Allowed

Pandhyan Insurance Co. Ltd. v. Commissioner of Income-Tax, Madras

Supreme Court29 Sept 19641964 INSC 202 · [1965] 1 S.C.R. 3671964 INSC 202

Case brief

AI extract

What is this about?

A general insurance company claimed depreciation on its partly let-out building in an insurance-business assessment computed under section 10(7) and the Schedule rules. The Supreme Court held depreciation includes notional depreciation, which the Income-tax Officer must allow under rule 3(b), and answered the reference question affirmatively.

What did the court decide?

Question answered in the affirmative; appellant granted costs incurred in Supreme Court and High Court.

What the court decided

Pandhyan Insurance Co. Ltd. versus Commissioner of Income-Tax… — Insurance | Supreme Court (1965)

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367

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PANDHY AN INSURANCE CO. LTD.

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COMMISSIONER OF INCOME-TAX, MADRAS

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September 29, 1964

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(K. SUBBA RAO, J. C. SHAH ANDS. M. SIKRI JJ.)

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lnco111e Tax Act (I I of 1922) Schedule, rr. 3(b) and 6-Scopc oj

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l"he appellant ( assessee) was a company carrying on the business of general insurance. It erected a substantial modern building at a cost of about Rs. 12.00.000 towards the end of 1952. For the accounting year 1953 it wrote off a sum of about Rs. 1,00,000 as representc ing ~he depreciation with respect to various items. The Income-tax Officer disallowed 4/ 5 of the depreciation on the ~i:ound that only a fifth part of the building was utilised for the purpose of the appellant's business and the remaining 4/ 5 part was let out. and that the rent thereon was exempted under s. 4(3) (xii) of the Income-tax Act. 1922. On appeal by the assesscc, the Appellate Assistant Con1missioner dismissed the appeal and enhanced the assessment by disallowing even the 1/5 of the depreciation allowed by the Income Tax Officer, on the ground D that under r. 3 (b) of the Schedule to the Act, the allowable depreciation was an actual depreciation of the value of the assets. On furthe1 appeal, the Appellate Tribunal restored the order of the lncon1c·ta': Officer with respect to 115 part but as to the 4/5 part agreed with the Appellate Assistant Commissioner. The High Court, on a reference as to whether the 4/5 part of the depreciation w-as also <sllo\.·ahlc as a deduction in the assessment completed under s. 10(7) unJ the rule-; contained in the Schedule, of the Act, held against the appellant. On E appeal to the Supreme Court,

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HELD : The appeal must be allowed. [374C].

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Rules 3(b) and 6 of the Schedule to the Income-tax Act, which are the applicable rules, should be read against the background of the 'arious provisions of the Insurance Act (4 of 1938) making detailed provision to ensure the true valuation of assets and the determination F of the true balance of profits of an insurance business. So read. the Income Tax Officer can ex.elude fron1 the balance of profits, only any expenditure which i!I not allowable under s. 10 of the Income-tax Act. 'l'he \'Ord "'expenditure" in r. 6 means disbursement and does not comprehend depreciation. As regards "depreciation", it covers both actual and notional, and the Income Tax Officer has no option but to allow it under r. 3 (b). He cannot ask the assessee to prove that there has been any actual depreciation. [370E; 372A, C; 373E, F; 374C].

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G Life Insurance Corporation of India v. Cotnmissioner of lncomctax (1964) 5I l.T.R. 773, followed.

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CIVIL APPELLATE JURISDICTION: Civil Appeal No. 816 of 1963.

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Appeal by special leave from the judgment dated the July 4, H 1961, of the Madras High Court in case referred No. 4 of 1957.

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A. V. Viswanatha Sastri, R. Venkataraman and R. Gopalakrishnan, for the appellant.

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368

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[1965) I S.C.R.

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SUPREME COURT REPORTS

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R. Ganapathy Iyer, R. H. Dhebar and R. N. Sachthey, for the respondent.

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The Judgment of the Court was delivered by

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Sikri J. This is an appeal by special leave against the ju<.lgment of the Madras High Court in a case referred to it under the Indian Income Tax Act, 1922, hereinafter referred to a~ the B Act, answering the question of law against the a~essec. The question referred is :

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"Whether four-fifth of the sum of Rs. 1,21,245 written off in the books of the assessee as depreciation for the calendar year 1953 is allowable as a deduction C in the assessment completed under section I 0 ( 7) and the rules contained in the schedule of the Income-tax Act."

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The fac1s relevant for answering the question are as follows. The asscssce is a public limited company carrying on the business of general insurance. It erecte<.1 a modem substantial building with D 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 Rs. 1.21.245 a< depreciation as follows :

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	Rate ~PerCt'-Ol)		Amount (inrupees)	E
Bu1r~11ng_,	10		1.06,940
.\irconJ1tioning plan:	15		2,973
Lifts	"		6,214
Transformer~	15		1,442
InrernalTclcphonc	15		3,676	F·
		TOT"-L	1,21.245

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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 fer rent. The Income-tax Officer disallowed fourtifth of the depreciation claimed on <he ground that "the rentals receiYCd .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 tnere would have been a statutory allowance which would compensate for depreciation. The fact that the whole jncome i~ exempt further strengthens that no allowance regarding these portions could be made."

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PANDHYAN INSURANCE V. C.I.T., MADRAS (Sikri J.) 369

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A 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 3 (b) contemplated was an actual depreciation of the value of such assets. As the counsel of the assessee admitted before him that B the property being new, there could be no question of actual depreciation.

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On further appeal, the Appellate Tribunal came to the conclusion that the immovable property to the exient of four-fifths thereof was an investment held 'solely for the purpose of earning c rent therefrom 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.

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' On a reference being made to it, the High Court held thlit in computing profits and gains, the Income-tax Officer had the power D to examine the quantiim of depreciation either written off or reserved and to satisfy himself that it did not exceed the amount allowable to meet the depreciation.

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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 E 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, read thus :

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"3. In 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 ~ains on the realisation of the securities or other assets shall be included in the surplus :

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Provided that if upon investigation it appears to the Income-tax Officer after con~ultation with the Controller of Insurance that having due regard . to ·the necessity for making reasonable .provision for bonu'!CS ·to pal'ficipating policy-holders and for contingencies, the rate· of

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(1965] l S.C.R.

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SUPREME COL'RT REPORTS

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370

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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 the 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;

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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 arc required under the Insurance Act, 1938 (4 of i 91R]. to be furnished to the Controller of Insurance, "her adjusting such balance so as to exclude from it any ~xpcnditurc, either than expenditure which may under the provisions of section IO of this Act be allowed for in computing the profits ,and gains of a business. Profits and losses on the realisinion of invesunents and depreciation and appreciation < •f the value of investments shall be dealt with as provided in rule 3 for the business of life insurance."

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Mr. Vbwanatha Sastri contends that the Insurance Act, 1938 ( 4 of 1938 l makes detailed provisions to ensure the true valuation of assets and the determination of the true balance of profits of an insurance business. An examination of various sections of the 1 nsurancc 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 fonns for the preparation of a balance sheet. Regulation 6 enjoins the appendinf! to the Balance Sheet a statement in Form AA, as set out in Part 11 of the Fi~t Schedule, showing the market value and the lm<'k 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 a' 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 quorarions. and ( c) refers to how the value of the assets as has not been ascertained from uublic quotations has been arrived at. Rut it is not necCS.'lary to show the market values where they are not less than the book values, and a certificate to that effect is

PANDHYAN JllSURANCE V. C.I.T., MADRAS (Sikri J.) 37 l

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A appended to the statement. In other wqrds, if the market value is lnore 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.

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B The Second Schedule prescribes the regulations and forms for the preparation of .profits and loss account of some insurers. There are two columns in Form 'B' which need be mentioned : ( I ) Depreciation of Investments (not charged to Reserves or any particular Fund or Account); (2) Appreciation of Investments (not credited to Reserves or any particular Fund or Account).

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c The Third Schedule sets forth the regulations and forms for the preparation of a revenue account (one of the items to be shown iu Form D is 'Rents for offices belonging to and occupied by the Insurer'). Form F is form for Revenue Account applicable to Fire Insurance Business, Marine Insurance Business, and Miscellaneous Insurance Business. One of the items to be shown is

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D "expenses of management" and note ( c) says that if any sum has been deducted from this item and entered on the a~sets side of the Balance Sheet, the amount to be. deducted must .be shown separately.

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After the balance sheet, profit and loss account and revenue

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E 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.

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Section 18 requires every insurer to furnish to the Controller

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F a certified copy of every report on the affairs of the concern which is submitted to the members or policy holders of the insurer.

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Section 21 enables the Controller to get such further information from the insurer as he may consider necessary to correct or supplement a return, to examine books of accounts, rejjsters and G documents or to examine any officer. The Controller may decline to accept any return unless the ina<1Curacy has been corrected or the deficiency has been supplied. If he decli9es to accept any return, the insurer shall be deemed to have failed to comply with the provisions of s. 15, s. 16 or s. 28 or s. 28A relating to the furnishing of returns. Sub-section (2) of s. 21 enables an insurer H to apply to court for cancellation of any order made under c:ls. (a), ( b) or ( c) of sub-section ( 1) or for directing the acceptanc:e of any return which the Controller has declined to accept.

( 1965] I S.C.R.

372

SUPREME COURT

RLPORTS

Mr. Sastri next contends that r. 6 and r. 3 ( b), quoted above, should be read in the light of this background. He says that r. 6 authorises an Income-tax Officer to make adjustments of two kinds. First, he can exclude from the balance of profits any expenditure which is not allowable under s. I 0 of the Act. He says that the depreciation which has been claimed is not an expenditure within r. 6, for the expenditure must be a disbursement. He refers in this connection to s. 10(2) (xii), (xiv) and (xv) where the word 'expenditure' is expressly used. Coming to the 5econd part of r. 6, he argues that the word 'depreciation' includes both actual and notional depreciation, and in r. 3 (b) similarly the word 'depreciation' includes actual and notional depreciation. If he is right in this. he says that as r. 3 (b) directs the Income-tax Officer to allow the depreciation, which has been written off, the Income-tax Ollicer has no option but to allow it and he cannot ask the assessee to prove that there has been any actual depreciation. He relies · strongly on the decision of this Court in Life Insurance Corporation of India v. Commissioner of Income-tax.(') Let us first see what is the exact scope of this decision. Sarkar J., interpreted r. 3 (b) in the following terms :

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"When we come to rule 3 r b > we find that tl1c first part of it lays down that it shall be obligatory on the Income-tax Officer to allow certain amounts written off or re,ervcd by the asscssce as a dtiluction and to include in the surplus any sums for which credit has been taken on account of appreciation or gains on the realisation of the securities or other assets. This part of the rule only compels the Income-tax Officer to allow certain amounts as deductions and to include certain amounts for which credit had been taken in the accounts of the asscssec. It. therefore, does trot warrant what the Income-tax Officer ditl. namely, to adiust the accounts 011 the basis of a revaluation made by him." (emphasis supplied)

Hidayatullah J .. said this about Rule 3 (h);

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"Under the main part of rule 3 (b) certain special deductions and additions must be made to the annual average of the surplus determined under the second rule. Since the life fund is held in securities and the price of stocks and shares fluctuates, provision has been made in rule 3 (b} to make adjustmenlb. Ruic 3 (b) in its· main part speaks of adjustments on the has is of the accounts and amounts as entered in ·the accounts determine what --- ·- (I) (1964) 51 l.T.R;·773_

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PANDHYAN INSURANCE V. C.I.T •• MADRAS (Sikri J.)

373

must be adde<I. to or deducted from the surplus. The Income-tax Officer must deduct from the annual average of the surplus for purposes of rule 2 any amount entered in the account to cover depreciation of the securities and assets and add any amount taken credit for on account of appreciation. The Incqme-tax Officer here follows the accounts and gives effect to the entries such as they are. The provision is mandatory and the Income-tax Officer has no discretion."

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He then adds :

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"The entire subject of such disparity between fact and actual entries ls comprehended in the proviso."

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It seems to us that this Court has held in o<:ategorical 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 D is fact.

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•

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Mr. Ganapathy Iyer tried to distinguish the case on the ground that r. 6 was not applicable to a life insurance business and was not considered by the Court. He at first suggested that in the second part of r. 6 the word 'depreciation' did not include notional depreciation. When it was pointed out to him that if this is correct, E r. 3 (b) would not be attracted at all, he modified his stand and argued that in r. 3 ( b) notional depreciation of property is not included in the word 'depreciation'. We .are 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 F understood in the ordinary connotation. If the draftsman wanted to include depreciation on buildings, what Mr. Ganapathy Iyer calls notional depreciation; he could hardly have used any other wording. '

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Mr. Ganapathy Iyer says that this Court in Life Insurance G Corporation of India v. Commissioner of Income Tiu(') did not examine one aspect, and this aspect is derived from the words "to meet" occurring in r. 3 (b). He ·says that the effect of these words is that the Income-tax Officer is obliged to allow any amount written off only if it is really to meet actual denreciation and not any other fanciful conception of depreciation. 'Ibis H question does not arise on the facts of this case, for once we hold that the word "depreciation" covers notional depreciation, it Is

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(I) [19641 SI I.T.R. 773. L2Sup./64--l 1

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(1965] I S.C.R.

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374

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SUPREME COURT REPORTS

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nobody's ca.~e 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.

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Mr. Ganapathy 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 depreciation. We agree with Mr. Sastri that the \yOrd "expenditure" in r. 6 means disbursement.

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Accordingly, we accept the appeal and answer the question in the affirmative. The respondent will pay costs incurred in this Court and the High Court.

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Appeal allowed.

Pandhyan Insurance Co. Ltd. v. Commissioner of Income-Tax, Madras

Case brief

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What the court decided

Pandhyan Insurance Co. Ltd. v. Commissioner of Income-Tax, Madras

Case brief

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