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

A reference was made by theAppellate Tribunal under section 256(1) of theAct, 1961, at the instance of the assessee, to the Bombay High Court for deciding seven questions of law arising out of the Tribunals order. The first six questions were answered by the High Court in favour of the assessee, while the seventh question was answered against the assessee. This appeal by special leave is by the assessee challenging the High Courts decision only in respect of the seventh question decided against the assessee. That question is as under (at page 52)"Whether, on the facts and in the circumstances of the case, the sum of Rs. 29, 39, 959 being the refund ofreceived by the Corporation during theperiod in respect of theup to the assessment yearof the life insurance business of the erstwhile insurers whose business had been taken over by the Corporation, should be allowed as a deduction while computing the income of the assessee under rule 2(1)(b) of the First Schedule to theAct, 1961?" *In this appeal, no further reference to, the other six questions is necessaryThe assessee, the Life Insurance Corporation of India (Corporation), is a statutory corporation established under the Life Insurance Corporation Act, 1956 ("the LIC Act" for short), with effect from September 1, 1956. The relevant assessment year isfor which the accounting period ended on March 31, 1963. During the relevant assessment year, the assessee received refunds ofof Rs. 3, 02, 90, 898 in the life insurance business. The assessee contended before theOfficer that the entire amount of refund was not includible in the revenue account and treated as profits and gains of the assessee for the assessment year under consideration. TheOfficer rejected the contention and included the entire amount in the revenue account. In the assessees appeal, the Appellate Assistant Commissioner held that out of the amount of Rs. 3, 02, 90, 898 included in the revenue account, the sum of Rs. 2, 73, 50, 939 only was to be excluded but the balance amount had to be included. The assessee as well as the Revenue preferred appeals to the TribunalBefore the Tribunal, it was contended by the Revenue that in computing the profits of the assessee under section 44 read with rule 2(1)(b) of the First Schedule to theAct, 1961, theOfficer can make only such adjustments to the surplus or deficit disclosed by the actuarial valuation which are permissible under the rule ; that the rule permits adjustment by way of exclusion of any surplus or deficit included therein which was made in any earlierperiod relating to the assessee itself and not to that of its predecessor in the business. It was contended that a part of the refund of taxes received by the Corporation had not been included in the surplus of the earlierperiod relating to the assessee but of its predecessor since the refund was in respect of the taxes paid by the predecessor prior to the formation of the Corporation on September 1, 1956. It was contended that the words "included therein" used in rule 2(1)(b) indicated that the sill plus or deficit in any earlierperiod must relate to that of the Corporation and not its predecessor. The decision of the Bombay High Court in Bombay Mutual Life Assurance Society Ltd. v. CIT was distinguished. The contention of the assessee was that the payment of taxes which gave rise to the refund have been made prior to the formation of the Corporation, by the predecessor, there was no occasion for the surplus or deficit in any earlierperiod of the Corporation being required to be looked into for the purpose. Reliance was placed on section 7 of the Life Insurance Corporation Act, 1956 (for short, "the LIC Act"), to contend that the Corporation stepped into the shoes of its predecessor for all practical purposes including the legal consequences flowing from the refund received by the Corporation as the successor of its predecessor in businessThe Tribunal accepted the contention of the Revenue and held as under" But only such portion of the refunds which has been included in the surplus or deficit made in the earlierperiod alone has to be excluded. On the analysis of the refunds and the assets to which they related, the Appellate Assistant Commissioner found that this sum of Rs. 2, 73, 50, 939 only had entered into the surplus of the earlier intervaluation period out of Rs. 3, 02, 90, 898. Therefore, only that portion is allowable under rule 2(1)(b) and has been rightly allowed by the Appellate Assistant Commissioner. Disallowance of the balance of the tax refund was quite in order because they did not come out of the assets which were included in the surplus of the earlierperiod." *The abovequoted question was referred to the High Court for its decision at the instance of theunder section 256(1) of theAct. The High Court upheld the view taken by the Tribunal. That decision of the High Court is reported in Life Insurance Corporation of India v. CIT. The relevant part of the High Courts judgment, rejecting the assessees contention, is as under (page 55)"It is difficult to accept this submission. Rule 2(1)(b) is an artificial mode of computation of profits of an assessee who carries on life insurance business. These profits are arrived at by first determining the annual average of the surplus after adjusting the surplus or deficit as disclosed by the actuarial valuation made in accordance with the Insurance Act, 1938, in respect of the lastperiod. What is contemplated by rule 2(1)(b) is that if there is a surplus of the earlierperiod, which was entered in the accounting while finding out the surplus for theperiod in question, then that surplus has to be deducted for the purposes of finding out the surplus in respect of the assessment year in question. It is necessary to remember that when an actuarial valuation is made by an actuary on behalf of the company, first of all a consolidated revenue account is prepared, which would show on the one side the amount of life insurance fund at the end of the period for which the consolidated revenue account is prepared. The actuary then finds out what is the net liability of the company under the current policies and after fixing the net liability on the current policies, he deducts that liability from the life assurance fund and the result is the surplus. If this is the concept of the surplus to be found on actuarial valuation, then it is obvious that before a surplus is asked to be deducted on the ground that that part of the surplus was carried forward from the earlier intervaluation period, it must be found as a fact that what is now sought to be deducted was shown as a surplus of the earlierperiod. Rule 2(1)(b) operates in respect of the particular assessee whose profits of the life insurance business are under computation. Accepting the contention of learned counsel for the assessee would mean that we would have to add to the language of rule 2(1)(b) so that it should be so construed that what is to be taken into account is not the actual surplus which has been carried forward into theperiod in question but also some amount which must be deemed to have been carried forward into the surplus of theperiod. It is, no doubt, true that the legal effect of section 7 of the Life Insurance Act is that the assets of the insurer who carried on the life insurance business are vested in the Life Insurance Corporation, but the legal effect of that vesting cannot be imported into the provisions of rule 2(1)(b) where ahas to be satisfied before a deduction in respect of the surplus is made, thebeing that that surplus has to be shown as a surplus of the previous intervaluation period. There is no scope for reading into rule 2(1)(b) any additional powers for theauthorities to so amend the figure of, surplus that is different from the actual surplus which is shown on the basis of the actuarial valuation. . . . . ."In substance, the High Court declined to give effect to section 7 of the LIC Act on its view that the provision in rule 2(1)(b) alone was decisive and it could not be given effect to, if the legal effect of section 7 of the LIC Act is to be taken into account. Apparently, the High Court took the view that rule 2(1)(b) cannot be reconciled with section 7 of the LIC Act. The question is whether this view is correct

Reasoning: 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