# LIFE INSURANCE CORPORATION LTD. December 9 v. COMMISSIONER OF INCOME-TAX, DELHI & RAJASTHAN

- **Citation:** [1964] 5 S.C.R. 880
- **Court:** Supreme Court of India
- **Decided:** 1964
- **Case number:** Civil Appeals No. 678-680 of 1962
- **Bench:** A.K. Sarkar, M. Hidayatullah, J.C. Shah
- **Source:** https://unisonlegal.in/judgment/supreme-court-of-india/life-insurance-corporation-ltd-december-9-v-commissioner-of-income-tax-delhi-3052
- **Pages:** 26

## Headnote

Income Tax Act (XI of 1922), .s. i0(7) and Schedule rr. 2(b) and
3(b)-Direction for readjustment by income tax ojficer-·lf o/ficer has
potver.
The appellant tran~ferred a certain amonnt from its Consolidated Revenue Account to the Investment Reserve Fund which it
was entitled to do; By this transfer the appellant's surplus on
which tax has to be assessed was reduced. The Income-tax Officer
directed the appellant to reduce the transfer by a certain amount.
The appellant challenged this direction.
Held: (per Sarkar and Shah, JJ.) The assessment of the
profits of an insurance business is bys. 10(7) of the Act completely
governed by the rules in the Schedule to the Act and there is no
general power in the Income-tax Officer to correct any error apart
from these rules.
Of these rules, rr. 2(b) and 3(b) were relevant
to the present case.
-~
'
t
(
5 S.C.R.
SUPREME COURT REPORTS
881
Under r. 2(b) of the Schedule the Income-tax Officer had no
1963
power to change the figures in the account of the assessee while
r. 3(b) only compelled the Income-tax Officer to allow certain Life Insurance
deductions and to include certain amounts in making the assess- C
. Ltd
ment. None of these rules warranted the adjustment of accounts orporatwn
·
made by the Income-tax Officer. Neither was it justified by the
V;
proviso to r. 3(b).
Commissioner
(Per Hidayatullah J.),(i}Thelncome-taxAct contemplates that of Income-tax,
the assessment of insurance companies should be carried out not
Delhi &
according to the ordinary principles applicable to business conRaja.'than
cerns as laid down in s. l 0 of the Income-tax Act.
(ii) If the Income-tax Officer doubts the accounts his powers
are defined by the provi~o to r. 3(h). The proviso requires him to
consult the Controller of Insurance. The proviso negatives the
existence of a separate general power. Action has to be taken in
the manner laid down in the proviso or not at all.
(iii) In the present case the Income-tax Officer did not follow
the proviso at all and therefore the impugned adjustment was
improperly made.

## Text

_Characters 0–39,958 of 54,090. This is a partial read: ask again with offset=39958 for what follows._

880
SUPREME COURT REPORTS
[1964]
1963
issued. There can be little doubt that if a decision
--
of a quasi-judicial Tribunal is challenged before the
Sri Rama Vilas High Court under Art. 226 and it is shown that the
Service (P) Ltd. said decision is based on irrelevant considerations
v.
or on considerations which are invalid in law, a writ
C.
will undoubtedly be issued under Art. 226. But
Chandrasekaran the order passed by the Appellate Tribunal in the
& Ors.
present case does not suffer from any suchdnfirmity .
. --
Therefore, we are satisfied that the decision in the
Ga1endragadkar case of ex parte Grant on which Mr. Pathak relies,
1'
does not assist his case.
The result is, the appeal fails and is dismissed
with costs.
Appeal dismissed.
1963
LIFE INSURANCE CORPORATION LTD.
December 9
v.
COMMISSIONER OF INCOME-TAX, DELHI &
RAJASTHAN
(A.K. SARKAR, M. HIDAYATULLAH AND
J.C. SHAH, JJ.)
Income Tax Act (XI of 1922), .s. i0(7) and Schedule rr. 2(b) and
3(b)-Direction for readjustment by income tax ojficer-·lf o/ficer has
potver.
The appellant tran~ferred a certain amonnt from its Consolidated Revenue Account to the Investment Reserve Fund which it
was entitled to do; By this transfer the appellant's surplus on
which tax has to be assessed was reduced. The Income-tax Officer
directed the appellant to reduce the transfer by a certain amount.
The appellant challenged this direction.
Held: (per Sarkar and Shah, JJ.) The assessment of the
profits of an insurance business is bys. 10(7) of the Act completely
governed by the rules in the Schedule to the Act and there is no
general power in the Income-tax Officer to correct any error apart
from these rules.
Of these rules, rr. 2(b) and 3(b) were relevant
to the present case.
-~
'
t
(
5 S.C.R.
SUPREME COURT REPORTS
881
Under r. 2(b) of the Schedule the Income-tax Officer had no
1963
power to change the figures in the account of the assessee while
r. 3(b) only compelled the Income-tax Officer to allow certain Life Insurance
deductions and to include certain amounts in making the assess- C
. Ltd
ment. None of these rules warranted the adjustment of accounts orporatwn
·
made by the Income-tax Officer. Neither was it justified by the
V;
proviso to r. 3(b).
Commissioner
(Per Hidayatullah J.),(i}Thelncome-taxAct contemplates that of Income-tax,
the assessment of insurance companies should be carried out not
Delhi &
according to the ordinary principles applicable to business conRaja.'than
cerns as laid down in s. l 0 of the Income-tax Act.
(ii) If the Income-tax Officer doubts the accounts his powers
are defined by the provi~o to r. 3(h). The proviso requires him to
consult the Controller of Insurance. The proviso negatives the
existence of a separate general power. Action has to be taken in
the manner laid down in the proviso or not at all.
(iii) In the present case the Income-tax Officer did not follow
the proviso at all and therefore the impugned adjustment was
improperly made.
CIVIL APPELLATE JURISDICTION : Civil Appeals
No. 678-680 of 1962.
Appeal from the judgment dated March 2, 1960
of the Punjab High Court (Circuit Bench) at Delhi
in Income-tax Reference No. 6-D of 1957.
M.C. Setalvad, Bishan Narain,
R.J. Ko/ah and
K.L. Hathi, for the appellant.
Gopal Singh and R.N. Sachthey, for the respondents.
JJecember 9, 1963.
The Judgment of A.K.
Sarkar, and J.C. Shah, JJ. was delivered by Sarkar, J.
M. Hidayatullah, J. delivered a separate opinion.
SARKAR, J.-We think that these appeals should
Sarkar J.
be allowed.
The appeals relate to the assessment to incometax of the income of the life insurance business of the
Bharat Insurance Co. Ltd. now merged in the Life
Insurance Corporation Ltd.
The assessment years
concerned are 1952-53, 1953-54 and 1954-55. The
Income-tax Act, 1922 makes special provision for
assessment of the income of insurance business.
The Income-tax Officer in making the assessment
orders made some adjustments in the accounts which
l/SCI/64-56
882
SUPREME COURT REPORTS
[1964]
I
the appellant contends, he has no power to do under
these provisions. The question in these appeals is
Life Insurance whether he had the power to make these- adjustCorporation Ltd. ments.
.
1963
y,
Sub-section (7) of s. l 0 of the Act makes the
Commissioner special provision for the assessment of the income
of Income-tax, of insurance business and that is in these terms:
Delhi &
Rajasthan
Sarkar J.
"Notwithstanding anything to the contrary
contained in Section 8, 9, 10, 12 or 18, 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 this Act."
Rule 2 in the Schedule lays down in clauses (a) and
( b) · two different methods for calculating the profits
and gains of a life insurance business and provides
that whichever of these two methods results in larger
profits being arrived at, has to be adopted. The
relevant portion of r. 2 is in these terms:
Rule 2. "The profits and gains of life .insurance
business shall be taken to be either-
(a) the gross external incomings of the preceding year from that business less the
management expenses of tha~ 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 included therein which was
made in any earlier inter-valuation period
and any expenditure other than expenditure which may under the provisions of s. l 0 of this Act be allowed
for in computing the profits and gains
of a business,
whichever is the greater:".
•
"
5 S.C.R.
_,,
SUPREME COURT REPORTS
883
•
)
Then follows a proviso which sets out a certain limit
1963
for management expenses to be allowed but that
.
is not material for this judgment. It is not in dispute Life Insurance
that the method laid down in cl. (b) would in the present Corporation Ltd.
cases produce the larger income and had, therefore,
v.
to be followed.
The relevant part of r. 3 of the Commissioner
Schedule on which the arguments in these cases turn of Income-tax,
may now be set out.
Delhi d
Rajasthan
Rule 3. "In computing the surplus for the purpose of rule 2,-
Sarkar J.
(a) ............................••
(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 lncom.e-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 and
other assets,
as shall increase the
884
SUPREME COURT REPORTS
[1964]
1963
surplus for the purposes of these rules
to a figure which is fair and just;"
Life Insurance No other rule in the Schedule was referred to at the bar
Corporation Ltd.
'
. v.
What had happened was this. The assessee
Commissioner had debited a sum of Rs. 18,75,000 to its Consolidao/ Income-tax ted Revenue Account and credited it to the Invest-
.De/hi &
' ment Reserve Fund. There is no dispute that the
Rajasthan
assessee had to maintain the Investment Reserve
Fund. The transfer. had been made because the
Sarkar J.
assessee thought that the securities in respect of
which the Investment Reserve Fund had been constituted having depreciated the fund had become inadequate. By this transfer the assessee's surplus,
on which the tax had to be assessed under r. 2, was
reduced. The Income-tax Officer thought that this
transfer made the balance in the Investment Reserve
Fund exceed the deficit disclosed on the book values
of the securities in that fund by Rs. 30,420. He
also checked up the market value of the securities
and came to the conclusion that they had been undervalued in the books by the assessee. In his view,
the Investment Reserve Fund was for the aforesaid
reasons actually in excess by Rs. 1,89,185 of the
amount which it should have had to its credit.
He,
therefore, directed that the transfer from the Revenue
Account to the Investment Reserve Fund be reduced
by Rs. 1,75,000. The assessee appealed to the Appellate Assistant Commissioner and he directed that
the transfer to the Investment Reserve Fund be reduced
by
Rs.
1,45,000 instead of Rs.
1,75,000.
On
a further appeal by the assessee to the Income-tax .
Appellate Tribunal, it was held that the adjustment
could only be made under the proviso to r. 3(bJ of the
Schedule and that that rule required a prior consultation with the Controller of Insurance, and as that
had not been made, the adjustment was wholly illegal:
The Tribunal, therefore, ordered that the transfer
of Rs. 18,75,000 made by the assessee as aforesaid
had to be accepted as a whole.
(
The Commissi_oner then applied to the Tribunal ..
under s. 66(1) to state a case but that having been
.,..
...
5 S.C.R.
SUPREME COURT REPORTS
885
rejected he moved the High Court of Punjab for an
1963
order on the Tribunal to state a case under s. 66(2)
.
of the Act. The High Court made an order on the life Insurance
Tribunal and the latter thereupon stated a case setting Corporation Ltd.
out the facts earlier mentioned and referring the followv.
ing question to the High Court for its decision:
Comn:issioner
-of Income-tax,
"Whether upon the facts found by the
Delhi &
Tribunal, the Income-tax Officer had in this
Rajasthan
case jurisdiction to proceed to make
adjustment in terms of r. 3(b) of the Schedule to the
Sarkar J.
Indian Income-tax Act."
The High Court took the view that the matter
did not come within r. 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 incometax, undervalued 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 r. 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
els. ta) and (bJ. There may be no restriction upon
his jurisdiction in the computation of profits and
gains under cl. (a) but under cl. (b) the computation can be made within a limited field.
He has
to accept the annual average of the surplus disclosed
by the actuarial valuation made in accordance with
the Life Insurance Act in respect of the last intervaluation period, so as to exclude therefrom any
surplus or deficit included therein which was made
in the earlier inter-valuation period, and expenditure
not allowable under s. 10 in computing the profits.
This is made explicit by r. 3 which makes it obligatory
886
SUPREME COURT REPORTS
[1964]
1963
upon the Income-tax Officer to make the computation
of the surplus for the purpose of r. 2 according to the
Life Insurance scheme provided in els. (aJ, (b) and (c) of r. 3 . Under
Co1poration Ltd. r. 2(b) of the Schedule the Income-tax Officer has,
v.
therefore, no power to change the figures in the account
Commissioner of the assessee. He has to take the surplus as diso/ Income-tax, closed by the actuarial valuation made by the assessee
Delhi &
under the Insurance Act and then to arrive at the averRajasthan
age mentioned in the rule. He has the power to exclude
any surplus or deficit included in the actuarial valuaSarkar J,
tion in respect of an earlier inter-valuation period
and any expenditure other than an expenditure which
mav under s. IO of the Act be allowed. What the
Income-tax Officer in the present case did does not
come within r. 2(b). This is not disputed.
It is furthermore not in dispute that apart from
the provisions in r. 3 of which only cl. (b) is relevant
. for our purpose,
there is no other provision
in the
Schedule
which
authorises an Incometax Officer to make adjustments in the actuarial valuation made by the assessee.
When we come to r. 3(b)
we find that the first part of it lays down that it shall
be obligatory on the Income-tax Officer to allow
certain amounts written off or reserved by the assessee
as a deduction and to include in the surplus any sums
for which credit has been taken on account of appreciation or gains on the realisation of the securities or
other assets. This part of the rule only compels
the Income-tax Officer to allow certain amounts
as deductions and to include certain amounts for
which credit had been taken in the accounts of the
assessee. It, therefore, does not warrant what the
Income-tax Officer did, namely, to adjust the accounts
on the basis of a revaluation made by him.
Then we come to the proviso in r. 3(b). It
says that if it appears to the Income-tax 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
-
-
5 S.C.R.
SUPREME COURT REPORTS
887
as artificially to reduce the surplus, then he would
1963
have the power to make certain adjustments after
-
consultation with the Controller of Insurance. Quite Life Insurance
clearly the adjustment made in the present case by Corporation Ltd.
the Income-tax Officer was not of the variety mentionv.
ed in the proviso. He does not say that he made Commissioner
the adjustment because he found that any rate of of Income-tax,
interest was inconsistent with the valuation of securiDelhi &
ties or other assets. The adjustment made by him
Rajasthan
had nothing to do with any rate of interest. It was
made only because he thought that the securities
Sarkar J.
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 of the
figures in the accounts of the insurance companies
apart from what they expressly provide for. We
have shown that the present adjustment does not fall
within those so expressly provided for.
The only other question is,
Is there a general
right to correct the errors in the accounts of an insurance company when assessing the income-tax?
The High Court thought there was. We are wholly
unable to agree· with this view. The assessment
of the profits of an insurance business is completely
governed by the rules in the Schedule and there is
no power to do anything not contained in it. The
reason may be that the accounts of an insurance
business are fully controlled by the. Controller of
Insurance under the provisions of the Insurance Act.
They are checked by him. He has power to see that
various provisions of the Insurance Act are complied
with by an insurer so that the persons who have insured
with it are not made to suffer by.mismanagement. A
tampering with the accounts of an insurer by an Incometax Officer may seriously affect the wo~king ~f the
insurance companies. But apart from this cons1dera-
888
SUPREME COURT REPORTS
[1964)
1963
ti on, we feel no doubt that the language of s. 10(7)
and the Schedule to the Income-tax Act makes it
Life lnsurance perfectly certain that the lncome-tax Officer could not
Corporation Ltd. make the adjustment that he did in these cases.
C
v. .
It may be pointed out that the question referred
om1nzss1oner
·
1
I
was confined to the powers of the Income-tax Officer
of ncome- ax
D lh. &
' under r. 3(b) of the Schedule. Indeed learned counsel
R ~ ;h
for the assessee did not contend to the contrary.
aJas an
The High Court, as may have been noticed, held
Sarkar J.
that the proviso to r. 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.
We would for this reason allow the appeals with
costs.
Hidayatullah J.
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 s. 66(A) 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 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 Bharat Insurance
Co., Ltd. by the Income-tax Officer, Companies
Circle, New Delhi under the rules framed for assess-
5 S.C.R.
SUPREME COURT REPORTS
889
ment of insurance companies pursuant to s. 10 sub-s.
1963
(7) of the Income-tax Act, on the basis of the annual
average of the surplus of the insurance company Life Insurance
as found by actuarial valuation in the last inter- Corporation Ltd.
valuation period of four years ending on December
v.
31, 1951 and accepted by the Controller of Insurance Commi«ioner
under the Insurance Act, 1938. In this quadrennium, of Income-tax,
the Bharat Insurance Co., Ltd. had debited a sum
Delhi &
of Rs. 18,75,000 in the consolidated revenue account
Rajasthan
from January 1, 1948 to December 31, 1951 and
had transferred the same to the investment reserve Hidayatullah J.
fund to meet an alleged depreciation in the value
of securities.
The
Income-tax Officer compared
the book value and the market value of the stocks
and shares and found that that insurance company
had under-valued certain shares and securities by
Rs. 1,58,756 in the aggregate, and increased the
investment reserve fund by a sum of Rs. 30,420 which
was not required.
The
Income-tax Officer disallowed Rs. 1,75,000 from the total amount of
Rs. 1,89,186 and added it to the surplus for calculating
tax. He held at the same time that in his opinion
the balance left over "provided adequate cover as
contemplated by rule 3(b) of the rules under s. 10(7)
of the Insurance Act." On appeal, the Appellate Assistant Commissioner reduced the figure of Rs. 1,89,186
to Rs.
1,61,770.
He also reduced the amount
of Rs. 1,75,000 to Rs. 1,45,000. With this modification (among some others) he dismissed the appeal.
Against the order of the Appellate Assistant Commissioner appeals were filed respectively by the Incometax Officer, Companies Circle (I), New Delhi-I and
the Bharat Insurance Co., Ltd. ·There were thus
six appeals in respect of the three assessment years.
The Tribunal held by its order dated October 23,
1956 as follows:
"The Income-tax Officer objects to the relief
given by the Appellate Assistant Commissioner
while the assessee objects to the adjustments
which were made by the Income-tax Officer
in to to. The proviso to Rule 3(b) of the Schedule
appended to Section 10(7) clearly lays down that
1963
Life Insurance
Corporation Ltd.
v.
Co1111nissioner
of Income-tax,
Delhi &
Rajas than
890
'.~
SUPREME COURT REPORTS
(1964]
the Income-tax Officer has to consult the Controller of Insurance before he becomes competent
to make any adjustments to the actuarial sur-
. plus disclosed by the valuation. In this case
no consultation with the Controller of Insurance
appears to have been made. The adjustments
made by the Income-tax Officer on this account
are, therefore, set aside. The assessments will
be modified accordingly.
Hidayatullah J. The Commissioner of Income-tax Delhi and Rajasthan then moved the Tribunal for a reference to the
High Court suggesting for decision the question:
"Whether the proviso to Rule 3(b), Schedule to
Indian Income-tax Act, 1922 was applicable
and whether the Income-tax Officer was bound
to consult the Controller of Insurance in this
case where no question arose about the rate
of interest or other factor 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 Incometax Act?"
·
••
....
In the High Court, the Commissioner made an application under s. 66(2) of the Income-tax Act for an order
directing the Tribunal to refer the former question;
but that application was disposed of alongwith the
reference and the High Court by its order under
appeal answered the latter question against the assessee
and dismissed the application under s. 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
:fl.
the other question. The High Court in disposing
- .-
5 S.C.R.
SUPREME co'URT REPORTS
891
of the reference held that the Income-tax Officer
1963
had the jurisdiction "to deal with the matter in the
manner employed by him" and "was not obliged Life Insurance
to consult the Controller of Insurance before he correct- Corporation Ltd.
ed the valuation of the securities". It may be menv.
tioned that while the reference was pending in the Commissioner
High Court a Government Administrator took over of Income-tax,
the insurance company. Subsequently, the Life InDelhi &
surance Corporation, by virtue of a notification of
Rajasthan
the Government of India under s. 45 of the Life
Insurance Corporation Act, 1956, took over from Hidayatullah J.
July 6, 1960 the assets and liabilities of the insurance
company in respect of the controlled business as
defined in s. 2(3) of the Corporation Act.
The Corporation, in the circumstances, was substituted as
the appellant in place of the insurance company
under s. 9 of the Life Insurance Corporation Act.
In this appeal, it is contended that the High Court
was in error in the conclusion it reached and the
answer to the question should have been in favour
of the Life Insurance Corporation and against the
Department.
Before dealing with this case, a reference in brief
to the scheme of the Insurance Act and to the rules
framed under s. 10(7) of the Income-tax Act for assessment of insurance companies is necessary. Bys. 11
of the Insurance Act, every insurer in India and every
foreign insurer in respect of the insurance business
transacted by him in India is required to prepare
at the expiration of each calendar year with reference
to that year (a) a balance sheet, (b) a profit and
loss account and (c) a revenue account.
Special
forms are prescribed and the
schedules to the
Act
provide
by
Regulations what should be
shown in these accounts. The balance sheet, profit
and loss account, revenue account including accounts
which the other provisions require the insurer to
prepare, must then be audited by an auditor. By
s. · 13 of the Insurance Act, every insurer, carrying
on life insurance business, is required, at intervals
of not less than 3 years, to cause an actuarial investi-
892
SUPREME COURT REPORTS
[1964)
1963
gation to be made into the financial condition of
life insurance business carried on by him, including
Life Insurance a valuation of its liabilities in respect of that business.
Corporation Ltd. An abstract of the report of the actuary must then
v.
be prepared according to prescribed regulations.
Commissioner These accounts and the abstract, together with other
of Income-tax, statements etc. must be submitted to the Controller
Delhi &
of Insurance. The Controller may ask for further
Rajasthan
information and, if he so desires, take evidence and
. --
order a re-valuation causing at the same time an
Hidayatullah 1· 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
27 A indicate . the kinds of investments in which the
insurer must invest or keep invested the assets and
the controlled fund.
The balance sheet of 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 "investments" have not
been valued at amounts exceeding the realisable or
market value. This precaution is necessary otherwise there may not be adequate cover for the liabilities.
For this purpose, Form AA which has to be annexed
to the balance sheet must show a classified summary
of the assets on the date of the balance sheet and it
must show in particular:
-
..
•
-
5 S.C.R.
SUPREME COURT REPORTS
893
(a) the value for which credit is taken in the
balance sheet for each of the above-mentioned
1963
classes of assets;
Life Insurance
(b) the market value of such of the above-men- Corporation Ltd.
tioned classes of assets as has been ascer- c
v ..
tained from published quotations after deducotmisszoner
ti<~n o~ accrued interest included in _market of ;~~z;e~ax,
pnces m those cases where accrued mterest
is
included
elsewhere
in
the
balanceRajasthan
sheet;
Hidayatullah J.
(c) how the value of such of the above-mentioned
classes of assets as has not been ascertained
from published quotations has been arrived
at.
The revenue account has to be prepared in four
forms of which Form D shows the revenue account
applicable to life insurance business in respect of
the year and the other three documents are statements
of life insurance policies for the same year (Form
DD), the additions to and deductions from policies
(Form DDD) and particulars of policies forfeited
or lapsed in the year (Form DDDD)
The Regulations for the preparation of the abstract of the report
of the actuary are to be found in the fourth schedule
to the Insurance Act. This schedule is in two parts.
The second part lays down inter alia that every abstract shall show the average rates of interest yielded
by the assets, whether invested or uninvested, constituting the life insurance fund for each of the years covered
by the valuation period and Regulation 3 of Part J
lays down how the average rate of interest yielded
in any year by the assets constituting the life insurance
fund must be calculated.
This is a complicated
calculation which it is unnecessary to describe here.
The abstracts must explain the specific manner in
which the said average rate of interest has been calculated. The consolidated revenue account has to be
shown in Form G and a final valuation balance sheet
is required to be prepared in Form I "".hich compares
the net liability under business as shown m the summ~ry
and valuation of the policies on the one hand with
894
SUPREME COURT REPORTS
[1964]
1963
the balance of life insurance fund as shown in the
balance sheet on the other and this discloses the
Lif" Insurance surplus or the deficiency as the case may be.
As
Corporation Ltd. investments depreciate, an investment reserve fund
v.
is maintained to which amounts are transferred to
Commissioner make up for the shortfall .. The Insurance company
of Income-tax, is thus required to maintain an insurance fund suffiDelhi &
cient to cover its liabilities in investments and depreciaRajasthan
tion in the value of the investments must be specially
.
provided for by making other investments which
Hidayatullah J. 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 & c.". Sub-section 7,
however, says
that notwithstanding anything to
the contrary contained in ss. 8, 9, 10, 12 or 18, the
profits and gains of any business of insurance and
the tax payable thereon shall be computed in accordance with the rules contained in a schedule to the
Act. These rules provide the mode of computing
the profits and gains of life insurance business.
Under
r. 2, the profits· and gains of life insurance business
are taken to be either~
"(a) the · gross external iru::omings 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
...
/ "-
...
.. -
I
5S.C.R.
SUPREME COURT REPORTS
895
inter-valuation period ending before the
1963
year for which the assessment is to be
made so as to exclude from it any surplus Life Insurance
or deficit included therein which was made Corporation Ltd.
in any earlier inter-valuation period and
v.
any expenditure other than expenditure Commissioner
which may under the provisions of section of Income-tax,
10 of this Act be allowed for in comput··
Delhi &
ing the profits and gains of a business,
Rajasthan
whichever is greater:"
x
x
x
x
x
In this case the second method was applicable. Rule
3 (in so far as it is relevant for our purpose) then
provides as follows:
(a) x
x
x
x
x
(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
to 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
/
Hidayatul/ah J.
896
SUPREME COURT REPORTS
[1964]
1963
included in the surplus in respect of appreciation of, such securities and other assets,
Life Insurance
as shall increase the surplus for the purposes
Corporation Ltd.
of these rules to a figure which is fair and
v.
just;
Commissioner
x
x
x
x
· x
01 Income-tax, Rule 2 shows what shall be taken to be the profits
D~lhi &
and gains of the insurance company.
Rule 3 shows
Ra1asthan
what changes can be made in the annual average
. --
of the surplus. The purport of Rule 3, in the context
Hidayatullah J. of this case, may now be stated in simple language.
lt provides in its main part that amounts reserved
in the accounts or throu!.!h the actuarial valuation
balance-sheet to meet depreciation of securities shall
be allowed as a deduction and ex converso 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 undervaluing the stocks and shares, it is always
possible artificially to reduce the surplus by making
a part of it go into the reserve to take the place of the
amount by which the stocks and shares are alleged
to have, but have not in fact, depreciated. The
proviso which is annexed to the main rule takes
note of the existence of such a possibility and provides
that if the Income-tax Officer on investigation finds
(after consultation with the Controller of Ins\M'ance)
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
~
~·
...
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•
I '
..
5 S.C.R.
SUPREME COURT REPORTS
897
to reduce the surplus, he may make such adjustments
1963
to the allowance for depreciation as shall increase
-
the surplus to a figure which is fair and just. The Life Insurance
proviso further says that in doing so the necessity Corporation Ltd.
for making reasonable provision for bonuses to partiv.
cipating policy-holders and for contingencies must Commissioner
be taken into consideration. Put in simple language, of Income-tax,
it means that the Income-tax Officer can, after inDelhi &
vestigation and consultation with the Controller of
Rajasthan
Insurance, increase the surplus to a figure which is
-·-
fair and just. But this action is open to him only Hidayatullah J.
if the valuation of the securities and other assets
has been artificially manipulated to reduce the surplus
by making the rate of interest or other factor employed
in determining the liability in respect of outstanding
policies inconsistent with the valuation of the securities.
Further, the Income-tax Officer, before he makes
any change, must pay due attention to the necessity
for making reasonable provision for bonuses to
participating policy-holders and contingencies.
The power which is conferred on the Incometax Officer under the proviso clearly has its limitations, and is hedged in by conditions. In the present
case, the Income-tax Officer admittedly did not consult the Controller of Insurance. Nor did he consider the necessity for making reasonable provision
for bonuses to participating policy-holders and for
contingencies. Nor did he establish that the rate
of interest or other factor employed in determining
the liability in respect of outstanding policies was
materially inconsistent with the valuation of the
securities or other assets. What he did was to find
out the market value of stocks and shares and to
compare that 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
1/SCI/64-57
898
SUPREME COURT REPORTS
[1964]
1963
the Controller of Insurance. The two questions (that
proposed by the Commissicner and that actually
Life Insurance referred) bring into relief respectively the actions of
Corporation Ltd. the Income-tax Officer and the order of the Tribunal.
.v.
The question as answered refers to the Income-tax
Commissioner Officer's decision while the other was limited to the
of Income-tax, Tribunal's order. The Department did not seek
Delhi &
to place its case under the proviso either before the
Rajasthan
High Court or before us, perhaps, because the con-
--
ditions in the proviso (whether they be directory
Hidayatullah J. 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
ar:d this contention appears to have been accepted
by the High Court.
As has been shown above, Form G is the consolidated revenue account. The Bharat Insurance
Company hud, during the quadrennium commencing
on January 1, 1948 ar:d ending on December 31,
1951, transferred to the investment reserve fund a
sum of Rs. 18,75,000 and shown it in Form G. The
balance of life fund thus stood at Rs. 5,45,88,286-1-10
as against the net liability of Rs. 5,19,42,924 and there
was a surplus. The valuation balance-sheet in Form
I as on December 31, 1951 thus was:
Net liability
urder business
as shown in the
S'1mmary and
valuacion
Surplus
Rs.
Rs.
Balance of Life
Ass·1rance Fund
as sho.vn in the
Balance sheet 5,45,88,286
5,19,42,924
. 26,45,362
5,45,88,286
5,45,88,286
The valuation atstract prepared under the fourth
schedule. showed that the· actuary had assumed the
rate of. interest at 3% per annum and he found
, .. -
-
that the average rate of interest earned on the mean
•..•
life fund in each year; was as follows:
-.
,
5 S.C.R.
SUPREME COURT REPORTS
899
Year ending 31st December, 1948
3.5 per cent.
1963
1949
3.27 "
1950
3 27
Life Insurance
''
"
"
·
''
Corporation Ltd.
"
"'
"
"
"
"
1951
3.26 "
v.
The Income-tax Officer did not concern himself with Commissioner
the rate of interest employed in determining the of Income-tax,
liability in respect of outstanding policies. He conDelhi &
sider'd the valuation of stocks and shares held in
Rajasthan
the life fund with a view to ascertaining wheth>:r
the sum of Rs. 18,75,000 transferred to the inve~t- Hidayatullah J.
ment reserve fund to balance an alleged depreciation
in the value of stocks and shares was justified or not.
He examined for this purpose the details of the alleged
depreciation amounting to Rs. 22,64,733 which had
been worked out by the assessee company and observed
that after the transfer of Rs.