Insurance business profits must follow disclosed annual accounts, with only limited statutory adjustments allowed for tax computation.

For insurance business assessments, section 44 read with Rule 5 of the First Schedule requires profits and gains to be computed from the balance disclosed in the annual accounts furnished under the Insurance Act, subject only to the limited statutory adjustments in clauses (a), (b) and (c). The tax authority cannot go behind that disclosed figure or independently recharacterise an item shown as profit. On that basis, the exchange gain reflected in the accounts had to be included in taxable profits, and the challenge to its treatment failed.

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Issues: Whether, in computing the profits and gains of an insurance business, the Income-tax Officer could go behind the annual accounts furnished to the Controller of Insurance and exclude the exchange gain of Rs. 21,26,932 shown therein as profit on exchange.

Analysis: Section 44 of the Income-tax Act, 1961, mandates that the profits and gains of insurance business be computed only in accordance with the First Schedule. Rule 5 of that Schedule requires the balance of profits disclosed by the annual accounts furnished under the Insurance Act, 1938, to be taken as the profits and gains, subject only to the specific adjustments permitted by clauses (a), (b) and (c). The exchange gain was expressly shown in the annual accounts as profit, and the Court held that there was no power under the Act to re-examine its true character or to go behind the figures so disclosed. The alternative contention that part of the appreciation in Burma and Ceylon should be excluded was also rejected, both because it was not properly raised before the Tribunal and because the same rule barred interference with the disclosed profit figure.

Conclusion: The exchange gain had to be treated as part of the taxable profits of the assessee, and the assessee's challenge failed.

Final Conclusion: In insurance business assessments governed by section 44 and Rule 5, the disclosed profit figure in the annual accounts is binding save for the limited statutory adjustments, and the tax authority cannot independently recharacterise an item shown as profit.

Ratio Decidendi: For insurance business, the statutory computation scheme in section 44 read with Rule 5 is exhaustive, and the Income-tax Officer must accept the profit balance disclosed in the annual accounts subject only to the specified adjustments.

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