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TMI Blog1949 (2) TMI 10X X X X Extracts X X X X X X X X Extracts X X X X ..... the statutory percentage to the average capital employed in the business during the relevant chargeable accounting period. The only point for decision in the present reference is how the average amount of capital employed in the business during the chargeable accounting period is to be computed. Under Section 2(3) of the Excess Profits Tax Act "average amount of capital" means the average amount of capital employed in any business as computed in accordance with Schedule II. The relevant provisions of Rules 1 and 2 are in the following terms :- "Rule 1 .-(1) Subject to the provisions of this Schedule, the average amount of the capital employed in a business (so far as it does not consist of money) shall be taken to be- (a)so far as it consists of assets acquired by purchase on or after the commencement of the business, the price at which those as sets were acquired, subject to the deductions hereafter specified ; (b)so far as it consists of assets being debts due to the persons carrying on the business, the nominal amount of those debts, subject to the said deductions. ****** (2) The price or value of any assets other than a debt shall be subject to such d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ting period as on the credit side and the claims, if any, in respect of policies issued during the previous accounting period are shown on the debit side. The contention of the revenue authorities is that the amount shown as reserves for "unexpired risk" should be treated as a "debt" under Rule 2 of Schedule II of the Excess Profits Tax Act and be deemed to be "sums in respect of accruing liabilities" and be deducted from the capital for the purpose of determining the "average capital" employed and assessing the excess profits tax payable. The contention of the assessee, on the other hand, is that such reserves for "unexpired risks" are not debt in respect of accruing liability" but are sums which are to be treated in the same manner as capital for the period and the "average capital" is to be calculated taking such reserves as part of the capital. It may be stated at once that this difference as between the revenue authorities and the assessee depends on the divergent interpretations of Rule 2, Schedule II, of the Excess Profits Tax Act. The revenue authorities attempt to reduce the amount of average capital emplo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... will not be sufficient if the date when it is to take effect is specifically mentioned. Until a sum becomes payable it is difficult to bring that amount within the category of a debt, and there is no scope for an argument if an accruing liability is not brought within the category of a debt. We shall have to consider the significance of the term "accruing liability". Suffice it to say a person cannot be deemed as owing a debt until the same becomes payable : see Henry Dresser v. William Johns 141 ER 524. It has also been held by the Judicial Committee in Syud Tuffussol Hossein Khan v. Rughoonath Pershad [1871] 14 MIA 40, that the expectant claim under an inchoate award was not property within the meaning of section 205 of Act VIII of 1859 (now repealed) and was not saleable in execution of a decree. "An existing debt, though payable at a future day, may be attached, whilst a salary, wages, or money claim accruing due, may not……In the present case the attachment, as it has been observed, is not of the antecedent share in the undivided assets. It is of a claim under a future award, as to which it is wholly uncertain, until the award be made, to what the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... et apart to cover the risk, are actually required or not for specific unexpired risks are definitely known and ascertained more often within the next accounting period. The transfer of 40 per cent. of the premium income of a particular year to cover unexpired risks in the fire, marine and motor insurance business has been fixed on expert calculation as also by authoritative decisions by different Courts. This amount is nothing more or less than a temporary reserve to cover these unexpired risks. It is difficult to characterize the same as debt in respect of accruing liabilities. In our view, contingencies in respect of unexpired risks are not liabilities, far less accruing liabilities. The forms which are to be maintained under the Insurance Act, 1938, viz., Form 'A' for the balance sheet, Form 'B' for profit and loss account and Form 'F' for revenue account applicable to fire, insurance business, etc., make it abundantly clear that not only the balances of the different insurance funds but other contingent liabilities are to be separately accounted for in the same manner as reserves. In Form 'F' the penultimate item is described as "reserve fo ..... X X X X Extracts X X X X X X X X Extracts X X X X
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