Apportionment of Branch Income: previous-year premiums govern apportionment, and interim bonuses count in valuation surplus under rules.

The article addresses apportionment of a non-resident life assurance company's total income and treatment of interim bonuses under the valuation regime. It explains that, as a majority rule, the apportionment fraction in Rule 35 is to be computed using Burma premium as a proportion of total premium for the previous year (the year for which tax is charged), rather than premiums for the actuarial valuation period; it also states that interim bonuses paid to policyholders during the quadrennium form part of the divisible surplus and must be included in the valuation surplus.

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Issues: (i) Whether, for the Burma assessment 1937-38 of a non-resident life insurance company, the Burma portion of total income should be determined by the proportion of Burma premium to world premium received in the previous year (year ending 30 April 1937) or by the proportion of premia received during the valuation period (quadrennium ended 30 April 1936); (ii) Whether interim bonuses paid to policyholders must be added to the actuarial valuation surplus when computing income for the quadrennium ended 30 April 1936.

Issue (i): Whether the apportionment fraction in Rule 35 is to be computed using premium income of the previous year or premium income for the valuation period applicable to Rule 25.

Analysis: Rule 25 prescribes the method for ascertaining total income of life assurance companies where profits are periodically ascertained by actuarial valuation; the second part of Rule 35 applies that method to non-resident life companies for computing total income. The first sentence of Rule 35 provides an empirical method for apportioning total income to the Burma branch by reference to premium income fractions. The majority held that the apportionment fraction should be based on the premium income of the previous year because the assessment is charged on the income, profits and gains of the previous year and the premium figures of that year are directly ascertainable; the rules are to be read as prescribing computation for the previous year. The majority emphasised the primacy of the Act and that Rule 25/35 operate to determine the income of the previous year. The dissenting view reasoned that when Rule 25 valuation is used to compute total income (an average over the valuation period), the corresponding premium income fraction should use premium figures from the same valuation period so that the numerator and denominator relate to the same period as the computed average profits.

Conclusion: The majority answer: the apportionment fraction in Rule 35 is to be computed using the proportion of Burma premium to total premium received in the previous year (year ending 30 April 1937), not the valuation-period premia.

Issue (ii): Whether interim bonuses paid to policyholders must be included in the divisible surplus for the quadrennium ending 30 April 1936.

Analysis: The actuarial valuation disclosed a surplus which, when combined with interim bonuses paid during the quadrennium, produced the total surplus for that period. Interim bonuses were distributed out of or in anticipation of net profits of the period and are not shown to be expenditure incurred solely for earning profits within the meaning of Section 10(2)(ix). Precedent and the actuarial report demonstrate that the interim bonuses form part of the distributable profits used in the valuation.

Conclusion: Interim bonuses paid to policyholders during the quadrennium must be included in the total surplus for that quadrennium.

Final Conclusion: The reference is answered against the assessee on the apportionment method (majority) and in favour of including interim bonuses in the valuation surplus (unanimous); accordingly the Commissioner's computation method for the previous year premia and inclusion of interim bonuses is sustained.

Dissenting Opinion: One judge dissented on Issue (i) and would have held that where total income is computed under Rule 25 by reference to an actuarial valuation covering a valuation period, the Burma proportion should be determined by premium income from that same valuation period (quadrennium ended 30 April 1936), and not by premium income of the previous year.

Ratio Decidendi: For non-resident life assurance companies assessed under the Income-tax Act, the apportionment of total income to a branch under Rule 35 is to be determined by reference to premium income corresponding to the period for which the tax is charged (the previous year) unless the valuation method under Rule 25 requires using figures from the valuation period when both total income and the apportionment fraction are expressly tied to that valuation period.

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