Chandulal Harjiwandas v. Commissioner Of Income-Tax, Gujarat.

Shelat, C.J:— This reference arises out of a claim made by the assessee for a rebate under section 15(1) of the Income-tax Act, 1922, in respect of the premium paid on a policy of insurance. Section 15(1), inter alia, provides:

“15. (1) The tax shall not be payable in respect of any sums paid by an assessee to effect an insurance on the life of the assessee…”

2. The question that arises is whether the premium in respect of which the rebate is claimed by the assessee was the sum paid to effect an insurance on the assessee's life.

3. The reference relates to the assessment year 1960-61, the relevant previous year being Samvat Year 2015. On June 23, 1959, i.e, during the relevant previous year, a policy called “Children's Deferred Endowment Assurance” for a sum of Rs. 50,000 was issued by the Life Insurance Corporation of India. The proposer was Harjivandas Kotecha, the father of the assessee, and the life assured was the assessee. The premium payable in respect of the said policy was Rs. 1,925 per annum. That amount was paid as premium out of the taxable income of the assessee. In the course of the assessment for the assessment year 1960-1961, the assessee claimed rebate on the said insurance premium of Rs. 1,925, grounding his claim under the provisions of section 15(1) of the Act. The Income-tax Officer rejected the claim upon the ground that under the said policy the life of the minor assessee had not been assured. The Assistant Commissioner, who agreed with the Income-tax Officer, also held that the sum for which the life had been assured did not become payable if death should occur before the assessee attained majority and, therefore, it could not be held that the sums paid by the assessee through his guardian till he attained majority, were paid to effect an insurance on the life of the assessee. The assessee took the case in appeal before the Tribunal and the Tribunal, agreeing with the conclusion of the department authorities, also rejected the claim of the assessee, observing as follows:

“The terms of the contract, in our opinion, indicate that covering of the risk commences only on the attainment of majority by the life assured followed by the life assured adopting the policy. If both these events do not take place, then there is no element of risk that is covered by the policy and what is received is merely a return of the premia paid. To such a payment the provisions of section 15(1) cannot be applied as there is no payment to effect an insurance on the life of the assessee because the insurance on life commences only after the attainment of majority and the life assured adopting the policy after the said date of attaining majority.”

4. The Tribunal, therefore, held that there was no insurance as such of the life of the assured during his minority and before he adopted the contract of insurance.

5. The question referred to us in this reference is:

“Whether rebate under section 15(1) of the Income-tax Act, 1922, is admissible on the premia payable as per annexure “A” during the minority of the assessee?”

6. The question that really arises in this reference is whether the amount of Rs. 1,925 paid by the guardian of the assessee on his behalf was by way of premium in respect of an insurance effected on the life of the assessee. The policy, a copy of which is annexed to the statement of the case as annexure “A”, lays down the following details:

* * * * Cash option Rs. 11,693-50 Deferred date 11-3-65 11-3-82— Date of maturity * * * * Event on the happening of which sum assured payable On the stipulated date of Maturity if the Life Assured is then alive or at his prior death if it shall occur on or after the Deferred Date * * * *

7. Clause 5 of the policy provides that:

“All moneys payable in terms of these provisions shall, if the policy has been adopted by the life assured, be payable to the life assured, or his Assigns or Nominees under section 39 of the Insurance Act, or Proving Executors or Administrators or other legal Representatives……………… Provided always that in the event of the Life Assured not having adopted the Policy, the moneys payable in terms of these provisions shall become payable to the proposer or his proving Executors or Administrators or other Legal Representatives……………”

8. Certain other provisions contained in the policy which are material run as follows:

“The Life Assured shall at any time after attaining majority and before the Deferred Date by a writing signed by him adopt this policy, agreeing to be bound by all its provisions. On such adoption, by the Life Assured, this Policy shall be deemed to be a contract between the Corporation and the Life Assured as the absolute owner of the Policy as from the date of such adoption, and the Proposer or his Estate shall not have any right or interest therein………

Provided that if all the premiums due prior to the Deferred Date have been paid, the person entitled to the Policy moneys shall have the option to apply for and receive as on the Deferred Date the Cash Option mentioned in the Schedule in entire cancellation of this Policy.

This Policy shall stand cancelled in case the Life Assured shall die before the Deferred date and in such event a sum of money equal to all the premiums paid without any deduction whatsoever shall become payable to the person entitled to the policy moneys.

This Policy shall stand cancelled also in the event of the Life Assured declining to adopt or failing or neglecting to adopt the Policy before the Deferred Date, and in such event a sum of money equal to the Cash Option will become payable to the person entitled to the Policy moneys.”

9. The proposer of this policy was the assessee's father and the acceptor was the Life Insurance Corporation of India. Obviously, therefore, the contract of assurance, if at all it can be so called, was between the proposer and the Life Insurance Corporation. The Life Insurance Corporation under this contract was liable to pay the sum assured (a) on the stipulated date of maturity, if the life assured was alive, i.e, on the nth of March, 1982, or (b) if the life assured were to die before the said date, provided that the death occurred on or after the deferred date i.e, the nth of March, 1965. Under the scheme of the policy, these are the two events upon the happening of either of which the Corporation would become liable to pay the sum assured, namely, Rs. 50,000. As regards the first event, i.e, on the date of maturity the life assured being then alive, the contract of insurance is to be deemed to be the contract of the life assured, i.e, the assessee, only if upon attaining majority and before the deferred date, the life assured were to adopt the contract of insurance. It is clear from the provisions of the policy that until then the contract would not be his and would continue to be the contract of the proposer, i.e, the father of the assessee. The assessee, therefore, not having adopted the contract, he being still a minor during the accounting year namely Samvat Year 2015, the contract had not yet become his contract and the contract was one and remained as one between the proposer and the Life Insurance Corporation. The contract being between the Life Insurance Corporation and the father of the assessee and since under the terms thereof it could become the assessee's contract only upon his adopting it on attaining majority, it had to be provided that the assessee was to be entitled to the benefit thereunder upon the footing that the contract was to be deemed to be the contract of the life assured. This is also clear from the other provisions of the policy. Even if the life assured were to be alive on the deferred date, it would be the proposer, i.e, the assessee's father, who would be entitled to receive the cash option unless the life assured adopted the contract as his own. Therefore, it is only if the life assured attains majority and adopts the policy before the deferred date that the Corporation can be said to have effected an insurance in respect of the life of the assessee under this contract and it is then only that it can be said to become liable to pay the sum insured to the assessee.

10. If the life assured however were to expire before the deferred date, the policy would stand cancelled and, in that event, it would be the proposer and not the heirs of the life assured, who would get the sum equal to the premiums paid, again not the sum insured. Even if the life assured continues to be alive but fails and declines to adopt the policy, it is again the proposer who would be entitled to receive the cash option and not the assessee. It is thus clear that it is only when the life assured attains majority and adopts the policy that the contract is to be deemed to be his contract and it is then only that the Life Insurance Corporation can be said to accept the risk of his life, that is to say, to effect insurance on the life of the assessee, and would then become liable to pay the sum insured on the happening of either of the two events aforesaid.

11. Mr. Parikh, who appears for the assessee, drew our attention to paragraph 576 and onwards at page 290 of Halsbury's Laws of England, 3rd edition, volume 22, which sets out the basic features of an endowment insurance. We are, however, not so much concerned in this reference with ascertaining the features of an endowment insurance, as with the question whether the contract entered into by the assessee's father amounts to effecting an insurance on the life of the assessee. In paragraph 578 in that very same volume, it is stated that considerable difficulties have arisen in the case of children's endowment or deferred life insurance policies taken out by parents, because normally a person has no insurable interest in the life of his child and such a policy would, therefore, be illegal if it were regarded as enuring for the benefit of the proposer. It appears that in order to get over this difficulty, sometimes policies are effected by parents for and on behalf of or for the benefit or in trust of, their infants. In such cases, the proposer would be regarded as holding the policy in trust for the child and if, after attaining the age of 21, the child makes appropriate payments of the premium it might well operate as a novatio by which he would be accepted as the assured. It will thus be observed that even in such a case where a policy is taken out in trust for an infant or for and on behalf of such an infant, a novatio is necessary upon the infant's attaining majority and making appropriate payments of premium and it would be then only that it can be said that the insurance company had accepted him as the assured. Mr. Parikh also pointed out to us the decision in In re Webb: Barclays Bank Ltd. v. Webb [1941] 1 All E.R 321. presumably in support of his proposition that even where a parent takes out a policy of insurance, so long as the life assured is the assessee such an assessee would be entitled to claim rebate under section 15(1) if he pays the premium in respect of such a contract. The decision in In re Webb: Barclays Bank Ltd. v. Webb however did not have to deal with such a proposition. The only question arising there was whether the terms of the policies in that case created a trust in favour of the children and whether the policies were held, not for the benefit of the testator's estate but in trust for the children. The testator in that case took out a policy of insurance on the life of each of his two infant children payable to their personal representatives on the death of either of them after their attaining the age of 21 years. If a child died before attaining 21 years, the testator had the right to recover part of the premiums paid. The policies, and all the powers exercisable thereunder, were stated throughout to be for the benefit of the children, and, on their attaining the age of 21 years, the testator's own interest in the policy moneys terminated. On a summons taken out before Farwell J. the learned judge held, on the construction of the terms of the policy of insurance, that they created a trust in favour of the children, and the policies were held not for the benefit of the testator's estate, but in trust for the children. The learned judge at page 322, however, observes that in cases concerning a policy of the kind he had before him by a father or another person on behalf of an infant it was established that, ordinarily speaking, the mere fact that a man took out a policy for or on behalf of an infant did not constitute that person a trustee for the infant, and that, apart from some special provisions in the policy pointing to the conclusion that the insurance money was to be a fund to which the infant was to be entitled, and, accordingly, the assured and the assured's estate would take any money merely as trustee for the infant, the infant for whom the policy was taken out would have no title to the money. In this connection the learned judge particularly referred to an earlier decision of Romer J. in In re Engelbach's Estate: Tibbetts v. Engelback, where Romer J. had held that an endowment policy taken out by a person in his own name for the benefit of his daughter, to mature on her attaining a specified age, created no legal estate in the daughter and she could not sue on the contract, nor did the assured thereby constitute himself a trustee for his daughter of the policy and of the moneys payable thereunder. If, therefore, the assured died before the policy matured the policy moneys belonged not to the daughter but to the estate of the assured and must be paid to his executors. After analysing a number of cases, the learned judge ultimately came to the conclusion that the policy before him contained provisions from which he could make out that the policies and the powers exercisable thereunder were for the benefit of the children and, therefore, the provisions of those policies created a trust in favour of the children. We have found it difficult to comprehend as to how Mr. Parikh can possibly claim any assistance from this decision. In the first place, there is nothing, as was the case before Farwell J., in the policy before us which would indicate that the contract of insurance was entered into by the assessee's father either as the guardian of the assessee or for the benefit of the assessee or in trust for him. On the contrary, one of the provisions in the policy which we have already cited above, expressly provides that it is only after the life assured, i.e, the assessee, attains majority and adopts the contract as his own, that the policy is to be deemed to be a contract between the Corporation and the assessee and it is only from the date of such adoption that the assessee would be considered to be the absolute owner of the policy and the proposer or his estate would not have any right or interest therein. This clause impliedly means that until such adoption takes place by the assessee after the assessee has attained majority and before the deferred date arrives, the benefit of the contract is to go to the proposer and not to the life assured, namely, the assessee. Consistently with this provision, the contract also provides that it would stand cancelled in case the life assured were to die before the deferred date and in such an event, it would be the proposer and not the estate of the life assured who would get the sum of money equal to all the premiums paid. Similarly, the policy also is to stand cancelled if the life assured upon attaining majority were to decline to adopt or fail to or neglect to adopt the policy before the deferred date and in which event, a sum of money equal to the cash option was payable, not to the life assured, but to the proposer. These provisions clearly show, unlike the case before Farwell J. that until a novatio takes place whereunder the contract is to be deemed to become the contract of the life assured after he attained majority and adopted the policy, the contract is to remain the contract as between the Life Insurance Corporation and the proposer and it is the proposer, in the event of the life assured dying before the deferred date, who is to get a sum equivalent to the premiums so far paid or the cash option in the event of the life assured failing or neglecting or declining to adopt this contract.

12. But Mr. Parikh argued somewhat strenuously that the contract concerned the life of the assessee and it was the assessee from whose estate his guardian paid the premium in question. He submitted that these two facts were sufficient to constitute a contract of insurance which would entitle the assessee to a rebate under section 15(1). The fact, however, that premium was paid from out of the moneys of the assessee is, to our mind, entirely immaterial, for, that begs the very question which arises in this reference, the question being whether the contract in question, in respect of which the premium was paid, effected an insurance on the life of the assessee. In our view, what in substance and reality the assessee's father did when he took out the policy, was to tell the Life Insurance Corporation that he was entering into a contract so that if the assessee adopted that contract upon his attaining majority and before the deferred date, it could become his policy of insurance. If the assessee did not choose to adopt the policy or were to die before attaining majority, the father said in effect that he should be given back his premiums or the cash option, as the case may be. It is clear that the contract was to remain as the contract of the assessee's father until it was adopted by the assessee and until such adoption took place, even the assessee's father, being the proposer, was not entitled to the sum insured, namely, Rs. 50,000 or any part thereof, but only to the premiums paid so far or to the cash option, depending upon the event in respect of which he was entitled to either of them. It must not be forgotten that the adoption by the assessee depended unilaterally upon the sweet will of the assessee and that by itself must destroy the argument that the contract effected was an insurance on the life of the assessee, for, if such insurance was already effected on the date when the policy was issued, there was no question of the assessee exercising the option and entering into a novatio effecting thereby only insurance on his life. That being the position, it is impossible to say that the contract entered into by the assessee's father, or the policy issued by the Life Insurance Corporation, effected an insurance on the life of the assessee, or that the premium paid during the accounting period was a premium paid by the assessee to effect an insurance on his life. In these circumstances, section 15(1) would not apply to the present case and the Tribunal was right in the conclusion it arrived at.

13. Our answer to the question referred to us, therefore, will have to be in the negative. The assessee will pay to the Commissioner the costs of this reference.

14. Question answered in the negative.