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Judgment
Sethuraman, J.—The following questions have been referred to this court under s. 256(1) of the I.T. Act, 1961 :
Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the provision of Rs. 2,68,056 made by the
assessee-company to meet the loss of its fixed deposit and the interest accrued thereon with Messrs. Calicut Modern Spinning And Weaving Mills
is an admissible deduction under rule 5(b) of the First Schedule to the I.T. Act, 1961 ?
Whether the Tribunal''s view that the expression ''investment'' contemplated in rule 5(b) would include the fixed deposit made by the assessee-
company with Messrs. Calicut Modern Spinning and Weaving Mills is in accordance with the scheme of the Act and is sustainable in law ?
Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the interest accrued on the deposit but not
realised would also be an ''investment'' under rule 5(b) and that the provision made to meet this amount should also be deducted under this rule ?
The assessee is a general insurance company which has since been nationalised. The company deposited a sum of Rs. 1,00,000 with Calicut
Modern Spinning and Weaving Mills on December 20, 1963, for a period of two years. On March 13, 1964, and on April 18, 1964, two further
deposits of Rs. 50,000 each were made with the same company for a period of three years each. Thus the total deposits aggregated to Rs.
2,00,000.
These deposits were, after the period of maturity, being renewed annually, and when the interest was in arrears, the renewal was with the
interest also. The interest payable on the deposits was 8% p.a. The total deposit with the mills stood at Rs. 2,68,056 as on December 31, 1970.
The interest accrued was offered for assessment to tax as and when it accrued. In 1968, the company did not pay the amount demanded and,
therefore, a suit was filed in the court of the subordinate judge of Madurai, the suit being numbered as O.S. No. 203 of 1968. At the time, when
the assessment under consideration came to be made, the suit was pending. While preparing the balance-sheet of the company as at December
31, 1970, the custodian of the company in accordance with the directions issued by the Central Govt. went into the possibility of realising all the
investments made by the assessee. The balance-sheet of the mill was taken into account and it showed that the mill had huge liabilities and that the
value of the assets as shown in the balance-sheet was inadequate to meet the claims of the secured creditors. The assessee was in the position of
an unsecured creditor. The auditor of the assessee-company examined the financial position of the mills and gave his opinion that no part of the
fixed deposit made with the mills or interest thereon was realisable. In this circumstances, the assessee made a provision of Rs. 2,68,056 to meet
the depreciation or loss of this deposit.
For the assessment year 1971-72, the company claimed that this sum of Rs. 2,68,056 should be allowed as a deduction under r. 5(b) of the
First Schedule to the I.T. Act 1961. The ITO disallowed the claim on the ground that all types of assets could not be included in the category of
investments and that the present deposit did not fall within the category. The AAC on appeal accepted the assessee''s claim that the term
investment"" in r. 5(b) would cover fixed deposits also and he, therefore, directed the ITO to allow the claim. The matter was taken on appeal by
the ITO to the Tribunal. The Tribunal held that the expression ""investment"" occurring in r. 5(b) of the First Schedule to the I.T. Act would cover
the fixed deposit also and that as the deposit made by the assessee with the mills became irrecoverable, the amount claimed was an admissible
deduction under the said rule. The disallowance made by the ITO was not, therefore, sustained. It is against that order of the Tribunal, the
reference of the question extracted above, has been made.
Section 44 of the I.T. Act provides that notwithstanding anything to the contrary contained in the provisions of this Act relating to the
computation of income chargeable under the various heads, the profits and gains of any business of insurance should be computed in accordance
with the rules contained in the First Schedule. Rule 1 to 4 the First Schedule deal with the computation of the income of a life insurance company
and r. 5 with the computation of income of other insurers. This being a case of a general insurance company, r. 5 is the provision to be considered.
That provision, is so far as is material, runs as follows :
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, subject to the
following adjustments :-......
(b) any account either written off or reserved in the accounts to meet depreciation of or loss on the realisation of investments shall be allowed as a
deduction, and any sums taken credit for in the accounts on account of appreciation of or gains on the realisation of investments shall be treated as
part of the profits and gains :
Provided that the Income Tax Officer is satisfied about the reasonableness of the amount written off or reserved in the accounts, as the case may
be, to meet depreciation of or loss on the realisation of investments;....
In the present case, the assessee made a provision of a sum of Rs. 2,68,056 due from the mills. From the facts mentioned above, it would be
clear that the custodian who was in charge of the assessee-company examined the possibility of realisation of the investments and he obtained an
opinion of a qualified auditor, who after examining the financial position of the mills gave his opinion that no part of the fixed deposit and the interest
due was realisable. It was in these circumstances, that the assessee made a provision of Rs. 2,68,056 to meet the depreciation or loss in respect of
the deposit. The ITO has not doubted the reasonableness of the amount reserved in the accounts as a provision to meet the depreciation of these
investments. The disallowance was made only on the ground that the amount deposited did not represent an investment. We have, therefore, to
find out whether the deposit in the present case would fall within the category of ""investments"" contemplated by r. 5(b) of the First Schedule to the
I.T. Act, 1961.
The ""investment"" has been defined in r. 7(1)(ii) of the First Schedule to the I.T. Act, 1961. It stated :
''Investments'' includes securities, stocks and shares.
The definition is of the obvious. From the fact that the word ""includes"" occur in the definition, it is clear that the word ""investments"" is not
restricted in its application only to securities, stocks and shares. If can comprehend other items of properties, and the question is whether the
deposit like this comes within the scope of the said expression. As the word ""investment"" has not been comprehensively defined in the Act, t should
be understood in its ordinary and popular sense or in the sense in which it is understood in the business parlance. The meaning of the word
investment"" has been given in the Chamber''s XX Century Dictionary, as ""an act of investing, any placing of money to secure income or profits,
that in which money is invested"". In Concise Oxford Dictionary, the meaning of the word ""investment"" has been given as ""investing of money;
money invested; property in which money is invested"". The dictionary meaning shows that so long as money is placed with someone in order to
secure income or profits, it will be an ""investment"". There must be something, some property which represents the investment. A fixed deposit in a
company is a piece of movable property and would be an ""investment"".
In IRC v. Rolls-Royce Ltd.(No.2)(1944) 29 TC 137, Macnaghten J. observed in considering the meaning of the word ""investment"" as follows
(p. 140) :
The word investment, though it primarily means the act of investing, is in common use meaning that which is thereby acquired; and the primary
meaning of the transitive verb ""to invest"" is to lay out money in the acquisition of some species of property;...
Thus so long as the act of investment brings into existence a species of property, it would be an investment within the ordinary or commercial
parlance. Judged by this test, in the present case, the fixed deposit with the company would be comprehended by this expression. It would,
therefore, qualify for being considered under r. 5(b) of the First Schedule to the I.T. Act, 1961. As already seen there has been depreciation or
loss in the realisation of this investment and hence, for this purpose, a provision has been made and such a provision is intended to be allowed by
the said rule.
The learned counsel for the revenue drew our attention to two decisions. The first decision is that of the Supreme Court in (1977) 106 ITR 45
(SC) . In that case, the company was incorporated with the object of purchasing lands and buildings and letting them out. The question was
whether this company was one whose business consisted wholly or mainly in the holding of or dealing in investments within the meaning of s. 23A
of the Indian I.T. Act, 1922. The contention of the assessee was that the word ""investment"" had to be understood in a restrictive sense, viz.,
investments on shares, securities and stocks and not in immovable properties. This contention was not accepted by the Supreme Court. As the
expression is understood in a wider sense, this decision in a way supports the view that we are taking and that we have indicated above.
The other decision relied on by the learned counsel is Commissioner of Income Tax, Bombay City-III Vs. Aloo Investment Co. P. Ltd., . The
Bombay High Court has considered the scope of the expression ""investment company"" occuring in s. 109(ii) of the I.T. Act, 1961, which
corresponds to s. 23A of the Indian I.T. Act, 1922. A reference was made in the said decision to the case of Nawn Estates (P.) Ltd. Vs.
Commissioner of Income Tax, West Bengal, and it was held that loans and advances made by the company would not constitute ""investments"".
The meaning of the word ""investment"" has to be taken in the context in which it occurs, and merely because one view was taken with reference
to the said expression occurring in a different provision, it does not mean that the same view would have to be taken wherever the word occurs in
any other context. It cannot be disputed that when a person takes up debentures, he merely advances money to a company and he gets in return a
bond. The bond is nothing but a voucher for the amount deposited. The debentures has the advantage of the security of the properties of the
company. It is also easily transferable. A deposit is in the same position as a debenture. The only difference is that a deposit is an a specie of
property. It is not necessary for our present purpose to pursue this point. As indicated earlier, we are clearly of the opinion that the deposit made
by the assessee in the mills was an investment.
The learned counsel for the Commissioner contended that the deposit creates only a debtor and creditor relationship and that, therefore, it
cannot be taken as an investment. The contention was that there must be some acquisition of species of property as a result of laying out of the
money. As pointed out earlier, we consider that there has been acquisition of a specie of property. We are not concerned with the question
whether this deposit is a negotiable one or not. But it cannot be gainsaid that by reason of the deposit, the assessee has acquired property in the
shape of the receipt, and he is the owner thereof. The existence or otherwise of the relationship of debtor and creditor between the person who
lays out the money and the company which receives it is not the real criterion of an investment. There may be properties which give rise to that
relationship, while there may be others which do not. The result is that the question 1 and 2 are answered in the affirmative and in favour of the
assessee.
As regards the third question, as set out in the settlement of the case, the amount due from the company was being capitalised and that is how
the sum of Rs. 2,68,056 was taken as an investment in the hands of the assessee. Whenever a deposit is renewed, the amount actually due under
deposit along with the interest has been stated to be the renewed deposit. What has obviously happened in effect is that the assessee has been paid
the money due as interest, and it redeposited in in the mills. It should also be an investment. The net result is that the third question is also answered
in the affirmative and in favour of the assessee. The assessee will be entitled to costs. Counsel fee Rs. 500.