1. The assessee before us in this reference is the New India Assurance Co. Ltd., Bombay, and will be hereinafter referred to as 'New India' for the sake of brevity. The reference is at the instance of the Commissioner and is under s. 66(1) of the Indian I.T. Act, 1922. As many as nine questions are referred to us for our advisory opinion and these are as follows :
'1. Whether, on the facts and in the circumstances of the case, the amount of Rs. 1,50,983 received by the assessee-company as compensation under section 8 read with section 7 of the Life Insurance (Emergency Provision) Act, 1956, was a capital receipt not liable to be included in its business Profits
2. Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that the basis adopted by the Life Insurance Corporation Act for paying the compensation in 1956 need not be the basis for determining the market value of the life insurance business of the company as on January 1, 1954, for the purpose of considering the capital gain on acquisition of the business by the Government
3. Whether, on the facts and in the circumstances of the case, the assessee was entitled to rebate and reliefs under the appropriate provisions of the Income-tax Act or the Finance Act in respect of dividends received by it from the companies and co-operative societies and in respect of interest on tax-free Mysore Government securities
4. If the answer to the above question No. 3 is in the affirmative, whether, on the facts and in the circumstances of the case, the amounts of dividends and interest on securities, in respect of which relief was due, were liable to be reduced by any portion of expenses incurred by the company for its business
5. Whether, on the facts and in the circumstances of the case, the assesses was entitled to relief under section 15B in respect of donations of Rs. 31,500, Rs. 3,000, Rs. 19,600 and Rs. 17,500 for the assessment years 1957-58, 1958-59, 1959-60 and 1960-61, respectively
6. Whether, on the facts and in the circumstances of the case, the assessee was entitled to a deduction of Rs. 4,500 from its income accruing outside the taxable territories under the third proviso to section 4(1) as it stood at the relevant time for the assessment years 1957-58, 1958-59 and 1959-60
7. Whether, on the facts and in the circumstances of the case, the deduction in respect of tax paid by the company to the Madras Municipal Corporation could be disallowed under the provisions of section 10(4)
8. Whether, on the facts and in the circumstances of the case, the amount of Rs. 7,397, being travelling expenses of Shri Hassan for his trip to Kabul, Kandhar and Tehran, was deductible in determining the company's business profits for the assessment year in question (i.e., 1960-61)
9. Whether, on the facts and in the circumstances of the case, the debts of Rs. 12,927 could be allowed as a deduction in determining the company's business profits for the assessment year in question (i.e., 1960-61) ?'
2. As far as question Nos. 3, 5, 6, 7 and 8 are concerned, Mr. Joshi, appearing on behalf of the Commissioner, has stated that he is instructed to concede these questions and that they may accordingly be answered in favour of the assessee. He has further stated that the answers to these questions are concluded by the principles laid down in two decisions of this court as also in one of the Supreme Court, viz., CIT v. New India Assurance Co. Ltd. : 71ITR761(Bom) , Life Insurance Corporation of India v. CIT : 115ITR45(Bom) and Jaipuria Samla Amalgamated Collieries Ltd. v. CIT : 82ITR580(SC) . In view of this concession, it appears to us be unnecessary to set out the facts pertaining to these questions.
3. Similarly, as far as question No. 4 is concerned, it is agreed that it is concluded in favour of the assessee by the decision of this court in CIT v. New Great Insurance Co. Ltd. : 90ITR348(Bom) and, accordingly, it will have to be answered in favour of the assessee. In view of this, it appears to us to be unnecessary to refer to the factual aspects involved for this question also.
4. The necessary facts may now be stated as far as question Nos. 1, 2 and 9 are concerned. We propose to deal with question No. 9 in the first instance. The question pertains to the assessment year 1960-61. In the assessee's books two debts were shown, one in the name of Kapila Textiles Ltd., which was in the amount of Rs. 7,631, and the other in the account of Kalyan Spinning & Weaving Mills Ltd., which was for Rs. 5,296. In the case of the first debtor, the liquidation proceedings had not been completed in the year of account. In the case of the second debtor, a suit had been filed by New India against the said debtor in the Calcutta High Court. The amounts had been written off by the assessee in its own accounts for the year in question and the amounts of the debts written off in the accounts of New India had been accepted by the Controller of Insurance. The ITO, however, disallowed these debts on the ground that recovery proceedings could not be considered to have been completed in either case. The AAC upheld the decision of the ITO, confirming the disallowance in respect of both the debts. Before the Tribunal, it was contended on behalf of the assessee that under r. 6 of the Schedule to the I.T. Act, the ITO had the jurisdiction to go into the question and disallow expenditure but that the debts written off by the assessee would not fall within the jurisdiction of the ITO as they could not be considered to be within the scope of the word 'expenditure'. The Tribunal relied upon the decision in Pandyan Insurance Co. Ltd. v. CIT : 55ITR716(SC) , where r. 6 of the Schedule to the Indian I.T. Act, 1922, was held to mean disbursement only and not to include depreciation. Before us the decision of a Division Bench of this court in South India Insurance Co. Ltd. v. CIT : 106ITR969(Bom) was cited, where the proper meaning to be ascribed to the word 'expenditure' occurring in r. 6 has been considered and dealt with (see pages 974 and 975 of the report). The decision of the Supreme Court in Pandhyan Insurance Co. Ltd.'s case : 55ITR716(SC) has also been considered in South India Insurance Co's. case : 106ITR969(Bom) . Following the principle laid down in the aforesaid two decisions, it is obvious that the debts written off, viz., Rs. 12,927, would be required to be allowed as a deduction in determining the company's business profits for the assessment year 1961-62, as the ITO could not reconsider the question of their allowance. Accordingly, the question will have to be answered in favour of the assessee.
5. That brings us to a consideration of questions Nos. 1 and 2, which are to a certain extent interconnected as they appear to arise from the interconnected process of nationalising the life insurance business of Indian insurance companies. We may now refer to the steps taken by Parliament for achieving this purpose and which has occasioned the said two questions being referred to us.
6. Both the questions relate to the assessment year 1957-58. New India was, prior to the said year, doing both life insurance and general insurance business. In 1957-58, for a part of the year, it also did life insurance business but ceased doing the same in the circumstances hereinafter mentioned. On 19th January, 1956, the Government of India promulgated an Ordinance called the Life Insurance (Emergency Provisions) Ordinance, 1956 (Ordinance No. 1 of 1956); this will be hereinafter referred to as 'the Ordinance'. The Ordinance was subsequently replaced by the Life insurance (Emergency Provisions) Act, which Act came into operation on 21st March, 1956; this Act will hereinafter be referred to as 'the said Act', for the sake of brevity. Pursuant to the provisions of the Ordinance, the management of the assessee-company's life insurance business vested in the Central Government with effect from 19th January, 1956. The said Act, which replaces the Ordinance, described itself as an Act to provide for taking over in public interest the management of life insurance business pending nationalisation thereof. Under the said Act it was, inter alia, provided that pending appointments of custodians by the Government, persons in charge of management of such business, i.e., life insurance business of the various insurers immediately before 19th January, 1956, were to remain in charge of that business but for and on behalf of the Central Government and life insurance business was to be carried on by such persons in accordance with the directions of the Central Government and subject to the provisions of the said Act. Under s. 4 of the said Act, the Central Government had the power to appoint any person as custodian for the purpose of taking over the management of life insurance business. Under s. 7 of the said Act each insurer was entitled to compensation in respect of the vesting in the Central Government of the management of the life insurance business and this compensation was to be equal to one-half of the annual average of the share of surplus allocated to the shareholder in accordance with the provisions of the Schedule to the Insurance Act for each month during which such vesting continued. If, however, an insurer had no such surplus, either because there were no shareholders or for any other reason, compensation was payable at the rate of the premium income of the insurer relating to his life insurance business during the year 1954. The amount of compensation payable under s. 7 was in the first instance payable out of 7 1/2 per cent. of the surplus, which under the Insurance Act was the maximum portion which could be reserved for the benefit of the shareholders, earned by the insurer during the period the management of the life insurance business vested in the Central Government. Where such compensation or part thereof could not be so paid out, the Central Government had to make the necessary provision for the payment of the compensation. Section 6 of the said Act provided that the compensation payable was to be distributed among the persons entitled thereto and in the case of a company the Government was to have due regard to the wishes of its members. In accordance with the Ordinance and the said Act, the management of the life insurance business of New India became vested in the Central Government from 19th January, 1956, and on the very next day a custodian was appointed by the Government and he took over the management. Ultimately, New India received Rs. 1,50,983, as management compensation, under s. 8 read with s. 7 of the said Act.
7. In question No. 1, we are concerned with whether this amount of Rs. 1,50,983 was a revenue receipt or a capital receipt. The ITO included this amount in the company's total income as a revenue receipt. In the view of the ITO, management was a commercial activity and the business and the profits derived therefrom are assessable as business income. Hence, in the view of the ITO, the management compensation received by New India was assessable as its business income; further, this was to be regarded as a revenue receipt. He, accordingly, proceeded to assess the amount as such.
8. The assessee, thereafter, appealed to the AAC claiming that the amount in question was a capital receipt. The AAC, however, upheld the conclusions of the ITO. In his view, the question was required to be decided by keeping before oneself not only the provisions of the said Act but the said Act as well as the Life Insurance Corporation Act, 1956 (hereinafter referred to as the Nationalisation Act for the sake of brevity), which came into effect on 1st September, 1956, which completed the process of nationalisation. In the view of the AAC, full compensation had been awarded under the later Act, i.e., the Nationalisation Act, for taking away the life insurance business of India insurers and vesting it in the Central Government. The compensation under the Ordinance and the said Act was paid in respect of the management of the life insurance business, whereas compensation in respect of the taking over of the business was provided for under the Nationalisation Act. In the view of the AAC, the vesting of the management itself. The compensation for management, therefore, did not, in his view, partake of the character of compensation for taking over the entire business itself; it was rather a payment for the loss of business profits. The AAC, therefore, agreed with the ITO that the management compensation was required to be assessed as business income of the assessee.
9. The assessee carried the matter in second appeal to the Income-tax Appellate Tribunal, where it was contended on its behalf that compensation under the said Act was paid to New India for loss of its management right and, therefore, the amount received was essentially a capital receipt. It was emphasised that the assessee was paid compensation for being deprived of its right to manage its own business. The Tribunal upheld the claim of the assessee and was of the view that the amount in question was a capital receipt. In the view of the Tribunal, vesting of the management in the Central Government was an integral part or the first step towards complete nationalisation which had been decided upon by the Government. Such take-over of the management could not be regarded as a temporary take-over for a short-lived emergency or on account of any business or other contingency. In such a case different considerations may be available and which could be pressed into service by the revenue. However, according to the Tribunal, if the take-over of the management of the assessee was regarded in a proper perspective, then, this was the case of an assessee being deprived of an important function of business as a prelude to being deprived of the whole business in the near future. The Tribunal, in this view of the matter, held that the compensation received by the company must be taken as a kind of realisation receipt which was clearly of a capital nature.
10. Mr. Joshi, appearing on behalf of the revenue, stated that he was bringing to the attention of the court certain observations to be found in the decision of the Madras High Court in CIT v. United India Life Assurance Co. Ltd. : 62ITR610(Mad) , which observations were in favour of the view taken by the ITO and upheld subsequently by the AAC. The assessee, before the Madras High Court, had received Rs. 63,034 as similar managerial compensation for the period from 19th January, 1956, to 31st August, 1956, as provided by the said Act. It is pertinent, however, to note that the only question which was being considered by the Madras High Court was whether this amount was assessable under s. 10(7) as business income or under s. 12 as income from other sources. The Tribunal had held this amount to fall within the purview of s. 10(7). The assessee had not disputed this and the reference was at the instance of the Commissioner. It is clear that the Madras High Court was not directly concerned with the question whether the amount was a capital receipt or not. Mr. Joshi has taken us through the observations to be found at pages 615 and 616 of the report. To some extent, these observations support the case of the revenue, but they must be regarded as obiter, since the point with which we are concerned, as arising in question No. 1 referred to us, was not being canvassed before the Madras High Court.
11. On the other hand, the point was directly considered and decided against the revenue in two other decisions, to which our attention was drawn at the bar. The first of these two decisions was that of the Delhi High Court in Lakshmi Insurance Co. (P.) Ltd. v. CIT : 80ITR575(Delhi) . The assessee, before the Delhi High Court, had been paid the sum of Rs. 56,028 as compensation under s. 7 of the said Act and the question being considered by the Delhi High Court in the reference was whether that amount was income in its hands and liable to tax. The Delhi High Court approached the question in the same manner as was done by the Tribunal in the instant case and observed that the Ordinance and the said Act had been enacted for the taking over of the management of life insurance business pending nationalisation thereof. According to the Delhi High Court, therefore, these two enactments were by way of a preliminary step for taking over the controlled business of all insurers. According to the Delhi High Court, the right of management has been equated to property attracting art. 31(2) of the Constitution of India. Reference was made in this connection to the second Sholapur case, viz., Dwarkadas Shrinivas v. Sholapur Spinning and Weaving Co. Ltd. : 1SCR674 . In the view of the Delhi High Court, therefore, there was substance in the contention of the assessee before it that the right of management being property had to be equated to a capital asset as being a part of the profit-making apparatus of the assessee-company and for that reason the compensation paid for divesting the assessee of its management was compensation for acquisition of part of its profit-making apparatus and must be regarded as a capital rather than a revenue receipt or income (see page 582 of the report). The conclusion of the Delhi High Court on the question being considered by it is to be found at page 582; the said paragraph may be quoted :
'Applying these principles, we are of the opinion that the assessee company having been divested of its management did not and could not carry on business in the sense of carrying on an activity with the object of earning profit by a process or production. The divesting of its management was really divesting the assessee-company of its property. The compensation paid was, therefore, for the loss of a capital asset. The mere fact that the compensation paid to the assessee-company was measured by its past profits does not make the compensation paid the income of the assessee-company as a result of business done by it. In our opinion, the compensation paid to the assessee-company is not income and the answer to the question referred has to be in the negative.'
12. A similar question came to be considered by the Calcutta High Court in CIT v. National Insurance Co. Ltd. : 113ITR37(Cal) . In this decision, the Calcutta High Court considered and followed the decided of the Delhi High Court in Lakshmi Insurance Co. Ltd.'s case : 80ITR575(Delhi) ; it had occasion also to refer to the decision of the madras High Court in United India Life Assurance Co's. case : 62ITR610(Mad) . As far as the latter case was concerned, it was observed, and rightly so, that the point whether the amount of management compensation was a capital or a revenue receipt was not in issue in the said case. The Calcutta High Court, accordingly, held in National Insurance Co.'s case : 113ITR37(Cal) that where the assessee had been permanently deprived of its right to manage its life insurance business by the Central government in exercise of its paramount power for which it has been paid certain compensations as determined by law, the compensation was paid not for inflicting any injury on any stock-in-trade or circulating capital of the assessee but for the total and outright deprivation of the right of management of its life insurance business. According to the Calcutta High Court, therefore, the amount of compensation received by the assessee was not assessable as a revenue receipt in its hands. Perusing this judgment, therefore, it is clear that the Calcutta High Court has expressed its total concurrence with the approach and conclusions of the Delhi High Court.
13. It appears to us that the view taken by the Delhi and the Calcutta High Courts is unexceptionable and we must proceed to answer question No. 1 in accordance with that view. Accordingly, it must be held that the amount of Rs. 1,50,983 received by New India was a capital receipt not liable to be included in its business profits.
14. There now remains for our consideration question No. 2. This question relates to the amount of compensation received by New India on acquisition of its life insurance business by the Government. The compensation received was Rs. 52,35,332 and an amount of Rs. 2,27,720 had to be excluded from this amount on account of capital allocated towards life insurance business. Accordingly, if this amount was deducted, the net compensation paid to New India came to Rs. 50,07,612. The question that was required to be considered was whether and if so what capital gains accrued to the assessee when it received this compensation. The amount of compensation paid to New India was determined in accordance with the Life Insurance Corporation Act, 1956; the principles governing the determination of compensation were given in the First Schedule to the Nationalisation Act. This Schedule provided for two alternative methods for determining compensation payable and the method followed in the case of New India was contained in para. 1 of Part A of the First Schedule. It is not disputed by either party that the compensation received by New India was in accordance with the said paragraph. In arriving at the compensation payable to the company the growth factor was taken at a particular ratio after comparing the extent of business between 1946 and 1953 and between 1950 and 1955. The annual average surplus was determined at Rs. 1,63,871 after taking into account the surpluses shown by the several valuations covering the period from January 1, 1946, to December 31, 1950, and from January 1, 1951, to December 31, 1953. In calculating the annual surplus, however, only 5% of the total was taken into account, although a higher percentage was in fact reserved for shareholders by the company.
15. The controversy arose in determining the capital gains in accordance with the provisions of s. 12B of the Indian I.T. Act. That section gave the assessee an option to substitute in place of the original cost of the asset sold the fair market value of the asset as on January 1, 1954, for the purpose of determining capital gains accruing to him. The ITO determined the fair market value of the life insurance business of the company as on the said date, viz., January 1, 1954, applying the formula laid down in para. 1, Expln. 2 (of the Schedule to the life Insurance Corporation Act, 1956). On that basis he arrived at the fair market value of the life insurance business as on January 1, 1954, at Rs. 36,69,262 and he took the difference between that amount and the compensation received by the company as capital gains accruing to New India. The amount of capital gains so determined came to Rs. 13,38,350.
16. The assessee took up the matter before the AAC, who took as different rate of growth. The figure of annual average surplus worked out by the AAC was also different. He also changed the multiplier from 20 to 13.33 on the ground that the rate of expected return could not be 5% but should be 7.5 per cent. to make allowance for the element of risk involved in the business. On that basis the AAC arrive at the fair market value of the life insurance business as on January 1, 1954, at Rs. 39,07,184, which would result in the reduction of the figure of capital gains arising to the company.
17. When the matter came up before the Tribunal it was, inter alia, contended on behalf of the revenue that the market value as on January 1, 1954, was required to be determined in accordance with the formula prescribed in the Schedule to the Life Insurance Corporation Act, 1956. This contention was not accepted by the Tribunal. The Tribunal then considered the various items as had been considered by the AAC and substantially accepted the approach of the AAC with one important modification, viz., that the rate of expected return was taken at 5% as had been determined originally by the ITO and not at the rate of 7.5%, which had been substituted by the AAC.
18. Question No. 2 brings out to the forefront the contention of the revenue viz., that the basis adopted by the Life Insurance Corporation Act for paying compensation in 1956, which basis is to be found in the Schedule to the said Act, was necessarily the basis for determining the market value of the life insurance business of the assessee as on January 1, 1954, for computing capital gains which had arisen to the assessee on acquisition of its life insurance business by the Government.
19. Apart from the bare submission, we have not been referred to any principle of law or logic on which such a contention could be based. It may be pointed out that a similar question had been considered by the Madras High Court in United India Life Assurance Co.'s case : 62ITR610(Mad) . There also the ITO had proceeded to calculate the capital gains in the same manner as was done by the ITO in the reference before us. The Tribunal had modified the first finding by varying various items. One of the items in which the formula in the Life Insurance Corporation Act, 1956, was given a go-by to was in the matter of surplus allocated to shareholders. Under the Nationalisation Act for purpose of working out compensation the surplus allocated to shareholders was limited to 5%, whilst under the Insurance Act such surface which could be remarked for shareholders could be as high as 7.5%. For determination of capital gains and for working out the value of the business as on January 1, 1954, the Madras High Court approved of the decision of the Tribunal (in the case before it) by considering the higher amount permissible under the insurance Act than the lower figure of 5% made mandatory by the Nationalisation Act. We have before us a similar case of an assessee providing for higher allocation being remarked for shareholders. It appears to us that there is no infirmity in the approach of the Tribunal that in considering the value of the acquired asset as on January 1, 1954, it is not bound by the formula for determining compensation payable under the Nationalisation Act. In this view, we derive support from the approach of the Madras High Court in United India Life Assurance Co.'s case : 62ITR610(Mad) . Thus, question No. 2 also will be required to be answered in favour of the assessee.
10. Thus, the questions referred to us are answered as follows :
Question No. 1. - The amount of Rs. 1,50,983 was a capital receipt not liable to included in the assessee's business profits.
Question No. 2. - In the affirmative and against the revenue.
Questions Nos. 3, 5, 6 and 7. - Mr. Joshi states that these questions may be answered as it would appear of the assessee. Accordingly, the questions are so answered as it would appear that the principles laid down in the decisions of this court in CIT v. New India Assurance Co. Ltd. : 71ITR761(Bom) and Life Insurance Corporation of India v. CIT : 115ITR45(Bom) and of the Supreme Court in Jaipuria Samla Amalgamated Collieries Ltd. v. CIT : 82ITR580(SC) would govern these questions.
Question No. 4. - Mr. Joshi states that as far as this court is concerned, the answer to this question is concluded by the decision of this court in New Great Insurance Co.'s case : 90ITR348(Bom) and that in accordance with the said decision the question may be answered in the negative and in favour of the assessee. The question is accordingly answered.
Question No. 8. - Mr. Joshi concedes that the question may be answered in favour of the assessee. Accordingly, it is answered in the affirmative and in favour of the assessee.
Question No. 9. - In the affirmative and in favour of the assessee.
11. The Commissioner is directed to pay to the assessee the costs of this reference.
12. Reference answered accordingly.