PETITIONER: GENERAL INSURANCE CORPORATION OF INDIA . Vs. RESPONDENT: COMMISSIONER OF INCOME-TAX, BOMBAY DATE OF JUDGMENT: 21/09/1999 BENCH: S.Rajendra R.C.Lahoti JUDGMENT:
R.C. LAHOTI, J
General Insurance Corporation of India, the appellant
– assessee is 100 % Central Government Undertaking formed as
a Government Company under The General Insurance Business (
Nationalisation) Act, 1972 ( hereinafter G I B Act, for
short ). It carries on general insurance business in India.
At the time of nationalisation, there were 107 companies
carrying on the business of general insurance. They were
all merged together into four subsidiaries of the appellant
Corporation viz. National Insurance Co. Limited, New India
Assurance Co. Limited, Oriental Insurance Co. Limited, and
United India Insurance Co. Limited. The Central Government
contributed to the capital of the appellant in the form of
preference shares and equity shares for the purpose of
paying compensation to the shareholders and the management
of the merged companies. The preference shares were to be
redeemed in such time as the Board of Directors of the
appellant Corporation may deem fit. The controversy relates
to the assessment year 1977-78, corresponding to the
accounting year ending 31.12.1976. It is not disputed that
the income of the appellant assessee is to be computed under
Rule 5 of First Schedule to the Income-tax Act, 1961.
The Income-tax Act, 1961 makes a special provision for
computing the taxable income of an assessee engaged in
business of insurance. It provides as under:-
Insurance business
44. “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 section 199 or
in sections 28 to [43 A] 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.”
Inasmuch as the appellant – assessee carries on
business of insurance other than life insurance, we are
concerned with Rule 5 of the First Schedule which reads as
under:
B- Other insurance business
Computation of profits and gains of other insurance
business.
5. 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 [43 A] in computing the profits
and gains of a business shall be added back;
(b) xxx xxx xxx
(c) such amount carried over to a reserve for
unexpired risks as may be prescribed in this behalf shall be
allowed as a deduction.
[ Note:- Sec. 44 and Rule 5 (a) of First Schedule as
reproduced hereinabove are as they stood at the relevant
time. Later by the Direct Tax Laws (Amendment) Act 1987 `43
B’ has been substituted in place of `43 A’ in both the
provisions]
The problem is created by Rule 2 (2) (a) of the
General Insurance Business (Nationalisation) Rules 1973
(hereinafter G I B Rules, for short) framed by the Central
Government in exercise of the powers conferred by Section 39
of the G I B Act, the relevant part whereof reads as under:-
“39. (1) The Central Government may, by Notification,
make rules to carry out the provisions of this Act.
(2) In particular, and without prejudice to the
generality of the foregoing power, rules made under this
Section may provide for :-
(a) the manner in which the profits, if any, and other
moneys received by the Corporation may be dealt with.”
xxx xxx xxx xxx
Rule 2 (2) (a) referred to hereinabove reads as under:
“2. Profits and receipts of the Corporation and
acquiring companies how to be dealt with —
….. ….. ….
(2) (a) In arriving at the net profit of the
Corporation, the amount set apart for redemption of
preference shares to such extent as the Board of Directors
of the Corporation may consider expedient shall be treated
as an item of expenditure in the Profit and Loss Account.”
In Profit and Loss Account, the appellant assessee had
made a debit entry for an amount of Rs.3,00,30,700/- and
transferred the amount to preference share capital
redemption account. The Income-tax Officer added back the
amount to the income of the assessee on the reasoning that
this amount was to be treated as revenue expenditure in view
of Rule 2 (2) (a) of G I B Rules. The assessee appealed to
the Appellate Assistant Commissioner of Income-tax (Appeals)
who agreed with the assessee and deleted the addition in the
income following his own order on a similar claim made for
the assessment year 1976-77. The department appealed to the
Income Tax Appellate Tribunal. The Tribunal followed its
own order dated 26.9.1978 in respect of this very assessee
for the assessment year 1974-75 and dismissed the appeal. A
perusal of the order of the Tribunal ( Annexure P-3 ) for
the assessment year 1974-75 shows that in the opinion of the
Tribunal the amount set apart as a reserve could not be
treated as expenditure or allowance and assuming it to be an
amount of expenditure, it was not an item of expenditure
dealt with by the provisions of Sections 30 to 43A of the
Income-tax Act. Accordingly, the claim of the assessee was
liable to be upheld.
On a request made by the Revenue, the following
question was referred by the Tribunal for the opinion of the
High Court under Section 256 (1) of the Income-tax Act:-
“Whether on the facts and in the circumstances of the
case the Tribunal was justified in law in holding that the
sum of Rs.3,00,30,700/- being provision for redemption of
preference shares was not liable to be added back in the
total income of the assessee for the assessment year 1977-
78”. The High Court has answered the question in the
negative, that is, in favour of the Revenue. In doing so,
the High Court has purported to treat the question as
covered by two decisions of the Supreme Court in Anarkali
Sarabhai vs. C.I.T (1997) 224 ITR 422, Associated Power Co.
Ltd. vs. C.I.T. ( 1996) 218 ITR 195, and a decision of
the Bombay High Court in Colaba Central Co-operative
Consumers’ Wholesale and Retail Stores Ltd. vs. C.I.T.
(1998) 229 ITR 209 Bom.
The aggrieved assessee has filed this appeal by
special leave granted under Article 136 of the Constitution
of India.
We have heard Shri T.R. Andhyarujina, learned senior
advocate for the assessee – appellant and Shri T.L.
Viswanatha Iyer, learned senior advocate for the Revenue.
Having heard the learned counsel for the parties, we are of
the opinion that the appeal deserves to be allowed.
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) to the First Schedule would not
arise at all. A perusal of the order dated 26.9.1978 passed
in ITA No.2699/1977-78 by the ITAT in the case of this very
assessee and relied on and followed by the Tribunal while
disposing of the appeal for the assessment year in question
(AY 1977-78) shows three submissions having been made on
behalf of the assessee before the Tribunal: firstly, that
the amount set apart by the assessee for redemption of
preference shares was only a reserve or a provision and not
an expenditure and therefore its allowability for deduction
cannot be considered under Sections 30 to 43A; secondly,
assuming it was an expenditure, this expenditure was not of
the category of expenditure contemplated in Sections 30 to
43A and therefore unless there was a specific prohibition
for such an allowance, the departmental authorities would
not be justified in adding back the amount under that
clause; and thirdly, if Rule 2(2)(a) of the General
Insurance Business (Nationalisation) Rules, 1973 be read as
providing that the amount so set apart for redemption of
preference shares was an expenditure, the fiction should be
taken to its logical conclusion so as to hold that the
expenditure was allowable as deduction under Sections 30 to
43A of the Income-tax Act. The Tribunal upheld the
contention that the provision made by the assessee was
neither an expenditure nor an allowance in the ordinary
commercial sense and Rule 5 (a) of First Schedule would have
no application at all and further, as admittedly Sections 30
to 43A do not deal with an amount set apart for redemption
of preference shares so also the amount could not have been
added back.
The term `expenditure’ came up for consideration of
this Court in Indian Molasses Company Pvt. Ltd. Vs.
Commissioner of Income-tax 1959 (37) ITR 66. It was held :-
“”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.”
In Pandyan Insurance Co.Ltd. Vs. CIT Madras (1965)
55 ITR 716 also this Court has held that “expenditure” meant
“disbursement” and hence did not include depreciation.
It is therefore clear that the sum of Rs.3,00,30,700/-
set apart as provision for redemption of preference shares
could not have been treated as an expenditure. It is also
not an expenditure or allowance of the nature covered by
Sections 30 to 43A of the Income-tax Act, 1961. The
question of determining its admissibility by reference to
Rule 5 (a) of First Schedule to the Income-tax Act, 1961
does not arise nor could it have been added back by the
assessing authority by purporting to exercise power under
the said Rule. Rule 2 (2) (a) of GIB Rules undoubtedly
speaks of the amount set apart for redemption of preference
shares being treated as an item of expenditure in the profit
and loss account. However, the purpose and extent of the
provision has to be kept in view. These rules have been
framed in exercise of the power conferred by clause (a) of
sub-section (2) of Section 39 of the G I B Act. The object
of these rules is entirely different. These rules lay down
the manner in which the profits, if any, and other monies
received by the General Insurance Corporation may be dealt
with. The concept behind Rule 2 (2) (a) is to permit the
Corporation to enter the amount of reserve in the profit and
loss account in the expenditure side which would not have
been permissible otherwise because the amount set apart in a
reserve cannot be expenditure. The rule puts a stamp of
permissibility on something not permissible otherwise. This
rule itself is suggestive of the fact that the amount set
apart in a reserve is not an expenditure in its commercial
sense. The extent of the GIB Rules does not go beyond
providing an accounting method. These Rules cannot be
pressed into service for altering the basic character of the
amount which is not an expenditure. Merely because Rule 2
(2) (a) of GIB Rules permits the amount set apart for
redemption of preference shares being debited to the profit
and loss account, the amount so set apart does not become
the amount of an expenditure for all intent and purposes so
as to fall within the meaning of the term `expenditure’ as
employed in Rule 5(a) of First Schedule to the Income-tax
Act, 1961.
If the view taken by the High Court is accepted there
would be a conflict between the provisions of Rule 2(2)(a)
of GIB Rules and Rule 5(a) of First Schedule to Income-tax
Act. The object of Rule 2(2)(a) is to reduce the amount of
profit of Corporation by the amount set apart as reserve by
artificially treating the amount of reserve as an item in
expenditure column. If the same amount was allowed to be
added back to profits under Rule 5(a) of First Schedule to
Income-tax Act then the object sought to be achieved by Rule
2(2)(a) abovesaid is defeated. The non-obstante clause with
which Section 44 of Income-tax Act opens and gives it an
over-riding effect only on the provisions of Income-tax Act
would earn an overriding effect on the provisions of another
enactment also though the Parliament has not chosen to give
Section 44 of the Income-tax Act such an effect. It is to
be noted that Section 44 does not say – `notwithstanding
anything to the contrary contained in the provisions of this
Act or any other law for the time being in force’.
Nor does the Rule 2(2)(a) of GIB Rules have an
overriding effect on the provisions of Income-tax Act. The
two provisions contained in two enactments have thus
different purposes to achieve. Rule of harmonious
construction would therefore sustain neither what the
Income-tax officer did nor the view of the law taken by the
High Court.
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 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.
In the Life Insurance of India Vs. CIT – 1964 (51)
ITR 773 SC their Lordships were dealing with the pari
materia provisions contained in the Income-tax Act, 1922.
The Court analysed the scheme underlying the relevant
provisions of the Insurance Act, 1938 and the Income-tax
Act, 1922 and held that where the accounts of an insurance
company engaged in insurance business are required to be
submitted and approved by the Controller of Insurance, the
Income-tax Officer has no power to change the figures in the
accounts of the assessee. A.K. Sarkar,J. recorded in his
opinion :
“The assessment of the profits of an insurance
business is completely governed by the rules in the Schedule
and there is no power to do anything not contained in it.
The reason may be that the accounts of an insurance business
are fully controlled by the Controller of Insurance under
the provisions of the Insurance Act. They are checked by
him. He has power to see that various provisions of the
Insurance Act are complied with by an insurer so that the
persons who have insured with it are not made to suffer by
mismanagement. A tampering with the accounts of an insurer
by an Income-tax Officer may seriously affect the working of
insurance companies. But apart from this consideration, we
feel no doubt that the language of section 10(7) and the
Schedule to the Income-tax Act makes it perfectly certain
that the Income-tax Officer could not make the adjustment
that he did in these cases.”
M.Hidayatullah,J. (as His Lordship then was) observed
:
“the Income-tax Act contemplates that the assessment
of insurance companies should be carried out not according
to the ordinary principles applicable to business concerns
as laid down in section 10, but in quite a different
manner.”
The view so taken has been followed by this Court in
Pandyan Insurance Company Ltd. Vs. CIT, Madras 1965 (55)
ITR 716 SC and CIT, West Bengal Vs. Calcutta Hospital and
Nursing Home Benefits Association Ltd. – 1965 (57) ITR 313
SC. In the later case, their Lordships have also observed :
“the balance of profits as disclosed by the accounts
submitted to the Superintendent of Insurance and accepted by
him would be binding on the Income-tax Officer, except that
the Income-tax Officer would be entitled to exclude
expenditure other than expenditure permissible under the
provisions of section 10 of the Act. It is common ground in
this case that the reserves which were added to the balance
of profits were not expenditure.”
The cases relied on by the High Court have no
applicability to the facts of the case and the issue arising
for decision herein. In Anarkali Sarabhai’s case (supra) ,
the question arising for decision was whether redemption by
a company of a preference share amounts to sale of the
shares by the shareholder to the company so as to be taxable
for capital gains as amounting to transfer within the
meaning of Section 2 (47) of the Income-tax Act, 1961.
Their Lordships held that such redemption amounted to a sale
and hence was covered by the definition of transfer. In
Associated Power Co. Ltd’s case (Supra) monies standing to
the credit of the contingencies reserve set apart to be
utilised by the electricity company to meet expenses or
recoup loss of profits arising out of accidents, strikes, or
other circumstances etc. were claimed as business
expenditure entitled to deduction. It was also submitted
that the amount so set apart in the reserve had resulted in
diversion of income by reason of an overriding title. Their
Lordships held that the amount had reached the hands of the
company and inspite of having been set apart by creating a
reserve was still available with the company and therefore
could neither be treated as an expenditure nor excluded from
computing the income of the assessee by application of the
doctrine of diversion of income by reason of an overriding
title or obligation. In Colaba Central Co- operative
Consumers’ Wholesale and Retail Stores Ltd.’s case (Supra)
decided by a Division Bench of Bombay High Court also the
amount in question was set apart by the society as capital
contribution redemption fund. The High Court having
examined the nature of the amount and the accounts held that
the amount so set apart was neither business expenditure nor
liable to be excluded from computation of income by applying
the doctrine of diversion of income by overriding title. In
our opinion, none of the cases has any applicability to the
case at hand. In none of the three cases, the question of
determining applicability of Section 44 and the First
Schedule of the Income-tax Act arose for consideration.
To sum up, the amount set apart by general insurance
corporation for redemption of preference shares and treated
as expenditure under Rule
2(2)(a) of General Insurance Business
(Nationalisation) Rules, 1973 is so treated for the purpose
of Insurance Act, 1938. The reserve is not an expenditure
in ordinary commercial sense of the term. It cannot be
added back for computing profits and gains of business by
including it in `expenditure not admissible under the
provisions of Sections 30 to 43A of Income-tax Act’ by
reference to Rule 5(a) of the First Schedule to Income-tax
Act, 1961. The question referred to the High Court should
have been answered in affirmative.
The appeal is allowed. The judgment of the High Court
is set aside and in supersession thereof it is directed that
the question referred by the Tribunal to the High Court
shall stand answered in the affirmative, i.e., in favour of
the assessee and against the Revenue. No order as to costs.