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Commissioner of Income-tax Vs. Asian Assurance Co. Ltd. - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtMumbai High Court
Decided On
Case NumberIncome-tax Reference No. 24 of 1959
Judge
Reported in[1962]46ITR560(Bom)
ActsIncome Tax Act, 1922 - Sections 4(3) and 10(7) - Schedule - Rule 2
AppellantCommissioner of Income-tax
RespondentAsian Assurance Co. Ltd.
Appellant AdvocateG.N. Joshi, Adv.
Respondent AdvocateR.J. Joshi, Adv.
Excerpt:
.....taxation - exemption - sections 4 (3) and 10 (7) and rule 2 of schedule to income tax act, 1922 - assessee (insurance company) having rental income claimed exemption from tax on impugned income availing section 4 (3) - income of insurance company to be computed under rule 2 - accordingly various incomes of insurance company to be treated as one from business - consequently income from property to be treated as income from business - section 4 (3) which provides exemption of income from property cannot be availed - exemption cannot be granted. - - an appeal taken by the assessee to the commissioner failed. in our opinion, the contentions raised on behalf of the revenue are well founded. (2) the building was constructed between 1st of april, 1946, and 31st of march, 1956; (3) the..........hand, mr. kolah, for the assessee, contends that under the income-tax act, what is taxable is the total income of the assessee. whether a particular receipt is income or not has to be first determined in accordance with the provisions of section 4 of the act. if any receipt is taken away or taken out of the total income of an assessee, then that amount cannot be taken into consideration at all. it goes out at the inception and no question arises of any computation of that income as such. sub-section (7) of section 10 of the act deals only with computation. unless and until it is shown that a particular receipt is income which can be included in the total income of the assessee, section 10(7) has no application thereto. it is his argument that the rental income received by the assessee.....
Judgment:

Tambe, J.

1. This is a reference under section 66(1) of the Indian Income-tax Act (hereinafter referred to as the Act). The relevant assessment years are 1952-53, 1953-54 and 1954-55, the accounting years being the calendar years 1951, 1952 and 1953. The assessee is a life insurance company, and the assessment has been made by the Income-tax Officer under rule 2(b) of the Schedule under section 10(7) of the Act on the basis of the actuarial valuation for the biennial period 1950 and 1951. The assessee company constructed a house property at Borivli between 1st April, 1946, and 31st December, 1949. By 31st December, 1949, the building had been completed and had been rented out. The question involved in this case relates to the rental income of this property. The assessee company claimed that the rental income from Borivli property was exempt from taxation under section 4(3)(xii) of the Act. This contention was not accepted by the Income-tax Officer. In his view the insurance company had to be assessed according to the rules contained in the Schedule of the Act. In that Schedule, the income of an insurance company is only the income from its business and is not divided under the various heads. The income assessed is a notional income as determined under the Schedule of the Act. In this view of the matter, the deduction claimed by the assessee was not granted. An appeal taken by the assessee to the Commissioner failed. A second appeal was taken to the Tribunal. The Tribunal took the view that the assessee was entitled to the benefit of the exemption in respect of the Borivli property under section 4(3)(xii) of the Act, and that income being exempt from tax, the manner of computation of the assessee's income did not arise. In this view of the matter, the Tribunal held that from the figure of surplus arrived at in accordance with the Schedule of the Act the rental income derived by the assessee from the Borivli property should be excluded, and the assessee taxed on the balance. On an application made by the Commissioner of Income-tax under section 66(1) of the Act, the following question has been referred to this court :

'Whether on the facts and in the circumstances of the case, the income arising to the assessee from the Borivli property and exempt from taxation under section 4(3)(xii) of the Income-tax Act is assessable in its hands in any of the assessment years 1952-53 or 1953-54 or 1954-55 ?'

2. In our opinion, the question has not been happily framed. As already stated, the dispute between the parties is whether income of the Borivli property is exempt from taxation under section 4(3)(xii) of the Act. The question, on the other hand, assumes that that income is exempt from taxation. The question, as framed, does not bring out the real controversy between the parties. We therefore reframe the question in the following terms :

'Whether on the facts and in the circumstances of the case the income arising to the assessee from Borivli property is assessable in its hands in any of the assessment years 1952-53 or 1953-54 or 1954-55 ?'

3. Mr. Joshi, learned counsel for the revenue, contends that the income, profits and gains of an insurance company are charged to tax not under different heads of income mentioned in the Act, but by the special mode provided in sub-section (7) of section 10 of the Act, read together with the rules contained in the Schedule to the Act. The insurance company, therefore, had no income chargeable under the head 'income from property'. The provisions of clause (xii) of sub-section (3) of section 4, therefore, are not attracted to the 'income from property' received by an insurance company in the course of its business. The assessee, therefore, is not entitled to claim exemption in respect of the rental income of the Borivli property. He referred us to the decisions in Commissioner of Income-tax v. Western India Life Insurance Co. Ltd., Commissioner of Income-tax v. B. B. & C. I. Railway Co-operative Mutual Death Benefit Society for Indian Staff Ltd. and Commissioner of Income-tax v. Crown Life Insurance Co. On the other hand, Mr. Kolah, for the assessee, contends that under the Income-tax Act, what is taxable is the total income of the assessee. Whether a particular receipt is income or not has to be first determined in accordance with the provisions of section 4 of the Act. If any receipt is taken away or taken out of the total income of an assessee, then that amount cannot be taken into consideration at all. It goes out at the inception and no question arises of any computation of that income as such. Sub-section (7) of section 10 of the Act deals only with computation. Unless and until it is shown that a particular receipt is income which can be included in the total income of the assessee, section 10(7) has no application thereto. It is his argument that the rental income received by the assessee from its Borivli property is exempt under clause (xii) of sub-section (3) of section 4 of the Act. That income, therefore, goes out of the total income of the assessee. Section 10(7) therefore has no application to that income and that income will have to be deducted from the sum ascertained under section 10(7) read with the rules in the Schedule. He referred us to the decisions in Commissioner of Income-tax v. Sir Kameshwar Singh and B. M. Kamdar, In re. In our opinion, the contentions raised on behalf of the revenue are well founded.

4. Section 3 of the Act provides that where any Central Act enacts that income-tax shall be charged for any year at any rate or rates, tax at that rate or those rates shall be charged for that year in accordance with, and subject to the provisions of, this Act, in respect of the total income of the previous year of an assessee. 'Total income' has been defined in sub-section (15) of section 2 as : ''total income' means total amount of income, profits and gains referred to in sub-section (1) of section 4 computed in the manner laid down in this Act...' The liability of an assessee to pay tax is on the total income referred to in sub-section (1) of section 4. Sub-section (1) of section 4 provides that 'subject to the provisions of the Act, the total income of any previous year of any person includes all income, profits and gains from whatever source derived...' It will thus be seen that under sub-section (1) of section 4, all income, profits and gains received by the assessee in the previous year from whatever source he might have received it is liable to tax, unless, in accordance with the provisions of the Act, exemption in respect of any particular item of income is permissible. It has to be seen whether the assessee is entitled to the exemption under clause (xii) of sub-section (3) of section 4. The material part reads : '(3) any income, profits or gains falling within the following classes shall not be included in the total income of the person receiving them.... (xii) any income chargeable under the head 'income from property' in respect of a building the recreation of which is begun and completed between the 1st day of April, 1946, and the 31st day of March, 1956, both dates inclusive, for a period of two years from the date of such completion.' Now, to attract the provisions of this clause, the following facts will have to be established : (1) It is income of a building; (2) the building was constructed between 1st of April, 1946, and 31st of March, 1956; (3) the income is of two years immediately following the date of completion of the building, and lastly (4) - and that is an important factor - that that income is chargeable under the head 'income from property'. In the instant case, it is not in dispute that the first three tests are satisfied so far as the assessment year 1952-53 is concerned. It has to be seen whether the last test, namely, that it is income chargeable under the head 'income from property' is satisfied. Now, the heads of income are enumerated in section 6 of the Act. It provides that 'Save as otherwise provided by this Act, the following heads of income, profits and gains shall be chargeable to income-tax in the manner hereinafter appearing...', and then it enumerates those heads, head (iii) being 'income from property'. Reading these material provisions of section 6 together with clause (xii) of sub-section (3) of section 4, it is apparent that unless and until the assessee establishes that the income relating to which it has claimed exemption is income from property within the meaning of section 6 and chargeable in income-tax in the manner provided in the Income-tax Act, he cannot claim that the provisions of clause (xii) of sub-section (3) of section 4 are attracted thereto. Section 9 is the relevant section of the Act, which deals with computation of income from property, which is chargeable to tax. The answer then is, if the provisions of section 9 of the Act govern the income derived by the assessee from the Borivli property, the assessee establishes that the income from the Borivli property in its hands is an income chargeable under the head 'income from property'. There is, however, a difficulty in the way of the assessee and that is the provisions of sub-section (7) of section 10 of the Act. Section 10 relates to computation of income from business. Sub-section (7) provides that 'Notwithstanding anything to the contrary contained in sections 8, 9, 10, 12, or 18, the profits and gains of any business of insurance and the tax payable thereon shall be computed in accordance with the rules contained in the Schedule to this Act.' On the terms of sub-section (7) of section 10, in our opinion, it is clear that the income from property received by an insurance company during the course of its business is not to be computed in accordance with the provisions of section 9 of the Act, but, on the other hand, that income has to be computed in accordance with the rules contained in the Schedule to the Act. That being the position, on the language of sub-section (7) of section 10, it cannot be said that the income from property received in the course of its business by an insurance company is in its hands an income chargeable under the head 'income from property'. The assessee, therefore, is not entitled to claim exemption of the said income from its total income. The provisions of the rules contained in the Schedule framed under sub-section (7) of section 10 of the Act will show that the profits and gains of an insurance business are computed in a manner different than the profits and gains of an ordinary business are computed. The learned Chief Justice in Commissioner of Income-tax v. B. B. & C. I. Railway Co-operative Mutual Death Benefit Society for Indian Staff Ltd. has pointed it out at page 512 :

'...and section 10(7) provides a special method of computing the profits and gains of any business of insurance and the manner in which tax is to be paid on those profits and gains. Section 10(7) further provides that in place of the provisions contained in section 8, 9, 10, 12, or 18 the rules contained in the Schedule to the Act shall be substituted. Therefore, the result of this provision is that instead of computing the income of an insurance company as laid down in various sections under Chapter III, you compute them in the manner laid down in the Schedule to the Act, and the relevant provision of the Schedule to the Act is rule 2 which provides that the profits and gains of life insurance business shall be taken to be either what is stated in sub-clause (a) or sub-clause (b) and whichever is greater,..... Therefore, it will be noticed that instead of an insurance company making its return of income under the various heads as laid down in section 6, it has got to submit one unit of income, a sort of notional or artificial income, as provided in the Schedule to the Act.'

5. The aforesaid observations of the learned Chief Justice lend support to our conclusion that the income received by the insurance company from a property is in its hands not an income chargeable as income from property, but, on the other hand, the entire income of the insurance company received by it during the course of business bears one character only and that is profits and gains from the business of insurance. In Commissioner of Income-tax v. Western India Life Insurance Co. Ltd., an Indian assurance company doing business in India held, for the purpose of its business, certain foreign investments from which it received income. The income received by the Company outside British India was not brought by the company into British India. The company claimed that under the third proviso to section 4(1) of the Act, it was entitled, for assessment purposes, to the allowance therein mentioned of Rs. 4,500 in respect of the said investment income accruing to it outside British India. This contention of the assessee was not accepted by their Lordships of the Privy Council. Their Lordships held that the computation made of the income of the insurance company under rule 2(b) was naturally done in a manner different than the computation of the income of an ordinary business. The income computed was a notional income, and that being the position, the third proviso to sub-section (1) of section 4 was not attracted. At page 129 of the report it was observed :

'But apart from authority, their Lordships are of opinion that the appellant's (Revenue's) contention is correct and they find it impossible to apply the words of the third proviso to section 4(1) to an assessment under rule 2(b) of the Schedule and they will, therefore, humbly advise His Majesty that this appeal should be allowed...'

6. The decisions on which reliance is placed by Mr. Kolah, in our opinion, are not of any assistance to the assessee. Mr. Justice Kania relating to the scheme of the Income-tax Act in B. M. Kamdar, In re and in particular to the following observations :

'According to section 4 therefore two questions arise : (1) whether the amount in question is income, profits and gains, from whatever sources derived; and (2) whether such income falls within the words found in sub-section (a), (b) or (c). If the answer to these questions is in the affirmative, the next process is to ascertain if such income is excluded under section 4(3) from tax. This is material because the heading of this section is 'Applicability of the Act'. Section 4 itself excludes certain income, like agricultural income, or income of charitable trusts from taxation. If it was so excluded, the same ceased to be income for the Act, and no computation is necessary to be made. If the amount passes these tests, it becomes income referred to in section 4(1).'

7. We have no quarrel with these observations of the learned judge. We have, as discussed above, pointed out that the income received from property is an income within the meaning of sub-section (1) of section 4 of the Act. That sub-section makes an income from whatever source received by an assessee chargeable to tax, save and except such income as is excluded therefrom in accordance with the provisions of the Act. We have also discussed above that the assessee is not entitled to claim any exemption in respect of this income under clause (xii) of sub-section (3) of section 4.

8. The other decision on which reliance is placed is Commissioner of Income-tax v. Sir Kameshwar Singh. The assessee in that case was a money-lender. In the course of his money-lending, the assessee had advanced considerable amount, and as a part of that money-lending transaction, he obtained as a mortgagee in possession certain agricultural property. A question arose whether income of that agricultural property was liable to tax. The department contended that it was income from business and, therefore, taxable; while it was the contention of the assessee that the source of the income being agricultural, it was exempted from being included in the total income of the assessee. Reliance was placed by the assessee on clause (viii) of sub-section (3) of section 4 of the Act. This contention of the assessee was upheld by their Lordships of the Privy Council. On the basis of this decision, it was argued by Mr. Kolah that as agricultural income is excluded from being included in the total income of the assessee, similarly income received from property built between the years 1946 and 1956 is also excluded. The observation of their Lordships would apply with equal force to such income from property. We find it difficult to accept this argument, because clauses (viii) and (xii) are couched in materially different languages. Clause (viii) is unqualified and absolute in terms. The establishment of the fact that a particular income is agricultural income is sufficient to take it out from the total income of the assessee. Such, however, is not the case under clause (xii). Merely establishing that a particular income is income from house property built between the years 1946 and 1956 is not sufficient. The assessee has also further to establish that that income is in his hands chargeable as income from property under the Act. This, as already stated above, the assessee has failed to establish.

9. In the result, in our opinion, the assessee is not entitled to claim exemption in respect of the rental income of the Borivli property. In view of our aforesaid finding, it is not necessary to consider the other alternative question which was argued before us. Mr. Joshi, in the alternative, had argued that even if the assessee is entitled to claim exemption in respect of the rental income of the Borivli property for the year 1952-53, he could not be entitled to such exemption for the years 1953-54 and 1954-55. The question does not survive in view of our aforesaid finding.

10. The answer to the reframed question is in the affirmative. The assessee shall pay the costs of the department.

11. Question answered in the affirmative.


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