Commissioner of Income-Tax, West Bengal, Calcutta v. Calcutta Hospital and Nursing Home Benefits Association

Judgment

CIVIL APPELLATE JURISDICTION: Civ~l Appeals Nos. 206 to 210 of 1964. Appeals from the judgment and orders dated September 26, 1961 of the Calcutta High Court in Income-tax Reference No. 24 of 1957. Niren De, Additional Solicitor-General, Ganapathy Iyer and R. N. Sachthey, for the appellants. Sampat Iyengar, B.R.L. Iyengar and D. N. Gupta, for the respondents. The Judgment of the Court was delivued by Sikri, J. These appeals by certificate granted by the High Court of Calcutta under s. 66(A)(2) of the Indian Income Tax Act, 1922, are directed against t:1e judgment of the said High Court answering two questions referred to it against the Revenue. The questions are : l J) Whether the profit arising to the assessee company from miscellaneous insurance transactions of mutual character was assessable under the Indian Income Tax Act, and 12) If the answer to question No. (!) is in the affirmative, whether on the facts and in the circumstances of the case the balance of the profits as disclosed in the assessee company's pcofit and loss account after deducting the various reserves should be the taxable profits within the meaning of Section 2(6C) read with Rule 6 of the Schedule of the Indian Income Tax Act.

The relevant facts and circumstances are as follows: The respondent. the Calcutta Hospital and Nursing Home Benefits Association Lim'ted. hereinafter referred to as the assessee, is a mutual insurance concern carrying on miscellaneous insurance business. The principal objects for which the Associat;on was established were: (!) By means of insurance on the mutual principle to provide, or help towards provid;ng, anywhere in the world for the expense of accommodation and treatment in hospitals (1965] 3 8,C.R. and nursing homes and of private nursing for members and their dependants; (2)

To organise insurance on the mutual principle under Rules and Regulations to be framed for the purpose with the object of providing such hospital, med'cal, surgical, nursing and allied services as before mentioned, of supporting JI and assisting hospitals, in Calcutta or elsewhere; of relieving members or their dependants, in whole or in part fro;n the payment of hospital and other charges while in receipt of such hosp'tal, medical, surg'cal, nursing and allied services; and of reimbursing and repaying to members or their dependants in whole or in part, all payments for O such hospital and other charges wl:ich they may have incurred or made wh:le in receipt of such hospital, medical, surgical, nursing and allied services. The members were required to pay a monthly premium, but there was a waiting period of four months for all benefits other than maternity, for which the waiting period was one year.

Benefits and privileges became available as from the first day of the fifth calenrlar month of registration (in respect of Maternity the 13th month) and contin_ued to be available thereafter so long as the subscriptions were not m arrear. These appeals are concerned with the assessment years 1949-50 to 1953-54 and the relevant accounting years ended on December 31, 1948, December 31, 1949, December 31, 1950, December 31, 1951 and December 31, 1952, respectively. In the statement of the case, the Appellate Tribunal describes the accounts maintained by the assessee thus : "The assessee's published revenue accounts contained three classifications, viz. (i) miscellaneous insurance business revenue account, (ii) profit and loss account and (iii) profit and loss appropriation account.

In the miscellaneous insurance business revenue accounts were mcluded subscriptions from the members, gross premia from the members and from such amounts were deducted general reserve and or contingency reserve. Reserve so made were transferred to the balance sheet as credit accounts. The claims paid or payable and the expenses of management were deducted from this revenue account. The balance of the miscellaneous insurance business revenue account was transferred to the profit and loss account to the credit of which was further added interest on investments and the debits included provision for taxation. interest on loan. contribution to provident fund and depreeiation. The balance of this account being the balance of profit and loss account was transferred to the profit and lo&s appropriation account. Therefrom, in one year, ended C, I. T. V. GAL. HOSP. & NURSING HOME BENEFIT ASSN. (Sikri, J.)

635 31st December, 1949, further deduction was made against. contingency reserve and the balance either loss or profit was carried forward." We may now set out the facts regarding 1949-50 assessment. It ;s not n11cessary to state the facts regarding other assessment years. The Income Tax Officer for the assessment year 1949-50 added the reserve for taxation, Rs. 1000 /-, to the net profit as per profit and loss acount, which showed a profit of Rs. J,653 /-, and after deducting depreciation, he assessed the total income at Rs. 2,651/ -. On appeal, the Appellate Assistant Commissioner upheld the order of the Income Tax Officer. Following the decis'on of the Bombay High Court in Bombay Mutual Life A"surance Society Ltd., v. Commissioner of Income Tax, Bombay City,(') he held that the income was assessable to income tax and that under Rule 6 of the Schedule to the Income Tax Act it was permiss'ble for the Income Tax Officer to add the reserves to the income disclosed in the profit and loss account.

On further appeal, the Appellate Tribunal found no difficulty in holding that s. 2(6C) of the Income Tax Act, according to its true :nterpretation, included income or the profits of any insurance company of mutual assurance and the said profits shall be taken to be balance of the profits disclosed by the annual accounts. Regarding the reserve, the Tribunal held that the provision for reserve was not an expense to be deducted from the profits disclosed by the assessee company in order to arrive at the prorits within the meaning of r. 6, and the Income Tax Officer was entitled to add back the reserve. The High Court held that the surplus, miscalled profit, arising to the assessee company from the miscellaneous insurance transactions of mutual character was not assessable under the Indian Income Tax Act and that, in any event, the assessee was entitled to deduct the reserve. The High Court distinguished Bombay Mutual Life Assurance Society Ltd. v. Commissioner of Incume Tax, Bomhay City(') on the ground that the Bombay decision was a life insurance decision and although it was a mutual life insurance sosiety, nevertheless different and special rules applied to life :nsurance and tht:. rules with which the Bombay decision was concerned were rules 2 and 3 which d;d not apply to mutual insurance other than life.

The second point of distinction, according to the High Court, was the very distinctive clauses in the memorandum 0f objects and articles of association of the assessee. Section 2(6CJ at the relevant time defined 'income' to include " ...... profits of any bus'ness of insurance carried on by a mutual insurance association computed in accordance with Rule 9 in the Schedule." We may mention that another s. 2(6CJ was substituted by Act XV of 1955, and the wording substituted by th;s Act in (') 20 I.T.R.189. SUPREME COURT REPGRTS (J 965) S 8.p,R sub-clause (vii) is "the profits and gains of any business of insurance carried on by a mutual insurance assoc'ation or by a co-operative society computed in accordance with rule 9 in the Schedule." But nothing turns on the change of the language as far as a mutual insurance association carrying on business of insurance is concerned. Rule 9 of the Schedule reads thus· "9.

These rules apply to the assessment of the profits of any business of insurance carried on by a mutual insurance association ....... " Rule 6 with which we are concerned reads thus: "The profits and ga;ns 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, to be furnished to the Superintendent of Insurance after adjusting such balance so as to exclude from it any expend;ture other than expenditure which may under the provisions of Section 10 of this Act be allowed for in computing the profits and ga'ns of a business. Profits and losses on the realisation of investments and depreciation and appreciation of the value of investments shall be dealt with as provided in Rule 3 for the business of life insurance."

The Additional Solicitor General, appearing on behalf of the appellant, contends that the Bombay High Court was right in hold- . ing that "s. 2(6C) ;mports into the definition of 'income', which is to be found in the charging section 3, these profits whch may not be profits in the ordinary sense of the term· but which are made profits by reason of Rule 2 of the Schedule because Rule 2 really gives an artificial extens;on to the meaning of the word 'profits' when it says that 'profits and gains shall be taken to be'. Therefore a new class of artificial income is created by this rule and that art;- ficial income is included into the meaning of Secti~n 3 by reason of this rule." Mr. Sampat Ayyangar, learned counsel for the assessee, relying on the decision of the House of Lords in Arvshire Employers Mutual Insurance Association Ltd. v. Commissioner of Inland Revenue,(') contends that the Legislature has not made its intention clear because it has used the word 'profits' in s.

2(6C) under a misapprehension that the surplus of a mutual insurance company (') 27 T.C. 331. C. I. T. t'. CAL, HOSP, & '1URSINO HOME BENEFIT ASSN. (Sikfi, J.) 637 carrying on insurance business is profits. He says that in Arvshire Employers Mutual Insurance Association case(') the Legislature had proceeded on a similar misapprehension and the House of Lords held that s. 31 (I) of the Finance Act, 1933 (23 & 24 Geo. V. c. 19) did not succeed in making the profits of a mutual insult ranee company taxable. He urges that we should follow this precedent. He relies on the following passage from the speech of Lord Macmillan at p. 347: "The structure of Section 31 (I) is quite simple. It assumes that a surplus arising from the transactions of an in- 0 corporated company with its members is not taxable as profits or gains.

To render such a surplus taxable it enacts that the surplus, although in fact arising from transactions, of the company with its members, shall be deemed to be something which it !s not, namely, a surplus arising from transactions of the company with non-members. The hypothes's is that a surplus arising on the transaction of a mutual insurance company with non-members is taxable as profits or gains of the company. But unfprtunately for the Inland Revenue the hypothesis is wrong. It is not membership or non-membership which determines immunity from or liability to tax, it is the nature of the transactions. If the transactions are of the nature of mutual insurance the resultant surplus is not taxable whether the transactions are with members or with non-members." He further relies on the observations of Lord Macmillan that "the Legislature has plainly missed fire.

Its failure is perhaps less regrettable than it might have been, for the Sub-se.ction has not the meritorious object of preventing evasion of taxation, but the Jes~ laud' able design of subjecting to tax as profit what the law has consistently and emphatically declared not to be profit." He says that similarly in this case the Legislature has plainly missed fire. In order to appreciate the scope of that decision, it is necessary to set out the relevant part of s. 31 of the Finance Act, 1933. Section 31(1) enact- B ed: "31.-(1) In the application to any company or society of any provision or rule relating to profits or gains chargeable under Case I of Schedule D (which relates to trades) ...... any reference tG profits or gains shall be deemed to include a reference to a profit or surplus arising from trans- (1) 27 TC. 331. (1965]

3 S.C.R, actions of the compa,ny or society with its members which would be included in profits or gains for the purposes of that provision or rule if those transactions were transactions w'th non-members, and the profit or surplus aforesaid shall be determined for the purposes of that provision or rule on the same principles as those on which profits or gains aris'ng from transactions with non-members would be so determined." The Section adopted the device of a deeming provision. The profits arising from the transact'ons of a company or society with its members were deemed to be pro~ts arising from transactions with non-members. Parliament assumed that the latter were taxable. As this hypothesis was wrong, Parl'ament failed in its ·objective. But the Indian Legislalure did not adopt any deeming device. It defined 'income' to include profits of any bus'ness of insurance carried on by a mutual insurance assoc!ation. What are those profits is then explainea by reference to the Schedule.

The effect of this in substance 's to incorporate r. 6 into the definition. If the legisla-· ture had defined income to include profits of insurance carried on by a mutual insurance association computed according to r. 6, very little would have remained arguable. It 's, however, urged that in r. 6 also the word 'profits' means taxable profits. But r. 6 speaks of balance of profits as disclosed in the accounts submitted to the Superintendent of Insurance. Tre Superintendent of Insurance is not concerned with taxable profits. What he is concernd with, inter alia, is the balance of profits for the purpme of the Insurance AG!. It is then urged that in the definition the word 'surplus' should have been used instead of profits. But the word 'surplus' has a technical significance in the Insurance Act, and it seems to us that it would have been inexpedient to use the word 'surplus'. At any rate. r. 6 would then have been drafted differently.

It is finally urged that this is a taxing statute and we should give a str'ct construction to the definition. The definition could still operate if we interpret it in a narrow sense as to include· profits from investments and other activities of a mutual insurance company. It is said that this definition was inserted to make it clear that such profits would be taxable. We cannot acc;ede to this contention. It · B was well established that such profits would be taxablf; apartfrom the new definition. We cannot understand why it was necessary r, J, T. V, CAL, HOS!'. & NURSING HOME BENEFIT ASSN. (Si/cri, J.) to make it doubly clear. Moreover, r. 6 deals with balance of profits, which would include profits arising from the business of insurance of a mutual character. It dea'.ls with balance of profits as a compcsite thing. It is impossible to d;ssect this composite thing. If we were to accede to the assessee's contention, the definition would serve no purpose whatsoever.

It seems to us that the Legislature has evinced a clear intention to include the balance of profits as computed under r. 6 within the word 'income' in s. 3 of the Income Tax Act, and accordingly such balance of profits is taxable. We are unable to agree with the High Court that the Bombay case is distinguishable in principle. It is true that the Bombay High Court was concerned with r. 2, but when we go to the schedule and find out what is the balance of profits or surplus that has been made taxable, it does not make any difference to the construction of s. 2(6C) whether it is r. 2 that is applied or r. 6. Therefore, disagreeing with the High Court, we answer the first question in the affirmative. This takes us to the second question. The answer to this question depends on the true interpretation of r. 6.

It seems to us that on its language the Income Tax Officer is bound to accept the balance of profits d;sclosed by the annual accounts, copies of which have been submitted to the Superintendent of Insurance. He can only adjust this balance so as to exclude from it any expenditure other than expenditure which may under the provisions of s. 10 be allowed for in comput;ng the profits and gains of a business. We are not concerned here with the latter part of r. 6 dealing with profits and losses on the realisation of investments, and depreciation and appreciation of the value of investments. This Court examined the provisions of the Insurance Act in connection with the Schedule in Pandvan Insurance Company Ltd., Madurai v. The Commissioner of Income-Tax, Madras(') and arrived at the conclusion that the Insurance Act "makes detailed provisions to ensure the true valuation of assets and the determination of the true balance of profits of an insurance business" and that r.

6 should be construed in the light of this background. Examining r. 6 in the light of this background, it seems to us . that the intention of the rule is that the balance of profits as disclosed by the accounts submitted to the Superintendent of Insurance and accepted by him would be binding on the Income Tax Officer, (') [1965] I S.C.R. 3C7. (1965] 3 S.(;.R. except that the Inco:ne Tax Officer would be entitled to exclude expenditure other than expenditure perm'ssible under the provisions of s. JO of the Act. It is common ground in this case that the ; eserves which were added to the balance of profits were not expenditure. Accordingly, agreeing with the H;gh Court, we answer the. second question in the affirmative. In the result, the appeals are accepted in part. Parties will bear their own costs in this Court. Appeals partly allowed.