Reserve for unexpired risks not deductible as accruing liability under excess profits tax capital provisions.

The reserve for unexpired risks in pending insurance policies was not an accruing liability deductible under rule 2 of Schedule II to the Excess Profits Tax Act, 1940. The expression had to be read in context with borrowed money and debts, so only liabilities of a similar character that formed part of the real trading assets or capital employed could qualify. Although the reserve was treated as a liability for income-tax and accountancy purposes, it was only a contingent liability arising from unexpired policies and did not affect the actual capital position of the business. It was therefore not deductible.

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Issues: Whether the reserve for unexpired risks in pending insurance policies was deductible as a sum in respect of an accruing liability under rule 2 of Schedule II to the Excess Profits Tax Act, 1940.

Analysis: The relevant scheme of the Act treated capital employed as the basis for standard profits, and rule 2 permitted deduction only of borrowed money, debts, and sums referable to accruing liabilities. The Court held that this expression must be read in context with the other items in rule 2 and with the object of the capital provisions. A liability deductible under the rule must be of the same character as borrowed money and debts, in the sense that it forms part of the real trading assets or is factually utilised in the business. The reserve for unexpired risks, though treated as a liability for income-tax and accountancy purposes, was held not to affect the actual capital position of the business in the relevant chargeable accounting period. It was a contingent liability arising from unexpired policies and did not operate as a trading asset or as part of the capital employed.

Conclusion: The reserve for unexpired risks was not an accruing liability within rule 2 of Schedule II to the Excess Profits Tax Act, 1940, and was therefore not deductible.

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