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Life Insurance Corporation of India, Bombay Vs. Commissioner of Income-tax, Bombay City-iii - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtMumbai High Court
Decided On
Case NumberIncome-tax Reference No. 35 of 1968
Judge
Reported in[1978]115ITR45(Bom)
ActsIncome Tax Act, 1961 - Sections 10, 28, 43A, 44, 82, 85, 99, 101, 191 and 235 - Schedule - Rule 2 and 2(1); Income Tax Act, 1922 - Sections 10(7); Life Insurance Act - Sections 7
AppellantLife Insurance Corporation of India, Bombay
RespondentCommissioner of Income-tax, Bombay City-iii
Appellant AdvocateR.J. Kolah, Adv.
Respondent AdvocateR.J. Joshi, Adv.
Excerpt:
.....section 10 (7) of income tax act, 1922 and section 7 of life insurance act - business of all life insurance business transferred to and vested in assessed-corporation - whether in computing profits and gains of business of insurance under section 44 read with rules in first schedule certain items received during relevant inter-valuation period and which ordinarily not includible in total income computed under different heads rightly included in taxable surplus - firstly interest on national treasury savings certificates ordinarily not includible in total income under section 10 (15) (2) - secondly agricultural income ordinarily not includible in total income under section 10 (1) - nothing in section 44 and rule 2 which specifically excludes applicability of provisions on basis of which..........received by the assessee fromnewly established industrial undertakingsduring the relevant inter-valuationperiod under section 85 and 101 of theincome-tax act, 1961.5. 50,75,413 rebate of super-tax on dividendsreceived by the assessee during theindustrial undertakings under section99(1)(iv) of the income-tax act, 1961.6. 1,52,511 rebate of income-tax on dividendsassessed to agricultural income-taxreceived by the assessee undersection 235(b)(ii) of the income-taxact, 1961. 4. it is sufficient to state for the purposes of this reference that these deductions were permitted by the appellate assistant commissioner for the purposes of computing the total income of the assessed-corporation. so far as the assessed-corporation is concerned, its business having consisted of life insurance.....
Judgment:

Chandurkar, J.

1. The assessee in this case is the Life Insurance Corporation which is a statutory corporation established under the Life Insurance Corporation Act, 1956, with effect from September 1, 1956. Though the assessment year is 1963-64, for the purpose of assessment the inter-valuation period is the period from January 1, 1962, to March 31, 1963. Under the Life Insurance Corporation Act under section 7, it was provided that on the appointed day, which was September 1, 1956, there shall be transferred to and vested in the Corporation all the assets and liabilities appertaining to the controlled business of all insurers. 'Controlled business', so far as the present reference is concerned, was the life insurance business.

2. Sub-section (2) of section 7 provides :

'The assets appertaining to the controlled business of an insurer shall be deemed to include all rights and powers, and all the property, whether movable or immovable, appertaining to his controlled business, including, in particular, cash balances, reserve funds, investments, deposits and all other interests and rights in or arising out of such property as may be in the possession of the insurer and all books of account or documents relating to the controlled business of the insurer; and liabilities shall be deemed to include all debts, liabilities and obligations of whatever kind then existing and appertaining to the controlled business of the insurer......'

3. We are not concerned with the Explanation to sub-section (2) of section 7 for the purposes of this reference. A reference to the provision in section 7(2) will become material later when we come to discuss the contentions of the assessee in respect of question No. 7 which has been refereed to this court. In respect of the assessment year in question, the assessee had claimed certain deductions as follows :

---------------------------------------------------------------------S. Amount Nature of the deductionNo.----------------------------------------------------------------------Rs.1. (a) 1,72,009 Interest on Post Office and NationalTreasury Savings Certificates notincludible in total income under section10(15)(ii) of the Income-tax Act, 1961.(b) 41,019 Agricultural income not includible intotal income under section 10(1) of theIncome-tax Act, 1961.2. 1,44,751 Rebate of income-tax on the interestreceived by the assessee during therelevant inter-valuation period on MysoreGovernment Securities in view ofNotification No.878(F) issued undersection 60 of the Indian Income-tax Act,1922, read with section 297(2)(1) of theIncome-tax Act, 1961.3. 94,738 Rebate of income-tax and super-tax ondividends received by the assesseefrom co-operative societies during therelevant inter-valuation period underSections 82 and 99(1)(iii) of theIncome-tax Act, 1961.4. 29,38,237 Rebate of income-tax and super-tax ondividends received by the assessee fromnewly established industrial undertakingsduring the relevant inter-valuationperiod under section 85 and 101 of theIncome-tax Act, 1961.5. 50,75,413 Rebate of super-tax on dividendsreceived by the assessee during theindustrial undertakings under section99(1)(iv) of the Income-tax Act, 1961.6. 1,52,511 Rebate of income-tax on dividendsassessed to agricultural income-taxreceived by the assessee undersection 235(b)(ii) of the Income-taxAct, 1961.

4. It is sufficient to state for the purposes of this reference that these deductions were permitted by the Appellate Assistant Commissioner for the purposes of computing the total income of the assessed-Corporation. So far as the assessed-Corporation is concerned, its business having consisted of life insurance business, the computation had to be made in accordance with section 44 read with the rules contained in the First Schedule of the Income-tax Act, 1961. Section 44 reads as follows :

'Notwithstanding anything to the contrary contained in the provisions of this Act relating to the computation of income chargeable under the head 'Interest on securities', 'Income from house property', 'Capital gains' or 'Income from other sources' or in section 199 or in section 28 to 43A, 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 in accordance with the rules contained in the First Schedule.'

5. The provisions of the First Schedule which were in force at the material time in so far as they are relevant for the purposes of the present reference are to be found in rule 2 of the First Schedule which provides as follows :

'The profits and gains of life insurance business shall be taken to be the greater of the following :

(a) the gross external incoming 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 discloses 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 or deficit included therein which has made in any earlier inter-valuation period and any expenditure or allowance which is not deductible under the provisions of sections 30 to 43A in computing income chargeable under the head ' Profits and gains of business or profession'.'

6. It is not dispute that so far as the case of the assessee is concerned, it was clause (b) of rule 2 which was material. In addition to the above mentioned deductions, one of the contentions of the assessee in the course of the assessment proceedings was that a sum of Rs. 29,29,282 which purported to be an amount of refund of income-tax due in respect of the previous year to the other insurance whose property had vested in the Life Insurance Corporation was liable to be reduced from the surplus in respect of the assessment period in question. The Appellate Assistant Commissioner has recorded a finding in paragraph 63 that refunds relating to the other insurers never before formed part of the surplus of the assessed-Corporation and, therefore, while holding that the assessee was entitled to a deduction of the surplus amounting to Rs. 2,73,50,939 which was the amount of refund in respect of the business of the Life Insurance Corporation itself, the assessee was not entitled to have the said amount of Rs. 29,29,282 deducted out of the surplus in respect of the inter-valuation period for the purposes of the present assessment.

7. The department was aggrieved by the deductions which were permitted by the Appellate Commissioner as referred to above and the department filed an appeal before the Appellate Tribunal. The assessee also filed an appeal, one of the question agitated being that the Appellate Assistant Commissioner should have permitted the amount of Rs. 29,39,959 to be deducted out of the surplus for the purposes of computing the income as contemplated by rule 2(1)(b) of the rules in Schedule I. So far as the items which were excluded by the Appellate Assistant Commissioner were concerned, the Tribunal took the view that the assessee was not entitled to make adjustments while computing the taxable surplus under rule 2(1)(b) of the First Schedule and that the power of the Income-tax Officer to make adjustments to the actuarial surplus under rule 2(1)(b) of the First Schedule of the Income-tax Act, 1961, was very limited. The Tribunal on a construction of rule 2(1)(b) took the view that only adjustments which were contemplated by rule 2(1)(b) were :

(1) any surplus or deficit included in the actuarial surplus which was made in the earlier inter-valuation period, and

(2) the expenditure or allowance which is not deductible under sections 30 to 43A of the Income-tax Act.

8. These were the only adjustments which were permissible and barring these adjustments, according to the Tribunal, the Income-tax Officer was not entitled to make any other adjustments. The effect was that the deductions which were permitted by the Appellate Assistant Commissioner were held to be not permissible. With regard to the said amount of Rs. 29,29,282, the Tribunal confirmed the finding given by the Appellate Assistant Commissioner that these amounts of refund of income-tax which were now included in the surplus disclosed in the actuarial valuation of the latest inter-valuation period, were never included in the actuarial surplus of the earlier inter-valuation period. The Tribunal held as a fact that in the surplus as disclosed in the actuarial valuation in the last inter-valuation period, there was no brought forward surplus or deficit of the earlier inter-valuation period and, therefore, the tax refunds received did not form part of the surplus of the earlier inter-valuation period. The Tribunal also further found that only such portions of the refund which had been included in the surplus or deficit made in the earlier inter-valuation period alone had to be excluded and, therefore, disallowance of the balance of the tax refund was quite in order. The contentions of the assessee having been negatived by the Tribunal, the assessed-Corporation asked for a reference of seven questions out of which six questions related to the deductions which were permitted by the Appellate Assistant Commissioner but disallowed by the Tribunal and the seventh question related to the exclusion of the refund of income-tax to the tune of Rs. 29,39,959 out of the surplus during the inter-valuation period in question. The questions which have been referred to this court are as follows :

'(1) Whether in computing the profits and gains of business of insurance for the assessment year 1963-64, under section 44 read with rules in the First Schedule to the Income-tax Act, 1961, the following items received during the relevant inter-valuation period and which are ordinarily not includible in the total income computed under different heads, are rightly included in the taxable surplus :

(a) Interest on National Treasury Savings Certificates of Rs. 1,72,009 (ordinarily not includible in total income under section 10(15)(ii) of the Income-tax Act, 1961), and

(b) Agricultural income of Rs. 41,019 (ordinarily not includible in total income under section 10(1) of the Income-tax Act,1961)

(2) Whether in the computation of income from life insurance business under section 44 read with rules in the First Schedule to the Income-tax Act, 1961, was the assessee entitled, under Notification No. 878(F) issued under section 60(1) of the Indian Income-tax Act, 1922, read with section 297(2)(1) of the Income-tax Act, 1961, to a rebate of income-tax on the interest of Rs. 1,44,751 received by it during the relevant inter-valuation period on Mysore Government Securities

(3) Whether in the computation of income from life insurance business, the assessed-Corporation was entitled under sections 82 and 99(1)(iii) of the Income-tax Act, 1961, to rebate of income-tax and super-tax on dividends of Rs. 94,738 received by it from co-operative societies during the relevant inter-valuation period

(4) Whether in the computation of income from life insurance business, the assessed-Corporation was entitled under section 85 and 101 of the Income-tax Act, 1961, to rebate of income-tax and super-tax on dividends of Rs. 29,38,237 received by it from newly established industrial undertakings during the relevant inter-valuation period

(5) Whether in the computation of income from life insurance business, was the assessed-Corporation entitled under section 99(1)(iv) of the Income-tax Act, 1961, to rebate of super-tax on dividends of Rs. 50,75,413 received by it during the relevant inter-valuation period from industrial undertakings

(6) Whether in the computation of tax in respect of income from life insurance business, was the assessed-Corporation entitled under section 235(b)(ii) of the Income-tax Act, 1961, to a rebate of income-tax of Rs. 1,52,511 on dividends assessed to agricultural income-tax received by it during the relevant inter-valuation period

(7) Whether, on the facts and in the circumstances of the case, the sum of Rs. 29,39,959 being the refund of income-tax received by the Corporation during the inter-valuation period in respect of income-tax up to the assessment year 1956-57 of the life insurance business of the erstwhile insurers whose business had been taken over by the Corporation, should be allowed as a deduction while computing the income of the assessee under rule 2(1)(b) of the First Schedule to the Income-tax Act, 1961 ?'

9. The above questions Nos. 1 to 6 refer to the deductions, the details of which we have earlier reproduced. Now, so far as questions Nos. (1) to (6) are concerned, the basis of the decision off the Tribunal appears to be that the provisions of the rule 2(1)(b) have to be so read that deductions or allowances which are permissible to an ordinary assessee as provided by the several provisions of the Income-tax Act, 1961, cannot be availed of by a person who carries on the life insurance business like the present assessee. Rule 2 of the First Schedule has to be read along with the provisions of section 44 of the Income-tax Act, 1961. The question which essentially falls to be determined in this reference is whether, in view of the provisions of section 44 or rule 2 of the First Schedule, the Life Insurance Corporation will not be entitled to claim the deductions which are otherwise admissible in the case of an assessee, computation of whose income is governed by the other provisions of the Act. The argument of Kolah for the Life Insurance Corporation is that unless there are express provisions which disable the Corporation from claiming the deduction referred to above, the Corporation cannot be deprived of the benefit of the provision referred to in the questions Nos. 1 to 6. section 44, which deals with computation of profits and gains of business of insurance, begins with a non-obstante clause, the effect of which is that the provisions of the Act relating to the computation of income chargeable under the head 'Interest of security', 'Income from house property', 'Capital gains' or 'Income from other sources' do not apply in the case of computation of income from insurance business. The effect of the non-obstante clause so far as the earlier part of section 44 is concerned, therefore, is that the provisions of section 44 will prevail notwithstanding the fact that there are contrary provisions in the Act relating to computation of income chargeable under the four heads mentioned in section 44. The only other overriding effect of section 44 is that its provisions operate notwithstanding the provisions of section 191 or section 28 to 43A. Thus, the only effect of section 44 is that the operation of the provision referred to therein is excluded in the case of an assessee who carries on insurance business and in whose case the provisions of rule 2 of the First Schedule are attracted. If the deductions which are claimed by the assessee do not within the provisions which are referred to in section 44, it will have to be held that the applicability of those provisions in the case of an assessee whose assessment is governed by section 44 read with rule 2 in the First Schedule is not excluded.

10. Kolah has relied on the decision of this court in Commissioner of Income-tax v. New India Assurance Co. Ltd. : [1969]71ITR761(Bom) , in support of his proposition that the applicability of only certain provisions is excluded by the provisions of section 44 and that the other provisions which deal with the allowable deduction, unless they are expressly excluded, will have to be held applicable in the case of even an assessee who carries on life insurance business. In the case of New India Assurance Co. Ltd. : [1969]71ITR761(Bom) , the provisions considered was section 10(7) of the Indian Income-tax Act, 1922. Section 10(7) read as follows :

'Notwithstanding anything to the contrary contained in section 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.'

11. No doubt there is some difference between the provisions of section 10(7) of the 1922 Act and section 44 of the present Act as section 10(7) of the Indian Income-tax Act, 1922, also dealt with the computation of the tax payable in addition to the computation of profits and gains of business of insurance while section 44 does not referred to the computation of the tax but merely refers to the computation of profits and gains of any business of insurance. That does not, however, make any difference to the principle laid down by this court in the case of New India Assurance Co., because the contention of the revenue based on the fact that section 10(7) referred to computation of tax and, therefore, the application of any other provisions of the Act relating to exemption was excluded was rejected. The exemptions claimed in that case were those under section 15B and 15C of the Indian Income-tax Act, 1922, and the exemption permissible under Notification No. 39 issued under section 60 and a deduction under section 4(1) was also claimed. After referring to the provisions of the Act and negativing the contention of the revenue, the division Bench observed as follows (page 775) :

'We cannot, therefore, accept the first contention raised on behalf of the department that in view of the use of words 'and the tax payable thereon shall be computed in accordance with the rules contained in the Schedule to this Act ', the other provisions of the Income-tax Act, particularly the provisions relating to exemptions, would not apply and that the tax payable must be computed in the instant case only under rule 6. There is nothing to indicate in sub-section (7) of section 10 that the exemption under sections 15B and 15C and the exemption under the Notification No. 39 issued under section 60 or the deduction under section 4(1) cannot be allowed and the only ground upon which it has urged, that by inferences these provisions are excluded, cannot be accepted.'

12. The position not in any way different under the provisions of section 44. There is nothing in section 44 and rule 2 which specifically excludes the applicability of the provisions on the basis of which it was contended by the assessee that the amounts referred to above could not be included while computing the income of the assessed-Corporation.

13. Joshi appearing on behalf of the revenue was not in a position to dispute that the authority of the decision in New India Assurance Co. Ltd.'s case : [1969]71ITR761(Bom) has not been in any way shaken by any other decision. It was also not possible for him to dispute that, in view of this decision, it will have to be held that the several provisions on which reliance was placed on behalf of the assessee for claiming that the several amounts referred to above should not be included in income of the assessee could have been availed of by the assessee. It is, therefore, clear that the Tribunal was in error in setting aside the order of the Appellate Assistant Commissioner who had allowed the several amounts referred to above to be excluded from the total income of the assessee. In view of this, the questions Nos. 1 to 6 will have to be answered in favour of the assessee.

14. Coming to question No. 7, it is vehemently contended by Kolah appearing on behalf of the assessee that though the Appellate Assistant commissioner and the Appellate tribunal have found that the amount in question, i.e., the amount of refund of income-tax due in respect of the previous year to the other insurers whose property had vested in the Life Insurance Corporation has not been included in the surplus for the earlier inter-valuation period, both the authorities have loss sight of the statutory provisions in section 7 of the Life Insurance Corporation Act. It is contended that when rule 2(1)(b) of the First Schedule to the Income-tax Act, 1961, permits exclusion from the annual average surplus of any surplus or deficit included therein which was made in any inter-valuation period, these words must be so read, having regard to the provisions of section 7, that they include a surplus for the earlier inter-valuation period even in respect of the insurer whose assets have vested in the Life Insurance Corporation. It is, therefore, vehemently argued that in view of the provisions of section 7, if this amount was a part of the surplus of the insurer whose assets and liabilities have vested in the Corporation, then for the purposes of rule 2(1)(b) it must be taken granted that that was also the surplus of the Life Insurance Corporation.

15. It is difficult to accept this submission. Rule 2(1)(b) is an artificial mode of computation of profits of an assessee who carries on life insurance business. These profits are arrived at by first determining the annual average of the surplus after adjusting the surplus or deficit as disclosed by the actuarial valuation made in accordance with the Insurance Act, 1938, in respect of the last inter-valuation period. What is contemplated by rule 2(1)(b) is that if there is a surplus of the earlier inter-valuation period, which was entered in the accounting while finding out the surplus for the inter-valuation period in question, then that surplus has to be deducted for the purposes of finding out the surplus in respect of the assessment year in question. It is necessary to remember that when an actuarial valuation is made by an actuary on behalf of the company, firs of all a consolidated revenue account is prepared, which would show on the one side the amount of life insurance fund at the end of the period for which the consolidated revenue account is prepared. The actuary then finds out what is the net liability of the company under the current policies and after fixing the net liability on the current policies, he deducts that liability from the life assurance fund and the result is the surplus. If this is the concepts of the surplus to be found on actuarial valuation, then it is obvious that before surplus is asked to be deducted on the ground that that part of the surplus was carried forward from the earlier inter-valuation period, it must be found as a fact that what is now sought to be deducted was shown as a surplus of the earlier inter-valuation period. Rule 2(1)(b) operates in respect of the particular assessee whose profits of the life insurance business are under computation. Accepting the contention of the learned counsel for the assessee would mean that we would have to add to the language of rule 2 (1)(b) so that it should be so construed that what is to be taken into account is not the actual surplus which has been carried forward into the inter-valuation period in question but also some amount which must be deemed to have been carried forward into the surplus of the inter-valuation period. It is, no doubt, true that the legal effect of section 7 of the Life Insurance Act is that the assets of the insurer who carried on the life insurance business are vested in the Life Insurance Corporation, but the legal effect of that vesting cannot be imported into the provisions of section 2(1)(b) where a pre-condition has to be satisfied before a deduction in respect of the surplus is made, the pre-condition being that that surplus has to be shown as a surplus of the previous inter-valuation period. There is no scope for reading into rule 2(1)(b) any additional powers for the income-tax authorities to so amend the figure of surplus that is different from the actual surplus which is shown on the basis of the actuarial valuation. some reliance was placed by Mr. Kolah on a decision of this court in Bombay Mutual Life Assurance Society Ltd. v. Commissioner of Income-tax : [1951]20ITR189(Bom) , where certain amount representing appreciation in the value of security was not taken credit for in the revenue account or in the actuarial valuation balance-sheet but was merely shown in the balance-sheet and this court held that that amount should be included in the surplus for computing the profits in the insurance company. The facts of that case, however, show that the decision turned on the applicability of rule 3(b) of the Schedule which made certain provisions for the purposes of computing the surplus for the purposes of rule 2. Under rule 3(b) an amount which was either written off or resolved in the accounts or through the actuarial valuation balance-sheet to meet depreciation of or loss on the realisation of investments was allowed as a deduction, but in latter part of that rule it was provided that 'any sums taken credit for in the accounts or actuarial valuation balance-sheet on account of appreciation of or gains on the realisation of investments shall be included in the surplus'. It was this latter part of rule 3(b) that was given effect to by this court because it was found that that amount was liable to be included as a part of the surplus. that decision is, therefore, clearly distinguishable. We must, therefore, reject the contention that the Tribunal was in error in not permitting the said amount of Rs. 29,39,959 to be deducted out of the surplus. Question No. 7 will, threfore, have to be answered in the negative and against the assessee.

16. Accordingly, question No. 1 is answered in the negative and in favour of the assessee. Questions Nos. 2 to 6 are answered in the affirmative and in favour of the assessee. Question No. 7 is answered in the negative and in favour of the revenue. In the circumstances of the case, there will be no order as to costs.


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