1999 (9) TMI 3 - SC - Income Tax

In the profit and loss account, the appellant-assessee had made a debit entry for an amount of Rs. 3,00,30,700 and transferred the amount to preference share capital redemption account - Tribunal was justified in law in holding that the sum of Rs. 3,00,30,700 being provision for redemption of preference shares was not liable to be added back in the total income of the assessee for the assessment year 1977-78

Issues Involved:
1. Whether the sum set apart for the redemption of preference shares is to be treated as expenditure and added back to the total income of the assessee under rule 5(a) of the First Schedule to the Income-tax Act.
2. Interpretation and applicability of rule 2(2)(a) of the General Insurance Business (Nationalisation) Rules, 1973.
3. The relationship between section 44 of the Income-tax Act and rule 5(a) of the First Schedule with respect to insurance business.

Detailed Analysis:

1. Treatment of Redemption of Preference Shares as Expenditure:
The core issue is whether the sum of Rs. 3,00,30,700 set aside for the redemption of preference shares should be treated as an expenditure and added back to the assessee's income under rule 5(a) of the First Schedule to the Income-tax Act, 1961. The Supreme Court clarified that for rule 5(a) to apply, the amount must be an "expenditure or allowance." The court referred to the definition of "expenditure" from previous cases, such as Indian Molasses Co. (Pvt.) Ltd. v. CIT and Pandyan Insurance Co. Ltd. v. CIT, which defined expenditure as something irretrievably gone or disbursed. The court concluded that the sum set apart for redemption of preference shares is not an expenditure in the ordinary commercial sense and thus cannot be added back under rule 5(a).

2. Interpretation of Rule 2(2)(a) of the GIB Rules:
Rule 2(2)(a) of the General Insurance Business (Nationalisation) Rules, 1973, allows the amount set apart for redemption of preference shares to be treated as an item of expenditure in the profit and loss account. However, the Supreme Court emphasized that the purpose of this rule is limited to accounting practices under the Insurance Act, 1938, and does not alter the fundamental nature of the amount as non-expenditure. The court highlighted that these rules are meant to provide an accounting method and cannot redefine the term "expenditure" for the purposes of the Income-tax Act.

3. Relationship Between Section 44 and Rule 5(a):
Section 44 of the Income-tax Act, which governs the computation of income from insurance business, has an overriding effect over other provisions of the Act. The court noted that section 44 mandates the computation of taxable income according to the First Schedule. The court also explained that the figures in the accounts of the assessee, as approved by the Controller of Insurance, are binding on the Income-tax Officer. This principle was supported by precedents such as Life Insurance Corporation of India v. CIT and Pandyan Insurance Company Ltd. v. CIT, which held that the Income-tax Officer cannot alter the figures approved by the Controller of Insurance.

Conclusion:
The Supreme Court held that the amount set apart for redemption of preference shares is not an expenditure in the ordinary commercial sense and cannot be added back under rule 5(a) of the First Schedule to the Income-tax Act. Rule 2(2)(a) of the GIB Rules, while allowing such amounts to be treated as expenditure for accounting purposes under the Insurance Act, does not alter their fundamental nature. The High Court's judgment was set aside, and the question referred by the Tribunal was answered in the affirmative, favoring the assessee and against the Revenue.

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