Insurance business deductions: bonus payments to renewing policyholders were allowable as business expenditure when the liability crystallised on renewal.

In computing taxable profits of an insurer other than a life insurer, the annual accounts under the Insurance Act, including the appropriation account, form the basis of assessment subject to Income-tax Act adjustments. A bonus payable to renewing policyholders under a mercantile bonus scheme was deductible because the liability crystallised on renewal, was properly reflected in the accounts, and was incurred wholly and exclusively for the business. It was not disallowed merely because it appeared in the appropriation account rather than the profit and loss account, and it was not treated as a mere appropriation of profits or a contingent liability.

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Issues: Whether bonus payments made to renewing policyholders under the assessee's bonus scheme were admissible deductions in computing the taxable income of the insurance business.

Analysis: For insurance business other than life insurance, the taxable profits are to be computed from the annual accounts furnished under the Insurance Act, subject to adjustments for expenditure allowable under the Income-tax Act. The annual accounts include not only the profit and loss account but also the appropriation account. Where an insurer, following the mercantile system, estimates a liability arising under its policy scheme and records it in the appropriation account, the amount is not disallowed merely because it is not shown in the profit and loss account. The bonus scheme was designed to encourage renewals and advance the business of the insurer, and the liability became actual when the year of risk expired and the policy was renewed. The amount paid was therefore not a mere appropriation of profits or a contingent liability.

Conclusion: The bonus payments were admissible deductions and were allowable as expenditure laid out wholly and exclusively for the purpose of the assessee's business.

Ratio Decidendi: In computing taxable profits of insurance business, expenditure properly reflected in the annual accounts, including an estimated liability that has crystallised on renewal and is incurred wholly and exclusively for business purposes, cannot be disallowed merely because it is entered in the appropriation account rather than the profit and loss account.

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