The Neptune Assurance Co. Ltd vs The Life Insurance Corporation Of India

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

Court: Supreme Court of India

Case Number: Civil Appeal No. 386 of 1961

Decision Date: 8 November 1962

Coram: A.K. Sarkar, S.K. Das, J.L. Kapur, Raghubar Dayal

In this case the Supreme Court of India delivered a judgment on 8 November 1962 concerning a dispute between The Neptune Assurance Co. Ltd (the petitioner) and The Life Insurance Corporation of India together with another respondent. The judgment was authored by Justice A.K. Sarkar, who sat on the bench together with Justices S.K. Das, J.L. Kapur, and Raghubar Dayal. The citation of the decision is reported in 1963 AIR 900 and also appears in the 1963 Supplement to the Supreme Court Reports at page 980. The matters involved statutory provisions of the Insurance Act of 1938, sections ten and thirteen; the Indian Income‑tax Act of 1922, sections sixteen two, eighteen, forty‑eight and forty‑nine B; and section seven of the Life Insurance Corporation Act of 1956. The headnote recorded that the appellant company engaged in both life insurance and other types of insurance, making it a “composite insurer” under the 1956 Act. When the Life Insurance Corporation Act, 1956 came into force, section seven provided that all rights relating to the life‑insurance business of any insurer would vest in the Corporation on the appointed day, which was September 1956. Under the Income‑tax Act, an assessee becomes entitled to a tax refund when the tax deducted at source or the amount by which dividend income must be increased for tax computation exceeds the tax payable. The appellant had obtained assessment orders for the years 1955‑56 and 1956‑57 that indicated a right to certain refunds, although those assessment orders were issued after the appointed day of September 1956. The respondent Corporation claimed that it was entitled to a portion of those refunds by virtue of section seven of the Life Insurance Corporation Act. The Court was asked to decide two questions: first, whether the right to the refund existed as of 1 September 1956; and second, whether that right fell within the meaning of “rights appertaining to the life‑insurance business” under section seven. The Court held that the right to the refund did indeed exist on 1 September 1956. Although the assessment orders later specified the amounts, the right arose as soon as, under the relevant Finance Act, it became determinable that the tax deducted at source or treated as paid on behalf of the appellant exceeded the tax payable. The Court further held that the right to the refund was a right belonging to the life‑insurance business. Income derived from shares and securities held by the appellant, as defined by the Insurance Act of 1938 and relating to the life‑insurance business, must be treated as income of that business; consequently, a refund of such income remains a right of the life‑insurance business.

It was observed that the excess tax paid could not alter the character of the amount; the amount continued to be treated as income of the life insurance business. Consequently, the entitlement to recover that amount was also regarded as a right belonging to the life insurance business. The Tribunal had prescribed the manner in which the refund should be allocated between the life insurance operations and the general insurance operations.

The matter was presented as Civil Appeal No. 386 of 1961, filed by special leave against the order of 3 August 1959 issued by the Life Insurance Tribunal at Nagpur in case No. 24/XII of 1959. Counsel for the appellant included several members of the bar, while the Attorney‑General for India and other senior counsel appeared on behalf of the respondent. The appeal was heard on 8 November 1962, and the judgment was delivered by Justice Sarkar.

The appellant conducted both life insurance and other forms of insurance business, making it a “composite insurer” under the Life Insurance Corporation Act, 1956. The respondent corporation was constituted by that Act on 1 September 1956, and section 7 of the Act vested in the corporation all rights relating to the life insurance business, which the Act terms the “controlled business,” effective from the appointed day of 1 September 1956.

Assessments of income tax for the financial years 1955‑56 and 1956‑57 resulted in the appellant becoming eligible for certain refunds under the Income‑Tax Act, 1922. The respondent corporation asserted a claim to a portion of those refunds pursuant to section 7, a claim that the appellant disputed. The dispute was referred to the Life Insurance Tribunal for determination under the 1956 Act, and the Tribunal ruled in favour of the respondent corporation. The present appeal challenges that Tribunal decision.

Before addressing the substantive issues, the Court summarized the relevant provisions of the Income‑Tax Act that gave rise to the right of refund. Section 16(2) provides that, for calculating total income, a dividend received shall be increased to an amount that, after deducting tax at the applicable corporate rate, equals the dividend paid. Sub‑section 3 of section 18 mandates that tax be deducted at source on interest‑on‑securities income at the maximum rate. Sub‑section 4 deems all such deductions to be income of the assessee for tax computation, and sub‑section 6 requires that the deducted amounts be credited to the Central Government. Sub‑section 5 further provides that any deduction made under this section, together with any sum by which…

In the judgment, the Court explained that when a dividend is increased under sub‑section (2) of section 16, that increase shall be regarded as a payment of income‑tax or super‑tax on behalf of the person whose income gave rise to the deduction, or on behalf of the shareholder, as the situation requires. Section 49B, the Court noted, states that where any dividend has been paid or is deemed to have been paid to an assessee who is a shareholder of a company that is assessed to income‑tax, that assessee shall, if the dividend is included in his total income, be deemed to have paid income‑tax on himself in respect of such dividend in an amount equal to the increase made under section 16(2). The Court then reproduced the wording of Section 48, which provides that if any company satisfies the Income‑Tax Officer that the amount of tax paid by it or treated as paid on its behalf for a particular year exceeds the amount with which it is properly chargeable, the company shall be entitled to a refund of the excess. The Court summarised that the operative result of these provisions is to make an assessee eligible for a refund whenever the tax deducted from the income of his securities, or the amount by which his dividend must be increased under section 16(2) for the purpose of computing his income, or both together, exceed the tax that is actually payable by him.

The Court then turned to the provisions of section 10 of the Insurance Act, 1938. Under sub‑section (2) of that section, an insurer that carries on the business of life insurance must transfer to a separate fund, called the life‑insurance fund, all receipts that are due in respect of that business, and the assets of this fund must be kept distinct and separate from all other assets of the insurer. Sub‑section (3) further requires that the life‑insurance fund shall not be applied, either directly or indirectly, for any purpose other than the business of life insurance. The Court observed that there was no reason to doubt that the appellant had complied with the requirements of section 10(2), had created the life‑insurance fund as required, and that it was not contested that various shares and securities belonged to the life‑insurance fund of the appellant’s business. The Court also noted that other securities, and perhaps some shares, belonged to the appellant’s general business. The Court then set out the specific matters in dispute. The appellant’s previous assessment years, namely the assessment years 1950‑56 and 1956‑57, corresponded respectively to the calendar years 1954 and 1955. In each of those years the appellant was entitled to receive sums as interest on securities and as dividends on shares it held. The assessment orders for those years, the Court said, indicated that in the first assessment year the appellant received a credit of Rs 48,271.56 for tax earlier paid in respect of its life department and a further credit of Rs 3,245.25 for tax earlier paid in respect of its general department.

The Court recorded that the amounts of tax previously paid and credited in the appellant’s assessment for the second assessment year comprised Rs 48,271.56 for the life department and Rs 3,196.25 for the general department. The appellant’s income for the assessment year 1955‑56 was initially assessed on 29 September 1956, subsequently revised on 21 May 1957, while the assessment for the year 1956‑57 was made on 31 January 1957. In the assessment for 1955‑56 the life department showed a profit of Rs 1,50,191 and the general department a loss of Rs 23,667, resulting in a total assessed income of Rs 12,6,524. Because the tax computed on this total income was lower than the tax amounts already credited as previously paid, a refundable sum of Rs 12,867.58 was determined in favour of the appellant. For the assessment year 1956‑57 the life department reported a profit of Rs 1,51,835 while the general department incurred a loss of Rs 2,06,083, which meant that the appellant sustained an overall loss for that year and was not liable to pay any tax. Consequently, the full amount of tax that had been credited as earlier paid for that year became refundable. The Court noted that these assessment orders were issued after the appointed day of 1 September 1956. Both parties agreed that the amounts of tax credited as previously paid were deductions under section 18(3) of the Income‑Tax Act and were added to the dividend pursuant to section 16(2) of the same Act.

The respondent Corporation asserted that, under section 7 of the 1956 Act, it was entitled to a refund of Rs 9,622.43 from the amount found refundable for 1955‑56 and of Rs 48,271.56 from the amount refundable for 1956‑57. The Tribunal had previously allowed the Corporation’s claim. Section 7, as quoted by the Court, provides that on the appointed day all assets and liabilities pertaining to the controlled business of every insurer shall be transferred to and vested in the Corporation; that such assets include all rights, powers, and property, whether movable or immovable, related to the controlled business, specifically cash balances, reserve funds, investments, deposits, and all other interests and rights arising from such property, together with all books of account or documents relating to the controlled business, and that liabilities comprise all debts, obligations, and liabilities of any kind existing in relation to the controlled business. The Court identified the central issue as whether the right to a tax refund existed on 1 September 1956 and whether that right fell within the meaning of “assets…appertaining to the controlled business” under section 7.

The Court noted that the entitlement to a refund was part of the appellant’s life‑insurance business as defined by section 7, because the expression “right appertaining to his controlled business” necessarily referred to a right that existed in connection with that business; a business, not being a legal person, could not itself hold a right, so the right had to belong to the insurer who owned the business and to be a right that related to his controlled business. Regarding the first aspect of the issue, the Court held that it was clear that the right to a refund existed on 1 September 1956. Although the exact amount of the refund had not been determined until assessment orders were issued after that date, the Court stated that this delay did not affect the existence of the right. It explained that, under income‑tax law, the liability to which tax may be charged, if any, exists continuously, and the amount of that liability is dependent on the Finance Act applicable to the relevant year. This principle derived from section 3 of the Income‑Tax Act, which provides that tax at the rates specified in the Finance Act shall be charged for the year named in that Act. The Court then referred to the decision in Messrs Chatturam Horilran Ltd. v. Commissioner of Income‑tax, Bihar and Orissa (1), quoting that “the Income‑Tax Act is a standing piece of legislation which provides the entire machinery for the levy of income‑tax; the Finance Act of each year imposes the obligation for the payment of a determinate sum for each such year calculated with reference to that machinery.” The Court observed that the Finance Acts of 1955 and 1956, like all such statutes, set the rates at which income‑tax was payable for assessment years beginning on 1 April of the year each Act was passed. Consequently, on 1 April 1955 and on 1 April 1956, the amount of tax payable by the appellant became determinable because the income could then be computed and the applicable rate was known. On those dates, the appellant therefore became entitled to a refund of any tax deducted at source or treated as paid on its behalf under the provisions of the Income‑Tax Act that exceeded the tax actually payable for each of those years. The Court clarified that the assessment merely specified the amounts; it did not create the right, because the right arose as soon as, according to the relevant Finance Act, it became ascertainable that the tax deducted or treated as paid on the appellant’s behalf had exceeded the tax liability. Accordingly, the Court concluded that this right to a refund constituted an asset covered by section 7 of the 1956 Act. This reasoning resolved the first part of the question before the Court, and the discussion then moved to the second part of the issue.

The Court turned to the second issue, namely whether the entitlement to a tax refund was a right that belonged to the life‑insurance portion of the appellant’s operations. To resolve that question, the Court examined the provisions of the Insurance Act, because that statute distinguished among the various classes of insurance business and prescribed the manner in which each class should be accounted for. It was not contested that the appellant qualified as an insurer within the meaning of subsection (1) of section 10 of the Act, and that under that subsection an insurer was required to maintain a separate ledger of all receipts and payments for each distinct class of insurance business that it carried on. The Court recalled the earlier reference to subsections (2) and (3) of the same section, which further elaborate the accounting obligations. Section 11 of the Act mandated that an insurer such as the appellant keep, for each class of insurance business, (a) a balance‑sheet prepared in accordance with the third Schedule to the Act and (b) a revenue account also prepared in accordance with the third Schedule. Moreover, Regulation (2) of the First Schedule stipulated that the balance‑sheet applicable to the life‑insurance business had to be prepared as a separate document. The Schedule contained a specimen balance‑sheet form, and that form required that shares and securities held by the insurer in connection with its life‑insurance business be listed separately. Likewise, the form prescribed for the revenue account, which had to be drawn up separately for each type of insurance business, demanded that the interest and dividends attributable to the life‑insurance business be shown separately after deducting the income‑tax payable on those amounts. A note accompanying the form clarified that, when calculating income‑tax rebates, the tax element must be taken out of the tax payable. Section 13 of the Act further required every insurer that carried on life‑insurance business to perform an actuarial valuation every three years and to submit a report in the format specified in the fourth Schedule.

The regulations annexed to that Schedule required that a consolidated revenue account in the form designated as “G” be attached to the actuarial report. That consolidated account again required the presentation of interest and dividends, which necessarily related to the life‑insurance business because the report concerned only that business. In the Court’s view, all of these statutory provisions demonstrated what the Insurance Act regarded as assets belonging to the life‑insurance business. Those assets were identified in subsection (2) of section 10 as the assets of the life‑insurance fund. Because the Act specifically treated certain assets as belonging to the life‑insurance segment, it prescribed detailed rules for displaying those assets separately in the insurer’s accounts. Consequently, if an asset was held as part of the life‑insurance business, the income generated by that asset—its “fruit”—was also deemed to belong to the life‑insurance business.

In this case the Court observed that shares and securities which are owned by an insurer and are attributable to its life‑insurance business must themselves be regarded as belonging to that business. Accordingly, the statutory accounting forms prescribed in the Schedules require the income derived from those shares and securities to be shown separately in the accounts that are maintained for the life‑insurance business. The Court noted that the appellant had not contested the proposition that, in accordance with the provisions of the Insurance Act previously referred to, many of the shares and securities held by the appellant were indeed assets of its life‑insurance business. Nor did the appellant’s counsel dispute that the income generated by those shares and securities also fell within the life‑insurance business. It was for this income that, in each of the years 1954 and 1955, an amount of Rs 48,271.56 had been credited in the appropriate assessment order as tax previously paid. The appellant’s counsel, however, submitted that although the income belonged to the life‑insurance business, the right to the tax refund did not belong to any business. He argued that the right was created by section 48 of the Income‑Tax Act and that, under that provision, the right belonged to the assessee, who in the present case was the appellant. The Court considered this approach to be misconceived and held that it could not resolve the question of whether the refund right appertained to any particular business within the meaning of section 7 of the Insurance Act of 1956.

The Court reiterated that a life‑insurance business, being not a legal person, cannot itself own any right. All rights that relate to the business, including a right to a refund of taxes paid before assessment, must necessarily belong to the owner of the business. The owner may, if he so chooses, treat those rights as belonging separately to the different businesses he carries on, or a statute may require such a treatment. The Court found that the latter situation applied here. The Income‑Tax Act did not concern itself with the various categories of business carried on by the insurer, whereas the Insurance Act, as previously demonstrated, treated the various insurance businesses of an insurer as distinct. Likewise, the Insurance Act of 1956 treated the life‑insurance business as separate from the insurer’s other businesses. Consequently, the Court held that it would be incorrect to refer to the Income‑Tax Act when interpreting the 1956 Act to decide whether a refund right belonging to an insurer appertained to its life‑insurance business or to another line of business. While the right to the refund did exist in the appellant on 1 September 1956, it existed in the appellant as the proprietor of both the life‑insurance and the general‑insurance businesses, and therefore the right could be said to pertain, at least in part, to each of those businesses.

In this case the Court observed that the entitlement to the tax refund was split between the life‑insurance division and the general‑insurance division of the appellant. The Court explained that the income generated by the assets of the insurance undertaking, or that income which the Income‑Tax Act treats as belonging to those assets under section 16(2), had been employed for the payment of tax together with the income of other assets. When it became clear that the amount of income‑tax paid on that basis exceeded the amount that the law actually required, the surplus had to be returned to the appellant. The surplus consisted of the portion of the income that had been used in excess of the lawful tax liability, and therefore that excess income had to be refunded. The Court held that, even after the refund was made, the nature of the refunded amount could not be altered; it would continue to be characterized as income of the life‑insurance business. Consequently, a right to receive that refunded income was a right that belonged to the life‑insurance business.

The Court further noted that, although the right originally belonged to the appellant as the owner of the life‑insurance operation, section 7 of the Insurance Act of 1956 caused that right to pass to the respondent corporation on 1 September 1956 because it was linked to the life‑insurance business. It was argued by counsel for the appellant that, once the amount was deducted from the income of the shares and securities of the life‑insurance business, it ceased to be an asset of that business and therefore the right to a refund could no longer be said to belong to that business. The Court rejected this argument as erroneous. It held that the deduction represented a payment of tax made before the assessment was final and was therefore essentially provisional. The Court explained that a provisional tax payment becomes a refundable amount to the extent that a subsequent final assessment shows that the tax paid was in excess of the liability. Thus, where the deduction was of a kind that could be refunded, the amount to be refunded had never truly left the pool of assets of the life‑insurance business.

The Court observed that a question could arise as to whether amounts added to dividends under section 16(2) of the Income‑Tax Act are to be treated as deductions from income, and that different views might be expressed on that point. The Court stated that it was not required to resolve that issue in the present proceedings. It added that if those amounts were not deductions from income, the present dispute would not arise in relation to them; if they were deductions, the reasoning already expressed by the Court would equally apply to any such dividend deductions.

The Court also considered an argument that, if the right to the refund were said to belong to the life‑insurance business, that business would be receiving a benefit that originated from a loss incurred by the general‑insurance business, and that the refund right existed only because of that loss. The Court found this consideration irrelevant to the question of whether the right belonged to the life‑insurance business. It emphasized that the refund right did not arise as a consequence of a loss in the general‑insurance activity; it arose because the appellant, as a whole, had paid excess tax on income that was, in substance, the income of the life‑insurance division. Accordingly, the existence of the loss in the other line of business was not a factor in determining the ownership of the refund right.

In this case the Court observed that the appellant’s overall business had either suffered a loss or generated a smaller income, and therefore there was no possibility that one department of the appellant’s business could have taken advantage of another department. The Court held that the right to the tax refund belonged to the insurance business as a whole because the refund represented money that had been applied in excess of the tax for which the law made the appellant liable as the owner of the entire enterprise.

The next point for determination was the manner in which the refund should be apportioned between the two departments. The Court found that no difficulty arose with respect to the year 1956‑57. In that year the whole amount that had been deducted at source or treated as tax paid on behalf of the appellant was returned. Consequently each department was entitled to receive the amount that had been deducted from, or treated as paid on, the income of its own assets. Accordingly the total refund of Rs 51,468.81 for the year 1956‑57 was to be distributed as follows: the appellant would receive Rs 3,196.56 and the respondent corporation would receive Rs 48,271.25.

For the year 1955‑56 the refund amounted to Rs 12,867.68. The tax that had been deducted from, or treated as paid on, the income of the life‑insurance department was Rs 48,271.56, while the amount deducted from, or treated as paid on, the income of the general‑insurance department was Rs 3,245.25. The Court noted that in that year the general‑insurance department incurred a loss; therefore, if regarded as a separate business, it would not have been liable to pay any tax out of its own assets. As a result, none of the general department’s income could be applied toward the tax liability. The Court ordered that the entire sum of Rs 3,245.25 be refunded to the general‑insurance department. The balance, which represented the portion of tax deducted from the life‑insurance business, was to be transferred to the respondent corporation. This allocation was consistent with the view adopted by the Tribunal and with the principle that the tax liability for 1955‑56 should rest entirely on the life‑insurance department, which alone had generated a profit.

The Court added that, in other proceedings whose details were not necessary to disclose, the Government had already paid the refund and the appellant had received the portion to which it was entitled. The Court declared that the respondent corporation was entitled to the remaining balance, which had already been paid to it on 15 October 1959 by the second respondent in compliance with the Court’s order dated 21 September 1959. The appeal was dismissed with costs, and the final order affirmed the dismissal of the appeal.