TaxTMI 
TaxTMI 
1999 (9) TMI 3
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.... preference shares were to be redeemed in such time as the board of directors of the appellant-Corporation may deem fit. The controversy relates to the assessment year 1977-78, corresponding to the accounting year ending December 31, 1976. It is not disputed that the income of the appellant-assessee is to be computed under rule 5 of the First Schedule to the Income-tax Act, 1961. The Income-tax Act, 1961, makes a special provision for computing the taxable income of an assessee engaged in the business of insurance. It provides as under : "44. Insurance business.---Notwithstanding anything to the contrary contained in the provisions of this Act relating to the computation of income chargeable under the head 'Interest on securities', 'Income from house property', 'Capital gains' or 'Income from other sources', or in section 199 or in sections 28 to 43A, the profits and gains of any business of insurance, including any such business carried on by a mutual insurance company or by a co-operative society, shall be computed in accordance with the rules contained in the First Schedule." Inasmuch as the appellant-assessee carries on the business of insurance other than life insurance, we....
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....e of the assessee on the reasoning that this amount was to be treated as revenue expenditure in view of rule 2(2)(a) of the GIB Rules. The assessee appealed to the Appellate Assistant Commissioner of Income-tax (Appeals) who agreed with the assessee and deleted the addition in the income following his own order on a similar claim made for the assessment year 1976-77. The Department appealed to the Income-tax Appellate Tribunal. The Tribunal followed its own order dated September 26, 1978, in respect of this very assessee for the assessment year 1974-75 and dismissed the appeal. A perusal of the order of the Tribunal (annexure P-3) for the assessment year 1974-75 shows that in the opinion of the Tribunal the amount set apart as a reserve could not be treated as expenditure or allowance and assuming it to be an amount of expenditure, it was not an item of expenditure dealt with by the provisions of sections 30 to 43A of the Income-tax Act. Accordingly, the claim of the assessee was liable to be upheld. On a request made by the Revenue, the following question was referred by the Tribunal for the opinion of the High Court under section 256(1) of the Income-tax Act : "Whether, on the ....
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.... redemption of preference shares was only a reserve or a provision and not an expenditure and therefore its allowability for deduction cannot be considered under sections 30 to 43A ; secondly, assuming it was an expenditure, this expenditure was not of the category of expenditure contemplated in sections 30 to 43A and, therefore, unless there was a specific prohibition for such an allowance, the departmental authorities would not be justified in adding back the amount under that clause ; and thirdly, if rule 2(2)(a) of the General Insurance Business (Nationalisation) Rules, 1973, be read as providing that the amount so set apart for redemption of preference shares was an expenditure, the fiction should be taken to its logical conclusion so as to hold that the expenditure was allowable as deduction under sections 30 to 43A of the Income-tax Act. The Tribunal upheld the contention that the provision made by the assessee was neither an expenditure nor an allowance in the ordinary commercial sense and rule 5(a) of the First Schedule would have no application at all and further, as admittedly sections 30 to 43A do not deal with an amount set apart for redemption of preference shares so ....
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....viding an accounting method. These rules cannot be pressed into service for altering the basic character of the amount which is not an expenditure. Merel because rule 2(2)(a) of the GIB Rules permits the amount set apart for redemption of preference shares being debited to the profit and loss account, the amount so set apart does not become the amount of an expenditure for all intents and purposes so as to fall within the meaning of the term "expenditure" as employed in rule 5(a) of the First Schedule to the Income-tax Act, 1961. If the view taken by the High Court is accepted, there would be a conflict between the provisions of rule 2(2)(a) of the GIB Rules and rule 5(a) of the First Schedule to the Income-tax Act. The object of rule 2(2)(a) is to reduce the amount of profit of the Corporation by the amount set apart as reserve by artificially treating the amount of reserve as an item in the expenditure column. If the same amount was allowed to be added back to profits under rule 5(a) of the First Schedule to the Income-tax Act, then the object sought to be achieved by rule 2(2)(a) abovesaid is defeated. The non-obstante clause with which section 44 of the Income-tax Act opens an....
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....surance Act are complied with by an insurer so that the persons who have insured with it are not made to suffer by mismanagement. A tampering with the accounts of an insurer by an Income-tax Officer may seriously affect the working of insurance companies. But apart from this consideration, we feel no doubt that the language of section 10(7) and the Schedule to the Income-tax Act makes it perfectly certain that the Income-tax Officer could not make the adjustment that he did in these cases." M. Hidayatullah J., (as His Lordship then was), observed : " ... Income-tax Act contemplates that the assessment of insurance companies should be carried out not according to the ordinary principles applicable to business concerns as laid down in section 10, but in quite a different manner." The view so taken has been followed by this court in Pandyan Insurance Company Ltd. v. CIT [1965] 55 ITR 716 and CIT v. Calcutta Hospital and Nursing Home Benefits Association Ltd. [1965] 57 ITR 313 (SC). In the later case, their Lordships have also observed : "... the balance of profits as disclosed by the accounts submitted to the superintendent of insurance and accepted by him would be binding on the ....