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TMI Blog1937 (3) TMI 22X X X X Extracts X X X X X X X X Extracts X X X X ..... ot admissible for the purpose of Income Tax assessment, and any Indian Income Tax deducted from or paid on income derived from investments before such income is received, shall be added to the net profits disclosed by the valuation. Rule 35 provides : The total income of the Indian branches of non-resident insurance companies (Life, Marine, Fire, Accident, Burglary, Fidelity, Guarantee, etc.) in the absence of more reliable data, may be deemed to be the proportion of the total income, profits or gains, of the companies, corresponding to the proportion which their Indian premium income bears to their total income. For the purpose of this rule, the total income, profits or gains of non-resident Life Assurance Companies, whose profits are periodically ascertained by actuarial valuation shall be computed in the same manner as is prescribed in Rule 25 for the computation of income, profits and gains of Life Assurance Companies incorporated in British India. The second is that the tax-free securities in question are Government of India tax-free securities which come within the proviso to Section 8 of the Indian Income Tax Act of 1922, the words of which are : Provided ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The statement A shows that the following amounts were received free of Indian Income Tax; Rs. 1926 ... 2,04,790 1927 ... 2,04,790 1928 ... 2,04,790 1929 ... 1,95,911 1930 ... 22,577 8,32,858 It was stated by the assessees Counsel and accepted by the Advocate-General for the Income Tax authorities that the word liability in the table above should be read as fund available to meet liability. One-fifth of the amount of interest collected in India free of Income tax is ₹ 1,66,572. The assessees claim that this item of ₹ 1,66,572 comes within the exemption given by the proviso to Sec. 8 of the Act of 1922. The Income Tax authorities contend that the Income, profits gains are to be ascertained by rules 25 and 35, that those rules are a code complete in themselves and once the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dividends and rents less income tax thereon. It is clear, therefore, that the actuarial valuation prescribed for the Life Assurance Companies Act is not simply concerned with a final figure like the answer to an arithmetical sum but sets out the various assets of the company and the interest derived from them. In fact it informs and is intended to inform all concerned what the assets and the income and liabilities of the Company are in a way which goes much beyond the ordinary Company balance-sheet. It may be that the forms in Schedule 3 and Schedule 4 of the Act do not provide for each individual investment and item of interest to be set out. Nevertheless they do show the different classes of investment, the interest as a whole derived therefrom and the income tax paid thereon. If the assessee making a full and proper return chooses to show that he has certain tax-free investments and the income derived therefrom, it is in my view impossible to say that he has not made a proper return in accordance with the Life Assurance Companies Act of 1912. Where the return shows that some of the interest has been derived from securities of the Government of India to be tax-free, it is i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iew, therefore, it is not open to the Income Tax authorities to disregard that item or to say that it cannot be differentiated from that total. In my view that tax-free interest or its annual one-fifth part must be deducted from the income, profits, and gains and is not assessable to income tax. I am fortified in this conclusion by the decision in the recent case of Hughes v. Bank of New Zealand where Lord Justice Green said :- Section 46 of the Income Tax Act, 1918, provides that the interest of certain securities shall be exempt from tax and super-tax. The securities in question are securities which have been issued with a particular condition annexed to them, that condition being : that the interest thereon shall not be liable to tax or super-tax, so long as it is shown, in manner directed by the Treasury, that the securities are in the beneficial ownership of persons who are not ordinarily resident in the United Kingdom, Speaking for myself, I find in that language a perfectly clear Legislative provision that, so long as the securities are in the beneficial ownership indicated in the section, no tax is to be levied in respect of the interest on them. To say, as has been sa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r. In my view sub-Sec. (3) and sub-Sec. (5) of Sec. 18 apply equally whether the income of the assessees has been ascertained under rules 25 and 35 or not. In my opinion the answer to question (3) is in the affirmative. The last question submitted by the Commissioner of Income Tax for our opinion is : Whether in any event, the Assistant Commissioner of Income Tax had jurisdiction to enhance the said assessment, having regard to the terms of the said notice under Section 34 and the general provisions of the Indian Income Tax Act, 1922. In view of the answers I have given to the preceding questions it is not necessary for me to answer the last question. The assessees are entitled to their costs in these proceedings. L.W.J. Costello, J. The questions put for our consideration in this reference are of some complexity and difficulty. The matter which came to be argued before us arose out of the assessments made on the North British and Mercantile Insurance Company Limited for the years 1932-33, 1933-34 and 1934-35. The Commissioner of Income Tax stated that the points at issue in respect of the assessments for the last two years are identical. Two further questions ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... taken as an assessment for the following year within the meaning of that Sub-Section. The Income Tax Officer had, in fact, only given the Company credit for the sum of ₹ 51,332-6 as, and so the Company complained that they had suffered double taxation to the extent of the difference, namely, ₹ 65,620-11-6 pies. The contention of the Company as regards the meaning and effect of Sec. 18, sub-Sec. (5) of the Act was that the provision of that sub-Section was clear, unambiguous in its meaning and mandatory. The Company argued that the provisions of the Sections could not be varied or modified by any rules or directions in any way whatever and therefore they were entitled as of statutory right to full credit in the assessment for the whole amount of Income Tax paid by him by reason of deductions from interest on securities during the year ending the December 31, 1933. Accordingly when the Company appealed against the 1934 - 35 assessment they said that if proper credit had been given by the Income Tax Officer they would have been entitled to a refund of ₹ 28,202-8-6 pies but instead of that a demand was made on the Company for a further sum of ₹ 37,418-3 annas. T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat the whole of the life income of the assessees should be regarded as business income. The effect of that decision being that the assessees were liable to enhancement as the income previously regarded as accruing under the head tax-free securities would have to be charged to tax. It was consequent upon the order made by the Assistant Commissioner on the March 13, 1935, that the assessees requested the Commissioner of Income Tax to refer the questions of law arising out of the decision of the Assistant Commissioner under Sec. 66(2) of the Income Tax Act to the High Court. It was admitted that the returns made by the Company, although the Company was not registered in India, was upon the basis of Rules 25 and 35 made by the Board of Inland Revenue in exercise of the powers conferred by Sec. 59 of the Income Tax Act (XI of 1922) and promulgated by the Board of Inland Revenue Notification No. 3-I.T. dated the April 1, 1922, as subsequently amended. The rules in question are known as the Indian Income Tax Rules, 1922. It is the meaning and effect of these rules that we have to consider. It is not necessary that I should re-state the questions of law which were formulated by the Commis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion on assets (otherwise allowable under Section 10) and losses which are not ordinarily allowed. Again, in Rule 25, there is a provision for adding to the average annual net profits, the tax deducted from investments of the Company during the valuation period. If the other provisions of the Act applied, this provision in rule 25 would be redundant, for according to Sec. 18(4) of the Act, the tax deducted at source is to be deemed to be income received. If the average annual net profits could be held as containing income from taxed securities, the provision of Section 18(4) would have been applicable to that portion of the income. It is because it is Life Assurance business income and not income from interest on securities or from dividends as one of its components that it has been necessary to make provisions for giving credit of Income Tax deducted from interest on the investments of a Company doing Life Assurance business. Further, The Commissioner of Income Tax is of opinion and it has been contend before us that Sec. 18(5) of the Income Tax Act has no application to a case where the assessment is not made under different heads of income specified in Sec. 6 and so Sec. 18 has n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the average annual net profits disclosed by the last preceding actuarial valuation with a view to ascertaining whether any deductions had been made from the gross income in arriving at the actuarial valuations which are not admissible for the purpose of income tax assessment and there is also the further significant provision that any Income Tax deducted from or paid on income derived from investments before such income is received, shall be added to the net profits disclosed by the valuation. It seems to me that if operations of an exploratory nature are available to one side, that is to say to the Crown, they should be equally available to those acting on behalf of the assessees or to the assessees themselves. In other words, if the Crown are permitted to add, the assessees or their advisers may in proper circumstances subtract. Some little difficulty is created for the assessees by reason of that provision of Rule 28 which says that in the case of other classes of insurance business (fire, marine, motor car, burglary, etc.,) of a Company incorporated in British India, the income, profits or gains shall be determined in accordance with the provisions of the Act, subject to t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tself. I would refer also to the judgment of LORD HERSCHELL, L.C., in the case of Institute of Patent Agents v. Joseph Lockwood, who in his speech in the House of Lords as appearing in page 360, said : No doubt there might be some conflict between a rule and a provision of the Act. Well, there is a conflict sometimes between two sections to be found in the same Act. You have to try and reconcile them as best you may. If you cannot, you have to determine which is the leading provision and which the subordinate provision, and which must give way to the other. That would be so with regard to the enactment and with regard to rules which are to be treated as if within the enactment. In that case probably the enactment itself would be treated as the governing consideration and the rule as subordinate to it. It follows from this that where a scheme is framed by rules, even though they may have statutory authority, if any part of the scheme conflicts with an express provision of the Act, the rule will have to be disregarded. In the matter before us none of the rule we have to consider can be said, in my opinion, to be in direct conflict with any express provision in the Act ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... spector of Taxes) v. Bank of New Zealand that a privilege or exemption ought always to be taken into account whether assessment is made under one part of a tax Act and or another part of the same Act. An examination of all the judgments of the Lords Justices in that case shows that it was held by the Court that the exemptions contended on behalf of the Bank of New Zealand were allowed upon that basis. I accept the argument put forward by Mr. Isaacs on behalf of the assessees that as the Government of India securities held by the assessees are definitely and absolutely free from tax, the position of the North British and Mercantile Insurance Company, Limited, as regards the right to avail themselves of the second proviso of Sec. 3 of the Income Tax Act, ought to be deemed to be stronger than that of an assessee having securities which are merely free from tax in particular circumstances as for example in the case of non-residents. Upon the question of whether the second proviso of Sec. 8 operates in relation to the tax-free securities possessed by the present assessees, the words of LORD JUSTICE GREENE appearing at page 1003 in the report of the above cited case are much in po ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ome of the Indian branches of non-resident Insurance Companies (Life, Marine, Fire, Accident, Burglary, Fidelity, Guarantee, etc.,) in the absence of more reliable data may be deemed to be the proportion of the total income, profits or gains of the companies, corresponding to the proportion which their Indian premium income bears to their total premium income. For the purpose of this rule, the total income, profits or gains of non-resident Life Assurance Companies whose profits are periodically ascertained by actuarial valuation shall be computed in the same manner as is prescribed in rule 25 for the computation of income, profits and gains of Life Assurance Companies incorporated in British India. The assessees in this case are a non-resident Life Assurance Company within the meaning of rule 35. Rule 25 is as follows :- In the case of Life Assurance Companies incorporated in British India whose profits are periodically ascertained by actuarial valuation, the income, profits and gains of the Life Assurance Business shall be the average annual net profits disclosed by the last preceding valuation, provided that any deductions made from the gross income in arriving at th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... deductions made from the interest on securities under Section 18(3) had been made in most cases, if not in all, at rates of tax lower than the rates appropriate to the year of charge. He accordingly served the assessees with a notice under Section 34, calling on them for a fresh return of their income from all sources for the year ending March 31, 1933, and declared his intention of re-assessing the income at the correct rate. Calling for the return was really an unnecessary formality, for there was no question as to the correctness of the figures in the assessees first return. He proceeded to correct what he considered to be his predecessors error in the following way. He included one-fifth of the quinquenniums interest from taxed securities in the taxable income which he taxed at the rate of the year of charge after giving credit for one-fifth of the deductions at source actually made during the quinquennium. He followed the former assessments in excluding one-fifth of the interest on tax-free securities from the taxable income. The assessees appealed against the order of re-assessment to the Assistant Commissioner of Income Tax. In their appeal they questioned th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of income, profits and gains of a Life Insurance Company computed in the manner prescribed by the rules referred to in question 1, the assessee can claim credit under Sec. 18 (5) of the Indian Income Tax Act, for any deductions of tax made at the sources. Counsel for the assessees has objected to the form in which the questions have been raised, and I agree with him that it is open to criticism. Because a question is a question of law, it is not necessary to state it in a general form and indeed it is often preferable to formulate it with reference to the facts of the particular case. However, there really has been no doubt as to the substance of the dispute between the assessees and the Crown, and it would serve no useful purpose to remand the reference in order to have the form of the questions amended. The first question is concerned with the interest received in respect of tax-free securities and I should have preferred to express it thus - Are the assessees entitled to deduct from their total income in each year of assessment a sum equal to one-fifth of the interest on tax-free securities received during the quinquennium as being free from income tax ? The asse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Commissioner appears an analysis furnished at the Income Tax Officers request by the assessees London actuary. Counsel admitted to us that this analysis disclosed the fact that the so-called actuarial valuation is really nothing more than a profit and loss account over a period of five years in which the liabilities, though larger and more difficult of ascertainment, are in essence the same contingencies appearing in the ordinary trading firms accounts. This however is not an accurate picture, since the interest shown - and interest is the very factor with which we are concerned - exceeds by almost one-fifth the interest actually received in India by the assessees in order to bring it up to the rate of interest received all over the world. I assume it involves a corresponding writing down at some other branch. In the absence of expert evidence I am by no means convinced that the statement is as simple as Counsel maintain. Apart from the particular statement, however, there is no warrant for the assumption that all actuaries follow the same methods, and it is clear that the liability of any particular Life Insurance Company to tax cannot depend upon the possibility of tracin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Sums placed to reserve are not permissible deductions, a fact which is recognised in the forms prescribed by Rules 18 and 19. Before however the income, profits and gains of Life Insurance business are computed the Company is permitted to transfer liability Life Surplus the sum necessary to bring that fund up to actuarial requirements. The Advocate-General submits and I agree with him that there is no principle upon which the sum so transferred must be attributed to what in the case of an ordinary business would be taxable while the whole of the income derived from tax-free sources is to be held to be included in the balance liable to assessment. It is not necessary to decide whether, as the learned Advocate-General has submitted, the rules from a complete and self contained code to the exclusion of Chapter III, or whether the income, profits and gains come under the head of other sources in Section 6. It is sufficient to say that the assessees have not been able to show that ₹ 1,66,572 out of the income, profits and gains in the three years of assessment amounting to ₹ 5,24,967 is interest on securities within the meaning of Sec. 6. This being so, Sect ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... come chargeable under the head of Interest on Securities in Section 18 (2) must have reference to the classification in Section 6. This would have been a most unsatisfactory position, for although it is possible that the assessees might have claims under Section 48-A to a refund of the deductions improperly made, their claims might be timed-barred under Section 50. However the Advocate-General maintained that the deductions had been validly made under Section 18(3), and he was constrained to state that in face of that contention, although he was not in the position to make a formal admission, he could not usefully dispute the claim of the assessees to be given credit under Section 18(5). It follows that the answer to the third question propounded by the Commissioner is in the affirmative. The Commissioner has referred the following question with respect to the assessment for 1932-33 :... Whether in any event, the Assistant Commissioner of Income Tax had jurisdiction to enhance the said assessment, having regard to the terms of the said notice under Sec. 34 and the general provisions of Indian Income Tax Act, 1922. This question occasions me considerable diffi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or the argument that when what is appended against is an assessment or re-assessment under Sec. 34, the Assistant Commissioner is bound to confine himself to what is covered by such assessment or re-assessment and cannot deal with matters covered by a previous assessment made under Sec. 23. I think argument is to some extent supported by the decisions in In re Satyendra Mohan Roy Chaudhari and Seth Kasinath Bagla v. The Commissioner of Income Tax, United Provinces. But although this principle is comparatively easy to apply when income that has originally escaped assessment has been assessed under Sec. 34, its application is more difficult when the Income Tax Officer has Purported to reassess on the basis that income has been assessed at too low a rate. I prefer to base my decision that the Assistant Commissioner had no power in this case to enhance on the ground that the reassessment under Sec. 34 was on the face of it without jurisdiction and as such should have been annulled with the result that the original assessment under Sec. 23 would have stood. What had happened was that credit has been allowed on a wrong basis, in this case to the detriment of the assessee. It appear ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... otal income of the Indian branches of non-resident insurance companies (Life, Marine, Fire, Accident, Burglary, Fidelity, Guarantee, etc.) in the absence of more reliable data, may be deemed to be the proportion of the total income, profits or gains, of the companies, corresponding to the proportion which their Indian premium income bears to their total income. For the purpose of this rule, the total income, profits or gains of non-resident Life Assurance Companies, whose profits are periodically ascertained by actuarial valuation shall be computed in the same manner as is prescribed in Rule 25 for the computation of income, profits and gains of Life Assurance Companies incorporated in British India. The second is that the tax-free securities in question are Government of India tax-free securities which come within the proviso to Section 8 of the Indian Income Tax Act of 1922, the words of which are : Provided that no Income Tax shall be payable on the interest receivable on any security of the Government of India issued or declared to be Income Tax free. The North British Company made a return for the year 1934-35 of the profits of its Life Business in India and the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ... 2,04,790 1928 ... 2,04,790 1929 ... 1,95,911 1930 ... 22,577 8,32,858 It was stated by the assessees Counsel and accepted by the Advocate-General for the Income Tax authorities that the word liability in the table above should be read as fund available to meet liability. One-fifth of the amount of interest collected in India free of Income tax is ₹ 1,66,572. The assessees claim that this item of ₹ 1,66,572 comes within the exemption given by the proviso to Sec. 8 of the Act of 1922. The Income Tax authorities contend that the Income, profits gains are to be ascertained by rules 25 and 35, that those rules are a code complete in themselves and once the income, profits and gains have been ascertained under that code, it is not permissible in law to make any additions to or subtractions from that sum save in accordance with the provisions of rule 25. It is said that the total income so ascertained becomes only a noti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the company and the interest derived from them. In fact it informs and is intended to inform all concerned what the assets and the income and liabilities of the Company are in a way which goes much beyond the ordinary Company balance-sheet. It may be that the forms in Schedule 3 and Schedule 4 of the Act do not provide for each individual investment and item of interest to be set out. Nevertheless they do show the different classes of investment, the interest as a whole derived therefrom and the income tax paid thereon. If the assessee making a full and proper return chooses to show that he has certain tax-free investments and the income derived therefrom, it is in my view impossible to say that he has not made a proper return in accordance with the Life Assurance Companies Act of 1912. Where the return shows that some of the interest has been derived from securities of the Government of India to be tax-free, it is impossible in my view for the Income Tax authorities to ignore the plain provisions of the proviso to Sec. 8 of the Income Tax Act which say that no income tax shall be payable on the interest receivable on any security of the Government of India issued or declared to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not assessable to income tax. I am fortified in this conclusion by the decision in the recent case of Hughes v. Bank of New Zealand where Lord Justice Green said :- Section 46 of the Income Tax Act, 1918, provides that the interest of certain securities shall be exempt from tax and super-tax. The securities in question are securities which have been issued with a particular condition annexed to them, that condition being : that the interest thereon shall not be liable to tax or super-tax, so long as it is shown, in manner directed by the Treasury, that the securities are in the beneficial ownership of persons who are not ordinarily resident in the United Kingdom, Speaking for myself, I find in that language a perfectly clear Legislative provision that, so long as the securities are in the beneficial ownership indicated in the section, no tax is to be levied in respect of the interest on them. To say, as has been said on behalf of the Crown, that the true effect of the section is merely that the interest is not to be taxed as interest but can be taxed as part of an aggregate of profits of trade, appears to me to override the perfectly plain language of the section. In my v ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ner of Income Tax for our opinion is : Whether in any event, the Assistant Commissioner of Income Tax had jurisdiction to enhance the said assessment, having regard to the terms of the said notice under Section 34 and the general provisions of the Indian Income Tax Act, 1922. In view of the answers I have given to the preceding questions it is not necessary for me to answer the last question. The assessees are entitled to their costs in these proceedings. L.W.J. Costello, J. The questions put for our consideration in this reference are of some complexity and difficulty. The matter which came to be argued before us arose out of the assessments made on the North British and Mercantile Insurance Company Limited for the years 1932-33, 1933-34 and 1934-35. The Commissioner of Income Tax stated that the points at issue in respect of the assessments for the last two years are identical. Two further questions arise in respect of the assessment for the year 1932-33 . These two questions were concerned with the legality of the action of the Income Tax Officer in initiating and making a supplementary assessment under Sec. 34 of the Income Tax Act and the legality of the Assi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tent of the difference, namely, ₹ 65,620-11-6 pies. The contention of the Company as regards the meaning and effect of Sec. 18, sub-Sec. (5) of the Act was that the provision of that sub-Section was clear, unambiguous in its meaning and mandatory. The Company argued that the provisions of the Sections could not be varied or modified by any rules or directions in any way whatever and therefore they were entitled as of statutory right to full credit in the assessment for the whole amount of Income Tax paid by him by reason of deductions from interest on securities during the year ending the December 31, 1933. Accordingly when the Company appealed against the 1934 - 35 assessment they said that if proper credit had been given by the Income Tax Officer they would have been entitled to a refund of ₹ 28,202-8-6 pies but instead of that a demand was made on the Company for a further sum of ₹ 37,418-3 annas. The Company claimed in the appeal that their assessment ought to be reduced by giving them full credit of the tax previously paid in conformity with the precise provisions of Sec. 18 Sub-Sec. (5) of the Act and the Company claimed a refund accordingly. When the matter ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... charged to tax. It was consequent upon the order made by the Assistant Commissioner on the March 13, 1935, that the assessees requested the Commissioner of Income Tax to refer the questions of law arising out of the decision of the Assistant Commissioner under Sec. 66(2) of the Income Tax Act to the High Court. It was admitted that the returns made by the Company, although the Company was not registered in India, was upon the basis of Rules 25 and 35 made by the Board of Inland Revenue in exercise of the powers conferred by Sec. 59 of the Income Tax Act (XI of 1922) and promulgated by the Board of Inland Revenue Notification No. 3-I.T. dated the April 1, 1922, as subsequently amended. The rules in question are known as the Indian Income Tax Rules, 1922. It is the meaning and effect of these rules that we have to consider. It is not necessary that I should re-state the questions of law which were formulated by the Commissioner of Income Tax in the case stated by him under Sec. 66(2). Stated shortly, the points we have to consider and determine are these : How far, if at all, were the assessees entitled to claim credit in respect of taxes deducted at source from other securities held ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e other provisions of the Act applied, this provision in rule 25 would be redundant, for according to Sec. 18(4) of the Act, the tax deducted at source is to be deemed to be income received. If the average annual net profits could be held as containing income from taxed securities, the provision of Section 18(4) would have been applicable to that portion of the income. It is because it is Life Assurance business income and not income from interest on securities or from dividends as one of its components that it has been necessary to make provisions for giving credit of Income Tax deducted from interest on the investments of a Company doing Life Assurance business. Further, The Commissioner of Income Tax is of opinion and it has been contend before us that Sec. 18(5) of the Income Tax Act has no application to a case where the assessment is not made under different heads of income specified in Sec. 6 and so Sec. 18 has no application to a case like this. The matter may be summed up in this way. The opinion of the Commissioner of Income Tax was and the argument put forward before us on behalf of the Crown came to this that because a particular method is laid down by rules 25 and 3 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessment and there is also the further significant provision that any Income Tax deducted from or paid on income derived from investments before such income is received, shall be added to the net profits disclosed by the valuation. It seems to me that if operations of an exploratory nature are available to one side, that is to say to the Crown, they should be equally available to those acting on behalf of the assessees or to the assessees themselves. In other words, if the Crown are permitted to add, the assessees or their advisers may in proper circumstances subtract. Some little difficulty is created for the assessees by reason of that provision of Rule 28 which says that in the case of other classes of insurance business (fire, marine, motor car, burglary, etc.,) of a Company incorporated in British India, the income, profits or gains shall be determined in accordance with the provisions of the Act, subject to the allowance specified in the rule next following. It might be said that the provisions of the Act are those contained in Secs. 6 to 12 which, as argued by the Commissioner of Income Tax and generally on behalf of the Crown, are to be altogether excluded from consi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d a provision of the Act. Well, there is a conflict sometimes between two sections to be found in the same Act. You have to try and reconcile them as best you may. If you cannot, you have to determine which is the leading provision and which the subordinate provision, and which must give way to the other. That would be so with regard to the enactment and with regard to rules which are to be treated as if within the enactment. In that case probably the enactment itself would be treated as the governing consideration and the rule as subordinate to it. It follows from this that where a scheme is framed by rules, even though they may have statutory authority, if any part of the scheme conflicts with an express provision of the Act, the rule will have to be disregarded. In the matter before us none of the rule we have to consider can be said, in my opinion, to be in direct conflict with any express provision in the Act and certainly none of the rule in terms derogate from any of the provisions of the Act itself or detract from the full operative effect of any of the sections even as regards life insurance business. The learned Advocate-General made what seemed to me an important ad ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... case shows that it was held by the Court that the exemptions contended on behalf of the Bank of New Zealand were allowed upon that basis. I accept the argument put forward by Mr. Isaacs on behalf of the assessees that as the Government of India securities held by the assessees are definitely and absolutely free from tax, the position of the North British and Mercantile Insurance Company, Limited, as regards the right to avail themselves of the second proviso of Sec. 3 of the Income Tax Act, ought to be deemed to be stronger than that of an assessee having securities which are merely free from tax in particular circumstances as for example in the case of non-residents. Upon the question of whether the second proviso of Sec. 8 operates in relation to the tax-free securities possessed by the present assessees, the words of LORD JUSTICE GREENE appearing at page 1003 in the report of the above cited case are much in point. The learned Lord Justice there says :- Speaking for myself, I find in that language a perfectly clear legislative provision that, so long as the securities are in the beneficial ownership indicated in the section, no tax is to be levied in respect of the in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... onding to the proportion which their Indian premium income bears to their total premium income. For the purpose of this rule, the total income, profits or gains of non-resident Life Assurance Companies whose profits are periodically ascertained by actuarial valuation shall be computed in the same manner as is prescribed in rule 25 for the computation of income, profits and gains of Life Assurance Companies incorporated in British India. The assessees in this case are a non-resident Life Assurance Company within the meaning of rule 35. Rule 25 is as follows :- In the case of Life Assurance Companies incorporated in British India whose profits are periodically ascertained by actuarial valuation, the income, profits and gains of the Life Assurance Business shall be the average annual net profits disclosed by the last preceding valuation, provided that any deductions made from the gross income in arriving at the actuarial valuation which are not admissible for the purpose of income tax assessment, and any Indian income tax deducted from or paid on income derived from investments before such income is received, shall be added to the net profits disclosed by the valuation. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... them for a fresh return of their income from all sources for the year ending March 31, 1933, and declared his intention of re-assessing the income at the correct rate. Calling for the return was really an unnecessary formality, for there was no question as to the correctness of the figures in the assessees first return. He proceeded to correct what he considered to be his predecessors error in the following way. He included one-fifth of the quinquenniums interest from taxed securities in the taxable income which he taxed at the rate of the year of charge after giving credit for one-fifth of the deductions at source actually made during the quinquennium. He followed the former assessments in excluding one-fifth of the interest on tax-free securities from the taxable income. The assessees appealed against the order of re-assessment to the Assistant Commissioner of Income Tax. In their appeal they questioned the power of the Income Tax Officer to re-open the assessment under Sec. 34, and also complained that whereas they had a sum of ₹ 81,414-8-1 deducted at source during the previous year i.e., the accounting year January 1, 1931, to December 1, 1931, they had only ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for the assessees has objected to the form in which the questions have been raised, and I agree with him that it is open to criticism. Because a question is a question of law, it is not necessary to state it in a general form and indeed it is often preferable to formulate it with reference to the facts of the particular case. However, there really has been no doubt as to the substance of the dispute between the assessees and the Crown, and it would serve no useful purpose to remand the reference in order to have the form of the questions amended. The first question is concerned with the interest received in respect of tax-free securities and I should have preferred to express it thus - Are the assessees entitled to deduct from their total income in each year of assessment a sum equal to one-fifth of the interest on tax-free securities received during the quinquennium as being free from income tax ? The assessees contended that if they are not allowed the deduction they are deprived of the advantages conferred by the second proviso to Section 8 which is as follows :- Provided further that no Income Tax shall be payable on the interest receivable of any security of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er a period of five years in which the liabilities, though larger and more difficult of ascertainment, are in essence the same contingencies appearing in the ordinary trading firms accounts. This however is not an accurate picture, since the interest shown - and interest is the very factor with which we are concerned - exceeds by almost one-fifth the interest actually received in India by the assessees in order to bring it up to the rate of interest received all over the world. I assume it involves a corresponding writing down at some other branch. In the absence of expert evidence I am by no means convinced that the statement is as simple as Counsel maintain. Apart from the particular statement, however, there is no warrant for the assumption that all actuaries follow the same methods, and it is clear that the liability of any particular Life Insurance Company to tax cannot depend upon the possibility of tracing a particular factor in its actuarially ascertained valuation. I expressed this opinion in the course of the argument, and I was certainly fortified in it when we came to deal with the reference concerning the Phoenix Assurance Company Limited, whose assessment i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... urplus the sum necessary to bring that fund up to actuarial requirements. The Advocate-General submits and I agree with him that there is no principle upon which the sum so transferred must be attributed to what in the case of an ordinary business would be taxable while the whole of the income derived from tax-free sources is to be held to be included in the balance liable to assessment. It is not necessary to decide whether, as the learned Advocate-General has submitted, the rules from a complete and self contained code to the exclusion of Chapter III, or whether the income, profits and gains come under the head of other sources in Section 6. It is sufficient to say that the assessees have not been able to show that ₹ 1,66,572 out of the income, profits and gains in the three years of assessment amounting to ₹ 5,24,967 is interest on securities within the meaning of Sec. 6. This being so, Section 8 and the proviso thereto have no application, and the first question in the form in which I have stated it, must be answered in the negative. I should add that I have reached the conclusions I have set out above with great hesitation, since they are at variance ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 48-A to a refund of the deductions improperly made, their claims might be timed-barred under Section 50. However the Advocate-General maintained that the deductions had been validly made under Section 18(3), and he was constrained to state that in face of that contention, although he was not in the position to make a formal admission, he could not usefully dispute the claim of the assessees to be given credit under Section 18(5). It follows that the answer to the third question propounded by the Commissioner is in the affirmative. The Commissioner has referred the following question with respect to the assessment for 1932-33 :... Whether in any event, the Assistant Commissioner of Income Tax had jurisdiction to enhance the said assessment, having regard to the terms of the said notice under Sec. 34 and the general provisions of Indian Income Tax Act, 1922. This question occasions me considerable difficulty because having regard to the opinion that we hold as to the effect of Sec. 18(5), the action of the Income Tax Officer was based on a fundamental misconception of the law. What the assessees were entailed to was credit in the year of charge for the deduction ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ment made under Sec. 23. I think argument is to some extent supported by the decisions in In re Satyendra Mohan Roy Chaudhari and Seth Kasinath Bagla v. The Commissioner of Income Tax, United Provinces. But although this principle is comparatively easy to apply when income that has originally escaped assessment has been assessed under Sec. 34, its application is more difficult when the Income Tax Officer has Purported to reassess on the basis that income has been assessed at too low a rate. I prefer to base my decision that the Assistant Commissioner had no power in this case to enhance on the ground that the reassessment under Sec. 34 was on the face of it without jurisdiction and as such should have been annulled with the result that the original assessment under Sec. 23 would have stood. What had happened was that credit has been allowed on a wrong basis, in this case to the detriment of the assessee. It appears to me that there could not properly be said to be assessment at too low a rate or an escape from assessment so as to give the Income Tax Officer jurisdiction to reopen. In saying this I must not be thought to be assenting to the view that an Income Tax Officer c ..... X X X X Extracts X X X X X X X X Extracts X X X X
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