TMI Blog1957 (4) TMI 1X X X X Extracts X X X X X X X X Extracts X X X X ..... for the chargeable accounting periods ending December 31, 1940, and December 31, 1941. To appreciate the contentions raised, it is necessary to state that the policies of insurance, with which these proceedings are concerned, are, unlike life insurance policies, issued in general for short periods or ad hoc in relation to a specified voyage or event. To take the most important of them, fire insurance policies, they are issued normally for one year, and the whole of the premium due thereon is received when the policies are actually issued. In any given year, while the premiums due on the policies would have been received in full, the risks covered by them would have run only in part and a part will be outstanding for the next year. The companies have to prepare annual statements of profit and loss for the purpose of ascertaining their profits and distributing their dividends. They have also to prepare revenue statements to be sent to the authorities under the provisions of the Insurance Act, 1938. The method adopted by the respondent in preparing the above statements has been that while the premiums received are all of them included in the assets of the year, a certain proportion th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... us. The relevant statutory provisions may now be noticed. Under section 4 of the Act, the charge is on the " amount by which the profits during any chargeable accounting period exceed the standard profits." " Standard profits " are defined in section 6, sub-section (1), and the respondent having exercised his option under the second proviso thereto they have to be calculated " by applying the statutory percentage to the average amount of capital employed in the business during such chargeable accounting period. " Schedule II enacts rules for the determination of the average capital employed. Under rule 1(c), the capital employed will include the value of all assets " when they became assets of the business ". Rule 2(1) enacts that any borrowed money and debts shall be deducted from out of the value of the assets. There is a further provision in rule 2(1), which is what is material for the purpose of the present appeal, and it runs as follows : " The debts to be deducted under this sub-rule shall include any such sums in respect of accruing liabilities as are allowable as a deduction in computing profits for the purposes of excess profits tax ............. and the said sums sh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ire that the liability should have actually accrued ; it is sufficient that it is accruing. Liability under a policy must be held to be accruing so long as the policy is in force, because it can ripen into actual liability at any time during the life of the policy on the happening of the specified event. When the assessee shows a certain amount as the value of that liability, it is a sum in respect of an accruing liability and must be deducted under rule 2. In support of this contention, the decision in Sun Insurance Office v. Clark was relied on. The facts of that case were as follows : A fire insurance company which had been following the practice of entering in its annual statements 40 per cent. of the total premium receipts as reserve for unexpired risks claimed a deduction therefor in the assessment of its annual profits. The validity of the claim having been disputed, the question as to its admissibility was referred to the decision of the Court. Bray, J., who heard the reference, held that the amounts reserved for unexpired risks should be deducted firstly on the ground that the premium which had been paid in respect of a risk for a whole year could not be said to have be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Yet until that time has expired the service for which the company has been paid has not been completely performed. If the accounts of the company are to be rendered before the date of expiry, then some division of the premium must be made, and the proportion to be appropriated to the service which is to be performed thereafter. I think the description ' unearned premium ' which has been used to describe this latter portion is a very appropriate and accurate description." It is also material to note that one of the authorities relied on for the Crown was the decision in Scottish Union and National Insurance Company v. Smiles wherein, discussing how the reserve for unexpired risk in fire policies is to be dealt with in computing the profits, the Lord President observed : " Seeing that fire insurance policies are contracts for one year only, the premiums received for the year of assessment, or on an average of three years, deducting losses by fire during the same period and ordinary expenses, may be fairly taken as profits and gains of the company without taking into account or making any allowance for the balance of annual risks unexpired at the end of the financial year of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ebt owing or accruing within Order XLV, rule 2, of the English Rules of Practice. In holding that it could not be, Lindley, L. J., observed : " I should say, apart from any authority, that a debt legal or equitable can be attached whether it be a debt owing or accruing ; but it must be a debt, and a debt is a sum of money which is now payable or will become payable in the future by reason of a present obligation, debitum in presenti, solvendum in futuro. An accruing debt, therefore, is a debt not yet actually payable, but a debt which is represented by an existing obligation." Israelson v. Dawson (Port of Manchester Insurance Co. Ltd., Garnishees), was again a decision on Order XLV, rule 2, the Court holding that the amount which became payable under a policy as the result of the accident specified therein having occurred was, nevertheless, not a debt which could be attached under this rule, before the compensation had been determined by the arbitrator in accordance with the conditions of the policy. The argument of the respondent based on the above decisions is that until the risk specified in the policy materialises and consequent thereon, the compensation payable thereu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e accountancy valuation was not necessarily the correct valuation for purposes of income-tax, and that the real point for decision was whether the claim was to be regarded as an essential charge against the trade receipts during the year. In distinguishing the decision in Sun Insurance Office v. Clark, Lord Oaksey made the following observations, which are pertinent to the present discussion : " Reliance was placed, during the argument, on Sun Insurance Office v. Clark, in which this House held that a percentage of the premium income of an insurance company might be deferred as a receipt to a future year because it was paid as consideration for future liability, but the principle of that decision is not, in my opinion, applicable to the present case. The premium income was only deferred and would suffer tax in a future year, whereas, in the present case, if the appellant is permitted to deduct compensation, which it has not paid and which it may never have to pay, that compensation will escape tax altogether. There is, in my opinion, a fundamental distinction between a contingent liability and a payment dependent on a contingency. When a debt is not paid at the time it is incurr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , the whole scheme of the Act is to tax profits above a certain level, and that level will move upwards or downwards as the capital employed may be more or less. It is this that constitutes the distinguishing feature of the Excess Profits Tax Act, and it is the determination of the capital actually employed in business that forms one of the most important and arduous tasks in the ascertainment of taxable profits under the Act. Rule 1 of Schedule II to the Act enumerates three categories of properties, which are to be included in the computation of capital. It is to be noted that this rule does not adopt any legalistic or conventional, notion of what is technically termed " capital "; but it proceeds on a factual basis to include whatever is utilised in business, whether it be tangible property or intangible property. The object of this provision is clearly to confer a benefit on the assessee by enabling him to retain at least in part the profits realised by him by investment of additional capital. Then there is rule 2, which provides for certain deductions being made out of capital. Omitting for the present " accruing liabilities ", which form the subject of the present controve ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ounts in law to a debt---for if it is capable of being utilised in business and is so utilised, it will fall under rule 2, even though it is not strictly speaking a debt ; nor, on the other hand, whether it is a liability which has been treated as one for the purpose of assessing income-tax. In assessing income from business under section 10 of the Income-tax Act, what is allowed as a deduction is any liability incurred solely and exclusively for the purpose of the business, and when that has not matured, its value is to be determined according to rules of accountancy and deducted. But when a deduction is claimed under rule 2, what has to be seen is whether the obligation is such that it could be regarded as an asset used in the business, such as could conceivably contribute to its profits. If, that is not established, then it cannot be included as capital under rule 1, and cannot be deducted therefrom under rule 2 as an accruing liability. It should not be overlooked that a deduction under section 10 of the Income-tax Act and that under rule 2 of Schedule II to the Act proceed on totally different lines and have different objects in view. Under section 10, the deduction is claimed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... siness or the earning of profits. It was something in the air, and could have had no effect, in the working of the concern, during the chargeable accounting period. It cannot therefore be held to be an " accruing liability " within rule 2 of Schedule II to the Act. A case very much in point is the decision in Northern Aluminium, Go. Ltd. v. Inland Revenue Commissioners. There, the question arose whether a conditional liability under a contract was an " accruing liability " within the corresponding provision in the English Excess Profits Tax Act. The facts were that on 16th December, 1939, all agreement was entered into between the Ministry of Aircraft Production and a company engaged in manufacturing aluminium products and supplying them to manufacturers of aircraft for the Government, wherein it was provided that the prices which the latter was then charging to its customers should be reduced for the period 1st July, 1939, to 30th June, 1940, and that the amount by which the prices paid to the company were in excess of the reduced prices should be paid by the company to the Ministry. The agreement further provided that negotiations should be started not later than 30th June, 19 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Ltd. This decision establishes that a conditional liability under a concluded contract---it is on that footing that the second point arose for decision---was not an accruing liability for the purpose of the Excess Profits Tax Act, as the same had no effect on the actual capital position of the company, and the fact that it was allowed for purposes of income-tax did not affect the position under the Excess Profits Tax Act. The learned Solicitor-General sought to distinguish this decision on the ground that it did not relate to an insurance business, whereas it was contended that Sun Insurance Office v. Clark, directly dealt with the question now under consideration whether reserves for unexpired risks in pending policies were liabilities which could be deducted. We do not see, how it makes any difference in the construction of rule 2 of Schedule II to the Act that the liability sought to be deducted arises under an insurance policy and not under some other contract. We are of opinion that the principles laid down in Northern Aluminium Co. Ltd. v. Inland Revenue Commissioners, and Inland Revenue Commissioners v. Northern, Aluminum Co. Ltd., are applicable to the decision of the p ..... X X X X Extracts X X X X X X X X Extracts X X X X
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