NORTH BRITISH AND MERCANTILE INSURANCE CO Vs. RE

JUDGEMENT

(1.) The facts of this case are set out very fully in the case which has been stated by the Commissioner of Income Tax and I do not propose to re-state them here. There are, however, two matters which were admitted by both sides during the argument. The first is that we have been asked by both sides to decide this matter as if the return of income-tax by the North British Mercantile Insurance Company were made strictly under rules 25 and 35 made by the Central Board of Revenue under Section 59 of the Indian Income Tax Act, 1922. Rule 25 provides : "In the case of Life Assurance Companies incorporated in British India whose profits are periodically ascertained by actuarial valuation, the income, profits and gains of the life assurance business shall be the average annual net profits disclosed by the last preceding valuation, provided that any deductions made from the gross income in arriving at the actuarial valuation which are not admissible for the purpose of income-tax assessment, and any Indian income-tax deducted from or paid on income derived from investments before such income is received, shall be added to the net profits disclosed by the valuation." Rule 35 provides : "The total income of the Indian branches of non-resident insurance companies (Life, Marine, Fire, Accident, Burglary, Fidelity, Guarantee, etc.) in the absence of more reliable data, may be deemed to be the proportion of the total income, profits or gains, of the companies, corresponding to the proportion which their Indian premium income bears to their total income. For the purpose of this rule, the total income, profits or gains of non-resident Life Assurance Companies, whose profits are periodically ascertained by actuarial valuation shall be computed in the same manner as is prescribed in Rule 25 for the computation of income, profits and gains of Life Assurance Companies incorporated in British India."

(2.) The second is that the tax-free securities in question are Government of India tax-free securities which come within the proviso to Section 8 of the Indian Income Tax Act of 1922, the words of which are : "Provided that no income-tax shall be payable on the interest receivable on any security of the Government of India issued or declared to be income-tax free." The North British Company made a return for the year 1934-35 of the profits of its Life Business in India and the Income Tax Officer asked the Company to produce a certificate as to the composition of the interest item entering into the Life Business for the quinquennium 1926-30 in reply to which the following statement signed by the London Actuary of the Company dated the June 5, 1934, was submitted. INDIAN INCOME-TAX - Yearly profit for purpose of Indian Taxation 1931-32 to 1935-36, 1-5 of Rs. 26,24,835 ... 5,24,97 "The interest collected in India during the quinquennium 1926-1930 on our Indian Life investments amounted to Rs. 40,75,703 as will be seen from the accompanying statement A." "The amount of interest considered to have been earned on the Indian Life business, however, during the same period, calculated at the average rate earned on the total Life funds of the Company, amounted to Rs. 48,08,196 and in computing the Indian Life Profits 1926-30 for the purposes of the valuation of our Indian Life business, an amount of Rs. 7,32,488 has been added to the amount of the interest Rs. 40,75,708 collect in India in order to arrive at the figure of Rs. 48,08,196 credited in the valuation statement."

(3.) The statement "A" shows that the following amounts were received free of Indian Income Tax; It was stated by the assessees Counsel and accepted by the Advocate-General for the Income Tax authorities that the word "liability" in the table above should be read as "fund available to meet liability." One-fifth of the amount of interest collected in India free of Income tax is Rs. 1,66,572. The assessees claim that this item of Rs. 1,66,572 comes within the exemption given by the proviso to Section 8 of the Act of 1922. The Income Tax authorities contend that the Income, profits gains are to be ascertained by rules 25 and 35, that those rules are a code complete in themselves and once the income, profits and gains have been ascertained under that code, it is not permissible in law to make any additions to or subtractions from that sum save in accordance with the provisions of rule 25. It is said that the total income so ascertained becomes only a notional income and unless otherwise provided by the rules, it is not open to the Income Tax authorities to introduce any dissection or analysis of that total, so as to allow the proviso to Section 8 to operate. Great stress is laid by the Income Tax authorities upon the fact that the profits in the case of Life Assurance Companies are periodically ascertained by actuarial valuation. It is, in my view, necessary to refer to the Life Assurance Companies Act (Act VI of 1912) for some indication as to what is the prescribed form and substance of that actuarial valuation. Section 7 of the Life Assurance Companies Act provides that every Life Assurance Company shall, at the expiration of each financial year, prepare -(c) a balance-sheet or balance-sheets in the form or forms set forth in the Third Schedule. Section 8(1) provides - "Every life assurance company shall once in every five years, or at such shorter intervals as may be prescribed by the instrument constituting the company, or by its regulations or bye-laws cause an investigation to be made into its financial condition, including a valuation of its liabilities, by an actuary, and shall cause an abstract of the report of such actuary to be made in the form set forth in the Fourth Schedule."