Holding

An amount set apart for redemption of preference shares under the General Insurance Business (Nationalisation) Rules is a reserve, not an expenditure within the meaning of Rule 5(a) of the First Schedule, and therefore cannot be added back to income under Section 44 of the Income‑Tax Act.

Summary

The General Insurance Corporation of India, a wholly government‑owned insurer, set aside a sum for redemption of preference shares and debited it to its profit and loss account in accordance with Rule 2(2)(a) of the General Insurance Business (Nationalisation) Rules, 1973. The Income‑Tax Officer treated the amount as revenue expenditure and added it back to taxable income under Section 44 and Rule 5(a) of the First Schedule of the Income‑Tax Act, 1961. The assessee contested the addition, arguing that the amount is a reserve, not an expenditure, and that the non‑obstante clause in Section 44 does not override the GIB Rules. The Supreme Court held that the amount is a reserve, not an expenditure within the meaning of Rule 5(a), and that Section 44’s non‑obstante clause only overrides provisions of the Income‑Tax Act, not other statutes. Consequently, the amount cannot be added back to income, and the High Court’s decision in favour of the Revenue was set aside. The appeal was allowed and no costs were awarded.

Issues considered

Whether the amount set apart for redemption of preference shares under the General Insurance Business (Nationalisation) Rules, 1973 qualifies as "expenditure" or "allowance" within the meaning of Rule 5(a) of the First Schedule to the Income‑Tax Act, 1961.
Whether Section 44’s non‑obstante clause overrides the provisions of the General Insurance Business (Nationalisation) Rules, permitting the addition back of the amount to taxable income.
Whether the assessing officer has the power to add back the amount despite its treatment as expenditure under the GIB Rules.
Whether there is a conflict between Rule 2(2)(a) of the GIB Rules and Rule 5(a) of the First Schedule, and how the rule of harmonious construction applies.

Legislation cited

General Insurance Business (Nationalisation) Act, 1972s. 39
Income Tax Act, 1961s. 30, s. 31, s. 32, s. 33, s. 34, s. 35, s. 36, s. 37, s. 38, s. 39, s. 40, s. 41, s. 42, s. 43A, s. 44
Insurance Act, 1938

Subjects

Income TaxSection 44Rule 5(a)expenditurepreference sharesGeneral Insurance Business (Nationalisation) Rulesnon‑obstante clauseharmonious constructionreservetax deduction

Judgment

A GENERAL INSURANCE CORPORATION OF INDIA
v.
COMMISSIONER OF INCOME TAX BOMBAY

SEPTEMBER 21, 1999

B (S. RAJENDRA BABU AND R.C. LAHOTI, JJ.]

Income Tax Act, 1961-Ss. 30 to 43A, 44 read with Rule 5(a) of the
First Schedule-Insurance Company-Amount set apart for redemption of
preference shares-Debited to profit and loss account-Whether amounts to
C expenditure-Held, No-General Insurance Business (Nationalisation) Rules,
1973-Rule 2(2) (a)-Object of

Interpretation of statutes

Rule of Harmonius Construction-Two provisions contained in two
D enactments having different purposes to achieve-Held, rule of harmonious
construction would not sustain any view creating conflict between the two
provisions.

Non-obstente clause in S.44-Held, not only overrides the provisions
E of the Act but also has overriding effect over the provisions of other
enactments-Income Tax Act, 1961-S.44.
..
Appellant-assessee was an Insurance company wholly owned by Central
Government. The Central Government contributed to the Capital of the
appellant-assessee in the form of preference shares and equity shares. Rule
F 2(2) (a) of the General Insurance Business (Nationalisation) Rules, 1973
provides that the amount set apart for redemption of preference shares
should be treated as an expenditure in the profit and loss account. In the
profit and loss account for the relevant assessment year the appellant assessee
made a debit entry for certain amount and transferred it to preference share
capital redemption account. The Income Tax Officer, treating the said amount
G as revenue expenditure in view of Rule 2(2) (a) of GIB Ru.es, added back the
amount to the income of the assessee. On appeal, the Appellate Assistant

H
Commissioner oflncome Tax (Appeals) and Income Tax Appellate Tribunal
held that the amount set apart as redemption of preference shares could not
be treated as expenditure. However on reference, High Court answered the
question in favour of the Revenue. Hence the present appeal.
-
742
GENERAL INSURANCE CORPN. v. C.l.T 743

Allowing the appeal, and setting aside the order of High Court, the A
Court

HELD: 1.1. The amount set apart by assessee for redemption of
preference shares could not be treated as an expenditure. It is also not an
expenditure or allowance of the nature covered under Ss. 30 to 43A of
Income Tax Act, 1961. Consequently, the question of determining its B
admissibility by reference to Rule S(a) of First Schedule to the Act does not
arise nor could it have been added back by the assessing authority by
purporting to exercise power under the said Act. 1749-H; 750-AI

Indian Molasses Company Pvt. ltd. v. Commissioner of Income-tax,
(1959) 37 ITR 66, relied on. C

Anarkali Sarabhai v. C. /. T, (1997) 224 ITR 422 and Associated Power
Co. Ltd. v. C.l.T, (1996) 218ITR195, held inapplicable.

Cofoba Central Co-operative Consumers' wholesale and Retail Stores
Ltd. v. Cl. T, (1998) 229 lTR 209 Born., disapproved. D
1.2. S. 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 E
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 Ss. 30 to 43A. Thus,
if the amount is not an expenditure or allowance, the question of testing its F
eligibility for adjustment by reference to Rule 5(a) to the First Schedule
would not arise at all. (748-F-G)

2. Rule 2(2) (a) of General Insurance Business (Nationalisation) Rules
1973 undoubtedly speaks of the amount set apart for redemption ofp~eference
shares being treated as an item of expenditure in the profit and loss account. G
However, the purpose and extent of the provision has to be kept in view. These
rules have been framed in exercise of the power conferred by ciause (a) of
sub-section (2) of S.39 of the General Insurance Business (Nationalisation)
Act, 1972. These rules lay down the manner in which the profits, if any, and
other monies received by the General Insurance Corporation may be dealt H
..
744 SUPREME COURT REPORTS [1999] SUPP. 2 S.C.R.

A with. The concept behind Rule 2(2) (a) is to permit the Corporation to enter
the amount of reserve in the profit and loss account in the expenditure side
which would not have been permissible otherwise because the amount set
apart in a reserve cannot be expenditure. The rule puts a stamp of
permissibility on something not permissible otherwise. This rule itself is
suggestive of the fact that the amount set apart in a reserve is not an
B expenditure in its commercial sense. The extent of the GIB Rules does not
go beyond providing an accounting method. These Rules cannot be pressed
into service for altering the basic character of the amount which is not an
expenditure. 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
C 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. [750-B-C-D-EJ

3. If the view taken by the High Court is accepted, there would be a
D conflict between the provisions of Rule 2(2) (a) of GIB Rules and Rule 5(a)
of First Schedule to Income-tax Act. 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)
.E of First Schedule to Income tax Act then the object sought to be achieved by
Rule 2(2)(a) above said is defeated. The non-obstante clause with which S.44
of the Income-tax Act opens and gives it an over-riding effect only on the
provisions of Income-tax Act would earn an over-riding effect on the provisions
of another enactment also through the Parliament has not chosen to give
S.44 of the Income-tax Act such an effect. It is to be noted that S.44 does
F 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
Rule 2(2) (a) of GIB Rules have an over-riding effect on the provisions of
Income Tax Act. The two provisions contained in the two enactments have
thus different purposes to achieve. Rule of harmonious construction would
G therefore sustain neither what the Income-tax Officer did nor the view of the
law taken by the High Court. (750-F-G-H; 751-A-BI

4. S.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
H figures in the accounts of the assessee drawn up in accordance with the
GENERAL INSURANCE CORPN. v. C.l.T. [R.C. LAHOTI, J.] 745
provisions of the First Schedule to the Income-tax Act and satisfying the A
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.
[751-C-D)

Life Insurance ofIndia v. CIT, (1964) 51 ITR 773 SC; Pandyan Insurance B
Co. Ltd v. CIT, Madras, (1965) 55 ITR 716 SC and CIT West Bengal v.
Calcutta Hospital and Nursing Home Benefits Association Ltd, (1965) 57
ITR 313 SC, relied on.

CIVIL APPELLATE JURISDICTION: Civil Appeal No. 3283of1998. C
From the Judgment and Order dated 11.11.97 of the Bombay High Court
in I.T.R. No. 144of1984.

T.R. Andhyarujina, F.B. Andhyarujina and R.B. Hathikhanawala for the
Appellant.
D
T.L. Viswantha Iyer, M_s. Neera Gupta and Shail Kumar Dwivedi for the
respondent.

The Judgment of the Court was delivered by

R.C. LAHOTI, J. General Insurance Corporation of India, the appellant E
-assessee is I 00 % Central Government Undertaking formed as a Government
Company under The General Insurance Business (Nationalisation) Act, 1972
(hereinafter G I B Act, for short ). It carries on general insurance business in
India. At the time of nationalisation, there were I 07 companies carrying on
•• the business of general insurance. They were all merged together into four
subsidiaries of the appellant Corporation viz. National Insurance Co. Limited, F
New India Assurance Co. Limited, Oriental Insurance Co. Limited, and United
India Insurance Co. Limited. The Central Government contributed to the
capital of the appellant in the form of preference shares and equity shares for
the purpose of paying compensation to the shareholders and the management
of the merged companies. The preference shares were to be redeemed in such G
time as the Board of Directors of the appellant Corporation may deem· fit: The
controversy relates to the assessment year 1977-78, corresponding to the
accounting year ending 31.12.1976. It is not disputed that the income of the
appellant assessee is to be computed under Rule 5 of First Schedule to the
Income-tax Act, 1961.
H
746 SUPREME COURT REPORTS [1999) SUPP. 2 S.C.R.

A The Income-tax ·Act, 1961 makes a special provision for computing the
taxable income of an assessee engaged in business of insurance. It provides
as under:-

Insurance business

B 44. "Notwithstanding anything to the contrary contained in the
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
Section 199 or in sections 28 to [43 A] the profits and gains of any
business of insurance, including any such business carried on by a
c mutual insurance compariy or by a co-operative society, shall be
computed in accordance with the rules contained in the First Schedule."

Inasmuch as the appellant - assessee carries on business of insurance
other than life insurance, we are concerned with Rule 5 of the First Schedule
which reads as under:
D
B. Other insurance business

Computation of profits and gains of other insurance business.

5. The profits and gains of any business of insurance other than life
E 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 ( 4 of 1938), 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
F allowance which is not admissible under the provisions of
Sections 30 to [43 A] in computing the profits and gains of a
business shall be added back;

(b) xxx xxx xxx

(c) such amount carried over to a reserve for unexpired risks as may
G
be prescribed in this behalf shall be allowed as a deduction.

[Note:- Sec. 44 and Rule 5 (a) of First Schedule as reproduced hereinabove
are as they stood at the relevant time. Later by the Direct Tax Laws '
I
(Amendment) Act 1987 '43 B' has been substituted in place of' 43 A' in both
H the provisions]
GENERAL INSURANCE CORPN. v. C.l.T. [R.C. LAHOTI, J.] 747

The problem is creatP.d by Rule 2 (2) (a) of the General Insurance A
, Business (Nationalisation) Rules 1973 (hereinafter G I B Rules, for short)
framed by the Central Government in exercise of the powers conferred by
Section 39 of the G I B Act, the relevant part whereof reads as under:

"39. (1) The Central Government may, by Notification, make rules to
carry out the provisions of this Act. B
(2) In particular, and without prejudice to the generality of the
foregoing power, rules made under this Section may provide for:

(a) the manner in which the profits, if any, and other moneys
received by the Corporation may be dealt with." C
xxx xxx xxx xxx

Rule 2 (i) (a) referred to hereinabove reads as under:
...... •

"2. Profits and receipts of the Corporation and acquiring companies
how to be dealt with - .D

(2) (a) In arriving at the net profit of the Corporation, the amount
set apart for redemption of preference shares to such extent as the
Board of Directors of the Corporation may consider expedient shall be E
treated as an item of expenditure in the Profit and Loss Account."

In Profit and Loss Account, the appellant assessee had made a debit
entry for ~m amount of Rs. 3,00,30, 700 and transferred the amount to preference
share capital redemption account. The Income-tax Officer added back the
amount to the income of the assessee on the reasoning that this amount was F
to be treated as revenue expenditure in view of Rule 2 (2) (a) ofG I B Rules.
The assessee appealed to the Appellate Assistant Commissioner of Income-
tax (Appeals) who agreed with the assessee and deleted the addition in the
income following his own order on a similar claim made for the assessment
year 1976-77. The department appealed to the Income Tax Appellate Tribunal. G
The Tribunal followed its own order dated 26. 9 .1978 in respect of this very
assessee for the assessment year 1974-75 and dismissed the appeal. A perusal
of the order of the Tribunal (Annexure P-3) for the assessment.year 1974-75
shows that in the opinion of the Tribunal the amount set apart as a reserve
could not be treated as expenditure or allowance and assuming it to be an
amount of expenditure, it was not an item of expenditure dealt with by the H
748 SUPREME COURT REPORTS [1999] SUPP. 2 S.C.R.

A provisions of Sections 30 to 43A of the Income-tax Act Accordingly, the
claim of the assessee was liable to be upheld.

On a request made by the Revenue, the following question was referred
,by the Tribunal for the opinion of the High Court under Section 256 (1) of
the Income-tax Act:
B
"Whether on the facts and in the circumstances of the case the
Tribunal was justified in law in holding that the sum of Rs.3,00,30, 700
being provision for redemption of preference shares was not liable to
be added back in the total income of the assessee for the assessment
year 1977-78".
c
The High Court has answered the question in the negative, that is, in
favour of the Revenue. In doing so, the High Court has purported to treat
the question as covered by two decisions of the Supreme Court in Anarkali
Sarabhai v. C.l.T., (1997) 224 ITR 422, Associated Power Co. Ltd. v. C.l.T., ""i
D (1996) 218 ITR 195, and a decision of the Bombay High Court in Colaha
Central Co-operative Consumers' Wholesale and Retail Stores Ltd. v. C.l.T.,
(1998) 229 ITR 209 Born.

The aggrieved assessee has filed this appeal by special leave granted
under Article 136 of the Constitution of India
E
We have heard Shri T.R. Andhyarujina, learned senior advocate for the
assessee - appellant and Shri T.L. Viswanatha Iyer, learned senior advocate
for the Revenue. Having heard the learned counsel for the parties, we are of
the opinion that the appeal .deserves to be allowed.

F Section 44 of the Income-tax Act is a special provision governing
I
computation of taxable income earned from busin~ss of insurance. ll 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
G 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
H _not arise at all _
GENERAL INSURANCE CORPN. v. C.l.T. [R.C. LAHOTI, J.] 749
A perusal of the order dated 26.9.1978 passed in ITA No.2699/1977-78 A
by the ITAT in the case of this very assessee and relied on and followed by
the Tribunal while disposing of the appeal for the assessment year in question
(A Y 1977-78) shows three submissions having been made on behalf of the
assessee before the Tribunal: firstly, that the amount set apart by the assessee
for redemption of preference shares was only a reserve or a provision and not
an expenditure and therefore its allowability for deduction cannot be considered B
under Sections 30 to 43A; secondly, assuming it was an expenditure, this
expenditure was not of the category of expenditure contemplated in Sections
30 to 43A and therefore unless there was a specific prohibition for such an
allowance, the departmental authorities would not be justified in adding back
the amount under that clause; and thirdly, if Rule 2(2)(a) of the General C
Insurance Business (Nationalisation) Rules, 1973 be read as providing that
the amount so set apart for redemption of preference shares was an expenditure,
the fiction should be taken to its logical conclusion so as to hold that the
expenditure was allowable as deduction under Sections 30 to 43A of the
Income-tax Act. The Tribunal upheld the contention that the provision made
by the assessee was neither an expenditure nor an allowance in the ordinary D
commercial sense and Rule 5 (a) of First Schedule would have no application
at all and further, as admittedly Sections 30 to 43A do not deal with an amount
set apart for redemption of preference shares so also the amount could not
have been added back.

The !erm 'expenditure' came up for consideration of this Court in Indian
E·
Molasses Company Pvt. Ltd. v. Commissioner of Income-tax, (1959) 37 ITR
66. It was held :

"Spending" in the sense of "paying out or away" of money is the
primary meaning of"expenditure". "Expenditure" is what is paid out F
or away and is something which is gone irretrievably. Expenditure,
which is deductible for income- tax purposes, is one which is towards
a liability actually existing at the time, but the putting aside of money
which may become expenditure on the happening of an event is not
expenditure."
.G
In Pandyan Insurance Co.Ltd. v. CIT Madras, (1965) 55 ITR 716 also
this Court has held that "expenditure" meant "disbursement" and hence did
not include depreciation.

It i~, therefore, clear that the sum of Rs.3,00,30, 700 set apart as1~rovision
for redemption of preference shares could not have been treated as an H
750 SUPREME COURT REPORTS (1999] SUPP. 2 S.C.R. ...,,.
A 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.

B Rule 2 (2) (a) of GIB Rules undoubtedly speaks of the amount set apart
·for redemption of preference shares being treated as an item of expenditure
in the profit and loss account. However, the purpose and extent of the
provision has to be kept in view. These rules have been framed in exercise
of the power conferred by clause (a) of sub-section (2) of Section 39 of the
c GIB Act. The object of these rules is entirely different. These rules lay down
the manner in which the profits, if any, and other monies received by the
General Insurance Corporation may be dealt with. The concept behind Rule
2 (2) (a) is to permit the Corporation to enter the amount of reserve in the
profit and loss account in the expenditure side which would not have been
permissible otherwise because the amount set apart in a reserve cannot be
D expenditure. The rule puts a stamp of permissibility on something not "-" -
permissible otherwise. This rule itself is suggestive of the fact that the amount
set apart in a reserve is not an expenditure in its commercial sense. The extent
of the GIB Rules does not go beyond providing an accounting method. These
Rules cannot be pressed into service for altering the basic character of the
amount which is not an expenditure. Merely because Rule 2 (2) (a) of GIB
E
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.
F ,..
If the view taken by the High Court is accepted there would be a
conflict between the provisions of Rule 2(2)(a) of GIB Rules and Rule 5(a) of
First Schedule to Income-tax Act. 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.
G 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
H provisions of another enactment also though the Parliament has not chosen
·-
GENERAL INSURANCE CORPN. v. C.l.T. [R.C. LAHOTI, J.] 751

to give Section 44 of the Income-tax Act such an effect. It is to be noted that A
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 B
would therefore sustain neither what the Income-tax Officer did. nor the view
of the law taken by the High Court.

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 C
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 D
and undo the entries made therein.

In the Life Insurance of India v. CIT., (1964) (51) ITR 773 SC their
Lordships were dealing with the pari materia provisions contained in the
Income-tax Act, 1922. The Co~rt analysed the scheme underlying the relevant
provisions of the Insurance Act, 1938 and the Income-tax Act, 1922 and held E
that where the accounts of an insurance company engaged in insurance
business are required to be submitted and approved by the Controller of
Insurance, the Income-tax Officer has no power to change the figures in the
accounts of the assessee. A.K. Sarkar,J. recorded in his opinion :

' "The assessment of the profits of an insurance business is completely F
governed by the rules in the Schedule and there is no power to do
anything not contained in it. Thit. reason may be that the accounts of
an insurance business are fully controlled by the Controller of
Insurance under the provisions of the Insurance Act. They are checked
by him. He has power to see that various provisions of the Insurance
G
Act are complied with by an insurer so that the persons who have
insured with it are not made to suffer by mismanagement. A tampering
with the accounts of an insurer by an Income-tax Officer may seriously
affect the working of insurance companies. But apart from this
consideration, we feel no doubt that the language of Section 10(7) and
the Schedule to the Income-tax Act makes it perfectly certain that the H
752 SUPREME COURT REPORTS [1999] SUPP. 2 S.C.R.

A Income-tax Officer could not make the adjustment that he did in these
cases."

M. Hidayatullah, J. (as His Lordship then was) observed :

"the Income-tax Act contemplates that the assessment of insurance
B companies should be carried out not according to the ordinary
principles applicable to business concerns as laid down in Section 10,
but in quite a different manner."

The view so taken has been followed by this Court in Pandyan Insurance
Company Ltd v. CIT, Madras;(l965) 55 ITR 716 SC and CIT, West Bengal
C v. Calcutta Hospital and Nursing Home Benefits Association Ltd, (1965) 57
ITR 313 SC. In the later case, their Lordships have also observed :

"the balance of profits as disclosed by the accounts submitted to the
Superintendent of Insurance and accepted by him would be binding
on the Income-tax Officer, except that the Income-tax Officer would be
D
entitled to exclude expenditure other than expenditure permissible
under the provisions of Section l 0 of the Act. It is common ground
in this case that the reserves which were added to the balance of
profits were not expenditure."

E The cases relied on by the High Court have no applicability to the facts
of the case and the issue arising for decision herein. In Anarkali Sarabhai 's
case (supra) , the question arising for decision was whether redemption by
a company of a preference share amounts to sale of the shares by the
shareholder to the company so as to be taxable for capital gains as amounting
to transfer within the meaning of Section 2 (47) of the Income-tax Act, 1961.
F Their Lordships held that such redemption amounted to a sale and hence was
covered by the definition of transfer. In Associated Power Co. Ltd's case
(Supra) monies standing to the credit of the contingencies reserve set apart
to be utilised by the electricity comp:ny to meet expenses or recoup loss of
profits arising out of accidents, strikes, or other circumstances etc. were
G claimed as business expenditure entitled to deduction. It was also submitted
that the amount so set apart in the reserve had resulted in diversion of income
by reason of an overriding title. Their Lordships held that the amount had
reached the hands of the company and inspite of having been set apart by
creating a reserve was still available with the company and therefore could
neither be treated as an expenditure nor ex~luded from computing the income
H of the assessee by application of the doctrine of diversion of income by
GENERAL INSURANCE CORPN. v. C.l.T. [R.C. LAHOTI, J.] 753
reason of an overriding title or obligation. In Colaba Central Co-operative A
Consumers' Wholesale and Retail Stores Ltd 's case (Supra) decided by a
Division Bench of Bombay High Court also the amount in question was set
apart by the society as capital contribution redemption fund. The High Court
having examined the nature of the amount and the accounts held that the
amount so set apart was neither business expenditure nor liable to be excluded
from computation of income by applying the doctrine of diversion of income B
by overriding title. In our opinion, none of the cases has any applicability to
the case at hand. In none of the three cases, the question of determining
applicability of Section 44 and the First Schedule of the Income-tax Act aro~e
for consideration.

To sum up, the amount set apart by General Insurance Corporation for
c
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 computihg
profits and gains of business by including it in 'expenditure not admissible D
under the provisions of Sections 30 to 43A of Income-tax Act' by reference
.... to Rule S(a) of the First Schedule to Income-tax Act, 1961. The question
referred to the High Court should have been answered in affirmative.

- The appeal is allowed. The judgment of the High Court is set aside and
in supersession thereof it is directed that the question referred by the Tribunal
to the High Court shall stand answered in the affirmative, i.e., in favour of the
assessee and against the Revenue. No order as to costs.
E

S.VK Appeal allowed.

.....