Insurance profit computation must follow the statutory schedule, and surplus adjustments are limited to the express rule-based conditions.

Profits of a life insurance business must be computed strictly under the statutory schedule, and the assessing authority cannot depart from it by revaluing securities or reducing transfers to the investment reserve fund outside the express limits of rule 3(b). The proviso to rule 3(b) is the only source of power to correct artificial distortion in the surplus, and that power may be used only on the stated conditions, including consultation with the Controller of Insurance and regard to policy-holder bonuses and contingencies. The main rule does not confer any separate general authority to disturb the accounts. The stated principle is that a complete special code for insurance profits excludes extra-statutory adjustments.

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Issues: Whether, in assessing the profits of a life insurance business, the Income-tax Officer could adjust the surplus by revaluing securities or reducing amounts transferred to the investment reserve fund outside the limits of rule 3(b) of the Schedule, and whether any general power existed to make such adjustments apart from the proviso to that rule.

Analysis: Under section 10(7) of the Income-tax Act, 1922, the profits of insurance business had to be computed strictly in accordance with the Schedule. Rule 2 required the annual average surplus to be taken from actuarial valuation, and rule 3(b) required the Officer to give effect to the amounts actually written off or reserved in the accounts for depreciation, and the amounts credited for appreciation. The proviso to rule 3(b) alone permitted adjustment where the rate of interest or other factor used in valuing liabilities was materially inconsistent with the valuation of securities so as artificially to reduce the surplus, and even then only after consultation with the Controller of Insurance and regard to policy-holder bonuses and contingencies. The Officer in this case did not act within those limits, but proceeded on a revaluation of securities and a view that they were undervalued. The main rule did not confer a separate general power to disturb the accounts, and the proviso was the only source of power to correct such discrepancies.

Conclusion: The Income-tax Officer had no jurisdiction to make the adjustment in the manner adopted, and the question referred had to be answered in the negative, in favour of the assessee.

Final Conclusion: The assessment of a life insurance business is controlled exclusively by the statutory schedule, and adjustments to the surplus can be made only in the manner and on the conditions expressly provided therein.

Ratio Decidendi: Where a taxing provision prescribes a complete and special code for computing insurance profits, the assessing authority cannot invoke any general power to alter the accounts or revalue securities except within the express limits and conditions of the statutory rule.

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