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PETITIONER: COMMISSIONER OF INCOME-TAX, WEST BENGAL, CALCUTTA

       Vs.

RESPONDENT: CALCUTTA HOSPITAL AND NURSINGHOME BENEFITS ASSOCIATION

DATE OF JUDGMENT: 02/04/1965

BENCH: SIKRI, S.M. BENCH: SIKRI, S.M. SUBBARAO, K. SHAH, J.C.

CITATION:  1965 AIR 1902            1965 SCR  (3) 632

ACT: Indian  Income  Tax  Act  1922, s.  2(6C);  Rule  6  to  the Schedule-Profits of mutual insurance business whether can be included in income--Reserve for income tax whether taxable.

HEADNOTE: The  respondent Association was a mutual insurance   concern carrying on miscellaneous insurance business. The objects of the  Association included provision of help anywhere in  the world in respect of expenses of accommodation and  treatment in   nursing   homes for members and their  dependents.  The members  were  required  to pay a monthly  premium.  In  the assessments  for  the  assessment  years 1949-50 to  1953-54 the Income-tax  Officer  taxed  the  reserves for payment of income-tax  which  had been debited to the profit  and  loss account. The Appellate Assistant Commissioner as well as the Appellate  Tribunal upheld the Income-tax  Officer’s  order. The  questions arising in the proceedings were; (1)  whether the  balance of profits of a mutual insurance  concern  were included  in the definition of the word ’income’ and  if  so (2)  whether reserves for income-tax could be taxed. At  the instance of the respondent a reference was made to the  High Court.  That Court held that the surplus, miscalled  profit, arising  to  the company from  the  miscellaneous  insurance transactions  of mutual character was not  assessable  under the  Indian  Income-tax  Act  and that  in  any  event,  the assessee  was entitled to deduct the reserves.  The  Revenue appealed to this Court with certificate. HELD: (i) In s. 2(6C), the Legislature has evinced a   clear intention  to  include  the balance of profits  under  r.  6 within  the  meaning  of the word ’income’ in 6.  3  of  the Indian  Income  Tax  Act, and accordingly  such  balance  of profits is taxable. [639B-C] Ayrshire  Employers  Mutual Insurance  Association  Ltd.  v. Commissioner of Inland Revenue, 27 T.C. 331, distinguished. "Profits."  in  r.  6  cannot  be  said  to  mean   "taxable profits". Rule 6 refers to ’balance of profits’ as disclosed in   the  accounts  submitted  to  the.  Superintendent   of Insurance. The Superintendent of Insurance is not  concerned with  taxable  profits.  What he is concerned  with  is  the balance of profits under the Insurance Act. [638E-F]

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Nor  can  the term ’profits’ in r. 6 be interpreted  in  the narrow sense of including only profits from investments  and other activities of a mutual insurance company. Rule 6 deals with  "balance  of  profits" as a  composite  thing.  It  is impossible to dissect this composite thing. [639A-B] Bombay  Mutual Life Assurance Society Ltd. v.   Commissioner of Income-tax, Bombay City, 20 I.T.R. 189, affirmed. (ii) The Insurance Act makes detailed provisions to   ensure the  true valuation of assets and the determination  of  the true "balance of profits" of an insurance business and r.  6 should be construed in the light of this background.  [639G- H] 633 Pandyan  Insurance Company Ltd. Madurai v. The  Commissioner Income-tax, Madras, [1965] 1 S.C.R. 367, referred to.     Examining  r.  6 in the light of  this  background.  the intention  of  the  rule seems to be 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 expenditur.e  other than  expenditure permissible under the provisions of s.  10 of the Act.     In  the  present case it was common ground  between  the parties that the reserves which were added to the balance of profits  were not expenditure. The High Court  rightly  held that  the reserve for income tax could not be taxed.  [639H- 640B]

JUDGMENT: CIVIL APPELLATE JURISDICTION: Civil Appeals Nos. 206  to 210 of 1964.     Appeals  from the judgment and orders  dated   September 26, 1961 of the Calcutta High Court in income-tax  Reference No.  24 of 1957.     Niren  De, Additional Solicitor-General, Ganapathy  Iyer and R.N. Sachthey, for the appellants. Sampat  lyengar,  B.R.L.  Iyengar and D.N.  Gupta,  for  the respondents.The Judgment of the Court was delivered by Sikri, J. These appeals by certificate  granted by the  High Court of Calcutta under s. 66(A)(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 mutual               character  was  assessable  under  the  Indian               Income Tax Act, and                 (2)  If the answer to question No.   (1)  is               in the  affirmative, whether on the facts  and               in  the circumstances of the case the  balance               of  the profits as disclosed in  the  assessee               company’s   profit  and  loss  account   after               deducting  the various reserves should be  the               taxable profits within the meaning of  Section               2(6C) read with Rule 6 of the Schedule of  the               Indian Income Tax Act. The  relevant  facts and circumstances are as  follows:  The respondent. the Calcutta Hospital and Nursing Home  Benefits Association   Limited,  hereinafter  referred  to   as   the assessee,   is  a  mutual  insurance  concern  carrying   on miscellaneous insurance business. The principal objects  for

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which the Association was established were:               (1)  By  means  of  insurance  on  the  mutual               principle   to   provide,  or   help   towards               providing,  anywhere  in  the  world  for  the               expense  of  accommodation  and  treatment  in               hospitals               634               and  nursing homes and of private nursing  for               members and their dependants;                  (2)  To  organise insurance on  the  mutual               principle  under Rules and Regulations  to  be               framed  for  the purpose with  the  object  of               providing  such hospital,  medical,  surgical,               nursing   and   allied  services   as   before               mentioned,   of   supporting   and   assisting               hospitals,   in  Calcutta  or  elsewhere;   of               relieving members or then dependants, in whole               or  in part from the payment of  hospital  and               other   charges  while  in  receipt  of   such               hospital,  medical,   surgical,   nursing  and               allied   services;  and  of  reimbursing   and               repaying  to  members or their  dependants  in               whole  or  in  part, all   payments  for  such               hospital and other charges which they may have               incurred  or  made which in  receipt  of  such               hospital,   medical,  surgical,  nursing   and               allied services. The  members  were required to pay a  monthly  premium,  but there was a waiting period of four months for all bench  its other  than maternity, for which the waiting period was  one year.  Benefits and privileges became available as from  the first  day of the fifth calendar month of  registration  (in respect  of  Maternity the 13th month) and continued  to  be available  thereafter so long as the subscriptions were  not in arrear. These appeals are concerned with the assessment years  1949- 50  to  1953-54 and the relevant accounting years  ended  on December  31,  1948, December 31, 1949, December  31,  1950, December 31, 1951 and December 31, 1952, respectively.     In  the  statement of the case, the  Appellate  Tribunal 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.               Reserve  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

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             the  profit  and toss  appropriation  account.               Therefrom, in one year, ended               635               31st  December,  1949, further  deduction  was               made  against  contingency  reserve  and   the               balance  either  loss or  profit  was  carried               forward." We may now set out the facts regarding 1949-50   assessment. It  is  not necessary to state the  facts  regarding   other assessment years. The Income Tax Officer for the  assessment year  1949-50 added the reserve for taxation, Rs. 1000/-, to the net profit as per profit and loss account, which  showed a   profit   of   Rs.   1,653/-,   and    after    deducting depreciation,   he   assessed   the total  income   at   Rs. 2,651/-.     On    appeal,    the    Appellate     Assistant Commissioner  upheld  the order of the Income  Tax  Officer. Following  the decision of the Bombay High Court  in  Bombay Mutual  Life  Assurance  Society Ltd.,  v.  Commissioner  of Income  Tax,  Bombay City (1) he held that  the  income  was assessable  to  income  tax and that under  Rule  6  of  the Schedule  to the Income Tax Act it was permissible  for  the Income  Tax  Officer  to  add the  reserves  to  the  income disclosed in the profit and loss account. On further appeal, the  Appellate Tribunal found no difficulty in holding  that s.  2(6C)  of  the Income Tax Act,  according  to  its  true interpretation,  included  income  or  the  profits  of  any insurance  company of mutual assurance and the said  profits shall be taken to be balance of the profits disclosed by the annual  accounts. Regarding the reserve, the  Tribunal  held that  the  provision for reserve was not an  expense  to  be deducted from the profits disclosed by the assessee  company in  order to arrive at the profits within the meaning of  r. 6,  and the Income Tax Officer was entitled to add back  the reserve.     The High Court held that the surplus, miscalled  profit, arising  to  the  assessee company  from  the  miscellaneous insurance   transactions   of  mutual  character   was   not assessable under the Indian Income Tax Act and that, in  any event, the assessee was entitled to deduct the reserve.  The High  Court  distinguished  Bombay  Mutual  Life   Assurance Society,  Ltd.  v.   Commissioner  of   Income  Tax,  Bombay City(1)  on the ground that the Bombay decision was  a  life insurance  decision  and  although  it  was  a  mutual  life insurance society, nevertheless different and special  rules applied  to  life  insurance and the rules  with  which  the Bombay  decision was concerned were rules 2 and 3 which  did not  apply to mutual insurance other than life.  The  second point of distinction, according to  the High Court, was  the very  distinctive clauses in the memorandum of  objects  and articles of association of the assessee.     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 Schedule." We may  mention  that another s. 2(6C) was substituted by Act XV of 1955, and  the wording substituted  by this Act in (1) 20 I.T.R.189. 636 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 surance association carrying  on business  of insurance is concerned. Rule 9 of the  Schedule reads thus’

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             "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 reads 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 Superinte ndent  of               Insurance  after adjusting such balance so  as               to exclude from it 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.               Profits  and  losses  on  the  realisation  of               investments and depreciation and  appreciation               of  the  value of investments shall  be  dealt               with as provided in Rule 3 for the business of               life insurance." The Additional Solicitor General, appearing on behalf of the appellant, contends that the Bombay High Court was right  in holding  that  "s.  2(6C) imports  into  the  definition  of ’income’,  which is to be found in the charging  section  3, these profits which may not be profits in the ordinary sense of  the term but which are made profits by reason of Rule  2 of  the Schedule because Rule 2 really gives  an  artificial extension to the meaning of the  word ’profits’ when it says that  ’profits and gains shall be taken to be’. Therefore  a new  class of artificial income is created by this rule  and that  artificial  income  is included into  the  meaning  of Section 3 by reason of this rule." Mr.  Sampat  Ayyangar,  learned counsel  for  the  assessee, relying  on the decision of the House of Lords  in  Arvshire Employers Mutual Insurance Association Ltd. v.  Commissioner of Inland Revenue,(1) contends that the Legislature has  not made  its  intention  clear because it  has  used  the  word ’profits’  in  s.  2(6C) under a  misapprehension  that  the surplus of a mutual insurance company (1) 27 T.C. 331. 637 carrying  on insurance business is profits. He says that  in Arvshire Employers Mutual Insurance Association case(1)  the Legislature  had proceeded on a similar misapprehension  and the  House of Lords held that s. 31(1) of the  Finance  Act, 1933  (23 & 24 Geo. V.c. 19) did not succeed in  making  the profits of a mutual insurance company taxable. He urges that we should follow this precedent. He relies on the  following passage from  the speech of Lord Macmillan at p. 347:               "The  structure  of  Section  31(1)  is  quite               simple. It assumes that a surplus arising from               the  transactions of an  incorporated  company               with its members is not taxable as profits  or               gains.  To  render such a surplus  taxable  it               enacts  that  the surplus,  although  in  fact                             arising from transactions, of the comp any  with               its  members, shall be deemed to be  something               which  it  is not, namely, a  surplus  arising               from  transactions  of the company  with  non-               members.  The  hypothesis is  that  a  surplus               arising  on  the  transaction  of   a   mutual               insurance company with non-members is  taxable

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             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 s. 31  of  the Finance Act, 1933. Section 31(1) enacted:               "31.--(1) In the application to any company or               society  of any provision or rule relating  to               profits  or gains chargeable under Case  I  of               Schedule  D (which relates to  trades)  ......               any  reference  to profits or gains  shall  be               deemed  to include a reference to a profit  or               surplus arising from trans-               (1)T. C. 331.               638               actions  of  the company or society  with  its               members which would be included in profits  or               gains  for the purposes of that  provision  or               rule  if those transactions were  transactions               with non-members, and  the  profit or  surplus               aforesaid shall be determined for the purposes               of   that  provision  or  rule  on  the   same               principles as those on which profits or  gains               arising  from  transactions  with  non-members               would be so determined." The Section adopted the device of a deeming provision.   The profits  arising  from  the transactions  of  a  company  or society  with its members were deemed to be profits  arising from transactions with non-members. Parliament assumed  that the  latter  were  taxable. As this  hypothesis  was  wrong, Parliament   failed  in  its  objective.  But   the   Indian Legislature  did  not adopt any deeming device.  It  defined ’income’  to  include profits of any business  of  insurance carried on by a mutual insurance association. What are those profits is then explained by reference to the Schedule.  The effect of this in substance is to incorporate r. 6 into  the definition. If the legislature had defined income to include profits  of  insurance  carried on  by  a  mutual  insurance association  computed according to r. 6, very  little  would have remained arguable.     It  is,  however,  urged  that in r.  6  also  the  word ’profits’ means taxable profits. But r. 6 speaks of  balance of  profits  as disclosed in the accounts submitted  to  the Superintendent   of   Insurance.   The   Superintendent   of Insurance is not concerned with taxable profits. What he  is concerned  with, inter alia, is the balance of  profits  for the purpose of the Insurance Act.     It  is  then  urged  that in  the  definition  the  word ’surplus’ should have been used instead of profits. But  the word ’surplus’ has a technical significance in the Insurance

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Act, and it seems to us that it would have been  inexpedient to use the word ’surplus’. At any rate. r. 6 would then have been drafted differently.     It is finally urged that this is a taxing statute and we should  give  a strict construction to the  definition.  The definition  could  still  operate if we interpret  it  in  a narrow  sense  as to include profits  from  investments  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 639 to  make it doubly clear. Moreover, r. 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  r. 6 within ’the word ’income’ in s. 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 r. 2, but when  we go  to  the  schedule and find out what is  the  balance  of profits  or surplus that has been made taxable, it does  not make any difference to the construction of s. 2(6C)  whether it is r. 2 that is applied or r. 6.  Therefore,  disagreeing with  the  High Court, we answer the first question  in  the affirmative. This  takes  us to the second question. The answer  to  this question  depends  on the true interpretation of  r.  6.  It seems  to us that on its language the Income Tax Officer  is bound  to   accept the balance of profits disclosed  by  the annual accounts, copies of which have been submitted to  the Superintendent of Insurance. He can only adjust this balance so  as  to  exclude  from  it  any  expenditure  other  than expenditure  which  may  under the provisions of  s.  10  be allowed  for  in  computing  the  profits  and  gains  of  a business. We are not concerned here with the latter part  of r.  6 dealing with profits and losses on the realisation  of investments, and depreciation and appreciation of the  value of  investments. This Court examined the provisions  of  the Insurance  Act  in connection with the Schedule  in  Pandvan Insurance   Company  Ltd.,  Madurai  v.   The   Commissioner Income-Tax, Madras(1) and arrived at the conclusion that the Insurance  Act "makes detailed  provisions to   ensure   the true  valuation of assets and the determination of the  true balance  of profits of an insurance business" and that r.  6 should be construed in the light of this background. Examining r. 6 in the light of this background, it seems  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, [1965] 1 S.C.R. 3C7. 640 except  that  the Income Tax Officer would be  entitled   to exclude  expenditure  other  than  expenditure   permissible under  the  provisions of s. 10 of the Act .  It  is  common

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ground  in this case that these serves 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 . In  the  result, the appeals are accepted in  part.  Parties will bear  their own costs in this Court. Appeals partly  allowed . 641