TMI Blog1946 (4) TMI 24X X X X Extracts X X X X X X X X Extracts X X X X ..... alled the General Family Pension Fund founded and formed for the purpose of carrying on any business that has for its objects the acquisition of gain within the meaning of Section 4 of the said Act (Indian Companies Act, 1882). (b) To grant terminable pensions or annuities dependent on human life or any other event or contingency in favour of any subscriber and/or any nominee or nominees (within the categories therin mentioned) of a subscriber to the funds of the company. (d) To grant invest and deal with the moneys of the company not immediately required. (g) To pay out of any of the company's funds all expenses of management of the company's business and objects. 4. The income and property of the company whensoever derived shall be applied solely towards the promotion of the business and objects of the company as set forth in the Memorandum of Association and no portion thereof shall be paid or transferred directly by way of dividend or bonus or otherwise by way of profit to the members of the company. Provided that nothing therein contained shall prevent ( i) payment of specified salaries and wages and (ii)............granting to any m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mutual receipts which are non- taxable under the authority of Styles case? The Fund has considerable sums invested in Indian Government and similar securities and also some other investments, e.g., banking, Indian Treasuries and sterling securities brought into British India. The assessment for the year 1937-38 was made with regard to the Fund's financial year ending on 31st December, 1936, and the other assessment relates to the next financial year. Reference, in any detail, to the earlier year is alone necessary as the later year, except for some variations in amounts, is substantially the same. During 1936 the total investments amounted in value to ₹ 77 lakhs, approximately, of which the main portion was Indian Government and like securities; the investment income amounted to about ₹ 4,75,000 in respect of which, in most instances, income-tax was deducted at source; the other receipts, to use a neutral term, were from the members and amounted to a, sum slightly in excess of ₹ 1 lakh, being their annual subscriptions for pensions and annuties; the Fund paid about ₹ 4,12,000 in pensions and annuities and about ₹ 66,000 for management exp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... respect of the investment income. Prior to the second assessment for the year 1937-38 it would seem that the whole of the Fund's receipts were considered to appertain to its business of a mutual insurance company and that rule 25 of the Income-tax Rules, which was then in force, was applicable to the Fund. This rule provides that: In the case of Life Assurance Companies incorporated in British India whose profits are periodically ascertained by actuarial valuation, the income, profits and gains of the Life Assurance Business shall be the average annual net profits disclosed by the last preceding valuation, provided that any deductions made from the gross income in arriving at the actuarial valuation which are not admissible for the purpose of income-tax assessment, and any Indian income-tax deducted from or paid on income derived from investments before such income is received, shall be added to the net profits disclosed by the valuation . After the first assessment for 1937-38 had been made by application of rule 25, the Income-tax department subsequently formed the opinion that the rule did not apply to the company and it should be assessed upon its actual ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... those rules apply to a mutual insurance company. Dr. Gupta argued that, since the new rules are expressly made applicable to a mutual company, upon which rule 25 is silent, it should be inferred that the rule was inapplicable to a mutual company. The provisions of a subsequent enactment are not a safe guide to ascertain the meaning and effect of a repealed earlier enactment dealing with the same subject matter. Although an earlier enactment may not expressly make its provisions applicable in a particular instance, it does not necessarily follow that the provisions do not apply because a later enactment dealing with the same subject matter, contains an express provision for applicability in that instance. To ascertain its effect, the earlier enactment must be construed by reference to its provisions and those of the statute in which it is contained and not by reference to the later enactment. The exemption from the operation of the Indian Life Assurance Companies Act, it is argued, prevents the application of rule 2ft. The rule does not restrict its application to those companies which are subject to that Act nor make it inapplicable to companies which are exempted from th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d gains of a life insurance company shall be the average annual net profits disclosed by a periodical actuarial valuation when such company ascertains its profits by that method. The contention by the Commissioner is that the Fund must derive profits from its life assurance business as a condition precedent to the application of the provisions of the rule; if there are no profits from that business, the rule cannot be applied; the Fund is a mutual insurance company and the receipts from its members are mutual dealings, the excess of those receipts over expenditure is not profits ; and since there are no profits, the condition precedent is not fulfilled and the rule is inapplicable. Styles' case (supra) is relied upon as having decided that the receipts, or the excess of receipts over expenditure, from members of a mutual life assurance company, are not income or profits. The question for decision in that case was whether income-tax was payable upon the surplus from those receipts, after discharging the expenses for which they were obtained from members. This is made clear by the opening words of the argument for the insurance company at page 387 of the report. In ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... profits or gain, which are the result of that, are subject to income-tax. They do not refer to the question of trading per se and alone, but only to the question of trading incidental to the question which they had to decide, namely, whether the surplus was subject to income-tax . With respect to Lord Watson's observations Viscount Cave said, at page 867 of the report in the House of Lords in Cornish's case, that I cannot help thinking that the very learned Lord directed his observations only to the real question before the House, namely, whether there were taxable profits within the Income Tax Acts . Two earlier decisons, by the Court of Appeal, were not cited to, and were not considered by, the House of Lords in Styles' case but they were quoted with approval by Pollock, M.R., in the Court of Appeal and by Lord Cave in the House of Lords, in Cornish's case. Arthur Average Association for British and Colonial Ships [1875] 10 Ch. App. 542 and Padstow Total Loss and Collision Assurance Association [1880] 20 Ch D. 137 concerned mutual marine assurance associations, in which the opinions were expressed that each such association carried on the business of ma ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e extent usefully made to English decisions, in particular as to the meaning of the word 'income . I venture to include the words profits and gains as being included in the effect of the above observation. In the present reference the Fund is a mutual company which, it is admitted, carries on the business of life insurance, the transactions of insurance are effected between the Fund and its members from whom the Fund obtains receipts with respect to those business transactions. The Concise Oxford Dictionary defines income as periodical receipts from one's business . In the judgment of the Board in Commissioner of Income-tax v. Shaw Wallace and Company [1932] 59 I.A. 206, it is stated at page212 that income,' their Lordships think, in the Act (the Indian Income-tax Act, 1922) con notes a periodical monetary return coming in with some sort of regularity, or expected regularity, from definite sources . The annual payments by the members to the Fund are covered by the above observation. Whilst, as its Memorandum of Association provides, the income of the Fund shall be applied solely towards the promotion and objects of the company and no portion shall be paid ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the income, profits and gains of the previous year but, the section provides, this is subject to the provisions of the Act . Sub section (1) of Section 59 empowers the Central Board of revenue to make rules for the purpose of the ascertainment and determination of any class of income; by sub-section (5) the rules made under the section shall have effect as if enacted in the Act; and by sub-section (2) the rules may prescribe the manner in which and the procedure by which the income, profits and gains shall be arrived at in the case of, by clause (ii), insurance companies. The Income-tax Rules, including rule 25 which relates to an Indian life assurance company, and rule 33, which attracts the provisions in rule 25 to a non-resident life assurance company having business in India, were made in pursuance of Section 59; rule 25 is in effect, a provision of the Act and is mandatory in its terms; it provides that the income, profits and gains of Indian life assurance companies, whose profits are ascertained by periodical actuarial valuation, shall be the average annual net profits disclosed by the last preceding actuarial valuation. Since Section 3 is subject to the provisions in the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... idence of the public and also its members, particularly in the case of a mutual company, and to be in a position to fulfill its obligations. Reports of the decisions in the Liverpool and London and Globe Insurance Company v. Bennett are found, before Hamilton, J., in [1911] 2 K.B. 577, before the Court of Appeal in [1912] 2 K.B. 41, and in the House of Lords in [1913] A.C. 610. That was a case of an English Fire and Life Assurance Company which carried on a fire insurance business in the United States and in the Dominion of Canada, it made investments (called class A) in those countries for the purpose of complying with their laws; and also other investments (called class B) to comply with the laws of New York and other laws of the Dominion; it also made certain voluntary investments (called class C), not under legal obligation, but for the purpose of deriving income from funds consisting of accumulated profits acquired in past years but not distributed among the shareholders and the investments were made in order to have a fund easily realisable, if required. Generally it had not been necessary for the company to realise or expend any part of those moneys for the immediat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iness. From the decision in that case and the observations by the noble Lords, which I have quoted, it emerges that the investments of the fund form part of its insurance business. The profits from those investments are part of the business profits and those profits, as well as other profits, are ascertained by an actuarial valuation. This was done at the quinquennial valuation as on 31st December, 1934. Incidentally this is an additional circumstance which fulfills the requirements of rule 25 for its application to the fund. National Mutual Life Association of Australasia v. Commissioner of Income-tax, Bombay Presidency and Aden [1936] 63 LA. 99,- 4 ITR 44 concerned a non-resident mutual life assurance company which effected 98 per cent, of its total business with members. It was accepted before the Board, in that case, as it was accepted in this reference, that the principles in Styles' case applied; the head office of the company was in Melbourne and it had two branches in India; rule 35 of the Income-tax Rules makes the provisions of rule 25 applicable to a non-resident life assurance company, in the absence of more reliable data, to ascertain its income, profits and gains; ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... unty Council v. Attorney-General [1901] AC 26 and Edinburgh Life Assurance Co. v. Lord Advocate [1910] AC 143. I will refer later to those authorities. Since the profits of the Fund's life assurance business are ascertained by means of a periodical actuarial valuation, rule 25 applies; by this means, the income, profits and gains for purposes of assessment in any year are the average annual net profits disclosed by the last preceding valuation, after making any addition, which the rule specifics, and to which reference is not necessary. All assets and liabilities, including management expenses, are taken into account when computing the valuation and before arriving at the estimated surplus for the period covered by the valuation. In those circumstances the question of an allocation of a special fund or of a particular source of income, out of which the management expenses should be paid, or should be deemed to have been paid, does not arise. Allocation or appropriation with respect to payment of management expenses could only arise if rule 25 were inapplicable and if the income-tax assessment of the Fund's life assurance business were properly made pursuant to othe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ptions is to pay those expenses and when received they are readily available for that purpose and should be so utilised. If they are not so spent, they are not used for that purpose. Further, the Fund can, under the Memorandum of Association, invest moneys not immediately required. This must mean that they are to remain invested until needed. The capital of the investments cannot be realised to meet liabilities, e.g., management expenses, when other moneys are available, e g., members' subscriptions. Since the subscriptions are, I would say, ear-marked for those liabilities to the extent which would be covered by them, if the interest from investments is used to pay for the management expenses and the subscriptions are not used, that is not dealing with the subscriptions in a correct manner. If other moneys are used to pay for the object for which the subscriptions are received, the whole of those subscriptions is not the surplus after utilisation of the fund for its special purpose. In the London County Council and Edinburgh cases, in the House of Lords, there arose the meaning and effect of an English enactment, Section 24(3) of the Customs and Inland Revenue Act, 18 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ies, the company deducted and retained the amount of tax due in respect thereof. In the above two cases in the House of Lords, payments were made, of interest upon loans by the London County Council and, of annuities by the Edinburgh Insurance Company, out of income from which tax was deducted before it was received by the payer, or debtors. Each debtor had two sources of receipts, charged and uncharged, and sought to allocate the payments to charged receipts and to retain the amount of tax deducted. It was emphasised, by Lord Macnaghten at page 40 and by Lord Davey at page 42 in the London Country Council's case (supra) and by Lord Atkinson at page 158 in the Edinburgh's case (supra), that tax is not payable twice on the same income; at pages 42 and 43 in the London County Council case, Lord Davey pointed out that the Crown receiving tax on the whole income in the first instance from the owner had no further claim against the mortgagee or annuitant on whose account the owner is deemed to have paid as well as his own and, at page 45, Lord Davey held that the Council was entitled to retain the deductions in respect of income-tax with respect to payments made out of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rned Lord Justice added: If the question of liability, for instance, depended upon whether a man made a payment out of his professional income or out of his invested income, I should have said that that was solved by considering the actual fact whether the money did in fact come out of his professional income or..................out of his invested income. If, on the other hand, the question was what were the expenses of his profession, then the fact that he had charged those expenses to invested income or to some other item of income than his professional income would be irrelevant because he could not prevent the fact of it being an expense of his professional income from being determined properly merely by his making a different account in his book . In this case, again, there was not a fund, apart from the mixed fund, out of which the debenture interest should have been paid and there was no attempt to avoid using a fund for its special purpose. If the General Family Pension Fund allocated the management expenses to interest upon securities, instead of to the members' subscriptions, they would not be using the subscriptions upon the purpose for which they are rece ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s now before us the Income-tax Act has been amended by the inclusion of a new schedule governing computation of the income, profits and gains of insurance companies, and that this schedule has been made directly applicable to mutual concerns. Whether or not certain points now raised in this case may possibly arise also directly or indirectly in connection with the application in future cases of the schedule, we are not now adjudicating on the position as it stands today under the schedule but as it stood before the schedule. The nature of the decision to be arrived at in the present case in any event is one that will make a difference to the extent of large sums to the assessee company. In spite of the directions (at page 1 of the Paper Book) for one reference (meaning presumably the papers for one case relating to one assessment year) to be printed, this has not been done in any clear simple way. The result is that it is not as easy as it should be to trace the details of the various orders made relating to any one of the years of assessment with which the four appeals before us are concerned. The history of the various assessments actually made is found to be this. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 4 years (it does not appear from the materials before us which 4 years) and worked on figures taken from an account which he refers to as the Life Fund Account . The course of reasoning involved in this decision, it will be seen, must I think be this: Take the actual expenditure (₹ 19 lacs odd): Pay this first out of the non mutual actual receipts (₹ 16 lacs odd) as far as these will go thus absorbing them entirely; then pay the remaining balance of the total of expenditure (say ₹ 3 lacs approximately) out of the mutual receipts (₹ 7 lacs odd); you thus arrive at a resultant balance or surplus said to consist of the unused portion of the mutual receipts; then, because these mutual receipts are not taxable you conclude that no tax is payable by the company on these assessment years in any respect. (I shall come back to this). The assessee company was then assessed in accordance with the foregoing decision of the Appellate Assistant Commissioner for the assessment years 1928-29 to 1934-35. It was also assessed on, the same lines for the assessment year 1935-36. Its income for each one of these two assessment years was computed as nil. Moreov ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aper Book). The figures were taken by him not from any actuarial report but from figures of actual receipts and actual expenditure as shown in the assessee's accounts during the accounting year from 1st January to 31st December, 1937. At the same time as making the new assessment for the year of assessment 1938-39, the Income-tax Officer also served on the assessee a notice under Section 34 in respect of the year of assessment 1937-38 for the purpose of reopening that assessment. And he made a revised assessment for the year 1937-38 on the same lines as his new assessment for the year 1938-39. The revised assessment for 1937-38 as then made by him is set out at page 9 of the Paper Book. Both these assessments were made on 16th January, 1941 (the date 1943 on page 10 being a misprint). From these two assessments for 1938-39 and 1937-38 the assessee appealed to the Appellate Assistant Commissioner. That appeal was disposed of by an order of the Appellate Commissioner on 19th/23rd December, 1941. The effect of his order then made was:- 1.That these two assessments of the Income-tax Officer should be set aside. 2.Revised assessments for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ance with rule 25 with another direction to make the assessment of interest on investments under Section 8 and of income, profits and gains from other sources under Section 12 was illogical and illegal. 2.That the company maintained the Appellate Assistant Commissioner was right in directing assessment under rule 25. 3.That the assessee was entitled to the benefit of favour able appropriation as laid down in the Edinburgh's case ( supra); that in pursuance of that principle it should be held that the company had met its expenses first from its non-mutual receipts, absorbing all these, so that any surplus of receipts must be derived from mutual dealings; and that the result should be held to be, as contended by the assessee, that there was finally no taxable income for assessment. (The order dated 28th July, 1942, is printed at page 25 of the Paper Book). It was ordered that the Appellate Assistant Commissioner's direction that the assessment should be made under rule 25 was not correct. To this extent his order was modified. But except in this respect (which was in fact on a point not taken by the assessee, who wished to have the assessme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... utual receipts, that is income from its investments, in the first instance, against its expenditure and to charge any balance of expenditure against its mutual receipts, that is income from members' subscriptions, thus leaving a final balance of mutual receipts which are non- taxable under the authority of Sryles case (supra). I would first make certain general observations concerning rule 25:- For an insurance business the actual receipts and actual expenditure in any given year of account give little real indication of the financial state of progress of the business or whether it is heading in the long run towards a profit or a loss. When it is considered that an assured may pay a single lump sum entitling him to receive an annuity payment every year for the rest of his life, it is no proper indication of the solvency or profit of the business to point in one given year to the single large receipt for premium counterbalanced during that accounting year by no outgoing payment at all (which will have to be paid if it all many years later), or to point in another given year to the single small payment for an annuity for that year counterbalanced during that accounting y ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... business under Section 10 or of income, profits and gains from other sources under Section 12 is in every case based on actual receipts or on a surplus of actual receipts over actual expenditure during a particular year of account. This is not so for the computation made under rule 25 Here the computation is based on a comparison between the latest actuarial valuation report and last made previous actuarial valuation report of five years before. For the purposes of the actuarial valuation report the prospective liabilities and prospective assets of the company are taken at a valuation on a capitalised or discounted basis to represent their valuation at the date of the report, after allowing for the prospects of the length of life of the assured on actuarial life tables. Assuming the company is in a solvent state, a sin plus will be shown of the valuation of assets on that date over the valuation of liabilities. A difference can then be struck between the figure for surplus on the current actuarial valuation report and the figure for surplus on the last preceding actuarial valuation report made five years before. Such difference is (subject to minor adjustments) taken for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lus of assets over liabilities on the date of the actuarial valuation report of 1929. Then suppose all those 20 persons die prematurely in 1930. When it comes to make the actuarial valuation report of 1934 the debit figure for liability of the company in respect of the policies of those 20 persons (now deceased) will have vanished to zero. The difference in the surplus of 1934 from the surplus of 1929 will have been increased (among other elements) by the elimination of that debit figure. By that amount (irrespective of other elements) the profits of the insurance company (if a non-mutual company) will have been increased by the difference between that debit figure as it stood in 1929 and as it now stands at zero, in 1934. Yet there will have been no actual receipts during the 5 year period covered by the report which can be said to be responsible for this profit. In the actuarial valuation report in addition to taking account of the valuation of prospective assets and liabilities arising from premiums expected to be received and payments expected to be made on policies, account is also taken on the valuation of the assets of the company arising from its investmen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , profits and gains of the previous year............ By Section 13 it is also provided that income, profits and gains shall be computed for the purposes of Sections 10, 11 and 12 in accordance with the method of accounting regularly employed by the assessee . The assessee company kept its accounts by calendar years. So, for the year of assessment 1st April, 1937, to 31st March, 1938, if assessed under Section 8 the income computed would be actual receipts of interest actually received during the accounting year between 1st January and 31st December, 1936. But for application of rule 25, the position would be different. In 1937 the last quinquennial actuarial valuation report to have been made would be the one for the five years ending on 31st December, 1934. So the computation under rule 25 of income, profits and gains would be based on a difference in the surplus (of potential assets over potential liabilities) at 31st December, 1934, from the surplus at 31st December, 1929; for which the company's actual transactions over these 5 years and of nothing later than 31st December, 1934, would form the basis of calculation. It is clear that none of the actual re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rest on securities is intended to be included in the computation made under rule 25 and based on the actuarial valuation report; and that no separate assessment under Section 8 of interest on securities is contemplated. Interest on investments of non Indian companies (such as sterling companies) brought into India which, apart from the rule, might be assessed under Section 12 are also similarly intended, I think, when a computation is to be made under the rule to bo brought in to the same calculation based on the actuarial valuation report as being income, profits and gains of the company's business . I need not here consider whether there might be any receipt other than interest on investment which as outside the business might be open to separate assessment under Section 12. There are no such other receipts concerned so far as I am aware in the present case Apart from considerations arising on the wording of the rule, it would, I think, also be highly impracticable in any practical working of the rule when rule 25 is applied, and a computation is made under it based on the actuarial valuation report, to make any separate assessment under Section 12 in respect of i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... insurance business in the case of a non-mutual company was in the present case of a mutual concern mere mutual dealings. Having no business, it accordingly had no profits. Alternatively even if it be correct to say that the assessee company carried on insurance business, yet it was precluded by its own articles and memorandum of association from making any income, profits or gains from its business. In respect of its mutual receipts, by the rule in Styles' case being a mutual concern it could not have profits. And in respect of its interest on investments these were not included in the term business mentioned in rule 25; since the management of its investments did not form an integral part of the company's business . In any event, having no profits, the assessee company was therefore outside the rule, (iii) That, conceding, as he did, that the principle of Styles' case was applicable in India, any application of rule 25 did not make sense; and the rule became impossible of practical application and could not be worked out. Regarding the first of these objections: In my view rule 25 is not restricted to insurance companies governed by the Act of 1912 for reas ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s and taxable income. Therefore I do not feel it open to me to say that the word profits in rule 25 can be taken in the first instance, when testing whether the rule is applicable or not, to mean profits not liable to tax. For this reason I do not feel, when applying the rule to a mutual company, to ascertain its income, profits and gains, that you would be justified in making a computation in which you took account of all matters (including in this case mutual dealings) which you would take into account if the company were a non-mutual company. In my view the computation to be made under the rule can only mean a computation of the income profits and gains liable to tax. I agree with Dr. Gupta's argument therefore this far that the rule then will only be applicable to a company which has or may have profits in this sense of profits chargeable to income-tax . Secondly, on the authority of Styles' case which, it was conceded by counsel on both sides, is applicable in India, any surplus resulting from mutual dealings in the insurance business of a mutual concern such as the assessee company does not constitute a profit chargeable to income-tax. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al. For, since the insurance business was mutual, there would be nothing to assess; and if the interest on investments were assessed under Sections 8 and 12, there would be no room for any available deductions beyond those allowed by the Income-tax Officer in those assessments as made by him. In view of what I have already said earlier in this judgment, it is unnecessary for me now to gay more as to these contentions concerning an alternative or partial application of rule 25. Holding as I do that for this insurance company the management of its investments is an integral part of its business, and in view of the obligatory wording of rule 25 (by use of the word shall ) and holding as I do that rule 25 is applicable to this case, there is no room in my opinion for any assessment under Section 8 or Section 12 in this case. The position then is, since the management of its investments forms an integral part of its business, this assessee company has a combined business which includes its mutual insurance business and the management of its investments. On this position rule 25 has to be applied in a manner to achieve computation of profits from that side of the combi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... further, that even though that has not been done in fact by any separate allocation of the money, as was done here (that is, in the Sterling Trust case) in the later years by putting it at a special bank, still you are entitled to treat the money as having been paid out of the fund which is most favourable to the company, which is, in this case, the tax-payer . The same principle was in the Sterling Trust case held to be equally applicable whether the asssessee was seeking to show as the most favourable method of payment for himself payment out of the taxed income or payment out of the untaxed income. In the Edinburgh case and other cases the assessee was contending that moneys had been paid out of funds already charged or subject to charge. In the Sterling Trust case it was the other way about. That this made no difference is clear from the passage in the judgment in the Sterling Trust case of Atkin, L.J., at page 887 when he said: So far that seems to me to establish what was undoubtedly in all those cases a material fact, namely, that the annuities or the interest whatever it might be, was paid, and paid out of, in that case, the taxed income; and I think the same p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ofits Tax. The question then is: is that principle of favourable attribution as laid down in the Edinburgh case and those other cases to which I have referred, to be applied in the present case % In my view it should not for the following two reasons; firstly, because the main problem here is quite different; secondly, even if the main problem were the same, because the necessity for the assessment in the present case being made under rule 25 entails an assessment on a basis of valuation, which is not dependent on or directly concerned with actual payment, and therefore no question of attribution of payments arises at all. It stands to reason that any principle of attribution entails a notion of attribution of some payment to any particular fund, as having been made from, or as having been deemed to have been made from, that particular fund. And if there are no actual payments to be considered, there can be no process of attribution. I should, to explain myself better, enlarge slightly on these two reasons. In the first place the question arising in the present case is entirely different to my mind from that which arose in those cases to which the principle of fav ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r branch have in fact been paid out of the receipts of your branch . This simple illustration, though not exactly on all fours with the present case, illustrates what I find it otherwise difficult to put sufficiently forcibly into simple clear words: that (as I see it), attribution of payment has in truth nothing to do with any process for the ascertainment of profit, which must be worked out, and the working out of which must be finished, before the profit has been ascertained. This, it seems to me, was what Lord Atkin was referring to when he said (in the Sterling Trust Ltd. case (supra)) when giving an illustration:- If, on the other hand, the question was what were the expenses of his profession, then the fact that he had charged those expenses to invested income or to some other item of income than his professional income would be irrelevant because he could not prevent the fact of it being an expense of his professional income from being determined properly merely by his making a different account in his book, and I do not think the cases go to any different decision than that . What is I think a related aspect of the matter was also referred to by Lord Hal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ipts. In this computation now to be made under rule 25, no actual expenditure and no actual receipts are contemplated; since the whole matter rests on a surplus of assets over liabilities on mere valuation figures (taking into account prospective future liabilities and future assets) and on a difference between a surplus at the terminus at the end of a five year period from a surplus at the terminus a quo at the beginning of the five year period. The surplus itself is only notional figure. Since there is no question of actual expenditure or actual receipts there can be no question of attributing payment in fact to any particular class of receipts or to any particular fund. The result is, I hold therefore, that the principle of favourable attribution as exemplified in the Edinburgh erne for example, is not applicable to the present case. This brings me back again to the third objection rasied by Dr. Gupta concerning the actual application of rule 25 as a practical proposition in the present case. Is there any difficulty making it so impracticable in application as was suggested by Dr. Gupta as to make it proper for us to hold in spite of its terms, that on a genera ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ent. In either case a system of proportion is involved in the calculation. This brings me to what I reckon to be the last point for determination in this case. Is the use of any such system of proportion in the present case prohibited or legally unjustified? To hold that none of the company's expenses are to be taken into account, in arriving at the figure for taxable profit, would amount, I think, to holding that the interst on investments was not part of the company's business. It would be the similar thing in the result as taxing the company on its interest on its investments under Section 8 and not in relation to its business under Section 10. To hold, on the other hand, that the whole of the expenses of the company's business may be deducted in full against its interest on investment would be tantamount to holding that the company had no expenses in its insurance side of its business. As at present advised, though this is not part of the question directly referred to us, once it is decided that it is correct in the case of this insurance company to treat the management of its investments as part of its business, and to treat the carrying on of its ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is not the source from which certain moneys had in fact been paid or to be deemed to have been paid, but a pure question of calculation of the amount of profits. As at present advised I see no better alternative as a matter both of logic, arithmetic and justice than that the Income-tax Officer in applying rule 25 should adopt a system of proportion; by taking first one-fifth of the surplus shown (by a comparison of the two actuarial reports) which would give the figure for total annual profit if this company had been a non-mutual insurance company; and then taking some proportionate part of that figure so as to arrive at a proper figure representing that part of such total annual figure as would represent the portion of taxable profit in the case of this inuiual insurance company It will be for the Income-tax Officer to divide the figures of the relation in which the proportion should be calculated. Such an assessment though based on valuations on the actuarial reports would have a similar effect as alloting (if an assessment had been carried out under Section 10) a portion of the total expenses of the carrying on of the whole combined business of the company to the earning of the ..... X X X X Extracts X X X X X X X X Extracts X X X X
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