1982 PLP 200 (PTD)

(4) ....................................................... (5) (6) ........................................................ (7) Notwithstanding anything to the contrary contained in section 8, 9, 10, 12 or 18, the profits and gains of any business of insurance and the tax payable thereon shall be computed in accordance with the rules contained in the First Schedule to this Act." Rule 6 provides : "6.‑‑‑(1) 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 busi ness The relevant part of the Circular on the basis of which it was held by the Income‑tax Officer that the Respondent has failed to prove that in providing higher percentage of the amount of premia as reserve, greater risks were involved in any of the years under assessment, which appears at page 254 of the Income‑tax Manual, Part II, 1958 Edition, reads as follows :‑‑ "Normally a reserve equal to 40 per cent of the premium income of the expiring year is sufficient provision against all unexpired risks, but if, in any case, it is claimed that on account of the greater risks involved in a particular type of policies, the normal allowance is not sufficient, an aggregate allowance up to, but not in any case exceeding 50 per cent of the premium income may be allowed." Having quoted the relevant provisions, we may first, in order to answer the question as framed, consider the point, 'whether setting aside a certain percentage of the premium income from fire or marine insurance against all unexpired risks is an expenditure within the meaning of section 10 (2) of the income‑tax Act : The word `expenditure' is not defined in the Income‑tax Act, 1922, but it has been considered judicially in a number of cases. We may here refer to Indian Molasses Co. (Private) Ltd. v. Commissioner o Income‑tax, West Bengal ((1959) 37 I T R 66), wherein the Supreme Court of India observed that "spending" in the sense of "paying out or away" of money is the primary meaning of "expenditure". "Expenditure" is thus what is "paid out or away" and is something which is gone irretrievably. This meaning has been followed by a Division Bench of this Court in the Eastern Federal Union Insurance Co. Ltd. v. Commissioner of Income‑tax (Central) (1980 P T D 73). The next point that requires consideration to answer the question under reference is what is meant by the word "reserves". This word came up for consideration before the Supreme Court of Pakistan in the Commissioner of Income‑tax, North Zone, Pakistan v. The Lyallpur Cotton Mills Ltd., Lyallpur (P L D 1960 S C (Pak.) 48) with reference to its use in Schedule II, rule 2 (1) of the Business Profits Tax Act. It was held therein by Amiruddin Ahmad, a. who delivered the opinion of the Court that the word "reserves" should be given its plain and dictionary meaning, i.e. there must be some setting apart of the amount for some special o: general purpose. This was also the meaning assigned to this word by the Dacca High Court in R. Sim & Company Limited v. Commissioner of Income‑tax, East Bengal Dacca (1955) 27 I T R

530. According to Ballentine's Law Dictionary, Third Edition, page 1101, `Reserve' means: "Verb : To appropriate to a particular purpose. To exclude to set a side. To set apart from that which has been granted. To make a reservation." "Noun : In insurance, a sum of money variously computed or estimated, which, with accretions from interest, is set aside, as a fund with which to mature or liquidate, either by payment or reinsurance with other companies, future unaccrued and contingent claims, and .claims accrued but contingent and indefinite as to amounts or time of payment." In view of the meaning of the words "Expenditure" and "reserves", judicially explained, it cannot be said that a portion of the amount of premia kept in reserves for unexpired risks in fire and marine accounts could be treated as expenditure, for, as already noticed "expenditure"' is what is paid out or away or disbursed and is some thing which is gone irretrievably. It is not disputed and cannot be disputed that, that part of premium which is set aside for unexpired risks, is brought back as income after the expiry of the risks and meeting out of loss, if any, arising out of unexpired risks. We would have rested our answer to the question there but we find from the four questions referred to by the Commissioner of Income‑tax and quoted hereinbefore and the questions referred to us in the connected references made by the applicant for subsequent years, that the proper question which arises out of the order is `whether in the facts and circum stances of the case the Tribunal was justified in holding that the entire claim for the reserves was outside the ambit of scrutiny by the Income‑tax Officer as the unexpired risks could not be treated as expenditure within the meaning of rule 6 of the First Schedule to the Income‑tax'. The first point for consideration to answer this question is of the powers of the Income‑tax Officer to question the setting aside of a portion of premium by the assessee as reserves for unexpired risks. Somewhat a similar question but in different form came up for con sideration before this Court in the Eastern Federal Union Insurance Company Ltd. v. Commissioner of Income‑tax. The question was: "Whether in the facts and circumstances of this case, the Tribunal was justified in holding that the reserve for unexpired risk in Fire, Marine and Miscellaneous Accounts could be reduced "to 40 % from 50 % of the premium income as provided for in the account submitted to the Controller of Insurance?" In that case the question was answered in the negative, for, in that case the Tribunal had held that the reserves for unexpired risks in fire; marine, and miscellaneous accounts, could be reduced by the Income‑tax Officer to 40 per cent from 50 per cent of the premium income as provided for in .the accounts submitted to the Controller of Insurance. Reliance was placed on two decisions of Supreme Court of India in Pavan Insurance Company Ltd. v. Commissioner of Income‑tax (Madras) ((1965) 55 I T R 716=1965 P T D 475) and Commissioner of Income‑tax West Bengal v. Calcutta ‑ Hospital & Nursing House Benefits Association Ltd. (AIR 1965 SC 1902=1967PTD 176)). In the last named case it was observed in paragraph 18 of the judgment as follows: "(18) Examining R. 6 in the light of this background, it seems to us that the intention of rule is that 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 entitled to exclude expenditure other than expenditure permissible under the provisions of section 10 of the Act." It may be noted that in the case the Tribunal had taken a view contrary to the view taken in the present case. The reasons given by this Court for the answer to the above‑mentioned question in 1980 P T D 73 can also be given for answer to the question framed by us for no additional arguments were advanced on behalf of the applicant except one, which we will immediately notice. In that case reliance was placed before the Division Bench on the Circular, relevant portion whereof we have already quoted, in support of the argument that the Income tax Officer under that Circular was bound to allow only 40 per cent of the amount of premium for unexpired risks unless it was proved that unexpired risk was greater. It was submitted before us by Mr. Haider Ali Pirzada that the finding of the Income‑tax Officer was that the respondent had failed to make out any case for claiming higher risks as it was not proved that greater risks were involved in any of the years under assessment and it was further submitted that it was stated before the Tribunal that there was no evidence to establish the stand for claiming higher reserves. It was argued by Mr. Haider Ali Pirzada that the instructions contained in Circular were binding on the Income‑tax Officer under section 5, subsection (8) of the Income‑tax Act, 1922, which provides that all officers and persons employed in the execution of the Act shall observe and follow the orders, instructions and directions of the Central Board of Revenue. He also argued that any directions issued by the Central Board of Revenue have the force of law as under section 59 of the Act they have the powers to make the rules for carrying out the purposes of the Act. He placed reliance on The Province of West Pakistan Through the Secretary, Social Welfare and Local Government Department v. Ch. Din Muhammad and others (P L D 1964 S C 21) and Sh. Masud Ahmad v. Pakistan (1976 S C 195). In the first mentioned case it was observed that administrative instruc tions contained in memorandum issued by authority competent to alter or amend rules can be as effective and binding as statutory rules. In the second named case it was observed by the Supreme Court that "this argument is also without any substance. It can scarcely be controverted that the letter is expressed in general terms and having been issued by the appropriate authority namely the President, who it cannot be controverted was a repository of the rule‑making power regulating the terms and conditions of service of the "listed post' holders". So far as the first argument is concerned, it may be stated that section 5 (8) of the Act binds the Income‑tax Officer to follow the orders, instructions and directions of the Central Board of Revenue but such orders, instructions and cannot bind an assessee, if the same are not based or do not rest for their validity on some provision of the Act or the Rule framed thereunder. Since it is not shown that the Central Board of Revenue under any provisions of the Act or the Rules framed thereunder could restrict the provision for keeping aside certain portion of premium income for an unexpired risk to 40 per cent. or in case of a greater risks to 50 per cent., therefore, such restrictions could not have any binding force on the assessee. In fact Kanga and Palkhivala in their book, 'The Law and Practice of Income‑tax', 5th Edition (1958), page 883, expressed the desirability for making the provisions for allowance in respect of unexpired risks in the statute in the following words "It is eminently desirable that provisions for allowance in respect of unexpired risks should be made in the statute itself rather than that the matter should be regulated merely by administrative practice and execu tive instructions." Accordingly, the Indian Legislature in rule 5 (c) in the First Schedule to the Indian Income‑tax Act, 1961 has made provision to the effect that "such amount carried over to a reserve for unexpired risks as may be prescribed in this behalf, shall be allowed as a deduction." Taking up the second arguments that the instructions issued by the Central Board of Revenue have the force of law as they, under section 59 of the Act, have powers to make rules, it may be stated that under section 59 (4) & (5) of the Act the considerations for framing valid rules and their previous publication in the official Gazette. It is not shown that these conditions were fulfilled with regard to the instructions contained in the Circular. We may here refer to Supreme Court decision in Pakistan v. Sheikh Abdul Hamid (PLD1961SC105). In this case it was observed by Cornelius, C. J. as follows:‑ "The conclusion appears to us to have been reached altogether too easily. Office instructions are manifold in their scope and are designed and expressed to be used as guidance for the conduct of the affairs of each Department, and on such instructions it is perfectly pain that no legal right can be founded. On the other hand, a statutory rule has certain visible characteristics which must be looked for and cannot be dispensed with, when the question arises of claiming upon the basis of such rule, a right in law. A rule requires to be expressed with precision, and yet to possess generality so as to be capable of applica tion to a large number of cases. If it leaves scope for discretion, that should be expressly provided for. Ordinarily, it is necessary also that making and promulgation of a rule should be attended by certain for malities e.g. publication in a Government Gazette. It is not enough that there is no express rule relating to a point to confer upon any existing office instruction that there may be, the status and validity of a statutory rule." In the two cases cited by Mr. Haider Ali Pirzada the powers for framing rules .sere not circumscribed by the conditions of their previous publication and the publication in the official Gazette and therefore, the cases are dis tinguishable. We may also here refer to The United Netherlands Navigation Co. Ltd. v. The Commissioner of Income‑tax South Zone (West Pakistan), Karachi (PLD1965SC412), on which reliance was placed by Mr. Ali Athar, wherein the Supreme Court had ruled while considering the instructions issued by the Central Board of Revenue for grant of depreciation allowance while comput ing profits of non‑residents, that instructions had no legal force. From the forgoing we conclude that the Income‑tax Officer is bound to accept balance of profits and disclosed by the accounts submitted by an assessee to the Collector of Insurance under section 15 (1) of the Insurance Act, 1938 and accepted by him, except that the Income‑tax Officer is entitled to exclude expenditure other than expenditure permissible under the pro visions of section 10 of the Act and that the amount set aside as reserves for unexpired risks is not "expenditure" within the meaning of rule 6 of the First Schedule and section 10 of the Income‑tax Act. We would accordingly answer the question reframed by us in the affirmative. Order accordingly.