Case: The Commissioner Of Excess Profits Tax, West Bengal Vs. The Ruby General Insurance Co. Ltd

1912 A.C. 443: 6 Tax Cas 59 (A) that it should be allowed as a deduction was based on two grounds. One was that it should be regarded as unearned income, and for the reasons already stated, it cannot avail when the question is one of determining capital under that Act. And the other was that the reserve represents a liability in the nature of unpaid price of property included in the trading assets. But apart from the fact that we have to strain the analogy in applying it to the present situation, can that liability be held to be of the character contemplated by R. 2? Can it be said that the reserve for unexpired risk was, like borrowed money and debt, part of the real trading assets of the business? The answer must clearly be in the negative.The reserve liability could not factually be said to have contributed to the running of the business or the earning of profits. It was something in the air, and could have had no effect in the working of the concern, during the chargeable accounting period. It cannot therefore be held to be an accruing liability within R. 2 of Sch. II to the Act.17. A case very much in point is the decision in Northern Aluminium Co. Ltd. v. Inland Revenue Commrs., 1946-1 ALL E R 546 at p. 554 (H). There the question arose whether a conditional liability under a contract was an accruing liability within the corresponding provision in the English Excess Profits Tax Act. The facts were that on December 16, 1939, an agreement was entered into between the Ministry of Aircraft Production and a company engaged in manufacturing aluminium products and supplying them to manufacturers of aircraft for the Government, wherein it was provided that the prices which the latter was then charging to its customers should be reduced for the period July 1, 1939 to June 30, 1940, and that the amount by which the prices paid to the company were in excess of the reduced prices should be paid by the company to the Ministry. The agreement further provided that negotiations should be started not later than June 30, 1940, for determining the rates to be charged for the periods following June 30, 1940. The agreement was, in fact, concluded only on October 12, 1942, whereby the prices to be charged by the company were fixed for the years, 1941, 1942 and 1943. In accordance with the agreement entered into on October 12, 1942, a sum of ? 2, 743, 469 was repaid by the company to the Ministry in 1943 being the difference between the price paid by the customers and that fixed in the agreement. This amount was actually allowed as a deduction in the assessment of the business income for purpose of income tax, and the dispute related to the question whether it could be deducted in assessing the excess profits tax as an accruing liability of the company for the chargeable accounting period which was January 1 to December 31, 1941. It was held by the Court of appeal that there was, in fact, no agreement between the parties during the chargeable accounting period and that therefore no liability was incurred. In the alternative, it was held that even if the agreement dated December 16, 1939, could be construed as amounting to a conditional agreement for the period subsequent to June 30, 1940, the obligation created thereby could not be regarded as an accruing liability within the rule in question. Lord Greene, M. R., Stated the reason thus:"A purely conditional liability, which may or may not mature, is not one which falls within that language, for this reason: Quite apart from the actual words it would be contrary to the whole conception underlying these capital provisions because a purely conditional liability which may or may not eventuate, is not a thing which affects a companys capital position, any more than a conditional receipt can affect its capital position. A receipt which may or may not be received, according as some agent does or does not happen, is not a thing with which you can earn profits. It is the possibility of earning profits on your real capital that these capital provisions are concerned with. Therefore, in my opinion, even if one could spell such a hypothetical and conditional contract out of these words, the result would not give rise to an accruing liability within the meaning of the section."This decision was taken in appeal to the House of Lords and was affirmed. Vide Inland Revenue Commissioners v. Northern Aluminium Co. Ltd., 147-1 ALL E. R. 608 (I).18.This decision establishes that a conditional liability under a concluded contract - it is on that footing that the second point arose for decision - was not an accruing liability for the purpose of the Excess Profits Tax Act, as the same had no effect on the actual capital position of the company, and the fact that it was allowed for purposes of income-tax did not affect the position under the Excess Profits Tax Act. The learned Solicitor-General sought to distinguish this decision on the ground that it did not relate to an insurance business, whereas it was contended that 1912 A. C. 443: 6 Tax Cas 59 (A), directly dealt with the question now under consideration whether reserves for unexpired risks in pending policies were liabilities which could be deducted. We do not see how it makes any difference in the construction of R. 2 of Sch. II to the Act that the liability sought to be deducted arises under an insurance policy and not under some other contract. We are of opinion that the principles laid down in 1946 1 ALL. E.R. 546 (H), and 1947-1 ALL. E.R, 608 (1), are applicable to the decision of the present case, and that a contingent liability in respect of unexpired risk is not an "accruing liability" within R. 2 of Sch. II to the Act.

Decision (1 = appeal accepted, 0 = rejected): 1

Explanation:
1[ds]This decision was taken in appeal to the House of Lords and was affirmed. Vide InlandRevenue Commissioners v. Northern Aluminium Co. Ltd., 147-1 ALL E. R. 608(I).18.This decision establishes that a conditional liability under a concluded contract - it is on that footing that the second point arose for decision - was not an accruing liability for the purpose of the Excess Profits Tax Act, as the same had no effect on the actual capital position of the company, and the fact that it was allowed for purposes of income-tax did not affect the position under the Excess Profits Taxlearned Solicitor-General sought to distinguish this decision on the ground that it did not relate to an insurance business, whereas it was contended that 1912 A. C. 443: 6 Tax Cas 59 (A), directly dealt with the question now under consideration whether reserves for unexpired risks in pending policies were liabilities which could be deducted. We do not see how it makes any difference in the construction of R. 2 of Sch. II to the Act that the liability sought to be deducted arises under an insurance policy and not under some otherare of opinion that the principles laid down in 1946 1 ALL. E.R. 546 (H), and 1947-1 ALL. E.R, 608 (1), are applicable to the decision of the present case, and that a contingent liability in respect of unexpired risk is not an "accruing liability" within R. 2 of Sch. II to the Act.