9911796707
TMI Blog1967 (10) TMI 16X X X X Extracts X X X X X X X X Extracts X X X X ..... es as well as the assets are those of the Life Insurance Corporation, those questions are being agitated by the Life Insurance Corporation in separate proceedings even for the years of account with which we are concerned. The questions which arise in the present reference, therefore, are solely concerned with the general insurance business of the assessee for those years. We are concerned with the assessment years 1954-55, 1955-56 and 1956-57 corresponding to the account years which are the calendar years 1953, 1954 and 1955. In the assessment proceedings for the three years, the assessee had, inter alia, claimed the following exemptions : Firstly, under the provisions of section 15B of the Indian Income-tax Act, the assessee claimed exemption in respect of donations for charitable purposes. Secondly, it claimed that certain dividends received by them from companies in which they had invested moneys were exempt from tax, because those companies were new companies and their dividend income in the hands of the assessee as a shareholder was exempt under the provisions of section 15C(4). Thirdly, the assessee claimed exemption in respect of interest on loans of the Mysore Government ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ovisions of the Act. Section 10(7) runs as follows : " Notwithstanding anything to the contrary contained in section 8, 9, 10, 12 or 18, the profits and gains of any business of insurance and the tax payable thereon shall be computed in accordance with the rules contained in the Schedule to this Act." A glance at the rules contained in the Schedule to the Act shows that rules 1 to 5 govern the computation of the profits and gains of only life insurance business and since, as we have said, we are only concerned in this reference with the profits and gains of the assessee-company from the general insurance, these rules as such will not directly apply. They were referred to in the arguments for certain purposes and we will refer to them when we deal with the arguments. But the rule which directly governs the case and which is concerned with the general business of insurance is rule 6 and it makes the following provisions : " The profits and gains of any business of insurance other than life insurance shall be taken to be the balance of the profits disclosed by the annual accounts, copies of which are required under the Insurance Act, 1938, to be furnished to the Controller of Ins ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of Commissioner of Income-tax v. Western India Life Insurance Co. Ltd. The assessee carried the matter to the Tribunal by way of appeal and the Tribunal has, so far as the exemptions claimed are concerned, allowed the exemptions, but it did not accept the assessee's contention so far as the statutory allowance of Rs. 4,500 is concerned for each year of account under the third proviso to section 4(1). As regards the allowance the Tribunal somewhat summarily brushed it aside by saying that it was not permissible because it was specifically considered by the Privy Council in Commissioner of Income-tax v. Western India Life Insurance Co. Ltd. On the general contention, which was a contention which affected the grant of all the exemptions claimed by the asscssee, the Tribunal did not accept the view of the tax authorities. It pointed out that the business of insurance is separately provided for in section 10(7) and section 10(7) excludes only the application of the provisions of sections 8, 9, 10, 12 and 18 to the extent that the rules in the Schedule to the Act apply. It does not exclude, the operation of the entire Act. Next the Tribunal pointed out that rule 6 ordains that the profi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 3 and 4 referred for our decision. Questions Nos. 2, 3 and 4 are as follows : 2. Whether the claim of the assessee-company in regard to the payment of Rs. 1 lakh from the general department funds to the mutual benefit society is admissible in the assessment of 1954-55 having due regard to section 10(2)(xv), section 10(4)(c) and section 58K of the Act ? 3. Whether Rs. 79,592, being the difference in the exchange rates of Pakistan currency before and after its devaluation on July 31, 1955, on account of payment under section 18A of the Pakistan Income-tax Act is deductible in the assessment of 1956-57 under any of the provisions of the Income-tax Act or the Schedule ? 4. Whether Rs. 1,33,694, being the difference in the exchange rates of the Pakistan currency before and after its devaluation on July 31, 1955, on account of double taxation relief till then ascertained to be due, is deductible in the assessment of 1956-57 under any of the provisions of the Income-tax Act or the Schedule ? Of these amounts, the first amount which forms the subject-matter of question No. 2 is an amount of Rs. 1 lakh contributed by the assessee-company towards a society called the New India Mutual B ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mployees for their benefit would be allowed as expenditure. Accordingly, the Income-tax Officer allowed the sum of Rs. 2,420 as a deduction in the assessment year 1954-55. In appeal, the Appellate Assistant Commissioner confirmed the view of the Income-tax Officer. He held that the assessee had, so to say, constituted a fund or the nucleus of a fund which would be in the nature of a capital expenditure and, therefore, could not be allowed on the authority of the decision in Atherton v. British Insulated & Helsby Cables Ltd. The Appellate Assistant Commissioner took the view that the initial contribution by the company had enabled it to divest itself from the future liabilities for payment to its employees and, since the extinguished future liability was a capital asset, the payment of this lump sum " had acquired a capital asset of enduring nature ". Since under rule 6 any expenditure which was not allowable under the provisions of section 10 could be disallowed, the Income-tax Officer was right in disallowing this item. The Appellate Assistant Commissioner also added that the item of expenditure would also not be allowable under the provisions of section 10(4)(c) of the Income-tax ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... expressly excluded as an item of expenditure. He remarked that " the proper entry in this case is not to debit this amount of loss to exchange reserve, but to debit it to reserve for taxes account ". In the appeal by the assessee, it appears that the Appellate Assistant Commissioner through an oversight failed to deal with this claim of the assessee altogether. The Tribunal on its part allowed both the items, because it felt that both the items constituted a business loss of the assessee. They had business all over the world and if, as a result of devaluation of a foreign currency, loss is sustained it would be purely a business loss. The Tribunal also remarked that, when Indian currency was devalued and the assessee-company derived a profit, the department had brought that profit to tax and recovered tax thereon. The tax thus recovered was in 1951 on a profit of Rs. 25,787. On these items the questions Nos. 3 and 4 quoted above have been referred for our decision. It will be convenient first of all to deal with the question No. 1, which is of general importance and which affects all the exemptions granted to the assessee, the question being whether, having regard to the provision ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s of any business of insurance and the tax payable thereon shall be computed in accordance with the rules contained in the Schedule to this Act ". Therefore, the first contention is that not only is the computation of the profits and gains of the business to be in accordance with the Schedule but also the tax payable thereon must be only according to the rules contained in the Schedule. Therefore, the assessee cannot claim the exemption granted by the Act. Secondly, it is contended that, having regard to rule 6, which applies in the case of general insurance business, the profits and gains which it contemplates is indicated by the words used in the rule " the profits and gains of any business of insurance . . . . shall be taken to be the balance of the profits disclosed by the annual accounts, copies of which are required under the Insurance Act, 1938, to be furnished to the Controller of Insurance ". It is, therefore, urged that this is not really a computation of any actual profits and gains of the business of an insurer, but by the use of the words " shall be taken to be " a sort of a fictional income is being referred to. Counsel called it a notional income having regard to cer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... th the question of tax or taxes payable on the profits and gains of the business of insurance. All that rule 6 says is that so far as the profits and gains of any business of insurance other than life insurance is concerned, it shall be taken to be the balance of the profits disclosed by the annual accounts furnished to the Controller of Insurance. That is the initial mandate of the rule. After accepting that balance as being the profits and gains of the business of general insurance what the tax officer is empowered to do is made clear. What he is to do is that, after adjusting such balance, he has to exclude from it any expenditure other than expenditure which may, under the provisions of section 10 of this Act be allowed for in computing the profits and gains of a business. In other words, the balance as shown in the annual accounts furnished to the Controller of Insurance must first of all be taken as the profits and gains of the business of general insurance and that amount can only be adjusted so as to exclude any expenditure which is not allowable under the provisions of section 10 as a business expenditure. That and that alone is the power of the Income-tax Officer under th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ess less the management expenses of that year ". The words " the gross external incomings " are defined in rule 5(ii). Thus, broadly speaking, it is the full amount of incomings from whatever source derived of the preceding year less the expenses of management of that year. The other mode of computation is as prescribed under rule 2(b), which is an alternative to rule 2(a) and which is in these terms : " 2. The profits and gains of life insurance business shall be taken to be either---... (b) the annual average of the surplus arrived at by adjusting the surplus or deficit disclosed by the actuarial valuation made in accordance with the Insurance Act, 1938, (4 of 1938), in respect of the last inter-valuation period ending before the year for which the assessment is to be made, so as to exclude from it any surplus or deficit included therein which was made in any earlier inter-valuation period and any expenditure other than expenditure which may under the provisions of section 10 of this Act be allowed for in computing the profits and gains of a business ......." This rule serves to emphasise two circumstances : The peculiar nature of the business of life insurance and the necess ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ished according to law. Now, section 10(7), as we have said, expressly excludes section 18 and, notwithstanding anything to the contrary contained in section 18, that sub-section directs that the profits and gains of any business of insurance shall be computed in accordance with the rules. In the case of a life insurance business, if tax is deducted from source on any item of income, that deduction of tax will be lost to the insurance company because of the exclusion of section 18. Therefore, it became necessary to provide specially for such a case and that provision was made by rule 4 and all that rule 4 does is to replace the provisions of sub-section (5) of section 18 so far as credit to be allowed for tax paid at source is concerned in the case of a business of life insurance. Having regard to the manner of computation of its profits and gains, instead of the normal allowance of the whole amount of tax deducted at source, rule 4 says that credit shall not be given for the tax paid in the preceding year, but " credit shall be given for the annual average of the income-tax paid by deduction at source from interest on securities or otherwise during such period ". Rule 4 thus prov ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ance of the profits disclosed. . . ." The words " taken to be " would suggest that the tax officer is bound to accept the balance of the profits disclosed by the annual accounts, but it is not the same thing as saying that it shall be deemed to be profits and gains of any business of insurance. What is rather sought to be indicated by rule 6 is a sort of rule of evidence that the profits appearing in the balance-sheet as furnished to the Controller of Insurance shall be the starting point for the purposes of the exercise of his jurisdiction by the Income-tax Officer. If one turns to the provisions of the Indian Insurance Act, one finds careful provisions made for preparation of accounts of an insurance business and barring such changes or differences as of necessity are dictated by the peculiar nature of an insurance business the balance sheet and the profit and loss account are made to reflect as nearly as may be the actual profits derived by the insurance company. The balance of the profits disclosed by the annual accounts thus prepared is by no means a notional figure of profit, but is an actual figure, though, no doubt, computed in a special way because of the exigencies and na ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ted what in its opinion was the effect of the Insurance Act and the nature of the accounts to be maintained thereunder. At page 719 the Supreme Court held : " Mr. Viswanatha Sastri contends that the Insurance Act, 1938 (IV of 1938), makes detailed provisions to ensure the true valuation of assets and the determination of the true balance of profits of an insurance business. An examination of the various sections of the Insurance Act discloses that he is right in this respect. " In that case rule 6 read with rule 3(b) fell to be considered and the Supreme Court further pointed out that, acting under his powers under rule 6, the Income-tax Officer cannot adjust the accounts of an insurer on the basis of a revaluation made by him. They observed at page 721, after quoting with approval the decision in Life Insurance Corporation of India v. Commissioner of Income-tax : " The entire subject of such disparity between fact and actual entries is comprehended in the proviso. It seems to us that this court has held in categorical terms that rule 3(b) does not empower the Income-tax Officer to adjust the accounts on the basis of a revaluation made by him or to correct the discrepancy betw ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y be included in the balance of the profits disclosed to the Controller of Insurance. At no stage of the proceedings before the tax authorities or before the Tribunal was it in dispute that this was income earned without the taxable territories and that the requirements of section 4(1), third proviso, were fulfilled. The only ground upon which this item was not allowed to the assessee was on the basis of the decision of the Privy Council in Commissioner of Income-tax v. Western India Life Insurance Co. Ltd. As we have shown, beyond referring to that decision, the Tribunal did not give any reason why this allowance should be denied to the assessee. In Western India Life Insurance Company's case the question was whether the assessee, which was doing business in life insurance, would be entitled to this statutory allowance under section 4(1) in respect of the profits and gains of its insurance business which have been computed in accordance with rules 1 and 2 of the Schedule. Now we have already indicated above the distinction drawn in the rule between the method by which the profits and gains of life insurance business are to be computed and the method by which the profits and gains ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... attention to the distinction between an assessment upon actual income and an assessment upon a notional income and in so far as an average derived from a triennial period is the basis for computation of the income of one year in this Act the case has an important bearing." Beyond saying this their Lordships did not decide the issue. The ground upon which the Privy Council actually decided the case is thus stated at page 129 : " But apart from authority, their Lordships are of opinion that the appellant's contention is correct and they find it impossible to apply the words of the third proviso to section 4(1) to an assessment under rule 2(b) of the Schedule and they will therefore humbly advise His Majesty that this appeal should be allowed ........" Therefore, the precise point upon which the Privy Council decided the case of Western India Life Insurance Co.'s case was shortly this that, having regard to the wording of the third proviso to section 4(1), it could not be applied to a case where an assessment of the profits and gains of a life insurance company is made under rule 2(b) of the Schedule. That case, therefore, must be limited to the particular facts upon which it was d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the word " deleted " but what they intended to say is clear from the earlier portions of that judgment at pages 498 and 499. While considering the provisions of section 10(7) they referred to their earlier decision in Life Insurance Corporation of India v. Commissioner of Income-tax and pointed out that they had already held that " the assessment of the profits of an insurance business is completely governed by the rules in the Schedule to the Income-tax Act and the Income-tax Officer has no power to do anything not contained in it; there is no general right to correct the errors in the accounts of an insurance business." They also indicated that rule 2(b) of the Schedule did not empower the Income-tax Officer to adjust the accounts on the basis of a revaluation made by him or to correct the discrepancy between what was entered in the accounts and what was fact. Then at page 499 they observed : " It seems to us that insurance companies are assessed on a special basis, though the special basis is different for life insurance companies and companies carrying on general insurance business. In the case of life insurance business, while defining 'gross external incomings' in paragraph ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... because there is nothing to the contrary in the rule. A curious argument was then advanced on behalf of the department that, since there is a separate assessment of the two departments of the assessee's business, namely, the life department and the general department, the assessee would be claiming the exclusion of the amount of Rs. 4,500 twice over and that cannot be permitted even having regard to the provisions of the proviso to section 4(1). This contention cannot for a moment be accepted for the simple reason that there is nothing shown that the amount of Rs. 4,500 was claimed or allowed in connection with the life insurance business. In any case, we are not concerned with the assessment of life business in the present reference and so long as the assessee would upon the terms of the exemption granted be entitled to it on the basis of its general business, we can see no reason why it should not be allowed upon the terms of that provision. We are unable to accept this contention. So far as the Tribunal is concerned, we have already said that the only reason why it did not consider this a permissible item was because of the decision of the Privy Council in Commissioner of Incom ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e in the fourth column of the chart reproduced above in the respective years. Sub-section (4) of section 15C grants exemption to a shareholder in respect of so much of any dividend paid or deemed to be paid to him by an industrial undertaking to whom sub-section (1) applies. It says " the tax shall not be payable by a shareholder in respect of so much of any dividend paid or deemed to be paid to him by an industrial undertaking as is attributable to that part of the profits or gains on which the tax is not payable under this section. " This item was also disallowed both by the Income-tax Officer and the Appellate Assistant Commissioner on the same ground as the other items, namely, that the income assessed under rule 6 read with section 10(7) was a notional income and, therefore, the other provisions of the Act will not apply. The Appellate Assistant Commissioner held " as discussed while dealing with grounds Nos. 1, 2, 3 and 4, I hold that in the case of general insurance, the income has been assessed as a notional income and, therefore, the other provisions of the Act would not apply relying on the decision of the Privy Council in the case of Commissioner of Income-tax v. Western ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e chart. We accordingly answer the question No. 1(ii)(c) in the affirmative. For the same reasons we think that the assessee would be entitled to the exemption claimed in respect of interest on the Mysore Government loan which is the subject-matter of question No. 1(ii)(d). By the notification of the Mysore Government No. 39 dated 5th July, 1954, the interest receivable on certain securities issued by the Mysore Government was declared to be exempt from income-tax payable under the Act, though they would be liable to be included in the total income of such assessee and not be exempt from super-tax payable under the said Act. The loan in question in the present case was the Mysore Government 3% loan. The exemption was granted under the provisions of section 60(1) which gives power to the Government by notification to make an exemption in respect of income-tax in favour of any class of income or in regard to the whole or any part of the income of any class of persons. Some distinction was sought to be made on behalf of the department because of the use of the word " class of income " in section 60. It was urged that the power of the Government is to exempt any class of income which ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . That being the exemption, it seems clear to us that the interest arising from the Mysore Government Loan would clearly be exempt. There is nothing in section 10(7) or in rule 6 to suggest that the exemption granted by the notification cannot be availed of in the case of an insurance business. Indeed, as we have pointed out in the other cases, neither section 60 nor any of the notifications granting exemption thereunder is referred to in section 10(7) or in rule 6. We agree with the Tribunal, therefore, that the interest received by the assessee on the Mysore Government Loan under the notification would be exempt from tax. We answer the question No. 1(ii)(d) in the affirmative. Then we turn to the question No. 2, which relates to an item of Rs. 1 lakh contributed by the assessee-company to the Mutual Benefit Society started by the company. The amount actually is not Rs. 1 lakh as stated in the question. The correct amount is Rs. 96,665. The facts relating to this question are briefly as follows : On 18th July, 1952, the general manager of the company made an announcement that a society to be called the New India Mutual Benefit Society would be incorporated, and the objects of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the deduction on the ground that the assessee had transferred a lump sum to the credit of the trust to be held as a sort of a benefit fund for the benefit of the employees, the Income-tax Officer holding, " Therefore on general principles as well as under section 58K(1) such a nucleus of a provident fund would be capital expenses ". Taking this view the Income-tax Officer held that the actual payments made by the assessee in the years of account out of the funds of the society towards its purposes and objects could be claimed as expenses but not the amount transferred by the company to the funds of the society. The Appellate Assistant Commissioner held, " the appellant had, therefore, transferred this lump sum amount to the trustees to be held as a sort of benefit fund for the benefit of its employees and, therefore, such a nucleus of funds would be capital expenses and would not be deducted : vide the case of Atherton v. British Insulated and Helsby Cables Ltd. The appellant is not correct in stating that it is not a capital expenditure, because no enduring asset has been secured by the appellant-company. If no contribution to this mutual benefit society were made by the company, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ction (4) " nothing in ....... clause (xv) of sub-section (2) shall be deemed to authorise " show that, unless the case falls under clause (c), the allowance would be in conflict with the provisions of sub-section (2), clause (xv), which allows to an assessee " any expenditure not being an allowance of the nature described in any of the clauses (i) to (xiv) inclusive, and not being in the nature of capital expenditure or personal expenses of the assessee ". We do not think, therefore, that there is anything in section 10(4)(c) to bar the grant of this allowance. So far as section 58K(1) is concerned, it only envisages a provident fund and, since this fund can by no stretch of language be held to be a provident fund, we do not think that section 58K(1) would be attracted. That leaves for consideration section 10(2)(xv) and, as we have shown, it speaks of an allowance " not being in the nature of capital expenditure " and the principal endeavour on behalf of the department has been to show that this item contributed by the assessee-company was of a capital nature. It was not disputed that but for that contention section 10(2)(xv) would be attracted. The Appellate Assistant Commissi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ecision the Lord Chancellor referred to some of the tests which would be decisive of the question whether the expenditure is a capital expenditure or in the nature of a revenue expenditure and he referred to the decision in Vallambrosa Rubber Company Ltd. v. Farmer and to the remark of Lord Dunedin that " 'in a rough way' it was 'not a bad criterion of what is capital expenditure as against what is income expenditure to say that capital expenditure is a thing that is going to be spent once and for all, and income expenditure is a thing which is going to recur every year ; and no doubt this is often a material consideration. But the criterion suggested is not, and was obviously not intended by Lord Dunedin to be a decisive one in every case. From the report it is difficult to find even though the entire statement of the case is reproduced and the document creating by the trust whether only the income arising out of the amount contributed the company was to be spent ; but one thing is clear that in that case it was found as a fact that the sum was spent once and for all by the company in order to earn for itself a permanent and lasting benefit, namely, the goodwill and contentment of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... able to divest itself from future liabilities for payment to the employees does not commend itself to us. There was, in the first place, no liability upon the company to provide for the welfare and interest of its permanent and retired employees much less of their families and dependants beyond the actual emoluments which by contract has been fixed. No doubt, it would be a proper and perhaps a logical thing to do it, but one cannot say that the company was under a liability to make such a provision. If there was no such liability then the company secured no particular advantage nor got rid of any particular liability by making this contribution. The circumstances under which this amount was paid by the assessee-company were wholly different from the circumstances which prevailed in Atherton's case. The same was the position in the other case which was relied upon namely, Rowntree and Co. Ltd. v. Curtis. There a sum of pound 50,000 was claimed as a deduction from the year of account by the assessee, Messrs. Rowntree and Co. Ltd., the well known chocolate manufacturers, which the assessee had set aside in the hands of trustees as a fund for the relief, out of the income therefrom, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e out of this fund are being allowed year after year by the department as an allowable expenditure and it can hardly be a matter of dispute today that the amount was spent on account of the assessee's business. Looking at it from any point of view and taking into account all circumstances, it is clear to us that this amount of Rs. 96,665 paid by the assessee out of the funds of its general department to the Mutual Benefit Society would be an allowable expenditure under section 10(2)(xv). It is not an expenditure of a capital nature. Accordingly, we answer question No. 2 in the affirmative. Then we come to questions Nos. 3 and 4. As a common point of law is involved so far as' these two questions are concerned, we would deal with both these questions together. The questions Nos. 3 and 4 are as follows : " 3. Whether Rs. 79,592, being the difference in the exchange rates of Pakistan currency before and after its devaluation on July 31, 1955, on account of payment under section 18A of the Pakistan Income-tax Act is deductible in the assessment of 1956-57 under any of the provisions of the Income-tax Act or the Schedule ? 4. Whether Rs. 1,33,694, being the difference in the exchang ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... devalued with reference to the Pakistan currency the advance payment of tax in Pakistan which was then outstanding had resulted in a profit of Rs. 25,787 to the assessee and that profit was in that year duly taxed as a profit on exchange. Thus, in respect of these two items the assessee claimed that it had sustained a business loss because of the devaluation of the currency by the Pakistan Government. The Income-tax Officer disallowed the claim. There is hardly any reason to be found for his order but rather an officious suggestion was made to the assessee by observing : " The proper entry in this case is not to debit this amount of loss to Exchange Reserve, but to debit it to reserve for taxes account. " So far as the Appellate Assistant Commissioner is concerned, the statement of the case itself points out that through an oversight that officer failed to deal with the claim of the assessee-company. The Tribunal in appeal has allowed both these items as a deductible loss in business observing as follows : " When the Pakistan currency was devalued the assessee lost Rs. 2,13,286 on its Pakistan portfolio of investments. It is obviously a business loss, particularly for insuranc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... usion the Tribunal has erroneously used the word " investments ". Nothing. turns, however, upon the use of that word, because the finding of the Tribunal is clear " it is obviously a business loss " and " the loss claimed should be allowed ". The substance of their decision is clear that the two items constituted a business loss. As regards the contention based on the provisions of section 10(4), that sub-section provides that : " Nothing in clause (ix) or clause (xv) of sub-section (2) shall be deemed to authorise the allowance of any sum paid on account of. . . . tax levied on the profits or gains of any business.... or assessed at a proportion of or otherwise on the basis of any such profits or gains ; . . . . " The reference to clauses (ix) and (xv) of sub-section (2) of section 10 indicates that sub-section (4) is an exception to the allowances contemplated in clauses (ix) and (xv) of section 10(2). Clause (ix) of section 10(2) deals with the allowance of sums paid on account of land revenue, local rates or municipal taxes and clause (xv) deals with other expenditure and not being an allowance of the nature described in clauses (i) to (xiv) of section 10(2) and not being i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eal distinction, between these things. " This passage emphasised one important point of distinction, namely, that an expenditure is voluntarily incurred while a business loss is fortuitous or ab extra as the learned judge put it. The same distinction was accepted by a Division Bench of this court in Lord's Dairy Farm Ltd. v. Commissioner of Income-tax. In that case the loss was caused by defalcations by the cashier of the company and the amount of the loss was claimed as a trading loss. It was urged that it was really a deduction contemplated by section 10(2)(xv) of the Income-tax Act, and that such an amount could be claimed only when the amount had been irrecoverable. In answering this point the Division Bench distinguished between the nature of a deduction claimable under section 10(2)(xv) and a business loss. They pointed out at page 705 : " Then it is suggested that even if the case falls under section 10(2)(xv) the relevant time for claiming the deduction is not when the loss occurred but when the loss was written off. In the first place, in our opinion, the case cannot fall under section 10(2)(xv). Section 10(2)(xv) deals with any expenditure laid out or expended wholly ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bursement because in the present case the loss resulted because of the devaluation of the Pakistan currency. There is no question under these circumstances of any prospect of this loss being recovered. In view of this distinction it seems to us clear upon the facts and circumstances of this case that what the assessee has been claiming here in regard to both the items covered by questions Nos. 3 and 4 is only an ordinary business loss and the assessee is not claiming any allowance or any allowable deduction. A glance at the original order passed by the Income-tax Officer in the present case shows that he accepted the total figure of losses in exchange as were shown by the accounts of the assessee at Rs. 8,33,395 but he added back the two items which are comprised in questions Nos. 3 and 4 and, therefore, reduced the loss to Rs. 6,20,109. Now the amount of Rs. 8,33,395 is comprised of the figures shown in the accounts of the assessee for the year 1955 at pages 6, 8 and 10, being the amounts of Rs. 5,19,751, Rs. 1,03,126 and Rs. 2,10,518 shown under the head " Exchange Adjustment " under the revenue accounts pertaining to fire, miscellaneous insurance and marine insurance. They have ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that this income arose to the assessee-company as a profit or gain from the business of insurance. This is not a profit made in any other business and, therefore, if it is a profit or gain from the business of insurance the profit cannot be computed in accordance with section 12, but it could only be computed in accordance with the rules contained in the Schedule to the Act, and when we turn to the Schedule there is no provision for computing this income as an income on which tax can be levied. " In Commissioner of Income-tax v. Cocanada Radhaswami Bank Ltd. the Supreme Court permitted the setting off of a business loss even though the assessment was as per, rule 6. Under that rule the Income-tax Officer is bound to accept the balance of profit disclosed by the annual accounts, copies of which have been submitted to the Controller of Insurance. He can only adjust this balance " so as to exclude from it any expenditure other than expenditure, which may under the provisions of section 10 of this Act, be allowed for in computing the profits and gains of a business. . ." Therefore, subject to the exceptional power to exclude expenditure not allowable under section 10, the Income-tax O ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
