Calcutta H.C : Whether, on the facts and in the circumstances of the case, and on a correct interpretation of r. 5 of the First Schedule to the IT Act, 1961, and of s. 41(1) of the said Act, the Tribunal was justified in holding that the sum of Rs. 46,703 was not chargeable to tax ?

High Court Of Calcutta

CIT vs. Ruby General Insurance Co.

Sections 41(1), SCH. I, Rule 5

Asst. Year 1967-68

Dipak Kumar Sen & Mrs. Monjula Bose, JJ.

IT Ref. No. 508 of 1975

7th August, 1986

Counsel Appeared

Sunil Mukherjee, for the Revenue : R.N. Shah & S. Bhattacharjee, for the Assessee

DIPAK KUMAR SEN, J.:

Ruby General Insurance Co., the assessee, was assessed to income- tax for the asst. yr. 1967-68, the relevant accounting period ending on 31st Dec., 1966. During the accounting year, the claims of the policyholders of the assessee in Burma to the extent of Rs. 50,000 became time-barred. The assessee adjusted the said Rs. 50,000 to its revenue account for the year 1960 in its Rangoon branch and thereafter, after deducting the expenses in respect of the policies to the extent of Rs. 3,297, the balance Rs. 46,703 was written off in the account of the assessee as there was no certainty of remittance of any surplus from Rangoon to India. In the income-tax assessment, the ITO held that the same could not be written off as a loss and, in any event, the loss, if any, would only be a loss of capital. The assessment was completed accordingly.

2. Being aggrieved, the assessee preferred an appeal before the AAC. The AAC, following the decision of the Tribunal in respect of the same assessee for the earlier assessment year, held that the assessee having credited the amount of Rs. 50,000 in its account, the said amount of Rs. 46,703 could not be written off in the accounting year and should be included in the total income. It was noted that the assessee had not wound up its business in Burma and had been making efforts to obtain remittance of surplus amounts from Burma. The AAC confirmed the order of the ITO.

3. Being aggrieved, the assessee filed a further appeal before the Tribunal. It was contended before the Tribunal on behalf of the assessee that the said amount of Rs. 46,703 brought into the account as a result of the claims of the policyholders being time-barred was not a profit liable to tax. The entry in respect of the said amount was only an adjustment entry. The amount having been assessed in earlier years, when the premia in respect of the policies were paid by the policyholders in Burma, inclusion of the said amount would amount to double taxation. It was further submitted that the assessment of the insurance company had to be made in accordance with the specific procedure laid down in s. 44 of the IT Act, r/w Sch. I thereto. It was pointed out to the Tribunal that as regards the premia received in respect of the policies, 40% of the same was transferred to the reserve for unexpired risks and (only) the balance of 60% was brought to assessment. The balance in the reserve for unexpired risks was carried forward to the next year and shown on the credit side of the revenue account and any additional reserve credited in the next year also came into this account. The whole of the amount received on account of premia was assessed to tax.

4. The Tribunal accepted the contentions of the assessee. The Tribunal held that in view of the method of taxation, all premium receipts were assessed to tax within a period of two years but 40% of the premium receipts had to be kept in reserve in accordance with law. The amount of Rs. 50,000 representing time- barred claims could not be held to be the profits of the assessee and the same could not be assessed merely because the said amount had been adjusted in the revenue account by way of a contra entry for accounting purposes. The Tribunal directed the deletion of the said amount of Rs. 46,703 from the total income.

5. On an application of the Revenue under s. 256(1), IT Act, 1961, the Tribunal has referred the following question as a question of law arising out of its order for the opinion of this Court :

“Whether, on the facts and in the circumstances of the case, and on a correct interpretation of r. 5 of the First Schedule to the IT Act, 1961, and of s. 41(1) of the said Act, the Tribunal was justified in holding that the sum of Rs. 46,703 was not chargeable to tax ?”

6. At the hearing, contentions raised in the proceedings below were reiterated before us. The Revenue did not dispute the method and manner of assessment of the insurance company. It was also not disputed that the premia paid in respect of the claims of the policyholders had been assessed to tax earlier. The said amount of Rs. 50,000 representing the time-barred claims did not reach the hands of the assessee as income. But, for the purpose of accounting, the same was adjusted by way of a contra entry. The method of accounting has also not been disputed by the Revenue.

For the above reasons, we do not find any reason to interfere with the findings of the Tribunal and answer the question in the affirmative and in favour of the assessee. The reference is disposed of accordingly. There will be no order as to costs. It is stated on behalf of the assessee that Ruby General Insurance Co. has since merged with the National Insurance Co. of India. Let the records be corrected accordingly.

MRS. MONJULA BOSE, J.:

I agree.

[Citation : 172 ITR 337]

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