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1935 Supreme(SC) 48
PRIVY COUNCIL [ON APPEAL FROM THEEAST INDIES]
LORD THANKERTON, SIR LANCELOT SANDERSON, AND SIR GEORGE RANKIN
NATIONAL MUTUAL LIFE ASSOCIATION OF AUSTRALASIA, LIMITED - Appellant
Versus
COMMISSIONER OF INCOME-TAX, BOMBAY PRESIDENCY AND ADEN - Respondents
On appeal from the High Court at Bombay.
Decided On : October 15, 17, 1935; November 18, 1935.
Solicitors for appellants:E. F. Turner & Sons. Solicitor for respondent: Solicitor, India Office.
Proportionate assessment for non-resident life insurance companies is permissible if reliable actuarial valuations are unavailable. However, the assessment is invalid if the total global profit figure used is incorrectly computed, fails to deduct business expenses, or includes non-taxable surpluses.
Headnote:(A) Income-tax Act, 1922 - Sections 13, 22, 23, 59 - Income-tax Rules - Rule 35 - Assessment of non-resident insurance companies - Computation of income, profits or gains - Use of Rule 35 in the absence of more reliable data - For life insurance companies, actuarial valuation reports are considered the most reliable data for determining profits - Revenue accounts and balance sheets alone may be insufficient for such purpose.
(B) Application of Rule 35 - Total income, profits or gains of the company must be ascertained as they would be for the purposes of the Act - Inclusion of non-taxable surplus from participating policyholders or failure to deduct liabilities and expenses for non-participating business renders the assessment invalid - A proportionate assessment based on an incorrect total profit figure is not a legal assessment.
Facts of the case:
A mutual life insurance company with branches in the jurisdiction was assessed for income-tax. The company submitted a return based on its revenue account and balance sheet. The tax officer rejected this data as unreliable and applied a rule allowing for a proportionate assessment of the company's total global profits based on the ratio of local premium income to total premium income. The company challenged the use of this rule and the validity of the resulting assessment.
Findings of Court:
The tax officer was justified in resorting to the proportionate assessment rule because the data provided by the company was insufficient to properly deduce profits, and actuarial valuations are the most reliable method for life insurance companies. However, the actual assessment was illegal because the total profit figure used was incorrectly calculated, ignoring non-participating premiums and failing to deduct necessary liabilities and expenses.
Issues: (1) Whether the tax officer was justified in resorting to the proportionate assessment rule given the data furnished; (2) Whether the resulting assessment was legal and binding.
Ratio Decidendi: The proportionate assessment rule is applicable when more reliable data is unavailable, and for life insurance companies, valuation reports are the primary reliable data. However, any assessment under this rule must be based on a correct ascertainment of the company's total taxable income, profits, or gains; failure to exclude non-taxable surpluses or deduct business expenses renders the assessment invalid.
Result: Appeal allowed.
Appeal (No. 50 of 1934) from a judgment of the High Court (February 27, 1933) upon a reference by the Commissioner of Income-tax under s. 66, sub-s.1, of the Indian Income-tax Act, 1922.
The questions referred to the High Court were "(1) Whether the Income-tax Officer, Companies Circle, Bombay, was justified in law in resorting to r. 35 of the Income-tax Rules for the purpose of assessing the Company to income-tax for the year 1931-32 having regard to the data furnished by it to that Officer.
"(2.) Whether the assessment of the Company to income-tax for the year 1931-32 is a legal assessment and binding upon it in view of the opinion expressed by this Honourable Court in Civil Reference No. 5 of 1928 (Commissioner of Income-tax, Bombay v. National Mutual Life Association of Australasia, Ld. ( 1931) I. L. R. 55 B. 637).”
The material facts and the relevant statutory provisions appear from the judgment of the Judicial Committee.
The High Court (Beaumont C. J. and Rangnekar J.) by separate judgments, answered both questions in the affirmative. The judgments are reported at ( 1933) I. L. R. 57 B. 519.
1935- Oct. 15, 17. Latter K.C., and Cyril King for the appellants. The second question only arises if the first is answered in the affirmative. The material contained in the revenue account and balance sheet of the Indian branch of the appellants business afforded more reliable data for arriving at the total income than the application of r. 35. Profits from investments made outside India do not arise directly or indirectly through or from a business connection or property in India, and this remains true notwithstanding that the capital invested and earning remuneration outside India may in part be taken to have arisen from money collected in India from policyholders. The returns made and the material submitted for the purposes of the assessment of the profits of the Indian branch were not insufficient or unreliable by reason of their containing no reference to the income of the investments of the company outside India. In assessing under r. 35 the Income-tax Officer took a proportion of the total surplus of the appellant companys business as the profits liable to Indian income-tax notwithstanding the fact that this surplus included all the receipts from participating policyholders which were admittedly not liable to tax. The adoption of a proportion of this surplus cannot be regarded as a reliable means of arriving at the taxable Indian profits.
Reference was made to Income-tax Chief Commissioner, Madras v. Bhanjee Ramjee & Co. (( 1921)
I. L. R. 44 M. 773.); Income-tax Commissioner, Burma v. Steel Bros. & Co., Ld. (( 1925) I. L. R. 3
R. 614.); New York Life Insurance Co. v. Styles (( 1889) 14 App. Cas. 381); Income-tax Commissioner, Bombay Presidency v. National Mutual Life Association of Australasia, Ld. (( 1931) I.
1 Law. Rep. 63 Ind. App. 99 ( 1935- 1936) National Mutual Life Assocn. of A Ltd v. C ommnr. I.T. Bom.
193
L. R. 55 B. 637.); Thomas v. Richard Evans & Co.; Jones v. South-West Lancashire Coal Owners Association .([ 1927] 1 K. B. 33, 46, 47.)
Rule 35 applies only in the absence of more reliable data; the appellants gave data on which profits could be assessed on any basis. The return shows all profits which arose in India. Even if r. 35 is applicable in the circumstances of this case the receipts and the surplus arising from the transactions of the appellants with their members should be excluded from the total income, profits or gains of the company referred to in that rule.
Dunne K.C., and Reginald Hills for the respondent. The appellants have to render an account of the profits of their Indian business. Under Styless case (3) the respondent is entitled to tax all profits made on the life fund. The Chief Justice said that the respondent was in India entitled to tax profit made by the main company out of moneys remitted from India which were invested by the company. The life fund, in which the Indian branch
