# PANDHY AN INSURANCE CO. LTD v. COMMISSIONER OF INCOME-TAX, MADRAS

- **Citation:** [1965] 1 S.C.R. 367
- **Court:** Supreme Court of India
- **Decided:** 1964-09-29
- **Case number:** Civil Appeal No. 816 of 1963
- **Bench:** K. Subba Rao, J. C. Shah Ands. M. Sikri
- **Source:** https://unisonlegal.in/judgment/supreme-court-of-india/pandhy-an-insurance-co-ltd-v-commissioner-of-income-tax-madras-3323
- **Pages:** 8

## Headnote

lnco111e Tax Act (I I of 1922) Schedule, rr. 3(b) and 6-Scopc oj
l"he appellant ( assessee) was a company carrying on the business
of general insurance.
It erected a substantial modern 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 ~he depreciation with respect to
various items.
The Income-tax
Officer disallowed 4/ 5 of the depreciation on the ~i:ound 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 assesscc, the Appellate Assistant Con1missioner dismissed
the appeal and enhanced the assessment by disallowing even the 1/5
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 furthe1
appeal, the Appellate Tribunal restored the order of
the
lncon1c·ta'\:
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 w-as also <sllo\\.·ahlc as
a deduction in the assessment completed under s. 10(7) unJ the rule-;
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
\'arious 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 ex.elude fron1 the balance of profits, only any expenditure
which i!I not allowable under s. 10 of the Income-tax Act. 'l'he \\'Ord
"'expenditure" in r. 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. Cotnmissioner of lncomctax (1964) 5I l.T.R. 773, followed.

## Text

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367
PANDHY AN INSURANCE CO. LTD.
v.
COMMISSIONER OF INCOME-TAX, MADRAS
September 29, 1964
(K. SUBBA RAO, J. C. SHAH ANDS. M. SIKRI JJ.)
lnco111e Tax Act (I I of 1922) Schedule, rr. 3(b) and 6-Scopc oj
l"he appellant ( assessee) was a company carrying on the business
of general insurance.
It erected a substantial modern 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 ~he depreciation with respect to
various items.
The Income-tax
Officer disallowed 4/ 5 of the depreciation on the ~i:ound 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 assesscc, the Appellate Assistant Con1missioner dismissed
the appeal and enhanced the assessment by disallowing even the 1/5
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 furthe1
appeal, the Appellate Tribunal restored the order of
the
lncon1c·ta'\:
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 w-as also <sllo\\.·ahlc as
a deduction in the assessment completed under s. 10(7) unJ the rule-;
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
\'arious 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 ex.elude fron1 the balance of profits, only any expenditure
which i!I not allowable under s. 10 of the Income-tax Act. 'l'he \\'Ord
"'expenditure" in r. 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. Cotnmissioner of lncomctax (1964) 5I l.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 1957.
A. V. Viswanatha Sastri, R. Venkataraman and R. Gopalakrishnan, for the appellant.
368
SUPREME COURT REPORTS
[1965) I S.C.R.
R. Ganapathy Iyer, R. H. Dhebar and R. N. Sachthey, for the
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respondent.
The Judgment of the Court was delivered by
Sikri J. This is an appeal by special leave against the
ju<.lgment of the Madras High Court in a case referred to it under
the Indian Income Tax Act, 1922, hereinafter referred to a~ the
B
Act, answering the question of law against the a~essec.
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
C
in the assessment completed under section I 0 ( 7) and the
rules contained in the schedule of the Income-tax Act."
The fac1s relevant for answering the question are as follows.
The asscssce is a public limited company carrying on the business
of general insurance. It erecte<.1 a modem substantial building with
D
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 a< depreciation as follows :
Bu1r~11ng_,
.\ir conJ1tioning plan:
Lifts
Transformer~
I nrernal T clcphonc
Rate
~Per Ct'-Ol)
10
15
"
15
15
Amount
(in rupees)
1.06,940
2,973
6,214
1,442
3,676
TOT"-L
1,21.245
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 four-fifth as let
out to tenants fer rent. The Income-tax Officer disallowed fourtifth of the depreciation claimed on <he ground that "the rentals
receiYCd .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 tnere would have been a statutory allowance
which would compensate for depreciation. The fact that the whole
jncome i~ exempt further strengthens that no allowance regarding
these portions could be made."
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PANDHYAN INSURANCE V. C.I.T., MADRAS (Sikri J.)
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 exient of four-fifths
thereof was an investment held 'solely for the purpose of earning
rent therefrom capable of appreciation either notionally 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 thlit in
computing profits and gains, the Income-tax Officer had the power
to examine the quantiim 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 ~ains 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 con~ultation with the Controller
of Insurance that having due regard . to ·the necessity
for making reasonable .provision for bonu'!CS ·to pal'ficipating policy-holders and for contingencies, the rate· of
370
SUPREME COL'RT REPORTS
(1965] l S.C.R.
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 arc required under the Insurance Act, 1938 (4 of
i 91R]. to be furnished to the Controller of Insurance,
"her adjusting such balance so as to exclude from it any
~xpcnditurc, either than expenditure which may under the
provisions of section IO of this Act be allowed for in
computing the profits ,and gains of a business. Profits
and losses on the realisinion of invesunents and depreciation and appreciation < •f the value of investments shall
be dealt with as provided in rule 3 for the business of
life insurance."
Mr. Vbwanatha Sastri contends that the Insurance Act, 1938
( 4 of 1938 l 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 1 nsurancc 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 fonns for the
preparation of a balance sheet. Regulation 6 enjoins the appendinf! to the Balance Sheet a statement in Form AA, as set out in
Part 11 of the Fi~t Schedule, showing the market value and the
lm<'k value of the assets, including house property. This Form AA
has three columns; (I) book value as per (a) below, (2) market
value as per (b) below, and (3) remarks a' 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
quorarions. and ( c) refers to how the value of the assets as has
not been ascertained from uublic quotations has been arrived at.
Rut it is not necCS.'lary to show the market values where they are
not less than the book values, and a certificate to that effect is
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PANDHYAN JllSURANCE V. C.I.T., MADRAS (Sikri J.)
37 l
appended to the statement. In other wqrds, if the market value
is lnore 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 : ( I )
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
iu 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 a~sets 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, rejjsters and
documents or to examine any officer. The Controller may decline
to accept any return unless the ina<1Curacy has been corrected or
the deficiency has been supplied. If he decli9es 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 c:ls. (a),
( b) or ( c) of sub-section ( 1) or for directing the acceptanc:e of
any return which the Controller has declined to accept.
372
SUPREME COURT
RLPORTS
( 1965] I S.C.R.
Mr. Sastri next contends that r. 6 and r. 3 ( b), quoted 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. I 0 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
'expenditure' is expressly used. Coming to the 5econd 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
Ollicer 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.(') 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 r b > we find that tl1c first
part of it lays down that it shall be obligatory on the
Income-tax Officer to allow certain amounts written off
or re,ervcd by the asscssce as a dtiluction 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 asscssec. It.
therefore, does trot warrant what the Income-tax Officer
ditl. namely, to adiust the accounts 011 the basis of a
revaluation made by him." (emphasis supplied)
Hidayatullah J .. said this about Rule 3 (h);
"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 adjustmenlb. Ruic 3 (b) in its· main
part speaks of adjustments on the has is of the accounts
and amounts as entered in ·the accounts determine what
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(I) (1964) 51 l.T.R;·773_
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PANDHYAN INSURANCE V. C.I.T •• MADRAS (Sikri J.)
373
must be adde<I. to or deducted from the surplus. 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 Incqme-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 ls comprehended in the proviso."
It seems to us that this Court has held in o<:ategorical 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
D 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,
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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
F understood in the ordinary connotation. If the draftsman wanted
to include depreciation on buildings, what Mr. Ganapathy Iyer
calls notional depreciation; he could hardly have used any other
wording.
'
Mr. Ganapathy Iyer says that this Court in Life Insurance
G Corporation of India v. Commissioner of Income Tiu(') 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 denreciation
and not any other fanciful conception of depreciation. 'Ibis
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question does not arise on the facts of this case, for once we hold
that the word "depreciation" covers notional depreciation, it Is
(I) [19641 SI I.T.R. 773.
L2Sup./64--l 1
374
SUPREME COURT REPORTS
(1965] I S.C.R.
nobody's ca.~e that it is not notional depreciation that is intended
A
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 \yOrd "expenditure" in r. 6 means disbursement.
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.
Appeal allowed.
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