Policy-holder reserve deduction denied where statutory credit to life fund was mandatory, not a voluntary surplus allocation.
A deduction for amounts reserved for policy-holders under rule 3(a) is available only when an insurer voluntarily applies a disposable surplus for their benefit. Where the amount must be credited to the life insurance fund under a statutory obligation to meet existing and contingent liabilities, it is not a voluntary reservation out of free surplus and does not qualify. The Bombay HC held that the sum required to make good an actuarial deficit was not an amount reserved for policy-holders, so no deduction was allowable and the Revenue's view on deductibility was upheld.
Issues: Whether the sum of Rs. 3,56,054, being the amount required to be credited to the life insurance fund to make good an actuarial deficit, could be treated as an amount reserved for policy-holders so as to attract the deduction under rule 3(a) of the Schedule to the Income-tax Act.
Analysis: The deduction under rule 3(a) is attracted only where the insurer, out of a disposable surplus, voluntarily pays, reserves, or expends amounts for the benefit of policy-holders. The amount in question was not part of a free surplus at the company's disposal. It had to be credited to the life insurance fund under the statutory obligation to meet existing and contingent liabilities of policy-holders, and therefore did not represent a benefit conferred on policy-holders by the company's volition.
Conclusion: The amount of Rs. 3,56,054 was not an amount reserved for policy-holders within rule 3(a), and no deduction was allowable in respect of it.
Final Conclusion: The reference was answered against the assessee and the Revenue's view on deductibility was upheld.
Ratio Decidendi: A deduction for amounts reserved for policy-holders is allowable only when the insurer, from a disposable surplus, voluntarily applies the amount for the policy-holders' benefit; a statutorily compelled credit to the life fund to make good an actuarial deficit does not qualify.
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AI Drafter ✕
TaxTMI 
