1996 (2) TMI 5 - SC - Income Tax

Supreme Court: LIC income-tax refund deemed part of earlier period, rules in favor of assessee

The Supreme Court held that the income-tax refund received by the Life Insurance Corporation of India (LIC) should be deemed included in the earlier ... Construction of rule 2(1)(b) of the First Schedule to the Income-tax Act, 1961 - legal fiction of vesting under section 7 of the Life Insurance Corporation Act, 1956 - deeming of inherited opening balance and its effect on actuarial surplus - refund of income-tax received by successor corporation - harmonious construction of overlapping statutory provisionsConstruction of rule 2(1)(b) of the First Schedule to the Income-tax Act, 1961 - legal fiction of vesting under section 7 of the Life Insurance Corporation Act, 1956 - deeming of inherited opening balance and its effect on actuarial surplus - refund of income-tax received by successor corporation - Whether the refund of income-tax received by the Life Insurance Corporation, being in respect of taxes paid by predecessor insurers prior to the appointed day, is allowable as a deduction in computing profits under rule 2(1)(b) by treating the refund as deemed included in the earlier inter-valuation period opening balance. - HELD THAT: - Section 7(1)-(2) of the LIC Act transfers and vests in the Corporation all assets and liabilities appertaining to the controlled business of predecessor insurers and creates a legal fiction that such rights and amounts are assets of the predecessor deemed transferred on the appointed day. The refund received by the Corporation arose because amounts due to the predecessor formed part of the assets transferred. Rule 2(1)(b) requires exclusion of any surplus or deficit 'included therein' which was made in any earlier inter-valuation period. Although the actual actuarial surplus of the Corporation could not physically reflect pre-formation transactions, the legal fiction of section 7(2) requires that such amounts be treated as part of the inherited opening balance of the Corporation and therefore as deemed to have been included in the earlier inter-valuation period. The rule must be construed harmoniously with section 7 so as to give full effect to the statutory vesting; lex non cogit ad impossibilia supports not requiring an impossible factual inclusion. The decision in Bombay Mutual Life Assurance Society Ltd. corroborates that amounts subsequently shown as part of surplus should not be taxed again. Applying these principles, the refund is to be treated as falling within the exclusion under rule 2(1)(b).The refund of income-tax received by the Corporation in respect of taxes paid by predecessor insurers is deemed to have been included in the earlier inter-valuation period and is allowable as a deduction under rule 2(1)(b).Final Conclusion: The appeal is allowed; the judgments of the Tribunal and the High Court are set aside, and the referred question is answered in favour of the assessee and against the Revenue. Issues Involved:1. Deductibility of income-tax refund received by the Life Insurance Corporation of India (LIC) during the inter-valuation period under rule 2(1)(b) of the First Schedule to the Income-tax Act, 1961.Issue-wise Detailed Analysis:1. Deductibility of Income-Tax Refund under Rule 2(1)(b):The core issue in this appeal was whether the sum of Rs. 29,39,959, being the refund of income-tax received by the LIC during the inter-valuation period, should be allowed as a deduction while computing the income of the assessee under rule 2(1)(b) of the First Schedule to the Income-tax Act, 1961. The relevant assessment year was 1963-64, and the accounting period ended on March 31, 1963.Contentions and Findings:- Assessee's Argument: The LIC contended that the entire amount of the income-tax refund was not includible in the revenue account and should not be treated as profits and gains for the assessment year under consideration. The LIC argued that since the taxes were paid by its predecessor before the formation of the Corporation, the refund should not be included in its revenue account.- Revenue's Argument: The Revenue argued that in computing the profits under section 44 read with rule 2(1)(b), only those adjustments to the surplus or deficit disclosed by the actuarial valuation which are permissible under the rule can be made. They contended that the refund related to taxes paid by the predecessor and not by the Corporation itself; hence, it should not be excluded under rule 2(1)(b).Tribunal's Decision: The Tribunal accepted the Revenue's contention, stating that only the portion of the refunds included in the surplus or deficit of the earlier inter-valuation period should be excluded. The Tribunal upheld that Rs. 2,73,50,939 of the refund was allowable under rule 2(1)(b) and disallowed the balance amount.High Court's Decision: The High Court upheld the Tribunal's decision, stating that rule 2(1)(b) is an artificial mode of computation of profits for life insurance business. It emphasized that the surplus to be deducted must have been shown as a surplus of the earlier inter-valuation period of the particular assessee, not its predecessor.Supreme Court's Analysis:- Legal Fiction of Section 7 of the LIC Act: The Supreme Court highlighted the provisions of section 7 of the LIC Act, which states that all assets and liabilities of the predecessor insurers are transferred to and vested in the LIC from the appointed day. This includes all rights, powers, and property related to the controlled business of the insurers.- Harmonious Construction: The Court emphasized the need for a harmonious construction of the provisions of the LIC Act and rule 2(1)(b). It concluded that the legal fiction enacted in section 7(2) must be taken to its logical conclusion. Therefore, the refund of the excess tax paid by the predecessor should be deemed to be included in the inherited opening balance of the Corporation.- Principle from Bombay Mutual Life Assurance Society Ltd. v. CIT: The Court referred to the principle that amounts forming part of the surplus in future actuarial valuations should not be taxed again, reinforcing that the refund should be considered as part of the surplus carried forward from the earlier inter-valuation period.Conclusion: The Supreme Court held that the amount of refund should be deemed to be included in the earlier inter-valuation period of the Corporation, thereby satisfying the requirement of rule 2(1)(b). The Court set aside the judgments of the High Court and the Tribunal, answering the question in favor of the assessee and against the Revenue.Final Judgment: The appeal was allowed, and the judgments of the High Court and the Tribunal were set aside. The question was answered in favor of the assessee, with no costs awarded.