COMMISSIONER OF INCOME TAX, NEW DELHI versus ORIENTAL FIRE & GENERAL INSURANCE CO.LTD.

Citation: [2007] 7 S.C.R. 462 · Decided: 18-05-2007 · Supreme Court of India · Bench: S.B. SINHA · Disposal: Disposed off

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Judgment (excerpt)

:. 
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: 
c 
S.44 and First Schedule, Rule 5(a)-Insurance company-Deductions-
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 
D the assessee insurance company is entitled to deductions in respect of the 
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 
E of the Income Tax Act, 1961 for the purpose of computation of incoOle of an 
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 
G 
(c) a revenue account; at the expiry of each calendar year wherefor special 
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] 
V azir Sultan Tobacco Co. Ltd, Hyderabad etc. v. Commissioner of Income 
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

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