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High Court Of Delhi
LAKSHMI INSURANCE COMPANY LIMITED,NEW DELHI - Appellant
Versus
COMMISSIONER OF INCOME TAX - Respondent
I.T.R. 47 of 1966
Decided On : 08/21/1970
INCOME TAX - Compensation paid to insurer for divesting of management under Life Insurance (Emergency Provisions) Act, 1956 - Whether income or capital receipt - Held, compensation is for loss of capital asset and not income.
Fact of the Case:
The assessee, an insurance company, was divested of its management under the Life Insurance (Emergency Provisions) Act, 1956, and was paid compensation for the same. The question before the court was whether the compensation was income or a capital receipt.
Finding of the Court:
The court held that the compensation was not income, but a capital receipt. It reasoned that the divesting of management was a divesting of property, and that the compensation was therefore for the loss of a capital asset.
Issues: Whether the compensation paid to the assessee company for the divesting of its management under the Life Insurance (Emergency Provisions) Act, 1956, was income or a capital receipt.
Ratio Decidendi: The court applied the following principles in reaching its decision: * The first consideration before holding a receipt to be profits or gains of business within section 10 of the Income-tax Act was to see if there was a business at all of which it could be said to be income. * The primary condition of the application of section 10 was that tax was payable by an assessee under the head "profits and gains of a business" in respect of a business carried on by him. * Where an assessee did not carry on business at all, the section could not be made applicable, and any compensation for requisition of assets that he received could not bear the character of profits of a business. * The business denoted an activity with the object of earning profit. * To say that a business was being carried on meant no more than that profit was being earned by a process of production. * The measure and method of its payment was not decisive of the character of a payment of compensation. * Compensation paid to the assessee cannot partake of the character of profit if business has not been done by the assessee.
Final Decision: The court answered the question referred to it in the negative, holding that the compensation paid to the assessee company was not income.
( 1 ) AT the instance of the Lakshmi Insurance Co. Ltd. , New Delhi, hereinafter referred to as the "assessee company". the Income-Tax Appellate Tribunal has referred the following question for the opinion of this Court:
"whether on the facts and in the circumstances of the case. the Tribunal rightly held that the amount of Rs. 56,028 represented assessee company s income liable to tax ?"
( 2 ) THE said amount was paid to the assessee company by the Central Government in accordance with the provisions of section 7 of the Life Insurance (Emergency Provisions) Act, 1956 in the assessment year 1957-58, the previous year having ended on March, 31, 1957. The assessee company had been carrying on life insurance business up to January 18, 1956. On January 19, 1956, the President of India promulgated the Life Insurance (Emergency Provisions) Ordinance, 1956 (No. I of 1956) which was replaced on March 21, 1956 by the Life Insurance (Emergency Provisions) Act, 1956 (No. IX of 1956 ). The Ordinance and the Act were passed to provide for the taking over, in the public interest, of the management of the life insurance business pending nationalisation thereof. The assessee company s business consisted wholly of the business of life insurance and, therefore, the whole of its business was "controlled business" as defined in the said Act. By section 3 of the said Act, the management of the assessee company, amongst others, vested in the Central Government and this section provided that pending the appointment of a Custodian for the controlled business of any insurer, the persons in charge of the management of such business immediately before the appointed day were to be in charge of the management of business for and on behalf of the Central Government and the business was to be carried on by them subject. inter alia, to such directions as may be given by the Central Government. Sub-section (2) of this section terminated as on the appointed day any contract, express or implied, providing for the management of the controlled business of an insurer made between the insurer and any person in charge of the management of such business immediately before the appointed day. Sub-section (3) contained prohibition and regulations against the insurer with respect to making of payments or granting loans; incurring any expenditure from the assets appertaining to the controlled business ; transferring or disposing of the assets of the insurer; investment of the monies of the insurer; acquisition of immovable property ; contracts of service or agency and any other transaction relating to the controlled business of the insurer.
( 3 ) SECTION 7 of the said Act provided for payment of compensation for management of the controlled business vesting in the Central Government in these words:
"the amount of compensation payable in respect of the vesting in the Central Government of the management of the controlled business of an insurer shall, for every month during which the management thereof remains vested in the Central Government, be a sum which is equivalent to one- twelfth of the annual average of the share of the surplus allocated to share-holders as disclosed in the abstracts prepared in accordance with Part II of the Fourth Schedule to the Insurance Act in respect of the last two actuarial investigations relating to the controlled business as at dates earlier than the first day of January, 1956. Provided that if in respect of the controlled business of an insurer no such surplus as is referred to in this sub-section has been allocated to share-holders either because there are no shareholders or for any other reason, the compensation shall be payable at the rate of one rupee per month for every two thousand rupees or part thereof of the premium income of the insurer relating to his controlled business during the year 1954. "section 8 provided for the payment and distribution of the compensation and it is in these terms:
" (1) The amount of comp
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