1. For the assessment year 1956-57 the return of income of the assessee insurance company was Rs. 4,93,065. It is not in dispute that this was computed in accordance with Rule 2(b) of the rules for the computation of the profits and gains of insurance business. The average actuarial valuation for the two years period ended on 31-12-1954 disclosed the average surplus of Rs. 51, 38,221. In order to arrive at the taxable profits, certain sums have to be deducted under Rule 3. One of those is 80 per cent of the amounts paid to or reserved for or expended on behalf of the policy holders. The company declared Rs. 42,58,246 as bonus to the policy holders and this sum was credited to the accounts of the various policy holders. It would follow form Rule 3(a) that 80 per cent of this amount has to be deducted in arriving at the surplus for the purpose of rule 2. Accordingly, a sum of Rs. 34,06,597 was claimed as deduction. It appears that subsequently it was discovered that a mistake had occurred in the determination of the actuarial surplus due to certain figures being taken in excess of actual realisations.
(2) The correct figures of surplus was re-determined under the direction of the Controller of Insurance at Rs. 44,87,338. It naturally followed that the amount distributable to the policy holders had to be re-computed and it came to Rs. 36,66,225. The company informed the Income-tax Officer that the sum of RS. 42,58,246 having already been declared as bonus and having been credited to the accounts of the several policy holders, that sum might be taken for the purpose of computing the deduction under Rule 3. The Income-tax Officer however allowed only 80 per cent of the sum of Rupees 36,66,225. The result was that the deduction claimed under Rule 3(a) of the Schedule was disallowed to the extent of Rs. 4,73,617.
(3) On the application of the assessee, this court directed the submission of the following question for determination:
'Whether, on the facts and in the circumstances of the case, the Tribunal was justified in sustaining the disallowance of a sum of Rs. 4,73,617, out of the sum claimed as deduction under Rule 3(a) of the Schedule?'
(4) It seems to us that the question has to be answered in favour of the assessees and that the departmental authorities and the Tribunal have misconstrued the entire position. The schedule to the Act contains rules for the computation of profits and gains of insurance business. It is an artificial income that is so determined based on the surplus disclosed by actuarial valuation. In the case of such insurance companies, the actuarial valuation is made generally not at the end of each year but at an interval of a number of years. The annual average surplus as disclosed by such two consecutive actuarial valuations is adopted after making certain adjustments as provided in the rules. In order to arrive at the profit, certain deductions are allowed. One of these deductions is specified in Rule 3(a) in this manner:
'In computing the surplus for the purpose of Rule 2(a) four-fifths of the amounts paid to or reserved for or expended on behalf of the policy holders shall be allowed as a deduction'. There are two provisos to this rule which are not relevant in the present case. The Rule clearly states in a mandatory form that four-fifths of the amounts paid to or expended on behalf of the policy holders shall be allowed as a deduction. It would follow in terms of the rule that whenever it is established that a certain amount has been paid to or reserved for or expended on behalf of the policy holders, four-fifths of that amount has to be deducted. No discretion is vested in the Income-tax Officer to vary the sum for any reason whatsoever. It is true that the declaration of the bonus to the policy holders rests upon the approval of the Controller of Insurance, and the insurance company generally limits the grant of bonus to such figure as is authorised by the Controller of Insurance. It is not however the law that the company cannot, if it has the approval of Controller of Insurance, expend the whole of its surplus for the purpose of the policy holders. In the present case, the average annual surplus was initially determined at a particular figure and on the basis of that figure, the Controller of Insurance sanctioned the declaration of bonus to the extent of Rs. 42, 58, 246.
It is stated by the learned counsel that though the mistake of actuarial valuation was discovered later, the declaration of bonus had already been made and those amounts credited to the accounts of the policy holders. In several cases, the policies had matured and there had been a final payment of the accumulated bonus had already been made and those amounts credited to the accounts of the policy holders. In several cases, the policies had matured and there had been a final payment of the accumulated bonus to the policy holders. The Company in its letter to the Income-tax Officer, informed him that by reason of the mistake, excess payments had been made to the policy holders and that in the next declaration of the bonus, such excess would-be adjusted in the account of the police holders. This intimation was wholly unnecessary for the Income-tax Officer was not concerned with the quantum of bonus paid. That had no relation to the determination of the surplus for the purpose of the rules. Even where an excess payment by way of bonus is made, the insurance company is entitled under the rule to a deduction of four-fifths of the amount actually paid out or reserved. Any adjustment which the company could make in the accounts of the policy holders was a matter of concern only as between the company and the policy holders. It was not relevant to he determination of the profits or gains of the business.
(5) Mr. Balasubramaniam, learned counsel for the department, is not able to say that there is any rule or law which limits the quantum of bonus which could be declared by the company. While it is true that normally only a certain percentage of the profits is declared as a bonus, it depends upon the direction of the Controller of Insurance. In the present case, as has been pointed out, the Controller of Insurance did sanction the declaration of bonus to the extent of Rs. 42,00,000 and odd, and that order, which is not shown to be an invalid one, had in fact been given effect to. In terms of the rule, the department has no reserve power to limit the quantum of bonus for the purpose of deduction contemplated in Rule 3(a).
(6) A decision of the Bombay High Court in Commissioner of Income-tax v. Crown Life Insurance Co. Bombay, : AIR1956Bom203 was cited before the Appellate Assistant Commissioner, who thought that this decision had no application. In that case, the actuarial valuation of the Insurance company had not taken into account a sum of Rupees 75,411, which represented the income from certain securities which had been placed at he disposal of the Bombay branch of the Insurance Income-tax department sought to correct the actuarial valuation by adding this sum and there by to increase the surplus. The learned Judges of the Bombay High Court categorically ruled that the actuarial valuation could be regulated only by the provisions of S. 2(b) and the correction attempted by the department was not permissible there under. This decision certainly establishes that the department's right of interference in the manner of computation of the average annual surplus is exceedingly, limited.
(7) As we have pointed out, the rule in question clearly declares that 80 per cent of whatever amount had been paid out to the policy holders shall be deducted. Unless it can be postulated that what can be paid out by the insurance company, is subject to the control of the Income-tax Authorities, the stand taken by the department cannot be accepted. It follows that the company is entitled to the deduction of 80 per cent of Rs. 42,58,246. The question is accordingly, answered in favour of the assessee. The assessee will be entitled to its costs. Counsel's fee Rs. 250.
(8) Answer accordingly.