1935 (11) TMI 26 - HC - Income Tax

Tax Officer justified in resorting to Rule 35 for assessment, but flawed assessment not binding. Appeal allowed.

National Mutual Life Association of Australasia Ltd. Versus Commissioner of Income-tax

The court held that the Income Tax Officer was justified in resorting to Rule 35 for assessment as the data provided by the appellant company was deemed ... - Issues Involved:1. Justification of resorting to Rule 35 for assessment.2. Legality of the assessment under Rule 35.Detailed Analysis:Issue 1: Justification of resorting to Rule 35 for assessment.The appellant company, a mutual life insurance company with branches in India, challenged the Income Tax Officer's decision to use Rule 35 for computing their income, profits, or gains for the financial year ending March 31, 1932. This challenge was based on the data provided by the company, which included a return of its total income, a revenue account, and a balance sheet.The Income Tax Officer is authorized to use Rule 35 'in the absence of more reliable data.' This requires scrutiny of the data provided and consideration of its reliability for proper computation under Section 13 of the Indian Income Tax Act, 1922. The appellant argued that the data submitted, including the triennial valuation reports and the balance sheet, provided sufficient information. However, the Income Tax Officer deemed these data insufficient and insisted on a separate valuation report of the Indian business for a triennial period, which the company declined to provide.The court held that the Income Tax Officer was justified in resorting to Rule 35, as the data supplied did not offer a more reliable basis for computation. The method prescribed by Rule 35, based on the total income, profits, or gains of the company and the proportion attributable to the Indian business, was considered the most reliable method in the case of a life insurance company.Issue 2: Legality of the assessment under Rule 35.The second issue concerned whether the assessment made under Rule 35 was legal and binding. The Income Tax Officer computed the income, profits, or gains of the Indian business by applying Rule 35, resulting in an assessment of lb38,038 or Rs. 5,14,020. The appellant contended that this assessment ignored the principle established in Styles' case, which excluded surplus profit arising from contributions by participating policy-holders from being taxed.The court found that the Income Tax Officer's assessment was flawed. The Officer had ignored non-participating premiums and included the entire amount received for annuities without deducting liabilities or expenses related to the non-participating business. This approach did not accurately reflect the income, profits, or gains of the company.Therefore, the court concluded that the assessment was not valid or legal under Rule 35. The first question was answered in the affirmative, justifying the use of Rule 35, while the second question was answered in the negative, declaring the assessment invalid.Conclusion:The court advised that the appeal be allowed, the judgment of the High Court be set aside, and the questions be answered as follows:1. The Income Tax Officer was justified in resorting to Rule 35.2. The assessment made under Rule 35 was not legal or binding.The respondent was ordered to pay the costs of the appeal and the proceedings in the Court in India.