Unexpired risk reserve is a provision, not surplus profit, for valuing unquoted insurance shares under wealth-tax law.

In valuing unquoted shares of an insurance company under the Wealth-tax Act, the open-market value must be derived from the balance sheet with appropriate adjustments. A reserve for unexpired risks, required under insurance law and regulations, represents a commercially certain liability linked to future claims and is therefore a provision against a known liability, not an appropriation of surplus profits or a revenue reserve. That amount must be excluded from share valuation, although general reserves and surplus may be considered and the face value of shares alone is not the proper basis.

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Issues: Whether the amount standing to the credit of the reserve for unexpired risks, shown under "balance of funds and accounts" in the balance sheet of an insurance company, could be treated as surplus profits or revenue reserve for valuing unquoted shares under the Wealth-tax Act.

Analysis: The valuation of unquoted shares under section 7 of the Wealth-tax Act depends on the price the asset would fetch in the open market, and the balance sheet may be used with appropriate adjustments. The reserve for unexpired risks was held to be statutory under the Insurance Act and the General Insurance Council regulations. Applying the principles distinguishing a reserve from a provision, the Court held that the collective liability of an insurer for unexpired risks is commercially certain, though the exact quantum is future-dependent. Such an amount is therefore a provision against a known liability and not an appropriation of surplus profits. The Court rejected the Revenue's contention that the amount should be added as revenue reserve, while accepting that the face value of shares alone could not be the basis and that the general reserves and surplus could be taken into account.

Conclusion: The amount credited as reserve for unexpired risks could not be added as surplus profits or treated as a revenue reserve for share valuation, and it had to be excluded while determining the intrinsic value of the shares.

Ratio Decidendi: In valuing unquoted shares of an insurance company under the Wealth-tax Act, a statutory reserve for unexpired risks representing a commercially certain liability is a provision against known liability and not surplus profit or revenue reserve.

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