R. C. Lahoti, J. - (1.) General Insurance Corporation of India, the appellant-assessee is 100% Central Government Undertaking formed as a Government Company under the General Insurance Business (Nationalisation) Act, 1972 (hereinafter GIB Act, for short). It carries on general insurance in India. At the time of nationalisation, there were 107 companies carrying on the business of general insurance. They were all merged together into four subsidiaries of the appellant-Corporation viz. National Insurance Co. Limited, New India Assurance Co. Limited, Oriental Insurance Co. Limited and United India Insurance Co. Limited. The Central Government contributed to the capital of the appellant in the form of preference shares and equity shares for the purpose of paying compensation to the shareholders and the management of the merged companies. The preference shares were to be redeemed in such time as the Board of Directors of the appellant-Corporation may deem fit. The controversy relates to the assessment year 1977-78, corresponding to the accounting year ending 31-12-1976. It is not disputed that the income of the appellant-assessee is to be computed under Rule 5 of First Schedule to the Income-tax Act, 1961.
(2.) The Income-tax Act, 1961 makes a special provision for computing the taxable income of an assessee engaged in business of insurance. It provides as under:- Insurance business 44. "Notwithstanding anything to the contrary contained in the provisions of this Act relating to the computation of income chargeable under the head "Interest on securities", "Income from house property", "Capital gains" or "Income from other sources", or in Section 199 or in Section 28 to (43-A) the profits and gains of any business of insurance, including any such business carried on by a mutual insurance company or by a co-operative society, shall be computed in accordance with the rules contained in the First Schedule." Inasmuch as the appellant-assessee carries on business of insurance other than life insurance, we are concerned with Rule 5 of the First Schedule which reads as under: B - Other insurance business Computation of profits and gains of other insurance business. 5. The profits and gains of any business of insurance other than life insurance shall be taken to be the balance of the profits disclosed by the annual accounts, copies of which are required under the Insurance Act, 1938 (4 of 1938), to be furnished to the Controller of Insurance, subject to the following adjustments:- (a) subject to the other provisions of this rule, any expenditure or allowance which is not admissible under the provisions of Sections 30 to (43-A) in computing the profits and gains of a business shall be added back; (b) ********** (c) such amount carried over to a reserve for unexpired risks as may be prescribed in this behalf shall be allowed as a deduction. [Note:- Sec. 44 and Rule 5(a) of First Schedule as reproduced hereinabove are as they stood at the relevant time. Later by the Direct Tax Laws (Amendment) Act, 1987 '43-B' has been substituted in place of '43-A' in both the provisions.]
(3.) The problem is created by Rule 2(2)(a) of the General Insurance Business (Nationalisation) Rules, 1973 (hereinafter GIB Rules, for short) framed by the Central Government in exercise of the powers conferred by Section 39 of the GIB Act, the relevant part whereof reads as under:- '39. (1) The Central Government may, by Notification, make rules to carry out the provisions of this Act. (2) In particular, and without prejudice to the generality of the foregoing power, rules made under this Section may provide for:- (a) the manner in which the profits, if any, and other moneys received by the Corporation may be dealt with." ********** ;