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Commissioner of Income-tax, Bombay City-iii Vs. Crown Life Insurance Co. - Court Judgment

LegalCrystal Citation
SubjectCompany;Direct Taxation
CourtMumbai High Court
Decided On
Case NumberIncome-tax Reference No. 41 of 1968
Judge
Reported in[1980]123ITR641(Bom)
ActsIncome Tax Act, 1922 - Schedule - Rules 2 and 3
AppellantCommissioner of Income-tax, Bombay City-iii
RespondentCrown Life Insurance Co.
Appellant AdvocateR.J. Joshi, Adv.
Respondent AdvocateR.J. Colah, Adv.
Excerpt:
.....is contemplated by rule 2 (b) - half of amount to be added which was deducted for computing surplus in assessment order for assessment year 1950-51 - held, tribunal was not right in holding that in computing surplus for year 1950 and amount which has been actually allowed as deduction in assessment for 1950-51 out of amount reserved for policy holders during quinquennium ended 31.12.1949 should be added back under second proviso to rule 3 (a). - - the view of the tribunal was expressed in the following words :if, therefore, in the annual average surplus which formed the basis of the assessment for the earlier assessment year 1950-51 only one-fifth of the one-half of the amount reserved on behalf of the policyholders was ultimately allowed as a deduction, and it is not..........runs counter to the express words in the proviso to r. 3 and inasmuch as in respect of the earlier year of assessment, half of the amount referred to in clause (a) of r. 3 was allowed to be deducted, it is that whole amount which is referred to in the second proviso which was required to be added back because the said amount had ceased to be reserved on behalf of the policyholders. it is contended that what was material for the purposes of the operation of r. 3 was the computing of the surplus as provided in r. 2 and not the annual average of the surplus. it was contended that in a case where the annual average of the surplus has to be found, what has to be done first was to find out the surplus for the inter-valuation period; then if addition in respect of the figure referred to in r......
Judgment:

Chandurkar, J.

1. The assessee in this reference made at the instance of the revenue is the Crown Life Insurance Co., and the assessment year in respect of which the following question has been referred is the assessment year 1951-52 :

'Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that, in computing the surplus for the year 1950, only the amount which has been actually allowed as a deduction in the assessment for 1950-51 out of the amount reserved for policyholders during the quinquennium ended December 31, 1949, should be added back under the second proviso to rule 3(a) ?'

2. The earlier inter-valuation period in respect of the assessee was a period of five years from January 1, 1945, to December 31, 1949. In the assessment year 1950-51 while computing the income of the circumstances in accordance with r. 2(b) and r. 3 of the rules in the Schedule to the Indian I.T. Act, 1922, half of the amount reserved for policyholders was allowed as a deduction under r. 3(a). Half of the amount was allowed because at the material time r. 3(a) provided that in computing the surplus for the purpose of r. 2 half of the amount paid to or reserved for or expended on behalf of policyholders shall be allowed as a deduction. In respect of the assessment year in question, that is, 1951-52, the ITO found that the amount originally reserved for the policyholders in the earlier actuarial valuation had ceased to be so reserved in the second actuarial valuation. Therefore, acting under the second proviso to r. 3 the ITO added back one-half of the amount reserved for the policyholders and proceeded to assess the assessee to tax. This action of the ITO was challenged in appeal by the assessee and the AAC confirmed the order of the ITO. The matter was, therefore, carried in appeal further to the Tribunal. It was contended before the Tribunal that the earlier inter-valuation period being a period of five years for the purposes of the average surplus contemplated by r. 2 (b), so far as the earlier assessment year was concerned, what had entered into the deduction so as to make allowance under r. 3(b) was only one-fifth of one-half of the amount reserved for the policyholders and, therefore, though it could not be disputed on behalf of the assessee that the said amount had ceased to be so reserved, and an addition was required to be made in view of the second proviso to r. 3(a), according to the assessee the addition could not be made to the extent of one-half, but the addition had to be only in respect of one-fifth of one-half of the amount reserved for policyholders. This argument appealed to the Tribunal and the Tribunal took the view that the entire half amount which was deducted in respect of the earlier assessment year 1950-51 could not be added back and what was liable to be added was only one-fifth of one-half of the said amount. The view of the Tribunal was expressed in the following words :

'If, therefore, in the annual average surplus which formed the basis of the assessment for the earlier assessment year 1950-51 only one-fifth of the one-half of the amount reserved on behalf of the policyholders was ultimately allowed as a deduction, and it is not disputed that that was the only amount allowed as a deduction, then we fail to see how in making the adjustment as provided in rule 3(a) a higher amount, i.e., the entire one-half of the amount reserved on behalf of the policyholders, is still required to be so adjusted.'

Now, admittedly, the relevant provisions in r. 3 which govern the case is as follows :

'In computing the surplus for the purpose of rule 2, -

(a) four-fifths of the amounts paid to or reserved for or expended on behalf of policyholders shall be allowed as a deduction : Provided that in the first such computation made under this rule of any such surplus no account shall be taken of any such amounts to the extent to which they are paid out out of or in respect of any surplus brought forward from a previous inter-valuation period : Provided further that if any amount so reserved for policyholders ceases to be so reserved, and is not paid to or expended on behalf of policyholders that proportion of such amount (one-half or four-fifths, as the case may be), if it has been previously allowed as a deduction, shall be treated as part of the surplus for the period in which the said amount ceased to be so reserved.'

3. Clauses (b) and (c) of r. 3 are not relevant for our purpose. We are also not concerned in this case with the first proviso to clause (a). We must, however, notice the fact that the words 'four-fifths' were substituted for the words 'one-half' by Act No. 25 of 1953 and by sub-s. (2) of s. 30 of the Amending Act the amendments in r. 3 were provided as being deemed to be operative in relation to any assessment subsequent to the assessment for the year ending on March 31, 1951, whether such assessment has or has not been made before the commencement of the Amending Act and where any such assessment has been made before such commencement, it was provided that it shall be lawful for the ITO to revise it wherever necessary to give effect to such amendment. The other material amendment made was in the second proviso and in place of the words 'one-half of such amount' the words and brackets 'that proportion of such amount (one-half or four-fifths, as the case may be)' were substituted. Mr. Joshi appearing on behalf of the revenue contends that the order of the Tribunal runs counter to the express words in the proviso to r. 3 and inasmuch as in respect of the earlier year of assessment, half of the amount referred to in clause (a) of r. 3 was allowed to be deducted, it is that whole amount which is referred to in the second proviso which was required to be added back because the said amount had ceased to be reserved on behalf of the policyholders. It is contended that what was material for the purposes of the operation of r. 3 was the computing of the surplus as provided in r. 2 and not the annual average of the surplus. It was contended that in a case where the annual average of the surplus has to be found, what has to be done first was to find out the surplus for the inter-valuation period; then if addition in respect of the figure referred to in r. 3(a) was required, that figure had to be added to the surplus to found and it was thereafter that the annual average surplus had to be calculated.

4. On the other hand, it is vehemently contended by Mr. Colah appearing on behalf of the assessee that the Tribunal has found as a fact that in respect of the earlier assessment year 1950-51 only one-fifth of one-half of the amount reserved on behalf of the policyholders was allowed as a deduction and if that was the amount which was allowed as a deduction for the purposes of the assessment based on the annual average surplus, then for the purposes of r. 3(b), second, proviso, it is that amount which alone was required to be added back. Stress was laid on the fact that the second proviso after the amendment by Act No. 25 of 1953 referred to 'that proportion of such amount'. In view of these words, according to Mr. Colah, it is only one-fifth of one-half of the amount which was liable to be added back and no the entire amount which was originally reserved on behalf of the policyholders.

5. Admittedly, it has been found as a fact by the Tribunal that one-fifth of one-half of the amount reserved on behalf of the policyholders was ultimately allowed as a deduction so far as the earlier assessment year is concerned. However, even though Mr. Joshi did not dispute this finding, Mr. Colah wanted to produce for our perusal the earlier assessment order in respect of the calendar year 1949, that is, for the assessment year 1950-51. Mr. Joshi has opposed the production of this document on the ground that there is already a finding, but as we found that that order would give us a clear picture of the manner in which the surplus has been calculated in respect of the assessment year 1950-51 we have overruled the objection of Mr. Joshi and have allowed Mr. Colah to produce the said document which will be treated as annex. 'D' and a part of the statement of the case.

6. Now, it is not possible to dispute as a fact the contention of Mr. Colah that if an analysis is made of the annual average of the surplus, which was taken into account for the assessment year 1950-51, in so far as the amount reserved on behalf of the policyholders was concerned, only one-fifth of one-half of the amount has entered that part of the surplus. That this would be the position so far as mathematical calculation is concerned would be clear from the order which is now produced by Mr. Colah. the assessment order, now annex. 'D', shows that in the relevant assessment year Rs. 6,36,094 were shown under the head 'Dividends to policyholders' and Rs. 9,01,995 were found to be in the nature of profits reserved on behalf of the policyholders. The total of these two figures came to Rs. 15,38,089. The ITO then made allowance which was stated to be allowance under s. 2(3) (a) and the figure shown was Rs. 15,38,089/2. The amount thus came to Rs. 7,69,044. Making allowance for the inadmissible expenses and other adjustments the surplus thus came to Rs. 10,44,889 and after making allowance under r. 3(a), the surplus was found to be Rs. 2,75,825. The average surplus which came to Rs. 55,125 was then arrived at by dividing this amount of Rs. 2,75,825 by 5. The order of the ITO, therefore, shows that what he had done was that he had initially found the total surplus for the inter-valuation period by making allowance for the amount as provided under r. 3(a). There can be no dispute that this was the correct method of working out the surplus. The question which, therefore, falls for consideration is whether the amount which is required to be added back as contemplated by the second proviso to r. 3 (a) is only that amount which has entered as a part of the average surplus being a fraction of the total allowance on account of the fact that the inter-valuation period was more than a year or whether it is the amount of the actual deduction that was made by the ITO in respect of the figure referred to in r. 3(a). This question will have to be decided on the words of r. 3(a), second proviso.

7. Now, under r. 3(a) a certain deduction is permitted to be made and as provided for in the opening words of r. 3, that deduction is for the purposes of computing the surplus for the purpose of r. 2. When we go back to r. 2(b), which is the only material rule, we find that it uses the words 'annual average of the surplus' at one place and 'surplus' at another. The scheme of r. 2 (b) clearly is that initially it is the surplus that must be found first and then the annual average of the surplus has to be found. Rule 3 merely uses the word 'surplus'. It does not use the words 'annual average of the surplus'. When the deduction is to be made as contemplated by r. 3(a), it is not to be made out of the annual average of the surplus but it has to be made out of the 'surplus'. Now, when the second proviso to r. 3(a) refers to a deduction which 'has been previously allowed', the reference is to the deduction out of the surplus as provided by r. 3 (a). The second proviso further states that the amount which was originally allowed as a deduction 'shall be treated as part of the surplus for the period in which the said amount ceased to be so reserved'. The surplus contemplated is thus not the annual average surplus but the surplus for the inter-valuation period as a whole. Now, it is no doubt true that by the amending Act No. 25 of 1953, the words 'that proportion of such amount (one-half or Four-fifths, as the case may be)' have been substituted for the words 'one-half of such amount'. If we read the unamended rule, there is no difficulty in holding that it only provided that what was to be added was one-half of the amount which was originally deducted. It is obvious that it became necessary to introduce the words 'that proportion of such amount' as a result of the amendment because, by the amendment, the amount to be deducted under r. 3(a) had been changed to 'four-fifths'. A consequential amendment was, therefore, required to be made in the latter part of the second proviso. At the same time, there were likely to be cases where the assessee having got a deduction to the extent of half as originally provided, after the change of the words 'one-half' to 'four-fifths' the amount in respect of which deduction was allowed might cease to be reserved, in which case the question would have been as to which is the amount to be added in view of the second proviso to r. 3(a). It is on account of this that it became necessary to make it clear that the addition would be either one-half or four-fifths, as the case may be, depending upon what was the deduction made in accordance with r. 3(a). The proportion which is contemplated by the amendment is referred to as the proportion of such amount'. 'Such amount' refers back to the amount which is described in the opening part of the second proviso as 'any amount so reserved for policyholders'. What the proportion was to be had been made further clear by the amendment by putting the words in brackets, namely, 'one-half or four-fifths, as the case may be'. The effect of the amendment on its plain reading is that if one-half of the amount which was originally reserved was deducted, the addition would be one-half; if the amount deducted was four-fifths, the addition would also be four-fifths. The words 'one-half' or 'four-fifths' thus indicate the proportion of the amount originally reserved and the only question is which one of these two is to apply The golden rule of construction of a statute is to give the words their plain grammatical meaning. If the concept of the annual average of the surplus is different from the surplus in the case of an inter-valuation period, which is more than a year, and this difference is contemplated by the provision in r. 2(b) itself, then it would be contrary to ordinary canons of construction to give the word 'surplus' used in the second proviso to r. 3(a) the same meaning as the annual average of the surplus. What had, therefore, to be added back was the half of the amount which was deducted for computing the surplus in the assessment order for the assessment year 1950-51 (annex. D).

8. The view which the Tribunal has taken, no doubt, seems to be an equitable view, but equity has no place where a statute dealing with taxation is concerned. So far as the computation of the profits and gains of the insurance business is concerned, that computation has to be made strictly and solely in terms of the artificial rules made in the Schedule. The word in the second proviso must, therefore, be given their literal meaning and if the surplus contemplated by the second proviso to r. 3(a) is not the annual average of the surplus but the total surplus for the inter valuation period, then it is difficult to uphold the view of the Tribunal that only one-fifth of one-half of the amount reserved for the policyholders was alone liable to be added to the surplus under the second proviso.

9. In this view of the matter, we must hold that the Tribunal was in error in taking the view that in respect of the assessment year 1951-52, only one-fifth of one-half of the amount which was originally allowed as a deduction was liable to be added under r. 3(b), second proviso. The question must, therefore, be answered in the negative and the further answer is that the entire deduction made under r. 3(a) in the assessment proceeding for the assessment year 1950-51 was liable to be added under the second proviso to r. 3(a). Assessee to pay the costs of the reference.


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