Question

How are additional reserves or catastrophic reserves typically treated in the computation of profits?

a.

They are included as a deduction before assessment of tax

b.

They are included as a deduction after assessment of tax

c.

They are not allowed as a deduction before assessment of tax

d.

They are not allowed as a deduction after assessment of tax

Answer: (c).They are not allowed as a deduction before assessment of tax Explanation:In most countries, including India, additional reserves or catastrophic reserves are not allowed as a deduction before the assessment of tax. The normal format of profit computation as laid down by legislation does not provide for such reserves, and income tax authorities do not permit their deduction. Therefore, if an insurer or reinsurer wishes to set up an additional catastrophic reserve, it must be done out of profit after tax.

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Q. How are additional reserves or catastrophic reserves typically treated in the computation of profits?

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