Leonard Stone, Kt. , C. J. - (1.)THIS matter came before my learned brother Sir Harilal Kania and myself on November 10, 1944, when we sent the reference back to the Tribunal to ascertain certain additional and necessary facts. We then pointed out that the Tribunal had made an incorrect approach to Rules 2 (b) and 3 (a) of the schedule to the Income-tax Act to which I will presently refer. The point which arises when analysed resolves itself into an extremely narrow one. By Section 10 (7) of the Indian Income-tax Act, it is provided that notwithstanding anything to the contrary contained in Sections 8, 9, 10, 12 or 18, the profits and gains of any business of insurance and the tax payable thereon shall he computed in accordance with the rules contained in the schedule to the Act. Turning to the schedule it will he found that Rule 1 provides; In the ease 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 and gains from any other business. Rule 2 provides : The profits and gains of life insurance business shall be taken to be either.
(2.)THEN two alternatives are given, and it is the greater which is to be taken. In this case it is the second alternative, viz. that which is lettered (b) which is relevant, it provides: 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 busines, whichever is the greater :
But it is to Rule 3 to which importance is attached in this case:- In computing the surplus for the purpose of rule 2, (a) one-half of the amounts paid to or reserved for or expended on behalf of policy-holders shall be allowed as a deduction :

It is under that sub-rule that the three sums with which we are concerned are said to fall.

(3.)IN remitting their supplemental case, the Tribunal has not raised any fresh question. Therefore, the questions which we have to consider are those which are to be found in the original case which are: (1) Whether income-tax deducted at source of Rs. , 83,860 and the income-tax reserve created by the company of Rs. 1,00,770 are the amounts expended or reserved for or on behalf of the policy-holders within the meaning of Rule 3 (a) of the rules made under Section 10 (7) of the INcome-tax Act? (2) Whether the assessee is entitled to a deduction under Rule S (a) of half the amount of Rs. 14,142 being the unappropriated carry-forward to the subsequent valuation period ?
On behalf of the assessee, the insurance company, Sir Jamshedji Kanga has submitted that any amount which the company expends out of its life fund is an expenditure on behalf of its policy-holders, because they are virtually the owners of the fund. "with regard to that, submission the following further material is to be found in the supplemental case, paragraph 9: The actuary had taken into account in preparing the consolidated revenue account two items, viz. , Rs. 33,800 as income-tax paid, and Rs. 1,00,770 being the reserve for income-tax and super-tax. Under Rule 2 (6) only such items are allowed as a deduction as are allowable under Section 10 of the Income-tax Act. Both these items cannot be allowed as an expenditure under Section 10 of the Income-tax Act. The assessee company does not object to the deduction of the above two items as provided under Section 10, but it is contended that the company is entitled to the deduction of one-half of the above two items, as these amounts have been paid to or reserved for or expended on behalf of the policy-holders, as provided under Rule 8 (a ). In support of this contention the assessee company relied upon the following evidence :

;