1. The Income-tax Appellate Tribunal, Madras Bench, under Section 256(1) of the Income-tax Act, 1961, has referred the following question of law for the opinion of this court:
'Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that the assessee is not entitled to deduction of the sum of Rs. 52,591 ?'
2. The assessee is a public limited company, carrying on general insurance business. The assessee invested a portion of its funds in the purchase of shares of Kapila Textile Mills Ltd., a public limited company, having its registered office at Nanjangud, Mysore State. In the year 1953, the company acquired 10,000 shares of Kapila Textile Mills Ltd., the face value of the shares being Rs. 10 each and the paid-up value being Rs. 5 per share. Accordingly, the assessee paid Rs. 50,000 for acquiring the said shares. In the same year, the Controller of Insurance directed the assessee to sell these shares. The assessee carried out the directions and sold the shares to Premier Chemical Industries Ltd. for Rs. 50,000. However, the transfer of the shares was not recorded in the books of Kapila Textile Mills Ltd. and they continued to stand in the name of the assessee.
3. In the year 1958, Kapila Textile Mills Ltd. went into liquidation. The official liquidator of Kapila Textile Mills Ltd. called upon the assessee to pay the balance of call money of Rs. 50,000 referable to the 10,000 shares to make them fully paid up. The assessee contested this claim in a suit. The assessee deposited a sum of Rs. 6,999 as ordered by the court some time before 1963. In 1963, orders of the court were received by which the liquidator was authorised to appropriate the sum of Rs. 6,999 towards the dues from the assessee for making the shares paid up and towards the cost. The court further ordered that 75 per cent. of the total claim for the sum due and interest should also be paid by the assessee and this came to Rs. 45,591. Thus the assessee paid out in all Rs. 52,590 to the liquidator and this sum was adjusted to the profit and loss account in the year 1963. In its assessment for 1964-65, for which the previous year is the calendaryear 1963, the asses see claimed deduction of a sum of Rs. 52,591 but the Income-tax Officer rejected the claim of the assessee taking the view that it related to a capital loss. The assessee filed an appeal to the Appellate Assistant Commissioner contending that the sum of Rs. 52,591 represented loss in realisation of its investment and was therefore, admissible. The Appellate Assistant Commissioner held that the shares of Kapila Textile Mills Ltd. did not constitute investment held by the assessee in the year under consideration and that the claim on account of depreciation of the value of investment was not admissible. He also rejected the argument that the sum of Rs. 52,591 represented loss on the realisation of its investment, as he was of the opinion that the ownership in the shares had passed to the Premier Chemical Industries Ltd. He, hence, dismissed the appeal.
4. The assessee filed a further appeal to the Income-tax Appellate Tribunal and contended before the Tribunal that the amount of Rs. 52,591 was deductible under Rule 5(b) of the First Schedule to the Income-tax Act. The Tribunal found that the investment in the shares as such had ceased long before 1963, that there was no question of either adjusting depreciation on the value of any investment or loss in realisation thereof in 1963, and that the sums in question were paid out because the assessee was found to be under a legal obligation to pay the monies to the liquidator of a company in which the assessee had at a much earlier stage acquired certain shares. The Tribunal further held that the disbursement made in these circumstances was not admissible as a deduction under Rule 5(b) as claimed by the assessee. Only one other fact that requires to be noticed is that in the order of the Tribunal the Tribunal pointed out that it requested the representative of the assessee to make available to the Tribunal the relevant books of account and other documents ; but he did not do so explaining that they were not readily traceable having been produced before a court in the course of some litigation. In view of this, the Tribunal observed that it was sufficient to state that it was common ground that sometime long before 1963, the partly paid-up shares had been sold by the assessee and no part of the sum of Rs. 52,591 around which the dispute centered related to the sum of Rs. 50,000 which had been originally paid for acquiring the shares. It is the correctness of this conclusion of the Tribunal that is challenged in the form of the question extracted already.
5. There is no controversy with regard to the facts. Admittedly, the assessee purchased 10,000 shares of Kapila Textile Mills Ltd. of the face value of Rs. 10 per share and paid Rs. 5 per share in respect of 10,000 shares totalling Rs. 50,000 and that it took place in 1953. Equally admittedly, before 1963, the assessee had sold away the shares to the Premier Chemical Industries Ltd. for Rs. 50,000 but the transfer of shares was not registered in the name of the transferee in the books of Kapila Textile Mills Ltd. andtherefore, at the time when Kapila Textile Mills Ltd. went into liquidation in 1958, in its books the assessee remained the shareholder and, therefore, became a contributory to pay the balance of the face value of the shares and it is that balance which ultimately came to Rs. 52,591 which was paid during the year of account.
6. Mr. S. Swaminathan, the learned counsel for the assessee, contended that the assessee is entitled to the deduction of the amount in question under Rule 5 of the First Schedule to the Income-tax Act, 1961. The said Rule 5 dealing with computation of income of the general insurance business is as follows :
'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 (IV 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 43A in computing the profits and gains of a business shall be added back ;
(b) any amount either written off or reserved in the accounts to meet depreciation of or loss on the realisation of investments shall be allowed as a deduction, and any sums taken credit for in the accounts on account of appreciation of or gains on the realisation of investments shall be treated as part of the profits and gains :
Provided that the Income-tax Officer is satisfied about the reasonableness of the amount written off or reserved in the accounts, as the case may be, to meet depreciation of or loss on the realisation of investments; (c) such amount carried over to a reserve for unexpired risks as may be prescribed in this behalf shall be allowed as deduction.'
7. Thus, it will be clear that this rule takes the balance of the profits disclosed by the annual accounts to be furnished to the Controller of Insurance under the Insurance Act, 1938, as the basis and makes provision for certain adjustments. The adjustment contemplated by Rule 5(a) is in the form of adding back and the adjustment contemplated in Rule 5(b) is in the form of a further deduction or addition. The case of the learned counsel for the assessee in the present case-is that the amount in question, namely, Rs. 52,591, falls within the scope of Rule 5(b) and, therefore, the assessee is entitled to have that amount deducted from the profits disclosed in the statement furnished to the Controller of Insurance. We are of the opinion that this contention is unsound. The very language of Rule 5(b) will clearly show that it will cover a case not of any actual expenditure, but will cover a case of some provision made in the accounts by way of writing off or reserve forthe purpose of meeting depreciation of or loss on the realisation of investments. It is not the case of the assessee that any depreciation of investment is involved in the present case. On the other hand, the case of the assessee is that the sum represented loss on the realisation of investment. Even assuming that there was loss on the realisation of investment, the amount that could be deducted under Rule 5(b) is not the amount that was actually spent, but only the provision made in the accounts, in anticipation of any depreciation of or loss on the realisation of investment. As a matter of fact, the actual expenditure is dealt with in Rule 5(a) and it is only the provision made in anticipation of depreciation of or loss on the realisation that is covered by Rule 5(b). The present being not one of a case of provision to meet a depreciation of or loss on the realisation of investment, Rule 5(b) has no application to the present claim of the assessee.
8. In support of the claim that Rule 5(b) applies to the present case, Mr. S. Swaminathan relied on the decision of the Bombay High Court in Commissioner of Income-tax v. New India Assurance Co. Ltd. : 71ITR761(Bom) . That case was concerned with the question of loss suffered by the assessee on account of devaluation of the Pakistan currency in 1955 and consequently deduction in the amount to which the assessee was entitled by way of refund of excess advance tax paid by it as well as the amount to which it was entitled under the agreements for relief of double taxation. The claims of the assessee were covered by the following questions in that case :
'3. Whether Rs. 79,592, being the difference in the exchange rates of Pakistan currency before and after its devaluation on July 31, 1955, on account of payment under Section 18A',of the Pakistan Income-tax Act is deductible in the assessment of 1956-57 under any of the provisions of the Income-tax Act or the Schedule ?
4. Whether Rs. 1,33,694 being the difference in the exchange rates of the Pakistan currency before and after its devaluation on July 31, 1955, on account of double taxation relief till then ascertained to be due, is deductible in the assessment of 1956-57 under any of the provisions of the Income-tax Act or the Schedule ?'
9. With regard to these two claims, the Bombay High Court held that the amounts claimed constituted the business loss of the assessee. There is a reference to Rule 6, the rule corresponding to the present Rule 5, under the Indian Income-tax Act, 1922, and we are of the opinion that the said reference is not of any assistance to the present case. All that the court pointed out was (page 797):
' Under Rule 6 also the loss sustained and entered in the accounts is taken into account. In fact, the position is that it is not open to the tax authorities to go behind the balance of the profits disclosed by the annualaccounts as filed before the Controller of Insurance. We have already shown that these two items have been entered in the accounts of the assessee and the profits and gains of their business of insurance assessed after taking into account both the items. That balance of profits as disclosed by their annual account is by Rule 6 to be taken as the profits and gains of their business of insurance for the year of account. All that Rule 6 permits is that the Income-tax Officer may adjust such balance so as to exclude from it any expenditure other than expenditure which may under the provisions of Section 10 be allowed. Since we have already found that these two items do not constitute ' expenditure', but is a simple business loss sustained by the assessee, we do not think that the tax authorities would have any jurisdiction to go behind the balance of profits as disclosed by the annual accounts and tamper with the figure by disallowing any item of business loss such as we have found it to be.'
10. Thus, it will be seen that the Bombay High Court merely referred to the scope of Rule 6 corresponding to the present Rule 5 and it was not dealing specifically with the provision corresponding to Rule 5(b) to hold what type of claims can be brought under Rule 5(b). Therefore, this decision is not of any assistance to the assessee in the present case. Consequently, on the basis of the claim put forward by the assessee before the Income-tax Appellate Tribunal the assessee has to fail.
11. Mr. S. Swaminathan, the learned counsel for the assessee, once he realised this position, contended that there is no need for him to rely upon Rule 5(b) at all and it is enough for him to put forward the contention that the main part of Rule 5 itself shows that the balance of profit disclosed in the annual account to be furnished to the Controller of Insurance has been arrived at after treating this sum of Rs. 52,591 as a loss and the Income-tax Officer or the other authorities had no power to tamper with that balance of profit by adding back the sum in question. According to the learned counsel for the assessee the question referred to this court is comprehensive enough to include this point. However, Mr. J. Jayaraman, the learned counsel for the department, contended that this contention does not arise out of the order of the Tribunal because no such contention was put forward before the Tribunal and the only claim put forward before the Tribunal was based on Rule 5(b) and even though the language of the question referred to this court is wide, still that has to be understood in the context of what was argued before the Tribunal and consequently the assessee cannot raise this question for the first time before this court. Though Mr. S. Swaminathan tried to contend that before the Tribunal this aspect also was argued, ultimately, having regard to the language of the order of the Tribunal as well as the statement contained in the agreed statement of the case, he had to concede that the only point urged before the Tribunal was based only onRule 5(b). The agreed statement of the case referred to this court clearly says in paragraph 6 thereof:
'The assessee filed a further appeal to the Tribunal and submitted that the amount of Rs. 52,591 is deductible under Rule 5(b) of the First Schedule to the Income-tax Act.'
12. Thus, this statement contained in the statement of the case makes it absolutely clear that the assessee relied only on Rule 5(b) in support of his claim and on no other provision of law. Under these circumstances, the question for consideration is whether it is open to the assessee now to contend that even if Rule 5(b) had no application, the authorities had no right to add back this sum to the balance of the profits disclosed in the annual accounts furnished to the Controller of Insurance.
13. The scope of the jurisdiction of the court under Section 66 of the Indian Income-tax Act, 1922, corresponding to section 256 of the Income-tax Act, 1961, was elaborately considered by the Supreme Court in Commissioner of Income-tax v. Scindia Steam Navigation Co. Ltd. : 42ITR589(SC) . In that case, after elaborately considering the earlier decisions and the language of Section 66, the Supreme Court observed:
' The result of the above discussion may thus be summed up:
(1) When a question is raised before the Tribunal and is dealt with by it, it is clearly one arising out of its order.
(2) When a question of law is raised before the Tribunal but theTribunal fails to deal with it, it must be deemed to have been dealt with byit, and is, therefore, one arising out of its order.
(3) When a question is not raised before the Tribunal but the Tribunal deals with it, that will also be a question arising out of its order.
(4) When a question of law is neither raised before the Tribunal nor considered by it, it will not be a question arising out of its order notwithstanding that it may arise on the findings given by it.
Stating the position compendiously, it is only a question that has been raised before or decided by the Tribunal that could be held to arise out of its order.' '
14. If this test is applied to the present case, having regard to what we havalready pointed out, namely, that the only point urged before the Tribuna was that the assessee was entitled to deduction of this amount under Rule 5(b) of the rules referred to above, the question now sought to be argued by theassessee cannot be said to arise out of the order of the Tribunal. However, Mr. S. Swaminathan relied upon another passage in the same judgment andcontends that what he is now putting forward is only another aspect of the question actually put forward before the Tribunal and, therefore, it cannot be a new question. The passage relied on in this behalf is : 42ITR589(SC) :
'Section 66(1) speaks of a question of law that arises out of the order of the Tribunal. Now a question of law might be a simple one, having its impact at one point, or it may be a complex one, trenching over an area with approaches leading to different points therein. Such a question might involve more than one aspect, requiring to be tackled from different standpoints. All that Section 66(1) requires is that the question of law which is referred to the court for decision and which the court is to decide must be the question which was in issue before the Tribunal. Where the question itself was under issue, there is no further limitation imposed by the section that the reference should be limited to those aspects of the question which had been argued before the Tribunal. It will be an over-refinement of the position to hold that each aspect of a question is itself a distinct question for the purpose of Section 66(1) of the Act.'
15. We are unable to accept the argument of the learned counsel for the assessee that what the learned counsel is now urging is only an aspect of the question argued before the Tribunal. As a matter of fact, another passage in the same judgment at page 612 itself will clearly show the necessity for restricting the scope of a question, apparently framed in wide terms, in the light of what was actually raised before the Tribunal. The Supreme Court observed (See : 42ITR589(SC) :
'It is argued for the appellant that this view would have the effect of doing away with limitations which the Legislature has advisedly imposed on the right of a litigant to require references under Section 66(1), as the question might be framed in such general manner as to admit of new questions not argued being raised. It is no doubt true that sometimes the questions are framed in such general terms that, construed literally, they might take in questions which were never in issue. In such cases, the true scope of the reference will have to be ascertained and limited by what appears on the statement of the case. '
16. Consequently, having regard to what we have pointed out as to the content of the statement of the case, the true scope of the question actually referred to the court, though apparently wide in its terms, has to be ascertained and limited to the claim based on Rule 5(b) only.
17. Mr. S. Swaminathan also relied on two other decisions of the Supreme Court which followed the above decision. The first of them is Bhanji Bagawandas v. Commissioner of Income-tax : 67ITR18(SC) . In that case, the question actually referred to the court was whether, on the facts and in the circumstances of the case, the assessment made is saved from the bar of limitation under the second proviso to Section 34(3). One of the points that was raised before the court was with reference to the amendment of the Income-tax Act by Act 1 of 1959 which question was not admittedlyraised either before the Tribunal or before the High Court. With reference to that situation, the Supreme Court observed :
'It is not a separate question by itself and is only an aspect of the question of limitation which has already been referred by the Appellate Tribunal to the High Court.'
18. Thus, it will be seen that the question of limitation having been already raised before the Tribunal, another aspect of that question of limitation was held to be comprehended by the question actually referred to the court. In view of this, the decision referred to also is not of any assistance to the assessee.
19. The next decision relied on is Commissioner of Income-tax v. Indian Molasses Co. P. Ltd. : 78ITR474(SC) . In that case, there were two questions referred to the court :
'1. Whether, on the facts and in the circumstances of the case, the sum of Rs. 1,83,434 was an expenditure effectively laid out or expended during the accounting year 1955 within the meaning of Section 10(2)(xv) of the Income-tax Act ?
2. If the answer to question No. (1) is in the affirmative, then whether the said expenditure of Rs. 1,83,434 represented a revenue expenditure ?' In the context of those questions, after referring to the passage in the judgment of the Supreme Court in Commissioner of Income-tax v. Scindia Steam Navigation Co. Ltd. : 42ITR589(SC) , the Supreme Court proceeded to state--See : 78ITR474(SC) .
20. The second question raised in the present case, in our judgment, permits an enquiry whether the amount claimed is an admissible allowance tinder Section 10(2)(xv). We are unable to hold that it is restricted to an enquiry whether the expenditure is of a capital nature. The Tribunal did not consider whether the amount was laid out or expended wholly and exclusively for the purpose of the business of the company. Expenditure is admissible as an allowance under Section 10(2)(xv) if all the conditions prescribed thereby are satisfied and is authorised by Section 10(4A). We are unable to hold that the question framed and referred excluded an enquiry whether the expenditure was wholly and exclusively laid out or expended for the purpose of the business of the company.' We may also point out that the second question concerned in that judgment was really dependent upon the first question and the first question did actually refer to Section 10(2)(xv) of the Indian Income-tax Act, 1922. Therefore, in our opinion, this decision is not of any: assistance to the assessee.
21. As against this, Mr. J. Jayaraman brought to our notice the following observations of the Supreme Court in Commissioner of Income-tax v. Kirkend Coal Co. : 74ITR67(SC) :
'Before the Tribunal and the High Court, the case was argued on the footing that Section 44 alone was applicable. Whether under the terms of Section 26 read with Section 28, penalty may be imposed upon the new partners for the failure of the partners of the firm constituted in the year of account relevant to the assessment year 1948-49 was never investigated. The question raised by the Tribunal is in terms sufficiently comprehensive to embrace an enquiry whether partners of the firm in existence on July 30, 1954, were liable to be assessed to penalty as successors in interest of the partners of the original firm in existence in the year of account relating to the assessment year 1948-49. But, in a reference under Section 66 of the Indian Income-tax Act, 1922, only the question which was either raised or argued before the Tribunal may be answered, even if the language of the question framed by the Tribunal may apparently include an enquiry into other matters which could have been, but were not, raised or argued.' Having regard to the above decision as well as the actual point argued before the Tribunal in the present case, we are of the opinion that the question referred to this court, though framed in a wide language, has to be understood only with reference to the claim of the assessee based on Rule 5(b) of the Rules and since the assessee fails with reference to that claim, the question referred to this court is answered in the affirmative and against the assessee. '
22. There will be no order as to costs.