Case: Life Insurance Corporation Ltd Vs. Commissioner Of Income-Tax, Delhi &Rajasthan

Sarkar, J. (for himself and J. C. Shah J.)1. We think that these appeals should be allowed.2. The appeals relate to the assessment to income-tax of the income of the life insurance business of the Bharat Insurance Co., Ltd. now merged in the Life Insurance Corporation Ltd. The assessment years concerned are 1952-53, 1953-54 and 1954-55. The Income-tax Act, 1922 makes special provision for assessment of the income of insurance business. The Income-tax Officer in making the assessment orders made some adjustments in the accounts which the appellant contends, he has no power to do under these provisions. The question in these appeals is whether he had the power to make these adjustments.3. Sub-section (7) of S. 10 of the Act makes the special provision for the assessment of the income of insurance business and that is in these terms :"Notwithstanding anything to the contrary contained in Ss. 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 cls. (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 R. 2 is in these terms :Rule 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 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."Then follows a proviso which sets out a certain limit for management expenses to be allowed but that is not material for this judgment. It is not in dispute that the method laid down in cl. (b) would in the present cases produce the larger income and had, therefore, to be followed. The relevant part of R. 3 of the Schedule on which the arguments in these cases turn may now be set out.Rule 3. "In computing the surplus for the purpose of R. 2-(a) .... .... .... .... ....(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 of interest or other factor employed in determining the liability in respect of outstanding policies is materially inconsistent with the valuation of the securities and other assets so as artificially to reduce the surplus, such adjustment shall be made to the allowance for depreciation of, or to the amount to be included in the surplus in respect of appreciation of, such securities and other assets, as shall increase the surplus for the purposes of these rules to a figure which is fair and just."No other rule in the Schedule was referred to at the bar.4. What had happened was this. The assessee had debited a sum of Rs. 18,75,000/- to its Consolidated Revenue Account and credited it to the Investment Reserve Fund. There is no dispute that the assessee had to maintain the Investment Reserve Fund. The transfer had been made because the assessee thought that the securities in respect of which the Investment Reserve Fund had been constituted having depreciated the fund had become inadequate. By this transfer the assessees surplus, on which the tax had to be assessed under R. 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 he 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 R. 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 wholly illegal. The Tribunal, therefore, ordered that the transfer of Rs. 18,75,000/- made by the assessee as aforesaid had to be accepted as a whole.5. The Commissioner then applied to the Tribunal under S. 66(1) to state a case but that having been rejected he moved the High Court of Punjab for an order on the Tribunal to state a case under S. 66(2) of the Act. The High Court made an order on the Tribunal and the latter thereupon stated a case setting out the facts earlier mentioned and referring the following question to the High Court for its decision :"Whether upon the facts found by the Tribunal, the Income-tax Officer had in this case jurisdiction to proceed to make adjustment in terms of R. 3(b) of the Schedule to the Indian Income-tax Act."6. The High Court took the view that the matter did not come within R. 3(b) of the Schedule and, therefore, no question of consultation with the Controller of Insurance arose. In the High Courts opinion the Income-tax Officer had not been deprived of the authority of correcting errors of the kind that had been detected in these cases and the proviso was not intended to cover those cases where, as in the present, the assessee in order to evade income-tax, undervalued his securities. The High Court, therefore, answered the question in the affirmative. The present appeals are against this judgment of the High Court.7. It seems to us that the decision of the High Court is clearly erroneous. Under R. 2 of the Schedule the Income-tax Officer has to compute the profits and gains of a life insurance company at the greater of the two methods of assessments mentioned in cls. (a) and (b). There may be no restriction upon his jurisdiction in the computation of profits and gains under cl. (a) but under cl. (b) the computation can be made within a limited field. He has to accept the annual average of the surplus disclosed by the actuarial valuation made in accordance with the Life Insurance Act in respect of the last inter-valuation period, so as to exclude therefrom any surplus or deficit included therein which was made in the earlier inter valuation period, and expenditure not allowable under S. 10 in computing the profits. This is made explicit by R. 3 which makes it obligatory upon the Income-tax Officer to make the computation of the surplus for the purpose of R. 2 according to the scheme provided in cls. (a), (b) and (c) of R. 3.Under R. 2(b) of the Schedule the Income-tax Officer has, therefore no power to change the figures in the account 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 S. 10 of the Act be allowed. What the Income-tax Officer in the present case did does not come within R. 2(b). This is not disputed.8. It is furthermore not in dispute that apart from the provisions in Rule 3 of which only cl. (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 R. 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 the surplus any sums for which credit has been taken on account of appreciation or gains on the realisation of the securities or other assets. This part of the rule only compels the Income-tax Officer to allow certain amounts as deductions and to include certain amounts for which credit had been taken in the accounts of the assessee. It, therefore, does not warrant what the Income-tax Officer did, namely, to adjust the accounts on the basis of a revaluation made by him.9. Then we come to the proviso in R. 3 (b). It says that if it appears to the Income-tax Officer having regard to certain matters to which it is not necessary to refer here in detail, that the rate of interest or other factor employed in determining the liability in respect of outstanding policies is materially inconsistent with the valuation of the securities and other assets so as artificially to reduce the surplus, then he would have the power to make certain adjustments after consultation with the Controller of Insurance. Quite clearly the adjustment made in the present case by the Income-tax Officer was not of the variety mentioned in the proviso. He does not say that he made the adjustment because he found that any rate of interest was inconsistent with the valuation of securities or other assets. The adjustment made by him had nothing to do with any rate of interest. It was made only because he thought that the securities had been under-valued. This he had no power to do under the proviso. This again is not in dispute.10. The result, therefore, is that we find nothing in the rules justifying the adjustment made by the Income-tax Officer in the present cases. We have set out the relevant provisions and we think that they do not contemplate any other adjustment of the figures in the accounts of the insurance companies apart from what they expressly provide for. We have shown that the present adjustment does not fall within those so expressly provided for.11. The only other question is, is there a general right to correct the errors in the accounts of an insurance company when assessing the income-tax ? The High Court thought there was. We are wholly unable to agree with this view. The assessment of the profits of an insurance business is completely governed by the rules in the Schedule and there is no power to do anything not contained in it. The reason may be that the accounts of an insurance 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 with it 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 S. 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.12. It may be pointed out that the question referred was confined to the powers of the Income-tax Officer under R. 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 R. 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 nonetheless answered the question in the affirmative. Obviously what was meant was that the Income-tax Officer had the power quite apart from the rule, to make all adjustments to prevent evasion of tax. The High Court in fact expressly said that the rule did not deprive the Income-tax Officer of the power to do this.It is clear that the High Court had travelled beyond the question. No objection having been taken at the bar to this procedure, we have dealt with the matter from this point of view also. The question framed has to be answered in the negative.

Decision:
1[ds]9. Then we come to the proviso in R. 3 (b). It says that if it appears to the Income-tax Officer having regard to certain matters to which it is not necessary to refer here in detail, that the rate of interest or other factor employed in determining the liability in respect of outstanding policies is materially inconsistent with the valuation of the securities and other assets so as artificially to reduce the surplus, then he would have the power to make certain adjustments after consultation with the Controller of Insurance. Quite clearly the adjustment made in the present case by the Income-tax Officer was not of the variety mentioned in the proviso. He does not say that he made the adjustment because he found that any rate of interest was inconsistent with the valuation of securities or other assets. The adjustment made by him had nothing to do with any rate of interest. It was made only because he thought that the securities had been under-valued. This he had no power to do under the proviso. This again is not in dispute.10. The result, therefore, is that we find nothing in the rules justifying the adjustment made by the Income-tax Officer in the present cases. We have set out the relevant provisions and we think that they do not contemplate any other adjustment of the figures in the accounts of the insurance companies apart from what they expressly provide for. We have shown that the present adjustment does not fall within those so expressly provided for.It may be pointed out that the question referred was confined to the powers of the Income-tax Officer under R. 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 R. 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 nonetheless answered the question in the affirmative. Obviously what was meant was that the Income-tax Officer had the power quite apart from the rule, to make all adjustments to prevent evasion of tax. The High Court in fact expressly said that the rule did not deprive the Income-tax Officer of the power to do this.It is clear that the High Court had travelled beyond the question. No objection having been taken at the bar to this procedure, we have dealt with the matter from this point of view also. The question framed has to be answered in the negative.