Law: Income Tax Act, 1961

Section: 10(7)

JUDGMENT V.S. Desai, J.-The question which is raised on this reference relates to the amounts of Rs. 29,615 and Rs. 44,920 paid by the assessee to its policy-holders in the calendar years 1956 and 1957 respectively. The assessee is a co-operative insurance company, carrying on general insurance business. During the assessment years 1957-58 and 1958-59, the relevant previous years for which were the calendar years 1956 and 1957, respectively, the assessee paid by way of bonus to certain policyholders Rs. 29,615 in the first year, and Rs. 44,920 in the second year. These payments were made under by-law No. 52 of the by-laws of the company. This by-law provided, so far as material for our purpose, as follows : "52. The profits shall be allocated as under carrying at least ten per cent, thereof to the statutory reserve fund which shall be invested or utilised as provided in section 37 of the Bombay Co-operative Societies Act .... (c) such percentage not exceeding fifty per cent, as may be deemed proper for payment of profits to policyholders." Under this by-law, the bonus was declared at the rate of ten per cent, on the net premium paid by the policyholder on his policy for the year 1956, and at the rate of twelve per cent, on the policies for the year 1957. The warrants for the bonus of 1956 were issued on the 1st July, 1957, and those for the year 1957 on the 1st July, 1958. The bonus payable was subject to certain conditions. These conditions were that the premium paid on the policy must be more than Rs. 5; that there should have been no claim made on the policy ; that the policy must have been issued during the year in which the bonus was declared ; and that bonus would be payable only if the policy was renewed on expiration and at the option of the policy-holder the bonus amount would be creditable towards the premium under the renewed policy. In the company's accounts, the amounts paid by way of bonus to the policyholders were not debited to the revenue accounts. There was, however, a provision made on an estimate basis for the payment of the bonus in the profit and loss appropriation account in each of the years. During the assessments for the years 1957-58…

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