Commissioner of Income-Tax, West
Bengal, Calcutta Vs. Calcutta Hospital and Nursing Home Benefits Association
[1965] INSC 91 (2 April 1965)
02/04/1965 SIKRI, S.M.
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] 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 expenditure 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]
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 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 the profit and toss appropriation account.
Therefrom, in one year, ended 635 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' "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 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 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 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 .
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