Treatment of reserve fund for securities depreciation as expenditure remains valid despite later appreciation in securities.

Rule 30 of the Indian Income-tax Rules was construed as permitting a life assurance company to treat amounts bona fide carried to an investment reserve fund to meet actual depreciation in securities as expenditure incurred for earning business profits. The later appreciation of those securities in a subsequent year did not alter the character of the sums validly set aside in earlier years, and the rule did not require those amounts to be restored to revenue once the loss had been made good. The assessee was therefore entitled to claim the treatment, and the reference was answered in favour of the assessee.

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Issues: Whether amounts carried by a life assurance company to an investment reserve fund to meet depreciation in securities could be treated as expenditure under Rule 30 of the Indian Income-tax Rules, and whether a later appreciation in securities compelled reversal of that treatment.

Analysis: Rule 30 was construed as conferring a permission on the assessee, not merely an option on the taxing officer. Amounts written off or carried to a reserve fund for the sole purpose of meeting actual depreciation or loss on securities, if properly set aside in the relevant years, could be treated as expenditure incurred solely for earning the business profits. The later appreciation in the third year did not affect the character of the sums set aside in the earlier years, and nothing in the rule required those sums to be brought back into revenue once the earlier depreciation had been made good. The reference to the appreciation finding was therefore immaterial to the application of the rule.

Conclusion: The assessee was entitled to treat the sums so set aside as expenditure, and the question was answered in the negative, in favour of the assessee.

Ratio Decidendi: A rule using permissive language may confer a substantive option on the assessee to treat amounts bona fide set aside for actual depreciation as expenditure, and such treatment is not nullified by a subsequent appreciation in later years unless the rule expressly so provides.

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