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TMI Blog1960 (3) TMI 65X X X X Extracts X X X X X X X X Extracts X X X X ..... d for our opinion was comprehensive enough to cover the points arising in the case and, therefore, it was unnecessary to adopt the phraseology proposed by the Commissioner of Income-tax. The Commissioner of Income-tax has made a fresh application to us (Income-tax Case No. 8-D of 1957) in which the prayer is that the Income-tax Appellate Tribunal be directed to refer the question as originally drafted by him instead of the question actually referred. It will be presently seen that there is no difference in substance in the two questions and that the points raised before us can be disposed of by a consideration of the question actually referred. The circumstances in which the matter arose are as follows : The assessee is the Bharat Insurance Company Limited doing insurance business. The years of assessment are 1952-53, 1953-54 and 1954-55. The Income-tax Officer had to assess the gains of this company in accordance with the provisions of the Schedule as directed by section 10(7) of the Indian Income-tax Act. Section 10(7) is in the following terms : Notwithstanding anything to the contrary contained in sections 8, 9, 10, 12 or 18, the profits and gains of any business of ins ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . As the value of securities varies with the variation in market prices, the quantum of this reserve fund may increase or decrease. If the value falls below the amount required to meet the liabilities in respect of the outstanding policies, it must be made good by further transfers. If, on the other hand, the securities appreciate or for some other reason the amount exceeds the actual liabilities, a corresponding adjustment has to be made. The amounts which are transferred bona fide and legitimately to the reserve fund in order to maintain it at the requisite figure, are permissible deductions from the total gains for the purposes of income-tax. If larger amounts are transferred, no deduction would be permissible. According to the Income-tax Officer, what happened in this case was that a sum of ₹ 18,75,000 was required to be transferred to the reserve fund. The assessee transferred securities of which he showed the value at the figure of ₹ 18,75,000. In fact, the value of these securities was considerably more and, therefore, the excess could not be treated as a permissible deduction. Also a sum of ₹ 30,420 was part of a larger sum of ₹ 22,64,733 which repre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ge should not form the basis of calculating the value of these securities. The second item was preference shares. The Bharat Fire General shares were valued by the assessee at ₹ 60 but the Income-tax Officer valued them at ₹ 65. This figure was adopted by the Income-tax Officer on the basis of a letter which had been produced by the assessee himself and according to this letter actual transfers of the shares of the Bharat Fire General Insurance Company had been effected at ₹ 65. The other preference shares were of Dalmia Dadri Cement. These were valued by the assessee at ₹ 60, whereas the Income-tax Officer, on the basis of some transactions during the relevant period, adopted the figure ₹ 70. He observed in his order that the Dalmia Dadri Cement shares gave a dividend of 6 per cent. free of income-tax and another Dalmia concern giving a dividend of 6 per cent. less tax had been assessed at cost price by the assessee, and since the Dalmia Dadri Cement gave a much better return, the price of their shares must be higher than the price of Dalmia Jain Aviation shares. The last item was ordinary shares. The Bank of Bihar fully paid-up shares were valued ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng policies is materially inconsistent with the valuation of the securities and other assets so as artificially to reduce the surplus, such adjustment shall be made to the allowance for depreciation of, or to the amount to be included in the surplus in respect of appreciation, of such securities and other assets, as shall increase the surplus for the purposes of these rules to a figure which is fair and just. We are here dealing with a case both of depreciation and appreciation. The depreciation is of the sum of ₹ 30,420 and the appreciation is alleged to be in respect of the securities of which details have been given above. What the above provision means is this. If there is a depreciation in the securities, such depreciation becomes a permissible deduction. If there is any appreciation, the resulting increase must be added to the surplus from which the taxable amount is to be calculated. It may, however, happen that owing to a set of circumstances the amount in the reserve fund and the liability, which it is intended to meet, show an appreciable disparity. The reserve fund may be greatly in excess of the liability in respect of the outstanding policies or it may fall c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt contemplated by the proviso. All that the Income-tax Officer did was to fix up the amount of permissible deduction at the figure permitted by rule 3(b). In calculating the quantum of the deduction he took as his basis the correct valuation of the securities. The Income-tax Officer was perfectly justified in holding that a certain asset had been under-valued. In fixing the correct value of this asset he was not making the sort of adjustment which is contemplated by the proviso to rule 3(b), because it is quite clear that rule 3(b) assumes that the securities and assets have been correctly valued. It is only the disparity between the correctly valued assets and the liability in respect of outstanding policies that requires previous consultation with the Controller of Insurance. That clearly is not the case in the matter before us. Mr. Hardy, who appeared on behalf of the Income-tax Department, relied upon certain observations made by Beaumont, C.J., in Western India Life Insurance Co. Ltd., In re [1938] 6 ITR 44 . In this case there was a reduction in the valuation of securities in the reserve fund in the years 1930 and 1931. To cover this depreciation, the company transferred sum ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... heir discretion think necessary to safeguard the future position of the company, or to meet future contingencies, but only such amounts as are necessary to meet depreciation or loss that has actually occurred or has actually been suffered..............it is not, therefore, open to the assessee company to write off amounts larger than those actually lost by depreciation of securities. It is true that under new rule 2, sub-rule (3), the Income-tax Officer after consultation with the Superintendent of Insurance has been given discretion to control to some extent amounts which can be regarded as fair provision for meeting contingencies and should be free from income-tax, but this does not, in my opinion, affect the answer to the question now before us. It is, therefore, clear that the proviso does not apply to a case where the Income-tax Officer has to see whether the securities have been correctly valued or not. He must satisfy himself without any reference to the Controller of Insurance that the securities which are being transferred to the reserve fund are no more than unnecessary to meet depreciation or loss that has actually occurred or has actually been suffered and to deter ..... X X X X Extracts X X X X X X X X Extracts X X X X
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