JUSTICE V.K. JAIN, PRESIDING MEMBER

The complainant, which is a proprietorship concern of Smt. Meenakshi Namdeo Jadhav, obtained an insurance policy from the New India Assurance Company Ltd., for the period from 15.6.2011 to 14.6.2012 in respect of the manufacturing unit being run by her in Naigaon Deshmukh Village, District Buldhana of Maharashtra.  The insurance policy covered building, plant and machinery, furniture as well as the stocks and stocks in process.  The building was insured to the extent of Rs.15,00,000/-, whereas the stock and stock in process was insured to the extent of Rs.1,50,00,000/-.  A fire allegedly broke out in the godown of the said unit on 12.5.2002, due to an electric short-circuit in the electric wiring of the godown, resulting in damage to the building as well as loss of /damage to the stock.  Intimation having been given to the insurer, M/s. Ashok & Company were appointed as the surveyors.  Another surveyor namely Mr. Robert Rodrigues was appointed by another insurer SBI General Insurance Company Ltd.  Initially, the complainant estimated the loss at Rs.61,85,350/- which was later revised to Rs.1,42,87,130/-.

2.      Considering the size of the godown the surveyor was of the opinion that the stock worth not more than Rs.60,35,330/- could have been stored in the said godown.  He felt that the maximum quantity of the stock which could have been stored in the godown would be about 45% of the quantity claim by the insured.

          The surveyor found that no sign of burnt stock of groundnut or groundnut seeds in the affected godown at the time of survey on 14.5.2012.  Based upon the value of the stock which could possibly be stored in the said godown the loss to the complainant, in the opinion of the surveyor, could not be more than Rs.57,52,560/-.  The surveyor was of the opinion that the complainant / insured had deliberately claimed an exaggerated amount by misleading the insurer, thereby violating condition No. 1 and 8 of the Standard Fire & Special Perils Policy. 

3.      The report of the surveyor, to the extent it is relevant, reads as under:

          “(5)    The insured have tried to put up an exaggerated claim apparently with fraudulent intentions.  The following points indicate as possibility of fraud:

1. Unusual location and size of oil mill building

2. Installation of a second-hand oil expeller

3. Doubtful quantities of production of groundnuts by alleged cultivators / sellers with doubtful ownership / size of agriculture land

4. Doubtful purchases of huge quantities of stocks (these purchases did not seem to be genuine)

5. Doubtful nature of origin of funds and payments for purchases

6. Unusual plan to purchase and store huge quantities of stocks even before obtaining the electric connection

7. Insured taking photographs of the gunny bags containing ‘stocks’ before the occurrence of fire and submission of these photographs and Audit Reports at the time of our visit for surveyor on 14.5.2012 morning.

8. Delay in informing the police / fire brigade / bank / insurance companies and allowing the property to burn freely.

9. The insured had been depositing huge amounts of cash 9lacs of rupees) in their bank account periodically.The cheques issued by insured ot various persons were not account payee cheques.The cash was withdrawn by these persons against the cheques issued by insured.This practice was unusual.

The insured seem to have deliberately claimed an exaggerated amount by misleading the insurers.  This would amount to violation of conditions Nos. 1 and 8 of the Standard Fire & Special Perils Policy.  The insurers may take their own decision about liability and settlement.

This report is issued without prejudice, subject to terms, conditions and exclusions under the relevant policies of insurance.”

4.      Based upon the report of the surveyor, the claim was rejected vide letter dated 12.12.2012, which to the extent, it is relevant reads as under:

          “We had deputed M/s. Ashok & Co. Surveyors and Loss Assessors, Nagpur, for survey and assessment of your claim.  We have carefully gone through their Interim Survey Report dated 23.6.2012 and final survey report dated 31.11.2012.  We regret our inability to entertain your claim due to violation of conditions Nos. 1 and 8 of the Standard Fire and Special Perils Policy reading as under:

          Condition No.1   This policy shall be voidable in the event of misrepresentation, mis-description or non-disclosure of any material particular.

          Condition No.8   If the claim be in any respect fraudulent, or if any false declaration be made or used in support thereof or if any fraudulent means or devices are used by the insured or any one acting on his behalf to obtain any benefit under the policy or if the loss or damage be occasioned by the wilful act, or with the connivance of the insured, all benefits under this policy shall be forfeited.”

5.      Being aggrieved from the rejection of the claim, the complainant is before this Commission seeking payment of Rs.1,42,87,130/- along with compensation etc.

6.      The complaint has been resisted by the insurer, which besides relying upon the survey report has inter-alia stated in its written version that (i) the police was informed of the fire only at 6.05 pm after about 13.00 hours, (ii) the Fire Brigade received the call only at 8.45 pm, after about 15.45 hours of the fire (iii) the complainant claimed Rs.6,000/- per qntl. for the groundnut, whereas the rate provided to the surveyor by the Agricultural Produce Market Committee was Rs.3380/- per qntl.

7.      A perusal of Annexure C-14, which deals the purchases alleged to have been made by the complainant from 10.5.2011 to 30.4.2012, would show that the complainant claims to have made huge payments to the supplier of groundnut / peanut by way of cheques which admittedly were bearers’ cheques and not payees account cheques.   For instance, the complainant claims to have paid by as many as six bearers’ cheques, to one Prakash B Rathore and the said cheques are stated to have been encashed on 29.11.2011.  The date entered against these payments is 12.5.2011.  The amount of these six cheques comes to more than Rs.9.00 lacs.  Similarly, six cheques purport to have been issued to one Namdeo S. Jadhav.  The aggregate amount of these six cheques comes to about Rs.12.00 lacs.  As many as seven cheques purport to have been issued to one Subhash D. Chauhan.  The date of encashment of these cheques is stated to be 17.12.2011, though the date entered before the name of Mr. Subhash D. Chauhan in Annexure C-14 is 27.4.2012.  The aggregate of the cheques issued to Mr. Subhash D. Chauhan comes to more than Rs.12.00 lacs.

          One Mr. Gajanan S. Jadhao is shown to have been issued three bearers’ cheques one of Rs.1,92,000/- the other of Rs.1,56,000/- and the third one of Rs.1,95,000/- and the amount of the said cheques are shown to have been withdrawn on 25.11.2011.  In a similar manner three cheques one of Rs.1,92,000/- and two of Rs.1,98,000/- each purport  to have been issued to Kamalsing M Jadhao and encashed on 10.12.2011, whereas Mr. Kisan R. Rathod is shown to have been issued four cheques for about Rs.8,00,000/- and the said cheques are shown to have been encashed on 10.12.2011.  One Pratap S. Rathod is shown to have been given four cheques for a total sum of about Rs.8,00,000/-, all encashed on 07.12.2011.

8.      Section 40A(3) of Income Tax Act, 1961 provides that where the assessee incurs any expenditure in respect of which a payment or aggregate of payments made to a person in a day otherwise than by an account payee cheque drawn on a bank or account payee bank draft exceeds Rs.20,000/-, no deduction shall be allowed in respect of such expenditure.  Rule 6DD of Income Tax Rules however, saves certain payments form such disallowance in the cases and circumstances specified therein. 

          Though, the cash payments made inter-alia for the purchase of the agriculture produce to the cultivator, grower or producer of such produce are included in the cash payments saved by Rule 6DD, there is no credible evidence of the persons to whom the cash payments for purchase of groundnut / groundnut seeds is alleged to have been made being cultivators, growers or producers of the such produce.  No material was placed before the surveyor to prove that the persons to whom huge payments by way of bearers’ cheques is alleged to have been made were the cultivators, growers or producers of groundnut and groundnut seeds.  Though, the complainant has alleged in the consumer complaint that she had made purchase of groundnut from nearby farmers and stored the same in the godown, the said averment was specifically denied in the written version filed by the insurer.  In view of the said denial, it was necessary for the complainant to produce evidence to prove that the persons to whom the said bearer cheques purport to have been given were cultivators or growers of groundnut and / or groundnut seeds and had received the said bearer cheques towards the price of the produce sold by them to the complainant.  No affidavit of any of these persons has been filed by the complainant, despite the insurer having denied the averment that the complainant had been purchasing produce from the nearby farmers.  Even, a letter from any of these persons has not been produced before this Commission to satisfy it that the above referred persons were cultivators, growers or producers of groundnut and groundnut seeds and had sold the same to the complainant.  Such letters were not produced even before the surveyor.  Therefore, I have no hesitation in holding that the complainant has failed to prove that the payments made by way of bearer cheques were out of the purview of Section 40A(3) of the Income Tax Act.

9.      In Attar Singh Gurmukh Singh & Ors. Vs. Income Tax Officer, Ludhiana & Ors. (1991) 4 SCC 385, the word “expenditure” used in Section 40A(3) of the Income Tax Act came up for interpretation by the Hon’ble Supreme Court.  The following was the view taken by the Hon’ble Supreme Court in this regard:

        “8.    As to the second question it may be stated that the word ‘expenditure’ has not been defined in the Act.  It is a word of wide import.  Section 40-A(3) refers to the expenditure incurred by the assessee in respect of which payment is made.  It means all outgoings are brought under the word ‘expenditure’ for the purpose of the section.  The expenditure for purchasing the stock-in-trade is one of such outgoings.  The value of the stock-in-trade has to be taken into account while determining the gross profits under Section 28 on principles of commercial accounting.  The payments made for purchases would also be covered by the word ‘expenditure’ and such payments can be disallowed if they are made in cash in the sums exceeding the amount specified under Section 40-A(3).  We have earlier observed that Rule 6-DD has to be read along with Section 40-A(3) .  The rule also contemplates payments made for stock-in-trade and raw material.  This rule is in accordance with the terms of Section 40-A(3).  The rule provides that an assessee can be exempted from the requirements of payment by crossed cheque or a crossed bank draft where the purchases are made of certain agricultural or horticultural commodities or from a village where there is no banking facility.  Section 40-A(3) is, therefore, attracted to payments made for acquiring stock-in-trade and other materials.”

 In view of the authoritative pronouncement of the Hon’ble Supreme Court, it cannot be disputed that a payment other than by way of a payees account cheque made for purchasing the stock in trade is expenditure within the meaning of Section 40-A(3) of the Income Tax Act and consequently if such payments of more than Rs.20,000/- are made, in a day to purchase the stock in trade, the same is liable to be disallowed.  The consequence of such disallowance would be that such cash payments would be added to the income of the assessee and appropriate income tax would be payable on them.

10.    In view of the above referred decision of the Hon’ble Supreme Court, it can be safely said that the payments alleged to have been made by the complainant to the above referred persons for purchasing groundnut / groundnut seeds were expenditure within the meaning of Section 40A(3) of the Income Tax Act and therefore, the same were liable to be added to the income of the complainant and income tax on the said payments would be payable by her.  If a person, despite knowing the payments of more than Rs.20,000/- other than by way of Payees Account Cheque would be added to her income, claims to have made such payments to a number of persons over a substantial period and offers no explanation for not making those payments by way of Payees Account cheques, the inference would be that the alleged transactions were not genuine transactions and are shown to have been made only for the purpose of substantiating the claim lodged with the insurer.  This is not the case of the complainant that all these persons to whom bearers’ cheques for huge amounts were issued did not have a bank account. Therefore, ordinarily, a person would have no difficulty in accepting the payment by way of an account payees cheque / pay order/ demand draft.  In this regard, it has to be kept in mind that this is not a case of solitary payments to one or two persons having been made by way of bearers’ cheque.  Annexure C-14 to the consumer complaint itself shows as many as 50 such payments to different persons, and all these bearers’ cheques are stated to have been encashed between November, 2011 to March, 2012.

11.    The insurance policy taken by the complainant was a Standard Fire & Special Perils Policy.  As per Condition No.8 of the policy, all the benefits under the policy were liable to be forfeited if the claim was found to be fraudulent in any respect. If the complainant did not make the above referred payments by bearers’ cheques and lodged a claim based upon such false payments, the claim would undoubtedly be a fraudulent claim and no benefits under the insurance policy would be payable even if the part of the claim is proved to be genuine.  In other words, if it is shown that any part of the claim is false and fraudulent to the knowledge of the insured, no claim is payable to him / her even in respect of that part of the claim, which is not shown to be fraudulent. 

12.    It was contended by the learned counsel for the complainant that the policy condition having not been supplied to the complainant, she is not bound by those conditions.  The learned counsel for the complainant was requested to point out from the complaint if she has pleaded that the policy conditions had not been supplied to her by the insurer.  The learned counsel however, was unable to draw my attention to any such averment in the complaint.  Since the insurer had referred to conditions No.1 and 8 of the Standard Fire & Special Perils Policy in the repudiation letter itself, it was for the complainant to atleast plead that the said conditions had not been received by her.  In the absence of such pleadings, no note of the oral submissions made in this regard can be taken. 

13.    The complainant herself has filed a Standard Fire & Special Perils Policy issued to her by the insurer.  One of the Sections of the said policy reads as under:

          It would thus be seen that there is reference to the special clauses, in the policy document itself.  Obviously, the reference was to the clauses of the terms and conditions applicable to the policy.  Had the policy conditions not been supplied to the complainant, the least she would have done would be to ask the insurer to provide her endorsement 9 and clause 3 referred in the above referred part of the policy documents.  That having not been done, the inference would be that the policy conditions were duly received by her along with the policy documents.

14.    As noted earlier, the insurance policy taken by the complainant was a Standard Fire & Special Perils Policy.  In General Assurance Society Ltd.Vs. Chandumull Jain & Anr. (1966), 3 SCR 500, the respondent submitted two proposals to the appellant, which were accepted vide two separate letters.  Two interim protection cover notes in respect of the said two proposals were then issued by the insurer.  It was inter-alia stated in the cover notes that the property was insured subject to the terms of the applicant’s proposal and to the usual conditions of the Society’s policies.  The case of the appellant society was that the insurance policy was cancelled by it as per condition No.10 of the said policy.  The suit filed by the insured was dismissed by the trial Court holding that the protection available to the plaintiff was as per the usual terms and subject to the conditions of the policy.  In an appeal, filed by the plaintiff, the Division Bench of the High Court held that as the cover note was only for a month and had ceased to be operative.  Condition No.10 of the insurance policy, which permitted its cancellation, was held not to be applicable.  The Hon’ble Supreme Court felt that the application of Condition No.10 was dependent on how far the terms and conditions could be said to be incorporated in the contract of insurance between the parties.  Dealing with the issue the Hon’ble Supreme Court inter-alia held as under:

          “11.   ……  A cover note is a temporary and limited agreement.  It may be self-contained or it may incorporate by reference the terms and conditions of the future policy.  When the cover note incorporates the policy in this manner, it does not have to recite the term and conditions, but merely to refer to a particular standard policy.  If the proposal is for a standard policy and the cover note refers to it, the assured is taken to have accepted the terms of that policy.  The reference to the policy and its terms and conditions may be expressed in the proposal or the cover note or even in the letter of acceptance including the cover note.  The incorporation of the terms and conditions of the policy may also arise from a combination of references in two or more documents passing between the parties. 

          12.    ……  The policy not only defines the risk and its duration but also lays down the special terms and conditions under which the policy may be enforced on either side.  Even if the letter of acceptance went beyond the cover notes in the mater of duration, the terms and conditions of the proposed policy would govern the case because when a contract of insuring property is complete, it is immaterial whether the policy is actually delivered after the loss and for the same reason the rights of the parties are governed by the policy to be, between acceptance and delivery of the policy.  Even if no terms are specified the terms contained in a policy customarily issued in such cases, would apply.  There is ample authority for the proposition.” Emphasis supplied.

15.    Relying upon the survey report, it was submitted by Mr. Vishnu Mehra, learned counsel for the insurer that the godown where the groundnut and groundnut seeds are alleged to have been stored was not big enough to accommodate the quantity alleged to have been stored therein.  The surveyor opined that the maximum quantities that could be stored in the godown would be about 45% of the quantities stated by the insured.  Though, the surveyor has not given the length, width and height of the godown nor has he stated the quantity of groundnut / groundnut seeds which could be kept in one bag and the space required by each bag full of the groundnut / groundnut seeds, I need not delve further into this aspect of the matter since, the claim is otherwise found to be atleast partially fraudulent, the complainant having based the claim on false payments alleged to have been made by way of bearer cheques.

16.    The learned counsel for the insurer also submitted that as found by the surveyor the complainant had been depositing huge amount of cash in the bank account but there is no explanation from the complainant as to from where the said cash became available to her so many times for depositing in her bank account.  His contention was that the same amount was being deposited and then withdrawn by the complainant herself.   Again, I need not examine this part of the report of the surveyor since I am satisfied that the claim has otherwise been shown to be atleast partly fraudulent.

17.    It was also submitted by the learned counsel for the insurer that no explanation has been given by the complainant for the delay in intimating the fire to the police and the fire brigade.  He has also pointed out that no sign of the fire was found by the surveyor when he inspected the godown of the complainant.  However, the said contentions need not be examined, considering the claim is otherwise shown to be partly fraudulent.

18.    For the reasons stated hereinabove, I hold that the complainant is not entitled to pay relief, in view of Condition No.8 of the Policy.  The complaint is therefore, dismissed, with no order as to costs.