MOOKHERJEE, J. - This is a reference under section 66(1) of the Indian Income-tax Act raising a question dependent on an interpretation of Rule 2 of Schedule II with the explanatory sub-paragraph of the Excess Profits Tax Act (XV of 1940).
The assessee company, Ruby General Insurance Co. Ltd., is a company incorporated in India carrying on different branches of insurances including life, fire, marine and general insurances. We are not concerned with the life insurance branch of the business but only about the method of calculation to be adopted for determining the excess profits tax payable in respect of the other branches for the accounting period commencing from September 1, 1939, and ending December, 1939. The company having exercise option as regards standard profits under the second proviso to section 6(1) of the excess Profit under the second proviso to section 6(1) of the Excess Profits Tax Act such standard profits have to be calculated by applying the statutory percentage to the average capital employed in the business during the relevant chargeable accounting period.
The only point for decisions in the present reference is how the average amount of capital employed in the business during the chargeable accounting period is to be computed.
Under section 2(3) of the Excess Profits Tax Act 'average amount of capital' means the average amount of capital employed in any business as computed in accordance with Schedule II. The relevant provisions of Rules 1 and 2 are in the following terms :-
'Rule 1. - (1). Subject to the provisions of this Schedule, the average amount of the capital employed in a business (so far as it does not consist of money) shall be taken be -
(a) so far as it consists of assets acquired by purchase on or after the commencement of the business, the price at which those assets were acquired, subject to the deductions hereafter specified;
(b) so far as it consists of assets being debts due to the persons carrying on the business, the nominal amount of those debts, subject to the said deductions.
(2) The price or value of any assets other than a debt shall be subject to such deductions for depreciation are necessary to reduce the assets to its written down value and to such other deductions in respect of reduced values of assets as are allowable in computing profits for the purposes of income-tax and in the case of a debt, the nominal amount of the debt shall be subject to any deduction which has been allowed in respect thereof for income-tax purposes.
Rule 2. (1) Any borrowed money and debt shall be deducted and in particular any debt for income-tax or super-tax or for excess profits tax in respect of the business shall be deducted.
The debts to be deducted under this sub-rule shall include any such sums in respect of accruing liabilities as are allowable as a deduction in computing profits for the purposes of excess profits tax or would have been so allowable if the period for which the amount of capital is being computed had been a chargeable accounting period; and the said sums shall be deducted notwithstanding that they have not become payable.'
The assets of the company as on January 1, 1939, are valued by the taxing authority at Rs. 19,83,890 and are accepted by both the parties as correct as the starting point for computing the average amount of capital under Rules 1 and 2 of Schedule II of the Act.
In respect of insurance business conducted certain reserves are maintained by the company to cover 'unexpired risks' which arises in the following circumstances. Fire, marine or general insurance premiums are ordinarily annual covering the period from the date of payment of the premium or the acceptance of the risk to the end of the twelfth month following. The period for which the risk is covered does not tally with the accounting period either of the company which is a calendar year or for the purpose of applying the provisions of the Excess Profits Tax Act the accounting period for which in the present case is from September 1, to December 31, 1939. In respect of premiums received on a particulars date within one accounting next accounting period. To cover such 'unexpired risks' : 40 per cent. of the premium income of any particular year is carried in the revenue account for that year to the reserve. These reserve are brought back into the revenue account of the next succeeding chargeable accounting period as on the credit side and the claims, if any, respect of policies issued during the previous accounting period are shown on the debit side.
The contention of the revenue authorities is that the amount shown as reserve for 'unexpired risks' should be treated as a 'debt' under Rule 2 of Schedule II of the Excess Profits Tax Act and be deemed to be 'sums in respect of accruing liabilities' and be deducted from the capital for the purpose of determining the 'average capital' employed and assessing the excess profits tax payable.
The contention of the assessee, on the other hand, is that such reserve for 'unexpiry risks' are not debt in respect of 'accruing ; liability' but are sum which are to be treated in the same manner as capital for the period and the 'average capital' is to be calculated taking such reserves as a part of the capital.
It may be stated at once that this difference as between the revenue authorities and the assessee depends on the divergent inter partitions of Rule 2, Schedule II, of the Excess Profits Tax Act. The revenue authorities attempt to reduce the amount of average capital employed as the standard profit is assessed at a fixed rate if interest ( accounting to rules) and the excess profit of the chargeable accounting period is compared to the standard profits for the same period. The assessee attempts to make the average capital as high as possible so that the standard profits may be correspondingly higher whereas the revenue authorities try to put the average capital at as low a figure as may be possible so that the standard profit may be lower and that taxable profit under the excess profits tax higher.
The point raised falls to be decided on the provisions contained in Rule 2 of Schedule II of the Excess profits Tax Act and the law as in force this country. The analogy to the rules applicable for pure life insurance business is not justified, as the rules governing the computation of profits as also the ascertainment of the average capital for such business are different from those as are applicable to other forms of insurance including fire, marine and motor insurance. We should also be very cautious in replying upon English decisions as the law governing contingent contract in the relevant provisions of the Indian Contract Act is not the same is as in English Law : Muralidhar Chatterjee v. International Film Corporation, Ltd.
Under Rule 2 of Schedule II of the Excess Profit Tax Act 'debts' include certain sums in respect of 'accruing liabilities.' The opening words of Rule 2 refer to 'any borrowed money and debt' and not 'any borrowed money or debt.' the legislator does not make the two terms' 'borrowed money' and 'debt' as mutually interchangeable once, otherwise those two terms would have been joined by a conjunctive.
The amount in question cannot in any view be considered as borrowed money. Is this a debt, as debt includes, for the purpose of Rule 2, accruing liabilities ?
The word 'accruing' has got a meaning different from 'owing'. Accruing means to become due. As to when a particular mount accrues depends on the circumstance in each particular case. Rent accrues when it has already become due. With reference to the accrual of title, the time is referable to when the instrument creating a title become operative - even the execution of the document will not be sufficient of the date when it is to take effect of specifically mentioned.
United a sum becomes payable it is difficult to bring that amount within the category of a debt, and there is no scope for an argument if an accruing liabilities is not brought within the category of a debt. We shall have to consider the significant of the term 'accruing liability.' Suffice it to say a person cannot be deemed as owning a debt until the same become payable : see Henry Dresser v. William Johns. It has also been held by the Judicial Committee in Syud Tuffussool Hossein Khan v. Rughoonath Pershad, that the expectant claim under an inchoate award was not property within the meaning of section 205 of Act VIII of 1859 (now repealed) and was to salable in execution of a decree. 'An existing debt, though payable at a future day, may be attached, while a salary, wages, or money claim accruing due, may not........... In the present case the attachment as it has been observed, is not of the antecedent share in the undivided assets. It is of a claim under a future award, as to which it is wholly uncertain, until the ward be made, to what the debtor will be entitled. The uncertainty at the time of the attachment and sale was not limited to a mere question of quantum; it was who wholly uncertain. ..... what way the arbitration might terminate.'
The business carried on by the assessee - company in the departments mentioned above are in respect of contract of insurance, such contracts are to be tested as under the provisions contained in Chapter III of the Indian contract Act. On the acceptance of a risk a contract is entered into between the insurer and the insured though that contract cannot be enforced unless and until a particular event has happened ( vide section 32 of the Indian Contract Act). An insurance company has to make provisions for meeting the liability if it actually accrues on the happening of a particular event. The primary source of income of an insurance company is that premium received from the insured. If the accounting period for determining the profit of the company and the term for which all premiums are paid are identical then there is no difficulty. Before the end of the accounting period it can be definitely ascertained whether the contingency has happened and the liability to pay has occurred. But the position is altogether different when the terms for which a premium is received on a particular date extend beyond the accounting period, either of the company for ascertaining the profits earned or for determining excess profits tax payable by the said said company. The premiums are fixed and ascertained on a calculation of the provabilities and average on a strict scientific basis by the actuary. The company must carry forward a certain portion of the premium received to cover what is described as 'unexpired risks', i.e., the liability which may happen in a subsequent accounting period on the happening of a contingency for which the premium received in the pervious period must be made available.
The reserve which is maintained by a company is to meet eventual loose or to be drawn upon in the case of certain emergencies. The Insurance Act provides for the transference in certain proportion of the premium received to the reserve to cover claim by the insured. In the case of long term insurance, amounts in the reserve have to be kept more or less as a permanent reserve. But in short term insurance the position is altogether different, what the amounts, which are set apart to cover the risk, are actually required or not for specific unexpired risks are definitely known and ascertained more often within the next accounting period. The transfer of 40 per cent. of the premium income of a particular year to cover unexpired risks in the fire, marine and motor insurance business has been fixed on expert calculation as also by authoritative decisions by different courts. Thus amount is nothing more or less than to a temporary reserve to covers these unexpired risks. It is difficult to characterise the same as debt in respect of accruing liabilities.
In our view, contingencies in respect of unexpired risks are not liabilities far less accruing liabilities. The forms which are to be maintained under the Insurance Act, 1938, viz., from A for the balance sheet, Form B for profit and loss account and from F for revenue account applicable to fire insurance business etc., make it abundantly clear that only the balance of the difference insurance funds but other contingent liabilities are to be separately accounted for in the same manner as reserves. In form F the penultimate item is described as 'reserve for unexpired risk being..................per cent. of premium income of year....................................' In the full Bench decision of this Court, Banchharman Majumdar v. Adyanath Bhattacharjee, Jenkin C.J., and Mookerjee, J., made it clear and applied the ordinary meaning of the word 'debt' in interpreting section 4 of the Succession Certificate Act (VII of 1889) : 'A sum of money which is certainly and in all events payable is a debt, without regard to the fact whether it be payable now or at a future time. A sum payable upon a contingency, however, is not not a debut, or does not become a debt, until the contingency has happened' (page 941). Unless there be a clear and cogent ground the ordinary and natural sense of a words is to be preferred - a term is to be interpreted in the popular sense ( Simpsion v. Teignmouth and Shaldon Bridge Co. Per Halsbury. L.C. at pages 411-412). One of the ordinary meaning of the words 'accrue',........... to arise or spring as a natural growth or result, has been strongly relied upon by the learned counsel appearing for the revenue authorities. But a liability will be an accruing liabilities of at every monument during the subsistence of thee contract a liability springs but on the facts of the present case as already explained above, there is no liability at any moment during the subsistence of the contract unless and until the actual contingency happens. The unexpired risks are transferred into a liability only on the happening of that contingency and they are not accruing liability. Although in a different context in connection with bankruptcy law, the observation in Hopkins v. Thomas are apposite.
Reference may also be made to the recent decision by the House of Lords in Inland Revenue Commissioners v. Northern Aluminium Co., Ltd. affirming the decision of the court of Appeal by green, M.R. in (1946) 1 All E.R. 546. In calculating capital for the purposes of excess profit tax or in deducting 'debts' which would be reduce the amount of that capital the debt should be existing at the time. No doubt the provisions of finance (No. 2) Act, 1939, Schedule VII, Part 2, which fell to be considered in that case were slightly different from the provisions now under considers by Green, M.R. appearing at page 55 in (1946) 1 all E.R. and approved by the House of Lords may be referred to :-
'You cannot earn profits on a notional debt-it is not an asset. It is not an asset which would ever appears in a balance sheet. It must be in the balance sheet for the years as an existing assets, not something which is written back by a re-operating of the balance sheet in some subsequent year so to let in something which in that year was not an asset at all....... It is quite impossible to trade a receipt, which is to be written back into a previous year for the purpose of ascertaining the profit, as being an asset in the shape of a debt within the meaning of these capital provisions.'
The questions refereed to this court must accordingly be answered in the negative and the sums standing to the credit of the different insurance funds as reserve for exceptional losses cannot be deducted under Rule 2 of schedule II read with the explanatory sub-paragraph of the excess Profits Tax Act, 1940.
The assessee application is entitled to the costs of the hearing in this court. Certified for 2 counsel.
DAS, J. - I agree.
Reference answered in the negative.