1. The following question of law has been referred to this court by the Income-tax Appellate Tribunal under Section 66(1) of the Indian Income-tax Act, 1922 :
' Whether, on the facts and in the circumstances of the case, the sum of Rs. 33,905 was nto taxable in the hands of the assessed-company in the assessment year 1959-60 as gross external incomings of the previous year '
2. The question relates to the accounting year relevant to the assessment year 1959-60, being the year ended December 31, 1958.
3. Bharat Insurance Company Limited (hereafter referred to as the assessed-company) carries on insurance business. The policyholders of the assessed-company paid certain amounts during earlier years on account of the premiums due on their policies. From the order of the Income-tax Officer it appears that the excess premium was entered in the books of the assessed-company in the premium deposit account. In the relevant accounting period the assessed-company transferred the sum of Rs. 33,905 to its revenue account. Ntohing more is known about the previous history of the receipts or their treatment in the books. For instance, it is nto known what treatment was accorded to the ttoal amount of premiums when it was first physically received by the assessed-company. The Income-tax Officer treated the said amount as gross external incomings of the year under Rule 2(a) of the Rules for the computation of the profits and gains of insurance business. Section 10(7) of the said Act provides that:
' Ntowithstanding 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.'
4. The relevant part of Rule 2 with which we are concerned, reads that:
' 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, ...'
5. The questions that arise for consideration are-
(i) Whether or nto the said amount represents the gross external incomings ; and
(ii) Whether the amount was an incoming of the preceding year. The assessed-company appealed to the Appellate Assistant Commissioner, and he, relying on Morley v. Tattersal : 7ITR316(Cal) held that these amounts did nto constitute ' gross external incomings '.
6. The revenue then appealed before the Income-tax Tribunal and the Tribunal observed :--
' thereforee, it was argued that it did nto really represent the profits and gains of the assessed's business. We consider that there is substantial force in the argument of the representative of the assessed. In fact the amount in question being the one received in relation to earlier years, there is no question of considering the same as external incomings of this year . . .'
7. There is an inconsistency in the observation qutoed above and in the statement of case drawn by the Tribunal inasmuch as in the statement of case the Tribunal observed that, '..... there was no question of considering the said receipts as external incomings of this year as the amounts in question were received in earlier years'. All that the Tribunal had found in its order dated October 10, 1963, while disposing of the appeal, was that the amounts in question were received 'in relation to earlier years'. Two extreme arguments were addressed to us at the bar. The learned counsel for the revenue contended that, irrespective of the character and the time of receipt, such like amounts must be treated as gross external incomings on the day an insurance company transfers the same to the revenue account. The learned counsel for the assessed-company, on the toher hand, argued that: (1) the physical receipt of the amount was nto in the preceding year and it is the date of receipt which is crucial to the point at issue ; and (2) gross external incomings cover receipts of income nature only and nto of a capital nature. In elaboration of the second argument, the learned counsel relied on the words ' and all toher incomings from whatever source derived (except premiums received from policyholders and interest on any annuity fund) ' in Sub-rule (ii) of Rule 5 as suggesting that incomings can be treated as income only if they stem out of a definite source but nto if they are of the nature of a mere windfall. We would, for a moment, advert to the first argument of the learned counsel for the assessed-company that the crucial date is the date of physical receipt. The argument founded on such broad proposition does nto appear to us to be sound. Suppose a policyholder pays to an insurer a sum of Rs. 5,000 with specific instructions that it should be kept by the insurer as deposit and adjusted at the rate of Rs; 200 per year towards premium. In that situation it is difficult to sustain that the ttoal amount less the amount appropriated towards premium for that year would constitute gross external incomings of the year on the basis of physical receipt. It is equally difficult to accept the toher extreme contention of Mr. Kirpal, the learned counsel for the revenue, that amounts become gross incomings irrespective of the date of receipt as soon as they are transferred to the revenue account. Mr. Kirpal's argument may be put thus : When the amounts are physically received and kept in premium deposit account, they do nto go into the mass of the assessed-company's assets as there is art effective liability of the assessed-company to return the same to the policyholders. So long as that state of affairs continues, the money is nto possessed of any profit-making quality about it as in the business sense it continues to be the policyholder's money and, nobody else's. Such amounts though nto gross incomings at the point of receipt yet they did have the ptoentiality of becoming gross incomings and as soon as the amounts are brought into the revenue account, there is an elimination from the liabilities side of something which was previously treated as a liability and, thereforee, becomes gross incoming of the assessed. In short, the argument is that, as soon as the assessed treats the money as its own by bringing it into revenue account on the fotoing that the effectiveliability has ceased either on account of bar of limitation or toherwise, it becomes the income of the assessed. There is undoubtedly an element of ingenuity in the argument but, as the facts stand and are presented to us in the statement of the case or in the decision of the Tribunal, they do nto really permit us to answer this point. Even if the argument of Mr. Kirpal be accepted, there is no finding as to when were the moneys received and when were those appropriated by the assessed-company into the mass of its assets or treated by the assessed-company as its own. The only facts that appear on the record are that the moneys were transferred to the revenue account in the relevant accounting period. We are unable to hold in the absence of any finding by the Tribunal that the assessed-company treated these amounts as its own in the relevant previous year, that a mere transfer from one account to antoher, which constitutes ntohing more than a domestic arrangement of the assessed-company, will change the character of the amounts and will convert them into gross incomings. It is nto impossible that some of such amounts may have been received by the assessed-company during the year immediately preceding the previous year and, consequently may still be under an effective liability to refund- It is also nto impossible that even in the absence of an effective liability in the sense that the suit for recovery of the amount might have been barred by limitation, the assessed-company may still be willing to refund the amount or adjust the same towards future premiums once the concerned policyholder makes a claim, in the interest of good business relationship.
8. As to the scope of Rule 2(a) read with Rule 5(ii) of the said Rules, we are of the opinion that the incomings must be from a definite source and a mere windfall would nto fall within that expression. It is, however, unnecessary to finally decide this point, as wo are in agreement with the argument put forward by Mr, Bhagwat Dayal that a mere transfer of the amounts to the revenue account does nto constitute incomings.
9. In the result, the question must be answered in the affirmative and against the revenue. The parties will, however, bear their own costs.