V.S. Desai, J.
1. The question which is raised on this reference relates to the amounts of Rs. 29,615 and Rs. 44,920 paid by the assessee to its policy holders in the calendar years 1956 and 1957 respectively.
2. The assessee is a co-operative insurance company, carrying on general insurance business. During the assessment years 1957-58 and 1958-59, the relevant previous years for which were the calendar years 1956 and 1957, respectively the assessee paid by way of bonus to certain policyholders Rs. 29,615 in the first year, and Rs. 44,920 in the second year. These payments were made under by-law No. 52 of the by-laws of the company. This by-law provided so far as material for out purpose, as follows :
'52. The profits shall be allocated as under carrying at least ten per cent. thereof to the statutory reserve fund which shall be invested or utilized as provided in section 37 of the Bombay Co-operative Societies Act......
(c) such percentage not exceeding fifty per cent. as may be deemed proper for payment of profits to policy holders.'
3. Under this by-law, the bonus was declared at the rate of ten per cent. on the net premium paid by the policyholder on his policy for the year 1956, and at the rate of twelve per cent. on the policies for the year 1957. The warrants for the bonus of 1956 were issued on the 1st Juy 1957 and those for the year 1957 on the 1st July, 1958. The bonus payable was subject to certain conditions. These conditions were that the premium paid on the policy must be more than Rs. 5; that there should have been no claim made on the policy; that the policy must have been issued during the year in which the bonus was declared; and that bonus would be payable only if the policy was renewed on expiration and at the option of the policyholder the bonus amount would be creditable towards the premium under the renewed policy. In the company's accounts, the amounts paid by way of bonus to the policyholders were not debited to the revenue accounts. There was, however, a provision made on an estimate basis for the payment of the bonus in the profit and loss appropriation account in each of the years. During the assessments for the years 1957-58 and 1958-59 the company claimed these amounts as legitimate expenditure deductible against the profits earned by the company in respect of the premiums received by it in the respective years, and hence, admissible as deductions in the computation of its taxable income. This claim was disallowed by the Income-tax Officer on the ground that the items represented the application of the profits after they had been earned and could not, therefore, be claimed as revenue expenses. The view of the Income-tax Officer was confirmed by the Appellate Assistant Commissioner in the appeals which the assessee filed before him. The assessee then took appeals to the Income-tax Appellate Tribunal which allowed the appeals and held that the assessee was entitled to claim the amounts as admissible deductions for the purposes of computation of its taxable income for the relevant assessment years. According to the Tribunal, the payment of bonus made by the assessee to its policyholders was necessary for the purpose of business in the assessee's line, and, therefore, constituted expenses which were laid out wholly and exclusively for the purposes of the assessee's business. According to the Tribunal the said payments could not be regarded as appropriation of profits as held by the Income-tax officer and the Appellate Assistant Commissioner. At the instance of the department the Tribunal has referred to this court the following question as arising out of its order :
'Whether, on the facts and in the circumstances of the case the amounts of Rs. 29,615 and Rs. 44,920 paid to certain policyholders 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 1957-58 and 1958-59 ?'
4. Mr. Joshi, learned counsel for the revenue has submitted before us that the Tribunal has erred in holding that the assessee was entitled to claim the said amounts as permissible deduction. He has argued that the assessee being an insurance company the profits and gains of its business had to be determined in accordance with the rules contained in the schedule to the Income-tax Act, in view of the provisions of section 10(7) of the Act. The assessee was doing general insurance business, and, therefore, rule 6 of the said schedule was the appropriate rule under which the profits and gains of its business had to be computed. That rule provided that in computing the profits and gains of the business of general insurance the said profits had to be taken as the balance of the profits disclosed by the annual accounts which the assessee company had furnished to the Controller of Insurance under the Insurance Act, and the balance of profits shown in this account had to be further adjusted by the Income-tax Officer so as to exclude from it any expenditure other than the expenditure which was properly admissible under section 10 of the Act. According to Mr. Joshi in the annual accounts which the assessee had submitted to the Controller of Insurance, the balance of profits disclosed was Rs. 1,42,309-15-1 in the assessment year next year 1957-58, i.e., in the calendar year 1956, and Rs. 1,81,852.96 nP. in the next year. Under rule 6, according to Mr. Joshi, there was no question of reducing the balance of profits so disclosed by the assessee in its annual accounts in arriving at its assessable profits because what the rule permitted was only to add back to the said figure such amounts of expenditure which were other than the expenditure properly deductible under section 10(2). The amounts of bonus paid by the company, therefore, could not be deducted from the figure shown by the assessee as balance of profits in its annual accounts. Mr. Joshi's argument further was that the assessee not having shown in its accounts the provision for the payment of bonus as provision of expenditure, but having shown it as an item in the appropriation of profits, on its own showing was not entitled to claim it as by way of expenditure. According to Mr. Joshi, the statement of appropriation of profits which the assessee has submitted along with the accounts contains its of disbursements of the profits after they have been earned and no item in this statement pertains to the expenditure for the purpose of earning profits. The circumstance that a part of the profits is disbursed with a view that such disbursement may help business and increase its volume in subsequent year would not make it an expenditure incurred for the purpose of business. According to Mr. Joshi, therefore, the assessee was not entitled to claim those amounts as deductions under rule 6 of the schedule to the Income-tax Act.
5. Mr. Joshi's next argument was that even if the payment of bonus was to be regarded as an expenditure incurred for the purposes of the business, it could not be the expenditure of the year in which it was claimed. The conditions subject to which the bonus was paid showed, according to Mr. Joshi that the payment was an inducement for the policyholders to renew their policies with the assessee company in the subsequent year. Thus the payment had relation with the business of the subsequent year and could be said to be the expenditure in that year at the most. It had, however no connection with the business done in the accounting year itself, and could not, therefore, form part of the expenditure of the accounting year.
6. M. Joshi's third argument was that the provision of the payment of the bonus could not be regarded as expenditure which is deductible for income-tax purposes. He argues that the liability in respect of which the said provision was made had in the first place not even crystallised because bonus was to be paid only in the event of the policies being renewed and there was no knowing how many of the old policyholders would renew their policies in the subsequent year. Secondly, the liability was also contingent, in the sense that the payment would be required to be made only in the event of the policies being renewed. The liability which is not actually crystallised or which is only such as would come in on the fulfillment of a certain contingency cannot amount to an expenditure within the meaning of section 10(2) (xv).
7. Now under section 11 of the Insurance Act, 1938, every insurance company has to prepare and submit at the end of the expiration of each calendar year certain statements of accounts and balance-sheet before the Controller of Insurance. Under the said provision it must submit in accordance with the regulations contained in Part I of the First Schedule a balance-sheet and a profit and loss account in forms set forth in Part II of the Schedule. The forms set forth in Part II of the schedule for the balance-sheet is Form A and those for the profit and loss account are Forms B and C. Form B is the form for the profit and loss account and Form C is the form for the profit and loss appropriation account. In the profit and loss account in Form B is disclosed the balance of the profits for the year carried to the appropriation account. The profit and loss appropriation account gives details of the appropriation of the profit and discloses at the end thereof the balance which is to be carried forward to the next year. Now, in the accounts which the assessee submitted under the Indian Insurance Act, 1938, to the controller of Insurance the profit and loss account for the year ending 31st December, 1956, which as we have stated was the account to be submitted in Form B, disclosed Rs. 1,42,309-15-1 as the balance being the net profit transferred to the profit and loss account. The profit and loss appropriation account for the said year, which was the account to be submitted in Form C showed the disbursement of the said amount of Rs. 1,42,309-15-1 together with the balance carried forward from the earlier year, namely, Rs. 1,825-15-10 under several heads, and showed the balance carried forward as Rs. 2,518-14-11. The accounts submitted in the next year similarly disclosed a balance of Rs. 1,80,724.05 transferred to the profit and loss appropriation account in the profit and loss account for the year submitted in Form B and the disbursement of the said profit along with the balance carried forward from the previous year of Rs. 2,518.94 in the profit and loss appropriation account in Form C. It would, therefore, appear that the balance of profits disclosed by the annual accounts, copies of which were submitted by the assessee to the Controller of Insurance, was Rs. 1,42,309-15-1 for the first year and Rs. 1,80,724.05 for the next year, within the meaning of rule 6 of the schedule to the Income-tax Act. Under the said rule the figure so disclosed was capable of further adjustments, but the adjustments were to be made so as to exclude the expenditures which were included in arriving at the said figure and which were not permissible under section 10 of the Income-tax Act. In other words the adjustment was permissible so as to increase the amount and not to reduce it by allowing the deductions.
8. Mr. Kolah, learned counsel for the assessee, contends that the expression 'balance of profit disclosed by the annual accounts' in rule 6 does not means the figure which is mentioned in the profit and loss account in Form B as the balance of net profit transferred to the profit and loss appropriation account. The annual accounts do not consist merely of the profit and loss account, but the balance-sheet, profit and loss account and the appropriation account all together, and the balance of profits disclosed by this annual accounts is the figure which is to be arrived at after the deduction of permissible expenses from the profits and gains. The further part of rule 6 which refers to the adjustment of the profits disclosed by the annual accounts shows that the adjustments are permissible either way and not only in one way as contended for by the department. Mr. Kolah argues that the assessee in his return stated its assessable income at Rs. 1,16,880. This income was arrived at by the assessee on the basis of the accounts which it had submitted before the Controller of Insurance and after making such adjustments thereto as were permissible under rule 6. The Income-tax Officer also in the assessment which he made had proceeded with the figure of income as returned by the assessee, and had thereafter considered the items which the assessee had claimed as permissible deduction in arriving at that figure, and had proceeded to permissible deduction in arriving at that figure and had proceeded to disallow some of them including the items for the payment of bonus. The method adopted by the Income-tax Officer himself in making the assessment would show according to Mr. Kolah, that the expression 'balance of profits disclosed on the annual accounts' was not understood by the Income-tax Officer also as the figure which was stated in the profit and loss account in Form B as the figure of the balance of net profits transferred to the profit and loss appropriation account. Mr. Kolah argued that the balance of profit disclosed by the annual accounts within the meaning of rule 6 could very well be the figure mentioned as the balance carried forward in the profit and loss appropriation account in each year. According to Mr. Kolah, under rule 6, the Income-tax Officer was entitled to start with the figure of Rs. 2,518-14-11 for the first year and Rs. 2,212.99 for the second year, and could add back the said amounts as were to be excluded under rule 6 and arrive at the assessable profits. Instead of proceeding from the figure stated as balance carried forward in the profit and loss appropriation account in each year and proceeding to add back, the Income-tax Officer could, in the laternative, proceed with the figure stated in the profit and loss accounts as the balance transferred to the appropriation account; but in that case, he would have to permit such deductions as would be permissible under section 10(2). According to Mr. Kolah, therefore, under rule 6 of the schedule, he was still entitled to have the expenditure which he could claim as a proper revenue expenditure admissible under section 10(2) (xv), or under section 10(1), even if the said expenditure had not been shown in the revenue account or taken into calculation in arriving at the figure of the balance of net profits transferred to the profit and loss account in Form B. According to Mr. Kolah, therefore, the accounts submitted by the assessee to the Controller of Insurance under rule 6 of the Schedule, did not disentitled it from claiming the deduction. As to the department's argument that the expenditure could not be regarded as the expenditure of the year of account Mr. Kolah's submission is that on the conditions of the bonus the expenditure had relation not only to the increase in the volume of business in the subsequent year but even to the business of the current year. In the first place this declaration as to the grant of bonus is made from year to year and the advantage of the bonus is in the view of the policyholders even when they first come to do business with the assessee company. Secondly, the bonus is promised in case there is no claim made on the policy during the course of the year. The detriment to the income of the year therefore from claims is thereby reduced and that is the advantage of the business of the current year itself. According to Mr. Kolah, therefore, if the payment of bonus could be regarded as expenditure it would certainly be an expenditure of the current year also.
9. As to the last argument of Mr. Joshi that the liability, not being a crystallised liability and being in the nature of a contingent liability could not be regarded as an expenditure deductible under the Indian Income-tax Act, Mr. Kolah argues that the liability is in reality a liability which is incurred although the quantum thereof would be ascertained at a later date. According to Mr. Kolah, the company has by its declarations undertaken the liability to pay bonus. A provision in respect of this liability could on an estimate basis be made by the company in its revenue budget for the year and the company could claim a deduction in respect of the same. It would be perfectly possible for the income-tax authorities to ascertain what amount out of the said estimated provision made by the company would be really permissible to the company, because, by the time the assessment order comes to be made, the exact quantum of the said liability could be determined as it was capable of being found out from the payment actually made out by the company. Mr. Kolah pointed out that in the present case, the provision made by the company was a provision to the extent of Rs. 50,000 for the first and Rs. 70,000 for the next year. The amounts which the assessee claimed were not the full amounts of Rs. 59,000 and Rs. 70,000 for which provision had been made by it in the relevant years, but had asked for deductions only to the extent of the actual amounts paid by it namely Rs. 29,615 for the first year and Rs. 44,920 for the next year.
10. The payment of bonus by its very nature was a payment which had to be made at a subsequent date. But section 10(5) does not require an actual payment in order that the amount claimed as expenditure should be allowed.
11. In view of the provisions of section 10(7) of the Indian Income-tax Act, there can be no doubt whatsoever that the profits and gains of any business of insurance and the tax payable thereon shall have to be determined in accordance with the rules contained in the schedule to the Income-tax Act, and section 8 to 12 will not be available for the said computation. Now, coming to the Schedule rule 6 of the Rules contained therein is the appropriate rule, which provides for the computation of the profits and of the assessee was general insurance i.e., other than life insurance and its income therefore had to be computed under the said rule 6. It has been held in Vanguard Fire & General Insurance Co. Ltd. v. Commissioner of Income-tax, that Schedule I of the Indian Income-tax Act, 1922, having prescribed special rules for computing the income of insurance business, the income of an insurance business is not attributable to the several heads of income is specified in the Act, and the exemptions and deductions mentioned in the other parts of the Income-tax Act cannot be claimed in respect of the income from such business. The same is also the view taken by this court in Commissioner of Income-tax v. Asian Assurance Co. Ltd. In order to ascertain, therefore, whether the deductions claimed by the assessee in the present case are allowable or not we must go to rule 6 and see whether the said rule permits the said deductions. Now, rule 6 is in the following terms :
'6. The profits and gains of any business of insurance other than life insurance shall be taken tone the balance of the profits disclosed by the annual accounts, copies of which are required under the Insurance Act, 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.'
12. It is clear from this rule that the mode of computation of the profits and gains which is prescribed by it is that the Income-tax Officer proceeds with the profits disclosed by the annual accounts as the basis and adjusts the said amount of profit disclosed in the manner provided. The manner of adjustment provided is that he considers what items of expenditure have been included by the assessee in arriving at the profits which are disclosed in its annual accounts, and if he finds that any of such items of expenditure are other than expenditure which would be permissible under the provisions of section 10, he disallows such expenses and adds them back to the profits disclosed by the assessee. He, thereafter, makes such further adjustments as may be necessary in respect of profits and losses on realisation of investments and depreciation and appreciation of the value of investments after dealing with such profits and appreciation of the value of investments after dealing with such profits and losses in the manner provided in rule 3 of the Schedule. The provision of rule 6, therefore, provides for an adjustment of the balance of profits only so as to exclude from the said balance expense which are not permissible. There is no provision in the rule however, which would enable either the assessee to claim an expenditure which it has not included in arriving the assessee to claim and expenditure which it has not included in arriving at the balance of profits disclosed by it in its annual accounts or for the Income-tax Officer to consider and allow such expenditure. If the assessee in the present case is to be entitled to claim the amounts claimed by it what is first to be seen is whether in the balance of profits disclosed by it, in the annual accounts the said expenditure has at all be included. If it is so included then of course, it could be allowed by the Income-tax officer unless he finds that it is not such as would be permissible under the provisions of section 10. If it is, however, not so included it is not possible for the assessee to claim it or for the Income-tax Officer to allow it. We have already referred to the annual accounts of the assessee copies of which it had submitted to the Controller of Insurance under the Insurance Act. We have also pointed out that in the said copies of accounts, in the profit and loss accounts submitted in Form B, the balance of net profit is disclosed as Rs. 1,42,309-15-1 for the first year and Rs. 1,80,724.05 for the second year. Mr. Joshi has argued that that is the balance of profits disclosed by the annual accounts referred to in the 6 of the schedule. Mr. Kolah's argument, on the other hand, is that the profit and loss account referred to in section 11(1)(b) of the Insurance Act does not merely consist of the profit and loss account submitted in Form B but also of the profit and loss appropriation account submitted in Form C. The annual accounts referred to in rule 6 again are not merely the profit and loss accounts, but include even the balance-sheet, because under section 11(1)(a) copies of the balance-sheet also are required to be furnished to the Controller of Insurance. Mr. Kolah argues that what is meant by the balance of profit disclosed on the annual accounts is not merely the figure as is mentioned in the profit and loss account as carried forward to the appropriation account but the true state of profits as could be ascertained from the several different accounts submitted before the Controller of Insurance. According to Mr. Kolah, in the profit and loss appropriation account submitted in Form C for the two relevant years the figures of Rs. 2,518-14-11 and Rs. 2,212.99 have been mentioned as the balance carried forward in the respective two years. According to him, the expression 'balance of profits disclosed by the annual account' may very well refer to the said figure also. Mr. Kolah's argument in short is that under rule 6 what the Income-tax Officer is required to do is to take the accounts submitted by the assessee as the material for the purposes of ascertaining the profits of the assessee. He has to see on an examination of the several accounts as to what profits are disclosed by the assessee on the accounts made by it, and then proceed to make adjustments as provided under the rule. He argues, therefore, that if a provision for expenditure has been made by the assessee, such a provision has to be allowed in arriving at what profits are disclosed by the assessee in its accounts.
13. In our opinion, the balance of profits disclosed by the annual accounts of the assessee must be the figure which the assessee has arrived at in its own accounts as its profits from business. The figure in the accounts which the assessee has presented before the Controller of Insurance is Rs. 1,42,309-15-1 for the first year, and Rs. 1,80,724.05 for the second year. The profits and gains of the business is the figure arrived at after deducting from the total receipts of the business the total outgoing in connection therewith. In the profit and loss account, submitted in Form B, this is what the assessee stated and depicted according to the accounts made by it. In the profit and loss appropriation account submitted in Form C, it showed several disbursements from the said profits. It took to this account the balance carried forward from the previous year and showed the disbursements of the total amount of profits of the accounting year together with the balance carried forward from the previous year. After the several disbursements had been provided for a balance remained to the extent of Rs. 2,518-14-11 for the first year, and Rs. 2,212.99 for the second year which were carried forward to the subsequent years. It is impossible to regard these figures of Rs. 2,518-14-11 and Rs. 2,212.99 as the balance of profits disclosed by the annual accounts within the meaning of rule 6. These figures in each year do not represent the balance of the profits of the business of that year. They are the figures which represented how much of the earned profit remained after several disbursements from the said profit were made to the several heads to be carried forward to the next year. As we have already pointed out, disbursements in the appropriation account are of the total aggregate of the balance of profit carried forward from the previous year as well as the profit of the current year. The figure mentioned as the balance carried forward as the last item in this account therefore could not possibly mean the balance of profits disclosed by the annual accounts within the meaning of rule 6, because that expression must have reference only to profits of the accounting year. If Rs. 1,42,309-15-1 for the first year, and Rs. 1,80,724.05 for the second year were the profits disclosed by the annual accounts within the meaning of rule 6, it is clear that these amounts did not take into account the provision of bonus as items of expenditure in arriving at the profits. Under rule 6, the adjustment of the figure could be only by excluding the items of expenditure taken into consideration in arriving at that figure and would not permit inclusion of items of expenditure not included therein. The items, therefore, which the assessee claimed even though they were to be regarded as items of expenditure would not be permissible to be included under rule 6. We are, however, of the opinion that on the assessee's own showing, the provision for the payment of bonus was not regarded by the assessee itself as an expenditure. By-law 52(c) which provided for the bonus regarded it as allocation of profits. In the assessee's own accounts, provision was made for the bonus payment not in its revenue expenditure, so as to be accounted for in arriving at the profits of the business after deduction of expenses but in the appropriation of the profits. It will be seen from all heads that are included in the profit and loss appropriation account that none of the said heads pertains to the expenditure of the business. All the heads in this appropriation account are heads for the disbursement of profits after the profits have been earned. It is clear therefore from the by-laws of the company which provide for the bonus as also from the accounts maintained by the company that the bonus was regarded by the company as a part of its profits which was distributed amongst the policyholders who had brought business to it and helped the company to earn profits. The payment of bonus therefore was not treated by the company itself as an expenditure of the business but only as an application of its profits. Under rule 6, what can be the subject-matter of adjustment are only such items which have been treated as expenditure by the assessee in its accounts. In arriving at account can be regarded as an item of expenditure. The provision for the account or payments made actually by the assessee in pursuance of the said provision, cannot, therefore, be claimed by the assessee as expenditure for the purposes of its business.
14. In the view that we are taking the further contentions of Mr. Joshi that the liability not being crystallised liability and being in the nature of a contingent liability could not be regarded as an expenditure and that the liability even if regarded as expenditure would not be expenditure of the year of account for which it was claimed need not be considered. We, therefore, do not express any opinion on the said contentions.
15. In our opinion, therefore, the assessee was not entitled to claim the amounts of Rs. 29,615 and Rs. 44,920 as admissible deductions for the purpose of computing its taxable income for the relevant years. Our answer, therefore, to the question referred to us is in the negative.
16. The assessee will pay the costs of the department.
17. Question answered in the negative.