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TMI Blog1996 (2) TMI 5X X X X Extracts X X X X X X X X Extracts X X X X ..... s of the erstwhile insurers whose business had been taken over by the Corporation, should be allowed as a deduction while computing the income of the assessee under rule 2(1)(b) of the First Schedule to the Income-tax Act, 1961?" In this appeal, no further reference to, the other six questions is necessary. The assessee, the Life Insurance Corporation of India (Corporation), is a statutory corporation established under the Life Insurance Corporation Act, 1956 ("the LIC Act" for short), with effect from September 1, 1956. The relevant assessment year is 1963-64 for which the accounting period ended on March 31, 1963. During the relevant assessment year, the assessee received refunds of income-tax of Rs. 3,02,90,898 in the life insurance business. The assessee contended before the Income-tax Officer that the entire amount of refund was not includible in the revenue account and treated as profits and gains of the assessee for the assessment year under consideration. The Income-tax Officer rejected the contention and included the entire amount in the revenue account. In the assessee's appeal, the Appellate Assistant Commissioner held that out of the amount of Rs. 3,02,90,898 included ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hey related, the Appellate Assistant Commissioner found that this sum of Rs. 2,73,50,939 only had entered into the surplus of the earlier intervaluation period out of Rs. 3,02,90,898. Therefore, only that portion is allowable under rule 2(1)(b) and has been rightly allowed by the Appellate Assistant Commissioner. Disallowance of the balance of the tax refund was quite in order because they did not come out of the assets which were included in the surplus of the earlier inter-valuation period." The abovequoted question was referred to the High Court for its decision at the instance of the assessee-Corporation, under section 256(1) of the Income-tax Act. The High Court upheld the view taken by the Tribunal. That decision of the High Court is reported in Life Insurance Corporation of India v. CIT [1978] 115 ITR 45. The relevant part of the High Court's judgment, rejecting the assessee's contention, is as under (page 55) : "It is difficult to accept this submission. Rule 2(1)(b) is an artificial mode of computation of profits of an assessee who carries on life insurance business. These profits are arrived at by first determining the annual average of the surplus after adjusting the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at surplus has to be shown as a surplus of the previous intervaluation period. There is no scope for reading into rule 2(1)(b) any additional powers for the income-tax authorities to so amend the figure of, surplus that is different from the actual surplus which is shown on the basis of the actuarial valuation. . . . . ." In substance, the High Court declined to give effect to section 7 of the LIC Act on its view that the provision in rule 2(1)(b) alone was decisive and it could not be given effect to, if the legal effect of section 7 of the LIC Act is to be taken into account. Apparently, the High Court took the view that rule 2(1)(b) cannot be reconciled with section 7 of the LIC Act. The question is whether this view is correct. The relevant provisions in the Life Insurance Corporation Act, 1956, are as under : " 7. Transfer of assets and liabilities of existing insurers carrying on controlled business.--(1) On the appointed day there shall be transferred to and vested in the Corporation all the assets and liabilities appertaining to the controlled business of all insurers. (2) The assets appertaining to the controlled business of an insurer shall be deemed to include all r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e pending by or against an insurer. This legal fiction enacted in section 7(2) includes within the assets transferred and vested in the Corporation of all such insurers any amounts which were due to the predecessor-insurer and which remained to be recovered. Section 9(2) enabled the Corporation to prosecute any legal proceeding of whatever nature for the purpose of recovering amounts due to the predecessor on the appointed day. There is no dispute that any liability of the insurer also stood transferred similarly to the Corporation. Accordingly, if any amount remained due towards taxes to be recovered from the predecessor, it was a liability transferred to the Corporation and the Corporation became liable to discharge the same. It is also not in dispute that it is only by virtue of this character of the Corporation that the amount refunded as excess tax paid prior to the appointed day by the predecessor came to be refunded to the Corporation to whom all the assets of the predecessor stood transferred and vested from the appointed day in 1956. It is also not disputed that the opening balance inherited by the Corporation from the predecessor on the appointed day had to be deducted u ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion of the Corporation. For the same reason, this amount of refund, even though made later, must also be deemed to be included in the inherited opening balance shown by the Corporation in the earlier inter-valuation period which undisputedly had to be deducted under rule 2(1)(b). It follows that because of this legal fiction being required to be taken to its logical conclusion, the amount so refunded to the Corporation must be deemed to be included in the earlier inter-valuation period of the Corporation. On this conclusion, the requirement of rule 2(1)(b) is satisfied since the amount is deemed to be included in the earlier inter-valuation period of the Corporation itself. The expression "included therein" which is the basis of the view taken by the Tribunal and the High Court and is also the contention of the Revenue before us, must be construed to mean also the amount deemed to be included therein because of the legal effect of section 7 of the LIC Act. The High Court failed to appreciate the true import of the decision in Bombay Mutual Life Assurance Society Ltd. v. CIT [1951] 20 ITR 189 to take the view that the decision turned on the application of rule 3(b) of the Schedule ..... X X X X Extracts X X X X X X X X Extracts X X X X
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