1972 (5) TMI 7 - HC - Income Tax

Effect of rule 6 in the Schedule to the Income-tax Act, 1922 - Whether amount transferred from the dividend equalisation fund to revenue account could be taken into consideration in computing the profits of the relevant year and taxed - Whether amount shown in the revenue account by making a transfer entry from the general reserves could be taken into consideration in computing the profits of the relevant year and taxed

Summary

Issues:
Interpretation of Rule 6 in the Schedule to the Income-tax Act, 1922 regarding insurance business profits. Assessing the inclusion of specific amounts in the assessee's revenue account for taxation purposes.

Analysis:
The case involved the interpretation of Rule 6 in the Schedule to the Income-tax Act, 1922 concerning the computation of profits for insurance businesses. The assessee, a public limited company engaged in insurance, transferred sums from dividend equalization fund and general reserve to the revenue account. The Income-tax Officer included these amounts in the assessment, leading to appeals and subsequent judicial review.

The primary contention was whether the transferred amounts should be considered income for the relevant year. The assessee argued that mere transfer entries do not constitute profits unless received or accrued during the accounting year. Reference was made to a Supreme Court case involving estimated liability debits in an insurance company's accounts, emphasizing that the character of entries matters in determining taxable income.

The Court, however, held that under the Income-tax Act, profits for insurance businesses are computed based on Schedule rules, not general provisions. The Controller of Insurance's acceptance of audited accounts is crucial, preventing further investigation by the Income-tax Officer. Precedents like Life Insurance Corporation of India v. Commissioner of Income-tax reaffirmed the primacy of accepted accounts in assessing insurance business profits.

In conclusion, the Court ruled in favor of the revenue, affirming that the character of entries cannot be reevaluated post-Controller acceptance. The accepted accounts must serve as the assessment basis for insurers under the Income-tax Act's Schedule rules. Both questions regarding the transferred amounts were answered in the affirmative, supporting the revenue's position. The revenue was awarded costs, concluding the judgment.