TMI Blog1951 (4) TMI 23X X X X Extracts X X X X X X X X Extracts X X X X ..... ents for the assessment years 1939-40 and 1940-41 are governed by the valuation made in 1937, while those for the assessment years 1941-42, 1942-43, 1943-44, 1944-45 and 1945-46 are governed by the valuation made in 1940. The assessee company carries on only life insurance business. It is common ground that Rule 2(b) of the rules in the Schedule to the Indian Income-tax Act applies for the purpose of computing the assessee company's profits. 3. The first question that was raised in respect of the above assessments was that the profits of the assessee company in respect of its mutual activities were not liable to tax. The profits of the assessee company in respect of its profit-sharing policies were not subjected to tax prior to the assessment year 1939-40. This fact is not disputed by the Department. It was, however, contended on behalf of the Department that these profits were liable to tax by virtue of the amendments made to the Indian Income-tax Act in 1939. Reliance was placed particularly on Section 2(6C) of the Act which defines the word income . It was argued on behalf of the assessee company that even though the Legislature might have intended to tax profits of a mu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the said appreciation had been passed through the revenue account, the consolidated revenue account would have reflected the appreciation by increasing the amount of life assurance fund by that amount. As a result of the increase in the amount of the life assurance fund as at 31st December, 1937, the surplus also would have increased by the said amount of ₹ 2,72,946-0-10 if the actuary maintained the same assumed rate of interest for working out the net liabilities. A copy of the revenue account for the year ending 31st December, 1937, a copy of the balance sheet as at 31st December, 1937, a copy of the consolidated revenue account for the period commencing 1st January, 1934, and ending 31st December, 1937, a copy of the valuation balance sheet as at 31st December, 1937, and a copy of the actuary's report dated the 17th December, 1938, form part of the case. They are, however, not printed to reduce the cost of printing. The assessee company has been directed to produce the copies at the hearing of the reference. 6. In computing the surplus as at 31st December, 1937, the Income-tax Officer added the sum of ₹ 2,72,946-0-10 in view of Rule 3(b) of the Schedule to t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s. Rs. for 4 years (from 1934 to 1937) 22,96,068 Add for interim bonus paid 87,816 23,83,884 Less surplus of previous valuation: brought forward 1,70,139 22,13,745 Add appreciation of securities not credited to Revenue accounts 2,72,966 Surplus 24,86,711 Add Disallowables: Income-tax deducted at source 96,496 Depreciation debited: Building 36, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Glass Sheets - 51 35 - 86 Entertainment to Agents - 265 375 207 847 Divali, X' mas presents - 45 25 15 85 Fitters - 70 - - 70 Sundries ( of ₹ 1,400) - 222 188 170 700 Contribution to Hon. Secretary: Insurance Legislation - - 1875 - 1,875 6,769 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ited by guarantee and all the policy-holders are members of this company. Some policy-holders participate in the profits and some do not, and the very important question that arises on this reference is, whether the profits made by the participating members is income liable to tax at all. Sir Jamshedji contends that the participating policy-holders make contributions in order to meet certain contingent liabilities. It turns out that the liabilities are less than what they contemplate and although the word profits is used, in substance and in reality what the participating members receive is not profits but the return of their own contributions which were more than sufficient to meet the liabilities contemplated. I think Sir Jamshedji's definition of the profits received by the participating members is perfectly correct. But the question that we have to determine is whether under the Income-tax Act such surplus which is returned to the participating members is made liable to tax. If what was taxed was profits or income in the ordinary sense, then undoubtedly the surplus which was returned to the participating members would not be liable to tax and prior to the amendment of Sec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e computed. There would be considerable force in the argument of Sir Jamshedji if Section 2(6C) had not been enacted. But Section 2(6C) imports into the definition of income which is to be found in the charging Section 3 these profits which may not be profits in the ordinary sense of the term but which are made profits by reason of Rule 2, because Rule 2 really gives an artificial extension to the meaning of the word profits , when it says that profits and gains shall be taken to be . Therefore a new class of artificial income is created by this rule and that artificial income is included into the meaning of Section 3 by reason of this rule. Sir Jamshedji relied on English authorities to point out that ever since Styles case [1889] 14 App. Cas. 381, the view consistently taken by the Judges in England has been that the surplus resulting from mutual activities of persons joining to form an insurance company is not income or profits subject to tax. Sir Jamshedji points out that as recently as in 1948 the House of Lords has rejected an attempt made by the Parliament to include that surplus in the profits which are subjected to tax. The decision is Inland Revenue Commissioners v. T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nterest on the investment of the company which he expects the company to realise in coming years. After fixing the net liability of the company on the current policies he deducts the liability from the life assurance fund and the result is the surplus. If the liability is more than the life assurance fund then there is a deficit. Now in the case of the assessee company the life assurance fund at the end of the actuarial period the 1st of January, 1934, to the 31st December, 1937, was ₹ 1,01,53,809 and the net liability was worked out at ₹ 78,57,741. This resulted in a surplus of ₹ 22,96,068. Now the sum of ₹ 2,72,946 was not added to the life assurance fund. If it had been added it would have resulted in the surplus being increased by that amount. It was not so added in the life assurance fund because the company did not take this amount to the revenue account in which case it would have increased the life assurance fund, but they took this amount direct to the balance sheet and showed it as investment reserve fund. Now the question is whether although the company has not shown it in the revenue account this sum of ₹ 2,72,946 still forms part of the su ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 77; 2,72,946 to the life assurance fund. We cannot speculate on the possibility of the actuary reducing the rate of interest with the result that the surplus may not have been the same by the addition of ₹ 2,72,946 as the surplus now shown in the valuation. The same considerations apply to the sum of ₹ 1,00,000 which is shown in the balance sheet as of the 31st of December, 1940. 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 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 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 ₹ 2,72,946 and also the sum of ₹ 1,00,000 it can only be on the basis that these two amounts formed part of the surplus. There ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... expenditure incurred by the assessee must be deemed to be expenditure on behalf of the policy-holders. Sir Jamshedji says that here we have not a company where there are shareholders in which case it might be stated that some expenditure was on behalf of the shareholders and the other on behalf of the policy-holders, and the expenditure on behalf of the shareholders would not have fallen under Rule 3(a). But where we have a company where all members are policy-holders and there is no share capital at all then the expenditure incurred by the company can be on behalf of no one else but the policy-holders. I should like to point out that question 3 as raised by the Tribunal does not really bring out the effect of the contention put forward by Sir Jamshedji. We are not concerned with the surplus as shown by the company or the surplus adjusted by the taxing authorities; surplus has to be adjusted in order to bring it within the compass of Rule 2(b). What we are concerned with is not Rule 2(b) but Rule 3(a) which deals with deductions on the basis of the amounts paid to or reserved for or expended on behalf of the policy-holders. The real question is which are the items which the taxing ..... X X X X Extracts X X X X X X X X Extracts X X X X
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