Reserved Amounts for Policy-Holders: statutory restorations to a life insurance fund do not qualify for deduction as reserved benefits.

Question addressed whether an amount credited to the Life Insurance Fund to rectify a prior deficit qualifies as an "amount reserved for the policy-holders" entitling the insurer to a deduction under the Schedule. The Schedule permits deduction for amounts paid to, reserved for, or expended on behalf of policy-holders where the insurer elects to confer a benefit from a disposable surplus. Amounts required to be credited by statutory obligation to restore a statutory Life Insurance Fund are statutory restorations, not voluntary reserved benefits, and therefore do not qualify for the deduction; no deduction is allowable for the restoration sum.

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Issues: Whether the amount of Rs. 3,56,054 representing the deficit made good to the Life Insurance Fund is an "amount reserved for the policy-holders" within the meaning of rule 3(a) of the Schedule to the Income-tax Act, entitling the company to a deduction of one-half of that amount.

Analysis: The Schedule requires application of rule 2 and permits under rule 3(a) a deduction of one-half of amounts "paid to or reserved for or expended on behalf of policy-holders" where a benefit is conferred on policy-holders. The Life Insurance Fund is a statutory fund maintained to meet present and contingent liabilities of policy-holders and is subject to statutory obligations as to crediting and investment; amounts credited to make good a prior deficit are statutory restorations of the fund rather than voluntary dispositions. Rule 3(a) contemplates a disposable surplus which the insurer elects to apply for the benefit of policy-holders (such as by declaring bonuses or setting aside reserves for future bonuses). An amount that must be credited to the Life Insurance Fund by statutory obligation to make good earlier deficiencies does not confer any benefit by volition of the insurer and is not a reserved benefit in the sense contemplated by rule 3(a).

Conclusion: The sum of Rs. 3,56,054 credited to the Life Insurance Fund to make good the earlier deficit is not an "amount reserved for the policy-holders" under rule 3(a); no deduction under rule 3(a) is allowable in respect of that sum.

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