GENERAL INSURANCE CORPORATION OF INDIA vs. COMMISSIONER OF INCOME TAX BOMBAY

CIVIL APPEAL No. 3283/1998Supreme Court1999 INSC 43321 September 1999Bench: 2 JudgesAuthor: S. RAJENDRA BABU, R.C. LAHOTI GENERAL INSURANCE CORPORATION OF INDIA12 pages
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What did the Supreme Court hold?

The Tribunal held that the amount set apart by the assessee for redemption of preference shares could not be treated as expenditure. It is neither an expenditure nor an allowance covered under Sections 30 to 43A of the Income Tax Act, 1961. Consequently, the question of its admissibility under Rule 5(a) of the First Schedule does not arise, and it could not have been added back by the assessing authority. While Rule 2(2)(a) of the GIB Rules permits debiting this amount to the profit and loss account, this rule provides an accounting method for the purpose of the Insurance Act and does not alter the basic character of the amount as not being expenditure in a commercial sense. The Tribunal noted that accepting the High Court's view would create a conflict between the GIB Rules and the Income Tax Act. Section 44 of the Income Tax Act, with its non-obstante clause, governs the computation of taxable income for insurance business, and the figures in accounts prepared according to the First Schedule are binding on the assessing officer. The appeal was allowed, and the High Court's judgment was set aside.

What were the facts?

The assessee, General Insurance Corporation of India, a wholly Government-owned entity, debited an amount set apart for the redemption of preference shares to its profit and loss account. This debit was made in accordance with Rule 2(2)(a) of the General Insurance Business (Nationalisation) Rules, 1973. The Income Tax Officer treated this amount as revenue expenditure and added it back to the assessee's income. The Appellate Assistant Commissioner and the Income Tax Appellate Tribunal held that the amount was not expenditure. However, the High Court, on reference, ruled in favour of the Revenue. The appeal is against this High Court judgment.

What were the issues?

1. Whether the amount set apart by the assessee for the redemption of preference shares can be treated as expenditure under the Income Tax Act, 1961, specifically in relation to Sections 30 to 43A and Rule 5(a) of the First Schedule. - Assessee's contention: The amount is not an expenditure and therefore cannot be added back by the assessing authority. - Revenue's contention: The amount is revenue expenditure as per Rule 2(2)(a) of the GIB Rules and is thus admissible for addition back. 2. Whether Rule 2(2)(a) of the General Insurance Business (Nationalisation) Rules, 1973, which permits debiting the amount set apart for redemption of preference shares to the profit and loss account, can override the provisions of the Income Tax Act, 1961, particularly Section 44 and the First Schedule. - Assessee's contention: The GIB Rules do not alter the fundamental character of the amount as not being expenditure for the purposes of the Income Tax Act. There is no conflict if interpreted harmoniously. - Revenue's contention: Rule 2(2)(a) of the GIB Rules mandates treating the amount as expenditure, and this should be followed for income computation.

Which sections of the Income-tax Act were involved?

Section 44

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A GENERAL INSURANCE CORPORATION OF INDIA v. COMMISSIONER OF INCOME TAX BOMBAY SEPTEMBER 21, 1999 B (S. RAJENDRA BABU AND R.C. LAHOTI, JJ.] Income Tax Act, 1961-Ss. 30 to 43A, 44 read with Rule 5(a) of the First Schedule-Insurance Company-Amount set apart for redemption of preference shares-Debited to profit and loss account-Whether amounts to C expenditure-Held, No-General Insurance Business (Nationalisation) Rules, 1973-Rule 2(2) (a)-Object of Interpretation of statutes Rule of Harmonius Construction-Two provisions contained in two D enactments having different purposes to achieve-Held, rule of harmonious construction would not sustain any view creating conflict between the two provisions.

Non-obstente clause in S.44-Held, not only overrides the provisions E of the Act but also has overriding effect over the provisions of other enactments-Income Tax Act, 1961-S.44 . ..

Appellant-assessee was an Insurance company wholly owned by Central Government. The Central Government contributed to the Capital of the appellant-assessee in the form of preference shares and equity shares. Rule F 2(2) (a) of the General Insurance Business (Nationalisation) Rules, 1973 prov

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