Insurance business depreciation written off in accounts was allowable; tax could not substitute actual depreciation valuation.

In computing insurance business profits under the Schedule to the Indian Income-tax Act, 1922, an amount written off in the accounts for depreciation on a building and its appurtenances was allowable as a deduction. Rule 3(b) was treated as mandatory and the word "depreciation" was read in its ordinary sense, wide enough to include depreciation written off on buildings, including notional depreciation. The Income-tax Officer could not revalue the assets or substitute his own view of actual depreciation for the accounting entry, and rule 6 did not expand that power because "expenditure" was confined to disbursement. The allowance was therefore upheld in favour of the assessee.

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Issues: Whether, in computing the profits and gains of an insurance business, an amount written off in the accounts as depreciation on a building and its appurtenances was allowable as a deduction under the Schedule to the Indian Income-tax Act, 1922, and whether the Income-tax Officer could restrict the allowance by insisting on proof of actual depreciation.

Analysis: Under section 10(7), the profits of an insurance business have to be computed strictly in accordance with the Schedule. Rule 3(b) requires allowance of any amount written off in the accounts to meet depreciation of securities or other assets, and the language is mandatory. The Court held that the expression "depreciation" in rule 3(b) is to be understood in its ordinary sense and is wide enough to include depreciation written off on buildings, including what was described as notional depreciation. The Court further held that rule 3(b) does not permit the Income-tax Officer to revalue the assets or to substitute his own view of actual depreciation for the entries made in the accounts. Rule 6 also did not enlarge the Income-tax Officer's power to disallow such written-off depreciation, and the word "expenditure" in that rule was confined to disbursement.

Conclusion: The written-off depreciation was allowable as a deduction, and the question was answered in the affirmative in favour of the assessee.

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