SARKAR - (1.) THE following Judgments of the court were delivered by
(2.) WE think that these appeals should be allowed. The appeals relate to the assessment to incometax of the income of the life insurance business of the Bharat Insurance Co. Ltd. now merged in the Life Insurance Corporation Ltd. The assessment years concerned are 1952- 53, 1953-54 and 1954-55. The Income-tax Act, 1922 makes special provision for assessment of the income of insurance business. The Income-tax Officer in making the assessment orders made some adjustments in the accounts which the appellant contends, he has no power to do under these provisions. The question in these appeals is whether he had the power to make these adjustments. Ss. (7) of s. 10 of the Act makes the special provision for the assessment of the income of insurance business and that is in these terms: 'Notwithstanding anything to the contrary contained in Section 8, 9, 10, 12 or 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.' Rule 2 in the Schedule lays down in clauses (a) and (b) two different methods for calculating the profits and gains of a life insurance business and provides that whichever of these two methods results in larger profits being arrived at, has to be adopted. The relevant portion of r. 2 is in these terms: Rule 2. 'The profits and gains of life insurance business shall be taken to be either- (a) the gross external incomings of the precedingyear 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 in accordance with the Insurance Act, 1938 (IV of 1938) in respect of 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 s. 10 of this Act be allowed for in computing the profits and gains of a business, whichever is the greater:' Then follows a proviso which sets out a certain limit for management expenses to be allowed but that is not material for this judgment. It is not in dispute that the method laid down in cl. (b) would in the present cases produce the larger income and had, therefore, to be followed. The relevant part of r. 3 of the Schedule on which the arguments in these cases turn may now be set out. Rule 3. 'In computing the surplus for the purpose of rule 2,(a) .............................. (b)any amount either written off or reserved in the accounts or through the actuarial valuation balance sheet to meet depreciation of or loss on the realisation of securities or other assets shall be allowed as a deduction, and any sums taken credit for in the accounts or actuarial valuation balance sheet on account of appreciation of or gains on the realisation of the securities or other assets shall be included in the surplus: Provided that if upon investigation it appears to the Income-tax Officer after consultation with the Controller of Insurance that having due regard to the necessity for making reasonable provision for bonuses to participating policy-holders and for contingencies, the rate of interest or other factor employed in determining the liability in respect of outstanding policies is materially inconsistent with the valuation of the securities and other assets so as artificially to reduce the surplus, such adjustment shall be made to the allowance for depreciation of, or to the amount to be included in the surplus in respect of appreciation of, such securities and other assets, as shall increase the surplus for the purposes of these rules to a figure which is fair and just;' No other rule in the Schedule was referred to at the bar. What had happened was this. The assessee had debited a sum of Rs. 18,75,000.00 to its Consolidated Revenue Account and credited it to the Investment Reserve Fund. There is no dispute that the assessee had to maintain the Investment Reserve Fund. The transfer had been made because the assessee thought that the securities in respect of which the Investment Reserve Fund had been constituted having depreciated the fund had become inadequate. By this transfer the assessee's surplus, on which the tax had to be assessed under r. 2, was reduced. The Income-tax Officer thought that this transfer made the balance in the Investment Reserve Fund exceed the deficit disclosed on the book values of the securities in that fund by Rs. 30,420.00. He also checked up the market value of the securities and came to the conclusion that they had been undervalued in the books by the assessee. In his view, the Investment Reserve Fund was for the aforesaid reasons actually in excess by Rs. 1,89,185.00 of the amount which it should have had to its credit. He, therefore, directed that the transfer from the Revenue Account to the Investment Reserve Fund be reduced by Rs. 1,75,000.00. The assessee appealed to the Appellate Assistant Commissioner and lie directed that the transfer to the Investment Reserve Fund be reduced by Rs. 1,45,000.00 instead of Rs. 1,75,000.00. On a further appeal by the assessee to the Income-tax Appellate tribunal, it was held that the adjustment could only be made under the proviso to r. 3(b) of the Schedule and that that rule required a prior consultation with the Controller of Insurance, and as that had not been made, the adjustment was wholly illegal. The tribunal, therefore, ordered that the transfer of Rs. 18,75,000.00 made by the assessee as aforesaid had to be accepted as a whole. The Commissioner then applied to the tribunal under s. 66(1) to state a case but that having been rejected he moved the High court of Punjab for an order on the tribunal to state a case tinder s. 66(2) of the Act. The High court made an order on the tribunal and the latter thereupon stated a case setting out the facts earlier mentioned and referring the following question to the High court for its decision: 'Whether upon the facts found by the tribunal, the Income-tax Officer had in this case jurisdiction to proceed to make adjustment in terms of r. 3(b) of the Schedule to the Indian Income-tax Act.'
(3.) THE High court took the view that the matter did not come within r. 3(b) of the Schedule and, therefore, no question of consultation with the Controller of Insurance arose. In the High court's opinion the Income-tax Officer had not been deprived of the authority of correcting errors of the kind that had been detected in these cases and the proviso was not intended to cover those cases where, as in the present, the assessee in order to evade incometax, undervalued his securities. THE High court, therefore, answered the question in the affirmative. THE present appeals are against this judgment of the High court. It seems to us that the decision of the High court is clearly erroneous. Under r. 2 of the Schedule the Income tax Officer has to compute the profits and gains of a life insurance company at the greater of the two methods of assessments mentioned in cls. (a) and (b). There may be no restriction upon his jurisdiction in the computation of profits and gains under cl. (a) but under cl. (b) the computation can be made within a limited field. He has to accept the annual average of the surplus disclosed by the actuarial valuation made in accordance with the Life Insurance Act in respect of the last intervaluation period, so as to exclude therefrom any surplus or deficit included therein which was made in the earlier inter-valuation period, and expenditure not allowable under s. 10 in computing the profits. This is made explicit by r. 3 which makes it obligatory upon the Income-tax Officer to make the computation of the surplus for the purpose of r. 2 according to the scheme provided in cls. (a), (b) and (c) of r. 3. Under r. 2(b) of the Schedule the Income-tax Officer has, therefore, no power to change the figures in the account of the assessee. He has to take the surplus as disclosed by the actuarial valuation made by the assessee under the Insurance Act and then to arrive at the average mentioned in the rule. lie has the power to exclude any surplus or deficit included in the actuarial valuation in respect of an earlier inter-valuation period and any expenditure other than an expenditure which may under s. 10 of the Act be allowed. What the Income-tax Officer in the present case did does not come within r. 2(b). This is not disputed. It is furthermore not in dispute that apart from the provisions in r. 3 of which only cl. (b) is relevant for our purpose, there is no other provision in the Schedule which authorises an Income-Tax Officer to make adjustments in the actuarial valuation made by the assessee. When we come to r. 3(b) we find that the first part of it lays down that it shall be obligatory on the Income-tax Officer to allow certain amounts written off or reserved by the assessee as a deduction and to include in the surplus any sums for which credit has been taken on account of appreciation or gains on the realisation of the securities or other assets. This part of the rule only compels the Income-tax Officer to allow certain amounts as deductions and to include certain amounts for which credit had been taken in the accounts of the assessee. It, therefore, does not warrant what the income-tax Officer did, namely, to adjust the accounts on the basis of a revaluation made by him. ;