http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 1 of 5  

PETITIONER: GENERAL FAMILY PENSION FUND

       Vs.

RESPONDENT: THE COMMISSIONER OF INCOME-TAX,WEST BENGAL.

DATE OF JUDGMENT: 01/11/1954

BENCH: AIYYAR, T.L. VENKATARAMA BENCH: AIYYAR, T.L. VENKATARAMA MAHAJAN, MEHAR CHAND (CJ) DAS, SUDHI RANJAN HASAN, GHULAM BHAGWATI, NATWARLAL H.

CITATION:  1955 AIR   50            1955 SCR  (1) 822

ACT: Indian  Income-tax Act (XI of 1922), s. 10(7)  and  schedule Rule  2(a)(b) as published in 1939-Income-tax  on  insurance companyHow     ascertained-Statement     of     Departmental Representative,  Effect  of-Insurance Act (IV  of  1938)  s. 2(11.) -Life Insurance business. In accordance with the provisions of s. 10(7) of the  Indian Income-tax  Act,  1922,  the  profits  and  gains  of   Life Insurance  business for the periods 1943-1944  to  1946-1947 are  to  be computed under Rule 2(a) and Rule  2(b)  of  the rules published in 1939 and contained in the schedule to the Act.  -  This  computation should  be  made  separately  and independently  once  under Rule 2(a) and  again  under  Rule 2(b).  On such computation income-tax is to be levied on the greater of the two amounts so computed.  It is erroneous  to adopt the computation made under Rule 2(b) as the basis  for computation under Rule 2(a). Mere  statement  of the Departmental Representative  of  the Income-tax  Department  to the Tribunal referred to  in  the order of the Tribunal cannot have the effect of a finding of fact by the Tribunal. Business of a company which consists in granting  terminable pensions  or annuities dependent on human life in favour  of the subscribers or their nominees, is an insurance  business within the meaning of s, 2(11) of the Insurance Act, 1938,

HEADNOTE: 823

JUDGMENT: CIVIL APPELLATE JURISDICTION: Civil Appeal No. 144 of 1953. Appeal from the Judgment and Order dated the 28th  November, 1951,  of  the  High  Court of  Judicature  at  Calcutta  in Reference No. 40 of 1950. Sukumar   Mitra  (S.   N.  Mukherjee,  with  him)  for   the appellant. C.   K. Daphtary, Solicitor-General of India, (G.  N. Joshi,

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 2 of 5  

with him) for the respondent. 1954.   November 1. The Judgment of the Court was  delivered by VENKATARAMA AYYAR J.-This is an appeal from the judgment  of the  High  Court of Calcutta on a  reference  under  section 66(1)  of  the Income-tax Act.  The appellant is  a  Company which  came  into  existence  in  1870  as  an  unregistered association,  and  in  1906  it  was  registered  under  the provisions  of  the  Indian  Companies  Act.   Its  business consists  exclusively  in granting  terminable  pensions  or annuities   dependent  on  human  life  in  favour  of   the subscribers  or their nominees.  The dispute in this  appeal relates to the assessment of the profits of the Company  for income-tax for the periods, 1943-1944, 1944-1945,  1945-1946 and 1946-1947. To follow the points in issue, it will be useful to refer to the  statutory  provisions bearing on the  matter.   Section 2(11)  of the Insurance Act, 1938, defines  "life  insurance business" as meaning "the business of effecting contracts of insurance upon human life" and as including "the granting of annuities  upon human life." The business of  the  appellant Company  would  therefore  be  life  insurance  business  as defined  in-section  2(11)  of  the  Insurance  Act.   Under section 10(7) of the Indian Income-tax Act, the profits  and gains  of  any business of insurance are to be  computed  in accordance with the Rules in the Schedule to the Act.   Rule 2 in the Schedule is as follows: " The profits and gains of life insurance business shall  be taken to be either- 824 (a)the  gross external incomings 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  for the last intervaluation period ending  before the  year for which the assessment is to be made’ so  as  to exclude  from  it any surplus or  deficit  included  therein which was made in any earlier intervaluation period and  any expenditure  which  may  under section 10  of  this  Act  be allowed  for  in  computing  the  profits  and  gains  of  a business, whichever is the greater. "Rule 5(ii) defines "gross external incomings" as  including profits  on  the sale or the granting of  annuities.   These Rules came into force in 1939. In  1945  the  assessment of the profits  of  the  appellant Company for the years 1943-1944, 1944-1945 and 19451946  was taken up by the Income-tax Officer.  Under Rule 2, what  the Income-tax  Officer had to do was to compute the profits  of the Company under the two heads (a) and (b) in that Rule and to  adopt whichever was higher as assessable profits.   What he actually did however is uncertain, because the orders  of assessment themselves have not been exhibited as part of the record.   From  the order of the Tribunal dated  5th  March, 1949,  it  appears  that  the  Income-tax  Officer   firstly determined  the  profits  under Rule 2(b) on  the  basis  of actuarial  valuation after making certain  adjustments;  and secondly  on the basis of the figure arrived at  under  Rule 2(b),  he worked out the profits under Rule 2(a)  by  making further  adjustments.  These orders were made on 14th  July, 1945.   The  company preferred appeals against them  to  the Appellate  Assistant  Commissioner, who held  by  his  order dated  30th  November,  1945,  that  the  annuity   business contemplated  by Rule 5(ii) was "purely  annuity  business", that  the  business  carried  on  by  the  Company  was  "an

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 3 of 5  

admixture  between an annuity and life insurance", and  that there  had been no adequate investigation by the  Income-tax Officer of the nature of the business of the Company.  He 825 accordingly  remanded the case for further enquiry  and  for passing fresh orders of assessment. By  the time the matters came up for further enquiry  before the Income-tax Officer in pursuance of the order of  remand, the  assessment of the profits of the Company for  the  year 1946-1947  had  also  to  be  made.   By  order  dated  23rd December,  1946,  the  Income-tax  Officer  determined   the assessable  profits of the Company for all the  four  years. He  held  that  there was no element  of  insurance  in  the business of the Company, and that the computation should  be made  under  Rule  2(a).  Then he proceeded  to  assess  the profits  under that Rule precisely in the manner adopted  by him  in his order dated 14th July, 1945.  He first took  the annual   adjusted  surplus  calculated  according   to   the actuarial valuation under Rule 2(b) and after making certain adjustments,  adopted  it  as the figure  under  Rule  2(a). These  orders  were clearly erroneous.  The  statement  that there  was no element of life insurance in the policies  was rightly  hold  to be erroneous by the Tribunal and  has  not been sought to be supported.  If the annuity business of the Company was not life insurance business, then even Rule 2(a) would  have  no  application.  The  Income-tax  Officer  was likewise in error in adopting the figures reached under Rule 2(b) as the basis for computing the profits under Rule  2(a) without an independent enquiry into the materials  requisite under that Rule. The  Company took up the matter in appeal to  the  Appellate Assistant   Commissioner,  who  by  his  order  dated   26th September,  1947,  held  that the annuity  business  of  the appellant was life insurance business, and that the  profits should be computed under Rule 2. He further held that in the absence  of  a profit and loss ,statement for  the  previous year, the Income-tax Officer could only act on the materials furnished  by  the  actuarial  valuation  as  a  guide   for computation  under  Rule 2(a).  He therefore  confirmed  the orders of assessment. The  Company  then appealed to the Tribunal.  By  its  order dated  5th March, 1949, the Tribunal held that the  business of the Company was "in a way" insurance, 826 and  that  computation  of the profits  should  be  made  in accordance  with Rule 2, after determining the profits  both under  Rule  2(a) and Rule 2(b).  It took exception  to  the modus  adopted by the Income-tax Officer in  ,computing  the profits  under Rule 2(a), and observed that he  should  have made independent enquiry under Rule 2(a), and determined the profits  and not merely adopted the figures  computed  under Rule 2(b) as the basis for computing the profits under  Rule 2(a).   The Tribunal accordingly remanded the matter to  the Income-tax  Officer for further enquiry for determining  the profits in terms of Rule 2(a). Dissatisfied  with  this order, the respondent  applied  for reference under section 66(1) of the Income-tax Act, and  on that  application, the following questions were referred  to the decision of the High Court: 1.   "  Whether in the facts and circumstances of  the  case the  business  of the assessee-Company consisted  wholly  of annuity  business or whether it contained some  elements  of ordinary  life insurance business as distinct  from  annuity business. 2.   Whether the Income-tax Officer was justified in  making

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 4 of 5  

an estimate for calculations under Rule 2(a) of the Schedule attached to section 10(7) of the Income- tax Act.  " The  reference was heard by Chakravarti and S. R. Das  Gupta JJ.  They held that the first question did not arise on  the order  of  the Tribunal, but all the  same  expressed  their opinion thereon in the following terms : " Its business is *holly a business of granting annuities on human  life,  and no part of its business is  ordinary  life insurance business.  " As  we  are not concerned with this matter in  this  appeal, there is no need to further refer to it. On  the  second  question, they observed  that  business  in annuities  dependent on life as contrasted  with  "annuities certain"  would be insurance business as defined in  section 2(11)  of  the Act, and that the profits  of  that  business being  "gross external incomings" as defined in  Rule  5(ii) must  be determined under Rule 2(a).  Dealing next with  the objection  of  the appellant that there had been  no  proper determination of the 827 profits  under Rule 2(a), they held that in the  absence  of profit and loss statements for the previous years and  other materials  the Income-tax Officer had no course open to  him except  to adopt the figures computed under Rule 2(b)  as  a basis for computation under Rule 2(a).  The second  question was accordingly, answered in the affirmative.  It is against this decision that the present appeal has been preferred  on a certificate granted under section 66A (2). Mr.  Mitra for the appellant does not dispute  the  position that  the  business  of  the  Company  on  annuity  policies dependent on human life is insurance business as defined  in section  2(11), and that the profits of the business  should therefore  be  computed  in accordance with Rule  2  in  the Schedule to the Income-tax Act.  His contention is that  the Income-tax  Officer  had failed to make the  computation  in accordance  with Rule 2(a), and that the Tribunal was  right in  remanding  the matter for a correct computation  of  the profits in accordance with that Rule.  This contention must, in  our  opinion,  succeed.  Under Rule  2,  the  Income-tax Officer  has  to determine under clause (a) what  the  gross external incomings of the previous year were, and deduct out of them the managing expenses for that year.  He has also to find  out in terms of clause (b) the annual average  surplus on the basis of actuarial valuation in the manner prescribed therein.   He has then to adopt whichever is higher  as  the assessable  profits of the year.  Now the complaint  of  the appellant is that while a computation was made under  clause (b)  no independent computation was made under  clause  (a), and  that therefore the profits had not been  determined  as required  by  the Rules.  It is a fact that  no  independent computation  has  been made under Rule 2(a),  and  therefore there  has  been no compliance with the Rule.   The  learned Judges declined to uphold this objection on the ground  that the  Company did not place any materials before the  Income- tax  Officer  so as to enable him to  make  a  determination under  Rule 2(a), and that in the absence of  any  materials the  Income-tax  Officer  was justified  in  acting  on  the actuarial  report for computing the profits even under  Rule 2(a). 828 The  argument of the appellant is that having regard to  the stand taken by either side at the stage of investigation and to  the  opinion expressed by the  Income-tax  Officer  that there was no element of insurance in the annuity business of

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 5 of 5  

the  Company,  the true position under the  Rules  had  been missed  by  all of them, with the result that there  was  no attempt  made  to  compute  the  profits  in  terms  of  the provisions of Rule 2(a), that the appellant had not wilfully failed to produce any evidence, and that the observation  of the  learned  Judges that no profit and loss  statement  had been  produced  was based on a misapprehension, as  no  such statement had to be prepared by an Insurance Company. We  must  now  turn  to the statement of  the  case  by  the Tribunal to see what had really happened before the  Income- tax Officer, for the last word on questions of fact is  with it,  and  that  is binding on the Courts.   Neither  in  the statement  of the case by the Tribunal, nor in its order  of remand is there any finding that the requisite materials had been withheld by the appellant.  The only statement  bearing on this question in the order of the Tribunal is as follows: "  ...  the Departmental Representative admitted  before  us that the calculations purported to have been made under Rule 2(a)  were not in accordance with the requirements  of  Rule 2(a), but it was explained that as the information necessary for determining income under Rule 2(a) was not available, an estimate was made and the income determined under Rule  2(b) was adopted for determining the income under Rule 2(a).  " What  is referred to in this passage is only a statement  of the  Departmental Representative and not a finding.  On  the other hand, the whole tenor of the judgment of the  Tribunal is that there had been no determination of the profits under Rule  2(a)  by  reason of the erroneous view  taken  by  the Income-tax Officer as to the true nature of the business  of the  Company.  If there had been a finding by  the  Tribunal that  the  requisite  materials  had  been  called  for  and withheld  by the appellant, the decision of the  High  Court would  be unassailable, and, indeed, that was the  only  one that 829 could  have  been  reached.  But in the absence  of  such  a finding, we are unable to see any ground on which the  order of the Tribunal could be upset in a reference under  section 66(1).   When  once  it is found that there  was  no  proper determination  of the profits as required: under Rule  2(a)- and that was indeed conceded-and there was no  justification for  it such as the High Court thought there was,  the  only order that could properly be made was to remand the case for further  enquiry and fresh disposal in accordance with  law. That  was  the order which was passed by the  Tribunal,  and that, in our opinion, was right. This  appeal  will accordingly be allowed,  and  the  second question referred by the Tribunal answered in the  negative. The result of this will be that the Income-tax Officer  will proceed to enquire into the profits of the appellant Company for   the   years  in  question  in  accordance   with   the requirements  of Rule 2. Under the circumstances, we  direct that  the parties do bear their respective costs  both  here and in the High Court. Appeal allowed.