John Beaumont, Kt., C.J.
1. This is a reference made by the Commissioner of Income-tax in which he raises the following question :-
The Assistant Commissioner having found as a fact that in the triennium under consideration, there was an appreciation in the value of the securities held by the assessee;, was his action correct in refusing to grant any deduction from income liable to tax on account of 'the sum of Rs. 1,74,919 claimed by the assessee under Rule 30 of the Income-taxi rules as an item of expenditure on account of amounts carried to the Investment Reserve Fund meant to provide for depreciation in the value of the said securities ?
2. The assessee is a company carrying on life assurance business. The year of assessment is the year 1933-34. Under Rule 2o of the Indian Income-tax rules framed under Section 59 (2)(a)(ii), it is provided :-
In the case of Life Assurance Companies incorporated in British India whose profits are periodically ascertained by actuarial valuation, the income, profits and gains of the Life Assurance Business shall be the average annual net profits disclosed by the last preceding valuation,... with certain statutory additions which may have to be made thereto.
3. Now, in the three years covered by the valuation in the case of the assessee company, which were the years 1930, 1931 and 1932, there was a substantial depreciation in the investments held by the company for the year 1930, and the company set aside to a special depreciation account a sum considerably less than the actual amount of depreciation. In 1931 there was a further and heavier depreciation and the directors again set aside to the depreciation reserve fund a further sum, again considerably less than the amount of the depreciation in that year. In the third year there was an appreciation and the Assistant Commissioner of Income-tax has found as a fact that the losses of the two years were wiped out, and in the three years there was a small appreciation. The question is how on these facts Rule 30 has to be applied. Now, Rule 30 provides :-
Any amount either written-off in the accounts or through the Actuarial Valuation. Balance Sheet to meet depreciation of, or loss on securities or other assets, or which is carried to a reserve fund formed for that sole purpose and not used for any other purpose, may be treated as expenditure incurred solely for the purpose of earning the profits of the business.
4. In the present case for the first two years there was a depreciation of securities, and amounts to meet that depreciation were carried to a reserve fund formed for that sole purpose, and the question is whether the assessee can treat those sums as expenditure incurred solely for the purpose of earning the profits of the business, without giving credit for appreciation which occurred in the third year.
5. The contention of the Commissioner for Income-tax is that the words ' may be treated as expenditure' in Rule 30 are permissive and confer an option upon the Income-tax Officer, either to allow this expenditure or not. No doubt the word 'may' is permissive. But the question is on whom is the permission conferred. It seems to me perfectly plain that it is conferred on the assessee. It may also be conferred on the Income-tax Officer, but that is irrelevant. It seems to me quite clear that when the rule says that these sums: placed to reserve may be treated as an expenditure incurred solely for the purpose of earning the profits of the business, that confers the right on the assessee to treat the sums in that way. The rule is not compulsory and it: is possible that an assessee might prefer to pay the income-tax en moneys placed to a special reserve, so that there would be no difficulty in the future in bringing those sums back into revenue. But I am clearly of opinion that the rule gives permission to the assessee to do what the rule allows, and that it. does not merely confer an option upon the Income-tax Officer. These sums having been properly placed to the special reserve in the first two years of the triennial period, I can find nothing in the rules which requires that they be brought back into the revenue account as soon as the depreciation which they were designed to meet has been made good. The company may well think that it may have to pass through difficult times again, and that it is prudent to keep its reserve in hand even though the reserve at the moment may not be wanted for the purpose for which it was made.
6. The Advocate General says that serious consequences may follow on this interpretation of Rule 30, because large sums may be placed to reserve on which tax will never be paid. But it is to be noticed that sums placed to the special reserve must be in respect of depreciation or loss which, in my view, means depreciation or loss which was actually incurred and that the reserve fund can be used for no other purpose. These two considerations afford considerable safeguard against the possibility of a company forming excessive reserves under Rule 30 and evading paying tax. In my view the rinding of fact of the Assistant Commissioner of Income-tax, which is referred to in the question raised, is really irrelevant, and the question must be answered in the negative. Usual order as to costs.
7. I am of the same opinion.
8. The contention of the Commissioner for Income-tax is that the words ' may be treated' in Rule 30 confer upon him and upon him alone the option to treat sums written off to meet depreciation of, or loss on securities or other assets, or carried to a reserve fund formed for that sole purpose, and not used for any other purpose, as expenditure incurred solely for the purpose of earning the profits of the business. In my opinion this construction does violence to the plain words of the rule. It seems to me that the rule confers an option upon the assessee to write off in his accounts to meet depreciation or to carry to a reserve fund to meet depreciation any amount which is justified by an actual loss in any particular year. The facts as disclosed by the evidence in the present case are that the assessee set aside in the first two years sums much smaller than were sufficient to meet the actual loss which occurred in those years. The mere fact that there was an appreciation in the securities in the third year seems to me to be entirely irrelevant so far as the construction of Rule 30 is concerned, in relation to the first and second years and if there has been a writing off or setting aside to reserve fund in any particular year justified by the state of accounts of the company of that year, the rule seems to me plainly to permit the assessee to treat the amount so written off or set aside as expenditure incurred solely for the purpose of earning the profits of the business. There is nothing in the rule to compel an assessee who has so exercised his option to bring back any sums which have been properly set aside by him in accordance with the rule.
9. I agree, therefore, that the question must be answered in the negative.