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PETITIONER: GENERAL INSURANCE CORPORATION OF INDIA .

       Vs.

RESPONDENT: COMMISSIONER OF INCOME-TAX, BOMBAY

DATE OF JUDGMENT:       21/09/1999

BENCH: S.Rajendra R.C.Lahoti

JUDGMENT:

     R.C.  LAHOTI, J

     General  Insurance Corporation of India, the appellant - assessee is 100 % Central Government Undertaking formed as a  Government Company under The General Insurance Business ( Nationalisation)  Act,  1972  ( hereinafter G I B  Act,  for short ).  It carries on general insurance business in India. At  the  time of nationalisation, there were  107  companies carrying  on  the business of general insurance.  They  were all  merged together into four subsidiaries of the appellant Corporation viz.  National Insurance Co.  Limited, New India Assurance Co.  Limited, Oriental Insurance Co.  Limited, and United India Insurance Co.  Limited.  The Central Government contributed  to the capital of the appellant in the form  of preference  shares  and  equity shares for  the  purpose  of paying  compensation to the shareholders and the  management of  the merged companies.  The 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 31.12.1976.  It is not disputed that the income of the appellant assessee is to be computed under Rule 5 of 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 business of insurance.  It provides as under:-

     Insurance business

     44.    "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  [43 A] 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 business  of  insurance  other than life insurance,  we  are concerned  with Rule 5 of the First Schedule which reads  as under:

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     B- Other insurance business

     Computation  of  profits and gains of other  insurance business.

     5.  The profits and gains of any business of insurance other  than life insurance shall be taken to be the  balance of  the profits disclosed by the annual accounts, copies  of which  are  required  under the Insurance Act, 1938 (  4  of 1938),  to  be  furnished to the  Controller  of  Insurance, subject to the following adjustments:-

     (a)  subject to the other provisions of this rule, any expenditure  or allowance which is not admissible under  the provisions of sections 30 to [43 A] in computing the profits and gains of a business shall be added back;

     (b) xxx xxx xxx

     (c)  such  amount  carried  over   to  a  reserve  for unexpired risks as may be prescribed in this behalf shall be allowed as a deduction.

     [  Note:- Sec.  44 and Rule 5 (a) of First Schedule as reproduced  hereinabove  are as they stood at  the  relevant time.  Later by the Direct Tax Laws (Amendment) Act 1987 ‘43 B’  has  been  substituted in place of ‘43 A’  in  both  the provisions]

     The  problem  is  created  by Rule 2 (2)  (a)  of  the General  Insurance  Business  (Nationalisation)  Rules  1973 (hereinafter  G I B Rules, for short) framed by the  Central Government in exercise of the powers conferred by Section 39 of the G I B Act, the relevant part whereof reads as under:-

     "39.  (1) The Central Government may, by Notification, make rules to carry out the provisions of this Act.

     (2)  In  particular,  and  without  prejudice  to  the generality  of  the foregoing power, rules made  under  this Section may provide for :-

     (a) the manner in which the profits, if any, and other moneys received by the Corporation may be dealt with."

     xxx xxx xxx xxx

     Rule 2 (2) (a) referred to hereinabove reads as under:

     "2.   Profits  and  receipts of  the  Corporation  and acquiring companies how to be dealt with --

     .....  .....  ....

     (2)  (a)  In  arriving  at   the  net  profit  of  the Corporation,   the  amount  set   apart  for  redemption  of preference  shares to such extent as the Board of  Directors of  the Corporation may consider expedient shall be  treated as an item of expenditure in the Profit and Loss Account."

     In Profit and Loss Account, the appellant assessee had made  a  debit entry for an amount of  Rs.3,00,30,700/-  and

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transferred   the  amount  to   preference   share   capital redemption  account.  The Income-tax Officer added back  the amount  to the income of the assessee on the reasoning  that this amount was to be treated as revenue expenditure in view of  Rule 2 (2) (a) of G I B 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 26.9.1978 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 facts and in the circumstances of the case  the Tribunal was justified in law in holding that  the sum  of  Rs.3,00,30,700/- being provision for redemption  of preference  shares  was not liable to be added back  in  the total  income of the assessee for the assessment year  1977- 78".   The  High  Court  has answered the  question  in  the negative,  that is, in favour of the Revenue.  In doing  so, the  High  Court  has  purported to treat  the  question  as covered  by  two decisions of the Supreme Court in  Anarkali Sarabhai vs.  C.I.T (1997) 224 ITR 422, Associated Power Co. Ltd.   vs.   C.I.T.  ( 1996) 218 ITR 195, and a decision  of the  Bombay  High  Court  in  Colaba  Central   Co-operative Consumers’  Wholesale  and Retail Stores Ltd.   vs.   C.I.T. (1998) 229 ITR 209 Bom.

     The  aggrieved  assessee  has  filed  this  appeal  by special  leave granted under Article 136 of the Constitution of India.

     We  have heard Shri T.R.  Andhyarujina, learned senior advocate   for  the  assessee  -  appellant  and  Shri  T.L. Viswanatha  Iyer,  learned senior advocate for the  Revenue. Having  heard the learned counsel for the parties, we are of the opinion that the appeal deserves to be allowed.

     Section  44  of  the  Income-tax   Act  is  a  special provision  governing  computation of taxable  income  earned from  business  of insurance.  It opens with a  non-obstante clause  and  thus  has  an   overriding  effect  over  other provisions  contained in the Act.  It mandates the assessing authorities  to  compute the taxable income for business  of insurance  in  accordance with the provisions of  the  First Schedule.   A  plain  reading  of Rule  5(a)  of  the  First Schedule  makes  it  clear  that in  order  to  attract  the applicability  of  the  said  provision  the  amount  should firstly be an expenditure or allowance.  Secondly, it should be one not admissible under the provisions of Sections 30 to 43A.   If the amount is not an expenditure or allowance, the question  of  testing  its  eligibility  for  adjustment  by reference  to  Rule  5 (a) to the First Schedule  would  not

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arise at all.  A perusal of the order dated 26.9.1978 passed in  ITA No.2699/1977-78 by the ITAT in the case of this very assessee  and  relied on and followed by the Tribunal  while disposing  of the appeal for the assessment year in question (AY  1977-78)  shows three submissions having been  made  on behalf  of the assessee before the Tribunal:  firstly,  that the  amount  set  apart by the assessee  for  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 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 also the amount could not have been added back.

     The  term  ‘expenditure’ came up for consideration  of this  Court  in  Indian  Molasses Company  Pvt.   Ltd.   Vs. Commissioner of Income-tax 1959 (37) ITR 66.  It was held :-

     ""Spending"  in  the sense of "paying out or away"  of money   is   the    primary    meaning   of   "expenditure". "Expenditure"  is what is paid out or away and is  something which   is  gone  irretrievably.    Expenditure,  which   is deductible for income- tax purposes, is one which is towards a  liability actually existing at the time, but the  putting aside of money which may become expenditure on the happening of an event is not expenditure."

     In  Pandyan Insurance Co.Ltd.  Vs.  CIT Madras  (1965) 55 ITR 716 also this Court has held that "expenditure" meant "disbursement" and hence did not include depreciation.

     It is therefore clear that the sum of Rs.3,00,30,700/- set  apart as provision for redemption of preference  shares could  not have been treated as an expenditure.  It is  also not  an  expenditure or allowance of the nature  covered  by Sections  30  to  43A  of the  Income-tax  Act,  1961.   The question  of  determining its admissibility by reference  to Rule  5  (a) of First Schedule to the Income-tax  Act,  1961 does  not  arise  nor could it have been added back  by  the assessing  authority  by purporting to exercise power  under the  said  Rule.   Rule 2 (2) (a) of GIB  Rules  undoubtedly speaks  of the amount set apart for redemption of preference shares being treated as an item of expenditure in the profit and  loss  account.  However, the purpose and extent of  the provision  has  to be kept in view.  These rules  have  been framed  in exercise of the power conferred by clause (a)  of sub-section  (2) of Section 39 of the G I B Act.  The object of  these rules is entirely different.  These rules lay down the  manner  in which the profits, if any, and other  monies

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received  by the General Insurance Corporation may be  dealt with.   The  concept behind Rule 2 (2) (a) is to permit  the Corporation to enter the amount of reserve in the profit and loss  account  in the expenditure side which would not  have been permissible otherwise because the amount set apart in a reserve  cannot  be expenditure.  The rule puts a  stamp  of permissibility on something not permissible otherwise.  This rule  itself  is suggestive of the fact that the amount  set apart  in a reserve is not an expenditure in its  commercial sense.   The  extent  of the GIB Rules does  not  go  beyond providing  an  accounting  method.  These  Rules  cannot  be pressed into service for altering the basic character of the amount  which is not an expenditure.  Merely because Rule  2 (2)  (a)  of  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 intent and purposes so as  to fall within the meaning of the term ‘expenditure’  as employed  in  Rule 5(a) of 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  GIB Rules and Rule 5(a) of First Schedule to  Income-tax Act.   The object of Rule 2(2)(a) is to reduce the amount of profit  of Corporation by the amount set apart as reserve by artificially  treating  the amount of reserve as an item  in expenditure  column.   If the same amount was allowed to  be added  back to profits under Rule 5(a) of First Schedule  to 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 Income-tax Act opens and gives  it  an over-riding  effect only on the provisions of Income-tax Act would earn an overriding effect on the provisions of another enactment  also though the Parliament has not chosen to give Section  44 of the Income-tax Act such an effect.  It is  to be  noted  that Section 44 does not say  -  ‘notwithstanding anything to the contrary contained in the provisions of this Act or any other law for the time being in force’.

     Nor  does  the  Rule  2(2)(a) of  GIB  Rules  have  an overriding  effect on the provisions of Income-tax Act.  The two  provisions  contained  in   two  enactments  have  thus different   purposes  to  achieve.    Rule   of   harmonious construction  would  therefore  sustain   neither  what  the Income-tax  officer did nor the view of the law taken by the High Court.

     There  is another approach to the same issue.  Section 44  of  the Income-tax Act read with the Rules contained  in the  First Schedule to the Act lays down an artificial  mode of  computing  the profits and gains of insurance  business. For  the purpose of income-tax, the figures in the  accounts of  the assessee drawn up in accordance with the  provisions of  the First Schedule to the Income-tax Act and  satisfying the  requirements  of  Insurance  Act  are  binding  on  the assessing  officer  under the Income-tax Act and he  has  no general  power  to correct the errors in the accounts of  an insurance business and undo the entries made therein.

     In  the  Life Insurance of India Vs.  CIT - 1964  (51) ITR  773  SC  their  Lordships were dealing  with  the  pari materia  provisions  contained in the Income-tax Act,  1922. The  Court  analysed  the  scheme  underlying  the  relevant provisions  of  the Insurance Act, 1938 and  the  Income-tax

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Act,  1922 and held that where the accounts of an  insurance company  engaged  in insurance business are required  to  be submitted  and approved by the Controller of Insurance,  the Income-tax Officer has no power to change the figures in the accounts  of the assessee.  A.K.  Sarkar,J.  recorded in his opinion :

     "The  assessment  of  the   profits  of  an  insurance business is completely governed by the rules in the Schedule and  there  is no power to do anything not contained in  it. The reason may be that the accounts of an insurance business are  fully  controlled by the Controller of Insurance  under the  provisions  of the Insurance Act.  They are checked  by him.   He  has power to see that various provisions  of  the Insurance  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 :

     "the  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.  Vs.  CIT, Madras 1965  (55) ITR  716 SC and CIT, West Bengal Vs.  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 Income-tax Officer, except that the   Income-tax  Officer  would  be  entitled  to   exclude expenditure  other  than expenditure permissible  under  the provisions of section 10 of the Act.  It is common ground in this  case that the reserves which were added to the balance of profits were not expenditure."

     The  cases  relied  on  by  the  High  Court  have  no applicability to the facts of the case and the issue arising for  decision herein.  In Anarkali Sarabhai’s case (supra) , the  question arising for decision was whether redemption by a  company  of  a preference share amounts to  sale  of  the shares by the shareholder to the company so as to be taxable for  capital  gains  as  amounting to  transfer  within  the meaning  of  Section  2 (47) of the  Income-tax  Act,  1961. Their Lordships held that such redemption amounted to a sale and  hence  was covered by the definition of  transfer.   In Associated  Power Co.  Ltd’s case (Supra) monies standing to the  credit  of  the contingencies reserve set apart  to  be utilised  by  the  electricity company to meet  expenses  or recoup loss of profits arising out of accidents, strikes, or other   circumstances  etc.   were   claimed   as   business expenditure  entitled  to deduction.  It was also  submitted that  the amount so set apart in the reserve had resulted in diversion of income by reason of an overriding title.  Their

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Lordships  held that the amount had reached the hands of the company  and inspite of having been set apart by creating  a reserve  was still available with the company and  therefore could neither be treated as an expenditure nor excluded from computing  the income of the assessee by application of  the doctrine  of diversion of income by reason of an  overriding title  or  obligation.   In  Colaba  Central  Co-  operative Consumers’  Wholesale and Retail Stores Ltd.’s case  (Supra) decided  by  a Division Bench of Bombay High Court also  the amount  in question was set apart by the society as  capital contribution  redemption  fund.   The   High  Court   having examined the nature of the amount and the accounts held that the amount so set apart was neither business expenditure nor liable to be excluded from computation of income by applying the doctrine of diversion of income by overriding title.  In our  opinion, none of the cases has any applicability to the case  at hand.  In none of the three cases, the question  of determining  applicability  of  Section  44  and  the  First Schedule of the Income-tax Act arose for consideration.

     To  sum up, the amount set apart by general  insurance corporation  for redemption of preference shares and treated as expenditure under Rule

     2(2)(a)     of     General      Insurance     Business (Nationalisation)  Rules, 1973 is so treated for the purpose of  Insurance Act, 1938.  The reserve is not an  expenditure in  ordinary  commercial  sense of the term.  It  cannot  be added  back  for computing profits and gains of business  by including  it  in  ‘expenditure  not  admissible  under  the provisions  of  Sections  30 to 43A of  Income-tax  Act’  by reference  to Rule 5(a) of the First Schedule to  Income-tax Act,  1961.  The question referred to the High Court  should have been answered in affirmative.

     The appeal is allowed.  The judgment of the High Court is set aside and in supersession thereof it is directed that the  question  referred  by the Tribunal to the  High  Court shall  stand answered in the affirmative, i.e., in favour of the assessee and against the Revenue.  No order as to costs.