Desai, J.:— This is a consolidated reference in respect of two assessment years. Certain questions are referred at the instance of the Commissioner and a common question for the two assessment years at the instance of the assessee. For the first of the two assessment years we are governed by the Indian I.T Act, 1922. For the second year we are governed by the I.T Act, 1961, but the change in the statutory provisions applicable makes no difference to the questions referred to us except that the reference will be under s. 66(1) of the Indian I.T Act, 1922, for the first year and under s. 256(1) of the I.T Act, 1961, for the later year. The questions for the respective years are found in para. 9 of the statement of case, but we propose to give them fresh numbers so that they may be more easily answered, since we are informed that, as far as this court is concerned, the questions referred at the instance of the Commissioner are concluded. As far as the common question for the two years at the instance of the asses-see is concerned, the assessee does not press the same for the reasons which we will indicate later on.
2. As renumbered by us, the following questions are referred to us:
1. For the assessment year 1961–62 (at the instance of the CIT):
“Whether, on the facts and in the circumstances of the case, was the assessee-company, carrying on insurance business other than life insurance, entitled to the grant of rebate under sec. 15B(2) of the Indian I.T Act, 1922, for the assessment year 1961–62, in respect of a donation of Rs. 21,000 made by it to Shri Somani Trust?”
2. For the assessment year 1962–63 (at the instance of the CIT):
“Whether, on the facts and in the circumstances of the case, was the assessee-company, carrying on insurance business other than life insurance business, entitled to the allowance of rebate on dividend income of Rs. 1,86,292 for the assessment year 1962–63?”
3. For the assessment year 1962–63 (at the instance of the CIT):
“Whether, on the facts and in the circumstances of the case, was the assessee-company, carrying on insurance business, entitled to an allowance of rebate u/ss. 85 and 101(2) of the Income-tax Act, 1961, in respect of dividends of Rs. 2,585 from Tata Engineering and Locomotive Co. Ltd. and Rs. 9,992 from Orissa Cement Ltd.?”
4. For the assessment year 1962–63 (at the instance of the CIT)—:
“If the answer to the first two questions is in the affirmative and in favour of the assessee-company, then, is the assessee-company entitled to such rebates on gross dividends or on net dividends after the deduction of the costs relating thereto?”
5. For the assessment years 1961–62 and 1962–63 (at the instance of the assessee):
“Whether, on the facts and in the circumstances of the case, was the assessee, carrying on insurance business other than life insurance, entitled to a deduction of entertainment expenses incurred by it over and above Rs. 5,000 for the assessment years 1961–62 and 1962–63?”
3. As stated by the Tribunal in para. 3 of the statement of case, questions Nos. 1 to 4 pertain to rebate on corporation tax, donation to Shri Somani Trust, rebate on dividends received by the assessee from Tata Engineering and Locomotive Co. Ltd. and from Orissa Cement Ltd., and rebate being allowed on gross dividends without deduction of expenses allowed subject to verification on the footing indicated in para. 7, and this approach of the Tribunal is borne out admittedly by the decision of this High Court in CIT v. New India Assurance Co. Ltd., [1969] 71 ITR 761. It has been held in the said decision that computation of the profits and gains of general insurance business is covered by r. 6 in the Schedule, and the words “the tax payable thereon shall be computed in accordance with the rules contained in the Schedule to this Act”, which occur in s. 10(7), cannot be taken to mean that the exemptions under ss. 15B and 15C and under the Notification No. 39 issued under s. 60 or the deduction under s. 4(1) cannot be allowed or are in any way excluded from operation.
4. As far as questions Nos. 1, 2 and 3 are concerned, therefore, as far as this court is concerned, the answers will have to be in favour of the assessee. It may be mentioned that, as far as question No. 1 is concerned, the answer to it will have to be given in favour of the assessee is also borne out by the decision of the Delhi High Court in Lakshmi Insurance Co. Ltd. v. CIT, [1969] 72 ITR 474, and by a later decision of the Bombay High Court in South India Insurance Company Ltd. v. CIT, [1977] 106 ITR 969.
5. As far as question No. 2 is concerned, on general principles enunciated in New India Assurance Company's case, [1969] 71 ITR 761 (Bom), the answer will have to be in favour of the assessee, but the precise point was considered and decided in favour of the assessee by the Madras High Court in CIT v. Madras Motor & General Insurance Co. Ltd., [1975] 99 ITR 243.
6. As far as question No. 3 is concerned, the answer to it is directly within the compass of the decision in New India Assurance Company's case, [1969] 71 ITR 761 (Bom).
7. As far as question No. 4 is concerned, our attention has been drawn to two decisions of this High Court given in income-tax applications, viz. Income-tax Application No. 97 of 1975 (Commissioner Of Income-Tax, Bombay City Iii, Bombay v. B.M Grover) decided on November 17, 1975 (since reported in [1978] 115 ITR 885 (Bom)) and Income-tax Application No. 72 of 1976 (CIT v. United General Trust P. Ltd.) decided on 30th November, 1976 (unreported) (since printed as appendix at page 664 infra), where after referring to the decision of this court in New Great Insurance Co.'s case, [1973] 90 ITR 348 (Bom), it has been held that the deduction has to be computed on the gross dividend before deduction of costs or expenses relating thereto. In view of these decisions and the earlier decisions, question No. 4 is also required to be answered in favour of the assessee.
8. As far as question No. 5 is concerned, which is at the instance of the assessee for both the assessment years, the provision, both in the Act of 1922 and also in the Act of 1961, which is relevant for our purposes, i.e, for profits up to rupees ten lakhs, is identical. The limit prescribed on the first rupees ten lakhs of the profits and gains of the business as computed in accordance with the statutory provision is 1% of the profits or Rs. 5,000, whichever is higher. Mr. Kolah states that the profits or gains of the assessee for the two years as properly computed would be about rupees five lakhs or a little less, so that he is not pressing the question. If, however, the profits of an assessee were to exceed rupees five lakhs, but less than rupees ten lakhs, the assessee would be entitled to deduction by way of entertainment expenses of 1% of such profits which 1% may exceed Rs. 5,000 and to that extent the observation to be found in para. 6 of the appellate order of the Tribunal which mentions rupees ten lakhs is not correct. The profit of the assessee may be less than rupees ten lakhs, but after it exceeds rupees five lakhs, he would be entitled to deduction of entertainment expenditure which may be in excess of Rs. 5,000 but which will equal 1% of such profits and gains, since the expression used is “whichever is higher” and not “whichever is lower”. We do not say anything more on this aspect of the matter, since the question is not pressed.
9. Accordingly, the questions referred to us as renumbered by us are answered as follows:
Question No. 1: In the affirmative and in favour of the assessee.
Question No. 2: In the affirmative and in favour of the assessee.
Question No. 3: In the affirmative and in favour of the assessee.
Question No. 4: The assessee-company is entitled to such rebate on gross dividends and not on net dividends after deduction of costs relating thereto.
Question No. 5: (At the instance of the assessee for both the assessment years in question) Not pressed and, therefore, not answered.
10. The parties will bear their own costs of the reference.