Appeals Nos 206 to 210 of 1964
Appeals from the judgment and orders dated September 26 1961 of the Calcutta High Court in income tax Reference No 24 of 1957
Niren De Additional Solicitor General Ganapathy Iyer and RN Sachthey for the appellants
Sampat lyengar BRL Iyengar and DN Gupta for the respondents
The Judgment of the Court was delivered by Sikri J
These appeals by certificate granted by the High Court of Calcutta under section 66A2 of the Indian Income Tax Act 1922 are directed against the judgment of the said High Court answering two questions referred to it against the Revenue
The questions are 1 Whether the profit arising to the assessee company from miscellaneous insurance transactions of mutual character was assessable under the Indian Income Tax Act and 2 If the answer to question No 1 is in the affirmative whether on the facts and in the circumstances of the case the balance of the profits as disclosed in the assessee company s profit and loss account after deducting the various reserves should be the taxable profits within the meaning of Section 26C read with Rule 6 of the Schedule of the Indian Income Tax Act
The relevant facts and circumstances are as follows The respondent
the Calcutta Hospital and Nursing Home Benefits Association Limited hereinafter referred to as the assessee is a mutual insurance concern carrying on miscellaneous insurance business
The principal objects for which the Association was established were 1 By means of insurance on the mutual principle to provide or help towards providing anywhere in the world for the expense of accommodation and treatment in hospitals 634 and nursing homes and of private nursing for members and their dependants 2 To organise insurance on the mutual principle under Rules and Regulations to be framed for the purpose with the object of providing such hospital medical surgical nursing and allied services as before mentioned of supporting and assisting hospitals in Calcutta or elsewhere of relieving members or then dependants in whole or in part from the payment of hospital and other charges while in receipt of such hospital medical surgical nursing and allied services and of reimbursing and repaying to members or their dependants in whole or in part all payments for such hospital and other charges which they may have incurred or made which in receipt of such hospital medical surgical nursing and allied services
The members were required to pay a monthly premium but there was a waiting period of four months for all bench its other than maternity for which the waiting period was one year
Benefits and privileges became available as from the first day of the fifth calendar month of registration in respect of Maternity the 13th month and continued to be available thereafter so long as the subscriptions were not in arrear
These appeals are concerned with the assessment years 1949 50 to 1953 54 and the relevant accounting years ended on December 31 1948 December 31 1949 December 31 1950 December 31 1951 and December 31 1952 respectively
In the statement of the case the Appellate Tribunal describes the accounts maintained by the assessee thus The assessee s published revenue accounts contained three classifications viz i miscellaneous insurance business revenue account ii profit and  loss account and iii profit and loss appropriation account
In the miscellaneous insurance business revenue accounts were included subscriptions from the members gross premia from the members and from such amounts were deducted general reserve and or contingency reserve
Reserve so made were transferred to the balance sheet as credit accounts
The claims paid or payable and the expenses of management were deducted from this revenue account
The balance of the miscellaneous insurance business revenue account was transferred to the profit and loss account to the credit of which was further added interest on investments and the debits included provision for taxation interest on loan contribution to provident fund and depreciation
The balance of this account being the balance of profit and loss account was transferred
to the profit and toss appropriation account
Therefrom in one year ended 635 31st December 1949 further deduction was made against contingency reserve and the balance either loss or profit was carried forward
 We may now set out the facts regarding 1949 50 assessment
It is not necessary to state the facts regarding other assessment years
The Income Tax Officer for the assessment year 1949 50 added the reserve for taxation Rs 1000  to the net profit as per profit and loss account which showed a profit of Rs 1653  and after deducting depreciation he assessed the total income at Rs 2651 
On appeal the Appellate Assistant Commissioner upheld the order of the Income Tax Officer
Following the decision of the Bombay High Court in Bombay Mutual Life Assurance Society Ltd vs Commissioner of Income Tax Bombay City 1 he held that the income was assessable to income tax and that under Rule 6 of the Schedule to the Income Tax Act it was permissible for the Income Tax Officer to add the reserves to the income disclosed in the profit and loss account
On further appeal the Appellate Tribunal found no difficulty in holding that section 26C of the Income Tax Act according to its true interpretation included income or the profits of any insurance company of mutual assurance and the said profits shall be taken to be balance of the profits disclosed by the annual accounts
Regarding the reserve the Tribunal held that the provision for reserve was not an expense to be deducted from the profits disclosed by the assessee company in order to arrive at the profits within the meaning of r 6 and the Income Tax Officer was entitled to add back the reserve
The High Court held that the surplus miscalled profit arising to the assessee company from the miscellaneous insurance transactions of mutual character was not assessable under the Indian Income Tax Act and that in any event the assessee was entitled to deduct the reserve
The High Court distinguished Bombay Mutual Life Assurance Society Ltd vs Commissioner of Income Tax Bombay City1 on the ground that the Bombay decision was a life insurance decision and although it was a mutual life insurance society nevertheless different and special rules applied to life insurance and the rules with which the Bombay decision was concerned were rules 2 and 3 which did not apply to mutual insurance other than life
The second point of distinction according to the High Court was the very distinctive clauses in the memorandum of objects and articles of association of the assessee
Section 26C at the relevant time defined income  to include    profits of any business of insurance carried on by a mutual insurance association computed in accordance with Rule 9 in Schedule
 We may mention that another section 26C was substituted by Act XV of 1955 and the wording substituted by this Act in 1 20 ITR189
636 sub clause vii is the profits and gains of any business of insurance carried on by a mutual insurance association or by a co operative society computed in accordance with rule 9 in the Schedule
 But nothing turns on the change of the language as far as a mutual surance association carrying on business of insurance is concerned
Rule 9 of the Schedule reads thus  9
These rules apply to the assessment of the profits of any business of insurance carried on by a mutual insurance association  
Rule 6 with which we are concerned reads thus The profits and gains of any business of insurance other than life insurance shall be taken to be the balance of the profits disclosed by the annual accounts copies of which are required under the  to be furnished to the Superinte ndent of Insurance after adjusting such balance so as to exclude from it 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
Profits and losses on the realisation of investments and depreciation and appreciation of the value of investments shall be dealt with as provided in Rule 3 for the business of life insurance
 The Additional Solicitor General appearing on behalf of the appellant contends that the Bombay High Court was right in holding that section 26C imports into the definition of income  which is to be found in the charging section 3 these profits which may not be profits in the ordinary sense of the term but which are made profits by reason of Rule 2 of the Schedule because Rule 2 really gives an artificial extension to the meaning of the word profits  when it says that profits and gains shall be taken to be 
Therefore a new class of artificial income is created by this rule and that artificial income is included into the meaning of Section 3 by reason of this rule
 Mr Sampat Ayyangar learned counsel for the assessee relying on the decision of the House of Lords in Arvshire Employers Mutual Insurance Association Ltd vs Commissioner of Inland Revenue1 contends that the Legislature has not made its intention clear because it has used the word profits  in section 26C under a misapprehension that the surplus of a mutual insurance company 1 637 carrying on insurance business is profits
He says that in Arvshire Employers Mutual Insurance Association case1 the Legislature had proceeded on a similar misapprehension and the House of Lords held that section 311 of the Finance Act 1933 23  24 Geo
Vc 19 did not succeed in making the profits of a mutual insurance company taxable
He urges that we should follow this precedent
He relies on the following passage from the speech of Lord Macmillan at p 347 The structure of Section 311 is quite simple
It assumes that a surplus arising from the transactions of an incorporated company with its members is not taxable as profits or gains
To render such a surplus taxable it enacts that the surplus although in fact arising from transactions of the comp any with its members shall be deemed to be something which it is not namely a surplus arising from transactions of the company with non members
The hypothesis is that a surplus arising on the transaction of a mutual insurance company with non members is taxable as profits or gains of the company
But unfortunately for the Inland Revenue the hypothesis is wrong
It is not membership or non membership which determines immunity from or liability to tax it is the nature of the transactions
If the transactions are of the nature of mutual insurance the resultant surplus is not taxable whether the transactions are with members or with non members
 He further relies on the observations of Lord Macmillan that the Legislature has plainly missed fire
Its failure is perhaps less regrettable than it might have been for the Sub section has not the meritorious object of preventing evasion of taxation but the less laudable design of subjecting to tax as profit what the law has consistently and emphatically declared not to be profit He says that similarly in this case the Legislature has plainly missed fire
In order to appreciate the scope of that decision it is necessary to set out the relevant part of section 31 of the Finance Act 1933
Section 311 enacted 31 1 In the application to any company or society of any provision or rule relating to profits or gains chargeable under Case I of Schedule D which relates to trades  any reference to profits or gains shall be deemed to include a reference to a profit or surplus arising from trans 1T C 331
638 actions of the company or society with its members which would be included in profits or gains for the purposes of that provision or rule if those transactions were transactions with non members and the profit or surplus aforesaid shall be determined for the purposes of that provision or rule on the same principles as those on which profits or gains arising from transactions with non members would be so determined
 The Section adopted the device of a deeming provision
The profits arising from the transactions of a company or society with its members were deemed to be profits arising from transactions with non members
Parliament assumed that the latter were taxable
As this hypothesis was wrong Parliament failed in its objective
But the Indian Legislature did not adopt any deeming device
It defined income  to include profits of any business of insurance carried on by a mutual insurance association
What are those profits is then explained by reference to the Schedule
The effect of this in substance is to incorporate r 6 into the definition
If the legislature had defined income to include profits of insurance carried on by a mutual insurance association computed according to r 6 very little would have remained arguable
It is however urged that in r 6 also the word profits  means taxable profits
But r 6 speaks of balance of profits as disclosed in the accounts submitted to the Superintendent of Insurance
The Superintendent of Insurance is not concerned with taxable profits
What he is concerned with inter alia is the balance of profits for the purpose of the 
It is then urged that in the definition the word surplus  should have been used instead of profits
But the word surplus  has a technical significance in the  and it seems to us that it would have been inexpedient to use the word surplus 
At any rate
r 6 would then have been drafted differently
It is finally urged that this is a taxing statute and we should give a strict construction to the definition
The definition could still operate if we interpret it in a narrow sense as to include profits from investments and other activities of a mutual insurance company
It is said that this definition was inserted to make it clear that such profits would be taxable
We cannot accede to this contention
It was well established that such profits would be taxable apart from the new definition We cannot understand why it was necessary 639 to make it doubly clear
Moreover r 6 deals with balance of profits which would include profits arising from the business of insurance of a mutual character
It deals with balance of profits as a composite thing
It is impossible to dissect this composite thing
If we were to accede to the assessee s contention the definition would serve no purpose whatsoever
It seems to us that the Legislature has evinced a clear intention to include the balance of profits as computed under r 6 within the word income  in section 3 of the Income Tax Act and  accordingly such balance of profits is taxable
We are unable to agree with the High Court that the Bombay case is distinguishable in principle
It is true that the Bombay High Court was concerned with r 2 but when we go to the schedule and find out what is the balance of profits or surplus that has been made taxable it does not make any difference to the construction of section 26C whether it is r 2 that is applied or r 6
Therefore disagreeing with the High Court we answer the first question in the affirmative
This takes us to the second question
The answer to this question depends on the true interpretation of r 6
It seems to us that on its language the Income Tax Officer is bound to accept the balance of profits disclosed by the annual accounts copies of which have been submitted to the Superintendent of Insurance
He can only adjust this balance so as to exclude from it any expenditure other than expenditure which may under the provisions of section 10 be allowed for in computing the profits and gains of a business
We are not concerned here with the latter part of r 6 dealing with profits and losses on the realisation of investments and depreciation and appreciation of the value of investments
This Court examined the provisions of the in connection with the Schedule in Pandvan Insurance Company Ltd Madurai vs The Commissioner Income Tax Madras1 and arrived at the conclusion that the makes detailed provisions to ensure the true valuation of assets and the determination of the true balance of profits of an insurance business and that r 6 should be construed in the light of this background
Examining r 6 in the light of this background it seems to us that the intention of the rule is that the balance of profits as disclosed by the accounts submitted to the Superintendent of Insurance and accepted  by him would be binding on the Income Tax Officer 640 except that the Income Tax Officer would be entitled to exclude expenditure other than expenditure permissible under the provisions of section 10 of the Act 
It is common ground in this case that these serves which were added to the balance of profits were not expenditure
Accordingly agreeing with the High Court we answer the second question in the affirmative 
In the result the appeals are accepted in part
Parties will bear their own costs in this Court
Appeals partly allowed 


Summary:
The respondent Association was a mutual insurance concern carrying on miscellaneous insurance business
The objects of the Association included provision of help anywhere in the world in respect of expenses of accommodation and treatment in nursing homes for members and their dependents
The members were required to pay a monthly premium
In the assessments for the assessment years 1949 50 to 1953 54 the Income tax Officer taxed the reserves for payment of income tax which had been debited to the profit and loss account
The Appellate Assistant Commissioner as well as the Appellate Tribunal upheld the Income tax Officer s order
The questions arising in the proceedings were 1 whether the balance of profits of a mutual insurance concern were included in the definition of the word income  and if so 2 whether reserves for income tax could be taxed
At the instance of the respondent a reference was made to the High Court
That Court held that the surplus miscalled profit arising to the company from the miscellaneous insurance transactions of mutual character was not assessable under the Indian Income tax Act and that in any event the assessee was entitled to deduct the reserves
The Revenue appealed to this Court with certificate
HELD i In section 26C the Legislature has evinced a clear intention to include the balance of profits under r 6 within the meaning of the word income  in 6 3 of the Indian Income Tax Act and accordingly such balance of profits is taxable
639B C Ayrshire Employers Mutual Insurance Association Ltd vs Commissioner of Inland Revenue  distinguished
Profits in r 6 cannot be said to mean taxable profits
Rule 6 refers to balance of profits  as disclosed in the accounts submitted to the
Superintendent of Insurance
The Superintendent of Insurance is not concerned with taxable profits
What he is concerned with is the balance of profits under the Insurance Act
638E F Nor can the term profits  in r 6 be interpreted in the narrow sense of including only profits from investments and other activities of a mutual insurance company
Rule 6 deals with balance of profits as a composite thing
It is impossible to dissect this composite thing
639A B Bombay Mutual Life Assurance Society Ltd vs Commissioner of Income tax Bombay City  affirmed
ii The Insurance Act makes detailed provisions to ensure the true valuation of assets and the determination of the true balance of profits of an insurance business and r 6 should be construed in the light of this background
639G H 633 Pandyan Insurance Company Ltd Madurai vs The Commissioner Income tax Madras   referred to
Examining r 6 in the light of this background
the intention of the rule seems to be that the
balance of profits as disclosed by the accounts submitted to
the Superintendent of Insurance and accepted by him would be binding on the Income Tax Officer except that the Income Tax Officer would be entitled to exclude expenditure other than expenditure permissible under the provisions of section 10 of the Act
In the present case it was common ground between the parties that the reserves which were added to the balance of profits were not expenditure
The High Court rightly held that the reserve for income tax could not be taxed
639H 640B