1. The assessee is an insurance company doing life insurance and also general insurance in the nature of marine, fire and other insurance, and the question that arises is the mode of computing the losses incurred by the company in its life insurance business.
2. Now, the profits and gains of a life insurance business have to be computed not in the manner laid down in the Income-tax Act but in the manner laid down in the rules contained in the Schedule to the Act, and what falls for construction in this reference is rule 2. Rule 2(a) provides that the profits and gains of life insurance business shall be taken to be either the gross external incomings of the preceding year from that business less the management expenses of that year, and sub-clause (b) of the rule provides for profits and gains to be computed after making certain deductions by taking the annual average of the surplus arrived at by adjusting the surplus or deficit disclosed by the actuarial valuation made, for the last inter-valuation period ending before the year for which the assessment is to be made, and the rule ends by saying 'whichever is the greater.'
3. Now, the position is that if the deficit was calculated under rule 2(a) for the assessment years 1947-48, 1948-49, 1949-50 and 1950-51, the deficit disclosed was much larger than the deficit disclosed if the computation was made under rule 2(b), and the contention of the department was that they were entitled to compute the losses under rule 2(b) at their option, whereas the contention of the assessee was that on a true construction of rule 2 it was incumbent upon the department to calculate the losses in the manner laid down in rule 2(a). The Tribunal upheld the contention of the department with regard to the assessment years 1948-49, 1949-50 and 1950-51 but upheld the contention of the assessee with regard to 1947-48 on a different ground with which we shall deal later.
4. Now, what is contended by the assessee is that when there is a loss you cannot consider rule 2(b) because rule 2(b) deals with surplus and if rule 2(b) deals with surplus, ex hypothesi it cannot apply when the valuation discloses a deficit. In putting forward this contention what is overlooked is the operative words of rule 2, and the operative words of the rule are 'profits and gains of life insurance business shall be taken to be'. It is well settled that the expression 'profits and gains' include losses. It is comprehensive expression used by the Legislature to cover not only profits and gains of a business but also the losses of a business. Therefore for the purpose of rule 2 it is not merely the profits and gains of life insurance business, which have to be computed but also the losses of life insurance business, and the losses are to be computed in the manner laid down in sub-clause (a) or sub-clause (b). If Mr. Palkhiwalla's contention were to be accepted, the result would be that as far as profits and gains are concerned the computation must be either in the manner laid down in sub-clause (A) or sub-clause (b), but when there are losses the computation must only be as laid down in sub-clause (b), but such a conclusion is totally opposed to the scheme of rule 2. Rule 2 puts profits and gains of life insurance business on the same footing as the losses of life insurance business and the mode of computation both with regard to profits and gains and losses is the same. It is either under sub-clause (a) or sub-clause (b), whichever is greater, and therefore in our opinion the Tribunal was right in the view that it took that whether there are profits or losses computation can be made either under sub-clause (A) or sub-clause (b) or rule 2.
5. The next contention urged by Mr. Palkhiwalla is that if either (a) or (b) is to be availed of by the taxing department, then the expression 'Whichever is the greater' should be strictly construed and as in this case the loss is greater under sub-clause (a) than on a computation under sub-clause (b) the computation under sub-clause (a) should be accepted. Now, it is only because Mr. Palkhiwalla told us that he has seriously advanced this argument that we consider it necessary to deal with it, because it is obvious that the expression 'whichever is the greater' is used by the Legislature in order that advantage should ensue to the revenue by computing the profits and gains or losses under sub-clause (a) or under sub-clause (b). The option is left to the taxing department and obviously the taxing department would avail itself of the option from the point of view of benefit to the revenue. In our opinion it is impossible to contend that the expression 'whichever is the greater' when understood in the context of losses means that the revenue is compelled to accept greater loss rather than lesser loss if computation was made under sub-clause (b). Therefore, from that point of view also the contention of the assessee is unacceptable.
6. With regard to the assessment year 1947-48, the reference is made by the department because the view taken by the Tribunal was that sub-clause (b) had no application. Now, in this case the actuarial valuation was made by the company in the inter-valuation period ending with the 31st of December, 1946, and we are concerned with the assessment year 1947-48. When we turn to sub-clause (b) what that sub-clause requires is that there must be an actuarial valuation made for the last inter-valuation period ending before the year for which the assessment is to be made. Therefore, the first question that we have to consider is which is the year for which the assessment is to be made, and the only answer to that question can be that the year for which the assessment is to be made is the year 1947-48. If that be the only answer, then the valuation has got to be made for the last inter-valuation period ending before that year, and in that view in this case that period is the 31st of December, 1946. Now, it is difficult to understand the reasoning of the Tribunal when it says that this inter-valuation can only be availed of not for the year 1947-48 but for the year 1948-49. Apparently the view taken by the Tribunal was that the expression 'the year for which the assessment is to be made' means the accounting year and not the assessment year. It is contrary to all canons of construction. The expression 'year for which assessment is to be made' is not a new expression used for the first time in rule 2. This expression is to be found in various sections of the Income-tax Act and as we said before there can be no doubt whatsoever that the year for which assessment is to be made is the assessment year and not the accounting year, and therefore if that expression means assessment year, the Tribunal, with respect, was obviously wrong and the department was right in its contention that it was justified in computing the losses of the company under sub-clause (b) also for the year 1947-48.
7. Therefore as far as this reference is concerned the question submitted to us in para. 7 of the statement of the case will be answered in the affirmative. With regard to the question submitted to us in para. 10 of the statement of the case it must also be answered in the affirmative. The assessee must pay the costs of the reference.
8. Now, there is a notice of motion taken out by the assessee in order to raise the two following questions :
'(1) Whether all insurance business covered by Section 10(7) and the Schedule to the Act is not the same business and
(2) Whether the losses in the life insurance business can be set off under Section 24(2) against profits of any business of insurance other than life insurance ?'
9. What the assessee company contends is that the losses made by it under the life insurance business can be set off in law against the profits made by it under the general insurance business done by the company. In other words, the contention of the assessee is that Section 24(2) applies to the facts of this case. Now, Section 24(2) would only apply if the business done by the assessee company of life insurance was the same as the business done by the company in respect of general insurance. It is only when losses are incurred under the same head that they can be carried forward to the next year under Section 24(2) and the finding of the Tribunal on this aspect of the case is that life insurance business and other general insurance business constitute different businesses, and therefore it is not open to the assessee to claim the benefit of Section 24(2). It is strongly pressed upon us by Mr. Joshi on behalf of the department that we should not allow the assessee to raise this question because there is a clear finding of fact by the Tribunal and no question of law arises, and the finding on which reliance is placed is in paragraph 14 of the order, viz., 'There is no inter-dependence or inter-lacing of the two business of any type.' Now, if there was evidence on the record to justify this finding, then undoubtedly we would be bound by this finding and possibly no question of law would arise, but on a careful perusal of the order of the Tribunal, we find that the basis of this finding is not any appreciation of evidence or an assessment of facts established before it but the finding is based upon the view of the law that the Tribunal has taken, and briefly put, the view of the Tribunal is that inasmuch as the law requires an insurance company to maintain a separate account with regard to life insurance business and also maintain a separate life insurance fund, in no view of the case can life insurance business constitute the same business vis-a-vis the other businesses carried on by the life insurance company. Now, in coming to this conclusion we find that the Tribunal has not taken into consideration at all the decision of the Appellate Assistant Commissioner which was in favour of the assessee. the Appellate Assistant Commissioner based his decision on three important facts. One was that the higher staff was common to all types of insurance businesses, the other was that agents employed to secure life insurance were mostly the same as those employed for securing other insurance business, and the third was that important items of expense were common and they were allocated subsequently to different kinds of insurance business. Now, these are all questions of facts and it was open to the Tribunal to have considered these facts and come to a conclusion, but we find that the Tribunal has not taken into consideration these facts at all. On the contrary, in paragraph 14 the Tribunal says : 'These two branches of insurance are so different to each other that invariably special staff is employed for each type of insurance.' With respect to the Tribunal, we are not concerned with what the general practice is nor are we concerned with what several or a majority of insurance companies do. What we are concerned with, and what we are interested in is to find out what this particular insurance company does. Therefore, it seems to us that although we are not prepared to ask the Tribunal to refer the question as formulated by the assessee which raises a general question with regard to all insurance companies, we are prepared to accede to the request of the assessee and ask the Tribunal to refer to us a question of law which has relevance with regard to the facts with regard to the specific insurance company and the question that we propose to raise is :
'Whether there is any evidence to justify the finding of the Tribunal that life insurance business of the assessee company and the other insurance business was not the same business ?'
10. Having asked the Tribunal to refer this question, we will also ask the Tribunal to submit to us a statement of the case with reference to this question.
11. Mr. Joshi has taken another objection to our asking the Tribunal to raise a question of law, and that is that in view of the recent decision of the Supreme Court the answering of such a question would become purely academic. Mr. Joshi's contention is that the Supreme Court had held that a set-off is only possible provided there is another head of income against which the losses can be set off. It is only then that a set off can be carried to the next year, and Mr. Joshi's contention is that as far as insurance business is concerned, in view of Section 10(7) no question of heads of insurance can ever arise, and whatever the income of the insurance company, it is one income and under one head. Under these circumstances, according to Mr. Joshi, even if Section 24(2) were to apply inasmuch as this insurance company can have no income under any other head, no question of carrying forward the losses to the sub-sequent year would arise. Now, we do not propose to deal with this aspect of the matter. This point was never urged before the Tribunal. The only question that was urged before the Tribunal and the Tribunal has considered in its order is that life insurance business and general insurance business cannot under any circumstances constitute one business, and what we propose to decide after the statement of the case has been submitted to us is whether on the facts of this case the view taken by the Tribunal is justified. If we hold in favour of the assessee it would be open then to the department to urge when the matter goes back to the Tribunal that even though the business of this assessee company is one business, no set-off is permissible in view of the Supreme Court decision. But that question does not arise as indeed it was never urged before the Tribunal and therefore we do not think that the assessee should be deprived of his right to have this question answered by us because of a possible objection that the department might take on the basis of the Supreme Court judgment.
12. The order we propose to make on this notice of motion is that we ask the Tribunal to refer to us the question formulated above and we ask the Tribunal to submit the statement of the case. The Commissioner to pay the costs of the notice of motion.
13. Reference answered accordingly.