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PETITIONER:

GENERAL FAMILY PENSION FUND

Vs.

RESPONDENT:

THE COMMISSIONER OF INCOME-TAX,WEST BENGAL.

DATE OF JUDGMENT:

01/11/1954

BENCH:

AIYYAR, T.L. VENKATARAMA

BENCH:

AIYYAR, T.L. VENKATARAMA

MAHAJAN, MEHAR CHAND (CJ)

DAS, SUDHI RANJAN

HASAN, GHULAM

BHAGWATI, NATWARLAL H.

CITATION:

1955 AIR 50 1955 SCR (1) 822

ACT:

Indian Income-tax Act (XI of 1922), s. 10(7) and schedule

Rule 2(a)(b) as published in 1939-Income-tax on insurance

companyHow ascertained-Statement of Departmental

Representative, Effect of-Insurance Act (IV of 1938) s.

2(11.) -Life Insurance business.

In accordance with the provisions of s. 10(7) of the Indian

Income-tax Act, 1922, the profits and gains of Life

Insurance business for the periods 1943-1944 to 1946-1947

are to be computed under Rule 2(a) and Rule 2(b) of the

rules published in 1939 and contained in the schedule to the

Act. - This computation should be made separately and

independently once under Rule 2(a) and again under Rule

2(b). On such computation income-tax is to be levied on the

greater of the two amounts so computed. It is erroneous to

adopt the computation made under Rule 2(b) as the basis for

computation under Rule 2(a).

Mere statement of the Departmental Representative of the

Income-tax Department to the Tribunal referred to in the

order of the Tribunal cannot have the effect of a finding of

fact by the Tribunal.

Business of a company which consists in granting terminable

pensions or annuities dependent on human life in favour of

the subscribers or their nominees, is an insurance business

within the meaning of s, 2(11) of the Insurance Act, 1938,

HEADNOTE:

823

JUDGMENT:

CIVIL APPELLATE JURISDICTION: Civil Appeal No. 144 of 1953.

Appeal from the Judgment and Order dated the 28th November,

1951, of the High Court of Judicature at Calcutta in

Reference No. 40 of 1950.

Sukumar Mitra (S. N. Mukherjee, with him) for the

appellant.

C. K. Daphtary, Solicitor-General of India, (G. N. Joshi,

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with him) for the respondent.

1954. November 1. The Judgment of the Court was delivered

by

VENKATARAMA AYYAR J.-This is an appeal from the judgment of

the High Court of Calcutta on a reference under section

66(1) of the Income-tax Act. The appellant is a Company

which came into existence in 1870 as an unregistered

association, and in 1906 it was registered under the

provisions of the Indian Companies Act. Its business

consists exclusively in granting terminable pensions or

annuities dependent on human life in favour of the

subscribers or their nominees. The dispute in this appeal

relates to the assessment of the profits of the Company for

income-tax for the periods, 1943-1944, 1944-1945, 1945-1946

and 1946-1947.

To follow the points in issue, it will be useful to refer to

the statutory provisions bearing on the matter. Section

2(11) of the Insurance Act, 1938, defines "life insurance

business" as meaning "the business of effecting contracts of

insurance upon human life" and as including "the granting of

annuities upon human life." The business of the appellant

Company would therefore be life insurance business as

defined in-section 2(11) of the Insurance Act. Under

section 10(7) of the Indian Income-tax Act, the profits and

gains of any business of insurance are to be computed in

accordance with the Rules in the Schedule to the Act. Rule

2 in the Schedule is as follows:

" The profits and gains of life insurance business shall be

taken to be either-

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(a)the gross external incomings of the preceding year from

that business less the management expenses of that year,

or

(b)the annual average of the surplus arrived at by

adjusting the surplus or deficit disclosed by the actuarial

valuation for the last intervaluation period ending before

the year for which the assessment is to be made' so as to

exclude from it any surplus or deficit included therein

which was made in any earlier intervaluation period and any

expenditure which may under section 10 of this Act be

allowed for in computing the profits and gains of a

business, whichever is the greater.

"Rule 5(ii) defines "gross external incomings" as including

profits on the sale or the granting of annuities. These

Rules came into force in 1939.

In 1945 the assessment of the profits of the appellant

Company for the years 1943-1944, 1944-1945 and 19451946 was

taken up by the Income-tax Officer. Under Rule 2, what the

Income-tax Officer had to do was to compute the profits of

the Company under the two heads (a) and (b) in that Rule and

to adopt whichever was higher as assessable profits. What

he actually did however is uncertain, because the orders of

assessment themselves have not been exhibited as part of the

record. From the order of the Tribunal dated 5th March,

1949, it appears that the Income-tax Officer firstly

determined the profits under Rule 2(b) on the basis of

actuarial valuation after making certain adjustments; and

secondly on the basis of the figure arrived at under Rule

2(b), he worked out the profits under Rule 2(a) by making

further adjustments. These orders were made on 14th July,

1945. The company preferred appeals against them to the

Appellate Assistant Commissioner, who held by his order

dated 30th November, 1945, that the annuity business

contemplated by Rule 5(ii) was "purely annuity business",

that the business carried on by the Company was "an

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admixture between an annuity and life insurance", and that

there had been no adequate investigation by the Income-tax

Officer of the nature of the business of the Company. He

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accordingly remanded the case for further enquiry and for

passing fresh orders of assessment.

By the time the matters came up for further enquiry before

the Income-tax Officer in pursuance of the order of remand,

the assessment of the profits of the Company for the year

1946-1947 had also to be made. By order dated 23rd

December, 1946, the Income-tax Officer determined the

assessable profits of the Company for all the four years.

He held that there was no element of insurance in the

business of the Company, and that the computation should be

made under Rule 2(a). Then he proceeded to assess the

profits under that Rule precisely in the manner adopted by

him in his order dated 14th July, 1945. He first took the

annual adjusted surplus calculated according to the

actuarial valuation under Rule 2(b) and after making certain

adjustments, adopted it as the figure under Rule 2(a).

These orders were clearly erroneous. The statement that

there was no element of life insurance in the policies was

rightly hold to be erroneous by the Tribunal and has not

been sought to be supported. If the annuity business of the

Company was not life insurance business, then even Rule 2(a)

would have no application. The Income-tax Officer was

likewise in error in adopting the figures reached under Rule

2(b) as the basis for computing the profits under Rule 2(a)

without an independent enquiry into the materials requisite

under that Rule.

The Company took up the matter in appeal to the Appellate

Assistant Commissioner, who by his order dated 26th

September, 1947, held that the annuity business of the

appellant was life insurance business, and that the profits

should be computed under Rule 2. He further held that in the

absence of a profit and loss ,statement for the previous

year, the Income-tax Officer could only act on the materials

furnished by the actuarial valuation as a guide for

computation under Rule 2(a). He therefore confirmed the

orders of assessment.

The Company then appealed to the Tribunal. By its order

dated 5th March, 1949, the Tribunal held that the business

of the Company was "in a way" insurance,

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and that computation of the profits should be made in

accordance with Rule 2, after determining the profits both

under Rule 2(a) and Rule 2(b). It took exception to the

modus adopted by the Income-tax Officer in ,computing the

profits under Rule 2(a), and observed that he should have

made independent enquiry under Rule 2(a), and determined the

profits and not merely adopted the figures computed under

Rule 2(b) as the basis for computing the profits under Rule

2(a). The Tribunal accordingly remanded the matter to the

Income-tax Officer for further enquiry for determining the

profits in terms of Rule 2(a).

Dissatisfied with this order, the respondent applied for

reference under section 66(1) of the Income-tax Act, and on

that application, the following questions were referred to

the decision of the High Court:

1. " Whether in the facts and circumstances of the case

the business of the assessee-Company consisted wholly of

annuity business or whether it contained some elements of

ordinary life insurance business as distinct from annuity

business.

2. Whether the Income-tax Officer was justified in making

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an estimate for calculations under Rule 2(a) of the Schedule

attached to section 10(7) of the Income-

tax Act. "

The reference was heard by Chakravarti and S. R. Das Gupta

JJ. They held that the first question did not arise on the

order of the Tribunal, but all the same expressed their

opinion thereon in the following terms :

" Its business is *holly a business of granting annuities on

human life, and no part of its business is ordinary life

insurance business. "

As we are not concerned with this matter in this appeal,

there is no need to further refer to it.

On the second question, they observed that business in

annuities dependent on life as contrasted with "annuities

certain" would be insurance business as defined in section

2(11) of the Act, and that the profits of that business

being "gross external incomings" as defined in Rule 5(ii)

must be determined under Rule 2(a). Dealing next with the

objection of the appellant that there had been no proper

determination of the

827

profits under Rule 2(a), they held that in the absence of

profit and loss statements for the previous years and other

materials the Income-tax Officer had no course open to him

except to adopt the figures computed under Rule 2(b) as a

basis for computation under Rule 2(a). The second question

was accordingly, answered in the affirmative. It is against

this decision that the present appeal has been preferred on

a certificate granted under section 66A (2).

Mr. Mitra for the appellant does not dispute the position

that the business of the Company on annuity policies

dependent on human life is insurance business as defined in

section 2(11), and that the profits of the business should

therefore be computed in accordance with Rule 2 in the

Schedule to the Income-tax Act. His contention is that the

Income-tax Officer had failed to make the computation in

accordance with Rule 2(a), and that the Tribunal was right

in remanding the matter for a correct computation of the

profits in accordance with that Rule. This contention must,

in our opinion, succeed. Under Rule 2, the Income-tax

Officer has to determine under clause (a) what the gross

external incomings of the previous year were, and deduct out

of them the managing expenses for that year. He has also to

find out in terms of clause (b) the annual average surplus

on the basis of actuarial valuation in the manner prescribed

therein. He has then to adopt whichever is higher as the

assessable profits of the year. Now the complaint of the

appellant is that while a computation was made under clause

(b) no independent computation was made under clause (a),

and that therefore the profits had not been determined as

required by the Rules. It is a fact that no independent

computation has been made under Rule 2(a), and therefore

there has been no compliance with the Rule. The learned

Judges declined to uphold this objection on the ground that

the Company did not place any materials before the Income-

tax Officer so as to enable him to make a determination

under Rule 2(a), and that in the absence of any materials

the Income-tax Officer was justified in acting on the

actuarial report for computing the profits even under Rule

2(a).

828

The argument of the appellant is that having regard to the

stand taken by either side at the stage of investigation and

to the opinion expressed by the Income-tax Officer that

there was no element of insurance in the annuity business of

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the Company, the true position under the Rules had been

missed by all of them, with the result that there was no

attempt made to compute the profits in terms of the

provisions of Rule 2(a), that the appellant had not wilfully

failed to produce any evidence, and that the observation of

the learned Judges that no profit and loss statement had

been produced was based on a misapprehension, as no such

statement had to be prepared by an Insurance Company.

We must now turn to the statement of the case by the

Tribunal to see what had really happened before the Income-

tax Officer, for the last word on questions of fact is with

it, and that is binding on the Courts. Neither in the

statement of the case by the Tribunal, nor in its order of

remand is there any finding that the requisite materials had

been withheld by the appellant. The only statement bearing

on this question in the order of the Tribunal is as follows:

" ... the Departmental Representative admitted before us

that the calculations purported to have been made under Rule

2(a) were not in accordance with the requirements of Rule

2(a), but it was explained that as the information necessary

for determining income under Rule 2(a) was not available, an

estimate was made and the income determined under Rule 2(b)

was adopted for determining the income under Rule 2(a). "

What is referred to in this passage is only a statement of

the Departmental Representative and not a finding. On the

other hand, the whole tenor of the judgment of the Tribunal

is that there had been no determination of the profits under

Rule 2(a) by reason of the erroneous view taken by the

Income-tax Officer as to the true nature of the business of

the Company. If there had been a finding by the Tribunal

that the requisite materials had been called for and

withheld by the appellant, the decision of the High Court

would be unassailable, and, indeed, that was the only one

that

829

could have been reached. But in the absence of such a

finding, we are unable to see any ground on which the order

of the Tribunal could be upset in a reference under section

66(1). When once it is found that there was no proper

determination of the profits as required: under Rule 2(a)-

and that was indeed conceded-and there was no justification

for it such as the High Court thought there was, the only

order that could properly be made was to remand the case for

further enquiry and fresh disposal in accordance with law.

That was the order which was passed by the Tribunal, and

that, in our opinion, was right.

This appeal will accordingly be allowed, and the second

question referred by the Tribunal answered in the negative.

The result of this will be that the Income-tax Officer will

proceed to enquire into the profits of the appellant Company

for the years in question in accordance with the

requirements of Rule 2. Under the circumstances, we direct

that the parties do bear their respective costs both here

and in the High Court.

Appeal allowed.