P (PLP)

MUHAMMAD MUNIR, C. J.‑This is a case stated by the Income‑tax Appellate Tribunal under section 66 (1) of the Income -tax Act, the question referred being "Whether in the circumstances of this case the sum ' of Rs. 19,703, representing interest on tax free securities of the Central Government, was rightly assessed to super‑tax". The necessary facts have been set out in the statement and need not be recapitulated. Suffice it to say that the assessee which is a company carrying on the business of life insurance received during the previous year for the year of assessment 1939‑40 a sum of Rs. 19,708 as interest on tax free securities of the Central Government. The Department has taken the view that this amount is liable to be included in the total income of the assessee for the assessment year in question while the assessee's contention is that the amount cannot be so included and is exempt both from income‑tax and super‑tax. Under section 55 of the Income‑tax Act, in addition to the income‑tax charged for any year, there shall be charged for that year, in respect of the total income of a company an additional duty of income‑tax, called super‑tax, at the rate laid down 'for that year by Act of the Central Legislature. By section 56 of the same Act the total income of any company shall, for the purposes of super‑tax, be the total income as assessed for the purposes of Income‑tax. "Income" under section (2) (6) (c) includes the profits of any business of insurance carried on by a mutual insurance company computed in accordance with Rule 9 in the Schedule: and "total income" under section 2 (15) read with section 4 means the total amount of income, profits and gains of a person from whatever source derived. The heads of income chargeable to income‑tax mentioned in section 6 are (i) salaries, (ii) interest on securities, (iii) income from property, liv) profits and gains of business, profession or vacation and (v) income from other sources. Section 10 defines what the profits and gains of business are and says that in the case of an insurance company 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 the Act. The rules in the Schedule deal with the manner in which the profits and gains of insurance business are to be computed, the governing rule being that the profits and gains of such 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 disclosed by the actuarial valuation made for the last inter‑valuation period ending before the year for which the assessment is to be made, after adjusting such surplus 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 the Act be allowed for in computing the profits and gains of a business, whichever is the greater. Rule 3 gives certain directions in computing the surplus for the purposes of Rule 2 and in clause (c) directs that the whole amount of interest received in respect of any securities of the Central Government which have been issued or declared to be income‑tax free shall be deducted. It is thus clear that the provisions of clause (c) in Rule 3 are relevant only for the purpose of computing the surplus which is mentioned in clause (b) of Rule 2, and that the Rules in the Schedule are merely an artificial method of calculating the profits and gains of insurance business for the purposes of section

10. Where, therefore, an insurance company also receives income from interest on securities, such income has to be added to the amount of profits and gains from the business of insurance for the purposes of assessment of income, though where the interest received is from any security of the Central Government, which is income‑tax free, no income‑tax is payable on it by reason of the second proviso to section

8. But for this exemption an insurance company would be liable to pay income=tax on interest on securities in exactly the same way as it is liable to pay income‑tax on income from property where it owns property. Thus, in computing the total income of an insurance company the profits and gains of the business have to be calculated in accordance with the rules in the Schedule but, besides the income from such business, the company has also to pay income‑tax on all other sources of income mentioned in section 6, whether such source be securities or property or some other source, though, as already pointed out, if the interest accrues on securities of the Central Government, which are free from income‑tax, no income‑tax is payable on it. Section 16 directs that in computing the total income of an assessee any sums exempted under the second proviso to section 8 shall be included. It is, therefore, evident that in computing the total income of an assessee, whether it be a company carrying on insurance business or not, the interest received on any security of the Central Government which is income‑tax free must be included; and since under section 55 super‑tax has to be levied on the total income, it is obvious that interest on securities of the Central Government which are free from income‑tax are subject to the incidence of super‑tax. This is made further, clear by section 58 according to which in the application of the Act to super‑tax all provisions of the Act relating to assessment shall apply but that the concession referred to in the second proviso to section 8 shall not apply. As the Appellate Tribunal has pointed out, the rules in the Schedule have nothing to do with any exemption and have been framed merely with a view to computing the profits and gains of insurance business for the purposes of section

10. Such profits and gains however, are, merely, one head of income, and besides income from business an assessee may have other heads of income, as for instance, interest on securities, income from property, and income from other sources. In computing the total taxable income, income under all these heads has got to be added. Where the assessee also carries on the business of insurance its profits and gains from that business have to be calculated in accordance . with the rules in the Schedule though by reason of the second proviso to section 8, it is not liable to pay income‑tax on the securities of the Central Government which are free from income‑tax. But. when total amount has to be computed, whether for purposes of income‑talc or for purposes of super‑tax, the sum exempted under the second proviso to section 8 must be included. This can only mean that in computing the total income of an assessee that is carrying on the business of insurance and has also other sources of income, the income from the latter sources including interest on securities must be added to the amount of profits and gains of insurance business. We are, therefore, of the view that the sum of Rs. 1978 was rightly assessed to super‑tax and that the answer to the question referrer, must be in the affirmative. K. M. A. Reference Answered.