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CALCUTTA HIGH COURT
Ormond, J., Gentle, J.
GENERAL FAMILY PENSION FUND - Appellant
Versus
COMMISSIONER OF Income Tax, BENGAL. - Respondent
Decided On : 12-04-1946
Taxation - Mutual Life Assurance Company - Indian Income Tax Act, 1922 - Rule 25 - Applicability - Act, 1922, Sections 8, 10, 12 - Exemption from Life Assurance Companies Act - Actuarial Valuation - Profits - Mutual Dealings - Styles Case - Edinburgh Case - Principle of Favourable Attribution - Applicability - Proportionate Allocation of Expenses - Indian Income Tax Rules, 1922, Rule 25 - Indian Companies Act, 1882 - Section 26 - Indian Life Assurance Companies Act, 1912 - Finance Act, 1920 - Section 52 - Customs and Inland Revenue Act, 1888 - Section 24(3)
Fact of the Case:
A mutual life assurance company, exempted from the Indian Life Assurance Companies Act, 1912, was assessed for income tax. The company's income was derived from members' subscriptions and investments. The income tax officer assessed the company's income based on its actual income during the year, excluding the members' subscriptions and allowing only a small portion of management expenses. The company argued that its income should be assessed under Rule 25 of the Indian Income Tax Rules, which applied to life assurance companies whose profits were ascertained by actuarial valuation.
Finding of the Court:
The court held that Rule 25 applied to the company, despite its exemption from the Life Assurance Companies Act. The court reasoned that the company's business was life assurance, and its profits were ascertained by actuarial valuation. The court also held that the company's investments were an integral part of its business, and the income derived from them was taxable. The court rejected the company's argument that it could allocate its non-mutual receipts (income from investments) against its expenditure and charge any balance against its mutual receipts (members' subscriptions). The court found that the principle of favorable attribution, as laid down in the Edinburgh case, was not applicable in this case. The court held that the company's expenses should be allocated proportionally between its taxable and non-taxable business activities.
Issues: The main issues before the court were: 1. Whether Rule 25 of the Indian Income Tax Rules applied to the company, despite its exemption from the Life Assurance Companies Act, 1912. 2. Whether the company's investments were an integral part of its business, and the income derived from them was taxable. 3. Whether the company could allocate its non-mutual receipts (income from investments) against its expenditure and charge any balance against its mutual receipts (members' subscriptions).
Ratio Decidendi: The court held that Rule 25 applied to the company because it was a life assurance company whose profits were ascertained by actuarial valuation. The court also held that the company's investments were an integral part of its business, and the income derived from them was taxable. The court rejected the company's argument that it could allocate its non-mutual receipts against its expenditure and charge any balance against its mutual receipts because the principle of favorable attribution was not applicable in this case. The court held that the company's expenses should be allocated proportionally between its taxable and non-taxable business activities.
Final Decision: The court answered the second question in the affirmative and the third question in the negative. The court held that the company's income should be assessed under Rule 25 of the Indian Income Tax Rules, and the company's expenses should be allocated proportionally between its taxable and non-taxable business activities.
JUDGMENT
GENTLE, J. - The General Family Pension Fund was incorporated under the Indian Companies Act, 1882 on 17th August, 1906; it is a company limited by guarantee; it has no share capital and its members are confined to persons who are subscribers for grants of pensions and annuities and who hold entrance certificates; the liability of each member is limited to a nominal sum of Rs. 5; since it complied with the provisions of Section 26 of the above Act, a licence was granted by the Bengal Government permitting the company to be registered without the word "limited" being included in its name.
The objects of the company, as contained in its Memorandum of Association, inter alia, are :-
3. (a) To acquire and take over as a going concern and to carry on and conduct and continue the objects of an existing unincorporated association or institution called the General Family Pension Fund founded and formed for the purpose of carrying on any business that has for its objects the acquisition of gain within the meaning of Section 4 of the said Act (Indian Companies Act, 1882).
(b) To grant terminable pensions or annuities dependent on human life or any other event or contingency in favour of any subscriber and/or any nominee or nominees (within the categories therein mentioned) of a subscriber to the funds of the company.
(d) To grant invest and deal with the moneys of the company not immediately required.
(g) To pay out of any of the companys funds all expenses of management of the companys business and objects.
4. The income and property of the company whensoever derived shall be applied solely towards the promotion of the business and objects of the company as set forth in the Memorandum of Association and no portion thereof shall be paid or transferred directly by way of dividend or bonus or otherwise by way of profit to the members of the company. Provided that noting therein contained shall prevent (i) payment of specified salaries and wages and (ii).........granting to any member a pension or annuity.
It is conceded by the Commissioner of income tax that the company carried on the business of a life assurance company. The Indian Life Assurance Companies Act, 1912, applies to all persons or bodies of persons, whether corporate or incorporate, (therein referred to as life assurance companies), who carry on such business within British India except, inter alia, to any fund which the Governor-General in Council may, by notification exempt from the operation of the Act. By Notification No. 7345-97 dated 13th September, 1913, the General Family Pension Fund was exempted from the operation of that Act. It is also conceded by the Commissioner that the transactions between the company and its members are mutual dealings and that income tax is not assessable upon the surplus of the members subscriptions; this concession was made in pursuance of the decision in New York Life Insurance Company v. Styles, the principles of which, it is admitted, apply in India. It is convenient hereafter to refer to the General Family Pension Funds as the Fund.
This reference is concerned with the assessments for the years 1937-38 and 1938-39. Since they are in respect of years prior to the passing of the Indian income tax (Amendment) Act, 1939, the provisions of the Indian income tax Act, 1922 (hereinafter called the Act), as enacted before the Amendment Act of 1939, will apply to this reference.
The questions referred for the opinion of this Court are :-
1. Whether the decisions of the Assistant Commissioner of income tax, Calcutta, for the years 1928-29 to 1935-36 are binding upon the income tax Officer upon the principles of res judicata or otherwise ?
2. Whether the income, profits and gains of the General Family Pension Fund for the year ending the 31st December, 1936, should be assessed under rule 25 of the Indian income tax Rules in the form then in force ?
3. If the answer to (2) is in the affirmative, whether in applying the said rule 25, from the surplus so
Bank interest income taxable as mutuality breached by third-party banks; 5% expenditure allowed on estimation basis.
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