- Bookmark
- Share
- CaseIQ
New Asiatic Insurance Co. Ltd. v. Commissioner Of Income-Tax
Factual and Procedural Background
The assessee is a public limited company carrying on general (non-life) insurance business. For the accounting year ending 31 December 1957 (assessment year 1958–1959), the assessee credited two transfer entries to its profit and loss (revenue) account: Rs. 1,00,000 transferred from the dividend equalisation fund, and Rs. 1,55,726 transferred from the general reserve. The Income-tax Officer (Companies Circle, New Delhi) included these two sums in the assessee's taxable income, rejecting the assessee's contention that they were not income of the relevant year but merely adjustment/transfer entries.
The assessee appealed to the Appellate Assistant Commissioner (“A” Range, New Delhi), who confirmed the Income-tax Officer's order. The Income-tax Appellate Tribunal thereafter upheld the revenue's contention. The assessee then requested the Tribunal to state a case to the High Court. Two questions were referred to the High Court for opinion concerning whether each of the two transferred sums could be taken into account in computing the profits for the relevant year and be taxed.
Legal Issues Presented
- Whether, on the facts and in the circumstances of the case, the amount of Rs. 1,00,000 transferred from the dividend equalisation fund to the revenue account could be taken into consideration in computing the profits of the relevant year and taxed?
- Whether, on the facts and in the circumstances of the case, the amount of Rs. 1,55,726 shown in the revenue account by making a transfer entry from the general reserves could be taken into consideration in computing the profits of the relevant year and taxed?
Arguments of the Parties
Assessee's Arguments
- The two amounts brought into the revenue account by transfer entries are not income of the relevant accounting year; they were merely adjustment entries (transfers) and did not represent receipts received or accrued in that year.
- The character of an amount cannot be altered merely by entering it as a revenue receipt in the profit and loss account; showing these amounts as revenue receipts does not change their true character.
- Reliance was placed on the Supreme Court decision in Union Co-operative Insurance Society v. Commissioner of Income-tax ([1967] 66 I.T.R. 360) to support the proposition that debiting or crediting certain amounts in particular heads (e.g., appropriation accounts) does not alter the substantive character of the amounts for income-tax purposes.
The opinion does not contain a detailed account of specific arguments advanced by the revenue beyond the Tribunal and Income-tax Officer including the sums in assessment and upholding taxation of the transfers.
Table of Precedents Cited
| Precedent | Rule or Principle Cited For | Application by the Court |
|---|---|---|
| Union Co-operative Insurance Society v. Commissioner of Income-tax [1967] 66 I.T.R. 360 | Held that payments/adjustments made under a bonus scheme constituted deductible business expenditure under section 10(2)(xv) of the Income-tax Act, 1922, and that debiting an estimated liability in an appropriation account does not alter the character of the expenditure. | The High Court considered this precedent but distinguished it: the court held that the Union Co-operative decision did not advance the assessee's case because insurance-business profits must be computed under the Schedule rules (by virtue of section 10(7)), and therefore the ordinary principles applied in Union Co-operative were not applicable to override the statutory scheme governing insurers' accounts accepted by the Controller of Insurance. |
| Life Insurance Corporation of India v. Commissioner of Income-tax | Established that assessment of profits of an insurance business is governed exclusively by the rules in the Schedule to the Income-tax Act, 1922; the Income-tax Officer has no power to act beyond those rules and cannot generally correct errors in accounts of an insurance business where accounts are prepared under the Insurance Act and accepted by the Controller of Insurance. | The court relied on this principle to hold that once annual statements of accounts are submitted to and accepted by the Controller of Insurance, the Income-tax Officer (and the assessee) cannot go behind those accepted accounts to re-characterise entries: the accepted accounts must form the basis of assessment for insurers governed by the Schedule rules. |
| Pandyan Insurance Co. Ltd. v. Commissioner of Income-tax [1965] 55 I.T.R. 716 | Reiterated the rule from Life Insurance Corporation that the Income-tax Officer follows the accounts accepted under the Insurance Act and gives effect to the accounts as they stand; the provision is mandatory and the Income-tax Officer has no discretionary power to alter entries except as provided in the proviso. | The court treated this authority as a reaffirmation of settled law and used it to support the conclusion that the character of entries in accounts accepted by the Controller of Insurance cannot be questioned by the assessee to avoid taxation; accordingly these precedents supported answering the referred questions in favour of the revenue. |
Court's Reasoning and Analysis
The court began by construing rule 6 of the Schedule to the Income-tax Act, 1922, which governs computation of profits and gains of insurance businesses other than life insurance. Rule 6 requires that the profits and gains be taken as the balance of profits disclosed by the annual accounts required under the Insurance Act, 1938, subject only to adjustments necessary to exclude certain expenditures except those allowable under section 10 of the Income-tax Act.
The court then examined the statutory framework under the Insurance Act, 1938. Section 15 requires insurers to furnish audited accounts and statements annually to the Controller of Insurance in prescribed forms; Parts of the Insurance Act's Schedules prescribe the form of balance-sheets and profit and loss accounts. Section 21 gives the Controller power to require correction or supplementation of returns and to examine documents and officers where returns are inaccurate or defective; section 22 permits ordered investigations or revaluations by an actuary. Because of these powers and the regulatory scheme, the returns accepted by the Controller of Insurance acquire a degree of sanctity.
The Income-tax Act (by section 10(7) as read in the opinion) precludes assessment of insurance business profits by reference to general provisions (sections 8, 9, 10, 12 or 18) and mandates computation in accordance with the Schedule rules. The court emphasized that, given this statutory structure, once the insurer's annual statements have been submitted and accepted by the Controller of Insurance, the assessee cannot contend that entries shown as revenue receipts in the accepted accounts are in reality of some other character for purposes of assessment.
The court considered the Union Co-operative Insurance Society decision relied upon by the assessee, which concerned appropriation entries and the character of expenditures, but found it inapposite because of the special statutory regime governing insurance accounts. The court relied principally on the Life Insurance Corporation decision and the Pandyan Insurance decision, which established and reaffirmed that the Income-tax Officer must accept and follow accounts as accepted by the Controller of Insurance and cannot exercise a general right to re-characterise or correct such accounts beyond the powers given in the Schedule.
Applying these principles to the facts, the court concluded that the transfer entries credited to the revenue account (the Rs. 1,00,000 and the Rs. 1,55,726) as shown in the annual statements accepted by the Controller of Insurance could be taken into account in computing the profits of the relevant year and therefore be assessed to tax.
Holding and Implications
Holding: Both questions referred to the High Court were answered in the affirmative — in other words, the amounts of Rs. 1,00,000 (transferred from the dividend equalisation fund) and Rs. 1,55,726 (transferred from general reserves) as credited to the revenue account could be taken into consideration in computing the profits of the relevant year and be taxed. The decision is rendered in favour of the revenue and against the assessee.
Implications:
- Direct effect: The two transfers credited to the revenue account are taxable as part of the profits for the assessment year 1958–1959; the revenue succeeds before the High Court on the referred questions.
- Procedure and precedent: The court reiterated settled law that for insurers governed by the Schedule to the Income-tax Act, the accounts submitted to and accepted by the Controller of Insurance form the basis of assessment and their entries cannot be re-characterised by the assessee or the Income-tax Officer beyond what the Schedule and provisos allow. The opinion applies existing precedents rather than creating a new legal principle.
- Costs: The revenue was awarded its costs and counsel fee of Rs. 300.
Prakash Narain, J.:— The short question which arises in this case is the construction to be put on and the effect of rule 6 in the Schedule to the Income-tax Act, 1922, which reads as under:
“6. The profits and gains of any business of insurance other than life insurance shall be taken to be the balance of the profits disclosed by the annual accounts, copies of which are required under the Insurance Act, 1938, to be furnished to the Controller of Insurance after adjusting such balance so as to exclude from it any expenditure other than expenditure which may under the provisions of section 10 of this Act be allowed in computing the profits and gains of a business. Profits and losses on the realisation of investments and depreciation and appreciation of the value of investments shall be dealt with as provided in rule 3 for the business of life insurance.”
2. The assessee is a public limited company doing insurance business. During the accounting year ending on 31st December, 1957, relevant to the assessment year 1958–1959, it carried on the business of general insurance. In the profit and loss account of the relevant assessment year, i.e, 1958–1959, the assessee credited in its profit and loss account a sum of Rs. 1,00,000 by transfer fiom the dividend equalization fund to revenue account. A sum of Rs. 1,55,726 was also shown in the revenue account by a transfer entry from general reserve. In computing the profits of the assessee for the assessment year in question, the Income-tax Officer, Companies Circle at New Delhi, included the above sums in the assessment, rejecting the contention of the assessee that the aforesaid two sums did not represent income for the relevant assessment year and that they were merely adjustment entries effected by the transferring of the said two sums to the revenue account.
3. The assessee filed an appeal before the Appellate Assistant Commissioner, “A” Range, New Delhi, who confirmed the order of the Income-tax Officer. On further appeal, the Income-tax Appellate Tribunal also upheld the contention on behalf of the revenue. On this, the assessee moved the Tribunal for stating a case to the High Court for its opinion and now the following questions have been referred to this court for its opinion:
“Whether, on the facts and in the circumstances of the case, the amount of Rs. 1,00,000 transferred from the dividend equalisation fund to revenue account could be taken into consideration in computing the profits of the relevant year and taxed?
(2) Whether, on the facts and in the circumstances of the case, the amount of Rs. 1,55,726 shown in the revenue account by making a transfer entry from the general reserves could be taken into consideration in computing the profits of the relevant year and taxed?”
4. Mr. K.K Jain, the learned counsel for the assessee, urged that in order to make the two amounts brought by transfer entries into the revenue account assessable as income of the assessee, the said amounts must be received or deemed to be received in the accounting year or should have accrued or deemed to have accrued during the accounting year. Merely because the assessee made transfer entries does not make these amounts profits or income of the company as the character of the amount entered as revenue receipts has to be taken into account and showing these amounts as revenue receipts cannot change the character of the so-called receipts. Reliance in support of this argument was placed on the decision of the Supreme Court in Union Co-operative Insurance Society v. Commissioner of Income-tax [1967] 66 I.T.R 360.
5. In the Union Co-operative Insurance Society's case, the Supreme Court was concerned with certain disbursements made by the appellant for the calendar years 1956 and 1957. In drawing up its profit and loss account, instead of showing the actual disbursements in Form B, i.e, the profit and loss account, against the head “other expenditure”, it estimated the amounts it would be liable to pay, under a bonus scheme, and debited the same against the head “transfers to any particular funds or accounts” in Form C, i.e, the profit and loss appropriation account. The estimated sums so debited were Rs. 50,000 and Rs. 70,000, respectively, under the head “policyholders bonus fund”. for the corresponding assessment years it, however, claimed deduction of only the sum of Rs. 26,650 and Rs. 44,920, which were paid towards bonus, in computing its taxable income. It was held that the payment or adjustment of bonus against renewal from time to time made under the scheme adopted by the appellant was intended to advance its business and constituted expenditure laid out wholly and exclusively for the business of the appellant and was a permissible deduction under section 10(2)(xv) of the Indian Income-tax Act, 1922; and that merely because the appellant debited an estimated liability in its profit and loss appropriation account the character of the expenditure was not altered.
6. In our opinion, the above decision does not advance the case of the assessee at all. Under section 10(7) of the Indian Income-tax Act, 1922, the profits and gains of any business of insurance and the tax payable thereon have to be computed in accordance with the rules contained in the Schedule to that Act and not in accordance with the provisions of section 8, 9, 10, 12 or 18. Rule 6 has already been read earlier and is the one which is attracted in the present case. By virtue of section 15 of the Insurance Act, 1938, every insurer is obliged to furnish to the Controller of Insurance, the audited accounts and statements referred to in section 11 of that act. The insurer is to prepare on the expiration of every calendar year, with regard to that year—
(a) accounts and statements in respect of insurance business transacted in accordance with the regulations contained in Part I of the First Schedule, a balance-sheet in the form set out in Part II of the Schedule to that Act;
(b) in accordance with the regulations contained in Part I of the Second Schedale, a profit and loss account in the form set forth in Part II of that Schedule except where the insurer carried on business of one class only of the classes specified in clauses (a), (b) and (c) of sub-section (1) of section 7 and no other business.
7. Section 21 of the Insurance Act authorises the Controller of Insurance, if it appears to him that any return furnished to him under the provisions of that Act is inaccurate or defective in any respect, to require the insurer to correct or supplement such return, or to call upon the insurer to submit for his examination any books of account, registers or other documents or to examine any officer of the insurer on oath in relation to the return, or to decline to accept any such return unless the inaccuracy has been corrected or the deficiency supplied. By section 22 of the Insurance Act, the Controller is empowered to order investigation or revaluation to be made by an actuary appointed by the insurer for the purpose, fit is on account of this wide powers conferred on the Controller of Insurance and the sanctity that is attached to the returns accepted by him that provision has been made in the Income-tax Act precluding any further investigation and the Income-tax Officer is required to accept, subject to any adjustment he may make so as to exclude from it any expenditure other than expenditure which may under the provisions of section 10 of the Income-tax Act be allowed in computing the profits and gains of business, the accounts that have been submitted to the Controller of Insurance. Since that statute so provides, once the annual statements of accounts have been submitted by the assessee-insurance company, and the same have been accepted by the Controller of Insurance, the assessee cannot be heard to argue that the revenue receipts as shown in the statement of accounts were really not revenue receipts but had some other character.
8. In Life Insurance Corporation of India v. Commissioner of Income-tax, the Supreme Court laid down the rule that the assessment of profits of an insurance business is completely governed by the rules in the Schedule to the Indian Income-tax Act, 1922, and the Income-tax Officer has no power to do anything not contained in it; there is no general right to correct errors in the accounts of an insurance business. The court in that case was concerned with the annual average of the surplus disclosed by the actuarial valuation made in accordance with the Insurance Act.
9. The assessee in that case had debited a sum of Rs. 18,75,000 to its consolidated revenue account and credited it to the investment reserve fund. By this transfer the assessee's surplus, on which the tax had to be assessed under rule 2 of the Schedule, was reduced. The Income-tax Officer thought that this transfer made the balance in the investment reserve fund exceed the deficit disclosed on the book values of the securities in that fund by Rs. 30,420. The Income-tax Officer also checked the market value of the securities and he was of the view that the investment reserve fund was in excess by Rs. 1,89,185 of the amount which it should have had to its credit. He, therefore, directed that the transfer from the revenue account to the investment reserve fund be reduced by Rs. 1,75,000. It was common case that the accounts submitted by the assessee had been accepted by the Controller of Insurance. In these circumstances, it was held that the revenue could not go behind the accepted accounts and assessment had to be made on the basis of the statement of accounts accepted by the Controller of Insurance.
10. In Pandyan Insurance Co. Ltd. v. Commissioner of Income-tax [1965] 55 I.T.R 716, the above rule was reiterated. Sikri, J. (as hon'ble the Chief Justice then was), speaking for the court, quoted with approval the observations of Hidayatullah, J. (as his Lordship then was) in the case of Life Insurance Corporation of India, to the effect that the Income-tax Officer while acting under the rales given in the Schedule to the Income-tax Act “follows the accounts and gives effect to the entries such as they are. The provision is mandatory and the Income-tax Officer has no discretion…. The entire subject of such disparity between fact and actual entries is comprehended in the proviso.”
11. Thus, the law seems to be settled that the character of the entries cannot be gone into and the accounts as accepted by the Controller of Insurance must form the basis of assessment in case of insurers who fall within the ambit of the rules enacted in the Schedule to the Indian Income-tax Act, 1922. Accordingly, both the questions referred for our opinion are answered in the affirmative, in favour of the revenue and against the assessee. The revenue will be entitled to its costs. Counsel fee Rs. 300.
12. Questions answered in the affirmative.
Alert