Commissioner of Income-Tax, West Bengal, Calcutta v. Calcutta Hospital and Nursing Home Benefits Association

Sikri, J. These appeals by certificate granted by the High Court of Calcutta under s. 66(A)(2) of the Indian Income Tax Act, 1922, are directed against t:1e judgment of the said High Court answering two questions referred to it against the Revenue. The questions are :

l J) Whether the profit arising to the assessee company from

miscellaneous insurance transactions of mutual character was assessable under the Indian Income Tax Act, and 12) If the answer to question No. (!) is in the affirmative,

whether on the facts and in the circumstances of the case the balance of the profits as disclosed in the assessee com-pany's pcofit and loss account after deducting the various reserves should be the taxable profits within the meaning of Section 2(6C) read with Rule 6 of the Schedule of the Indian Income Tax Act.

The relevant facts and circumstances are as follows: The res-pondent. the Calcutta Hospital and Nursing Home Benefits Associa-tion Lim'ted. hereinafter referred to as the assessee, is a mutual in-surance concern carrying on miscellaneous insurance business. The principal objects for which the Associat;on was established were:

(!) By means of insurance on the mutual principle to provide,

or help towards provid;ng, anywhere in the world for the expense of accommodation and treatment in hospitals

and nursing homes and of private nursing for members and their dependants;

(2) To organise insurance on the mutual principle under Rules

and Regulations to be framed for the purpose with the object of providing such hospital, med'cal, surgical, nurs-ing and allied services as before mentioned, of supporting JI and assisting hospitals, in Calcutta or elsewhere; of reliev-ing members or their dependants, in whole or in part fro;n the payment of hospital and other charges while in receipt of such hosp'tal, medical, surg'cal, nursing and allied services; and of reimbursing and repaying to members or their dependants in whole or in part, all payments for O such hospital and other charges wl:ich they may have in-curred or made wh:le in receipt of such hospital, medical, surgical, nursing and allied services.

The members were required to pay a monthly premium, but there was a waiting period of four months for all benefits other than maternity, for which the waiting period was one year. Benefits and privileges became available as from the first day of the fifth calen-rlar month of registration (in respect of Maternity the 13th month) and contin_ued to be available thereafter so long as the subscriptions were not m arrear.

These appeals are concerned with the assessment years 1949-50 to 1953-54 and the relevant accounting years ended on December 31, 1948, December 31, 1949, December 31, 1950, December 31, 1951 and December 31, 1952, respectively.

In the statement of the case, the Appellate Tribunal describes the accounts maintained by the assessee thus :

"The assessee's published revenue accounts contained three classifications, viz. (i) miscellaneous insurance busi-ness revenue account, (ii) profit and loss account and (iii) profit and loss appropriation account. In the miscellaneous insurance business revenue accounts were mcluded sub-scriptions from the members, gross premia from the mem-bers and from such amounts were deducted general reserve and or contingency reserve. Reserve so made were transfer-red to the balance sheet as credit accounts. The claims paid or payable and the expenses of management were deducted from this revenue account. The balance of the miscellaneous insurance business revenue account was transferred to the profit and loss account to the credit of which was further added interest on invest-ments and the debits included provision for taxation. in-terest on loan. contribution to provident fund and dep-reeiation. The balance of this account being the balance of profit and loss account was transferred to the profit and lo&s appropriation account. Therefrom, in one year, ended

31st December, 1949, further deduction was made against. contingency reserve and the balance either loss or profit was carried forward."

We may now set out the facts regarding 1949-50 assessment. It ;s not n11cessary to state the facts regarding other assessment years. The Income Tax Officer for the assessment year 1949-50 added the reserve for taxation, Rs. 1000 /-, to the net profit as per profit and loss acount, which showed a profit of Rs. J,653 /-, and after deducting depreciation, he assessed the total in-come at Rs. 2,651/ -. On appeal, the Appellate Assistant Commissioner upheld the order of the Income Tax Officer. Follow-ing the decis'on of the Bombay High Court in Bombay Mutual Life A"surance Society Ltd., v. Commissioner of Income Tax, Bombay City,(') he held that the income was assessable to income tax and that under Rule 6 of the Schedule to the Income Tax Act it was permiss'ble for the Income Tax Officer to add the reserves to the income disclosed in the profit and loss account. On further appeal, the Appellate Tribunal found no difficulty in holding that s. 2(6C) of the Income Tax Act, according to its true :nterpretation, includ-ed income or the profits of any insurance company of mutual assu-rance and the said profits shall be taken to be balance of the profits disclosed by the annual accounts. Regarding the reserve, the Tribu-nal held that the provision for reserve was not an expense to be de-ducted from the profits disclosed by the assessee company in order to arrive at the prorits within the meaning of r. 6, and the Income Tax Officer was entitled to add back the reserve.

The High Court held that the surplus, miscalled profit, arising to the assessee company from the miscellaneous insurance transac-tions of mutual character was not assessable under the Indian In-come Tax Act and that, in any event, the assessee was entitled to deduct the reserve. The High Court distinguished Bombay Mutual Life Assurance Society Ltd. v. Commissioner of Incume Tax, Bomhay City(') on the ground that the Bombay decision was a life insurance decision and although it was a mutual life insurance sosiety, nevertheless different and special rules applied to life :n-surance and tht:. rules with which the Bombay decision was con-cerned were rules 2 and 3 which d;d not apply to mutual insurance other than life. The second point of distinction, according to the High Court, was the very distinctive clauses in the memorandum 0f objects and articles of association of the assessee.

Section 2(6CJ at the relevant time defined 'income' to include " ...... profits of any bus'ness of insurance carried on by a mutual insurance association computed in accordance with Rule 9 in the Schedule." We may mention that another s. 2(6CJ was substituted by Act XV of 1955, and the wording substituted by th;s Act in

636 SUPREME COURT REPGRTS (J 965) S 8.p,R

sub-clause (vii) is "the profits and gains of any business of insurance carried on by a mutual insurance assoc'ation or by a co-operative society computed in accordance with rule 9 in the Schedule." But nothing turns on the change of the language as far as a mutual in-surance association carrying on business of insurance is concerned. Rule 9 of the Schedule reads thus·

"9. These rules apply to the assessment of the profits of any business of insurance carried on by a mutual insurance association ....... "

Rule 6 with which we are concerned reads thus:

"The profits and ga;ns 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 Superintendent of Insurance after adjust-ing such balance so as to exclude from it any expend;ture other than expenditure which may under the provisions of Section 10 of this Act be allowed for in computing the profits and ga'ns of a business. Profits and losses on the realisation of investments and depreciation and apprecia-tion of the value of investments shall be dealt with as pro-vided in Rule 3 for the business of life insurance."

The Additional Solicitor General, appearing on behalf of the appellant, contends that the Bombay High Court was right in hold- . ing that "s. 2(6C) ;mports into the definition of 'income', which is to be found in the charging section 3, these profits whch may not be profits in the ordinary sense of the term· but which are made profits by reason of Rule 2 of the Schedule because Rule 2 really gives an artificial extens;on to the meaning of the word 'profits' when it says that 'profits and gains shall be taken to be'. Therefore a new class of artificial income is created by this rule and that art;- ficial income is included into the meaning of Secti~n 3 by reason of this rule."

Mr. Sampat Ayyangar, learned counsel for the assessee, rely-ing on the decision of the House of Lords in Arvshire Employers Mutual Insurance Association Ltd. v. Commissioner of Inland Revenue,(') contends that the Legislature has not made its inten-tion clear because it has used the word 'profits' in s. 2(6C) under a misapprehension that the surplus of a mutual insurance company carrying on insurance business is profits. He says that in Arvshire Employers Mutual Insurance Association case(') the Legislature had proceeded on a similar misapprehension and the House of Lords held that s. 31 (I) of the Finance Act, 1933 (23 & 24 Geo. V. c. 19) did not succeed in making the profits of a mutual insu-lt ranee company taxable. He urges that we should follow this pre-

cedent. He relies on the following passage from the speech of Lord Macmillan at p. 347:

"The ' structure of Section 31 is quite simple. It assu- (I) mes that a surplus arising from the transactions of an in-corporated company with its members is not taxable as profits or gains. To render such a surplus taxable it enacts that the surplus, although in fact arising from transactions, of the company with its members, shall be deemed to be something which it !s not, namely, a surplus arising from transactions of the company with non-members. The hypo-thes's is that a surplus arising on the transaction of a mutual insurance company with non-members is taxable as profits or gains of the company. But unfprtunately for the Inland Revenue the hypothesis is wrong. It is not membership or non-membership which determines immu-nity from or liability to tax, it is the nature of the trans-actions. If the transactions are of the nature of mutual insurance the resultant surplus is not taxable whether the transactions are with members or with non-members."

He further relies on the observations of Lord Macmillan that "the Legislature has plainly missed fire. Its failure is perhaps less regret-table than it might have been, for the Sub-se.ction has not the meri-torious object of preventing evasion of taxation, but the Jes~ laud' able design of subjecting to tax as profit what the law has consistent-ly and emphatically declared not to be profit." He says that similar-ly in this case the Legislature has plainly missed fire. In order to appreciate the scope of that decision, it is necessary to set out the relevant part of s. 31 of the Finance Act, 1933. Section 31(1) enact-ed:

"31.-(1) In the application to any company or society of any provision or rule relating to profits or gains charge-able under Case I of Schedule D (which relates to trades) ...... any reference tG profits or gains shall be deemed to include a reference to a profit or surplus arising from trans-

actions of the compa,ny or society with its members which would be included in profits or gains for the purposes of that provision or rule if those transactions were trans-actions w'th non-members, and the profit or surplus aforesaid shall be determined for the purposes of that provision or rule on the same principles as those on which profits or gains aris'ng from transactions with non-mem-bers would be so determined."

The Section adopted the device of a deeming provision. The profits arising from the transact'ons of a company or society with its members were deemed to be pro~ts arising from transactions with non-members. Parliament assumed that the latter were tax-able. As this hypothesis was wrong, Parl'ament failed in its ·objec-tive. But the Indian Legislalure did not adopt any deeming device. It defined 'income' to include profits of any bus'ness of insurance carried on by a mutual insurance assoc!ation. What are those profits is then explainea by reference to the Schedule. The effect of this in substance 's to incorporate r. 6 into the definition. If the legisla-· ture had defined income to include profits of insurance carried on by a mutual insurance association computed according to r. 6, very little would have remained arguable.

It 's, however, urged that in r. 6 also the word 'profits' means taxable profits. But r. 6 speaks of balance of profits as disclosed in the accounts submitted to the Superintendent of Insurance. Tre Superintendent of Insurance is not concerned with taxable profits. What he is concernd with, inter alia, is the balance of profits for the purpme of the Insurance AG!.

It is then urged that in the definition the word 'surplus' should have been used instead of profits. But the word 'surplus' has a tech-nical significance in the Insurance Act, and it seems to us that it would have been inexpedient to use the word 'surplus'. At any rate. r. 6 would then have been drafted differently.

It is finally urged that this is a taxing statute and we should give a str'ct construction to the definition. The definition could still operate if we interpret it in a narrow sense as to include· profits from investments and other activities of a mutual insurance company. It is said that this definition was inserted to make it clear that such profits would be taxable. We cannot acc;ede to this contention. It · was well established that such profits would be taxablf; apartfrom the new definition. We cannot understand why it was necessary to make it doubly clear. Moreover, r. 6 deals with balance of profits, which would include profits arising from the business of insurance of a mutual character. It dea'.ls with balance of profits as a compc-site thing. It is impossible to d;ssect this composite thing. If we were to accede to the assessee's contention, the definition would serve no purpose whatsoever.

It seems to us that the Legislature has evinced a clear intention to include the balance of profits as computed under r. 6 within the word 'income' in s. 3 of the Income Tax Act, and accordingly such balance of profits is taxable.

We are unable to agree with the High Court that the Bombay case is distinguishable in principle. It is true that the Bombay High Court was concerned with r. 2, but when we go to the schedule and find out what is the balance of profits or surplus that has been made taxable, it does not make any difference to the construction of s. 2(6C) whether it is r. 2 that is applied or r. 6. Therefore, dis-agreeing with the High Court, we answer the first question in the affirmative.

This takes us to the second question. The answer to this ques-tion depends on the true interpretation of r. 6. It seems to us that on its language the Income Tax Officer is bound to accept the balance of profits d;sclosed by the annual accounts, copies of which have been submitted to the Superintendent of Insurance. He can only adjust this balance so as to exclude from it any expenditure other than expenditure which may under the provisions of s. 10 be allowed for in comput;ng the profits and gains of a business. We are not concerned here with the latter part of r. 6 dealing with profits and losses on the realisation of investments, and depreciation and appreciation of the value of investments. This Court examined the provisions of the Insurance Act in connection with the Schedule in Pandvan Insurance Company Ltd., Madurai v. The Commissioner of Income-Tax, Madras(') and arrived at the conclusion that the Insurance Act "makes detailed provisions to ensure the true valuation of assets and the determination of the true balance of profits of an insurance business" and that r. 6 should be construed in the light of this background.

Examining r. 6 in the light of this background, it seems to us that the intention of the rule is that the balance of profits as dis-closed by the accounts submitted to the Superintendent of Insurance and accepted by him would be binding on the Income Tax Officer, except that the Inco:ne Tax Officer would be entitled to exclude expenditure other than expenditure perm'ssible under the provisions of s. JO of the Act. It is common ground in this case that the ; e-serves which were added to the balance of profits were not expendi-ture.

Accordingly, agreeing with the H;gh Court, we answer the. second question in the affirmative.

In the result, the appeals are accepted in part. Parties will bear their own costs in this Court.

Appeals partly allowed.

CIVIL APPELLATE JURISDICTION: Civ~l Appeals Nos. 206 to 210 of 1964.

Appeals from the judgment and orders dated September 26, 1961 of the Calcutta High Court in Income-tax Reference No. 24 of 1957.

Niren De, Additional Solicitor-General, Ganapathy Iyer and R. N. Sachthey, for the appellants.

Sampat Iyengar, B.R.L. Iyengar and D. N. Gupta, for the res-pondents.