M/S. Baspa Organics Limited. vs United India Insurance Company … on 14 February, 2020


Supreme Court of India

M/S. Baspa Organics Limited. vs United India Insurance Company … on 14 February, 2020

Author: Mohan M. Shantanagoudar

Bench: Mohan M. Shantanagoudar, R. Subhash Reddy

                                                                      REPORTABLE

                             IN THE SUPREME COURT OF INDIA

                              CIVIL APPELLATE JURISDICTION

                             CIVIL APPEAL NO. 13401 OF 2015

           M/S BASPA ORGANICS LIMITED                               ...APPELLANT

                                                 VERSUS

           UNITED INDIA INSURANCE COMPANY LTD.                      …RESPONDENT




                                        JUDGMENT

MOHAN M. SHANTANAGOUDAR, J.

The present appeal arises out of the judgment dated

21.07.2015 passed by the National Consumer Disputes

Redressal Commission, New Delhi (“National Commission”)

dismissing the consumer complaint (Original Petition No. 48 of

2004) filed by the Appellant herein.

2. The facts giving rise to this appeal are as follows:

2.1 One M/s Shrirang Agro Chemical Pvt. Ltd., having its

factory premises in Tarapur, Thane District, was engaged in the
Signature Not Verified

Digitally signed by
GULSHAN KUMAR

business of manufacturing a chemical called Cyper Methnic
ARORA
Date: 2020.02.14
16:47:11 IST
Reason:

Acid Chloride (“CMAC”), an intermediate product used in

1
growing cash crops. The said factory premises had become a

sick unit, and was auctioned off by the Maharashtra State

Financial Corporation (“MSFC”). The bidding took place on

14.03.2001, and on 15.03.2001, the Appellant was declared the

highest bidder, having quoted a price of Rs. 4 crores.

2.2 The Appellant commenced production of CMAC in

November 2001. The previous company (Shrirang Agro

Chemical Pvt. Ltd.) had taken an insurance coverage from the

Respondent, and the Appellant continued this coverage. To this

end, after inspecting the plant and machinery, a Fire and

Special Perils Policy was issued by the Respondent from

12.11.2001 to 11.12.2001 insuring the subject premises for a

total Insured Declared Value of Rs.12.5 crores. The said policy

was continued for the period between 12.12.2001 and

11.01.2002 as well.

2.3 On 03.01.2002, a fire broke out at the factory

premises, based on which the Appellant filed a claim with the

Respondent. On 30.01.2004, based on reports from the three

surveyors, the Respondent repudiated the claim of the

Appellant on two grounds. It was held, firstly, that the Appellant

had purchased the factory premises for only Rs. 4 crores, but

2
had overvalued it and taken a policy for an excessive value of

Rs. 12.5 crores, and secondly, that the Appellant suppressed

the material fact of not being duly licensed for the storage and

use of Hexane at the factory. Aggrieved by such repudiation,

the Appellant filed a consumer complaint before the National

Commission.

3. The National Commission dismissed the Appellant’s

complaint, holding that the repudiation was justified on both

the above counts, i.e., that the Appellant had overstated the

value of the factory while taking insurance, and that the

Appellant was operating without obtaining the requisite licence

for the storage of Hexane. It is against this dismissal that the

Appellant has approached this Court by way of an appeal under

Section 23 of the Consumer Protection Act, 1986.

4. Learned Senior Counsel appearing on behalf of the

Appellant, Shri S.S. Naphade, argued against the appointment

of the third surveyor, S.B. Nalluri & Associates (“third

surveyor”). He contended that once the second surveyor,

Mehta and Padamsey Surveyors Pvt. Ltd. (“second surveyor”),

had clearly assessed the loss and submitted a detailed report

wherein it had ruled out any mala fides on part of the

3
Appellant, there was no occasion to appoint the third surveyor.

Learned Senior Counsel also relied on the notification dated

21.11.2001 issued by the Ministry of Petroleum and Natural Gas

in exercise of its powers under the Essential Commodities Act,

1955 (“the Essential Commodities Act”), to argue that the

Appellant was exempt from obtaining a licence for storage of

Hexane, since according to him, the Appellant had stored less

than 20 kilolitres of Hexane. It was submitted that the said

notification clearly stipulated that there was no requirement of

a licence for storing up to 20 kilolitres of Hexane.

5. On the other hand, learned Senior Counsel appearing

on behalf of the Respondent, Shri P.P. Malhotra, contended that

repudiation of the claim was justified, inasmuch as the

Appellant had not disclosed that it was not in possession of the

requisite licence for storing Hexane. It was contended that the

Appellant was required to obtain a licence as per either Article

3 or Article 7 of the First Schedule to the Petroleum Rules, 1976

(“1976 Rules”).

5.1 It was further argued that even assuming that the

aforementioned notification dated 21.11.2001 exempted the

Respondent from obtaining a licence for storing Hexane up to

4
20 kilolitres, the second surveyor’s report, against which the

Appellant had not raised any objection, was categorical in its

finding that the factory premises held over 90 kilolitres of

Hexane, out of which 79.152 kilolitres of Hexane had suffered

damage. Thus, no reliance could be placed on the exemption

under this notification in the instant facts and circumstances.

5.2 Learned Counsel also argued in favour of the finding

of the National Commission with respect to overvaluation of the

subject factory by the Appellant while taking insurance.

6. At the outset, we must observe that we are at a loss

to understand why the insurance policy was taken by the

Appellant for only one month and extended thereafter, again,

for only one more month. It is also quite perplexing as to why

the Respondent agreed to issue a policy for such a short period

of time, and no plausible reasons are forthcoming from the

records to explain the peculiar nature of this transaction.

7. Be that as it may, upon perusing the material on

record and after hearing the learned counsel, we find that two

issues arise in the instant case, to determine whether

repudiation of the claim was justified for breach of policy terms:

5

(i) whether the Appellant was not duly licensed to store

Hexane, and therefore had suppressed a material fact, thus

breaching Clause 1 of the policy, and

(ii) whether the Appellant overvalued the subject factory

while taking insurance, amounting to fraud under Clause 8 of

the policy.

8. In this regard, we find it relevant to reproduce the

said clauses of the insurance policy:

“1. This policy shall be voidable in the event of mis-
representation, mis-description or non-disclosure of
any material particular.

xxx

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 willful act, or with the connivance
of the insured, all benefits under this policy shall be
forfeited.”

9. With respect to the question of licensing, the

Respondent’s case is that the Appellant had not disclosed that

it had stored Hexane without having obtained a licence for the

same, as required under the 1976 Rules. In this respect, the

Respondent has relied on Articles 3 and 7 of the First Schedule

to the 1976 Rules. Articles 3 and 7 specifically refer to

6
petroleum Class A, which is defined as follows under Section

2(b) of the Petroleum Act, 1934 (“the Petroleum Act”):

“(b) “petroleum Class A” means petroleum having a
flash-point below twenty-three degree centigrade”.

10. To show that Hexane falls within Class A, learned

Counsel for the Respondent has drawn our attention to

literature from the National Fire Protection Association (“the

NFPA”), an international non-profit organisation working

towards eliminating death, injury, property and economic loss

due to fire. As per the records of physical properties of selected

chemicals prepared by the NFPA, the flash point of n-Hexane is

-23°C.1 Admittedly, the substance being stored by the Appellant

was n-Hexane, or normal Hexane. Indeed, as per nomenclature

adopted by the International Union of Pure and Applied

Chemistry, the substance carrying the molecular formula C 6H14

is known as “Hexane” or “n-Hexane”. 2 This is also supported

by Bretherick’s Handbook of Reactive Chemical Hazards ,

referred to by the Respondent, which notes that Hexane,
1
NFPA 497, Recommended Practice for the Classification of
Flammable Liquids, Gases, or Vapors and of Hazardous (Classified)
Locations for Electrical Installations in Chemical Process Areas (2017
edition).

2

National Center for Biotechnology Information, PubChem
Compound Database, available at
https://pubchem.ncbi.nlm.nih.gov/compound/Hexane.

7
having the formula C6H14, has a flash point of -23°C. 3 Since the

flash point of the substance is well below 23°C, it can safely be

said that it falls under the category of petroleum Class A.

11. Against this backdrop, we find it useful to refer to the

relevant Articles of the First Schedule to the 1976 Rules, which

were the rules in force as on the date of the incident:

FIRST SCHEDULE

Article Form Purpose Authority Fee
of for empower
licence which ed to
granted grant
licence
1 2 3 4 5
3 X To import District Rs. 20 for every
and store Authority calendar year or
petroleu part thereof.

                       m Class
                       A         in
                       quantity
                       not
                       exceedin
                       g       300
                       litres.
        xx       xx        xx           xx                xx
    6        XIII      To import    Chief
                       and store    Controller
                       petroleu     or         a
                       m in an      Controller
                       installati   of
                       on.          Explosives
3

BRETHERICK’S HANDBOOK OF REACTIVE CHEMICAL HAZARDS, Vol. I, 2032
(PG Urben ed., 7th edition, 2006).

8

authorised
in this
behalf by
the Chief
Controller.

7   XIV   To import                    Petroleum Class B
          and store                    – When stored in
          otherwis                     bulk or with any
          e than in                    other    class   of
          bulk (a)                     petroleum        or
          petroleu                     when stored in
          m Class                      quantities
          A        in                  exceeding 25,000
          quantitie                    litres. The same
          s                            fee as laid down
          exceedin                     for      petroleum
          g      300                   Class A.
          litres, (b)
          petroleu
          m Class
          B        in
          quantitie
          s
          exceedin
          g 25,000
          litres (c)
          petroleu
          m Class
          C        in
          quantitie
          s
          exceedin
          g 45,000
          litres or
          (d) partly
          one class
          and
          partly
          two class
          of
          petroleu

                        9
                     m.

12. Before looking into whether the Appellant was

required to obtain a licence under the provisions reproduced

above, it is relevant to note that the Appellant has not

challenged the second surveyor’s report, or its finding that the

factory premises contained over 90 kilolitres of Hexane, out of

which 79.152 kilolitres were damaged. On the contrary, the

Appellant seeks to rely on the report heavily.

13. The Respondent has contended that the Appellant

was required to obtain a valid licence under the Petroleum Act

and the 1976 Rules. In this regard, it is pertinent to note that

Section 8 of the Petroleum Act makes it clear that storage of

small quantities of petroleum Class A does not require any

licence. It reads:

“8. No licence needed for import, transport or
storage of small quantities of petroleum Class
A.—(1) Notwithstanding anything contained in this
Chapter, a person need not obtain a licence for the
import, transport or storage of petroleum Class A not
intended for sale if the total quantity in his
possession does not exceed thirty litres.

(2) Petroleum Class A possessed without a licence
under this section shall be kept in securely stoppered
receptacles of glass, stoneware or metal which shall
not, in the case of receptacles of glass or stoneware,
exceed one litre in capacity or, in the case of

10
receptacles of metal exceed twenty-five litres in
capacity.”

13.1 Therefore, it is evident that for the storage of

petroleum Class A less than 30 litres in quantity, no licence is

required under the Petroleum Act or rules thereunder. As per

Article 3, a licence issued by the District Authority is required

for importing and storing petroleum Class A in a quantity not

exceeding 300 litres. Thus, the Respondent may be justified in

arguing that for storage of petroleum Class A ranging from 30

litres to 300 litres in quantity, a licence under Article 3 may be

required. However, in the instant case, it is clear that the

Appellant had stored much more than 300 litres of Hexane, and

therefore, a licence under Article 3 would not be sufficient.

14. The Respondent also drew our attention to Article 7

of the 1976 Rules to further its argument on the requirement of

the licence. Article 7 deals with storage of certain forms of

petroleum otherwise than in bulk. The expression “ petroleum in

bulk” is defined in clause (xv) of Rule 2 of the 1976 Rules as

follows:

“(xv) “petroleum in bulk” means petroleum
contained in a tank irrespective of the quantity of
petroleum contained therein” (emphasis supplied)

11
14.1 In turn, the term “tank” is defined in clause (xxii) of

Rule 2 in the following manner:

“(xxii) “tank” means a receptacle for petroleum
exceeding 1000 litres in capacity”

15. From the definitions reproduced above, it becomes

evident that irrespective of the quantity of petroleum, when

petroleum is stored in a tank, it is referred to as “ petroleum in

bulk” under the 1976 Rules. As mentioned earlier, Article 7, on

which the Respondent seeks to place reliance, deals with the

grant of a licence for storage of petroleum otherwise than in

bulk, i.e. otherwise than in a tank. In other words, for petroleum

Class A exceeding 300 litres, a licence under Article 7 is

required when it is not being stored in receptacles exceeding

1000 litres in capacity.

16. In this regard, we may also refer to Condition 2 of

Form XIV of the Second Schedule to the 1976 Rules. Form XIV

corresponds to the licence granted under Article 7 of the First

Schedule, and Condition 2 of the said Form reads as follows:

“2. The petroleum shall be stored only in the storage
shed which shall be constructed of suitable non-

combustible materials, provided that when no
petroleum Class A is stored, the beams, rafters,
columns, windows and doors may be of wood.”

12
(emphasis supplied)

16.1 In turn, the term “store shed” is defined in clause

(xxi) of Rule 2 as follows:

“(xxi) “store shed” means a building used for the
storage of petroleum otherwise than in bulk, whether
forming part of an installation or not, but does not
include a building used for the stores of petroleum
exempt from licence under Sections 7,8 or 9 of the
Act”

16.2 A store shed, therefore, is a building where

petroleum is stored otherwise than in bulk, i.e., otherwise than

in receptacles with a capacity of over 1000 litres. Most

significantly, clause (xxi) of Rule 2 states that a store shed may

be a part of an “installation”. At this juncture, it is relevant to

note that this term is also defined under the 1976 Rules, in

clause (xiv) of Rule 2:

“(xiv) “installation” means any premises wherein any
place has been specially prepared for the storage of
petroleum in bulk, but does not include a well-head
tank or service station”

17. Upon reading the definitions of “store shed” and

“installation” together, it becomes clear that “ installation”

carries a much broader meaning. In order for any premises to

be an “installation” under the 1976 Rules, it must necessarily

13
contain a place specially prepared to store petroleum in bulk. In

other words, such a place must have the capacity to hold

receptacles with a capacity of 1000 litres or more (which would

be nothing but a “tank” as defined under the 1976 Rules). At

the same time, an installation may also have the capacity to

store petroleum otherwise than in bulk. An installation,

therefore, may consist of both tanks and storage sheds, or it

may consist only of tanks.

18. In the instant case, the second surveyor had clearly

stated that the Hexane had leaked from the tanks in which it

was stored. However, it is not clear from the material on record

whether or not the term “tank” was assigned the same

meaning as under the 1976 Rules. If the tanks referred to by

the second surveyor were receptacles that could not store

more than 1000 litres of petroleum, then they would not

constitute “tanks” under the 1976 Rules, and the petroleum

stored in such tanks would fall under the category of petroleum

stored “otherwise than in bulk”. In such a case, a licence would

be required under Article 7.

19. At this stage, we may fruitfully refer to the

application preferred by the Appellant to obtain a licence under

14
Article 6 of the First Schedule to the 1976 Rules, which pertains

to the import and storage of petroleum in an installation, vide

letter dated 22.10.2001. In its response to the above

application, the Controller of Explosives, Nagpur noted vide

letter dated 05.11.2001, that the drawings of the site and

layout of the proposed installation had been approved, subject

to the condition that the pump/motor to be incorporated were

flame proof, in accordance with IS:2148. Further, the Appellant

was asked to submit certain documents that were necessary in

connection with the grant of the licence applied for, such as an

application under Form VIII (which is an application for the

grant, amendment, renewal, or transfer of a licence to import

and store petroleum), a Safety and Test Certificate required

under Rule 130 and 126 of the 1976 Rules issued by a

competent person, a No-Objection Certificate from the Local

District Authority along with the site plan duly endorsed by

such authority, and so on. Additionally, the Appellant was

directed to comply with the provisions of the Solvent, Raffinate

and Slop (Acquisition, Sale, Storage and Prevention of Use in

Automobiles) Order, 2000 (“the 2000 Order”).

15

20. The above communication clearly indicates that even

the Controller of Explosives was of the opinion that the

premises where the Appellant was storing Hexane amounted to

an “installation”. As we have discussed supra, for a premises to

be considered as an installation, it must contain a place

prepared to hold “tanks” as defined under the 1976 Rules. This

strongly suggests that the “tanks” referred to by the second

surveyor were indeed “tanks” as envisaged under the 1976

Rules. In our considered view, this shows that the Appellant

may well have been required to obtain a licence under Article 6

itself.

21. It is not the case of the Appellant that it provided the

documents stipulated by the Controller of Explosives. No

further communication between the Appellant and the said

authority has been placed on record either. There is nothing on

record to show that a licence under Article 6 was granted to the

Appellant.

22. In light of the above discussion, we are of the view

that the Appellant was required to obtain a licence under the

1976 Rules for the storage of Hexane, be it under Article 6 or 7,

and has failed to show that it possessed any such licence.

16

23. Having examined the scheme of the 1976 Rules with

respect to licensing requirements, we may now turn to the

Appellant’s contention that it was exempt from obtaining a

licence under the said rules, by virtue of the notification dated

21.11.2001 issued by the Ministry of Petroleum and Natural

Gas, amending the 2000 Order. The relevant clause of the

amended order that is being relied upon by the Appellant is as

follows:

“3. Restriction on sale and use of solvents,
raffinates, slops and other product:-
(1) No person shall either acquire, store or sell
solvents included in the Schedule, without a licence
issued by the State Government or the District
Magistrate or any other Officer authorised by the
Central or the State Government;

Provided that no such licence shall be required for
consumption of 50 KLs per month or less and storage
of 20 KLs or less of solvents listed in the Schedule
combined.”

24. Evidently, there is an exemption carved out in the

proviso dispensing with the need for a licence in the cases laid

down thereunder. Significantly, Hexane is mentioned in the

Schedule referred to in the above clause, making it clear that

the substance is governed by the same. The Appellant seeks to

argue that pursuant to the above proviso, it was not required to

17
obtain a licence under the 1976 Rules for the storage of

Hexane on its premises. In order to determine whether the

reference to a “licence” in the said clause includes licences

under the Petroleum Act, it is essential to examine the

background and scheme of the 2000 Order.

25. A glance at the notification dated 21.11.2001,

amending the 2000 Order, as well as the said order itself,

reveals that both were issued in exercise of the powers of the

Central Government under Section 3(1) of the Essential

Commodities Act. This statute, as is evident from its Statement

of Objects and Reasons, was enacted to provide for the control

of the production, supply and distribution of and trade and

commerce in certain commodities, in the interest of the general

public. Further, Section 3 empowers the Central Government to

pass orders providing for the regulation or prohibition of the

production, supply and distribution of any essential commodity,

and trade and commerce therein, under certain conditions.

Section 3(1), in particular, reads as follows:

“3. Powers to control production, supply,
distribution, etc., of essential commodities.―
(1) If the Central Government is of opinion that it is
necessary or expedient so to do for maintaining or
increasing supplies of any essential commodity or for

18
securing their equitable distribution and availability
at fair prices, or for securing any essential
commodity for the defence of India or the efficient
conduct of military operations, it may, by order,
provide for regulating or prohibiting the production,
supply and distribution thereof and trade and
commerce therein.”

26. Clearly, orders under Section 3(1) may pertain to the

following objectives:

(i) maintaining or increasing supplies of any essential

commodity;

(ii) securing the equitable distribution and availability at

fair prices of such commodity; or,

(iii) securing any essential commodity for the defence of

India or the efficient conduct of military operations.

27. Furthermore, Section 3(2) contemplates particular

aspects with respect to which orders may be passed in exercise

of the power under Section 3(1). In this regard, it is relevant to

refer to clause (d) of Section 3(2):

“(2) Without prejudice to the generality of the powers
conferred by sub-section (1), an order made
thereunder may provide―
xxx

19

(d) for regulating by licences, permits or otherwise
the storage, transport, distribution, disposal,
acquisition, use or consumption of, any essential
commodity”.

28. Thus, it is clear that the Central Government has the

power to pass orders under the Essential Commodities Act to

provide for licensing regimes governing the storage of an

essential commodity, in pursuance of the three objectives set

out in Section 3(1). The 2000 Order, in our considered view, is

one such order, providing for a licensing regime regulating the

acquisition, sale, storage and prevention of use in automobiles

of solvents, raffinates and slops, particularly for the purposes of

the Essential Commodities Act. There is nothing in the said

order to suggest that it intends to replace or modify any other

existing licensing regime under any other law in force, including

the Petroleum Act and the rules formulated thereunder.

29. In fact, we find that the notifications issued in

pursuance of the 2000 Order set to rest any residual doubt in

this regard. For instance, a perusal of G.R.S. 578(E), an order

dated 30.06.2000 issued by the Central Government under

Clause 3 of the 2000 Order, clearly reveals that the licence

being referred to under the order is the Solvent, Raffinate and

20
Slop Licence. The said notification reiterates that the said

licence is to be issued by the State Government, District

Magistrate, or the officer authorised by the Central or State

Government, as also mentioned in Clause 3(1) of the 2000

Order.

30. There cannot be any dispute that the licence issued

under the Essential Commodities Act and control orders are for

a different purpose altogether compared to the Petroleum Act.

Thus, it is clear that the licensing regime envisaged in clause 3

of the 2000 Order, and the exemption granted thereto, is in

addition to the licensing requirements under the Petroleum Act.

The direction of the Controller of Explosives vide letter dated

05.11.2001 to comply with the requirements under the 2000

Order is an additional requirement to be complied with in order

to obtain a licence under the Petroleum Act. It cannot be said

that an exemption from obtaining a licence under the 2000

Order would amount to an exemption to obtain a licence under

the Petroleum Act. Hence, even assuming that the Appellant

was exempt from obtaining a licence under the 2000 Order by

virtue of the said exemption, the Appellant was still required to

obtain a licence in accordance with the 1976 Rules. We hasten

21
to add here that, as already mentioned supra, the quantity of

Hexane stored by the Appellant was more than 20 kilolitres.

Hence, the Appellant was required to obtain a licence under the

2000 Order as well.

31. From the above discussion, it is evident that the 1976

Rules prescribed that a licence had to be obtained for the

purposes of storing Hexane of the quantity involved in the

instant case, and the Appellant has failed to comply with this

requirement. In the absence of such a licence, the Appellant

could not have lawfully stored Hexane. Therefore, we are of the

view that the non-disclosure of the non-possession of a licence

was of a material nature, and constituted a violation of

Condition 1 of the insurance policy. As a result, we are inclined

to affirm the finding of the National Commission that the

Respondent was justified in repudiating the claim of the

Appellant on this ground.

32. The second issue, regarding the overvaluation of the

subject factory, was not seriously argued by either party.

Moreover, it is a question of fact, which this Court generally

does not probe deeply. Thus, we shall refrain from examining

the merits thereof. The same is also unnecessary in light of our

22
above finding that the repudiation of the instant claim was

justified on the ground pertaining to the Appellant lacking a

licence for storing Hexane under the Petroleum Act and 1976

Rules.

33. Before we part with this matter, we may note that

some objection was raised by the Appellant against the

appointment of the third surveyor by the Respondent. Suffice it

to state that the appointment of the third surveyor was for the

limited purpose of examining whether the Appellant was in

possession of the requisite licences for the storage of Hexane.

Moreover, neither did the findings of the third surveyor disturb

the findings of the second surveyor, nor were they material to

the conclusion against the Appellant arrived at by the National

Commission. The second surveyor had given a categorical

finding that about 90 kilolitres of Hexane were stored in the

factory premises, and this finding has not been challenged by

the Appellant. At the same time, while the findings of the third

surveyor supplement the reasoning of the National Commission

vis-à-vis the absence of a licence under the Petroleum Act and

1976 Rules, they are not crucial to this conclusion, inasmuch as

the Appellant itself never contended that it was in possession of

23
the requisite licences for the storage of Hexane. As a result, we

find that irrespective of whether or not the appointment of the

third surveyor was proper, the findings of the said surveyor do

not materially affect the outcome of the instant case.

34. In light of the above discussion, we find no reason to

interfere with the conclusion in the impugned judgement of the

National Commission that the repudiation of the claim was

justified for breach of Clauses 1 and 8 of the insurance policy.

35. The instant appeal is therefore dismissed. Ordered

accordingly.

…..……………………………………..J.
(MOHAN M. SHANTANAGOUDAR)

.…………………………………………J.

(R. SUBHASH REDDY)
New Delhi;

February 14, 2020

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