CHANDURKAR, J. - (1.) THE assessee in this reference made at the instance of the revenue is the Crown Life Insurance Co., and the assessment year in respect of which the following question has been referred is the assessment year 1951 -52 : 'Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that, in computing the surplus for the year 1950, only the amount which has been actually allowed as a deduction in the assessment for 1950 -51 out of the amount reserved for policyholders during the quinquennium ended December 31, 1949, should be added back under the second proviso to rule 3(a) ?'
(2.) THE earlier inter -valuation period in respect of the assessee was a period of five years from January 1, 1945, to December 31, 1949. In the assessment year 1950 -51 while computing the income of the circumstances in accordance with r. 2(b) and r. 3 of the rules in the Schedule to the Indian I.T. Act, 1922, half of the amount reserved for policyholders was allowed as a deduction under r. 3(a). Half of the amount was allowed because at the material time r. 3(a) provided that in computing the surplus for the purpose of r. 2 half of the amount paid to or reserved for or expended on behalf of policyholders shall be allowed as a deduction. In respect of the assessment year in question, that is, 1951 -52, the ITO found that the amount originally reserved for the policyholders in the earlier actuarial valuation had ceased to be so reserved in the second actuarial valuation. Therefore, acting under the second proviso to r. 3 the ITO added back one -half of the amount reserved for the policyholders and proceeded to assess the assessee to tax. This action of the ITO was challenged in appeal by the assessee and the AAC confirmed the order of the ITO. The matter was, therefore, carried in appeal further to the Tribunal. It was contended before the Tribunal that the earlier inter -valuation period being a period of five years for the purposes of the average surplus contemplated by r. 2 (b), so far as the earlier assessment year was concerned, what had entered into the deduction so as to make allowance under r. 3(b) was only one -fifth of one -half of the amount reserved for the policyholders and, therefore, though it could not be disputed on behalf of the assessee that the said amount had ceased to be so reserved, and an addition was required to be made in view of the second proviso to r. 3(a), according to the assessee the addition could not be made to the extent of one -half, but the addition had to be only in respect of one -fifth of one -half of the amount reserved for policyholders. This argument appealed to the Tribunal and the Tribunal took the view that the entire half amount which was deducted in respect of the earlier assessment year 1950 -51 could not be added back and what was liable to be added was only one -fifth of one -half of the said amount. The view of the Tribunal was expressed in the following words : 'If, therefore, in the annual average surplus which formed the basis of the assessment for the earlier assessment year 1950 -51 only one -fifth of the one -half of the amount reserved on behalf of the policyholders was ultimately allowed as a deduction, and it is not disputed that that was the only amount allowed as a deduction, then we fail to see how in making the adjustment as provided in rule 3(a) a higher amount, i.e., the entire one -half of the amount reserved on behalf of the policyholders, is still required to be so adjusted.' Now, admittedly, the relevant provisions in r. 3 which govern the case is as follows : 'In computing the surplus for the purpose of rule 2, - (a) four -fifths of the amounts paid to or reserved for or expended on behalf of policyholders shall be allowed as a deduction : Provided that in the first such computation made under this rule of any such surplus no account shall be taken of any such amounts to the extent to which they are paid out out of or in respect of any surplus brought forward from a previous inter -valuation period : Provided further that if any amount so reserved for policyholders ceases to be so reserved, and is not paid to or expended on behalf of policyholders that proportion of such amount (one -half or four -fifths, as the case may be), if it has been previously allowed as a deduction, shall be treated as part of the surplus for the period in which the said amount ceased to be so reserved.' Clauses (b) and (c) of r. 3 are not relevant for our purpose. We are also not concerned in this case with the first proviso to clause (a). We must, however, notice the fact that the words 'four -fifths' were substituted for the words 'one -half' by Act No. 25 of 1953 and by sub -s. (2) of s. 30 of the Amending Act the amendments in r. 3 were provided as being deemed to be operative in relation to any assessment subsequent to the assessment for the year ending on March 31, 1951, whether such assessment has or has not been made before the commencement of the Amending Act and where any such assessment has been made before such commencement, it was provided that it shall be lawful for the ITO to revise it wherever necessary to give effect to such amendment. The other material amendment made was in the second proviso and in place of the words 'one -half of such amount' the words and brackets 'that proportion of such amount (one -half or four -fifths, as the case may be)' were substituted. Mr. Joshi appearing on behalf of the revenue contends that the order of the Tribunal runs counter to the express words in the proviso to r. 3 and inasmuch as in respect of the earlier year of assessment, half of the amount referred to in clause (a) of r. 3 was allowed to be deducted, it is that whole amount which is referred to in the second proviso which was required to be added back because the said amount had ceased to be reserved on behalf of the policyholders. It is contended that what was material for the purposes of the operation of r. 3 was the computing of the surplus as provided in r. 2 and not the annual average of the surplus. It was contended that in a case where the annual average of the surplus has to be found, what has to be done first was to find out the surplus for the inter -valuation period; then if addition in respect of the figure referred to in r. 3(a) was required, that figure had to be added to the surplus to found and it was thereafter that the annual average surplus had to be calculated.
(3.) ON the other hand, it is vehemently contended by Mr. Colah appearing on behalf of the assessee that the Tribunal has found as a fact that in respect of the earlier assessment year 1950 -51 only one -fifth of one -half of the amount reserved on behalf of the policyholders was allowed as a deduction and if that was the amount which was allowed as a deduction for the purposes of the assessment based on the annual average surplus, then for the purposes of r. 3(b), second, proviso, it is that amount which alone was required to be added back. Stress was laid on the fact that the second proviso after the amendment by Act No. 25 of 1953 referred to 'that proportion of such amount'. In view of these words, according to Mr. Colah, it is only one -fifth of one -half of the amount which was liable to be added back and no the entire amount which was originally reserved on behalf of the policyholders.;