SRINIVASAN J. - The question that stands referred to us for determination i :
'Whether the unabsorbed losses incurred by the assessee in the earlier years in its insurance business are available to set off against its profits from the general insurance business for the assessment years 1951-52 to 1954-55?'
The assessee is the Prithvi Insurance Company Ltd., Madras. The assessment years in question are 1951-52 to 1954-55. During the account years relevant to these assessment years, the assessee was carrying on business of life insurance as well as general insurance inclusive of fire, marine, accident and miscellaneous insurances. Under the Insurance Act, the assessee, though his business is a composite one, has to prepare separate accounts for the life insurance business as distinct from other lines of insurance. The life insurance part of the business resulted in losses for a number of years. The general insurance business yielded a profit in these years. The assessee claimed that set-off should be permitted under section 24(2) of the Act of so much of the losses of the life insurance business as had already been set off against the profits of the general insurance business. The Income-tax Officer refused the set-off, being of the view that the life insurance business and the general insurance business are distinct and separate from each other, and, therefore, the losses carried forward from the life insurance business were not eligible to be set off against the profits from the general insurance business. It is not necessary to set out the figures of losses in the life business or the profits from the general business against which this set-off was asked for. On appeal, the Appellate Assistant Commissioner accepted the view of the Income-tax Officer as correct, relying upon an unreported decision of the Bombay High Court in Income-tax Reference No. 11 of 1956 of that court. On a further appeal to the Tribunal, it was claimed that though there was a common management and common staff in respect of both parts of the business and expenses were incurred in a single account, they were later apportioned in certain proportions only to conform to the requirements of the Insurance Act. The Tribunal did not accept these features as indicative of the unity of the business. It thought that one business could very well go on without the other, that the nature of the risks undertaken in the two parts of the business were different, while one, that is, the life business, involved commitments of the company spread over a long period, the general insurance covered only contracts of indemnity for short periods not exceeding a year at a time. Again relying upon the unreported decision of the Bombay High Court, the Tribunal held that the two types of insurance business cannot be said to be the same business for the purpose of application of section 24(2) of the Indian Income-tax Act.
Section 24(1) of the Act, excluding the provisos thereto, read :
'24. (1) Where any assessee sustains a loss of profits or gains in any year under any of the heads mentioned in section 6, he shall be entitled to have the amount of the loss set off against his income, profits or gains under any other head in that year.'
Even if the two parts of the business, life insurance and general insurance, do not constitute the same business, both parts would nevertheless come under the head of 'business' and any loss from one part of that business would be eligible for being adjusted against the profits from the other part under the general provision, section 10. This is not a set-off in the strict sense of the terms. It is only where there is still a resulting loss under one head of income that the assessee is by reason of section 24(1) of the Act entitled to set off such resultant loss against the income, profits or gains under any of the other heads mentioned in section 6 of the Act. That kind of set-off does not arise in the present case, because the assessee had no other head of income other than the business of insurance. Section 24(2), which provides for the carry forward of losses, was amended with effect from the 1st of April, 1952. Prior to the amendment, it read thu :
'24. (2) Where any assessee sustains a loss of profits or gains in any year, being a previous year not earlier than the previous year for the assessment for the year ending on the 31st day of March, 1940, in any business, profession or vocation, and the loss cannot be wholly set off under sub-section (1), so much of the loss as is not so set off or the whole loss, where the assessee had no other head of income, shall be carried forward to the following year and set off against the profits and gains, if any, of the assessee from the same business, profession or vocation for that year...'
The rest of the section deals with the period for which such carry forward can be effected. This provision, therefore, contemplated that a loss should have been sustained in a business, profession or vocation and that loss had not been wholly set off under sub-section (1), that is to say, against the income, profits or gains from any other head of income, and only such of the loss as is not so set off or the whole of the loss where the assessee had no other head of income was entitled to be carried forward. But it could be carried forward and set off against the profits and gains of the assessee from the same business, profession or vocation of the succeeding year. This provision therefore required that in order to enable the carry forward and set-off in the succeeding year, the business in which the loss was incurred should have been carried on in the subsequent year. Prior to the amendment in 1953, the position was that if the assessee had no other head of income against which the business losses could be set off under sub-section (1) of section 24, section 24(2), as it stood previously, would not apply and the loss could not be carried forward. This was the result of the decision of the Supreme Court in Anglo-French Textile Co. Ltd. v. Commissioner of Income-tax. The effect of this decision was overcome by the amendment in 1953, which provided that even if the assessee had no other head of income than business and no set-off under section 24(1) was possible, he could still carry forward the loss, but the requirement was that the same business in which the loss was incurred should be carried on in the subsequent year. This sub-section underwent a further amendment in 1955, which in so far as the carry forward and the set-off in the subsequent year is concerned, is in these term :
'24. (2) where any assessee sustains a loss of profits or gains in any year, being a previous year not earlier than the previous year for the assessment for the year ending on the 31st day of March, 1940, in any business, profession or vocation, and the loss cannot be wholly set off under sub-section (1), so much of the loss as is not so set off or the whole loss where the assessee had no other head of income shall be carried forward to the following year, and...
(ii) where the loss was sustained by him in any other business, profession or vocation, it shall be set off against the profits and gains, if any, of any business, profession or vocation in which the loss was originally sustained continued to be carried on by him in that year...'
The position after this amendment is that it is not necessary for the carry forward and set-off that the set-off should be against the income, profits and gains of the same business in which the loss was originally incurred. The loss could be set off against the profits and gains of any business, the only further requirement being that that business in which the loss was incurred should be carried on in the subsequent year.
In the present case, it is common ground that losses were being sustained in the life business while the general insurance business yielded profits. The first of the questions that we have deal with is whether the carried forward loss could be set off only against the profits and gains of the life insurance business, that is to say, whether the view taken by the department and the Tribunal that the business of life insurance was distinct and different from that of general insurance, is correct. Section 24(2), as it previously stood, permitted the set-off against the profits and gains of the assessee from the same business. What then is the business of the assessee and would it be correct to say whether an insurance business, a composite one taking in both life insurance and general insurance, can be split up and regarded as two different businesses for the purpose of the expression 'the same business' occurring in section 24(2)?
Considered from the laymans point of view, it seems difficult to hold that a business of insurance can be spit up in this artificial manner into as many kinds of business as there are kinds of insurance, such as, life, fire, marine, accident or the like. As a business, undoubtedly, it is one indivisible, and whatever parts of that business the assessee may or may not carry on it seems reasonable to hold that it is a business of insurance and consequently, the same business that is carried on from year to year. Does the income-tax law require a different approach? Section 10 of the Act, which deals with the mode of computation of the profits and gains of the business, states in sub-section (7 :
'10. (7) 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.'
The excepted sections are which deal with interest on securities, property income, business income, income from other sources and payment by deduction at source. The computation of the income of a business of insurance, therefore, ignores the various different modes of computation set out in the excepted sections and directs computation of the income of such a business by a different mode. It is noticeable that it is nevertheless a 'business of insurance', clearly falling under the relevant head in section 6 of the Act. Turning now to the Schedule to the Act which lays down the 'rules for the computation of the profits and gains of insurance business', rule 1 states that the profits and gains from life insurance business shall be computed separately from income, profits or gains from 'any other business'. But the expression 'any other business in this context means 'other than insurance business' and not 'other than life insurance business'. This is supported by rule 6, which reads, 'the profits and gains of any business of insurance other than life insurance business shall be taken to be the balance of the profits disclosed by the annual accounts, etc., etc.' It is only the method of computation that is required to be differently made in the case of life insurance and in the case of any business of insurance other than life insurance. The argument of Mr. Ranganathan, learned counsel for the department, that 'any other business' in rule 1 would include business of general insurance does not fit in with the controlling provision, section 10(7), which clearly regards business of insurance as embracing all kinds of such business, be it life or general insurance. Neither section 10(7) of the Act nor the rules found in the Schedule necessarily involves the conclusion that a business of life insurance is different from the business of general insurance in so far as the Indian Income-tax Act is concerned.
The Tribunal has mainly relied upon an unreported decision of the Bombay High Court. Before we deal with that decision, we may refer to Zenith Insurance Co. Ltd. v. Commissioner of Income-tax, which was an earlier stage of the same decision of the Bombay High Court. In this reported decision, the High Court called for a further statement of the case on a question which the High Court framed as belo :
'Whether there is any evidence to justify the findings of Tribunal that life insurance business of the assessee company and the other insurance business was not the same business?'
Originally, the Tribunal had referred two questions which wer :
'1. Whether all insurance business covered by section 10(7) of the Schedule of the Act is not the same business?
2. Whether the losses in the life insurance business can be set off under section 24(2) against the profits of any business of insurance other than life insurance?'
In framing the further question set out above and calling for a statement of the case, Chagla C.J. observe :
'Now, section 24(2) would only apply if the business done by the assessee company of life insurance was the same as the business done by the company in respect of general insurance. It is only when losses are incurred under the same head that they can be carried forward to the next year under section 24(2) and the finding of the Tribunal on this aspect of the case is that life insurance business and other general insurance business constitute different businesses and, therefore, it is not open to the assessee to claim the benefit of section 24(2).'
After referring to the contention for the department that no question of law arose in regard, the learned judges went on to sa :
'... but on a careful perusal of the order of the Tribunal we find that the basis of this finding is not any appreciation of evidence or an assessment of facts established before it. But the finding is based upon the view of the law that the Tribunal has taken, and briefly put, the view of the Tribunal is that, inasmuch as the law requires an insurance company to maintain a separate account with regard to life insurance business and also maintain a separate life insurance fund, in no view of the case can life insurance business constitute the same business vis-a-vis the other businesses carried on by the life insurance company. Now, in coming to this conclusion we find that the Tribunal has not taken into consideration at all the decision of the Appellate Assistant Commissioner which was in favour of the assessee. The Appellate Assistant Commissioner based his decision on three important facts. One was that the higher staff was common to all types of insurance businesses; the other was that the agents employed to secure life insurance were mostly the same as those employed for securing other insurance business; and the third was that important items of expenses were common and they were allocated subsequently to different kinds of insurance business. Now, these are all questions of facts and it was open to the Tribunal to have considered these facts and come to a conclusion, but we find that the Tribunal has not taken into consideration these facts at all. On the contrary, in paragraph 14, the Tribunal say : These two branches of insurance are so different to each other that invariably special staff is employed for each type of insurance. With respect to the Tribunal, we are not concerned with what the general practice is, nor are we concerned with what several or a majority of insurance companies do. What we are concerned with, and what we are interested in, is to find out what this particular insurance company does. Therefore, it seems to us that although we are not prepared to ask the Tribunal to refer the question as formulated by the assessee, which raises a general question with regard to all insurance companies, we are prepared to accede to the request of the assessee and ask the Tribunal to refer to us a question of law which has relevance with regard to the facts found with regard to the specific insurance company...'
When the matter came for final decision after the statement of the case by the Tribunal, the learned judges accepted the position that there was an essential difference in life insurance business and general insurance business. They thought that while general insurance business is a contract of indemnity, a life insurance contract is an entirely different type of contract, that the law required separate accounts to be kept and a separate fund to be maintained for the life insurance business. The learned judges, however, conceded that these facts by themselves may not be sufficient to lead to the conclusion that the assessee was carrying on two separate businesses and that if the assessee proved facts which went to show that there was interdependence and interlacing between the two businesses, then, undoubtedly, notwithstanding what the law required, the business might be held to be one business. They proceeded to examine the facts found by the Tribunal which revealed that the expenses of the two departments, the life insurance and the general departments, were apportioned at the end of the year, that though the managerial staff might be common, the two departments had separate staff and that separate agents were employed for the life department and the other department. From these facts and from the further position that it was not an appeal that was before the High Court, the learned judges felt inclined to take the view that there was material to justify the finding of the Tribunal. They nevertheless stated that the inference drawn must be a reasonable inference, but were not prepared to hold that the inference reached by the Tribunal that the life business and the general business were different and was so wholly unjustified in the circumstances of the case. It is in reliance upon the decision of the Bombay High Court that the Tribunal in the present case has held two businesses to be different.
Not unnaturally, both the department and the Tribunal have just stressed those features of the business which are indicated in the judgment of the Bombay High Court. In its appellate order, the Tribunal observe :
'It is urged on behalf of the assessee that there is a common management, common staff, including canvassing agents, expenses incurred commonly, though later apportioned in certain notional proportions. All these arguments cannot, however, displace the fundamental position that the two businesses are not in any sense inextricably interwined. One business can very well go on without the other, though perhaps not so economically. The nature of the risks underwritten in each is too vitally different. Life risks combined endowment principles and investment over long periods of contract which are totally absent in general insurance which covers contracts of indemnity from year to year only. Also the types of men required to run these two require educational and other qualifications and training different from each other.'
On the above features, the Tribunal followed the decision of the Bombay High Court.
To our minds, this decision of the Bombay High Court did not proceed upon an abstract consideration whether when a composite insurer carried on both life business as well as general insurance business, the two parts of the business should always be regarded as separate and distinct from each other for the purpose of applying the various provisions of the Income-tax Act. On the other hand, both in the order calling for a further statement of the case and the decision which followed it, there are observations of the learned judges of the Bombay High Court to show that they were not prepared to ask the Tribunal to refer the question as formulated by the assessee which raised a general question with regard to all insurance companies. They only directed the Tribunal to refer a question of law which was relevant with regard to the facts found in respect of the specific insurance company before them. The question was directed only to a determination whether there was no evidence to justify the finding of the Tribunal that the life insurance business of the assessee company and the other insurance business were not the same business. In the final decision of the High Court also, they referred to the fact that the circumstance that the contracts entered into in the case of general insurance business represented a different type of contract from that in life insurance and the further feature that under the insurance law separate accounts had to be kept and a separate fund maintained for the life insurance may not be sufficient to lead to the conclusion that the assessee was carrying on two separate businesses. They emphasised that fact that they were exercising an advisory jurisdiction and not sitting as a court of appeal and that all they had to decide was whether there were materials or circumstances which would justify the Tribunal in drawing the inference which it had drawn. Within the scope of that limited jurisdiction, they proceeded to find out whether the inference was a reasonable one. We are accordingly inclined to hold that the decision of the Bombay High Court cannot be regarded as one declaring that in the case of all insurance business, the two parts of the business, life insurance business and general insurance business, should invariably be regarded as separate and distinct from each other. It is true that the Tribunal in this case purported to set out those facts upon which the Bombay High Court accepted the inference made by the Tribunal with regard to the insurance company whose case was being dealt with by them and proceeded to draw a like inference. But, in view of the nature of the question that has been submitted to us, we are not constrained by the findings on these facts. The question really raises a general question of law, whether notwithstanding the facts found, the conclusion that the two were separate businesses is justified in law.
There are certain observations of the Supreme Court in a recent decision, Neptune Assurance Co. Ltd. v. Life Insurance Corporation, I which afford a valuable guidance in reaching a decision upon the question before us. In that case, upon the nationalisation of the life insurance business, the life insurance part of the business previously run by a composite insurer vested in the Life Insurance Corporation. Certain refunds were due to the composite insurer for the previous years and the question arose whether any portion of those refunds could be regarded as pertaining to the life insurance business, so that the Life Insurance Corporation would become entitled thereto. The contention of the insurer was that no part of the refunds which had become payable to the insurance business could be allocated to the life insurance part of the business and that even though that part of the business had vested in the Life Insurance Corporation, no portion of the tax refunds could go to the benefit of the Corporation. Their Lordships ultimately reached the conclusion that if an asset pertained to the life insurance business, then its fruit, viz., the income from it, would also pertain to that business. Their Lordships pointed out that while the Income-tax Act was not concerned with the various kinds of businesses carried on by the insurer, it was the Insurance Act that treated the various kinds of insurance businesses carried on by an insurer separately, likewise the Life Insurance Corporation Act treated the life insurance business as something separate from other kinds of businesses carried on by an insurer. They observe that it would be a misconception to refer to the Income-tax Act in interpreting the Life Insurance Corporation Act for deciding whether a right to refunds belonging to an insurer pertains to his insurance business or to another kind of insurance business carried on by him. They refer to the various provisions of the Insurance Act and observe thu :
'We turn now to the other part of the question, viz., whether the right to the refund was one appertaining to the life insurance business. That question has to be decided by reference to the Insurance Act, because it is that Act which treated the different kinds of insurance businesses separately. Some of the sections of that Act have now to be referred to. It is not in dispute that the appellant is an insurer within the meaning of the Act. Sub-section (1) of section 10 of the Act requires an insurer like the appellant to keep a separate account of all receipts and payments in respect of each separate class of insurance business carried on by him. We have earlier referred to the provisions of sub-sections (2) and (3) of this section. Section 11 provides that an insurer like the appellant shall kee : (a) a balance-sheet... (b) a revenue account... in respect of each class of insurance business carried on by him... All these provisions to out mind indicate what is contemplated by the Insurance Act to be asset appertaining to the life insurance business.'
Proceeding further, they conclude that because certain assets were specifically earmarked by operation of the Insurance Act to the life insurance business, it should necessarily follow that a claim to refund became associated with such assets. Though at first sight it might appear as if this fragmentation of a composite business carried on by an insurer means that he carries on a multiplicity of different businesses, that does not appear to us to be true ratio of this decision. Their Lordships clearly point out that the Income-tax Act was not concerned with such splitting up of the business and that the question before them had to be interpreted only in the light of the Insurance Act and the rights conferred upon the Life Insurance Corporation by the Act of 1956. There is a clear under-current noticeable in this decision that but for these acts, which call for a separate maintenance of accounts and other returns under the Insurance Act, there is nothing in the Indian Income-tax Act which warrants the view that the several classes of insurance business carried on by a composite insurer were different businesses.
Looking at the substance of the matter, we are unable to see any real or justifiable reason for the spitting up of the business in this manner for the purposes of the Income-tax Act. We may point out that under the English Act, Income Tax Act, 1952, a special provision has been enacted, whereby the life insurance business carried on by a composite insurer has been declared to be a separate and distinct business from the other classes of insurance business. It is section 426 and it is as follow :
'426. Separation of different classes of business carried on by companies. - (1) Where an assurance company carried on life assurance business in conjunction with assurance business of any other class, the life assurance business of the company shall, for the purposes of this Act, be treated as a separate business from any other class of business carried on by the company.
(2) Where an assurance company carries on both ordinary life assurance business and industrial life assurance business, the buriness of each such class shall, for the purposes of this Act, be treated as though it were a separate business, and the last preceding section shall apply separately to each such class of business.'
But for that provision, the English Income Tax Act also could not treat the different classes of insurance as different businesses. Such a provision is lacking in the Indian Income-tax Act, and if at all, any inference that can flow from section 10(7) of the Act is clearly against the contentions of the department. The principal reason why the Insurance Act calls for a separation of the life business from the other classes of insurance business is that in the case of life insurance, the insured person is entitled to a return of the sums of premia paid by him or of a stated amount in the event of his death or his surviving a stated number of years. In the case of other classes of insurance, it is true that a risk is undertaken by the insurer and indemnity offered against that risk. But, unless the risk occurs, the insurer is under no liability to pay any part of the amount in respect of that contract of insurance. Clearly, therefore, in the case of life insurance, a certain sum becomes payable to the insured or his successors-on-interest, while in the case of other classes of insurance, no such amount is payable unless the risk happens. It is for this purpose that accounts are maintained separately and a life fund is created by operation of the Insurance Act. But these facts cannot in our opinion justify the classification of the two kinds of businesses into two different businesses for the purposes of the Income-tax Act.
We are, accordingly, of the view that the assessee having continued to carry on the same business in the succeeding years, the unabsorbed losses of the earlier years are available to be set off against the profits of the subsequent years.
A further question was argued whether the amendment of the Act in 1953 was or was not retrospective in its scope. That question would arise only if we had held against the assessee on the first point. In that event, it would have been necessary to examine whether the amendment gave the right of adjustment only on and after the date thereof. In the view that we have taken, it is unnecessary to examine this question.
The question referred to us is accordingly answered in favour of the assessee, which will be entitled to its costs. Counsels Fee Rs. 250.
Question answered in favour of the assessee.