TaxTMI 
TaxTMI 
1951 (4) TMI 23
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.... company's actuarial valuations were made in 1937, 1940 and 1946. The assessments for the assessment years 1939-40 and 1940-41 are governed by the valuation made in 1937, while those for the assessment years 1941-42, 1942-43, 1943-44, 1944-45 and 1945-46 are governed by the valuation made in 1940. The assessee company carries on only life insurance business. It is common ground that Rule 2(b) of the rules in the Schedule to the Indian Income-tax Act applies for the purpose of computing the assessee company's profits. 3. The first question that was raised in respect of the above assessments was that the profits of the assessee company in respect of its mutual activities were not liable to tax. The profits of the assessee company in respect of its profit-sharing policies were not subjected to tax prior to the assessment year 1939-40. This fact is not disputed by the Department. It was, however, contended on behalf of the Department that these profits were liable to tax by virtue of the amendments made to the Indian Income-tax Act in 1939. Reliance was placed particularly on Section 2(6C) of the Act which defines the word "income". It was argued on behalf of the assessee co....
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....e account the company took it direct to the balance sheet. If the said appreciation had been passed through the revenue account, the consolidated revenue account would have reflected the appreciation by increasing the amount of life assurance fund by that amount. As a result of the increase in the amount of the life assurance fund as at 31st December, 1937, the surplus also would have increased by the said amount of Rs. 2,72,946-0-10 if the actuary maintained the same assumed rate of interest for working out the net liabilities. A copy of the revenue account for the year ending 31st December, 1937, a copy of the balance sheet as at 31st December, 1937, a copy of the consolidated revenue account for the period commencing 1st January, 1934, and ending 31st December, 1937, a copy of the valuation balance sheet as at 31st December, 1937, and a copy of the actuary's report dated the 17th December, 1938, form part of the case. They are, however, not printed to reduce the cost of printing. The assessee company has been directed to produce the copies at the hearing of the reference. 6. In computing the surplus as at 31st December, 1937, the Income-tax Officer added the sum of Rs. 2,....
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.... valuation Report as at 31-12-1937: Rs. Rs. Rs. for 4 years (from 1934 to 1937) 22,96,068 Add for interim bonus paid 87,816 23,83,884 Less surplus of previous valuation: brought forward 1,70,139 22,13,745 Add appreciation of securities not credited to Revenue accounts 2,72,966 Surplus 24,86,711 Add Disallowables: Income-tax deducted at source 96,496 Depreciation debited: Building 36,937 Furniture 14,922 51,859 Provision for Income-tax 77,799 Souvenir and building expenses: 1935 6,273 1936 6,000 1937 6,000 18,273 2,44,427 Actuarial charges 1934 '35 '36 '37 For new tables 42....
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....re, arise are:- (1) Whether the surplus accruing to the assessee company from insurance transactions of a mutual character is assessable to tax under the Indian Income-tax Act? (2) Whether the appreciation in the value of securities which is not taken credit for in the revenue account or in the actuarial valuation balance sheet, but is only shown in the balance sheet, should be included in the 'surplus' for computing the profits of the assessee company, having regard to Rule 3(b) of the Schedule to the Indian Income-tax Act? (3) Whether under Rule 3(a) of the Schedule to the Indian Income-tax Act relief should be given to the assessee company on the basis of half the adjusted surplus determined under Rule 2(b) or half of the actual surplus as computed by the Income-tax Officer? Sir Jamshedji Kanga with N. A. Palkhiwalla, for the assessee C. K. Daphtary, Advocate-General, withG. N. Joshi, for the Commissioner JUDGMENT CHAGLA, C.J.--The assessee in this reference is the Bombay Mutual Life Assurance Co. Ltd. It is an incorporated company limited by guarantee and all the policy-holders are members of this company. Some policy-holders participate in the prof....
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....xation of the surplus arrived at as a result of the actuarial valuation. Sir Jamshedji's contention is that the schedule as its heading itself indicates is intended for the computation of the profits and gains of insurance business. The schedule is referred to in Section 10(7) of the Act which provides that notwithstanding anything to the contrary contained in Sections 8, 9,10, 12 or 18, the profits and gains of any business of insurance and the tax payable thereon shall be computed in accordance with the rules contained in the schedule to the Act. Sir Jamshedji's argument is that Sections 8, 9, 10, 12 or 18 are not charging sections. They merely deal with the mode of computing the profits of insurance companies. Therefore, according to Sir Jamshedji if the surplus doe snot constitute profits the schedule cannot be requisitioned to make what is not profits, profits. According to Sir Jamshedji in the first instance the taxing authorities must establish that the surplus is profits before they can rely on the schedule in order to find out how these profits can be computed. There would be considerable force in the argument of Sir Jamshedji if Section 2(6C) had not been enacted.....
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....ing to bring the surplus within the ambit of the taxing law has failed to express its intention in sufficiently clear language which would compel us to hold that the surplus to which the participating members are entitled is not subject to tax. The second question raised on this reference is with regard to a sum of Rs. 2,72,946 which is shown in the balance sheet as of the 31st of December, 1937, under the head investment reserve fund and a sum of Rs. 1,00,000 shown in the balance sheet as of the 31st of December, 1940, also under the head investment reserve fund. Now in order to understand the contention of the assessee it is necessary to understand how the actuarial valuation is made by the actuary on behalf of the company. A consolidated revenue account is prepared which would show on one side the amount of life assurance fund at the end of the period for which the consolidated revenue account is prepared. Then the actuary finds out what is the net liability of the company under the current policies and he fixes the liability on the basis of a rate of interest on the investment of the company which he expects the company to realise in coming years. After fixing the net liabil....
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....nt and was merely shown in the balance sheet as the investment reserve fund. But surely it cannot be left to the volition of the assessee to determine what the surplus should be in respect of any particular actuarial valuation. The surplus contemplated by Rule 2(b) is the surplus which is the result of the annual average of the surplus arrived at by adjusting the surplus or deficit disclosed by the actuarial valuation and, therefore, if in fact the sum of Rs. 2,72,946 should have formed part of the surplus on a proper actuarial valuation the mere fact that the assessee did not choose to take it to the revenue account can make no difference to his liability to tax on this amount. It is contended that if this sum of Rs. 2,72,946 had formed part of the life assurance fund it may be that the rate accepted by the actuary for working out the yield on the investment of the company might have been different and the result might have been that the surplus might have been less than what it would be by the addition of this sum of Rs. 2,72,946 to the life assurance fund. We cannot speculate on the possibility of the actuary reducing the rate of interest with the result that the surplus may not....
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.... sum of Rs. 2,72,946 which is the amount which we have considered when considering the second question bringing the total surplus to the figure of Rs. 24,86,711. To this amount they have added a sum of Rs. 2,51,196. This is made up of Rs. 96,496 for income tax deducted at source, Rs. 51,859 for depreciation and Rs. 77,799 set apart as provision for income-tax ; then there are three items debited to the building expenses account amounting in all to Rs. 18,273 ; then there are various small items of expenditure totaling up to Rs. 6,769. The total comes to Rs. 27,37,907; which is taken as the surplus for the purpose of Rule 2(b). But for the purpose of Rule 3(a) the amount taken into consideration is Rs. 22,96,068, the surplus shown in the valuation report. Now Sir Jamshedji's contention is that although for the purpose of arriving at the surplus under Rule 2(b) certain expenses may be added to it, for the purpose of deduction under Rule 3(a) every expenditure incurred by the assessee must be deemed to be expenditure on behalf of the policy-holders. Sir Jamshedji says that here we have not a company where there are shareholders in which case it might be stated that some expenditur....