TMI Blog1963 (12) TMI 5X X X X Extracts X X X X X X X X Extracts X X X X ..... held that the proviso to rule 3(b) was not intended to cover cases like the present. It would appear, therefore, that the High Court thought that the Income-tax Officer had no power under the rule to make the adjustment. It however none the less answered the question in the affirmative. Obviously, what was meant was that the Income-tax Officer had the power, quite apart from the rule, to make all adjustments to prevent evasion of tax. The High Court in fact expressly said that the rule did not deprive the Income-tax Officer of the power to do this. It is clear that the High Court had travelled beyond the question. No objection having been taken at the Bar to this procedure, we have dealt with the matter from this point of view also. The question framed has to be answered in the negative. Appeal allowed. - - - - - Dated:- 9-12-1963 - Judge(s) : A. K. SARKAR., M. HIDAYATULLAH., J. C. SHAH JUDGMENT [The judgment of SARKAR and SHAH JJ. was delivered by SARKAR J. HIDAYATULLAH J. delivered a separate judgment.] SARKAR J.----We think that these appeals should be allowed. The appeals relate to the assessment to income-tax of the income of the life insurance business of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... these cases turn may now be set out. 3. In computing the surplus for the purpose of rule 2---. (b) any amount either written off or reserved in the accounts or through the actuarial valuation balance-sheet to meet depreciation of or loss on the realisation of securities or other assets shall be allowed as a deduction, and any sums taken credit for in the accounts or actuarial valuation balance-sheet on account of appreciation of or gains on the realisation of the securities or other assets shall be included in the surplus : Provided that if upon investigation it appears to the Income-tax Officer after consultation with the Controller of Insurance that having due regard to the necessity for making reasonable provision for bonuses to participating policy-holders and for contingencies, the rate of interest or other factor employed in determining the liability in respect of outstanding policies is materially inconsistent with the valuation of the securities and other assets so as artificially to reduce the surplus, such adjustment shall be made to the allowance for depreciation of, or to the amount to be included in the surplus in respect of appreciation of, such securities a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n : "Whether, upon the facts found by the Tribunal, the Income-tax Officer had in this case jurisdiction to proceed to make adjustment in terms of rule 3(b) of the Schedule to the Indian Income-tax Act ?" The High Court took the view that the matter did not come within rule 3(b) of the Schedule and, therefore, no question of consultation with the Controller of Insurance arose. In the High Court's opinion the Income-tax Officer had not been deprived of the authority of correcting errors of the kind that had been detected in these cases and the proviso was not intended to cover those cases where, as in the present, the assessee, in order to evade income-tax, under-valued his securities. The High Court, therefore, answered the question in the affirmative. The present appeals are against this judgment of the High Court. It seems to us that the decision of the High Court is clearly erroneous. Under rule 2 of the Schedule the Income-tax Officer has to compute the profits and gains of a life insurance company at the greater of the two methods of assessments mentioned in clauses (a) and (b). There may be no restriction upon his jurisdiction in the computation of profits and gains ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Officer, having regard to certain matters to which it is not necessary to refer here in detail, that the rate of interest or other factor employed in determining the liability in respect of outstanding policies is materially. inconsistent with the valuation of the securities and other assets so as artificially to reduce the surplus, then he would have the power to make certain adjustments after consultation with the Controller of Insurance. Quite clearly the adjustment made in the present case by the Income-tax Officer was not of the variety mentioned in the proviso. He does not say that he made the adjustment because he found that any rate of interest was inconsistent with the valuation of securities or other assets. The adjustment made by him had nothing to do with any rate of interest. It was made only because he thought that the securities had been undervalued. This he had no power to do under the proviso. This again is not in dispute. The result, therefore, is that we find nothing in the rules justifying the adjustment made by the Income-tax Officer in the present cases. We have set out the relevant provisions and we think that they do not contemplate any other adjustment ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on allow the appeals with costs. HIDAYATULLAH J.----I agree but would like to add the following : These are three appeals by certificate granted by the High Court of Punjab under section 66A of the Income-tax Act against its judgment dated March 2, 1960. The appellant is the Life Insurance Corporation (Unit : Bharat Insurance Company Ltd.---original appellant). The appeals relate to the assessment years 1952-53, 1953-54 and 1954-55 and the corresponding years of account were the calendar years 1951, 1952 and 1953. The assessment was made on the original appellant, the Bharat Insurance Co. Ltd., by the Income-tax Officer, Companies Circle, New Delhi, under the rules framed for assessment of insurance companies pursuant to section 10, sub-section (7), of the Income-tax Act, on the basis of the annual average of the surplus of the insurance company as found by actuarial valuation in the last inter-valuation period of four years ending on December 31, 1951, and accepted by the Controller of Insurance under the Insurance Act, 1938. In this quadrennium, the Bharat Insurance Co. Ltd. had debited a sum of Rs. 18,75,000 in the consolidated revenue account from January 1, 1948, to Dece ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ctor employed in determining the liability in respect of outstanding policies ?" The Tribunal drew up a consolidated statement of the case for the three assessment years and referred the following question for the decision of the High Court : " Whether, upon the facts found by the Tribunal, the Income-tax Officer had in this case jurisdiction to proceed to make adjustments in terms of rule 3(b) of the Schedule to the Indian Income-tax Act? " In the High Court, the Commissioner made an application under section 66(2) of the Income-tax Act for an order directing the Tribunal to refer the former question ; but that application was disposed of along with the reference and the High Court by its order under appeal answered the latter question against the assessee and dismissed the application under section 66(2) of the Income-tax Act. Khosla C.J. and Grover J., who disposed of the above reference, observed that the question which they were answering comprehended the other question. The High Court in disposing of the reference held that the Income-tax Officer had the jurisdiction " to deal with the matter in the manner employed by him," and " was not obliged to consult the Contro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uation causing at the same time an investigation to be made. The Insurance Act further requires that every insurer must invest and at all times keep invested, assets equivalent to the liabilities on matured claims or on the policies in the life business maturing for payment. Sections 27 and 27A indicate the kinds of investments in which the insurer must invest or keep invested the assets and the controlled fund. The balance-sheet of the life insurance business must always be prepared as a separate document. The regulations enjoin that a statement in Form AA showing the market value and the book value of the assets in India must be appended to the balance-sheet. The accounts must be signed and certified and, in particular, a certificate must be appended explaining how the values as shown in the balance-sheet of the investment of stocks and shares have been arrived at and how the market value thereof has been ascertained for the purpose of comparison with the values so shown. There has further to be another certificate that the items in respect of reversions and life interests have been valued as on the date of the balance-sheet by an actuary and the assets shown under the heading ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s the surplus or the deficiency as the case may be. As investments depreciate, an investment reserve fund is maintained to which amounts are transferred to make up for the shortfall. The insurance company is thus required to maintain an insurance fund sufficient to cover its liabilities in investments and depreciation in the value of the investments must be specially provided for by making other investments which are kept in the investment reserve fund. We are now in a position to understand the provisions of the Income-tax Act which include references to these documents. To begin with, it must be remembered that insurance companies are assessed somewhat differently from other business organisations. Normally sections 8, 9, 10 and 12 of the Income-tax Act apply to the assessment of business organisations but the rules for assessment contained in those sections do not apply to the assessment of an insurance company. Section 10 of the Income-tax Act deals with the head " profits and gains of business, etc. ". Sub-section (7), however, says that notwithstanding anything to the contrary contained in section 8, 9, 10, 12 or 18 the profits and gains of any business of insurance and th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o be the profits and gains of the insurance company. Rule 3 shows what changes can be made in the annual average of the surplus. The purport of rule 3, in the context of this case, may now be stated in simple language. It provides in its main part that amounts reserved in the accounts or through the actuarial valuation balance-sheet to meet depreciation of securities shall be allowed as a deduction and converse any sums taken credit for in the accounts or actuarial valuation balance-sheets on account of appreciation of securities shall be included in the surplus. In short, the amount by which the value of securities depreciates is allowed as a deduction from the surplus and the amount of appreciation of securities is included in the surplus. There is no question here of appreciation and the latter part of the main rule may, therefore, be ignored. This case is concerned only with the depreciation of the securities in the reserves as shown in the accounts and through the actuarial valuation balance-sheets. If such depreciation in fact takes place, it is open to the insurance company to claim that it be allowed as a deduction from the surplus and it must be allowed. But by under-valui ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... value with the valuation actually made and on finding that they were under-valued, to add a certain amount to the surplus for tax purposes. The Appellate Assistant Commissioner differed about the market value of the stocks and shares and reduced the amount which was added but did no more. The Tribunal, which reversed these orders went merely by the failure of the Income-tax Officer to consult the Controller of Insurance. The two questions (that proposed by the Commissioner and that actually referred) bring into relief respectively the actions of the Income-tax Officer and the order of the Tribunal. The question as answered refers to the Income-tax Officer's decision while the other was limited to the Tribunal's order. The department did not seek to place its case under the proviso either before the High Court or before us, perhaps, because the conditions in the proviso (whether they be directory or mandatory), had not been followed at all. The department claimed that the matter fell to be governed by the main rule without the assistance of the proviso and this contention appears to have been accepted by the High Court. As has been shown above, Form G is the consolidated revenue ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sfer of Rs. 18,75,000 to the investment reserve fund the balance to the credit of the fund was Rs. 22,95,154 when it need not have been more than Rs. 22,64,733 and this showed an excess of Rs. 30,420. This excess he disallowed. He then found out the market rate of stocks and shares in the fund and came to the conclusion that some of these were under-valued by a sum of Rs. 1,58,756. He held that an excess of Rs. 1,89,186 was transferred to the investment reserve fund from the surplus. According to him, the surplus of Rs. 26,45,362 shown in Form I required to be adjusted and be added a lump sum of Rs. 1,75,000 to the surplus. In other words, the total depreciation claimed under rule 3(b) as an allowance was not accepted. The sum of Rs. 1,75,000 was reduced by the Appellate Assistant Commissioner to Rs. 1,45,000 and it was altogether cancelled by the Income-tax Appellate Tribunal. The learned judges of the High Court in dealing with this matter observed that the excess of Rs. 30,420 was not an actual depreciation and no provision need have been made in the reserve fund for this sum. They also held that the Income-tax Officer had rightly held that some of the stocks and shares had b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... correct valuation of the securities." In the result, they held that the Income-tax Officer had " full jurisdiction " to deal with the matter in the manner employed by him. Mr. Setalvad on behalf of the Life Insurance Corporation pointed out that the actuarial valuation balance-sheet in Form I had determined the surplus by deducting from the life insurance fund as on the valuation date the net liability under the life insurance business. He pointed out that in working out this liability the actuary had assumed the rate of interest at 3% per annum and to arrive at this figure, he had taken into consideration the average interest yield for the four years covered by the valuation. The interest yield thus was obtained by properly following the procedure laid down by regulation 3 of Part 1 of the Fourth Schedule to the Insurance Act. He contended that if the interest yield were found to be lower by reason of the reduction of the amount of depreciation, the liability for the policies, as calculated in the accounts, would be disturbed and the liability would increase. He pointed out that rule 30 of the previous rules was amended by the addition of a proviso in the new rule 3(b) to m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the gross external incomings of the preceding year with the management expenses. Rule 2(b), contemplates the annual average of the surplus of deficit disclosed by actuarial valuation. In the present case the first limb of rule 2 did not apply. So the annual average of the surplus found by the actuary had to be taken and from it the surplus of the last inter-valuation period had to be deducted as also expenditure allowable under section 10 of the Income-tax Act. This is the basic calculation and they were followed. Certain special limitations indicated in the proviso to rule 2 and rule 3(a) are not relevant for the present case. Under the main part of rule 3(b) certain special deductions and additions must be made to the annual average of the surplus determined under the second rule. Since the life fund is held in securities and the price of stocks and shares fluctuates, provision has been made in rule 3(b) to make adjustments. Rule 3(b) in its main part speaks of adjustments on the basis of the accounts and amounts as entered in the accounts determine what must be added to or deducted from the surplus. The Icome-tax Officer must deduct from the annual average of the surplus for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by the assessee. But the gist of the matter is the same whichever way one looks at it. The adjustment of the surplus in the matter of the appreciation and depreciation of securities not on the basis of the accounts but on the basis of the Income-tax Officer's discretion can only be done in the manner laid down in the proviso. Such power is not available under the main rule which merely allows book entries to be worked into the surplus. I find it impossible to endorse the view of the High Court that the Income-tax Officer had any general power to make adjustments independently of the proviso. If he detected any discrepancy he had to proceed under the proviso. To hold otherwise would make the proviso entirely redundant, and it is quite clear that such could not be the intention. Cases under the former rule 30 cannot be used as Precedents because the present rule 3(b) has been materially altered by the addition of the proviso. Formerly the rule tried to serve both the objects by using the word " may " but the word " may " which gave a discretion to the Income-tax Officer could lead to arbitrary actions and the rule is now in two parts, the main rule leaving no discretion and the pr ..... X X X X Extracts X X X X X X X X Extracts X X X X
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