Decided on October 04,1962



V.S.DESAI J. - (1.)THE question which is raised on this reference relates to the amounts of Rs. 29,615 and Rs. 44,920 paid by the assessee to its policyholders in the calendar years 1956 and 1957 respectively.
(2.)THE assessee is a, co -operative insurance company, carrying on general insurance business.
During the asst. yrs. 1957 -58 and 1958 -59, the relevant previous years for which were the calendar years 1956 and 1957, respectively, the assessee paid by way of bonus to certain policyholders Rs. 29,615 in the first year, and Rs. 44,920 in the second year. These payments were made under by - law No. 52 of the by -laws of the company. This by -law provided, so far as material for our purpose, as follows : "52. The profits shall be allocated as under carrying at least ten per cent. thereof to the statutory reserve fund which shall be invested or utilised as provided in S. 37 of the Bombay Co -operative Societies Act . . . (c) such percentage not exceeding fifty per cent. as may be deemed proper for payment of profits to policyholders. "Under this by -law, the bonus was declared at the rate of ten per cent. on the net premium paid by the policyholder on his policy for the year 1956, and at the rate of twelve per cent. on the policies for the year 1957. The warrants for the bonus of 1956 were issued on the 1st July, 1957, and those for the year 1957 on the 1st July, 1958. The bonus payable was subject to certain conditions.

These conditions were that the premium paid on the policy must be more than Rs. 5 ; that there should have been no claim made on the policy ; that the policy must have been issued during the year in which the bonus was declared ; and that bonus would be payable only if the policy was renewed on expiration and at the option of the policyholder the bonus amount would be creditable towards the premium under the renewed policy. In the company's accounts, the amounts paid by way of bonus to the policyholders were not debited to the Revenue accounts. There was, however, a provision made on an estimate basis for the payment of the bonus in the profit and loss appropriation account in each of the years. During the assessments for the years 1957 - 58 and 1958 -59 the company claimed these amounts as legitimate expenditure deductible against the profits earned by the company in respect of the premiums received by it in the respective years, and hence, admissible as deductions in the computation of its taxable income. This claim was disallowed by the ITO on the ground that the items represented the application of the profits after they had been earned and could not, therefore, be claimed as revenue expenses.

(3.)THE view of the ITO was confirmed by the AAC in the appeals which the assessee filed before him. The assessee then took appeals to the Tribunal, which allowed the appeals and held that the assessee was entitled to claim the amounts as admissible deductions for the purposes of computation of its taxable income for the relevant assessment years. According to the Tribunal, the payment of bonus made by the assessee to its policyholders was necessary for the purpose of business in the assessee's line, and, therefore, constituted expenses which were laid out wholly and exclusively for the purposes of the assessee's business. According to the Tribunal the said payments could not be regarded as appropriation of profits as held by the ITO and the AAC. At the instance of the Department, the Tribunal has referred to this Court the following question as arising out of its order :
"Whether, on the facts and in the circumstances of the case the amounts of Rs. 29,615 and Rs. 44,920 paid to certain policyholders in the calendar years 1956 and 1957, respectively, by the assessee company were admissible deductions for the purpose of computation of its taxable income for the asst. yrs. 1957 -58 and 1958 -59 ?"

Mr. Joshi, learned counsel for the Revenue, has submitted before us that the Tribunal has erred in holding that the assessee was entitled to claim the said amounts as permissible deductions. He has argued that the assessee being an insurance company, the profits and gains of its business had to be determined in accordance with the rules contained in the schedule to the IT Act, in view of the provisions of S. 10(7) of the Act. The assessee was doing general insurance business, and, therefore, r. 6 of the said schedule was the appropriate rule under which the profits and gains of its business had to be computed. That rule provided that in computing the profits and gains of the business of general insurance the said profits had to be taken as the balance of the profits disclosed by the annual accounts which the assessee company had furnished to the Controller of Insurance under the Insurance Act, and the balance of profits shown in this account had to be further adjusted by the ITO so as to exclude from it any expenditure other than the expenditure which was properly admissible under S. 10 of the Act. According to Mr. Joshi in the annual accounts which the assessee had submitted to the Controller of Insurance, the balance of profits disclosed was Rs. 1,42,309 -15 -1 in the asst. year 1957 -58, i.e., in the calendar year 1956, and Rs. 1,81,852.96 nP. in the next year. Under r. 6, according to Mr. Joshi, there was no question of reducing the balance of profits so disclosed by the assessee in its annual accounts in arriving at its assessable profits, because what the rule permitted was only to add back to the said figure such amounts of expenditure which were other than the expenditure properly deductible under S. 10(2).

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