1. The assessee is a life insurance company and according to the actuarial valuation as at 31st December, 1943, there was a deficit of Rs. 3,56,054. The actuarial valuation as at 31st December, 1946, showed a surplus of Rs. 37,429, and the question that arose was the proper mode of ascertaining the profits or income of this company in accordance with the Schedule to the Income-tax Act.
2. Now, there is no dispute with regard to the application of rule 2. For that purpose the surplus for the inter-valuation period has to be assessed at Rs. 3,93,483 comprising the actuarial valuation of Rs. 37,429 and the deficiency as disclosed by the actuarial valuation as at 31st December, 1943. The question that arise on this reference is ads to the application of rule 3 and rule 3 (a) provides.
'In computing the surplus for the purpose of rule 2, one-half of the amounts paid to or reserved for or expended on behalf of policy-holders shall be allowed as a deduction.'
3. The company carried forward a sum of Rs. 34,622 out of the actuarial surplus of Rs. 37,429 to be reserved for the exclusive benefit of the policy-holders as Participating Policy-holders' Bonus Reserve Fund and with regard to this half, the amount, viz, Rs. 17,311 was allowed by the Department as a permissible deduction. But the claim put forward by the company was that it was also entitled to a education with regard to the sum of Rs. 3,56,054, and what was urged was that this amount had to be credited to the Life Insurance Fund, that it constituted a statutory reserve for the policy-holders, and therefore this amount must be looked upon for the purpose of rule 3 (a) as the an amount reserved for the policy-holders. Now, the scheme of the Life Insurance Fund is that there is an obligation upon every life insurer to maintain a fund which is sufficient to meet the present and contingent liabilities of the policy-holders. This fund cannot be utilised for any other purpose except for the purpose of meeting these liabilities, and there is also an obligation upon the insurer under the Act. When the actuarial valuation was made as at 31st December, 43, a deficit was discovered in this fund; in other words, the company was not in a position to meet all the present and contingent liabilities of its policy-holders, and the deficit was to the extent of Rs. 3,56,054. This deficit was made good after three years. Not only was it made good, but there was actually a surplus in the fund to the extent of Rs. 37,429. Now, in law the insurance company could dispose of this surplus, viz., Rs. 37,429, as it pleased. It could declare a dividend out of it or it could give bonus to the policy-holders or it could reserve it for bonus to be given in future, and what the company did, as pointed out, was that extent of Rs. 37,622, it set it apart for bonus to be given to the participating policy-holders. When we return to rule 3 (a) it is clear that the object of the Legislature in enacting this rule was to induce a life insurance company to reserve as much as possible out of the actual surplus amounts for the benefit of policy-holders and not to distribute it as dividend to the shareholders. Therefore, the application of this rule would only arise when some benefit was conferred upon the policy-holders. The benefit might take the shape of amount actually paid or reserved for them or expended on their account. But there must be a benefit which is enjoyed by the policy-holders.
4. Now, on the facts of this case it is clear that with regard to this sum of Rs. 3,56,054 no benefit whatever is conferred upon the policy-holders. This amount, by reason of the statutory obligation, goes to the life fund to make up the deficit which had arisen in the earlier period. This amount is earmarked to meet the liabilities due to the policy-holders. This amount is not intended to confer any benefit upon the policy-holders. It is, therefore, not by any volition on the part of the insurance company that this amount is credited to the life fund. Rule 3 (a) postulates some action on the part of the insurance company which is a voluntary act and which arises out of the volition of the company. In other words, there must be a disposal surplus which it would be open to the company to dispose of in one way or another and it dispose of it conferring a benefit upon the policy-holders.
5. When it confers a benefit upon the policy-holders, then to the extent of half that amount it can claim a deduction for the purpose of assessing its profits or gains for the purpose of taxation. But with regard to this particular amount of Rs. 3,56,054 it was not an amount which was at the disposal of the company to do with it liked. It was not open to the company to utilise any part of this amount either for declaring dividend or giving benefits to the policy-holders. By statute this amount had to be credited to the life fund in order to make good the deficit which had occurred in the earlier years. Therefore, in our opinion, it could not be said of this sum of Rs. 3,56,054 that it was reserved for the policy-holders within the meaning of rule 3 (a). In our opinion, therefore, the Tribunal was right in the view that it look that no deduction could be allowed to the company in respect of this amount.
6. We, therefore, answer the question submitted to us in the negative. The company to pay the costs.
7. Reference answered in the negative.