Judgement

VENKATARAMA AYYAR J. : This is an appeal from the judgment of the High Court of Calcutta on a reference under Section 66(1) of the Income-tax Act. The appellant is a Company which came into existence in 1870 as an unregistered association and in 1906 it was registered under the provisions of the Indian Companics Act. Its business consists exclusively in granting terminable pensions or annuities dependent on human life in favour of the subscribers or their nominees. The dispute in this appeal relates to the assessment of the profits of the Company for income-tax for the periods, 1943-1944, 1944-1945, 1945-1946 and 1946-1947.

2. To follow the points in issue, it will be useful to refer to the statutory provisions bearing on the matter. Section 2(11) of the Insurance Act, 1938 defines "life insurance business" as meaning "the business of effecting contracts of insurance upon human life" and as including "the granting of annuities upon human life". The business of the appellant Company would therefore be life insurance business as defined in Section 2(11) of the Insurance Act. Under Section 10(7) of the Indian Income-tax Act, the profits and gains of any business of insurance are to be computed in accordance with the Rules in the Schedule to the Act. Rule 2 in the Schedule is as follows :

"The profits and gains of life insurance business shall be taken to be either

(a) the gross external incomings of the preceding year from that business less the management expenses of that year,

or

(b) the annual average of the surplus arrived at by adjusting the surplus or deficit disclosed by the actuarial valuation for the last intervaluation period ending before the year for which the assessment is to be made, so as to exclude from it any surplus or deficit included therein which was made in any earlier intervaluation period and any expenditure which may under Section 10 of this Act be allowed for in computing the profits and gains of a business, whichever is the greater".

Rule 5(ii) defines "gross external incomings" as including profits on the sale or the granting of annuities. These Rules came into force in 1939.

3. In 1945 the assessment of the profits of the appellant Company for the years 1943-1944, 1944-1945 and 1945-1946 was taken up by the Income-tax Officer. Under Rule 2, what the Income-tax Officer had to do was to compute the profits of the Company under the two heads (a) and (b) in that Rule and to adopt whichever was higher as assessable profits. What he actually did however is uncertain, because the orders of assessment themselves have not been exhibited as part of the record. From the order of the Tribunal dated 5-3-1949 it appears that the Income-tax Officer firstly determined the profits under Rule 2(b) on the basis of actuarial valuation after making certain adjustments; and secondly on the basis of the figure arrived at under Rule 2(b), he worked out the profits under Rule 2(a) by making further adjustments. These orders were made on 14-7-1945.

The company preferred appeals against them to the Appellate Assistant Commissioner, who held by his order dated 30-11-1945 that the annuity business contemplated by Rule 5(ii) was "purely annuity business", that the business carried on by the Company was "an admixture between an annuity and life insurance", and that there had been no adequate investigation by the Income-tax Officer of the nature of the business of the Company. He accordingly remanded the case for further enquiry and for passing fresh orders of assessment.

4. By the time the matters came up for further enquiry before the Income-tax Officer in pursuance of the order of remand, the assessment of the profits of the Company for the year 1946-1947 had also to be made. By order dated 23-12-1946 the Income-tax Officer determined the assessable profits of the Company for all the four years. He held that there was no element of insurance in the business of the Company, and that the computation should be made under Rule 2(a).