1933 (12) TMI 34 - Other - Income Tax

Summary

Issues Involved:
1. Liability of Bharat Insurance Company to be assessed for Income Tax on profits allotted to participating policy-holders.
2. Nature of profits distributed to participating policy-holders: whether assessable income or deductible expenditure.
3. Applicability and interpretation of Rule 25 under Section 59, Income Tax Act, 1922.
4. Relevance of precedents, particularly Last v. London Assurance Corporation and related cases.
5. Impact of legislative changes on established judicial decisions.

Issue-Wise Detailed Analysis:

1. Liability of Bharat Insurance Company to be assessed for Income Tax on profits allotted to participating policy-holders:
The primary issue was whether Bharat Insurance Company was liable to be assessed under the Income Tax Act, 1922, for the profits distributed to participating policy-holders. The company contended that the sum of Rs. 4,68,394 paid to participating policy-holders should be deducted before arriving at the surplus for tax purposes. The High Court, agreeing with the Commissioner of Income Tax, held that this sum was part of the profits of the company and assessable to Income Tax.

2. Nature of profits distributed to participating policy-holders: whether assessable income or deductible expenditure:
The High Court and the Privy Council both concluded that the profits distributed to participating policy-holders were part of the company's assessable income and not an expenditure incurred for earning profits. This conclusion was supported by precedents such as Last v. London Assurance Corporation, which established that profits shared with policy-holders under contractual obligations are still considered part of the company's profits and thus taxable.

3. Applicability and interpretation of Rule 25 under Section 59, Income Tax Act, 1922:
Rule 25 stipulates that the income, profits, and gains of a life assurance business should be the average annual net profits disclosed by the last preceding valuation. The valuation balance-sheet showed a surplus, and one-fifth of this surplus was treated as the average annual income. The company argued that the amount paid to participating policy-holders should be deducted from this surplus. However, the proviso to Rule 25 states that any deductions made by the actuary, which are inadmissible for Income Tax purposes, should be added back to the net profits. Thus, the Rs. 4,68,394 allotted to policy-holders was considered part of the surplus and assessable income.

4. Relevance of precedents, particularly Last v. London Assurance Corporation and related cases:
The judgment heavily relied on the precedent set by Last v. London Assurance Corporation, which held that profits distributed to policy-holders are part of the company's taxable income. This case was reaffirmed by subsequent decisions, including Mersey Docks and Harbour Board v. Lucas and Gresham Life Assurance Co. v. Styles. The Privy Council found these precedents decisive, noting that they had been treated as settled law for nearly 50 years.

5. Impact of legislative changes on established judicial decisions:
The appellant contended that legislative changes, particularly Section 16 of the Finance Act, 1923, which exempted the share of profits allotted to participating policy-holders from Income Tax, implied that the earlier judicial decisions were wrong. The Privy Council rejected this argument, stating that legislative changes do not necessarily indicate that prior decisions were incorrect. The judgment emphasized that the established judicial interpretation remains valid unless explicitly overruled by legislation.

Conclusion:
The Privy Council upheld the High Court's judgment, confirming that the profits distributed to participating policy-holders are part of the company's assessable income and not deductible as expenditure. The appeal was dismissed, and the appellant company was ordered to pay the respondent's costs. The judgment reaffirmed the applicability of established precedents and the interpretation of relevant statutory provisions, maintaining the consistency and stability of tax law principles.