Case: Pandhyan Insurance Co. Ltd Vs. Commissioner Of Income-Tax, Madras

2. The facts relevant for answering the question are as follows. The assessee is a public limited company carrying on the business of general insurance. It erected a modern substantial building with 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 Rupees 1,21,245/- as depreciation as follows:Rate AmountBuildings 10% 1,06,940Air-conditioning Plant 15% 2,973Lifts 15% 6,214Transformers 15% 1,442Internal Telephone 15% 3,676Total 1,21,2453. 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 for rent. The income-tax Officer disallowed four-fifth of the depreciation claimed on the ground that "the rentals received 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 there would have been a statutory allowance which would compensate for depreciation. The fact that the whole income is exempt further strengthens that no allowance regarding these portions could be made."4. 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 (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.5. On further appeal, the Appellate Tribunal came to the conclusion that the immovable property to the extent of four-fifths thereof was an investment held solely for the purpose of earning rent there from 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.6. On a reference being made to it, the High Court held that in computing profits and gains, the Income-tax Officer had the power to examine the quantum of depreciation either written off or reserved and to satisfy himself that it did not exceed the amount allowable to meet the depreciation.7. 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 readIn 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 gains 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 consultation with the Controller of Insurance that having due regard to the necessity for making reasonable provision for bonuses to participating policy-holders and for contingencies, the rate of 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 thc 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 are required under the Insurance Act, 1938 (4 of 1938), to be furnished to the Controller of Insurance, after adjusting such balance so as to exclude from, it any expenditure other than expenditure which may under the provisions of section 10 of this Act be allowed for in computing the profits and gains of a business. Profits and losses on the realisation of investments, and depreciation and appreciation of the value of investments shall be dealt with as provided in Rule 3 for the business of life insurance."

Court's reasoning:
An examination of various sections of the Insurance 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 forms for the preparation of a balance sheet. Regulation 6 enjoins the appending to the Balance Sheet a statement in Form AA, as set out in Part II of the First Schedule, showing the market value and the book 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 as 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 quotations, and (c) refers to how the value of the assets as has not been ascertained from public quotations has been arrived at. But it is not necessary to show the market values where they are not less than the book values, and a certificate to that effect is appended to the statement. In other words, if the market value is more 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.It seems to us that this Court has held in categorical 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 isare 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 understood in the ordinary connotation. If the draftsman wanted to include depreciation on buildings, what Mr. Ganpathy Iyer calls notional depreciation, he could hardly have used any otherquestion does not arise on the facts of this case, for once we hold that the word depreciation covers notional direction, it is nobodys case that it is not notional depreciation that is intended 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.17. Mr. Ganpathy 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 depresciation. We agree with Mr. Sastri that the word expenditure in R. 6 meansother words, if the market value is more 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.After the balance sheet, profits 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.