Decided on October 05,1962

Union Co Respondents


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 calender years 1956 and 1957 respectively.
(2.)The assessee is a co-operative insurance company, carrying on general insurance business. During the assessment years 1957-58 and 1958-59, the relevant previous years for which were the calendar years 1956 and 1957 respectively, the assessee paid by way bonus to certain policyholders Rs. 29,615 in the first year, and Rs. 44,920 in the second year. These payments were made under bye-law No. 52 of the bye-laws of the company. This bye-law provided, so far as material for our purpose, is as follows :
"52. The profits shall be allocated asunder carrying at least ten per cent. thereof to the Statutory reserve fund which shall be invested or utilised as provided in section 37 of the Bombay Co-operative Societies Act......

(c) such percentage not exceeding fifty percent, as may be deemed proper for payment of profits to policy holders."

(3.)Under this bye-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 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 amount 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 Income-tax Officer 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. The view of the Income-tax Officer was confirmed by the Appellate Assistant Commissioner in the appeals which the assessee filed before him. The assessee then took appeals to the Income-tax Appellate 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 Income-tax Officer and the Appellate Assistant Commissioner. 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 assessment years 1957-58 and 1958-59 -

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