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Commissioner of Income-tax Vs. National Insurance Co. Ltd. - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtKolkata High Court
Decided On
Case NumberIncome-tax Reference No. 113 of 1977
Judge
Reported in(1986)54CTR(Cal)172,[1986]159ITR314(Cal)
ActsIncome Tax Act, 1961 - Sections 44, 80AA and 80M; ;Insurance Act, 1938
AppellantCommissioner of Income-tax
RespondentNational Insurance Co. Ltd.
Appellant AdvocateM.L. Bhattacharya, Adv.
Respondent AdvocateSukumar Bhattacharji, Adv.
Cases ReferredCloth Traders P. Limited v. Addl.
Excerpt:
- .....was justified in holding that the assessee was entitled to relief under section 80m on the gross dividend without reducing the same by proportionate management expenses attributable to the earning of the dividend income ?' 2. the assessee, an insurance company, received dividend of rs. 2,24,425 and claimed deduction under section 80m on the gross dividend income. the income-tax officer, however, computed the proportionate managerial expenses of rs. 1,35,025 as attributable to the earning of that income. he allowed deduction under section 80m after deducting the proportionate managerial expenses from the gross dividend income. the assessee preferred an appeal to the appellate assistant commissioner who, following the decision of the calcutta high court in the case of cit v......
Judgment:

1. In this reference under Section 256(1) of the Income-tax Act, 1961, for the assessment years 1971-72 and 1972-73, the following two questions of law have been referred:

'1. Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that the assessee company which carried on business in general insurance and was assessable under Section 44 of the Income-tax Act, 1961, was entitled to relief under Section 80M ?

2. Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that the assessee was entitled to relief under Section 80M on the gross dividend without reducing the same by proportionate management expenses attributable to the earning of the dividend income ?'

2. The assessee, an insurance company, received dividend of Rs. 2,24,425 and claimed deduction under Section 80M on the gross dividend income. The Income-tax Officer, however, computed the proportionate managerial expenses of Rs. 1,35,025 as attributable to the earning of that income. He allowed deduction under Section 80M after deducting the proportionate managerial expenses from the gross dividend income. The assessee preferred an appeal to the Appellate Assistant Commissioner who, following the decision of the Calcutta High Court in the case of CIT v. Darbhanga Marketing Co. Ltd. : [1971]80ITR72(Cal) , directed the Income-tax Officer to recompute the deductions under Section 80M with reference to the gross dividend income. The Department, being aggrieved, came up in appeal before the Tribunal.

3. It was the contention of the Department before the Tribunal that as the assessee was an insurance company, its income was computed under Section 44 of the Income-tax Act, 1961, in accordance with rules contained in the First Schedule. It was contended that as investment by an insurance company was part of its business activities, the income from dividend was income from business. According to the Department, dividend income lostits character as such after merging in the business income and Section 80M was not applicable in such a case, and that it was only the net income from dividend which was included in the total income of the assessee under Section 80M, and the assessee was entitled to deduction only on that part of the income from dividend which was included in the income of the assessee and not on the gross dividend income.

4. The Tribunal held that the income of the insurance company is computed under Section 44 read with the First Schedule as profits and gains of the business of insurance. The income from dividend is treated as income from insurance business for the purpose of assessment under Section 44. Section 80M, however, provides for deduction on income from dividend irrespective of the fact under which head the income is included in the income of the assessee. The Tribunal also held that in view of the decision of the Calcutta High Court in the case of Darbhanga Marketing Company Ltd. : [1971]80ITR72(Cal) , the assessee was entitled to relief under Section 80M on the entire dividend income and not on the gross dividend less managerial expenses as contended by the Department.

5. Two questions that call for determination in this case are, firstly, whether profit of an insurance company having been assessed under Section 44 of the Act in accordance with rules contained in the First Schedule, the dividend income included in such profit is entitled to relief under Section 80M and, secondly, whether having regard to the provisions of Section 80AA of the Act, the relief under Section 80M should be on the gross dividend or on the net dividend.

6. Section 44 deals with the mode of computation of profits and gains of insurance business. It is in the following terms :

'44. Insurance business.--Notwithstanding anything to the contrary contained in the provisions of this Act relating to the computation of income chargeable under the head ' Interest on securities', ' Income from house property', ' Capital gains ' or 'Income from other sources', or in Section 199 or in Sections 28 to 43A, the profits and gains of any business of insurance, including any such business carried on by a mutual insurance company or by a co-operative society, shall be computed in accordance with the rules contained in the First Schedule.'

7. The First Schedule to the Income-tax Act, 1961, provides the manner of computation of profits and gains from insurance business. Part B is concerned with insurance business other than life insurance business. In Part B, the First Schedule provides that 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 arerequired, under the Insurance Act, 1938, to be furnished to the Controller of Insurance, subject to the adjustments mentioned therein.

8. It is contended on behalf of the Revenue that since the special provisions in Section 44 relating to the assessment of insurance business have to be invoked, Sections 56 and 57 will not be applicable and the income under the head ' Other sources ' cannot be separately computed. Accordingly, no relief under Section 80M on the (gross) dividend income is to be allowed. It is contended by the assessee that the dividend income of an insurance -company can never be assessed under Sections 56 and 57 of the Act in view of the non obstante clause with which Section 44 opens. But the dividend income which is included in the gross total income of an insurance company does not lose its quality and character as income by way of dividend and accordingly such income is entitled to relief provided for under Section 80M.

9. In the case of an insurance company, in view of Section 44 of the Income-tax Act, 1961, notwithstanding anything to the contrary contained in the provisions of the Income-tax Act relating to the computation of income chargeable under the head ' Income from other sources ', the profits and gains of any business of insurance shall be computed in accordance with rule 5 contained in the First Schedule. According to Rule 5 of the First Schedule, 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 Controller of Insurance, subject to the adjustments to be made in accordance with Rule 5 of the said First Schedule. The form of revenue account applicable to fire insurance business is Form No. F of the Third Schedule to the Insurance Act, 1938. In the said Form, it will appear that on the right hand side (i.e., on the credit side), apart from the insurance receipts, there is a specific inclusion of items like (a) interest, (b) dividend, and (c) rents. Therefore ' income by way of dividend' is included to be the balance of the profits disclosed by the annual accounts and referred to in Rule 5 of the First Schedule. Chapter IV of the Income-tax Act, 1961, deals with the computation of the total income under different heads. But, in view of the provisions of Section 44, the computation of the income of an insurance company is not required to be done. The dividend income of an insurance company cannot be assessed under the head ' Income from other sources ', in view of the non obstante clause with which Section 44 opens. Even though in the case of an insurance company, the different classes and categories of income, viz., income from house property, capital gains or income from other sources are not separately computed in accordance with the computation Sections for therespective heads of income, the differant classes or categories of income which are shown in Form No. F to the Third Schedule of the Insurance Act, 1938, do not lose their character or quality. The income by way of dividend even though assessed as business income in accordance with Section 44 of the Act also does not lose its character and quality as income by way of dividend.

10. At this stage, it would be convenient to refer to the decisions cited at the Bar. A decision of the Privy Council in the case of CIT v. Western India Life Insurance Company Ltd. [1949] 17 ITR 125, has been relied on by the Revenue. In that case, the Privy Council held that the proviso to Section 4(1) of the Indian Income-tax Act, 1922, did not apply to assessment of the profits and gains of a life insurance business under Rule 2(b) of the Schedule to the Indian Income-tax Act, 1922.

11. The next decision cited by the Revenue is in the case of CIT v. Asian Assurance Co. Ltd. : [1962]46ITR560(Bom) , where the Bombay High Court held as follows (headnote) 3

'The income, profits and gains of an insurance company are charged to tax not under the different heads of income mentioned in the Act but by the special mode provided in Sub-section (7) of Section 10 of the Act, read with the rules contained in the Schedule to the Act. It has, therefore, no income chargeable under the head ' Income from property' and cannot claim the benefit of the exemption under Section 4(3)(xii) of the Indian Income-tax Act, 1922, in respect of buildings newly erected by it.'

12. The said view was approved by the Supreme Court in the case of Vanguard Fire & General Insurance Co. Ltd. v. CIT : [1966]60ITR496(SC) , where the Supreme Court held as follows (headnote) :

' It is impossible to apply the provisions of Section 4(3)(xii) of the Indian Income-tax Act, 1922, to an assessment made under Section 10(7) of the Act read with paragraph 6 of the Schedule thereto. There is no income chargeable under the head ' Income from property' as far as general insurance business is concerned. The effect of Section 10(7) is to delete the heads ' Interest on securities',' Income from property' and ' Income from other sources' from Section 6 of the Act as far as general insurance businesses are concerned.'

13. Counsel for the Revenue has heavily relied on the said decision of the Supreme Court in support of his contention that there is no dividend income as such of an insurance company eligible for relief under Section 80M of the Act. The decision of the Supreme Court in the case of Vanguard Fire & General Insurance Co. Ltd. : [1966]60ITR496(SC) , is distinguishable. In the said case, the appellant company carried on fire and general insurance business. It owned a building of which a part was occupied bythe assessee for its own business, the rest being let out on rent. During the relevant assessment year, the assessee claimed the benefit of Section 4(3) of the Indian Income-tax Act, 1922. The relevant clause reads as follows :

'4. (3) Any income, profits or gains falling within the following clauses shall not be included in the total income of the person receiving them......

(xii) any income chargeable under the head ' Income from property' in respect of a building, the erection of which is begun and completed between the 1st day of April, 1946, and the 31st day of March, 1956 (both dates inclusive), for a period of two years from the date of such completion.'

14. It is on these facts that the Supreme Court pointed out that insurance companies are assessed on a special basis, though the special basis is different for life insurance companies and companies carrying on general insurance business. 'The form of revenue account applicable to fire insurance business, marine insurance and miscellaneous insurance business contains the items on the right side 'Interest, Dividends and Rents, less income-tax thereon '. Presumably, the rents here would be actual rents received, and not annual value as determined under Section 9.' (See [1966] 60 ITR 499).

15. In this context, the Supreme Court observed ' it is equally impossible to apply the provisions of Section 4(3)(xii) to an assessment made under Section 10(7), read with paragraph 6 of the Schedule. There is no income chargeable under the head ' Income from property ' as far as a general insurance business is concerned. The effect of Section 10(7) is to delete the heads 'interest on securities', 'income from property' and ' income from other sources ' from Section 6 of the Act as far as general insurance businesses are concerned.' (at page 500 of 60 ITR):

Section 10(7) of the Indian Income-tax Act, 1922, corresponds to Section 44 of the Income-tax Act, 1961. The effect of the Supreme Court decision, therefore, is that in the case of an insurance company, there is no income chargeable under the head ' Income from property ' or ' Income from other sources ' or ' Interest on securities '. The entire income of an insurance company including interest on securities, income from property, income from other sources is computed in accordance with the special provision of Section 44 read with Rule 5 of the First Schedule. Income chargeable under the head ' Income from house property 'is computed on a notional basis on the annual value as determined under Section 9 of the Indian Income-tax Act, 1922, corresponding to Section 22 of the Income-tax Act, 1961. But, while computing the income of aninsurance company, the rents which are included in the form of the return submitted in Form No. F of the Third Schedule to the Insurance Act are actual rents received and not annual value as determined under Section 9. It is significant that neither Section 80M nor Section 80AA uses the expression income chargeable under the head ' income from other sources' viz., dividend. Sections 80M and 80AA significantly use the expression income by way of dividend and not income chargeable under the head ' Income from other sources ' including dividend.

16. In our opinion, even though Section 44 excludes the computation of the income of an insurance company under different heads but after the computation is made, the insurance company would also be entitled to the benefits as far as applicable to a company under Chapter VIA. The gross total income of an insurance company undoubtedly includes income which is descriptive of the category of income, viz., income by way of dividend. The Legislature advisedly has not used the expression ' the gross total income includes any income chargeable under the head ' Income from other sources including dividend '. In the absence of any such provision, it is not permissible to equate the expression ' income by way of dividend ' with 'income chargeable under the head 'Income from other sources' including dividend '. The decision of the Bombay High Court in Asian Assurance Co. Ltd.'s case : [1962]46ITR560(Bom) , proceeds on the same basis on which the Supreme Court has decided in Vanguard Fire & General Insurance Co. Ltd.'s case : [1966]60ITR496(SC) . The Bombay High Court pointed out that on the terms of Section 10(7) of the 1922 Act, it is clear that income from property received by an insurance company during the course of its business is not to be computed in accordance with the provisions of Section 9 of the Act, but that income is to be computed in accordance with the Rules contained in the Schedule to the Act. That being the position, on the language of Section 10(7), it cannot be said that the income from property received in the course of the business by an insurance company is in its hands an income chargeable under the head ' Income from property '. It is because of the reason that the assessee could not claim the benefit of Section 4(3)(xii) of the Indian Income-tax Act, 1922. Section 80M or Section 80AA does not use the expression ' income chargeable under the head ' Income from other sources'' but uses the expression income by way of dividend which is included in the gross total income.

17. It appears to us that there is no divergence on the issue. The Bombay High Court in the case of CIT v. New India Assurance Company Ltd : [1969]71ITR761(Bom) , held that exemption under Sections 15B and 15 or under Section 4(1) of the old Act cannot be denied to an insurance company.

18. In Lakshmi Insurance Co. Ltd. v. CIT : [1969]72ITR474(Delhi) , the question was whether the exemption under Section 60 is allowable to an insurance company or not. There, the Delhi High Court held that the exemption under Section 60 is an overall exemption from the levy of tax under the Act itself and, consequently, the provisions of Rule 2(b) of the Schedule did not come into operation at all.

19. The Madras High Court in the case of CIT v. Madras Motor & General InsuranceCo. Ltd. : [1975]99ITR243(Mad) , held that the special mode of computation of income of an insurance company under the First Schedule to the Income-tax Act treating its entire income as income from business cannot be imported into the calculation of tax under the Finance Act. Merely because the income of a general insurance company has to be computed in a particular manner, it could not be said that the total income did not include dividend from other Indian companies when in fact the company had received such dividends. Hence, a general insurance company receiving dividend income from other Indian companies would be entitled to rebate under the above provision.

20. In Life Insurance Corporation of India v. CIT : [1978]115ITR45(Bom) , the Bombay High Court, following the decision in CIT v. New India Assurance Company Ltd. : [1969]71ITR761(Bom) , held that applicability of only certain provisions is excluded by the provisions of Section 44 and the other provisions which deal with allowable deduction, unless they are expressly excluded, will have to be held applicable in the case of an assessee who carries on insurance business.

21. In CIT v. Advance Insurance Company Limited : [1979]119ITR660(Bom) , the Bombay High Court has held that an assessee who carries on insurance business other than life insurance business is entitled to the allowance of rebate on dividend income.

22. Similar view was taken in the case of CIT v. New India Assurance Co. Ltd. : [1980]122ITR633(Bom) .

23. For the reasons aforesaid, we are of the view that the assessee which carries on business in general insurance and is assessable under Section 44 is entitled to relief under Section 80M. In the result, the first question in this reference is answered in the affirmative and in favour of the assessee, The next question is whether the relief under Section 80M should be allowed on the gross dividend. The contention of the assessee is that the expression ' income by way of dividend ' is descriptive of the category of income which is to be included in the gross total income. The learned advocate for the assessee, in this connection, has relied on the decision of theSupreme Court in the case of Cloth Traders P. Limited v. Addl. CIT : [1979]118ITR243(SC) .

24. The contention of the Revenue is that Section 80AA was inserted by the Finance (No. 2) Act, 1980, with retrospective effect from 1st April, 1968, which a view to counter the aforesaid decision of the Supreme Court in which it was held that deduction in respect of intercorporate dividend should be allowed on the gross amount of dividend received. On the other hand, it is contended by the learned advocate for the assessee that even in accordance with the provisions of Section 80AA of the Act, the quantum of the income which is by way of dividend included in the gross total income, is to be computed in accordance with the provisions of the Income-tax Act and with reference to the gross amount of dividend. In the case of an assessee, other than an insurance company, the dividend income is to be computed in accordance with Sections 56 and 57 of the Act and, as such, in view of Section 80AA of the Act, the net dividend after deduction of expenses is to be included for the purpose of relief under Section 80M of the Act.

25. We are, however, unable to accept this contention. Section 80AA provides that where any deduction is required to be allowed under Section 80M in respect of any income by way of dividends from a domestic company which is included in the gross total income of the assessee, then notwithstanding anything contained in that Section, the deduction under that Section shall be computed with reference to the income by way of such dividends as computed in accordance with the provisions of this Act and not with reference to the gross amount of such dividends. Although the assessment of an insurance company is made under Section 44 and dividend income is not separately chargeable to income-tax under the head 'Income from other sources', the dividend income is one of the items to be included in the annual accounts under the Insurance Act. The dividend income forms part of the total income of the assessee under the Insurance Act read with Section 44 of the Income-tax Act. Such dividend income as computed by the Income-tax Officer in accordance with the provisions of the Income-tax Act qualifies for relief under Section 80M. Thus, under Section 80AA, deduction under Section 80M shall be computed with reference to the income by way of such dividend as computed in accordance with the provisions of the Income-tax Act. What the learned advocate for the assessee wants us to hold is that relief should be given to an insurance company under Section 80M without making any computation under the Income-tax Act, which is required to be done in the cases of all other assessees. In computing such deduction in accordance with the provisions of the Income-tax Act in all cases, expenditure, if any, incurredin earning such dividend income has to be taken into consideration. The case of the assessee before us is not that no expenditure was incurred. As a matter of fact, in this case, the Income-tax Officer allowed the deduction under Section 80M after deducting the proportionate managerial expenses from the gross dividend income. The contention is that no expenditure should be deducted in computing the relief under Section 80M as provisions of Sections 56 and 57 are not applicable to an insurance company. This contention was not raised before the Tribunal. The only contention raised was that deduction should be allowed on the gross dividend income received by the assessee. The Tribunal upheld this contention following the decision of this court in the case of Darbanga Marketing Co. Ltd.'s case : [1971]80ITR72(Cal) . Having regard to the provisions of Section 80AA, we are unable to accept the contention of the assessee. In a case where deduction is allowable to an assessee under Section 80M, the deduction is to be allowed with reference to the amount of dividend computed in accordance with the provisions of the Income-tax Act.

26. For the reasons aforesaid, we answer the second question in the negative and in favour of the Revenue.

27. There will be no order as to costs.


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