1965 (4) TMI 12 - SC - Income Tax

Whether the profit arising to the assessee-company from miscellaneous insurance transactions of a mutual character was assessable under the Indian Income-tax Act ? and Whether on the facts and in the circumstances of the case, if the answer to question No. (1) is in the affirmative, the balance of the profits as disclosed in the assessee-company s profit and loss account after deducting the various reserves should be the taxable profits within the meaning of section 2(6C) read with rule 6 of the Schedule of the Indian Income-tax Act ? Held that - It is true that the Bombay High Court was concerned with rule 2, but when we go to the Schedule and find out what is the balance of profits or surplus that has been made taxable, it does not make any difference to the construction of section 2 (6C) whether it is rule 2 that is applied or rule 6. Therefore, disagreeing with the High Court, we answer the first question in the affirmative. Examining rule 6 in the light of this background, it seems to us that the intention of the rule is that the balance of profits as disclosed by the accounts submitted to the Superintendent of Insurance and accepted by him would be binding on the Income-tax Officer, except that the Income-tax Officer would be entitled to exclude expenditure other than expenditure permissible under the provisions of section 10 of the Act. It is common ground in this case that the reserves which were added to the balance of profits were not expenditure. Accordingly, agreeing with the High Court, we answer the second question in the affirmative. Appeal allowed in part.

Issues Involved:
1. Assessability of profit from miscellaneous insurance transactions of a mutual character under the Indian Income-tax Act.
2. Determination of taxable profits after deducting various reserves as per section 2(6C) read with rule 6 of the Schedule of the Indian Income-tax Act.

Detailed Analysis:

Issue 1: Assessability of Profit from Miscellaneous Insurance Transactions of a Mutual Character

The first issue addressed whether the profit arising to the assessee-company from miscellaneous insurance transactions of a mutual character was assessable under the Indian Income-tax Act. The Supreme Court considered the relevant facts and circumstances, noting that the assessee was a mutual insurance concern carrying on miscellaneous insurance business. The High Court of Calcutta had previously held that the surplus arising from such transactions was not assessable, distinguishing it from the Bombay Mutual Life Assurance Society Ltd. v. Commissioner of Income-tax case, which dealt with life insurance.

The Supreme Court examined section 2(6C) of the Indian Income-tax Act, which defined "income" to include profits from any business of insurance carried on by a mutual insurance association computed in accordance with rule 9 in the Schedule. The Court noted that rule 6 specifically addressed the profits and gains of any business of insurance other than life insurance, stating that these should be taken as the balance of the profits disclosed by the annual accounts submitted to the Superintendent of Insurance.

The Additional Solicitor-General argued that section 2(6C) created an artificial extension of the meaning of "profits," thereby including them in the definition of "income" under section 3 of the Act. The respondent's counsel, however, referenced the House of Lords decision in Ayrshire Employers Mutual Insurance Association Ltd. v. Commissioners of Inland Revenue, arguing that the legislature had misapprehended the nature of surplus in mutual insurance transactions.

The Supreme Court concluded that the Indian legislature did not adopt a deeming device as in the Ayrshire case but instead defined "income" to include profits of any business of insurance carried on by a mutual insurance association. The Court held that the legislature's intention was clear in including the balance of profits as computed under rule 6 within the word "income" in section 3, making such balance of profits taxable. Consequently, the first question was answered in the affirmative, disagreeing with the High Court's distinction of the Bombay case.

Issue 2: Determination of Taxable Profits After Deducting Various Reserves

The second issue pertained to whether the balance of the profits disclosed in the assessee-company's profit and loss account, after deducting various reserves, should be considered taxable profits within the meaning of section 2(6C) read with rule 6. The Supreme Court analyzed the language of rule 6, which required the Income-tax Officer to accept the balance of profits disclosed by the annual accounts submitted to the Superintendent of Insurance, with adjustments only to exclude non-permissible expenditures under section 10 of the Act.

The Court referenced its earlier decision in Pandyan Insurance Co. Ltd. v. Commissioner of Income-tax, which established that the Insurance Act's provisions ensured the true valuation of assets and determination of the true balance of profits of an insurance business. Therefore, rule 6 should be construed in this context. It was determined that reserves added to the balance of profits were not considered expenditure, and thus, the Income-tax Officer was not entitled to add back these reserves.

Agreeing with the High Court, the Supreme Court answered the second question in the affirmative, confirming that the balance of profits as disclosed by the accounts submitted to the Superintendent of Insurance, and accepted by him, would be binding on the Income-tax Officer, except for exclusions of non-permissible expenditures.

Conclusion

The Supreme Court allowed the appeals in part, affirming the assessability of profits from miscellaneous insurance transactions of a mutual character and confirming the determination of taxable profits after deducting various reserves. The parties were directed to bear their own costs in the court.

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