1979 (1) TMI 27 - HC - Income Tax

Capital Asset Capital Gains Capital Receipt Computation Of Capital Income Tax Act Insurance Company Life Insurance Business Life Insurance Corporation Market Value

Issues Involved:
1. Capital receipt vs. revenue receipt of compensation under the Life Insurance (Emergency Provisions) Act, 1956.
2. Basis for determining the market value of life insurance business for capital gains.
3. Entitlement to rebates and reliefs under the Income-tax Act or Finance Act.
4. Reduction of dividends and interest on securities by business expenses.
5. Entitlement to relief under section 15B for donations.
6. Deduction of income accruing outside taxable territories.
7. Disallowance of tax paid to Madras Municipal Corporation.
8. Deduction of traveling expenses for business profits.
9. Deduction of written-off debts in determining business profits.

Detailed Analysis:

Issue 1: Capital Receipt vs. Revenue Receipt
The court examined whether the amount of Rs. 1,50,983 received by the assessee as compensation under section 8 read with section 7 of the Life Insurance (Emergency Provisions) Act, 1956, was a capital receipt. The Tribunal had upheld that this amount was a capital receipt, arguing that the vesting of management in the Central Government was a step towards complete nationalisation. The compensation was for the deprivation of an important business function, thus making it a capital receipt. The court agreed with this view, citing similar decisions from the Delhi High Court in Lakshmi Insurance Co. (P.) Ltd. v. CIT and the Calcutta High Court in CIT v. National Insurance Co. Ltd. Therefore, the amount was not liable to be included in the business profits.

Issue 2: Basis for Determining Market Value for Capital Gains
The second issue was whether the basis adopted by the Life Insurance Corporation Act for paying compensation in 1956 should be used for determining the market value of the life insurance business as of January 1, 1954, for capital gains purposes. The Tribunal rejected the revenue's contention that the formula prescribed in the Schedule to the Life Insurance Corporation Act, 1956, should be used. The Tribunal's approach was supported by the Madras High Court's decision in United India Life Assurance Co.'s case, which allowed for a higher allocation permissible under the Insurance Act. The court found no infirmity in the Tribunal's approach and answered the question in favor of the assessee.

Issue 3: Entitlement to Rebates and Reliefs
Mr. Joshi, representing the Commissioner, conceded that the assessee was entitled to rebates and reliefs under the appropriate provisions of the Income-tax Act or the Finance Act. This concession was based on principles laid down in earlier decisions, including CIT v. New India Assurance Co. Ltd., Life Insurance Corporation of India v. CIT, and Jaipuria Samla Amalgamated Collieries Ltd. v. CIT. Therefore, the question was answered in favor of the assessee.

Issue 4: Reduction of Dividends and Interest by Business Expenses
It was agreed that this issue was concluded in favor of the assessee by the decision of this court in CIT v. New Great Insurance Co. Ltd. Therefore, the question was answered in the negative and in favor of the assessee.

Issue 5: Entitlement to Relief for Donations
Mr. Joshi conceded that the assessee was entitled to relief under section 15B for donations made in the assessment years 1957-58, 1958-59, 1959-60, and 1960-61. The question was answered in favor of the assessee.

Issue 6: Deduction of Income Outside Taxable Territories
The assessee was entitled to a deduction of Rs. 4,500 from its income accruing outside the taxable territories under the third proviso to section 4(1) for the assessment years 1957-58, 1958-59, and 1959-60. Mr. Joshi conceded this point, and the question was answered in favor of the assessee.

Issue 7: Disallowance of Tax Paid to Madras Municipal Corporation
The deduction in respect of tax paid by the company to the Madras Municipal Corporation could not be disallowed under the provisions of section 10(4). Mr. Joshi conceded this point, and the question was answered in favor of the assessee.

Issue 8: Deduction of Traveling Expenses
The amount of Rs. 7,397, being traveling expenses of Shri Hassan for his trip to Kabul, Kandhar, and Tehran, was deductible in determining the company's business profits for the year 1960-61. Mr. Joshi conceded this point, and the question was answered in favor of the assessee.

Issue 9: Deduction of Written-off Debts
The court considered whether the debts of Rs. 12,927 could be allowed as a deduction in determining the company's business profits for the assessment year 1960-61. The Tribunal had relied on the decision in Pandyan Insurance Co. Ltd. v. CIT, where it was held that "expenditure" did not include depreciation. Following this principle, the court concluded that the debts written off would be required to be allowed as a deduction. Thus, the question was answered in favor of the assessee.

Conclusion:
All questions were answered in favor of the assessee, with the Commissioner directed to pay the costs of the reference.

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