The proviso to R. 3(b) of the Schedule to the Income-tax Act, 1922, which requires the Income-tax Officer to consult the Controller of Insurance before making any adjustment to the actuarial surplus disclosed by the valuation, is mandatory and not directory.

Judgment

SARKAR, J. : (for himself and J. C. Shah J.) We think that these appeals should be allowed.

2. The appeals relate to the assessment to income-tax of the income of the life insurance business of the Bharat Insurance Co., Ltd. now merged in the Life Insurance Corporation Ltd. The assessment years concerned are 1952-53, 1953-54 and 1954-55. The Income-tax Act, 1922 makes special provision for assessment of the income of insurance business. The Income-tax Officer in making the assessment orders made some adjustments in the accounts which the appellant contends, he has no power to do under these provisions. The question in these appeals is whether he had the power to make these adjustments.

3. Sub-section (7) of S. 10 of the Act makes the special provision for the assessment of the income of insurance business and that is in these terms :

"Notwithstanding anything to the contrary contained in Ss. 8, 9, 10, 12 or 18, the profits and gains of any business of insurance and the tax payable thereon shall be computed in accordance with the rules contained in the Schedule to this Act."

Rule 2 in the Schedule lays down in cls. (a) and (b) two different methods for calculating the profits and gains of a life insurance business and provides that whichever of these two methods results in larger profits being arrived at, has to be adopted. The relevant portion of R. 2 is in these terms :

Rule 2. "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 made in accordance with the Insurance Act, 1938 (IV of 1938) in respect of the last inter-valuation 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 inter-valuation period and any expenditure other than expenditure which may under the provisions of Section 10 of this Act be allowed for in computing the profits and gains of a business, whichever is the greater."

Then follows a proviso which sets out a certain limit for management expenses to be allowed but that is not material for this judgment. It is not in dispute that the method laid down in cl. (b) would in the present cases produce the larger income and had, therefore, to be followed. The relevant part of R. 3 of the Schedule on which the arguments in these cases turn may now be set out.

Rule 3. "In computing the surplus for the purpose of R. 2-

(a) .... .... .... .... ....

(b) any amount either written off or reserved in the accounts or through the actuarial valuation balance sheet to meet depreciation of or loss on the realisation of securities or other assets shall be allowed as a deduction and any sums taken credit for in the accounts or actuarial valuation balance sheet on account of appreciation of or gains on the realisation of the securities or other assets shall be included in the surplus :

Provided that if upon investigation it appears to the Income-tax Officer after consultation with the Controller of Insurance that having due regard to the necessity for making reasonable provision for bonuses to participating policy-holders and for contingencies, the rate of interest or other factor employed in determining the liability in respect of outstanding policies is materially inconsistent with the valuation of the securities and other assets so as artificially to reduce the surplus, such adjustment shall be made to the allowance for depreciation of, or to the amount to be included in the surplus in respect of appreciation of, such securities and other assets, as shall increase the surplus for the purposes of these rules to a figure which is fair and just."

No other rule in the Schedule was referred to at the bar.

4. What had happened was this. The assessee had debited a