Retained premium under reinsurance is not a fund for surtax capital computation where the assessee does not own the amount.

A retained premium under a reinsurance arrangement is not a "fund" for capital computation under rule 2(ii) of the Second Schedule to the Companies (Profits) Surtax Act, 1964, because the decisive test is ownership of the amount. The assessee merely withheld part of the premium otherwise payable to the foreign reinsurer, with the balance remaining payable with interest under the contract. That arrangement was a deferred premium payment mechanism, not a lending or borrowing transaction. On that basis, the premium reserve deposit account could not be included as a fund, and the Revenue's view prevailed.

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Issues: Whether the premium reserve deposit retained under a reinsurance arrangement constituted a "fund" within rule 2(ii) of the Second Schedule to the Companies (Profits) Surtax Act, 1964, for inclusion in capital computation.

Analysis: The amount standing to the premium reserve deposit account was not money owned by the assessee. Under the treaty, the assessee merely retained part of the premium otherwise payable to the foreign reinsurer, with the balance adjustable and payable with interest. The arrangement showed a deferred payment of premium to secure performance of the contract, not a lending and borrowing transaction. Since the statutory expression "fund" had to be construed in the context of rule 2 and the relevant capital computation scheme, the decisive consideration was ownership of the amount. On that test, the retained premium could not be treated as a fund.

Conclusion: The Tribunal was wrong in treating the premium reserve deposit account as a fund under rule 2(ii); the issue is decided against the assessee and in favour of the Revenue.

Final Conclusion: The reference was answered only on the substantive question, and the premium reserve deposit was held not to qualify as a fund for surtax capital computation.

Ratio Decidendi: For the purpose of rule 2(ii) of the Second Schedule to the Companies (Profits) Surtax Act, 1964, an amount can be treated as a fund only if it is owned by the assessee and not merely a deferred premium payable under a contractual arrangement.

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