High Court Of Delhi
Oriental Insurance Co. Ltd. vs. CIT
Section 30, 43A, 44
Asst. Year 1980-81 & 1981-82
Badar Durrez Ahmed & R. V. Easwar, JJ.
ITR 113-117/1998
17th January, 2013
Counsel appeared
M. S. Syali, Sr. Advocate with Mayank Nagi and Prakhar Dixit for the Appellant.: Sanjeev Sabharwal with Puneet Gupta for the Respondent
BADAR DURREZ AHMED, J.
1. In these references, several common questions have been referred to this Court. The assessee’s references are ITR 113/1998 and ITR 114/1998 pertaining to the assessment years 1980-81 and 1981-82, respectively. The department’s references are ITR 115/1998, ITR 116/1998 and ITR 117/1998, which pertain to the assessment years 1980-81 and 1981-82. In ITR 113/1998, which is the assessee’s reference, the following questions have been referred to this Court for consideration:- (I) Whether on the facts and circumstances of the case and a true interpretation of Section 44 of the Income Tax Act, 1961 read with Rule 5 of the First Schedule to the said Act, the Tribunal was right in confirming the addition of Rs.85,55,077/- representing tax deducted at source to the balance of profits disclosed by the annual accounts of the appellant insurance company? (II) Whether on the facts and circumstances of the case and a true interpretation of Section 44 of the Income Tax Act, 1961 read with Rule 5 of the First Schedule to the said Act, the Tribunal was right in confirming the addition of provision for taxation to Rs.9,30,00,000/- to the balance of profits disclosed by the annual accounts of the appellant insurance company? (III) Whether on the facts and circumstances of the case and a true interpretation of Section 44 of the Income Tax Act, 1961 read with Rule 5 of the First Schedule to the said Act, the Tribunal was right in rejecting the applicant insurance company claim for allowing weighted deduction under Section 35B of the Act at Rs.82,19,658/- in respect of total expenditure of Rs.1,04,93,445/-? ITR 114/1998, which is also a reference of the assessee, raises the same three questions, though the amounts mentioned therein are different. The amounts in ITR 114/1998 are – Rs.2,02,98,457/- and Rs.9,50,00,000/- in question Nos. I and II, respectively. Insofar as question No. III is concerned, the amounts are – Rs.1,07,76,524/- and Rs.3,23,29,571/-. Thus, it is seen that the questions in the two references on behalf of the assessee are identical except for the differences in the amounts.
Insofar as the department’s reference is concerned, only two questions arise for consideration. In ITR 115/1998, the following question has been referred to us:-
(IV) Whether on the facts and circumstances of the case, the ITAT is right in law in holding that assessee’s claim for deduction of Rs.1,08,66,420/- and Rs.49,341/- being reserves for export market development allowance and bad/ doubtful debt is allowable under the Income Tax Act, 1961?
In ITR 116/1998, the following question has been referred to us:-
(V) Whether on the facts and circumstances of the case, the ITAT is right in law in holding the disallowance of Rs.57,047/- made under Section 37 (4) of the Income Tax Act on account of expenditure on lease rent, taxes and repairs and maintenance of a guest house, on the ground that this expenditure was allowable under certain other provisions of the Income Tax Act?
Insofar as ITR 117/1998 is concerned, the question in this reference is identical to question No. IV above except that the amounts are Rs.1,16,14,440/- and Rs.3,94,916/-. ITR 115/1998 pertains to the assessment year 1980-81, ITR 116/1998 pertains to the assessment year 1981-82 and so does ITR 117/1998. Thus, although there are several questions referred in each of the references mentioned above, only five questions need to be answered by this Court.
Insofar as question Nos. (I) and (II) are concerned, they are covered against the revenue by virtue of the Supreme Court decision in the assessee’s own case in CIT v. Oriental Fire and General Insurance Co. Ltd: 291 ITR 370 (SC). Question Nos. (I) and (II) are, therefore, answered in favour of the assessee and against the revenue.
Insofar as question No. (III) is concerned, that is covered against the assessee and in favour of the revenue by virtue of the Supreme Court decision in the case of CIT v. Hero Cycles Pvt. Ltd. & Ors: 228 ITR 463 (SC).
As regards question No. (V), that is also covered against the assessee by virtue of the Supreme Court decision in the case of Britannia Industries Ltd. v. CIT & Anr. : 278 ITR 546 (SC). That leaves us with question No. (IV). This question has two parts. One deals with the export market development allowance and the other with bad / doubtful debts. Insofar as the part pertaining to bad/ doubtful debts is concerned, there is no debate that it stands covered against the revenue in the assessee’s own case in CIT v. Oriental Fire and General Insurance Co. Ltd (supra) which confirms this court’s decision in Oriental Fire and General Insurance Co. Ltd v. CIT: 278 ITR 312 (Del).
As regards the reserves for export market development allowance, there was some controversy before us inasmuch as according to the learned counsel for the assessee, this aspect also stood covered by the very same decision i.e., CIT v. Oriental Fire and General Insurance Co. Ltd (supra) because the reserves for export market development allowance stood in an identical position as the reserves for bad / doubtful debts and since the question of bad/ doubtful debts has been decided by the Supreme Court in CIT v. Oriental Fire and General Insurance Co. Ltd (supra), the same decision would apply to reserves for export market development allowance. However, the learned counsel for the revenue sought to bring about a distinction in the two elements in this question. He submitted that export market development allowance would have to be construed in the light of the provisions of Section 35B of the Income Tax Act, 1961. A reference was made to the Supreme Court decision in the case of General Insurance Corporation of India v. CIT: 240 ITR 139 (SC).
In the said decision, Section 44 of the Income Tax Act was considered and so was the First Schedule to the said Act and particularly Rule 5(a) thereof. The Supreme Court observed that Section 44 of the said Act is a special provision governing computation of taxable income earned from the business of insurance. It further observed that the said provision begins with a nonobstante clause and thus has an overriding effect over other provisions contained in the Act. The Supreme Court noted that the provision mandates the assessing authorities to compute the taxable income for business of insurance in accordance with the provisions of the First Schedule. Furthermore, the Supreme Court held that a plain reading of Rule 5(a) of the First Schedule of the said Act makes it clear that in order to attract the applicability of the said provision the amount in question should satisfy twin conditions. First of all, it must be an expenditure or allowance and secondly, it should be one not admissible under the provisions of Section 30 to 43A of the said Act. The Supreme Court also held that if the amount was not an expenditure or allowance, the question of testing its eligibility for adjustment by reference to Rule 5(a) of the First Schedule would not arise at all.
Mr Syali, the learned senior counsel appearing on behalf of the assessee, submitted that the very first test is not satisfied in the present case inasmuch as the export market development allowance is actually a reserve and it has been shown as such in the accounts of the assessee. He further states that it is also so treated in the statement of the case which has been prepared by the Tribunal, while referring the said question to this Court. Mr Sabharwal, however, contended that it was not a reserve but an allowance. However, on going through the balance-sheet, we find that the export market development allowance has been shown as a reserve. In the very same decision, that is, in the case of General Insurance Corporation of India (supra), the Supreme Court observed that there was another approach to the same issue which was that Section 44 of the said Act read with the rules contained in the First Schedule, laid down an artificial mode of computing profits and gains of an insurance business. For the purposes of income tax, the figures in the accounts of the assessee drawn up in accordance with the provisions of the First Schedule to the Income Tax Act and satisfying the requirements of the Insurance Act are binding on the Assessing Officer under the Income Tax Act and he has no general power to correct the errors in the accounts of an insurance business and undo the entries made therein. Keeping this in mind, it is clear that the accounts reveal that the said export market development allowance has been shown as a reserve and that cannot be altered. Once it is recognized as a reserve, then it is neither an expenditure nor an allowance and, therefore, the very first condition, which was required to be satisfied, as indicated by the Supreme Court decision, has not been satisfied in this case and, therefore, no adjustment can be made by invoking Rule 5(a) of the First Schedule to the said Act.
We may point out that all the years in question are prior to 01.04.1989, when an amendment was introduced in Rule 5(a) of the First Schedule to the said Act. By virtue of that amendment, the following phrase was added:- “including any amount debited to the profit and loss account either by way of a provision for any tax, dividend, reserve or any other provisions as may be prescribed.”
In the present case, since the relevant assessment years are all prior to 01.04.1989, this additional phrase would not apply. Even the Supreme Court decision in General Insurance Corporation of India (supra) was in respect of the assessment years 1977-78 when this phrase was not there in the statute book.
16. Consequently, this aspect of the matter pertaining to reserves for export market development allowance would also have to be decided in favour of the assessee and against the revenue. It is so decided. All the questions stand answered. The references stand disposed of accordingly.
[Citation : 351 ITR 270]
