LIFE INSURANCE CORPORATION OF INDIA A v.

COMMISSIONER OF INCOME TAX

[J.S. VERMA A.Nb K. VENKATASWAMY JJ.)

FEBRUARY 19, 1996 B

Income Tax Act, 1961/Life Insurance Corporation Act, 1956-Section 44 read with Rule 2(1)(b) of the First Schedule/S.7-Life Insurance Business-Computation of Income-Refund of amount of excess tax paid by predecessor insurer prior to appointed day in 1956--Held, an allowable deduc- C tion-Cannot be disallowed on mere ground of not having been included in the surplus in any earlier inter-valuation perio~Hamwnious construction of Rule 2(1)(b) of Income Tax Act and Section 7 of Life Insurance Corporation Act wa1Tants such constmction.

Interpretation of Statutes-Hmmonious co11stmtion :

Legal Maxim : "Lex 11011 cogit ad impossibilia" applicability of

The assessee, Life Insurance Corporation of India, a statutory Corporation established under the Life Insurance Corporation Act which was E established with effect from 1 September, 1956, received during the relevant assessment year 1963-64 refunds of income-tax aggregating to Rs. 3,02,90,898 in life insurance business. The Income Tax Officer treated the entire amount on revenue account and negatived the contention of the assessee that the same to be treated as profits and gains of the assessee F for the relevant period. On 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 and the balance amount had to be included. In the cross appeals filed by both the Revenue and the Assessee before the Income Tax Appellate Tribunal, it was interalia contended by the Revenue that in computing the profits of the Assessee G under section 44 read with Rule 2(1)(b) of the First Schedule to the Income Tax Act, 1961, only such adjustments to the surplus or deficit as disclosed by actuarial valuation was permissible under the rule; and that rule permitted adjustment by way of exclusion of any surplus or deficit included therein which was made in any earlier inter-valuation period relating to H 795

A the assessee itself and not that of its predecessor in business. It was also inter-alia stated that the words 'included therein' occurring in Rule 2(1) (b) indicated that the surplus or deficit in any earlier inter-valuation period must relate to that of the Corporation and not of its predecessor.

For the assessee, it was contended that the payment of taxes giving B rise to the refund had made prior to the formation of the Corporation by the predecessor and that on the strength of section 7 of the Life Insurance Corporation Act, 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 in business. The C Tribunal accepted the contention of the Revenue and affirmed the order of the Appellate Assistant Commissioner to the effect that only a sum of Rs. 2, 73, 50, 939 which had entered into the surplus of the earlier inter-valuation period was allowable under section 2 (l)(b).

The High Court, on reference, upheld the view taken by the Tribunal D observing that Rule 2 (l)(b) of the First Schedule to the Income Tax Act 1961 cannot be reconciled with Section 7 of the Life Insurance Corporation Act.

Allowing the appeal of the Assessee, this Court

HELD : 1.1 In view of the legal fiction enacted in Section 7 (2) of the Life Insurance Act, the amount of refund made to the Corporation because of excess tax paid by the predecessor prior to the appointed day on which the Corporation was formed, must form 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, the 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 (l)(b). The amount so refunded to the Corporation must be deemed to be included in the earlier inter-valuation G period of the Corporation. Thus 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. (804-E-G]

1.2 A reading of Sections 7 and 9 of the Life Insurance Corporation H Act maes it clear that from the appointed day, the Corporation stepped

...

L.l.C. v. C.l.T. 797

into the shoes of all insurers. By virtue of Section 7(1), all assets and A liabilities appertaining to the controlled business of all insurers were to be transferred and vested in the Life Insurance Corporation from the appointed day in 1956. The legal fiction enacted in Section 7 (2) included within the assets transferred to the Corporation of all such insurers, any amounts which were due to the predecessor-insurer and which remained to be recovered and Section 9(2) enabled the Corporation to prosecute any legal proceeding of whatever nature for the. purpose of recovering the amounts due to the predecessor on the appointed day. It is only by virtue of this character of the Corporation that the amount refunded as excess tax paid prior to the appointed day by the predecessor came to be refunded to the Corporation. [802-G, F, 803-B-C]

1.3 The expression 'included therein' occurring in Rule 2 (l)(b) of Schedule 1 to the Income Tax Act 1961 must be construed to mean also the amount deemed to be included therein because of the legal effect of section 7 of the Life Insurance Corporation Act. [804-H]

1.4 On a harmonious construction of the provisions of Life Insurance Corporation Act, particularly Section 7 and Rule 2(1)(b) of the First Schedule to the Income Tax Act 1961, the actuarial valuation is to be shown as part of the surplus and would not be liable to tax once again.

Unless this is done, full effect cannot be given to Section 7 of the Life Insurance Corporation Act. The requirement of harmonious construction leads to this result which is also in consonance with logic and justice of the cause. [805-H, 806-A]

Bombay Mutual Life Insurance Society Ltd. v. CIT, (1951) 20 ITR,

explained and affirmed.

Life Insurance Corporation of India v. Commissioner of Inconie Tax, 115 ITR 45, reversed.

CIVIL APPELLATE JURISDICTION : Civil Appeal No. 295 (NT) ~~ G

From the Judgment and Order dated 4.11.77 of the Bombay High Court in I.T.R. No. 35 of 1968.

H.N. Salve, T.A. Ramachandran, A.V. Rangam, A. Ranganadhan and K.K. Sharma for the Appellants.

A J. Ramamurthi and S.N. Terdol for the Respondent.

The Judgment of the Court was delivered by

J.S. VERMA, J. A reference was made by the Income-tax Appellate Tribunal under Section 256(1) of the Income-tax Act, 1961, at the instance B of the assessee, to the Bombay High Court for deciding seven questions of law arising out of the Tribunal's 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 Court's decision only in respect of C the seventh question decided against the assessee. That question is as under:

"Whether on the facts and in the circumstances of the case, the sum of Rs. 23,39,959 being the refund of incometax received by the Corporation during the intervaluation period in respect of the D income-tax upto the assessment year 1956-57 of 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 the Income-tax Act, 1961 ?" E In this. appeal, no further reference to the other six question.~ is necessary.

The assessee Life Insurance Corporation of India (Corporation) is a statutory Corporation established under the Life Insurance Corporation Act, 1956 with effect from 1st September, 1956. The relevant assessinent F year is 1963-64 for which the accounting period ended on 31.3.1963. During the relevant assessment year, the assessee received refunds of income-tax of 3,02,90,898 in the life insurance business. The assessee contended before the Income-tax Officer that the entire amount of refund was not includable in the revenue account and treated as profits and gains of the assessee for

G . the assessment year under consideration. The Income-tax Officer rejected the contention and included the entire amount in the revenue account. In the assessee's 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 H Tribunal..

L.I.C.v. C.l.T. [J.S. VERMA, J.] 799

Before the Tribunal, it was contended by the revenue that in com- A puting the profits of the assessee under Section 44 read with Rule 2(1)(b) of the First Schedule to the Income-tax Act, 1961, the Income-tax Officer 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 earlier inter-valuation period 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 taxs received by the Corporation had not been included in the surplus of the earlier inter-valuation period 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 1st September, 1956. It was contended that the words "included therein" used in Rule 2(1)(b) indicated that the surplus or deficit in any earlier inter-valuation period 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. Commissioner of Income-tax, D Bombay City, (1951) 20 ITR 189 was distinguished. The contention of the assessee was that the payment of taxes which gave rise to the refund having been made prior to the formation or the Corporation, by the predecessor, there was no occasion for the surplus or deficit in any earlier inter-valuation period of the Corporation being required to be looked into for the purpose. Relianee was placed. on Section 7 of the Life Inurance Corpora- E tii:m Act, 1956 (for short ,; the LIC Act") to contend that the Corporation stepped into the shoes of its predecessor for all practical putpcises including the legal consequences floWing from the refund received by the Corporation as the success9r of its predecessor in business.

The 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 earlier intervaluation period alone has to be excluded. On the analysis of the refunds G and the assets to which they related, the appellate Asstt. 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 u/s. 2(1)(b) and has been rightly allowed by the Appellate Asstt. Commis- H

sioner. 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 surplus of the earlier inter-valuation period."

The above-quoted question was referred to the High Court for its decision at the instance of the assessee-Corporation, under Section 256(1) of the Income-tax' Act. The High Court upheld the view by the Tribunal.

That decision of the High Court is reported in (1978) 115 ITR 45 Life Insurance Corporation of India, Bombay v. Commissioner of Income-tax, Bombay City-Ill. The relevant part of the High Court's judgment, rejecting the assessee's contention, is as under : . "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 aetuarial valuation made in -accordance with the Insurance Act, 1938, in respect of the last inter-valuation period. What is contemplated by rule 2(1)(b) is that if there is a surplus of the earlier inter-valuation period, which was entered in the accounting while finding out the surplus for the inter-valuation period in question, then that surplus has to be deducted for the purposes of findg out the surplus in respect of r . c~ • 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 fitids 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, than_ it is obvious that that before a surplus is asked to be deducted on the ground that part of the surplus was carried forward from the ear lie~ inter-va_lliation period, it must be found as a fact that what - is now-sought to be deducted was shown as a surplus ofthe earlier -

inter-valuation period. Rule 2(1)b) operates ill respect of the particular assessee whose profits of the life insurance business are

L.l.C. v. C.l.T. (J.S. VERMA, J.] 801

under computation. Accepting the contention of the learned coun- A sel 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 the inter-valuation period in question but also some amount which must be deemed to have been carried forward B into the surplus of the inter-valuation period. 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 a pre-condition has to be satisfied before a deduction in respect of the surplus is made, the pre-condition being that that surplus has to be shown as a surplus of the previous intervaluation period. There is no scope of reading into rule 2(1)(b) any additional powers for the income-tax authorities to so amend

the figure of surplus that is different from the actual surplus which D is shown on the basis of the actuarial valuation ........... "

(at page 55)

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 E 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 view that Rule 2(1)(b) cannot be reconciled with Section 7 of the LIC Act. The question is whether this view is correct.

The relevant provisions in the Life Insurance Corporation Act, 1956 F are as under :

"7. Transfer of assets and liabilities of existing insurers carrying on controlled business . - (1) On the appointed day* there shall be transferred to and vested in the Corporation all the assets and G liabilities appertaining to the controlled business of all insurers.

(2) The assets appertaining to the controlled business of an insurer shall be deemed to include all rights and powers, and all property, whether movable or immovable, appertaining to his controlled business, including, in particular, cash balances reserve H

funds, investments, deposits and all other interests and -rights in or arising out of such property as may be in the possession of the insurer and . all books of account or documents relating to the controlled business of the insurer; and liabilities shall be deemed to include all debts, liabilities and obligations of whatever kind then existing and appertaining to the controlled business of the insurer.

xxx xxx xxx ..

* 1st September, 1956."

"9. General effect of vesting of controlled business. - ( 1) ....... .

(2) If on the appointed day any suit, appeal or other legal proceeding of whatever nature is pending by or against an insurer, then, in so far as it relates to his controlled business, it shall not abate, be discontinued or be in any way prejudicially affected by reason of the transfer to the Corporation of the business of the . insurer or of anything done under this Act, but the suit, appeal or other proceeding may be continued, prosecuted and enforced by or against the Corporation."

Sub-section (1) of Section 7 clearly provides that from the appointed day in .1956, ali the assets and liabilities appertaining to . the controlled blisiness of all insurers, are to be trru; isferred and vested in the Life Insurance Corporation of India. Subsection (2) of Section 7 enacts the legal fiction by virtue of which "all rights and powers, an property, whether movable or immovable, appertaining to his controlled business, including, in particular, cash balances, reserve funds, investments, deposits and all . other interests and rights in or arising out of such property as may be in . the possession of the . msurer and all books of accounts. or document~ relating to the controlled business of the insurer" were deemed to be assets of ari:· insuret which came to be transferred and vested irt the Corporation G from th'e aPRointed day, and so also all the liabilities. In other words, from the "appoinfo4 , day, th~_ Corporation stepped into the shoes of all-. such

insurrs. Section 9 provides for the _general effect of vesting of. controlled

busines~ d sub-section (2) therin express_ly enacts that the Corporation stepped into the shoes of the predecessor-insurer from the appointed day H in respect of any suit, appeal 01 other legal proceeding of whatever nature

L.I.C.v. C.l.T. [J.S. VERMA, J.) 803

pending by or against an insurer.

This legal fiction enacted in Section 7(2) includes within the assets transferred and vested in the Corporation of all such insurers any amounts which were due to the predecessor-insurer and which remained to be recovered. Section 9(2) enable the Corporation to prosecute any legal proceeding of whatever nature for the purpose of recovering amounts due to the predecessor on the appointed day. There is no dispute that any liability of the insurer also stood transferred similarly to the Corporation; Accordingly, if any amount remained due towards taxes to be recovered from the predecessor, it was a liability transferred to the Corporation and

the Corporation became liable to discharge the same. It is also not in C dispute that it is only by virtue of this character of the Corporation that the amount refunded as excess tax paid prior to the appointed day by the predecessor came to be refunded to the Corporation to whom all the assets of the predecessor stood transferred and vested from the appointed day in

1956. It is also not disputed that the opening balance inherited by the Corporation from the predecessor on the appointed day had to be D deducted under Rule 2(1)(b) and the amount shown as such was so deducted. It is further not disputed that if this excess amount of tax paid by the predecessor had not been so paid and the question of refund did not arise, then this extra amount would have formed a part of the inherited opening balance with the Corporation and deduction of the same would E 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 -

(a)············

(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 ( 4 of 1938)j in respect of H

the last inter-valuation 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 43-A)* in computing income chargeable under the head "Profits and gains of business or prpfession".

' *Subs. by Finance (No. 2) Act of 1967 (w.e.f. 1-4-1967).

It is obvious that in the surplus or deficit in any intervaluation C 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 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 D 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 Acmust be taken to its logical conclusion. For this reason, the amount of refund made to the Corporation because of excess tax paid by the predecessor prior to E the appointed" day on which the Corporation was formed, must form a part of the asset 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 F 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 intervaluation period of the Corporation. On G 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 meaa also the amoµnt deemed to be included therein because of the legal effect of H Seation 7 of the LIC Act.

L.l.C.v. C.l.T. [J.S. VERMA, J.) 805

The High Court failed to appreciate the true import of the decision A in Bombay Mutual Life Assurance Society Ltd. v. Commissioner of Incometax, Bombay City, (1951) 20 ITR 189, 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 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 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 :

"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 C 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 D 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 intervaluation 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 . E 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."

(at page 198)

The principle enunciated in the above passage to be noticed is : •

" ......... 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 G again as the position in law is clear ............ "

This aspect has been overlooked by the High Court.

A harmonious construction of the provisions of the LIC Act, particularly Section 7 therein, and Rule 2(1)(b) of the First Schedule to the H

A I.ncome-truc Act, 1961, is requires this construction to be made. Unless this 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.

B Consequently; the appeal is allowed. The judgments of the High Court and the Tribunal are set aside. The aforesaid question is answered in favour of the assessee and against the revenue. No costs.

R.D.R.

Assessee's appeal allowed.