Commissioner of Income-Tax, Madras Vs.
Prithvi Insurance Co. Ltd. [1966] INSC 231 (26 October 1966)
26/10/1966 SHAH, J.C.
SHAH, J.C.
RAMASWAMI, V.
CITATION: 1967 AIR 853 1967 SCR (1) 943
CITATOR INFO:
RF 1969 SC 946 (7) F 1970 SC1379 (3,5) R 1978
SC1320 (11,14,16)
ACT:
Indian Income-tax Act, 1922, s.
24(2)-Insurance company carrying on life insurance business as well as general
insurance business-Such businesses whether one business for purpose of section.
HEADNOTE:
The respondent company carried on business of
life and general insurance. In assessment proceedings for the year 1951-52, the
Income-tax Officer held that the life insurance business and the general
insurance business carried on by the company were 'distinct and separate' and
the loss carried forward from the Previous year in respect of life insurance
business could not be set off under s. 24(2) against the profit from the
general insurance business. The Appellate Assistant Commissioner and the
Tribunal confirmed the view of the Income-tax Officer. The Tribunal based its
decision primarily on the provisions of the Income-tax Act which provided
different methods of computation of the taxable income of life insurance
business and of general insurance business. In reference the High Court decided
in favour of the company, and the Revenue appealed. The test suggested on
behalf of the Revenue for determining whether the two businesses were one
business within the meaning of s. 24(2) was whether one of them could be closed
without affecting the conduct of the other.
HELD : (i) The test suggested on behalf of
the Revenue could not be accepted. If one business cannot conveniently be
carried on after the closure of the other, there would be -a strong indication
that the two business constitute "the same business", but no decisive
inference may be drawn from the fact that after the closure of one business
another may conveniently be carried on. [948 D] (ii) Whether two or more lines
of business may be regarded as the "same business" or different business
depends not upon the special methods prescribed by the Income-tax Act for
computation of the taxable income, but upon the nature of the lines of
business, the nature of their organisation, management, the source of the
capital fund utilised, methods of book keeping and a host of other related
circumstances which stamp the lines of business as same or distinct. [947 H]
Scales v. George Thompson & Co. Ltd., 13 T.C. 89, 'referred to.
(iii) In the present case there was little
doubt that the two businesses constituted one composite business : the company
was entitled to carry on the life insurance business and the general insurance
business under its Memorandum of Association, and the business were attended to
by the Branch Manager and the Agents without any distinction, there was one
common administrative Organisation and the expenses incurred in connection with
business both for administration and for heads of expenditure such -as salary
of the staff, postage, staff welfare fund and general charges, were common.
[948 B] The High Court was therefore fight in holding that the life insurance
business and the general insurance business constituted the same business
within the meaning of s. 24(2) of the Act. [949 B] 944
CIVIL APPELLATE JURISDICTION Civil Appeals
Nos. 729-732 of 1965.
Appeals by special leave from the judgment
and order dated May 3, 1963 of the Madras High Court in Tax Case No. 196 of
1960.
R. M. Hazarnavis, Gopal Singh and R. N.
Sachthey, for the appellant (in all the appeals).
S. Swaminathan and M. S. Narasimhan, for the
respondent (in all the appeals).
The Judgment of the Court was delivered by
Shah, J. The respondent, a public limited company, carried on in the relevant
years of account business of insurance- life and general. In each of the
calendar years 1944 to 1948 relating to the assessment years 1945-46 to
1950-51, the Company suffered loss in the life insurance section, and made
profit in the general insurance section. Till the assessment year 1950-51 the
loss suffered in the life insurance section was allowed by the Revenue
authorities to be carried forward and set off under s. 24(2) of the Indian
Income-tax Act, 1922, against profits from the general insurance section in the
subsequent year. In proceedings for assessment for the assessment year 1951-52
the Income- tax Officer held that the life insurance business and the general
insurance business carried on by the Company were ','distinct and
separate" and the loss carried forward from the previous year in respect
of life insurance business could not be set off under s. 24(2) against the
profit of the general insurance business. The Appellate Assistant Commissioner
and the Tribunal confirmed the view of the Incometax Officer. The Tribunal
referred the following question to the High Court of Madras under s. 66(1) of
the Income-tax Act:
"Whether the unabsorbed losses incurred
by the assesse'e in the earlier years in its life insurance business are
available to be set off against its profits from general insurance business for
the assessment years 1951-52 to 1954-55?" The High Court answered the
question in the affirmative.
With certificate granted by the High Court,
these appeals have been preferred by the Commissioner of Income-tax.
The order of the Income-tax Appellate
Tribunal summarises the reasons which persuaded the Departmental authorities to
reject the claim of the Company. The Tribunal states:
"The business of life insurance
possesses peculiar characteristics which do not exist in respect of other
insurance businesses.
Firstly, the life insurance policies are not
contracts of indemnity; they are forms of investments. Other classes of
insurance business are contracts of indemnity. Secondly, the contract in the
general insurance is generally annual while in the case of life business the
risk continues until death. Unlike general insurance con- tracts, the life
contract, is made once and for all. The general insurance contracts, are in
law, fresh contracts entered into at the time of each renewal. Thirdly, life
business is controlled by principles essentially variant from those which
control the general insurance business. Fourthly, the life premia do not
represent the life profits nor can the total amount of claims arising in one
year be set off as a deduction. Fifthly, the law under which life business is
carried on is quite different from the laws governing general business' and
lastly, assessable profits of life business shall be computed separately from
those of the general business, the consequence of which would be that the carry
forward of loss of life business cannot- be had against the profit of general
business."' Tax payable by an assessee under the head "Profits and
gains of business, profession or vocation" is normally computed under s.
10(1) of the Income-tax Act, 1922, after making allowances mentioned in sub-s.
(2) of s. 10. But sub-s. (7) of s. 10 provides that notwithstanding anything to
the contrary contained in ss. 8, 9, 10, 12 or 18 of the Act, 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 the Act.
The Schedule is headed "Rules for the computation of the Profits. and
Gains of Insurance Business". By r. it is provided that 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. By r. 2 it is, provided:
"The profits and gains of life insurance
shall-be taken be to either:- (a) the gross external incoming of the preceding
year from, that business less 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.,
946 under the provisions of section 10 of this Act be allowed for the computing
the profits and gains of a business, whichever is the greater:
Provided................................"
Rules 3 and 4 lay down the methods of computing the surplus for the purpose of
T. 2. Rule 5 is a definition clause.
Rule 6 deals with the computation of profits
and gains of any business of insurance other than life insurance, and provides
that 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 as
to exclude from it any expenditure other than expenditure which may under the
provisions of S. 10 of the Act be allowed for in computing the profits and
gains of a business. Rule 7 deals with the computation of profits and gains of
companies carrying on dividing societies or assessment business. Rule 8 deals
with the computation of profits of non-resident insurance companies having
branches in the taxable territory. Rule 9 provides that the profits of any
business carried on by a mutual insurance association or by a co-operative
society shall be computed in accordance with the rules.
Computation of the assessable income of an
assessee carrying on business of life insurance or general insurance has
therefore to be made in accordance with the rules and not by determining the
profits under sub-s. (1) of S. 10 after making allowances under sub-s. (2).
Where an assessee sustains a loss of profits
or gains in any year under any of the heads mentioned in s. 6, he is entitled
to have the amount of the loss set off against his income, profits or gains
under any other head in that year:
[s. 24(1)]. Therefore in determining the
taxable profits, the net balance under the same head mentioned in s. 6 has to
be taken into account, and if there be loss under a head of income (subject to
the special exception relating to admissibility of loss from speculative
business), that loss has to be set off against the income, profits or gains
under any other head. Sub-s. (1) does not however deal with carry forward to
the following year of loss suffered by the assessee as a result of computing
,the total income from all the heads. That is dealt with under sub-s.
(2). Section 24(2) as it stood at the
material time provided:
"Where any assessee sustains a loss of
profits or gains in any year, being a previous year not earlier than the
previous year for the assessment for the year ending on the 31st day of March,
1940, in any business, profession or vocation, and the loss cannot be wholly
set off under sub-section (1), 947 so much of the loss as is not so set off or
the whole loss where the assessee had no other head of income shall be carried
forward to the following year and set off against the profits and gains, if
any, of the assessee from the same business, profession or vocation for that
year;
The words it alicised were substituted by the
Income Tax Amendment Act 25 of 1953, for the words "under the head Profits
and gains of business, profession or vocation"', and "the portion not
so set off " respectively. At the relevant time loss which could not be
set off in the year of account may be carried forward to the following year,
but it could be set off against the profits and gains of the assessee from
"the same business, profession or vocation". If the loss carried
forward from the previous year and sought to be set off was not from the same
business, profession or vocation, it could not be set off under s. 24(2). If
there was no income or profits from the same business in the subsequent year
the loss could not be set off, but had to be carried forward in the next year
following, subject to the restriction placed in that sub-section.
The question whether the business of life
insurance and the business of general insurance could be regarded as the same
business assumes importance in this case, since the right to carry forward the
loss suffered in the life insurance business and to set it off against the
profit of the company in the general insurance business of the subsequent year
is clearly in issue. If the life insurance business and the general insurance
business were not "the same business" within the meaning of s. 24(2),
loss in the life insurance business which could not be set off against income
from other businesses of the Company and sources of income, could not be
carried forward and set off in the year following against the income from the
general insurance business.
Counsel for the Commissioner contended that
life insurance business and general insurance business were separate businesses
and he relied in support of that contention primarily upon the method of
computation of taxable income of the life insurance business and of the general
insurance business. Both in respect of the life insurance business and general
insurance business, there are, as already mentioned, special methods of
computation of income. But because there are distinct methods of computation of
taxable income of the insurance business, and the general provisions of the
Income-tax Act relating to computation of profits and gains of a business in s.
10 and the related sections are inapplicable, it does not follow that the two businesses
cannot be the "same 'business" within the meaning of s. 24(2).
Whether two or more lines of businesses may be regarded as the "same
business" or different businesses depends not upon' the special, methods
prescribed by the Income-tax Act for computation of the taxable income, but
upon the nature of the businesses, the nature of their organisation,
management, the source of the capital fund utilised, methods of book-keeping
and a host of other related circumstances which stamp the businesses as same or
distinct.
In the present case, there is little doubt
that the two businesses constituted one composite business: the Company was
entitled to carry on the life insurance business and the general insurance
business under its Memorandum of Association, and the businesses were attended
to by the Branch Managers and the Agents without any distinction, there was one
common administrative organization and the expenses incurred in connection with
the business both for administration and for heads of expenditure such as
salary of the staff, postage, staff welfare fund and general charges, were
common.
We are unable to agree with counsel for the
Commissioner that the test whether one of the businesses can be closed without
affecting the conduct of the other business, is a decisive test in determining
whether the two constitute the same business within the meaning of s. 24(2). If
one business cannot conveniently be carried on after the closure of the other,
there would be a strong indication that the two businesses constitute "the
same business", but no decisive inference may be drawn from the fact that
after the closure of one business another may conveniently be carried on.
In the present case the Tribunal's judgment
proceeds not upon any special circumstances governing the distinctive
organization, management, account, methods of book-keeping or the peculiarities
of the two businesses, but primarily upon the provisions of the Income-tax Act
which provide different methods of computation of the taxable income of the
life insurance business and- of the general insurance business. We are unable
to agree with the Tribunal, that because in respect of the life insurance
business and general insurance business there are special methods of
computation of income for the purpose of levying income-tax, they are not the
"same business" within the meaning of s. 24(2). A fairly adequate
test for determining whether the two constitute the same business is furnished
by what Rowlatt, J. said in Scales v. George Thompson & Co. Ltd:
"Was there any inter-connection, any
interlacing, any inter-dependence, any unity at all embracing those two
businesses ?" That inter-connection, interlacing, inter-dependence and
unity are furnished in this case by the existence of common management, (1) 13
T.C. 83, 89.
949 common business Organisation, common
administration, common fund and a common place of business.
in our view therefore the High Court was
right in' holding that the life insurance business and the general insurance
business constitute the same business within the meaning of s. 24(2) of the
Act.
The appeals therefore fail and are dismissed
with costs.
One hearing fee.
G.C.
Appeal dismissed.
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