STONE, C.J. - This is a reference under section 66 (1) of the Indian Income-tax Act, 1922, the relevant assessment year being 1939-40 and the accounting year being the calendar 1938.
The assessee is a non-resident life insurance company, having a branch in British India. The questions raised concern the method of assessment of the profits and gains of the Indian business of the company. That depends on Section 10 (7) of the Indian Income-tax Act and certain rules which are set out in the Schedule to the Act. The rules, with which we are concerned, are the new rules, which became operative in 1939.
Section 10, sub-section (7), of the Indian Income-tax Act is 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.'
Turning to the Schedule, it is to be observed that it is headed :
'Rules for the computation of the profits and gains of insurance business.'
Rule 1 provides : 'In the case of any person who carries on, or at any time in the preceding year carried on, life insurance business, the profits and gains of such person from that business shall be computed separately from his income, profits or gains from any other business.'
Rule 2 is : 'The profits and gains of life insurance business shall be taken to be either -
(a) the gross external incomings of the preceding year from that business less the management expenses of that year, or
(b) 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, so as to exclude from it any surplus or deficit included therein which was made in any earlier inter-valuation period and any expenditure other than expenditure which may under the provisions of Section 10 of this Act be allowed for in computing the profits and gains of a business, whichever is the greater.'
There then follows a proviso with regard to how the amount to be allowed as management expenses is to be calculated.
Rule 3 provides how 'the surplus', referred to in rule 2, is to be computed.
Rule 4 is also ancillary to rule 2, and provides machinery for calculating the surplus under it.
Rule 5 is a definition clause, such definitions applying : 'For the purposes of these rules - ', and the following expressions are therein defined : (i) preceding year; (ii) gross external incomings; (iii) management expenses; (iv) life insurance business and (v) securities.
Rule 6 is as follows :
The profits and gains of any business of insurance other than life insurance shall be taken to be the balance of the profits disclosed by the annual accounts, copies of which are required under the Insurance Act, 1938, to be furnished to the Superintendent of Insurance after adjusting such balance so as to exclude from it any expenditure other than expenditure which may under the provisions of Section 10 of this Act be allowed for in computing the profits and gains of a business. Profits and losses on the realisation of investments and depreciation and appreciation of the value of investments shall be dealt with as provided in rule 3 for the business of life insurance.'
Be it noted in passing that this rule applied to any business of insurance other than life insurance.
Rule 7, which applies to a particular type of business, and which makes special provision for the case of anon-resident company, and sets out how its profits and gains are to be computed, is in the following terms :
'The profits and gains of companies carrying on dividing society or assessment business shall be taken to be 15 per cent. of the premium income of the previous year or in the case of non-resident companies 15 per cent. of the British Indian premium income of the previous year.'
Then comes rule 8 :
'The profits and gains of the British Indian branches of an insurance company not resident in British India, in the absence of more reliable data, may be deemed to be the proportion of the total world income of the company corresponding to the proportion which its British Indian premium income bears to its total premium income. For the purpose of this rule, the total world income of life insurance companies not resident in British India whose profits are periodically ascertained by actuarial valuation shall be computed in the manner laid down in these rules for the computation of the profits and gains of life insurance business carried on in British India.'
Lastly, rule 9 provides :
'These rules apply to the assessment of the profits of any business of insurance carried on by a mutual insurance association.'
The rules as a whole provide for the computation of profits and gains of insurance business; and whilst rules 1 to 4 deal with one type of insurance business, namely life insurance business, rule 6 deals with non-life insurance business rule 5 providing a sort of general definition clause : so that down to the end of rule 6 what has been dealt with are the methods of computation of the profits and gains of insurance business, whether the business belongs to an individual, firm, company or association of persons. The difference between these rules is the type of business, and not the status of the owner who is to be assessed to tax. On the other hand, rules 7, 8 and 9 deal with status.
Rule 7, whilst it deals with a special type of business, only applies to resident and non-resident companies, and has no application to individuals, firms or associations of persons.
Rule 8 is even more restricted, and only applies to the British Indian Branches of insurance companies.
Rule 9 makes all the rules apply to mutual insurance associations.
We are concerned with the assessment to tax of a non-resident life insurance company in respect of the profits and gains of the business of its British Indian branch; and the problem, which arises and which has caused a most interesting and able argument before us, can, as it seems to me, be best resolved by finding the correct method of approach to it and by keeping in mind that method and status are two independent and incomparable conceptions.
Section 3 of the Indian Income-tax Act is the charging section, and by it income-tax shall be charged in respect of the total income of every individual, Hindu undivided family, company, etc.
Section 10 (7) and the Schedule, which depends upon it, are procedural, and the first approach to any computation of profits and gains for taxation purposes under the Schedule must be to ascertain the status of the intended assessee, and not to plunge into methods of computation, calculations and figures before it is ascertained who are what it is which attracts the incidence of taxation.
The argument addressed to us as to rule 2 being the paramount rule, and it is only if there is no reliable data to make a computation under it leading to assessment that it is necessary to turn to rule 8, in its turn leads to the contention that computations under rule 2 are what is meant by 'more reliable data' mentioned in rule 8.
In my opinion, this reasoning is unsound. The first approach must be : whose profits and gains is it which are to assessed And the answer must be : the profits and gains of the British Indian branch of an insurance company not resident in British India. That answer compels a primary consideration of rule 8.
Reliance has been placed by Sir Jamshedji Kanga on the case of National Mutual Life Association of Australasia Ltd. v. Income-tax Commissioner, Bombay Presidency and Aden. In that case the Privy Council had to consider the old rules, that is to say, as they stood before the 1939 amendments, and it is essential before approaching that case to appreciate some of the fundamental differences between the old rules and the new rules.
Old rule 25 approximates in its terms to new rule 2 (b), with this difference that it applied only to residents, and not, as the whole of rule 2, to persons whose status is either resident or non-resident. Further, old rule 25 postulates only one basis of assessment and not two as are provided by rule 2, the alternative resulting in the greater assessment being the one to be taken. Old rules 27 and 28 approximate to new rule 5; and old rule 35 approximates to new rule 8. But as old rule 25 did not touch non-residents, old rule 35 could alone be applicable to a non-resident company. There was not provided by the old rules any other possible method of assessment of the Indian business of a non-resident company with the necessary data for which a comparison of reliability could be made with the data necessary to produce the artificial method of computation provided by old rule 35 and now provided by new rule 8.
Their Lordships of the Privy Council, therefore, had to consider what data it was which could be less reliable than that underlying the artificial method contained in old rule 35; and Lord Thankerton, delivering the judgment of the Board said :-
'There can be no doubt that the total income, profits or gains of the company would fall to be computed on the basis of their triennial valuation reports, which, in their Lordships opinion, is the most reliable method of computation in the case of life insurance company.'
Whilst, therefore, the National Mutual case affords some guidance as to the avenue of approach, it in no way decides the problem which arises in this case. If rule 8 had extended its operation to non-resident persons, Hindu undivided families, firms, and associations of persons, it would have been difficult to say that the underlying data necessary to make the computations under rules 2 and 6 was not the data, the reliability of which had to be compared with the data status ambit of rule 8 is extremely limited, as rule 8 appears to have no application except to the Indian branch business of a non-resident company carrying on insurance business.
Apart from these considerations, Sir Jamshedji Kanga has pointed out that the methods of computation under rules 2 and 6 are inappropriate to the computation of the profits and gains of the branch business of a non-resident company, and so far as life insurance is concerned, that is rule 2, Sir Jamshedji points out that it would be impracticable, if not impossible, having regard to the definition supplied by rule 5, to compute the gross external incomings and the management expenses of a branch business, if the branch is to be assessed as a separate entity under rule 2. I think there is considerable force in this contention. In both cases the definitions provide for the full amounts, and there are obvious difficulties in applying there to branch business.
Sir Jamshedji also contends that the matter can be further tested by inquiring whether in the case of a British Indian branch of a company non-resident in British India, which carries on insurance business other than life insurance business, rule 6 would apply. By rule 6 the profits and gains of any insurance business other than life insurance are to be taken to be the balance of the profits disclosed by the annual accounts, copies of which are required under the Insurance Act, 1938, to be furnished to the Superintendent of Insurance after making certain adjustments therein mentioned.
Under the Insurance Act, 1938, Section 16, which came into force on July 1, 1939, the annual accounts for the whole of India have to be filed, and there will include the business done outside British India, and, therefore, cannot be made to fit as an ancillary to the computation of the profits and gains of a British Indian branch of a non-resident insurance company under rule 8.
We are concerned with a life insurance company, and, therefore, although the scheme of the Schedule as a whole can be usefully tested by considering the application of rule 6, the question we have to determine is : whether the operation of rule 2 is what is meant as supplying the more reliable date than the artificial method of rule 8. Dealing with this question, the Appellate Tribunal says in its judgment :
'Rule 8, in our opinion, does not bear the interpretation put upon it by the Appellate Assistant Commissioner. If there is more reliable data available, a computation under rule 2 (a) or 2 (b) is not called for.'
In my opinion, the statement should be extended as excluding the application of rule 2 as a whole. In my judgment, the 'reliable date' referred to in rule 8 is the necessary to assess the profits and gains of a branch business by some recognized business method, which can be applied having regard to the manner in which the insurance company conducts its affairs.
The Tribunal has found that the 'separate actuarial statement for the Indian business,' which is the same thing as the 'Consolidated Statement of Indian Fund,' which appears at page 3 of the record, provides the more reliable date, since in para 27 of its judgment the Tribunal says this :-
'As a result of what we have said above, we hold that the Consolidated Statement of Indian Fund for the triennium ended December 31, 1937, provides more reliable date in terms of rule 8. The business income for the assessment year under appeal must therefore be computed from the date given in that statement.'
And in setting out its case to this Court, the Tribunal states :
'The Tribunal found that the Consolidated Statement of Indian Fund submitted by the assessee provided more reliable data for computation of profits in terms of rule 8.'
No other data has been put forward, and it should be noticed that rule 2 and rule 6 are both artificial, in the sense that in both cases the profits and gains are to be taken to be something which is arrived at by valuations and computations.
The questions, which the Tribunal has asked, are two in number and although they are set out as alternatives, I think it is clear that, if question (1) is answered in the negative, the answer to question (2) necessarily must follow. Question (1) is :
'Is the scope of the expression more reliable data, occurring in rule 8 of the Schedule to the Income-tax Act, confined to the higher of the two computations under rules 2 (a) and 2 (b) of the said Schedul ?'
Although it is clear what that question means, it would, in my opinion, as date must be compared with data, and not with method, be more appropriately framed, if it were made to read :
'Is the Scope of the expression more reliable data, occurring in rule 8 of the Schedule of the Income-tax Act, confined to the date required for arriving at the higher of the two computations under rules 2 (a) and 2 (b) of the said Schedul ?'
In my judgment, that question must be answered in the negative.
That necessitates the answer to question (2), which is :
'Whether the separate actuarial valuation statement for the Indian business has tightly been held by the Tribunal to contain more reliable data for the purpose of rule 8 of the said Schedul ?'
I have already referred to the Tribunals findings about the actuarial valuation statement, and have pointed out that no other date has been put forward. It follows, in my judgment, that question (2) must be answered in the affirmative.
The Commissioner must pay the costs.
KANIA, J. - I agree. The relevant provisions of the Income-tax Act, and the rules in the Schedule enacted for the computation of the profits and gains of the insurance business of an assessee, are summarized in the judgment of the learned Chief Justice. The real question for consideration is : whether in respect of a non-resident insurance company, having a branch in British India and carrying on life insurance business, the assessment must in the first insurance be attempted to be made under rule 2, or whether the assessee-company is entitled to contend that in view of rule 8 the assessment must be made on the computation made thereunder.
The Commissioner relied on Section 10 (7) of the Indian Income-tax Act, which runs 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.'
From that it was argued that the Schedule formed a code by itself, and the computation of the profits and gains of an insurance business must be under that Schedule. The argument so advanced is not quite correct, because it has to be conceded that, even after attempting to proceed under rule 2, if a computation could not be made, the assessment would have to be made under Section 23 (4) of the Indian Income-tax Act. Apart from that, the question is : whether rule 2 is the paramount rule, which has to be approached first.
Analysing the rules in the Schedule, it is clear that the legislature has decided that the profits and gains of insurance business of an assessee should be separately calculated from his profits from others business. With that object rule 1 is framed. Rules 2, 3, 4 and 5 go together. They relate to the profits and gains of life insurance business. In rule 2, two methods of calculation are provided and it is stated that the profits and gains shall be taken to be the higher of the two figures arrived at on such calculations. In rule 3 provision is made in respect of the computations to be made under rule 2 (b). Rule 4 provides for certain deductions to be made also in respect of calculations made under rule 2 (b). Rule 5 contains definitions of certain words used in the rules, and particularly gives the meaning of the expression 'gross external incomings' and 'management expenses' found in rule 2 (a). The proviso the rule 2 sets the maximum limit to the management expenses to be allowed under rule 2 (a). Rule 6 provides for the computation of the profits and gains of insurance business other than life insurance. Rules 7 and 8 and 9 do not deal with the nature of business. They deal with the status of the party doing insurance business. Rule 7 deals with the profits and gains of companies carrying on dividing society or assessment business. Rule 8 deals with the profits and gains of the British Indian branches of an insurance company not resident in British India. Rule 9 provides for the assessment of the profits of business of insurance carried on by a mutual insurance association. Reading the rules together, it is therefore clear that rule 8 does not deal with the nature of business. The relevant matter is the status of the assessee. Considering the rules from that point of view, the first question, which the taxing authorities have to ask is, what is the status of the assesse The answer is that it is a non-resident company which has a British Indian branch. The object being to assess the profits and gains of the British Indian branches of such company, the assessment should be according to that rule.
It was strenuously urged on behalf of the Commissioner that the words 'life insurance business' in rule 2 are not confined to such business carried on by resident companies only. To that extent the contention may be accepted. As that rule stands, it is capable of covering the case of a foreigner doing business individually in British India and having a branch in British India. It may cover the case also of a firm or association of person doing similar business. I do not pronounce any definite opinion on the point, as it is not necessary to do so. But the contention may be accepted in such cases, not on the ground that in the rule 2 do not exclude such person or association, but on the ground that in the Schedule there is no other specific rule which covers their case. As I have pointed out, rule 8 in terms open with the words, 'The profits and gains of the British Indian branches of an insurance company not resident in British India.' Therefore, when the question facing the taxing authorities is what are the profits and gains of the British Indian branches of an insurance company not resident in British India, their first duty is to turn to rule 8.
It was argued on behalf of the Commissioner that, as Section 10 (7) enjoins that the computation of the profits and gains 'shall be' in accordance with the rules contained in the Schedule, and because rule 8 does not prescribe the method of computation, rule 8 cannot be worked out as contended by the assessee. This argument is based on the assumption that the preceding rules contain a complete code for computation of income or profits in all cases. A perusal of rules 5 and 6 shows that the assumption is not justified. In calculating the profits and gains of a life insurance business under rule 2 (a), two items have to be ascertained : (1) 'gross external incomings,' and (2) 'management expenses,' both of these, as I have pointed out, are defined in rule 5. 'Gross external incomings' are defined to mean the full amount of incomings from interest, dividends, fines and fees, etc. There is no reason to read that definition as limited to the amount of incomings from interest, dividends, fines and fees, etc., 'arising or accruing in British India,' as contended on behalf of the Commissioner. Supposing a resident insurance company has large investment outside British India, and it does not bring into British India I do not think that argument will be accepted at all. In the case of a foreign company, if there is no separate Indian life insurance fund, but there is one fund of the whole company, which is invested outside, what is to be the proportion of interest or dividend which should be included under the heading 'gross external incomings' under rule 5 (ii) of the Schedul If the argument of the Commissioner is correct, the figure will have to be separately worked out, by a rule of thumb, because actual figures could not be available. The position is the same in respect of the 'management expenses'. In the case of foreign companies, when a head supervisor is traveling to inspect the business of life insurance of different branches, there is no provision for separating or allocating the proportionate expenditure to the Indian business. It is, therefore, clear that the definitions of 'gross external incomings' and 'management expenses' do not happily fit in with the contention urged on behalf of the Commissioner. The point is made more clear on reading rule 6. I have already pointed out that it deals with the business of an insurance company, which is not doing life insurance business. Rule 6 provides that the profits and gains of such companies shall be taken to be the balance of the profits disclosed by the annual accounts copies of which are required under the Insurance Act to be files with the Superintendent of Insurance. Now, under the Insurance Act, 1938, Section 16 prescribes the filing of such statements by foreign companies in respect of Indian business. The word 'India' is defined in the General Clauses Act, and in the absence of any other definition, that definition would be applicable to the word used in the Insurance Act. The definition given in the General Clauses Act includes Indian State under the suzerainty of His Majesty and also British India governed under the Government of India Act. A foreign company, therefore, having a branch in a Native State and in British India will have to file a statement of account under Section 16. The balance of the profits disclosed by such statement, must be taken to be the profits and gains of such company under rule 6 of the Schedule to the Income-tax Act. It is, however, clear that under Section 4 (1) (c) of the Income-Tax Act, the income, profits and gains of a non-resident are liable to be taxed only to the extent they 'accrue or arise or are deemed to accrue or arise to him in British India during such year.' They will not include income which has accrued to such persons outside British India, but within 'India' within the meaning of the General Clauses Act. It is, therefore, clear that, in respect of a company not resident in British India rule 6 will be inappropriate.
Bearing in mind there aspects, it seems that the legislature has separately provides rule 8 for computation of income of insurance business of British Indian branches of non-resident companies. It is to be noticed that rule 8 does not cover only life insurance business but covers business of all classes of insurance.
Even if the matter is of some doubt, as state by Lord Lyndhurst in Stockton & Darlington railway v. Barrett and Pryce v. Monmouthshire Canal and Railway Companies, 'in a case of reasonable doubt the construction most beneficial to the subject is to be adopted.'
In the present case there is no question of escaping assessment. The grievance of the assessee is that the taxing authorities, having accepted the triennial actuarial valuation in the preceding year, and, having acted under rule 4 of the Schedule, gave it for one year the annual average deduction of the income-tax paid by the company in respect of interest on securities deducted at source, and that by the method now sought to be adopted, the department seeks to deprive the assessee company of the remaining two years income-tax deducted at source. Unless there is clear ground to adopt a different construction, it would, therefore, be unjust to do so.
Approaching the matter from another point of view, it should be noted that the assessment in question is in the first year after the amendment was made in the Income-tax Act of 1939. Before the amendment, there were rules in the Schedule dealing with the assessment of profits of insurance companies. Rule 25 covered the case of insurance companies incorporated in 'British India,' while rule 35 covered the case of Indian branches of non-resident insurance companies. The wording of rule materially corresponds to the wording of old rule 35, only with the addition of the word 'British' before the word 'Indian' in two places in that rule. The structure of rule 25 is wholly changed. It must be remembered that before the amendment the world income of a resident was not liable to be taxed, unless the foreign income was brought in British India. The whole scheme of assessment was materially altered by the amendments made in 1939. The effect of incorporation of a limited company was materially altered by the definitions contained in Section 4A and Section 4B, which define the word 'resident' and not 'ordinarily resident,' respectively within the meaning of the Act. It should be noticed that while rule 25 has been substituted by a series of rules, rule 8 substantially is retained in the same terms. This strongly lends support to the contention that the original method of approach, which was contemplated by the old rules, has not been altered by the new Act.
Against this contention it was strenuously urged that Section 10 (7) is new, and alters the whole aspect of legislation. But if calculation of income could not be made under rule 2 (a) or 2 (b), what is to be don I do not think the legislature contemplated that although each of these methods is the proper method for computing the profits and gains of an insurance company, it should be held that no computation could be made under the rules in the Schedule, and if computation under both sub-rules could not be made, the Department was entitled to proceed under Section 23 (4) in the case of a foreign company.
It was argued that the words 'reliable data' used in rule 8 must mean the calculation of income as mentioned in rule 2. It is that argument which has given rise to the question framed by the Tribunal. It was argued on behalf of the Commissioner that, if both the calculations under rules 2 (a) and (b) in respect of a British Indian branch of a non-resident life insurance company could not be made, there was no reliable data within the meaning of rule 8 and therefore, the assessment must be on the proportionate income. In other words, it was contended that the words 'more reliable data' in rule 8 are the same as the two methods of calculation indicated in rules 2 (a) and 2 (b) of the Schedule. I see no justification for such limited construction being put on the words 'more reliable data' in rule 8. Bearing in mind that each of the two methods indicated in rule 2 is a proper method of calculating the profits and gains, there is no reason to say that calculation made on one of those methods is not founded on more reliable data. The expression 'more reliable data' is nowhere defined. Having regard to the wording of rule 8, the comparative term 'more' must refer to the date required for arriving at the proportionate income, which is the alternative suggested.
It was contended on behalf of the Commissioner that, if the legislature intended rule 8 to be a separate code by itself, it should have stated that in respect of such business, when more reliable data was available, a certain method of calculation should be adopted, and in the absence of more reliable data the proportionate profits based on premium income should be assessed. In my opinion, it is not necessary for the legislature to state in terms the first alternative, as contended. If rule 8 is read by itself, when more reliable data is available, there is no difficulty in computing the income, as it was capital of being computed before the Schedule was amended in 1939. One of the methods of such computation is the actuarial valuation of the Indian business. It has nowhere been suggested, at any time, by any one, that computation based on such valuation does not result in the proper determination of profits and gains of the life insurance company. Indeed rule 2 (b) incorporates that as one of the methods of calculation. Therefore, it seems to me that, because the legislature has not stated how the computation should be made, if more reliable data was available, rule 8 does not cease to be an independent rule capable of being worked out. In this connection, the last sentence of rule 8 should be particularly noted. That sentence limits the calculation of the total profits of the world business of such companies according to the rules in that Schedule only when their profits are periodically ascertained by actuarial valuation. Therefore, in cases where there is no such valuation, the rule does not prescribe the mode of computation, and yet to ascertain the income based on the proportion on Indian premium a method of computation must be resorted to. Therefore the contention urged on behalf of the Commissioner that the legislature had adopted the method of calculation, prescribed in rule 2, in such cases also, is not correct.
It seems that the Tribunal has framed its questions having regard to the argument advanced on behalf of the Commissioner. The first question is whether the expression 'more reliable data' occurring in rule 8 is limited to the higher of the two computations made under rules 2 (a) and (b) In advancing the argument, as in framing the question, it is obvious that there is an error. 'More reliable data' means figures from which computation of income could be made. It does not mean the computation. If so, that should be compared with other figures from computations have to be made. I, therefore, agree that question (1) should be amended as suggested in the judgment of the learned Chief Justice, and the answer to that question should be in the negative.
In the reply filed by the assessee, to the application made by the Commissioner for stating the case, the company had suggested question (2), the first portion of which was in these terms : 'whether rule 2 of the said Schedule applies to non-resident companies independently of the latter part of rule 8.' I think what was intended to be conveyed was : 'whether rule 2 of the said Schedule applied to the assessment of the profits and gains of the British Indian branch of a non-resident company doing life insurance business.' In the course of out judgment this aspect of the case has been fully discussed, and it is not necessary to raise that question as an independent question. That, however, obviously is the very material question, which has been discussed and argued at length before this Court.
As I have pointed out, at no time any one has ventured to contend that a separate actuarial valuation of British Indian business of a company is not the proper data from which the profits and gains of a company in British Indian could be assessed. If so, that is certainly more reliable data, in the absence of any other data. On behalf of the Commissioner it was urged that there were other data from which figures to be calculated under rules 2 (a) and 2 (b) could be worked out. Having regard to the question submitted to us on the construction of rule 8, we are not concerned with that aspect of the matter. The answer to the alternative question will be in the affirmative.
I agree that the Commissioner must pay the costs.
Reference answered accordingly.