Full Judgment Text
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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
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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