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Petitioner: LAKSHMI INSURANCE Co. LTD. VS Respondent: COMMISSIONER OF INCOME-TAX, NEW DELHI
Court Name: Delhi High Court Judge(s): Inder Dev Dua, T. V. R. Tatachari Title: LAKSHMI INSURANCE Co. LTD. vs COMMISSIONER OF INCOME-TAX, NEW DELHI Case No.: Income-tax Reference No. 32 of 1962 Date of Judgment:1967-10-17 Reported As: 1972 PTD 233 Result: Reference answered accordingly
JUDGMENT
JUDGMENT TATACHARI, J.---This is a reference under section 66(1) of the Indian Income-tax Act, 1922, made by the Income-Sax Appellate Tribunal, Delhi Bench "C", referring two questions of law which are said to arise out of the Tribunal's consolidated order, dated May 25, 1960, in Income-tax Appeals Nos. 8133 and 8134 of 1956-57. The assessee, the Lakshmi Insurance Co. Ltd., New Delhi, is a public limited company which carried on life insurance business. The Income-tax officer made assessments on December 30, 1954, for the years 195 t-52 and 1952-53 on the basis of tile last actuarial valuation made for the period ending December 31, 1950. The assessments were made for the said two years on total income of Rs. 1,03,381 and Rs. 59,043 respectively. The assessments are said to have been made under rule 2(b) of the Schedule to the Income-- tax Act. In computing the taxable surplus, the Income-tax Officer excluded: (i) a sum of Rs. 62,678 being dividends from the Industrial Finance Corporation of India ; and (ii) a sum of Rs. 3,40,065 as interest on securities issued by the Mysore Darbar (State Securities) by reason of a notification under section 60 of the Indian Income-tax Act, 1922. Acting under section 33-B of the Act, the Commissioner of Income-tax, Delhi, took the view in his consolidated order dated December 29, 1956, that the exclusion of the two amounts was contrary to the provisions of rule 2(b) of the Schedule to the Income-tax Act, and, therefore, directed that the said two amounts should be included in the taxable surplus. Against that order of the Commissioner, the assessee prefer--red an appeal to the Appellate Tribunal. The Tribunal, by its consolidated order dated May 25, 1960, held that the sum of Rs. 62,678, being dividends from the Industrial Finance Corpora--tion of India, was exempt from income-tax
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and should not have, therefore, been included in the taxable surplus. But, as regards the sum of Rs. 3,40,065, being interest on securities issued by the Mysore Darbar (State Securities), the Tribunal agreed with the view of the Commissioner and held that the same should be included in the taxable surplus. A third contention was raised by the assessee before the Tribunal that the order passed by the Commissioner of Income-tax under section 33-B was barred by limitation. The Tribunal held that it was not barred by limita--tion. As regards the sum of Rs. 62,678, the revenue did not pursue the matter further, and the question about the same did not, therefore, survive. But, as regards the question about the sum of Rs. 3,40,065 and the question of limitation, the assessee moved the Tribunal to refer the questions to this Court under sec--tion 66(1) of the Act. The Tribunal, accordingly, by its order, dated May 4, 1962, referred the following two questions for the opinion of this Court: "(1) Whether the interest of Rs. 3,40,065 received on the securities issued by the Mysore Darbar for both the years is exempt from taxation ? (2) Whether the order under section 33-B passed by the Commissioner of Income-tax was barred by limitation ?" The first question relates to the sum of Rs. 3,40,065 received by the assesses-company in each of the two years 1951-52 and 1952-53, as interest on securities issued by the Mysore Darbar (State Securities). The contention of the assessee before the income-tax authorities was that by virture of a notification under section 60, interest on Mysore Darbar Securities was exempt from tax, and that the said amounts should not be included in the taxable surplus. The Income-tax Officer accepted the said con--tention of the assessee and excluded the amounts in computing the taxable surplus. But, the Commissioner of Income-tax took the view that the said amounts should not be so excluded. According to him, the life insurance business is a class by itself, the profits of which are to be computed in accordance with the procedure laid down in the Schedule to the Income-tax Act, and only the adjustments enumerated in the said Schedule are to be carried out and no other modification is to be made to the basis of com--putation of profits. His reasoning vas that the income that is assessed in the case of life insurance business is neither the actual income nor the total income of the previous year, that what is charged to tax under section 10(7) and the Schedule to the Act is a notional or conventional income, that as actual income is not to be brought under tax, the question of exclusion of the interest on the securities of the Mysore Darbar does not arise, that in cases where rule 2(b) of the Schedule is applicable, the Schedule provides a method of finding out the amount which is to be the subject of tax in respect of profits of insurance business, and that the exemption granted by notification under section 60 of the Act is not available in the case of assessable profits of insurance companies determined under rule 2(b) of the Schedule. In support of his view, he relied upon the decisions in Inland Revenue Com--missioners v. Australian Mutual Provident Society (1947 A C 605), Commis--sioner of Income-tax v. Western India Life Insurance Co. Ltd. ((1949) 17 I T R 125 (P C)) and Commissioner of Income-tax v. B. B. & C. I. Railway Co--operative Mutual Death Benefit Society ((1949) 17 I T R 509). The Income-tax Appellate Tribunal, as already stated, took the same view. The reasoning of the Appellate Tribunal was that, according to the Income-tax Act, profits and gains of any business of life insurance can be computed only in accordance with rule 2(b) of the Schedule to the Act and in no other manner, that, instead of computing the income of an insurance company as laid down in various sections under Chapter III, it has to be computed in the manner laid dawn in the Schedule to the Act, that an insurance company, instead of making its return of income under the various heads as laid down in section 6 of the Income-- tax Act, has got to submit one unit of income, a sort of notional or artificial income as provided in the Schedule to the Act, that, since the income of the assessee has to be worked out in accor--dance with rule 2(b) of the Schedule, there is no scope for making any adjustments other than those provided in the Schedule itself, and that the
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assessm ent in the instant case having been made on a notional income and not on the actual receipts of the pre--ceding year, there is no scope for excluding from assessment the income earned as interest on the Mysore Darbar Securities. In support of their view, the Tribunal relied upon the decision in Commissioner of Income-tax v. Crown Life Insurance Co. ((1956) 30 I T R 365). Shri Bhagwat Dayal, the learned counsel for the assessee --company, contended that the view taken by the Appellate Tribunal and the Commissioner of Income-tax was erroneous and that the exemption granted by the notification under section 60 is available to the assessee-company, and the amounts of interest received by the assessee-company on the Mysore Darbar Securi--ties should be excluded in computing the taxable surplus. For a proper appreciation of the said contention, it is necessary to refer to the provisions in sections 3, 4, 6, 10(7) and 60, the notifi-- cation made under section 60, and rule 2(b) of the Schedule to the Income-tax Act, 1922. Chapter I of the Indian Income-tax, 1922, which contains sections 3, 4, 4-A and 4-B provides for "charge of income-tax". Section 3 which is the charging section, provides as under: "3. Charge of income-tax.-Where any Central Act enacts that income-tax shall be charged for any year at any rate or rates, tax at that rate or those rates shall be charged for that year in accordance with, and subject to the provisions of, this Act in respect of the total income of the previous year of every indivi--dual, Hindu undivided family, company and local authority, and of every firm and other association of persons or the part--ners of the firm or the members of the association individually." Section 4 deals with the application of the Act, and the part of the section which is relevant for the purpose of this reference runs as under: "4. Application of Act.-(1) Subject to the provisions of this Act, the total income of any previous year of any person includes all income, profits and gains from whatever source derived which- . . . . . ." Chapter III, which contains sections 6 to 17, deals with "taxable income". Section 6 enumerates the heads of income chargeable to income-tax. The said section runs as under: "6. Heads of income chargeable to income-tax.-Save as otherwise provided by this Act, the following heads of income, profits and gains shall be chargeable to income-tax in the manner hereinafter appearing, namely :- (i) Salaries. (ii) Interest on securities. (iii) Income from property. (iv) Profits and gains of business, profession or vocation. (v) Income from other sources. (vi) Capital gains." The various heads of income mentioned in section 6 are dealt with in sections 7 to 12. Section 10 deals with "business". Subsection (1) of section 10 provides that: "The tax shall be payable by an assessee under the head `Profits and gains of business, profession or vocation' in respect of the profits or gains of any business, profession or vocation carried on by him." Subsections (2) to (6) deal with the computation of the profits or gains and the allowances which may be made in the computa--tion. Subsection (7), which is the material provision for the purposes of this reference, runs as under: "(7) 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." Chapter X of the Act contains miscellaneous provisions. Section 60, which occurs in this Chapter, runs as under:
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"60. Power to make exemption, etc.-(1) The Central Government may, by notification in the official Gazette, make an exemption, reduction in rate or other modification, in respect of income-tax in favour of any class of income, or in regard to the whole or any part of the income of any class of persons." Subsections (2) and (3) thereof are not material for the pur--pose of this case. The Schedule to the Act contains the rules for the computa--tion of the profits and gains of insurance business, as provided in section 10(7) of the Act. Rules 1 and 2, in so far as they are material for the purpose of this reference, are ,as follows: "1. In the case of any person who carries on, or at any time in the preceding year carried on, life insurance business, the profits and gains of such person from that business shall be computed separately from his income, profits or gains from any other business. 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 lass 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 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 section 10 of this Act be allowed for in computing the profits and gains of a business, whichever is the greater : . . . ." The proviso and clauses (c) and (d) of rule 2 and rules 3 and 4 of the Schedule contain other provisions as to deductions and adjustment of tax paid by deduction at source, in the matter of the computation of the profits and gains of life insurance business. The notification issued under section 60 of the Act, anti which is relied upon by the assessee, in so far as it is material, is as follows: "(Finance Department Notification No. 878-F Income-tax, dated the 21st March 1922, as amended or added to from time to time). The following classes of income shall be exempt from the tax payable under the said Act and they shall not be taken into account in determining the total income or salary of an assessee for the purposes of the said Act, except for the purposes of subsection (4) of section 48 - . . . . . (27) The interest on Mysore Durbar Securities. . ." Thus, under section 3, where any Central Act enacts that in--come-tax shall be charged for any year at any rate or rates, income --tax shall be charged at that rate or those rates for that year in accordance with and subject to the provisions of the Act in respect of the total income of the previous year. Section 4 prescribe that, subject to the provisions of the Act, the total income of any previous year includes all income, profits and gains from what--ever source derived, and also provides that certain classes of income, profits or gains shall not be included in the total income. Section 6 enumerates the heads of income, profits and gains, which shall be chargeable to income-tax in the manner prescribe, in the subsequent sections of the Act. One of the heads of income is "Profits and gains of business, profession or vocation", and the same is dealt with in section 10. In the case of profits and gains of any business of insurance, section 10(7) provides that, 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 com--puted in accordance with the rules contained in Schedule to the Act. The profits and gains of any business of insurance might consist of income by way of "interest on securities" which is dealt with in section 8, or "income from property" which is dealt with in section 9, or "income from profits and gains of business" which is dealt with in section 10, or "income from
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other sources" which is dealt with in section 12, or might consist of two or more of the said heads of income. Normally, the computation of the income and the tax payable thereon in respect of each `of the said heads of income is to be made under the respective sections. But, in the case of the computation of the profits and gains of any business of insurance and the tax payable thereon, section 10(7) prescribes that such computation shall be made in accordance with the rules contained in the Schedule to the Act. A reference to rule 2 of the Schedule shows that the computation of profits of life insurance business is to be made not on the basis of the actual income or the total income (as is the case under sections 8, 9, 10 and 12), but on the basis of a notional income mentioned in the said rule. Rules 3 and 4 in the Schedule deal with deduc--tions and adjustment of tax paid by deduction at source in the case of profits and gains of life insurance business. Thus, the scheme of the provisions referred to above shows that the chargeability of the total income of an assessee to income --tax and the applicability of the Act to the total income re gover--ned by the provisions in sections 3, 4, 4-A and 4-B, while the determination as to what is taxable income is governed by sec--tions 6 to 17 in Chapter III of the Act. Each of the sections 7, 8, 9, 10 and 12 deals with the question as to whether a particular head of income as taxable or not, and also with the qu9stion as to the computation of the taxable income. Section 10 deals with the question as to what is taxable income from business, and with the question as to the computation of such taxable income from business. So far as the computation of the income from the business of insurance is concerned, section 10(7) provides that the said computation should be made not in the manner prescribed in sections 7, 8, 9, 10 and 12, but should be made in the manner prescribed in the rules contained in the Schedule to the Act. Rules 1 to 4 in the Schedule deal with the computation of the profits and gains of life insurance business, while rule 5 deals with the computation of profits and gains of other insurance business, and rules 6 and 7 contain other general provisions regarding the profits and gains of insurance business. It has to be noticed in particular that the provisions in rule 2 in the Schedule deal with the computation of profits and gains of life insurance business, but not with the chargeability of Income-tax tinder the Act oar the applicability of the Act. Now, section 60(1) of the Act, which occurs among the Miscellaneous provisions in Chapter X of the Act, empowers the Central Government to make an exemption, reduction in rate or other modifications, in respect of income-tax in favour of any class of income, or in regard to the whole or any part of the income of any class of persons, by notification in the official Gazette The language of the section as well as the fact that it occurs among the miscellaneous provisions Chapter X of the Act shows that the said provision in section 60(1) is a general provision which governs all the other provisions in the Act. It refers to the power to make an exemption, reduction in rate, etc., in respect of income-tax itself in favour of any class of income. When, by a notification, the Central Government exempts any class of income from income-tax, the said income is not chargeable at all with income-tax under the Act. In other words, any class of income, which would otherwise normally be chargeable with income-tax under any of the provisions of the Act, would not be so charge--able with income-tax if the Central Government, by notification under section 60, makes an exemption in respect of income-tax in favour of the said class of income. Of course, the nature and the extent of the exemption depends upon the actual provision in the notification, and has to be gathered from the language used in the said notification. The provisions in the rules in the Schedule to the Act are also a part of the Act, and are, in fact, ancillary to the provisions in section 10 of the Act. So, the said rules in the Schedule, which might normally apply to a class of income referred to in the said rules, cannot apply to the said class of income, when the Central Government makes, by notification in the official Gazette, an exemption in respect of income-tax in favour of the said class of income.
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In the present case, the amount in question is the interest of Rs. 3,40,065 received by the assessee on the securities issued by the Mysore Darbar in each of the accounting years, and such a class of income was exempted from the tax payable under the Income-tax Act, 1922, by Notification No. 878-F, dated March 21, 1922, made by the Central Government under section 60(1) of the Act. The interest on Mysore Darbar Securities is item (27) in the classes of income set out in the aforesaid notification and the notifi--cation expressly and clearly states that "the classes of income (set out in the notification) shall be exempt from the tax payable under the said Act (Income-tax Act, 1922) and they shall not be taken in--to account in determining the total income or salary of an assessee for the purposes of the said Act". In our opinion, the language of section 60 and the notification clearly shows that the amount of interest on Mysore Darbar Securities received by the assessee was exempted from income-tax under the Act, and cannot be included in computing the taxable surplus. In Commissioner of Income-tax v. B. B. & C. I. Railway Co--operative Mutual Death Benefit Society for Indian Staff Ltd., a notification was issued under section 60 in the following terms: "The following classes of income shall be exempt from the tax payable under the said Act, but shall be taken into account in determining the total income of an assessee for the purposes of the said Act : . . . 2. The profits of any co-operative society other than the Sanikatta Salt-Owners' Society in the Bombay Presidency for the time being registered under the Co-operative Societies Act, 1912 (II of 1912), the Bombay Co-operative Societies Act, 1925 (Bombay Act VII of 1925), or the Madras Co- operative Socie--ties Act, 1932 (Madras Act VI of 1932) or the dividends or other payments received by the members of any such society out of such profits. . ." As pointed out in the head-note to the report, the notification applied both to co-operative societies which were not doing insurance business as well as to co-operative societies which were doing insurance business. The assessee in that case was registered under the Bombay Co- operative Societies Act, 1925, and it was a mutual insurance association within the meaning of section 2(6-C) of the Indian Income-tax Act, 1922. The Income-- tax Officer computed the society's income for the relevant years under rule 2(a) of the Schedule to the Act as required by rule 9 of the Schedule. The assessee-society claimed exemption from income-tax on the strength of the notification issued by the Central Government under section 60 of the Indian Income-tax Act, 1922. The contention was accepted by the Appellate Tribunal. The question as to whether the income of the society was exempt from income-tax under the notification issued by the Central Government under section 60 of the Indian Income-tax Act or was otherwise exempt, was referred to the High Court. Chagla, C. J. And Tendolkar, J., in dealing with the said question, explained the legal position in the following manner: "Under section 2(6-C) of the Act, the profits of any business of insurance carried on by a mutual insurance association is income for the purpose of tax, and section 10(7) provides a special method of computing the profits and gains of any business of insurance and the manner in which tax is to be paid on those profits and gains. Section 10(7) further provides that, in place of the provisions contained in section 8, 9, 10, 12 or 18, the rules contained in the Schedule to the Act shall be substitut--ed. Therefore, the result of this provision is that instead of computing the income of an insurance company as laid down in the various sections under Chapter III, you compute them in the manner laid down in the Schedule to the Act, and the rele--vant provision of the Schedule to the Act is rule 2 which pro--vides that the profits and gains of life Insurance business shall be taken to be either what is stated in sub-clause (a) or sub-clause (b) and whichever is greater, and it is not disputed before us that in the case before us, sub-clause (a) would apply . . . . . Therefore, it will be noticed that instead of an insurance company making its return of income under the various heads a, laid down in section 6, it has got to submit one unit of income, a sort of notional or
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artificial income, as provided in the Schedule to the Act. Then, under section 60 of the Act, certain power is given to the Central Government to exempt classes of income of the whole or any part of the income of any class of persons in respect of income-tax, and this power can be exercised by the Central Government by a notification in the official Gazette." Then, dealing with an argument on behalf of the revenue that the notification itself does not apply to an insurance com--pany, which argument was based upon the language in the noti--fication, viz., "the following classes of income shall be exempt from the tax", the learned Judges observed as follows: "It is argued that this notification can only apply to those assessee which have different classes of income, but if an assessee has only one class of income or only one income, in terms the notification cannot apply to such an assessee. In putting forward this construction, Mr. Joshi (for the revenue) is obviously reading into section 60 and into the notification the words of section 6 of the Act. Mr. Joshi wants us to read `classes of income' as if it meant `heads of income' within the meaning of section 6. Mr. Joshi would have been undoubtedly right if section 60 restricted the power of the Central Govern--ment only to exempt certain heads of income in the case of certain assessee. Then, it could be said that such a notifica--tion would only apply where an assessee had more than one head of income. But the Legislature, having section 6 before it and being fully apprised of the language used in that section, has advisedly not used the expression `heads of income' but has used the expression `classes of income'. In my opinion, a class of income really means a category…
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