J. S. Verma, J. - (1.) A reference was made by the Income-tax Appellate Tribunal under S. 256(1) of the Income-tax Act, 1961, at the instance of the assessee, to the Bombay High Court for deciding seven questions of law arising out of the Tribunals order. The first six questions were answered by the High Court in favour of the assessee, while the seventh question was answered against the assessee. This appeal by special leave is by the assessee challenging the High Courts decision only in respect of the seventh question decided against the assessee. That question is as under: Whether on the facts and in the circumstances of the case, the sum of Rs. 23,39,959/- being the refund on income-tax received by the Corporation during the inter-valuation period in respect of the income-tax up to the assessment year 1956-57 of the life insurance business of the erstwhile insurers whose business had been taken over by the Corporation, should be allowed as a deduction while computing the income of the assessee under Rule 2(1)(b) of the First Schedule to the Income-tax Act, 1961?
(2.) The assessee Life Insurance Corporation of India (Corporation) is a statutory Corporation established under the Life Insurance Corporation Act, 1956 with effect from 1st September, 1956. The relevant assessment year is 1963-64 for which the accounting period ended on 31-3-1963. During the relevant assessment year, the assessee received refunds of income-tax of 3,02,90,898/- in the life insurance business. The assessee contended before the Income-tax Officer that the entire amount of refund was not includible in the revenue account and treated as profits and gains of the assessee for the assessment year under consideration. The Income-tax Officer rejected the contention and included the entire amount in the revenue account. In the assessees appeal, the Appellate Assistant Commissioner held that out of the amount of Rs. 3,02,90,898/- included in the revenue account, the sum of Rs. 2,72,50,939/- only was to be excluded but the balance amount had to be included. The assessee as well as the revenue preferred appeals to the Tribunal.
(3.) Before the Tribunal, it was contended by the revenue that in computing the profits of the assessee u/S. 44 read with rule 2(1)(b) of the First Schedule to the Income-tax Act, 1961, the Income-tax Officer can make only such adjustments to the surplus or deficit disclosed by the actuarial valuation which are permissible under the rule; that the rule permits adjustment by way of exclusion of any surplus or deficit included therein which was made in any earlier inter-valuation period relating to the assessee itself and not to that of its predecessor in the business. It was contended that a part of the refund of taxes received by the Corporation had not been included in the surplus of the earlier inter-valuation period relating to the assessee but of its predecessor since the refund was in respect of the taxes paid by the predecessor prior to the formation of the Corporation on 1st September, 1956. It was contended that the words included therein used in Rule 2(1)(b) indicated that the surplus or deficit in any earlier inter-valuation period must relate to that of the Corporation and not its predecessor. The decision of the Bombay High Court in Bombay Mutual Life Assurance Society Ltd. v. Commissioner of Income-tax, Bombay City, (1951) 20 ITR 189 was distinguished. The contention of the assessee was that the payment of taxes which gave rise to the refund having been made prior to the formation of the Corporation, by the predecessor, there was no occasion for the surplus or deficit in any earlier inter-valuation period of the Corporation being required to be looked into for the purpose. Reliance was placed on S. 7 of the Life Insurance Corporation Act, 1956 (for short the LIC Act) to contend that the Corporation stepped into the shoes of its predecessor for all practical purposes including the legal consequences flowing from the refund received by the Corporation as the successor of its predecessor in business.;