1. This is a reference to this Court under Section 66(2) of the Indian Income-tax Act. The matter originally came before this Court consisting of Sir Amberson Marten C.J. and Mr. Justice Blackwell on December 13, 1929, and it was then referred back to the Commissioner to find further facts, and it was suggested by the Court that the questions raised should be amended by asking three questions which are specified in the judgment. The first two questions are really subsidiary, and the third one is, whether in law the existing assessment is valid and binding on the company. The Commissioner of Income-tax declined to raise that question taking the view that he had no power to do so. The case having been argued before us, it appears to us that that is the real question which arises, and we propose, therefore, to amend the questions raised by raising that question in addition to the two questions actually raised in the case. In doing so, we are following the view expressed by the High Court of Allahabad in Shiva Prasad Gupta v. Commissioner of Income-tax, U.P. (1929) 3 I.T.C. 406 and in the later case of Kajorimal Kalyanmal v. Commissioner of Income-tax, U.P. (1929) 3 I.T.C. 451, that the Court has power under Section 66(5) of the Indian Income-tax Act to amend the questions asked by the Commissioner by raising the real question and then answering that question.
2. The two questions which are originally raised in the case really involve determining whether the principle of the decision of the House of Lords in New York Life Insurance Company v. Stylea (1889) 14 App. Cas. 381 applies to the assessee-company.
3. The Commissioner has found the nature of the company, and I think it is only necessary to say that it is a company limited by guarantee, has no share capital, and under article 6 of the articles of association every person who insures his life with the company under a participating policy is to be deemed to be a member of the company. The principle which the House of Lords laid down in Styles' case was this, that where you are dealing with a mutual insurance company, the premiums paid by the policy holders who are to share in the whole of the profits of the company do not amount to profits or gains of the company which are liable to tax. The principle at the bottom of the decision is that a man cannot make a profit out of himself: if a number of persons contribute to a common fund which immediately or later is to come back to the subscribers then there is no profit which can be liable to tax, and I see no reason why the principle of that case should not apply to the assessee company in this case. I, therefore, think that any premiums paid by those entitled to participate in policies who become thereby the members of the company are not profits of the company.
4. But then the question arises, on what income ought this assessee company to be assessed? Now, in Styles' case the Commissioners of Inland Revenue, whose decision was upheld by the House of Lords, had decided, first, that no part of the premium income of the company received under participating policies is liable to be assessed to income-tax as profits or gains, and, secondly, that the company was liable to be assessed (a) in /respect of profits made on annuities granted, (6) on profits made from premiums paid under non-participating policies, (c) on all income derived by or from investment of all premiums paid to them in the United Kingdom or abroad, and as to the latter when such money is received in the United Kingdom, and (d) on all profits, if any, derived in any manner other than by the annual premium contributions of the participating policy-holders. It seems to me that that is a finding that the whole of the income of the company derived from sources other than contributions by the participating policy-holders was liable to tax and that seems to me to presuppose that the premiums paid by the participating policy-holders must be the first fund to bear the expenses of management and so forth. That, I think, is borne out by the opening argument of Mr. Finlay, as he then was, in which he says:--'The question is whether where members of a mutual insurance company make contributions towards the expected expenses, and there is a surplus after paying the expenses, income tax is payable upon the surplus which is returned to the contributors'. Clearly in that case the House of Lords was only dealing with the actual surplus of the premiums after payment of expenses, but the principle upon which the decision rests covers, I think, the whole of the premiums. It seems to me, therefore, that in this case the company ought to have been charged upon its income derived from investments and on profits from non-participating policies or any other sources except the contributions from the participating policy-holders. So far as Indian income-tax is concerned, it is of course only chargeable prima facie on those sources of income in so far as they accrue or arise or are received in India.
5. Now it was the duty of the assessee company under Section 22(1) of the Indian Income-tax Act to make a, return of the total income of the company during the previous year, the 'total income' being defined in Section 2(15) as total amount of income, profits, and gains from all sources to which the Act applies. If the company does not make a return, then under Section 23(4) the Income-tax Officer has to make the assessment to the best of his judgment. The assessee company did not make any return of the income, upon which in my view, they were liable to tax. On February 10, 1927, their solicitors wrote a letter to the senior Income-tax Officer, in which they stated that they were only liable to be taxed on the interest and dividends of any securities and moneys held by them in this country and on the interest on loans made to members after making a reasonable allowance for office expenses, and they offered to make a declaration of their actual income on those lines. But that clearly was not enough, because they would have had to include in their return any profits made from non-particicipating policies issued in India. At any rate they did not in fact make any return. That being so, the senior Income-tax Officer in the first instance made an assessment applying Rules 25 and 35 of the rules made under Section 59 of the Act, which under that section have statutory effect. Rule 25 provides:--'In the case of Life Insurance Companies incorporated in British India whose profits are periodically ascertained by actuarial valuation, the income, profits and gains of the Life Assurance Business shall be the average annual net profits disclosed by the last preceding valuation', and the proviso allows certain deductions. It is to be noticed that that rule applies to Life Insurance Companies incorporated in British India, and as the assessee-company is not incorporated in British India, it is, in my view plain that Rule 25 has no application to the present case. Then comes Rule 35 which says:--
The total income of the Indian branches of non-resident insurance companies (Life, Marine, Fire, Accident, Burglary, Fidelity, Guarantee, &c.;), in the absence of more reliable data, may be deemed to be the proportion of the total income, profits or gains of the companies, corresponding to the proportion which their Indian premium income bears to their total premium income.'
It is to be observed that this rule is only to be applied in the absence of more reliable data. The learned Commissioner has, in his supplemental case referred to us pursuant to the judgment of this Court which I have mentioned, stated as a fact that he had no reliable data. I agree with him that it was not possible on the materials before him to assess this company in the manner in which, as I have indicated, I think it ought to have been assessed, I think, therefore, he was justified in applying Rule 35. Now in order to apply Rule 35 he has first of all to find out what is the total income, profits or gains of the assessee-company. What he had got was a triennial valuation, and without any more reliable data, I think he was justified in saying that he must assume that the profits for the year in question would be the average annual profits shown in the triennial valuation, that is to say, in order to make the best assessment he can under Section 23(4) of the Act, he arrives at the same result as he would reach if Rule 25 applied. Now, under the triennial valuation it appears that the company has certain sources of income which are plainly taxable. As appears from page 10 of Exhibit C, it has got consideration for annuities granted 91,000 odd, interest 3,000,000 odd, fees 600 odd, consideration for reinsuring liability of other companies 1,500,000 odd. All those are sources of income which are taxable leaving out of account premiums of participating policies, which, as I have already said, are not, in my view, taxable. The receipts from those taxable sources are greater than the profits for the period shown in the account, so that some expenses must have been deducted from those taxable sources of income. I think, therefore, that the Commissioner was justified in coming to the conclusion that the profits shown in the triennial account did in fact represent taxable profits. In doing so he has not taken into account as taxable profits premiums paid on participating policies; he has taken the other sources of income and deducted from them the balance of expenses remaining over after the premiums on participating policies have been wiped out. Having arrived in that way at the total income, profits or gains of the company, he then under Rule 35 had to find out the proportion of the Indian income, and he did this by taking the proportion which the Indian premium income bears to the total premium income. The figures are shown in the case. The result is, I think, that the existing assessment is substantially binding on the company, though I arrive at that conclusion by a different road to that which the Commissioner took. I answer the first question--whether the premium income received by the Association from its members under participating policies or any part thereof is liable to be assessed to income tax as profits or gains of a business under Section 6 (iv) and Section 10 of the Indian Income-tax Act, XI of 1922,--in the negative. I answer the second question--whether such income or any part thereof is liable to be assessed to income-tax or super-tax as income profits or gains under any other and if so under which of the provisions of the said Act--by saying that such income is not liable to assessment. I answer the third question raised--whether in law the existing assessment is valid and binding on the company--by saying that an assessment equal in amount to the existing assessment is binding on the company.
6. As regards costs there will be no order.
7. I also answer the questions put to us in the same way as has been done by My Lord the Chief Justice for the same reasons to which I have nothing to add.