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

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 = appeal accepted, 0 = rejected): 1

Explanation:
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.