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Issues: (i) Whether, for computing fair market value under section 55(2) of the Income-tax Act, 1961, the surplus to be taken into account was the minimum permissible surplus under the Life Insurance Corporation Act, 1956 or the surplus actually allocated by the assessee; (ii) whether there was improvement in the capital asset after 1 January 1954 within section 55(1)(b) of the Income-tax Act, 1961; and (iii) whether the Tribunal's estimate of the cost of improvement at not less than Rs. 3,98,000 was unsupported by evidence or perverse.
Issue (i): Whether, for computing fair market value under section 55(2) of the Income-tax Act, 1961, the surplus to be taken into account was the minimum permissible surplus under the Life Insurance Corporation Act, 1956 or the surplus actually allocated by the assessee.
Analysis: The compensation scheme under section 16 and Part A of the First Schedule to the Life Insurance Corporation Act, 1956, fixes compensation by reference to the statutory principles for valuation. The expression relating to surplus in the Schedule does not mean that a surplus amount, over and above market value, is to be paid to the insurer. It only supplies the statutory method for determining compensation, and the valuation cannot be read as requiring the entire allocated surplus to be treated as an independent amount payable.
Conclusion: The question was answered in the affirmative in favour of the assessee.
Issue (ii): Whether there was improvement in the capital asset after 1 January 1954 within section 55(1)(b) of the Income-tax Act, 1961.
Analysis: The capital asset in question was the running business itself. The increase in business activity and assessed profits during 1954 and 1955 supported the finding that the business had undergone improvement. The absence of a change in share capital did not negate improvement in the capital asset, and the concept of improvement was not confined to depreciable assets.
Conclusion: The question was answered in the affirmative in favour of the assessee.
Issue (iii): Whether the Tribunal's estimate of the cost of improvement at not less than Rs. 3,98,000 was unsupported by evidence or perverse.
Analysis: The Tribunal relied on the available record, including the substantial assessed profits and the admitted improvement in the business, and declined to remand the matter after a long lapse of time. On that material, the estimate was treated as a reasonable factual inference and not as a finding without basis or perverse.
Conclusion: The question was answered in the affirmative in favour of the assessee.
Final Conclusion: All the referred questions were decided in favour of the assessee, and the reference was disposed of accordingly.
Ratio Decidendi: Where the statutory compensation scheme uses surplus only as a valuation factor, the resulting amount is not to be treated as an independent surplus payable for capital gains purposes; and a running business may itself constitute a capital asset capable of improvement on the facts proved.
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