1. The questions referred under section 66(2) of the Indian Income-tax Act for our decision are :
'(1) Whether there was any evidence to support the findings that the house property assets were at all time acquired in the course of the petitioner company's business and not as part of its any allied non- Insurance business and
(2) Whether, on the facts and in the circumstances of this case, the sum of Rs. 2,36,416 (rupees two lakhs thirty six thousand four hundred and sixteen) has been rightly assessed as the income of the petitioner company under para. 6 of the Schedule to the Income-tax Act ?'
2. In stating the second question we have corrected an arithmetical error in that in the original question No. 2 the figure is mentioned as Rs. 2,30,416, but by a note appended to the questions by the Tribunal the correct figure is Rs. 2,36,416. Accordingly, we deal with question No. 2 as corrected.
3. The circumstance under which the questions arise are as follows : The assessee is the Habib Insurance Co. Ltd., Bombay, and the year of assessment is 1950-51 corresponding to the account year being the calendar year 1949. The company was incorporated some time in December, 1942, and it commenced business from January 2, 1943. In an extensive 'objects' clause contained in its memorandum of association the company was empowered to carry on several different businesses. After the commencement of its business in January, 1943, it began to do the business of 'life insurance' and general Insurance including fire, marine and miscellaneous insurance. Soon after commenced business the company purchased eight properties in all, inclusive of three under consideration and in respect of which the question arise. These properties were three buildings in Bombay named Habib Mansion, Habib Villa and Khatiza Villa. By a resolution passed on December 8, 1949, these properties came to be transferred and the transfers were as follows : Habib Mansion was sold outright by the company and the two other properties, Habib Villa and Khatiza Villa, were transferred merely by means of book entries. They were shown in the books of account as being transferred from 'other classes of business' to 'life and annuity business'.
4. The Income-tax Officer found that as a result of these transfers the assessee-company earned a total profit of Rs. 2,36,416 which is the subject matter of the two questions referred to us. This amount consisted of Rs. 76,462 being the actual surplus realised on the sale of the property known as Habib Mansion and a sum of Rs. 1,59,954, which represents to appreciation in the value of the other two properties, namely, Habib Villa and Khatiza Villa, which were transferred from the assets belonging to 'other classes of business' to 'life and annuity business' of the assessee. The Income-tax Officer brought to tax this amount as a profit on the sale of investment and in doing so he relied upon the special rules of computation of the profits and gains Insurance business contained in the Schedule to the Income-tax Act. He relied upon rule 6 read with rule 3 of the Schedule.
5. The assessee on its part contented that these properties never formed part of its Insurance business at all, whether of life Insurance or of general Insurance and, therefore, could not be brought to tax under the provisions of rule 6 read with rule 3 of the Schedule to the Income-tax Act, but represent capital gains of the company in respect of properties held by the assessee company on account of another business which Mr. Kolah on behalf of the assessee described as an 'investment business' and which has been referred to in the statement of the as 'non-Insurance business'. The assessee urged that the amount represented merely capital accretion on a capital assets of the 'investment business' and as such it was not chargeable to tax at all. It may be noted here that in the year of account there was no tax payable on capital gains.
6. The assessee filed in support of its contention accounts for the two years, namely, for the year ended December 31, 1943, which was the year after it commenced business and for the year ended December 31, 1949, which was the relevant account year for the assessment year with which we are concerned, 1950-51. In the balance-sheet for the year ended December 31, 1943, the assessee has shown its liabilities and assets under two heads 'life and annuity business' and 'other classes of business'. In that year on its assets side it had shown 'Landed property in India' of Rs. 10,47,100 under 'other classes of business'. This represents the total value of the eight properties which the assessee-company owned in Bombay of which three are the properties with which we are concerned in the present reference. It has also shown on the assets side 'interest and rent outstanding' of Rs. 13,458-8-9 and on the liabilities side 'rent received in advance' of Rs. 15-4-0 'deposits from tenants' of Rs. 7,091-9-0. All these items it has shown under 'other classes of business'. In the same year the company has disclosed that it had a reserve fund of Rs. 2,50,000 and other funds amounting to Rs. 93,255-5-0 under 'life and annuity business'. In the profit and loss account for the year ended December 31, 1943, it showed an income from interests, rents etc., of Rs. 95,028-11-4 and so far as its Insurance business is concerned it showed the profits from its general Insurance under the three heads 'fire revenue account', 'marine revenue account' and 'accident and miscellaneous account'. We are not here concerned with the figures pertaining to these items of business but we refer to theses entries to show how the accounts were maintained.
7. Similarly for the account year ended 31st December, 1949, after the transfer of the three properties the assessee had shown on its assets side the resultant effect of the transfers as follows : It showed the landed property at Rs. 3,39,356 under the head 'life and annuity business' and Rs. 7,28,450 as 'other classes of business' making a total of Rs. 10,67,806 which on that date was the total landed property belonging to the assessee-company. It was explained that the small difference in the total figure of landed property as compared with year ended December 31, 1943, was as a result of some purchases made in the intervening years. The amount of profit now brought to tax is the profit derived from the sale of Habib Mansion and by the transfer of the two properties, Habib Villa and Khatiza Villa, to the 'life and annuity business'. Part of the profits brought to tax was therefore as a result of the transfer of the properties to the 'life and annuity business' amounting to Rs. 3,39,356.
8. It was urged before the tax authorities that soon after the company commenced business out its subscribed and paid-up capital of Rs. 25 lakhs it possessed funds in excess of its requirements in relation to its business of Insurance and, therefore, the directors decided to utilise the surplus funds by investment them in the purchase of properties. the investments made in the purchase of properties were made initially from the subscribed capital and not from any Insurance fund and therefore the properties stood outside the scope of the Insurance business and must be regarded as asset of a different business, namely, an 'investment business'. The properties purchased were investments pure and simple and were not committed to any business in real estate. In other words, the company was not dealing in the purchase and sale of immovable properties but merely investing the surplus funds out of the general reserve of the company in the shape of immovable properties. Those properties therefore do not form part of the any asset of the Insurance business nor can the profits and gains arising therefrom be said to be profits and gains of that business of insurance.
9. These contentions have been concurrently rejected by the income-tax authorities and by the Tribunal. They have first of all point out that, if there was a separate business, there would have been some material which the assessee could have produced to show that a separate 'investment business' or 'non- Insurance business' was started at the very inception, but the assessee has not been able to produce any such resolution or other papers indicating the commencement of an 'investment business' or 'non- Insurance business'. Secondly, they have found that no part of the income from such property was ever brought to tax under section 9 of the Indian Income-tax Act under which it ought to have been submitted for taxation between the years 1943 and 1949, because if these properties were the assets of a separate investment business, then the income arising out of these properties would be subject to tax under section 9. On the other hand, they were always treated as part of the assessee's business of insurance. Thirdly, the manner in which the assessee-company has throughout dealt with these properties is reflected in its accounts and according to the authorities on a plain reading of these accounts it is clear that these properties were throughout treated as the properties of the Insurance business and not of any other business. We will separately deal with the detailed contentions on this aspect of the question but the conclusion of the authorities has been that the accounts established that these properties were the properties of the Insurance business of the assessee.
10. When the case had come before the Income-tax Tribunal for the first time a grievance was made on behalf of the assessee that the Income-tax Officer and the Appellate Assistant Commissioner had throughout the proceedings assumed that the immovable properties in question were from the date of their acquisition part of the assets of the assessee's Insurance activities and the Tribunal felt that the assessee had had no opportunity to establish its assertion that these properties were the assets of a different business or investment business and not of Insurance business and therefore they remanded the matter to the Income-tax Officer for a report on that question. The Income-tax Officer made his report on October 10, 1958, reporting that the profits on the sale and transfer of the three properties in question from the general Insurance department were rightly brought to tax under the Schedule to the Income-tax. After taking into consideration the report of the Income-tax Officer after remand, the Tribunal confirmed the views taken by the Income-tax Officer and the Appellate Assistant Commissioner and dismissed the assessee's appeal. The Tribunal has held that there was no evidence that these properties were earmarked for a purpose such a investing them in landed properties, but that, on the other hand, the whole conduct of the assessee-company in the course of the assessment proceedings for several years was contrary to that submission of the assessee. It pointed out that the company did not declare its income from these properties under section 9 to be assessed as 'Income from property' as upon its contention is should have done. It also pointed out that all expenses incurred in connection with these assets were claimed as part of the expenses with regard to the general Insurance business. As regards the accounts for the years ended December 31, 1943, and December 31, 1949, it examined those accounts and held that there was no justification for the holding that in these accounts there was included income from any other non- Insurance business. Upon these grounds the Tribunal held that these property assets were at all time acquired in the course of the assessee's Insurance business and not as part of any non- Insurance business.
11. All these findings of the Tribunal have been disputed before us by Mr. Kolah on behalf of the assessee. Mr. Kolah has first of all referred to the memorandum of association of the company which he says empowered the company to start a business in the nature of an investment business in immovable property and that accordingly the company had invested out of its capital of Rs. 25 lakhs which was found surplus for the purchase of their Insurance business an amount of over Rs. 10 lakhs for the purchase of eight properties of which these three form a part. The intention of the company clearly was to commence a business separate from its business of insurance, viz., of investment in immovable properties. He referred to the accounts, the balance-sheet for the year ended December 31, 1943, and pointed out that the purchase of these properties was reflected in the entry on the assets side 'landed property in India' of Rs. 10,47,100 under the head 'other classes of business'. He says that the dichotomy adopted in the accounts themselves establishes the assessee's contention and the dichotomy is between 'life and annuity business' and 'other classes of business'. Therefore, these properties were assets of a business other than the 'life and annuity business'.
12. Now, in the first place, the company, when it started business in 1943 (after its incorporation in December, 1942), was started as an Insurance company. A glance at clause 3 which lays down the objects of the company shows that principally the objects of the company were to carry on the business of insurance. Mr. Kolah referred particularly to clauses 3(r), (u) and (v) of the memorandum of association. No doubt, clauses 3(r) and (u) give the power to purchase real property and to sell the properties of the company and clause (v) gives the power 'To invest and deal with the moneys of the company not immediately required in such manner as may from time to time be determined', but none of these clauses refers to a separate business other than Insurance as was contended. Along with the principle objects of a company in every memorandum of association are mentioned objects which subserve the main object or are ancillary to the main object and obviously in the case of an Insurance business a right to purchase and sell immoveable property must necessarily be there, for that is generally regarded as the safest and the most valuable assets of an Insurance company. So too is the right to invest and deal with the moneys of the company not immediately required in such manner as may from time to time be determined. It is merely given in aid of the main purpose, viz., the carrying on of an Insurance business. These clauses upon which reliance has been placed by Mr. Kolah are at any rate not decisive of the issue before us, namely, whether the company had at the inception commenced a separate business - a non- Insurance business or an investment business. The power to purchase or sell immoveable property or to invest and deal with the moneys of the company even upon the terms of these clauses could as well be an adjunct to the power to carry on Insurance business. These clauses do not necessarily therefore show that there was authority to carry on a separate business. There is nothing else in the memorandum of association to support the contention.
13. The company had a paid-up capital of only Rs. 25 lakhs and if it was decided to divert a substantial portion of that capital to a new or separate business, there would certainly be placed on record the fact of the commencement of that business. Obviously, such a business could not be commenced without at least a resolution of the board of directors of the company. It is therefore undoubtedly an important circumstance to be taken into account that no such resolution has been produced to indicate (a) that a certain part of the capital of the company was at time set apart for the commencement of a new business nor (b) to show that the properties purchased were earmarked as an asset of the new business. Even resolutions as to how the property after it was purchased, was to be treated, have not been produced nor even the sale deeds of these properties which would have shown who was purchasing party.
14. We are also in agreement with the remarks of the Tribunal that if these properties were initially acquired as the assets of a separate business, namely, the non- Insurance business or the investment business as Mr. Kolah put it, the assessee was bound to have shown the income from these properties in its income-tax return, as 'income from property', but the Tribunal has observed - and we think correctly - that from 1943 to 1949 the company itself year after year did not declare income from these properties under section 9 to be assessed as 'income from property'. Further, all expenses incurred in connection with these assets were also claimed as part of the expenses only of the general Insurance business and not, as now contented, of a separate investment business.
15. The same position is reflected in the accounts of the company. The principal contention founded upon these accounts is that the balance-sheets both of year ended December 31, 1943, and for the year ended December 31, 1949, distinguish between two categories of business, namely, 'the life and annuity business' and 'other classes of business' and therefore the accounts themselves show that there was a business other than the Insurance business. The argument is based upon the two headings under which the assets and liabilities of the company are shown in the two balance-sheets. On behalf of the department, however, it was contented that obviously the heading 'other classes of business' refers to other classes of Insurance business and nothing more and that the dichotomy in the accounts is between such as marine, fire, accident and miscellaneous Insurance business. Of course, if the interpretation which the assessee has put upon its own accounts be correct, then there would be a considered support for its contention that a new business was commenced from the very inception but we are quite unable to accept this reading of the accounts for the two relevant years.
16. In order to understand these accounts it is necessary to refer to some of the provisions of the law under which these accounts came to be prepared and submitted. Obviously these were accounts of an Insurance company which that company was statutorily obliged to maintain and submit to the Controller of Insurance under the Insurance Act read with the provisions of the Schedule to the Act. The Insurance Act 4 of 1938 deals with different categories of Insurance business and these are found defined in section 2, sub-section (6A), (6B), (11), (13A) and (13B). The categories are 'fire Insurance business', ' general Insurance business', 'marine Insurance business' and 'miscellaneous Insurance business' and in section 2, sub-section (11) 'life Insurance business'. It is these categories which are throughout the Act referred to as the 'class' of Insurance business. For instance, sub-section (1) of section 2C says :
'Save as hereinafter provided, no person shall, after the commencement of the Insurance (Amendment) Act, 1950, begin to carry on any class of Insurance business in India and no insurer carrying on any class of Insurance business in India shall........ carry on any such business unless...........'
Section 3(1) makes it obligatory on every person carrying on any 'class of Insurance business' in India to apply for registration and obtain a registration certificate. The provision in sub-section (1) is :
'No person shall, after the commencement of this Act, begin to carry on any class of Insurance business in India and no insurer carrying on any class of Insurance business in India shall,........'
17. In prescribing the particulars necessary for an application for registration under sub-section (2) of section 3 one of the requirements is 'a statement of the class or classes of Insurance business done or to be done'. No doubt section 2C was incorporated into the Act by the Amendment Act of 1950 with effect from June 1, 1950, but we only refer to it in order to show what the statute itself implies and always implied by the expression 'class of Insurance business' and not because any of its substantive provisions apply here. At any rate section 3(1) and 3(2)(c) which were always there, also make the same position clear.
18. Coming to the provision as to the maintenance of accounts under the Act, section 10(1) provides :
'Where the insurer carries on business of more than one of the classes specified in clauses (a), (b), (c), and (d) of sub-section (1) of section 7, he shall keep a separate account of all receipts and payments in respect of each such class of Insurance business and where the insurer carries on business of the class specified in clause (d) of that sub-section whether alone or in conjunction with business of another class, he shall, unless the Controller waives this requirement in writing, keep a separate account of all receipts and payments in respect of each sub-class of the class specified in clause (d) as may be prescribed in this behalf.'
19. Here clearly business of miscellaneous Insurance is in terms referred to as a class of Insurance business and since it is 'miscellaneous' there may be a variety of miscellanies business and, therefore, reference is made in section 10(1) to 'sub-class of the class specified in clause (d)' of section 7(1). Therefore, we have no manner of doubt that when the Act uses the expression 'class of business' it refers of the several classes mentioned in sub-section (6A), (6B), (11), (13A), and (13B) of section 2.
20. Then we turn to the important provisions of section 11. The opening part of sub-section (1) says :
'Every insurer, in the case of an insurer specified in sub-clause (a) (ii) or sub-clause (b) of clause (9) of section 2 in respect of all Insurance business transacted by him, and in the case of any other insurer in respect of the Insurance business transacted by him in India shall at the expiration of each calendar year prepare with reference to that year - ..................
(c) in respect of each class or sub-class of Insurance business for which he is required under section sub-section (1) of section 10 to keep a separate account of receipts and payments, a revenue account in accordance with the regulations, and in the form or forms, set of forth in the Third Schedule applicable to that class or sub-class of Insurance business.'
Here again the distinction between the different categories of Insurance business in indicated by the use of the words 'that class or sub-class of Insurance business'. It is clear, therefore, in the first place that in the language of the Insurance Act whenever 'a class or sub-class' is referred to, it is 'class or sub-class' of Insurance business and nothing else.
21. The second and the more important point that emerges from the provisions of section 11 is that it makes it obligatory upon every insurer specified in section 2(9)(a)(ii) or section 2(9)(b) to prepare a balance sheet and a revenue account in the prescribed forms 'in respect of all Insurance business transacted by him, and in case of any other insurer in respect of the Insurance business transacted by him.' In other words, what every insurer is obliged to do is to maintain an account of his insurances business and nothing else in the forms prescribed.
22. The form and the regulations for the preparation of these accounts to be found in the First Schedule also refer to the different categories of Insurance business as 'every class of business carried on by an insurer' (vide Regulation 1 of Part 1) and the form of the balance-sheet prescribed pursuant to the requirement of section 11 lays down the dichotomy as between 'life and annuity business' and 'other classes of business' - the identical dichotomy which has been observed in the two balance-sheets of the assessee before us.
23. A note appended at the foot of the form of the balance-sheet in Schedule I indicate that 'assets and liabilities, shareholders' capital and reserves, not allocated to any class of business specified in column (1) must be shown in column (2)'. Reliance was placed on this not on behalf of the assessee to suggest that even if an Insurance company carried on a business other than insurance, the assets and liabilities and the shareholders' capital and reserves not allocated to any Insurance business but to a non- Insurance business must be specified in column (1) and it is submitted that that is what the assessee company has done in the present case. We are unable to accept this contention based on the note appended to the form, because of the express provision of section 11 under which the form is prescribed. We have shown that sub-section (1) of section 11 clearly requires every insurer to prepare accounts in respect of all Insurance business transacted by him and not other business. We cannot, therefore, read the note to cut down the clear intendment of the section itself under which the form is prescribed. The Second Schedule to the Act also refers back to section 11 and in the Second Schedule are laid down the regulations and forms for the preparation of the profit and loss account. Regulation 3 of the Second Schedule says :
'The Interest, Dividends and Rents, less income-tax thereon shown in the revenue account for any classes of business other than life Insurance business, including annuity business may, if the insurer so desires, be included with the corresponding items in the Profit and Loss Account.'
24. The expression in this Regulation 'for any classes of business other than life Insurance business' shows that the dichotomy is still between life Insurance business and other classes of business of which accounts are to be rendered. Moreover, as we have said, section 11 requires accounts of Insurance business only.
25. The balance-sheets for the years ended December 31, 1943, and December 31, 1949, were prepared and submitted by the assessee and they must accordingly be read in the light of these provisions of the law. The form used is clearly the form prescribed by the two Schedules to the Insurance Act and must be understood in the light of the provisions of that Act. Therefore, when the form distinguishes between 'life and annuity business' and 'other classes of business', under the expression 'other classes of business' we can only understand other classes of Insurance business, for the provisions of section 11 which are plenary prescribe the preparation of accounts only of Insurance business. We cannot, therefore, accept the interpretation placed on their own accounts by counsel for the assessee. On the other hand, those accounts were clearly prepared in terms of the provisions of the Act and the forms prescribed, and understood in the light of those provisions the balance-sheet of the assessee has shown that the entire assets comprised of the landed property in India of Rs. 10,47,100 were shown as the assets of other classes of Insurance business of the assessee and not of any supposed separate business of investment in property as was urged.
26. The same conclusion also follows from a consideration of Form AA which is part of the First Schedule and in which is required to be stated a summary of the assets in India of the particular Insurance company. Entry No. 15 in that Form is 'land and house property in India'. That Form was part of the balance-sheet and, though not included in the paper book of this reference was made available to us by Mr. Joshi on behalf of the department. Since it forms part of the balance-sheet which was before the tax authorities, we have looked into it and the book value of the landed and house property shown in the Form at the end of the year 1949 is the amount of Rs. 10,67,806 under the head 'Book value as prescribed', the market value thereof being Rs. 17,94,486 against which the assessee had added a note 'realisable value'. A similar entry is to be found in the Form AA for the year ended December 31, 1943. These being the provisions of law and the requirements of the Forms prescribed, since the entire property was shown in the accounts submitted to the Controller of Insurance, it must be held that on the assessee's own statement of account the entire landed property of the assessee-company was shown as an asset of its Insurance business and of no other.
27. Upon this view it seems to us unnecessary, in the first place, to consider the general argument advanced that a company doing life Insurance business could also transact any other business of a non- Insurance nature. In this respect reliance was placed upon the decision in Swadeshi Bima Co. Ltd. v. Commissioner of Income-tax. No doubt, it was laid down by the Allahabad High Court in that case that a company carrying on life Insurance business can carry on any other business from the income of the life Insurance business, but it does not follow, therefore, that where accounts are to be submitted under the statutory requirement of the Insurance Act, the accounts can include the profits and gains from non- Insurance business and that it would follow therefore that if the landed property is shown as an asset in the accounts to be statutorily submitted, it could still be regarded as an asset of non- Insurance business. The facts in Swadeshi Bima Company's case were very different from the facts before us. In that case, admittedly the assessee-company had utilised the income from the life Insurance business for starting brick kilns, cotton mill, a housing colony and various other businesses. The circumstances of the present case are entirely different.
28. In the light of what we have said, the resolution of the board of directors passed on the 8th December, 1949, when the transfer of these properties was sanctioned, can have no effect. All that the resolution says is : 'Resolved that two buildings of the company named 'Habib Villa' and 'Khatiza Villa' at Bombay be and are hereby sold and transferred to the life department of the company at a price as per last valuation report, i.e., Habib Villa at Rs. 1,56,678 and Khatiza Villa at Rs. 1,82,678.' The resolution says that one property may be sold and that the two other properties, Habib Villa and Khatiza Villa, be and are transferred to the life department of the company, but it is silent upon the question as to whose assets they were and that is the crucial question before us. Upon the interpretation put in the light of the provisions of the Insurance Act the accounts show that they were the assets of the Insurance business of the company other than 'life and annuity business' and the resolution, therefore, can only mean that these assets were transferred from the assets of the 'other classes of Insurance business of the company' to the 'life and annuity business of the company' and nothing more. The resolution, therefore does not carry the arguments on behalf of the assessee any further.
29. Under the circumstances, there is no doubt that these properties were the assets acquired in the course of the assessee's Insurance business alone and not as part of any of its alleged non-insurances business or business of investment in immovable properties, though it is not necessary for the purposes of the present reference to go so far as that. The department has come to a certain conclusion upon the evidence and all that we are required to see, upon the question referred, is whether there was evidence to support their conclusion. We have absolutely no doubt that there was ample evidence to support the conclusion which the tax authorities and the Tribunal reached.
30. In the result, we answer both the questions referred in the affirmative. The assessee will pay the costs of the Commissioner.
31. Questions answered in the affirmative.