1998 (9) TMI 70 - HC - Income Tax

Court rules 'premium reserve deposit' not a fund under Surtax Act. Deferred payment, not owned by assessee.

Commissioner Of Income-Tax Versus Indian Reinsurance Corporation Ltd.

The Court held that the 'premium reserve deposit' account should not be treated as a fund under Rule 2(ii) of the Second Schedule to the Surtax Act as it ... Computation Of Capital Issues Involved:1. Whether the 'premium reserve deposit' account should be treated as a 'fund' within the meaning of Rule 2(ii) of the Second Schedule to the Companies (Profits) Surtax Act, 1964.2. Whether the premium reserve deposit account could be considered as moneys borrowed within the meaning of Rule 2 of the Second Schedule to the Companies (Profits) Surtax Act, 1964.Issue 1: Treatment of 'Premium Reserve Deposit' Account as a FundThe Tribunal had to determine if the 'premium reserve deposit' account maintained by the assessee should be treated as a fund under Rule 2(ii) of the Second Schedule to the Companies (Profits) Surtax Act, 1964. The relevant rule states that the capital of a company should be diminished by the cost of certain assets, excluding any borrowed moneys or funds not to be considered in computing the capital.The assessee, a public limited company engaged in reinsurance, retained a portion of the premium payable to a foreign reinsurer as a deposit to ensure proper performance of their agreement, paying interest on this deposit. The Income Tax Officer (ITO) and the Appellate Assistant Commissioner (AAC) both held that this reserve was towards contingent liability and could not be considered part of the reserve for capital computation. The AAC further noted that the amount was a deferred payment rather than a loan or borrowing.The Tribunal, however, accepted the assessee's alternate submission that the premium reserve deposit account should be treated as a fund within the meaning of Rule 2(ii). The Tribunal's reasoning was that the amount retained by the assessee was a fund as it was held as a security deposit.Upon review, the Court found that the premium reserve deposit account did not constitute a fund under Rule 2(ii). The Court emphasized that for an amount to be considered a fund, it must be owned by the assessee. Since the amount in the premium reserve deposit account was merely a deferred payment to the foreign reinsurer and not owned by the assessee, it could not be treated as a fund. The Court concluded that the Tribunal erred in its judgment and held that the premium reserve deposit account should not be treated as a fund within the meaning of Rule 2(ii) of the Second Schedule to the Surtax Act.Issue 2: Consideration of Premium Reserve Deposit Account as Moneys BorrowedThe second issue was whether the premium reserve deposit account could be considered as moneys borrowed within the meaning of Rule 2 of the Second Schedule to the Companies (Profits) Surtax Act, 1964. The Tribunal initially referred this question to the Court at the request of the assessee during the hearing of the Revenue's application.However, the Court noted the Supreme Court's decision in CIT vs. V. Damodaran, which held that a non-applicant has no right to ask for a reference of a question of law on the application made by the applicant. Based on this precedent, the Court returned the second question unanswered as it was wrongly referred.Conclusion:The Court answered the first question in the negative, against the assessee and in favor of the Revenue, concluding that the premium reserve deposit account should not be treated as a fund within the meaning of Rule 2(ii) of the Second Schedule to the Surtax Act. The second question was returned unanswered due to procedural impropriety. The reference was disposed of with no order as to costs.