TMI Blog1951 (11) TMI 19X X X X Extracts X X X X X X X X Extracts X X X X ..... is no element of life insurance in any of the contracts, Classes A to D entered into by the company. In making these four assessments the Income-tax Officer and the Appellate Assistant Commissioner came to the conclusion that the business of the assessee was purely annuity business and there was no life insurance element in it as distinct from the annuity business. It was contended before the Income-tax Appellate Tribunal by the respondent company that the above finding was incorrect and that the company was carrying on life insurance business also. On this point the Income-tax Appellate Tribunal came to the conclusion that the company's business included elements of life insurance business. The order on this point states:- For example, in the policy forms for Class A, Class B and Class C the word used against item No. 5, namely event or events on the happening of which the pension shall become payable, are the death of the subscribers. The same words also appear in the policy form for the Joint Pensions Labels 1 to 6. In another part of the order the Income-tax Appellate Tribunal states:- We have no doubt in our mind that the business of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e, an estimate was made and the income determined under Rule 2(b) was adopted for determining income under Rule 2(a). 5. Regarding R.A. No. 128 covering the assessment year 1946-47, the Income-tax Appellate Tribunal further stated that for the purposes of this year's assessment, the Income-tax Officer had based his calculations on the actuarial valuation as at 31st December, 1942, although the actuarial valuation as at 31st December, 1945, was available. The Department's plea was that as the assessee had based his Income-tax Return on 1942 valuation instead of the 1945 valuation, as he should have done, the Income-tax Officer adopted the same valuation. In sending the case back to the Income-tax Officer, the Income-tax Appellate Tribunal wanted this mistake also to be corrected. 6. Against this order of the Income-tax Appellate Tribunal the Commissioner of Income-tax has filed the present application. We refer the following questions to the Honourable 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 a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... valuation. 3. Regarding 1946-47 assessment year the Department's position was that the company had not brought to the notice of the Department that a valuation had been made as at 31st December, 1945, that the assessee himself had based his return of income on the basis of 1942 valuation, and that this point had not been taken before the Appellate Assistant Commissioner. 4. As part of the enclosures the Income-tax Officer's letter dated 24th July, 1946, and the company's reply dated 30th July, 1946, may also be included. ALTERATION IN THE STATEMENT OF CASE We have considered this application. The only alteration in the statement of the case considered by us necessary is the addition of the word strictly after the words were not in line 21 on page 3 and further the Income-tax Officer's letter dated 24th July, 1946, and the company's reply thereto dated 30th July, 1946, referred to in this application, should also form part of the Paper Book. Further, this application along with our order on it may also form part of the Paper Book. S. Mitra, for the assessee E. R. Meyer and B. L. Pal, for the Commissioner JUDGMENT CHAKRAVARTTI ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uded therein which was made in any earlier inter-valuation period and any expenditure other than expenditure which may under the provisions of Section 10 of this Act be allowed for in computing the profits and gains of a business, whichever is the greater . Broadly speaking, the profits under the first method are the incomings received during the relevant year, less expenses, while under the second method they are only the average of the actuarial surplus, as disclosed by the last valuation subject to certain adjustments. Under the first method, an attempt is to be made to ascertain the actual profits of the year by reference to the receipts and disbursements. Under the second, no such attempt is to be made and the surplus disclosed by the last actuarial valuation, after making certain adjustments, is to be divided by the number of years for which the valuation was made and the amount thus arrived at is to be taken as the profits of the year. So far there is no difficulty. The two methods would appear to be mutually exclusive, as logically they ought to be, if the amounts respectively arrived at by their application are to be compared and the greater of the two is to be tak ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ct will be to import the actuarial method into Rule 2(a) and the mutual exclusiveness between that Rule and Rule 2(b) will be destroyed. Where a company carries on life insurance business of the ordinary kind and also annuity business, it will be destroyed partially, but where annuity business is the only business done, the destruction will be complete. Basically, the same method of computation will then have to be applied under both the sub-rules, in part in one case and wholly in the other, and the direction that the two sums ascertained by the two methods are to be compared with a view to taking the greater of them as the income of the year, will, to a certain extent at least, become unreal. The controversy under the principal question in this reference relates to this difficulty and the question is whether in the case of the assessee company which does only annuity business, the Income-tax Officer was right in taking annual average of the actuarial surplus disclosed by the last valuation as the gross external incomings , less management expenses, for the purposes of Rule 2(a), subject to certain adjustments. The other question referred concerns the nature of the annuity busine ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on a remand made by the Appellate Assistant Commissioner, while the assessment for the year 1946-47 is an original assessment. The method adopted in making the assessments can be ascertained only from the original assessment orders in respect of the first three years which have not been included in the Paper Book and without reference to which neither the contentions of the parties nor the findings of the Appellate Tribunal are intelligible. It appears that in making the original assessments for the first three years, the Income-tax Officer first computed the profits under Rule 2(b) by reference to the last actuarial valuation which was a triennial valuation for the period ending on the 31st December, 1942. There is no question that this computation was correctly made. The Income-tax Officer next proceeded to make a computation under Rule 2(a) and for that purpose he had to ascertain the gross external incomings of the preceding year, as defined in Rule 5(ii) and deduct therefrom the management expenses as defined in Rule 5(iii). As has been seen from the definition quoted earlier, under gross external incomings fall to be included- (a) interest ; (b) dividends (but not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... including therein the profits on the sale or the granting of annuities was applicable to the case, the method of computation adopted by the Income-tax Officer was still wrong. What he held was that the said provision applied only to purely annuity business , but not to cases where the contract was an admixture between an annuity and life insurance . In his opinion, the policies issued by the company required closer examination and, in that view, he remanded the cases to the Income-tax Officer for making fresh assessments after studying the various schemes evidenced by the policies. There can be no doubt that by purely annuity business the Assistant Commissioner meant annuities certain or at least annuities not dependent on human life. It appears that thereafter the attempt on each side was to adjust its case to the observations made by the Assistant Commissioner. The Income-tax Officer, before he took up the fresh assessments for the first three years, completed the assessment for the year 1946-47. The company contended that the contracts embodied in its policies were admixtures of annuity and life insurance, but expressed its inability to dissect its accounts and show the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oceed on the basis adopted by the Income-tax Officer. Before him, the company repeated its contention that it carried on a mixed type of business and also advanced a fresh contention that its business was ordinary life insurance business and not annuity business at all, the only difference being that the insured amount was paid in instalments instead of in a lump sum. Both these contentions were rejected by the Appellate Assistant Commissioner. He held that the business carried on by the company was life insurance business of the annuity type, as defined in the Insurance Act of 1938, and being thus life insurance business within the meaning of the Schedule, the sale and granting of annuities in which it consisted came within the purview of Rule 5(ii) and accordingly the profits of the company from the granting of annuities were to be included in the gross external incomings . The view attributed to the Appellate Assistant Commissioner in the Statement of the Case does not appear to be correct. He proceeded to hold that in the absence of a profit and loss account for the previous year, the Income-tax Officer had to make an estimate of the profits of the previous year and the way in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... its reply to the Commissioner's application. It is true that in his application for a reference the Commissioner said that what the Income-tax Officer had held was that the company did no other life insurance business than the granting of annuities and thereby he tried to explain away the inconsistency in the Officer's action in holding that the company's business had no element of life insurance in it and yet applying Rule 2 of the Schedule to the computation of its profits. That explanation, as I have already pointed out, is not acceptable, but the Tribunal held nothing contrary to the view wrongly attributed to the Income-tax Officer and its finding that the company's business was life insurance business in a way was not questioned by anybody. The explanation attempted by the Commissioner of what the Income- tax Officer had held could therefore be no occasion for referring the first question. Apart from the fact that the reference of the question is an unwanted reference, it is not very clear what the question, as framed, really means. Surely it does not ask whether the company's business consisted in granting annuities dependent on human life or in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . As far as can be seen from that order, the contest before the Tribunal was as to whether the policies had or had not in them an element of life insurance. That contest might well arise on and out of the Income-tax Officer's order, but why the parties engaged in it before the Tribunal and why the order of the Assistant Commissioner, holding that the company's policies were life insurance policies, was totally ignored both by the Tribunal and the parties, are by no means clear. Be that as it may, the extreme contention of Mr. Mitra is clearly not within the question referred, for the alternatives contemplated by it do not cover a case of the company not doing any annuity business at all. In any event, I am of opinion that neither of the contentions of Mr. Mitra is tenable and the view taken by the Tribunal, though somewhat curiously expressed, is correct. The object of Mr. Mitra's contentions was clear. If he could establish that the business of the company was not annuity but ordinary life insurance business, either wholly or in part, then to the extent he succeeded in his contention no profits would be liable to be included in the computation of gross external inc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... annuities on human life ; as under the definition it does annuity business contemplated by the definition can only be business of the kind represented by those policies. The business done by the assessee company under the A, B and C policies is therefore the specific variety of life insurance business defined by the Act as annuity business and not life insurance business of the ordinary kind. The case of the D policies was hardly argued. Under them, the subscriber secures for himself a monthly pension commencing from a selected age and lasting upto the end of his life and there can be no doubt that what he secures is a life annuity commencing from the selected age. It need hardly be pointed out that the subsidiary provisions contained in all the policies as to the refund of the premium in certain circumstances or the payment of certain minimum or additional benefits do not affect the fundamental character of the contracts which are contracts for the payment of annuities. Since the company does no business other than the business of issuing the four kinds of policies mentioned above, it follows that its business is wholly a business of granting annuities on human life and no part o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... certain were to be included in the gross external incomings under the head profits on the sale or the granting of annuities . The computation of the profits of such an annuity business would require no actuarial valuation and it was contended that since such construction of the definition would avoid the overlapping between Rules 2(a) and 2(b), it ought to be adopted as the practically feasible construction. In my opinion this contention is plainly untenable. Rules 1 to 5 of the Schedule contain provisions for the computation of the profits of not life insurance companies, but life insurance business. No business which is not life insurance business is germane to those rules of the Schedule, although such business may be carried on by a life insurance company. Life insurance business , according to its definition given in the Insurance Act which the Schedule adopts, includes the business of granting annuities on human life. Mr. Mitra himself pointed out, by reference to the language used in Gresham's case*, that in the case of a business in insurance annuities, sale and granting are synonymous and so the use of the word sale does not point to the annuities contempl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... deduct therefrom the management expenses of that year, as defined in Rule 5(iii). In carrying out the first part of his task, he had to take in (i) interest and dividends (but not those on the annuity fund), (ii) fees, (iii) fines, (iv) incomings from all other sources (but not premiums received from policy-holders), (v) profits on the sale or the granting of annuities and (vi) profits from reversions. The complaint against the Income-tax Officer is that he did not take the incomings under the several heads, item by item, but confined himself to the total profits of the annuity business and that for those profits he adopted the annual average of the actuarial surplus. I shall take the two parts of the criticism separately. As regards the first part, in a case where apart from annuity business, the company also does life insurance business of the ordinary kind, it may be possible to apply Rule 2(a) to the letter of the law and proceed by way of taking some incoming under each head, for, while the incomings of the annuity business will go into the profits of that business, to be taken in as a whole under item (v) above, there will still be the incomings of the general business a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nsurance, but there may be an annuity business as well. It is to be noticed further that the profits of an annuity business are not only treated separately as a distinct item, but also differently. While Rule 2(a) read with Rules 5(ii) and 5(iii) purports to prescribe an investment income minus expenses method of computing the profits of a life insurance business, it at the same time lays down that one of the items to be included on the receipt side is profits from the sale or the granting of the annuities taken as a whole. The method of taking the individual items of certain kinds of receipt and deducting the expenses as defined in Rule 5(iii) from the sub-total which is generally directed by the rule is not applied to annuity business but, on the other hand, the direction with regard to such business is to take the resultant profits in a lump. Such profits, it will be noticed, will include the premiums received on the annuity policies, although under the general rule, premiums received from policy-holders are to be excluded. But the main point is that where, as in the present case, the only business done is annuity business and the whole profits of the business are to be taken in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oint the Tribunal has held that in applying Rule 2(a), no reference to the actuarial valuation report is permissible and it has directed the Income-tax Officer to make a fresh computation without resorting to the report. There can be no doubt that the view taken by the Tribunal is wrong. A business of granting annuities on human life is life insurance business and it is now a matter of elementary knowledge that the profits of such a business cannot be ascertained in the ordinary way (Commissioner of Income-tax, Bengal v. Himalaya Assurance Co. Ltd., per Lord Romer) and that they can be ascertained only by an actuarial valuation: Scottish Union and National Insurance Co. v. Smiles; Liverpool and London and Globe Insurance Co. v. Bennet. The obvious reason is that the amount of the premia receivable and the sums payable under the policies issued must necessarily vary with the incidence of mortality among the insured and therefore anything like profits can be ascertained only by intricate actuarial calculations of the present value of the premia receivable under the policies and that of the liabilities thereunder on the basis of mortality expectations. The difference between the two ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (a). When a company is assessed according to the second method, it is entitled to claim refund of tax on an amount equal to the expenses of management, but from such expenses must be deducted fines, fees, income from untaxed sources, profits from reversions [Income-tax Act, 1918, Section 33(1)(b)] and profits arising from the granting of annuities on human life [Finance Act, 1923, Section 16(1)]. The process under the English law is thus the converse of that under the Indian Act, for, whereas under the Indian law deductions are made when computing the assessable income, under the English law tax is first suffered on the gross income and a refund of tax on the amount of the allowable deductions is then granted. But what is important to notice is that for the purposes of the deduction, the profits of the annuity business are to be computed in accordance with the rules of Case I of Schedule D [Finance Act, 1923, Section 16(2)]. It will thus appear that while the computation in one case is on the balance of profit basis, corresponding to Rule 2(b), and in the other case on the investment income minus expenses basis, corresponding to Rule 2(a), still the computation of the profits of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cision nothing contrary thereto has been done in the present case, for it is nobody's contention that in determining the actuarial surplus, the annuity claims paid were not deducted. I have already pointed out that the profits of an annuity business under Rule 2(a) are to be ascertained by the particular method of commercial accounting of which such profits are susceptible but that reference to the actuarial valuation can in no case be avoided. Yet, although such reference is required and the net actuarial liability on the relevant dates must always be taken into account, adoption of the annual average of the actuarial surplus will not always be necessary. Three kinds of cases are possible, viz., (i) where a company does both annuity business and insurance business of the ordinary kind, but maintains a common fund and a combined revenue account; (ii) where a company does business of both kinds, but maintains a separate annuity fund and a separate revenue account for the annuity business; and (iii) where the company does annuity business only. We are concerned here only with the third case. In none of the cases, however, can the profits of the annuity business for any particu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o such valuation, and no profit and loss account of the kind mentioned or of any kind has been submitted by the company, it is not possible for the Income-tax Officer to make any computations himself of the profits of the particular years with which he is concerned and he must necessarily fall back on the computation made by the actuary for the last valuation period and take the annual average of the surplus found by him, as representing the profits of each of the years. In the present case, there was no annual actuarial valuation and as the Appellate Assistant Commissioner has pointed out, no profit and loss account of any kind for the relevant preceding years was submitted by the company at all. In those circumstances, the Income-tax Officer, in my opinion, had no alternative to adopting the annual average of the actuarial surplus as representing the basis profits for each of the years. The direction of the Tribunal to make a computation in some different manner by, as it says, following the provisions of Rule 2(a) to the letter of the law and without reference to the actuarial valuation report is not a practicable one and the Tribunal has not said, nor was it pointed to us, ho ..... X X X X Extracts X X X X X X X X Extracts X X X X
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