COMMISSIONER OF INCOME-TAX CENTRAL, KARACHI vs MERCANTILE FIRE AND CENTRAL INSURANCE CO. LTD

1. ' SALEEM AKHTAR, J-The respondent is a company engaged in fire and general insurance business.

2. For the assessm ent years 1972-73 and 1973-74 the Income Tax Officer observed credit balances of Rs,59,185 and Rs,82,754 outstanding for more than three years. He treated them as assessces' income for the respective years under Section 10 (2A)' of the Income Tax Act. The assbssee challenged the taxability of credit standing unpaid for more than three years. In appeal the Tribunal held that in view of the provisions of Section 10 (7), Section 10 (2A) could not be attracted to the case of Insurance Companies.

3. ' In respect of years 1972-73 and 1973-74 the respondents claimed management expenses in excess of Rule 40 of the Insurance Rules and were disallowed by the Income-tax Officer. However, in appeal the Tribunal directed that the same should be allowed. For the years 1972-73, 1973-74 and 1974-75 the respondent had made a number of provisions for taxation in its accounts. These provisions were disallowed being inadmissible expenditure under Section 10 of the Income-tax Act.

4. The learned Tribunal, however, allowed the same. On Commissioner's application the following questions have been referred:

(1) Whether, on the facts and in the circumstances of the case, the Income-Tax Appellate Tribunal was right in ordering deletion of the addback of Rs,1,23,856 (Rs,76,692 and Rs,81,360 for the years 1973-74 and 1974-75) claimed by the assessee-company on account of provision for taxation or taxation reserve?

(2) Whether, on the facts and in the circumstances of the case the learned Appellate Tribunal is justified in deleting the addition of outstanding trading liability of Rs,59,185 (Rs, 82,754 for the year 1973-74) under Section 10 (2A) of the Income-Tax Act on the ground that Section 10 is not applicable in the case?

5. The first question was considered in I. T. C. No,326/74 Commissioner of Income-tax v. New Jubilee Insurance Co. Ltd. In which after exhaustive discussion it was answered in the affirmative. The learned counsel for the Department has repeated the same arguments and we have no hesitation in following the Judgment quoted above, as no valid reason to disagree with it has been advanced. We, therefore, answer this .

6. ' So far second question is concerned Mr. Shaikh Haider, the learned counsel for the Department, has contended that in view of rule 6 power is given for adjustment of expenditure and therefore, 'section 10 (2A) will apply. Mr. Sirajul Haque the learned counsel for the respondent has pointed out that by section 10(7) applicability of Section 10 to the Insurance Companies is completely ousted and therefore, the deletion was proper and valid. Section 10 (7) reads as follows: "(7) Notwithstanding anything to the contrary contained in sections 8, 9, 10, 12 and 18 the profits and gains of any business of insurance and the tax payable thereon shall he computed in accordance with rules contained in the First Schedule to this Act."

7. ' The First Schedule mentioned in section 10(7) provides different provisions for Life. Insurance business and general (non-life) insurance business. Rule 6 deals with the computation of profits and gains of non-life insurance business. Rule 6 (1) reads as follows:- "(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, 1928, 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 he allowed for computing the profits and gains of a business. Profits and Losses on the realization of investments, and depreciation and appreciation of the value of investments shall be dealt with as provided in rule 3 for the business of life insurance."

8. This rule provides that the Income-tax Officer has to assess on the basis of the balance disclosed by the annual accounts required to be prepared under the Insurance Act. Section 10 has been applied only for the purpose of excluding expenditure other than which may under section 10 "be allowed for computing the profits and gains of the business". This applicability is for limited purpose and the provisions of Section 10 (2A) cannot be applied under this garb. In this regard reference can be made to C.I.T. v. Alpha Insurance Co. Ltd., Karachi PLD 1981 SC 293 where after an exhaustive discussion it was observed as follows:- "Rules contained in the First Schedule to the Income-tax Act completely, exhaustively and to the exclusion of every other provision not expressly incorporated, govern the computation of profits and gains of insurance business."

9. ' The provisions of section 10 arc not applicable to the assessee as discussed above therefore, our answer to this question is in the affirmative.