Unexpired risk reserves treated as a fund and included in surtax capital base under the Second Schedule.

Reserves for unexpired risks arising from marine, accident, miscellaneous and fire insurance policies were treated as a "fund" under rule 2(ii) of the Second Schedule to the Companies (Profits) Surtax Act, 1964, because they represented money available to meet unexpected claims. The Bombay High Court also noted that CBDT Circular No. 1-P (XV-5) directly governed the issue and was binding on the income-tax authorities. The reserves were therefore includible in the capital base for surtax computation, and the question was answered in favour of the assessee.

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Issues: Whether reserves for unexpired risks could be treated as a "fund" under rule 2(ii) of the Second Schedule to the Companies (Profits) Surtax Act, 1964 and included in the capital base for surtax computation.

Analysis: The assessee's departmental reserves represented reserves for unexpired risks arising from marine, accident and miscellaneous, and fire insurance policies. The Tribunal had held that such reserves were not a "reserve" or "surplus" but constituted a "fund" within the meaning of rule 2(ii), applying the ordinary meaning of the term as money available for meeting unexpected claims. The Court further noted that Circular No. 1-P (XV-5) issued by the Central Board of Direct Taxes directly governed the question and that the income-tax authorities were bound to act in accordance with it.

Conclusion: The reserves for unexpired risks were includible in the capital computation as a "fund" under rule 2(ii), and the question was answered in the affirmative, in favour of the assessee.

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