Insurance income computation: foreign exchange devaluation loss in accounts cannot be added back as disallowable expenditure.

In computing the profits of a general insurance business under the Indian Income-tax Act, 1922, the tax authority was confined to the balance shown in the annual accounts filed with the Controller of Insurance, subject only to adjustments for expenditure not allowable under section 10. A loss arising from devaluation of foreign currency was treated as a business loss reflected in the accounts, not as "expenditure" laid out by calculation and intention. On that basis, the amount could not be added back merely because the authority regarded it as imaginary or unsupported, and the assessee's computation was upheld.

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Issues: Whether the Income-tax Officer was empowered, in computing the total income of a general insurance business, to add back an amount of Rs. 4,646 shown in the profit and loss account as loss on account of devaluation of foreign currency.

Analysis: Under section 10(7) of the Indian Income-tax Act, 1922 read with rule 6 of the Schedule, the profits of a non-life insurance business are to be computed on the basis of the balance disclosed by the annual accounts filed with the Controller of Insurance, subject only to adjustment for expenditure not allowable under section 10. The settled principle is that the Income-tax Officer cannot go behind those accounts or correct items shown therein unless the item sought to be excluded is truly expenditure. A loss arising from devaluation of currency is not money laid out by calculation and intention, and is therefore not expenditure. The amount in question was shown as a debit in the accounts and represented a business loss, not an expenditure item capable of being disallowed and added back.

Conclusion: The addition of Rs. 4,646 could not be sustained and the question was answered in the negative, in favour of the assessee.

Ratio Decidendi: In computing the profits of an insurance business under the Schedule to the Indian Income-tax Act, 1922, the tax authority may adjust only items that are properly expenditure disallowable under section 10, and cannot re-open or add back a loss shown in the insurer's accounts merely because it is considered imaginary or unsupported.

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