Leonard Stone, Kt., C.J. - (1.) THIS is a reference under Section 66(1) of the Indian Income-tax Act, 1922, the relevant assessment year being 1939-40, and the accounting year being the calendar 1938.
(2.) THE assessee is a non-resident life insurance company, having a branch in British India. THE questions raised concern the method of assessment of the profits and gains of the Indian business of the company. That depends on Section 10(7) of the Indian Income-tax Act and certain rules which are set out in the schedule to the Act. THE rules, with which we are concerned, are the new rules, which became operative in 1939. Section 10, Sub-section (7), of the Indian Income-tax Act, is as follows: Notwithstanding anything to the contrary contained in Sections 8, 9, 10, 12 and 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. Turning to the schedule, it is to be observed that it is headed: Rules for the computation of the profits and gains of insurance business. Rule 1 provides: In the caste of any person who carries on, or at any time in the preceding year carried on, life insurance business, the profits and gains of such person from that business shall be computed separately from his income, profits or gains from any other business. Rule 2 is: The profits and gains of life insurance 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 arrived at by adjusting the surplus or deficit disclosed by the actuarial valuation made for the last inter-valuation period ending before the year for which the assessment is to be made, 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 this Act be allowed for in computing the profits and gains of a business, whichever is the greater. There then follows a proviso with regard to how the amount to be allowed as management expenses is to be calculated.
(3.) RULE 3 provides how "the surplus", referred to in RULE 2, is to be computed. Rule 4 is also ancillary to Rule 2, and provides machinery for calculating the surplus under it.;