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TMI Blog1972 (2) TMI 9X X X X Extracts X X X X X X X X Extracts X X X X ..... said valuation. He worked out their value on the basis of the balance sheet of the company as on December 31, 1959, for the assessment year 1960-61 as under Rs. Share capital, 30,000 shares of Rs. 100 each 30,00,000 Reserve and surplus 14,80,000 Balance of funds and 14,34,697 Proposed dividend 4,50,000 ------------------ 63,65,100 Less advance tax 2,95,036 ---------------- Value of 30,000 shares 60,70,036 ---------------- Value per share Rs. 202.33. The same basis was adopted by the Wealth-tax Officer for the assessment year 1961-62 and the value per share as per the balance-sheet of the company as on December 31, 1960, was arrived at at Rs. 231.72 per share. The Wealth-tax Officer in arriving at the value of the share took the amounts shown as " balance of funds and accounts " in the two balance sheets of the company as revenue reserve or appropriation of profit which will enhance the intrinsic worth of the shares. The assessee appealed to the Appellate Assistant Commissioner objecting to the above method of valuation. The assessee contended before him that the sums standing to the credit of " balance of funds and accounts " had been set apart as per regulation 26, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as a whole is to be determined with reference to the balances sheet of the company, the accrued liabilities of the company have to be excluded. According to the assessee the amount set apart as a reserve for unexpired risks in each of the years is a trading liability in general and, therefore, it cannot be added to the profits. It is pointed out that rule 5(c) of the First Schedule (Insurance Business), to the Income-tax Act of 1961. specifically allows such an amount carried over to a reserve for unexpired risks as may be prescribed as a deduction in computing the profits and gains of any business of insurance other than life insurance, and that rule 6(e) of the Income-tax Rules, 1962, prescribes the limits of such reserves for unexpired risks at 50% of the net premium income in relation to fire or miscellaneous insurance and at 100% of the net premium income in relation to marine insurance and that, even though such a provision was not there before the enactment of the Income-tax Act, 1961, such a deduction was allowed in assessments under the Indian Income-tax Act, 1922, as well. Reference also is made to the provisions of section 11 of the Insurance Act, 1938, which enjoins on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he insurance company in question. In Sun Insurance Office v. Clark, a company carrying on business of fire insurance, had made a practice of carrying forward annually, in its published accounts, as a reserve, 40 per cent. of the yearly premium receipts representing estimated losses on unexpired risks, and had claimed to be assessed on that basis. The court held that, notwithstanding the absence of any rule of law as to the admissibility of an allowance for unexpired risks in estimating profits, on the facts found the allowance claimed was a proper allowance, overruling the contention of the revenue that the company was not legally entitled to such an allowance. In Commissioner of Income-tax v. Calcutta Hospital and Nursing Home Benefits Association the Supreme Court had to deal with a mutual insurance business carried on by the assessee. In that case the assessee in its balance sheet and profit and loss account made a provision for taxation in the form of a reserve. The Income-tax Officer added the said reserve to the general revenue reserve for taxation purposes. The Supreme Court held that as per rule 6 of Schedule I to the Income-tax Act, 1922 (corresponding to rule 5 of Schedu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for the year and the amount set apart as a provision for tax liability under the Income-tax Act were debts and could be deducted while computing the company's net wealth. It was held by the Supreme Court that the dividend amount was not a debt as on the valuation date, but the amount set apart as the estimated tax liability was a debt inasmuch as the liability to pay the tax was in praesenti though payable in future and was in respect of an ascertainable sum of money. In Standard Mills Co. Ltd. v. Commissioner of Wealth-tax the Supreme Court considered the question whether an estimated liability under the gratuity scheme framed under the industrial awards amounted to a debt and could be deducted while computing the net wealth, and it was held that in view of the terms of section 2(m) of the Wealth-tax Act, as the liability to pay a gratuity was not in praesenti but would arise in future on the termination of service, it was not a debt and the liability is only a contingent liability. In a recent decision of the Privy Council in Guiana Industrial and Commercial Investments Ltd. v. Inland Revenue Commissioners (No. 2) the question arose as to whether in computing the amount of " net ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... within a limited field, and that the adjustment of the profits of an insurance business is completely governed by the rules in the Schedule to the Income-tax Act, and that the Income-tax Officer has no power to do anything not contained in it, there being no general power to correct the errors in the accounts of an insurance business. The relevant observations are these: " It is clear that the 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 different manner. Insurance companies do not compute their profits in the ordinary way because premiums cover risks which run into future years and loss includes losses from previous years. The method prescribed ensures that by taking the average of several years a fair and reasonable conclusion is reached. Actuarial estimation plays an important part and surplus only results when there is an excess of the fund over the liability after all other charges are met." It is in the light of these decisions we have to consider the question as to whether the amount standing to the credit of " ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dated November 24, 1952, issued by the Controller of Insurance which states that the income-tax authorities allow up to 50% in the case of fire and miscellaneous insurance and up to 100% in the case of marine insurance to be deducted as a reserve for unexpired risks for the purposes of assessing income-tax even in respect of assessments under the Indian Income-tax Act, 1922. The learned counsel for the assessee contends that the statutory reserve for unexpired risks is not a contingent liability, but is in the nature of an accrued liability which has been quantified and evaluated at 50%, of the premium income in respect of fire and miscellaneous insurance and 100% in respect of marine insurance, that such an evaluated or discounted liability is a liability in praesenti and not in future and that, therefore, such a liability has to be excluded before the profit of the business is arrived at. It is stated that the liability is certain and not contingent, and that it is only the quantum of the liability that has to be determined later. The learned counsel points out the distinction between a contingent liability and a payment dependent upon a contingency and states that the insurers a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erest. An amount set aside out of profits and other surpluses, not designed to meet a liability, contingency, commitment or diminution in value of assets known to exist at the date of the balance-sheet is a reserve but an amount set aside out of profits and other surpluses to provide for any known liability of which the amount cannot be determined with substantial accuracy is a provision. " The question still remains as to whether the liability towards unexpired risks is a liability which is certain but its extent alone will have to be ascertained on a future date. Having regard to the nature of the insurance business, it cannot be said that in respect of the collective risk undertaken by the company the liability is contingent. The collective liability is sure to arise and it is only the extent of the liability that will vary in any year. Though the liability towards a particular policyholder may be contingent, the cumulative or collective liability of the insurer towards its policyholders in general is a liability certain and the extent of the liability will depend upon the contingencies that will take place in respect of each of the policyholders in a particular year. As a mat ..... X X X X Extracts X X X X X X X X Extracts X X X X
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