1960 (3) TMI 65 - HC - Income Tax

Summary

Issues Involved:
1. Jurisdiction of the Income-tax Officer to make adjustments under Rule 3(b) of the Schedule to the Indian Income-tax Act.
2. Obligation to consult the Controller of Insurance before making adjustments.

Issue-wise Detailed Analysis:

1. Jurisdiction of the Income-tax Officer to Make Adjustments under Rule 3(b) of the Schedule to the Indian Income-tax Act:
The central question referred to the High Court was whether the Income-tax Officer had jurisdiction to make adjustments in terms of Rule 3(b) of the Schedule to the Indian Income-tax Act. The Income-tax Officer had disallowed a sum of Rs. 1,75,000 out of Rs. 18,75,000 transferred by the insurance company to the reserve fund, claiming the securities were under-valued. The Tribunal initially ruled that the Income-tax Officer acted without jurisdiction as he did not consult the Controller of Insurance. However, the High Court found that the Income-tax Officer was justified in valuing the securities correctly and making the necessary adjustments to the reserve fund. The Court held that the Income-tax Officer was not making the sort of adjustment contemplated by the proviso to Rule 3(b), which assumes the correct valuation of securities. Thus, the Income-tax Officer had full jurisdiction to correct the valuation of the securities without consulting the Controller of Insurance.

2. Obligation to Consult the Controller of Insurance Before Making Adjustments:
The proviso to Rule 3(b) states that the Income-tax Officer must consult the Controller of Insurance if there is a disparity between the reserve fund and the liability in respect of outstanding policies, which may arise due to incorrect rates of interest or other factors. However, the High Court clarified that this proviso applies only when there is an inconsistency between the correctly valued assets and the liability. In this case, the dispute was solely about the valuation of the securities, not the liability. The Court emphasized that the Income-tax Officer is empowered to correct erroneous or fraudulent valuations without consulting the Controller of Insurance. The Court cited precedents like Western India Life Insurance Co. Ltd. and Commissioner of Income-tax v. Indian Life Assurance Co. Ltd., affirming that the Income-tax Officer can determine the correct value of securities independently. Therefore, the Court concluded that the Income-tax Officer was not obliged to consult the Controller of Insurance before correcting the valuation of the securities.

Conclusion:
The High Court answered the referred question in the affirmative, confirming that the Income-tax Officer had jurisdiction to make the adjustments without consulting the Controller of Insurance. The petition (Income-tax Case No. 8-D of 1957) was dismissed, and the assessee was ordered to pay the costs of the proceedings, assessed at Rs. 200.