The surplus received by participating members of a mutual insurance association was liable to tax under Section 2(6C) of the Income-tax Act, 1922, and Rule 2(b) of the Schedule, which provided for the taxation of the surplus arrived at as a result of actuarial valuations.

Chagla, C.J.

1. The assessee in this reference is the Bombay Mutual Life assurance Co. Ltd. It is an incorporated company limited by guarantee and all the policy-holders are member of this company. Some policy-holders participate in the profits and some do not, and the very important question that arises on this reference is, whether the profits made by the participating members is income liable to tax at all. Shri Jamshedji contends that the participating policy-holders make contributions in order to meet certain contingent liabilities. It turns out that the liabilities are less than what they contemplate and although the word "profits" is used, in substance and in reality what the participating members receive is not profits but the return of their own contributions which were more than sufficient to meet the liabilities contemplated. I think Sir Jamshedjis definition of the profits received by the participating members is perfectly correct. But the question that we have to determine is whether under the Income-tax Act such surplus which is returned to the participating member is made liable to tax. If which was taxed was profits or income in the ordinary sense, then undoubtedly the surplus which was returned to the participating member would not be liable to tax and prior to the amendment of section 2 (6C) of the Income-tax Act it is common ground that these profits were not subject to taxation. The question really is whether in view of section 2 (6C) and the scheme of our Act this surplus received by the participating members is subject to tax or not.

2. Now the charging section, as is well known, is section 3 which charges to tax the total income of every assessee. "Income" is defined definition is the profits of any business of insurance carried out by a mutual is association computed in accordance with Rule 9 of the Schedule. When we turn to Rule 9 of the Schedule it says that the rules contained in the schedule apply to the assessment of the profits of any business of insurance carried on by a mutual insurance association. Rule 2 of the rules provides that the provides that 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 for the last intervaluation period ending before the year for which the assessment is to be made. Therefore, clause (b) in terms provides for the taxation of the surplus arrived at as a result of the actuarial valuations. Sir Jamshedjis contention is that the schedule as its heading itself indicates business. The schedule is referred to in section 10 (7) of the Act which provides that notwithstanding anything to the contrary contained in Sections 8, 9, 10, 12 or 18, are not charging sections. They merely deal with the mode of computing the profits of insurance companies. Therefore, according to Sir Jamshedji if the surplus foes not constitute profits. According to Sir Jamshedji in the first instance the taxing authorities must establish that the surplus is profits before they can rely on the schedule in order to find out how these profits can be computed. There would be considerable force in the argument of Sir Jamshedji if section 2 (6C) had not been enacted. But section 2 (6C) import into the definition of "income" which is to be found in the charging section 3 these profits which may not be profits in the ordinary sense of the term but which are made profits can be reason of Rule 2, because Rule 2 really gives and artificial extension to the meaning of the word "profits", when it says that "profits and gains shall be taken to be". Therefore a new class of artificial income is created by this rule and that artificial income is included into the meaning of section 3 by reason of this rule. Sir Jamshedji relied on English a