CASE NO.: Appeal (crl.) 1260-1261 of 1997 PETITIONER: <NAME> & Anr. RESPONDENT: Commissioner of Income Tax and Anr. DATE OF JUDGMENT: 16/02/2004 BENCH: <NAME> & <NAME>. JUDGMENT:

JUDGMENT <NAME>,J.

These appeals revolve round the scope and ambit of Section 276-CC of the Income Tax Act, 1961 (in short the 'Act'), and are directed against a common judgment rendered by a Division Bench of <ORG> which rejected the three writ petitions filed by the appellants in these two appeals. The Assistant Commissioner of Income tax, Circle I, Shimla filed a complaint in terms of Section 276-CC of the Act in the Court of the <ORG> who had issued process of taking cognizance of the offence. In each of the writ applications, challenge was made to legality of the proceedings pending in <ORG>, Shimla (in short the '<ORG>').

The factual position is almost undisputed and needs to be noted in brief.

The three appellants were partners of a firm carrying on business under the name and style of <ORG> Kailash Nath and Associates. Apart from the three appellants, two other persons were partners and one of them <NAME> was the Managing partner in terms of the Partnership Deed dated 1.4.1983. For the assessment year 1988-89 return of income was to be filed on or before 31.7.1988, but was in fact filed on 20.3.1991. Assessment under Section 143(3) of the Act was completed on 26.8.1991. Proceedings for late submission of return were initiated against the appellants under Section 271(1)(a) of the Act and penalty was imposed. Proceedings in terms of Section 276-CC of the Act were also initiated and complaint was filed before the concerned Court. As noted above, cognizance was taken and process was issued. The writ applications were filed challenging legality of the proceedings. By the impugned judgment <ORG> dismissed the writ petitions. The points which were mooted before <ORG> were re-iterated in the present appeals.

Mr. <NAME>, learned senior counsel appearing for the appellants urged the following points for consideration:

1. The expression "to furnish in due time" occurring in Section 276CC means to furnish within the time permissible under the Act. The return furnished under Section 139(4) at any time before the assessment is made has to be regarded as a return furnished under Section 139(1) . This was so held by this Court in <CITATION> . (1970 (77) ITR 518) in the context of Sections 22(1) and 22(3) of the Indian Income Tax Act, 1922 (in short the 'Old Act') which are in pari-materia of Section 139(1) and Section 139(4) of the Act. It follows that return was furnished in "the due time" and consequently Section 276CC is not attracted.

2. The provisions of Section 276CC(i) are not intended to apply to the cases of assessees who have been regularly assessed to income tax and have voluntarily submitted their returns of income without issue of any notice to do so by the Assessing Officer in that behalf, within the time permissible to furnish the return under the Act. This interpretation gets support from the marginal heading and explanatory memo laid before <ORG> when the Section was introduced.

3(i) The provision only applies where the amount of tax which would have been evaded if the failure had not been discovered exceeds Rs,1,00,000/-. There has been no discovery of the failure in this case from the point of view of evasion of tax. The assessee has submitted return voluntarily, paid advance tax and self assessment tax.

3(ii) There has been no concealment of income in this case, and no penalty has been or can be imposed. The allegation made in the complaint that there has been evasion of tax to the extent of Rs.5,68,039/- is based on no evidence and is contrary to the materials on record.

4. The petitioners in reply to show cause notice issued pleaded that the delay in submission of returns was unavoidable, because their share of profit from the firm in which they were partners had not been communicated by the Managing Partner of the firm who was responsible for the accounts. They had no guilty mind.

5. Mere delay in filing a return without contumacious conduct and mens rea being established could not make the petitioner liable for prosecution.

6. Petitioner having been subjected to levy of interest under Section 139(1) and also to penalty proceedings under Section 271(1)(a) of the Act, could not further be prosecuted for the same defaults.

Per contra, learned counsel appearing for the respondents submitted that <ORG> was justified in its conclusions in dismissing the writ petitions. The decision in Kullu Valley's case (supra) has no application to the facts of the present case and in fact it was rendered in a different set up. Sub-sections (1) and (4) of Section 139 deal with different situations and it cannot be said that a return filed in terms of Section 139(4) would mean compliance with the requirements indicated in sub-section (1) of Section 139 . It is further submitted that Section 278-E raises a presumption which is a rebutable one and the factual aspects raised by the appellants can be placed for consideration in the proceedings before the learned CJM.

Since the fate of the appeals revolves round the scope and ambit of Section 276-CC in the background of sub-sections (1) and (4) of Section 139 , it would be appropriate to quote the aforesaid provisions, as they stood at the relevant point of time:

" Section 276-CC : Failure to furnish returns of income: If a person wilfully fails to furnish in due time the return of income which he is required to furnish under sub-section (1) of Section 139 or by notice given under sub-section (2) of Section 139 or Section 148 , he shall be punishable,-

(i) in a case where the amount of tax, which would have been evaded if the failure had not been discovered, exceeds one hundred thousand rupees, with rigorous imprisonment for a term which shall not be less than six months but which may extend to seven years and with fine;

(ii) in any other case, with imprisonment for a term which shall not be less than three months but which may extend to three years and with fine:

Provided that a person shall not be proceeded against under this section for failure to furnish in due time the return of income under sub- section (1) of Section 139-

(i)for any assessment year commencing prior to the Ist day of April, 1975; or

(ii)for any assessment year commencing on or after the Ist day of April, 1975, if-

(a)the return is furnished by him before the expiry of the assessment year; or

(b)the tax payable by him on the total income determined on regular assessment, as reduced by the advance tax, if any, paid, and any tax deducted at source, does not exceed three thousand rupees".

Section 139 : Return of income- (1) Every person, if his total income or the total income of any other person exceeded the maximum amount which is not chargeable to income tax, shall furnish a return of his income or the income of such other person during the previous year in the prescribed form and verified in the prescribed manner and setting forth such other particulars as may be prescribed.

(a) in the case of every person whose total income, or the total income of any other person in respect of which he is assessable under this Act, includes any income from business or profession, before the expiry of four months from the end of the previous year or where there is more than one previous year, from the end of the previous year which expired last before the commencement of the assessment year, or before the 30th day of June of the assessment year, whichever is later;

(b) in the case of every other person, before the 30th day of June of the assessment year:

Provided that, on an application made in the prescribed manner, the Assessing Officer may, in his discretion, extend the date for furnishing the return, and, notwithstanding that the date is so extended, interest shall be chargeable in accordance with he provisions of sub-section (8).

(IA) Notwithstanding anything contained in sub-section (1), no person need to furnish under that sub-section a return of his income or the income of any other person in respect of whose total income he is assessable under this Act, if his income or, as the case may be, the income of such other person during the previous year consisted only of income chargeable under the head "Salaries" or of income chargeable under that head and also income of the nature referred to in any one or more of clause (i) to

(ix) of sub-section (1) of Section 80L and the following conditions are fulfilled, namely:-

(a) where he or such other person was employed during the previous year by a company, he or such other person was at no time during the previous year a director of the company or a beneficial owner of shares in the company (not being shares entitled to a fixed rate of dividend whether with or without a right to participate in profits) carrying not less than twenty per cent of the voting power;

(b) his income or the income of such other person under the head "Salaries", exclusive of the value of all benefits or amenities not provided for by way of monetary payment, does not exceed twenty four thousand rupees;

(c) the amount of income of the nature referred to in clause (i) to (ix) of sub-section (1) of Section 80L , if any does not, in the aggregate, exceed the maximum amount allowable as deduction in his case under that section; and

(d) the tax deductible at source under section 192 from the income chargeable under the head "Salaries" has been deducted from that income.

(2) In the case of any person who, in the Assessing Officer's opinion, is assessable under this Act, whether on his own total income or on the total income of any other person during the previous year, the Assessing Officer may, before the end of the relevant assessment year, issue a notice to him and serve the same upon him requiring him to furnish, within 30 days from the date of service of the notice, a return of his income or the income of such other person during the previous year, in the prescribed form and verified in the prescribed manner and setting forth such other particulars as may be prescribed:

Provided that, on an application made in the prescribed manner, the Assessing Officer may, in his discretion, extend the date for furnishing the return, and, notwithstanding that the date is so extended, interest shall be chargeable in accordance with the provisions of sub-section (8).

(3) If any person who has not been served with a notice under sub- section (2), has sustained a loss in any previous year under the head "Profits and gains of business or profession" or under the head "Capital gains" and claims that the loss or any part thereof should be carried forward under sub-section (1) of Section 72 , or sub-section (2) of Section 73 , or sub-section (1) or sub- section (3) of Section 74 , or sub- section (3) of Section 74A , he may furnish within the time allowed under sub-section (1) or by the thirty first day of July of the assessment year relevant to the previous year during which the loss was sustained, a return of loss in the prescribed form and verified in the prescribed manner and containing such other particulars as may be prescribed, and all the provisions of this Act shall apply as if it were a return under sub-section (1).

(4)(a) Any person who has not furnished a return within the time allowed to him under sub-section (1) or sub-section (2) may, before the assessment is made, furnish the return for any previous year at any time before the end of the period specified in clause (b), and the provisions of sub-section (8) shall apply in every such case.

(b)The period referred to in clause (a) shall be-

(i)where the return relates to a previous year relevant to any assessment year commencing on or before the Ist day of April, 1967 four years from the end of such assessment year;

(ii)where the return relates to a previous year relevant to the assessment year commencing on the Ist day of April, 1968 three years from the end of the assessment year;

(iii)where the return relates to a previous year relevant to any other assessment year, two years from the end of such assessment year.

(4A) Every person in receipt of income derived from property held under trust or other legal obligation wholly for charitable or religious purposes or in part only for such purposes, or of income being voluntary contributions referred to in sub-clause (iia) of clause (24) of section 2 shall, if the total income in respect of which he is assessable as a representative assessee(the total income for this purpose being computed under this Act without giving effect to the provisions of sections 11 and 12 ) exceeds the maximum amount which is not chargeable of income tax furnish a return of such income of the previous year in the prescribed form and verified in the prescribed manner and setting forth such other particulars as may be prescribed and all the provisions of this Act shall, so far as may be, apply as if it were a return required to be furnished under sub-section (1).

(4B) The Chief Executive Officer (whether such Chief Executive Officer) is known as Secretary or by any other designation) of every political party shall, if the total income in respect of which the political party is assessable (the total income for this purpose being computed without giving effect to the provisions of section 13A ) exceeds the maximum amount which is not chargeable of income tax furnish a return of such income of the previous year in the prescribed form and verified in the prescribed manner and setting forth such other particulars as may be prescribed and all the provisions of this Act shall, so far as may be, apply as if it were a return required to be furnished under sub-section (1).

(5)If any person having furnished a return under sub-section (1) or sub- section (2), discovers any omission or any wrong statement therein, he may furnish a revised return at any time before the assessment is made.

Kullu Valley's case (supra ) was rendered in the background of Section 22 of the Old Act. Great emphasis is laid on the observation by this Court that sub-section (3) of Section 22 of the Old Act was in the nature of a proviso to sub- section (1) thereof. It is to be noted that the decision was rendered in a totally different context. The question related to the treatment of a return of loss filed beyond the time provided under sub-section (1) of Section 22 . The observation on which reliance is placed cannot be read out of context.

In Kullu valley's case (supra) the majority view was that Section 22(3) of the Old Act (corresponding to Section 139(4) of the Act) is merely a proviso to Section 22(1) (Section 139(1)) respectively, and if Section 22(3) is complied with, Section 22(1) must be held to have been complied with and that if compliance has been made with Section 22(3) , the requirement of Section 22(2A) (corresponding to Section 139(3) of the Act) would stand satisfied. It was thus, held that the ascertained losses could be carried forward to the subsequent years and set off, even though suo motu return is not filed within time prescribed under Section 22(1) of the Old Act.

The decision was rendered in a conceptually different situation, and has no relevance so far as the present dispute is concerned.

The basic issue in Kullu Valley's case (supra) was determination of loss on the basis of return filed under Section 22(1) or 22(3) of the Old Act. In the Act , Section 80 deals specifically with the situation.

The original Section 80 in the Act reads as under:

"Notwithstanding anything contained in this Chapter, no loss which has not been determined in pursuance of a return filed under Section 139 , shall be carried forward and set off under sub-section (1) of Section 72 or sub- section (2) of Section 73 or sub- section (1) of Section 74 ".

By the Taxation Laws (Amendment) Act , 1984 with effect from Ist April, 1985, the words "under Section 139 " (underlined for emphasis) were substituted by the words "within the time allowed under sub-section (1) of Section 139 or within such further time as may be allowed by the Income Tax Officer". (underlined for emphasis) As a result of the amendment of Section 139(3) by the Taxation Laws (Amendment and Miscellaneous Provisions) Act , 1986 the power of the Income tax Officer to extend time for furnishing return was taken away w.e.f. Ist April, 1987.

Yet again, by the Direct Tax Laws (Amendment Act), 1987 w.e.f. Ist April, 1989 the words "within the time allowed under sub-section (1) of Section 139 or within such further time as may be allowed by the Income tax Officer" were substituted by the words "in accordance with the provisions of sub-section (3) of Section 139 ".

It is well settled principle in law that the <ORG> cannot read anything into a statutory provision which is plain and unambiguous. A statute is an edict of the legislature. The language employed in a statute is the determinative factor of legislative intent. The first and primary rule of construction is that the intention of the legislation must be found in the words used by the legislature itself. The question is not what may be supposed and has been intended but what has been said. "Statutes should be construed, not as theorems of <NAME>", Judge <NAME> said, "but words must be construed with some imagination of the purposes which lie behind them". (See <ORG> v. <NAME> (218 FR 547). The view was re- iterated in <CITATION> (AIR 1990 SC 981), and <NAME> (dead) and <CITATION> . (2002 (3) SCC 533).

In <NAME> v Dy. Transport Commissioner (1977 (2) SCC 273) it was observed that courts must avoid the danger of a priori determination of the meaning of a provision based on their own preconceived notions of ideological structure or scheme into which the provision to be interpreted is somewhat fitted. They are not entitled to usurp legislative function under the disguise of interpretation.

While interpreting a provision the court only interprets the law and cannot legislate it. If a provision of law is misused and subjected to the abuse of process of law, it is for the legislature to amend, modify or repeal it, if deemed necessary. ( <CITATION> . (2000 (5) SCC 515). The legislative casus omissus cannot be supplied by judicial interpretative process.

Two principles of construction- one relating to casus omissus and the other in regard to reading the statute as a whole -appear to be well settled. Under the first principle a casus omissus cannot be supplied by the court except in the case of clear necessity and when reason for it is found in the four corners of the statute itself but at the same time a casus omissus should not be readily inferred and for that purpose all the parts of a statute or section must be construed together and every clause of a section should be construed with reference to the context and other clauses thereof so that the construction to be put on a particular provision makes a consistent enactment of the whole statute. This would be more so if literal construction of a particular clause leads to manifestly absurd or anomalous results which could not have been intended by the legislature. "An intention to produce an unreasonable result", said <NAME>, L.J., in <NAME> v. <NAME> (1966 (1) QB 878), "is not to be imputed to a statute if there is some other construction available". Where to apply words literally would "defeat the obvious intention of the legislation and produce a wholly unreasonable result", we must "do some violence to the words" and so achieve that obvious intention and produce a rational construction. (Per Lord <NAME> in <NAME> v. IRC {1963 AC 557} where at AC p.577 he also observed: "This is not a new problem, though our standard of drafting is such that it rarely emerges".} The heading of the Section or the marginal note may be relied upon to clear any doubt or ambiguity in the interpretation of the provision and to discern the legislative intent. <CITATION> . (AIR 1950 SC 134) after referring to the view expressed by Lord <NAME> in <NAME> v. <NAME> (ILR 26 All. 393 (PC), it was held that marginal notes in an Indian Statute, as in an Act of Parliament cannot be referred to for the purpose of construing the statute. Similar view was expressed in <CITATION> and Ors. (1979(2) SCC 468), and <CITATION> . (AIR 1991 SC 1581). Marginal note certainly cannot control the meaning of the body of the Section if the language employed there is clear. ( <CITATION> . (AIR 1978 SC 1025) In the present case as noted above, the provisions of Section 276-CC are in clear terms. There is no scope for trying to clear any doubt or ambiguity as urged by learned counsel for the appellants. Interpretation sought to be put on Section 276-CC to the effect that if a return is filed under sub-section (4) of section 139 it means that the requirements of sub-section (1) of Section 139 cannot be accepted for more reasons than one.

One of the significant terms used in Section 276-CC is 'in due time'. The time within which the return is to be furnished is indicated only in sub-section (1) of Section 139 and not in sub- section (4) of Section 139 . That being so, even if a return is filed in terms of sub-section (4) of Section 139 that would not dilute the infraction in not furnishing the return in due time as prescribed under sub-section (1) of Section 139 . Otherwise, the use of the expression "in due time" would loose its relevance and it cannot be said that the said expression was used without any purpose. Before substitution of the expression "clause (i) of sub-section (1) of section 142 " by Direct Tax Laws (Amendment) Act, 1987 w.e.f. 1.4.1989 the expression used was "sub-section (2) of section 139 ". At the relevant point of time the assessing officer was empowered to issue a notice requiring furnishing of a return within the time indicated therein. That means the infractions which are covered by Section 276-CC relate to non-furnishing of return within the time in terms of sub-section (1) or indicated in the notice given under sub-section (2) of Section 139 . There is no condonation of the said infraction, even if a return is filed in terms of sub-section (4). Accepting such a plea would mean that a person who has not filed a return within the due time as prescribed under sub-sections (1) or (2) of Section 139 would get benefit by filing the return under Section 139(4) much later. This cannot certainly be the legislative intent.

Another plea which was urged with some amount of vehemence was that the provisions of Section 276-CC are applicable only when there is discovery of the failure regarding evasion of tax. It was submitted that since the return under sub-section (4) of Section 139 was filed before the discovery of any evasion, the provision has no application. The case at hand cannot be covered by the expression "in any other case". This argument though attractive has no substance.

The provision consists of two parts. First relates to the infractions warranting penal consequences and the second, measure of punishment. The second part in turn envisages two situations. The first situation is where there is discovery of the failure involving the evasion of tax of a particular amount. For the said infraction stringent penal consequences have been provided. Second situation covers all cases except the first situation elaborated above.

The term of imprisonment is higher when the amount of tax which would have been evaded but for the discovery of the failure to furnish the return exceeds one hundred thousand rupees. If the plea of the appellants is accepted it would mean that in a given case where there is infraction and where a return has not been furnished in terms of sub-section (1) of Section 139 or even in response to a notice issued in terms of sub-section (2), the consequences flowing from non-furnishing of return would get obliterated. At the relevant point of time Section 139(4)(a) permitted filing of return where return has not been filed within sub- section (1) and sub-section (2). The time limit was provided in clause (b). Section 276-CC refers to "due time" in relation to sub-sections (1) and (2) of Section 139 and not to sub-section (4). Had the <ORG> intended to cover sub- section (4) also, use of expression " Section 139 " alone would have sufficed. It cannot be said that <ORG> without any purpose or intent specified only the sub-sections (1) and (2) and the conspicuous omission of sub-section (4) has no meaning or purpose behind it. Sub- section (4) of Section 139 cannot by any stretch of imagination control operation of sub-section (1) wherein a fixed period for furnishing the return is stipulated. The mere fact that for purposes of assessment and carrying forward and to set off losses it is treated as one filed within sub-sections (1) or (2) cannot be pressed into service to claim it to be actually one such, though it is factually and really not by extending it beyond its legitimate purpose.

Whether there was wilful failure to furnish the return is a matter which is to be adjudicated factually by the <ORG> which deals with the prosecution case. Section 278-E is relevant for this purpose and the same reads as follows:

"278-E: Presumption as to culpable mental state-

(1) In any prosecution for any offence under this Act which requires a culpable mental state on the part of the accused, the court shall presume the existence of such mental state but it shall be a defence for the accused to prove the fact that he had no such mental state with respect to the act charged as an offence in that prosecution.

Explanation: In this sub-section, "culpable mental state" includes intention, motive or knowledge of a fact or belief in, or reason to believe, a fact (2) For the purposes of this section, a fact is said to be proved only when the court believes it to exist beyond reasonable doubt and not merely when its existence is established by a preponderance of probability".

There is a statutory presumption prescribed in Section 278-E . The Court has to presume the existence of culpable mental state, and absence of such mental state can be pleaded by an accused as a defence in respect to the act charged as an offence in the prosecution. Therefore, the factual aspects highlighted by the appellants were rightly not dealt with by <ORG>. This is a matter for trial. It is certainly open to the appellants to plead absence of culpable mental state when the matter is taken up for trial.

Looked at from any angle the appeals are without merit and are dismissed.


PETITIONER: <ORG>. Vs. RESPONDENT: COMMISSIONER OF INCOME-TAX, MADRAS DATE OF JUDGMENT: 29/09/1964 BENCH: SIKRI, S.M. BENCH: SIKRI, S.M. SUBBARAO, K. SHAH, J.C. CITATION: 1965 AIR 1004 1965 SCR (1) 367 CITATOR INFO : R 1965 SC1902 (17) ACT: Income Tax Act  Schedule, rr. 3(b) and 6--Scope of HEADNOTE: The appellant (assessee) was a company carrying on the business of general insurance. It erected a substantial modem building at a cost of about Rs. 12,00,000 towards the end of 1952. For the accounting year 1953 it wrote off a sum of about Rs. 1,00,000 as representing the depreciation with respect to. various items. The Income-tax Officer disallowed 4/5 of the depreciation on the ground that only a fifth part of the building was utilised for the purpose of the appellant's business and the remaining 4/5 part was let out, and that the rent thereon was exempted under s. 4(3) (xii) of the Income-tax Act , 1922. On appeal by the assessee, the Appellate Assistant Commissioner dismissed the appeal and enhanced the assessment by disallowing even the 115 of the depreciation allowed by the Income Tax Officer, on the ground that under r. 3(b) of the Schedule to the Act, the allowable depreciation was an actual depreciation of the value of the assets. On further appeal, <ORG> restored the order of the Income-tax Officer with respect to 115 part but as to the 4/5 part agreed with the Appellate Assistant Commissioner. <ORG>, on a reference as 'to whether the 4/5 part of the depreciation was also allowable as a deduction in the assessment completed under s. 10(7) and the rules contained in the Schedule, of the Act, held against the appellant. On appeal to <ORG>, HELD : The appeal must be allowed. [374C]. Rules 3(b) and 6 of the Schedule to the income-tax Act, which are the applicable rules, should be read against the background of the various provisions of the Insurance Act  making detailed provision to ensure the true valuation of assets and the determination of the true balance of profits of an insurance business. So read, the Income Tax Officer can exclude from the balance of profits, only any expenditure which is not allowable under s. 10 of the Income-tax Act. The word "expenditure" inr. 6 means disbursement and does not comprehend depreciation. As regar- ds "depreciation", it covers both actual and notional, and the Income Tax Officer has no option but to allow it under r. 3 (b). He cannot ask the assessee to prove that there has been any actual depreciation. [370E; 372A, C; 373E, F; 374C]. <ORG> v. Commissioner of Incometax (1964) 51 I.T.R. 773, followed. JUDGMENT:

CIVIL APPELLATE JURISDICTION : Civil Appeal No. 816 of 1963.

Appeal by special leave from the judgment dated the July 4, 1961, of <ORG> in case referred No. 4 of 1957.

<NAME>, <NAME> and <NAME>, for the appellant.

<NAME>, <NAME> and <NAME>, for the respondent.

The Judgment of the Court was delivered by <NAME> This is an appeal by special leave against the judgment of <ORG> in a case referred to it under the Indian Income Tax Act , 1922, hereinafter referred to as the Act, answering the question of law against the assessee. The question referred is :

"Whether four-fifth of the sum of Rs. 1,21,245 written off in the books of the assessee as depreciation for the calendar year 1953 is allowable as a deduction in the assessment completed under section 10(7) and the rules contained in the schedule of the Income-tax Act ."

The facts relevant for answering the question are as follows. The assessee is a public limited company carrying on the business of general insurance. It erected a modem substantial building with lifts and air-conditioning at a cost of Rs. 12,08,252 and got it ready for occupation from December 1, 1952. In its books for the calendar year 1953, the previous year for assessment year 1954-55, it wrote off Rs. 1,21,245 as depreciation as follows Rate Amount Per cent (in rupees) Buildings 10 1,06,940 Air conditioning plant 15 2,973 Lifts 15 6,214 Transformers 15 1,442 Internal Telephone 15 3,676 TOTAL1,21,245 It was common ground before <ORG> that one-fifth of the building could be considered as occupied for its own purposes and the remaining four- fifth as let out to tenants for rent. The Income-tax Officer disallowed fourfifth of the depreciation claimed on the ground that "the rentals received from this 4/5th portion are being shown separately under the head 'Property' which income in turn has been claimed as 'exempt under s. 4 (3) (xii). Had there been no exemption in the property income there would have-been a statutory allowance which would compensate for depreciation. The fact that the whole income is exempt further strengthens that no allowance regarding these portions could be made.

On appeal, the Appellate Assistant Commissioner disallowed the whole claim (including that allowed by the Income-tax Officer) on another ground. He held that the property fell within the words'other assets' used in Rule 3 (b) of the Schedule, but what Rule 3 (b) contemplated was an actual depreciation of the value of such assets. As the counsel of the assessee admitted before him that the property being new, there could be no question of actual depreciation. On further appeal, <ORG> came to the con- clusion that the immovable property to the extent of four- fifths thereof was an investment held 'solely for the purpose of earning rent therefrom capable of appreciation either nationally or by sale and realisation', but under r . 6 of the Schedule, the Income-tax Officer has jurisdiction to fix a figure which is fair and just. It accordingly allowed the appeal in part.

On a reference being made to it, <ORG> held that in computing profits and gains, the Income-tax Officer had the power to examine the quantum of depreciation either written off or reserved and to satisfy himself that it did not exceed the amount allowable to meet the depreciation. It is common ground between the parties that by virtue of s. 10(7) of the Act the profits and gains of any business of insurance have to be computed in accordance with the rules contained in the Schedule to the Act, and ss. 8 , 9 , 10 , 12 or 18 have no application. Rule 3(b) and r. 6, on the interpretation of which the answer to the question referred to depends, read thus,:

"3. In computing the surplus for the purposes of rule 2-

(b)any amount either written off or reserved in the accounts or through the actuarial valuation balance sheet to meet depreciation of or loss on the realisation of securities or other assets, shall be allowed as a deduction, and any sums taken credit for in the accounts or actuarial valuation balance sheet on account of appreciation of or gains on the realisation of the securities or other assets shall be included in the surplus:

Provided that if upon investigation it appears to the Income-tax Officer after consultation with the Controller of Insurance that having due regard to the necessity for making reasonable provision for bonuses to participating policy- holders and for contingencies, the rate of interest or other factor employed in determining the liability in respect of outstanding policies is materially inconsistent with the valuation of the securities and other assets so as artificially to reduce the surplus, such adjustment shall be made to the allowance for depreciation of, or to the amount to be included in the surplus in respect of appreciation of, such securities and other assets, as shall increase the surplus for the purposes of these rules to a figure which is fair and just;

6.The profits and gains of any business of insurance other than life insurance shall be taken to be the balance of the profits disclosed by the annual accounts, copies of which are required under the Insurance Act , 1938 [4 of 1938], to be furnished to the Controller of Insurance, after adjusting such balance so as to exclude from it any expenditure, other than expenditure which may under the provisions of section 10 of this Act be allowed for in computing the profits and gains of a business. Profits and losses on the realisation of investments and deprecia- tion and appreciation of the value of investments shall be dealt with as provided in rule 3 for the business of life insurance." Mr. <NAME> contends that the Insurance Act , 1938  makes detailed provisions to ensure the true valuation of assets and the determination of the true balance of profits of an insurance business. An examination of various sections of the Insurance Act discloses that he is right in this respect. Section 1  1 requires an insurer to prepare at the expiration of the calendar year a balance sheet, a profit and loss account, and a revenue account in accordance with the schedules. Part I of the First Schedule prescribes regulations and Part II gives forms for the preparation of a balance sheet. Regulation 6 enjoins the appending to the Balance Sheet a statement in Form AA, as set out in Part 11 of the First Schedule, showing the market value and the book value of the assets, including house property. This Form AA has three columns; (1) book value as per (a) below, (2) market value as per (b) below. and (3) remarks as per (c) below-(a) refers to the value for which credit is taken; (b) refers to the market value of assets which has been ascertained from public quotations, and (c) refers to bow the value of the assets as has not been ascertained from public quotations has been arrived at. But it is not necessary to show the market values where they are not less than the book values, and a certificate to that effect is appended to the statement. In other words, if the market value is more than the book value, it need not be shown. Theresult of the above-mentioned provisions is that the statement ofassets will show book value of house property and its marketvalue unless the market value is more.

The Second Schedule prescribes the regulations and forms for the preparation of profits and loss account of some insurers. There are two columns in Form 'B' which need be mentioned : (1) Depreciation of Investments (not charged to Reserves or any particular Fund or Account); (2) Appreciation of Investments (not credited to Reserves or any particular Fund or Account). The Third Schedule sets forth the regulations and forms for the preparation of a revenue account (one of the items to be shown in Form D is 'Rents for offices belonging to and occupied by the Insurer'). Form F is form for Revenue Account applicable to Fire Insurance Business, Marine Insurance Business, and Miscel- laneous Insurance Business. One of the items to be shown is " expenses of management" and note (c) says that if any sum has been deducted from this item and entered on the assets side of the Balance Sheet, the amount to be deducted must be shown separately.

After the balance sheet, profit and loss account and revenue account have been prepared, they have to be audited unless they are subject to an audit under the Indian Companies Act . Under s. 15 the audited accounts and statements above referred to have to be furnished to the Controller as returns.

Section 18 requires every insurer to furnish to the Controller a certified copy of every report on the affairs of the concern which is submitted to the members or policy holders of the insurer.

Section 21 enables the Controller to get such further information from the insurer as he may consider necessary to correct or supplement a return, to examine books of accounts, registers and documents or to examine any officer. The Controller may decline to accept any return unless the inaccuracy has been corrected or the deficiency has been supplied. If he declines to accept any return, the insurer shall be deemed to have failed to comply with the provisions of S. 15 , S. 16 or S. 28 or S. 28A relating to the furnishing of returns. Sub-section (2) of S. 21 enables an insurer to apply to court for cancellation of any order made under cls. (a), (b) or (c) of sub-section (1) or for directing the acceptance of any return which the Controller has declined to accept.

above, should be read in the light of this background. He says that r. 6 authorises an Income-tax Officer to make adjustments of two kinds. First, he can exclude from the balance of profits any expenditure which is not allowable under S. 10 of the Act. He says that the depreciation which has been claimed is not an expenditure within r. 6, for the expenditure must be a disbursement. He refers in this connection to S. 10(2) (xii), (xiv) and (xv) where the word I expenditure' is expressly used. Coming to the second part of r. 6, he argues that the word 'depreciation' includes both actual and notional depreciation, and in r. 3(b) similarly the word 'depreciation' includes actual and notional depreciation. If he is right in this, he says that as r. 3(b) directs the Income-tax Officer to allow the depreciation, which has been written off, the Income-tax Officer has no option but to allow it and he cannot ask the assessee to prove that there has been any actual depreciation. He relies strongly on the decision of this Court in <CITATION> . (1) Let us first see what is the exact scope of this decision. <NAME>, interpreted r. 3 (b) in the following terms :

"When we come to rule 3 (b) we find that the first part of it lays down that it shall be obligatory on the Income-tax Officer to allow certain amounts written off or reserved by the assessee as a deduction and to include in the surplus any sums for which credit has been taken on account of appreciation or gains on the realisation of the securities or other assets. This part of the rule only compels the Income-tax Officer to allow certain amounts as deductions and to include certain amounts for which credit had been taken in the accounts of the assessee. It, therefore, does not warrant what the Income-tax Officer did, namely, to adjust the accounts on the basis of a revaluation made by him." (emphasis supplied) <NAME>.. said this about Rule 3(b); "Under the main part of rule 3(b) certain special deductions and additions must be made to the annual average of the surplus determined under the second rule. Since the life fund is held in securities and the price of stocks and shares fluctuates, provision has been made in rule 3(b) to make adjustments.

Rule 3(b) in its main part speaks of adjustments on the basis of the accounts and amounts as entered in the accounts determine what (1)(1964) 51 I.T.R. 773.

must be added to or deducted from the surplus. The Income-tax Officer must deduct from the annual average of the surplus for purposes of rule 2 any amount entered in the account to cover depreciation of the securities and assets and add any amount taken credit for on account of appreciation. The Income-tax Officer here follows the accounts and gives effect to the entries such as they are. The provision is mandatory and the Income-tax Officer has no discretion."

He then adds :

"The entire subject of such disparity between fact and actual entries is comprehended in the proviso."

It seems to us that this Court has held in categorical terms that r. 3(b) does not empower the Income-tax Officer to adjust the accounts on the basis of a revaluation made by him or to correct the discrepancy between what is entered in the accounts and what is fact.

Mr. <NAME> tried to distinguish the case on the ground that r. 6 was not applicable to a life insurance business and was not considered by the <ORG>. He at first suggested that in the second part of r. 6 the word 'depreciation' did not include notional depreciation. When it was pointed out to him that if this is correct, r. 3 (b) would not be attracted at all, he modified his stand and argued that in r. 3 (b) notional depreciation of property is not included in the word 'depreciation'. We are unable to agree with him that the word 'depreciation' in r. 3 (b) should be construed in this limited sense. The words "any amount written off ... in the accounts ... to meet depreciation of ... other assets" have to be understood in the ordinary connotation. If the draftsman wanted to include depreciation on buildings, what Mr. <NAME> calls notional depreciation, he could hardly have used any other wording.

Mr. <NAME> says that this Court in <CITATION> (1) did not examine one aspect, and this aspect is derived from the words "to meet" occurring in r. 3 (b). He says that the effect of these words is that the Income-tax Officer is obliged to allow any amount written off only if it is really to meet actual depreciation and not any other fanciful conception of depreciation. This question does not arise on the facts of this case, for once we hold that the word "depreciation" covers notional depreciation, it is (1) [1964151 I.T.R. 773.

L2Sup./64-11 nobody's case that it is not notional depreciation that is intended to be written off. There is no sanctity about the rate of depreciation prescribed under the Act. If the rate of depreciation applied by the assessee and accepted by the Controller differs from that allowed under the Act, it cannot be said that the assessee did not write off the amount to meet depreciation.

Mr. <NAME> has referred us to some cases but they were discussed in the above-mentioned decision of this <ORG> and there is no point in discussing them again. We may mention that the learned Counsel for the <ORG> has not rightly urged that the word "expenditure" in the first part of r. 6 comprehends depreciation. We agree with Mr. <NAME> that the word "expenditure" in r. 6 means disbursement. Accordingly, we accept the appeal and answer the question in the affirmative. The respondent will pay costs incurred in this <ORG> and the High <ORG>.

Appeal allowed.