Unexpired risk reserves are not deductible as debt or accruing liability when computing average capital employed.

An insurance company's reserve for unexpired risks was analysed under Rule 2 of Schedule II of the Excess Profits Tax Act, 1940. The court explained that "debt" means a present liability, even if payable later, whereas a contingent claim is not a debt until the relevant contingency occurs. The unexpired risk reserve was treated as a temporary provision for possible future claims, not borrowed money or an existing debt, and it was also not an accruing liability because no enforceable liability existed during the contract's subsistence unless and until the contingency happened. The reserve was therefore not deductible in computing average capital employed.

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Issues: Whether reserves maintained by an insurance company for unexpired risks constitute "debt" or "accruing liabilities" deductible under Rule 2 of Schedule II of the Excess Profits Tax Act, 1940 for computing average capital employed.

Analysis: The reference turned on the meaning of "debt" and "accruing liabilities" in Rule 2 of Schedule II. The court held that a debt must be a present liability, even if payable in future, while a contingent claim that arises only on the happening of an uncertain event is not a debt until the contingency occurs. The unexpired risk reserve represented a temporary reserve against possible future claims under insurance contracts and did not amount to borrowed money or an existing debt. It was also not an accruing liability, because no liability existed at any moment during the subsistence of the contract unless and until the contingency happened. The reserve was therefore not deductible in computing average capital.

Conclusion: The question was answered in the negative. The reserve for unexpired risks could not be deducted under Rule 2 of Schedule II of the Excess Profits Tax Act, 1940.

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