I. MAHMUB, J.-This is a reference by the Income-tax Appellate Tribunal at the instance of the Commissioner of Income-tax (Central), Karachi, in which the following question of law has been referred to the High Court for opinion under section 66(1) of the Income-tax Act, 1922: "Whether on the facts and in view of the provisions of rule 2(a) and the definition of management expenses in rule 5(iii) of the First Schedule, the Income-tax Appellate Tribunal was justified in allowing depreciation over and above the maximum Management expenses, which had already been allowed?"
2. The respondent, Messrs United Insurance Co. Ltd., which carries on business of life insurance, submitted a return of income for the assessment year 1962-63, in which it claimed depreciation on assets written off in the accounts amounting to Rs.4,606. The Income-tax Officer computed the profits under rule 2(a) of the Rules in the First Schedule to the Income-tax Act, in the absence of an actuarial valuation under rule 2(b). He disallowed depreciation and added back this amount, which, he stated, would be considered separately, which however, he failed to do. The insurance company appealed to the Appellate Assistant Commissioner of Income-tax, who allowed the appeal and held that the depreciation on assets written off in the accounts should be allowed under rule 3(b). The Department filed an appeal to the Income-tax Appellate Tribunal (hereinafter referred to as the Tribunal). The Tribunal agreed with the view of the Commissioner and dismissed the appeal holding that whether the computa--tions of the profits from life insurance business is made under rule 2(a) or rule 2(b) of the First Schedule, the' depreciation of the assets written off in the accounts had to be allowed under rule 3(b).
3. The Commissioner, therefore, applied for a reference under sec--tion 66(1) of the Income-tax Act and the question set out above has thus been referred to us.
4. Before discussing the question, it is pertinent to state the scope of rules 2 and 3 of the Rules contained in the First Schedule to the Income-taxi Act for computing the profits and gains of life insurance business. Under 'A rule 2, the profits and gains of life insurance business should be taken to be, either--- "(a) the gross external incomings of the previous year from the business less the Management expenses of that year, or
(b) the annual average of the surplus or deficit disclosed by the actuarial valuation made for the last inter-valuation period ending before the year for which the assessment is to be made . . . ."whichever is the greater.
Rule 3 states that in computing the surplus for the purposes of rule 2---- "3(b) any amount either written off or reserved in the accounts or through the actuarial valuation balance-sheet to meet depreciation of .... Assets, shall be allowed as a deduction . . . . ."
5. The submission of Mr. Mansoor Ahmad Khan, learned counsel for the Commissioner, is that rule 3(b) applies only where there is a surplus arrived at while computing the profits and gains of the business under rule 2(b), whereas there is no mention of "surplus" in rule 2(a) and, therefore, rule 3(b) can have no application to the computation of profits under rule 2(a), namely gross external incomings of the preceding year less the Management expenses of that year. He referred to the definition of the word 'surplus' in several dictionaries, such as, Ballantyne Law Dictionary, page 1244, Black's Law Dictionary, page 1612, Stroud's Judicial Dictionary, Vol. 5, page 2697, which, in general, define the meaning of the word 'surplus', as that which is not needed or which is left over or an amount of excess over capital, etc. However, we are not satisfied that the word 'surplus' has any technical meaning in insurance law and none has been shown to us, e Therefore, we are of the opinion that the word 'surplus' would also mean the excess of "the gross external incomings less the Management expenses".
6. The submission of Mr. Ali Ather, learned counsel for the respondent, is that rule 3 applies to rule 2 as a whole and not only to rule 2(b). When the profits and gains of the life insurance business are computed under rule 2(a) on the basis of the excess of gross external incomings less Management expenses or on the basis of the annual average surplus disclosed by the actuarial valuation balance-sheet in accordance with rule 2(b), and if there is a surplus, then in computing that surplus, rule 3(b) provides that depreciation amount written off or reserved in the accounts or through the actuarial valuation balance-sheet shall be allowed by the Income-tax Officer as a deduction. Rule 3(b) embraces both the depreciation written off in the accounts produced for computation of the profits and gains of the life insurance business under rule 2(a) as well as when it is written off or reserved through the actuarial valuation balance-sheet which is produced for computa--tion of the profits and gains under rule 2(b). Rule 3(b) is mandatory and the I. T. O. Has no option but to allow it as observed in the case of Pandyan Insurance Company Ltd. v. The Commissioner of Income-tax, Madras (1965 PTD 475) referred to by the Tribunal in its order.
7. Moreover, the definition of 'Management expenses' in rule 5(iii) excludes depreciation and the Management expenses shall not exceed the prescribed limits contained in clauses (a), (b), (c) and
(d) to the proviso to rule 2. Therefore, but for rule 3(b), depreciation would be excluded from the Management expenses in every case and this cannot be the intention of the Legislature. Rule 3(b) provides for allowance of the depreciation after the surplus is determined with reference to the gross external incomings as reduced by the Management expenses. We are inclined to agree with the view of the Tribunal that the respondent was entitled to a deduction of the amount of depreciation claimed over and above the maximum Management expenses already allowed.
8. In this view of the matter, we would answer the question referred to us in the affirmative and hold that the Tribunal was justified in allowing the depreciation. There will be no order as to costs.