Dipak Kumar Sen, J. - (1.) This reference arises out of the income-tax assessment of General Assurance Society Ltd., Calcutta, the assessee, in the assessment year 1957-58, the relevant previous years being the one ended on the 31st December, 1956. The facts found and/or admitted in these proceedings are as follows : Till 1956, the assessee carried on business as a composite insurer, and life insurance was part of its business. Under the Life Insurance (Emergency Provisions) Ordinance, 1956, all life insurance business vested in the Central Government on the 19th January, 1956, pending nationalisation thereof. Such business was ultimately nationalised under the Life Insurance Corporation Act, 1956, on the appointed date, i.e., the 1st September, 1956. As a result, the life insurance business carried on by the assessee was taken over with effect from the said date and under Section 16 of the Life Insurance Corporation Act the assessee was paid a compensation of Rs. 5,95,764.
(2.) In the assessment of the assessee in the relevant year the ITO took the value of the capital of the assessee relating to life business as computed in terms of Section 7(2) of the Life Insurance Corporation Act, 1956, to be Rs. 2,79,683 and deducting the said amount from the compensation paid held that the balance Rs. 3,16,981 was taxable as capital gains in the hands of the assessee under Section 12B of the Indian I.T. Act, 1922. It was contended on behalf of the assessee that in the balance-sheet of the life insurance business of the assessee prepared as at the 31st December, 1955, the value of the land and buildings of the assessee were not correctly shown. The proper value of the same as at the 31st December, 1955, was Rs. 8,13,819. The said land and buildings had been valued in 1949 by chartered architects which resulted in an appreciation of Rs. 11,87,069 which was shown in the subsequent balance-sheets of the assessee. The Controller of Insurance, however, did not accept such appreciated value and in 1952 the said land and buildings were valued at a lesser figure. For the purpose of computation of capital gain, if the said appreciated value had been taken into account there would be a capital loss instead of gain. The ITO rejected the aforesaid contentions.
(3.) Being aggrieved, the assessee preferred an appeal. It was contended before the AAC on behalf of the assessee that capital gain had not been properly computed by the ITO inasmuch as the market value of the assets of the assessee as at the 1st January, 1954, in fact exceeded that which was shown in the balance-sheet by Rs. 11,30,771. By actuarial valuation of the business of the assessee for the period 1950 to 1952 the appreciated value was written back only for the limited purpose of ascertaining the surplus, but for the purpose of determining the market value of its assets as on the 1st January, 1954, the said enhancement had to be taken into account. The AAC accepted the contentions of the assessee and held that the assessee was entitled to exercise his option and choose the market value of its assets as on the 1st January, 1954, for computation of capital gains. He accepted the valuation of the land and buildings by the architects in 1949 and held that such enhanced value reflected the correct market value of the said assets as on the 1st January, 1954, On such computation he found that there was a capital loss and he deleted the amount added as capital gains.;