Case: Union Co-Operative Insurance Society Ltd.,Bombay Vs. Commissioner Of Income-Tax, Bombay

loss appropriation account submitted in Form C. In our judgment that view cannot be sustained. In Form B expenditure which is already incurred or which is capable of being actually 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 and loss account and enter it in the profit and 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 Income-tax Officer, merely because it is not entered in the profit and loss account and is found appropriated in the profit and 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; does not oblige him to accept the figure disclosed at the foot of the profit and 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 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 by the annual account must be equated with the balance of profits disclosed in Form B. 7. 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 and 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 and 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 his 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 Section 10 (2) allow as a permissible deduction. 8. The High Court did not express any view on the question whether the expenditure was a permissible allowance under Section 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. 9. 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 Section 10 (2) (xv), nor a permissible outgoing in the determination of the income, profits or gains of the business. This question apparently was 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 contingent liability. So long as the year of risk has not expired, the liability is contingent: but once the year of risk is over, and the policy is renewed the liability becomes actual and concrete. The assessee 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. 10. It was finally said that under Section 41 of the Insurance Act there is prohibition against the grant of any rebate alia 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 of 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 of bonus is a rebate within the meaning of Section 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 Section 41 of the Insurance Act. 11. The answer recorded by the High Court will be discharged and an answer in the affirmative be recorded on the question submitted.

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

Explanation:
1[ds]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 of bonus is a rebate within the meaning of Section 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 Section 41 of the Insurance Act11. The answer recorded by the High Court will be discharged and an answer in the affirmative be recorded on the question submitted7. 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 underw 52 in respect of the business transacted by it, and debited it in the profit and 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 and 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 his annual accounts a certain outgoing actual or estimated, and if sanctioned by the Controller to claim that amount or such other amount as thex Officer may under Section 10 (2) allow as a permissible deductionAssuming that it could be raised before the High Court and this Court, we are of the view that under the scheme ofw 52, the liability is not a contingent liability. So long as the year of risk has not expired, the liability is contingent: but once the year of risk is over, and the policy is renewed the liability becomes actual and concrete. The assessee 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 thet as actually paid. This expenditure cannot be said to be contingent.