9911796707
TMI Blog1951 (11) TMI 27X X X X Extracts X X X X X X X X Extracts X X X X ..... to the further questions directed to be referred were all to be found in the original statement. 2. I have had occasion to comment in the past and find it necessary to comment again on the form in which the Tribunal is often found to draw up the statement of the case. It seems to think that the statement of the case means the judgment on the application for a reference. In the present ease, for example, the original reference was limited only to two questions of law and yet what was sent up ag the statement of the case was the order passed on the application for a reference, containing a discussion, question by question, of all the nine questions formulated. The facts relating to the seven questions, not referred, were entirely different and severable, except to a slight extent in one case, and clearly no reference to them was at all relevant, far less any discussion of the questions on the merits. Then again, the statement of the case ought certainly not to be a judgment on the application for a reference, recounting in detail the whole controversy on the application and the Tribunal's views thereon and covering not only the point as to whether the questions formulated aris ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pointed out to the Advocate for the company, he stated that the application might be treated as relating to the 1039-40 assessment only. Accordingly, a reference limited to that assessment was made. There was no direction in the subsequent order of the High Court to enlarge the scope of the reference so as to cover the three other assessments and in the circumstances of the case, no such direction could be given. The assessments for the years 1940-41, 1941-42 and 1942-43 are, therefore, not covered by the references. The only assessment they relate to is the assessment for the year 1939-40. 5. Since each one of the questions is concerned with some individual item in the computation of the company's profits, it is not possible to give anything like a general statement of the facts. All that may be stated here is that the assessee is an insurance company and its profits were computed under Rule 2(b) of the schedule to the Income-tax Act, i. e. on the basis of the surplus disclosed by the last actuarial valuation. That valuation was for the quinquennium ended on 31-12-1937 and it appears that the previous valuation had been for a period of two years, ended on 31-12-1932 and, b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the purposes of a business and under Section 10 (5) 'plant' in Section 10 (2) includes vehicles and books. It thus deals directly with the depreciation with which we are concerned here. The allowance is to be not whatever depreciation may be put down in the assessee's books, but only a sum equivalent to such percentage on the written down value of the articles concerned as may be prescribed and the prescribed percentages are to be found in Rule 8 of the Rules framed under the Act. While Rule 2 (b) of the Schedule, read with Section 10, is to the above effect, Rule 3 (b) provides that in computing the surplus for the purpose of Rule 2, any amount either written off or reserved in the accounts ot through the actuarial valuation balance-sheet to meet depreciation of or loss on the realisation of securities or other assets shall be allowed as a deduction and any sums taken credit for in the accounts or actuarial valuation balance sheet on account of appreciation of or gains on the realisation of the securities or other assets shall be included in the surplus. 10. There is a proviso to the Rule which states, to put it broadly, that if it appears bo the Income-tax Offic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , since Section 10 does not apply of its own force to profits of life insurance companies but applies only so far aa it is imported by Rule 2 (b), the question assumes that depreciation is 'expenditure' within the meaning of the Rule and that what was written off in the present case was not in excess of what was allowable under Section 10. The grounds of the assessee's claim under the two questions are thus mutually contradictory. 13. I put it to Mr. Mitra in course of the argument that if he pressed his view of question (i) of Reference No. 2, he could not at the same time press Question (ii) of Reference No. 4 as he had been doing and that the latter ought logically to be struck out. Ultimately, he stated that he would have no objection if that was done. On further consideration, however, I think that since the question has been referred under a di ection of this Court, it will be better to deal with it, as it is. 14. With regard to Question (i), it was further contended by Mr. Mitra that other assets in Rule 3 (b) would cover furniture, motor-cars and books. He also argued that the scheme of the Schedule was not that only such debit items in the valuation she ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... wable, whereas what was really added back was only ₹ 848, the rest being allowed. The question thus puts in issue the correctness of something which was not in fact done aud, therefore, it does not arise. In the above view, it ia nob necessary to examine the legal basis of the question, although it may be pointed out that if Section 10 applied, as the question assumes, the manner in which the Income-tax Officer dealt with the amount was obviously correct. 17. With regard to the same amount, Question (i) of Reference No. 2 presents a problem of decision between Section 10 (2)(vi) of the Act and Rule 3(b) of the Schedule, although instead of the specific sum of ₹ 7938, the subject-matter for consideration has been put in general terms as depreciation on furniture, motor-cars and books. By reason of the provisions of Section 10(7) of the Act, Section 10 (2) (vi) will not apply to such depreciation in the computation of the profits of a life insurance business, unless it has been made applicable by the Schedule or, to be more precise, by Rule 2 (b) which is the only Rule which mentions Section 10. But Rule 2(b) cannot be said to import Section 10 (2) (vi), unless the w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d does not, therefore, attract Section 10(2)(vi). The same, it will be remembered, was the contention of Mr. Meyer in connection with the other question and indeed he went even further and contended that the reference to Section 10 in Rule 2(b) must be taken as limited to Clauses (xii), (xiv) and (xv), Section 10 (2), where the word 'expenditure' had been used. I cannot accept the latter contention as correct. In the year 1939-40 to which the assessment relates, the present Clauses (xii) and (xiv) were not in existence, but besides Clauses (xv) which was then Clauses (xii), there were Clauses (i) to (v) and (vii) to (x) in the same form as at present, dealing with payments of specific kinds but not using the word 'expenditure'. I cannot agree that even those clauses are outside the contemplation of Rule 2 (b) and that all that the Rule covered in 1939-40 was expenditure allowable under the general provisions of what was then Clauses (xii) and that all that it covers now is expenditure allowable under Clauses (xii), (xiv) and (xv). Such a construction would be contrary to the plain language of the Rule. Still, however, the clauses I have mentioned do not carry Rule 2 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iation and depreciation, for the definite article prefixed to the words securities or other assets in the second part of the Rule clearly suggests that the assets there contemplated are the same assets as are contemplated by the first part. It was, however, contended that even furniture, motor-cars and books might appreciate in value. While that is not an impossibility, the real point is that appreciation of such equipments of a business concern are not taken into account in ordinary commercial accounting in valuing or computing the profits of a business. The Rule is concerned with adjustment of the actuarial surplus and clearly it has reference to what is to be normally found in the accounts from which the surplus has been determined. But that is not all. The Rule speaks not only of appreciation and depreciation of securities or other assets but also of gain or loss on their realisation. No doubt can be left by that language that the assets contemplated are assets of the nature of investments which may appreciate or depreciate and which are of such kind that they have to be or may be realised. It need hardly be pointed out that it is entirely inappropriate to think or speak of r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 0 (2) (vi), read with Section 10 (5), cannot be within Rule 3 (b). The reference to both accounts and the actuarial valuation which is to be found in the Rule is due to the fact (that ?) sometimes a company does not pass the investment gains or losses through the Revenue Account, but takes them from some other account or accounts directly to the Balance-sheet. 23. Jn the result, I am of opinion that in the case of life insurance companies, depreciation on furniture, motor-cars and books is not governed by either Section 10 (2) (vi), read with Rule 2 (b), or by Rule 3 (b). For practical purpose, it is sufficient for the assessee if Rule 2 (b) is excluded, for even if such depreciation does not come under Rule 3 (b), it has still to be allowed in full, since there is no other provision in the Schedule for disallowing it or reducing its amount. As I have already explained, subject to the adjustments directed by the Schedule, the actuarial surplus must stand. There is thus either a lacuna in the schedule or an intention that in the case of life insurance companies, depreciation on the assets mentioned in Section 10 (2) (vi), so far as it is debited in the accounts, must be allowed i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e, the credit given will be for the actual amount of the tax paid on the actual amount of the relevant receipts included in the assessable income. But where the profits of any previous year are determined on the basis of the actuarial surplus disclosed by a valuation which was a valuation for a period covering several years, such profits are, leaving aside the adjustments, only the annual average of that surplus, i.e., the average of the profits of an antecedent period, and not the actual profits of the year concerned. In such a case where the income assessed for the previous year is only a notional figure, based on the profits of an antecedent period, it will obviously be inappropriate to give credit under Section 18 (5), for the tax actually deducted in the previous year, for such deduction will have no relation to the income brought under assessment. But it was held by this Court in the cases of North British Mercantile Insurance Co., In re, 1937-5 I. T. R. 349 (cal,), and Phoenix Assurance Co., In re, 1937-51. T. R. 397 (cal.) under the old Rr. 25 and 35 that even in such a case effect had to be given to Section 18 (S), because the section had no reference to any particular m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... balance left. The amount is, therefore, first added to the assessable income under Section 16 (2) and then credit is given for it under Section 18 (5) against the tax payable. Such amount also is thus paid by deduction at source and the words or otherwise in Rule 4 refer to this amount which is the second sum mentioned in Section 18 (5). Bat there can be no question of the words or otherwise importing the tax paid directly on assessment. As the Tribunal has pointed out, a question of giving credit can arise only when before. the assessment for a particular year has been made, some tax payable on the income of that year has already been realised. Tax paid under an assessment is tax paid on demand as due under an assessment which has been completed and no credit can possibly be given for such payment in a future assessment. Indeed, as the Tribunal has also pointed out, if tbe assessee's contention were correct, all the tax realised from a life insurance company would ultimately have to be refunded and such companies might as well have been exempted from taxation altogether. 28. I may now proceed to Reference No. 4 of 1947. The first question in that reference is the tal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... resulted. In order to ascertain the real profits of the last intervaluation period, the previous surplus, if any, must, therefore, be deducted or the amount of the previous deficit, if any, added. This was pointed out by the Privy Council in the case of Commr. of Income-tax Bengal v. Himalaya Assurance Co., 1939-7 I. t. r. 402 (P.c.), where the old RULE 25 fell to be considered, although their Lordships did not give effect to the view because of a previous decision. But it has now been expressly provided for in Rule 2 (b) which directs the Income-tax officer to adjust the surplus disclosed by the last actuarial valuation so as to exclude from it any surplus or deficit included therein which was made in any earlier intervaluation period. Leaving aside the case of a deficit which does not arise in the present case, the task of the Income-tax Officer was to find out what amount, included in the surplus of the 1937 valuation, was surplus carried over from the 1932 valuation. Had there been no facts, other than those stated above, such amount would be ₹ 14,889, and the whole of the amount would have to be deducted from ₹ 1,27,994, which is what the assessee contends. But ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... luding from the surplus any expenditure other than expenditure which may under the provisions of Section 10 of this Act be allowed, but a case under that part which speaks of excluding any surplus included therein which was made in any earlier inter-valuation period, the amount of ₹ 1058 was not an expense of carrying on the business during the last valuation period, but a belated appropriation of a portion of the 1932 surplus in accordance with the recommendation made at the 1930 valuation when the amount had first emerged as a surplus. If the case comes under the second part of Rule 2 (b) that I have quoted, it is to be noticed that the Rule does not say that whatever surplus was disclosed by the next preceding valuation must be excluded, hat only so much of that surplus as may have been included in the last surplus which is being adjusted. How much has been included is a problem of arithmetic and accounting and so a question of fact and not a question of law, but, in any event, the question in the present case was correctly answered by the Income-tax Officer. 32. Question (ii) of this Reference has already been dealt with. Question (iii) is in the following terms : ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tself which is one of the documents included in the Appendix to the Statement of the Case, although it has not been printed on the ground that it was separately available in print. The Tribunal has pointed out that in the abstract of the report itself, in the part drawn up in accordance with Clauses 9, Schedule 4 to the Act, the following statement occurs ; The total profit made by the Company has been ₹ 1,97,994 allocated as follows : (a) ₹ 1,08,620 among policy-holders with immediate participation in profits (details omitted). (b) ₹ 12,799 among the shareholders. (c) ₹ 6,575 carried forward unappropriated. 36. It will be seen that what is allocated to the policy-holders is only a sum of ₹ 1,08,620 and that ₹ 6,575 is a separate sum which is the balance left after the appropriations and is carried forward unappropriated , In the forwarding letter, however, the actuary stated as follows : 'The valuation discloses a surplus of ₹ 1,27,994. This is allocated as follows : The total divisible surplus Rs. 1,27,994 Less 1/10th, being shareholders' share Rs. 12,799 policy holders' share Rs. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rd unappropriated. 40. It will be seen that Sub-clause (i) begins with the words allocated as follows and, among the heads of allocation, carried forward unappropria ted is a distinct item, distinct both from allocation among policy holders and allocation to reserve funds or to other accounts. It is itself a head of allocation. There is no head in the clause such as carried forward unappropriated out of the sum allocated under (a), (b), (c) or (d). The abstract in the present case is exactly in this prescribed form and contains entries under heads corresponding to heads (a), (c) and (e). The amount of ₹ 6575, shown as carried forward unappropriated is thus an amount not allocated otherwise and indeed the abstract specifically says under head 'a', that the amount allocated to policy-holders is only BS, 1,08,620. The entry, regarding the ₹ 6575 is clearly an entry under head (e) of Clauses 9 (1) of Schedule 4 to the Act. If, as Mr. Mitra contended, the amount was reserved for policy-holders, there was no reason why an entry to that effect should not have been made under head (d) of Clauses 9 (1) of Schedule 4. It is true that in the forwarding letter, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t the next valuation and will be liable to be distributed according to the recommendations then made and there will be nothing to compel the insurer to allocate it to policy-holders only. Accordingly, the assessee was not entitled to a deduction of one-half of the sum of ₹ 6,575 under Rule 3 (a). 41. The next question is Question (iv) and it is in the following terms ; Having regard to the provisions of the first proviso to Rule 3 (a), whether the sum of ₹ 13,831 or any part of it can be excluded while computing the surplus for the purpose of Rule 2 ? 42. The sum of ₹ 13,831, is the same that we came across in connection with Question (i). It is the amount of the 1932 surplus which was included in the larger surplus disclosed by the 1937 valuation, but is referred to here in connection with a different plea. 43. Here again, in order that the question may be understood it is necessary to refer first to the relevant provisions of law. They are Rule 3 (a) and the first proviso thereto, reading as follows : 3. In computing the surplus for the purpose of Rule 2 : (a) One-half of the amounts paid to or reserved for or expended on behalf of policy- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... purpose of the whole Rule 2, that is to say, for the purpose of determining the taxable profits and gains of the business. What it means is that the surplus ascertained under Rule 2 (b) is to be further adjusted under RULE 3, except in the case of Sub-rule (c), by reference to the manner in which the surplus has been utilised and the 'amounts' referred to in Rule 3 (a) are, therefore, amounts paid or reserved or expended out of the surplus. 46. What is important to notice is that Rule 3 (a) directs a deduction to be made from the surplus and, therefore, the larger the deduction, the smaller will be the taxable profits. Under Clauses (a), read without the proviso, the whole of the amounts allocated to the participating policy-holders out of the surplus, whether for immediate payment or for reservation, is to be taken into account and one-half thereof deducted. But then comes the proviso, limited in its operation to the first computation under the 1939 Act. The function of a proviso is to except a case which would otherwise fall within the general language of the main enactment and the proviso in the present case lays down that in making the deduction under Clause (a) at ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... was liable to be deducted at all. 48. According to Mr. Mitra, in determining the amount of which one-half was to be deducted under Rule 3 (a), the Income-tax, Officer would have, but for the proviso, to exclude the amount which had come out of the previous surplus, for, his task was to compute the surplus of the last valuation period. But the proviso enjoined that in the first computation under the new rules, no such exclusion was to be made. In other words, one-half of the whole amount paid to or spent or reserved for policy-holders was to be deducted. It was contended that the words no account shall be taken of, occurring in the proviso, meant ignored and the proviso meant that in the first computation, the fact that a part of the total amount paid to or reserved for policy-holders had come out of the surplus of a previous period was not to bo taken into consideration. In supp'ort of his construction of the words no account shall be taken, Mr. Mitra referred to Sections 15 (2-A) and 44E (3) (b) of the Act where also the same words had been used. 49. Mr. Mitra did not seem to realise that if his contention was correct, his client might save some tax in the 1939-40 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and it is in that way that the proviso restricts the operation of the Rule in the case of the first computation and makes the taxable profits larger. We are not concerned with the policy of the Legislature, but the reason for the proviso has been suggested to be that since no part of the amounts allocated to the policy-holders was formerly deductible and one-half was now being allowed, it was sought to moderate the sudden fall of revenue in the first year. The construction I have placed on the words no account shall be taken viz., shall not be taken into account or shall be left out of account, is perfectly consistent with the meaning of the same words in ₹ 15 (2-A) and 44E (3) (b) cited by Mr. Mitra. 50. For the reasons given above, I am of opinion that so much of the sum of ₹ 1,08,620, allocated to the policy-holders, as was paid out of the previous surplus of ₹ 13,831 was liable to be excluded by virtue of the proviso to Rule 3 (a), the computation being the first computation under the Rules. There can be no reason to suppose that the whole of the amount aflocated to the policy-holders was paid out of the surplus of the last valuation period, leaving the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... are assets within the meaning of Rule 3 (b) and whether setting off a portion of the profits against organisation expenses can be regarded as writing off the amount concerned to meet loss on the realisation of those assets. 55. Prima facie, it is difficult to see how expenses can be assets, particularly assets capable of realisation. Mr. Mitra, however, tried to introduce some new facts and stated that the expenses concerned were ceally advances granted to the organisers which they had failed to repay and which had become irrecoverable. According to him, the expenses were thus debts due to the company and loss had been suffered on their realisation. 56. I am afraid it is not possible in a reference to go beyond the Statement of the Case and admit further facts which alone supply the foundation for a particular contention. A stern reminder of this limitation is contained in the recent judgment of the Supreme Court in the case of Commr. of Income-tax, West Bengal v. Calcutta Agency Ltd., . Neither the Statement of the Case in the present case, nor the appellate order of the Tribunal contains any finding or material to show that the expenses concerned were anything other ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dealers in investments although they are really not so and the other assets contemplated by the Rule are assets of the nature of investments. I am clearly of opinion that organisation expenses cannot come within such assets. 58. I have already pointed out that the further facts sought to be introduced by Mr. Mitra are not admissible, but I may add a word with regard to them. On the basis that the expenses concerned were advances made to the organisers, the argument of Mr. Mitra appeared to proceed on principles applicable to bad debts. But it is well settled that bad debts in respect of which an allowance is available for purposes of income-tax are trading debts, i. e., debts constituted by outstanding business dues or, in the case of bankers and money-lenders, debts arising out of loans granted in the course of the money lending business. Financial accommodation granted to employees or sums over-drawn by an employee on his commission account are not debts which, on becoming irrecoverable, can be claimed as bad debts for purposes of income-tax. I am not forgetting that the allowance for bad debts I am speaking of is a revenue allowance, but it shows the principle applicable, b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... loss or depreciation. He referred to the dictionary meaning of the word 'reserve' which, according to the Oxford Dictionary, was to keep for future use, to keep back or hold over for a later time and contended that the Rule did not, in any way, limit the contingency contemplated by it to actual loss or depreciation. According to Mr. Mitra, the decision of the Bombay High Court in the case of the Commr. of Income-tax Bombay v. Western India Life Insuranee Co. Ltd., 1938-6 I. t. r. 44 (Bom.) in which a contrary view had been taken under the old Rule 30, was not correct. 62. In my opinion, the answer to the question is not to be found in the dictionary meaning of the word 'reserve' or any other word, but in what the Rule aims at and intends and what, taken as a whole, it says. As I have already explained, although in the case of a life insurance company, depreciation of or loss on the realisation of securities held by it is really decrease of capital or capital loss, Rule 3 (b), in effect, treats such a company as a dealer in investments and gives it a right to claim deduction on the ground of such depreciation or loss. But, there is no reason to suppose that the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a present depreciation and present notional loss, although the actual loss may be a future contingency. The loss must, however, be a loss occurring upon a computation of both appreciation and depreciation of assets of the class concerned, because if inspite of depreciation of some of the assets of the class, the net result is still a profit or at least no loss, there will be no necessity or justification for taking anything to the reserve out of the profits to provide against loss by depreciation under the head concerned. Again, although the present loss is only notional, commercial practice treats it as actual loss and income-tax allows it to be so treated, of course when the accounts are kept on the mercantile basis. The measure of the present notional. loss, as determined at the stock valuation, is the measure of the deduction allowed. Rule 3 (b) embodies the same principle and provides for a. deduction to the extent of any actual loss written off and to the extent of so much of any actual depreciation as has been sought to be met by taking an amount to a reserve fund. The language used in the Rule leaves no doubt that such is its intention. If Mr. Mitra's contention was co ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
