1977 (11) TMI 20 - HC - Income Tax

Summary

Issues Involved:
1. Whether the sums representing premium deposits, unearned premium, provision for outstanding claims, provision for taxation, proposed dividends, and balance in the profit and loss account fall under rule 2(i) or rule 2(ii) of the Second Schedule to the Companies (Profits) Surtax Act, 1964.

Detailed Analysis:

1. Provision for Taxation:
- Issue: Whether the provision for taxation should be considered a reserve.
- Judgment: The provision for tax cannot be a reserve as the tax had already accrued, creating a specific liability. This is supported by the Supreme Court's decision, leading to the conclusion that the sum of Rs. 24,36,239 should not be excluded.

2. Estimated Liability for Outstanding Claims:
- Issue: Whether the estimated liability for outstanding claims should be considered a reserve.
- Judgment: The amounts related to outstanding claims under fire, marine, and miscellaneous insurance are liabilities and not reserves. Even if treated as reserves, they do not qualify as reserves under rule 1 of the Second Schedule.

3. Unearned Premium:
- Issue: Whether the unearned premium should be considered a reserve.
- Judgment: The unearned premium, calculated and shown on the liabilities side, is not a reserve. It is a receipt shown for balancing the account and cannot be treated as income for the year in question.

4. Premium Deposits:
- Issue: Whether premium deposits should be considered a reserve.
- Judgment: Premium deposits are amounts held in trust for future insurance policies and do not belong to the company. They are shown under liabilities and cannot be treated as funds from the company's profits. Consequently, they are not considered reserves under rule 2(ii) of the Second Schedule.

5. Proposed Dividends:
- Issue: Whether proposed dividends should be considered a reserve.
- Judgment: Proposed dividends, set apart by the board of directors, do not constitute an accrued liability until approved by the shareholders. Following the Supreme Court's ruling in Kesoram Industries and Cotton Mills Ltd. v. CWT, a proposal does not create an accrued liability. Therefore, the amount provided for proposed dividends is not a reserve but a provision for a contingent liability. However, even if considered a reserve, it would fall under rule 1 of the Second Schedule and thus cannot be excluded under rule 2(ii).

6. Balance in Profit and Loss Account:
- Issue: Whether the balance in the profit and loss account should be considered a reserve.
- Judgment: The judgment did not specifically address this issue, but by implication, the balance in the profit and loss account would follow the same reasoning as other provisions and reserves discussed.

Conclusion:
The court held that the sums representing premium deposits, unearned premium, provision for outstanding claims, provision for taxation, proposed dividends, and balance in the profit and loss account do not fall under rule 2(i) or rule 2(ii) of the Second Schedule to the Companies (Profits) Surtax Act, 1964. The questions for the three years were answered in the affirmative, favoring the revenue, with costs awarded to the revenue.