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

1. The Union Co-operative Insurance Society Ltd., hereinafter 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 :"1. That the premium on that policy is more than Rs. 5/-2. That there has been no claim on that policy3. That the policy was insured during the year for which bonus is declared4. 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"2. 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 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 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 Income-tax Officer. The Income-tax Appellate Tribunal, however, held that the payments were not mere appropriation of profits, and were admissible as permissible deductions on the ground of business 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 l957-58 and 1958-59"was answered in the negative3. The High Court held that since the amounts paid were not entered in the profit and 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 assessee Company under Rule 6 of the Schedule to the Income-tax Act. With special leave, the assessee Company has appealed to this Court.

Reasoning: 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.