Application of profits, not business expenditure, keeps participating policy-holders' share within taxable life assurance profits.
Payments to participating policy-holders were treated as a division of profits after profits had arisen, not as expenditure incurred in earning them, so the amount remained part of the life assurance company's assessable profits. Rule 25 also did not permit deduction of that amount in computing average annual net profits, because its proviso required non-admissible income-tax deductions to be added back and the policy-holders' share was not expenditure laid out solely for earning profits. The assessable surplus therefore included the participating policy-holders' share of profits.
Issues: (i) whether the sum distributed among participating policy-holders formed part of the company's profits assessable to income tax or constituted expenditure incurred for earning those profits; (ii) whether Rule 25 permitted deduction of that sum in computing the average annual net profits of a life assurance business.
Issue (i): whether the sum distributed among participating policy-holders formed part of the company's profits assessable to income tax or constituted expenditure incurred for earning those profits.
Analysis: The amount paid to participating policy-holders was treated as a division of profits after profits had already come into existence. It was not expenditure incurred for the purpose of earning profits, because the liability to pay arose only if profits were earned. The earlier authorities on profits retained that distinction between sums spent in earning income and sums applied out of income after it was earned.
Conclusion: The sum was part of the assessable profits and not deductible as expenditure.
Issue (ii): whether Rule 25 permitted deduction of that sum in computing the average annual net profits of a life assurance business.
Analysis: Rule 25 required the average annual net profits disclosed by the last preceding valuation to be taken, and its proviso directed that deductions not admissible for income-tax purposes must be added back. The participating policy-holders' share, even if reflected in the valuation surplus, was not an admissible deduction because it was not expenditure laid out solely for earning profits.
Conclusion: Rule 25 did not allow the amount to be deducted before arriving at assessable profits.
Final Conclusion: The assessable surplus of the life assurance business included the participating policy-holders' share of profits, and the appeal failed.
Ratio Decidendi: A payment made out of profits and contingent on profits being earned is an application of profits, not an expenditure incurred in earning them, and therefore remains part of the taxable business profits.
TaxTMI 
AI Drafter ✕
TaxTMI 
