1. This is a reference on a case stated under s. 256(1) of the Income-tax Act, 1961 (referred to hereinafter as 'the said Act').
2. The facts giving rise to this reference are as follows :
3. In 1951 the assessee-respondent, the Jupiter General Insurance Company Limited, Bombay, carried on the business, inter alia, of life insurance. Although the Life Insurance Corporation has been brought on record as the respondent in the circumstances set out hereinafter for the sake of convenience per propose to refer to the said Jupiter General Insurance. Co. Ltd., as the assessee. In 1951 the Central Govt. appointed an administrator to manage the affairs of the assessee under the direction and control of the Controller of Insurance under s. 52A of the Insurance Act, 1938. Till October 5, 1956, the administrator of the assessee carried on life insurance business as well as general insurance business. In 1956 the Central Govt. nationalised the business of life insurance, but it did not take over the life insurance business of life assessee. By a letter dated September 24, 1956, the Ministry of Finance, Government of India, directed the administrator, Mr. N. J. Rao, that the assessee should stop issuing any further policies seven days after the receipt of the letter. There was a clarification with which we are not concerned here. On October 5, 1956, the Controller of Insurance issued a letter to the administrator under sub-section (6) of section 52A of the Insurance Act directing the administrator of the assessee to stop issuing any further policies seven days after the receipt of the said letter dated September 24, 1956, from the Finance Ministry of the Government of India (Department of Economic Affairs). New policies were, however, permitted to be issued in respect of the proposals already received. What is relevant is that the assessee's Certificate of Registration, without which it could not carry on any business of insurance, was not renewed for life insurance business by an order dated February 28, 1957, under s. 3A of the Insurance Act. The assessment years, with which we are concerned, are the assessment years 1963-64 to 1966-67. It is the accepted position, as recorded by the Tribunal, that during the relevant previous years respect of these assessment years no new life insurance policies were issued by the assessee. The only life insurance work done by the assessee-company during the relevant previous years was that of servicing the policies which had already been issued earlier and carrying out those policies. The Life Insurance Corporation of India took over the life insurance business of the assessee as from December 31, 1968, and in view of this the name of the Life Insurance Cooperation of India has been substituted as aforesaid in place of the Jupiter General Insurance Company, as the respondent. During the assessment for the year 1963-64, the assessee pleaded before the ITO that since it was not allowed to embark upon any new life insurance business and was only allowed to continue its business of servicing the life insurance policies issued earlier, the income of the life insurance business ought to be computed under r. 2(1)(b) of Sch. I to the said Act. The ITO rejected this plea without giving reasons and observed that r. 2(1)(a) and r. 2(1)(b) of the said Schedule. The ITO first computed the income of the assessee in respect of the life insurance business under r. 2(1)(b) and he arrived at the figure or Rs. 19,62,632 after making certain deductions and additions in the figure of surplus on actual valuation. After making deductions, from the amount as provided, he arrived at the net surplus of Rs. 13,28,083. He divided it by three and arrived at the final income of Rs. 4,42,694 under r. 2(1)(b). He then proceeded to compute the income under r. 2(1)(a) and after making adjustments, arrived at the figure of income at Rs. 11,20,812. He deducted from this amount, a sum of Rs. 2,72,229 being the statutory expenses, as against the actual expenses of Rs. 5,96,260 and after adding the property income arrived at the net income of Rs. 8,80,288 under r. 2(1)(a). As the income computed under r. 2(1)(a) was higher than that under r. 2(1)(b), he computed the income from life insurance business at Rs. 8,80,288 under r. 2(1)(a). The assessee appealed to the AAC. The said appeal was dismissed by the AAC. The assessee the preferred an appeal to the Income-tax Appellate Tribunal. The Tribunal referred to s. 44 of the I.T. Act and the Rul es contained in Sch. I thereto and to s. 2(11) of the Insurance Act and observedthat a combined reading of all these provisions showed that the income from the business of insurance upon human life has to be computed according to the rules in Sch.I. But the Tribunal held that the business of effecting contracts of insurance upon human life meant effecting new contracts of such insurance and did not include servicing of contracts of insurance upon human life effected in earlier years and that in view of this the income of the assessee was not computable under the rules contained in Sch. I to the said Act. It held that the income of the assessee had to be computed de hors the rules in Sch. I to the said Act. It, thereafter, went to hold that thought the assessee-company did not carry on the business of effecting contracts of insurance upon human life during the years under consideration, the business of servicing the existing contracts was not much dissimilar in nature and the rules in the said Schedule which were considered to be reasonable of insurance could be adopted with suitable modifications in the case of the computation of the income of the business of servicing of existing life policies. It held that the provisions of r. 2(1)(a) could not be applied and that a more reasonable method for computation of such income would be as set out in the order of the Tribunal more or less as on the lines contained in r. 2(1)(b) with suitable modifications.
4. Arising from this order of the Tribunal, the following two questions have been referred to us for determination :
'(1) Whether, on the facts and in the circumstances of the case, the Jupiter General Insurance Company Limited carried on the business of effecting contracts of insurance upon human life during the assessment years 1963-64 to 1966-67 ?
(2) Whether the profit derived by the Jupiter General Insurance Company Limited, from the Life Insurance Department for the assessment years 1963-64 to 1966-67 was computable as per the rules contained as the First Schedule to the Income-tax Act, 1961 ?'
5. Before considering the said questions, we propose to refer to the relevant provisions of law. The relevant portion of s. 44 of the said Act runs thus :
'Notwithstanding anything to the contrary... the profits and gains of any business of insurance, including any such business carried on by a mutual insurance company or by a co-operative society, shall be computed is accordance with the rules contained in the First Schedule'.
5. At the relevant time the material portion of r. 2 of the said Schedule ran as follows :
'(1) The profits and gains of the insurance business shall be taken to be the greater of the following :
(a) the gross external incomings of the previous year from that business, less the management expenses of that year;
(b) the annual average of the surplus arrived at by adjusting the surplus or deficit disclosed by the actuarial valuation made in accordance with the Insurance Act, 1938 (IV of 1938), in respect of the last inter valuation period ending before the commencement of the assessment year, so as to exclude from it any surplus... in computing income chargeable under the head 'Profits and gains of business or profession ?' Sub-r. (2) of the said r. 2 provides that the amount to be allowed as management expenses under sub-r. (1) shall not exceed the aggregate of the percentages or thisamount calculated as set out in that sub-rule. Clause (iv) of sub-r. (1) of r. 7 of the said Schedule states as follows :
'Life insurance business means life insurance business as defined in clause (11) of section 2 of the Insurance Act, 1938 (Act IV of 1938)'. Section 2 of the Insurance Act is the definition section in that Act. The relevant portion of clause (11) of that section runs as follows : 'Life insurance business means the business of effecting contracts of insurance upon human life, including any contract whereby the payment of money is assured on death (expect death by accident only...'
6. Both the definitions, viz., the definition under, r. 7 of Sch. I to the said Act, viz., I.T. Act, and the definition contained in cl. (11) of section 2 of the Insurance Act are exhaustive definitions, and sub-r. (iv) of r. 7 makes it clear that the expression 'life insurance business' has the same meaning in that schedule as set out in cl. (11) of s. 2 of the Insurance Act.
7. A plain reading of cl. (11) shows that by the expression 'life insurance business' is meant the business of effecting contracts of insurance upon human life. The only question which we have to consider in this regard is what is meant by 'effecting contracts or insurance'. Accordingto Mr. Mehta this only means issuing new policies of insurance, whereas, according to Mr. Joshi, even the servicing of old policies would amount to carrying on insurance business. We find that the Dictionary meaning of the verb 'effect' which is appropriate to the present case, is 'to take or to take out' (see Concise Oxford Dictionary of Current English, Fifth Edition, page 389). What we have to consider is whether the said expression in s. 2(11) of the I.T. Act should be given a more extensive meaning that the aforesaid Dictionary meaning. We see no reason to do any such thing. It is clear from the order of the Tribunal that the result of giving a wider meaning to the expression 'effecting contract of insurance upon human life' would be to limit the permissible management expenses in the manner laid down in sub-r. (2) of r.2 of the said Schedule, which would obviously be unfair in a case like this. It is not disputed that this method would result in an artificially high figure or income being arrived at in respect of the business of servicing previously issued life insurance policies carried on by an assessee in a case like the one before us and apart from this no reason is shown as to Why it would be more reasonable to give a more extensive meaning to the said expression. We are, therefore, of the view that the expression 'the business of effecting contracts of insurance upon human life' as used in cl. (11) of section 2 of the Insurance Act should be interpreted as meaning the business of taking out or issuing new policies for that purpose. We any point out that the normal rule of construction is that where words or expressions in a statute have a literal or plain grammatical meaning attributable to them, and no particular reason is shown as to why that literal or grammatical meaning should be departed from it is that meaning, which must be given to such words or expressions.
8. In the case of the assessee, we find the admitted position that it was not issuing any new policy of insurance upon human life during the relevant previous years and hence we fail to see how it could be held to be carrying on business of effecting contracts or insurance upon human life during the said previous years. Question No. 1 referred to us must, therefore, be answered in the negative and in favour of the assessee.
9. As far us question No. 2 is concerned, the answer is obvious in view of what we have already held. As the assessee was not carrying on life insurance business as contemplated in r. 1 of the aforesaid First Schedule read with clause (iv) of sub-r.(1) of r.7 therein and cl. (11) of s. 2 of the Insurance Act, it is clear that the income of the assessee in respect of its business of servicing previously issued life insurance policies could not be computed as per the rules contained in the First Schedule. The said question, therefore, will have to be answered also in the negative and in favour of the assessee.
10. It was urged by Mr. Joshi that in view of the conclusions to which we have arrived, we must go on to consider whether the Tribunal was justified is applying the principles and method laid down in r. 2(1)(b) of the said First Schedule to the said Act with suitable modifications for the computation of the income of the assessee from the said business of servicing life insurance policies issued earlier on the ground that it was a reasonable method of determining the income of the assessee in respect of its business of servicing old policies of insurance upon human life. We see nothing in the question referred to us which would require us to go into that question. If the Department wanted to challenge this method of determination adopted by the Tribunal on the ground that it was not just or reasonable or warranted by law, a proper question should have been framed for that purpose and we do not find any such question referred to us for our determination. In the result, both the questions referred to us are answered in the negative and against the Department. The Department to pay to the assessee the costs of the reference.