1999 Supreme(SC) 1092

1999(8) Supreme 255
Supreme Court of India
(From Bombay High Court)
S. Rajendra Babu & R.C. Lahoti, JJ.
General Insurance Corporation of India -Appellant
versus
Commissioner of Income Tax, Bombay -Respondent
Civil Appeal No. 3283 of 1998
Decided on 21-9-1999
Counsel for the Parties :
For the Appellant : T.R. Andhyarujina, Sr. Advocate, F.B. Andhyaruji­na, R.B. Hathikhanawala, Advocates.
For the Respondent : T.L. Viswantha Iyer, Sr. Advocate, Ms. Neera Gupta, Shail Kumar Dwivedi, Advocates.

Headnote:(i) Income Tax Act, 1961-Sec­tion 44 r/w Rule 5(a) of the First Schedule - Profits of insurance business-Computation of-Adjust­ment of an amount by reference to Rule 5(a) of First Schedule-Conditions precedent - Amount should be an expenditure and it should be one not admissible under Sections 30 to 43A-Provision for redemption of preference shares cannot be treated as expenditure in commercial sense-It cannot be added back for computing profits and gains by including it in expenditure u/s 30 to 43A by reference to Rule 5(a) of First Schedule.

       Held : Section 44 of the Income-tax Act is a special provision governing computation of taxable income earned from business of insurance. It opens with a non-obstante clause and thus has an overriding effect over other provisions contained in the Act. It mandates the assessing authorities to compute the taxable income for business of insurance in accordance with the provisions of the First Schedule. A plain reading of Rule 5(a) of the First Schedule makes it clear that in order to attract the applicability of the said provision the amount should firstly be an expenditure or allowance. Secondly, it should be one not admissible under the provisions of Sections 30 to 43A. If the amount is not an expenditure or allowance, the question of testing its eligi­bility for adjustment by reference to Rule 5(a) to the First Schedule would not arise at all. (Para 9)

       The sum of Rs. 3,00,30,700/- set apart as provision for redemption of preference shares could not have been treated as an expenditure. It is also not an expenditure or allowance of the nature covered by Sections 30 to 43A of the Income-tax Act, 1961. The question of determining its admissibility by reference to Rule 5(a) of First Schedule to the Income-tax Act, 1961 does not arise nor could it have been added back by the assessing authority by pur­porting to exercise power under the said Rule. (Para 12)

       Merely because Rule 2(2)(a) of GIB Rules permits the amount set apart for redemption of preference shares being debited to the profit and loss account, the amount so set apart does not become the amount of an expenditure for all intent and purposes so as to fall within the meaning of the term ‘expenditure’ as employed in Rule 5(a) of First Schedule to the Income-tax Act, 1961. The object of Rule 2(2)(a) is to reduce the amount of profit of Corporation by the amount set apart as reserve by artificially treating the amount of reserve as an item in expenditure column. If the same amount was allowed to be added back to profits under Rule 5(a) of First Schedule to Income-tax Act then the object sought to be achieved by Rule 2(2)(a) abovesaid is defeat­ed. The non-obstante clause with which Section 44 of Income-tax Act opens and gives it an over-riding effect only on the provisions of Income-tax Act would earn an overriding effect on the provisions of another enactment also though the Parliament has not chosen to give Section 44 of the Income-tax Act such an effect. It is to be noted that Section 44 does not say -‘notwithstanding anything to the contrary contained in the provisions of this Act or any other law for the time being in force’. Nor does the Rule 2(2)(a) of GIB Rules have an overriding effect on the provisions of Income-tax Act. The two provisions contained in two enactments have thus different purposes to achieve. Rule of harmo­nious construction would therefore sustain neither what the Income-tax officer did nor the view of the law taken by the High Court. (Paras 13, 14 & 15)

       There is another approach to the same issue. Section 44 of the Income-tax Act read with the Rules contained in the First Schedule to the Act lays down an artificial mode of computing the profits and gains of insurance business. For the purpose 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 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. (Para 16)

       To sum up, the amount set apart by general insurance Corporation for redemption of preference shares and treat­ed as expenditure under Rule 2(2)(a) of General Insurance Business (Nationalisa­tion) Rules, 1973 is so treated for the purpose of Insurance Act, 1938. The reserve is not an expenditure in ordinary commercial sense of the term. It cannot be added back for computing profits and gains of business by including it in ‘expenditure not admissible under the provisions of Sections 30 to 43A of Income-tax Act’ by reference to Rule 5(a) of the First Schedule to Income-tax Act, 1961. (Para 19)

       (ii) Words and Phrases-Expen­diture as used in Rule 5(a) of the First Schedule to the Income Tax Act-Meaning of.