G.E. Veerabhadrappa, Vice President. - These appeals, by the revenue (sic-assessee), arise out of separate orders dated 30-9-2003 of the CIT(A) for assessment years 2001-02 and 2001-02 (sic). Certain common disputes are raised in these appeals, therefore, the same were heard together and are being disposed of by this consolidated order, for the sake of convenience.

2. First common dispute in both these appeals relates to the action of the CIT(A) in not allowing deduction in respect of taxes deducted at source in foreign countries. According to the assessee, the TDS in foreign countries does not constitute income arising in those countries in terms of section 5(1)(c) of the Act. The assessee company credited interest, dividend, rent and net of TDS to its profit and loss account after deducting TDS. The TDS was not grossed up while computing the income. The Assessing Officer did not accept the assessee’s contention that the TDS did not constitute income.

3. At the time of hearing of these appeals, the assessee has not pressed this ground. Accordingly, order of the CIT(A) on this issue for both the assessment years in question is upheld.

4. Next common ground in both these appeals relates to disallowance of vestment written off. The CIT(A) following his predecessor’s orders in assessee’s own case for assessment years 1989-90 to 1999-2000 sustained the addition made by the Assessing Officer.

5. The learned counsel for the assessee filed copies of the orders dated 29-9-2004 of the Tribunal involving assessment years 1990-91 to 1995-96. The revenue sought approval of the CoD to file appeal against this order, which the CoD has not permitted. Our attention was drawn to p. 56 of the paper book. The learned counsel further relied upon the order dated 6-6-2008 of the Tribunal in assessment year 1998-99 wherein the Tribunal following its earlier order has again decided the issue in favour of the assessee.

6. The learned Departmental Representative on the other hand strongly supported the impugned orders.

7. We have gone through the records and find that the issue is decided in favour of the assessee. The operative part of the Tribunal’s order dated 29-9-2004 reported as Commissioner Of Income-Tax v. Oriental Insurance Co. Ltd. [2005] 143 Taxman 15 (Delhi) (Mag.), which deals with this issue in para 19 is reproduced as below :

"19. We have carefully considered the rival submissions. In this appeal, we are concerned with the assessment year 1990-91 i.e., after the omission of sub-rule (b) of rule 5 of First Schedule to Income-tax Act, 1961 with effect from 1st April, 1989. The learned CIT(A) has based his decision on CBDT circular by way of Explanatory Notes on the changes brought about by the relevant Finance Act. The learned counsel for the assessee has pointed out that the discussion in para 45 of the circular in relation to omission of sub-rule (b) could at best be elucidation of the intention of the law makers. The fact of the matter was that such effect was not forthcoming from omission of clause (b). On consideration, we find ourselves in substantial agreement with this argument. If the intention of the legislature was to exempt profit on sale of investments and to disallow deduction of loss on sale of investments, the fact remains that such intention has not been translated into statute. Omission of sub-rule (b) of rule 5 does not bring about this change in the statute. In these circumstances, we are left with the only question as to whether the write off/write down of investments made in the books of accounts of the assessee for the assessment year before us can be considered to be ‘expenditure’ or ‘allowance’. If it represents either of the two, provisions of sections 30 to 43B of the Act would come into operation and the amount claimed by the assessee cannot be allowed as deduction for want of corresponding provisions in Income-tax Act, 1961. If, on the contrary, the amount claimed by the assessee by way of write off/write down of investments is neither an ‘expenditure’ nor an ‘allowance’, the Assessing Officer, is not clothed with any jurisdiction to interfere in the profit and loss account as drawn by the assessee in this behalf. On consideration of the matter, we find that the entries made in the assessee’s books of account in this behalf are strictly in accordance with the guidelines issued by General Insurance Corporation. These guidelines permit the assessee to book a loss which has for all practical purposes, been suffered on account of depreciation in value of investments beyond any reasonable hope of recovery. In such circumstances, the guidelines permitted the insurance company to book the loss in the accounts rather than waiting for actual realization of loss on sale of investment. Thus, the amounts claimed by the assessee are to be understood as a loss on investments suffered by the assessee. Such ‘loss’ can neither be considered an ‘expenditure’ nor an ‘allowance’. We find support in this view from the judgment of Hon’ble Supreme Court in the case of General Insurance Corporation of India v. CIT [1999] 156 CTR (SC) 425 : [1999] 240 ITR 139 (SC). In that judgment Hon’ble Supreme Court held that ‘spending’ in the sense of ‘paying out or away’ of money is the primary meaning of ‘expenditure’. ‘Expenditure’ is what is paid out or away and is something which is gone irretrievably. In that case, Hon’ble Supreme Court held that certain amounts set apart which is treated to be an expenditure for the purpose of Insurance Act, 1938 cannot be treated so for the purpose of rule 5(a) of the First Schedule for the reason that the amount set apart did not fall to be considered as an expenditure in the ordinary meaning of the expression. As we hold the view that write off of investments claimed by the assessee represents, ‘loss’ and not ‘expenditure’ nor ‘allowance’ we hold that the Assessing Officer erred in adding back the same in the computation of assessee’s income chargeable to tax and similarly the CIT(A) erred in confirming the same. As to the judgment relied upon by the learned CIT-Departmental Representative in Indore Malwa United Mills Ltd. v. CIT [1962] 45 ITR 210 (SC), we find the same to be out of context. In view of the discussion in the foregoing paras we direct deletion of the addition made by the Assessing Officer in respect of amounts written off by the assessee on punt of depreciation in the value of investments."

8. In the light of the above precedent, the disallowance made by the Assessing Officer and sustained by the CIT(A) is deleted.

9. The next common dispute in both the appeals relates to the action of the CIT(A) for disallowing 50 per cent of the guest house expenses. The assessee company maintains 16 guest houses and transit houses out of which several guest houses are owned by the assessee company. The assessee did not give details of expenditure on repairs and maintenance of own guest houses and rented guest houses. The Assessing Officer disallowed 50 per cent of these expenses. The assessee has also not furnished lease agreement so as ascertain the liability to maintain the guest houses. It is in this background that the Assessing Officer was held to be justified, in disallowing 50 per cent of the expenses incurred on maintenance of guest houses. The learned CIT(A) made an observation that his order for the year follows his own identical order for assessment year 1999-2000.

10. The learned counsel for the assessee pointed out that in assessment year 1999-2000, the Tribunal vide order dated 25-7-2008 in ITA No. 4565/Delhi/2002 has accepted the assessee’s contentions. A copy of the said order of the Tribunal is placed at pp. 78 to 82 of the paper book.

11. The learned Departmental Representative, on the other hand, strongly justified the order of the CIT(A), in the light of his discussion in the impugned order.

12. We have carefully considered the rival contentions and gone through The records. The Tribunal in assessment year 1999-2000 has held that expenditure incurred for maintenance of the company’s own guest houses is covered under section 30(a)( ii) of the Act. Therein the Tribunal accepted the plea of the assessee that in respect of the guest houses owned by the assessee, repair expenses will have to be allowed as deduction under section 30(a)(ii ) of the Act. Once the expenditure is allowable under section 30(a)(ii ), if the expenditure of incurred on repair and maintenance of guest house taken on lease should also be allowed. In the light of the aforesaid order of the Tribunal, we decide the matter, for the assessment years in question, in favour of the assessee.

13. The next common dispute relates to the addition on account of interest accrued on loans, bonds and debentures, the recovery of which was deferred or has remained outstanding.

14. The assessee is engaged in the business of general insurance. In its return of income for the assessment years in question the assessee did not include the amount of interest outstanding on term loan etc., on the plea that the debtors have deferred in making payments and recoveries were outstanding for more than one year. The Department went on to make addition relying upon the decision of the Hon’ble Supreme Court in the case of State Bank of Travancore v. CIT [1986] 158 ITR 102 ¹ on the reasoning that the interest was still liable to be included in the assessee’s total income on the basis of mercantile system of accounting. In appeal the CIT(A) confirmed the action of the Assessing Officer.

15. The learned counsel for the assessee stated that in assessee’s own case for assessment years 1985-86 to 1988-89 identical issue came up for consideration before the Tribunal wherein the assessee’s claim was allowed. He further submitted that for assessment year 1986-87 the matter went upto the High Court and the Hon’ble Delhi High Court vide its order dated 17-9-2002, CIT v. Oriental Insurance Co. Ltd. [2002] 125 Taxman 1094 (Delhi), has affirmed the order of the Tribunal. The learned counsel submitted that as such the issue is fully covered in favour of the assessee.

16. The learned Departmental Representative on the other hand supported the observations made by the CIT(A) in para 4 of his order for assessment year 2000-01 in sustaining the addition in question.

17. We have heard rival submissions of the parties and have gone through the material available on record. Identical issue arose in assessee’s own case for assessment year 1985-86. The Tribunal accepted the plea of the assessee and in fact the issue went up to the Hon’ble Delhi High Court in assessment years 1986-87 to 1988-89, which is Oriental Insurance Co. Ltd.’s case (supra), decided the issue in favour of the assessee by holding that section 44 of the Act is a special provision dealing with the computation of profits and gains of business of insurance. It being a non obstante provision, has to prevail over other provisions in the Act. It clearly provides that income from insurance business has to be computed in accordance with the rules contained in the First Schedule. It is not the case of the revenue that the assessee has not computed the profits and gains of its insurance business in accordance with the said rules. Reliance was placed on the scope of section 44, as held in the case of General Insurance Corpn. of India v. CIT [1999] 240 ITR 139 ¹ (SC), wherein their Lordships of the Apex Court have categorically held that the provision of section 44 being a special provision, governs computation of taxable income earned from business of insurance. It mandates the tax authorities to compute the taxable income in respect of insurance business in accordance with the provisions of the First Schedule to the Act. In the light of these, their Lordships of Delhi High Court have held that no question of law, much less a substantial question of law survives for their consideration. In other words, order of the Tribunal has been affirmed. Following the same reasoning, addition made by the Assessing Officer is deleted.

18. The next common dispute relates to the order of the CIT(A) in sustaining the action of Assessing Officer in making (sic) allowing only 50 per cent of the management expenses by invoking the provisions of section 14A of the Act. The addition is made by the Assessing Officer on the plea that the provision of section 14A was inserted by Finance Act, 2001 with effect from 1-4-1962. It is stated that the investments made by the assessee are both taxable as well as tax-free. An estimated disallowance of 50 per cent out of the management - expenses incurred and as claimed in the profit and loss account is treated as is expenses incurred in connection with the looking after tax-free investment.

19. The learned counsel for the assessee vehemently argued that the income of the assessee is to be computed under section 44 read with rule 5 of Schedule I of the Income-tax Act. Section 44 is a non obstante clause and applies notwithstanding anything to the contrary contained within the provisions of the Income-tax Act relating to computation of income chargeable under different heads, other than the income to be computed under the head "Profits and gains of business or profession". For computation of profits and gains of business or profession the mandate to the Assessing Officer is to compute the said income in accordance with the provisions of sections 28 to 43B of the Act. In the case of the computation of profits and gain of any business of insurance, the same shall be done in accordance with the rules prescribed in First Schedule of the Act, meaning thereby sections 28 to 43B shall not apply. No other provision pertaining to computation of income will become relevant. According to the learned counsel, two presumptions that follow on a combined reading of sections 14, 14A and 44 and rule 5 of the First Schedule are :

(a)That no head-wise bifurcation is called for. The income, inter alia, of the business of insurance is essentially to be at the amount of the balance of profits disclosed by the annual accounts as furnished to the Controller of Insurance under the Insurance Act, 1938. The said balance of profits is subject only to adjustments thereunder. The adjustments do not refer to disallowance under s. 14A of the Act.

(b)Profits and gains of business as referred to in (a) above have only to be computed in accordance with rule 5 of the First Schedule.

20. Section 44 creates a specific exception to the applicability of sections 28 to 43B. Therefore, the purpose, object and purview of section 14A has no applicability to the profits and gains of an insurance business.

21. The learned Departmental Representative strongly justified the action Of the Assessing Officer and that of the CIT(A) in the light of the clear provisions of section 44A of the Act.

22. We have considered the rival contentions and gone through the records. The provisions of section 44 read as under :

"44. Insurance business.—Notwithstanding anything to the contrary contained in the provisions of this Act relating to the computation of income chargeable under the head ‘Interest on securities’, ‘Income from house property’, ‘Capital gains’ or Income from other sources’, or in section 199 or in sections 28 to 43B, the profits and gains of any business of insurance, including any such business carried on by a mutual insurance company or by a co-operative society, shall be computed in accordance with the rules contained in the First Schedule."

23. The above provision makes it very clear that section 44, applies notwithstanding anything to the contrary contained within the provisions of the Income-tax Act relating to computation of income chargeable under different heads. We agree with the learned counsel that there is no requirement of head-wise bifurcation called for while computing the income under section 44 of the Act in the case of an insurance company. The income of the business of insurance is essentially to be at the amount of the balance of profits disclosed by the annual accounts as furnished to the Controller of Insurance. The actual computation of profits and gains of insurance business will have to be computed in accordance with rule 5 of the First Schedule. In the light of these special provisions coupled with non obstante clause the Assessing Officer is not permitted to travel beyond these provisions.

24. Section 14A contemplates an exception for deductions as allowable under the Act are those contained under sections 28 to 43B of the Act. Section 44 creates special application of these provisions in the cases of insurance companies. We therefore, agree with the assessee and delete the disallowance made by the Assessing Officer which is based on the application of section 14A of the Act as according to us, it is not permissible to the Assessing Officer to travel beyond s. 44 and First Schedule of the Income-tax Act.

25. The next common dispute relates to the disallowance of provision for bad and doubtful debts. The Assessing Officer has disallowed on the ground that the assessment of the company being made under section 44 read with rule 5 of the First Schedule of the Income-tax Act, the provisions of section 36(1)(vii) will not be available. The learned CIT(A) upheld the action of the Assessing Officer by following his own order for assessment years 1998-99 and 1999-2000. Aggrieved, the assessee is in appeal before us.

26. The learned counsel for the assessee pointed out that this issue came up before the Tribunal for assessment year 1998-99 in ITA No. 589 (Delhi) of 2002 and the Tribunal vide order dated 6-6-2008 has accepted the contention of the assessee. It is also prayed that in the light of the aforesaid order, a direction may be issued to the Assessing Officer that while giving effect to the Tribunal’s order, if the total income of the assessee is positive then only deduction to the extent of 5 per cent be allowed under section 36(1)(viia) of the Act.

27. The learned departmental Representative on the other hand, strongly justified the disallowance. According to him, the assessee is not eligible for any deduction under section 36(1)(viia) as held by the Assessing Officer and CIT(A). We have carefully considered the rival contentions and gone through the records.

28. Identical issue came up before the Tribunal in assessment year 1998-99. The Tribunal gave its finding in para 5.2 of its order dated 6-6-2008 in ITA No. 589 (Delhi) of 2002, which reads as under :

"5.2 We have perused the record and considered the matter carefully. The income of the insurance companies is required to be computed under section 44 of the IT Act as per which the profit is to be computed under rule 5(a) of the First Schedule. Rule 5A of the First Schedule provides for computation of income under the Insurance Act subject to adjustment made as per clauses (a) and (c) clause (b ) being deleted with effect from 1-4-1989]. Under the clause (a) any expenditure or allowance including provision which is not admissible under provisions of sections 30 to 43B is required to be adjusted to the profit computed under the Insurance Act. The provision for bad and doubtful debt is allowable under section 36(1)(viia)( c) only to the per cent extent of 5 per cent of income and, therefore, extra debit of 2.5 per cent made by the assessee in the P&L a/c is required to be added under clause(a). This is what the assessee has done. The adjustment made by the assessee is as per rule 5(a). The judgment of the Hon’ble High Court of Madras in the case of United India Insurance Co. is distinguishable. We are, therefore, unable to sustain the order of CIT(A) the order is accordingly set aside and the claim of the assessee is allowed."

29. Following the same reasoning, we accept the claim of the assessee indirect the Assessing Officer to compute the income and if the total income is positive then only the deduction to the extent of 5 per cent be allowed under section 36(1)(viia) of the Act. We order accordingly.

30. The next common dispute relates to the disallowance made by the (O and confirmed by the CIT(A) out of depreciation claimed by the assessee.

31. The Assessing Officer noted from the computation of depreciation claimed, as given in Annex. ‘A to the tax audit report filed under section 44AB along with the return of income, that during the year under consideration additions to assets have taken place. The details of additions/deletions of assets have not been provided in Col. 14 of Form 3CA report. The statutory auditors have qualified report stating that information regarding addition/deletion during the year referred to in Annex. ‘A’ is not given for want of necessary details based on the qualifications contained in the tax audit report. The Assessing Officer required the assessee to provide the information. It was submitted before the Assessing Officer that it was not possible to compile the date-wise details of addition due to multiplicity of items in various offices located at different places. However, it was submitted that the figure of the additions was duly audited and depreciation should be allowed. According to the CIT(A), it was the duty of the assessee to provide details of assets added and the Assessing Officer is required to scrutinize and allow depreciation as per the provisions of law. If details are not forthcoming from the assessee, the disallowance was justified.

32. The learned counsel reiterated the contentions that were taken before the Assessing Officer and the CIT(A) and pleaded that the depreciation as claimed by assessee be allowed.

33. The learned Departmental Representative, on the other hand, strongly relied upon the discussions in the .order of CIT(A).

34. We have carefully gone through the records and considered the rival contentions. We agree with the reasoning given by the CIT(A) in sustaining the disallowance. If the assessee claims to have made addition to the assets, it is obligatory on its part to give all the details of such assets added, to the Assessing Officer so that he may scrutinize them and allow depreciation as per the provisions of law. The assessee has not given the basic details therefore, the question of allowing any depreciation on such assets cannot be accepted. We endorse the findings of the CIT(A), having regard to the facts and circumstances of the case.

35. The only surviving dispute for assessment year 2001-02 relates to the disallowance of Rs. 4,12,00,000 on account of estimated liability for orphan claims.

36. The assessee made provision in respect of unidentified motor third party claim (orphan claim). The assessee explained that as per clause 5.1 of the accounting policy of the assessee company in respect of motor third party claim where Court summons have been served on the company without adequate policy particulars to establish the liability of the company, provision is made to the extent of one-third of the value of the total estimated liability of such unidentified claims determined on the basis of existing guidelines and practices. The Assessing Officer held the said provision as contingent in nature. In appeal, the CIT(A) confirmed the finding of the Assessing Officer and the Assessing Officer (sic-assessee) is aggrieved.

37. The learned counsel for the assessee was fair enough to point out that identical issue arose in assessee’s own case for assessment years 1997-98 and 1998-99 and the Tribunal has decided this issue against the assessee. The learned Departmental Representative in the light of this strongly justified the disallowance.

38. We have gone through the records and considered rival contentions, following our own order for assessment years 1997-98 and 1998-99 the issue has been decided against the assessee. We hold that the claim of the assessee is clearly contingent in nature and cannot be allowed as deduction. The order of the CIT(A) on this issue for assessment year 2001-02 is confirmed.

39. In the result both the appeals are partly allowed.

Omission of sub-rule (b) of rule 5