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Petitioner: COMMISSIONER OF INCOME-TAX, BOMBAY CITY II, BOMBAY VS Respondent: NEW INDIA JUDGMENT
Court Name: Bombay High Court Judge(s): V. S. Desai, S. P. Kotwal Title:COMMISSIONER OF INCOME-TAX, BOMBAY CITY II, BOMBAY vs NEW INDIA
JUDGMENT
Reported As: 1972 PTD 458 Result: company made Judgment JUDGMENT KOTVAL, C. J.-This is a consolidated reference pertaining to the assessments of three years upon the assessee. The consolidation is due to the fact that common questions of law arise pertaining to the three years. The assessee is the New India Assurance Co. Ltd., Bombay, with its head office at Bombay. It has, however, branches and agencies all over the world. It used to carry on business in both life and general insurance, but the life insurance business was taken away from the assessee-company in consequence of the nationalisation of the life insurance business which took effect from the 1st of September 1956. Thereafter, the life insurance business was vested in the Life Insurance Corporation of India. It appears that in respect of the life business done by the assessee during the years in question before us, certain questions of law had arisen, but, since, under the statute, the liabilities as well as the assets arc those of the Life Insurance Corporation, those questions are being agitated by the Life Insurance Corporation In separate proceedings even for the years of account with which we are concerned. The questions which arise in the present reference, therefore, are solely concerned with the general insurance business of the assessee for those years. We are concerned with the assessme nt years 1954-55, 1955-56 and 1956-57 corresponding to the account years which are the calendar years 1953, 1954 and 1955. In the assessment proceedings for the three years, the assessee had, inter alia, claimed the following exemptions: Firstly, under the provisions of section 15-B of the Indian Income-tax Act, the assessee claimed exemption in respect of donations for charitable purposes. Secondly, it claimed that certain
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dividends received by them from companies In which they had invested moneys were exempt from tax, because those companies were new companies and their dividend income in the hands of the assessee as a shareholder was exempt under the provisions of section 15-C(4). Thirdly, the assessee claimed exemption in respect of Interest on loans of the Mysore Government which, according to the assessee, were exempted by the Central Government Notification No. 39 dated 5th July 1954, under section 60 of the Indian Income-tax Act. The Tribunal has given a chart showing the respective figures of exemption claimed by the assessee which we reproduce below which serves to give at a comprehensive glance the amounts of the exemptions claimed in each year of account: Per Year Cal.Asst Year.U/s. 15-B for donation for charitable purposes. (General)U/s. 15-C(4) on dividends from companies exempt U/s. 15-C. (General)Under notification No. 39 dt.5-7-1954 issued U/s. 60 for interest on Mysore Govt. Loan; (General) 1953 1954 19551954- 55 1955- 56 1956- 578,471 15,722 61,80022,145 6,375 23,00024,450 24,450 24,450 The Tribunal has noted at the foot of the chart that the exemption claimed under section 15-C(4) was claimed for the first time in the above years of account. Under the third proviso to section 4(1) of the Indian Income-tax Act exemption is granted in respect of an amount of its. 4,500 ". . . If in any year the amount of income accruing or arising without the taxable territories exceeds the amount brought into the taxable territories in that year. .." The exemption granted is by the following words ". . . There shall not be included in tile assessment of the income of that year so much of such excess as does not exceed four thousand five hundred rupees. . ." In respect of the business which the assessee-company carried on in foreign countries it claimed this exclusion of income under this proviso to section 4(1) to the extent of Rs. 4,500 in respect of each of the assessm ent years above. Under the provisions of the Indian Income-tax Act the profits and gains of any business of insurance is not taxed in the ordinary way but under the special provisions of the Schedule to the Act. Section 10(7) applies the provisions of the Schedule to the Act to the exclusion of certain provisions of the Act. Section 10(7) runs as follows: "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." A glance at the rules contained in the Schedule to the Act shows that rules 1 to 5 govern the computation of the profits and gains of only life insurance business and since, as we have said, we are only concerned in this reference with the profits and gains of the assessee-company from the general insurance, these rules as such will not directly apply. They were referred to in the arguments for certain purposes and we will refer to them when we deal with the arguments. But the rule which directly governs the case and which is concerned with the general business of insurance is rule 6 and it makes the following provisions : "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 Controller of Insurance after adjusting such balance so
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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." We have quoted these provisions of the law at this stage because they serve to explain the view taken by the tax authorities upon several of the items involved in this reference and the arguments. Reverting to the claims made by the assessee-company for exemptions as indicated in the chart above, the Income-tax officer disallowed the claims to exemptions because he took the view that, having regard to the provisions of rule 6, the profits or gains which fell to be assessed under rule 6 were only notional. It is a notional income which Is directed by the rules under the Schedule to be assessed and, therefore, there is no scope for giving effect to the exemptions or the provisions granting the exemptions. By the time the assessee could appeal to the Appellate Assistant Commissioner, as we have said, the life insurance business carne to be nationalised and, therefore, the assessee-company and the Life Insurance Corporation preferred separate appeals to the Appellate Assistant Commissioner in regard to the general insurance business and the life insurance business which by then vested in the life insurance Corporation of India. The Appellate Assistant Commissioner took the same view as taken by the Income-tax officer and disallowed all the exemptions claimed as also the amount of Rs. 4,500, which the assessee claimed should be deducted under the third proviso to section 4(1)(c). The view of the Appellate Assistant Commissioner was "the appellant has raised another ground of appeal stating that they should be allowed relief under section 15-C(4) on amounts received as dividend from newly established industries in India, viz., India Cement Ltd. And National Rayon Corporation Ltd. As discussed, while dealing with grounds Nos. 1, 2, 3 and 4, I hold that, in the case of general insurance, the income has been assessed as a notional income and, therefore, the other provisions of the Act would not apply relying on the decision of the Privy Council in the case of Commissioner of Income-tax v. Western India Life Insurance Co. Ltd. ((1949) 17 I T R 125 (P C)). The assessee carried the matter to the Tribunal by way of appeal and the Tribunal has, so far as the exemptions claimed are concerned, allowed the exemptions, but it did not accept the assessee's contention so far as the statutory allowance of Rs. 4,500 is concerned for each year of account under the third proviso to section 4(1). As regards the allowance the Tribunal somewhat summarily brushed it aside by saying that it was not permissibly because it was specifically considered by the Privy Council it Commissioner of Income-tax v. Western India Life Insurance Co. Ltd. On the general contention, which was a contention which affected the grant of all the exemptions claimed by the assessee, the Tribunal did not accept the view of. The tax authorities. It pointed out that the business of insurance is separately provided for in section 10(7) and section 10(7) excludes only the application of the provisions of sections 8 9, 10, 12 and 18 to the extent that the rules in the Schedule to the Act apply. It does not exclude the operation of the entire Act. Next the Tribunal pointed out that rule 6 ordains that the profits as disclosed to the Controller of Insurance by the actuary of the company should be accepted for assessment and that the reasons for this procedure are fairly obvious. The computation of profits of an Insurance company is a very difficult and technical process and can only be satisfactorily performed by a competent actuary. It is not merely a matter of guess work but of the application of a highly developed actuarial science. Therefore, the matter was taken out of the purview of the tax authorities so far as the figure of the profits or gains of insurance business is concerned, except to the extent permitted by rule 6. They then pointed out that, having regard to its provisions, section 10(7) does not replace the entire Income-tax Act by the Schedule, but only certain sections of the Income-tax Act to the extent indicated in section 10(7) and that section 10(7) does not inhibit the considerations of the exemptions provided In the other portions of the Act. They, therefore, held that a plain reading of
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the Act did not suggest that section 15-C and other sections were inoperative In the case of insurance business. It is in respect of this decision of the Tribunal on these questions that the first question which contains several parts has been referred to us. The following is the question "1. Whether in the assessm ents of all the years 1954-55, 1955-56 and 1956-57 made under rule 6 of the rules contained in the Schedule, (i) the assessable income of the assessee from its general insurance business was notional ? (ii) the assessee-company is entitled to the following : (a) deduction of Rs. 4,500 under the proviso to sec--tion 4(1)(c) ; (b) exemption from tax on account of donations for charita--ble purposes under section 15-B; (c) exemption under section 15-C(4); and (d) exemption in respect of interest on Mysore Government Loan under the Notification No. 39 dated July 5, 1954, issued under section 60 ?" As we have said, the Tribunal had disallowed the claim of the assessee to the deduction of Rs. 4,500 and, therefore, the question No. 1(ii)(a) has been referred at the instance of the assessee and the rest of the above questions have been referred at the instance of the Commissioner. A part from these exemptions, there were three items in--volved which were disallowed by the departmental authorities and which formed the subject-matter of questions Nos. 2, 3 and 4 referred for our decision. Questions Nos. 2, 3 and 4 are as follows : "2. Whether the claim of the assessee-company in regard to the payment of Rs. 1 lakh from the general department funds to the mutual benefit society is admissible in the assessment of 1954-55 having due regard to section 10 (2) (xv), section 10(4)(c) and section 58-K of the Act? 3. Whether Rs. 79,592, being the difference in the exchange rates of Pakistan currency before and after its devaluation on July 31, 1955, on account of payment under section 18-A of the Pakistan Income-tax Act is deductible in the assessment of 1956-57 under any of the provisions of the Income-tax Act or the Schedule ? 4. Whether Rs. 1,33,694 being the difference in the exchange rates of the Pakistan currency before and after its devaluation on July 31, 1955, on account of double taxation relief till then ascertained to be due, is deductible in the assessment of 1956-57 under any of the provisions of the Income-tax Act or the Schedule ?" Of these amounts, the first amount which forms the subject --matter of question No. 2 is an amount of Rs. 1 lakh contributed by the assessee-company towards a society called the New India Mutual Benefit Society started with the object of promoting the welfare and interest of all permanent employees of the New India Assurance Company and their families. This society is governed by certain rules and regulations, a copy of which has been placed before us. The funds of this society were initially contributed from the funds of the assessee company and were derived from the voluntary contributions from all permanent members of the staff and from further grants or donations by the company itself. The total amount with which the society commenced was a sum of Rs. 2,19,650 contributed by the directors as follows: Rs. From the life department1,00,000 From the general department (profit and loss account)1,00,000 From the staff compassionate and charitable allowance fund19,650 2,19,650 thus making a total of Rs.2,19,650. As to the contribution from the life fund also it appears that the same dispute had arisen but, since the life business has now been separated and vests in the Life
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Insurance Corporation of India, that item cannot be agitated by the assessee. We were told that the Life Insurance Corporation of India did not appeal in respect of that item after the Income-tax Officer disallowed that item of expenditure. We are only concerned with the amount of Rs. 1 lakh contributed from the funds of the company from its general department. The society was incorporated pursuant to the announcement of the General Manager dated 18th July 1952, but, till about the year, 1959, it does not appear to have been very active in carrying out its objects. From the year, 1950, onwards, however, the society commenced to receive large funds both from the staff and from the assessee-company. The society itself is being assessed separately on its own income and in the three accounting years it has spent amounts as mentioned below from its own funds Calendar Assessm ent General year year Department Rs. 19531954-552,420 19541955-563,274 19551956-57 1,540 The Income-tax Officer disallowed this claim on the short ground that the amount contributed by the company was a capital expenditure and should, therefore, be disallowed on general principles but also because it could not be allowed under section 58-K(1) of the Income-tax Act. He, however, took the view that such amounts as are actually paid by the society to the employees for their benefit would be allowed as expenditure. Accordingly, the Income-tax Officer allowed the sum of Rs. 2,420 as a deduction in the assessment year 1954-55. In appeal, the Appellate Assistant Commissioner confirmed the view of the Income-tax Officer. He held that the assessee had, so to say, constituted a fund or the nucleus of a fund which would be in the nature of a capital expenditure and, therefore, could not be allowed on the authority of the decision in Atherton v. British Insulated & Helsby Cables Ltd. ((1925) 10 Tax Cas. 155). The Appellate Assistant Commissioner took the view that the initial contribution by the company had enabled it to divest itself from the future liabilities for payment to its employees and, since the extinguished future liability was a capital asset, the payment of this lump sum "had acquired a capital asset of enduring nature". Since under rule 6 any expenditure which was not allowable under the provisions of section 10 could be disallowed, the Income-tax Officer was right in disallowing this item. The Appellate Assistant Commis--sioner also added that the item of expenditure would also not be allowable under the provisions of section 10(4)(c) of the Income-tax Act. Each one of these provisions upon which either the Income-tax Officer or the Appellate Assistant Commis--sioner disallowed this item is reflected in the question No. 2 which we have quoted above. So far as this item is concerned, the Tribunal has taken the view that it is clear law that under section 10(2)(xv) any expenditure incurred as a matter of commercial expediency must be allowed and since in this case the company chose to set apart some amount for the benefit of the staff such payment could be allowable if it was made in the interest of business. In this case the assessee did not retain any dominion over the funds, though, no doubt, it has a certain amount of say in the matter of its distribution. The claim ought to be allowed especially because the contribution is made to a society which is a separate legal entity. The third question relates to an item of Rs. 79,592 which, according to the assessee, is the loss incurred by it in the currency exchange rates prevailing between Pakistan and India before and after the devaluation of the Pakistan currency on 31st July 1955. On the date of the devaluation, the assessee-company had paid to the Pakistan Government large amounts equal to Its estimate of income-tax and super tax liability on the basis of the last completed assessm ent. On the date of devaluation, i.e., 31st July 1955, a sum of 1,80,892 Pakistan
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rupees was due from the Pakistan Government to the assessee, but in the mean--while the Pakistan currency came to be devalued and the assessee suffered a loss thereby of Rs. 79,592. The assessee claimed this as an allowable loss. The same is the position regarding the item of Rs. 1,33,694 which is the subject-matter of the fourth question referred for our decision. This is an item of loss sustained by the assessee on account of devaluation and arising out of an amount of 4,37,542 Pakistan rupees due and payable to the assessee under the double taxation avoidance agreement between India and Pakistan. As a result of the devaluation this amount at the new exchange rate was reduced by a sum of Rs. 1,33,694, which difference is due to the devaluation of the Pakistan currency. The Income-tax Officer disallowed both the above items, because according to him this was an item which the assessee claimed to be allowed to it on account of taxes which could never be a valid item of expenditure, taxes are expressly excluded as an item of expenditure. He remarked that "the proper entry in this case is not to debit this amount of loss to exchange reserve, but to debit it to reserve, for taxes account". In the appeal by the assessee, it appears that the Appellate Assistant Commissioner through an over--sight failed to deal with this claim of the assessee altogether. The Tribunal on its part allowed both the items, because it felt that both the items constituted a business loss of the assessee. They had business all over the word and if, as a result of devaluation of a foreign currency, loss is sustained it would be purely a business loss. The Tribunal also remarked that, when Indian currency was devalued and the assessee-company derived a profit, the Department had brought that profit to tax and recovered tax thereon. The tax thus recovered was in 1951 on a profit of Rs. 25,787. On these items the questions Nos. 3 and 4 quoted above have been referred for our decision. It will be convenient first of all to deal with the question No. 1, which is of general importance and which affects all the exemptions granted to the assessee, the question being whether, having regard to the provisions of section 10(7) read with the provisions of rule 6 of the Schedule, one or more of the exemp--tions claimed cannot at all be granted because the Schedule provides for an independent "code" for assessm ents of insurance business. We have already reproduced subsection (7) of section 10 and it commences with the non-obstante clause "notwithstand--ing anything to the contrary contained in section 8, 9, 10, 12 or 18". Therefore, it clearly excludes the operation of the stated sections, but it does not entirely exclude those sections, for the subsequent part of subsection (7) says merely that "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." The primary provision, thus, is that the profits and gains of any business of insurance and the tax payable thereon should be computed in accordance with the rules in the Schedule and nothing contained in the stated section: to the contrary should be allowed to interfere with that computa--tion. In other words, in computing the profits and gains of any insurance business and the tax payable thereon, the rules in the Schedule will govern and prevail over the sections mentioned in the non-obstante clause, namely, sections 8, 9, 10, 12 and 18. Sections 8, 9, 10 and 12 are sections which relate to the computation of income under the respective heads of income mentioned in section 6(ii), (iii), (iv) and (v). So far as the business of general insurance with which we are dealing in the present case is concerned, the rule in the Schedule which governs and, as we have said, prevails over the sections 8, 9, 10 and 12 is rule 6. As to the remaining section, viz., section 18, the rule in the Schedule which replaces it is rule 4 but that rule is applicable to the business of life insurance only. The effect of section 10(7), therefore, so far as general insurance is concerned, is that rule 6 in the Schedule governs and prevails over sections 8, 9, 10 and 12 in the matter of computation of the profits and gains of general insurance business. The contention on behalf of the department has been two-fold. The first is that subsection (7) of section 10 does not only speak of computing the profits and gains of any business of insurance, but
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it also speaks of "the tax payable thereon" and it says that both "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". Therefore, the first contention is that not only is the computation of the profits and gains of the business to be in accordance with the Schedule but also the tax payable thereon must be only according to the rules contained in the Schedule. Therefore, the assessee cannot claim the exemption granted by the Act. Secondly, it is contended that, having regard to rule 6, which applies in the case of general insurance business, the profits and gains which it contemplates is indicated by the words used in the rule "the profits and gains of any business of 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 Controller of Insurance". It is, therefore, urged that this is not really a computation of any actual profits and gains of the business of an insurer, but by the use of the words "shall be taken to be" a sort of a fictional income is being referred to. Counsel called it a notional income having regard to certain decisions to which we will presently refer. The second point, therefore, taken is that if it i9 not the actual income, but only the notional income, that has to be taken into account for the purpose of rule 6 in computing the profits and ,gains of an insurance business, then by necessary implication the several provisions of the Income-tax Act granting the several exemptions would not apply, because those exemptions are only exemptions upon actual profits and gains and not upon such notional profits and/or gains. Before we deal with these two contentions, it is necessary to emphasise that, in the present case, the assessee claims exemption under sections 15-B, 15-C(4) and upon the terms of the Notification No. 39 issued under section 60. The deduction which it claims is under section 4(1). Subsection (7) of section 10, while it expressly refers to certain sections, does not refer to any one of the sections on the basis of which the assessee claims the exemption or the deduction. In other words, neither section 4(1) nor section 15-B nor section 15-C(4) nor the Notifica--tion No. 39 under section 60 of the Income-tax Act is referred to in subsection (7) of section 10. The question then is whether, having regard to its provisions and reading it along with rule 6 can we by a process of inference hold that the intention of the Legislature nevertheless was to do away with the exemptions granted by sections 15-B and 15-C(4) and by the Notification No. 39 under…
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