V.S. Desai, J.
1. The questions which are referred to this court on this reference under section 66(1) are as follows :
'1. Whether, on the facts and circumstances of the case, the assessee company is entitled to claim as a revenue deduction amounts of Rs. 35,073, Rs. 34,536 and Rs. 34,153, being the amounts transferred to the building depreciation fund in the three respective years under reference under any of the rules in the Schedule to the Income-tax Act
2. Whether, on the facts and in the circumstances of the case, income from tax-free securities or income which has borne tax aggregating to Rs. 1,73,318 should be excluded from the surplus for the purpose of allowing half of that amount under rule 3(a) of the Rules in the Schedule to the Income-tax Act ?'
3. The facts relating to the first question may be shortly stated as follows :
The assessee company is a mutual concern doing the business of life insurance. The actuarial valuation of the company was made at the end of the years 1937, 1940, 1945 and 1948. The assessments under reference were for the assessment years 1946-47, 1947-48 and 1948-49 and it is common ground that the assessments under reference are to be made on the actuarial valuation as on December 31, 1945. In the consolidated revenue account for the five years, ending with 31st December, 1945, a total amount of Rs. 2,49,488 had been transferred to two funds, one of which was styled as the 'building depreciation fund' and the other as 'furniture, fittings, office equipment and library books depreciation fund'. Of the aggregate sum of Rs. 2,49,488, an amount of Rs. 1,86,007 belonged to the 'building depreciation fund', and the remaining amount of Rs. 63,481 was for the 'furniture, etc., depreciation fund'. The assessee claimed that it was entitled to an average depreciation of 1/5th of the total amount of Rs. 2,49,488 in each of the years under assessment. The claim, however, was not fully allowed by the Income-tax Officer. He allowed the depreciation of Rs. 63,481, which was claimed in respect of furniture etc., but, so far as the amount claimed as depreciation in respect of the buildings was concerned, he allowed only Rs. 2,218 in the first year, Rs. 2,665 in the second year and Rs. 3,048 in the third year, and thus, in respect of these three years, the amount claimed in respect of depreciation of building was disallowed to the extent of Rs. 35,073, Rs. 34,536 and Rs. 34,153 for the three respective years under reference. In the appeals, which were filed by the assessee to the Appellate Assistant Commissioner, the order of the Income-tax Officer, disallowing the amount as stated, was upheld, the Appellate Assistant Commissioner taking the view that the assessee had failed to establish that the amounts claimed by it as depreciation represented actual depreciation in the building which were the investment assets of the assessee. In the appeals before the Income-tax Appellate Tribunal, the learned President of the Tribunal, who was a Member of the Appellate Bench, took the view that under rule 3(b) of the Schedule, under which profits and gains of the life insurance business were to be computed, the Income-tax Officer had no right to add back to the surplus any amount which was either written off or reserved in the accounts or through the actuarial valuation balance-sheet to meet the depreciation of assets. If he considered that the amount written off in the consolidated revenue account was unreasonable, he had first to approach the Superintendent of Insurance and consult him before proceeding to disallow it either wholly or in part. Since he had not done that in the present case he was not competent to disallow the said amount which was shown in the accounts as reserved to meet the depreciation of assets. The other learned Member of the Bench did not agree with this view of the President. According to him, only the amount reserved to meet the actual depreciation could be allowed a deduction and, as there was no evidence to indicate that the building had depreciated in value, the amount transferred to the building depreciation fund could not be allowed as a deduction. Although, however, he held a different view, he did not disagree with the order passed by the President, directing the Income-tax Officer to delete the add-back of Rs. 2,49,488 and re-compute the surplus, since even in the preceding year's assessment, such amount had been allowed and the department had accepted that decision. At the instance of the department, the Tribunal referred to this court a question of law, which arose on this part of its decision, and which we have stated as question No. 1 at the beginning of the judgment.
4. Mr. Joshi, learned counsel for the revenue, had argued that the view taken by the learned President of the Tribunal is erroneous. According to Mr. Joshi, the Income-tax Officer is not obliged to consult the Superintendent of Insurance while he is computing the surplus for the purpose of rule 3 of the Schedule every time he wants to correct the valuation of the securities or considers the question of allowing or disallowing an item in the accounts for the purpose of adjusting the surplus. The proviso to rule 3, which requires the Income-tax Officer to consult the Superintendent Insurance, only relates to such matters of a complicated nature involving a specialised knowledge and complicated actuarial calculations in ascertaining the insurer's liability in respect of outstanding policies. The said proviso provides that where there is a discrepancy or inconsistency in the valuation of the securities and other assets and the rate of interest or other factor employed in determining the liability in respect of the outstanding polices resulting in an artificial reduction of the surplus, the Income-tax Officer is required to consult the Controller of Insurance before proceeding to make adjustments so as to bring the surplus to a figure which is proper and just. The valuations and correctness, which can be easily done by a layman and which do not require a specialised study or complicated actuarial calculations, can be made by the Income-tax Officer without consulting the Superintendent of Insurance. In our opinion, there is considerable force in the submission which Mr. Joshi has made and the view which he has urged is also supported by a decision of the Punjab High Court in Commissioner of Income-tax v. Bharat Insurance Co. Ltd. It was held in that case that 'in computing the profits of an insurance business, the Income-tax Officer is not obliged to consult the Controller of Insurance before he corrects the valuation of securities transferred by an insurer to the reserve fund. The Controller has to be consulted under the proviso to rule 3(b) of the Schedule to Income-tax Act only in regard to the computation of the insurer's liability in respect of outstanding polices, which is a technical and complicated matter, whose correctness the Controller also would be able to check.' Mr. Palkhivala does not agree with the view taken in this case and contends that, on a proper interpretation of the proviso to rule 3(b), the view expressed by the learned President of the Tribunal is the correct view. Since the point under consideration has been decided by a Division Bench of the Punjab High Court and not authority of any other High Court taking a contrary view has been pointed out to us, we do not think it necessary to pursue the point any further. Following, therefore, the decision of the Punjab High Court referred to above, we hold that the view taken by the learned President of the Tribunal was not correct view, and the Income-tax Officer was not precluded from considering whether the amount which was reserved to meet the depreciation of the building was the proper amount or not.
5. It was contended for the assessee that the assets referred to in the rule 3(b) would not cover the buildings and the item which was set apart in the accounts as for depreciation of the building was not capable of being interfered with by the Income-tax Officer under rule 3(b). The argument of Mr. Palkhivala on behalf of the assessee in this connection was as follows :
He stated that the scheme of the rules in the Schedule relating to the computation of profits and gains of the life insurance business was that the Income-tax Officer had to start with the annual average surplus as presented by the actuarial valuation report and the balance-sheet with reference to this surplus. There were undoubtedly adjustments and additions which the Income-tax Officer was entitled to make. But such additions and adjustments which he could make were only those whose were permitted under the Rules. If there was a rule which permitted alterations in the items of the accounts, such alterations could undoubtedly be made; but, if there was no rule which permitted such alterations, then the items as presented in the actuarial accounts could not be altered or adjusted by the Income-tax Officer. Now, under rule 3(b), according to Mr. Palkhivala, the amount which was referred to was the amount in respect of the depreciation of securities and other assets. The expression 'other assets' related to assets like securities which appreciated or depreciated in value and were assets of the kind of which both rose and fell in value and the gain and the loss on realisation of which were ordinarily taken into account in valuing the business or in computing its profits. The buildings, in the present case, in respect of the which depreciation was reserved, were not assets of this kind. It is true that the buildings may appreciate, but the appreciation is not taken into account in ordinary commercial accounting in valuing or computing the profits business. Mr. Palkhivala, in this connection, referred us to some observations in the decision of the Calcutta High Court in Calcutta Insurance Ltd. v. Commissioner of Income-tax. It was held in that case that 'other assets' contemplated by rule 3(b) were assets of the nature of investments which might appreciate or depreciate about which it was appropriate to speak of realisation and realisation of which might result in gain or loss.
6. We are not impressed by this submission of Mr. Palkhivala and, in our opinion, the buildings in the present case were investment assets of the assessee, which came within the expression 'other assets' used in rule 3(b) of the Schedule. The observations to which Mr. Palkhivala has invited our attention were made in the context of the question which was, whether the furniture and business equipment would come within the meaning of the expression 'other assets' used in rule 3(b). In the present case, the buildings in respect of which depreciation was claimed were undoubtedly investment assets of the assessee. Under section 27A of the Insurance Act, immoveable property situate in India is included in the list of approve investments in which an insurer can invest his funds. In the Form AA in the Schedule, which provides for classification of the summary of the assets in India, of the insurance company, item No. 15 is land and house property in India. The buildings, therefore, in the present case, were as much investment assets of the assessee as the securities or other investment assets could be. Even in the case of securities held by the insurance company, the insurance company was not a dealer in securities, and the securities held by it were only for the purpose of investing its funds and not for dealing with them as its stock-in-trade. The buildings in which the insurance company invests its money are also investments as the securities are and, under rule 3(b), the amount set apart to meet the depreciation of these investments assets is allowed as a deduction. In our opinion, therefore, the buildings, in the present case, come within the meaning of the expressions 'other assets' used in rule 3(b) and the Income-tax Officer, therefore, was entitled to consider whether the amount which was set apart for the purpose of meeting the depreciation in respect of these buildings was a proper amount to be allowed as deduction.
7. Mr. Joshi has argued that under rule 3(b) what can be properly allowed as depreciation is the actual deprecation and not the amount set apart to meet future or apprehended depreciation. It is not, says Mr. Joshi, that an item must be allowed as depreciation simply because it is shown in the accounts as reserved for that purpose. It is only when the item so stated in the accounts represent the actual depreciation suffered by the asset at the material time that the said item can be allowed. According to Mr. Joshi, therefore, in order to claim a given amount as depreciation in respect of any investment asset, it is for the assessee to satisfy the Income-tax Officer that his investment asset has actually depreciated by that amount. What is meant by depreciation is the difference between what if costs to the assessee at the time when he acquired the asset and the value which the asset can fetch at the material time when the depreciation is claimed. It is not merely because a certain length of time has elapsed since the assessee acquired the asset that the asset can be said to have depreciated within the meaning of rule 3(b). In the present case, says Mr. Joshi, the fact of the actual depreciation of the asset has not been established by the assessee and the only basis of the claim for depreciation by the assessee is that the buildings have gone down in their value by reason of age. Mr. Joshi says that such diminution in its value, if any, by reason of age may have been more than off-set by the rise in the building market and, at the value of the building might have even been in the excess of what it had cost when it was acquired. On the ground of the age of the building alone, therefore, the assessee cannot be said to have established either the fact of depreciation or the amount of depreciation claimed by it and, since the amount which it claimed has not thus been established, the Income-tax Officer was entitled to disallow it under rule 3(b), as not being the amount of actual depreciation. Mr. Palkhivala, on the other hand, has contended that it is erroneous, in the first place, to say that the depreciation which can be claimed as a deduction under rule 3(b) is only the actual depreciation. According to him, the rule is wide enough not only to include actual depreciation, but even the future or apprehended depreciation. Moreover, he says, on the language employed in rule 3(b), if the item is shown in the accounts as a reserve to meet the depreciation, the Income-tax Officer has to accept it as such with out raising any objection to it. His alternative submission is that, even if it is assumed that the depreciation and not apprehended or future depreciation, what has been claimed by the assessee in the present case is what can properly be regarded as actual depreciation. At any rate, says Mr. Palkhivala, if what has been claimed by the assessee as assessee is a proper and reasonable amount calculated according to the normal rules for determining the depreciation of a building as the asset and, if the said amount is to be disallowed to the assessee on the ground that it does not represent the actual depreciation which his asset has suffered, there must be material before the Income-tax Officer to take that view and, in the absence of any material before him to take that view, he would not be entitled to disallow the amount on that ground.
8. Now, it appears to us well settled on authority that the depreciation referred to in rule 3(b) is not future or apprehended depreciation and, therefore, the amount which is either written off or reserved in the accounts or through the actuarial report and the balance-sheet to meet the depreciation must be an amount which can be said to represent the value of the depreciation at the material time when the amount is so written off or reserved. Thus in Western India Life Insurance Co. Ltd., In re, which was a case under the old rule 30 of the Income-tax Rules, which, so far as the question to determined is concerned, was the same as the present rule 3(b), this court took the view that the sums placed in the special reserve fund to meet depreciation or loss must be such as are reserved for the depreciation or loss which has actually occurred. The same view was also taken by the Chief Court in Sind in Commissioner of Income-tax v. India Life Assurance Co. Ltd., where it was held that 'under rule 30 of the Income-tax Rules the depreciation of or loss on securities or other assets to meet which a reserve fund may be formed must be a depreciation or loss actually suffered and not depreciation or loss which is apprehended in the future.' In Calcutta Insurance Ltd. v. Commissioner of Income-tax, to which we have already referred, and which was a case under the present rule 3(b), the same view has been taken (see the observations at pages 445 and 446 of the report). In view of these decisions, it is futile for Mr. Palkhivala to urge before us that the language of rule 3(b) is wide enough to cover not only actual depreciation but even apprehended or future depreciation or that, once a sum is set apart or reserved as for the purpose of meeting such depreciation, the Income-tax Officer will have no jurisdiction or right to consider whether the said amount represents actual depreciation or not.
9. So far as the alternative submission of Mr. Palkhivala, however, is concerned, we are of the view that there is considerable force in it. It seems to us on a consideration of the scheme of the Rules in the Schedule that, although the Income-tax Officer is entitled to scrutinies the actuarial balance-sheet or the accounts arrived at on actuarial calculations, which are put before him by the assessee, ordinarily it appears, that he must proceed on the basis of the said accounts as representing the correct position and make such adjustments or variations as he is permitted to do under the Rules. It must be remembered that, under the Insurance Act, the accounts of the insurance company are required to be scrutinised and checked by certain authorities and they have also to conform to certain prescribed forms and procedure. The accounts of the assessee company had been prepared following all those rules and provisions and they had been accepted by the insurance authorities. The amount, therefore, which was set apart to meet the depreciation of the buildings in the accounts was considered to be the proper amount by the authorities concerned under the Insurance Act. It is no doubt true that the Income-tax Officer was not bound to take the amount was the correct amount and he was entitled, if he had reason to do so, to disallow a part or whole of it. But, he could do it only if he had reason to do so or, in other words, if he had any material before him showing that the said amount which was claimed as depreciation could not be regarded as the proper amount for depreciation in view of the facts and circumstances of the case. What the income-tax authorities appear to have done in the present case is that they have regarded that the burden was on the assessee to prove before the income-tax authorities that the amount, which it was claiming, was the amount of actual depreciation, and if it failed to discharge this burden by producing satisfactory material before the income-tax authorities, the income-tax authorities would be entitled to disallow the said item. In our opinion, this approach of the income-tax authorities was clearly a wrong approach. Under the scheme of the Rules, what the assessee had to do was to place before the income-tax authorities the actuarial accounts and the balance-sheet. Prime facie, the position as stated in the accounts was the position on which the assessee was entitled to rely. If the income-tax authorities had material before them not to accept the position as stated in the accounts in respect of any items, which they were entitled to interfere with under the rules, the income-tax authorities could do so. But, if there was no such material before them, they could not say that they would not accept the position as stated in the accounts and require the assessee still to prove affirmatively before them that what was stated in the accounts was the correct position. It may also be noted that the amount which was set apart to meet depreciation was calculated at the normal rate of depreciation of buildings as a capital asset. Thus, in the case of buildings, which belonged to the first class, depreciation was computed at the rate of 2 1/2 per cent. and, in the case of buildings which were rated second class, the depreciation was computed at the rate of 5 per cent. Mr. Joshi has urged that the calculation of depreciation by the assessee was not the correct calculation, because the asset was not a capital asset but an investment asset and, in the case of an investment asset, depreciation can only be determined by finding out the difference between the cost of the asset to the assessee and its market value at the time of its sale or at the time or computation of its depreciation or appreciation. We agree with Mr. Joshi that the buildings in the present case were not capital assets, but investment assets. Still, however, the buildings even as investment assets, were capable of diminishing in value by reason of age as much as capital assets would be. If the quantum of depreciation of buildings as capital assets can properly by determined at a particular rate, the said rate would not be unreasonable in determining that diminution in respect of the buildings even when the buildings are investment assets on the ground of age of the buildings. It is true that this diminution in the value of the buildings as an investment asset is quite likely to be made up and even more than made up by reason of a rise in the market for buildings, or because of some other circumstances. But there must be material to show that such other circumstances did exist at the time when the deduction was claimed, so that deduction claimed could not be said to be proper deduction. If, in the present case, the income-tax authorities had any material before them, from which it could have appeared to them, at least prima facie, that what was claimed as and by way of diminution in the value of the buildings because of their age was likely to be off-set by the other factors which existed tending it increase the market value of the buildings, it would have been possible for them not to accept the amount claimed by the assessee as the proper amount of depreciation. We do not find, however, that there was any such material before the income-tax authorities in the present case. The relevant period in the present case in the period between the years 1941 and 1945 because, it is on the basis of that period that the actuarial valuation was made on the 31st December, 1945. In our opinion, therefore, there was no material whatsoever before the income-tax authorities for not accepting the amount stated in the accounts as the amount kept apart to meet depreciation of the buildings and since, in our view, unless there was any such material before the income-tax authorities, they could not interfere with or alter the amounts as were stated in the accounts submitted before them, the disallowance of the amount of Rs. 1,86,007 by the income-tax authorities was not justified. Mr. Joshi has urged before us that, on the view which we are inclined to take, the matter must go back to the Income-tax Appellate Tribunal for the purpose of determining whether the amount which the assessee had claimed as being the depreciation of buildings represents the actual depreciation at the material time. Mr. Joshi has pointed out that the President of the Tribunal took the view that the amount could be allowed because it was stated in the accounts and the income-tax authorities ad no right to interfere with that item except on prior consultation with the Superintendent of Insurance. The other Member of the Tribunal Bench was inclined to take the view that no depreciation had occurred in the value of the buildings and, since the assessee had not been able to satisfy the income-tax authorities that the buildings concerned had depreciation in value, the amount could not be allowed. In spite of this view taken by him, he agreed with the order which the President proposed to make in the appeal. Mr. Joshi, therefore, says that it is desirable, in the circumstances of the case, that the matter should go back to the Tribunal for the determination of the question as to whether the amount of Rs. 1,86,007 was the amount of the actual depreciation of the buildings at the material time. In our opinion, it is not necessary to remand the case to the Tribunal. Our view is that since there was no material whatsoever before the Income-tax Officer to hold that the amount, which was stated in the accounts as a reserve to meet depreciation, did not represent the actual depreciation, the Income-tax Officer was not competent to disallow the said item. We have gone through the order passed by the Appellate Assistant Commissioner. It appears to be the view of the Appellate Assistant Commissioner that it was for the assessee to satisfy the Income-tax Officer that there was actual depreciation of the buildings and the assessee could not merely rely on the actuarial valuation or the balance-sheet for the purpose. We do not find from the order of the Appellate Assistant Commissioner that there were any other circumstances which existed on the record and which the Appellate Assistant Commissioner had taken into consideration in coming to the conclusion that there was no actual depreciation of the building. Since the matter appears to have been dealt with only the basis of the burden of proof being on the assessee to establish affirmatively that there was an actual depreciation of the building asset equivalent to the amount which it had set apart in the accounts to meet depreciation and since, in our opinion, that basis is not the correct basis, it must be held that the said amount has been wrongly disallowed. It appears to us that the position cannot be improved by remanding the case to the Tribunal and we do not think, therefore, that it is necessary to remand the case to the Tribunal as requested by Mr. Joshi.
10. In our opinion, therefore, the conclusion arrived at by the Tribunal that the entire amount of Rs. 2,49,488 must be allowed to the assessee as a deduction for depreciation is correct, although our reasons for arriving at that conclusion are different. In our opinion, therefore, our answer to the first question is that the assessee was entitled to claim revenue deduction of the three items specified in the said question under rule 3(b) of the Schedule to the Income-tax Act.
11. Coming now to the second question, the facts giving rise to the same are as follows :
The Tribunal arrived at the figure of Rs. 3,55,108 as the amount available for being expended on behalf of policy-holders. Under rule 3(a), half of this amount, according to the assessee, was allowable as a deduction. The contention of the department was that, since this amount of Rs. 3,55,108, was arrived at after taking into consideration the sum of Rs. 1,73,318, which was not liable to the payment of tax, the said amount must first be deducted from the amount of Rs. 3,55,108 before the sum which was allowable as a deduction under rule 3(a) could be determined. In other words, what was contended on behalf of the department was that half of the amount which was to be deducted under rule 3(a) was not half of Rs. 3,55,108, but half of Rs. 3,55,108 minus Rs. 1,73,318. In our opinion, the contention of the department is clearly untenable. Whether the amount of Rs. 1,73,318 was liable to the payment of tax or not, it was still a part of the amount which was ultimately to be available for the purpose of being expended on behalf of the policy-holders under rule 3(a). It is of this entire amount that the half potion is allowed as a deduction under rule 3(a). In our opinion, therefore, the amount of Rs. 1,73,318 was not required to be excluded from the surplus for the purpose of allowing half of that amount under rule 3(a). Our answer, therefore, to the second question is in the negative.
12. The assessee will get its costs from the department.
13. Questions answered accordingly.