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PETITIONER: UNION CO-OPERATIVE INSURANCE SOCIETY LTD.,BOMBAY

       Vs.

RESPONDENT: COMMISSIONER OF INCOME-TAX, BOMBAY

DATE OF JUDGMENT: 23/03/1967

BENCH: SHAH, J.C. BENCH: SHAH, J.C. SIKRI, S.M. RAMASWAMI, V.

CITATION:  1968 AIR   78            1967 SCR  (3) 279

ACT: Indian  Income-tax Act 1922, s. 10 and Rule 6  of  Schedule- Indian  Insurance  Act,  1938, s.  15-Profits  of  insurance companies,  assessment of-Bonus paid by company  to  policy- holder  on  renewal of policies on which no claim  had  been made.--Estimated  amount  so payable debited by  company  to appropriation  account  and not to profit and  loss  account -Bonus   paid   during  previous  year   whether   allowable expenditure.

HEADNOTE: The appellant company carried on general insurance business. One of the bye-laws of the company allowed payment of  bonus where  a policy was ’renewed and there had been no claim  in the preceding year.  The company did not debit in its profit and  loss account the amount so paid in the  previous  years relevant  to  the assessment years 1957-58 and  1958-59;  it showed  an  amount estimated to be payable as bonus  in  its profit  appropriation account.  The Income-tax Officer  held that (i) the payment of bonus was made after the profits for the relevant year were determined and on that account it was only  a  case of appropriation of profits  after  they  were earned, (ii) in any event since the company had not  charged the  bonus  paid to revenue account and had  merely  made  a provision  in the appropriation account, it could not  claim relief after modifying the accounts in Form B to Schedule It of  the  Insurance Act 1938 submitted to the  Controller  of Insurance.  The High Court in a reference under s, 66 of the Income-tax   Act  held  against  the  company  The   company appealed. HELD  :  (i) Rule 6 of the Schedule to the  Income-,tax  Act enjoins the Income-tax Officer to take the balance disclosed by  the  annual  accounts  -is  the  profits  and  gains  of insurance  business other than life insurance : it does  not oblige him to accept the figure disclosed at the foot of the profit and loss account in the determination of the  quantum of profits and gains of the insurance business.  Section  15 of  the  Insurance Act requires the insurer  to  submit  not merely  the profit and loss account in Form B but  also  the balance sheet and the account in Form C and other  accounts, and  there  is no warrant for the view that the  balance  of

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profits  disclosed  must  be equated  with  the  balance  of profits disclosed in Form B. [283G-H] (ii) By  debiting the estimated bonus payment to the  profit appropriation account the company did not seek to alter  the character of the expenditure.  If it had been debited in the profit and loss account it could not with any show of reason be  regarded  as  not  incidental to  the  business  of  the assessee  company.   Merely because it was  debited  as  ’an estimated amount an intention not to treat it as expenditure for  the purpose of the business is not indicated.   It  was open to the assessee company to debit to its annual accounts a certain outgoing actual or estimated and if sanctioned  by the Controller to claim that amount or such other amount  as the  Income-tax Officer may under s. 10(2) allow as  permis- sible deduction. [284B-D] (iii)     The  bonus scheme was clearly intended to  advance the  business  of the insurer and the expenditure:  in  this regard was expenditure laid out  wholly and exclusively for the purpose of the  business of the company within ’the meaning of s. 10(2) (xv). [284F] (iv) The  liability of the company for payment of bonus  was not a contingent liability.  So long as the year of risk has not  expired the liability is contingent, but once the  year of  risk  is over, and the policy is renewed  the  liability becomes  actual and concrete.  The assessee company had  not claimed  the full amount for which an estimate was  made  in the  accounts submitted to the Controller of  Insurance  but only  those amounts which were entered in the balance  sheet as actually paid.  This expenditure could not be said to  be contingent. [284 H; 285 Al

JUDGMENT: CIVIL APPELLATE JURISDICTION : Civil Appeals No. 1052 & 1053 of 1966. Appeals from the judgment and order dated October 4, 5, 1963 of  the Bombay High Court in Income-tax Reference No. 50  of 1961. R.   J. Kolah, and Ravinder Narain, for the appellant. R.   M.  Hazarnavis,  S. K. Aiyar, S. P. Nayyar  for  R.  N. Sach- they, for the respondent. Shah, J. The Union Co-operative Insurance Society Ltd.-here- inafter  called  ’the assessee Company’-carries  on  general insurance  business.   Bye-law 52 of  the  assessee  Company provides  that  bonus shall be paid on those  policies  (not being  Reinsurance  Policies)  on  certain  conditions,  the following of which are relevant : "1. That the premium on that policy is more than Rs. 5 / -. 2. That there has been no claim on that policy. "3.  That the policy was insured during the year  for  which bonus is declared. 4.   That  the bonus amount will be paid only if the  policy is  renewed  on  expiration  and the  bonus  amount  may  be credited towards premium under the renewed policy." In proceedings for assessment of the income of the  assessee Company  for  the assessment years 1957-58 and  1958-59  the assessee  Company claimed allowance of Rs. 29,615/- and  Rs. 44,920/respectively, paid under the bonus scheme under  Bye- law  52,  in  the computation of its  taxable  income.   The Income-tax  Officer rejected the claim holding that  payment of  bonus was made after its profits for the relevant  years were  determined and on that account it was only a  case  of appropriation of profit after it was earned, and that in any

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event  since the assessee Company had not charged the  bonus paid to the revenue account and had merely made a 281 Provision  in the appropriation account, it could not  claim relief after modifying the accounts in Form B to Schedule 11 of  the Insurance Act, 1938, submitted to the Controller  of Insurance.  The, Appellate Assistant Commissioner upheld the order  of the Income tax Officer.  The Income-tax  Appellate Tribunal,  however,  held that the payments  were  not  mere appropriation of profits, and were admissible as permissible deductions  on  the  ground  of  business  expediency.   The following  question submitted for determination of the  High Court of Judicature at Bombay-               "Whether on the facts and in the circumstances               of  the case, the amounts of Rs. 29,615/-  and               Rs.  44,920/paid to certain policy-holders  in               the calendar years 1956 and 1957  respectively               by   the  assessee  Company  were   admissible               deductions  for the purpose of computation  of               its  taxable income for the  assessment  years               1957-58 and 1958-59 ?"               was answered in the negative. The  High  Court held that since the amounts paid  were  not entered  in the Profit & Loss account in Form B Schedule  II to  the  Insurance  Act and were also not  regarded  by  the assessee  Company  as expenditure charged on  profits,  they were not admissible as deductions in the computation of  the taxable  income  of the assessee Company under r. 6  of  the Schedule  to  the Income-tax Act.  With special  leave,  the assessee Company has appealed to this Court. , By  s. 10(7) of the Income-tax Act the profits and gains  of any  business of insurance and the tax payable  thereon  are computable,   notwithstanding  anything  to   the   contrary contained in ss. 8, 9, 10, 12 or 18, in accordance with  the rules  contained in the Schedule to the Act.  Rule 6 of  the Schedule  which  prescribes  the method  of  computation  of taxable  income  of  insurance  business  (other  than  life insurance) provides :               "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,  to  be furnished to the  Controller  of               Insurance  after adjusting such balance so  as               to exclude from it any expenditure other  than               expenditure which may under the provisions  of               section  10  of  this Act be  allowed  for  in               computing   the   profits  and  gains   of   a               business........... By  s.  15 of the Insurance Act 4 of 1938 every  insurer  is directed  to furnish to the Controller of  Insurance,  among others,  the audited accounts and statements referred to  in s.  1  1 of that Act.  By s. 1 1 (1) of  the  Insurance  Act every insurer is directed to prepare at the expiration of each calendar year with reference to  that year the following accounts and statements in respect of all insurance business transacted by him :               "(a)   in  accordance  with  the   regulations               contained  in Part I of the First Schedule,  a               balance-sheet in the form setforth in Part  11               of that Schedule;               (b)   in   accordance  with  the   regulations               contained in Part I of the Second Schedule,  a               profit and loss account in the forms  setforth

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             in Part II of that Schedule, except where  the               insurer carries on business of one class  only               of  the classes specified in clauses (a),  (b)               and (c) of subsection (1) of section 7 and  no               other business." Section 21 of the Insurance Act Authorises the Controller of Insurance, if it appears to him that any return furnished to him  under  the  provisions  of the  Act  is  inaccurate  or defective in any respect, to require the insurer to  correct or  supplement such return, or to call upon the  insurer  to submit for his examination any book of account, register  or other  document or to examine any officer of the insurer  on oath in relation to the return, or to decline to accept  any such return unless the inaccuracy has been corrected or  the deficiency  has been supplied.  By s. 22 the Controller  has the Power to order investigation or re-valuation to be  made by  an  actuary appointed by the insurer  for  the  purpose. Having  regard  to  the  wide  powers  conferred  upon   the Controller,  the  Income-tax  Act  has  in  respect  of  the business  of insurance, other than life insurance,  provided that  the  balance of the profits disclosed  by  the  annual accounts,  copies of which are required under the  Insurance Act,  1938, to be furnished to the Controller of  Insurance, shall be accepted by the Income-tax Officer, subject to  any adjustment  he  may  make  so as  to  exclude  from  it  any expenditure  other  than  expenditure which  may  under  the provisions  of s. 10 of the Incometax Act be allowed for  in computing the profits and gains of the business. It is common ground that the assessee Company had  submitted its  balance-sheet, the profit & loss account and  profit  & loss appropriation account.  The balance-sheets for the  two years 1956 and 1957 have not been printed in the record  and only  the  profit  & loss accounts and  the  profit  &  loss appropriation accounts have been printed.  In the statements of  profit  & loss account (Form B) for the years  1956  and 1957  disbursements by way of bonus to the renewing  policy- holders  under  Bye-law  52 are not included.   But  in  the profit & loss appropriation accounts (Form C) for the  years 1956  and 1957 entries for allocations for Rs. 50,0001-  and Rs.  70,000/- respectively are made under the head  "Policy- holders  Bonus  Fund".  In Form ’B’ in Schedule  11  of  the Insurance Act under  the  head  Other  EXpenditure  (to  be   specified)", outgoing other   than   taxes,  expenses  of  management,   loss   on realization   of   investments,   depreciation   and    loss transferred   from  Revenue  Account  are  required  to   be included.   In  Form C which is the form of  profit  &  loss appropriation  account  the  following  appropriations   are directed to be made :               "Balance being loss brought forward from  last               year.               Balance  being loss for the year brought  from               Profit & Loss Account (as in Form B).               Dividends  paid during the year on account  of               the current year.               Transfers to any particular Funds or Accounts,               and               Balance at the end of the year as shown in the               Balance-Sheet." The assessee Company in drawing up its profit & loss account instead of showing the actual disbursement in Form B against the head "Other Expenditure" estimated the amounts which  it would be liable to pay and debited the same against the head "Transfers  to any particular Funds or Accounts" in Form  C.

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The High Court held that r. 6 merely provides for adjustment of  the balance of expenses which are in the opinion of  the Income-tax  Officer not permissible allowances under s.  10, and  on  that hypothesis inferred that the  annual  accounts referred  to in r. 6 of the Schedule mean the profit &  loss account  submitted  in  Form B and not  the  profit  &  loss appropriation  account submitted in Form C. In our  judgment that view cannot be sustained.  In Form B expenditure  which is  already incurred or which is capable of  being  actually ascertained  at the close of the year may be included.   But the  insurer  who  has incurred  a  liability  may  allocate (subject  to adjustment in the balance-sheet)  an  estimated amount out of the profit & loss account and enter it in  the profit  &  loss appropriation account.   The  Controller  of Insurance  may, if he is not satisfied with the  correctness of the estimate, or the allocation refuse to accept it,  and may  call upon the insurer to rectify the accounts.  If  the Controller certifies the accounts, the expenditure cannot be disallowed  by the Incometax Officer, merely because  it  is not  entered  in  the profit & loss account,  and  is  found appropriated  in  the profit & loss  appropriation  account. Rule  6  of the Schedule to the Income-tax Act  enjoins  the Income-tax  Officer  to take the balance  disclosed  by  the annual  accounts  as  the profits  and  gains  of  insurance business other than life insurance : it does not oblige  him to  accept the figure disclosed at the foot of the profit  & loss account as determinative of the quantum of profits  and gains  of that insurance business.  Section 15 requires  the insurer  to submit not merely the profit & loss  account  in Form ’B’, but also the balance-sheet and the account in Form ’C’ and other accounts, and there is no warrant for the view 284 that the balance of profits disclosed by the annual  account must  be  equated with the balance of profits  disclosed  in Form ’B’. The other plea which appealed to the High Court that the as- sessee  Company had itself not treated the bonus paid as  an expenditure   related   to  the  business,   but   only   as disbursements made out of the profit after it had accrued to the  assessee  Company,  also  cannot  be  sustained.    The assessee  Company  maintains its accounts according  to  the mercantile  system.   It chose to  estimate  the  liability. arising  under  Bye-law  52  in  respect  of  the   business transacted  by  it,  and debited it in  the  profit  &  loss appropriation   account.    By  adopting  that   method   of accounting  the assessee Company did not seek to  alter  the character of the expenditure.  If it had been debited in the profit  & loss account it could not with any show of  reason be  regarded  as  not  incidental to  the  business  of  the assessee  Company.   Merely  because it was  debited  as  an estimated   amount,  an  intention  not  to  treat   it   as expenditure   for  the  purpose  of  the  business  is   not indicated.   In  our Judgment, it was open to  the  assessee Company  to debit in its annual accounts a certain  outgoing actual or estimated, and if sanctioned by the Controller  to claim  that  amount or such other amount as  the  Income-tax Officer may under s. 10(2) allow as a permissible deduction. The High Court did not express any view on the question whe- ther  the expenditure was a permissible allowance  under  s. 10(2)(xv) of the Income-tax Act.  It appears from the scheme for  payment of bonus to the policy-holders who renew  their policies  that  bonus would be admissible if  there  was  no claim on the policy and the renewal policy was issued during the  year  for which bonus was declared.   This  scheme  was evolved to induce the policy-holders to renew their policies

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with  the  assessee Company.  Even if no  immediate  benefit results therefrom to the trade of the insurer, the scheme is clearly intended to advance the business of the insurer, and payment  to renewing policy-holders or adjustment  of  bonus against  renewal premium made under that scheme  constitutes expenditure laid out wholly and exclusively for the  purpose of the business of the assessee Company. Counsel  for the Commissioner contended that  the  estimated liability  was not "crystallised liability" and was on  that account  inadmissible as an allowance in the computation  of taxable  income.   The liability, submitted counsel,  was  a mere   contingent  liability  which  could  not  amount   to expenditure  within  the  meaning of  s.  10(2)(xv),  nor  a permissible  outgoing  in the determination of  the  income, profits  or gains of the business.  This question was  appa- rently  not  raised before the Tribunal.  Assuming  that  it could be raised before the High Court and this Court, we are of  the  view  that  under the scheme  of  Bye-law  52,  the liability  is not a con. tingent liability.  So long as  the year of risk has not expired, the 285 liability is contingent; but once the year of risk is  over, and  the policy is renewed the liability becomes actual  and concrete.  The  assessee Company has not  claimed  the  full amount  for  which  an estimate was  made  in  the  accounts submitted  to  the Controller of Insurance, but  only  those amounts which were entered in the balance-sheet as  actually paid.  This expenditure cannot be said to be "contingent". It  was finally said that under s. 41 of the  Insurance  Act there is prohibition against the grant of any rebate and  it is  urged  that no insurer can in the course  of  assessment proceedings  claim  deduction  in  respect  of  the  amounts allowed  by  him  by  way rebate when  grant  of  rebate  is expressly  prohibited  by  statute.  Section  41(1)  of  the Insurance Act prohibits the allowance or offer of  allowance either directly or indirectly as an inducement to any person to take out or renew or continue an insurance in respect  of any  kind  of risk relating to lives or property  in  India. But  the question whether grant or bonus is a rebate  within the  meaning of s. 41 was never raised before the  Tribunal. This  Court  will  not  be justified  in  entering  upon  an investigation whether payment of bonus was, in the nature of rebate and on that account offended s. 41 of the.  Insurance Act. The answer recorded by the High Court will be discharged and an  answer  in the affirmative be recorded on  the  question submitted. The  appeals will be allowed.  The assessee Company will  be entitled to its costs in this Court and the High Court.  One hearing fee. G.C. allowed. 286