Annuity business under life insurance rules may be taxed using actuarial surplus when yearly accounts are unavailable.

An undertaking issuing policies payable on death, survival, or attainment of a chosen age was treated as carrying on annuity business, not ordinary lump-sum life policies, and that activity fell within life insurance business under the relevant statutory definition. On computation under Rule 2(a), where no annual valuation or profit and loss account was available, profits could be estimated from the latest actuarial valuation and the annual average surplus disclosed by it, with necessary adjustments. The actuarial basis was held consistent with the rule, and the assessments were upheld in favour of the Revenue.

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Issues: (i) Whether the assessee's business was wholly annuity business or included ordinary life insurance business; and (ii) whether, for computation under Rule 2(a), the Income-tax Officer was justified in estimating profits by reference to the actuarial surplus.

Issue (i): Whether the assessee's business was wholly annuity business or included ordinary life insurance business.

Analysis: The policies issued by the assessee provided for recurrent payments dependent on the death or survival of the subscriber or on attainment of a selected age. Such contracts were not ordinary life policies for a lump sum but were contracts for payment of annuities on human life. Since the assessee carried on no other business, its entire activity fell within annuity business, which is a species of life insurance business under the statutory definition adopted by the Schedule.

Conclusion: The business was wholly life insurance business in the form of granting annuities on human life.

Issue (ii): Whether, for computation under Rule 2(a), the Income-tax Officer was justified in estimating profits by reference to the actuarial surplus.

Analysis: Rule 2(a) required computation of gross external incomings less management expenses, but in a business consisting only of annuities on human life the profits of the annuity business were the only relevant incomings under the Schedule. As there was no annual valuation and no profit and loss account for the relevant years, the actual yearly figures could not be extracted directly. In such circumstances, the last actuarial valuation and the annual average of the surplus disclosed by it were the only workable basis for determining the profits for the preceding year, with necessary adjustments for the facts of the case. The use of actuarial material was therefore not inconsistent with Rule 2(a).

Conclusion: The estimate based on the actuarial surplus was justified.

Final Conclusion: The reference was answered in favour of the Revenue, and the assessments were upheld on the basis that the assessee's entire business was annuity life insurance and the profit computation method adopted under Rule 2(a) was lawful.

Ratio Decidendi: Where a life insurance undertaking carries on only annuity business on human life and no yearly accounts are available, profits under the relevant computation rule may be determined on the basis of the latest actuarial valuation and its annual average surplus.

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