Holding

Provisions for taxation and reserves for bad and doubtful debts are not deductible expenditures; under Section 44 and Rule 5(a) the insurer's profit is the balance disclosed in its statutory accounts, and the appeals are dismissed.

Summary

The Commissioner of Income Tax appealed against Oriental Fire & General Insurance Co. Ltd, contending that the insurer could not claim deductions for a provision for taxation and a reserve for bad and doubtful debts. The Supreme Court examined the computation of income for insurance businesses under Section 44 of the Income Tax Act, 1961 and Rule 5(a) of the First Schedule, which require profits to be taken as the balance disclosed in the annual accounts filed with the Controller of Insurance, subject only to adjustments for items not allowed under Sections 30‑43A. The Court held that a provision for tax and a reserve for doubtful debts are not "expenditure" within the meaning of the Act and therefore cannot be deducted. It also clarified the distinction between a provision (a charge against profit) and a reserve (an appropriation of profit). Consequently, the appeals were dismissed.

Issues considered

Whether the provision for taxation and reserve for bad and doubtful debts are admissible deductions under the Income Tax Act, 1961.
Whether Section 44 and Rule 5(a) of the First Schedule preclude such deductions for insurance companies.
Whether the amount of tax deducted at source and provision for taxation should be added back to the balance of profits.
Whether the distinction between 'provision' and 'reserve' affects their deductibility.

Legislation cited

Companies Act, 1956
Income Tax Act, 1961s. 30-43A, s. 36(1)(vii), s. 40(a)(ii), s. 44
Insurance Act, 1938

Subjects

Income TaxInsurance businessSection 44Provision for taxationReserve for doubtful debtsNon-obstante clauseDeductionAssessmentInsurance Act 1938

Judgment

:.
A COMMISSIONER OF INCOME TAX, NEW DELHI ~

v.
ORIENTAL FIRE & GENERAL INSURANCE CO.LTD.

MAY 18, 2007

B [S.B. SINHA AND MARKANDEY KA TJU, JJ.]

Income Tax Act, 1961:

S.44 and First Schedule, Rule 5(a)-Insurance company-Deductions-
c Provision of taxation and reserve for bad and doubtful debts-Held: These
items· are not expenditure and hence not entitled to deductions-Insurance
Act, 1938.

The question which arose for consideration in these appeals is whether
the assessee insurance company is entitled to deductions in respect of the
D provision of taxation and reserve for bad and doubtful debts.
\;
Dismissing the appeals, the Court

HELD: 1. Determination of liability of income tax under the provisions
of the Income Tax Act, 1961 for the purpose of computation of incoOle of an
E assessee, inter alia, for carrying on business in insurance is governed by
Section 44 thereof and Rule S(a) of the First Schedule appended thereto.
[Para 10) (467-D-E)

2. Section 44 contains a non obstante clause. It provides for a special
F mode in which the assessee carrying on business, inter alia, in general
insurance should be assessed. The reason for it is not far to seek as the matter ·
relating to "carrying on business" in General Insurance is covered by the
Insurance Act, 1938. By reason of Section 11 of the 1938 Act every insurer
is required to prepare: (a) Balance Sheet; (b) Profit and Loss Account; and
(c) a revenue account; at the expiry of each calendar year wherefor special
G forms are prescribed. Their Balance Sheets and Profit and Loss Accounts
etc. are audited by the auditors. Prudential regulation in the context of
insurance business has seminal importance as it caters to its very nature,
which entails pooling of risk. Acturial oversight involves keeping a tab on
--I:
'financial condition' of companies, valuation of liabilities, inter alia, with
H 462
C0MMNR. OF INCOME.TAX. NEW DELHI•. OIUENTALFIREA: GENERAL INSURA."ICECQ LTD. 463

regard to which investigation is required to be made at intervals of not less A
two years from the date they are submitted before the Controller of Insurance.
The said authority has a wide jurisdiction. It may take evidence and order
revaluation as also investigate into the affairs of the insurance company. The
statute provides for checks and balances. It mandates as to the kind of
investments which the insurer must make. The provisions of the 1938 Act
and the regulations framed thereunder provide for the details in which the l3
accounts are to be maintained. [Paras 11 and 12} [468-A-E]

3. Insurance companies in view of the provisions of the said Act, however,
are dealt with also under the 1961 Act differently. The jurisdiction of the
Income Tax Officer in passing the orders of assessment is limited. Keeping C
in view the fact that the business carried out by the assessee is not governed
. by the ordinary principles applicable to business computation as laid down in
Section 10 of the 1961 Act, the insurance companies do not compute their
profits annually in the manner laid down therein. [Para 13}

4. A bare perusal of Rule 51 1) of the 1961 Act would categorically D
demonstrate that ordinarily the annual accounts furnished before the
Controller of Insurance would be taken to be the balance of the profits
disclosed thereby. The same, however, is subject to the adjustments mentioned
therein, namely, any expenditure or allowance which is not admissible under
the provisions of Sections 30 to 43A in computing the profits and gains of
the business. If the said provision is found to be applicable, the amount may E
be added back. The rules lay down as to how the Income Tax Officer must
proceed in the matter if he finds any inaccuracy in the said accounts.
[Paras 14 and 15) (468-G-H; 469-A-BJ

5.1. There exists a distinction between a 'provision' and 'reserve'. F
[Para 18) (469-G-H]

5.2. A provision is a charge against the profits to be taken into account
against gross receipts in the Profit and Loss Account, whereas a reserve is
an appropriation of profits, the asset or assets by which it is represented being
retained to form part of the capital employed in the business. G
[Para 18) [470-D-E]

Vazir Sultan Tobacco Co. Ltd, Hyderabad etc. v. Commissioner ofIncome
Tax, Andhra Pradesh, Hyderabad etc., (1981) 4 SCC 435, relied on.

Life Insurance Corporation of India. v. Commissioner of Income Tax, H
464 SUPREME COURT REPORTS [2007] 7 S.C.R.
:
A Delhi and Rajasthan, [1964) 5 SCR 880; Pandhyan Insurance Co. Ltd v. r
. Commissioner ofIncome-Tax, Madras, {1965) 1 SCR 367 and Commissioner
ofIncome-Tax, West Bengal, Calcutta v. Calcutta Hospital and Nursing Home
Benefits Association, [1965) 3 SCR 632, referred to.

6. Section 36(1 )(vii) of the Act lays down the following conditions for
B allowance of a claim for a bad debt :(i) It must be a proper debt, or a part
thereof; ii) It must be of a revenue nature as contra distinguished from that
of capital nature; (a) It has been taken into account in computing the income .,.
of the assessment of that previous year or of an earlier previous year, or (b)
represents money lent in the ordinary course of the business of banking. (iii)
c which is established to have become a bad debt in the previous year; and (iv)
has been written off as irrecoverable in the accounts of the assessee for the
previous year. [Para 21) (471-D-G)

State Bank of Patiala, Patiala v. Commissioner ofIncome Tax, Patiala,
[1996) 3 sec 513, distinguished.
D
7.1. While calculating the profit and loss, what is primarily necessary
\:
to be taken into account is the gross profit. The amount of income tax payable
for the said purpose would not come within the purview of the definition of the
term 'expenditure'. [Para 23) [472-D-G]

E Ashton Gas Company v. Attorney General and Ors., (1906) AC 10 and
Bharat Commerce & Industries Ltd. v. Commissioner ofIncome Tax, Central-
II, (1998) 3 SCC 510, relied on.

Allen (HM Inspector of Taxes) v. Farquharson Brothers and Company,
XVII Tax Cases 54, referred to.
F
7.2. The tax which is payable is on the assesse's income after the income
is determined. This cannot, therefore, be considered as an expenditure for
the purpose of earning any income or profits. [Para 25) [473-D-E]

Madras Motor & General Insurance Co. Ltd v. Commissioner ofIncome
G Tax, Madras, (1979) 117 ITR 534 and General Insurance Corporation ofIndia
v. Commissioner of Income Tax, Bombay, [1999) 8 SCC 60, relied on.

8. Section 40(a)(ii) of the 1961 Act provides for a non-obstante clause. '\ ..__
It is of wide magnitude. Sections 32 to 38 of the 1961 Act refer to expenditure
admissible under the Act. Section 40, however, seeks to make an exception
H
COMMNR. OF INCOME TAX, NEW DELHI•· ORIENTAL FIRE .t; GENERAL INSURANCE CO. LTD. (S.B. SINHA. l.( 465

-; thereto stating that some expenditures would not be allowed. Sedion 40(a)(ii), A
however, does not say ~hat the income-tax would be an expenditure. It does not
provide as to how a total income of a person should be computed. It provides
""r other types of taxes. The said provision has, therefore, no application in
tl. ! instant case. [Para 28) [474-C)

9. So far as the question of 'bad and doubtful claims' is concerned, again B
the same is not an expenditure. Section 36(1 )(vii) of the Act cannot be said to
i have any application whatsoever in the instant case. It is not relevant for
computing the profit under the 1961 Act In any event, s.44 of the Act provides
for a non-obstante clause and, thus, would prevail over the former.
[Para 29) [474-D-E)
c
CIVIL APPELLATE JURISDICTION: Civil Appeal No. 2741 of2007.

From the Final Judgment and Order dated 27.5.2004 of the High Court
of Delhi at New Delhi in ITR Nos. 144-146of1984.

WITH
D

CA Nos. 2742, 2743, 2744, 2745 of2007.

Mohan Parasaran, ASG, Mathai M. Paike Dav, Sr. Adv. Sri Chidananda
D.L.. Shishir Pinaki, Shilpa Singh, Gaurav Dhingra, K.K. Senthilvalen, Chandra
Shekar Bhardwaj, B.V. Balaram Das for the Appellant. E
M.S. Syali, Sr. Adv. Mahuia C. Kalra, Vinay K. Shailendra, RS. Suri for
the Respondent.

The Judgment of the Court was delivered by
t
F
S.B. SINHA, J. 1. Leave granted in all the Special Leave Petitions.

2. Respondent is a subsidiary to the General Insurance Corporation of
India. It is wholly a government owned company engaged in the business of
general insurance. It is an income-tax asessee. Its affairs, indisputably, are
governed by the provisions of the Insurance Act, 1938 (for short, 'the 1938 G
Act). For the assessment years 1974-75, 1975-76 and 1978-79, it file~ its
income tax returns. Such returns were filed relying on or on the basis of the
,
annual accounts furnished by it before the Controller of Insurance.

3.' The Assessing Officer opined that .Respondent was not entitled to
.H
466 SUPREME COURT REPORTS (2007) 7 S.C.R.

A any deduction in.respect of the provisions of taxation.by way of"reserve for r-
bad and doubtful debts" and "entertainment allowance". The Commissioner
(Appeals), however, in respect of the assessment year 1974-75 allowed various
deductions and the order of the Assessing Officer disallowing certain
expenditure was set aside by orders dated Q9.02.1979 and 09.09.1980.

B .4. Both the orders were questioned by the Revenue before the Income
Tax Appellate Tribunal (for short, 'the Tribunal). By reason of an order dated
30.11.1981, the Tribunal held that the Assessing Officer was not correct ·in ...
refusing to accede to the deductions under the aforementioned heads claimed
by the assessee.
c 5. The foilowing questions oflaw were referred to the High Court under
Section 256 of the Income Tax Act, 1961 {for short, 'the 1961 Act').

"1. Whether on the facts and in the circumstances of the case, and
on a true interpretation of section 44 of the Income Tax, I961 read with
Rule 5 of the First Schedule to the said Act, the Tribunal was right
D in confirming the addition of the following amounts to the Balance of
profits disclosed by the annual accounts of the assessee Insurance
Company

(i) Tax deducted at source : Rs.76,74,713/-

E (n) Provision for taxation : Rs.6,57 ,00,000/-
Total Rs.7,33,74,713/-

(This question is referred at the instance of the assess~e for the
assessment year 1974-75)

F 2. Whether on the facts and in the circumstances of the case, the
Tribunal was correct in law in holding that reserve for bad and doubtful
debts cannot be added to the Balance of profit disclosed in the annual
accounts of the assessee insurance company ?

(This question is referred at the instance of Revenue for the assessment
G year-1974-75)"

6. The High Court, however, by reason of the impugned judgment
answered the said reference · in favour of the respondent and against the
Revenue. Indisputably~ the question as to whether the respondent was entitled
to deductions under the head ."Entertainment Allowance" is not in question .. :
H
COMMNR. OF INCOME TAX, NEW DELHI v. ORIENTAL FIRE 4 GENERAL INSIJllANCE CO. LTD. (S.B. SINHA. l.J 467

1
before us. A
7. Mr. Mohan Parasaran, the learned Additional Solicitor General
appearing on behalf of the Revenue, would submit that the terms 'provision'
and 'reserve' connote two different meanings, and, thus, there cannot be any
provision for "bad and doubtful debts" and in that view of the matter, the
High Court committed a serious error in passing the impugned judgment. B
8. Th1;; Assessing Authority, the learned counsel would point out, has
assigned sufficient and cogent reason for arriving at its decision. It was
furthermore argued that the provisions for tax cannot be claimed to be an
expenditure and in that view of the matter the Assessing Officer in regard to
the concept of provision for tax was entitled to invoke its jurisdiction in C
arriving at a finding as to whether the assessee was entitled to the deductions
claimed by it or not.

9. Mr. M.S. Syali, the learned Senior Counsel appearing on behalf of the
assessee, on the other hand, would support the impugned judgment. D
10. Determination of liability of income tax under the provisions of the
1961 Act for the purpose of computation of income of an assessee, inter alia,
for carrying on business in insurance is governed by Section 44 thereof and
Rule 5(a) of the First Schedule appended thereto, which read as under :

"S.44.-Notwithstanding anything to the contrary contained in the
E
provisions of this Act relating to the computation of income chargeable
under the head "Interest on securities", "Income from house property,
capital gains or Income from other sources, or in sections 28 to 43 A,
the profits and gains of any business of insurance, including any
such business carried on by a mutual insurance company or by a F
cooperative society, shall be computed in accordance with the rules
contained in the First Schedule."

"Rule 5(a).- 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 G
the Insurance Act, 1938 (4of1938) to be furnished to the Controller
of Insurance, subject to the following adjustments :

(a) Subject to the other provisions of this rule, any expenditure or
allowance which is not admissible under the provisions of Sections
H
468 SUPREME COURT REPORTS [2007] 7 S.C.R.

A 30 to 43A in computing the profits and gains of a business shall
be added back."

11. Section 44 contains a non obstante clause. It provides for a special
mode in which the assessee carrying on business, inter alia, in general
insurance should be assessed.
c
12. The reason for it is not far to seek as the matter relating to "carrying
on business" in General Insurance is covered by the 1938 Act. By reason of.
Secti9n 11 of the 1938 Act every insurer is required to prepare : (a) Balance '-
Sheet; (b) Profit and Loss Account; and (c) a revenue account; at the expiry
--of each calendar year wherefor special forms are prescribed. Their ·Balance
D Sheets and Profit and Loss Accounts etc. are audited by the auditors. Prudential
regulation in the context of insurance business has seminal importance as it
caters to its very nature, which entails pooling of risk. Acturial oversight
involves keeping a tab on 'financial condition' of companies, valuation of
liabilities, inter alia, with regard to which investigation is required to be
E made at intervals of not less two years from the date they are submitted
before the Controller of Insurance. The said authority has a wide jurisdiction.
It may take evidence and order revaluation as also investigate into the affairs ·""
of the insurance company. The statute provides for checks and balances. It
mandates as to the kind of investments which the insurer must make. The
provisions of the 1938 Act and the regulations framed thereunder provide for
E the details in which the accounts are to be maintained.
13. Insurance companies in view of the provisions of the said Act,
however, are dealt with also under the 1961 Act differently. Section 44 thereof,
as noticed hereinbefore, begins with a non-obstante clause. The jurisdiction
of the Income Tax Officer in passing the orders of assessment is limited.
F Keeping in view the fact that the business carried out by the assessee is not
governed by the ordinary principles applicable to business computation as
laid dowri in Section IO of the 1961 Act, the insurance companies do not
compute their profits annually in the manner laid down therein.

G 14. A bare perusal of Rule 5(a) of the 1961 Act would categorically
demonstrate that ordinarily the annual accounts furnished before the Controller
of Insurance w'ould be taken to be the balance of the profits disclosed
thereby. The same, however, is subject to the adjustments mentioned therein,
namely, any expenditure or allowance which is not admissible under the
provisions of Sections 30 to 43A in computing the profits and gains of the
H business. If the said provision is found to be applicable, the amount may be
COMMNR. Of. INCOME TAX. NEW DELHI •. ORIENTAL FIRE It. GENERAL INSURANCE CO. LTD. (S.B. SINHA, l. I
469

1
added back. A
15. The rules lay down as to how the Income Tax Officer must proceed
in the matter if he finds any inaccuracy in the said accounts.

16. The question came up for consideration before this Court in relation
to business of life insurance in Life Insurance Corporation of India. v. B'
Commissioner of Income Tax, Delhi & Rajasthan, [1964] 5 SCR 880. Therein,
this Court had the occasion to consider the relevant provisions of the 1938
-~
Act as also the 1961 Act. In respect of business of insurance other than life
insurance, a matter fell for consideration in Pandhyan Insurance Co. Ltd. v.
Commissioner of Income-Tax, Madras, [1965] I SCR 367, wherein it was
categorically held that the rules do not empower the Income Tax Officer to
c
adjust the accounts on the basis of revaluation made by him or to correct the
discrepancy between what is entered into the accounts and what is fact.

·- 17. In Commissioner of Income-Tax, West Bengal, Calcutta v. Calcutta
Hospital and Nursing Home Benefits Association, [1965] 3 SCR 632 application
D
of Rule 6 to the Schedule appended to the Income Tax Act came up for
consideration of this Court, wherein the law was laid down in the following
terms:

"11. The Section adopted the device of a deeming provision. The
profits arising from the transactions of a company or society with its E
members were deemed to be profits arising from transactions with
non-members Parliament assumed that the latter were taxable. As this
hypothesis was wrong Parliament failed in its objective. But the Indian
Legislature did not adopt any deeming device. It defined income to
include profits of any business of insurance carried on by a mutual
insurance association. What are those profits is then explained by F
t reference to the Schedule. The effect of this in substance is to
incorporate Rule 6 into the definition. If the legislature had defined
income to include profits of insurance earned on by a mutual insurance
association computed according to Rule 6, very little would have
' remained arguable."
I G
18. There cannot be any doubt whatsoever, as was submitted by the
learned Additional Solicitor General, that there exists a distinction between a
, 'provision' and 'reserve'. It was so held in Vazir Sultan Tobacco Co. Ltd,
Hyderabad etc. v. Commissioner of Income Tax, Andhra Pradesh, Hyderabad
etc. [1981] 4 sec 435 in the following terms: H
470 SUPREME COURT REPORTS [2007) 7 S.C.R.

A "9. The distinction between the two concepts of reserve and
provision is fairly well known in commercial accountancy and the
same has been explained by this Court in Metal Box Company of
India Ltd v. Workmen thus:

The distinction between a provision and a reserve is in commercial
B accountancy fairly well known. Provisions made against
anticipated losses and contingencies are charges against profits
and therefore, to be taken into account against gross receipts in
the P.&L. account and the Balance-sheet. On the other hand,
reserves are appropriations of profits, the assets by which they
are represented being retained to form part of the capital employed
c in the business. Provisions are usually shown in the Balance-
sheet by way of deductions from the assets in respect of which .
they are made whereas general reserves and reserve funds are
shown as part of the proprietors interest. (See Spicer and Pegler:
Book-keeping and Accounts, 15th Edn., p. 42.) -·
D In other words the broad distinction between the two is that whereas
a provision is a charge against the profits to be taken into account
against gross receipts in the Profit and Loss Account , a reserve is
an appropriation of profits, the asset or assets by which it is
represented being retained to form part of the capital employed in the
E business. Bearing in mind the aforesaid broad distinction we will
briefly indicate how the two concepts are defined and dealt with by
Companies Act, 1956."

19. Our attention, in this behalf, has also been drawn by the learned
Additional Solicitor General to State Bank ofPatio/a, Patio/av. Commissioner
F ofIncome Tax, Patio/a, [1996] 3 SCC 513, wherein Paripooman, J. speaking
for a Division Bench noticed :

"12. A fair reading of the above decisions would go to show that
if the transfer of amount is made ad hoc, when there is no known or
anticipated liability, such fund will only be treated as reserve. In this
G case, substantial amounts were set apart as reserves. No amount of
bad debts was actually written off or adjusted against the amount
as
claimed reserves. No claim for any deduction by way of bad debts
were made during the relevant assessment years. The assessee never
appropriated any amount against any bad and doubtful debts. The
amounts throughout remained in the account of the assessee by way
H
COMMNlt. OF INCOME TAX, NEW DB.HI '" ORIENTAL FIRE .rt GENERAL INSURANCE CO. LTD. (S.B. SINHA, J.( 471

of capital and the assessee treated the said amounts as reserves and A
__ J
not as provisions designed to meet liability, contingency, commitment
or diminution in the value of assets known to exist at the relevant
dates of Balance-sheets. These facts have been found by the Tribunal.
On the facts, the amount set apart as reserves cannot be said to be
so earmarked, when any liability has actually arisen or was
anticipated by the assessee. lt cannot be said either, that the amounts B
set apart out of the profits were designed to meet any known liability,
that existed at the date of the Balance-sheet. Tested in the light of
(
, -~
the decisions of this Court, referred to hereinabove, it appears to us,
that the amounts set apart towards bad and doubtful debts in these
cases are reserves qualifying for appropriate relief under Rule I(xi)(b) C
of the First Schedule and Rule l(iii) of the Second Schedule of the
Act."

20. The said decision was rendered in a case involving the Companies
(Profits) Surtax Act, 1964. It was decided on the fact situation obtaining in
that case. I>
21. Section 36(l)(vii) of the Act lays down the following conditions for
•
':-' allowance of a claim for a bad debt :
(i) It must be a proper debt, or a part thereof;
(11) It must be of a revenue nature as contra distinguished from that E
of capital nature;
(a) It has been taken into account in computing the income of the
assessment of that previous year or of an earlier previous year,
or
F
(b) represents money lent in the ordinary course of the business
•
- ..
' ,/
of banking.
(fu) which is established to have become a bad debt in the previous
year; and
(iv) has been written off as irrecoverable in the accounts of the G
assessee for the previous year.
22. We are, however, of the opinion that it is not necessary for us to
. '-.;
dwell further upon the said question, inasmuch as a distinction between a
'provision' and 'reserve' had been kept in mind by the authorities under the
1961 Act as also the High Court. Every provision, however, needs not be an H
472 SUPREME COURT REPORTS [2007) 7 S.C.R.

A expenditure, as the same may represent a liability.

23. While calculating the profit and loss, what is primarily necessary to
be taken into account is the gross profit. The amount of income tax payable
for the said purpose would not come within the purview of the definition of
the term 'expenditure'. It was so held in Ashton Gas Company v. Attorney
B General and Ors., (1906) AC IO in the following terms :

"My Lords, so presented, the case appears to me to be perfectly
clear. The fallacy has been in arguing as if you can deduct from the \
- 4- '
income tax which you have got to pay something which alters what
is the real nature of the profit. Now the profit upon which the income
c tax is charged is what is left after you have paid all the necessary
expenses to earn that profit. Profit is a plain English word; that is
2what is charged with income tax. But if you confound what is the
necessary expenditure to earn that profit with the income tax, which
is a part of the profit itself, one can understand how you get into the
D confusion which has induced the learned counsel at such very
considerable length to point out that this is not a charge upon the
profits at all. The ans·.ver is that it is. the income tax is a charge upon
the profits; the thing which is taxed is the profit that is made, and you
must ascertain what is the profit that is made before you deduct the
tax you have no right to deduct the income tax before you ascertain
E what the profit is. I cannot understand how you can made the income
tax part of the expenditure"

24. Yet again in Allen (H.M Inspector of Taxes) v. Farquharson Brothers
and Company, [XVII Tax Cases 54], it was held:

F "Now it is not necessary for me to discuss, and I do not need to
discuss, in detail or, indeed, at all, although my attention was properly
called to it by counsel, the exact nature of the Income Tax and its
distinction from Excess Profits Duty. The distinction, of course_, is
perfectly familiar and, in a general way, is recollected by anybody who
has ever had anything to do with these things. Income Tax is not a
G deduction before you arrive at the profits; it is a part of the profits.
It is, as has been expressed by some well-known person I cannot
remember who, but it does not matter the Crown's share of the profits.
Excess Profits Duty was quite a different sort of thing. That was a
deduction, the sum to be deducted before you arrived at the profits
H for the purpose of computation, with the result that you deducted the
COMMNR. OF INCOME TAX. NEW DELHI ••. ORIENTAL FIRE~ GENERAL INSURANCE co. LTD. 1s.e. SINHA. J.I
,, 473
_,.
Excess Profits Duty in arriving at the computation and then if, as A
.J
sometimes happened, later on, some Excess Profits Duty was got
back, that Excess Profits Duty had to be brought in."

25. The said principle has been applied by this Court in Bharat
Commerce & Industries Ltd. v. Commissioner of Income Tax, Central-II,
[1998] 3 sec 510, stating : B
"6. The expenses in that case were incurred for a very different
~ purpose from the purpose for which the assessee has paid interest in
the present case. When interest is paid for committing a default in
respect of a statutory liability to pay advance tax, the amount paid
and the expenditure incurred in that connection is in no way connected c
with preserving or promoting the business of the assessee. This is not
expenditure which is incurred and which has to be taken into account
before the profits of the business are calculated. The liability in the
case of payment of income tax and interest for delayed payment of
income tax or advance tax arises on the computation of the profits and D
gains of business. The tax which is payable is on the assessees
-" income after the income is determined. This cannot, therefore, be
considered as an expenditure for the purpose of earning any income
or profits. The ratio of Bir/a Cotton Mills case is not applicable in
the· present case."
E
26. It is, therefore, evident that the provision of income tax being not
an expenditure, the Assessing Officer could not have exercised its jurisdiction
in relation thereto.

27. Reliance has been placed by the learned Additional Solicitor General
on Madras Motor & General Insurance Co. Ltd. v. Commissioner of Income F
; Tax, Madras, (1979) 117 ITR 534. In the said decidon also, the Madras High
?-
Court categorically held that the provision for payment 0f income-tax is a
liability and not an expenditure. The question again came up for consideration
recently in General Insurance Corporation of India v. Commissioner of
Income Tax, Bombay [ 1999] 8 SCC 60 wherein this Court rejected the contention
G
of the learned counsel for the assessee therein, in the fact situation obtaining
in that case, opining :

...' ... ,
"19. 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 H

,'
474 SUPREME COURT REPORTS [2007] 7 S.C.R.
.,
A gains of insurance business. For the purpose of income tax, the
figures in the accounts of the assessee drawn up in accordance with .i.-

the provisions of the First Schedule to the Income Tax Ac~ and
satisfying the requirements of the 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
B and undo the entries made therein."

28. Section 40(a)(ii) of the 1961 Act, it will bear repetition to state,
provides for a non-obstante clause. It is of wide magnitude. Sections 32 to "~-
38 of the 1961 Act refer to expenditure admissible under the Act. Section 40,
however, seeks to make an exception thereto stating that some expenditures
c would not be allowed. Section 40(a)(ii), however, does not say that the
income-tax would be an expenditure. It does not provide as to how a total ;

income of a person should be computed. It provides for other types of taxes.
The said provision has, therefore, no application in the instant case.

D 29. So far as the question .of 'bad and doubtful claims' is concerned,
again the same is not an expenditure. Section 36(l)(vii) of the Act whereupon
the learned Additional Solicitor General placed strong reliance, cannot be said
to have any application whatsoever in the instant case. It is not relevant for -I
computing the profit under the 1961 Act. In any event, Section 44 of the Act
provides for a non -obstante clause and, thus, would prevail over tlie former.
E
30. For the reasons aforementioned, we find no merit in these appeals,
which are dismissed accordingly with costs. Counsel's fee is assessed at Rs.
10,000/- in each case.

D.G. Appeals dismissed.

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