TMI Blog1965 (11) TMI 145X X X X Extracts X X X X X X X X Extracts X X X X ..... of the Ordinance, the management of the assessee vested in the Central Government with effect from January 19, 1956. The Life Insurance Corporation Act, 1956 (Act 31 of 1956), received the assent of the President on June 18, 1956, and came into force on July 1, 1956. The Life Insurance Corporation as a corporation sole was brought into existence and on and from that date, by section 3, all the assets and liabilities of the assessee appertaining to its controlled business stood transferred to and were vested in the Corporation. In September, 1957, the assessee received ₹ 63,034 as managerial compensation determined under section 6 of Act 9 of 1956, and in October, 1957, ₹ 14,70,293, towards acquisition compensation. An additional sum of ₹ 1,61,318 was also received as acquisition compensation by the assessee in October, 1958, thus in all ₹ 16,31,611. In response to a notice under section 22(2) of the Income-tax Act, the assessee filed a return showing nil income. But in Section D of the return, the assessee showed these amounts. The Income-tax Officer found that the business income of the assessee for the period January 1, 1956, to January 18, 1956, worked ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he Life Insurance Corporation with effect from September 1, 1956. In our opinion, the view of the Tribunal is correct. The Ordinance was intended to provide for the taking over, in the public interest, of the management of life insurance business pending nationalisation of such business. The Ordinance was necessitated because, pending such nationalisation, adequate steps were required to be taken to protect the interests of policyholders. This Ordinance by sub-section (2) of section 2 defines controlled business which, broadly speaking, means the life insurance business. Among the other expressions defined by the section are custodian and insurer . Insurer is said to mean an insurer, as defined in the Insurance Act, who carries on life insurance business in India. By section 3, on and from the appointed day, which was January 19, 1956, the management of the controlled business of all insurers vested in the Central Government. Pending the appointment of a custodian for the controlled business of any insurer, the section directed that the persons in charge of the management of such business immediately before the appointed day should, on and from the appointed day, be in ch ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erty is involved, but in which possession and the actual control of the property are taken. He adds that for purposes of section 10 all that is necessary is that the person sought to be charged should be one that carried on the business and that it is not necessary that he should also be the owner of the business. On that question, there is no difficulty. A comparison between section 9 and section 10 of the Income-tax Act brings out the distinction that whereas, for purposes of the former section, the person charged or sought to be charged must be the owner of the property, under section 10(1) it will suffice if the assessee carried on the business in the previous year. In Executors of the Estate of Dubash v. Commissioner of Income-tax [1951] 19 I.T.R. 182, 189; [1950] S.C.R. 969, which was concerned mainly with sections 25(4) and 26(2) of the Income-tax Act, the Supreme Court in the course of its judgment observed: There seems to be no warrant, therefore, to insist on a transfer of ownership as the decisive test of 'succession' within the meaning of section 26(2) or section 25(4) any more than for insisting on the ownership of the business by the person c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng or substitution of the management of the insurer does not ipso facto operate as a deprivation of the carrying on of the controlled business from the insurer. The whole purpose of the Ordinance and the Act, as it seems to us, was to protect the interests of the policyholders in view of the impending nationalisation. Lest the assets of the insurer in relation to the controlled business were frittered away or dealt with in a manner prejudicial to the interests of the policyholders, the legislature thought fit to freeze the management so that effective control over the manner in which the controlled business is carried on and the assets of such insurer might be secured. In fact, there are indications in the Ordinance and the Act that the insurer, even after its management is taken over, was to continue to transact and enter into contracts in the issue of new life insurance policies. Sub-section (3) of section 3, which places certain restraints on the insurer with effect from January 19, 1956, does not anywhere state that on and from the appointed day, the insurer should cease to carry on its controlled business. Section 6 of the Ordinance, in fact, throws light upon the effect of se ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the board of directors in charge of the management effectively controls, directs and secures the affairs of the life insurance business of the insurer, such board of directors carries on the business of the insurer. Obviously, the person who carries on the business is the insurer and the board of directors only manages the business carried on by the insurer. That precisely is the position even after the appointed day with this difference that, instead of the erstwhile management, the Central Government and the custodian on his appointment comes into management. We are of the view, therefore, that the Tribunal was correct in its finding that the assessee carried on its business in life insurance until August 31, 1956. The first question in this reference is answered against the revenue. On the second question, the point is whether the sum of ₹ 63,034 was rightly held by the Tribunal to fall within the purview of section 10(7) of the Act. That provision says that notwithstanding anything to the contrary contained in sections 10 and 12, among other sections, the profits and gains of any business of insurance and the tax payable thereon shall be computed in accordance with th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e assessee. There remains Tax Case No. 84 of 1965, which relates to the mode of computation of fair market value for purposes of section 12B of the Income tax Act. The question referred to us reads: Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the method adopted by the Income-tax Officer for computing the market value of the business as on January 1, 1954, was correct? The Income-tax Officer calculated the fair market value on the same basis as adopted for computing the compensation in accordance with the First Schedule to the Life Insurance Corporation Act, 1956. The formula adopted by the Life Insurance Corporation has been briefly and correctly summarized by the Income-tax Officer as follows: (i) Firstly, the actuarial valuation surplus of the previous 5 years (1950 to 1954) is noted; (ii) Secondly, 5% of each year's surplus is attributed as the shareholders' surplus although, according to section 49 of the Insurance Act, the company can credit a higher percentage of the surplus to the shareholders' credit and in the case of this company a higher percentage has actually been cred ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... computing capital gains. In the statement of the case, it was pointed out that the average total surplus allocated per annum to the shareholders over a period of six years during the periods 1947 to 1949 and 1950 to 1952 was ₹ 78,266.50P. Under the proviso to section 49 of the Insurance Act, 1956, the share of any surplus allocated to shareholders shall not exceed 7? per cent. of the surplus. The Income- tax Officer worked out the fair market value by applying this formula: 51, 155 x 20 x 1.057265=Rs. 10,81,688. But the assessee worked out the fair market value thus: 78,266.50 x 20 x 1.057265=Rs. 16,54,969. The figure 20 and the quotient applied both by the revenue as also by the assessee are on the basis of the First Schedule to the Life Insurance Corporation Act. But the first figure in the two formulae depended on whether the surplus allocated to the shareholders should be limited to 5 per cent., while in fact the surplus worked out to 7? per cent. as permitted by the provisions of the Insurance Act. While the revenue says that 5 per cent. is reasonable, the assessee asserts that when the surplus worked out to 7? per cent., it is not unreasonable to take it as ..... X X X X Extracts X X X X X X X X Extracts X X X X
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