2007 (5) TMI 193 - SC - Income Tax

As the question of bad and doubtful claims is concerned, again the same is not an expenditure. Section 36(1)(vii) of the Act whereupon the learned Additional Solicitor General placed strong reliance, cannot be said to have any application whatsoever in the instant case. It is not relevant for computing the profit under the 1961 Act. In any event, section 44 of the Act provides for a non obstante clause and, thus, would prevail over the former - revenue s appeal dismissed

Issues Involved:
1. Deduction of provision for taxation and reserve for bad and doubtful debts.
2. Interpretation of section 44 of the Income-tax Act, 1961, and rule 5 of the First Schedule.
3. Distinction between "provision" and "reserve".
4. Applicability of section 36(1)(vii) of the Income-tax Act, 1961.

Detailed Analysis:

1. Deduction of Provision for Taxation and Reserve for Bad and Doubtful Debts:
The respondent, a subsidiary of the General Insurance Corporation of India, filed its income-tax returns for the assessment years 1974-75, 1975-76, and 1978-79 based on annual accounts submitted to the Controller of Insurance. The Assessing Officer disallowed deductions for "reserve for bad and doubtful debts" and "entertainment allowance". The Commissioner (Appeals) overturned this decision for the assessment year 1974-75, allowing various deductions. The Income-tax Appellate Tribunal upheld the Commissioner's decision, leading to a legal question referred to the High Court, which ruled in favor of the respondent. The Supreme Court upheld the High Court's decision, confirming that provision for taxation and reserve for bad and doubtful debts should not be added to the balance of profits disclosed by the annual accounts.

2. Interpretation of Section 44 of the Income-tax Act, 1961, and Rule 5 of the First Schedule:
Section 44 of the 1961 Act, read with rule 5 of the First Schedule, governs the computation of income for businesses engaged in insurance. Section 44 contains a non obstante clause, indicating that insurance businesses are assessed differently from other businesses. Rule 5(a) specifies that the annual accounts furnished to the Controller of Insurance are taken as the balance of profits, subject to adjustments for non-admissible expenditures under sections 30 to 43A. The Supreme Court emphasized that the Income-tax Officer's jurisdiction is limited and cannot adjust accounts based on revaluation or discrepancies.

3. Distinction Between "Provision" and "Reserve":
The Supreme Court reiterated the distinction between "provision" and "reserve" as established in previous judgments, such as Vazir Sultan Tobacco Co. Ltd. v. CIT and State Bank of Patiala v. CIT. A provision is a charge against profits for anticipated liabilities, while a reserve is an appropriation of profits retained as part of the capital. The court noted that every provision need not be an expenditure but may represent a liability. The provision for income-tax, being a liability and not an expenditure, should not be added back to the profits.

4. Applicability of Section 36(1)(vii) of the Income-tax Act, 1961:
Section 36(1)(vii) outlines conditions for allowing claims for bad debts, including that the debt must be revenue in nature, established as bad in the previous year, and written off in the accounts. The Supreme Court found that section 36(1)(vii) does not apply to the case at hand, as section 44 of the 1961 Act, with its non obstante clause, prevails. The court concluded that the provision for bad and doubtful debts is not an expenditure relevant for computing profits under the 1961 Act.

Conclusion:
The Supreme Court dismissed the appeals, affirming that the provision for taxation and reserve for bad and doubtful debts should not be added to the balance of profits disclosed by the annual accounts of the insurance company. The court upheld the High Court's interpretation of section 44 and rule 5, emphasizing the limited jurisdiction of the Income-tax Officer in adjusting insurance company accounts. The distinction between "provision" and "reserve" was reiterated, and section 36(1)(vii) was deemed inapplicable. The appeals were dismissed with costs, and counsel's fee was assessed at Rs. 10,000 in each case.

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