1995 (4) TMI 10 - HC - Income Tax

Court rejects interest inclusion in income for insurance companies, cites specific tax rules

The High Court dismissed the reference with costs, concurring with the Tribunal that interest credited to the suspense account should not be added to the ... Financial Year, High Court, Supreme Court Issues Involved:1. Whether the Tribunal was correct in law in holding that interest credited to the suspense account cannot be added to the income of the assessee.2. Whether the Tribunal was right in holding that the decision of the Supreme Court in the case of State Bank of Travancore v. CIT [1986] 158 ITR 102 cannot be applied to the facts of this case.Issue-wise Detailed Analysis:1. Interest Credited to Suspense Account:The primary issue revolves around whether interest on loans, kept in a suspense account by the assessee (an insurance company), should be included in the taxable income for the assessment year 1983-84. The Assessing Officer had added Rs. 37.35 lakhs to the total income of the assessee, relying on the Supreme Court's decision in State Bank of Travancore v. CIT [1986] 158 ITR 102. However, the assessee argued that under Section 44 of the Income-tax Act, read with the First Schedule, such inclusion was arbitrary and illegal.The Tribunal, upon reviewing the provisions of Section 44 and the First Schedule, concluded that the decision in State Bank of Travancore was not applicable to insurance companies. Section 44, a non obstante provision, mandates that the income of insurance companies be computed according to the rules in the First Schedule. Rule 5 of the First Schedule specifies that the profits and gains of non-life insurance businesses should be based on the annual accounts submitted to the Controller of Insurance, subject to certain adjustments, which do not include interest income.The Tribunal's decision was supported by precedents such as L.I.C. of India v. CIT [1978] 115 ITR 45 (Bom) and CIT v. Calcutta Hospital and Nursing Home Benefits Association Ltd. [1965] 57 ITR 313 (SC), which emphasized that the computation of income for insurance companies is strictly governed by the rules in the Schedule, and the Assessing Officer cannot make adjustments not specified therein.2. Applicability of State Bank of Travancore Decision:The second issue pertains to the applicability of the Supreme Court's decision in State Bank of Travancore v. CIT [1986] 158 ITR 102. The Department argued that, based on the charging section 5 of the Income-tax Act, the interest on mortgage loans should be added to the assessee's income. The Supreme Court's majority decision in State Bank of Travancore supported the notion that income, once accrued and recorded in the accounts, cannot be negated by mere entry into a suspense account.However, the Tribunal, and subsequently the High Court, distinguished the present case from State Bank of Travancore. It was noted that Section 44 of the Income-tax Act, which applies specifically to insurance companies, overrides other provisions of the Act, including Section 5. The High Court reiterated that the income of insurance companies must be computed as per the First Schedule, and the Supreme Court's decision in State Bank of Travancore does not apply to the unique context of insurance companies.The High Court affirmed the Tribunal's decision, stating that the interest credited to the suspense account could not be added to the income of the assessee. The Court held that the controversy in question was not covered by the decision in State Bank of Travancore, thereby answering both questions in favor of the assessee and against the Department.Conclusion:The High Court dismissed the reference with costs, agreeing with the Tribunal that the interest credited to the suspense account should not be added to the income of the assessee and that the decision in State Bank of Travancore v. CIT [1986] 158 ITR 102 was not applicable to the facts of this case.