Insurance profits must follow Controller-accepted accounts; reserve transfers can be taxed in assessable income.

In computing an insurer's profits under the special assessment scheme for insurance business, the taxing authority must take the annual accounts accepted by the Controller of Insurance as the starting point and apply only the statutory adjustments permitted by the Schedule to the Income-tax Act, 1922. Once those accounts are accepted, the revenue cannot go behind the disclosed entries or recharacterise transfer amounts credited from the dividend equalisation fund and general reserves to the revenue account. The amounts were therefore included in the insurer's assessable profits, with the result favouring the Revenue.

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Issues: Whether, in the case of an insurer governed by rule 6 of the Schedule to the Income-tax Act, 1922, amounts transferred from the dividend equalisation fund and general reserves to the revenue account could be taken into consideration in computing the profits of the relevant year and taxed.

Analysis: The assessment of insurance business profits is controlled by the special scheme in the Schedule to the Income-tax Act, 1922, and the Income-tax Officer is bound to accept the annual accounts furnished to and accepted by the Controller of Insurance, subject only to the statutory adjustments permitted by the rule. The statutory framework under the Insurance Act, 1938, gives the Controller supervisory powers over the insurer's returns, and once those accounts are accepted, the revenue cannot re-open the character of the items shown in them or treat the entries as anything other than what the accepted accounts disclose. The mere fact that the amounts were brought into the revenue account by transfer entries did not alter their character for assessment purposes.

Conclusion: The transferred amounts were rightly included in computing the insurer's assessable profits, and the answer was in favour of the Revenue.

Ratio Decidendi: In assessing insurance business profits, the taxing authority must follow the accounts accepted by the Controller of Insurance and cannot go behind those accepted entries to recharacterise their nature.

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