1985 PLP 847 (PTD)

CHANDURKAR, J.‑In this reference at the instance of the assessee, the following two questions have been referred to this Court under section 256 (1) 'the Income‑tax Act, 1961 : "(1) Whether on the facts and in the circumstances of the case and on a proper construction of the First Schedule read with section 44 of the Income‑tax Act, 1961, the assessee could claim that a sum of Rs. 21,26,932 representing the appreciation in value of some of its foreign assets consequent on the devaluation of the rupee was not assessable to income‑tax. (2) If the assessee could so claim, whether this amount of Rs. 21,26,932 was on the facts and in the circumstances of the case liable to tax as income‑tax under the Income‑tax Act, 1961 ?"

2. The assessee‑Company, The Oriental Fire and General Insurance Company Limited. Bombay, carries on business of general insurance. The relevant assessment year is 1967‑68 for which the previous year was the slender year 1966. In the profit and loss account for 1966, an entry with regard to Rs. 21,26,932 was as follows : "Profit on Exchange (net) see note 3 ..... Rs. 21,26,932" Note 3 referred to in the entry reads as follows : "Incorporated in the accounts are the figures of the company's foreign branches, agencies, treaties etc., at the pre‑devaluation rate in respect of transactions effected upto 5th June, 1966. The assets and liabilities thereof (except estimated liability for outstanding claims) at the close of business on 5th June, 1966 have been converted at the new rate of exchange. Estimated Liability for outstanding claims of the foreign business as on 5th June, 1966 was not ascertained. The amount of outstanding claims in respect of the foreign business as at 31st December, 1965 was converted at the new rate of exchange." While making computation of income of the assessment year in question the assessee deducted the abovementioned sum of Rs. 21,26,932 on the ground that it did not represent income as there was no physical transfer of funds to him. The Income‑tax Officer held that the gain on devaluation of currency was profit which arose‑ in the course of business carried on by the assessee and, therefore, such gain could not be excluded from the income.

3. In appeal before the Appellate Assistant Commissioner, details of the assets and liabilities were furnished to show that the appreciation was notional and unrealised and that the funds had never been transferred to India. It was also urged before the Appellate Assistant Commissioner that there were certain assets in Ceylon, Burma, and Pakistan and there was no possibility of repatriation of those funds lying in these countries owing to restriction on remittances. The case of the assessee also was that the assessee had stopped doing business in Burma and Ceylon in 1964 and in Pakistan in 1965 and that since the assets were immobilised in these countries, any appreciation in the value of such assets could not constitute the income of the assessee.

4. Relying on the decision of the Supreme Court in Commissioner of Income‑tax, Mysore v. Canara Bank Ltd. (1967) 63 I T R 328 : A I R 1967 S C 417) and the decision of the Bombay High Court in Commissioner of Income‑tax, Bombay v. Mogul Line Ltd., Bombay (1962) 46 IT R 590) the Appellate Assistant Commissioner held that the assessee was entitled to the relief claimed in respect of the assets in Burma, Ceylon and Pakistan; and directed the Income‑tax Officer to exclude the amounts in ques tion. The figures relating to Burma, Ceylon and Pakistan were as follows : Country In the respective currencies In Rupees Burma (Gain on (Exchange) Kyats 3,41,715.11 5,36,492.73 Ceylon ‑‑do‑ C. Rs. 1,52,204,15 1,38,960.52 Pakistan (Loss on Exchange) P. Rs. 8,894.70 13,964.68 The operative order of the Appellate Assistant Commissioner directed that the total income of the assessee should be reduced by Rs. 23,73,819 which included the amount of Rs. 21,26,932 in question.

5. The Department filed appeal against the order of the Appellate Assistant Commissioner and the contention raised was that the scheme of taxing profits of insurance business is distinct and separate and that the Income‑tax Officer could not go beyond the limits of the Rules prescribed in the First Schedule read with section 44 of the Income‑tax Act, 1961. This contention was accepted by the Tribunal which held that the Income‑tax Officer could not travel beyond the annual accounts and treat some amounts as balance of profits other than the balance of profits disclosed by the annual accounts furnished by the assessee under the Insurance Act. The order of the Appellate Assistant Commissioner was, thus, set aside and the order of the Income‑tax Officer was restored. The correctness of this order of the Tribunal is put in issue by the questions raised at the instance of the assessee in this reference.

6. Mr. Munim appearing on behalf of the assessee has contended that the surplus arising as a result of conversion of foreign currency into Indian currency is an accretion to fixed capital and not liable to tax and further that an entry in the balance‑sheet of the assessee was not conclusive. According to the learned counsel, taxability could not be decided solely on the basis of the entry made by the assessee. His further contention was that the assessee- Company did not carry on any business in Burma, Ceylon and Pakistan in the relevant assessment year and if there was any appreciation in the value of the assets of the company in those countries, the appreciation could not be treated ' as profits because it did not arise in the course of any trading operation. The learned counsel for the assessee has contended that neither the provisions of section 44 of the Income‑tax Act, 1961 nor the provisions of Rule 5 in the Schedule prevented the Income‑tax Officer trom truly ascertaining the profits of the insurance business of the assessee. In other words, the contention was that, the Income‑tax Officer should not have treated the amount in question as profits, even though that amount was expressly shown as profits sin the accounts submitted to the Controller of Insurance, under the Income‑tax Act.

7. The question, which has to be decided, in this case is whether it is open to the Income‑tax Officer to go behind the accounts submitted by the Insurance Company‑assessee in which the amount of Rs. 21,26,932 is expressly shown in the profit and loss account as "profit on exchange". In that context, the learned counsel for the assessee has placed reliance on this Court in Commissioner of Income‑tax, Bombay City II, Bombay v. New India Assur ance Co. Ltd. (1969) 71I T R 761). In that decision, which arose under the provisions of the Income‑tax Act, 1922, in which section 10(7) was the provision corresponding to section 44 of the Income‑tax Act, 1961 was construed and it was held that when rule 6 of the Schedule to the 1922 Act provided that "profits and gains of any business of insurance (other than Life Insurance) shall be taken to be the balance of the profits disclosed ", the words "taken to be" would suggest that the tax officer is bound to accept the balance of the profits disclosed by the annual accounts, but it is not the same thing as saying that it shall be deemed to be profits and gains of any business of insurance, The Division Bench held that the provisions of section 10(7) of the 1922 Act and rule 6 in Schedule do not prevent the Income‑tax Officer from granting exemptions to which the assessee would be entitled and that there is nothing to indicate in subsection (7) of section 10 that the exemption under sections 15‑B and 15‑C and the exemption under Notification No. 39 issued under section 16 or the deduction under section 4 (1) cannot be allowed . It was pointed out by the learned counsel for the assessee that this decision was followed by another Division Bench of this Court, to which one of us was a party, in Life Insurance Corporation of India Bombay v. Commissioner of Income‑tax Bombay City III (1978) 115 I T R 45 ; 1978 Tax L R 1241') in which it was held that the deductions which were claimed by the assessee whose assessment is governed by section 44 read with rule 2 of the First Schedule to the Income‑tax Act, 1961 were allowable,

8. Now at the outset we must refer to the provisions of section 44 of the Income‑tax Act, 1961 which reads as follows : "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 insur ance, including any such business carried on by a mutual insurance company or by a co‑operative society, shall be computed in accordance with the rules contained in the First Schedule." If we go to the First Schedule, is deals with two categories of Insurance business ; life insurance business, and other insurance business. The mode of computation of profits or gains of life insurance business is dealt with by rules 1 to

4. We are concerned with rule 5 which deals with computation of profits and gains of other insurance business. This Rule reads as follows : 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 (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 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) any amount either written off or reserved in the accounts to meet depriciation of or loss on the realisation of investments shall be allowed as a deduction, and any sums taken credit for in the accounts on account of appreciation of or gains on the realisation of investments shall' be treated as part of the profits and gains : Provided that the Income‑tax Officer is satisfied about the reasonableness of the amount written off or reserved in the accounts, as the case may be, to meet depreciation of or loss on the realisation of investments ; (c) such amount carried over to a reserve for unexpired risks as may be prescribed in this behalf shall be allowed as a deduction. On its plain terms, section 44 mandatorily requires that the profits and gains of any business of insurance shall be computed in accordance with the Rules contained in the First Schedule In its earlier part, section 44 has a non‑obstante clause and the effect of the non‑obstante clause is that in the case of business of insurance, provisions relating to computation of income which is chargeable under the head Interest on securities. Income from house property, capital gains and income from other sources will not apply but‑ the profits and gains of business of insurance will have to be computed only in accordance with the Rules contained in the First Schedule. Similarly, the provisions of section 199 and in sections 28 to 43‑A can also not be looked into for the purposes of computation of the profits and gains of business of insurance. The bare reading of rule 5 will show that it mandatorily requires that the balance of profits disclosed by the annual accounts, copies of which are required under the Insurance Act, 1938 to be furnished to the Controller of Insurance shall be ‑taken to be profits and gains of business of insurance other than the life insurance. A limited scope for adjustment of the balance of profits as disclosed in the annual accounts is permissible and could be made on the Income‑tax Officer as indicated in clauses (a), (b) and (c) of rule

5. None of these clauses are relevant for the purposes of the present case. Now it is difficult to accept the arguments of the learned counsel for the assessee that though the amount of Rs. 21,26,932 is shown as a part of the assessee in the annual accounts which are submitted to the Controller of Insurance as required by section 15 of the Insurance Act, that amount should not really be treated as part of the profits. Such an argument would run counter to the provisions of rule 5.

9. The provisions of the First Schedule an rule 5 in the instant case being the only mode prescribed by the Legislature for determining profits and gains of business of insurance other than life insurance and the mode being to look at the balance of profits disclosed by the annual accounts, conies of which are required under the Insurance Act, 1938 to be furnished to the Controller of Insurance, and the. permissible adjustments not being relevant in the instant case no power can be found in the Income‑tax Act under the provisions of the Act to meddle with the balance of profits disclosed by the annual accounts. The question as to whether any particular amount is really profit or not is wholly irrelevant in a case to which rule 5 applies because the criterion for determining the profits and gains of business of insurance other than life insurance is exclusively laid down in rule

5. This has nothing to do with the nature of the exemptions which were the subject- matter of the decision in New India Assurance Company's case or the Life Insurance Corporation's case. In these cases exemptions were claimed under certain provisions of the Income‑tax Act. It is not the case of the assessee that though the amount of Rs. 21 lacs and odd is in a part of the profits of the assessee‑Company, that amount is liable to be excluded for the purpose of taxability as being exempt under any specific provisions of the Income‑tax Act.

10. It may be pointed out that in Life Insurance Corporation of India v. Commissioner of Income‑tax, Delhi and Rajasthan (1964) 51 I T R 773: A I R 1964 S C 1403), the Supreme Court has i down that the assessment of profits of an insurance business, is completely governed by the Rules in the Indian Income‑tax Act, 1922 and that the income‑tax Officer has no power to do anything not contained in it and there io general right to correct any error in the case of insurance business. is view was reiterated in Pandyan Insurance Co. Ltd. v. Commissioner of income‑tax, Madras (1965) 55 I T R 716 : A I R 1965 S C 1004). In New Asiatic Insurance Co. Ltd. v. Commissioner Income‑tax (1973) 90 I T R 243 : 1973 Tax L R 127), a Division Bench of the Delhi High Court took the view a the character of the entries in the annual accounts furnished by an assessee-Ins urance insurer to the Controller of Insurance cannot be gone into and the accounts as accepted by the Controller must form the basis of assessment in case of insurers who fall within the ambit of the rules of the Schedule to Income‑tax Act, 1922. The question in that case was whether the counts credited by the assessee‑Insurance Company to its profit and loss account for the relevant year, by transfers from the dividend equalisation id and the general reserve account could be taken into consideration in-putting its profits and the Division Bench held that the question must be answered in the affirmative. After referring to the provisions of section 10(7) the Income‑tax Act, 1922 which corresponded to section 4 of the Income-tax Act, the Division Bench observed as follows (at p. 128) "It is on account of this wide powers conferred on the Controller of Insurance and the sanctity that is attached to the returns accepted by him that provision has been made in the Income‑tax Act preclud ing any further investigation and the Income‑tax Officer is required to accept subject to any adjustment he may make so as to exclude from it any expenditure other than expenditure which may under the provi sions of section 10 of the Income‑tax Act be allowed in computing the profits and gains of business, the accounts that have been submitted to the Controller of Insurance. Since that statute so provides, once the annual statements of accounts have been submitted by the assessee -Insurance Company, and the same been accepted by the Controller of Insurance, the assessee cannot be heard to argue that the revenue receipts as shown in the statement of accounts were really not revenue receipts but had some other character." This Court has also taken the same view in South India Insurance Company Ltd. v. Commissioner of Income‑tax, Bombay City I (1977) 106 I T R 969) in which dealing with section 10 (7) and rules 3 and 6 in the Schedule to the 1922 Act, the Division Bench held that the intention of rules 3 and 6 of the Schedule the Indian Income‑tax Act, 1922 was that the balance of profits as disclosed the accounts submitted to the Controller of Insurance shall be accepted by binding on the Income‑tax Officer and it would not be open to the tax authorities to go behind the balance of profits disclosed by the annual accounts filed before the Controller of Insurance except to make any adjustment so as to exclude from it any expenditure other than expenditure which may under section 10 be allowed in computing the profits and gains of a business.

11. It would, therefore, not be possible to accept the argument of the, learned counsel for the assessee that the sum of Rs. 21,26,932 should not be treated as a part of the profits of the assessee.

12. It was then argued that at least the appreciation of the assets in Burma and Ceylon should be excluded from the computation of profits. This argument must be rejected on two grounds. Firstly it was never argued before the Tribunal that in any case the appreciation in the value of the assets in Burma and Ceylon should be excluded from the profits shown in the Annual accounts. It is no doubt true that in the statement of the case a reference to the figures of the appreciation of the assets in Burma and Ceylon has been made but the reference made is in the statement of the case in the course of recital of facts in the appeal before the Appellate Assistant Commissioner. The Tribunal was never called upon to deal with the question as to whether these amounts should be excluded from the profits of the assessee‑Company. We do not know what view the Tribunal would have taken on the question and it was not permissible for the assessee now to agitate the question that the assets were blocked or frozen in Burma and Ceylon and they had ceased to be stock‑in‑trade,

13. The second and more substantial ground on which this contention will have to be rejected is the view which we have taken earlier that once certain amounts have been shown as profits in the annual accounts it is not open to the Income‑tax Officer to go behind those figures. We are not, therefore, in a position to accept the alternative submission that at least the amount of appreciation of assets in Burma and Ceylon should be excluded from the profits of Rs. 21,26,932.

14. Consequently, in the view, which we have taken, question No. 1 has to be answered in the negative and question No. 2 does not arise. The assessee to pay costs of the reference. M. B. A. Reference answered accordingly.