Chakravartti, J. - (1.) The principal question submitted to us by this Reference relates to an apparent difficulty in computing, under the Income-tax Act, the taxable profits of a life Insurance business, where such business includes sale or granting of annuities. In the particular case where the question has arisen, the business consists solely in granting of annuities and in such cases the difficulty appears to be greater.
(2.) In order to explain what the question is and how it has arisen, it is necessary to refer to the relevant provisions of the Act before stating the facts. At the present stage the reference need be only in broad outline. Before the amending Act of 1939, the profits and gains of life insurance business, in the case of companies incorporated in British India, were to be computed mainly under Rule 25 of the Rules framed under Section 59 of the Act. That rule prescribed a single straight-cut method and directed that the profits for any particular year were to be determined by simply taking the annual average of the total profits disclosed by the last actuarial valuation of the business and making certain additions thereto. The amendment of 1939 introduced a more complicated rule and prescribed what one may call a two-pronged method. It added a schedule to the Act and provided by Section 10(7) that the profits and gains of any business of insurance must be computed in accordance with the rules contained in the schedule. The schedule deals with all varieties of insurance, but the general method of computing the profits of a life insurance business is laid down in Rule 2. That rule prescribes two alternative methods of computation and directs that of the two sums arrived at by the application of the two methods, the greater shall be taken to be the profits and gains of the business The rule, as it stood at the relevant time and as it stands now, is in the following terms:
(3.) The profits and gains of life insurance business shall be taken to be either- (a) the gross external incomings of the preceding year 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 for 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 which may under Section 10 of this Act be allowed for in computing the profits and gains of a business, whichever is the greater.;