R. Ratilal and Co vs National Security Assurance Co. Ltd

Rewritten Version Notice: This is a rewritten version of the original judgment.

Court: Supreme Court of India

Case Number: Civil Appeal No. 382 of 1961

Decision Date: 16 December 1963

Coram: A.K. Sarkar, J.C. Shah, Raghubar Dayal

In this case the Supreme Court of India considered an appeal filed by R. Ratilal & Co. against National Security Assurance Co. Ltd., the judgment being delivered on 16 December 1963. The bench that heard the matter consisted of Justices A.K. Sarkar, J.C. Shah and Raghubar Dayal. The appeal arose from a suit instituted on the basis of a fire‑insurance policy that had been duly completed, together with an unstamped letter of cover relating to the same insurance, both issued by the respondent. The appellant sought recovery of loss caused by the destruction of insured goods by fire. While the respondent accepted liability under the fire‑insurance policy, it argued that the letter of cover could not be admitted as evidence because it lacked the stamp required by the Indian Stamp Act (II of 1899), section 35, Schedule 1, Article 47. The Court therefore examined whether the unstamped letter of cover was admissible in evidence and, if not, whether it could become admissible upon payment of the appropriate duty and penalty. The majority opinion, delivered by Justices Sarkar and Shah, held that a letter of cover, although it contains an insurance contract, is not itself a policy of insurance and therefore cannot be admitted under section 35 of the Stamp Act. The Court interpreted the general exemption in Article 47 of Schedule 1 to apply only when the letter is used to compel delivery of the policy mentioned therein; use for any other purpose does not attract the exemption. Consequently, when the exemption does not apply, the letter becomes a chargeable instrument under section 3 of the Stamp Act and may be admitted after the requisite duty and penalty are paid. In dissent, Justice Raghubar Dayal argued that section 35 requires a letter of cover to bear the necessary stamp at the time of execution and that subsequent affixing of a stamp does not render the document admissible for any purpose, including the basis of a claim. The dissent relied on the principle that the proviso to the general exception cannot be interpreted to allow a party to simply apply a stamp after execution and then use the document to enforce a claim. The judgment was recorded as Civil Appeal No. 382 of 1961, an appeal from the Calcutta High Court judgment dated 24 May 1960, which itself arose from Original Decree No. 144 of 1958. The parties were represented by counsel for the appellant and counsel for the respondent, and the final judgment was authored by Justices A.K. Sarkar and J.C. Shah, with a separate dissenting opinion by Justice Raghubar Dayal.

Sarkar J. delivered the majority opinion while Raghubar Dayal J. issued a dissenting opinion. In the majority judgment, the Court explained that the appellant had instituted a suit in the Original Side of the Calcutta High Court based on a fire‑insurance policy that was properly completed, dated 15 March 1951 and identified as policy number 26625, together with an unstamped letter of cover dated 5 November 1951 that related to the same insurance issued by the respondent. The purpose of the suit was to obtain compensation from the respondent for the loss that the appellant suffered when the goods described in the policy were destroyed by fire. The respondent acknowledged its liability under policy number 26625 but contended that the unstamped letter of cover could not be admitted as evidence because it lacked the required stamp. Notably, the respondent did not raise any other ground to contest liability on the letter of cover, nor did it dispute liability on the policy itself, so the sole issue for determination on appeal was whether the letter of cover could be admitted into evidence. The Court observed that the resolution of this issue required reference to certain provisions of the Stamp Act, 1899, and indicated that those provisions would be considered in due course. For convenience, the Court identified two relevant provisions: Section 35 of the Act and Article 47 contained in Schedule 1 of the Act. Section 35 provides that no instrument which is chargeable with duty shall be admitted in evidence for any purpose unless the instrument is duly stamped; however, the provision also states that any such instrument, except those chargeable with a duty not exceeding ten naye paise, or a bill of exchange, or a promissory note, may be admitted subject to all just exceptions upon payment of the duty applicable to it together with a prescribed penalty. The Court noted that there was no dispute that the letter of cover qualified as an “instrument” within the meaning of the statute. Schedule 1 sets out the duties payable on various instruments, and Article 47 of that schedule enumerates the duties chargeable on different kinds of insurance policies. Section B of Article 47 deals specifically with fire‑insurance policies and stipulates a range of duties according to the amount of the policy, with the minimum duty on a fire‑insurance policy being fifty naye paise. At the conclusion of Article 47, a general exemption is inserted, reading: “GENERAL EXEMPTION. Letter of cover or engagement to issue a policy of insurance: Provided that, unless such letter or engagement bears the stamp prescribed by this Act for such policy, nothing shall be claimable thereunder, nor shall it be available for any purpose, except to compel the delivery of the policy therein mentioned.” The Court found it clear that the phrase “such policy” in the proviso to the general exemption referred to the type of policy to which the letter of cover or engagement related. Accordingly, in the present case, the words “such policy” indicated a fire‑insurance policy, a point that was not contested by the parties.

In this case, counsel for the appellant submitted that the document labelled as a letter of cover was, in substance, a fire‑insurance policy and therefore should be admissible as evidence once the duty applicable to a fire‑insurance policy had been paid together with the penalty prescribed by the proviso to section 35(a) of the Act. The argument was continued by stating that, even if the document were to be characterised strictly as a letter of cover and not as a policy, it would nonetheless qualify as admissible evidence under the same statutory provision because it was an instrument on which duty was chargeable; the document was not a bill of exchange, nor a promissory note, and it did not fall within the category of instruments on which duty did not exceed ten naye paise. The lower‑court judge examined these submissions and concluded that the instrument could not be described as a mere letter of cover; rather, the judge held that the instrument was in reality a policy of insurance because it embodied the terms of an insurance contract. The judge further observed that there was no dispute over the consequence of that view: if the instrument were indeed a policy, then, upon payment of the requisite duty and the applicable penalty, the instrument would become admissible in evidence pursuant to section 35.

The appellate bench of the High Court, however, rejected the trial judge’s conclusion and, in the view of this Court, correctly so. The appellate judges pointed out that the mere inclusion of an insurance contract within a letter of cover does not automatically transform the letter into an insurance policy. They observed that the letter of cover had been granted a general exemption from the duty prescribed in Article 47, meaning that it was exempted from a duty that would otherwise have been payable on a policy of insurance under that article. Since Article 47 imposed duty on various classes of insurance policies, the letter of cover would have attracted such duty if the exemption had not been in force. Consequently, the letter of cover needed to contain an insurance contract to avoid liability under Article 47, but the presence of the contract did not convert the letter into a policy, for doing so would create an inconsistency between the exemption and the provisions of the article. The court further noted that the term “cover” itself conveys that property is insured against certain risks, yet a letter of cover remains distinct from a policy of insurance. The Act provides no specific definition of “letter of cover” or of an “engagement to issue a policy of insurance,” but these terms are well‑known in commercial practice. The legislation addresses businessmen and mercantile documents familiar to them, and while a letter of cover undoubtedly contains an insurance contract, it is not regarded as an insurance policy in the ordinary commercial sense. The court also recalled the customary practice that a fire‑insurance applicant first submits a proposal to the insurer; the insurer then conducts inquiries and, if satisfied, issues a policy. In the interim, the applicant may obtain a letter of cover to provide temporary protection pending the issuance of the formal policy.

In the commercial practice described, the insured first sent a proposal to the insurer. The insurer then spent a short period investigating the proposal to decide whether it would be a prudent business decision to accept the risk. The insurer would issue a formal policy only after being satisfied that the proposal warranted such an undertaking. Trade experience, however, indicated that the insured required some form of protection during the interval while the insurer was conducting its enquiries. That interim protection was supplied by a document commonly called a “letter of cover.” The Court explained that a letter of cover was expressly a contract that granted insurance coverage for the period beginning on its date and continuing until a policy was prepared and delivered, if a policy was eventually issued, or otherwise until the date specified in the letter. The Court cited the Interim Protection Note in the present case, which provided coverage for a period of thirty days or until the policy was issued, as an illustration of such a letter of cover. The Court observed that an “engagement to issue a policy” was essentially equivalent to a letter of cover, and consequently a letter of cover could not be admitted as evidence under section 35 as a policy of insurance.

The next issue before the Court was whether a letter of cover itself constituted an instrument liable to duty under the Act. The Court noted that it was not contested that, if the instrument were not liable to duty, it could not be admitted under section 35 even if duty and penalty were subsequently paid. Section 3 of the Act enumerated the instruments that were chargeable with duty, stating that, subject to the Act and the exemptions in Schedule 1, every instrument listed in the Schedule and executed in India on or after 1 July 1899 was liable to the duty specified in the Schedule. The respondent contended that a letter of cover was not chargeable because the general exemption in article 47 of the Schedule exempted it from duty. The learned judges of the appellate bench of the High Court accepted this contention, observing that the wording referred not to a letter of cover being chargeable with duty but to it “bearing the stamp prescribed by the Act for such policy.” They interpreted this to mean that a letter of cover was not inherently chargeable with duty, but if it bore the stamp prescribed for a policy of insurance, the document would become competent for a claim.

In the judgment, the Court referred to the earlier observations that a claim for loss could be made under the instrument, citing the authority (1) 7 C. 96, and noted that the earlier decision added that, because no specific stamp amount was fixed for a letter of cover, the statute’s phrase “bearing the stamp” indicated that the same stamp prescribed for a policy of insurance should be applied to the letter of cover. In the present proceedings, counsel for the respondent reiterated the same argument before this Court. The Court, however, was unable to accept the view that had been adopted by the Appellate Bench of the High Court. The issue was presented in two distinct fashions. The first formulation argued that an instrument that is exempted from duty by Schedule 1 is not chargeable under section 3, and that the letter of cover is expressly listed as exempt. While it is true that an instrument listed in the Schedule as exempt cannot be chargeable, the Court held that a letter of cover is not exempt from duty for every possible purpose. The proper construction of the General Exemption clause, according to the Court, is that the exemption applies only when the letter of cover is used to compel delivery of the policy referred to in the letter. If the letter is employed for any other purpose, the exemption does not apply. The presence of a proviso in the provision was intended to remove the letter of cover from the exemption in all other cases, and consequently the argument based on a blanket exemption fails. The Court further explained that if a letter of cover were exempt for all purposes, it would be fully enforceable even without a stamp, yet an unstamped letter of cover permits only a claim for delivery of the policy. When the letter bears the stamp prescribed for the relevant policy, a claim beyond mere delivery becomes possible. The Court observed that the attachment of the prescribed stamp indicates that the instrument has incurred liability for stamp duty; therefore it cannot be regarded as exempt. Hence, when the exemption does not apply, the letter of cover is a document chargeable with duty. The second line of argument focused on the expression “bears the stamp prescribed by this Act”. The respondent contended that the mere fact that an instrument bears the prescribed stamp does not make it chargeable to duty. The Court found this reasoning untenable, stating that an instrument cannot bear a stamp prescribed by the Act unless it is chargeable to duty, because the Act deals solely with instruments that are chargeable.

In this case the Court said that it was difficult to accept the argument that the proviso’s use of the words “bears the stamp prescribed by this Act for such policy” merely indicated the amount of duty payable. The Court observed that, while the rate of duty was indeed specified, the instrument still had to bear a stamp showing that rate. The Court noted that the Act did not explain how an instrument should bear a stamp. Section 17, the Court pointed out, required that every instrument which was chargeable with duty be stamped before or at the time of its execution. The Court explained that if a letter of cover were held not to be chargeable with duty but only required to bear a stamp, as the respondent claimed, then Section 17 would not apply to it. Consequently there would be no provision preventing a stamp from being affixed to such an instrument at any time, even at a hearing before the instrument was produced. The Court held that this result would not assist the respondent and would create an absurdity in the statute that arose from an unnatural reading of the phrase “bears the stamp.” By using those words, the Court concluded, the legislature intended to convey that a letter of cover was chargeable with duty in every case except where it merely served to deliver a policy. Accordingly, the Court found that a letter of cover was an instrument chargeable to duty under the Act and therefore could be admitted as evidence once the appropriate duty and penalty were paid under Section 35 of the Stamp Act, because it was neither a low‑value instrument exempted by the Act nor a bill of exchange or promissory note. The Court added, without relying on it for the judgment, that the idea of exempting a letter of cover from duty at the outset seemed aimed at avoiding the hardship of paying duty twice for the same insurance when a policy issued after the letter of cover had to cover the goods from the time the letter of cover insured them and the policy also required stamping. The Court further observed that if a policy insured the goods only after the expiry of the insurance provided by the letter of cover, the letter of cover would become an independent policy, possibly for a shorter period, and would no longer be an interim cover or a letter of cover at all. Finally, the Court remarked that it was unlikely that many cases would require enforcement of a letter of cover because fire incidents seldom occurred during the brief period covered by such letters, and noted that the appellant had paid the duty and penalty as required by Section 35.

The appellant had paid the duty and penalty required under section 35, and there was no longer any objection to admitting the letter of cover as evidence. Because the respondent’s sole defence to the appellant’s claim therefore failed, the appeal was required to succeed. The Court noted that its discussion was confined to a letter of cover that related specifically to fire insurance and that its interpretation of the proviso in the General Exemption in Article 47 of Schedule 1 of the Act was made only in that context. The Court expressly declined to express any opinion on whether the same interpretation would apply to letters of cover concerning other varieties of insurance, as that question was not before it. Accordingly, the Court allowed the appeal and issued a decree in favour of the plaintiff‑appellant for the sum of Rs 93,628/81‑ together with costs. The decree therefore orders the respondent to pay the specified sum, the costs of the proceedings, and interest calculated from the date the learned trial Judge rendered his judgment, the rate of interest being fixed at six per cent per annum. The opinion was authored by Justice RAGHUBAR DAYAL J.

The Court agreed that an interim protection note does not constitute a policy of insurance but is a letter of cover or an engagement to issue a policy of insurance. The Court disagreed with the view that such a note could be subsequently stamped in view of proviso (a) to section 35 of the Indian Stamp Act. Because the interim protection note is a letter of cover, it is exempt from stamp duty under the general exception in Article 47 of Schedule 1 of the Act. However, the note may be used to support a claim or for any other purpose only if it bears the stamp prescribed by the Act for the policy that will be issued pursuant to the letter of cover. The trial Court admitted this letter of cover after the appellant paid the duty and penalty prescribed by section 35 of the Act. The High Court held that the admission was improper because the provisions of section 35 were not applicable to documents that were not chargeable with duty under the Act. The appellant challenged that view. The Court then restated the general exception together with its proviso, quoting: “Letter of cover or engagement to issue a policy of insurance: Provided that, unless such letter or engagement bears the stamp prescribed by this Act for such policy, nothing shall be claimable thereunder, nor shall it be available for any purpose, except to compel the delivery of the policy therein mentioned.” The Court also quoted section 35, omitting the provisos other than (a), which provides that no instrument chargeable with duty shall be admitted in evidence unless it is duly stamped, with a proviso allowing instruments not chargeable with duty.

Section 35 provides that an instrument whose duty does not exceed ten rupees, or a bill of exchange, or a promissory note, shall, subject to the established exceptions, be admitted in evidence only after the duty payable on it has been paid. If the instrument is insufficiently stamped, the party must pay the amount required to make up the deficient duty together with a penalty of five rupees, or, where ten times the amount of the proper duty or of the deficient portion exceeds five rupees, a sum equal to ten times such duty or deficient portion must be paid. The Court observed that an unstamped letter of cover or an engagement to issue an insurance policy may be used solely to compel delivery of the policy mentioned therein; it cannot be employed for any other purpose and no claim may be founded upon it unless the letter bears the stamp prescribed by the Act for the contemplated policy. The pivotal question before the Court was whether the proviso allows the letter of cover to be stamped at the time of its execution or whether a letter that is initially unstamped may become valid if it is later stamped by an interested party or under any order issued under the Act. The Court opined that the proviso requires the letter of cover to carry the appropriate stamp at the moment of execution, and that any later affixing of the required stamp on an unstamped letter does not convert it into a document that can be used for any purpose, including as the basis of a claim. The Court further explained that the various provisions of the Act permit subsequent stamping only where the document in question is chargeable with duty, as defined in section 3 of the Act. Consequently, the Act neither contains nor could conceive of provisions directing the later stamping of documents that, at the time of execution, were not liable to stamp duty. Documents such as those cited in the records (I/SCI/64‑67) are valid without any stamp duty, and therefore no future issue can arise concerning their being stamped by order of a court or a public officer. The Act also lacks any provision that would allow a penalty to be imposed for a document that was not stamped when it was not required to be stamped, because such a document was not chargeable with stamp duty. The Court referred to the judgment in Narayanan Chetti v. Karuppathan, observing that the imposition of a penalty under the proviso for the admission of an insufficiently stamped document indicates a punishment for the failure to affix the correct stamp at the time of execution; the very existence of the penalty demonstrates that the date of execution is the crucial moment for determining the applicability of the stamp requirement.

In the passage under consideration, the Court explained that the term “chargeable” must be understood as meaning not chargeable under the Stamp Act of 1879, but chargeable under the law that was in force on the date the instrument was executed. This interpretation had previously been articulated in a reported decision and was later endorsed by a Full Bench that heard a reference from the Board of Revenue to the Madras High Court under section 46 of the Act. The Court noted that the provisions of section 35 apply only to instruments that were chargeable with stamp duty. Such instruments, if they were not properly stamped, could not be admitted as evidence for any purpose, nor could they be acted upon, registered, or authenticated by any person or public officer. However, the Court observed that certain instruments which are not duly stamped may still be admitted in evidence if they fall within any of the provisos contained in that section. The Court further clarified that the provisions of section 35 do not apply to instruments that are not chargeable with duty.

The Court referred to the definition of “chargeable” contained in section 2(6) of the Act, which describes “chargeable” as it applies to an instrument executed or first executed after the commencement of the Act and as it applies to any other instrument that was chargeable under the law in force in India at the time of its execution, or, where several persons executed the instrument at different times, at the time of the first execution. The expression “chargeable under the Act” therefore signifies that the ultimate liability for duty results from the various provisions of the Act. Section 3 of the Act, subject to its exemptions and to Schedule 1, enumerates the classes of instruments listed in clauses (a), (b) and (c) that are chargeable with the duty specified in that Schedule. Consequently, any instrument that is exempted by a provision of the Act cannot be said to be chargeable, even though, in the absence of such exemption, it might fall within an article of Schedule 1. For example, a policy of insurance is chargeable with duty under article 47 of Schedule 1, while a letter of cover is exempt from duty because of the general exemption applicable to that article. Hence, a letter of cover, as a document, is not chargeable with duty.

The Court then turned to section 47 of the Act, which permits the subsequent stamping of certain documents in specific circumstances. The Court stressed that this provision concerns only those documents that are chargeable with duty but are not covered by proviso (a) to section 35. Section 62(1)(b) makes it an offence to execute or sign, other than as a witness, any instrument that is chargeable with duty and that is not included in clause (a), without affixing the proper stamp. Accordingly, if a letter of cover were later stamped with the appropriate stamp, the parties could avoid the penalty prescribed by section 62(1)(b). However, because a letter of cover is not chargeable with duty, the subsequent stamping would not transform it into a document that attracts liability under the Act.

In this case the Court observed that a policy of insurance could be enforced only when it was properly stamped, because a stamped document was regarded as a legal instrument capable of enforcement. Section 29 of the Act, the Court noted, stipulated that unless the parties agreed otherwise, the cost of affixing the appropriate stamp on a fire‑insurance policy was to be borne by the person who issued the policy. The Court further explained that the statute did not expressly state who was required to stamp a document, but that, in view of the provisions of section 62, the liability for failing to stamp a document that attracted duty fell on the person who executed it. Consequently, the insurer would be reluctant to apply a stamp to a letter of cover after the uncertain event had occurred, and the Court held that such subsequent stamping by the assured could not have been contemplated by the Legislature.

Turning to the proviso to the general exception to article 47, the Court explained that no right could arise from an unstamped letter of cover; therefore, a suit could not be instituted to recover any amount claimed by the plaintiff. Since the suit itself could not be filed, the Court said that no question could arise concerning the exercise of the power under section 35(a) of the Act, which could be invoked only after a suit was instituted and when the document was offered as evidence. The Court suggested that the general exception indicated that the Legislature had intended to exempt the letter of cover from stamp duty, because it did not wish to impose the duty twice—once on the letter of cover and again on the policy. If the Legislature had desired a single duty, it could have provided that a stamped letter of cover would obviate the need to stamp the subsequent policy. Instead, the Legislature expressly exempted the letter of cover and allowed an unstamped letter to be used solely for enforcing delivery of the policy referred to therein. The Court observed that this exemption showed that the letter of cover was meant for a very limited purpose. The Legislature was aware that a letter of cover often contained terms that effectively created a short‑term policy, and it provided that such a document could be used to support a claim or for any other purpose only if it bore the requisite stamp for a policy. From this, the Court inferred that the Legislature left it to the parties to decide whether to stamp the letter of cover according to the purpose they intended. Accordingly, the Court held it would be erroneous to interpret the provision as allowing any later stamping of the document to alter its character and make it usable for purposes that were not envisaged at the time of its execution. The appellant had relied upon the decision reported in the earlier case, which the Court examined in the following discussion.

In the earlier decision of Tricamji Damji & Co. v. Virji Kanji, reported as (1) [1922] 24 B.L.R. 820, the plaintiff had sought monetary compensation on the basis of an unstamped protection note that was connected with a contract of sea insurance. The learned judge, Marten J., interpreted the words “unless such letter or engagement bears the stamp prescribed by this Act for such policy” appearing in the general exception to article 47 as requiring that the stamp be affixed before or at the moment of execution, in accordance with the provisions of section 17. He further held that section 35(a) must be read in a manner that respects the explicit direction contained in the proviso to the same general exception in article 47. This interpretation was not adopted by the Appellate Bench, which, in the judge’s view, erred in concluding that the protection note constituted a policy that could be admitted as evidence after the necessary steps under section 35 of the Act were taken. The present Court had already determined in the instant suit that the protection note did not qualify as a policy. Consequently, the Court was of the opinion that the High Court was correct in holding that an interim protection note which was not properly stamped as a policy at the time of its execution could not later be stamped with the required stamps under the provisions of section 35(a) of the Act. Accordingly, the appellant could not rely on that interim protection note to sustain his claim in the present suit. On that basis, the Court decided to dismiss the appeal, ordered that the costs of both this Court and the High Court be awarded, and directed that the decree of the High Court be altered so that the suit for the amount of Rs 93,628‑8‑0 be dismissed with proportionate costs in the trial court. The order further stated that, in accordance with the majority opinion, the appeal was allowed, a decree in favor of the plaintiff – the appellant – for Rs 93,628/8/- was passed, and costs together with interest at six per cent per annum from the date of the learned trial judge’s judgment were awarded.