell or Bekharam let' or means 'subsequently to the execution of the sale deed Ramcha:dra Sahu or lease deed by the vendor or the lessor, as the case may be'

--,.-- in pursuance of the contract to sell or let. It is contended for Raghub"'' D<1yal, J.the appellant that this expression means subsequently to the contract to sell or let, while the contention for the respondent is that it means subsequent to the actual sale or lease. We are inclined to agree with the contention for the appellant.

The case, in a way, is concluded by the decision of this Court in Kalyanpur Lime Works Ltd. v. State of Bihat(').

In that case the Government agreed to let the lease of the hills to Kalyanpur Lime Works Ltd., but the lease could not be executed as the forfeiture of the lease of a previous lessee was held invalid by the Court. When the lease of the previous lessee expired, Kalyanpur Works Ltd., wanted the execution of the lease for a period during which the lease to it would have continued if it had been granted in 1934.

This Court held that the case fell within s. 18(a) of the Act.

It said at p. 972:

"We agree with the High Court that section 18(a) of the Specific Relief Act applies to the case. That section lays down that where a person contracts to sell or let certain property having only imperfect title thereto, if the vendor or lessor has subsequently to the sale or lease acquired any interest in the property, the purchaser or lessee may compel him to make good the contract out of such interest. There can be no doubt whatever . that when the Government entered into the contract to grant leases to the Lime Co. in 1934, it had an imperfect title, inasmuch as it could not grant a fresh lease to anyone during the existence of the previous lease in favour of Kuchwar Co. No doubt the Government thought it had the right to forfeit those leases and did in fact order forfeiture but it having been found subsequently that the forfeiture was legally invalid, rights of the previous lessees were restored. As already pointed out above this is not the case of absence of title but is one of imperfect title and hence falls within the meaning of section I 8. After the 31st March, 1948, when the leases in favour of Kuchwar Co. expired, the impediment in the way of the Government to grant leases of tbe property stood removed, and the Lime Company's right to get the leases revived in its favour. This right

(') [1954] S.C.R. 958.

7 S.C.R.

SUPRE:\IJ~ COURT REPOHTS . 861

of the plaintiff was resisted by the Government who. on the other hand, granted the leases to defendant No. 2.

,')'ilia Chandra Bckliarnrn

The High Court of Patna rightly took the view that flamcliandm &hu

section 18(a) was applicable to the facts of this llaqhubar Dm, at J. case and although defendant No. 1 was not in a · ' position to grant a lease from the time it agreed to do, the impediment being now removed and a suit for specific performa nee not being barred. the Lime Company was entitled to sue for that relief. We have already held in agreement with the view of the High Court that section 18 is attracted to the facts of this case, and the contract of which specific performance can be decreed in favour of the plaintiff is the one embodied in Exhibits 22 and 22(a)." It is urged for the respondent that in that case it was not contended before this Court that s. l 8(a) could not apply to the facts of the case as no lease in favour of Kalyanpur Lime Works Ltd. had been executed and that therefore the question now before us was not discussed. It is also urged that the Patna High Court had not actually applied the provisions of s. 18(a) to the facts of the case but had decreed the specific performance of the contract 'on the basis of the general principle that the purchaser in a contract to sell entered into in the circumstances of the case, was entitled to sue for specific performance against such interest as the vendor might afterwards acquire in the property and support was found in what was said in Art. 994 in Fry's 'Specific Performance', 5th Edition. In these circumstances, we would like to consider the question directly before us ..

Sections 12 to 20 of Chapter II of the Act deal with contracts which may be specifically enforced. Section 18(a) deals with the rights of the purchaser or lessee in cases where the vendor has imperfect title to the property which he has contracted to sell or let. Apparently this must deal with the rights of the would be purchaser or lessee, and not of those who have already got the sale or lease of the property in pursuance of the contract to sell or let. If the person who contracted to sell or let has completed the sale or the lease transaction, nothing is left for the vendee or the lessee to seek by way of specific performance of the contract. This is when he himself acts according to the contract. If he does not act according to the contract, the person who has agreed to purchase or take on lease the property will have to seek enforcement of the contract through Court and then it may be that the Court might not enforce the contract. The Court will not, in view of the provisions of ss. 14 to 17 be able to

19G4

Sillrr r:f/f/11dr11.

i~:id.:llarcii1i

Rumrlutndra S11iat

862 SUPHEME COUHT HEl'ORTS [19641

enforce the contract even with respect to the property over which the person contracting to sell or let had perfect title, except in certain special circumstances, dealt with in ss. 14, 15 and 16.

Rag/, uJm,. Day"l, J.

Section 14 deals with cases where the part of the contract which could not be performed bears only a small proportion to the whole in value and admits of compensation in money. Section 16 deals, with the specific performance of a part of a contract wJien that stands on a separate and independent footing from another part of the same contract which cannot or ought not to be specifically performed. Cases coming under these two sections are not expected to give rise to circumstances In which provisions of sub-cl. (a) of s. 18 .:an be applied. Section 15 deals with the specific performance of a contract where the part unperformed is large. The Court has discretion in such circumstances to direct the party in default to perform specifically so much part of the contract as it could perform provided that the plaintiff relinquishes all claims to further performance, and all right to compensation either for the deficiency, or for the loss or damage sustained by him through the default of the defendant. When a Court has dealt with a case under s. 15, no question can however arise for action under s. 18(a). It follows, from the consideration of both the sets of circumstances, viz .. when the person contracting to sell or let him self performs his part of the contract and when he is made to perform the contract wholly or partially by Court, the occasion to apply for specific performance of the contract with respect to the property over which the person contracting to sell or let had originally imperfect title, does not arise. This points to the conclusion that this clause cannot therefore be restricted in its application to cases where actual sale or lease of property had taken place.

If clause (a) of s. 18 was to apply after the completion of the sale or lease and on the vendor or lessor acquiring interest in the property in which he had imperfect title to start with. there would be considerable overlapping between the provisions of cl. (a) of s. 18 and s. 43 of. the. Transfer of Property Act.

Section 43 of the Transfer of Property Act comes into piay when a prson fraudulently or erroneously represents that he is authorised to transfer certain immoveable property and professes to transfer such property for consideration, while cl. (a) of s. 18 would come into play when the person with imperfect title has sold or leased the property. There is some sort of representation whenever a person sells or leases property. the representation being implicit and to the

'-. .-,.-:i-, ' ...... ~-. .,,. ',\_ ', -( _-,4. _..,_ ·-- ',

,-\, I / _,_ - -. -

.. 7 s.c.R., -, suPRE:IIE coufiT REPo.ttrs 863

.,_,.

' : • '-. 4 - ---,._-- -_ .----:-. - 'effect that he is competent to sell or let the property. Thus 1964 there is over-lapping of the provisions of the two sections. .

Silla Ohawlra The actual right of the tranfere under s. 43 and cl. (a) S'kharam v. of s. 18 is however expressed in different language. In cases Ramchawlra Sahu where s. 43 operates, the transferee, at his option, cari have - the transfer operate on any interest which the transferor may R09huhar Dayal, 1• acquire in . the property at any time during which the contract for transfer subsists. The illustration to the section indicates that the transferee can require the transferor to deliver the property acquired _to him._ The purchaser or lessee on the other hand, acting under cl. (a) of s. 18, can compel the seller or the lessor to make good the contract out of such interest. The difference between the two provisions is this that in the case of the operation of s. 43, no recourse to Court is necessary. The transfer operates on_ the property transferred and the transferee can call upon the transferor to deliver the property to him. The purchaser i:fr the lessor having the right mentioned in cl. (a) of s. 18 has to go to l Court to compel the vendor or lessor to perform the con- ' tract out of the interest subsequently acquired by him. The purchaser or lessee goes to the Court to enforce the contract and the contract in cl. (a) of s. 18 must refer to the contract to sell or let and not to the contract of sale or lease, which, as indicated earlier, if voluntary, would have covered the entire property contracted to be sold or leased, and if enforced through Court no occasion for the operation of' clause

(a) of s. 18 would arise.

The expession in cl._ (a) of s. 18 should preferably be construed in a way so that there will be no overlapping between the provisions of this clause and of s. 43 of the Transfer of Property Act, as ordinarily the legislature does not intend to make duplicate provisions for similar situations.

The use of the words 'vendor or lessor' in cl. (a) are no definite pointers to the conclusion that the expression 'subsequently. to the sale -or 1ease' be given the meaning 'subsequently to the actual sale or lease'.

The sections preceding s. 18 deal with specific performance of contracts in general and . therefore use the expression 'party to a contract'. Section 18 deals with the cases of contracts to sell or let and therefore appropriately uses the simple word 'vendor' or 'lessor' with respect to the party contracting to sell or let and 'purchaser' or 'lessee' with respect to the party agreeing to purchase or take the property on lease. There is no incongruity in using such expressions so Jong as one knows to whom those expressions refer. In fact the word 'purchaser' or .'lessee' can be appropriately applied to persons agreeing to purchase or take the property ' • on lease.

--~ - ':

1964 in thiS connection reference may also be made to the.

Silla--o;:;; ndra provisions of cl. (d) of s. 18 which uses the words 'vendor Sekharam or lessor' and provides that where the vendor or lessor sues.

Ram<h ,":d, s 1 for specific performance of the contract and the suit is dis- • "' missed on the ground of his imperfect title. the defendant.

Raghubar Dayal, J, has a right to a return of his deposit ...... and to a lien for

such deposit, ...... on the interest of the vendor or lessor in the property agreed to be sold or let. It is clear that the words vendor or lessor in this clause refer to the person contracting to sell or let the property and who did not perform his part of the contract.

Section 25 of the Act also uses the expression 'vendor or lessor' who has not actually sold or leased the property.

It provides inter alia that a contract for the sale or letting of property cannot be specifically enforced in favour of the vendor or lessor who comes within the provisions of els. (a} to (c) of the section. The provisions of s.c 27 A also use the expression 'lessor and lessee' in connection with provisions relating to the contract to let when actually no lease is executed.

There may be another reason for using the expression 'sale or lease' in cl. (a) of s. 18. Section 13 and illustration (a) read:

"13. Notwithstanding anything contained in section 56 of the Indian Contract Act, a contract is not wholly impossible of performance because a portion of its subject matter, existing at its date. has ceased to exist at the time of the performance.

Illustrations (al A, contracts to sell a house to B, for a lakh of rupees. The day after the contract is made, the house is destroyed by a cyclone. B, may be compelled to perform his part of the contract by paying the purchase-money. • • • • • In Pollock & Mulla's 'Specific Relief Act', 8th edition. under s. 13. is a note:

"Illustration (a) assumes that a contract for the sale of a house does, of itself, transfer the beneficial -·· interest in the house to the purchaser, and make him owner in equity in the English phrase. This was also the law here before the Transfer of Property Act. 1882, came .into force. By s. 54 of that Act it is provided that a contract for the sale of immoveable property does not, of itself, ~

create any interest in or charge on such property. iilal By s. 55(5) it is enacted that the risk of destruc- Silla Chandra lion is borne by the purchaser only from the date Sekliaram when the ownership appears to pass on execu- R , ndv.

Sah amc11u ra • tton of a proper conveyance by the vendor [see _ s. 55(l)(d)]. It would, therefore, seem that the Raghubar Dayal, J. illustration cannot now be applied where the Transfer of Property Act is in force."

It may be that just as illustration (a) to s. 13 continues in the Act, the expression 'sale or lease' continued in cl. (a) of s. 18 as at the time cl. (a) of s. 18 was originally enacted -some sort of beneficial interest had passed 'to the person agreeing to purchase the property by the mere agreement to sell, arrived at between the parties.

It has also been urged for the respondent that cl. (a) of -s. 18 of the Act applies only when the person contracting to

sell or let lias imperfect title to the property and not when he is not entitled to the property as is the case in this suit, , as Ramchandra had no title to half the house. We do not consider it necessary to decide this question as we are of opinion that it cannot be said that Ramchandra had no interest in half the house. He had interest in the entire house and so had his mother, though in case of actual partition the interest of each would have been fixed at half. If Ramchandra was not competent to pass title with respect to the entire house during the life time of his mother, he can be said to have imperfect title to it.

We are therefore of opinion that on the death of the mother, Ramchandra obtained title to and interest in the portion of the house which on a private partition subsequent to the contract to sell had taken place between Ramchandra and his mother and that therefore he has to make good his contract out of the property he acquired subsequent to the contract to sell.

It has been submitted for the respondent that it need not be taken for granted that Ramchandra g!Jt title to the property which belonged to his mother as it might be that the mother had executed some will. No such allegation appears to have been made before the High Court where it was urged that Ramchandra had acquired title to that portion of the house. It was in view of this allegation that the appellant did not argue the appeal on the basis of the ground that had been taken in the memorandum of appeal, the ground being that Ramchandra had agreed to sell for Ieasons of legal necessity. We therefore do not consider any forr~

in this contention.

L P(D)JSCI-28

1964 We hold that the High Court was wrong in not applying Silla Olurn<lra the provisions of cl. (a) of s. 18 of the Act to the facts of Srklu., aa• the case. We therefore allow the appeal, set aside the orders

Ramc1,.,~; a Sahu of the Courts below and decree the plaintiff's suit and order -- that on payment of Rs. 6,000/- minus Rs. 300/- paid to the llagluhar Dayal, J.respondent at the time of the execution of the agreement for sale :ind such other costs to which the appellant be entitled within a month from the date of the costs being taxed, the respondent will be directed to execute the sale deed of the entire house covered by the agreement in favour of the appellant. The appellant will get his costs of the trial Court, as decreed by that Court, and of the appeal in this Court, the parties bearing their own costs of the appeal in the High Court. In case the appellant fails to deposit the amount aforesaid within the time allowed, his suit will stand dismissed with costs throughout.

Appeal allowed •

SILLA CHANDRA SEKHARAM

RAMCHANDRASAHU

K. SUBBA RAO

K. C. DAS GUPTA

RAGHUBAR DAYAL,

JJ.

Specific Relief Act, 1877

s. 18(a)

s. 18(a)

s. 18(a)

s. 18(a)

B. R. L. /yengal

S. K. Mehta

K. L. Mehta

K. Bhimsankaram

B. Parthasarthy

B. Dadachanji

C. Mathur

Ral'inde,. Narain

Specific Relief Act

lUPREME COURT REPORTS 859

Ramchandra

Ramchandra

s. 18(a)

Section 18(a)

Kalyanpur Lime Works Ltd.

Kalyanpur Works Ltd.

s. 18(a)

section 18(a)

Specific Relief Act

Kuchwar Co.

31st March, 1948

ilia Chandra Bckliarnrn

High Court of Patna

section 18(a)

section 18

Patna High Court

s. 18(a)

Art. 994

Sections 12 to 20

Chapter II of the Act

Section 18(a)

ss. 14 to 17

ss. 14, 15 and 16

Section 14

Section 16

s. 18

Section 15

s. 15

s. 18(a)

s. 18

s. 18

s. 43

Transfer of Property Act

Section 43

Transfer of Property Act

s. 18

Silla Ohawlra

s. 43

s. 18

Ramchawlra Sahu

s. 43

s. 18

s. 43

s. 18

s. 18

s. 18

s. 18

s. 43

Transfer of Property Act

s. 18

Section 18

s. 18

s 1

Raghubar Dayal

Section 25

s. 18

Section 13

section 56

Indian Contract Act

Pollock

Mulla

Specific Relief Act

s. 13

Transfer of Property Act

s. 54

s. 55(5)

s. 55(l)(d)

Transfer of Property Act

s. 13

s. 18

s. 18

s. 18

s. 18

llagluhar Dayal


' •

78.0.R.

SUPREME COURT REPORTS 867

NEW ASIATIC INSURANCE CO. LTD. v.

PESSUMAL DHANAMAL ASWAN! AND ORS. fK. SUBBA RAO, K. C. DAS GUPTA AND RAGHUBAR DAYAL,

JJ.J

Motor Vehicles Act-(4 of 1939), ss. 93 to 96-Scope of.

A had insured his car with the appellant under a comprehensive policy. A permitted B, (who had insured his own car with another company) to drive his car and while B was driving the car it met with an accident. As a result of the accident C died and D sustained serious injuries. Both C and D were in the car. The heirs of C and D filed suits for damages. Notices under s. 96(2) of the Motor Vehicles Act, 1939 were issued to the appellant who thereon took out a Chamber Summons contending that the notice was bad in law. Alternatively it was contended that the appellant be permitted to defend the suit in the name of the defendant. The Court held that the notices were bad. The plaintiffs filed Letters Patent appeals with success and the Chamber Summons were dismissed and the trial Judge was directed to hear the alternative prayer.

Against this Order the present appeal was filed with special leave.

The contention of the appellant was that in view of paragraph 4 of B's own policy issued by the other company which indemnified B against any liability incurred by him whilst personally driving a private car not belonging to him or hired by him under a Hire-Purchase agreement, B was not included among persons indemnified in para. 3 of A's policy which the appellant had issued on account of proviso (a) to the said para. The respondent contended that this proviso is not a limitation on the class of persons indemnified under para. 3 that class being the drivers driving A's car insured under the policy but merely amounted to a condition affecting the liability of the company vis a vis the driver who was entitled to be indemnified under any other policy.

Held: (i) From a consideration of ss. 93, 94, 95 and 96 of the Motor Vehicles Act it follows that if under the terms of the policy B can be said to be the person insured under Para 3 of the policy, the company would be liable to satisfy the decree if any passed against B.

(ii) The appellant by agreeing with the person who effects the policy, to insure him against liability to third parties, takes upon itself the entire liability of the person effecting the insurance. It os open to the insurer not to extend the indemnity to the insured to other persons but if it extends it to other persons, it cannot restrict it vis o, vis the right of the third party entitled to damages to recover them from the insured, a right which is not d; ted. A proviso meant to e!Xempt certain persons from the general classification will have to be related to considerations affecting it and is not to be related to such classified person's right to indemnity from any other insurer.

(iii) The cl. (4) of s. II of B's policy with the other company does not make that policy to be a policy within the meaning of LIP(D)lSCI-28(a)

April 24

s. 94 of the Act in relation to A's car by whose user B incurred N ... A.rialic liabilities sought to be established in the two suits. Such a policy 1 ........... Co. Lld. and any indemnity under it cannot be used for sul>-classifying p.....:Z" Dhattamal drivers specified in the policy issued to A by the appellant.

A..,...miand Ollters

(iv) The High Court was correct in holding that the appellant had insured B. in view of para. 3 of s. II of that policy and that it comes within the expression in&urer in s. '96 of the Act..

CIVIL APPELLATE JURISDICTION: Civil Appeals Nos. 1043-1044 of 1963. Appeals by special leave from the judgment and decree dated April 8, 1963 of the Bombay High Court in Appeals Nos. 10 and 11 of 1962.

S. T. Desai, V. N. Thakar, 1. B. Dadachanji, 0. C. Mathur and Ravinder Narain, for the appellant (in both the appeals).

G. S. Pathak, 0. P. Malhotra and I. N. Shroff, for respondent No. 1 (in both the appeals).

V. J. Merchant, for respondents Nos. 2 and 4 to 7 (in C.A. No. 1043/ 1963).

April 24, 1964. The Judgment of the Court was delivered by

JlaflobarDayal, J.

R.AGHUBAR DAYAL, J.-These appeals, by special leave. arise in the following circumstances:

S. N. Asnani owned Chevrolet Car bearing registered No.

AA 4431. He insured it with !lie New Asiatic Insurance Co.

Ltd., hereinafter referred to as the company, under a policy dated November 26, 1957. Asnani permitted Pessumal Dhanamal Aswani, hereinafter called Pessumal, to drive that car.

When Pessumal was driving the car with Daooji Radhamohan Meherotra and Murli Dholandas in the car, the car met with an accident as a result of which Meherotra died and Murli received injuries.

Pessumal himself owned a Pontiac car which had been insured with the Indian Trade & General Insurance Co. Ltd., under policy No. Bombay P.C. 42733-2, dated November 18, 1957.

Th~ heis of Meherotra instituted suit no.70 of 1959 against Pessumal for the recovery of Rs. 2,50,000 /- by way of damages with interest. Murli instituted suit no. 71 of 1959 against Pessumal to recover Rs. 1,50,000/- by way of damages. ' Notices under s. 96(2) of the Motor Vehicles Act, 1939 (Act IV of 1939), hereinafter called the Act, were issued to the New Asiatic Insurance Co, Ltd. The notice was given to the company as the defendant's liability to third parties had been insured with it under its policy no. MV I 4564. The company then took out Chamber Summons and it was contended that notice under s. 96(2) of the Act was bad in law and shouid be set aside and that the company was not liable to satisfy any

judgment which might be passed in the suit against the defen 1964 dant. Alternatively, it was prayed that the company be added Ne"' .A.aiatic as a party defendant to the suit and I or be authorised to defend 1 ........ Co. IM. the suit in the name of the defendant. Tarkunde J., held the P ~Dh al notice issued to the company in the suits under s. 96(2) of A::.":.~ and O:A:.... the Act, to be bad in law and, accordingly, set them aside. . . .

Ragl1vbar Dayal, J.

The plamtdfs then filed Letters Patent Appeals which were allowed and the Chamber Summonses were dismissed.

It was directed that the. trial Judge would hear the alternative prayers in the Chamber Summonses and make the necessary orders. It is against this order in each of the appeals that the company has preferred these appeals, after obtaining special leave.

To appreciate the contentions of the parties in these appeals, reference may be made to certain provisions in the two policies. The various provisions in the two policies are identi cal in matters affecting the question for determination before us. We, therefore, set out the relevant provisions from the policy issued by the company and would refer to differences, if any, at the proper place.

The policy is described as 'Private Car (Comprehensive Policy)'. The policy issued by the other company does not so describe it, but it is also a Comprehensive Policy as the premium charged is on that basis. The policy insures, under Section I against IGss or damage, under Section II against lia bility to third parties and under Section III against liability for medical expenses. Thereafter, follow the general exceptions and conditions.

Para I of Section II indemnifies the insured, i.e. Asnani who effected the policy, in the event of accident caused by or arising out of the use of the motor car, against all sums which he may become legally liable to pay in respect of death or of bodily injury to any person. Paras 3 and 4, generally known as 'Other drivers' 'Extension Clause' and 'Other Vehicles Extension Clause' respectively, are material and are set out in full:

"3. In terms of and subject to the limitations of the indemnity which is granted by this section to the Insured the Company will indemnify any driver who is driving the Motor Car on the Insured 's order or with his permission provided that such Driver:-

(a) is not entitled to indemnity under any other policy.

(b) shall as though he were the Insured observe, ful'

Iii and be subject to the terms, exceptions and conditions of the policy in so far as they can apply.

J.Vtw AsiaJic

lnsirance Co. Ltd.

Puaiimal Dhanamal .datcani and Otliera

Baghubar Da1JUl, J.

4. In terms of and subject to the limitations of the indemnity which is granted by this Section in connection with the Motor Car the Company will indemnity which is granted by this Section in con- Private Motor Car (but not a Motor Cycle) not belonging to him and not hired to him nnder a Hire Purchase Agreement".

Under the heading 'Avoidance of certain terms and right of recovery', the policy states: -

"Nothing in this Policy or any endorsement hereon shall affect the right of any person indemnified by this Policy or any other person to recover an amount under or by virtue of the provisions of the Motor Vehicles Act, 1939, section 96.

But the Insured shall repay to the Company all sums paid by the Company which the Company would not have been liable to pay but for the said provisions." Condition 6 reads:

"6. If at the time any claim arises under this Policy

there is any other existing insurance covering the same loss damage or liability the Company shall not be liable to pay or contribute more than its rateable proportion of any loss dam11ge compensation costs or expense. Provided ·always that nothing in this Condition shall impose on the Company any liability from which but for this Condition it would have been relieved under proviso (a) of Section 11-3 of this Policy".

The Schedule to the policy mentions the limitations as to use and under heading 'Driver' notes: -

(a) Any person: -

(b) The insured may also drive a motor car not belonging to him and not hired to him under a Hire Purchase Agreement.

Provided that the person driving holds a licence to drive the Motor Car or has held and is not disqualified for holding or obtaining such a licence".

At the end of the Schedule is an important notice which reads:

"The insured is not indemnified if the Vehicle is used or driven otherwise than in accordance with this Schedule. Any payment made by the Company by reason of wider terms appearing in the Certificate in order to comply with Motor Vehicles Act 1939 is recoverable from the Insured. See the clause headed 'Avoidance of certain terms and right of recovery'."

The contention for the appellant is that in view of para 1964

4 of Pessumal's policy issued by the other company, Pessumal New Asiatic was indemnified against any liability incurred by him whilst 1 .. urane,· Co. Ltd. personally driving a private motor car not belonging to himp,.,.ni:i'm.anamal and not hired to him under a Hire Purchase Agreement, and A .. ani and Other.

at, terefore, he was not nclded aong the person~ indem- Raaha,,,;; D,, yal, J.

mfied-m para 3 of the policy 1t had JSsued to Asnam on account of proviso (a) to para 3 which reads:

"provided that such driver is not entitled to indemnity under any other policy".

This contention is met by the respondent on the ground that this [>roviso is not a limitation on the class of persons indemnified under para 3, that class being the drivers driving the Chevrolet car insured under the policy, but merely amounted to a condition affecting the liability of the company vis a vis the driver who was entitled to indemnity under any other policy. The question thus reduces itself to the determination of whether Pessumal comes within the persons indemnified in para 3 of the policy issued by the company.

We may now set out the relevant provisions of the Act which have a bearing on the contention between the parties.

Chapter VIII of the Act provides for insurance of motor vehicles against third party risks. Section 93 defines the ex

pressions 'authorised i.tJsureil'; 'certifidate of in$ltlance' andi reciprocating country'. The relevant portions of the various sections are :

"94. (1). No person shall use except as a passenger or cause or allow any other person to use a motor vehicle in a public place, unless there is in force in relation to the use of the vehicle by that person or that other person, as the case may be. a policy of insurance complying with the requirements of this Chapter.

Explanation-A person driving a motor vehicle merely as a paid employee, while there is in force in relation to the use of the vehicle no such policy as is required by this subsection, shall not be deemed to act in contravention of the

sub-setion unless he knows or has reason to believe that there is no such policy in force.

(2) Sub-section (l) shall not apply to any vehicle owned by the Central Government or a State Government and used for Government purposes uncpnnecte<l with any commercial enterprise.

(3) The appropriate Government may. by order, exempt from the operation of sub-section (!) any

196l

New A.giatic

l1i,~1iranr-e Co. Ltd,.

Pe$, mmnl Dkat1amal

Aawani an!l Olht.ra

Raghubar Dayal, J.

vehicle owned by any of the following authorities. namely:- • • • • • Provided that no such order shall be made in relation to any such authority unless a fund has been established and is maintained by that authority in accordance with the rules made in that behalf under this Act for meeting any liability arising out of the use of any vehicle of that authority which thiit authority or any person in its employment may incur to third parties. • • • • •

95. (I) In order to comply with the requirements of this Chapter, a policy of insurance must be a policy which-

(a) is issued by a person who is an authorised insurer or by a co-operative society allowed under section 108 to transact the business of an insurer, and

(b) insures the person or classes of person specified in the policy to the extent specified in sub-section

i2) against any liability which may be incurred by him or them in respect of the death of or bodily injury to any person caused by or arising out of tbe use of the vehicle in a public pla.ce: • • • • •

(4) A policy shall be of no effect for the purposes of this Chapter unless and until there is issued by the insurer in favour of the person by whom the policy is effected a certificate of insurance in the prescribed form and containing the prescribed parjiculars of any conditions subject to which the policy is issued and of any other prescribed matters; and different forms, particulars and matters may be prescribed in different cases . • • • • •

(5) Notwithstanding anything elsewhere contained in any law, a person issuing a policy of insurance under this section shall be liable to indemnify the ·~ person or classes of person specified in the policy in respect of any liability which the policy purports to cover in the case of that person or those classes of person.

96. (!). If, after a certificate of insurance has been issued under sub-section (4) of section 95 in favour of the person by whom a policy has been effected, judgment in respect of any such liability

as is required to be covered by a policy , under ' 1964 clause (b) of sub-section (1) of section 95 (being New Asia!lc a liability covered by the terms of the policy) is ln•urance Oo. Lid. obtained al!ainst ay person insur~ by the policy, Puaumal ".Dhawa...; l

then, notw1thstandmg that the msurer ma.y. be Aswani and Other• entitled to avoid or cancel or may have avoided or cancelled the policy, the insurer shall, subject Raghu/mr Dayal, J. to the provisions of this section. pay to the person entitled to the benefit of the decree any sum not exceeding the sum assured payable thereunder, as if he were the judgment debtor, in respect of the liability, together with any amount payable in respect of costs and any sum payable in respect of interest on that sum by virtue of any enactment relating to interest on judgments.

(2) No sum shall be payable by an insurer under subsection (1) in respect of any judgment unless before or after the commencement of the proceedings in which the judgment is given the insurer had notice through the Court of the bringing of the proceedings, or in respect of any judgment so long as execution is stayed thereon pending an appeal; and an insurer to whom notice of the bringing of any such proceedings is so given shall be entitled to be made a party thereto and to defend the action on any of the following grounds, namely:-

• • • • •

(3) Where a certificate of insurance has been issued

under sub-section (4) of 11ection 95 to the person by whom a policy has been effected, so much of the policy as purports to restrict the insurance of the persons insured thereby by reference to any conditions other than those in clause (b) of subsection (2) shall, as respects such liabilities as are required to be covered by a policy under clause

(b) of sub-section (1) of section 95, be of no effect: Provided that any sum paid by the insurer in or towards the discharge of any liability of any person which is covered by the policy by virtue only of this sub-section shall be recoverable by the ininsurer from that person.

(4) If the amount which an insurer becomes IJable

mder this section to pay in respect of a liability rncurred by a person insured by a policy exceeds the amount for which the insurer would apart from the provisions of this section be liable under

:rew Asiaek

In.urroit!e Co. LW..

the policy in respect of that lia.bility, the insurer shall be entitled to recover the excess from that person. • • • • • Pessunwl Dlutn'lmol

Aswani and Others

(6) No insurer to whom the notice referred to in subsection (2) or sub-section (2A) has been given shall be entitled to avoid his liability to any person entitled to the benefit of any such judgment as is referred to in sub-section (I) or sub-section (2A) otherwise than in the manner provided for in sub-section (2), or in the corresponding law of the State of J ammu and Kashmir or of the r~ ciprocating country, as the case may be".

Chapter VII! of the Act, it appears from the heading. makes provision for insurance of the vehicle against third party risks, that is to say, its provisions ensure that thirdparties who suffer on account of the user of the motor vehick would be also to get damages for injuries suffered and that their ability to get the damages will not be dependent on the financial condition of the driver of the vehicle whose user led to the causing of the injuries. The provisions have to be construed in such a manner as to ensure this object of the enactment.

Section 94 prohibits, as a matter of necessity, for insurance against third-party risk, the use of a motor vehicle by any person unless there exists a policy of insurance in felation lo the use of the vehicle by that particular person and the policy of insurance complies with the requirements of Chapter VIII. The policy must therefore provide insurance against any liability to third party incurred by that person when using that vehicle. The policy should therefore be with respect ta that particular vehicle. It may, however, mention the perso11 specifically or generally by specifying the class to which that person may belong, as it may not be possible to name specifically all the persons who may have to use the vehicle with the permission of the person owning the vehicle and effecting the policy of insurance. The policy of insurance contemplated by s. 94 therefore must be a policy by which a particular car is insured.

Section 95 lays down the requirements which are to be complied with by the policy of insurance issued in relation to the use of a particular vehicle. They are: (1) the policy must specify the person or classes of person who are insured with respect to their liability to third-parties; (2) the policy must specify the extent of liability which must extend to the extent specified in sub-s. (2); and (3) the liability which be 1 incurred by the specified person or classes of person in respect of death or bodily injury to any person caused by or arising out of the use of the vehicle insured in a public place.

r '

7 s.c.R.

SUPREl\lE COURT REPORTS 873

Sub-section (4) of s. 95 requires the issue of a certificate of 1961 msnrance, in the prescribed form, to the person who effects Neu hiaJi' the policy. The form of the certificate prescribed by th~ Motor lnsuran" Cn. Lid,

Vehicles Third Party Insurance Rules, 1946, . requires _the p,88,.,,,,.;•j,1"'""'"'l specification of persons _or classes of rs_ons entitle~ to dnve. Aswani and Otl.eTB

The authorised insurer 1s also to certify m the certificate that -- , , . . .fi I te II th c r RH9liulwr Daya ••• the pohcy to which the ert1 ca_te re a s. as we. as e e: tificate of insurance, are issued m accordance with the provisions of Chapter VIII of the Act.

Sub-secticn (5) of s. 95 makes the insurer liable to indemnify the person or classes of person specified in the policy in respect of any liability which the policy purports to cover in the case of that person or those classes of person. If the policy covers the insured for his liability to third parties, tbe insurer is bound to indemnify the person or classes of person specified in the policy The same is the effect of sub-s. (!) of s. 96 which provides that the insurer is bound to pay to the-- person entitled to the benefit of a decree he obtains in respect of any liability covered by the terms of the policy against any person insured by the policy irrespective of the fact whether the insurer was entitled to avoid or cancel or might have avoided or cancelled the policy. This means that once the insurer has issued a certificate of insurance in accordance

.vith sub-s. (4) of s. 95 he has to satisfy any decree which a oerson receiving injuries from the use of the vehicle insured obtains against any person insured by the policy. He is however liable to satisfy the decree only when he has been served with a notice under sub-s. (2) of s. 96 about the proceedings in which the judgment was delivered. It is for this reason that a notice under sub-s. (2) of s. 96 was issued to the company and it is on account of the consequential liability ill case the plaintiffs' claim is decreed against Pessumal that the appellant challenged the correctness of the allegation that Pessumal was a person insured under the policy issued by it in respect or the Chevrolet car. It follows from a consideration of these various provisions of the Act-and this is not really disputed for the appellant-that if under the terms of the policy Pessumal can be said to he the person insured under para 3, the company would he liable to satisfy the decree if any passed against Pessumal.

The whole question then is whether Pesumal comes within the terms of para 3 of Section II of the policy.

Under this paragraph. the company indemnifies any person who is driving the motor-car on the insured's order or with his permission. Pessumal was driving the car with the permission of Asnani who had effected the policy and therefore the company undertook to indemnify Pessumal in accordance with this provision of para 3. The appellant, however. '

1964 contends that this provision should not be read as defining N•w A•iatic by itelf the class of persons insured under it, in viw of the lnMance Co. Lid. further classification of this class of drivers by proviso (a). It n _, v. is contended that only such drivers were indemnified as were ~'""""" D/&anamal • • • d h l" d th A•IDani and Otkera not entitled to mdemmty un er any ot er po icy an . us -. - drivers who were entitled to indemnity under any other poltcy RafAMbar Deya!, J. were taken out of the general class of drivers driving the car on the insured's order or with his permission. We do not ..... agree with this contention.

The proviso is not really a classification of driers but 1s a restriction on the right of the driver to recover any dam

ages he had to pay, from the company. The driver who can get indemnity from any other company under any other policy is, under this contractual term, not to get indemnity from the company. The proviso thus, affects the question of indemnity between a particular driver and the company and has noth ing to do with the liability which the driver has incurred to the third party for the injuries caused to it and against which liability was provided by s. 94 of the Act and was affected by the policy issued by the company. The company, by agree ing with the person who affects the policy, to insure him against . liability to third parties, takes upon itself the entire liabilit]' of the person effecting the insurance. it is open to the insurer not to extend this idemnity to the insured to other persons but if it extends it to other persons, it cannot restrict it vis a vis the right of the third party entitled to damages, to recover them from the insured, a right which is not disputed. A proviso meant to exempt certain persons from the general classi fication will have to be related to considerations affecting it and is not to be related to such classified persons right to indemnity from any other insurer. In this connection reference may be made to proviso (b) which cannot in any case be a proviso relating to the classification of persons to be indemni fied. It provides that the person indemnified under para 3 will observe, fulfil and be subject to the terms. exceptions and conditions of the policy in so far as they can apply to him.

We are further of opinion that clause (4) of Section II of Pessumal's policy with the other company does not make that policy to be a policy within the meaning of s. 94 of the Act in relation to the Chevrolet car by whose user Pessumal incurred liabilities sought to be established in the two suits. The para

gr~h indemnifi_es the insured, i.e., Pessumal, wp.iist pe!50nally dnvmg any pnvate motor car. It does not indemnify him against the liability incurred when driving any particular car and therefore, in view of what we have said earlier, Pessumal's policy cannot be a policy of insurance in relation to the Chevro- • let car as required by s. 94 of the Act Such a policy and any W indemnity under it cannot be used for sub-classifying driven specified in the policy of the company.

The Act contemplates the possibility of the policy of in- 1961 surance undertaking liability to third parties providing such a New Asiatic contract between the insurer and the insured, that is, the person 1...,.,.a ... Oo. Lid. who effected the policy, as would make the mpan>'. entitled p.,.., ... i"iJ,,_1 to recover the whole or part of the amount 1t has paid to the ;1 .... 3 ; and ou.er, third party from the insured. The insurer thus acts as security - for the third party with respect to its realising damages for the Raghtlbu.r Dayqj, J

injuries suffered, but vis a vis the insured, the company does not undertake that liability or undertakes it to a limited extent. It is in view of such a possibility that various conditions are laid down in the policy. Such conditions, however, are effective only between the insured and the company, and have to be ignored when considering the liability of the company to third parties. This is mentioned prominently in the policy itself and is mentioned under the heading 'Avoidance of certain terms and rights of recovery', as well as in the form of 'An Important Notice' in the Schedule to the policy. The avoidance clause says that nothing in the policy or any endorsement thereon shall affect the right of any person indemnified by the policy or any other person to recover an amount under or by virtue of the provisions of the Act. It also provides that the insured will repay to the company all sums paid by it which the company would not have been liable to pay but for the said provisions of the Act. The 'Important Notice' mentions that any payment made by the company by reason of wider terms appearing in the certificate in order to comply with the Act is recoverable from the insured, and refers to the avoidance clause.

Thus the contract between the insured and the company may not provide for all the liabilities which the company has to undertake vis a vis the third parties, in view of the provisions of the Act. We are of opinion that once the company had undertaken liability to third parties incurred by the per sons specified in the policy, the third parties' right to recover any amount under or by virtue of the provisions of the Act is not affected by any condition in the policy. Considering this aspect of the terms of the policy, it is reasonable to conclude that proviso (a) of para 3 of Section II is a mere condition affecting the rights of the insured who effected the policy and the persons to whom the cover of the policy was extended by the company, and does not come in the way of third parties: claim against the company on account of its claim against a person specified in para 3 as one to whom cover of the policy was extended.

It has been contended for the appellant that it was not incumbent on the owner of a car to take out a poli_cy of insurance indemnifying himself or any person permitted to drive the car and that if he does not insure the car and uses it he . runs the risk of prosecution under s. 125 of the Act. This is

878 SUPREl\IE COURT REPORTS [1964}

1961 true, but has no relevant effect on the question for decision N"v A,;,,,; c before us. Asnani did insure his car with respect to liability Jn.,.mnrc On. Lid. against third persons. We have to see whether the company. p,,,,.,,,,,111,.,.,,,,,,,1 on account of .undertaking that liability can be said to have

Amani and Ot/""' insured Pessumal on account of his driving the car with the R 1 d - 1 permission of Asnani. The same may be said about the other "ii" ""Daya' J. contention for the appellant that there is nothing in the Act which makes it compulsory for an insurer to insist that the owner of the car takes out a policy in the widest terms possible covering any person who qrives the car with his permission. The company did agree under the policy to indemnify drivers who drove the car with the insured's permission. The question is whether that undertaking covers PessumaL

Lastly, we may mention that the question about the proper stage at which the question raised by the company in the Chamber notice is to be decided, came up for consideration at the hearing. We however do not propose to express any opinion on that point in this case.

We are of opinion that the High Court rightly held that the company had insured Pessumal in view of para 3 of Section II of the policy and that it comes within the expression 'insurer' in s. 96 of the Act. We therefore dismiss the appeals with costs of hearing one set.

Appeals dismissed.

867

NEW ASIATIC INSURANCE CO. LTD

v.

PESSUMAL DHANAMAL ASWAN! AND ORS

K. C. DAS GUPTA

RAGHUBAR DAYAL,

JJ

Motor Vehicles Act

ss. 93 to 96

s. 96(2)

Motor Vehicles Act, 1939

ss. 93, 94, 95 and 96

Motor Vehicles Act

s. 94

Bombay High Court

S. T. Desai

V. N. Thakar

B. Dadachanji

C. Mathur

Ravinder Narain

G. S. Pathak

P. Malhotra

I. N. Shroff

V. J. Merchant

JlaflobarDayal

R.AGHUBAR DAYAL

S. N. Asnani

Asnani

Pessumal Dhanamal Aswani

Pessumal

Daooji Radhamohan Meherotra

Murli Dholandas

s. 96(2)

Motor Vehicles Act, 1939

New Asiatic Insurance Co, Ltd.

s. 96(2)

Tarkunde

s. 96(2)

Ragl1vbar Dayal

Puaiimal Dhanamal

Baghubar Da1JUl

Motor Vehicles Act

section 96

Section 11

Motor Vehicles Act

Asnam

Chapter VIII of the Act

Section 93

Raghubar Dayal

section 108

section 95

section 95

Raghu/mr Dayal

section 95

State of J ammu and Kashmir

Section 94

s. 94

Section 95

s. 95

Chapter VIII of the Act

s. 95

s. 96

s. 95

s. 96

s. 96

Pesumal

RafAMbar Deya

s. 94

s. 94

s. 94

Raghtlbu.r Dayqj

s. 125

Daya

s. 96