BEAUMONT, C.J. - This is a Reference made by the Commissioner of Income-tax raising in substance two questions, first of all whether he was justified in resort in to Rule 35 of the Income-tax Rules for the purpose of assessing the Company whose income-tax was in question, and secondly, if the was right in applying the rule, whether he has applied it correctly., We are dealing here with a company which carries on life insurance business and whose head office is in Canada, the Indian business being a branch business. The year of assessment is the financial year 1935-36, and the previous year is the year ending 31st December 1934. Rule 35 lays down a rough and ready method for assessing the profits of nonresident insurance companies in the absence of more reliable data. The method is to take the total world profits of the company, and then treat the Indian profits as bearing the same proportion to the total world profits as the Indian premium income bears to the total premium income. The rule, as I have said, is a rough and ready rule, and it is only applicable in the absence of or reliable date. The introduction of the comparative is not, I think, very happy, because almost any date might be more reliable than the data on which the rule of the thumb is based. But I take it the rule means that it is to be applied unless the assessee provides some reliable data on which the Income-tax Officer can make a satisfactory assessment. The question here is whether the date which the assessee have provided are reliable.
Now they have produced the quinquennial valuation for the period ending 31st December 1933. They have also produced their annual report for the year ending 31st December, 1934, with accounts attached, and they produced the books relating to their Indian income, from which the figures supplied by them can be verified. In addition to those data they have produced Exhibit A, which is headed 'Statement of profit and loss arising from business transacted in the Empire of Indian during the year ended 31st December 1934'. The question really is whether that profit and loss account with the materials for checking the figures to which I have referred provides reliable data. It is, of course, clear that you cannot arrive at a profit and loss account in the case of life insurance business in the same way as you can in the case of business like fire insurance dealing with annual contracts. In the case of a fire insurance business you have only got to ascertain the premium income, and interest on investments and so forth, and set off against the total receipts the working expenses and payments to policy-holders, and in the result you can get at your profits or loss. But in the case of life insurance companies where the contracts are continuing, it is obvious that your liability may be greater or less at the end of the year than what it was at the beginning. Therefore the method is generally adopted of taking an actuarial valuation of the business at the beginning and end of the year or period, and the ordinary form of revenue account is that gain in the First schedule to the Indian Life Insurance Companies Act, which shows on what is called the credit side the amount of life assurance fund at the beginning of the year, and on what is called the debit side the amount of life assurance fund at the end of the year. In dealing with a balance-sheet there is an actuarial valuation of liabilities on the debit side, and your actual assets on the credit side. Now here Exhibit A shows as the first item on the debit side a sum of approximately Rs. 164 lakhs, which is described as the present value on 31st December 1933 of future liabilities under policies, less present value of future contributions after allowing for future expenses. As I understand it, what that really means is that it is a valuation of the Indian liabilities of the Company as at the beginning of the year in question, that is the year 1934. In other words, if the company were to be wound up on the 31st December 1933, it would have to bring to India this sum of Rs. 164 lakhs in order to discharge its India liabilities. Then there is also included on the debit side premium income, certain interest on investments, and then the sum of Rs. 7 lakhs at the rate of interest taken in the companys quinquennial valuation. So that the company nationally treats as brought into India the sum necessary to discharge it liabilities at the beginning of the year, and allows interest on that notional sum. Then on the credit side it shows claims of the period paid, and working expenses, and then the last item so one corresponding to the first item of the debit side, on item of Rs. 190 lakhs, which again represents the sum which would have to be brought into India as at the end of the year 1934 in order to discharge there liabilities of the company in India at that date. The company say that they do not actually constitute a life insurance fund for India, but they say that Exhibit A gives sufficient data to enable the Income-tax Officer to arrive at the true income. Admittedly he can check the figures in that statement, and the assessee point out that during the 30 years in which they have done business in India they have always submitted a statement in the form of Exhibit A, and up to the present time the Commissioner of Income-tax accepted it. However, in the year in question, the Income-tax accepted it. However, in the year in question, the Income-tax Officer refused to accept the statement, and claimed that it did to provide reliable data. His decision was up held by the Assistant Commissioner of Income-tax.
The question we have to decide is whether Exhibit A does provide reliable data. The Advocate-General argued in the first instance that the question is purely one of fact on which the opinion of the Income-tax Officer is conclusive. What data were actually provided is, no doubt, a question of fact. Whether one set of data is more reliable than another set of data is a matter of opinion. It is a matter on which I am disposed to think that the opinion of an accountant might well be of more value than the opinion of a Judge. But the Income-tax Act does not provide for taking any bodys opinion except that of the Court, and it being a matter of opinion on which the court has to arrive at a conclusion, I think it must be considered as a matter of law. It was certainly so treated in the Privy Council in the case of The National Mutual Association of Australasia Limited v. The Commissioner of income-tax, Bombay Presidency and Aden (1935, 63 Indian Appeals 99).
The Statement, Exhibit A, is really, as I have pointed out, a statement in the normal form of a revenue account of life insurance company, except that instead of in lauding the life assurance fund at the beginning and the end of the year it has included certain actuarial estimates of the life insurance liabilities. The Company says that that in effect amounts to the same thing. They are not bound to bring assets to India, and that all they need do is to disclose what their Indian liabilities are. But the answer, to my mind, is that you are dealing with a mere national sum which has no existence in fact, instead of the life assurance fund which consists of actual assets; you are necessarily leaving out of account any rise or fall in the value of those assets during the year. But if the figures in the account were figures of actual assets, as life assurance find should be, it is obvious that they would vary according to the market value and an increase or decrease in the market value of the assets representing the Rs. 164 lakhs during the year would have to be brought into account, and without that one cannot, I think, arrive at the true profits of the business, as I can see. A mere estimate of liabilities seems to me to be an insufficient substitute for the Life Assurance Fund. On that short ground, it seems to me that the Commissioner is right in saying that he has not got sufficiently reliable data to enable him to say what the profits of the Indian business the assessee company were during the year of assessment. That being so, he was entitled to have recourse to Rule 35.
Upon the second question, it is suggested that in having recourse to Rule 35 the Commissioner has included in the total income of the assessee company two sums which he ought not to have included. The first is a sum of over Rs. 41,550 in respect of income received by the assessee from tax-free securities. With regard to the income-tax the argument is that Rule 35 provides that for the purpose of ascertaining the total income you are to act on the method prescribed in Rule 25, and as Rule 25 provides that in arriving at the income for any year you must add Indian income-tax, therefore you are precluded in a case falling under Rule 35 from adding any income-tax except Indian income-tax. The argument seems to me plainly fallacious. Rule 25 deals with life assurance companies incorporated in British India. One must apply that rule to a case falling under rule 35 mutatis mutandis. The reference to Indian income, cannot over all income-tax in a case under Rule 35, which is dealing with the world income of a company incorporated elsewhere than in India. Apart from any rule, income tax is a deduction from income. For convenience of collection the tax may be deducted before the taxpayer gets his income, but that does not alter the fact that income-tax is a deduction from income, and if you are arriving at a persons total income, you must obviously arrive at it before making any allowance for income-tax. Therefore I am of opinion that on that the Commissioner of Income-tax is right.
With regard to the other sum, Rs. 41,550, which is income of the assessee company derived from certain stocks which were issued on the terms that the income was to be free from income-tax, it is argued by the assessee company that if you base your Indian income on appropriation of the total income, and include in the total income from these tax-free securities you are in substance including the income from tax-free securities in your Indian income, and therefor your are indirectly levying tax on securities which were issued free of tax. You are not directly levying tax on the income from the securities which were issued free from tax, and I do not appreciate the argument that Rule 25 conflicts with the provision to Section 8. We have been referred on this point to a decision of a Full Bench of the Calcutta High Court, The North British and Mercantile Insurance Company Limited, In re (1937) 2 Cal. 540, in which a majority of the Bench come to the conclusion in a case of this sort that income derived from tax-free securities ought not to be included in the total income of the assessee company. In dealing with a statute which covers the whole of British India it is undesirable that different High Court should arrive at conflicting conclusions, and I think that we ought to follow on this point the judgment of the Calcutta High Court, though I must confess that I doubt if I should myself have answered the question as the Calcutta Court did.
We must therefor answer the first question raised in the affirmative, and in answer to question No. 2 we say that the rule has been rightly applied except in so far as it incorporated in the words total income of the assessee the sum of Rs. 41,550 derived from tax-free securities. The answer to question No. 3 is really covered by the answers to questions Nos. 1 and 2. Question No. 4 does not arise. Assessees to pay the costs of the Commissioner of Income-tax on the Original Side scale to be taxed by the Taxing Master less Rs. 100.
KANIA, J. - This reference involves in substance the decision of two questions, which are covered by the four questions submitted to the Court. They are, (1) whether the income-tax authorities were justified in invoking the application of Rule 35 of the Income-tax Rules or assessment of the income of the assessee company for the year 1934, and (2) whether in applying that rule and working out the figures on that basis they had acted properly.
The assessee company had been submitting its return or profit and loss statement of account for several years before this question was raised by the Income-tax authorities. Evidently, heaving regard to the judgment delivered in The National Mutual Association of Australasia, Limited v. The Commissioner of Income-tax, Bombay Presidency and Aden (1935) 63 IndAp 99, the attention of the income-tax authorities was drawn to the question whether Rule 35 was applicable to the case or not. It is clear that relying on that rule they called upon the assessee company to furnish if they thought it was possible, more reliable data. The assessee company sent a statement, which is filched as exhibit A in this Reference. In whole company for the year ending 31st December 1934, and the quinquennial report, also of the whole company, up to the 31st December 1933. In Exhibit A it sets out the first item as the present value of future liabilities under policies, less present value of future contributions, after allowing for future expenses. In other words, the first item was what it has estimate actuarially the liabilities under the existing policies at the end of 1933 after taking into consideration the expected prima less cost of recovering the same. That estimated liability was the first item of the so-called debit side. It next stated the premium receipts during the year. The third item is 'Interest earned.' Under that item it included two amounts in respect of interest revived out of India on tax-free sterling loan, and the third item in described as follows : 'Balance of interest earned on Assurance Fund in connection with Companys Indian business.' On the so-called credit side it included various disbursements, expenses, and the last item was described in the following terms. 'Present value, 31st December, 1934, of the future liabilities under policies less present value of future contributions after allowing for future expenses.' That item was similar to the first item on the debit side for the amount.
The question which was put to the assessee company by the income-tax authorities was how this was more reliable data within the meaning of Rule 35. It appears to have been urged by the assessee comply that it did not keep any Assurance Fund separately allocated to Indian business nor did it keep in India any Assurance Fund. Those answers do not appear to be relevant. The question to be answered was, 'where had you shown the Assurance Fund applicable to the business sin India, in the return which you had submitted?' From the annual report and the quinquennial report filed but the assessee company it is clear that in those cases they had clearly shown the Life Assurance Fund, the assets of the company consisting of investments and liabilities. In Exhibit A no such statement of Assurance Fund or investments is found. The item of Rs. 164 lakhs admittedly does not represent any fund or assets but is an actuarially estimated liability. The income-tax authorities therefore considered, in the absence of assets being shown in the statement, it cannot be considered that it was more reliable data at all. In my opinion that view is correct.
It was urged on behalf of the assessee company before us, that the first item represented the liabilities of the company at the beginning of the year, and the company had funds to meet the liability. In the same way the statement showed the liability of the company at the end of the year, and the company had funds top meet that liability. On those grounds it was contended that this was a proper statement of account. Both these items are admittedly only actuarial estimates of their liabilities at the beginning and end of the year. The question, however, which remains unanswered by the assessee company is 'What are the assets, or what is the Life Assurance Fund from which the liabilities of the company were to be satisfied?' The only answer which Mr. Taraporewalla could give us was, that the end of the year and in law they were not obliged to keep and funds in India. The latter proposition may be correct, but for the purpose of taxation, the first is not answer at all. An illustration will perhaps more clearly show that the item of interest earned is quite unreliable. The Life Assurance Fund as stated in the Indian Life Assurance Companies Act and in similar Acts applicable to the British Dominions is built up as security for the life policy-holders. The assessee company could have, as an illustration, a sum of over Rs. 2 crores of Life Assurance Fund applicable to the Indian business, and may still show correctly the first item to be Rs. 164 lakhs and odd. At the end of the year it may have that fund increased or diminished according to the fluctuations of the market, and may still urge that it had 193 lakhs and odd as liabilities. If that state of affairs existed, it had accounted only for interest not on the two crores worth of investment of assets which it held as the Life Assurance Fund for the Indian business, but only for one corer and 64 lakhs. This illustration shows that the answer the company had sufficient funds top meet its policy liabilities, as actuarially estimated, at the beginning and end of the year, is not the same this as stating that that was the Life Assurance Fund. Under the circumstances it is clear that Exhibit A, in so far as it does not disclose in particular, any Life Assurance Fund cannot be relied upon as more reliable data for the purpose of assessing income-tax. I, therefore, agree with the conclusion of the learned Chief Justice that the answer to Question No. 1 should be that income-tax authorities, under there circumstances of the case, where justified in resorting to Rule 35 for assessing the income of the assessees for the year 1934.
As regards the second item, only two points were urged on behalf of the assessee company against the actual assessment. They were in respect of the amount of Rs. 41,550 for interest earned, but to received in India, on tax-free securities. The second item was in respect of income-tax of Rs. 2,29,034. For the reasons stated in the judgment of the learned Chief Justice I agree with the conclusion that the first item should have been taken into consideration in computing the profits of the assessee company for the year 1934. On the item of income-tax the conclusion of the income-tax authorities appears to be correct.