1. I have had the advantage of perusing the judgment which my learned brother is about to deliver and I agree in the answer proposed by him to be given.
Venkatasubba Rao, J.
2. The Chief Judge of Small Causes has under Rule 17 of Schedule IV to Madras Act IV of 1919 (the City Municipal Act) referred certain questions for our decision.
3. Before stating the questions that have been so referred. I propose to set forth the facts that have led up to this reference.
4. The Sun Life Assurance Company of Canada has its head office at Montreal, Quebec, and a branch office for India at Bombay. The Company has an agent at Madras who maintains an office and has clerks under him. This office, it is admitted, is not a branch office of the Sun Life Assurance Company, but is merely a local agency, There appears to have been a finding to this effect in a suit in the Court of Small Causes, Madras, to which the Sun Life Assurance Company was a party, a finding which was accepted by the High Court.
5. Section 110 of the City Municipal Act provides that every incorporated company transacting business within the City shall pay by way of license fee 'a half yearly tax on its paid-up capital on the scale shown in the taxation rules in Schedule IV,' and the explanation to that section adds that 'whenever a company has an office, agent or firm to represent it for the purpose of transacting business in the city such company should be deemed to transact business in the city'. Under Rule 7 of the Taxation Rules contained in Schedule IV of the Act, the assessment is made to depend in the first instance upon the paid-up capital of the company; (Class A). If such capital is over twenty lakhs of rupees the half yearly tax will be Rs. 1,000; (Class B), If it is more than ten but less than twenty lakhs of rupees the assessment leviable is Rs. 500 for the half year. There is however an important proviso to this rule which shifts the basis of taxation in certain cases from the paid-up capital to the 'gross income' of the company. It is provided that 'any company, the head office or a branch or principal office of which is not in the city and which shows that its gross income received in or from the city has not in the year immediately preceding the year of taxation exceeded Rs. 25,000 shall pay only Rs. 125' for the half year.
6. The standing committee of the Corporation of Madras on the ground that this was a company with a paid up capital of more than ten lakhs of rupees and less than twenty lakhs of rupees confirmed the assessment levied by the Revenue Officer, and placing the company in the second or 'B Class' fixed the assessment at Rs. 500.
7. From this order an appeal was filed by the company under Rule 15 of Part V of Schedule IV to Madras Act IV of 1919 to the Court of Small Causes at Madras. The learned Chief Judge of that Court found that the gross income of the Company was considerably less than Rs. 25,000, that the Company discharged the onus that lay upon it under the proviso referred to above and he held that the Company was liable to be assessed on that basis and fixed the assessment at Rs. 125 for the half year. He delivered judgment on the 31st March 1921.
8. On the 11th April 1921, the Corporation of Madras applied to the Court of Small Causes that a case might be stated for a decision of the High Court on certain points; and on the 14th April 1921, the Company similarly applied that a Case might be stated for a decision on certain other points,
9. The learned Chief Judge observes : 'I have been asked to refer several points but consider the following questions of law to be of sufficient public interest for invoking the 'decision' of their Lordships, the Judges of the High Court.
I. What is meant by the 'gross income' of a Life Assurance Company for purposes of taxation under Rule 7, Schedule IV of the Madras City Municipal Act ?
II. Is it sufficient compliance with the provisions of the Act for the Life Assurance Company to show that its gross income could not have exceeded Rs. 25,000 in the year immediately preceding the year of taxation for the purpose of obtaining the benefit of the proviso (It is declared entitled to that benefit when it shows that its gross income received in or from the City has not exceeded Rs. 25,000).
III. Can payments of premia made in the first instance to sub-agents of the Company in the mofussil and remitted by them to Madras be treated as part of the gross income of the Company 'received' in or from the City of Madras ?
10. Mr. Venkalarama Sastri on behalf of the Company contended before us that it was open to him to argue on this reference the whole case and that he was not to be confined to the points specifically referred to us by the learned Chief Judge, His clients in their application to the Small Cause Court under Rule 17 had asked that two further 'questions of law' might be 'stated for the decision of the High Court,' I he Chief Judge presumably did not consider it necessary to refer them for our decision,
11. Rule 17 consists of two parts:
(a) 'The Small Cause Court may, if it thinks it, state a case for the decision of the High Court.
(b) 'The Court shall state a case whenever a question of law is involved if either the Commissioner or the appellant applies in writing in that behalf.
12. It seems unreasonable to hold that because a doubt is entertained on a particular question of law which leads to an application being made under Rule 17 and to a case being stated, the High Court is bound to consider and decide all the questions of law involved in the case. In other words, it may be that the party applying, finding that the Judge does not accept his contention on a particular question of law out of several that arise in the case, applies under Rule 17 for a case being stated; does it follow that, the moment a case is stated to the High Court, either party is at liberty to argue before the High Court all the points of law that arise in the case and request its decision on all of them The party who is dissatisfied with the terms of reference may have other remedies open to him; and I express no opinion on this point. The question before us is:--Is the High Court bound to decide questions other than the questions referred to it for decision? I am inclined to think that it is not. If the view contended for by the learned vakil is correct, it will be open to either of the parties to ask the High Court to arrive at a decision upon the facts of the case, and if necessary to revise the findings of fact of the Small Cause Court although the application to that Court under Rule 17 was due to the existence of a question of law on which the party applying and the Judge held opposite views. It will scarcely be disputed that this is a result not in the least contemplated by the legislature, and I do not think that there is anything in the terms of Rule 17 to compel us to accept the contention which will lead to this extremely undesirable and unforeseen result.
13. It may be useful to refer to some analogous provisions of the Civil Procedure Code. Section 113 provides: 'subject to such conditions and limitations as may be prescribed, any Court may state a case and refer the same for the opinion of the High Court, and the High Court may make such order thereon as it thinks fit. '
14. Order 46, Rule 1, 2 and 3 contain an amplification of Section 113.
Rule 1 says that 'when any question of law or usage arises on which the court entertains a reasonable doubt, the court may draw up a statement of the facts of the case and the point on which doubt is entertained and refer such statement with its own opinion on the point for the decision of the High Court,'
Rule 2 contemplates a decree being passed or order being made contingent upon the decision of the High Court on the point referred.
Rule 3 provides that 'the High Court shall decide the point so referred and shall transmit a copy of its judgment to the court by which the reference was made, and such court shall on the receipt thereof proceed to dispose of the case in conformity with the decision of the High Court.'
15. These provisions clearly contemplate the case being argued only in regard to the point referred and the decision being given also on the point so referred.
16. I may in passing refer to Section 69 of the Presidency Small Cause Courts Act, XV of 1882, which also is substantially to the same effect,
17. The learned vakil has relied on Mylapore- Hindu Permanent Fund (Limited) v. The Corporation of Madras l. it is a decision upon 8s, 176 and 177 of the Madras Municipal Act III of 1904, which correspond to Rule 17 under discussion, The wording of the sections of the old Act and Rule 17 is almost identical, and any slight difference that may exist is immaterial. I am, however, unable to agree that Mylapore Hindu Permanent Fund (Limited) v. The Corporation of Madras I.L.R. (1908) Mad. 408 supports the contention put forward, It does not decide that when a case is stated, the High Court is bound to decide every question of law arising in lit. In the opening paragraph of the judgment the question referred is stated, and the judgment proceeds to say 'the law hardly contemplates a reference in such general and abstract terms. It only enables the Magistrates to state a case on any appeal before them, and refer the same for the decision of the High Court; this is to state all the matters necessary for the decision of the particular case before them on appeal and to refer the case so stated for decision'.
18. This is an authority for the proposition that the High Court is not bound to answer an abstract and general question of law; the terms of reference must show how the question of law propounded affects the particular case on hand, and the High Court will answer it only so far as it bears on the particular case. The question referred for the decision of the High Court in Mylapore Hindu Permanent Fund (Limited) v. The Corporation of Madras is 'Does the word ' capital ' used in Schedule V of the Municipal Act, III of 1904, mean exclusively nominal capital or does it also include paid-up capital and, if so, should it be taken to mean paid-up capital exclusively.' The learned Judges however decided the question with reference to the facts of the case and their answer is contained in the following paragraph:
Our decision, therefore, is that, with reference to the Mylapore Hindu Permanent Fund (Limited), the word capital, in schedule V of the Madras Municipal Act, III of 1904 means paid-up capital.
19. I therefore have no hesitation in holding that we are not bound to give a decision on the questions involved in the suit other than the questions referred to us by the Chief Judge of the Court of Small Causes.
20. To deal with the questions referred to us, it would be necessary to describe very briefly the main principles underlying the calculations on the basis of which premia for assurances are fixed and illustrating by a concrete example how the premiums arrived at, besides being sufficient to meet the liabilities incurred, enable Life Assurance Companies to earn a profit. A statement of these principles would necessarily lead to a consideration of the sources of surplus or profit with which alone we are concerned.
21. Before it is possible for a company to fix the premium it must receive -in return for an undertaking to pay a specified amount at death, it is necessary for the company to know when the life or lives insured will terminate. The tables based upon observations of a large number of lives give the information required and are known as Mortality Tables, I take the following from a treatise on Life Assurance.
The fundamental facts which a Mortality Table supplies us with are the numbers living at each age from the earliest to the latest year included in the table, and the numbers dying in each year. From these two series of facts all the information in regard to mortality that is required for Life Assurance can be obtained. Let us suppose now that there are 10,000 people, all at the age of 40, who wish to arrange for a payment of 100 to the executors of such of them as may die before reaching the age of 41. The Mortality Table informs us that 103 of these people will die during the year, and as the death of each person involves the payment of 100, the sum of 10,300 will be required to meet the claims arising out of these 103 deaths. It is therefore necessary for each of the 10,000 persons to pay 1.03 or 1--0--7 in order to secure the payment of 100 to their executors, should death occur within the year. This leaves out of account any benefit that may be obtained by interest earned upon the 10,300 before being required for the payment of the claims, and takes no notice of the necessary expenses of transacting the business, but it shows clearly the use of the Mortality Table. If we had no experience to guide us as to the number of people who would die within the year, we might either charge too large an amount for the assurance, or we might charge too small a sum, and not have enough money available to meet the claims when they became due. In the instance just given, the 100 is the sum assured, the 1.03 paid to secure the sum assured in the event of death is called the premium, and a policy of this nature is called a Term Policy for one year, The premiums paid by those who did not die were used in paying the claims arising from the deaths that occurred, and the value received by the survivors for the premiums of 1.03 was the certainty of their heirs receiving 100 should the assured die.
22. It would be next necessary to indicate the part played by interest in the subject of Life Assurance, The rate of interest is indeed a very important factor affecting Life Assurance, 100 earning 3 per annum will amount in 50 years to 438; at 6 per cent, to 1,842. The information necessary is obtained from Interest Tables which are prepared and on the basis of which calculations are made by Life Assurance companies. It is important to know not merely what 100 will amount to at a given rate of interest in a certain number of years but also how much must now be lent or invested so that in a certain number of years it will at a given rate of interest increase to 100. This is called the present value of 100 due so many years hence at such a rate per cent.
23. With the aid of mortality and interest tables the companies are in a position to combine the result of mortality and interest and to have regard to them in fixing their premia. Going back to the illustration already given we shall have to examine how the results obtained from Interest Tables affect it.
24. I shall again quote from the book already referred to 'Let us now reconsider the example given in the chapter on mortality of 10,000 people aged 40, who wish to arrange for a payment of 100 to the executors of such of them as may die before reaching the age of 41. We find from the Mortality Table that 103 of them will die and that therefore 10,300 will be required at the end of the year to meet the claims arising out of these 103 deaths. On turning to the table showing the amount of 1 at the end of one year at 3 per cent, we find it is 1.03 and the amount of 10,000 is therefore 10, 300; so it is only necessary for the 10, 00 people effecting the assurance to pay this amount, pro rata between them at the commencement of the year, Thus the premium that each would have to pay would be I instead of the 1.03 which we saw would have been necessary when leaving interest out of the question.'
25. The premium ascertained in this manner is the net or the pure premium; and in order to arrive at the office premium which is what a policy holder has to pay, an amount is added to the net premium known technically as the 'loading'.
'In the case of policies which do not participate in profits. the loading only has to be sufficient to cover the expenses and such margin as may be considered necessary for contingencies, such as the death rate being in excess of that provided for by the Mortality Table or the rate of interest earned on the funds of the company being less than the rate of interest assumed in calculating the premium rates '.
'In the case of policies that participate in profits, the loading is increased in order to provide, not merely for the expenses incurred, but for the bonuses or profits that will be added to the policies in the future'--(See also Ency, Brit. Vol. 13 page 173).
26. The addition of loading is thus made to make provision for the expenses of the management of the business and further to provide against adverse fluctuations both in regard to mortality and in regard to interest.
27. In dealing with the subjects of mortality, interest and loading, I have indicated the main sources of surplus or profit.
A favourable mortality means that the policy holders live longer than according to the Mortality Table it was expected they would live. Their deaths are bound to come some day, but the longer duration of their lives implies the receipt by the Assurance Company of a larger number of premiums, and involves a longer time during which interest can accumulate on the funds, which are larger in amount owing to the claims not having to be paid so soon as the Mortality Table contemplates.
28. How does interest form a source of surplus The originally assumed rate of interest in making the calculations may have been 3 per cent, but the interest actually earned may amount to 4 per cent and the difference constitutes the surplus.
29. Smaller expenses than the additions (loading) made to the net premiums constitute the third cause of a surplus.
30. These are considered the chief sources of surplus or profit:
(1) a lighter or more favourable mortality than that assumed,
(2) a higher yield of interest than that calculated upon and
(3) smaller expenses than the additions made to the net premiums. Of the three, the two latter sources are considered more important. (Vide Life Assurance by S. G. Leigh page 55.)
31. A certain amount of profit is obtained from policies that are surrendered or that lapse.
32. It seems to be generally agreed that it is questionable after making all allowances whether the indirect loss to the company from surrenders does not nearly or quite balance the direct gain, and it is stated that the best offices much prefer the policies remaining on their books to their being surrendered.
33. It seems also to be assumed that though policies that lapse may result in a profit they cannot as a general rule be regarded as a very appreciable source of surplus.
34. Having made these observations in regard to the general principles that regulate the profit of a Life Assurance Company, I shall proceed to examine the conclusion of the learned Chief Judge. He, no doubt, ignored in his judgment all sources of surplus other than interest. But in my opinion his finding has not been affected in substance by this omission.
35. Under the City Municipal Act of 1919 the Company has to show that in the year immediately preceding the year of taxation its gross income did not exceed Rs. 25,000 before the company can claim the benefit of the proviso. We have it on record that the total premia received from the whole of the Presidency of Madras amounted to Rs. 4,13,550. It has also been found that the average rate of interest earned during the year by the company on the net invested ledger assets was 5.68 per cent.
36. It has been pointed out that even if for the sake of argument it should be assumed that the average rate realised by the Sun Life Assurance Company was 6 o/o and that the whole interest realised represented the profit of the company, in order to be able to earn Rs. 25,000 per annum the Sun; Life Assurance Company of Canada should have received premia from the City of Madras alone amounting to 4,16,666-10-8. We have seen that its receipts for the whole presidency amounted to only Rs. 4,13,550. A portion of the interest earned has to be returned to the policy-holders as the calculations I have adverted to above, which form the basis of the premia fixed, clearly indicate. The profit earned by the company on this head can only be the difference between the figures calculated on the basis of the rate of interest assumed and the rate of interest actually earned. The Sun Life Assurance Company in fixing its premia having assumed a rate of 3 1/2 p. c. (the rate assumed by this company in its interest calculation, is, we are informed, 3 1/2 p. c.), its profit from the source of interest could only be the amount which represents the difference between the two sums calculated at 5.68 p. c. and 3 1/2 p. c, or 2.18 p. c. The Learned Chief Judge for the purposes of his judgment assumed that the company is liable to be assessed with reference to the total amount of interest earned by it, that is, 'interest at 5.68 p. c.' upon the premia received. The amount arrived at falls short of Rs. 25,000 and the Learned Chief Judge holds, that the company is entitled to the benefit of the proviso. 1 he question to be determined would be therefore--could the profits of the company in any event exceed the total interest earned upon the premia We have seen that a slight variation in the rate of interest does produce an enormous difference in the interest earned, and I have pointed out that interest forms one of the three chief sources of surplus or profit.
37. The difficulty in dealing with this case arises from the fact that under the Municipal Act of 1919 the company must state its gross income received in the year preceding the year of taxation. It is said that it is impracticable to make an annual actuarial valuation and that it is extremely difficult to make such a valuation, with reference to any particular city or area in the case of a Life Assurance Company operating in different parts of the world. The company in a petition addressed to the Commissioner of the Corporation of Madras in connection with this assessment gives the following extract from Young on Insurance : 'but a valuation is in no sense a 'stock-taking' in the customary acceptation of that term. * * * The two operations are essentially distinguished from each other and differ extoto. In the ordinary stock-taking the trader is concerned with the value of his articles at the current prices of the period, and his results are obtained by a mechanical arithmetical process competent to average intelligence. In a valuation, however, the probable future requires to be carefully scrutinized and gauged in the light of the experience acquired both as regards the rate of mortality likely to be exhibited among the members, the rate of interest at which the accumulated fund and prospective premiums can probably be soundly and profitably invested, and the adequacy of the loading reserved for anticipated demands. And it is to be noted that this provision is not limited to the ensuing valuation period only, but necessarily extends to the entire possible duration of the whole of the existing contracts, comprising a range of time of thirty years and upwards'.
38. The rules made by the Governor in Council under the Income-tax Act, VII of 1918 (in virtue of the power conferred by Section 43, Sub-section 1 of the said Act) proceed on the basis of a periodical actuarial valuation for assessing to Income-tax Life Assurance Companies. If the periodical actuarial valuation has been made within 5 years previous to the year in which the assessment has to be made, then the income shall be determined with reference to the average net profits disclosed by the last preceding valuation. If the periodical actuarial valuation has been made more than 5 years previous to the year of assessment, the taxable income shall be determined with reference to interest, dividends and rents received by the company during the previous year, that is to say, with reference to returns upon investments.' (See p. 59 of the Income-tax Manual--Madras, 1919).
39. I have used the word 'interest' in this judgment as a compendious term meaning 'interest, dividend and rent.'
40. The Indian Life Assurance Companies Act, VI of 1912, directs every Life Assurance Company to make periodical investigations including actuarial valuations once in five years unless the instrument constituting the company directs investigations to be made at shorter intervals (vide Section 8 of the Act.)
41. Reading therefore the rules made under the Income-tax Act in conjunction with this provision of Act VI 1912, we arrive at this result, namely that in default of there being an actuarial valuation within. 5 years of the year in question, the taxable income is to be regarded as the aggregate of the interest, dividends and rents received by the company during the previous year.
42. I think that we shall be justified in deducing from this that it was intended to make the company, that is in default, pay the maximum amount of tax and that this object is accomplished by making the company pay a tax upon the entire amount of the yield produced by its investments.
43. It may be said that there is no fixed rule in regard to the amount of profits that can be earned by a Life Assurance Company; but surely experts conversant with matters pertaining to life assurance must be able to say that in view of competition among the concerns it would not be possible for a company of standing to earn profits beyond a certain limit. We take it that the rules framed under the Income-tax Act contain an indication that the interest etc. from investments constitute the maximum of profits. In the very nature of things it is impossible to state the income for a particular period of a life assurance company with accuracy; and the most careful calculation can only be regarded as an estimate. I find the following passage in an historical review of Life Assurance by Andras : 'In the year 1870 the average rate of interest earned by the funds of Life Offices, after deducting income-tax, was 4,47l per cent which declined to 3,771 per cent in the year 1899, but has since increased to nearly 4 per cent, after deducting income-tax, and from the increased skill and attention brought to bear upon the question of safe investment of the funds, at a satisfactory yield, there is little doubt that the number of Life Offices now obtaining a net average yield of at least 4 per cent will be rapidly increased. At the same time an effort is being made to persuade the Government to mete out what is no more than justice to Assurance Office, transacting life business only, by legislation which will enable them to be assessed for income-tax on the basis of average annual profit, in lieu of the present very unfair method of assessment on interest revenue.'
44. I may also quote here a passage from Insurance Guide and Hand-Book by Andras, Vol. I, page. 219.
During the last few years attempts have been made by life Insurance Companies to obtain a revision of the basis of taxation, but so far without any definite success, although the Government seem disposed to view the matter favourably.
The grievance from, which relief is sought is, of course, that those companies which are purely, or mainly, life offices, as distinguished from 'composite' concerns, are assessed on their interest from investments in lieu of on their profits.
It is hardly necessary for me to point out here that the interest earned by an office on its life fund is not profit in any sense of the word, but rather the 'raw material' of the business. It is not difficult to imagine a case in which a company might be in receipt of, and taxed upon, a very large income from interest, in spite of the fact that it was earning no profit at all. Indeed, it might even be totally insolvent, on account of the low average rate of interest earned, or of the heavy rates of mortality or expenses experienced.
45. The idea underlying the above passages is that assessment to tax on the basis of yield from investments entails a hardship upon Life Assurance Companies.
46. In the present case applying this test which from the point of view of a Life Assurance Company is a most unfavourable test to apply, the gross income falls short of Rs. 25,000. I may observe in passing that Rs. 4,13,550 is the total of the premia received from the whole of the Madras Presidency and no merely from the City of Madras.
47. On the materials that have been placed before us I am unable to say that the learned Chief Judge is wrong in his view on what I think is really a question of fact, that the profits of the company cannot in any event exceed Rs. 25,000. We have not been referred to any works on the subject of Life Assurance or to any judicial pronouncements which tend to show that a different conclusion is possible.
48. In the judgment of the learned Chief Judge it is assumed that the standing committee of the Corporation of Madras was of the opinion that the amounts received as premia constituted the gross income of the company. A large portion of the judgment is devoted to a criticism of this view, and the learned vakil for the Corporation seems to have conceded before the Small Cause Court that he could not support that extreme view and the learned Advocate General who appeared before us for the Corporation did not put forward that contention on behalf . of his clients.
49. Dealing with the questions that have been referred to us for our decision, I think it is sufficient to say in answer to questions 1 and 2 that the Sun Life Assurance Company has discharged the onus that lay upon it under the proviso to Rule 7 of the taxation rules, by showing that its income could not have exceeded Rs. 25,000 and the circumstance that the company has not been able to state positively what its actual gross income was would not disentitle it to the benefit conferred under the said proviso.
50. In regard to question 3 the learned Chief Judge has held that the Act refers not merely to income received from the City of Madras, but also to the income received in the City. The contention of the company on this point was that in addition to the principal Agency at Madras there were numerous sub-agencies in the mofussal and that when the mofussil policy holders paid their premia to the sub-agents who remitted the moneys to Madras, these amounts should not be taken into account in making the assessment. On the facts I have stated above it would be unnecessary to deal with this question because on the assumption that the interest upon the premia collected in the whole of the presidency constituted the income of the company, such interest amounted to less than Rs. 25,000-0-0. The point involved in this question is merely of academic interest, and I may in this connection once again refer to Mylapore Hindu Permanent Fund Limited v. The Corporation at Madras I.L.R. (1908) Mad. 408 It may be inferred from it that the Court was unwilling to answer an abstract question of law and I am similarly of the opinion that unless a decision of the question is necessary for the determination of the case before it, the Court must decline to answer the question referred o it. We do not therefore propose to give our decision on question No. 3.