PETITIONER:
LIFE INSURANCE CORPORATION OF INDIA,BOMBAY
Vs.
RESPONDENT:
COMMISSIONER OF INCOME TAX, BOMBAY
DATE OF JUDGMENT: 19/02/1996
BENCH:
VERMA, JAGDISH SARAN (J)
VENKATASWAMI K. (J)
CITATION:
1996 AIR 1720 JT 1996 (2) 336
1996 SCALE (2)258
ACT
HEADNOTE
JUDGMENT
JUDGMENTJ.S.VERMA.J. :
A reference was made by the Income-tax Appellate Tribunal under Section 256(1) Of the Income-tax Act, 1961, at the instance of the assessee, to the Bombay High Court for deciding seven questions of law arising out of the Tribunal’s order. The first six questions were answered by the High Court in favour of the assessee, while the seventh question was answered against the assessee. This appeal by special leave is by the assessee challenging the High Court’s decision only in respect of the seventh question decided against the assessee. That question is as under:
"Whether on the fact and in the
circumstance of the case,the sum of
Rs.23,959/-being the refund of
income-tax received by the
Corporation during the
undervaluation period in respect of
the income-tax upto the assessment
year 1956-57 of the life insurance
bus insurers of the erstwhile
insurers whose business had been
taken over by the Corporation,
should be allowed as a deflection
while computing the income of the
assessee under Rule 2(1)(b) of the
First Schedule to the Income-tax
Act, 1961?" In this appeal, no further reference to the other six questions is necessary.
The assessee Life Insurance Corporation of India (Corporation) is a statutory Corporation established under the Life Insurance Corporation Act, 1956 with effect from 1st September, 1956. The relevant assessment year is 1963-64 for which the accounting period ended on 31.3.1963. During the relevant assessment year, the assessee received refunds of income-tax of 3,02,90,898/- in the life insurance business. The assessee contended before the Income-tax officer that the entire amount of refund was not includable in the revenue account and treated as profits and gains of the assessee for the assessment year under consideration. The Income-tax Officer rejected the contention and included the entire amount in the revenue account. In the assessee’s appeal, the Appellate Assistant Commissioner held that out of the amount of Rs. 3,02,90,898/ included in the revenue account, the sum of Rs. 2,73,50,939/- only was to be excluded but the balance amount had to be included. The assessee as well as the revenue preferred appeals to the Tribunal.
Before the Tribunal, it was contended by the revenue that in computing the profits of the assessee under Section 44 read with Rule 2(1)(b) of the First Schedule to the Income-tax Act, 1961, the Income-tax Officer can make only such adjustments to the surplus or deficit disclosed by the actuarial valuation which are permissible under the rule; that the rule permits adjustment by way of exclusion of any surplus or deficit included therein which was made in any earlier inter-valuation period relating to the assessee itself and not to that of its predecessor in the business. It was contended that a part of the refund Of taxes received by the Corporation had not been included in the surplus of the earlier inter-valuation period relating to the assessee but of its predecessor since the refund was in respect of the taxes paid by the predecessor prior to the formation of the Corporation on 1st September, 1956. It was contended that the words "included therein" used in Rule 2(1)(b) indicated that the surplus or deficit in any earlier intervaluation period must relate to that of the Corporation and not its predecessor. The decision of the Bombay High Court in Bombay Mutual Life Assurance Society Ltd. vs. Commissioner of Income-tax. Bombay City, [1951] 20 ITR 189 was distinguished. The contention of the assessee was that the payment of taxes which gave rise to the refund having been made prior to the formation of the Corporation, by the predecessor, there was no occasion for the surplus or deficit in any earlier inter-valuation period of the Corporation being required to be looked into for the purpose. Reliance was placed on Section 7 of the Life Insurance Corporation Act, 1956 (for short "the LIC Act") to contend that the Corporation stepped into the shoes of its predecessor for all practical purposes including the legal consequences flowing from the refund received by the Corporation as the successor of its predecessor in business.
The Tribunal accepted the contention of the revenue and held as under :-
".........But only such portion of
the refunds which has been included
in the surplus or deficit made in
the earlier intervaluation
period alone has to be excluded. On
the analysis of the refunds and the
assets to which they related, the
Appellate Asstt. Commissioner found
that this sum of Rs.2,73,50,939/-
only had entered into the surplus
of the earlier intervaluation
period out of Rs.3,02,90,898/-.
Therefore, only that portion is
allowable u/s.2(1)(b) and has been
rightly allowed by the Appellate
Asstt. Commissioner. Disallowance
of the balance of the tax refund
was quite in order because they did
not come out of the assets which
were included in the surplus of the
earlier inter valuation period."
The above-quoted question was referred to the High- Court for its decision at the instance of the assessee Corporation, under Section 256(1) of the Income-tax Act. The High Court upheld the view taken by the Tribunal. That decision of the High Court is reported in [1978] 115 ITR 45 (Life Insurance Corporation of India. Bombay vs. Commissioner of Income-tax. Bombay City-III). The relevant part of the High Court’s judgment, rejecting the assessee’s contention, is as under :-
"It is difficult to accept this
submission. Rule 2(1)(b) is an
artificial mode of computation of
profits of an assessee who carries
on life insurance business. These
profits are arrived at by first
determining the annual average of
the surplus after adjusting the
surplus or deficit as disclosed by
the actuarial valuation made in
accordance with the Insurance Act,
1938, in respect of the last inter-
valuation period. What is
contemplated by rule 2(1)(b) is
that if there is a surplus of the
earlier inter-valuation period,
which was entered in the accounting
while finding out the surplus for
the intervaluation period in
question, then that surplus has to
be deducted for the purposes of
finding out the surplus in respect
of the assessment year in question.
It is necessary to remember that
when an actuarial valuation is made
by an actuary on behalf of the
company, first Of all a
consolidated revenue account is
prepared, which would show on the
one side the amount of life
insurance fund at the end of the
period for which the consolidated
revenue account is prepared. The
actuary then finds out what is the
net liability of the company under
the current policies and after
fixing the net liability on the
current policies, he deducts that
liability from the life assurance
fund and the result is the surplus.
If this is the concept of the
surplus to be found on actuarial
valuation, then it is obvious that
before a surplus is asked to be
deducted on the ground that that
part of the surplus was carried
forward from the earlier inter-
valuation period, it must be found
as a fact that what is now sought
to be deducted was shown as a
surplus of the earlier inter-
valuation period. Rule 2(1)(b)
operates in respect of the
particular assessee whose profits
of the life insurance business are
under computation. Accepting the
contention of the learned counsel
for the assessee would mean that we
would have to add to the language
of rule 2(1)(b) so that it should
be so construed that what is to be
taken into account is not the
actual surplus which has been
carried forward into the inter-
valuation period in question but
also some amount which must be
deemed to have been carried forward
into the surplus of the inter-
valuation period. It is, no doubt,
true that the legal effect of
section 7 of the Life Insurance Act
is that the assets of the insurer
who carried on the life insurance
business are vested in the Life
Insurance Corporation, but the
legal effect of that vesting cannot
be imported into the provisions of
rule 2(1)(b) where a precondition
has to be satisfied before a
deduction in respect of the surplus
is made, the precondition being
that that surplus has to be shown
as a surplus Of the previous inter-
valuation period. There is no scope
for reading into rule 2(1)(b) any
additional powers for the income-
tax authorities to so amend the
figure of surplus that is different
from the actual surplus which is
shown on the basis of the actuarial
valuation. ........"
(at page 55)
In substance, the High Court declined to give effect to Section 7 of the LIC Act on its view that the provision in Rule 2(1)(b) alone was decisive and it could not be given effect to, it the legal effect of Section 7 of the LIC Act is to be taken into account. Apparently, the High Court took the view that Rule 2(1)(b) cannot be reconciled with Section 7 of the LIC Act.The question is whether this view is correct.
The relevant provisions in the Life Insurance Corporation Act, 1956 are as under:-
"7. Transfer of assets and
liabilities of existing insurers
carrying on controlled business. -
(1) On the appointed day* there
shall be transferred to and vested
in the Corporation all the assets
and liabilities appertaining to the
controlled business of all
insurers.
(2) The assets appertaining to
the controlled business of an
insurer shall be deemed to include
all rights and powers, and all
property, whether movable or
immovable, appertaining to his
controlled business, including, in
particular, cash balances, reserve
funds, investments, deposits and
all other interests and rights in
or arising out of such property as
may be in the possession of the
insurer and all books of account or
documents relating to the
controlled business of the insurer;
and liabilities shall be deemed to
include all debts, liabilities and
obligations of whatever kind then
existing and appertaining to the
controlled business of the insurer.
xxx xxx xxx
___________
* 1st September, 1956."
"9. General effect of vesting
of controlled business. -(1)..
(2) If on the appointed day
any suit, appeal or other legal
proceeding of whatever nature is
pending by or against an insurer,
then, in so far as it relates to
his controlled business, it shall
not abate, be discontinued or be in
any way prejudicially affected by
reason of the transfer to the
Corporation of the business of the
insurer or of anything done under
this Act, but the appeal or other
proceeding may be continued,
prosecuted and enforced by or
against the Corporation."
Sub-section (1) of Section 7 clearly provides that from the appointed day in 1956, all the assets and liabilities appertaining to the controlled business of all insurers, are to be transferred and vested in the Life Insurance Corporation of India. Sub-section (2) of Section 7 enacts the legal fiction by virtue of which "all rights and powers, and all property, whether movable or immovable, appertaining to his controlled business, including, in particular, cash balances, reserve funds, investments, deposits and all other interests and rights in or arising out of such property as may be in the possession of the insurer and all books of accounts or documents relating to the controlled business of the insurer" were deemed to be the assets of an insurer which came to be transferred and vested in the Corporation from the appointed day, and so also all the liabilities. In other words, from the appointed day, the Corporation stepped into the shoes of all such insurers. Section’9 provides for the general effect of vesting of controlled business and sub-section (2) therein expressly enacts that the Corporation stepped into the shoes of the predecessorinsurer from the appointed day in respect of any suit, appeal or other legal proceeding of whatever nature pending by or against an insurer.
This legal fiction enacted in Section 7(2) includes within the assets transferred and vested in the Corporation of all such insurers any amounts which were due to the predecessor-insurer and which remained to be recovered. Section 9(2) enabled the Corporation to prosecute any legal proceeding of whatever nature for the purpose of recovering amounts due to the predecessor on the appointed day. There is no dispute that any liability of the insurer also stood transferred similarly to the Corporation. Accordingly, if any amount remained due towards taxes to be recovered from the predecessor, it was a liability transferred to the Corporation and the Corporation became liable to discharge the same. It is also not in dispute that it is only by virtue of this character of the Corporation that the amount refunded as excess tax paid prior to the appointed day by the predecessor came to be refunded to the Corporation to whom all the assets of the predecessor stood transferred and vested from the appointed day in 1956. It is also not disputed that the opening balance inherited by the Corporation from the predecessor on the appointed day had to be deducted under Rule 2(1)(b) and the amount shown as such was so deducted. It is further not disputed that if this excess amount of tax paid by the predecessor had not been so paid and the question of refund did not arise, then this extra amount would have formed a part of the inherited opening balance with the Corporation and deduction of the same would have been given under Rule 2(1)(b). The question is : Whether, the refund having been made to the Corporation only because of the provision in Section 7 of the LIC Act, the same result should not follow on the wording of Rule 2(1)(b) ?
Rule 2(1)(b) of the First Schedule to the Incometax Act, 1961 is as under:-
"2. Computation of profits of
life insurance business. -(1) The
profits and gains of life insurance
business shall be taken to be the
greater of the following
(a).............
(b) the annual average of the
surplus arrived at by adjusting the
surplus or deficit disclosed by the
actuarial valuation made in
accordance with the Insurance Act,
1938 (4 of 1938), in respect of the
last inter-valuation period ending
before the commencement of the
assessment year, so as to exclude
from it any surplus or deficit
included therein which was made in
any earlier inter-valuation period
and any expenditure or allowance
which is wot deductible under the
provisions of [Sections 30 to 43-
Al* in computing income chargeable
under the head "Profits and gains
of business or profession".
------------
*Subs. by Finance (No. 2) Act of
1967 (w.e.f. 1-4-1967).
It is obvious that in the surplus or deficit in any inter-valuation period relating to the Corporation which came to be formed only on the appointed day in 1956, this amount could not be reflected since it related to a period prior to the formation of the Corporation. The law does not contemplate or require the performance of an impossible actlex non cogit ad impossibilia. It is now to be seen whether the expression "included therein" in Rule 2(1)(b) is alone sufficient to negative the logical legal effect of Section 7 of the LIC Act.
The legal fiction enacted in Section 7(2) of the LIC Act must be taken to its logical conclusion. For this reason, the amount of refund made to the Corporation because of the excess tax paid by the predecessor prior to the appointed day on which the Corporation was formed, must form a part of the assets of the predecessor which came to be transferred and vested in the Corporation on the appointed day in 1956 on the formation of the Corporation. For the same reason, this amount of refund, even though made later, must also be deemed to be included in the inherited opening balance shown by the Corporation in the earlier intervaluation period which undisputedly had to be deducted under Rule 2(1)(b). It follows that because of this legal fiction being required to be taken to its logical conclusion, the amount so refunded to the Corporation must be deemed to be included in the earlier inter-valuation period of the Corporation. On this conclusion, the requirement of Rule 2(1)(b) is satisfied since the amount is deemed to be included in the earlier inter-valuation period of the Corporation itself. The expression "included therein" which is the basis of the view taken by the Tribunal and the High Court and is also the contention of the revenue before us, must be construed to mean also the amount deemed to be included therein because of the legal effect of Section 7 of the LIC Act.
The High Court failed to appreciate the true import of the decision in Bombay Mutual Life Assurance Society Ltd vs. Commissioner of Income-tax. Bombay City, [1951] 20 ITR 189, to take the view that the decision turned on the application of Rule 3(b) of the Schedule which made certain provisions for the purposes of computing surplus for the purposes of Rule 2; and that the latter part of Rule 3(b) was given effect to because it was found that that amount was liable to be included as a part of the surplus. The significance of that decision in the present context is in the observations of Chagla, C.J. speaking for the Bench, as under :-
"With regard to these two sums we
would like to add that as we are
holding that these two amounts form
part of the surplus and therefore
liable to tax although in the
accounts of the company, they have
not been shown as forming part of
the surplus, Sir Jamshedji
apprehends that when in fact these
amounts are shown as part of the
surplus in future the taxing
authorities will tax this amount
over again. Now it is clear that
when you determine the surplus for
the purposes of Rule 2(b) you have
to deduct from it any surplus or
deficit included therein which was
made in any earlier intervaluation
period. Therefore if the
Department proposes to tax this sum
of Rs.2,72,946 and also the sum of
Rs.1,00,000 it can only be on the
basis that these two amounts formed
part of the surplus. Therefore, in
future if these two amounts are
shown in the actuarial valuation as
part of the surplus they would not
be liable to tax over again as the
position in law is clear and we
have no doubt that the Department
will act in accordance with the
directions we are giving in this
reference."
(at page 198)
The principle enunciated in the above passage to be noticed is :
"........in future if these two
amounts are shown in the actuarial
valuation as part of the surplus
they would not be liable to tax
over again as the position in law
is clear. ....." This aspect has been overlooked by the High Court.
A harmonious construction of the provisions of the LIC Act, particularly Section 7 therein, and Rule 2(1)(b) of the First Schedule to the Income-tax Act, 1961, requires this construction to be made. Unless this is done, full effect cannot be given to Section 7 of the LIC Act, for which we find no reason. Since the requirement of harmonious construction leads to this result which is also in consonance with logic and justice of the cause, we do not find any reason to take a different view.
Consequently, the appeal is allowed. The judgments of the High Court and the Tribunal are set aside. The aforesaid question is answered in favour of the assessee and against the revenue. No costs.