1. There are two references before us relating to the assessment of the same assessee for the same assessment year and both at the instance of the assessee, the Calcutta Insurance Ltd. Reference no. 2 of 1946 was made by the Tribunal under Section 66 (l), Income-tax Act, and comprises two questions of law. The application on which the reference was made formulated nine questions, but with regard to seven of them, the Tribunal refused to state a case on the ground either that no question of law arose or that the question was based on an incorrect statement of facts. Thereupon, the company moved this Court under Section 66 (2) of the Act and obtained a direction to the Tribunal to state a case on six of the seven questions, one of which was slightly re-cast. Reference No. 4 of 1947 was made in accordance with that direction. In making that reference, the Tribunal did not submit a fresh 'Statement of the ease'., as the facts relating to the further questions directed to be referred were all to be found in the original statement.
2. I have had occasion to comment in the past and find it necessary to comment again on the form in which the Tribunal is often found to draw up the statement of the case. It seems to think that the statement of the case means the judgment on the application for a reference. In the present ease, for example, the original reference was limited only to two questions of law and yet what was sent up ag the statement of the case was the order passed on the application for a reference, containing a discussion, question by question, of all the nine questions formulated. The facts relating to the seven questions, not referred, were entirely different and severable, except to a slight extent in one case, and clearly no reference to them was at all relevant, far less any discussion of the questions on the merits. Then again, the statement of the case ought certainly not to be a judgment on the application for a reference, recounting in detail the whole controversy on the application and the Tribunal's views thereon and covering not only the point as to whether the questions formulated arise or not but also, once again, their merits. The Tribunal may, if it chooses, record an order on the application for a reference and where it declines to state a ease at all or a case on any of the questions formulated, it is perhaps necessary to do so. But when it has reached the stage of Rule 43 of its own Rules an I decided to make a reference or when it has been directed by the High Court to do so, all controversy has been left behind and the statement of the case contemplated by the Rule, as also by Section 66 of the Act, is obviously a separate document of a neutral character which must be limited to the questions referred and in which should be incorporated only the facts relevant to those questions as found by the Tribunal, the contentions of the parties, the decision thereon as recorded in the appellate order and the questions of law which arise. If a model is required, one will be found in the statements drawn up by the General or the Special Commissioners in England, incorporated in the reports in the Tax cases.
3. In fairness to the Tribunal in the present case, I must add that it was placed in a difficult position by reason of the manner in which the proceedings were conducted on behalf of the assessee. The assessment was an assessment of an insurance business and the objections related to individual items of deduction claimed by the company or 'add-back's made by the Income-tax Officer. The Tribunal has pointed out that at the stage of the appeal the assessee was unable, in some cases, even to state what the ground of the objection was and at the stage of the application for a reference, questions were raised and debated on an incomplete and incorrect basis of facts. Before us as well as I shall presently show, totally contradictory contentions were put forward in relation to two of the questions.
4. To turn now to the facts of the case, the order out of which the questions arise covered four appeals, relating to the respective assessments of the company for four successive years, viz., 1939-40, 1940-41, 1941-42 and 1942-43. A common order was passed, because the questions involved in all the appeals were identical. The present references, however, are limited to the year 1939-40. The reason is that although the application for a reference referred to all the four assessment years, only one reference fee was paid and on that being pointed out to the Advocate for the company, he stated that the application might be treated as relating to the 1039-40 assessment only. Accordingly, a reference limited to that assessment was made. There was no direction in the subsequent order of the High Court to enlarge the scope of the reference so as to cover the three other assessments and in the circumstances of the case, no such direction could be given. The assessments for the years 1940-41, 1941-42 and 1942-43 are, therefore, not covered by the references. The only assessment they relate to is the assessment for the year 1939-40.
5. Since each one of the questions is concerned with some individual item in the computation of the company's profits, it is not possible to give anything like a general statement of the facts. All that may be stated here is that the assessee is an insurance company and its profits were computed under Rule 2(b) of the schedule to the Income-tax Act, i. e. on the basis of the surplus disclosed by the last actuarial valuation. That valuation was for the quinquennium ended on 31-12-1937 and it appears that the previous valuation had been for a period of two years, ended on 31-12-1932 and, before that, there had been another valuation in 1930. The assessment made by the Income-tax. Officer was modified by the Appellate Assistant Commissioner in the assessee's favour with regard to one item which is the subject-matter of question (iv) in Eef. No. 4 of 1947. The assessment, so modified, was upheld by the Tribunal on further appeal.
6. The total number of the questions referred is eight and, between them they cover a part of Rule 2 (b), Rule 4 and all but one of the several clauses and provisos of Rule 3, Schedule to the Income-tax Act. No useful purpose will be served by setting out all the questions at one place. They can more conveniently be taken up one by one and disposed of.
7. Reference No. 2 of 1946, as has already been stated, comprises two questions. Question l is in the following terms:
In the computation of income, profits and gains of a life insurance business, is the allowance for depreciation on furniture, motor-car and books governed by Section 10 (2) (vi), Income-tax Aot or by Rule 3(b), Schedule to the Act, taking these assets as being included in 'other assets' appears in the Rule?
8. Although stated in a general form, the question really relates to a specific item of Rs. 7938 which is the subject-matter of separate question, question (ii), in Reference No. 4 of 1947. That question, which ought obviously to be considered along with the question set out above, is as follows:
Depreciation being allowable as deduction under Section 10, can the sum of Rs. 7938, the amount of depreciation written off, be added back for computation of the actuarial surplus under E. 2 (b)
9. In order that the facts and the contentions of the parties may be understood, it is necessary to refer first to the relevant provisions of law. Rule 2 (b) of the Schedule provides that in computing the profits of a life insurance business under that Rule and adjusting for that purpose the actuarial surplus disclosed by the last valuation, 'any expenditure other than expenditure which may under the provisions of Section 10 of this Act be allowed' should be excluded. In other words, if allowance has been made in the actuarial valuation for any expenditure not allowable under Section 10, the same should be disallowed and added back to the surplus. Section 10 (2) (vi) provides for a depreciation allowance on 'plant or furniture' used for the purposes of a business and under Section 10 (5) 'plant' in Section 10 (2) includes vehicles and books. It thus deals directly with the depreciation with which we are concerned here. The allowance is to be not whatever depreciation may be put down in the assessee's books, but only a sum equivalent to such percentage on the written down value of the articles concerned as may be prescribed and the prescribed percentages are to be found in Rule 8 of the Rules framed under the Act. While Rule 2 (b) of the Schedule, read with Section 10, is to the above effect, Rule 3 (b) provides that in computing the surplus for the purpose of Rule 2, 'any amount either written off or reserved in the accounts ot through the actuarial valuation balance-sheet 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 or actuarial valuation balance sheet on account of appreciation of or gains on the realisation of the securities or other assets shall be included in the surplus.'
10. There is a proviso to the Rule which states, to put it broadly, that if it appears bo the Income-tax Officer that 'the rate of interest or other factor employed in determining the liability in respect of outstanding policies is materialy inconsistent with the valuation of the securities and other assets so as artificially to reduce the surplus', he may, after consultation with the Superintendent of Insurance, adjust the depreciation or appreciation so as to increase the surplus to a fair and just figure.
11. The facts relevant to the present question are that during the last valuation period, the company had written off in its accounts a sum of Rs. 7938 as depreciation on furniture, books and motor-cars. The Income-tax Officer treated the ease as one under Rule 2 (b) of the Schedule, read with Section 10(2) (vi), and what he did was that has first added back the whole sum of Rs. 7938 and then deducted a depreciation allowance of Rs. 7090 which was the amount allowable according to the percentages prescribed. In effect, therefore, he added back only a sum of Rs. 848. The contention of the assessee is that the full amount of Rs. 7938 ought to have been allowed.
12. Now, the assessee did not seem to know its own mind as to the ground on which it would base its claim. Question (1) of reference No. 2, which is the Tribunal's paraphrase of question vi formulated by the assessee, proceeds on the view that Rule 3 (b) of the Schedule and not Section 10 (2)(vi) applied to the case. That view was sought to be supported before us with the argument that although Rule 2(b) imported Section 10, the allowances provided for by that section covered both items of expenditure, i. e. monies actually spent, and items of depreciation, but Rule 2 (b) mentioned only 'expenditure' while 'depreciation' was dealt with separately in Rule 3 (b). It was accordingly contended by Mr. Mitra that in computing the surplus of a life insurance business under the Schedule, the full amount of depreciation on furniture, motor-cars and books, written off in the accounts, was to be allowed under Rule 3 (b) and the percentage referred to in Section 10 (2) (vi) could not be applied under the authority of Rule 2 (b). Question (ii) of Reference No. 4, however, puts the claim entirely under Section 10 and asks whether depreciation being allowable under that section and the sum of Rs. 7938 being an amount of depreciation, it could be added back under Rule 2 (b), since Section 10 does not apply of its own force to profits of life insurance companies but applies only so far aa it is imported by Rule 2 (b), the question assumes that depreciation is 'expenditure' within the meaning of the Rule and that what was written off in the present case was not in excess of what was allowable under Section 10. The grounds of the assessee's claim under the two questions are thus mutually contradictory.
13. I put it to Mr. Mitra in course of the argument that if he pressed his view of question (i) of Reference No. 2, he could not at the same time press Question (ii) of Reference No. 4 as he had been doing and that the latter ought logically to be struck out. Ultimately, he stated that he would have no objection if that was done. On further consideration, however, I think that since the question has been referred under a di ection of this Court, it will be better to deal with it, as it is.
14. With regard to Question (i), it was further contended by Mr. Mitra that 'other assets' in Rule 3 (b) would cover furniture, motor-cars and books. He also argued that the scheme of the Schedule was not that only such debit items in the valuation sheet as were expressly allowable under the Schedule were to be allowed, but the scheme was that only such items as were expressly disallowable were to be excluded. The point of this argument was that as depreciation on furniture, motor-ears and books, written off in the accounts, was not disallowable under any express provision of the schedule, it could not be disallowed.
15. With regard to Question (ii), it was contended on behalf of the Commissioner of Income-tax by Mr. Meyer that Section 10 (2) itself used the word 'expenditure' in Causes (xii), (xiv) and (xv) and, therefore, Rule 2 (b) of the Schedule, which spoke of 'expenditure' allowable under Section 10, must be taken as limited to those clauses of Section 10 (2) where the word had been used. This contention, if correct, would establish that Rule 2(b) bad no concern with depreciation and might enable Mr. Meyer to get rid of Question (ii), but it would throw him, if I may use the expression, right into the arms of Rule 3(b) and Question (i). Mr. Meyer realised this and with regard to Rule 3(b) he contended that 'other assets' contemplated by that Rule were assets of the same kind as the variety expressly mentioned, viz., securities. As an illustration, he mentioned shares. He contended further that since the Rule directed depreciation on securities and other assets to be allowed and appreciation on securities and other assets to be included in the surplus, 'other assets' must be assets capable of both appreciation and depreciation which furniture, motor-cars and books were not. It was pointed out that the article 'the' had been prefixed to the expression 'securities and other assets' in the second part of the Rule which, it was said, clearly showed that the same assets were contemplated by both the parts and, therefore, the assets which the Rule had in view were only such assets as were capable of both appreciation and depreciation. In connection with Question (i) Mr. Meyer submitted that depreciation on furniture, motor-cars and books would be governed by Section 10 (2) (vi). The contradictory grounds on which the two questions were based thus involved both sides in contradictious.
16. In my opinion, Question (ii) of Reference No, 4 must be disposed of on the short ground that it does not arise. It asks whether the sum of Rs. 7938 could be rightly added back as disallowable, whereas what was really added back was only Rs. 848, the rest being allowed. The question thus puts in issue the correctness of something which was not in fact done aud, therefore, it does not arise. In the above view, it ia nob necessary to examine the legal basis of the question, although it may be pointed out that if Section 10 applied, as the question assumes, the manner in which the Income-tax Officer dealt with the amount was obviously correct.
17. With regard to the same amount, Question (i) of Reference No. 2 presents a problem of decision between Section 10 (2)(vi) of the Act and Rule 3(b) of the Schedule, although instead of the specific sum of Rs. 7938, the subject-matter for consideration has been put in general terms as 'depreciation on furniture, motor-cars and books.' By reason of the provisions of Section 10(7) of the Act, Section 10 (2) (vi) will not apply to such depreciation in the computation of the profits of a life insurance business, unless it has been made applicable by the Schedule or, to be more precise, by Rule 2 (b) which is the only Rule which mentions Section 10. But Rule 2(b) cannot be said to import Section 10 (2) (vi), unless the word 'expenditure' used in the Rule includes depreciation. On the other hand, the schedule expressly deals with depreciation in Rule 3 (b). The question asked is under which of these provisions depreciation on furniture, motor-cars and books falls in the case of the profits of a life insurance business. It cannot fall under both, as the two questions formulated by the assessee, between them, somewhat absurdly suggested.
18. The general provision relating to the computation of business income is to be found in Section 10 of the Act and the provision there contained is that such income is to be computed after making; certain specified 'allowances.' The allowances specified in the section comprise both items of expenditure and items of depreciation. Prima facie, it might appear that in the case of the profits of a life insurance business, the framers of the schedule had placed the expenditure items of Section 10 under Rule 2 (2) and the depreciation items, under Rule 3 (b). A closer examination of the Rule, however, reveals that such is not the fact.
19. It may be useful to remind ourselves at. this stage that in computing the profits of a life insurance business on the actuarial surplus basis, as in tbe present case, the Income-tax Officer does, not proceed in the ordinary way but starts with the surplus, in arriving at which certain debits. and credits have already been taken into account. His task is to adjust the surplus in the manner directed by the Schedule. Tbe direction in Rule 2 (b), is to disallow debits of expenditure, not warranted by Section 10. The direction in Rule 3 (b) is to allow: debits of depreciation on the assets, there mentioned, in full. The scheme of the schedule obviously is that subject to the adjustments specifically indicated, the actuarial surplus must stand. Profits of a life insurance business are treated by the Income-tax Act as a class by themselves and there is no reason to presume that all the general provisions of the Act relating to the computation of business income must occur somewhere or other in the schedule. With these consideration? in mind, we might proceed to consider the question referred and tbe contentions of the parties.
20. In my opinion, Mr. Mitra was right in contending, as he did in connection with the present question, that 'expenditure' in Rule 2 (b) does not include depreciation and does not, therefore, attract Section 10(2)(vi). The same, it will be remembered, was the contention of Mr. Meyer in connection with the other question and indeed he went even further and contended that the reference to Section 10 in Rule 2(b) must be taken as limited to Clauses (xii), (xiv) and (xv), Section 10 (2), where the word 'expenditure' had been used. I cannot accept the latter contention as correct. In the year 1939-40 to which the assessment relates, the present Clauses (xii) and (xiv) were not in existence, but besides Clauses (xv) which was then Clauses (xii), there were Clauses (i) to (v) and (vii) to (x) in the same form as at present, dealing with payments of specific kinds but not using the word 'expenditure'. I cannot agree that even those clauses are outside the contemplation of Rule 2 (b) and that all that the Rule covered in 1939-40 was expenditure allowable under the general provisions of what was then Clauses (xii) and that all that it covers now is expenditure allowable under Clauses (xii), (xiv) and (xv). Such a construction would be contrary to the plain language of the Rule. Still, however, the clauses I have mentioned do not carry Rule 2(b) beyond expenditure, whether described in Section 10 by that word or not. I cannot accept Mr. Meyer's contention, advanced in connection with the present question, that Rule 2 (b) covers depreciation as well, which the Tribunal also appears to have held. Both in actual commercial operations and in the view of the Income-tax Act, indeed in the view of Section 10 itself, depreciation of assets is something entirely different and distinct from expenditure and if the Legislature, while framing Rule 2 (b) and incorporating therein a reference to Section 10, used only the word 'expenditure', I can see no reason for supposing that it intended that word to cover depreciation also. Mr. Meyer, when asked, was unable to give any instance where depreciation and expenditure had been treated as synonymous. No question could have arisen if Rule 2 (b) had used the word 'allowances' which is the general expression used in Section 10 to cover both expenditure and depreciation. In my view, Rule 2 (b) is concerned only with expenses and merely provides that in adjusting the surplus, the Income-tax Officer must scrutinize the composition of the valuation sheet and the Revenue Account of the company and if he comes across debits of expenditure not allowable under Section 10, he must exclude them in making his computation. The Rule has no concern with depreciation and does not import Section 10 (2) (vi).
21. It does not, however, follow that depreciation on furniture, motor-cars and books must then come under Rule 3 (b). In my view, that Rule does not cover assets of all kinds, but is limited to securities and similar assets, as Mr. Meyer contended. If assets of all kinds were intended to be covered, there was no reason why the Rule should not have said so and why securities should have been specifically mentioned and then the words 'or other assets' added. The reason clearly is that the Rule is limited to securities and assets of the same kind. It is also clear that the similarity contemplated by the Rule is that the other assets are, like securities, capable of both appreciation and depreciation and they are assets of the kind of which both rise and fall in value and both gain and loss on realisation are ordinarily taken into account in valuing a business or computing its profits. It is not possible to say that the same assets need not be capable of both appreciation and depreciation, for the definite article prefixed to the words 'securities or other assets' in the second part of the Rule clearly suggests that the assets there contemplated are the same assets as are contemplated by the first part. It was, however, contended that even furniture, motor-cars and books might appreciate in value. While that is not an impossibility, the real point is that appreciation of such equipments of a business concern are not taken into account in ordinary commercial accounting in valuing or computing the profits of a business. The Rule is concerned with adjustment of the actuarial surplus and clearly it has reference to what is to be normally found in the accounts from which the surplus has been determined. But that is not all. The Rule speaks not only of appreciation and depreciation of securities or other assets but also of gain or loss on their realisation. No doubt can be left by that language that the assets contemplated are assets of the nature of investments which may appreciate or depreciate and which are of such kind that they have to be or may be realised. It need hardly be pointed out that it is entirely inappropriate to think or speak of realisation in the case of assets like furniture, motor-cars and books. That the assets contemplated are investments is made even clearer by the proviso to the Rule which inter relates interest and valuation. For all there reasons, I am clearly of opinion that depreciation on furniture, motor-cars and books is, outside the purview of Rule 8 (b).
22. Although it is not strictly necessary for the purpose of answering the question, I may point out what Rule 3 (b) really means. Apart from the proviso, it is practically the same as the old Rule 30. A life insurance company must be prepared to pay claims under the policies issued by it, as and when they mature, and for that purpose must provide itself with sufficient funds. The premia received can never be sufficient and, therefore, the funds require to be augmented by investments which will bring in interest or dividends or may result in profit, if disposed of. The investments may appreciate or depreciate or may become unrealisable wholly or in part or their realisation may result in gain or loss. But since an insurance company is not a dealer in investments, such appreciation or depreciation or gain or loss would not be profit or loss in the revenue sense but increase or decrease of capital, in other words, capital gain or capital loss. The company would not be entitled to a deduction of such loss under the ordinary provisions of the Income-tax Act, nor would the gains be liable to be added to its taxable profits. But as the financial position of a life insurance company vis a vis its liabilities under the outstanding policies, in other words, its ability to carry on successfully the life insurance business, depends very largely on the results of its investments, it was apparently thought proper to make a special provision and such provision has been made by the schedule in Rule 3 (b) which gives the company credit for losses on its investments and, correspondingly, brings gains thereon under liability to tax. That is the reason why such depreciation or loss is not placed under Rule 2 (b) which deals with allowances that may be had under the ordinary provisions of the Income tax Act contained in Section 10, but is provided for separately. That is also another indication that depreciation on furniture, motor-cars and books which is not depreciation on investments and which is expressly provided for in Section 10 (2) (vi), read with Section 10 (5), cannot be within Rule 3 (b). The reference to both accounts and the actuarial valuation which is to be found in the Rule is due to the fact (that ?) sometimes a company does not pass the investment gains or losses through the Revenue Account, but takes them from some other account or accounts directly to the Balance-sheet.
23. Jn the result, I am of opinion that in the case of life insurance companies, depreciation on furniture, motor-cars and books is not governed by either Section 10 (2) (vi), read with Rule 2 (b), or by Rule 3 (b). For practical purpose, it is sufficient for the assessee if Rule 2 (b) is excluded, for even if such depreciation does not come under Rule 3 (b), it has still to be allowed in full, since there is no other provision in the Schedule for disallowing it or reducing its amount. As I have already explained, subject to the adjustments directed by the Schedule, the actuarial surplus must stand. There is thus either a lacuna in the schedule or an intention that in the case of life insurance companies, depreciation on the assets mentioned in Section 10 (2) (vi), so far as it is debited in the accounts, must be allowed in full. Question (i) of Reference No. 2 must, therefore, be answered in the assessee's favour.
24. Proceeding next to Question (2) of Reference No. 2, it is in the following terms:
Whether 'income tax paid by deduction at source on interest on securities or otherwise,' appearing in Rule 4 of the Schedule to the Income tax Act, includes tax paid through assessments during the preceding inter-valuation period?
25. It appears to me that the question is sufficiently answered by B. 4 itself which runs as follows:
Where for any year an assessment is made in accordance with the annual average of a surplus disclosed by a valuation for an inter-valuation period exceeding twelve months, then, in computing the tax payable for that year, credit shall not be given in accordance with Sub-section (5) of Section 18 for the tax paid in the preceding year, but credit shall be given for the annual average of the income-tax paid by deduction at source from interest on securities or otherwise during such period.
26. Section 18 (s) provides that in computing the tax payable by an assessee for any year, credit shall be given to him for the tax deducted at source from his income in the previous year under the provisions of Section 18 and also for any sum by which his dividend income of that year has been increased under Section 16 (2). These sums are treated as tax already paid by the assessee on his income of the previous year which is the income that is being assessed. In the first case, the amount deducted is obviously so. In the second case, the amount represents the tax which the company, paying the dividend, has itself paid on the share of the profits allocated to the assessee, leaving as the balance the dividend amount actually paid to him, and such tax is under the provisions of Section 49B treated as tax paid by the assessee himself. It is by the amount of this tax that the dividend income is increased under Section 16 (2). In the case of a life insurance company, when the actual profits of the previous year are determined, whether on the basis of an actuarial valuation limited to that year or otherwise, credit may properly be given under Section 18 (5), against the tax payable on the whole income of the accounting year for the tax deducted at source in that year and for the sum by which the dividend income of that year has been grossed up. In such a case, the credit given will be for the actual amount of the tax paid on the actual amount of the relevant receipts included in the assessable income. But where the profits of any 'previous year' are determined on the basis of the actuarial surplus disclosed by a valuation which was a valuation for a period covering several years, such profits are, leaving aside the adjustments, only the annual average of that surplus, i.e., the average of the profits of an antecedent period, and not the actual profits of the year concerned. In such a case where the income assessed for the previous year is only a notional figure, based on the profits of an antecedent period, it will obviously be inappropriate to give credit under Section 18 (5), for the tax actually deducted in the previous year, for such deduction will have no relation to the income brought under assessment. But it was held by this Court in the cases of North British Mercantile Insurance Co., In re, 1937-5 I. T. R. 349 (cal,), and Phoenix Assurance Co., In re, 1937-51. T. R. 397 (cal.) under the old Rr. 25 and 35 that even in such a case effect had to be given to Section 18 (S), because the section had no reference to any particular method of assessment. Rule 4 is intended to counteract the effect of those decisions and provides that where in any year of assessment, the profits adopted for the previous year are the annual average of the profits of an antecedent period, the credit to which the assessee will be entitled will also be credit for the annual average of the tax deducted at source during the same period and not credit, in accordance with Section 18 (5), for the tax actually deducted in the previous year.
27. The contention of the assessee under the question referred is that under Rule 4, credit must be given not only for the annual average of the tax deducted at source, but also for such average of the tax paid directly on assessment. The latter, it is said, is drawn in by the word 'otherwise,' occurring in the rule. The contention is untenable on the face of it, as the Tribunal has pointed out. The rule is concerned only with the credit allowable under Section 18 (5) and with nothing else. All that it does is that it substitutes for the credit allowable under Section 18 (5), a credit of another kind, but anything not covered by Section 18 (5), as tax paid directly on assessment is not, is clearly outside its purview. It does use the expression 'paid by deduction at source from interest on securities or otherwise,' but the reason for the addition of the word 'otherwise' is plain. Section 18 provides, in the case of residents, for deduction at source of tax on salaries and interest on securities, but in the case of an insurance company, only the latter is relevant. Section 18 (5) allows credit for any deduction made under Section 18 and for the amount of any increase on dividends made under Section 16 (2). The expression 'paid'by deduction at source from interest on securities' in Rule 4 refers to the first sum. As has already been explained, the dividend received by a share-holder of a company is treated as his -share of the profits, less tax thereon which has been paid by the company on his behalf, and the amount of the tax so paid is the amount by which the dividend is increased under Section 16 (2), for that also is a part of his income. It is an amount which the share-holder would have received from the company as a part of bis share of the profits, if the company bad not deducted it and paid it out as tax on his behalf, paying him as dividend only the balance left. The amount is, therefore, first added to the assessable income under Section 16 (2) and then credit is given for it under Section 18 (5) against the tax payable. Such amount also is thus 'paid by deduction at source' and the words 'or otherwise' in Rule 4 refer to this amount which is the second sum mentioned in Section 18 (5). Bat there can be no question of the words 'or otherwise' importing the tax paid directly on assessment. As the Tribunal has pointed out, a question of giving credit can arise only when before. the assessment for a particular year has been made, some tax payable on the income of that year has already been realised. Tax paid under an assessment is tax paid on demand as due under an assessment which has been completed and no credit can possibly be given for such payment in a future assessment. Indeed, as the Tribunal has also pointed out, if tbe assessee's contention were correct, all the tax realised from a life insurance company would ultimately have to be refunded and such companies might as well have been exempted from taxation altogether.
28. I may now proceed to Reference No. 4 of 1947. The first question in that reference is the tallowing :
The sum of Rs. 1,058 (one thousand and fifty eight) not being an expenditure at all or not an expenditure within the meaning of Section 10, was it correct to add back the same to the actuarial surplus disclosed by the last actuarial valuation for the period ending 31-12-1937
29. The form of the question is open to serious objection. When the point to be decided is whether a particular sum was rightly added back, the character of the sum is the matter in issue and it cannot be proper to assume in the question framed, as has been done in the present case, that the sum is not of a particular character. If the assumption is negatived, the only answer which the Court can properly give is that the question does not arise. I may also point out that as formulated before tbe Tribunal, the question did not include the phrase 'not being an expenditure at all' and the question, as it stands now, is a question which the Tribunal was never asked to refer. However, as the question has been directed to be referred, it must be dealt with.
30. The facts are as follows. The last valuation of the company's business was for a period of five years and as at 31-12-1937, and before that there had been valuations as at 31-12-1932 and 31-12-1930. At the end of 1932, there was a surplus of Rs. 39,085, of which Rs. 27,776, was allocated to policy-holders and Rs. 2,420, to share-holders, leaving a balance of Rs. 14,889, which was ''carried forward unappropriated'. The ultimate surplus at the valuation next preceding tbe last valuation was thus Rs. 14,889. The surplus disclosed by the last valuation, i. e., the valuation as at 31-12-1937. was Rs. 1,27,994. Now, the task of the Income-tax Officer under Rule 2 of the Schedule is to find out the real profits of the last intervaluation period but the surplus disclosed by the actuarial valuation will not necessarily represent such profits, because there may have been, at the beginning of the period, some surplus outstanding from the pre. vious period, in which case the actual profits of the period under consideration will be the last surplus minus the previous surplus ; or there may have been an outstanding deficit, in which case the real profits of the period will be the surplus plus the amount of the previous deficit, because the deficit must have been wiped out before the surplus resulted. In order to ascertain the real profits of the last intervaluation period, the previous surplus, if any, must, therefore, be deducted or the amount of the previous deficit, if any, added. This was pointed out by the Privy Council in the case of Commr. of Income-tax Bengal v. Himalaya Assurance Co., 1939-7 I. t. r. 402 (P.c.), where the old RULE 25 fell to be considered, although their Lordships did not give effect to the view because of a previous decision. But it has now been expressly provided for in Rule 2 (b) which directs the Income-tax officer to adjust the surplus disclosed by the last actuarial valuation 'so as to exclude from it any surplus or deficit included therein which was made in any earlier intervaluation period.' Leaving aside the case of a deficit which does not arise in the present case, the task of the Income-tax Officer was to find out what' amount, included in the surplus of the 1937 valuation, was surplus carried over from the 1932 valuation. Had there been no facts, other than those stated above, such amount would be Rs. 14,889, and the whole of the amount would have to be deducted from Rs. 1,27,994, which is what the assessee contends. But the sum of Rs. 14,889, the surplus of the 1932 valuation, included a sum of Rs. 1058, 'carried forward unappropriated from the 1930 valuation, but allocated to share-holders.' That means, as it appears from the appellate order of the Tribunal, that at the 1930 valuation, this amount was allocated to share-holders and recommended to be taken over to the Reserve Fund, but neither was that done, nor was the amount paid to shareholders. Nothing, however, turns on that circumstance, so far as the present question is concerned and the only point to be noticed is that the amount remained unappropriated and came to form a part of 1932 surplus of Rs. 14,889. In 1934, however, the amount of 1058, was debited to the Revenue Account and transferred to the Dividend Equalisation Fund and it need hardly be pointed out that as soon as that was done, the surplus carried along so far was reduced by ES. 1058, and became Rs. 13,831. When, therefore, the next valuation was made in 1937, the surplus outstanding at that time from 1932 was only Rs. 13,831, and that was the amount of the previous surplus which went into Rs. 1,27,994, the surplus of 1937, and not Rs. 14,889. The Income-tax Officer might have deducted from the surplus of 1937 the sum of Rs. 13,831 straightway, as that was really the surplus of the previous intervaluation period included in the last surplus, but what he did instead was that he first deducted the whole sum of Rs. 14,889, and then added back Rs. 1058. The result was the same. There cannot be the slightest doubt that all the deduction which the assessee was entitled to under this head was a deduction of Rs. 13,831, which it, in fact, got.
31. Turning now to the question referred, if the amount of Rs. 1058 was expenditure, but 'not an expenditure within the meaning of Section 10,' it was obviously liable to be disallowed and added back under the express terms of Rule 2 (b). But it is clear that no question of expenditure arises. Whether the amount was to be allowed or disallowed, does not fall to be determined by whether it was or was not expenditure or allowable expenditure but by whether it was or was not included in the surplus of Rs. l, 27,994, disclosed by the 1937 valuation. On the facts I have set out, it was clearly not included. The case is not one under that part of Rule 2 (b) which speaks of excluding from the surplus 'any expenditure other than expenditure which may under the provisions of Section 10 of this Act be allowed,' but a case under that part which speaks of excluding 'any surplus included therein which was made in any earlier inter-valuation period,' the amount of Rs. 1058 was not an expense of carrying on the business during the last valuation period, but a belated appropriation of a portion of the 1932 surplus in accordance with the recommendation made at the 1930 valuation when the amount had first emerged as a surplus. If the case comes under the second part of Rule 2 (b) that I have quoted, it is to be noticed that the Rule does not say that whatever surplus was disclosed by the next preceding valuation must be excluded, hat only so much of that surplus as may have been included in the last surplus which is being adjusted. How much has been included is a problem of arithmetic and accounting and so a question of fact and not a question of law, but, in any event, the question in the present case was correctly answered by the Income-tax Officer.
32. Question (ii) of this Reference has already been dealt with. Question (iii) is in the following terms :
'Having regard to the finding of the valuing actuary that a sum of Rs. 1 15,195 was policy-holders' share out of which Rs. 108,620 was for immediate payment to policy-holders and the balance of Rs. 6575 was to be carried forward, whether in determining the allowance as deduction permissible under Rule 3 (a), one-half of the said Rs. 1,15,195 was allowable as deduction.'
33. This again is a question of fact and the form of the question is open to the same objection as question (i). Rule 3 (a) provides that:
'In computing the surplus for the purpose of Rule 2 :
(a) One-half of the amounts paid to or reserved for or expended on behalf of policy-holders shall be allowed as a deduction.'
34. The question formulated rests on two premises, viz., (a) that the valuing actuary found a sum of Rs. 1,15,195 to be the police-holder's share of the divisible surplus and (b) that of the said sum, a sum of Rs. 6575 was, instead of being paid out immediately, carried forward. If these premises be correct, the sum of Rs. 6575 was carried forward as reserved for policy-holders and the assessee would obviously be entitled under Rule 3 (a) to a deduction of one-half of the whole sum of Rs. 1,15,195 and not merely to one-half of rupees 1,08,620, as allowed by the Income-tax Officer, But it is not that the Tribunal has held the premises to be correct and yet held that the assessee was not entitled to a deduction of one-half of the entire amount. Rightly or wrongly, it has held the premises to be incorrect and thus the question assumes the very facts, the correctness of which is the matter for enquiry. The question, again, as to whether the sum of Rs. 6575 was reserved for the policy-holders is obviously a question of fact.
35. But the question having been directed to be referred, must be dealt with and the facts require to be stated in some detail. The last valuation was made in 1937 and, therefore, the Insurance Act applicable was the Act of 1912. In accordance with Section 8 of the Act, the actuary prepared an abstract of his valuation report and he prefixed to it a forwarding letter addressed to the Directors. The whole was called the Valuation Report. The Tribunal has referred to these documents and although we cannot make a fresh finding of fact in a Reference, our attention was drawn to the valuation Report itself which is one of the documents included in the Appendix to the Statement of the Case, although it has not been printed on the ground that it was separately available in print. The Tribunal has pointed out that in the abstract of the report itself, in the part drawn up in accordance with Clauses 9, Schedule 4 to the Act, the following statement occurs ;
'The total profit made by the Company has been Rs. 1,97,994 allocated as follows :
(a) Rupees 1,08,620 among policy-holders with immediate participation in profits (details omitted).
(b) Rupees 12,799 among the shareholders.
(c) Rupees 6,575 carried forward unappropriated.'
36. It will be seen that what is allocated to the policy-holders is only a sum of Rs. 1,08,620 and that Rs. 6,575 is a separate sum which is the balance left after the appropriations and is carried forward 'unappropriated', In the forwarding letter, however, the actuary stated as follows :
'Thevaluation discloses a surplus of Rs. 1,27,994. This is allocated as follows :
Thetotal divisible surplus
Less1/10th, being shareholders' share
Theprovision necessary for a simple Reversionary Bonus (details omitted) :
Theamount required as Bonus to Policies becoming claims by maturity during theinter- valuation period
The balance of Es. 6,575 is carried forward unappropriated.'
37. It is only in the forwarding letter that the policy-holders' share is stated to be Rs. 1,15,195 but even there, ultimately, Rs. 6,575 is not shown as reserved for policy-holders and is not recommended to be taken to a Reserve Fund, (as in the case of the sum of Rs. 1058, allocated to the shareholders at the 1930 distribution, which we saw under Question (i)), but is carried forward 'unappropriated', exactly as in the abstract of the report. The Tribunal has pointed out that in the question framed by the assessee, the important word 'unappropriated' has been omitted.
38. The contention of the assessee is that even the sum of Rs. 6575 was allocated to the policy. holders and though not appropriated, was reserved for them and that, therefore, one-half of this sum also ought to have been deducted under Rule 3 (a). The contention of Mr. Mitra before us can be summarised by saying that, according to him, the sum of Rs. 6,575 was the unappropriated balance of the amount allocated to policy-holders.
39. In my opinion, the contention of the assessee cannot be accepted. The material document is the statutory abstract of the valuation report according to which the sum of Rs. 6575 is no part of any sum allocated to policy-holders, but is simply 'carried forward unappropriated'.
Under Section 8 of the Act, the abstract had to be made 'in the form set forth in Schedule 4.' Schedule 4 contains nine clauses each of which mentions one or more things which must be included in the abstract and Clauses 9 provides that it must include-
'The results of the valuation, showing :
(1) the total amount ol profit made by the company, allocated as follows :
(a) among the policy-holders with immediate participation, and the number and amount of the policies which participated ;
(b) among policy-holders with deferred participation, and the number and amount of policies which participated;
(c) among the share-holders ;
(d) to reserve funds, or other accounts;
(e) carried forward unappropriated.'
40. It will be seen that Sub-clause (i) begins with the words 'allocated as follows' and, among the heads of allocation, 'carried forward unappropria ted' is a distinct item, distinct both from allocation among policy holders and allocation to reserve funds or to other accounts. It is itself a head of allocation. There is no head in the clause such as 'carried forward unappropriated out of the sum allocated under (a), (b), (c) or (d).' The abstract in the present case is exactly in this prescribed form and contains entries under heads corresponding to heads (a), (c) and (e). The amount of Rs. 6575, shown as 'carried forward unappropriated' is thus an amount not allocated otherwise and indeed the abstract specifically says under head 'a', that the amount allocated to policy-holders is only BS, 1,08,620. The entry, regarding the Rs. 6575 is clearly an entry under head (e) of Clauses 9 (1) of Schedule 4 to the Act. If, as Mr. Mitra contended, the amount was reserved for policy-holders, there was no reason why an entry to that effect should not have been made under head (d) of Clauses 9 (1) of Schedule 4. It is true that in the forwarding letter, the actuary first stated that the policy-holders' share was Rs. 1,15,195, but that, as the Tribunal has pointed out, might only mean that as between the share-holders and the policy-holders, Rs. 1,15,195 of the profits would be available for being allocated to the latter. The actual allocation, as shown in the abstract of the actuarial report, was only of Rs. 1,08,620 and the rest was directed to be 'carried forward unappropriated.' Indeed, the forwarding letter itself proceeds to say so. Mr. Mitra drew our attention to the statement in the abstract under Clauses 8 of the Schedule to the effect that 90% of the divisible surplus had been allocated to the policy-holders and 10% to the shareholders. Clause 8 requires the abstract to state the principles upon which the distribution of profits among the share-holders and policy-holders was made and apart from the fact that the statement relied on appears to be irrelevant to Clauses 8, it is not inconsistent witlj the meaning attributed by the'. Tribunal to the opening statement in the forwarding letter. The share-holders and the policy-holders being the only persons interested in the profits of a life insurance company, there may first be an overhead apportionment as between the two classes. Actual allocation of any particular sum is a further procets and there is no evidence in the actuarial report of the allocation of the sum of Rs. 6,575 to policy-holders. Indeed, the evidence is definitely to the contrary. There ia no finding, nor anything to show, that the sum of Rs. 6,575 was subsequently applied to the use of the policy-holders under a recommendation contained in the valuation report, from which it could be inferred that the sum had really been ear marked for the policy holders at the 1937 distribution of the surplus. The question is one of pure fact and in a reference we must go by the finding of the Tribunal. In any event, the contents of the statutory report, read with Clauses 9 (1) of Schedule 4 to the Insurance Act of 1912, are conclusive and the sum of Rs. 6,575 was, in my opinion, neither paid to, nor reserved for, nor expended on behalf of the policy-holders, as the Tribunal has held. Any amount, like the present amount of Rs. 6,575, 'carried forward unappropriated' nnder Part 9 of Schedule 4 to the actuary's report, will form part of the surplus disclosed at the next valuation and will be liable to be distributed according to the recommendations then made and there will be nothing to compel the insurer to allocate it to policy-holders only. Accordingly, the assessee was not entitled to a deduction of one-half of the sum of Rs. 6,575 under Rule 3 (a).
41. The next question is Question (iv) and it is in the following terms ;
'Having regard to the provisions of the first proviso to Rule 3 (a), whether the sum of Rs. 13,831 or any part of it can be excluded while computing the surplus for the purpose of Rule 2 ?'
42. The sum of Rs. 13,831, is the same that we came across in connection with Question (i). It is the amount of the 1932 surplus which was included in the larger surplus disclosed by the 1937 valuation, but is referred to here in connection with a different plea.
43. Here again, in order that the question may be understood it is necessary to refer first to the relevant provisions of law. They are Rule 3 (a) and the first proviso thereto, reading as follows :
'3. In computing the surplus for the purpose of Rule 2 :
(a) One-half of the amounts paid to or reserved for or expended on behalf of policy-holders shall be allowed as a deduction :
Provided that in the first such computation made under this rule of any such surplus, no account shall he taken of any such imownts to the extent to which they are paid out of or in resppet of any surplus brought forward from a previous inter valuation period,'
44. The amounts referred to in Clauses (a) above are not amounts of claims paid, which have already been deducted by the actuary in arriving at the surplus, but amounts paid out of the surplus, or reserved thereout for payment, as bonus to participating policy-holders or spent for them in other ways. In England, the whole of such amounts are now deductible under Section 16 (l), Finance Act of 1923, which was enacted on the recommendation of the Royal Commission of 1920 and superseded the decision in Last v. London Assurance Corporation Co., (1885) 10 A. c. 438. In India, however, before the Act of 1939, no part of such amounts was deductible, because according to the Revenue, and as was held by the Privy Council in Bharat Insurance Go. Ltd. v. Comm. of Income-tax, Punjab, 1934-2 I. t. R. 63 (P. C.), such amounts were paid out of profits after the same had been earned. On the other hand, the insurance companies had always been contending that participating policy-holders were charged a higher rate of premium in order to provide for payment of a bonus to them and dividends to share-holders and that the payment of the bonus was merely a return of that excess premium and, therefore, a return of capital and not payment of a share of the profits. Clause (a) represents a compromise between these two views. It was found on an analysis of the relevant figures that in fact the surplus out of which the bonus was paid arose partly out of the excess premia realised and partly out of profits and accordingly a rough proportion of half-and-half was laid down.
45. It may be added that the use of the bare word 'amounts' in Rule 3 (a), as contrasted with 'any part of the profits' in the English section, ought not to mislead anyone into thinking that the Rule deals with items of payment or expenditure made or incurred in the course of carrying on the business. Under Rule 2 (b), the surplus disclosed by actuarial valuation is to be adjusted. Under RULE 3, and, therefore, under: Rule 3 (a), the surplus is to be computed, not for the purpose of Rule (b) hut for the purpose of the whole Rule 2, that is to say, for the purpose of determining the taxable 'profits and gains' of the business. What it means is that the surplus ascertained under Rule 2 (b) is to be further adjusted under RULE 3, except in the case of Sub-rule (c), by reference to the manner in which the surplus has been utilised and the 'amounts' referred to in Rule 3 (a) are, therefore, amounts paid or reserved or expended out of the surplus.
46. What is important to notice is that Rule 3 (a) directs a deduction to be made from the surplus and, therefore, the larger the deduction, the smaller will be the taxable profits. Under Clauses (a), read without the proviso, the whole of the amounts allocated to the participating policy-holders out of the surplus, whether for immediate payment or for reservation, is to be taken into account and one-half thereof deducted. But then comes the proviso, limited in its operation to the first computation under the 1939 Act. The function of a proviso is to except a case which would otherwise fall within the general language of the main enactment and the proviso in the present case lays down that in making the deduction under Clause (a) at the first computation under the new rules, that portion of the amounts paid to or reserved for or expended on behalf of policy-holders which is relatable to the surplus brought forward from a previous valuation period as paid out of that surplus, shall not be taken into account. In other words, what shall be deducted will only be the amounts paid or spent or reserved out of the surplus of the last valuation period, but so far as any portion of the amounts, actually paid or spent or reserved, came out of the surplus of a previous period, still lying unappropriated in the hands of the insurer at the time of the distribution, the same shall be disregarded and one-half of such portion shall not bo included in the deduction. The result of the exclusion of such portion will be to reduce the amount of the deduction and make the taxable profits larger. The contention of the assessee, however, is that the meaning of Clauses (a) and proviso 1 thereto is quite the opposite.
47. It will be convenient now to state the facts. The computation for the 1939-40 assessment was the first computation under the schedule. It has already been seen that the amount of the surplus of the previous valuation period ending in 1932, which was included in the total surplus disclosed by the 1937 valuation, was Rs. 13,831. In making the deduction under Rule 3 (a) and computing the amount of which one-half was to be taken, the Income-tax Officer excluded the entire amount of Rs. 13,831 from Rs. 1,08,620, the amount allocated out of the surplus to policy-holders. On appeal, the Appellate Assistant Commissioner held that the whole amount of Rs. 13,831 ought not to be excluded but only that proportion of it which might fairly be said to have gone into the amount allocated to the policy-holders. Accordingly, he apportioned the latter amount between the previous surplus carried forward and the net surplus of the last valuation on a pro raia, basis and determined the proportion to be Rs. 11,737, which he directed to be excluded. His decision was upheld by the Tribunal. The expression 'or any part of it' in the question referred has reference to this reduction. No question was raised before us as to the method by which the proportion was worked out or the correctness of the amount determined. But the contention was that under the proviso, no part of the sum of Rs. 13,831 was liable to be deducted at all.
48. According to Mr. Mitra, in determining the amount of which one-half was to be deducted under Rule 3 (a), the Income-tax, Officer would have, but for the proviso, to exclude the amount which had come out of the previous surplus, for, his task was to compute the surplus of the last valuation period. But the proviso enjoined that in the first computation under the new rules, no such exclusion was to be made. In other words, one-half of the whole amount paid to or spent or reserved for policy-holders was to be deducted. It was contended that the words 'no account shall be taken of,' occurring in the proviso, meant 'ignored' and the proviso meant that in the first computation, the fact that a part of the total amount paid to or reserved for policy-holders had come out of the surplus of a previous period was not to bo taken into consideration. In supp'ort of his construction of the words 'no account shall be taken,' Mr. Mitra referred to Sections 15 (2-A) and 44E (3) (b) of the Act where also the same words had been used.
49. Mr. Mitra did not seem to realise that if his contention was correct, his client might save some tax in the 1939-40 assessment, but would be consigned to a liability for a heavier tax in all future assessments. On the view contended for by him, the deduction in the first assessment would be larger and in subsequent assessments smaller, for them, according to him, the amount coming out of the surplus of the previous period would have to be excluded from the amount of which one-half was to be deducted, the proviso no longer operating. As I have already explained, such is not the meaning of the rule or the proviso. It is to be noticed that by the time the stage of Rule 3 (a) is reached, the surplus carried forward from the previous period has already been deducted from the surplus of the last valuation under Rule 2 (b) as Rs. 13,831 was in the present case. That deduction is for the purpose of ascertaining what the surplus of the last valuation period itself was. Rule 3 (a) is concerned with laying down what portion of the surplus, as ascertained, shall be taken as taxable profits and it directs that one-half of the amounts paid to or reserved for the policy-holders shall be deducted. Since the direction, as I have explained, is on the basis that to the extent of one-half, the payment or reservation of the amounts may be taken to be return of capital, to that extent the amounts are not profits at all and, therefore, it is immaterial to what period the funds out of which they were paid or reserved belonged, i. e., when the capital returned was received or emerged as a surplus. A full one-half of the total amount paid or reserved for policy-holders is, therefore, to be deducted and there could be no reason for excluding any portion on the ground that it was provided out of the surplus of a previous period. It is for that reason that Rule 3 (a), taken by itself, is wholly unqualified and Mr. Mitra was not right in contending that in applying it, without the proviso, the amounts coming out of a previous surplus were to be excluded. It is the proviso which provides for the exclusion in the case of the first computation and the words 'no account shall be taken of any such amounts etc.' mean that such amounts shall not be taken into account or shall be kept out of account, in other words, they will not be included in the amount of which one-half is to be deducted. The effect of this exclusion will be to reduce the amount that would otherwise have to be deducted under Rule 3 (a) and it is in that way that the proviso restricts the operation of the Rule in the case of the first computation and makes the taxable profits larger. We are not concerned with the policy of the Legislature, but the reason for the proviso has been suggested to be that since no part of the amounts allocated to the policy-holders was formerly deductible and one-half was now being allowed, it was sought to moderate the sudden fall of revenue in the first year. The construction I have placed on the words 'no account shall be taken' viz., shall not be taken into account or shall be left out of account, is perfectly consistent with the meaning of the same words in Rs. 15 (2-A) and 44E (3) (b) cited by Mr. Mitra.
50. For the reasons given above, I am of opinion that so much of the sum of Rs. 1,08,620, allocated to the policy-holders, as was paid out of the previous surplus of Rs. 13,831 was liable to be excluded by virtue of the proviso to Rule 3 (a), the computation being the first computation under the Rules. There can be no reason to suppose that the whole of the amount aflocated to the policy-holders was paid out of the surplus of the last valuation period, leaving the previous surplus untouched, nor that the entire amount of the previous surplus was first exhausted. In the circumstances, to work out a proportion, as the Appellate Assistant Commissioner did, was obviously the fairest thing that could be done, as the Tribunal has held.
5l. Proceeding now to question (v), that question runs thus :
Was the Appellant entitled in law to claim allowance as deduction the sum of Rs. 31,317 being other assets written off under the provisions of Rule 3 (b)
52. Rules (b) has already been quoted in connection with question (ii). The facts relevant to the present question are that during the last valuation period, there was appreciation of securities held by the company to the extent of Rs. 97,112 and at the same time there was depreciation to the extent of Rs. 15. In the Statement of the Case, the latter amount is referred to as 'loss', but it is explained in the appellate order of the Tribunal that this loss was due to depreciation. The former of the two amounts was liable to be included in the surplus under the second part of Rule 3 (b) and, the latter was liable to be deducted under the first part, but the Income-tax Officer, instead of carrying out two operations of addition and subtraction, merely included the amount of the net appreciation which was Rs. 81,318. The further facts are stated by the Tribunal in the following words :
'Out of the net profits of Rs. 81,398 mentioned above, a sum of Es. 31,317 was taken to an account called Organisation Account. Organisation expenses were written off to the extent of this sum, or in other words, were reduced by this sum.'
53. In the appellate order of the Tribunal, the name of the account is given as Organisation Expenses Account. The contention of the assessee is that the organisation expenses were 'other assets' within the meaning of Rule 3 (b) and as the sum of Rs. 31,317 was written off to meet the loss on the realisation of such assets, the assessee was entitled under the Rule to its deduction from the surplus.
54. It appears to me that the reference to the appreciation and depreciation of the securities is pointless. The material fact is that a sum of Rs. 31,317 was set off against the organisation expenses, but wherefrom that sum came and how exactly it was earned, is immaterial. The real question is whether organisation expenses are 'assets' within the meaning of Rule 3 (b) and whether setting off a portion of the profits against organisation expenses can be regarded as 'writing off' the amount concerned 'to meet loss on the realisation of' those assets.
55. Prima facie, it is difficult to see how expenses can be assets, particularly assets capable of realisation. Mr. Mitra, however, tried to introduce some new facts and stated that the expenses concerned were ceally advances granted to the organisers which they had failed to repay and which had become irrecoverable. According to him, the expenses were thus debts due to the company and loss had been suffered on their realisation.
56. I am afraid it is not possible in a reference to go beyond the Statement of the Case and admit further facts which alone supply the foundation for a particular contention. A stern reminder of this limitation is contained in the recent judgment of the Supreme Court in the case of Commr. of Income-tax, West Bengal v. Calcutta Agency Ltd., : 19ITR191(SC) . Neither the Statement of the Case in the present case, nor the appellate order of the Tribunal contains any finding or material to show that the expenses concerned were anything other than expenses, properly so called, i. e., sums spent out.
57. I have already given, in connection with question (ii), my reasons for holding that 'other assets' contemplated by Rule 3 (b), are assets of the nature of investments which may appreciate or depreciate, about which it is appropriate to speak of realisation and realisation of which may result in gain or loss. I am unable to see how organization expenses can come under the category of such assets. If they are business expenditure, they would fall to be considered under Rule 2 (b), read with Section 10 of the Act. If they are capital expenditure, they would still not, by themselves, be assets, although any asset acquired by or through them may be an asset. It is, however, difficult to think of any asset, particularly a realisable asset, acquired by organisation expenses. They may be carried on the assets side of the Balance Sheet, as was said to have been done in the present case, but that is only a method of accounting and, as assets, such assets are fictitious, because they have no real existence in the shape of anything which may be the subject-matter of realisation. This last point appears to me to be decisive, for, apart from appreciation and depreciation, Rule 3 (b) contemplates assets which are held by the company for realisation or at least such assets as may be realised and which on realisation, may bring in gain or cause loss. It is impossible to see how organisation expenses can be realised as assets are realised and how there can be dealings in organisation expenses, leading to loss or gain. Further, Rule 3 (b) speaks of 'loss on the realisation of assets' which clearly contemplates that there has been a transaction of realisation and such transaction has resulted in loss. It is not even arguable that there was or could be any transaction of realisation in the present case. Mr. Mitra contended that the organisation expenses had always been shown as assets, had formed part of the surplus and had suffered tax in the past and it would be inequitable if a balancing allowance was not granted, when they were written off. Even if the facts be as stated, about which there is no finding, we are concerned here with only what the Act allows under Rule 3(b), As I have tried to explain in connection with Question (ii), Rule 3 (b) seeks to give relief to life insurance companies by treating them as dealers in investments although they are really not so and the 'other assets' contemplated by the Rule are assets of the nature of investments. I am clearly of opinion that organisation expenses cannot come within such assets.
58. I have already pointed out that the further facts sought to be introduced by Mr. Mitra are not admissible, but I may add a word with regard to them. On the basis that the expenses concerned were advances made to the organisers, the argument of Mr. Mitra appeared to proceed on principles applicable to bad debts. But it is well settled that bad debts in respect of which an allowance is available for purposes of income-tax are trading debts, i. e., debts constituted by outstanding business dues or, in the case of bankers and money-lenders, debts arising out of loans granted in the course of the money lending business. Financial accommodation granted to employees or sums over-drawn by an employee on his commission account are not debts which, on becoming irrecoverable, can be claimed as bad debts for purposes of income-tax. I am not forgetting that the allowance for bad debts I am speaking of is a revenue allowance, but it shows the principle applicable, because the allowances under Rule 3 (b), although capital allowances in form, really rest on an assumed basis that the insurance company carries on a business of dealing in investments and, therefore, the principle may be referred to for ascertaining what kind of debts are contemplated by Rule 3 (b), if 'other assets' mentioned by it include debts due to the company. In my opinion, Rule 3 (b) may include loans granted by the company out of its surplus funds as investments of its money and with regard to such loans it will obviously be appropriate to speak of realisation and of gain or loss. But even assuming that the organisation expenses written off in the present case were loans advanced to organisers, there is nothing to show that they were loans of the above kind or of what kind they were. A mere statement that they were advances would not bring them within Rule 3 (b). I need not, however, pursue this point further, because, on the facts s ated by the Tribunal, it does not arise. In my opinion, for the reasons I have given, the assessee was not entitled to a deduction of the sum of Rs. 31,317 on the basis that it was an amount written off to meet a loss on the realisation of assets.
59. The last question is Question (vi) which is in the following terms :
Whether the sum of Rs. 50,081 carried to the Investment Reserve Fund was admissible as deduction under Rule 3 (b) of the Schedule
60. We have seen in connection with the preceding question that the net appreciation of the-securities was Rs. 81,398 and that out of that amount, Rs. 31,317, was carried to the Organisation Expenses Account. The balance left was Rs. 50,081, and that is the sum referred to in the present question. This sum was carried to the Investment Reserve Fund. The contention of the assessee is that the amount was 'reserved in the accounts to meet depreciation of or loss on the realisation of securities' and that, therefore, it ought to have been deducted from the surplus under Rule 3 (b). The Tribunal rejected the contention on the ground that the Rule contemplated a depreciation or loss which had actually occurred and none having occurred in the present case, the deduction claimed was not allowable.
61. It was contended by Mr. Mitra that the language of the Rule was wide enough to cover both loss or depreciation which had actually occurred and future loss or depreciation. He referred to the dictionary meaning of the word 'reserve' which, according to the Oxford Dictionary, was 'to keep for future use, to keep back or hold over for a later time' and contended that the Rule did not, in any way, limit the contingency contemplated by it to actual loss or depreciation. According to Mr. Mitra, the decision of the Bombay High Court in the case of the Commr. of Income-tax Bombay v. Western India Life Insuranee Co. Ltd., 1938-6 I. t. r. 44 (Bom.) in which a contrary view had been taken under the old Rule 30, was not correct.
62. In my opinion, the answer to the question is not to be found in the dictionary meaning of the word 'reserve' or any other word, but in what the Rule aims at and intends and what, taken as a whole, it says. As I have already explained, although in the case of a life insurance company, depreciation of or loss on the realisation of securities held by it is really decrease of capital or capital loss, Rule 3 (b), in effect, treats such a company as a dealer in investments and gives it a right to claim deduction on the ground of such depreciation or loss. But, there is no reason to suppose that the Rule gives a life insurance company greater rights than those of an assessee who actually deals in securities. Such an assessee can only claim that losses actually suffered by him, whether on the purchases and sales of securities or by their depreciation, shall be taken into account in his assessment, but he cannot claim that future or apprehended losses shall also be taken into account. Rule 3 (b) places insurance companies exactly in the same position. The material words in it are 'any amount either written off or reserved in the accounts or through the actuarial valuation to meet depreciation of or oss on the realisation of securities.' As to writing off, it is perfectly clear that no loss can be written off unless it has actually occurred. 'Reserved' occurs in the Rule as an alternative to writing off and the scope of the two operations is obviously co-extensi ve. Strictly speaking, ' 'written off'' seems to go better with loss and 'reserved' with depreciation, but in income-tax language, depreciation is also loss and there is no reason to think that the Rule is, on the one hand, limiting writing off of losses on realisation to actual losses and on the other, contemplating losses by depreciation as comprising apprehended losses as well, in complete variance with the ordinary income-tax. It is true that the word 'reserved' itself implies a future contingency against which the reservation is made, but even that implication of the word does not involve a difference from writing off as regards the requirement that, like loss, the depreciation also must be a present depreciation which has already occurred and which requires to be met. The reason why there is no difference is that in a case of depreciation, the asset is still being held and depreciation is oniy a fall in value of the asset below its cost price and, therefore, only a notional loss. No actual loss is suffered until the asset is sold and unless depreciation exists at the date of the sale as well. When an amount is reserved to meet depreciation, it is undoubtedly reserved to meet this possible actual loss on sale, which is a future contingency, but the basis of such depreciation is that a depreciation has already occurred and notice must be taken of it and that the notional loss which has resulted foreshadows an actual loss which rejuires to be provided against. There must thus be a present depreciation and present notional loss, although the actual loss may be a future contingency. The loss must, however, be a loss occurring upon a computation of both appreciation and depreciation of assets of the class concerned, because if inspite of depreciation of some of the assets of the class, the net result is still a profit or at least no loss, there will be no necessity or justification for taking anything to the reserve out of the profits to provide against loss by depreciation under the head concerned. Again, although the present loss is only notional, commercial practice treats it as actual loss and income-tax allows it to be so treated, of course when the accounts are kept on the mercantile basis. The measure of the present notional. loss, as determined at the stock valuation, is the measure of the deduction allowed. Rule 3 (b) embodies the same principle and provides for a. deduction to the extent of any actual loss written off and to the extent of so much of any actual depreciation as has been sought to be met by taking an amount to a reserve fund. The language used in the Rule leaves no doubt that such is its intention. If Mr. Mitra's contention was correct, a life insurance company would be in a position to escape tax on any amount it pleased by simply taking it to a reserve fund on the plea that it was intended to meet future depreciation. Such a contention cannot be entertained for a moment. Reference was made to the proviso to the Rule ami it was contended that the Income-tax Officer could always revise and adjust the depreciation allowance claimed, but apart from the fact that that provision is a very inadequate safeguard against extravagant appropriations to depreciation, it throws no light on the question as to whether Rule 3 (b) contemplates that a loss on, realisation or loss by depreciation must actually have occurred.
In my opinion, the answer to that question must be in the affirmative, as was held in Re Commr. of Income-tux, Bombay v. Western India Insurance Co. Ltd., 1938-6 I. t. r. 44 (Bom.) and Commissioner of Income-tax, Bombay, Sind & Baluchistan v. Indian Life Insurance Co. Ltd., 1946-14 I. t. r. 347 (sind). Both the decisions were under the old R. 30, but that Rule was substantially the same as the present Rule 3 (b).
63. In the present case, although during the last valuation period, there was depreciation of some of the securities, appreciation of other securities was to a much larger extent so that the net result was a substantial increase of the money invested in securities. In the circumstances, there was no loss on securities, whether by depreciation or otherwise, and accordingly no reserve was required to be created 'to meet depreciation of or loss on the realisation of securities.' The sum of Rs. 50,081, taken to the Investment Reserve Fund, cannot, therefore, be said to be an amount reserved in the accounts for the purpose stated in, Rule 3 (b) and accordingly deduction of the amount was not allowable under the Rule. On general grounds too, it is clear that since the Schedule is concerned with the computation of the profits of the last valuation period, there is no reason why in Rule 3 (b) it should provide for deduction of any amount as loss where in fact no loss occurred.
64. In the result, the questions referred must, in my opinion, be answered as follows :
REFERENCE No. 2 of 1946 :Question (i):By neither.Question (ii):No.REFERENCE No. 4 of 1947 :Question (i):Yes.Question (ii):Does not arise.Question (iii):Does not arise, the facts assumed not being correct. On the correct facts, the answer is, No.Question (iv):Yes, a part proportionate to the total amount utilised for the policy-holders.Question (v):No.Question (vi):No.
65. As the two references were heard together, there will be only one set of costs and in view of the proportion of the divided success, the Commissioner will have three-fourths of them. He will also have the full costs of and incidental to the application on which the Rule Nisi, resulting in Reference No. 4 of 1947, was issued. Certified for two counsel.
S.R. Das Gupta, J.
66. I agree.