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PETITIONER: COMMISSIONER OF INCOME-TAX, MADRAS

       Vs.

RESPONDENT: PRITHVI INSURANCE CO.  LTD.

DATE OF JUDGMENT: 26/10/1966

BENCH: SHAH, J.C. BENCH: SHAH, J.C. RAMASWAMI, V.

CITATION:  1967 AIR  853            1967 SCR  (1) 943  CITATOR INFO :  RF         1969 SC 946  (7)  F          1970 SC1379  (3,5)  R          1978 SC1320  (11,14,16)

ACT: Indian  Income-tax  Act, 1922,  s.  24(2)-Insurance  company carrying  on  life  insurance business as  well  as  general insurance business-Such businesses whether one business  for purpose of section.

HEADNOTE: The  respondent  company  carried on business  of  life  and general  insurance.  In assessment proceedings for the  year 1951-52, the Income-tax Officer held that the life insurance business  and the general insurance business carried  on  by the  company  were  ’distinct and  separate’  and  the  loss carried  forward from the Previous year in respect  of  life insurance  business  could  not be set off  under  s.  24(2) against the profit from the general insurance business.  The Appellate Assistant Commissioner and the Tribunal  confirmed the view of the Income-tax Officer.  The Tribunal based  its decision  primarily on the provisions of the Income-tax  Act which  provided  different  methods of  computation  of  the taxable  income  of life insurance business and  of  general insurance business.  In reference the High Court decided  in favour  of the company, and the Revenue appealed.  The  test suggested  on behalf of the Revenue for determining  whether the  two businesses were one business within the meaning  of s.  24(2)  was whether one of them could be  closed  without affecting the conduct of the other. HELD : (i) The test suggested on behalf of the Revenue could not  be  accepted.  If one business cannot  conveniently  be carried on after the closure of the other, there would be -a strong indication that the two business constitute "the same business",  but no decisive inference may be drawn from  the fact  that  after the closure of one  business  another  may conveniently be carried on. [948 D] (ii) Whether  two or more lines of business may be  regarded as  the  "same business" or different business  depends  not upon  the special methods prescribed by the  Income-tax  Act for  computation of the taxable income, but upon the  nature of the lines of business, the nature of their  organisation,

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management, the source of the capital fund utilised, methods of  book keeping and a host of other  related  circumstances which stamp the lines of business as same or distinct.  [947 H] Scales v. George Thompson & Co. Ltd., 13 T.C. 89,  ’referred to. (iii)     In  the present case there was little  doubt  that the two businesses constituted one composite business :  the company was entitled to carry on the life insurance business and  the general insurance business under its Memorandum  of Association, and the business were attended to by the Branch Manager  and the Agents without any distinction,  there  was one  common  administrative Organisation  and  the  expenses incurred in connection with business both for administration and  for heads of expenditure such -as salary of the  staff, postage,  staff  welfare  fund  and  general  charges,  were common. [948 B] The High Court was therefore fight in holding that the  life insurance  business  and  the  general  insurance   business constituted the same business within the meaning of s. 24(2) of the Act. [949 B] 944

JUDGMENT: CIVIL  APPELLATE JURISDICTION Civil Appeals Nos. 729-732  of 1965. Appeals  by special leave from the judgment and order  dated May 3, 1963 of the Madras High Court in Tax Case No. 196  of 1960. R.   M. Hazarnavis, Gopal Singh and R. N. Sachthey, for  the appellant (in all the appeals). S.   Swaminathan  and M. S. Narasimhan, for  the  respondent (in all the appeals). The Judgment of the Court was delivered by Shah,  J. The respondent, a public limited company,  carried on  in the relevant years of account business of  insurance- life  and  general.  In each of the calendar years  1944  to 1948  relating to the assessment years 1945-46  to  1950-51, the Company suffered loss in the life insurance section, and made  profit  in the general insurance  section.   Till  the assessment  year  1950-51  the loss  suffered  in  the  life insurance section was allowed by the Revenue authorities  to be carried forward and set off under s. 24(2) of the  Indian Income-tax  Act,  1922,  against profits  from  the  general insurance  section in the subsequent year.   In  proceedings for  assessment for the assessment year 1951-52 the  Income- tax  Officer held that the life insurance business  and  the general  insurance business carried on by the  Company  were ’,’distinct and separate" and the loss carried forward  from the  previous  year in respect of  life  insurance  business could  not be set off under s. 24(2) against the  profit  of the  general  insurance business.  The  Appellate  Assistant Commissioner  and  the Tribunal confirmed the  view  of  the Incometax  Officer.   The Tribunal  referred  the  following question  to the High Court of Madras under s. 66(1) of  the Income-tax Act:               "Whether the unabsorbed losses incurred by the               assesse’e  in  the earlier years in  its  life               insurance business are available to be set off               against  its  profits from  general  insurance               business  for the assessment years 1951-52  to               1954-55?" The  High  Court answered the question in  the  affirmative.

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With  certificate granted by the High Court,  these  appeals have been preferred by the Commissioner of Income-tax. The  order of the Income-tax Appellate  Tribunal  summarises the reasons which persuaded the Departmental authorities  to reject the claim of the Company.  The Tribunal states:               "The  business  of  life  insurance  possesses               peculiar characteristics which do not exist in               respect   of   other   insurance   businesses.               Firstly,  the life insurance policies are  not               contracts  of  indemnity; they  are  forms  of               investments.    Other  classes  of   insurance               business are contracts of in-               945               demnity.    Secondly,  the  contract  in   the               general insurance is generally annual while in               the  case of life business the risk  continues               until  death.  Unlike general  insurance  con-               tracts,  the life contract, is made  once  and               for all.  The general insurance contracts, are               in  law, fresh contracts entered into  at  the               time of each renewal.  Thirdly, life  business               is   controlled  by   principles   essentially               variant  from those which control the  general               insurance business.  Fourthly, the life premia               do not represent the life profits nor can  the               total amount of claims arising in one year  be               set  off  as a deduction.   Fifthly,  the  law               under  which  life business is carried  on  is               quite   different  from  the  laws   governing               general   business’  and  lastly,   assessable               profits  of  life business shall  be  computed               separately from those of the general business,               the  consequence  of which would be  that  the               carry forward of loss of life business cannot-               be   had   against  the  profit   of   general               business."’ Tax payable by an assessee under the head "Profits and gains of  business, profession or vocation" is  normally  computed under  s.  10(1) of the Income-tax Act, 1922,  after  making allowances mentioned in sub-s. (2) of s. 10.  But sub-s. (7) of  s.  10  provides that notwithstanding  anything  to  the contrary contained in ss. 8, 9, 10, 12 or 18 of the Act, the profits  and gains of any business of insurance and the  tax payable  thereon shall be computed in,, accordance with  the rules contained in the Schedule to the Act.  The Schedule is headed "Rules for the computation of the Profits. and  Gains of  Insurance Business".  By r.  it is provided that in  the case  of  any person who carries on, or at any time  in  the preceding  year  carried on, life  insurance  business,  the profits and gains of such person from that business shall be computed  separately from his income, profits or gains  from any other business.  By r. 2 it is, provided: "The  profits and gains of life insurance shall-be taken  be to either:-               (a)   the  gross  external  incoming  of   the               preceding  year from, that business  less  the               management expenses of that year, or               (b)   the   annual  average  of  the   surplus               arrived   at  by  adjusting  the  surplus   or               deficit, disclosed by the actuarial  valuation               made  in  accordance with the  insurance  Act,               1938  (IV  of 1938), in respect  of  the  last               ’inter-valuation period ending before the year               for which the assessment is to be made, so  as               to  exclude  from it any  surplus  or  deficit

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             included therein which was made in any earlier               inter-valuation  period  and  any  expenditure               other than expenditure which may.,               946               under the provisions of section 10 of this Act               be  allowed for the computing the profits  and               gains of a business, whichever is the greater:               Provided................................" Rules 3 and 4 lay down the methods of computing the  surplus for  the  purpose of T. 2.  Rule 5 is a  definition  clause. Rule  6 deals with the computation of profits and  gains  of any  business  of insurance other than life  insurance,  and provides  that  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  Controller  of  Insurance  after adjusting  such  balance  so  as  to  exclude  from  it  any expenditure  other  than  expenditure which  may  under  the provisions  of S. 10 of the Act be allowed for in  computing the profits and gains of a business.  Rule 7 deals with  the computation  of profits and gains of companies  carrying  on dividing  societies  or assessment business.  Rule  8  deals with  the computation of profits of  non-resident  insurance companies having branches in the taxable territory.  Rule  9 provides  that the profits of any business carried on  by  a mutual  insurance association or by a  co-operative  society shall be computed in accordance with the rules. Computation of the assessable income of an assessee carrying on  business  of  life insurance or  general  insurance  has therefore to be made in accordance with the rules and not by determining  the  profits under sub-s. (1) of  S.  10  after making allowances under sub-s. (2). Where an assessee sustains a loss of profits or gains in any year  under  any  of  the heads mentioned in  s.  6,  he  is entitled to have the amount of the loss set off against  his income, profits or gains under any other head in that  year: [s.  24(1)].  Therefore in determining the taxable  profits, the net balance under the same head mentioned in s. 6 has to be taken into account, and if there be loss under a head  of income  (subject  to  the  special  exception  relating   to admissibility of loss from speculative business), that  loss has to be set off against the income, profits or gains under any other head.  Sub-s. (1) does not however deal with carry forward  to  the  following year of  loss  suffered  by  the assessee as a result of computing ,the total income from all the heads.  That is dealt with under sub-s. (2).      Section  24(2)  as it stood at the  material  time provided:               "Where any assessee sustains a loss of profits               or  gains in any year, being a  previous  year               not  earlier  than the previous year  for  the               assessment for the year ending on the 31st day               of March, 1940, in any business, profession or               vocation,  and the loss cannot be  wholly  set               off under sub-section (1),               947               so  much of the loss as is not so set  off  or               the whole loss where the assessee had no other               head of income shall be carried forward to the               following year and set off against the profits               and  gains, if any, of the assessee  from  the               same business, profession or vocation for that               year; The  words  italicised were substituted by  the  Income  Tax

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Amendment  Act  25 of 1953, for the words  "under  the  head Profits and gains of business, profession or vocation"’, and "the portion not so set off " respectively.  At the relevant time loss which could not be set off in the year of  account may  be carried forward to the following year, but it  could be  set  off against the profits and gains of  the  assessee from  "the same business, profession or vocation".   If  the loss carried forward from the previous year and sought to be set  off  was  not from the  same  business,  profession  or vocation, it could not be set off under s. 24(2).  If  there was  no  income  or profits from the same  business  in  the subsequent year the loss could not be set off, but had to be carried  forward in the next year following, subject to  the restriction placed in that sub-section. The question whether the business of life insurance and  the business of general insurance could be regarded as the  same business assumes importance in this case, since the right to carry  forward  the  loss suffered  in  the  life  insurance business and to set it off against the profit of the company in the general insurance business of the subsequent year  is clearly  in issue.  If the life insurance business  and  the general  insurance  business were not  "the  same  business" within  the meaning of s. 24(2), loss in the life  insurance business  which  could not be set off  against  income  from other businesses of the Company and sources of income, could not  be  carried forward and set off in the  year  following against the income from the general insurance business. Counsel  for the Commissioner contended that life  insurance business  and  general  insurance  business  were   separate businesses  and  he  relied in support  of  that  contention primarily  upon the method of computation of taxable  income of the life insurance business and of the general  insurance business.   Both in respect of the life  insurance  business and  general  insurance  business,  there  are,  as  already mentioned,  special methods of computation of  income.   But because there are distinct methods of computation of taxable income of the insurance business, and the general provisions of the Income-tax Act relating to computation of profits and gains  of a business in s. 10 and the related  sections  are inapplicable,  it  does not follow that the  two  businesses cannot  be  the "same ’business" within the  meaning  of  s. 24(2).   Whether  two  or more lines of  businesses  may  be regarded  as  the "same business"  or  different  businesses depends not upon’ the special, methods pres- 948 cribed by the Income-tax Act for computation of the  taxable income, but upon the nature of the businesses, the nature of their  organisation, management, the source of  the  capital fund  utilised, methods of book-keeping and a host of  other related circumstances which stamp the businesses as same  or distinct. In  the  present case, there is little doubt  that  the  two businesses  constituted one composite business: the  Company was entitled to carry on the life insurance business and the general   insurance   business  under  its   Memorandum   of Association,  and  the businesses were attended  to  by  the Branch  Managers  and the Agents  without  any  distinction, there  was  one common administrative organization  and  the expenses  incurred in connection with the business both  for administration  and for heads of expenditure such as  salary of  the  staff,  postage, staff  welfare  fund  and  general charges, were common. We  are  unable to agree with counsel for  the  Commissioner that  the test whether one of the businesses can  be  closed without  affecting the conduct of the other business,  is  a

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decisive test in determining whether the two constitute  the same  business  within  the meaning of  s.  24(2).   If  one business cannot conveniently be carried on after the closure of  the other, there would be a strong indication  that  the two  businesses  constitute  "the  same  business",  but  no decisive inference may be drawn from the fact that after the closure of one business another may conveniently be  carried on. In  the  present case the Tribunal’s judgment  proceeds  not upon  any  special circumstances governing  the  distinctive organization,  management, account, methods of  book-keeping or  the peculiarities of the two businesses,  but  primarily upon  the  provisions of the Income-tax  Act  which  provide different  methods of computation of the taxable  income  of the  life insurance business and- of the  general  insurance business.   We are unable to agree with the  Tribunal,  that because  in  respect  of the  life  insurance  business  and general  insurance  business there are  special  methods  of computation of income for the purpose of levying income-tax, they  are not the "same business" within the meaning  of  s. 24(2).   A fairly adequate test for determining whether  the two  constitute  the  same business  is  furnished  by  what Rowlatt, J. said in Scales v. George Thompson & Co. Ltd:               "Was    there   any   inter-connection,    any               interlacing,  any inter-dependence, any  unity               at all embracing those two businesses ?" That  inter-connection,  interlacing,  inter-dependence  and unity are furnished in this case by the existence of  common management, (1)  13 T.C. 83, 89. 949 common business Organisation, common administration,  common fund and a common place of business. in  our view therefore the High Court was right in’  holding that  the life insurance business and the general  insurance business constitute the same business within the meaning  of s. 24(2) of the Act. The  appeals  therefore fail and are dismissed  with  costs. One hearing fee. G.C.                                          Appeal dismissed. 950