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Ruby General Insurance Co. Ltd. Vs. the Comr. of Income-tax - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
Decided On
Case NumberIncome-tax Ref. No. 8 of 1947
Reported inAIR1952Cal355
ActsExcess Profits Tax Act, 1940; ;Excess Profits Tax Rules - Rule 2 and 2(1)
AppellantRuby General Insurance Co. Ltd.
RespondentThe Comr. of Income-tax
Appellant AdvocateSukumar Mitra, Adv.
Respondent AdvocateS.K. Gupta and ;J.C. Pal, Advs.
Cases ReferredNorthern Aluminium Co. Ltd. v. Inland Bevenue Commrs.
- .....branch of the business but only about the method of calculation to be adopted for determining the excess profits tax payable in respect of the other branches for the accounting period commencing from 1-9 1939 and ending december 1939. the co. having exercised option as regards standard profits under the second proviso to section 6 (1), excess profits tax act, such standard profits have to be calculated by applying the statutory percentage to the average capital employed in the business during the relevant chargeable accounting period.3. the only point for decision in the present reference is how the average amount of capital employed in the business during the chargeable accounting period is to be computed.4. under section 2 (3), excess fronts tax act, 'average amount or capital' means.....

R.P. Mookerjee, J.

1. This is a reference under Section 66 (1), Income-tax Act, raising a question dependant on an interpretation of E. 2, Sch. II with the explanatory sub-para, of Excess Profits Tax Act (xv [15] of 1940).

2. The assessee company, Ruby General Insurance Co. Ltd., is a company incorporated in India carrying on different branches of insurances including Life, Eire, Marine & general insurances. We are not concerned with the Life Insurance branch of the business but only about the method of calculation to be adopted for determining the excess profits tax payable in respect of the other branches for the accounting period commencing from 1-9 1939 and ending December 1939. The Co. having exercised option as regards standard profits under the second proviso to Section 6 (1), Excess Profits Tax Act, such standard profits have to be calculated by applying the statutory percentage to the average capital employed in the business during the relevant chargeable accounting period.

3. The only point for decision in the present reference is how the average amount of capital employed in the business during the chargeable accounting period is to be computed.

4. Under Section 2 (3), Excess fronts Tax Act, 'average amount or capital' means the average amount of capital employed in any business as computed in accordance with Sch. II. The, relevant provisions of Br. 1 & 2 are in the following terms:

Rule 1. (1) Subject to the provisions of this Schedule, the average amount of the capital employed in a business (so far as it does not consist of money) shall be taken to be-

(a) So far as it consists of assets acquired by purchase on or after the commencement of the business the price at which those assets were acquired subject to the deductions .hereafter specified;

(b) So far as it consists of assets being debts due to the persons carrying on the business, the nominal amount of those debts subject to the said deductions,

* * * * *(2) The price or value of any assets other than those shall be subject to such deductions for depreciation as are necessary to reduce the asset to its written down value & to such other deductions in respect of reduced values of assets as are allowable in computing profits for the purpose of income-tax & in the case of a debt, the nominal amount of the debt shall be subject to any deductions which has been allowed in respect thereof for income-tax purposes.

Rule 2. (1) Any borrowed money & debt shall be deducted, & in particular any debt for Income-tax or super-tax or for excess profits tax in respect of the business shall be deducted:

* * * * *The debts to be deducted under this sub-rule shall include any such sums in respect of accruing liabilities as are allowable as a deduction in computing profits for the purposes of Excess Profits Tax or would have been so allowable if the period for which the amount of capital is being computed had been a chargeable accounting period & the said sums shall be deducted notwithstanding that they have not become payable.'

5. The assets of the Co. as on 1-1-1939 are valued by the Taxing Authority at Bs. 19,88,890 & are accepted by both the parties as correct as the starting point for computing the average amount of capital under Sections 1 & 2 of Sch. II of the Act.

6. In respect of insurance business conducted certain reserves are maintained by the Co. to cover 'unexpired risks' which arise in the following circumstances. Eire, Marine or general insurance premiums are ordinarily annual generally covering the period from the date of the payment of the premium or the acceptance of the risk to the end of the twelfth month following. The period for which the risk is covered does not tally with the accounting period either of the company which is a calendar year or for the purpose of applying the provisions of the Excess Profits Tax Act the accounting period for which in the present case is from 1-9 to 31-12-1939. In respect of premiums received on a particular date within one accounting period, claims may have to be paid if there be a claim, during the next accounting period. To cover such 'unexpired risks' 40% of the premium income of any particular year is carried in the revenue account for that year to the reserve. These reserves are brought back into the revenue account of the next suaceeding chargeable period as on the credit side & the claims, if any, in respect of policies issued during the previous accounting period are shown on the debit side.

7. The contention of the Revenue Authorities is that the amount shown as reserves for 'unexpired risks' should be treated as a 'debt' under R. 2 of Sch. 11, Excess Profits Tax Act & be deemed to be 'sums in respect of accruing liabilities' & be deducted from the capital for the purpose of determining the 'average capital' employed & assessing the excess profits tax payable.

8. The contention of the assessee on the other hand is that such reserves for 'unexpired risks' are not debt in respect of 'accruing liability' but are sums which are to be treated in the same manner as capital for the period & the 'average capital' is to be calculated taking such reserves as a part of the capital.

9. It may be stated at once that this difference as between the Revenue Authorities & the assessee depends on the divergent interpretations of Rule 2, Sch. II, Excess Profits Tax Act. The Revenue Authorities attempt to reduce the amount of average capital employed as the standard profit is asses-ed at a fixed rate of interest (according to Rules) & the excess profits tax is assessed on the Excess Profits as may appear when the actual profits of the chargeable accounting period is compared to the standard profit for the same period. The assessee attempts to make the average capital as high as possible so that the standard profit may be correspondingly higher whereas the Revenue Authorities try to put the average capital at as low a figure as may be possible so that the standard profit may be lower & that taxable profit under the excess profits tax higher.

10. The point raised falls to be decided on the provisions contained in R. 2 of Sch. ii, Excess Profits Tax Act & the law as in force in this country. The analogy to the rules applicable for pure life insurance business is not justified, as the rules governing the computation of profits as also the ascertainment of the average capital for such business are different from those as are applicable to other forms of insurance, including fire, marine & motor insurance. We should also be very cautious in relying upon English decisions as the law governing contignent contract in the relevant provisions of the Contract Act, is not the same as in English Law, Muralidhar v. International Film Corpn. Ltd., 70 I. A. 35 at p. 48.

11. Under R. 2 of Sch. II, Excess Profits Tax Act, 'debts' include certain sums in respect of 'accruing liabilities.' The opening words of R. 2 refer to 'any borrowed money and debt & not why borrowed money or debt.' The Legislature does not make the' two terms 'borrowed money' and 'debt' as mutually interchangeable ones, otherwise those two terms would have been joined by a conjunctive.

12. The amount in question cannot, in any view, be considered as borrowed money. Is this a debt, as debt includes for the purpose of Rule 2 accruing liabilities?

13. The word 'accruing' has got a meaning different from 'owing'. Accruing means to become due. As to when a particular amount accrues depends on the circumstances in each particular case. Bent accrues when it has already become due. With reference to the accrual of title, the time ia referable to when the instrument creating a title becomes operative-even the exeoution of the document will not be sufficient if the data when it is to take effect is specifically mentioned.

14. Until a sum becomes payable, it is difficult to bring that amount within the category of a debt, & there is no scope for an argument if an accruing liability is not brought within the category of a debt. We shall have to consider the significance of the term 'accruing liability'. Suffice it is to say a person cannot be deemed as owing a debt until the same becomes payable (See Henry Dresser v. William Johns, (1859) 6 C. B. (N. S.) 429 : 141 E. R. 524). It had also been held by the Judicial Committee in Syud Tuffazal Hossein Khan v. Baghoo Nath, 14 M.I.A. 40, that the expective claim under an inchoate award was not property within the meaning of Section 205 of Act VIII [8] of 1859 (now repealed) & was not saleable in execution of a decree:

'An existing debt, though payable at a future day, may be attached, whilst a salary, wages, 'money claim accruing due, may not;.....In the present case the attachment, as it has been observed, is not of the antecedent share in the undivided assets. It is of a claim under a future award as to which it is wholly uncertain, until the award be made, to what the debtor will be entitled. The uncertainty at the time of the attachment and sale was not limited to mere question of quantum ; it was wholly uncertain . . , .in what way the arbitration might terminate.'

15. The business carried on by the assessee Co. in the departments mentioned above is in respect of contracts of insurance. Such contracts are to be tested as under the provisions contained in Chap. III, Contract Act. On the acceptance of a risk a contract is entered into between the insurer & the insured though that contract cannot be enforced unless & until a particular event has happened (vide Section 82, Contract Act). An Insurance Company has to make provision for meeting the liability if it actually accrues on the happening of a particular event. The primary source of income of an Insurance Company is the premium received from the insured. If the accounting period for determining the profits of the company & the term for which all premiums are paid are identical then there is no difficulty. Before the end of the accounting period it can be definitely ascertained whether the contingency has happened & the liability to pay has occurred. But the position is altogether different when the term for which a premium is received on a particular date extends beyond the accounting period, either of the Company for ascertaining the profits earned, or for determining excess profits tax payable by the said company. The premiums are fixed & ascertained on a calculation of the probabilities & averages on a strict scientific basis by the actuary. The company must carry forward a certain portion of the premium received to cover what is described as 'un-expired risks', i. e., the liability which may happen in a subsequent accounting period on the happening of a contingency for which the premium received in the previous period must be made available.

16. The reserve which is maintained by a company ,is to meet eventual losses or to be drawn upon in the case of certain emergencies. The Insurance Act provides for the transference in certain proportion of the premium received to the reserve to cover claims by the insured. In the case of long term insurance, amounts in the reserve have to be kept on more or less as a permanent reserve. But in short term insurance the position is altogether different; whether the amounts, which are set apart to cover the risk, are actually required or not for specific unexpired risks, are definitely known & ascertained more often within the next accounting period. The transfer of 40% of the premium income of a particular year to cover unexpired risks in the fire, marine & motor insurance business has been fixed on expert calculation as also by authoritative decisions by different Courts. This amount is nothing more or less than a temporary reserve to cover these unexpired risks. It is difficult to characterise the same as debt in respect of accruing liabilities.

17. In our view contingencies in respect of unexpired risks are not liabilities, far less accruing liabilities. The forms which are to be maintained under the Insurance Act 1938 viz., Form 'a,' for the balance sheet, form 'b' for profit & loss account and Form 'f' for revenue account applicable to fire insurance business etc. make it abundantly clear that not only the balances of the different insurance funds but other contingent liabilities are to be separately accounted for in the same manner as reserves. In form 'f' the penultimate item is described as 'reserve for un-expired risk, being .... per cent of premium income of year......' In the Full Bench decision of this Ct., Bancharam v. Adya Nath, 36 Cal. 936, Jenkins C. J. & Mookerjee J. made it clear & applied the ordinary meaning of the word 'debt' in interpreting Section 4. Succession Certificate Act, (VII [7] of 1889) :

'A sum of money which is certainly & in all events payable is a debt without regard to the fact whether it be payable now or a future time. A sum payable upon a contingency, however, is not a debt, or does not become a debt until the contingency has happened' (page 941).

Unless there be a clear & cogent ground the ordinary & natural sense of a word is to be preferred -a term is to-be interpreted in the popular sense. (Simpson v. Teignmouth & Shaldon Bridge Co., 1903) 1 K. B. 405, per Halsbury L. C. at p. 411/412). One of the ordinary meanings of the word 'accrue'.... to arise or spring as a natural growth or result has been strongly relied upon by the learned counsel appearing for the Revenue Authorities. But a liability will be an accruing liability if at every moment during the subsistence of the contract a liability springs but on the facts of the present case, as already explained above, there is no liability at any moment during the subsistence of the contract unless & until the actual contingency happens. The unexpired risks are transformed into a liability only on the happening of that contingency & they are not accruing liability. Although in a different context in connection with bankruptcy law the observations in Hopkins v. Thomas, (1860) 7 C. B. N. S. 711 : 141 E. R. 995 are apposite.

18. Reference may also be made to the recent decision by the House of Lords in Inland Revenue Commrs. v. Northern Aluminium Co. Ltd., (1947) 1 ALL E. R. 608 affirming the decision of the Court of Appeal by Green M. R. in Northern Aluminium Co. Ltd. v. Inland Bevenue Commrs., (1946) 1 ALL E. R. 546. In calculating capital for the purposes of Excess Profits Tax or in deducting 'debts' which would reduce the amount of that capital the debt should be really debt existing at the time. No doubt the provisions of Finance Act (No. II [2]) of 1939, sch. VII Part 2 which fell to be considered in that case were slightly different from the provisions now under consideration in the present case but the following general observations by Green M. R, appearing at page 551 in (1946) 1 ALL E. R. 146 and approved by the House of Lords may be referred to :

'You cannot earn profits on a notional debt-it is not an asset. It is not an asset which would ever appear in the balance sheet. It must be in the balance sheet for the year as an existing asset, not something which is written back by a re opening of the balance sheet in some subsequent year so as to let in something which in that year was not an asset at all .... It is quite impossible to treat a receipt, which is to be written back into a previous jesr for the purpose of ascertaining the profits, as being an asset in the shape of a debt within the meaning of those capital provisions.'

19. The question referred to this Court must' accordingly be answered in the negative & the sums' standing to the credit of the different insurance funds as reserve for exceptional losses cannot be deducted under B. 9 of Sch. II read with explanatory subpara of the Excess Profits Tax Act, 1910.

20. The assessee applicant is entitled to costs of the hearing in this Court. Certified for 2 counsel.

G.N. Das, J.

21. I agree.

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