Life
Insurance Corporation of India, Bombay Vs. Commissioner of Income Tax, Bombay [1996] INSC 288 (19 February 1996)
Verma,
Jagdish Saran (J) Verma, Jagdish Saran (J) Venkataswami K. (J) J.S.Verma.J. :
CITATION:
1996 AIR 1720 JT 1996 (2) 336 1996 SCALE (2)258
ACT:
HEAD NOTE:
A
reference was made by the Income-tax Appellate Tribunal under Section 256(1) Of
the Income-tax Act, 1961, at the instance of the assessee, to the Bombay High
Court for deciding seven questions of law arising out of the Tribunal's order.
The first six questions were answered by the High Court in favour of the assessee,
while the seventh question was answered against the assessee. This appeal by
special leave is by the assessee challenging the High Court's decision only in
respect of the seventh question decided against the assessee. That question is
as under:
"Whether
on the fact and in the circumstance of the case,the sum of Rs.23,959/-being the
refund of income-tax received by the Corporation during the undervaluation
period in respect of the income-tax upto the assessment year 1956-57 of the
life insurance bus insurers of the erstwhile insurers whose business had been
taken over by the Corporation, should be allowed as a deflection while
computing the income of the assessee under Rule 2(1)(b) of the First Schedule
to the Income-tax Act, 1961?" In this appeal, no further reference to the
other six questions is necessary.
The assessee
Life Insurance Corporation of India
(Corporation) is a statutory Corporation established under the Life Insurance
Corporation Act, 1956 with effect from 1st September, 1956. The relevant assessment year is
1963-64 for which the accounting period ended on 31.3.1963. During the relevant
assessment year, the assessee received refunds of income-tax of 3,02,90,898/-
in the life insurance business. The assessee contended before the Income-tax
officer that the entire amount of refund was not includable in the revenue
account and treated as profits and gains of the assessee for the assessment
year under consideration.
The
Income-tax Officer rejected the contention and included the entire amount in
the revenue account. In the assessee's appeal, the Appellate Assistant
Commissioner held that out of the amount of Rs.3,02,90,898/ included in the revenue
account, the sum of Rs.2,73,50,939/- only was to be excluded but the balance
amount had to be included. The assessee as well as the revenue preferred
appeals to the Tribunal.
Before
the Tribunal, it was contended by the revenue that in computing the profits of
the assessee under Section 44 read with Rule 2(1)(b) of the First Schedule to
the Income-tax Act, 1961, the Income-tax Officer can make only such adjustments
to the surplus or deficit disclosed by the actuarial valuation which are
permissible under the rule;
that
the rule permits adjustment by way of exclusion of any surplus or deficit
included therein which was made in any earlier inter-valuation period relating
to the assessee itself and not to that of its predecessor in the business.
It was
contended that a part of the refund Of taxes received by the Corporation had
not been included in the surplus of the earlier inter-valuation period relating
to the assessee but of its predecessor since the refund was in respect of the
taxes paid by the predecessor prior to the formation of the Corporation on 1st September, 1956. It was contended that the words
"included therein" used in Rule 2(1)(b) indicated that the surplus or
deficit in any earlier inter- valuation period must relate to that of the
Corporation and not its predecessor. The decision of the Bombay High Court in
Bombay Mutual Life Assurance Society Ltd. vs. Commissioner of Income-tax. Bombay City, [1951] 20 ITR 189 was distinguished. The contention of the
assessee was that the payment of taxes which gave rise to the refund having
been made prior to the formation of the Corporation, by the predecessor, there
was no occasion for the surplus or deficit in any earlier inter-valuation
period of the Corporation being required to be looked into for the purpose.
Reliance was placed on Section 7 of the Life Insurance Corporation Act, 1956
(for short "the LIC Act") to contend that the Corporation stepped
into the shoes of its predecessor for all practical purposes including the
legal consequences flowing from the refund received by the Corporation as the
successor of its predecessor in business.
The
Tribunal accepted the contention of the revenue and held as under :-
".........But only such portion of the refunds which has been included in
the surplus or deficit made in the earlier intervaluation period alone has to
be excluded. On the analysis of the refunds and the assets to which they
related, the Appellate Asstt. Commissioner found that this sum of
Rs.2,73,50,939/- only had entered into the surplus of the earlier intervaluation
period out of Rs.3,02,90,898/-.
Therefore,
only that portion is allowable u/s.2(1)(b) and has been rightly allowed by the
Appellate Asstt. Commissioner. Disallowance of the balance of the tax refund
was quite in order because they did not come out of the assets which were
included in the surplus of the earlier inter valuation period." The
above-quoted question was referred to the High- Court for its decision at the instance of the assessee
Corporation, under Section 256(1) of the Income-tax Act.
The
High Court upheld the view taken by the Tribunal.
That
decision of the High Court is reported in [1978] 115 ITR 45 (Life Insurance
Corporation of India. Bombay vs. Commissioner of Income-tax. Bombay City-III). The
relevant part of the High Court's judgment, rejecting the assessee's
contention, is as under :- "It is difficult to accept this submission.
Rule 2(1)(b) is an artificial mode of computation of profits of an assessee who
carries on life insurance business. These profits are arrived at by first
determining the annual average of the surplus after adjusting the surplus or
deficit as disclosed by the actuarial valuation made in accordance with the
Insurance Act, 1938, in respect of the last inter- valuation period. What is
contemplated by rule 2(1)(b) is that if there is a surplus of the earlier
inter-valuation period, which was entered in the accounting while finding out
the surplus for the inter- valuation period in question, then that surplus has
to be deducted for the purposes of finding out the surplus in respect of the
assessment year in question.
It is
necessary to remember that when an actuarial valuation is made by an actuary on
behalf of the company, first Of all a consolidated revenue account is prepared,
which would show on the one side the amount of life insurance fund at the end
of the period for which the consolidated revenue account is prepared. The
actuary then finds out what is the net liability of the company under the
current policies and after fixing the net liability on the current policies, he
deducts that liability from the life assurance fund and the result is the
surplus.
If
this is the concept of the surplus to be found on actuarial valuation, then it
is obvious that before a surplus is asked to be deducted on the ground that
that part of the surplus was carried forward from the earlier inter- valuation
period, it must be found as a fact that what is now sought to be deducted was
shown as a surplus of the earlier inter- valuation period. Rule 2(1)(b)
operates in respect of the particular assessee whose profits of the life
insurance business are under computation. Accepting the contention of the
learned counsel for the assessee would mean that we would have to add to the
language of rule 2(1)(b) so that it should be so construed that what is to be
taken into account is not the actual surplus which has been carried forward
into the inter- valuation period in question but also some amount which must be
deemed to have been carried forward into the surplus of the inter- valuation
period. It is, no doubt, true that the legal effect of section 7 of the Life
Insurance Act is that the assets of the insurer who carried on the life
insurance business are vested in the Life Insurance Corporation, but the legal
effect of that vesting cannot be imported into the provisions of rule 2(1)(b)
where a precondition has to be satisfied before a deduction in respect of the
surplus is made, the precondition being that that surplus has to be shown as a
surplus Of the previous inter- valuation period. There is no scope for reading
into rule 2(1)(b) any additional powers for the income- tax authorities to so
amend the figure of surplus that is different from the actual surplus which is
shown on the basis of the actuarial valuation. ........" (at page 55) In
substance, the High Court declined to give effect to Section 7 of the LIC Act
on its view that the provision in Rule 2(1)(b) alone was decisive and it could
not be given effect to, it the legal effect of Section 7 of the LIC Act is to
be taken into account. Apparently, the High Court took the view that Rule
2(1)(b) cannot be reconciled with Section 7 of the LIC Act.The question is
whether this view is correct.
The
relevant provisions in the Life Insurance Corporation Act, 1956 are as under:-
"7. Transfer of assets and liabilities of existing insurers carrying on
controlled business. - (1) On the appointed day* there shall be transferred to
and vested in the Corporation all the assets and liabilities appertaining to
the controlled business of all insurers.
(2)
The assets appertaining to the controlled business of an insurer shall be
deemed to include all rights and powers, and all property, whether movable or
immovable, appertaining to his controlled business, including, in particular,
cash balances, reserve funds, investments, deposits and all other interests and
rights in or arising out of such property as may be in the possession of the
insurer and all books of account or documents relating to the controlled
business of the insurer; and liabilities shall be deemed to include all debts,
liabilities and obligations of whatever kind then existing and appertaining to
the controlled business of the insurer.
xxx xxx
xxx ___________ * 1st
September, 1956."
"9.
General effect of vesting of controlled business. -(1)..
(2) If
on the appointed day any suit, appeal or other legal proceeding of whatever
nature is pending by or against an insurer, then, in so far as it relates to
his controlled business, it shall not abate, be discontinued or be in any way
prejudicially affected by reason of the transfer to the Corporation of the
business of the insurer or of anything done under this Act, but the appeal or
other proceeding may be continued, prosecuted and enforced by or against the
Corporation." Sub-section (1) of Section 7 clearly provides that from the
appointed day in 1956, all the assets and liabilities appertaining to the
controlled business of all insurers, are to be transferred and vested in the
Life Insurance Corporation of India.
Sub-section (2) of Section 7 enacts the legal fiction by virtue of which
"all rights and powers, and all property, whether movable or immovable,
appertaining to his controlled business, including, in particular, cash
balances, reserve funds, investments, deposits and all other interests and rights
in or arising out of such property as may be in the possession of the insurer
and all books of accounts or documents relating to the controlled business of
the insurer" were deemed to be the assets of an insurer which came to be
transferred and vested in the Corporation from the appointed day, and so also
all the liabilities. In other words, from the appointed day, the Corporation
stepped into the shoes of all such insurers. Section'9 provides for the general
effect of vesting of controlled business and sub-section (2) therein expressly
enacts that the Corporation stepped into the shoes of the predecessor- insurer
from the appointed day in respect of any suit, appeal or other legal proceeding
of whatever nature pending by or against an insurer.
This
legal fiction enacted in Section 7(2) includes within the assets transferred
and vested in the Corporation of all such insurers any amounts which were due
to the predecessor-insurer and which remained to be recovered.
Section
9(2) enabled the Corporation to prosecute any legal proceeding of whatever
nature for the purpose of recovering amounts due to the predecessor on the
appointed day. There is no dispute that any liability of the insurer also stood
transferred similarly to the Corporation. Accordingly, if any amount remained
due towards taxes to be recovered from the predecessor, it was a liability
transferred to the Corporation and the Corporation became liable to discharge
the same. It is also not in dispute that it is only by virtue of this character
of the Corporation that the amount refunded as excess tax paid prior to the
appointed day by the predecessor came to be refunded to the Corporation to whom
all the assets of the predecessor stood transferred and vested from the
appointed day in 1956. It is also not disputed that the opening balance
inherited by the Corporation from the predecessor on the appointed day had to
be deducted under Rule 2(1)(b) and the amount shown as such was so deducted. It
is further not disputed that if this excess amount of tax paid by the
predecessor had not been so paid and the question of refund did not arise, then
this extra amount would have formed a part of the inherited opening balance
with the Corporation and deduction of the same would have been given under Rule
2(1)(b). The question is : Whether, the refund having been made to the
Corporation only because of the provision in Section 7 of the LIC Act, the same
result should not follow on the wording of Rule 2(1)(b) ? Rule 2(1)(b) of the
First Schedule to the Income- tax Act, 1961 is as under:-
"2.
Computation of profits of life insurance business. -(1) The profits and gains
of life insurance business shall be taken to be the greater of the following
(a).............
(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 (4 of 1938), in respect of the last inter-valuation period
ending before the commencement of the assessment year, so as to exclude from it
any surplus or deficit included therein which was made in any earlier
inter-valuation period and any expenditure or allowance which is wot deductible
under the provisions of [Sections 30 to 43- Al* in computing income chargeable
under the head "Profits and gains of business or profession".
------------
*Subs. by Finance (No. 2) Act of 1967 (w.e.f. 1-4-1967).
It is
obvious that in the surplus or deficit in any inter-valuation period relating
to the Corporation which came to be formed only on the appointed day in 1956,
this amount could not be reflected since it related to a period prior to the
formation of the Corporation. The law does not contemplate or require the
performance of an impossible act- lex non cogit ad impossibilia. It is now to
be seen whether the expression "included therein" in Rule 2(1)(b) is
alone sufficient to negative the logical legal effect of Section 7 of the LIC
Act.
The
legal fiction enacted in Section 7(2) of the LIC Act must be taken to its
logical conclusion. For this reason, the amount of refund made to the
Corporation because of the excess tax paid by the predecessor prior to the
appointed day on which the Corporation was formed, must form a part of the
assets of the predecessor which came to be transferred and vested in the
Corporation on the appointed day in 1956 on the formation of the Corporation.
For the same reason, this amount of refund, even though made later, must also
be deemed to be included in the inherited opening balance shown by the
Corporation in the earlier inter- valuation period which undisputedly had to be
deducted under Rule 2(1)(b). It follows that because of this legal fiction
being required to be taken to its logical conclusion, the amount so refunded to
the Corporation must be deemed to be included in the earlier inter-valuation
period of the Corporation. On this conclusion, the requirement of Rule 2(1)(b)
is satisfied since the amount is deemed to be included in the earlier
inter-valuation period of the Corporation itself. The expression "included
therein" which is the basis of the view taken by the Tribunal and the High
Court and is also the contention of the revenue before us, must be construed to
mean also the amount deemed to be included therein because of the legal effect
of Section 7 of the LIC Act.
The
High Court failed to appreciate the true import of the decision in Bombay
Mutual Life Assurance Society Ltd vs. Commissioner of Income-tax. Bombay City,
[1951] 20 ITR 189, to take the view that the decision turned on the application
of Rule 3(b) of the Schedule which made certain provisions for the purposes of
computing surplus for the purposes of Rule 2; and that the latter part of Rule
3(b) was given effect to because it was found that that amount was liable to be
included as a part of the surplus. The significance of that decision in the
present context is in the observations of Chagla, C.J. speaking for the Bench,
as under :- "With regard to these two sums we would like to add that as we
are holding that these two amounts form part of the surplus and therefore liable
to tax although in the accounts of the company, they have not been shown as
forming part of the surplus, Sir Jamshedji apprehends that when in fact these
amounts are shown as part of the surplus in future the taxing authorities will
tax this amount over again. Now it is clear that when you determine the surplus
for the purposes of Rule 2(b) you have to deduct from it any surplus or deficit
included therein which was made in any earlier intervaluation period. Therefore
if the Department proposes to tax this sum of Rs.2,72,946 and also the sum of
Rs.1,00,000 it can only be on the basis that these two amounts formed part of
the surplus. Therefore, in future if these two amounts are shown in the
actuarial valuation as part of the surplus they would not be liable to tax over
again as the position in law is clear and we have no doubt that the Department
will act in accordance with the directions we are giving in this
reference." (at page 198) The principle enunciated in the above passage to
be noticed is :
"........in
future if these two amounts are shown in the actuarial valuation as part of the
surplus they would not be liable to tax over again as the position in law is
clear. ....." This aspect has been overlooked by the High Court.
A
harmonious construction of the provisions of the LIC Act, particularly Section
7 therein, and Rule 2(1)(b) of the First Schedule to the Income-tax Act, 1961,
requires this construction to be made. Unless this is done, full effect cannot
be given to Section 7 of the LIC Act, for which we find no reason. Since the
requirement of harmonious construction leads to this result which is also in
consonance with logic and justice of the cause, we do not find any reason to
take a different view.
Consequently,
the appeal is allowed. The judgments of the High Court and the Tribunal are set
aside. The aforesaid question is answered in favour of the assessee and against
the revenue. No costs.
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