1963 PLP 861 (PTD)

SRINIVASAN, J. The assessee is the Vanguard Fire and General Insurance Co. It owns a building of which a part is occupied by the company for its own business, the rest being let out for rent. In respect of the assessment for the year 1950-51, the Income tax Officer computed the income from the house property separately and since the building was new construction, he considered that the assessee was eligible for the two years' exemption provided under section 4(3)(xii) of the Act in respect of the rental income. The Commissioner of Income tax, taking the view that the Income tax Officer had acted erroneously (not only in respect of the rental income from the building but in respect of other allowances such as depreciation), issued a notice under section 33 B, of the Act. After hearing the assessee, the Commissioner set aside the order of the Income tax Officer granting exemptions and allowances and directed that the computation of the income of the assessee company should be made on the basis of the rules contained in the Schedule. This resulted in bringing to tax those amounts wrongly allowed by the Income tax Officer. A similar result followed in respect of the assessment for the year 1951-52. Thereafter the assessee appealed to the Appellate Tribunal reiterating its contention that notwithstanding the exclusion of sections 7 to 12 in the computation of income of a business of insurance, the exemptions contemplated in section 4 of the Act are still available to a business of insurance. This contention was not accepted by the Appellate Tribunal which agreed with the Commissioner of Income tax. On the application of the assessee under section 66(1) of the Act the following question stand referred to us : "Whether, on the fact and circumstances of the case, the rental income from the house property recovered by the assessee for the assessment years 1950 51 and 1951 52 is not exempt under section 4(3)(xii) of the Act notwithstanding section 10(7) of the Act?" Section 10(7) of the Act provides "Notwithstanding anything to the contrary contained in section 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." Under section 3 of the Act, the charge is laid on the total income of the previous year of every individual, Hindu undivided, family, company, etc. Section 6 lays down the several heads of income, profits or gains which shall be chargeable to income tax. It accordingly follows that the totality of the income falling under the several heads had to be computed in the case of every assessee. The method of computation of the income under each of these different heads set out in section 6 is contained in the succeeding sections, sections 7, 8, 9, 10 and

12. In the case of a company doing business, obviously there would be no head of income of "salaries". Such a company might be in receipt of income from securities, from property, from business and income from other sources. While sections 8, 9, 10 and 12 embody a set of rules for the determination of the income under each of these heads in general, in so far as the assessee doing the business of insurance is concerned, such an assessee is regarded as in receipt of income, profits and gains only under the head of business, and despite the fact that such an assessee might be in receipt of income, the computation of which would otherwise fall under section 8, 9 or 12, a special mode of determination of the profits and gains of the business of insurance is laid down in the Schedule to the Act. It should, therefore, follow from section 10(7) that the computation of the profits and gains of a business of insurance has to be done only according to the mode prescribed in the Schedule and there can be no computation of the income of such a business under the several other sections which provide for the determination of the income from securities, from property, from business or from other sources. The Schedule to the Act which contains the rules for the computation of the profits and gains of the insurance business deals both with life insurance business and business of insurance other than life insurance. Rule 6 of the Schedule lays down "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 for 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." This is the only rule which deals with the determination of the profits and gains of the assessee's business. It is noteworthy that while the balance of the profits disclosed by the annual accounts is taken as the basis, there is the further limitation that such a business would not be entitled to the allowance of any items of expenditure over and above what is laid down in section 10 of the Act which are to be allowed in the computation of the profits and gains of any business. There is a special rule for the computation of profits and losses on the realisation and depreciation and appreciation of investments. The effect of this rule so framed is that the income from whatever kind of source it may be derived by a business of insurance is regarded only as business income. The balance of profits as disclosed by the annual accounts is taken as the profits and gains of the business of insurance. What has been argued on behalf of the assessee by Mr. Swaminathan is that despite the computation of the income in the manner provided in the Schedule, the character of the income remains unaffected and is still attributable to the various heads of income set out in section

6. If the profits and gains of the business of insurance are, notwithstanding the mode of computation, derived from the various sources so that the character of the income is still capable of being ascertained, learned counsel argues the exemptions provided for in section 4 would still be available to it. This argument does not appear to be sound. If it was the intention of the Legislature to treat the income of the assessee the business of insurance--as made up of incomes from various sources, the rules would necessarily have provided for the allowances which each source of income would be entitled to by way of deduction or exemption in making up the total income of the assessee. But there is a very important part of rule 6 of the Schedule which treats the profits and gains of the business of insurance as wholly liable to be treated as business income. It is significant that in this rule no greater measure of allowance in respect of expenditure than what any business would be entitled to get under section 10 is to be allowed. That is to say, if in the annual income accounts of the assessee credit is taken for expenditures of various kinds, such items of expenditure, or quantum thereof which would be beyond the scope of the provisions of section 10 have to be excluded, and the balance of the profits disclosed by the annual accounts has to be adjusted accordingly. The special reference to the expenditure allowed under section 10 has clearly the effect of treating the entirety of the profits and gains of the business of insurance as only business income, notwithstanding that in the annual accounts the income from various sources might have been taken. The argument that the income computed under rule 6 still retains the character of its source, such as income from house property or from securities or other sources, is not supported by the rule. In Commissioner of Income tax v. Western India Life Insurance Co. Ltd. ((1949) 17 I T R 125) the question arose whether a life insurance business was entitled to the exclusion of a sum of Rs. 4,500 under the third proviso to section 4(1) of the Act on the ground that that income was derived from foreign securities, that is, it accrued or arose outside British India and was not brought into British India. The High Court had allowed the deduction and the Department contended that the computation of the income made under the Schedule was of a notional and not of an actual income, and that, therefore, the third proviso to section 4(1) had no application. This contention was accepted by the Judicial Committee. That the rules in the Schedule embody an artificial method of calculating the profits and gains of an insurance business for the purpose of section 10 was so decided in Lakshmi Insurance Co. Ltd. v. Commissioner of Income tax ((1950) 18 I T R 984). The question that arose there was somewhat different in that it was whether interest received by a business of life insurance from tax free securities was liable to be included for the purpose of super tax. That case contemplated the position where a business of insurance had other sources of income not related to its business, but in so far as the computation of the profits and gains of the business is concerned, the decision clearly indicates that that income is only business income. In Commissioner of Income tax v. B. B. and C. I. Railway Cooperative Society ((1949) 17 I T R 509, 512) Chagla C. J. observed : " . . it will be noticed that, instead of an insurance company making its return of income under the various heads as laid down in section 6, it has got to submit one unit of income, a sort of notional artificial income, as provided in the Schedule to the Act." Again in Commissioner of Income tax v. Crown Life Insurance Co. ((1956) 30 I T R 365) it was held that where the assessee derived income from securities as profits or gains from the insurance business and not of any other business, and as the profits or gains from insurance business could only be computed in accordance with the Schedule to the Income tax Act, and not in accordance with section 12 the income could not be assessed under section

12. It seems to us accordingly that the contention of the assessee in the present case that despite the mode of computation enjoined by the Schedule, the income is still attributable to the several heads of income and is consequently eligible for the various exemptions and deductions contemplated in the other parts of the Act cannot be supported by authority. We answer the question in the affirmative and against the assessee. The assessee will pay the costs of the department. Counsel's fee Rs.

250. Question answered in the affirmative.