LexTHE COMMISSIONER OF EXCESS PROFITS TAX, WEST BENGAL versus THE RUBY GENERAL INSURANCE CO., LTD.
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1002 SUPREME COURT REPORTS [1957] THE COMMISSIONER OF EXCESS PROFITS TAX, WEST BENGAL ti. THE RUBY GENERAL INSURANCE CO., LTD. (BHAGWATI, VENKATARAMA AYYAR and J. L. KAPUR JJ.) Excess Profits Tax-Insurance company-Premium receipts- R~scrve for unexpired risks on pending policies-Whether "accruing liability''-iVhether could be deducted as a debt-Excess Profits Tax Act, 1940 (XV of 1940), SS. 4, 6, rr. I, 2 of Sch. Il-Indian Income-tax Act, 1922 (XI of 1922), s. 10(7), r. 6 of the Sch. The respondent was a company carrying on life, fire, marine anJ general insurance business, and the question for detennina- tion related to the assessment of excess profits tax on its income other th:'!n life insurance. The n1ethod adopted by the company with respect to fire insurance policies was that while the premiums received were all of them included in the assets of the year, a portion thereof, 40 per cent., was treated as reserye for unexpired risks on the outstanding policies, and sho\\-·n as a liability. The appellant; the Co1nmissioner for Excess Profits 'fax, claimed that the sum set apart as reserve for unexpired risks was liable to be deducted under r. 2 of Sch. II of the Excess Profits Tax Act, 1940, fron1 out of the capital en1ployed in business for that year. The respondent, \Vhile maintaining that all the premiu1ns received must be treated as capital under r. 1 of Sch. II to the Act contended that the provision for unexpired risks was only a contingent liability and that a liability under a contract of insurance whereunder risk had not .materialised could not be hcl<l to be a debt and was therefore not an accruing liability within r. 2 of Sch. II to the Act. Held, that. the reserve liability for unexpired risk, unlike borrowed money and debts, cannot be treated as part of the real trading assets of the business so as to have an effect on the running of the business or the earning of profits, and consequently, as it cannot be included as capital under r. 1, it cannot be deducted as an .J.ccruing liability v,rithin r. 2 of Sch. II of the Excess Profits Tax .-\ct, 1940. Sun lnsun;nce Office Ra::i;!1c:y of Peru Ltd. '" gu1sii.e<l. v. Clad(, (1912) A.C. 443 and Southern O.vm, (1956) 2 All E.R. 728, distin- !/urthrrn /l/;;:;:h1iu11i Co., Ltd. v. In!and Revenue Cor;imis- sionc:·s, (19~6) /\ll E.R. 54\i agd Inland Reve1iue Commissioners v. N o,them Aluminium Co., Ltd. (1947) I All E. R. 608, relied on. .. 1 S.C.R. SUPREME COURT REPORTS 1003 CrvrL APPELLATE J URISDIGTION : Civil Appeal No. 12 of 1955. Appeal from the judgment and decree <lated Septem- ber 10, 1953, of the Calcutta High Court (Original Side) in I. T. Refrrcnce No. 8 of 1947. C. K. Daplitary, Solici:'Or-General for India, G. N. Joshi and R. H. Dliebar, for the appellant. K. P. Khaitan, Ramesluvar Nath. S. N. Andley and /. B. Dadaclianji, for the respondents. 1957. April 24. The Judgment of the Court was deli\"ered by VENKATAR.u.1A AIYAR J.-This appeal raises a question of importance as to whether amounts shown by an insurance company as reserves for unexpired risks on pending policies are liable to be deducted under r. 2 of Sch. II to the Excess Profits Tax Act (XV of 1940) hereinafter referred to as the Act. The respondent is a company carrying on life, fire, marine and general insurance business, and the present dispute relates to the assessment of excess profits tax on its income from business other than lifr insurance for the chargeable accounting periods ending December 31, 1940, and December 31, 1941. To appreciate the contentions raised. it is necessari; to state that the policies of insurance with which these proceedings are concerned, are, unlike life insurance policies, issued in general for short periods or rid hoc in relation to a specified voyage or event. To take the most important of them, fire insurance policies, they are issued normally for one year, and the whole of the premium due thereon is received when the policies :ire actually issued. In any given year, while the premiums due on the policies would ha\·e been n:cei\"ed in full, the risks CO\"ered by them would han· run only in part and :i p:irt will be outstanding for the next year. The companies have to prep1re annual statements of profit and loss for the purpose of ascertaining their profits and distributing their di\"
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