SRINIVASAN J. - The Pandyan Insurance Company Ltd. is the assessee which carries on the business of general insurance. By about the end of 1952, it had erected a substantial building at a cost of over rupees twelve lakhs. For the account year 1952, being the calendar year, the company wrote off as depreciation a small of Rs. 4,412. The depreciation claimed was only for one month in that year which relevant for the assessment year 1953-54. This appears to have been allowed by the department. For the succeeding year 1954-55, the account year being the calendar year 1953, the assessee purported to write off a sum if Rs. 1,21,245 as depreciation in respect of the buildings, the air conditioning plant, lifts, transformers and internal telephones. The Income-tax Officer disallowed four-fifths of the depreciation claimed on the ground that only a fifth part of the building was utilised for the business of the assessee. On appeal, the Appellate Assistant Commissioner disagreed with the view taken by the Income-tax Officer that any part of the depreciation was allowable. He held that the depreciation allowance in the case of a business of insurance must be limted to the actual and real depreciation and that as the buildings were new, there was no depreciation which needed such cover on the balancesheet. He disallowed the whole of the claim. In the appeal before it, the Appellate Tribunal restored the order of the Income-tax Officer. The view that it took was that in so far as the four-fifths of the building was concerned, since it was not used for the purpose of the business which the assessee carried on, that part of it must be regarded only as an investment. While holding that under the relevant rule depreciation could be claimed, the Tribunal still thought that such depreciation should only be claimed to the limits of actual and real depreciation and not a notional value. Accordingly four-fifths of the depreciation claimed was disallowed.
On the application of the assesee, the Tribunal referred the following question for the determination of this court :
'Whether four-fifths of the sum of Rs. 1,21,245, written off in the books of the assessee as depreciation for the calendar year 1953, is allowable as a deduction in the assessment completed under section 10(7) and the rules contained in the Schedule to the Income-tax Act ?'
The computation of the profits and gains of the business of insurance has to be made in accordance with the rules contained in the Schedule to the Act. Section 10(7) of the Act makes sections 8,9,10,12 or 18, inapplicable for the purpose of computation of such profits and gains. It has been well recognised that such computation leads to the determination of a sort of notional or artificial income based upon the rules laid down in the Schedule. The principal point to be noticed in this connection is accordingly that except to the extent to which the rules in the Schedule provide, an assessee is not entitled to the benefit of such allowances or deductions as are contemplated in section 10 or any of the other sections which have been excluded.
The assessee in the present case carries on a business of general insurance. The particular rule of the Schedule applicable to this case is rule 6 which reads thus :
'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.... 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 business.
Stopping there for a moment, it is clear that this rule lays down that the balance of profits disclosed by the annual account has to be taken as the profits and gains of the business. But, in so far as the computation of those profits takes into account any allowance for any items of expenditure, only those heads of expenditure laid down as allowable items under section 10 of the Act are permissible. The provision that the balance of profits disclosed by the annual accounts has to be adjusted excluding any items of the expenditure other than those permitted by section 10 of the Act quite obviously confers jurisdiction upon the taxing authority to scrutinise the annual accounts and allow or exclude from such accounts any items of expenditure which are not permitted to be taken into consideration by section 10 of the Act. We make special reference to this aspect of the matter and the right of the taxing authority to scrutinise the accounts in view of another argument which has been raised by the learned counsel for the assessee which will be referred to in due course. It is clear that the accounts of the business are liable to be scrutinised in the light of the allowances towards the expenditure sanctioned by section 10 and that the taxing authorities have jurisdiction to do so.
The same rule further lays down :
'Profits and losses on the realisation of investment and depreciation and appreciation of the value of the investments shall be dealt with as provided in rule 3 for the business of life insurance.'
Turning to rule 3, sub-rule (a) of that rule relates only to a business of life insurance. It is common ground that rule 3(b) applies both to a business carrying on life insurance and to a business carrying on general insurance.
This rule lays down :
'Any amount either written off or reserved in the accounts... to meet depreciation of or loss on the realisation of securities or other assets, 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 securities or other assets, shall be included in the surplus.' (The portions left out have relevance to a business of life insurance).
This rule provides for the writing off or reservation in the accounts to meet depreciation of or loss on the realisation of securities or other assets. Learned counsel for the department purported to argue that the expression 'other assets' appearing in this provision must relate to assets in the nature of securities and cannot possibly include buildings. It is not necessary for us to express any decide opinion upon this argument, though it seems to us that the wording 'securities or other assets' does not specify a class on the basis of which the principle of ejusdem generis may be applied in treating the expression 'other assets' as belonging to the same class, if any, described in the earlier portion. We may however mention that such a view seems to have been taken in Calcutta Insurance Co. Ltd. v. Commissioner of Income-tax. But that very decision is sufficient authority for the position that some classes of assets would be outside the purview of rule 3(b) and that rule does not cover assets of all kinds. That argument apart, it seems to us that even if any depreciation in the case of this particular asset, viz., the building, is allowable, the specific requirement found in this rule is that the amount so written off or reserved in the accounts should be 'to meet depreciation'. The expression 'to meet' seems to us to be very significant and to indicate that the provision either by reservation or by writing off should cover the actual depreciation; it is not the intention of the rule that any amount unrelated to the depreciation could notionally be written off or rerserved.
Before we refer to the authorities on this aspect of the matter, we may deal with the argument that any writing off or reservation in the accounts contemplated by this rule cannot be interfered with by the department. The rule, it is argued, requires that such writing off or reservation in the accounts 'shall be allowed as a deduction'. It is claimed that here is a mandatory provision. The argument further proceeds that by reason of the proviso to rule 3(b) the power of the Income-tax Officer to interfere with any such writing off or reservation is limited and that the Income-tax Officer cannot alter the amount written off or reserved except after consultation with the Controller of Insurance and to provide for a particular contingency set out in the proviso. It is true that rule 3(b) is followed by a proviso. But a close examination of the contents of this proviso makes it clear that it has application only to a business of life insurance and not to a business of general insurance. Rule 6 itself makes rule 3 applicable for the computation of profits and losses on the realisation of investments and depreciation and appreciation of the value of the investments in the case of a business of general insurance. But rule 3 both in form and in content has direct application only to a business of life insurance. That being so, it seems to us that in order to apply rule 3 to a case of general insurance, we have to ignore those parts of it which have special significance only to businesses carrying on life insurance. In that view, therefore, the proviso has no application whatsoever, and even the mandatory form of the expression that any amount written off shall be allowed as a deduction must in the context be read in the light of rule 6, which we have pointed out confers the necessary authority upon an Income-tax Officer to examine the accounts and disallow portions of such expenditure which are not sanctioned by section 10 of the Act. It is clear then that in computing profits and gains, the Income-tax Officer has the power to examine the quantum of depreciation either written off or reserved and satisfy himself that that does not exceed the amount allowable to meet the depreciation.
In Western India Life Insurance Co. Ltd., In re, the interpretation of rule 30 which was almost of the same scope as rule 3(b) came for consideration. That rule provided :
'Any amount either written off in the accounts or through the actuarial valuation balance-sheet to meet depreciation, 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 purpose, may be treated as expenditure incurred solely for the purpose of earning the profits of the business.'
Though the actual decision dealt with another point, the learned judges were of the view 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 the actual loss' in any particular year. The rule was accordingly interpreted to mean that the writting off or reservation must be justified by the loss actually incurred. In Commissioner of Income-tax v. Indian Life Assurance Company, in interpreting rule 30 the learned judges clearly laid down that what is properly to be carried to the reserve fund for the purpose of rule 30 is not any amount that the directors of the company in their discretion think necessary but only such amounts as are necessary to meet depreciation or loss that has actually occurred or has actually been suffered. It is not therefore open to the assessee company to write off amounts larger than those actually lost by depreciation. It seems to us that having regard to the content and scope of rule 3(b), the same view must hold good. It is not open to the assessee to write off any amount on a notional basis. His right is clearly restricted only to such amounts as are required to meet the depreciation, that is to say, to meet the actual loss by depreciation.
It follows from what has been stated above that, in the absence of any material to establish any actual loss in the depreciation of the assets, the Tribunal was justified in disallowing the amount. The question is accordingly answered in the negative and against the assessee. The assessee will pay the costs of the department. Counsels fee Rs. 250.