The main legal point established in the judgment is the application of rule 8 and its interaction with other rules in determining the computation of profits and gains for non-resident insurance companies under the Indian Income-tax Act 1922.

Sir John Beaumont.-This is an appeal from a judgment and order of the High Court of Judicature at Bombay, dated the 6th October, 1944, upon a reference made to that Court under section 66(1) of the Indian Income-tax Act, 1922, raising. two questions relating to the computation of the profits and gains of the Bombay branch of the respondent company (hereinafter called "the assessees").

The assessees are a company incorporated in the Straits Settlement having their head office at Singapore and carrying on life insurance business in British India through their branch office at Bombay. It is, therefore, a company not resident in British India. The year of assessment is the year 1939-40, and the previous year, that is the year of charge, is the calendar year 1938. The amendments to the Indian Income-tax Act 1922, made by the Indian Income-tax (Amendment) Act 1939, which came into force on the 1st April, 1939, apply to the year of assessment. The Act of 1922 as so amended by the Act of 1939 will hereinafter be referred to as " the Act."

It follows from the above that the problem for determination relates to the proper method of computing the profits and gains of the Indian branch of a nonresident life insurance company, and such problem arises, not under rules 25 and 35 of the old Indian Income-tax Rules, but under the rules contained in the schedule to the Amending Act of 1939.

Section 3 of the Act which is the charging section draws no distinction between resident and non-resident assessees. Section 4(1) provides that the total income of any previous year of any person includes all income, profits and gains from whatever source derived which (a) are received or are deemed to be received in British India in such year by or on behalf of such person, or (c) if such person is not resident in British India during such year, accrue or arise or are deemed to accrue or arise to him in British India during such year. Income is deemed to accrue or arise under the provisions of section 42 of the Act. Section 10(7) of the Act enacts that:

"Notwithstanding anything to the contrary contained in sections 8, 9, 10, 12 or 18, the profits and gains of any business of insurance and the tax payable thereon shall be computed in accordance with the rules contained in the schedule to this Act."

The rule-making power is contained in section 59 of the Act.

The schedule is headed "Rules for the computation of the profits and gains of insurance business" and the following rules or portions of rules are relevant in this appeal:

"1. In the case of any person who carries on, or at any time in the preceding year carried on, life insurance business, the profits and gains of such person from that business shall be computed separately from his income, profits or gains from any other business.

2. 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 actual valuation made for the last inter-valuation period ending before the year for which the assessment is to be made, so as to exclude from it any surplus or deficit included therein which was made in any earlier inter-valuation period and any expenditure other than expenditure which may under the provisions of section 10 of this Act be allowed for in computing the profits and gains of a business, whichever is the greater.

(3) In computing the surplus for the purpose of rule 2,-

(a) one half of the amounts paid to or reserved for or expended on behalf of policy-holders shall be allowed as a deduction."

The provisos to this rule are not relevant.

"4. Where for any year an assessment is made in accordance with the annual average of a surplus disclosed by a valuation fort an inter-valuation period exceeding twelve months, then, in computing the tax payable for that year, credit shall