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TMI Blog1945 (3) TMI 22X X X X Extracts X X X X X X X X Extracts X X X X ..... 1,45,514, being one-fifth of the balance shown in the investment reserve fund ? The matter in dispute appears to lie within a very small compass and that is whether, when under rule 30 of the Income-tax Rules, reference is made to the depreciation of or loss on securities or other assets to meet which a reserve fund may be formed, the depreciation or loss must be a depreciation or loss actually suffered or may be a depreciation or loss which is apprehended in the future. Mr. Coltman for the assessee company contends that rule 30 of the Income-tax Rules is intended to cover provision made under the reserve fund to meet apprehended depreciation or loss, while the learned advocate for the Commissioner of Income-tax contends that the depr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... was in the first of these two years an appreciation of ₹ 5,30,563 in the market value of the securities and in the second year there was a depreciation of ₹ 2,65,409, leaving a net appreciation of ₹ 2,65,154 ; as in the year ending 31st May 1935 the company ignored these changes in the market value. They, however, charged certain small losses actually incurred on securities sold or redeemed to the investment reserve fund. This was a sum amounting to ₹ 11,522. At the end of the five year period then there was, as a result of this accounting in the investment reserve fund, a balance of ₹ 7,27,573. The Income-tax Officer scrutinizing the accounts for the assessment year 1938-39 observed this balance of ₹ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ness, and therefore to be excluded for the purpose of the assessee's liability to income-tax. Mr. Coltman argues that clearly the purpose of the reserve fund is to meet not only present events but also future contingencies. According to the provisions of rule 30 of the Income-tax Rules, he argues, it is contemplated that amounts carried to a reserve fund are to be exempt from income-tax for so long as they serve their useful purpose. If any sum should, for instance, be brought out of the reserve fund and credited and used for any other purpose in the accounts, then this sum becomes liable to income-tax; it would, he argues, be frustrating the purpose of the rule if it were permitted to carry to the reserve fund only such sums as are ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 30. Rule 30, it is conceded, must be read with rule 25. Rule 25 refers to the periodical ascertainment of profits and refers to the average annual net profits disclosed by the last preceding valuation. But the fact that the profits or gains of a life assurance company are to be estimated on the basis of a three year or five year period as one entity, does not, I think, affect the answer to the question, whether the reserve fund is to meet actual or apprehended depreciation or loss. The answer to this question depends, I think, on the words of rule 30 itself. It is true that it is desirable for the assurance company to have funds in reserve ; it is also desirable for other companies to have funds in reserve, but it does not follow that sums ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... written off. The amounts carried to the reserve fund must be amounts equivalent to the amounts which could be written off as depreciation of or loss on securities. 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. I think, therefore, that the answer to the question must be in the affirmative. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... clause (xii) means anything more than actual expenditure. When, therefore, rule 30 of the Income-tax Rules treats the reserve fund mentioned in that rule as expenditure, the word expenditure in rule 30 must have the same meaning as in clause (xii) of sub-section (2) of Section 10 of the Income-tax Act. Mr. Coltman has relied upon the schedule containing clause (b ) of rule 3 of the rules framed for the computation of the profits and gains of an insurance business. The original schedule was repealed by the Repealing Act, 1927 (XII of 1927), and this schedule was added by Section 84 of the Income-tax (Amendment) Act, 1939 (VII of 1939). Clause (b) of rule 3 in the new schedule added by Section 84 of the Income-tax (Amendment) Act of 1939 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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