AI OCR 
TaxTMI 
TaxTMI 
TaxTMI 
1963 (12) TMI 5
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....ance business and that is in these terms : "Notwithstanding anything to the contrary contained in section 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 this Act." Rule 2 in the Schedule lays down in clauses (a) and (b) two different methods for calculating the profits and gains of a life insurance business and provides that whichever of these two methods results in larger profits being arrived at, has to be adopted. The relevant portion of rule 2 is in these terms : " 2. The profits and gains of life insurance business shall be taken to be either--- (a) the gross external incomings of the preceding year from that business less the management expenses of that year, or (b) the annual average of the surplus arrived at by adjusting, the surplus or deficit disclosed by the actuarial valuation made in accordance with the Insurance Act, 1938 (IV of 1938), in respect of the last intervaluation 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 earl....
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....ransfer the assessee's surplus, on which the tax had to be assessed under rule 2, was reduced. The Income-tax Officer thought that this transfer made the balance in the investment reserve fund exceed the deficit disclosed on the book values of the securities in that fund by Rs. 30,420. He also checked up the market value of the securities and came to the conclusion that they had been undervalued in the books by the assessee. In his view, the investment reserve fund was for the aforesaid reasons actually in excess by Rs. 1,89,185 of the amount which it should have had to its credit. He, therefore, directed that the transfer from the revenue account to the investment reserve fund be reduced by Rs. 1,75,000. The assessee appealed to the Appellate Assistant Commissioner and be directed that the transfer to the investment reserve fund be reduced by Rs. 1,45,000 instead of Rs. 1,75,000. On a further appeal by the assessee to the Income-tax Appellate Tribunal, it was held that the adjustment could only be made under the proviso to rule 3(b) of the Schedule and that that rule required a prior consultation with the Controller of Insurance, and as that had not been made, the adjustment was....
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.... scheme provided in clauses (a), (b) and (c) of rule 3. Under rule 2(b) of the Schedule the Income-tax Officer has, therefore, no power to change the figures in the accounts of the assessee. He has to take the surplus as disclosed by the actuarial valuation made by the assessee under the Insurance Act and then to arrive at the average mentioned in the rule. He has the power to exclude any surplus or deficit included in the actuarial valuation in respect of an earlier inter-valuation period and any expenditure other than an expenditure which may under section 10 of the Act be allowed. What the Income-tax Officer in the present case did does not come within rule 2(b). This is not disputed. It is furthermore not in dispute that apart from the provisions in rule 3 of which only clause (b) is relevant for our purpose, there is no other provision in the Schedule which authorises an Income-tax Officer to make adjustments in the actuarial valuation made by the assessee. When we come to rule 3(b) we find that the first part of it lays down that it shall be obligatory on the Income-tax Officer to allow certain amounts written off or reserved by the assessee as a deduction and to include in....
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....urance business are fully controlled by the Controller of Insurance under the provisions of the Insurance Act. They are checked by him. He has power to see that various provisions of the Insurance Act are complied with by an insurer so that the persons who have insured withlit are not made to suffer by mismanagement. A tampering with the accounts of an insurer by an Income-tax Officer may seriously affect the working of insurance companies. But apart from this consideration, we feel no doubt that the language of section 10(7) and the Schedule to the Income-tax Act makes it perfectly certain that the Income-tax Officer could not make the adjustment that he did in these cases. It may be pointed out that the question referred was confined to the powers of the Income-tax Officer under rule 3(b) of the Schedule. Indeed, learned counsel for the assessee did not contend to the contrary. The High Court, as may have been noticed, held that the proviso to rule 3(b) was not intended to cover cases like the present. It would appear, therefore, that the High Court thought that the Income-tax Officer had no power under the rule to make the adjustment. It however none the less answered the ques....
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....vided adequate cover as contemplated by rule 3(b) of the rules under section 10(7) of the Insurance Act ". On appeal the Appellate Assistant Commissioner reduced the figure of Rs. 1,89,186 to Rs. 1,61,770. He also reduced the amount of Rs. 1,75,000 to Rs. 1,45,000 With this modification (amorg some others) he dismissed the appeal. Against the order of the Appellate Assistant Commissioner appeals were filed respectively by the Income-tax Officer, Companies Circle (1), New Delhi-1, and the Bharat Insurance Co. Ltd. There were thus six appeals in respect of the three assessment years. The Tribunal held by its order dated October 23, 1956, as follows : " The Income-tax Officer objects to the relief given by the Appellate Assistant Commissioner while the assessee objects to the adjustments which were made by the Income-tax Officer in toto. The proviso to rule 3(b) of the Schedule appended to section 10(7) clearly lays down that the Income-tax Officer has to consult the Controller of Insurance before he becomes Competent to make any adjustments to the actuarial surplus disclosed by the valuation. In this case no consultation with the Controller of Insurance appears to have been made. T....
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....under section 9 of the Life Insurance Corporation Act. In these appeals, it is contended that the High Court was in error in the conclusion it reached and the answer to the question should have been in favour of the Life Insurance Corporation and against the department. Before dealing with this case, a reference ip brief to the scheme of the Insurance Act and to the rules framed under section 10(7) of the Income-tax Act for assessment of insurance companies is necessary. By section 11 of the Insurance Act, every insurer in India and every foreign insurer in respect or the insurance business transacted by him in India is required to prepare at the expiration of each calendar year with reference to that year (a) a balance-sheet, (b) a profit and loss account and (c) a revenue account. Special forms are prescribed and the Schedules to the Act provide by regulations what should be shown in these accounts. The balance-sheet, profit and loss account, revenue account, including accounts which the other provisions require the insurer to prepare, must then be audited by an auditor. By section 13 of the Insurance Act, every insurer, carrying on life insurance business, is required, at inte....
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.... market prices in those cases where accrued interest is included elsewhere in the balance-sheet ; (c) how the value of such of the above-mentioned classes of assets as has not been ascertained from published quotations has been arrived at. The revenue account has to be prepared in four forms of which Form D shows the revenue account applicable to life insurance business in respect of the year and the other three documents are statements of life insurance policies for the same year (Form DD), the additions to and deductions from policies (Form DDD) and particulars of policies forfeited or lapsed in the year (Form DDDD). The regulations for the preparation of the abstract of the report of the actuary are to be found in the Fourth Schedule to the Insurance Act. This Schedule is in two parts. The second part lays down inter alia that every abstract shall show the average rates of interest yielded by the assets, whether invested or uninvested, constituting the life insurance fund for each of the years covered by the valuation period and regulation a of part I lays down how the average rate of interest yielded in any year by the assets constituting the life insurance fund must be Cal....
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....ore 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 a and any expenditure other than expenditure which may undder the provisions of section 10 of this Act be allowed for in computing the profits and gains of a business whichever is greater. In this case the second method was applicable. Rule 3 (in so areas it is relevant for our purpose) then provides as follows : " (b) any amount either written off or reserved in the accounts or through the actuarial valuation balance-sheet to meet depreciation of or loss on the realisation of securities or other assets shall be allowed as a deduction, and any sums taken credit for in the accounts or actuarial valuation balance-sheet on account of appreciation of or gains on the realisation of the securities or other assets shall be included in the surplus : Provided that if upon investigation it appears to the Income-tax Officer after consultation with the Controller of Insurance that having due regard to the necessity for making reasonable provision for bonuses to participating policy-holders and for contingencies, the rate....
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....so as artificially to reduce the surplus, he may make such adjustments to the allowance for depreciation as shall increase the surplus to a figure which is fair and just. The proviso further says that in doing so, the necessity for making reasonable provision for bonuses to participating policy-holders and for contingencies must be taken into consideration. Put in simple language, it means that the Income-tax Officer can, after investigation and consultation with the Controller of Insurance, increase the surplus to a figure which is fair and just. But this action is open to him only if the valuation of the securities and other assets has been artificially manipulated to reduce the surplus by making the rate of interest or other factor employed in determining the liability in respect of outstanding policies inconsistent with the valuation of the securities. Further, the Income-tax Officer, before he makes any change, must pay due attention to the necessity for making reasonable provision for bonuses to participating policy-holders and contingencies. The power which is conferred on the Income-tax Officer under the proviso clearly has its limitations, and is hedged in by conditions.....
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....sp; Rs. Rs. -------------------------------------------------------------------------- Net liability under Balance of life business as shown assurance fund as in the summary shown in the and valuation 5,19,42,924 balance-sheet 5,45,88,286 Surplus 26,45,362 ....
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....of the alleged depreciation amounting to Rs. 22,64,733 which had been worked out by the assessee-company and observed that after the transfer of Rs. 18,75,000 to the investment reserve fund the balance to the credit of the fund was Rs. 22,95,154 when it need not have been more than Rs. 22,64,733 and this showed an excess of Rs. 30,420. This excess he disallowed. He then found out the market rate of stocks and shares in the fund and came to the conclusion that some of these were under-valued by a sum of Rs. 1,58,756. He held that an excess of Rs. 1,89,186 was transferred to the investment reserve fund from the surplus. According to him, the surplus of Rs. 26,45,362 shown in Form I required to be adjusted and be added a lump sum of Rs. 1,75,000 to the surplus. In other words, the total depreciation claimed under rule 3(b) as an allowance was not accepted. The sum of Rs. 1,75,000 was reduced by the Appellate Assistant Commissioner to Rs. 1,45,000 and it was altogether cancelled by the Income-tax Appellate Tribunal. The learned judges of the High Court in dealing with this matter observed that the excess of Rs. 30,420 was not an actual depreciation and no provision need have been mad....
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....necessary to meet depreciation or loss that has actually occurred or has actually been suffered, and to determine this he must have the correct valuation of the securities." In the result, they held that the Income-tax Officer had " full jurisdiction " to deal with the matter in the manner employed by him. Mr. Setalvad on behalf of the Life Insurance Corporation pointed out that the actuarial valuation balance-sheet in Form I had determined the surplus by deducting from the life insurance fund as on the valuation date the net liability under the life insurance business. He pointed out that in working out this liability the actuary had assumed the rate of interest at 3% per annum and to arrive at this figure, he had taken into consideration the average interest yield for the four years covered by the valuation. The interest yield thus was obtained by properly following the procedure laid down by regulation 3 of Part 1 of the Fourth Schedule to the Insurance Act. He contended that if the interest yield were found to be lower by reason of the reduction of the amount of depreciation, the liability for the policies, as calculated in the accounts, would be disturbed and the liability....
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....harges are met. The rules which have been quoted lay down two different methods of ascertaining profits. Rule 2(a) merely compares the gross external incomings of the preceding year with the management expenses. Rule 2(b), contemplates the annual average of the surplus of deficit disclosed by actuarial valuation. In the present case the first limb of rule 2 did not apply. So the annual average of the surplus found by the actuary had to be taken and from it the surplus of the last inter-valuation period had to be deducted as also expenditure allowable under section 10 of the Income-tax Act. This is the basic calculation and they were followed. Certain special limitations indicated in the proviso to rule 2 and rule 3(a) are not relevant for the present case. Under the main part of rule 3(b) certain special deductions and additions must be made to the annual average of the surplus determined under the second rule. Since the life fund is held in securities and the price of stocks and shares fluctuates, provision has been made in rule 3(b) to make adjustments. Rule 3(b) in its main part speaks of adjustments on the basis of the accounts and amounts as entered in the accounts determine....