1977 (11) TMI 8 - HC - Income Tax

Issues Involved:
1. Interpretation of Rule 3(a) and its second proviso in the Indian I.T. Act, 1922.
2. Computation of surplus for the assessment year 1951-52.
3. Deduction allowed for policyholders' reserves in the assessment year 1950-51.
4. Tribunal's decision on the amount to be added back under the second proviso to Rule 3(a).

Detailed Analysis:

1. Interpretation of Rule 3(a) and its Second Proviso:
The primary issue revolves around the interpretation of Rule 3(a) and its second proviso in the Indian I.T. Act, 1922. Rule 3(a) initially allowed half of the amount reserved for policyholders as a deduction. The second proviso to Rule 3(a) mandates that if any amount reserved for policyholders ceases to be so reserved, the proportion of such amount previously allowed as a deduction must be added back to the surplus for the period in which the amount ceased to be reserved. This rule was amended by Act No. 25 of 1953, changing "one-half" to "four-fifths" and specifying that the proportion of the amount to be added back depends on the deduction previously allowed.

2. Computation of Surplus for the Assessment Year 1951-52:
For the assessment year 1951-52, the ITO found that the amount reserved for policyholders in the earlier actuarial valuation had ceased to be reserved in the second actuarial valuation. Consequently, under the second proviso to Rule 3(a), the ITO added back half of the amount reserved for policyholders and assessed the assessee to tax. The Tribunal, however, held that only one-fifth of one-half of the amount reserved should be added back, based on the average surplus for the earlier assessment year 1950-51.

3. Deduction Allowed for Policyholders' Reserves in the Assessment Year 1950-51:
In the assessment year 1950-51, half of the amount reserved for policyholders was allowed as a deduction under Rule 3(a). The Tribunal found that only one-fifth of one-half of the amount reserved for policyholders entered into the annual average surplus for the assessment year 1950-51. The Tribunal's view was that only this fraction should be added back under the second proviso to Rule 3(a).

4. Tribunal's Decision on the Amount to be Added Back:
The Tribunal concluded that only one-fifth of one-half of the amount reserved for policyholders should be added back, as this was the amount that entered into the annual average surplus for the assessment year 1950-51. However, this view was challenged by the revenue, arguing that the entire half amount originally deducted should be added back under the second proviso to Rule 3(a).

Court's Analysis and Conclusion:
The court analyzed the relevant provisions and found that the surplus for the inter-valuation period must be computed first, and then the annual average surplus should be calculated. Rule 3(a) allows a deduction from the surplus, not the annual average surplus. The second proviso to Rule 3(a) requires adding back the proportion of the amount previously allowed as a deduction when it ceases to be reserved. The court held that the words "one-half" or "four-fifths" in the proviso indicate the proportion of the amount originally reserved, and the surplus referred to in the second proviso is the total surplus for the inter-valuation period, not the annual average surplus.

The court concluded that the Tribunal's view was incorrect, and the entire deduction made under Rule 3(a) in the assessment year 1950-51 should be added back under the second proviso to Rule 3(a). Therefore, the question was answered in the negative, and the assessee was ordered to pay the costs of the reference.

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