Case: Commissioner Of Income-Tax, West Bengal, Calcutta Vs. Calcutta Hospital And Nursinghome Benefits Association

1. These appeals by certificate granted by the High Court of Calcutta under S. 66A(2) of the Indian Income Tax Act, 1922, are directed against the judgment of the said High Court answering two questions referred to it against the Revenue, The questions areWhether the profit arising to the assessee company from miscellaneous insurance transactions of mutual character, was assessable under the Indian Income Tax Act, and(2) If the answer to question No. (1) is in the affirmative, whether on the facts and in the circumstances of the case the balance of the profits as disclosed in the assessee companys profit and loss account after deducting the various reserves should be the taxable profits within the meaning of Section 2(6C) read with Rule 6 of the Schedule to the Indian Income Tax Act.The relevant facts and circumstances are as follows : The respondent, the Calcutta Hospital and Nursing Home Benefits Association Limited, hereinafter referred to as the assessee, is a mutual insurance concern carrying on miscellanous insurance business. The principal objects for which the Association was established wereBy means of insurance on the mutual principle to provide, or help towards providing, anywhere in the world for the expense of accommodation and treatment in hospitals and nursing homes and of private nursing for members and their dependents.(2) To organise insurance on the mutual principle under Rules and Regulation; to be framed for the purpose with the object of providing such hospital, medical, surgical, nursing and allied services as before mentioned, of supporting and assisting hospitals, in Calcutta or elsewhere; of relieving members or their dependants, in whole or in part from the payment of hospital and other charges while in receipt of such hospital, medical, surgical, nursing and allied services; and of reimbursing and repaying to members or their dependants in whole or in part, all payments for such hospital and other charges which they may have incurred or made while in receipt of such hospital, medical, surgical, nursing and allied services.The members were required to pay a monthly premium, but there was a waiting period of four months for all benefits other than maternity, for which the waiting period was one year. Benefits and privileges became available as from the first day of the fifth calendar month of registration (in respect of Maternity the 13th month) and continued to be available thereafter so long as the subscriptions were not in arrear.4. These appeals are concerned with the assessment years 1949-50 to 1953-54 and the relevant accounting years ended on December 31, 1948, December 31, 1949, December 31, 1950, December 31, 1951 and December 31,1952, respectively.5. In the statement of the case, the Appellate Tribunal describes the accounts maintained by the assesseeassesses published revenue accounts contained three classifications, viz. (i) miscellaneous insurance business revenue account, (ii) profit and loss account and (iii) profit and loss appropriation account. In the miscellaneous insurance business revenue accounts were included subscriptions from the members, gross premia from the members and form such amounts were deducted general reserve and or contingency reserve. Reserve so made were transferred to the balance sheet as credit accounts. The claims paid or payable and the expenses of management were deducted from this revenue account. The balance of the miscellaneous insurance business revenue account was transferred to the profit and loss account to the credit of which was further added interest on investments made the debits included provision for taxation, interest on loan, contribution to provident fund and depreciation. The balance of this account being the balance of profit and loss account was transferred to the profit and loss appropriation account. Therefrom, in one year, ended 31st December, 1949, further deduction was made against contingency reserve and the balance either loss or profit was carried forward."

Court's reasoning:
16. We are unable to agree with the High Court that the Bombay case is distinguishable in principle. It is true that the Bombay. High Court was concerned with R. 2. but when we go to the schedule and find out what is the balance of profits or surplus that has been made taxable, it does not make any difference to the construction of S. 2 (6C) whether it is R. 2 that is applied or R. 6 Therefore, disagreeing with the High Court. we answer the first question in the affirmative.17. This takes us to the second question, The answer to this question depends on the true interpretation of R. 6.It seems to us that on its language the Income Tax Officer is bound to accept the balance of profits disclosed by the annual accounts, copies of which have been submitted to the Superintendent of Insurance. He can only adjust this balance so as to exclude from it any expenditure other than expenditure, which may under the provisions of S. 10 be allowed for in computing the profits and gains of a business. We are not concerned here with the latter part of R. 6 dealing with profits and losses on the realisation of investments. and depreciation and appreciation of the value of investments. This Court examined the provisions of the Insurance Act in connection with the Schedule in Pandyan Insurance Co. Ltd., Madurai v. Commr. Of Income Tax. Madras, Civil Appeal No. 816 of 1968 Dated 29-9-1964; (AIR 1965 SC 1004  ), and arrived at the conclusion that the Insurance Act "makes detailed provisions to ensure the true valuation of assets and the determination of the true balance of profits of an insurance business" and that R. 6 should be construed in the light of this background.18. Examining R. 6 in the light of this background, it seems to us that the intention of the rule is that the balance of profits as disclosed by the accounts submitted to the Superintendent of Insurance and accepted by him would be binding on the Income Tax Officer, except that the Income Tax Officer would be entitled to exclude expenditure other than expenditure permissible under the provisions of S. 10 of the Act. It is common ground in this case that the reserves which were added to the balance of profits were not expenditure.