TMI Blog1965 (4) TMI 12X X X X Extracts X X X X X X X X Extracts X X X X ..... to us that the intention of the rule is that the balance of profits as disclosed by the accounts submitted to the Superintendent of Insurance and accepted by him would be binding on the Income-tax Officer, except that the Income-tax Officer would be entitled to exclude expenditure other than expenditure permissible under the provisions of section 10 of the Act. It is common ground in this case that the reserves which were added to the balance of profits were not expenditure. Accordingly, agreeing with the High Court, we answer the second question in the affirmative. Appeal allowed in part. - - - - - Dated:- 2-4-1965 - Judge(s) : K. SUBBA RAO., J. C. SHAH., S. M. SIKRI JUDGMENT The judgment of the court was delivered by SIKRI J.--These appeals by certificate granted by the High Court of Calcutta, under section 66A(2) of the Indian Income-tax Act, 1922, are directed against the judgment of the said High Court answering two questions referred to it against the Revenue. The questions are : " (1) Whether the profit arising to the assessee-company from miscellaneous insurance transactions of a mutual character was assessable under the Indian Income-tax Act ? and ( ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al describes the accounts maintained by the assessee thus : " The assessee's published revenue accounts contained three classifications, viz., (i) miscellaneous insurance business revenue account, (ii) profit and loss account, and (iii) profit and loss appropriation account. In the miscellaneous insurance business revenue accounts were included subscriptions from the members, gross premia from the members and from such amounts were deducted general reserve and/or contingency reserve. Reserves so made were transferred to the balance-sheet as credit accounts. The claims paid or payable and the expenses of management were deducted from this revenue account. The balance of the miscellaneous insurance business revenue account was transferred to the profit and loss account to the credit of which was further added interest on investments and the debits included provision for taxation, interest on loan, contribution to provident fund and depreciation. The balance of this account being the balance of profit and loss account was transferred to the profit and loss appropriation account. Therefrom, in one year, ended 31st December, 1949, further deduction was made against contingency reserv ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... see. Section 2(6C) at the relevant time defined " income " to include "...profits of any business of insurance carried on by a mutual insurance association computed in accordance with rule 9 in the Schedule." We may mention that another section 2(6C) was substituted by Act XV of 1955, and the wording substituted by this Act in sub-clause (vii) is " the profits and gains of any business of insurance carried on by a mutual insurance association or by a co-operative society computed in accordance with rule 9 in the Schedule ". But nothing turns on the change of the language as far as a mutual insurance association carrying on business of insurance is concerned. Rule 9 of the Schedule reads thus : " 9. These rules apply to the assessment of the profits of any business of insurance carried on by a mutual insurance association..." Rule 6 with which we are concerned read thus : " The profits and gains of any business of insurance other than life insurance shall be taken to be the balance of the profits disclosed by the annual accounts, copies of which are required under the Insurance Act, 1938, to be furnished to the Superintendent of Insurance after adjusting such balance so ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that a surplus arising on the transaction of a mutual insurance company with non-members is taxable as profits or gains of the company. But unfortunately for the Inland Revenue the hypothesis is wrong. It is not membership or non-membership which determines immunity from or liability to tax, it is the nature of the transactions. If the transactions are of the nature of mutual insurance the resultant surplus is not taxable whether the transactions are with members or with non-members. " He further relies on the observations of Lord Macmillan that " the Legislature has plainly missed fire. Its failure is perhaps less regrettable than it might have been, for the sub-section has not the meritorious object of preventing evasion of taxation, but the less laudable design of subjecting to tax as profit what the law has consistently and emphatically declared not to be profit ". He says that similarly in this case the legislature has plainly missed fire. In order to appreciate the scope of that decision it is necessary to set out the relevant part of section 31 of the Finance Act, 1933. Section 31(1) enacted : " 31. (1) in the application to any company or society of any provision or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ts and other activities of a mutual insurance company. It is said that this definition was inserted to make it clear that such profits would be taxable. We cannot accede to this contention. It was well established that such profits would be taxable apart from the new definition. We cannot understand why it was necessary to make it doubly clear. Moreover, rule 6 deals with balance of profits, which would include profits arising from the business of insurance of a mutual character. It deals with balance of profits as a composite thing. It is impossible to dissect this composite thing. If we were to accede to the assessee's contention, the definition would serve no purpose whatsoever. It seems to us that the legislature has evinced a clear intention to include the balance of profits as computed under rule 6 within the word " income " in section 3 of the Income-tax Act, and accordingly such balance of profits is taxable. We are unable to agree with the High Court that the Bombay case is distinguishable in principle. It is true that the Bombay High Court was concerned with rule 2, but when we go to the Schedule and find out what is the balance of profits or surplus that has been m ..... X X X X Extracts X X X X X X X X Extracts X X X X
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