# [1967] 3 S.C.R. 279

- **Citation:** [1967] 3 S.C.R. 279
- **Court:** Supreme Court of India
- **Decided:** 1967-03-23
- **Bench:** J. C. Shah, S. M. S!Kri, V. Ramaswami
- **Source:** https://unisonlegal.in/judgment/supreme-court-of-india/1967-3-s-c-r-279-4046
- **Pages:** 7

## Headnote

Indian Income-tax Act 1922, ,; 10 and Rule 6 of Schedule-llldian
Insurance A.ct, 1938, s. 15-Profits of insurance companies. assessment
of-Bonus paid by company to policy-holder on renewal of policies on
which no claim had been made.--Estimated amoultl so payable debited
by company to appropriation account and not to profit and loss account
-Bonus paid during previous year whether allowable expenditure.
The appellant company carried on general insurance business.
One
of the bye-laws of the
company allowed payment of bonus
where a
policy was renewed and there had been no claim in the preceding year.
The company did not debit in its profir and loss account the amount so
paid in the previous years relevant to the assessment years 1957-58 and
1958-59; it showed an amount estimated to be payable as bonus in its
profit appropriation account. The Income-tax Officer held that ( i) the
payment of bonus was made after the profits for the relevant year were
determined and on that account it was only a case of appropriation of
profits after they were earned, (ii) in any event since the company had
not charged the bonus paid to revenue account and had merely made a
provision in the appropriation account,
it could not claim relief after
modifying the accounts in Form B to Schedule I! of
the Insurance
Act 1938 submitted to the Controller of Insurance.' The High Court in
a reference under s, 66 of the Income-tax Act held against the company
The company appealed.
HELD: (i) Rule 6 of the Schedule to the Income-tax Act enjoins the
Income-tu Officer to take the balance disclosed by the annual accounts
as the profits and gains of insurance business other than life insurance : it
does not oblige him to accept the figure disclosed at the foot of the profit
and loss account in the determination of the quantum of profits and gains
1Jf the insurance buSiiness.
Section 15 of the Insurance Act requires the
insurer to submit not merely the profit and loss account in Form B but
also the balance sheet and the ·account in Form C and other accounts, and
there is no warrant for the view that the balance of profits disclosed must
be equated with the balance of profits disclosed in Form B. [28JG-H]
(ii) By debiting the estimated bonus payment to the profit appropriation account the company did not seek to alter the character of the
expenditure. If it had been debited in the profit and loss
account it
cou)d not with any show of reason be regarded as not incidental to the
bustness of the assessee company.
Merely because it was debited· as an
estimated amount an intention not to treat it as expenditure for the pur·
pose o~ the business is not indicated. It was open to the assessee company
to debit to its annual accounts a certain outgoing actual or estimated
and if sanctioned by the Controller to claim that amount or such other
amount as the Income-tu Officer may irnder s. 10(2) allow as a permissible deduction.
[2R4B-D]
(iii) The bonus scheme was clearly intended to advance the business
of the insurer and the expenditure in this regard was expenditure laid
280
SUPREME COURT REPORTS
[1967] 3 S.C.R.
out wholly and exclusively for the purpose of the business of the com·
pany within the meaning of s. 10(2) (xv). [284F]
•
(iv) The liability of the company for payment of bonus was not a
conungent liability.
So long as the year of risk bas not expired the
liability is contingent, but once the year of risk is over, and the policy
ra renewed the liability becomes actual and concrete.
The
assessee
company had not claimed the full amount for which an estimate was
matle in the accounts submitted to the Controller of Insurance but only
those amounts which were entered in the balance sheet as actually paid.
This expenditure could not be said to be contingent. [284 H; 285 A]
CIVIL APPELLATE JurusDICTION : Civil Appeals No. 1052
& 1053 of 1966.
Appeals from the judgment and order dated October 4, 5, c
1963 of the Bombay High Court in Income-tax Reference No. 50
of 1961.
R. l. Ko

## Text

A
UNION CO-OPERATIVE INSURANCE SOCIETY LTD.,
BOMBAY
B
c
D
E
F
G
H
v.
COMMISSIONER OF INCOME· TAX, BOMBAY
March 23, 1967
(J. C. SHAH, S. M. S!KRI AND V. RAMASWAMI, JJ.]
Indian Income-tax Act 1922, ,; 10 and Rule 6 of Schedule-llldian
Insurance A.ct, 1938, s. 15-Profits of insurance companies. assessment
of-Bonus paid by company to policy-holder on renewal of policies on
which no claim had been made.--Estimated amoultl so payable debited
by company to appropriation account and not to profit and loss account
-Bonus paid during previous year whether allowable expenditure.
The appellant company carried on general insurance business.
One
of the bye-laws of the
company allowed payment of bonus
where a
policy was renewed and there had been no claim in the preceding year.
The company did not debit in its profir and loss account the amount so
paid in the previous years relevant to the assessment years 1957-58 and
1958-59; it showed an amount estimated to be payable as bonus in its
profit appropriation account. The Income-tax Officer held that ( i) the
payment of bonus was made after the profits for the relevant year were
determined and on that account it was only a case of appropriation of
profits after they were earned, (ii) in any event since the company had
not charged the bonus paid to revenue account and had merely made a
provision in the appropriation account,
it could not claim relief after
modifying the accounts in Form B to Schedule I! of
the Insurance
Act 1938 submitted to the Controller of Insurance.' The High Court in
a reference under s, 66 of the Income-tax Act held against the company
The company appealed.
HELD: (i) Rule 6 of the Schedule to the Income-tax Act enjoins the
Income-tu Officer to take the balance disclosed by the annual accounts
as the profits and gains of insurance business other than life insurance : it
does not oblige him to accept the figure disclosed at the foot of the profit
and loss account in the determination of the quantum of profits and gains
1Jf the insurance buSiiness.
Section 15 of the Insurance Act requires the
insurer to submit not merely the profit and loss account in Form B but
also the balance sheet and the ·account in Form C and other accounts, and
there is no warrant for the view that the balance of profits disclosed must
be equated with the balance of profits disclosed in Form B. [28JG-H]
(ii) By debiting the estimated bonus payment to the profit appropriation account the company did not seek to alter the character of the
expenditure. If it had been debited in the profit and loss
account it
cou)d not with any show of reason be regarded as not incidental to the
bustness of the assessee company.
Merely because it was debited· as an
estimated amount an intention not to treat it as expenditure for the pur·
pose o~ the business is not indicated. It was open to the assessee company
to debit to its annual accounts a certain outgoing actual or estimated
and if sanctioned by the Controller to claim that amount or such other
amount as the Income-tu Officer may irnder s. 10(2) allow as a permissible deduction.
[2R4B-D]
(iii) The bonus scheme was clearly intended to advance the business
of the insurer and the expenditure in this regard was expenditure laid
280
SUPREME COURT REPORTS
[1967] 3 S.C.R.
out wholly and exclusively for the purpose of the business of the com·
pany within the meaning of s. 10(2) (xv). [284F]
•
(iv) The liability of the company for payment of bonus was not a
conungent liability.
So long as the year of risk bas not expired the
liability is contingent, but once the year of risk is over, and the policy
ra renewed the liability becomes actual and concrete.
The
assessee
company had not claimed the full amount for which an estimate was
matle in the accounts submitted to the Controller of Insurance but only
those amounts which were entered in the balance sheet as actually paid.
This expenditure could not be said to be contingent. [284 H; 285 A]
CIVIL APPELLATE JurusDICTION : Civil Appeals No. 1052
& 1053 of 1966.
Appeals from the judgment and order dated October 4, 5, c
1963 of the Bombay High Court in Income-tax Reference No. 50
of 1961.
R. l. Ko/ah, and Ravinder Narain, for the appellant.
R. M. Hazarnavis, S. K. Aiyar, S. P. Nayyar for R. N. Sachthey, for the respondent.
D
The Judgment of the Court was delivered by
Shah, J. The Union Co-operative Insurance Society Ltd.-hereinaiter called 'the assessee Company'--carries on general insurance
business. Bye-law 52 of the assessee Company provides that bonus
shall be paid on those policies (not being Reinsurance Policies) on
certain conditions, the following of which are relevant :
"l. That the premium on that policy is more than
Rs. 5/-.
2. That there has been no claim on that policy.
"3. That the policy was insured during the year for
which bonus is declared.
4. That the bonus amount will be paid only if the
policy is renewed on expiration and the bonus amount
may be credited towards premium under the renewed
policy."
In proceedings for assessment of the income of the assessee
Company for the assessment years 1957-58 and 1958-59 the assessee Company claimed allowance of Rs. 29,615/- and Rs. 44,920/-
respectively, paid under the bonus scheme under Bye-law 52, in
the computation of its taxable income. The Income-tax Officer
rejected the claim holding that payment of bonus was made after
its profits for the relevant years were determined and on that account
it was only a case of appropriation of profit after it was earned,
and that in any event since the assessee Company had not charged
the bonus paid to the revenue account and had merely made a
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CO-OP. INSURANCE SOCY. v. C.l.T. (Shah, I.)
281
provision in the appropriation account, it could not claim relief
after modifying the accounts in Form B to Schedule II of the Insurance Act, 1938, submitted to the Controller of Insurance. The
Appellate Assistant Commissioner upheld the order of the Incometax Officer. The Income-tax Appellate Tribunal, however, held that
the payments were not mere appropriation of profits, ~d were
admissible as permissible deductions on the ground of busmess expediency. The following question submitted for determination of
the High Court of Judicature at Bombay-
"Whether on the facts and in the circumstances of the
case, the amounts of Rs. 29,615/- and Rs. 44,920/-
paid to certain policy-holders 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 ?"
was answered in the negative.
The High Court held that since the amounts paid were not entered in the Profit & Loss account in Form B Schedule II to the
Insurance Act and were also not regarded by the assessee Company
as expenditure charged on profits, .they were not admissible as
deductions in the computation of the taxable income of the assesscc
Company under r. 6 of the Schedule to the Income-tax Act. With
special leave, the assessee Company has appealed to this Court.
By s. 10(7) of the Income-tax Act the profits and gains of any
busin_ess of ii;isurance ~nd the tax payable thereon are computable,
notw1thstandmg apythmg to the contrary containoo in ss. 8, 9, 10,
12 or 18, in accordance with the rules contained in the Schedule
to the Act. Rule 6 of the Schedule which prescribes the method of
computation of taxable income of insurance business (other than
life insurance) provides :
"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
whi~h are required under the Insurance Act, 1938, to be
furmshed to the Controller of Insurance after adjusting
such balance so a~ to exc~ude from it any expenditure
other ~han expend.1ture which may under the provisions
of sect10n 10 of this Act be allowed for in computing the
profits and gains of a business . . . . . "
By s. 15 of the Insurance Act 4 of 193 8 every insurer is directed
to furnish to the Controller of Insurance, among others, the audited
accounts and statements referred to in s. 11 of that Act.
By s.
11(1) of the Insurance Act every insurer is directed to prepare at
'.282
SUPREME OOURT REPORTS
[1967] 3 S,C.R.
the expiration of each calendar year with reference to that year,
the following accounts and statements in respect of all insurance
business transacted by him ;
"(a) in accoraance with the regulations contained in
Part I of the First Schedule, a balance-sheet in the form
setforth in Part II of that Schedule;
(b) in accordance with the regulations contained in
Part I of the Second Schedule, a profit and loss account
in the forms setforth in Part II of that Schedule, except
where the insurer carries on business of one class only of
the classes specified in clauses (a), (b) and (c) of subsection (1) of section 7 and no other business."
Section 21 of the Insurance Act authorises the Controller of Insurance, if it appears to him that any return furnished to him under
the provisfons of the Act is inaccurate or defective in any respect,
to require the insurer to correct or supplement such return, or to
call upon the insurer to submit for his examination any book of
. account, register or other document or to examine any officer of
the insurer on .oath in relation to the return, or to decline to accept
any such return unless the inaccuracy has been corrected or the
deficiency has been supplied.
By s. 22 the Controller has the
power to order investigation or re-valuation to be made by an
actuary .appointed by the insurer for the purpose. Having regard
to the wide powers conferred upon the Controller, the Income-tax
Act has in respect of the business of insurance, other than life insu·
ranee, provided that the balance of the profits disclosed by the
annual accounts, copies of which are required under the Insurance
Act, 193 8, to be furnished to the Controller of Insurance, shall be
accepted by the Income-tax Officer, subject to any adjustment he
may make so as to exclude from it any expenditure other than expenditure which may under the provisions of s. 10 of the Incometax Act be allowed for in computing the profits and gains of the
business.
·
It is common ground that the assessee Company had submitted
its balance-sheet, the profit & loss account and profit & loss appropriation account.
The balance-sheets for the two years 1956
and 1957 have not been printed in the record and only the profit
& loss accounts and the profit & loss appropriation accounts have
been printed. In the statements of profit & loss account (Form B)
for the years 1956 and 1957 disbursements by way of bonus to
the renewing policy-holders under Bye-law 52 are not included.
But in the profit & loss appropriation accounts (Form C) for the
years 1956 and 1957 entries for allocations for Rs. 50,000/ • and
Rs. 70,000 /' respectively are made under the head "Policy-holders
Bonus Fund". In· Form .'B' in Schedule II of the Insurance Act
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CO-OP. INSURANCE SOCY. v. C.!.T. (Shah, /.)
283
under the head "Other Expenditure (to be specified)", outgoings
other than taxes, expenses of management, loss on realization of
investments, depreciation and loss transferred from Revenue
Account are required to be included. In Form C which is the form
of profit & loss appropriation account the following appropriations
are directed to be made :
"Balance being loss brought forward from last year.
Ralance being loss for the year brought from Profit
& Loss Account (as in Form B).
Dividends paid during the year on account of the current
year.
Transfers to any particular Funds or Accounts, and
Balance at the end of the year as shown in the
Balance-Sheet."
The assessee Company in drawing up its profit & loss account
instead of showing the actual disbursement in Form B against the
head "Other Expenditure" estimated the amounts which it would be
liable to pay and debited the same against the head "Transfers to
any particular Funds or Accounts" in Form C. The High Court
held that r. 6 merely provides for adjustment of the balance of
expenses which are in the opinion of the Income-tax Officer not
permissible allowances under s. 10, and on that hypothesis inferred
that the annual accounts referred to in r. 6 of the Schedule mean
the profit & loss account submitted in Form B and not the profit &
loss appropriation account submitted in Form C. In our judgment
that view cannot be sustained. In Form B expenditure which is
111ready incurred or which is capable of being actllally ascertained
at the close of the year may be included. But the insurer who has
incurred a liability may allocate (subject to adjustment in the
balance-sheet) an estimated amount out of the profit & loss account
and enter it in the profit & loss appropriation account. The Controller of Insurance may, if he is not satisfied with the correctness
of the estimate, or the allocation refuse to accept it, and may call
upon the insurer to rectify the accounts. If the Controller certifies
the accounts, the expenditure cannot be disallowed by the Incometax Officer, merely because it is not entered in the profit & loss
account, and is found appropriated in the profit & loss appropriation account. Rule 6 of the Schedule to the Income-tax Act enjoins the Income-tax Officer to take the balance disclosed by the
annual accounts as the profits and gains of insurance business other
than life insurance : it· does not oblige him to accept the figure disclosed at the foot of the profit & loss account as determinative of
the quantum of profits and gains of that insurance business. Section 15 requires the insurer to submit not merely the profit & loss
account in Form 'B', but also the balance-sheet and the account in
Form 'C' and other accounts, and there is no warrant for the view
284
SUPREME COURT REPORTS
(1967] 3 s.c.R.
that the balance of profits disclosed by the annual account must
be equated with the balance of profits disclosed in Form 'B'.
The other plea which appealed to the High Court that the assessee Company had itself not treated the bonus paid as an expenditure related to the business, but only as disbursements made
out of the profit after it had accrued to the assessee Company, also
cannot be sustained. The assessee Company maintains its accounts
according to the mercantile system. It chose to estimate the liability arising under Bye-law 52 in respect of the business transacted
by it, and debited it in the profit & loss appropriation account. By
adopting that method of accounting the assessee Company did not
seek to alter the character of the expenditure. If it had been debited in the profit & loss account it could not with any show of
reason be regarded as not incidental to the business of the assessee
Company. Merely because it was debited as an estimated amount,
an intention not to treat it as expenditure for the purpose of the ·
business is not indicated.
In our judgment, it was open to the
assessee Company to debit in its annual accounts a certain outgoing
actual or estimated, and if sanctioned by the Controller to claim
that amount or such other amount as the Income-tax Officer may
under s. 10(2) allow as a permissible deduction.
The High Court did not express any view on the question whether the expenditure was a permissible allowance under s. 10(2)(xv)
of the Income-tax Act. It appears from the scheme for payment of
bonus to the policy-holders who renew their policies that bonus
would be admissible if there was no claim on the policy and the
renewal policy was issued during the year for which bonus was
declared. This scheme was evolved to induce the policy-holders to
renew their policies with the assessee Company. Even if no immediate benefit results therefrom to the trade of the insurer, the
scheme is clearly intended to advance the business of the insurer,
and payment to renewing policy-holders or adjustment of bonus
against renewal premium made under that scheme constitutes expenditure laid out wholly and exclusively for the purpose of the
business of the assessee Company.
Counsel for the Commissioner contended that the estimated
liability was not "crystallised liability'' and was on that account inadmissible as an allowance in the computation of taxable income.
The liability, submitted counsel, was a mere contingent liability
which could not amount to expenditure within the meaning of s.
10(2)(xv), nor a permissible outgoing in the determination of the
income, profits or gains of the business. This question was appa·
rently not raised before the Tribunal. Assuming that it could be
raised before the High Court and this Court, we are of the view
that under the scheme of Bye-law 52, the liability is not a con·
tingent liability. So long as the year of risk has not expired, the
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co-OP. INSUllANCB SOCY. v. C.I.T. (Shah, !.)
285
liability is contingent; but once the year of risk is over, and the
policy is renewed the liability becomes actual and concrete. Theassessee Company has not claimed the full amount for which an
estimate was made in the accounts submitted to the Controller of
Insurance, but only those amounts which were entered in the
balance-sheet as actually paid. This expenditure cannot be said
to be "contingent".
It was finally said that under s. 41 of the Insurance Act there
is prohibition against the grant of any rebate and it is urged that no
insurer. can in the course of assessment proceedings claim deduction in respect of the amounts allowed by him by way rebate when
grant of rebate is expressly prohibited by statute. Section 41(1) of
the Insurance Act prohibits the allowance or offer of allowance
either directly or indirectly as an inducement to any person to
take out or renew or continue an insurance in respect of any kind
of risk relating to lives or property in India. But the question whether grant or bonus is a rebate· within the meaning of s. 41 was
never raised before the Tribunal This Court will not be justified
in entering upon an investigation whether payment of bonus was
in the nature of rebate and on that account offended s. 41 of the
Insurance Act.
The answer recorded by the High Court will be discharged and
an answer in the affirmative be recorded on the question submitted.
The appeals will be allowed. The assessee Company will be
entitled to its costs in this Court and the High Court. One hearing
fee.
G.C.
Appwls allowed.