General Family Pension Fund vs The Commissioner Of Income-Tax, West Bengal

Rewritten Version Notice: This is a rewritten version of the original judgment.

Court: Supreme Court of India

Case Number: Civil Appeal No. 144 of 1953

Decision Date: 1 November 1954

Coram: Mehar Chand Mahajan, Ghulam Hasan, Natwarlal H. Bhagwati, Venkataram Ayyar

The case titled General Family Pension Fund versus The Commissioner of Income-Tax, West Bengal, was decided on 1 November 1954 by the Supreme Court of India. The judgment was authored by a bench comprising Justices Mehar Chand Mahajan, Ghulam Hasan and Natwarlal H. Bhagwati, with Justice Ayyar T. L. Venkatarama also listed among the members. The decision is reported in 1955 AIR 50 and 1955 SCR (1) 822. The substantive provision relied upon was Section 10(7) of the Indian Income-Tax Act, XI of 1922, together with the schedule containing Rule 2(a) and Rule 2(b) as published in 1939. The Court noted that, under these rules, the profits and gains of a life-insurance business for the assessment years 1943-44, 1944-45, 1945-46 and 1946-47 must be computed separately under each rule, and tax is to be levied on the greater of the two resulting amounts. The headnote of the decision is numbered 823. The matter arose on civil appeal No. 144 of 1953, which was an appeal against the judgment and order dated 28 November 1951 of the High Court of Judicature at Calcutta, filed under Reference No. 40 of 1950. Counsel for the appellant was identified as the representative appearing with a colleague, while the Solicitor-General of India, appearing with counsel, represented the respondent.

The appellant in the appeal was a company that originated in 1870 as an unregistered association and was subsequently registered in 1906 under the Indian Companies Act. The company's exclusive business was the granting of terminable pensions or annuities that depended on human life and were payable to the subscribers or their nominees. The dispute before the Supreme Court concerned the assessment of the company's income-tax liability for the four fiscal years mentioned above. The Court referred to Section 2(11) of the Insurance Act, 1938, which defines “life insurance business” as the business of effecting contracts of insurance upon human life, including the granting of annuities. Consequently, the Court held that the appellant’s activity fell within the meaning of life-insurance business under that provision. The Court further explained that it would be erroneous to use the computation derived under Rule 2(b) as the basis for the computation required under Rule 2(a). Moreover, the Court observed that a mere statement made by a departmental representative of the Income-Tax Department to the tribunal, as recorded in the tribunal’s order, could not be treated as a factual finding by the tribunal.

The Insurance Act of 1938 defined “life insurance business” as the business of making contracts of insurance on human life and expressly included the granting of annuities on human life within that definition. Consequently, the appellant Company’s activity of granting terminable pensions or annuities to its subscribers and their nominees qualified as life insurance business under section 2(11) of the Insurance Act. Section 10(7) of the Indian Income-Tax Act required that the profits and gains of any insurance business be computed according to the rules set out in the Schedule to that Act. Rule 2 of the Schedule provided that the profits and gains of life-insurance business could be measured in either of two ways: (a) by taking the gross external incomings of the preceding year from that business and subtracting the management expenses of the same year, or (b) by taking the annual average of the surplus obtained by adjusting the surplus or deficit disclosed by the actuarial valuation for the last inter-valuation period that ended before the year for which assessment was to be made, after excluding any surplus or deficit from earlier inter-valuation periods and any expenditure that could be allowed under section 10 of the Act. The higher of these two amounts was to be treated as the assessable profit. Rule 5(ii) further explained that “gross external incomings” comprised, among other things, profits arising from the sale or granting of annuities. These rules had come into force in 1939.

In 1945 the Income-tax Officer began assessing the appellant Company’s profits for the fiscal years 1943-44, 1944-45 and 1945-46. By virtue of Rule 2, the officer was obliged to calculate the profit under both heads (a) and (b) and to adopt whichever figure was larger. The precise method employed by the officer could not be ascertained from the record because the assessment orders themselves were not produced. However, the Tribunal’s order dated 5 March 1949 indicated that the officer first arrived at a profit figure under Rule 2(b) by relying on an actuarial valuation and making certain adjustments. Subsequently, using the figure obtained under Rule 2(b), the officer derived a profit under Rule 2(a) after making additional adjustments. Those orders were dated 14 July 1945.

The appellant Company appealed those orders to the Appellate Assistant Commissioner. In his order dated 30 November 1945, the commissioner held that the annuity business referred to in Rule 5(ii) was “purely annuity business,” that the Company’s business represented “an admixture between an annuity and life insurance,” and that the Income-tax Officer had failed to conduct an adequate investigation into the nature of the Company’s business. Accordingly, he remanded the matter for further enquiry and for the issuance of fresh assessment orders.

Before the further enquiry could be completed, the assessment for the year 1946-47 also had to be made. By an order dated 23 December 1946, the Income-tax Officer determined the assessable profits for all four years, concluding that there was no element of insurance in the Company’s business and that the computation should be made under Rule 2(a). He then assessed the profits under Rule 2(a) in precisely the same manner he had used in his earlier order of 14 July 1945: he first took the annual adjusted surplus calculated according to the actuarial valuation under Rule 2(b), made certain adjustments, and adopted that amount as the figure under Rule 2(a). The Tribunal later held that these orders were clearly erroneous. It found the statement that the policies contained no element of life insurance to be mistaken and unsupported. If the Company’s annuity business were not life-insurance business, then Rule 2(a) would have no application. The Income-tax Officer was also in error by using the figures derived under Rule 2(b) as the basis for computing the assessable profit.

In the assessment year 1946-1947 the Income-tax Officer also had to determine the assessable profits. By an order dated 23 December 1946 the Officer fixed the assessable profits of the Company for each of the four years under review. In that order he declared that the Company’s business contained no element of insurance and therefore directed that the profit calculation be made pursuant to Rule 2(a). He then applied Rule 2(a) in exactly the same way he had applied it in his earlier order of 14 July 1945. Specifically, he took the annual adjusted surplus that had been computed by means of an actuarial valuation under Rule 2(b), made certain further adjustments, and then adopted that resulting figure as the profit under Rule 2(a). The Court observed that these orders were plainly erroneous. The Tribunal had correctly held that the assertion that the policies lacked any life-insurance component was mistaken and that the assertion had not been supported by any evidence. If the Company’s annuity business were not in fact life-insurance business, then Rule 2(a) would have no relevance at all. Moreover, the Income-tax Officer erred by using the figures derived under Rule 2(b) as the basis for the Rule 2(a) computation without conducting an independent enquiry into the material required by Rule 2(a). The Company appealed this determination to the Appellate Assistant Commissioner. By an order dated 26 September 1947 the Commissioner held that the annuity business of the appellant was in fact life-insurance business and that the profits therefore had to be computed under Rule 2. He further observed that, because there was no profit and loss statement for the preceding year, the Income-tax Officer could rely only on the data supplied by the actuarial valuation as a guide for the computation under Rule 2(a). On that basis the Commissioner confirmed the assessment orders. Unsatisfied with the Commissioner’s decision, the Company took the matter to the Tribunal. In its order of 5 March 1949 the Tribunal found that the Company’s business was “in a way” insurance and that profit computation should be carried out in accordance with Rule 2 after determining the profit under both Rule 2(a) and Rule 2(b). The Tribunal took objection to the method employed by the Income-tax Officer in applying Rule 2(a). It remarked that the Officer should have conducted an independent enquiry under Rule 2(a) and should have determined the profit afresh, rather than merely adopting the figures calculated under Rule 2(b) as the basis for the Rule 2(a) computation. Consequently, the Tribunal remanded the case to the Income-tax Officer, directing him to make a fresh enquiry and to determine the profit as required by Rule 2(a). Dissatisfied with the Tribunal’s order, the respondent filed an application for reference under section 66(1) of the Income-tax Act. The application sought a determination of two questions by the High Court: first, whether, in the facts and circumstances of the case, the assessee-Company’s business consisted solely of annuity business or whether it also contained elements of ordinary life-insurance business distinct from annuity business; and second, whether the Income-tax Officer was justified in making an estimate for calculations under Rule 2(a) of

The reference was heard by Justices Chakravarti and S R Das Gupta. They observed that the first question, concerning whether the company's business was entirely annuity business or included any ordinary life-insurance element, did not arise from the Tribunal’s order. Nevertheless, they expressed their view, stating that the company’s business consisted wholly of granting annuities on human life and that no part of its activity constituted ordinary life-insurance business. Because this issue was not relevant to the present appeal, the judges indicated that no further discussion of it was necessary.

Regarding the second question, the judges noted that an annuity business dependent on human life, as distinguished from “annuities certain,” fell within the definition of insurance business under section 2(11) of the Income-Tax Act. They further held that the profits of such a business, being “gross external incomings” as described in Rule 5(ii), had to be determined according to Rule 2(a). The judges then addressed the appellant’s objection that there had been no proper determination of profits under Rule 2(a). They concluded that, in the absence of profit-and-loss statements for previous years and other relevant material, the Income-Tax Officer could not make an independent calculation under Rule 2(a) and was therefore compelled to adopt the figures computed under Rule 2(b) as the basis for a computation under Rule 2(a). Consequently, the second question was answered in the affirmative.

The present appeal was filed against that decision on a certificate granted under section 66A(2). The appellant’s counsel did not dispute that the company’s annuity policies dependent on human life qualified as insurance business under section 2(11), nor that the profits of such business should be computed in accordance with Rule 2 in the Schedule to the Income-Tax Act. The appellant’s contention was that the Income-Tax Officer had failed to perform the computation required by Rule 2(a) and that the Tribunal was correct in remanding the matter for a proper computation under that rule. The Court agreed with this contention. Under Rule 2, the Income-Tax Officer must first determine, under clause (a), the gross external incomings of the preceding year and then deduct the managing expenses for that year. Subsequently, under clause (b), the officer must calculate the annual average surplus on the basis of an actuarial valuation prescribed by the rule, and finally adopt whichever of the two amounts is higher as the assessable profit for the year. The appellant complained that while a calculation had been made under clause (b), no independent calculation had been made under clause (a), resulting in non-compliance with the rule. The Court found that indeed no independent computation under Rule 2(a) had been carried out, establishing a failure to comply with the statutory requirement.

The Court observed that the Company had not placed before the Income-tax Officer any documents that would enable him to make a determination under Rule 2(a). Consequently, in the absence of such material, the Income-tax Officer was deemed justified in relying on the actuarial report to compute the profits, even for purposes of Rule 2(a). The appellant argued that, taking into account the positions taken by both sides during the investigation and the Income-tax Officer’s view that the Company’s annuity business contained no element of insurance, the correct position under the Rules had been overlooked by everyone. According to the appellant, this oversight meant that no attempt was ever made to compute the profits in accordance with the provisions of Rule 2(a). The appellant further contended that it had not willfully failed to produce any evidence and that the learned Judges’ observation that no profit-and-loss statement had been produced was a misapprehension, because an insurance company was not required to prepare such a statement. The Court therefore turned to the Tribunal’s statement of the case to ascertain what had actually transpired before the Income-tax Officer, noting that the ultimate determination of factual issues rests with the Tribunal and is binding on the courts.

The Court noted that neither the Tribunal’s statement of the case nor its order of remand contained any finding that the appellant had withheld the requisite materials. The only reference in the Tribunal’s order was the following remark: “…the Departmental Representative admitted before us that the calculations purported to have been made under Rule 2(a) were not in accordance with the requirements of Rule 2(a), but it was explained that as the information necessary for determining income under Rule 2(a) was not available, an estimate was made and the income determined under Rule 2(b) was adopted for determining the income under Rule 2(a).” The Court held that this passage reflected merely a statement made by the Departmental Representative and did not constitute a factual finding. By contrast, the overall tenor of the Tribunal’s judgment was that no determination of profits under Rule 2(a) had been made because the Income-tax Officer had taken an erroneous view of the Company’s true business nature. The Court explained that had the Tribunal found that the appellant had been asked for, and had withheld, the necessary materials, the High Court’s decision would have been unquestionable and that would have been the only possible conclusion. In the absence of such a finding, the Court saw no basis for upsetting the Tribunal’s order on a reference under section 66(1). Once it is accepted that there was no proper determination of profits as required by Rule 2(a)—a point the appellant had conceded—and that no justification such as the High Court’s view existed, the logical consequence was to uphold the Tribunal’s remand order.

In the view of the Court, because there was no proper determination of the profits, the only appropriate order that could be made was to remit the matter back to the Tribunal for a further enquiry and for a fresh disposal in accordance with the applicable law. The Tribunal had indeed passed such an order, and the Court expressed that, in its opinion, that order was correct. Consequently, the Court allowed the present appeal and dismissed the second question that had been referred by the Tribunal, holding that the answer to that question was negative. As a result of this direction, the Income-tax Officer was directed to commence a fresh enquiry into the profits of the appellant Company for the assessment years that were under dispute, and to conduct that enquiry in conformity with the requirements laid down in Rule 2. In view of the overall circumstances, the Court ordered that each party should bear its own costs both in these proceedings and in the earlier proceedings before the High Court. The Court further emphasized that the allocation of costs was to be made on a party-by-party basis, without any award of costs against the opposite side, thereby ensuring that each litigant bears the expenses incurred at both stages of the litigation. No further directions were issued beyond those set out above. Accordingly, the appeal was allowed.