Case: Life Insurance Corporation of India Vs. Commissioner of Income Tax

of the inherited opening balance with the Corporation and deduction of the same would have been given under rule 2(1)(b). The question is : Whether, the refund having been made to the Corporation only because of the provision in section 7 of the LIC Act, the same result should not follow on the wording of rule 2(1)(b) ?Rule 2(1)(b) of the First Schedule to the Income-tax Act, 1961, is as under "2. Computation of profits of life insurance business.--(1) The profits and gains of life insurance business shall be taken to be the greater of the following-- (b) the annual average of the surplus arrived at by adjusting the surplus or deficit disclosed by the act uarial valuation made in accordance with the Insurance Act, 1938 (4 of 1938), in respect of the last intervaluation period ending before the commencement of the assessment year, so as to exclude from it any surplus or deficit included therein which was made in any earlier inter-valuation period and any expenditure or allowance which is not deductible under the provisions of [sections 30 to 43A] in computing income chargeable under the head Profits and gains of business or profession. " * It is obvious that in the surplus or deficit in any inter-valuation period relating to the Corporation which came to be formed only on the appointed day in 1956, this amount could not be reflected since it related to a period prior to the formation of the Corporation. The law does not contemplate or require the performance of an impossible act - lex non cogit ad impossibilia. It is now to be seen whether the expression "included therein" in rule 2(1)(b) is alone sufficient to negative the logical legal effect of section 7 of the LIC Act The legal fiction enacted in section 7(2) of the LIC Act must be taken to its logical conclusion. For this reason, the amount of refund made to the Corporation because of the excess tax paid by the predecessor prior to the appointed day on which the Corporation was formed, must form a part of the assets of the predecessor which came to be transferred and vested in the Corporation on the appointed day in 1956 on the formation of the Corporation. For the same reason, this amount of refund, even though made later, must also be deemed to be included in the inherited opening balance shown by the Corporation in the earlier inter-valuation period which undisputedly had to be deducted under rule 2(1)(b). It follows that because of this legal fiction being required to be taken to its logical conclusion, the amount so refunded to the Corporation must be deemed to be included in the earlier inter-valuation period of the Corporation. On this conclusion, the requirement of rule 2(1)(b) is satisfied since the amount is deemed to be included in the earlier inter-valuation period of the Corporation itself. The expression "included therein" which is the basis of the view taken by the Tribunal and the High Court and is also the contention of the Revenue before us, must be construed to mean also the amount deemed to be included therein because of the legal effect of section 7 of the LIC ActThe High Court failed to appreciate the true import of the decision in Bombay Mutual Life Assurance Society Ltd. v. CIT to take the view that the decision turned on the application of rule 3(b) of the Schedule which made certain provisions for the purposes of computing the surplus for the purposes of rule 2 ; and that the latter part of rule 3(b) was given effect to because it was found that that amount was liable to be included as a part of the surplus. The significance of that decision in the present context is in the observations of Chagla C. J., speaking for the Bench, as under (at page 198) " With regard to these two sums we would like to add that as we are holding that these two amounts form part of the surplus and, therefore, liable to tax although in the accounts of the company, they have not been shown as forming part of the surplus, Sir Jamshedji apprehends that when in fact these amounts are shown as part of the surplus in future the taxing authorities will tax this amount over again. Now it is clear that when you determine the surplus for the purposes of rule 2(b) you have to deduct from it any surplus or deficit included therein which was made in any earlier inter-valuation period. Therefore, if the Department proposes to tax this sum of Rs. 2, 72, 946 and also the sum of Rs. 1, 00, 000 it can only be on the basis that these two amounts formed part of the surplus. Therefore, in future if these two amounts are shown in the actuarial valuation as part of the surplus they would not be liable to tax over again as the position in law is clear and we have no doubt that the Department will act in accordance with the directions we are giving in this reference." * The principle enunciated in the above passage to be noticed is (page 198) ".....in future if these two amounts are shown in the actuarial valuation as part of the surplus they would not be liable to tax over again as the position in law is clear . . . ..." * This aspect has been overlooked by the High CourtA harmonious construction of the provisions of the LIC Act, particularly section 7 therein, and rule 2(1)(b) of the First Schedule to the Income-tax Act, 1961, requires this construction to be made. Unless this is done, full effect cannot be given to section 7 of the LIC Act, for which we find no reason. Since the requirement of harmonious construction leads to this result which is also in consonance with logic and justice of the cause, we do not find any reason to take a different view

Decision (1 = appeal accepted, 0 = rejected): 1

Explanation:
1[ds]This aspect has been overlooked by the High CourtA harmonious construction of the provisions of the LIC Act, particularly section 7 therein, and rule 2(1)(b) of the First Schedule to theAct, 1961, requires this construction to be made. Unless this is done, full effect cannot be given to section 7 of the LIC Act, for which we find no reason. Since the requirement of harmonious construction leads to this result which is also in consonance with logic and justice of the cause, we do not find any reason to take a different view