Appeal No 144 of 1953
Appeal from the Judgment and Order dated the 28th November 1951 of the High Court of Judicature at Calcutta in Reference No 40 of 1950
Sukumar Mitra section N Mukherjee with him for the appellant
C K Daphtary Solicitor General of India G N Joshi with him for the respondent
November 1
The Judgment of the Court was delivered by VENKATARAMA AYYAR J
This is an appeal from the judgment of the High Court of Calcutta on a reference under section 661 of the Income tax Act
The appellant is a Company which came into existence in 1870 as an unregistered association and in 1906 it was registered under the provisions of the Indian Companies Act
Its business consists exclusively in granting terminable pensions or annuities dependent on human life in favour of the subscribers or their nominees
The dispute in this appeal relates to the assessment of the profits of the Company for income tax for the periods 1943 1944 1944 1945 1945 1946 and 1946 1947
To follow the points in issue it will be useful to refer to the statutory provisions bearing on the matter
Section 211 of the  defines life insurance business as meaning the business of effecting contracts of insurance upon human life and as including the granting of annuities upon human life
 The business of the appellant Company would therefore be life insurance business as defined in section 211 of the 
Under section 107 of the Indian Income tax Act the profits and gains of any business of insurance are to be computed in accordance with the Rules in the Schedule to the Act
Rule 2 in the Schedule is as follows  The profits and gains of life insurance business shall be taken to be either 824 athe gross external incomings of the preceding year from that business less the management expenses of that year or bthe annual average of the surplus arrived at by adjusting the surplus or deficit disclosed by the actuarial valuation for 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 earlier intervaluation period and any expenditure which may under section 10 of this Act be allowed for in computing the profits and gains of a business whichever is the greater
Rule 5ii defines gross external incomings as including profits on the sale or the granting of annuities
These Rules came into force in 1939
In 1945 the assessment of the profits of the appellant Company for the years 1943 1944 1944 1945 and 19451946 was taken up by the Income tax Officer
Under Rule 2 what the Income tax Officer had to do was to compute the profits of the Company under the two heads a and b in that Rule and to adopt whichever was higher as assessable profits
What he actually did however is uncertain because the orders of assessment themselves have not been exhibited as part of the record
From the order of the Tribunal dated 5th March 1949 it appears that the Income tax Officer firstly determined the profits under Rule 2b on the basis of actuarial valuation after making certain adjustments and secondly on the basis of the figure arrived at under Rule 2b he worked out the profits under Rule 2a by making further adjustments
These orders were made on 14th July 1945
The company preferred appeals against them to the Appellate Assistant Commissioner who held by his order dated 30th November 1945 that the annuity business contemplated by Rule 5ii was purely annuity business that the business carried on by the Company was an admixture between an annuity and life insurance and that there had been no adequate investigation by the Income tax Officer of the nature of the business of the Company
He 825 accordingly remanded the case for further enquiry and for passing fresh orders of assessment
By the time the matters came up for further enquiry before the Income tax Officer in pursuance of the order of remand the assessment of the profits of the Company for the year 1946 1947 had also to be made
By order dated 23rd December 1946 the Income tax Officer determined the assessable profits of the Company for all the four years
He held that there was no element of insurance in the business of the Company and that the computation should be made under Rule 2a
Then he proceeded to assess the profits under that Rule precisely in the manner adopted by him in his order dated 14th July 1945
He first took the annual adjusted surplus calculated according to the actuarial valuation under Rule 2b and after making certain adjustments adopted it as the figure under Rule 2a
These orders were clearly erroneous
The statement that there was no element of life insurance in the policies was rightly hold to be erroneous by the Tribunal and has not been sought to be supported
If the annuity business of the Company was not life insurance business then even Rule 2a would have no application
The Income tax Officer was likewise in error in adopting the figures reached under Rule 2b as the basis for computing the profits under Rule 2a without an independent enquiry into the materials requisite under that Rule
The Company took up the matter in appeal to the Appellate Assistant Commissioner who by his order dated 26th September 1947 held that the annuity business of the appellant was life insurance business and that the profits should be computed under Rule 2
He further held that in the absence of a profit and loss statement for the previous year the Income tax Officer could only act on the materials furnished by the actuarial valuation as a guide for computation under Rule 2a
He therefore confirmed the orders of assessment
The Company then appealed to the Tribunal
By its order dated 5th March 1949 the Tribunal held that the business of the Company was in a way insurance 826 and that computation of the profits should be made in accordance with Rule 2 after determining the profits both under Rule 2a and Rule 2b
It took exception to the modus adopted by the Income tax Officer in computing the profits under Rule 2a and observed that he should have made independent enquiry under Rule 2a and determined the profits and not merely adopted the figures computed under Rule 2b as the basis for computing the profits under Rule 2a
The Tribunal accordingly remanded the matter to the Income tax Officer for further enquiry for determining the profits in terms of Rule 2a
Dissatisfied with this order the respondent applied for reference under section 661 of the Income tax Act and on that application the following questions were referred to the decision of the High Court 1
 Whether in the facts and circumstances of the case the business of the assessee Company consisted wholly of annuity business or whether it contained some elements of ordinary life insurance business as distinct from annuity business
Whether the Income tax Officer was justified in making an estimate for calculations under Rule 2a of the Schedule attached to section 107 of the Income tax Act
 The reference was heard by Chakravarti and section R Das Gupta JJ
They held that the first question did not arise on the order of the Tribunal but all the same expressed their opinion thereon in the following terms   Its business is holly a business of granting annuities on human life and no part of its business is ordinary life insurance business
 As we are not concerned with this matter in this appeal there is no need to further refer to it
On the second question they observed that business in annuities dependent on life as contrasted with annuities certain would be insurance business as defined in section 211 of the Act and that the profits of that business being gross external incomings as defined in Rule 5ii must be determined under Rule 2a
Dealing next with the objection of the appellant that there had been no proper determination of the 827 profits under Rule 2a they held that in the absence of profit and loss statements for the previous years and other materials the Income tax Officer had no course open to him except to adopt the figures computed under Rule 2b as a basis for computation under Rule 2a
The second question was accordingly answered in the affirmative
It is against this decision that the present appeal has been preferred on a certificate granted under section 66A 2
Mr Mitra for the appellant does not dispute the position that the business of the Company on annuity policies dependent on human life is insurance business as defined in section 211 and that the profits of the business should therefore be computed in accordance with Rule 2 in the Schedule to the Income tax Act
His contention is that the Income tax Officer had failed to make the computation in accordance with Rule 2a and that the Tribunal was right in remanding the matter for a correct computation of the profits in accordance with that Rule
This contention must in our opinion succeed
Under Rule 2 the Income tax Officer has to determine under clause a what the gross external incomings of the previous year were and deduct out of them the managing expenses for that year
He has also to find out in terms of clause b the annual average surplus on the basis of actuarial valuation in the manner prescribed therein
He has then to adopt whichever is higher as the assessable profits of the year
Now the complaint of the appellant is that while a computation was made under clause b no independent computation was made under clause a and that therefore the profits had not been determined as required by the Rules
It is a fact that no independent computation has been made under Rule 2a and therefore there has been no compliance with the Rule
The learned Judges declined to uphold this objection on the ground that the Company did not place any materials before the Income tax Officer so as to enable him to make a determination under Rule 2a and that in the absence of any materials the Income tax Officer was justified in acting on the actuarial report for computing the profits even under Rule 2a
828 The argument of the appellant is that having regard to the stand taken by either side at the stage of investigation and to the opinion expressed by the Income tax Officer that there was no element of insurance in the annuity business of the Company the true position under the Rules had been missed by all of them with the result that there was no attempt made to compute the profits in terms of the provisions of Rule 2a that the appellant had not wilfully failed to produce any evidence and that the observation of the learned Judges that no profit and loss statement had been produced was based on a misapprehension as no such statement had to be prepared by an Insurance Company
We must now turn to the statement of the case by the Tribunal to see what had really happened before the Income tax Officer for the last word on questions of fact is with it and that is binding on the Courts
Neither in the statement of the case by the Tribunal nor in its order of remand is there any finding that the requisite materials had been withheld by the appellant
The only statement bearing on this question in the order of the Tribunal is as follows   the Departmental Representative admitted before us that the calculations purported to have been made under Rule 2a were not in accordance with the requirements of Rule 2a but it was explained that as the information necessary for determining income under Rule 2a was not available an estimate was made and the income determined under Rule 2b was adopted for determining the income under Rule 2a
 What is referred to in this passage is only a statement of the Departmental Representative and not a finding
On the other hand the whole tenor of the judgment of the Tribunal is that there had been no determination of the profits under Rule 2a by reason of the erroneous view taken by the Income tax Officer as to the true nature of the business of the Company
If there had been a finding by the Tribunal that the requisite materials had been called for and withheld by the appellant the decision of the High Court would be unassailable and indeed that was the only one that 829 could have been reached
But in the absence of such a finding we are unable to see any ground on which the order of the Tribunal could be upset in a reference under section 661
When once it is found that there was no proper determination of the profits as required under Rule 2a and that was indeed conceded and there was no justification for it such as the High Court thought there was the only order that could properly be made was to remand the case for further enquiry and fresh disposal in accordance with law
That was the order which was passed by the Tribunal and that in our opinion was right
This appeal will accordingly be allowed and the second question referred by the Tribunal answered in the negative
The result of this will be that the Income tax Officer will proceed to enquire into the profits of the appellant Company for the years in question in accordance with the requirements of Rule 2
Under the circumstances we direct that the parties do bear their respective costs both here and in the High Court
Appeal allowed


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