1981 (10) TMI 17 - HC - Income Tax

Summary

Issues Involved:
1. Computation of profits of a general insurance business under Rule 5 of the First Schedule to the Income Tax Act, 1961.
2. Treatment of depreciation and appreciation of investments in the annual accounts.
3. Interpretation of Rule 5(b) of the First Schedule.
4. Applicability of the proviso to Rule 5(b).
5. Granting benefit under sections 85 and 85A with reference to gross dividend income without deducting proportionate management expenses.

Issue-wise Detailed Analysis:

1. Computation of Profits of a General Insurance Business:
The primary issue is the computation of profits for a general insurance business as per the Income Tax Act, 1961. Rule 5 of the First Schedule provides the basis for this computation, taking the balance of profits as disclosed by the annual accounts furnished to the Controller of Insurance. The rule allows for specific adjustments as laid down in clauses (a), (b), and (c).

2. Treatment of Depreciation and Appreciation of Investments:
The assessee, a general insurance company, had investments that fluctuated in value. For the year ending December 31, 1965, the assessee wrote off Rs. 4,52,510 for depreciated investments but did not account for Rs. 2,22,083 in appreciated investments. The Income Tax Officer (ITO) set off the appreciation against the depreciation, allowing a net deduction of Rs. 2,30,427 instead of Rs. 4,52,510.

3. Interpretation of Rule 5(b) of the First Schedule:
Rule 5(b) deals with the valuation of investments for tax purposes, allowing deductions for depreciated investments and including appreciated investments in profits. The rule requires that these adjustments be reflected in the annual accounts submitted to the Controller of Insurance. The Tribunal held that the ITO's action of setting off appreciation against depreciation was not warranted under Rule 5(b).

4. Applicability of the Proviso to Rule 5(b):
The proviso to Rule 5(b) grants the ITO discretion to limit deductions for depreciation based on reasonableness. However, this discretion does not extend to appreciation of investments. The Tribunal found that the ITO had not questioned the reasonableness of the depreciation amount but had improperly set off appreciation against it. The Tribunal ruled that the entire depreciation amount of Rs. 4,52,510 should be allowed as a deduction.

5. Granting Benefit under Sections 85 and 85A:
The additional question in T.C. No. 1659 of 1977 concerned whether the benefit under sections 85 and 85A should be granted with reference to the gross dividend income without deducting proportionate management expenses. The Supreme Court's decision in Cloth Traders (P.) Ltd. v. Addl. CIT [1979] 118 ITR 243, which supports the assessee's position, was cited, leading to a favorable ruling for the assessee.

Conclusion:
The Tribunal's interpretation of Rule 5(b) was upheld, confirming that the ITO's action of setting off appreciation against depreciation was improper. The assessee's full deduction claim of Rs. 4,52,510 was validated. Additionally, the benefit under sections 85 and 85A should be granted with reference to the gross dividend income, as per the Supreme Court's precedent. The assessee was entitled to costs, with a counsel fee of Rs. 500.