Bonus paid to policyholders by an insurance company is an expenditure incurred wholly and exclusively for the purpose of the business of the company and is, therefore, admissible as a deduction in the computation of its taxable income.

Judgement

SHAH,J.:- The Union Co-operative Insurance Society Ltd., hereinafter called the assessee Company -carries on general insurance business. Bye-law 52 of the assessee Company provides that bonus shall be paid on those policies (not being Reinsurance Policies) on certain conditions, the following of which are relevant :

"1. That the premium on that policy is more than Rs. 5/-.

2. That there has been no claim on that policy.

3. That the policy was insured during the year for which bonus is declared.

4. That the bonus amount will be paid only if the policy is renewed on expiration and the bonus amount may be credited towards premium under the renewed policy".

2. In proceedings for assessment of the income of the assessee Company for the assessment years 1957-58 and 1958-59 the assessee Company claimed allowance of Rs. 29,615 and Rs. 44,920 respectively, paid under the bonus scheme under Bye-law 52 in the computation of its taxable income. The Income-tax Officer rejected the claim holding that payment of bonus was made after its profits for the relevant years were determined and on that account it was only case of appropriation of profit after it was earned, and that in any event since the assessee Company had not charged the bonus paid to the revenue account and had merely made a provision in the appropriation account it could not claim relief after modifying the accounts in Form B to Schedule II of the Insurance Act, 1938, submitted to the Controller of Insurance. The Appellate Assistant Commissioner upheld the order of the Income-tax Officer. The Income-tax Appellate Tribunal, however, held that the payments were not mere appropriation of profits, and were admissible as permissible deductions on the ground of business expediency. The following question submitted for determination of the High Court of Judicature at Bombay -

"Whether on the facts and in the circumstances of the case, the amounts of Rs. 29,615 and Rs. 44,920 paid to certain policy holders 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 l957-58 and 1958-59"

was answered in the negative.

3. The High Court held that since the amounts paid were not entered in the profit and loss account in Form B Schedule II to the Insurance Act and were also not regarded by the assessee Company as expenditure charged on profits, they were not admissible as deductions in the computation of the taxable income of the assessee Company under Rule 6 of the Schedule to the Income-tax Act. With special leave, the assessee Company has appealed to this Court.

4. By Section 10 (7) of the Income-tax Act the profits and gains of any business of insurance and the tax payable thereon are computable, notwithstanding anything to the contrary contained in Sections 8, 9, 10, 12 or 18, in accordance with rules contained in the Schedule to the Act. Rule 6 of the Schedule which prescribes the method of computation of taxable income of insurance business (other than life insurance) provides :

"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 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 ***"

By Section 15 of the Insurance Act, 4 of 1938 every insurer is directed to furnish to the Controller of Insurance, among others, the audited accounts and statements, referred to in Section 11 of that Act. By Section 11 (1) of the Insurance Act every insurer is directed to prepare at the expiration of each calendar year with reference to that year, the following accounts and statements in respect of all insurance bu