- (1.) This appeal raises a question of importance as to whether amounts shown by an insurance company as reserves for unexpired risks on pending policies are liable to be deducted under R.2 of Sch. II to the Excess Profits Tax Act (XV of 1940), hereinafter referred to as the Act.
(2.) The respondent is a Company carrying on life, fire, marine and general insurance business, and the present dispute relates to the assessment of excess profits tax on its income from business other than life insurance for the chargeable accounting periods ending 31st December 1940, and 31st December 1941. To appreciate the contentions raised, it is necessary to state that the policies of insurance with which these proceedings are concerned, are, unlike life insurance policies, issued in general for short periods or ad hoc in relation to a specified voyage or event. To take the most important of them, fire insurance policies, they are issued normally for one year, and the whole of the premium due thereon is received when the policies are actually issued. In any given year, while the premiums due on the policies would have been received in full, the risks covered by them would have run only in part and a part will be outstanding for the next year. The companies have to prepare annual statements of profit and loss for the purpose of ascertaining their profits and distributing their dividends. They have also to prepare revenue statements to be sent to the authorities under the provisions of the Insurance Act, 1938. The method adopted by the respondent in preparing the above statements has been that while the premiums received are all of them included in the assets of the year, a certain proportion thereof, usually 40 per cent., is treated as the reserve for unexpired risks, and that is shown as a liability. To take a concrete example, if in the year 1939 the respondent issued annual fire insurance policies and received a sum of Rs. 1,00,000 as premiums thereof, the whole of it would be shown as income in the statement for the year 1939, and a sum of Rs. 40,000 will be shown as a reserve for unexpired risks. In the profits and loss statement, the former will be shown as part of the assets and the latter as liability, and it is only the balance that will be included in the net profits. In 1940, the policies issued in 1939 would all of them have expired, and the sum of Rs. 40,000 shown as reserve in 1939 would be treated as part of the assets in 1940. There will, of course, be fresh policies issued in 1940, and in the statement of that year, the premiums received on those policies would be shown as part of the income, and 40 per cent. thereof would be set apart as reserve for unexpired risks. This method of account-keeping is what is usually adopted by insurance companies, and is in accordance with well-recognised and approved practice of accountancy.
(3.) Now, the question is whether in the illustration given above, the sum of Rs. 40,000 which is set apart in 1939 as reserve for unexpired risks is liable to be deducted under R.2 of Sch. 2 to the Act from out of the capital employed in business for that year, which would, of course, include, the whole of Rs. 1,00,000 received as premiums. The contention of the appellant is that if all the premiums received are to be treated as capital under R. 1, Sch. 2, then the sums which represent the outstanding liability in respect of the unexpired period of the policies -in the illustration given above, Rs. 40,000 - should be deducted as a liability under R.2 of Sch. 2. The respondent while claiming that all the premiums received must be treated as capital, maintains that the provision for unexpired risks is a contingent liability and that is not within R.2 of Sch. II. The Tribunal decided the question against the respondent, but on reference under S. 66(1) of the Indian Income-tax Act read with S.21 of the Act, the High Court of Calcutta answered the question adversely to the appellant, but granted a certificate under S. 66A, and that is how the appeal comes before us.;