Case Note & Summary
The appeals before the Supreme Court arose from income tax assessments of the life insurance business of Bharat Insurance Co. Ltd., which later merged with the Life Insurance Corporation Ltd. The assessment years involved were 1952-53, 1953-54 and 1954-55. The dispute concerned the power of the Income-tax Officer to adjust the accounts of a life insurance company under the special provisions of the Income-tax Act, 1922. The assessee had debited a sum of Rs. 18,75,000 to its Consolidated Revenue Account and credited it to the Investment Reserve Fund because the securities in respect of which the fund had been constituted had depreciated. This transfer reduced the surplus on which tax was to be assessed. The Income-tax Officer thought that the transfer made the balance in the Investment Reserve Fund exceed the deficit disclosed on the book values of the securities by Rs. 30,420. After checking the market value of securities, he concluded that they had been undervalued and that the fund was actually in excess by Rs. 1,89,185. He therefore directed that the transfer from the Revenue Account to the Investment Reserve Fund be reduced by Rs. 1,75,000. On appeal, the Appellate Assistant Commissioner reduced the adjustment to Rs. 1,45,000. The Income-tax Appellate Tribunal held that the adjustment could only be made under the proviso to Rule 3(b) of the Schedule to the Income-tax Act, 1922 and that rule required prior consultation with the Controller of Insurance. Since that consultation had not been made, the Tribunal held the adjustment wholly illegal and ordered that the transfer of Rs. 18,75,000 be accepted as a whole. The Commissioner of Income-tax then sought a reference to the High Court under Section 66(2) after the Tribunal rejected an application under Section 66(1). The Punjab High Court (Circuit Bench) at Delhi directed the Tribunal to state a case and the Tribunal referred the question whether the Income-tax Officer had jurisdiction to proceed to make adjustment in terms of Rule 3(b) of the Schedule. The High Court answered the question in the affirmative, holding that the matter did not come within Rule 3(b) and that no consultation with the Controller of Insurance was required. The High Court was of the view that the Income-tax Officer had not been deprived of authority to correct errors of the kind detected and that the proviso was not intended to cover cases where the assessee undervalued securities to evade tax. The assessee appealed to the Supreme Court. The Supreme Court held that under Section 10(7) of the Income-tax Act, 1922, profits of insurance business must be computed in accordance with the rules in the Schedule and there is no general power in the Income-tax Officer to correct any error apart from those rules. Under Rule 2(b), the Income-tax Officer must accept the annual average of the surplus disclosed by actuarial valuation made in accordance with the Insurance Act, 1938, subject only to excluding any surplus or deficit from earlier inter-valuation periods and expenditure not allowable under Section 10. The Income-tax Officer had no power to change the figures in the accounts of the assessee. Rule 3(b) only compelled the Income-tax Officer to allow certain deductions and to include certain amounts; it did not authorize revaluation of securities. The proviso to Rule 3(b) was the only provision permitting adjustment when accounts were doubted, and it required prior consultation with the Controller of Insurance. The adjustment made by the Income-tax Officer was not of the variety mentioned in the proviso because it was based on undervaluation of securities, not on any inconsistency of rate of interest with valuation. Hidayatullah J. in a separate opinion concurred that the Income-tax Act contemplates assessment of insurance companies not according to ordinary principles applicable to business concerns, and that the proviso to Rule 3(b) defines the exclusive power and negatives any separate general power. The Supreme Court allowed the appeals, set aside the High Court judgment, and held that the adjustment was improperly made.
Headnote
A) Income Tax - Assessment of Insurance Business - Special Computation Scheme - Income-tax Act, 1922, Section 10(7) and Schedule - Profits and gains of insurance business are to be computed only in accordance with Schedule rules, excluding ordinary principles under Section 10. The Schedule provides an exhaustive code and no general power exists in the Income-tax Officer to correct any error apart from these rules. Held that the assessment is completely governed by the Schedule and the Income-tax Officer could not act outside its provisions (Paras 1-5). B) Income Tax - Computation of Life Insurance Surplus - Rule 2(b), Schedule to Income-tax Act, 1922 - Income-tax Officer must accept the annual average of surplus disclosed by actuarial valuation made under the Insurance Act, 1938; he may only exclude any surplus or deficit included in an earlier inter-valuation period and expenditure not allowable under Section 10. He has no power to change figures in the account of the assessee based on a revaluation of securities. Held that the adjustment reducing the transfer to Investment Reserve Fund on the ground of undervaluation of securities was beyond power under Rule 2(b) (Paras 6-9). C) Income Tax - Deductions and Inclusions in Surplus - Rule 3(b), Schedule to Income-tax Act, 1922 - First part of Rule 3(b) only obliges the Income-tax Officer to allow certain amounts written off or reserved as deduction and to include sums taken credit for on account of appreciation or gains; it does not warrant adjustment of accounts on the basis of revaluation. The proviso to Rule 3(b) grants adjustment power only if after consultation with the Controller of Insurance it appears that the rate of interest or other factor employed is materially inconsistent with valuation of securities so as artificially to reduce surplus. Held that the Income-tax Officer's adjustment for undervaluation of securities without any inconsistency of rate of interest and without consultation fell outside the proviso and was illegal (Paras 10-14). D) Income Tax - Powers of Income-tax Officer - No General Power to Adjust Accounts - Schedule to Income-tax Act, 1922 - The proviso to Rule 3(b) defines the exclusive power when accounts are doubted; it negatives the existence of a separate general power. Action has to be taken in the manner laid down in the proviso or not at all. Held that failure to follow the proviso rendered the impugned adjustment wholly improper; appeals allowed and High Court judgment set aside (Paras 15-16).
Issue of Consideration
Whether the Income-tax Officer had jurisdiction to make adjustments to the transfer to Investment Reserve Fund under Rule 3(b) of the Schedule to the Indian Income-tax Act, 1922, given the absence of prior consultation with the Controller of Insurance and the special provisions of Section 10(7) and Schedule Rules 2(b) and 3(b).
Final Decision
Appeals allowed. Supreme Court held that Income-tax Officer had no power under Section 10(7) and Schedule Rules 2(b) and 3(b) to adjust accounts by revaluing securities without following proviso to Rule 3(b); the adjustment reducing transfer to Investment Reserve Fund was illegal and assessee's transfer of Rs.18,75,000 must be accepted. High Court judgment set aside, question answered in negative.
Law Points
- Section 10(7) of Income-tax Act
- 1922 provides that profits and gains of insurance business shall be computed in accordance with Schedule rules
- displacing general provisions
- the Schedule rules are exhaustive
- Income-tax Officer has no general power to correct errors apart from these rules
- under Rule 2(b)
- Income-tax Officer must accept annual average of surplus disclosed by actuarial valuation and has no power to change figures in assessee's accounts
- Rule 3(b) only compels allowance of certain deductions and inclusion of certain amounts
- it does not authorize revaluation of securities
- proviso to Rule 3(b) is the only route for adjustment when accounts are doubted and requires prior consultation with Controller of Insurance
- proviso negatives existence of a separate general power
- action must be taken in manner laid down in proviso or not at all
- adjustment of transfer to Investment Reserve Fund without following proviso is illegal
