Law:

Section:

Rule of Schedule I to the Income-tax Act, 1961 read with rule 3 of Schedule to the Indian Income-tax Act, 1922] - Life insurance business - Deductions - Whether application of rule 3(a) would only arise when some benefit was conferred upon policy-holders and benefit might take shape of amounts actually paid or reserved for them or expended on their account - Held, yes - Whether where amount, by reason of statutory obligation, went to life fund, to make good deficit of earlier years, it could not be said to be reserved for policy-holders within meaning of rule 3(a) and, hence, no deduction could be allowed on such sum - Held, yes FACTS The assessee-company was in life insurance business. According to acturial valuation as on 31-12-1943, there was a deficit of Rs. 3,56,054. The actuarial valuation as on 31-12-1946 showed a surplus of Rs. 37,429 after the deficit was made good. Out of this surplus, the assessee carried forward Rs. 34,622 for the exclusive benefit of the policy holders as policy holders Bonus Reserve Funds. Half of this amount claimed as deduction was allowed. The assessee claimed that it was also entitled to a deduction with regard to the sum of Rs. 3,56,054 and what was urged was that this amount had to be credited to the Life Insurance Fund, that it constituted a statutory reserve for the policyholders, and, therefore, this amount must be looked upon for the purpose of rule 3(a) as an amount reserved for the policy-holders. The claim was disallowed. On reference : HELD From rule 3(a) it was clear that the object of the Legislature in enacting this rule was to induce a life insurance company to reserve as much as possible out of the actual surplus amounts for the benefit of policy-holders and not to distribute it as dividend to the shareholders. Therefore, the application of this rule would only arise when some benefit was conferred upon the policy-holder. The benefit might take the shape of amounts actually paid or reserved for them or expended on their account. But there must be a benefit which is enjoyed by the policy-holder. On the facts of the instant case it was clear that with regard to this sum of Rs. 3,56,064 no benefit whatever was…

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