1. Three questions arise on this reference which are capable of very simple answers. The assessee is an insurance company doing 'insurance business. Its head office is at Toronto in Canada and it has a branch office in Bombay, It appears that in the actuarial valuation as of 31-12-1944 the life fund was shown at Rs. 1,20,29,894 and on an actuarial basis the liabilities in respect of subsisting policies of the policy holders amounted to Rs. 1,38,75,624. There was therefore a deficit of Rs. 18,45,730.
In order to get over this deficit the head office in Canada placed at the disposal of the branch office securities to the extent of Rs. 24 lakhs and the Imperial Bank was constituted a trustee in respect of those securities. These securities yielded income and in the relevant assessment year the income came to Rs. 85,700 and the Income-tax Authorities attempted to tax the assessee company in respect of this income under Section 12, Income-tax Act.
The question that arises is whether the assessee company is liable to be taxed under Section 12 on this amount. The answer is that under Section 10 (7), Income-tax Act:
'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.'
It is not disputed that this income arose to the assessee company as a profit or gain from the business of insurance. This is not a profit made in any other business and therefore if it is a profit or gain from the business of insurance the profit cannot be computed in accordance with Section 12, but it could only be computed in accordance with the rules contained in the Schedule to the Act, and when we turn to the Schedule there is no provision for computing this income as an income on which tax can be levied.
As a matter of fact, it is not the case of the Department that the assessment has been made on this income under the Schedule to the Income-tax Act. As we pointed out, the contention is that the Income-tax Department is entitled to tax this income as an income from other sources under Section 12, and tne short answer to the contention is that Section 12 had no application to an insurance company which is being assessed on the business done by that company as an insurance company.
2. The second question that arises is with regard to a sum of Rs. 74,511/- which accrued to the assessee company for interest before 1-1-1944. It appears that till the end of 1943 the assessee company had adopted a receipt basis and Interest used to be credited on receipt basis.
But with the commencement of 1944 the method was changed and the interest was credited on the accrual basis. The result of this change was that the sum of Rs. 74,511/- was not shown in the actuarial valuation of 31-12-1944, and the Income-tax Authorities attempted to correct the actuarial valuation by adding to it this sum of Rs. 74,511/-, thereby increasing the surplus, and the question is whether in law they are entitled to do so.
We agree with the Advocate-General that in justice the assessee company has no answer to the claim of the Taxing Department because by this sudden change in the system of accounting the assessee company has brought about a situation whereby it has escaped tax on this sum of Rs. 74,511/-. But what we have to decide is whether in Jaw they are liable to pay tax on this amount. When we turn to the Schedule, Rule 2 (b) lays down what additions and what deductions have to be made in arriving at the surplus and the correction intended to be made by the Income-tax Department is not an addition which is permissible under Rule 2 (b).
It must be borne in mind that when the valuation was made the valuation was correct because it was made on a receipt basis. The result of change made subsequently might have resulted in the amount evading tax. But what we are concerned with is the attempt on the part of the Department to alter or amend the actuarial valuation of 31-12-1944. The actuarial valuation can only be regulated by the provisions of Rule 2 (b) and it is not the case of the Department that the case falls under Rule 2(b).
Therefore we are of the opinion that it was not open to the Department to increase the surplus disclosed by the actuarial valuation by adding to it this sum of Rs. 74,511/-.
3. The third question that arises is with regard to the correct interpretation of Rule 3 (a) in the Schedule and that rule provides that in computing the surplus for the purpose of Rule 2, four-fifths of the amounts paid to or reserved for or-expended on behalf of policy holders shall be allowed as a deduction.
Admittedly, the assessee company has reserved or expended on behalf of policy holders a certain amount and they are claiming that amount as a permissible deduction by reason of Rule 3 (a), and the contention of the Department is that as in relevant valuation report there was no surplus but a deficit it is not open to the assessee company to deduct the amount referred to in Rule 3 (a) from the valuation when the valuation discloses a deficit and not a surplus.
In other words, according to the Department, Rule 3 (a) can only come into operation provided the valuation discloses a surplus and not a deficit. There is no warrant for that contention in the language of Rule 3 (a). When Rule 3 (a) refers to 'computing the surplus for the purpose of Rule 2' it only refers to the mode of computation laid down in Rule 2 (b),
It does not postulate that the result of the computation must be a surplus before Rule 3(a) can come into play. If there is a surplus, then the surplus would be reduced by the permissible deduction under Rule 3 (a). If there is a deficit, the deficit will be increased by the permissible deductionunder Rule 3 (a). But if the deduction is one which falls within the ambit of Rule 3 (a) it must be allowed as a deduction in computing the surplus or the deficit for the purpose of Rule 2 (b).
4. The answers to the questions therefore will be (1) in the negative, (2) does not arise, (3) in the negative, and (4) in the affirmative.
5. The Commissioner to pay the costs.
6. Reference answered.