1963 (12) TMI 5 - SC - Income Tax

Whether, upon the facts found by the Tribunal, the Income-tax Officer had in this case jurisdiction to proceed to make adjustment in terms of rule 3(b) of the Schedule to the Indian Income-tax Act ? Is there a general right to correct the errors in the accounts of an insurance company when assessing the income-tax ? Held that - Quite clearly the adjustment made in the present case by the Income-tax Officer was not of the variety mentioned in the proviso. He does not say that he made the adjustment because he found that any rate of interest was inconsistent with the valuation of securities or other assets. The adjustment made by him had nothing to do with any rate of interest. It was made only because he thought that the securities had been undervalued. This he had no power to do under the proviso. This again is not in dispute. The result, therefore, is that we find nothing in the rules justifying the adjustment made by the Income-tax Officer in the present cases. The High Court, as may have been noticed, held that the proviso to rule 3(b) was not intended to cover cases like the present. It would appear, therefore, that the High Court thought that the Income-tax Officer had no power under the rule to make the adjustment. It however none the less answered the question in the affirmative. Obviously, what was meant was that the Income-tax Officer had the power, quite apart from the rule, to make all adjustments to prevent evasion of tax. The High Court in fact expressly said that the rule did not deprive the Income-tax Officer of the power to do this. It is clear that the High Court had travelled beyond the question. No objection having been taken at the Bar to this procedure, we have dealt with the matter from this point of view also. The question framed has to be answered in the negative. Appeal allowed.

Issues Involved:
1. Jurisdiction of the Income-tax Officer to make adjustments in the actuarial valuation of an insurance company's accounts.
2. Applicability and interpretation of Rule 3(b) of the Schedule to the Indian Income-tax Act.
3. Requirement of consultation with the Controller of Insurance before making adjustments.
4. Validity of adjustments made by the Income-tax Officer without following the proviso to Rule 3(b).

Issue-wise Detailed Analysis:

1. Jurisdiction of the Income-tax Officer to make adjustments in the actuarial valuation of an insurance company's accounts:
The Supreme Court held that under Rule 2 of the Schedule, the Income-tax Officer must compute the profits and gains of a life insurance company using either of the two methods mentioned in clauses (a) and (b). The computation under clause (b) must be based on the annual average of the surplus disclosed by the actuarial valuation made in accordance with the Insurance Act. The Income-tax Officer has no power to change the figures in the accounts of the assessee, except as explicitly provided in the rules. The officer must take the surplus as disclosed by the actuarial valuation and exclude any surplus or deficit from earlier periods and any non-allowable expenditure under section 10 of the Act.

2. Applicability and interpretation of Rule 3(b) of the Schedule to the Indian Income-tax Act:
Rule 3(b) mandates that any amount written off or reserved in the accounts to meet depreciation of securities must be allowed as a deduction, and any sums credited for appreciation must be included in the surplus. The proviso to Rule 3(b) allows adjustments if the rate of interest or other factors used in determining liabilities are inconsistent with the valuation of securities, artificially reducing the surplus. However, such adjustments require consultation with the Controller of Insurance. The Supreme Court found that the adjustments made by the Income-tax Officer in this case did not fall within the scope of Rule 3(b) or its proviso, as they were based on the officer's revaluation of securities without consulting the Controller of Insurance.

3. Requirement of consultation with the Controller of Insurance before making adjustments:
The proviso to Rule 3(b) explicitly requires the Income-tax Officer to consult the Controller of Insurance before making any adjustments to the actuarial valuation that affect the surplus. The Supreme Court emphasized that this consultation is mandatory and a prerequisite for any adjustments. The Tribunal had correctly set aside the adjustments made by the Income-tax Officer due to the lack of consultation with the Controller of Insurance.

4. Validity of adjustments made by the Income-tax Officer without following the proviso to Rule 3(b):
The Supreme Court concluded that the adjustments made by the Income-tax Officer were invalid as they did not comply with the proviso to Rule 3(b). The officer's actions were beyond the scope of his jurisdiction as defined by the rules in the Schedule. The High Court's decision, which upheld the officer's adjustments without requiring consultation with the Controller of Insurance, was found to be erroneous. The Supreme Court held that the assessment of insurance companies is governed strictly by the rules in the Schedule, and any deviation from these rules is not permissible.

Conclusion:
The Supreme Court allowed the appeals, ruling that the Income-tax Officer did not have the jurisdiction to make the adjustments in question without consulting the Controller of Insurance. The adjustments made were not justified under the rules, and the High Court's decision was incorrect. The appeals were allowed with costs.

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