TMI Blog1981 (10) TMI 17X X X X Extracts X X X X X X X X Extracts X X X X ..... he ITO cannot tinker with the figure found in the assessee's annual accounts except to the extent allowed by cls. (a) to (c) of r. 5 of the First Schedule. The assessee in these cases is a general insurance company. It had considerable investments in joint stock company shares and the like. They were being held by the assessee over a period of time. Of those investments, some appreciated in value and some depreciated in value. In making up its annual accounts for the year ended December 31, 1965 (relevant to the assessment year 1966-67), the assessee displayed its investments in its balance-sheet. As on that date, some of the investments had registered a decline in value, and some had registered an appreciation in value since the first day of the account year. But in point of accounting, the assessee did not follow a uniform method in respect of these variations in value during the account year. On the one hand, as respects investments which had depreciated in value, the assessee wrote off the amount by which the investment had fallen in value. On the other hand, as respects investments which had appreciated in value, the assessee did not write up their value to accord with the p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... counts, copies of which are required under the Insurance Act, 1938 (IV of 1938), to be furnished to the Controller of Insurance, subject to the following adjustments :- . ...... (b) any amount either written off or reserved in the accounts to meet depreciation of or loss on the realisation of investments shall be allowed as a deduction, and any sums taken credit for in the accounts on account of appreciation of or gains on the realisation of investments shall be treated as part of the profits and gains : Provided that the Income-tax Officer is satisfied about the reasonableness of the amount written off or reserved in the accounts, as the case may be, to meet depreciation of or loss on the realisation of investments." Clause (b) of r. 5 lays down how the valuation of investments in the accounts of a general insurance business have got to be dealt with for purposes of assessment to income-tax. The enacting part of r. 5(b) consists of two distinct subjects (i) depreciation of, or loss in realisation of, investments; and (ii) appreciation of, or gains on the realisation of, investments. As to the first contingency, the rule says that any amount either written off or reserved in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nts, on the basis of what he considers to be a reasonable deduction. The proviso does not mention what the extent of reasonableness, is, but quite consistent with the concern of the rule, that has got to be determined in accordance with the exigencies of the business and other relevant considerations, if any. We are not concerned in these cases with the question whether the extent to which the ITO had cut down the loss in investments in his orders can be justified on the test of reasonableness. For the assessee's contention is more fundamental. It has always been that the action taken by the ITO in these cases does not really fall within the ambit of the proviso at all. It was urged before the Tribunal that the power of the ITO under the proviso if properly exercised only when he addresses his mind to the amount actually written off in the accounts. That amount, by definition, would only relate to a factual depreciation of such investments as had depreciated in value during the account year. The point urged before the Tribunal by the assessee was that the ITO has had no criticism to offer in his assessment orders as )respects the evaluation by the assessee of the extent to which in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nts, when such appreciation had not found its way or been truly reflected in its accounts. In our judgment, the fact that in certain other investments of the assessee there had been an appreciation in value, is not a consideration which is germane for testing the reasonableness of the depreciation in value of certain other investments, although in a global view of the entire investment schedule of the assessee it might be possible to set off the depreciation in one set of investment as against the appreciation in another set of investment. But r. 5(b) does not empower the ITO to take such a global view. The learned junior standing counsel for income-tax referred to a decision of the Calcutta High Court in Calcutta Insurance Ltd. v. CIT [1952] 21 ITR 404. That case had to do with the assessment of profit of a life insurance business, and with the special rules of computation enacted in the Schedule to the Indian I.T. Act, 1922, for ascertaining the assessable profits of life insurance business. A reference to the Schedule to the said I.T. Act as well as to the comparable provision of the First Schedule to the present I.T. Act, 1961, would readily reveal the difference in approach ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... made, clear by the wording of r. 6 of the Schedule to the Indian I.T. Act, 1922, which is in the following terms: " .....Profits and losses on the realisation of investments and depreciation and appreciation of the value of investments shall be dealt with as provided in rule 3 for the business of life insurance." The Calcutta decision, as we pointed out earlier, is a direct decision only as to the computation of profits of a life insurance business under r. 3(b) of the Schedule to the Indian I.T. Act, 1922. We would imagine that if a similar problem had arisen under the same Act in regard to the computation of a general insurance business, the result would have to be the same as in the decision rendered in that case, since r. 6 adopted, without change, the proviso to r. 3(b) of the Schedule to the Indian I.T. Act, 1922. In the case before the Calcutta High Court, the ITO had taken global view of the changes in the valuation of investments of a life insurance business during an inter-valuation period, and made his own assessment of the net result of the changes. Accepting this position, the learned judges observed as follows (p. 448 of 21 ITR): " In the present case, although ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng the addition representing' the appreciation in the value of shares/investments held by the assessee, made by the Income-tax Officer under the second part of rule 5(b) of the First Schedule to the Income-tax Act, 1961 ? 2. Whether the interpretation given by the Tribunal to rule 5(b) of the First Schedule to the Income-tax Act is valid in law ? We must return an affirmative answer in favour of the assessee for these two questions as well. In this very tax case, T.C. No. 1659 of 1977, there is an additional question which calls for our consideration and decision. That question is as follows: " Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in holding that the benefit under sections 85 and 85A should be granted with reference to the gross dividend income without deducting proportionate management expenses ? " It is, however, unnecessary for us to dilate on this matter since there is a direct decision of the Supreme Court in Cloth Traders (P.) Ltd. v. Addl. CIT [1979] 118 ITR 243, which covers the case. Following that precedent, the above question of law is answered in the assessee's favour and against the Revenue. Having regar ..... 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