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TMI Blog2007 (5) TMI 193X X X X Extracts X X X X X X X X Extracts X X X X ..... 75-76 and 1978-79, it filed its income-tax returns. Such returns were filed relying on or on the basis of the annual accounts furnished by it before the Controller of Insurance. The Assessing Officer opined that the respondent was not entitled to any deduction in respect of the provisions of taxation by way of "reserve for bad and doubtful debts" and" entertainment allowance". The Commissioner (Appeals), however, in respect of the assessment year 1974-75 allowed various deductions and the order of the Assessing Officer disallowing certain expenditure was set aside by orders dated February 9, 1979, and September 9, 1980. Both the orders were questioned by the Revenue before the Income-tax Appellate Tribunal (for short, "the Tribunal"). By reason of an order dated November 30, 1981, the Tribunal held that the Assessing Officer was not correct in refusing to accede to the deductions under the aforementioned heads claimed by the assessee. The following questions of law were referred to the High Court under section 256 of the Income-tax Act, 1961 (for short, "the 1961 Act"). "1. Whether on the facts and in the circumstances of the case, and on a true interpretation of section 44 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... thereof and rule 5(a) of the First Schedule appended thereto, which read as under: "S. 44.-Notwithstanding anything to the contrary contained in the provisions of this Act relating to the computation of income chargeable under the head 'Interest on securities', 'Income from house property, 'Capital gains' or 'Income from other sources', or in section 199 or in sections 28 to 43A, the profits and gains of any business of insurance, including any such business carried on by a mutual insurance company or by a co-operative society, shall be computed in accordance with the rules contained in the First Schedule. Rule 5.-The profits and gains of any business of insurance other than life insurance shall be taken to be the balance of the profits disclosed by the annual accounts, copies of which are required under the Insurance Act, 1938 (4 of 1938), to be furnished to the Controller of Insurance, subject to the following adjustments: (a) subject to the other provisions of this rule, any expenditure or allowance which is not admissible under the provisions of sections 30 to 43A in computing the profits and gains of a business shall be added back." Section 44 contains a non obstante ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o 43A in computing the profits and gains of the business. If the said provision is found to be applicable, the amount may be added back. The rules lay down as to how the Income-tax Officer must proceed in the matter if he finds any inaccuracy in the said accounts. The question came up for consideration before this court in relation to business of life insurance in Life Insurance Corporation of India v. CIT [1964] 5 SCR 880. Therein, this court had the occasion to consider the relevant provisions of the 1938 Act as also the 1961 Act. In respect of business of insurance other than life insurance, the matter fell for consideration in Pandyan Insurance Co. Ltd. v. CIT [1965] 1 SCR 367, wherein it was categorically held that the rules do not empower the Income-tax Officer to adjust the accounts on the basis of revaluation made by him or to correct the discrepancy between what is entered into the accounts and what is fact. In CIT v. Calcutta Hospital and Nursing Home Benefits Association Ltd. [1965] 3 SCR 632 application of rule 6 to the Schedule appended to the Income-tax Act came up for consideration of this court, wherein the law was laid down in the following terms: "11. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... distinction we will briefly indicate how the two concepts are defined and dealt with by Companies Act, 1956." Our attention, in this behalf, has also been drawn by the learned Additional Solicitor General to State Bank of Patiala v. CIT [1996] 3 SCC 513, wherein Paripoornan J. speaking for a Division Bench noticed: "12. A fair reading of the above decisions would go to show that if the transfer of an amount is made ad hoc, when there is no known or anticipated liability, such fund will only be treated as 'reserve'. In this case, substantial amounts were set apart as reserves. No amount of bad debts was actually written off or adjusted against the amount claimed as reserves. No claim for any deduction by way of bad debts were made during the relevant assessment years. The assessee never appropriated any amount against any bad and doubtful debts. The amounts throughout remained in the account of the assessee by way of capital and the assessee treated the said amounts as 'reserves' and not as 'provisions' designed to meet liability, contingency, commitment or diminution in the value of assets known to exist at the relevant dates of balance-sheets. These facts have been found by th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the income-tax is charged is what is left after you have paid all the necessary expenses to earn that profit. Profit is a plain. English word; that is what is charged with income-tax. But if you confound what is the necessary expenditure to earn that profit with the income tax, which is a part of the profit itself, one can understand how you get into the confusion which has induced the learned counsel at such very considerable length to point out that this is not a charge upon the profits at all. The answer is that it is. The income tax is a charge upon the profits; the thing which is taxed is the profit that is made, and you must ascertain what is the profit that is made before you deduct the tax-you have no right to deduct the income tax before you ascertain what the profit is. I cannot understand how you can make the income tax part of the expenditure. . ." Yet again in Allen (H. M. Inspector of Taxes) v. Farquharson Brothers and Company [1932] 17 Tax Cases 59 (KB), it was held: "Now it is not necessary for me to discuss, and I do not need to discuss, in detail or, indeed, at all, although my attention was properly called to it by counsel, the exact nature of the income-ta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nditure. The question again came up for consideration recently in General Insurance Corporation of India v. CIT [1999] 8 SCC 60, wherein this court rejected the contention of the learned counsel for the assessee therein, in the fact situation obtaining in that case, opining: "19. There is another approach to the same issue. Section 44 of the Income-tax Act read with the rules contained in the First Schedule to the Act lays down an artificial mode of computing the profits and gains of insurance business. For the purpose of income-tax, the figures in the accounts of the assessee drawn up in accordance with the provisions of the First Schedule to the Income-tax Act and satisfying the requirements of the Insurance Act are binding on the Assessing Officer under the Income-tax Act and he has no general power to correct the errors in the accounts of an insurance business and undo the entries made therein." Section 40(a)(ii) of the 1961 Act, it will bear repetition to state, provides for a non obstante clause. It is of wide magnitude. Sections 32 to 38 of the 1961 Act refer to expenditure admissible under the Act. Section 40, however, seeks to make an exception thereto stating that so ..... X X X X Extracts X X X X X X X X Extracts X X X X
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