1. NAIMUDDIN, J.-By this reference which relates to the assessment years 1963-64 and 1964-45, the following question of law has been referred to us, under section 66 (1) of the Income tax Act, 1922, at the instance of the Commissioner of Income-tax (Central), Karachi, the applicant .
2. "Whether on the facts and circumstances of the case the reserves for unexpired risks in fire and marine accounts were liable under rule 6 of the First Schedule read with section 10 of the Act as expenditure."
3. The facts giving rise to this question are that the respondents/assessee is an Insurance Company incorporated in Pakistan and carries on life and other insurance business in Pakistan. The respondents claimed reserves for unexpired risks in fire and marine accounts to the extent of 50 per cent. And 60 per cent. Respectively of the total premia received on account of these risks. The Income-tax Officer held that the amounts so reserved were exces--sive and restricted the same to 40 per cent. Of the amount of premia as in his opinion the respondent was unable to make out any case for claiming higher reserves as it was not shown that greater risks were involved in any of the years underassessm ent.
4. The respondent filed a direct appeal to the Income-tax Appellate Tribunal, Karachi Bench, Karachi but conceded before it that no evidence was available to establish the circumstances for claiming higher reserves. However, the respondent placed reliance on the earlier decision of the Tribunal in 1.
5. T. A. No. 2358 of 1966-67; decided on 19-10-1968, wherein the Tribunal, by majority opinion, ruled that the entire claim for the reserves was outside the ambit of scrutiny by the Income-tax Officer as the reserves for unexpired risks could not be treated as expenditure within meaning of rule 6-of the First Schedule to the Act. Therefore, the Tribunal deleted the additions made by the Income-tax Officer.
6. The applicant required the Income-tax Appellate Tribunal to refer the following questions of law, besides another question, said to arise from their order in 1. T. A. No. 2412 of 1:968 and I. T. A. No. 2413 of 1969 decided on 5-6-1970. However, the Tribunal framed only one question mentioned hereinabove; "Whether on the facts and in the circumstances of the case the reserve for unexpired risks in fire account of Rs. 1,58,550 not being an actual expenditure but hypothetical estimate of liabilities is allowable under section 10 read with rule 6 of the First Schedule of the Income-tax Act.
7. Whether on the facts and in the circumstances of the case the Income-tax Officer has no jurisdiction to disallow a part of the reserve for unexpired risks of Rs. 1,58,550 in Fire Revenue account as inadmis--sible under rule 6(1) of the First Schedule read with section 10 in spite of such reserves being contingent liability and hypothetical estimate of undermined and uncertain liability and no evidence have been produced for excessive ,risks involved by the assessee.
8. Whether on the facts and in the circumstances of the case the reserve for unexpired risks in Marine Revenue account of Rs. 2,60,392 not being an actual expenditure but hypothetical estimate of liabilities is allowable under section 10 read with rule 6 of the First Schedule of the Income. Tax Act.
9. Whether on the facts and in the circumstances of the case the Income-tax Officer has no jurisdiction to disallow a part of the reserve for unexpired risks of Rs. 2,60,362 in Marine Revenue Account as inadmissible under; rule 6 (Q,of the First Schedule read with section 10 in spite 4 such reserves being contingent liability and hypothetical estimate of under--mined and uncertain liability and no evidence having been produced for excessive risks involved by the assessee."
10. We have heard Mr. Haider Ali Pirzada, Advocate for the applicant and Mr. Ali Akthar, Advocate for respondent.
11. In order to answer the question we may first here quote the relevant provisions of section 10 (7) of the income-tax Act, rule 6 of the First Schedule to the Act and Circular No. 21 of 1941, issued by the Central Board of Revenue on which reliance was placed by the Income-tax Officer and also by the learned counsel for the Applicant.
12. Section 10 (7) of the Income-tax Act, 1922 reads as follows;-- "10.-(1) Subject to the provisions of this Act, the tax shall be payable by an assessee under the head Profits and gains of business, pro--fession or vocation in respect of the profits or gains of any business, `profession or vocation carried on by him.
13. (2)
14. (4)
(5) ..................
(6) . .... .......
(7) Notwithstanding anything to the contrary contained in section 8,,9 10, 12 or 18, the profits and gains of any business of insurance and the tax payable thereon shall be computed in accordance with the rules contained in the First Schedule to this Act."
15. Rule 6 provides "6.-(1) 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, 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 ...................
16. The relevant part of Circular on the basis of which it was held by the Income-tax Officer that the respondent has failed to prove that in providing higher percentage of the amount of premia as reserve, greater risks were involved in any of the years under assessments, which appears at page 254 of the Income-tax Manual, Part II, 1958 Edition, reads as follows :-.
17. "Normally a reserve equal to 40,per cent. Of the premium income of the expiring year is sufficient provision against all unexpired risks, but if, in any case, it is claimed that on account of the greater risks involved in a particular type of policies, the normal allowance is not sufficient, an aggregate allowance up to, but not in any case exceeding 50 per cent. Of the premium income may be allowed."
18. Having quoted the relevant provisions, we may first, in order to answer the question. As framed, consider the point, `whether setting aside a certain percentage of the premium income from fire, or marine insurance against all unexpired risks is an expenditure within the meaning of section 10(2) of the A Income-tax Act: The word `expenditure' is not defined in the Income-tax! Act, 1922, but it has been considered judicially in a number of cases. We may here refer to Indian Molasses Co.
19. (Private) Ltd. v. Commissioner of Income-tax, West Bengal (1959) 37 1 T R 66wherein the Supreme Court of India observed that "spending" in the sense of "paying out or away" of money is the primary meaning of "expenditure". "Expenditure" is thus what is "paid out or away" and is something which is gone irretrievably. This meaning has been followed by a Division Bench of this Court in the Eastern Federal Union Insurance Co. Ltd. v. Commissioner of Income-tax (Central) 1980 PTD 73.
20. The next point that requires consideration to answer the question under reference .Is what is meant by the word "reserves". This word came up for consideration before the Supreme Court of Pakistan in the Commissioner of Income-tax, North Zone, Pakistan v. The Lyallpur Cotton Mills Ltd., Lyallpur PLD 1960SC48, with reference to its use in Schedule 11, rule 2(1) of the Business Profits Tax Act. It was held therein by Amiruddin Ahmad, J. Who delivered the opinion of the court that the word "reserves" should be given its plain and dictionary meaning, i. e. there must be some setting apart of the amount for some special or general purpose. This was also the meaning assigned to this word by the Dacca High Court in R. Sim & Company Limited v. Commissioner of Income-tax, East Bengal, Dacca (1955) 271 T R 530 According to Ballentine's Law Dictionary, Third Edition, page 1101,\ `Reserve' means: "Verb: To appropriate to a particular purpose. To exclude. To set aside. To set apart from that which has been granted. To make a reservation."
21. "Noun: In insurance, a sum of money variously computed or estimated, which, with accretions from interest, is set aside, as a fund with which to mature or liquidate, either by payment or reinsurance with other companies, future uncured and contingent claims, and claims accrued but contingent and indefinite as to amounts or time of payment."
22. In view of the meaning of the words "Expenditure" and "reserves". Judicially explained, it cannot be said that a portion of the amount of premix kept in reserves for unexpired risks in fire and marine accounts could be treated as expenditure, for, as already noticed "expenditure" :s what is paid out or away or disbursed and is some thing which is gone irretrievably. It is not disputed and cannot be disputed that, that part of premium which is set aside for unexpired risks, is brought back as income after the expiry of the risks and meeting out of loss, if any, arising out of unexpired risks.
23. We would have rested our answer to the question there but we find from the four questions referred to by the Commissioner of Income-tax and quoted hereinbefore and the questions referred to us in the connected references made by the applicant for subsequent years, that the proper question which arises out of the order is 'whether in the facts and circumstances of the case the Tribunal was justified in holding that the entire claim for the reserves was outside the ambit of scrutiny by the Income-tax Officer as the unexpired risks could not be treated as expenditure within the meaning of rule 6 of the First Schedule to the Income-tax'. The first point for consideration to answer this question is of the powers of the Income-tax Officer to question the setting aside of a portion of premium by the assessee as reserves for unexpired risks.
24. Somewhat a similar question but in different form came up for con--sideration before this Court in the Eastern Federal Union Insurance Company Ltd. v. Commissioner of Income-tax. The question was: "Whether in the facts and circumstances of this case, the Tribunal was justified in holding that the reserve for unexpired risk in Fire, Marine and Miscellaneous Accounts could be reduced to 40 % from 50 % of the premium income as provided for in the account submitted to the Controller of Insurance?"
25. In that case the question was answered in the negative, for, in that case the Tribunal had held that the reserves for unexpired risks in fire, marine, and miscellaneous accounts, could be reduced by the Income-tax Officer to 40 per cent from 50 per cent of the premium income as provided for in the accounts submitted to the Controller of Issuance. Reliance was placed on two decisions of Supreme Court of India in Pavan Insurance Company Ltd. v. Commissioner of Income-tax (Madras) ((1965) 55 1 T R 716==1965 PTD 475and Commissioner of Income-tax, West Bengal v.
26. Calcutta Hospital & Nursing House Benefits Association Ltd. (AIR 1965 SC 1902 - 1967 PTD 176In the last-named case it was observed in paragraph 18 of the judgment as follows:- "(18) Examining rule 6 in the light of this. Background, it seems to us that the intention of the rule is that the balance of profits as disclosed by the accounts submitted to the Superintendent of Insurance and accepted by him would be binding on the Income-tax Officer, except that the Income-tax Officer would be entitled to exclude expenditure other than expenditure permissible under the provisions of section 10 of the Act."
27. It may be noted that in the case the Tribunal had taken a view contrary to the view taken in the present case.
28. The reasons given by this Court for the answer, to the above-mentioned question in 1980 PTD 73 can also be given for answer to the question framed by us for no additional arguments were advanced on behalf of the applicant except one, which we will immediately notice. In that case reliance was placed before the Division Bench on the Circular, relevant portion whereof we have already quoted, in support of the argument that the Income--tax Officer under that Circular was bound to allow only 40 per cent. Of the account of premium for unexpired risks unless it was proved that unexpired risk was greater.
29. It was submitted before us by Mr. Haider Ali Pirzada that the finding of the Income-tax Officer was that the respondent had failed to make out any case for claiming higher risks as it was not proved that greater risks were involved in any of the years under assessment and it was further submitted that it was stated before the Tribunal that there was no evidence to establish the stand for claiming higher reserves. 1t was argued by Mr. Haider Ali Pirzada that the instructions contained in Circular were binding on the Income-tax Officer under section 5, subsection (8) of the Income-tax Act, 1922, which provides that all officers and persons employed in the execution of the Act shall observe and follow the orders, instructions and directions of the Central Board of Revenue. He also argued that any directions issued by the Central Board of Revenue have the force of law as under section 59 of the Act they have the powers to make the rules for carrying out the purposes of the Act. He placed reliance on The Province of West Pakistan Through the Secretary, Social Welfare and Local Government Department v. Ch. Din Muhammad and others (PLD 1964 SC 21and Sh.
30. Masud Ahmad v. Pakistan (PLD 1976 SC 195 In the first mentioned case it was observed that administrative instruc--tions contained in memorandum issued by authority competent to alter or amend rules can be as effective and binding as statutory rules.
31. In the second named case it was observed by the Supreme Court that "this argument is also without any substance. It can scarcely be controverted that the letter is expressed in general terms and having been issued by the appropriate authority namely the President, who it cannot be controverted was a repository of the rule-making power regulating the terms and conditions of service of the "listed post holders".
32. So far as the first argument is concerned, it may be stated that section 5 (8 of the Act binds the Income-tax Officer to follow the orders, instructions and directions of the Central Board of Revenue but such orders, instructions and directions cannot bind an assessee, if the same are not based or do not rest for their validity on some provision of the Act or the Rule framed thereunder. Since B it is not shown that the Central Board of Revenue under any provisions of the Act or the Rules framed thereunder could restrict the provision for keeping aside certain portion of premium income for an unexpired risk to 40 per cent. Or in case of a greater risks to 50 percent. Therefore, such restrictions could not have any binding force on the assessee. In fact Kanga and Palkhivala in their book, `The Law and Practice of Income-tax', 5th Edition (1958), page 883, expressed the desirability for making the provisions for allowance in respect of unexpired risks in the statute in the following words; "It is eminently desirable that provisions for allowance in respect of unexpired risks should be made in the statute itself rather than that the matter should be regulated merely by administrative practice and execu--tive instructions."
33. Accordingly, the Indian Legislature in rule 5 (c) in the First Schedule to the Indian Income-tax Act, 1961 has made provision to the effect that "such y amount carried over to a reserve for unexpired risks as may be prescribed in this behalf, shall be allowed as a deduction."
34. Taking up the second arguments that .The instructions issued by the Central Board of Revenue have the force of law as they, under section 59 of the Act, have powers to make rules, it may be stated that under section 59 (4) & (5) of the Act the considerations for framing valid rules and their previous publication and publication in the official Gazette. It is not shown that these conditions were fulfilled with regard to the instructions contained in, the Circular.
35. We may here refer to Supreme Court decision in Pakistan v. Sheikh Abdul Hamid PLD1961SC105. In this case it was observed by Cornelius, C. J. As follows :-- "The conclusion appears to us to have been reached altogether too easily. Office instructions are manifold in their scope and are designed and expressed to be used as guidance for the conduct of the affairs of each Department, and on such instructions it is perfectly pain that no legal right can be founded. On the other hand, a statutory rule has certain visible characteristics which must be looked for and cannot be dispensed with, when the question arises of claiming upon the basis of such rule a right in law. A rule requires to be expressed with precision; and yet to possess generality so as to be capable of applica--tion to a large number of cases. If it leaves scope for discretion, that should be expressly provided for. Ordinarily, it. Is necessary also that making and promulgation of a rule should be attended by certain for--malities, e.g. publication in a Government Gazette. - It is not enough that there is no express rule relating to a point to confer upon any existing office instruction that there may be, the status and validity of a statutory rule."
36. In the two cases cited by Mr. Haider Ali Pirzada the powers for framing rules were not circumscribed by the conditions of their previous publication, and the publication in the official Gazette and therefore, the cases are dis--tinguishable. We may also here refer to The United Netherlands Navigation Co. Ltd. v. The Commissioner of Income-tax South - Zone (West Pakistan),Karachi PLD 1965 SC 412on which reliance was placed by Mr. Ali Athar, wherein the Supreme Court had ruled while considering the instructions issued by the Central Board of Revenue for grant of depreciation allowance while comput--ing profits of non-residents, that instructions had no legal force.
37. From the foregoing we conclude that the Income-tax Officer is bound to accept balance of profits and disclosed by the accounts submitted by an assessee to the Collector of Insurance under section 15 (1) of the Insurance Act, 1938 and accepted by him, except that the Income-tax Officer is entitled to exclude expenditure other than expenditure permissible under the provisions of section 10 of the Act and that the amount set aside as reserves for unexpired risks is not "expenditure" within the meaning of rule 6 of the First Schedule and section 10 of the Income-tax Act.
38. We would accordingly answer the question reframed by us in the affirmative.