Rule 35 assessment for life insurance income must still produce a lawful taxable profit computation.

Rule 35 could be used for the Indian branches of a non-resident life insurance company only where income, profits and gains could not be ascertained from more reliable data, and the materials produced with the return were not a better basis than the statutory method. Triennial actuarial valuation was treated as the most reliable method for life insurance profits, so resort to Rule 35 was justified. However, an assessment under that rule still had to reflect taxable income lawfully, and the computation here ignored the non-taxability of surplus from participating policy-holders' contributions and omitted relevant deductions and liabilities. The assessment was therefore held unsustainable and not binding.

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Issues: (i) Whether the Income Tax Officer was justified in resorting to Rule 35 for assessing the income of the Indian branches of the non-resident life insurance company in the absence of more reliable data; (ii) Whether the assessment made by applying Rule 35 was a valid and legal assessment binding on the company.

Issue (i): Whether the Income Tax Officer was justified in resorting to Rule 35 for assessing the income of the Indian branches of the non-resident life insurance company in the absence of more reliable data.

Analysis: Rule 35 could be invoked only where the income, profits and gains could not be ascertained by more reliable data. The materials furnished with the return, even when supplemented by the additional documents relied on by the company, did not furnish a better basis than the statutory method. In the case of a life insurance business, triennial actuarial valuation was treated as the most reliable method of ascertaining profits, and the company's proposed figures did not provide a dependable basis for computation under the Act.

Conclusion: The Income Tax Officer was justified in resorting to Rule 35.

Issue (ii): Whether the assessment made by applying Rule 35 was a valid and legal assessment binding on the company.

Analysis: Although Rule 35 was available, its application had to yield an assessment that truly represented the income, profits or gains liable to tax. The computation adopted by the officer ignored the principle that surplus arising from participating policy-holders' contributions was not taxable, omitted relevant deductions and liabilities, and did not properly reflect the taxable income of the company. The resulting figure therefore could not stand as a lawful ascertainment of taxable profits.

Conclusion: The assessment was not valid or legal and was not binding on the company.

Final Conclusion: The appeal succeeded, the High Court's judgment was set aside, and the reference questions were answered in the stated manner, with the assessment held unsustainable.

Ratio Decidendi: Rule 35 may be applied only where more reliable data are unavailable, but any assessment made under it must still yield a lawful computation of taxable income consistent with the statutory scheme and the applicable principles governing life insurance profits.

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