Pandhyan Insurance Co. Ltd. Vs.
Commissioner of Income-Tax, Madras  INSC 208 (29 September 1964)
29/09/1964 SIKRI, S.M.
CITATION: 1965 AIR 1004 1965 SCR (1) 367
CITATOR INFO :
R 1965 SC1902 (17)
Income Tax Act (11 of 1922) Schedule, rr.
3(b) and 6--Scope of
The appellant (assessee) was a company
carrying on the business of general insurance. It erected a substantial modem
building at a cost of about Rs. 12,00,000 towards the end of 1952. For the
accounting year 1953 it wrote off a sum of about Rs. 1,00,000 as representing
the depreciation with respect to. various items. The Income-tax Officer
disallowed 4/5 of the depreciation on the ground that only a fifth part of the
building was utilised for the purpose of the appellant's business and the
remaining 4/5 part was let out, and that the rent thereon was exempted under s.
4(3) (xii) of the Income-tax Act, 1922. On appeal by the assessee, the
Appellate Assistant Commissioner dismissed the appeal and enhanced the
assessment by disallowing even the 115 of the depreciation allowed by the
Income Tax Officer, on the ground that under r. 3(b) of the Schedule to the
Act, the allowable depreciation was an actual depreciation of the value of the
assets. On further appeal, the Appellate Tribunal restored the order of the
Income-tax Officer with respect to 115 part but as to the 4/5 part agreed with
the Appellate Assistant Commissioner. The High Court, on a reference as 'to
whether the 4/5 part of the depreciation was also allowable as a deduction in
the assessment completed under s. 10(7) and the rules contained in the
Schedule, of the Act, held against the appellant. On appeal to the Supreme
Court, HELD : The appeal must be allowed. [374C].
Rules 3(b) and 6 of the Schedule to the
income-tax Act, which are the applicable rules, should be read against the
background of the various provisions of the Insurance Act (4 of 1938) making
detailed provision to ensure the true valuation of assets and the determination
of the true balance of profits of an insurance business. So read, the Income
Tax Officer can exclude from the balance of profits, only any expenditure which
is not allowable under s. 10 of the Income-tax Act. The word
"expenditure" inr. 6 means disbursement and does not comprehend
depreciation. As regards "depreciation", it covers both actual and
notional, and the Income Tax Officer has no option but to allow it under r. 3
(b). He cannot ask the assessee to prove that there has been any actual
depreciation. [370E; 372A, C; 373E, F; 374C].
Life Insurance Corporation of India v.
Commissioner of Incometax (1964) 51 I.T.R. 773, followed.
CIVIL APPELLATE JURISDICTION : Civil Appeal
No. 816 of 1963.
Appeal by special leave from the judgment
dated the July 4, 1961, of the Madras High Court in case referred No. 4 of
A.V. Viswanatha Sastri, R. Venkataraman and
R. Gopalakrishnan, for the appellant.
368 R.Ganapathy lyer, R. H. Dhebar and R. N.
Sachthey, for the respondent.
The Judgment of the Court was delivered by
Sikri J. This is an appeal by special leave against the judgment of the Madras
High Court in a case referred to it under the Indian Income Tax Act, 1922,
hereinafter referred to as the Act, answering the question of law against the
assessee. The question referred is :
"Whether four-fifth of the sum of Rs.
1,21,245 written off in the books of the assessee as depreciation for the
calendar year 1953 is allowable as a deduction in the assessment completed
under section 10(7) and the rules contained in the schedule of the Income-tax
Act." The facts relevant for answering the question are as follows. The
assessee is a public limited company carrying on the business of general
insurance. It erected a modem substantial building with lifts and air-conditioning
at a cost of Rs. 12,08,252 and got it ready for occupation from December 1,
1952. In its books for the calendar year 1953, the previous year for assessment
year 1954-55, it wrote off Rs. 1,21,245 as depreciation as follows Rate Amount
Per cent (in rupees) Buildings 10 1,06,940 Air conditioning plant 15 2,973
Lifts 15 6,214 Transformers 15 1,442 Internal Telephone 15 3,676 TOTAL1,21,245
It was common ground before the Income-tax Appellate Tribunal that one-fifth of
the building could be considered as occupied for its own purposes and the
remaining fourfifth as let out to tenants for rent. The Income-tax Officer
disallowed four fifth of the depreciation claimed on the ground that "the
rentals received from this 4/5th portion are being shown separately under the
head 'Property' which income in turn has been claimed as 'exempt under s. 4 (3)
(xii). Had there been no exemption in the property income there would have-been
a statutory allowance which would compensate for depreciation. The fact that
the whole income is exempt further strengthens that no allowance regarding
these portions could be made.
369 On appeal, the Appellate Assistant
Commissioner disallowed the whole claim (including that allowed by the
Income-tax Officer) on another ground. He held that the property fell within
the words'other assets' used in Rule 3 (b) of the Schedule, but what Rule 3 (b)
contemplated was an actual depreciation of the value of such assets. As the
counsel of the assessee admitted before him that the property being new, there
could be no question of actual depreciation.
On further appeal, the Appellate Tribunal
came to the conclusion that the immovable property to the extent of four fifths
thereof was an investment held 'solely for the purpose of earning rent there from
capable of appreciation either nationally or by sale and realisation', but
under r .
6 of the Schedule, the Income-tax Officer has
jurisdiction to fix a figure which is fair and just. It accordingly allowed the
appeal in part.
On a reference being made to it, the High
Court held that in computing profits and gains, the Income-tax Officer had the
power to examine the quantum of depreciation either written off or reserved and
to satisfy himself that it did not exceed the amount allowable to meet the depreciation.
It is common ground between the parties that
by virtue of s. 10(7) of the Act the profits and gains of any business of
insurance have to be computed in accordance with the rules contained in the
Schedule to the Act, and ss. 8, 9, 10, 12 or 18 have no application. Rule 3(b)
and r. 6, on the interpretation of which the answer to the question referred to
depends, read thus,:
"3. In computing the surplus for the
purposes of rule 2(b)any amount either written off or reserved in the accounts
or through the actuarial valuation balance sheet to meet depreciation of or
loss on the realisation of securities or other assets, shall be allowed as a
deduction, and any sums taken credit for in the accounts or actuarial valuation
balance sheet on account of appreciation of or gains on the realisation of the
securities or other assets shall be included in the surplus:
Provided that if upon investigation it
appears to the Income-tax Officer after consultation with the Controller of
Insurance that having due regard to the necessity for making reasonable
provision for bonuses to participating policyholders and for contingencies, the
rate of 370 interest or other factor employed in determining the liability in
respect of outstanding policies is materially inconsistent with the valuation
of the securities and other assets so as artificially to reduce the surplus,
such adjustment shall be made to the allowance for depreciation of, or to the
amount to be included in the surplus in respect of appreciation of, such securities
and other assets, as shall increase the surplus for the purposes of these rules
to a figure which is fair and just;
6.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, after adjusting such balance so as to exclude from it any
expenditure, other than expenditure which may under the provisions of section
10 of this Act be allowed for in computing the profits and gains of a business.
Profits and losses on the realisation of investments and depreciation and
appreciation of the value of investments shall be dealt with as provided in
rule 3 for the business of life insurance." Mr. Viswanatha Sastri contends
that the Insurance Act, 1938 (4 of 1938) makes detailed provisions to ensure
the true valuation of assets and the determination of the true balance of
profits of an insurance business. An examination of various sections of the Insurance
Act discloses that he is right in this respect. Section 11 requires an insurer
to prepare at the expiration of the calendar year a balance sheet, a profit and
loss account, and a revenue account in accordance with the schedules. Part I of
the First Schedule prescribes regulations and Part II gives forms for the
preparation of a balance sheet. Regulation 6 enjoins the appending to the
Balance Sheet a statement in Form AA, as set out in Part 11 of the First
Schedule, showing the market value and the book value of the assets, including
house property. This Form AA has three columns; (1) book value as per (a)
below, (2) market value as per (b) below. and (3) remarks as per (c) below-(a)
refers to the value for which credit is taken; (b) refers to the market value
of assets which has been ascertained from public quotations, and (c) refers to
bow the value of the assets as has not been ascertained from public quotations
has been arrived at. But it is not necessary to show the market values where
they are not less than the book values, and a certificate to that effect is 371
appended to the statement. In other words, if the market value is more than the
book value, it need not be shown.
The result of the above-mentioned provisions
is that the statement of assets will show book value of house property and its
market value unless the market value is more.
The Second Schedule prescribes the
regulations and forms for the preparation of profits and loss account of some
insurers. There are two columns in Form 'B' which need be mentioned : (1)
Depreciation of Investments (not charged to Reserves or any particular Fund or
Account); (2) Appreciation of Investments (not credited to Reserves or any
particular Fund or Account). The Third Schedule sets forth the regulations and
forms for the preparation of a revenue account (one of the items to be shown in
Form D is 'Rents for offices belonging to and occupied by the Insurer').
Form F is form for Revenue Account applicable
to Fire Insurance Business, Marine Insurance Business, and Miscellaneous
Insurance Business. One of the items to be shown is " expenses of
management" and note (c) says that if any sum has been deducted from this
item and entered on the assets side of the Balance Sheet, the amount to be deducted
must be shown separately.
After the balance sheet, profit and loss
account and revenue account have been prepared, they have to be audited unless
they are subject to an audit under the Indian Companies Act.
Under s. 15 the audited accounts and statements
above referred to have to be furnished to the Controller as returns.
Section 18 requires every insurer to furnish
to the Controller a certified copy of every report on the affairs of the
concern which is submitted to the members or policy holders of the insurer.
Section 21 enables the Controller to get such
further information from the insurer as he may consider necessary to correct or
supplement a return, to examine books of accounts, registers and documents or
to examine any officer.
The Controller may decline to accept any
return unless the inaccuracy has been corrected or the deficiency has been
supplied. If he declines to accept any return, the insurer shall be deemed to
have failed to comply with the provisions of S. 15, S. 16 or S. 28 or S. 28A
relating to the furnishing of returns. Sub-section (2) of S. 21 enables an
insurer to apply to court for cancellation of any order made under cls. (a),
(b) or (c) of sub-section (1) or for directing the acceptance of any return
which the Controller has declined to accept.
372 above, should be read in the light of
this background. He says that r. 6 authorises an Income-tax Officer to make
adjustments of two kinds. First, he can exclude from the balance of profits any
expenditure which is not allowable under S. 10 of the Act. He says that the
depreciation which has been claimed is not an expenditure within r. 6, for the
expenditure must be a disbursement. He refers in this connection to S. 10(2)
(xii), (xiv) and (xv) where the word I expenditure' is expressly used. Coming
to the second part of r. 6, he argues that the word 'depreciation' includes
both actual and notional depreciation, and in r. 3(b) similarly the word
'depreciation' includes actual and notional depreciation. If he is right in
this, he says that as r. 3(b) directs the Income-tax Officer to allow the
depreciation, which has been written off, the Income-tax Officer has no option
but to allow it and he cannot ask the assessee to prove that there has been any
actual depreciation. He relies strongly on the decision of this Court in Life
Insurance Corporation of India v. Commissioner of Income-tax. (1) Let us first
see what is the exact scope of this decision. Sarkar J., interpreted r. 3 (b)
in the following terms :
"When we come to rule 3 (b) we find that
the first part of it lays down that it shall be obligatory on the Income-tax
Officer to allow certain amounts written off or reserved by the assessee as a
deduction and to include in the surplus any sums for which credit has been
taken on account of appreciation or gains on the realisation of the securities
or other assets. This part of the rule only compels the Income-tax Officer to
allow certain amounts as deductions and to include certain amounts for which
credit had been taken in the accounts of the assessee. It, therefore, does not
warrant what the Income-tax Officer did, namely, to adjust the accounts on the
basis of a revaluation made by him." (emphasis supplied) Hidayatullah J..
said this about Rule 3(b);
"Under the main part of rule 3(b) certain
special deductions and additions must be made to the annual average of the
surplus determined under the second rule. Since the life fund is held in
securities and the price of stocks and shares fluctuates, provision has been
made in rule 3(b) to make adjustments.
Rule 3(b) in its main part speaks of
adjustments on the basis of the accounts and amounts as entered in the accounts
determine what (1)(1964) 51 I.T.R. 773.
373 must be added to or deducted from the
The Income-tax Officer must deduct from the
annual average of the surplus for purposes of rule 2 any amount entered in the
account to cover depreciation of the securities and assets and add any amount
taken credit for on account of appreciation. The Income-tax Officer here
follows the accounts and gives effect to the entries such as they are. The
provision is mandatory and the Income-tax Officer has no discretion." He
then adds :
"The entire subject of such disparity
between fact and actual entries is comprehended in the proviso." It seems
to us that this Court has held in categorical terms that r. 3(b) does not
empower the Income-tax Officer to adjust the accounts on the basis of a
revaluation made by him or to correct the discrepancy between what is entered
in the accounts and what is fact.
Mr. Ganapathy Iyer tried to distinguish the
case on the ground that r. 6 was not applicable to a life insurance business
and was not considered by the Court. He at first suggested that in the second
part of r. 6 the word 'depreciation' did not include notional depreciation.
When it was pointed out to him that if this is correct, r. 3 (b) would not be
attracted at all, he modified his stand and argued that in r. 3 (b) notional
depreciation of property is not included in the word 'depreciation'. We are
unable to agree with him that the word 'depreciation' in r. 3 (b) should be
construed in this limited sense. The words "any amount written off ... in
the accounts ... to meet depreciation of ... other assets" have to be
understood in the ordinary connotation. If the draftsman wanted to include
depreciation on buildings, what Mr. Ganapathy lyer calls notional depreciation,
he could hardly have used any other wording.
Mr. Ganajpathy lyer says that this Court in
Life Insurance Corporation of India v. Commissioner of Income Tax(1) did not
examine one aspect, and this aspect is derived from the words "to
meet" occurring in r. 3 (b). He says that the effect of these words is
that the Income-tax Officer is obliged to allow any amount written off only if
it is really to meet actual depreciation and not any other fanciful conception
of depreciation. This question does not arise on the facts of this case, for
once we hold that the word "depreciation" covers notional
depreciation, it is (1) [1964151 I.T.R. 773.
L2Sup./64-11 374 nobody's case that it is not
notional depreciation that is intended to be written off. There is no sanctity
about the rate of depreciation prescribed under the Act. If the rate of
depreciation applied by the assessee and accepted by the Controller differs
from that allowed under the Act, it cannot be said that the assessee did not
write off the amount to meet depreciation.
Mr. Ganapathy Iyer has referred us to some
cases but they were discussed in the above-mentioned decision of this Court and
there is no point in discussing them again. We may mention that the learned
Counsel for the Revenue has not rightly urged that the word
"expenditure" in the first part of r. 6 comprehends depreciation. We
agree with Mr. Sastri that the word "expenditure" in r. 6 means
Accordingly, we accept the appeal and answer
the question in the affirmative. The respondent will pay costs incurred in this
Court and the High Court.