RAMANUJAM, J. - (1.) THE following common question has been referred to this Court for its opinion, at the instance of the revenue by the Tribunal : "Whether on the facts and in the circumstances of the case and having regard to the provisions of s. 44 of the IT Act, 1961 read with the First Schedule thereto, the assessee should be given credit for the tax deducted at source under s. 199 of the IT Act, 1961 ?"
(2.) THE assessee is a general insurance company. For the asst. yrs. 1969-70 to 1972-73 the ITO, while completing the original assessments, gave credit for the tax deducted at source. Subsequently he reopened the original assessments for those years under s. 147 of the IT Act, and took away the credit given by him earlier for the tax deducted at source. For the asst. yr. 1973-74 in the original assessment the ITO likewise did not give credit for the deducted at source. According to the ITO in view of the provisions of s. 44 which require a separate mode of computation for arriving at the income of an insurance company and which clearly preclude the assessee from taking credit for the tax deducted at source. The assessee took the matter in appeal to the AAC, who however, accepted the assessee's claim and held that the tax deducted at source should be given credit to, since r. 5 of the First Schedule does not exclude the operation of s. 199 of the Act. The revenue took the matter in appeal to the Tribunal and the Tribunal affirmed the order of the AAC on this aspect in the following cryptic sentence : "As regard s. 199 in the case of General Insurance assessee r. 5 of the Schedule I applies and not r. 4, which alone deals with s. 199." Aggrieved by the treatment given by the Tribunal on the question involved, the revenue has come before this Court by way of this reference. According to the ld. counsel for the revenue, neither the AAC nor the Tribunal dealt with the question at issue in the proper perspective and both the authorities have failed to consider the scope of s. 44 and they have expressed their views on the question only with reference to the language used in rr. 4 and 5 of Sch. I. On the facts and circumstances of this case and after going through the order of the inclined to agree with the learned counsel for the revenue that the question at issue did not get a proper or full treatment at the hands of either of the those authorities. As already pointed out, the AAC and the Tribunal had compared rr. 4 and 5 of Sch. I and according to them, as r. 5 of Sch. I does not refer to s. 199 and does not also prohibit in specific terms the application of s. 199 as has been done in r. 4 the deduction of tax at source should be given credit to, in the case of General Insurance Companies which come under r. 5. According to them, r. 4 which applies to Life Insurance Companies alone make s. 199 inapplicable and there is no such prohibition in r. 5 which applies to General Insurance Companies. However, both the authorities have not taken into account the scope and effect of s. 44 of the Act which contain a prohibition. Sec. 44 is to the effect that not withstanding anything to the contrary contained in the provisions of the IT 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 s. 199 or in ss. 28 to 43A, the profits and gains of any business of insurance shall be computed in accordance with the rules contained in the First Schedule. As per the said provision, in the case of insurance business of any kind, the operation of the provisions dealing with the specific head of income and of s. 199 which deals with credit for the tax deducted at source is excluded to the extent to which the provision of those section are inconsistent with the rules contained in the First Schedule to the Act, and the profits and gains of insurance business form all sources are to be computed artificially in accordance with those rule. Sec. 44 thus excludes the operation of certain provisions of the Act to the extent covered by the rule contained in the First Schedule. If the rule in the First Schedule permit the application of s. 199, then an insurance company can claim the benefit of s. 199 by seeking credit for the tax deducted at source. If, on the other hand, the rule are silent, then s. 199 cannot have application. Rule 4 of the First schedule deals with the mode of computation of income in respect of life insurance business and r. 5 deals with the mode of computation of income in respect of general insurance business. Rule 4 dealing with the computation of income from life insurance business no doubt specifically says that the benefit of s. 199 cannot be claimed. But r. 5 dealing with the mode of computation of income of the general insurance business does not refer to the relief under s. 199. The question is, merely because r. 5 does not specifically exclude the operation of s. 199, as has been done in r. 4, can it be said that in the mode of computation of income in respect of general insurance business, the tax deducted at source can be given credit to in accordance with s. 199. According to the Tribunal, since, r. 5 does not exclude the operation of s. 199, in the mode of computation of the income from general insurance business, s. 199 should be taken to apply. But this view of the Tribunal overlooks the specific provision in s. 44 which says that the profit and gains of any business of insurance shall be computed in accordance with the rules contained in the First Schedule, notwithstanding anything to the contrary contained in s. 199. However, we find it unnecessary to go into the question in detail at this stage, as we are directing the Tribunal to consider the question of applicability of s. 199 in all its aspects. According to the learned counsel for the revenue, the applicability of s. 199 to this case is ruled out for the reason that under the provisions of the Insurance Act, there is no question of grossing up of the income and then giving credit for the tax deducted at the source, as the Second Schedule to the Insurance Act contemplates preparation of profit and loss account by adding up the net income from all sources and the question of giving credit for the tax deducted at the source will arise only if there is grossing up of the total income. However, as we have said already, all these matter will have to be considered by the Tribunal, while dealing with the scope of s. 44 and other related provisions of the Act.
(3.) INCIDENTALLY we find that for one of the assessment years, the ITO has in fact grossed up the total income but curiously refused to give credit for the tax deducted at the source. Once there is a grossing up of the total income, the tax deducted at the source has naturally to be given credit to. But the ITO does not appear to be justified in grossing up the total income for one of the assessment years, having regard to the Insurance Act. On the interpretation placed by the Id. Counsel for the revenue on the provisions of the Second Schedule to the Insurance Act the grossing up of the total income by the ITO for one of the assessment years may not be correct. However, this is also a matter which will have to be considered in detail by the Tribunal.;