section 44/income-tax act

[2004] 140 taxman 446 (delhi)

High Court of Delhi

Oriental Fire & General Insurance Co. Ltd.

v.

Commissioner of Income-tax

B.C. Patel, CJ.

and Badar Durrez Ahmed, J.

IT Reference Nos. 144-146 of 1984

May 27, 2004

Provision for taxation made by an insurance company is
neither an expenditure nor an allowance

Section 44, read with rule 5, of the First Schedule to the Income-tax Act, 1961 - Insurance business - Assessment years 1974-75 and 1975-76 - Whether in respect of an insurance company profits and gains should be computed in accordance with rules contained in First Schedule - Held, yes - Whether in view of rule 5(a) of First Schedule any ‘expenditure’ or ‘allowance’ which is not admissible under provisions of sections 30-43A in computing profits and gains of business is to be added back - Held, yes - Whether provision for taxation is neither an ‘expenditure’ nor an ‘allowance’ - Held, yes - Assessee, an insurance company, made provision for taxation, but did not pay out of said provision any sum on account of any rate or tax levied on profits - Assessing Officer applying provision of section 44 read with rule 5(a) of First Schedule made addition of amount for provision for taxation to balance of profits disclosed by annual accounts of assessee - Whether Assessing Officer was wrong in adding back amount for provision for taxation - Held, yes

Words and phrases - ‘Expenditure’ or ‘allowance’ as occurring in rule 5(a) of the First Schedule to the Income-tax Act, 1961

Facts

The assessee, an insurance company, made provision for taxation and claimed that the amount for provision for taxation should be excluded from the computation of income made at the time of filing the original return and only the balance of profit should be taken as the starting point for the computation of income. The Assessing Officer disallowed the assessee’s claim and held that the amount for provision for taxation could not be allowed as deduction under section 40(a)(ii). He further applying the provisions of section 44 read with rule 5 of the First Schedule to the Act made addition of the amount for provision for taxation to the balance of profits disclosed by the annual accounts of the assessee. On appeal, the Commissioner (Appeals), and on further appeal, the Tribunal upheld the impugned order.

On reference :

Held

There were no adverse comments of the Comptroller and Auditor General of India with regard to provision for taxation. [Para 4]

Reading the provision of section 40(a)(ii), it is clear that if any sum is paid on account of any rate or tax levied on the profits or gains of business or profession or assessed at a proportion of or otherwise on the basis of any other profits or gains, then the same shall not be deducted in computing the income chargeable under the head ‘Profits and gains of business or profession’. In view of the provisions contained in sections 30-43A, it is clear that in respect of an insurance company the profits and gains should be computed in accordance with the rules contained in the First Schedule. Further, in view of rule 5(a) of the First Schedule any ‘expenditure’ or ‘allowance’ which is not admissible under the provisions of sections 30-43A in computing the profits and gains of a business is to be added back. If sections 30-43A are not applicable, then in that case there is no question of adding back the amount for provision for taxation. Even if the provision for taxation is not to be considered as any expenditure or allowance, then the same is not required to be added back. The provision for taxation is neither an ‘expenditure’ nor an ‘allowance’. Although a provision for taxation was made by the assessee, there was nothing to show that any sum was paid on account of any rate or tax levied on the profits, etc. In view of the provisions contained in the Insurance Act, 1938, as also being certified by the Comptroller and Auditor General and considering the scheme of the Act with reference to section 44 read with rule 5(a) of the First Schedule, it was not open to the Assessing Officer to add back the figures for provision for taxation. [Para 7]

Editor’s Note

1. Following the decision of the Supreme Court in the case of General Insurance Corpn. of India v. CIT [1999] 240 ITR 139/106 Taxman 389, it was to be held that reserve for bad and doubtful debts made by the assessee could not be added to the balance of profit disclosed in the annual accounts of the assessee.

2. Following the decision of the Supreme Court in the case of CIT v. Patel Bros. & Co. Ltd. [1995] 215 ITR 165/81 Taxman 156, it was to be held that the expenditure incurred by the assessee, which was partly for payment of entertainment allowance to the employees and partly for offering customary hospitality to the constituents, was allowable as a deduction.

Cases referred to

General Insurance Corpn. of India v. CIT [1999] 240 ITR 139/106 Taxman 389 (SC) [Para 1], CIT v. Patel Bros. & Co. Ltd. [1995] 215 ITR 165/81 Taxman 156 (SC) [Para 1] and Pandyan Insurance Co. Ltd. v. CIT [1965] 55 ITR 716 (SC) [Para 7].

S. Shyali and Satish Khosla for the Applicant. R.D. Jolly, R.C. Pandey, Sanjiv Khanna, Jagdish Rai Goel, Ms. Prem Lata Bansal, Ajay Jha and Ms. Rashmi Chopra for the Respondent.

Judgment

B.C. Patel, CJ. - As the instance of the assessee as well as the revenue, the Income-tax Appellate Tribunal, for assessment years 1974-75 and 1975-76, has referred three questions which are as under :

1. Whether on the facts and in the circumstances of the case, and on a true interpretation of section 44 of the Income-tax Act, 1961 read with rule 5 of the First Schedule to the said Act, the Tribunal was right in confirming the addition of the following amounts to the balance of profits disclosed by the annual accounts of the assessee Insurance Co. :

 

(i)

Tax deducted at source

Rs.   76,74,713

 

 

(ii)

Provision for taxation

Rs. 6,57,00,000

 

 

 

 

Rs. 7,33,74,713

 

(This question is referred at the instance of the assessee for the assessment year 1974-75)

2. Whether on the facts and in the circumstances of the case, the Tribunal was correct in law in holding that reserve for bad and doubtful debts cannot be added to the balance of profit disclosed in the annual accounts of the assessee insurance company ?

(This question is referred at the instance of Revenue for the assessment year 1974-75.)

3. Whether the Tribunal was correct in law in deleting the disallowance of Rs. 2,74,577 in assessment year 1974-75 and Rs. 4,72,461 in assessment year 1975-76 representing expenditure which was partly for payment of entertainment allowance to the employees and partly for offering customary hospitality to the constituents ?

(This question is referred at the instance of Revenue for the assessment years 1974-75 and 1975-76)

So far as question No. 2 is concerned, it requires no further consideration as the same is covered by the decision of the Apex Court in the case of General Insurance Corpn. of India v. CIT [1999] 240 ITR 1391  in favour of the assessee and against the revenue. Therefore, this question is required to be answered accordingly.

Question No. 3 is similarly covered by the decision of the Apex Court in the case of CIT v. Patel Bros. & Co. Ltd. [1995] 215 ITR 1651  and the answer is required to be given in favour of the assessee and against the revenue.

Question No. 1 is in two parts, i.e., in respect of (a) tax deducted at source and (b) provision for taxation. The assessee is not pressing the first part of the question with regard to tax deducted at source. Therefore, only the question with regard to provision for taxation is to be considered.

2. The assessee, the Insurance Company is required to prepare the books of account in accordance with the Insurance Act, 1938. Section 44 of the Income-tax Act, 1961, is required to be considered, at this stage, which reads as under :

Insurance business.—Notwithstanding anything to the contrary contained in the provisions of this Act relating to the computation of income chargeable under the head ‘Interest on securities’, ‘Income from house property’, ‘Capital Gains’ or ‘Income from other sources’, or in sections 28 to 43A, the profits and gains of any business of insurance, including any such business carried on by a mutual insurance company or by a co-operative society, shall be computed in accordance with the rules contained in the First Schedule.”

In view of this, we have to consider the provisions contained in the First Schedule for examining the income-tax return for its acceptability or otherwise. The First Schedule refers to insurance business. The question is required to be examined as the assessee is engaged in other than life insurance business. Rule 5(a) is relevant for our purpose and is reproduced as under :

Computation of profits and gains of other insurance business.—The profits and gains of any business of insurance other than life insurance shall be taken to be the balance of the profits disclosed by the annual accounts, copies of which are required under the Insurance Act, 1938 (4 of 1938) to be furnished to the Controller of Insurance, subject to the following adjustments :

  (a)   subject to the other provisions of this rule, any expenditure or allowance which is not admissible under the provisions of sections 30 to 43A in computing the profits and gains of a business shall be added back.”

3. The assessee had shown net profit, as per profit and loss account, amounting to Rs. 32,63,523 for the assessment year 1974-75. The Income-tax Officer added back the reserve for bad and doubtful debts as also provision for taxation of Rs. 6.57 lakhs and also tax deducted at source. We are concerned only with provision for taxation. The assessee pointed out before the Inspecting Assistant Commissioner that the income was to be computed under section 44 of the Income-tax Act, 1961 r/w Rule 5 of the First Schedule to the said Act which stands reproduced hereinabove. It was urged that the provision for taxation should be excluded from the computation of income made at the time of filing the original return and only the balance profit of Rs. 32,63,523 should be taken as the starting point for the computation of income.

4. Finally, the finding was recorded that the claim of the assessee in respect of provision for income-tax cannot be allowed as deduction under section 40(a)(ii) of the Act. The assessee approached the Appellate Forum wherein finding was recorded against the assessee. The assessee approached the Appellate Tribunal and contested the finding. The Income-tax Appellate Tribunal agreed with the findings recorded by the Commissioner (Appeals). It is against that order that the assessee is before us. Our attention was invited by the learned counsel to the records, auditor, report in the paper book, comments of the Comptroller and Auditor General of India on the accounts of the assessee. There were no adverse comments with regard to the provision for taxation. Page 18 of the annual report wherein provision for taxation is indicated contains notes forming part of the accounts wherein it is specifically indicated as under :

“1. In accordance with the provision of section 11(1) of the Insurance Act, 1938, read with provisions of sub-sections (1) and (2) and sub-section (5) of section 211 and section 227(5) of the Companies Act, 1956, the balance sheet, the profit and loss account, the profit and loss appropriation account and the revenue accounts are not required to be and are not drawn up in accordance with the requirements of the Schedule VI of the Companies Act, 1956, but are drawn up in conformity with Form ‘A’ of Part II of the First Schedule, Forms ‘B’ and ‘C’ of Part II of the Second Schedule and Form ‘F’ of Part II of the Third Schedule to the Insurance Act, 1938, respectively.”

5. It is in this background of examination of the accounts by the competent authority under the Act, that the question is required to be examined about the addition with regard to provision for taxation.

6. The learned counsel submitted that there is a provision for taxation but that has nothing to do with ascertained liability of taxation. It is merely a contingency, i.e., for future. According to the learned counsel for the assessee, it cannot be said to be covered by clauses ‘expenditure’ or ‘allowance’ as it does not relate to the current year’s liability due on filing of return. Section 40 of the Income-tax Act, 1961 is required to be considered at this stage. Section 40(a)(ii) reads as under :

Amounts not deductible.—Notwithstanding anything to the contrary in sections 30 to 39, the following amounts shall not be deducted in computing the income chargeable under the head ‘Profits and gains of business or profession’,—

  (a)   in the case of any assessee—

   (i)   **                                                             **                                                                                      **

  (ii)   any sum paid on account of any rate or tax levied on the profits or gains of any business or profession or assessed at a proportion of, or otherwise on the basis of, any such profits or gains;”

7. Reading the aforesaid provision it is clear that if any sum is paid on account of any rate or tax levied on the profits or gains of business or profession or assessed at a proportion of or otherwise on the basis of any other profits or gains, then the same shall not be deducted in computing the income chargeable under the head ‘Profits and gains of business or profession’. In view of the provisions contained in sections 30-43A of the Income-tax Act, 1961, it is clear that in respect of an insurance company, the profits and gains should be computed in accordance with the rules contained in the First Schedule, which we have referred earlier. In view of Rule 5(a) any ‘expenditure’ or ‘allowance’ which is not admissible under the provisions of sections 30-43A in computing the profits and gains of a business is to be added back. The moot question is whether the amount can be described as ‘expenditure’ or ‘allowance’ thereby attracting the provisions contained in sections 30-43A. If sections 30-43A are not applicable, then in that case there is no question of adding back the amount. Even if the provision for taxation is not to be considered as any expenditure or allowance, even then the same is not required to be added back. It is also required to be noted that provision for taxation is neither an ‘expenditure’ nor an ‘allowance’. Section 44 was examined by the Apex Court in the case of General Insurance Corpn. of India (supra), the Apex Court pointed out as under :

“Section 44 of the Income-tax Act is a special provision governing computation of taxable income earned from business of insurance. It opens with a non obstante clause and thus has an overriding effect over other provisions contained in the Act. It mandates the assessing authorities to compute the taxable income for business of insurance in accordance with the provisions of the First Schedule. A plain reading of rule 5(a) of the First Schedule makes it clear that in order to attract the applicability of the said provision the amount should firstly be an expenditure or allowance. Secondly, it should be one not admissible under the provisions of sections 30 to 43A. If the amount is not an expenditure or allowance, the question of testing its eligibility for adjustment by reference to rule 5(a) of the First Schedule would not arise at all.” (p. 144)

The term ‘expenditure’ came for consideration in the above case before the Apex Court, which observed as under :

“‘Spending’ in the sense of ‘paying out or away’, of money is the primary meaning of ‘expenditure’. ‘Expenditure’ is what is paid out or away and is something which is gone irretrievably. Expenditure, which is deductible for income-tax purposes, is one which is towards a liability actually existing at the time, but the putting aside of money which may become expenditure on the happening of an event is not expenditure’.” (p. 144)

The Apex Court in the case of Pandyan Insurance Co. Ltd. v. CIT [1965] 55 ITR 716 held that ‘expenditure’ meant ‘disbursement’ and hence did not include depreciation.

In the aforesaid case, a sum of Rs. 3,00,30,700 was set apart as provision for redemption of preference shares and the Apex Court pointed out that it is also not an expenditure or allowance of the nature covered by sections 30-43A of the Income-tax Act, 1961. The question for determining its admissibility by reference to Rule 5(a) of the First Schedule to the Income-tax Act, 1961, does not arise nor it could have been added back by the assessing authority by purporting to exercise power under the said Rule. The Apex Court also pointed out in case of General Insurance Corpn. of India (supra) as under :

“There is another approach to the same issue. Section 44 of the Income-tax Act read with the rules contained in the First Schedule to the Act lays down an artificial mode of computing the profits and gains of Insurance business. For the purpose of income-tax, the figures in the accounts of the assessee drawn up in accordance with the provisions of the First Schedule to the Income-tax Act and satisfying the requirements of the Insurance Act are binding on the Assessing Officer under the Income-tax Act and he has no general power to correct the errors in the accounts of an insurance business and undo the entries made therein.” (p. 146)

It is also required to be noted that a provision was made. However, there is nothing to show that any sum was paid on account of any rate or tax levied on the profits, etc. In view of the provisions contained in the Insurance Act, 1938, as also being certified by Comptroller and Auditor General and considering the scheme of the Income-tax Act with reference to section 44 of the Act read with Rule 5(a) of the First Schedule, in our opinion, it was not open for the Assessing Officer to add back the figures for provision for taxation. In the result, we answer the aforesaid question in favour of the assessee and against the revenue.

8. These references are disposed of accordingly.

nn

 

 [S1]1. 106 Taxman 389.

 [S2]1. 81 Taxman 156.