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HIGH COURT OF CALCUTTA
P. B. MUKHARJI,S. N. NIYOGI, JJ.
Calcutta Hospital and Nursing Home Benefits Association
Versus
Commissioner of Income Tax
Income Tax Ref. No. 24 of 1957
Decided On : 26-09-1961
Whether the profit arising to the assessee company from miscellaneous insurance transactions of mutual character was assessable under the Indian Income-tax Act? If the answer to question No. 1 is in the affirmative whether on the facts and in the circumstances of the case the balance of the profits as disclosed in the assessee companys profit and loss account after deducting the various reserves should be taxable profits within the meaning of S. 2(6C) read with Rule 6 of the Schedule of the Indian Income-tax Act.
Fact of the Case:
The assessee is a mutual concern carrying on miscellaneous insurance business. It has no share capital and no shareholder. To quote some of the major clauses like 3(1) and (iv) of the Memorandum of Association the objects of the society inter alia, are: (1) To provide, or help towards providing, anywhere in the world for the expense of accommodation and treatment in hospitals and nursing homes and of private nursing for members and their dependents "by means of insurance on the mutual principle. (2) "To organise insurance on the mutual principle" under regulations to be framed for the purpose with the object of providing such hospital, medical, surgical, nursing and allied services and of relieving members and their dependents in whole or in part from payment of hospital and other charges.
Finding of the Court:
The surplus, miscalled profit, arising to the assessee company from the miscellaneous insurance transactions of mutual character was not assessable under the Indian Income tax Act and that, in any event, the assessee was entitled to deduct the reserves within the meaning of S. 2 (6C) read with Rule 6 of the Schedule of the Indian Income tax Act.
Issues: 1. Whether the profit arising to the assessee company from miscellaneous insurance transactions of mutual character was assessable under the Indian Income-tax Act? 2. If the answer to question No. 1 is in the affirmative whether on the facts and in the circumstances of the case the balance of the profits as disclosed in the assessee companys profit and loss account after deducting the various reserves should be taxable profits within the meaning of S. 2(6C) read with Rule 6 of the Schedule of the Indian Income-tax Act.
Ratio Decidendi: 1. The so-called profits of the assessee as a mutual insurance company can only be regarded as surplus, not taxable. 2. The word profit in Rule 6 has the same meaning as the word profit in S. 2(6C) and S. 10(7) of the Income tax Act and does not include technical surplus of mutual insurance societies except, if the Bombay decision is taken to be right, the case of a mutual life insurance society where this surplus is expressly brought in by the clear language of Rules 2 and 3 to that effect, but which Rules 2 and 3 are inapplicable in the case governed by Rule 6. 3. The scheme of the Rules in the Schedule follows a particular pattern of definition of profit. 4. The second feature of Rule 6 is that the balance is as disclosed by the annual accounts, copies of which are required under the Insurance Act 1938 to be furnished to the Controller of Insurance. 5. It is difficult to see why a mutual insurance society should not have a reserve or even a larger reserve if that is necessary for the purpose of mutual insurance business and how the existence of that reserve will convert into profit the legal nature and character of a surplus, which is ones own money in surplus and refundable in cash or in kind. 6. Reserves as such are not mentioned and therefore, as they are not specifically excluded under S. 10 of the Act, they must be taken as included in Rule 6.
Final Decision: Answered the first question in the negative and the second question by holding that the assessee was justified in deducting the reserve and answering the question accordingly. The assessee is entitled to the costs of this reference.
P. B. MUKHARJI, J. : Has Parliament succeeded in bringing "Surplus" of a mutual insurance business not dealing with life, within the impact of Income-tax, is the main question in this Income-tax Reference.
2. This reference is made by the Tribunal under S. 66(1) of the Indian-Income-tax Act at the instance of the assessee, the Calcutta Hospital and Nursing Home Benefits Association Ltd., for the determination by this Court of the following questions of law :
1. Whether the profit arising to the assessee company from miscellaneous insurance transactions of mutual character was assessable under the Indian Income-tax Act ?
2. If the answer to question No. 1 is in the affirmative whether on the facts and in the circumstances of the case the balance of the profits as disclosed in the assessee companys profit and loss account after deducting the various reserves should be taxable profits within the meaning of S. 2(6C) read with Rule 6 of the Schedule of the Indian Income-tax Act.
3. There were five applications which have been consolidated into one statement of case covering the different assessment years. The Tribunal disposed of these applications by the consolidated order of the Tribunal dated 4th September, 1956.
4. The essential facts may be briefly stated at the outset. The assessee is a mutual concern carrying on miscellaneous insurance business. It has no share capital and no shareholder. To quote some of the major clauses like 3(1) and (iv) of the Memorandum of Association the objects of the society inter alia, are :
(1) To provide, or help towards providing, anywhere in the world for the expense of accommodation and treatment in hospitals and nursing homes and of private nursing for members and their dependents "by means of insurance on the mutual principle.
(2) "To organise insurance on the mutual principle" under regulations to be framed for the purpose with the object of providing such hospital, medical, surgical, nursing and allied services and of relieving members and their dependents in whole or in part from payment of hospital and other charges.
The members are required to pay a monthly premium and the risk covers for the month in which the premium is paid, although a grace period of three months is allowed within which period the premium can be paid covering the risk for the month for which the premium was due. We shall refer to the clauses in the Memorandum and Articles of Association of the assessee and the rules made thereunder at the appropriate place.
5. To proceed with the account of fact, the assessment orders are from 1949-50 to 1953-54 and the relevant accounting years ended on the 31st December 1948, 1949, 1950, 1951 and 1952 respectively. The assessees published revenue accounts have the usual three classifications - (1) Miscellaneous insurance business revenue account, (2) profit and loss account, and (3) profit and loss appropriation account. In the revenue account were included subscriptions from members, gross premia from the members and from such amounts were deducted general reserve and/ or contingency reserve. Such reserves were transferred to the balance sheet as credit accounts. The claims paid or payable and the expense of management were deducted from this revenue account. The balance of the revenue account was transferred to the profit and loss account to the credit of which was added interest on investment and the debits included provisions for taxation, interest on loan, contribution to provident fund and depreciation. The balance of this profit and loss account was transferred to the profit in one year appropriation account. Therefrom in one year ended 31st December 1949 further deduction was made against contingency reserve and the balance, either loss or profit, was carried forward. 6. The major contention of the assessee was that, because it was a mutual insurance company, there was no taxable profit and the profit as disclosed in the assessees account was not taxable under the Indian
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