TMI Blog1999 (9) TMI 3X X X X Extracts X X X X X X X X Extracts X X X X ..... ppellant Corporation, viz., National Insurance Co. Limited, New India Assurance Co. Limited, Oriental Insurance Co. Limited, and United India Insurance Co. Limited. The Central Government contributed to the capital of the appellant in the form of preference shares and equity shares for the purpose of paying compensation to the shareholders and the management of the merged companies. The preference shares were to be redeemed in such time as the board of directors of the appellant-Corporation may deem fit. The controversy relates to the assessment year 1977-78, corresponding to the accounting year ending December 31, 1976. It is not disputed that the income of the appellant-assessee is to be computed under rule 5 of the First Schedule to the Income-tax Act, 1961. The Income-tax Act, 1961, makes a special provision for computing the taxable income of an assessee engaged in the business of insurance. It provides as under : "44. Insurance business.---Notwithstanding anything to the contrary contained in the provisions of this Act relating to the computation of income chargeable under the head 'Interest on securities', 'Income from house property', 'Capital gains' or 'Income from oth ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to such extent as the board of directors of the Corporation may consider expedient shall be treated as an item of expenditure in the profit and loss account." In the profit and loss account, the appellant-assessee had made a debit entry for an amount of Rs. 3,00,30,700 and transferred the amount to preference share capital redemption account. The Income-tax Officer added back the amount to the income of the assessee on the reasoning that this amount was to be treated as revenue expenditure in view of rule 2(2)(a) of the GIB Rules. The assessee appealed to the Appellate Assistant Commissioner of Income-tax (Appeals) who agreed with the assessee and deleted the addition in the income following his own order on a similar claim made for the assessment year 1976-77. The Department appealed to the Income-tax Appellate Tribunal. The Tribunal followed its own order dated September 26, 1978, in respect of this very assessee for the assessment year 1974-75 and dismissed the appeal. A perusal of the order of the Tribunal (annexure P-3) for the assessment year 1974-75 shows that in the opinion of the Tribunal the amount set apart as a reserve could not be treated as expenditure or allowance ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er dated September 26, 1978, passed in ITA No. 2699 of 1977-78 by the Income-tax Appellate Tribunal in the case of this very assessee and relied on and followed by the Tribunal while disposing of the appeal for the assessment year in question (assessment year 1977-78) shows three submissions having been made on behalf of the assessee before the Tribunal : firstly, that the amount set apart by the assessee for redemption of preference shares was only a reserve or a provision and not an expenditure and therefore its allowability for deduction cannot be considered under sections 30 to 43A ; secondly, assuming it was an expenditure, this expenditure was not of the category of expenditure contemplated in sections 30 to 43A and, therefore, unless there was a specific prohibition for such an allowance, the departmental authorities would not be justified in adding back the amount under that clause ; and thirdly, if rule 2(2)(a) of the General Insurance Business (Nationalisation) Rules, 1973, be read as providing that the amount so set apart for redemption of preference shares was an expenditure, the fiction should be taken to its logical conclusion so as to hold that the expenditure was al ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t and loss account in the expenditure side, which would not have been permissible otherwise, because the amount set apart in a reserve cannot be expenditure. The rule puts a stamp of permissibility on something not permissible otherwise. This rule itself is suggestive of the fact that the amount set apart in a reserve is not an expenditure in its commercial sense. The extent of the GIB rules does not go beyond providing an accounting method. These rules cannot be pressed into service for altering the basic character of the amount which is not an expenditure. Merel because rule 2(2)(a) of the GIB Rules permits the amount set apart for redemption of preference shares being debited to the profit and loss account, the amount so set apart does not become the amount of an expenditure for all intents and purposes so as to fall within the meaning of the term "expenditure" as employed in rule 5(a) of the First Schedule to the Income-tax Act, 1961. If the view taken by the High Court is accepted, there would be a conflict between the provisions of rule 2(2)(a) of the GIB Rules and rule 5(a) of the First Schedule to the Income-tax Act. The object of rule 2(2)(a) is to reduce the amount of p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed in his opinion : "The assessment of the profits of an insurance business is completely governed by the rules in the Schedule and there is no power to do anything not contained in it, The reason may be that the accounts of an insurance business are fully controlled by the Controller of Insurance under the provisions of the Insurance Act. They are checked by him. He has power to see that various provisions of the Insurance Act are complied with by an insurer so that the persons who have insured with it are not made to suffer by mismanagement. A tampering with the accounts of an insurer by an Income-tax Officer may seriously affect the working of insurance companies. But apart from this consideration, we feel no doubt that the language of section 10(7) and the Schedule to the Income-tax Act makes it perfectly certain that the Income-tax Officer could not make the adjustment that he did in these cases." M. Hidayatullah J., (as His Lordship then was), observed : " ... Income-tax Act contemplates that the assessment of insurance companies should be carried out not according to the ordinary principles applicable to business concerns as laid down in section 10, but in quite a di ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n redemption fund. The High Court having examined the nature of the amount and the accounts held that the amount so set apart was neither business expenditure nor liable to be excluded from computation of income by applying the doctrine of diversion of income by overriding title. In our opinion, none of the cases has any applicability to the case at hand. In none of the three cases, the question of determining applicability of section 44 and the First Schedule to the Income-tax Act arose for consideration. To sum up, the amount set apart by General Insurance Corporation for redemption of preference shares and treated as expenditure under rule 2(2)(a) of the General Insurance Business (Nationalisation) Rules, 1973, is so treated for the purpose of the Insurance Act, 1938. The reserve is not an expenditure in the ordinary commercial sense of the term. It cannot be added back for computing the profits and gains of business by including it in "expenditure not admissible under the provisions of sections 30 to 43A of the Income-tax Act" by reference to rule 5(a) of the First Schedule to the Income-tax Act, 1961. The question referred to the High Court should have been answered in the a ..... X X X X Extracts X X X X X X X X Extracts X X X X
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