TaxTMI 
TaxTMI 
1951 (11) TMI 19
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....ear 1943-44 that the Income-tax Officer seems to have formed the opinion that there is no element of life insurance in any of the contracts, Classes A to D entered into by the company. In making these four assessments the Income-tax Officer and the Appellate Assistant Commissioner came to the conclusion that the business of the assessee was purely annuity business and there was no life insurance element in it as distinct from the annuity business. It was contended before the Income-tax Appellate Tribunal by the respondent company that the above finding was incorrect and that the company was carrying on life insurance business also. On this point the Income-tax Appellate Tribunal came to the conclusion that the company's business included elements of life insurance business. The order on this point states:- "For example, in the policy forms for Class A, Class B and Class C the word used against item No. 5, namely event or events on the happening of which the pension shall become payable, are the death of the subscribers. The same words also appear in the policy form for the Joint Pensions Labels 1 ....
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.... Representative admitted before us that the calculations purported to have been made under Rule 2(a) were not strictly in accordance with the requirements of Rule 2(a) but it was explained that as the information necessary for determining income under Rule 2(a) was not available, an estimate was made and the income determined under Rule 2(b) was adopted for determining income under Rule 2(a). 5. Regarding R.A. No. 128 covering the assessment year 1946-47, the Income-tax Appellate Tribunal further stated that for the purposes of this year's assessment, the Income-tax Officer had based his calculations on the actuarial valuation as at 31st December, 1942, although the actuarial valuation as at 31st December, 1945, was available. The Department's plea was that as the assessee had based his Income-tax Return on 1942 valuation instead of the 1945 valuation, as he should have done, the Income-tax Officer adopted the same valuation. In sending the case back to the Income-tax Officer, the Income-tax Appellate Tribunal wanted this mistake also to be corrected. 6. Against this order of the Income-tax Appellate Tribunal the Commissioner of Income-tax has filed the present applic....
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....that these policies were an admixture of annuity and ordinary life assurance business and on the other expressed inability to separate the two. In the absence of such an yearly valuation an estimate was made taking as a yardstick the average annual surplus according to the last valuation. 3. Regarding 1946-47 assessment year the Department's position was that the company had not brought to the notice of the Department that a valuation had been made as at 31st December, 1945, that the assessee himself had based his return of income on the basis of 1942 valuation, and that this point had not been taken before the Appellate Assistant Commissioner. 4. As part of the enclosures the Income-tax Officer's letter dated 24th July, 1946, and the company's reply dated 30th July, 1946, may also be included. ALTERATION IN THE STATEMENT OF CASE We have considered this application. The only alteration in the statement of the case considered by us necessary is the addition of the word "strictly" after the words "were not" in line 21 on page 3 and further the Income-tax Officer's letter dated 24th July, 1946, and the company's reply thereto dated 30th July, 1946, refe....
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....nual average of the surplus arrived at by adjusting the surplus or deficit disclosed by the actuarial valuation made for the last inter-valuation period ending before the year for which the assessment is to be made, so as to exclude from it any surplus or deficit included therein which was made in any earlier inter-valuation period and any expenditure other than expenditure which may under the provisions of Section 10 of this Act be allowed for in computing the profits and gains of a business, whichever is the greater". Broadly speaking, the profits under the first method are the "incomings" received during the relevant year, less expenses, while under the second method they are only the average of the actuarial surplus, as disclosed by the last valuation subject to certain adjustments. Under the first method, an attempt is to be made to ascertain the actual profits of the year by reference to the receipts and disbursements. Under the second, no such attempt is to be made and the surplus disclosed by the last actuarial valuation, after making certain adjustments, is to be divided by the number of years for which the valuation was made and the amount thus arrived at is to be take....
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....2(a). If the word "annuities", occurring in the definition of that term, means insurance annuities and if the profits from the sale of such annuities are to be ascertained by reference to the actuarial valuation, which is the only way in which it can be done, the effect will be to import the actuarial method into Rule 2(a) and the mutual exclusiveness between that Rule and Rule 2(b) will be destroyed. Where a company carries on life insurance business of the ordinary kind and also annuity business, it will be destroyed partially, but where annuity business is the only business done, the destruction will be complete. Basically, the same method of computation will then have to be applied under both the sub-rules, in part in one case and wholly in the other, and the direction that the two sums ascertained by the two methods are to be compared with a view to taking the greater of them as the income of the year, will, to a certain extent at least, become unreal. The controversy under the principal question in this reference relates to this difficulty and the question is whether in the case of the assessee company which does only annuity business, the Income-tax Officer was right in taki....
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....nd 1946-47, and the same points have been raised in respect of all the assessments. What the points are will be better understood if we explain first how the assessments have been made. It appears that the assessments for the first three years are assessments on a remand made by the Appellate Assistant Commissioner, while the assessment for the year 1946-47 is an original assessment. The method adopted in making the assessments can be ascertained only from the original assessment orders in respect of the first three years which have not been included in the Paper Book and without reference to which neither the contentions of the parties nor the findings of the Appellate Tribunal are intelligible. It appears that in making the original assessments for the first three years, the Income-tax Officer first computed the profits under Rule 2(b) by reference to the last actuarial valuation which was a triennial valuation for the period ending on the 31st December, 1942. There is no question that this computation was correctly made. The Income-tax Officer next proceeded to make a computation under Rule 2(a) and for that purpose he had to ascertain the "gross external incomings" of the prece....
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....45 and 1945-46, were made in the same manner. From these assessments, the company appealed to the Appellate Assistant Commissioner. The Assistant Commissioner did not hold that if the provisions contained in the definition of "gross external incomings" for including therein the "profits on the sale or the granting of annuities" was applicable to the case, the method of computation adopted by the Income-tax Officer was still wrong. What he held was that the said provision applied only to "purely annuity business", but not to cases where the contract was "an admixture between an annuity and life insurance". In his opinion, the policies issued by the company required closer examination and, in that view, he remanded the cases to the Income-tax Officer for making fresh assessments after studying the various schemes evidenced by the policies. There can be no doubt that by "purely annuity business" the Assistant Commissioner meant annuities certain or at least annuities not dependent on human life. It appears that thereafter the attempt on each side was to adjust its case to the observations made by the Assistant Commissioner. The Income-tax Officer, before he took up the fresh ass....
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....ficer had held was that the company did no other life insurance business than granting of annuities, but that is certainly not what his order says. The Appellate Assistant Commissioner who had to deal with these four assessments, upheld them, but he did not proceed on the basis adopted by the Income-tax Officer. Before him, the company repeated its contention that it carried on a mixed type of business and also advanced a fresh contention that its business was ordinary life insurance business and not annuity business at all, the only difference being that the insured amount was paid in instalments instead of in a lump sum. Both these contentions were rejected by the Appellate Assistant Commissioner. He held that the business carried on by the company was life insurance business of the annuity type, as defined in the Insurance Act of 1938, and being thus life insurance business within the meaning of the Schedule, the sale and granting of annuities in which it consisted came within the purview of Rule 5(ii) and accordingly the profits of the company from the granting of annuities were to be included in the "gross external incomings". The view attributed to the Appellate Assistant Com....
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....ge that finding or propose any question about it for reference, but in his observations on the draft Statement of the Case, he expressly admitted that "the contracts A to D came under the expression 'life insurance business'". As for the company, it did not ask for a reference of any question at all and also did not raise any question about the nature of its business in its reply to the Commissioner's application. It is true that in his application for a reference the Commissioner said that what the Income-tax Officer had held was that the company did "no other life insurance business than the granting of annuities" and thereby he tried to explain away the inconsistency in the Officer's action in holding that the company's business had "no element of life insurance" in it and yet applying Rule 2 of the Schedule to the computation of its profits. That explanation, as I have already pointed out, is not acceptable, but the Tribunal held nothing contrary to the view wrongly attributed to the Income-tax Officer and its finding that the company's business was life insurance business "in a way" was not questioned by anybody. The explanation attempted by the Commiss....
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....s at all. In any event, it was further contended, the business relating to the A, B and C classes of policies was not annuity business. The first and the extreme part of this contention, it will be remembered, was the new contention advanced for the first time before the Appellate Assistant Commissioner, but there is no trace or hint of it in the appellate order of the Tribunal. As far as can be seen from that order, the contest before the Tribunal was as to whether the policies had or had not in them an element of life insurance. That contest might well arise on and out of the Income-tax Officer's order, but why the parties engaged in it before the Tribunal and why the order of the Assistant Commissioner, holding that the company's policies were life insurance policies, was totally ignored both by the Tribunal and the parties, are by no means clear. Be that as it may, the extreme contention of Mr. Mitra is clearly not within the question referred, for the alternatives contemplated by it do not cover a case of the company not doing any annuity business at all. In any event, I am of opinion that neither of the contentions of Mr. Mitra is tenable and the view taken by the Tri....
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....ay well be payments of an annuity: Bebb v. Bunny**; Re Cooper, Cooper v. Cooper***; Re Janes' Settlement, Wasmouth v. Janes#. It is thus clear that the payments stipulated for under the A, B and C policies are payments of annuities and in life insurance business includes, "annuity business, that is to say, the business of effecting contracts of insurance for the granting of annuities on human life"; as under the definition it does annuity business contemplated by the definition can only be business of the kind represented by those policies. The business done by the assessee company under the A, B and C policies is therefore the specific variety of life insurance business defined by the Act as annuity business and not life insurance business of the ordinary kind. The case of the D policies was hardly argued. Under them, the subscriber secures for himself a monthly pension commencing from a selected age and lasting upto the end of his life and there can be no doubt that what he secures is a life annuity commencing from the selected age. It need hardly be pointed out that the subsidiary provisions contained in all the policies as to the refund of the premium in certain circumstanc....
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....of "gross external incomings" meant not life insurance annuities, but annuities certain. According to him, the definition contemplated a case where a life insurance company, while carrying on life insurance business, also carried on a business of granting or selling annuities certain and it was only in such cases that the profits of the subsidiary business of granting annuities certain were to be included in the "gross external incomings" under the head "profits on the sale or the granting of annuities". The computation of the profits of such an annuity business would require no actuarial valuation and it was contended that since such construction of the definition would avoid the overlapping between Rules 2(a) and 2(b), it ought to be adopted as the practically feasible construction. In my opinion this contention is plainly untenable. Rules 1 to 5 of the Schedule contain provisions for the computation of the profits of not life insurance companies, but life insurance business. No business which is not life insurance business is germane to those rules of the Schedule, although such business may be carried on by a life insurance company. "Life insurance business", according to its d....
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....le 2(a) was not correctly applied and the direction of the Tribunal is that its provisions are to be followed "to the letter of the law", I may now examine in greater detail what the rule directs and what the Income-tax Officer has done. Under the rule, he had first to compute for each year "the gross external incomings" of the preceding year, as defined in Rule 5(ii), and then deduct therefrom the "management expenses" of that year, as defined in Rule 5(iii). In carrying out the first part of his task, he had to take in (i) interest and dividends (but not those on the annuity fund), (ii) fees, (iii) fines, (iv) incomings from all other sources (but not premiums received from policy-holders), (v) profits on the sale or the granting of annuities and (vi) profits from reversions. The complaint against the Income-tax Officer is that he did not take the incomings under the several heads, item by item, but confined himself to the total profits of the annuity business and that for those profits he adopted the annual average of the actuarial surplus. I shall take the two parts of the criticism separately. As regards the first part, in a case where apart from annuity business, the company ....
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.... from annuity business are only a part of the total profits of a business of life insurance. That, coupled with the specific provision that in taking interest and dividends those "on any annuity fund" are to be excluded-which must mean "interest and dividends on an annuity fund, if any "clearly suggests that the business contemplated in the main is a business of ordinary life insurance, but there may be an annuity business as well. It is to be noticed further that the profits of an annuity business are not only treated separately as a distinct item, but also differently. While Rule 2(a) read with Rules 5(ii) and 5(iii) purports to prescribe an investment income minus expenses method of computing the profits of a life insurance business, it at the same time lays down that one of the items to be included on the receipt side is profits from the sale or the granting of the annuities taken as a whole. The method of taking the individual items of certain kinds of receipt and deducting the expenses as defined in Rule 5(iii) from the sub-total which is generally directed by the rule is not applied to annuity business but, on the other hand, the direction with regard to such business is to ....
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....e Tribunal has put it, "allowed himself to be entirely guided by the actuarial valuation which helps to determine profits under Rule 2(b)". The criticism involves two points, viz., (i) whether the Income-tax Officer was justified in referring to the actuarial valuation report at all, and (ii) whether he was justified in making use of it in the way he did. As regards the first point the Tribunal has held that in applying Rule 2(a), no reference to the actuarial valuation report is permissible and it has directed the Income-tax Officer to make a fresh computation "without resorting to" the report. There can be no doubt that the view taken by the Tribunal is wrong. A business of granting annuities on human life is life insurance business and it is now a matter of elementary knowledge that the profits of such a business cannot be ascertained in the ordinary way (Commissioner of Income-tax, Bengal v. Himalaya Assurance Co. Ltd., per Lord Romer) and that they can be ascertained only by an actuarial valuation: Scottish Union and National Insurance Co. v. Smiles; Liverpool and London and Globe Insurance Co. v. Bennet. The obvious reason is that the amount of the premia receivable and the s....
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.... law. Under that law, the Crown has an option of assessing a life insurance company either under Case I of Schedule D, i.e., on the balance of its profits and gains, or under Case II, IV or V of that Schedule, i.e., on the profits determined by the investment income less expenses method. Broadly speaking, the first method corresponds to Rule 2(b) and the second method to Rule 2(a). When a company is assessed according to the second method, it is entitled to claim refund of tax on an amount equal to the expenses of management, but from such expenses must be deducted fines, fees, income from untaxed sources, profits from reversions [Income-tax Act, 1918, Section 33(1)(b)] and profits arising from the granting of annuities on human life [Finance Act, 1923, Section 16(1)]. The process under the English law is thus the converse of that under the Indian Act, for, whereas under the Indian law deductions are made when computing the assessable income, under the English law tax is first suffered on the gross income and a refund of tax on the amount of the allowable deductions is then granted. But what is important to notice is that for the purposes of the deduction, the profits of the annuit....
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....was doing both ordinary insurance and annuity business and the profits computed were the profits of the whole undertaking; in the second place, the income was computed on the balance of profit basis; and in the third, the method adopted in computing the profits was in fact to take the annual average of the actuarial surplus (see page 310 of the report). As regards the actual decision nothing contrary thereto has been done in the present case, for it is nobody's contention that in determining the actuarial surplus, the annuity claims paid were not deducted. I have already pointed out that the profits of an annuity business under Rule 2(a) are to be ascertained by the particular method of commercial accounting of which such profits are susceptible but that reference to the actuarial valuation can in no case be avoided. Yet, although such reference is required and the net actuarial liability on the relevant dates must always be taken into account, adoption of the annual average of the actuarial surplus will not always be necessary. Three kinds of cases are possible, viz., (i) where a company does both annuity business and insurance business of the ordinary kind, but maintains a....
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....l liability on policies still current. The latter can be ascertained only from the documents prescribed by Section 13, read with the Fourth Schedule, Part II, particularly the Summary and Valuation and the Valuation Balance Sheet, but they will give the figures for the beginning and the end of the particular year only when there is a yearly actuarial valuation. Where there is no such valuation, and no profit and loss account of the kind mentioned or of any kind has been submitted by the company, it is not possible for the Income-tax Officer to make any computations himself of the profits of the particular years with which he is concerned and he must necessarily fall back on the computation made by the actuary for the last valuation period and take the annual average of the surplus found by him, as representing the profits of each of the years. In the present case, there was no annual actuarial valuation and as the Appellate Assistant Commissioner has pointed out, no profit and loss account of any kind for the relevant preceding years was submitted by the company at all. In those circumstances, the Income-tax Officer, in my opinion, had no alternative to adopting the annual average ....