JUDGMENT
STONE, C.J. – This matter came before my learned brother Sir Harilal Kania and myself on the 10th of November, 1944, when we sent the reference back to the Tribunal to ascertain certain additional and necessary facts. We then pointed out that the Tribunal had made an incorrect approach to rules 2(b) and 3 (a) of the Schedule to the Income-tax Act to which I will presently refer. The point which arises when analysed resolves itself into an extremely narrow one. By Section 10(7) of the Income-tax act, it is provided that notwithstanding anything to the contrary contained in Sections 8, 9, 10, 12, or 18, the profits and gains of any business of insurance and the tax payable there on shall be computed in accordance with the rules contained in the Schedule to the Act. Turning to the Schedule it will be found that rule 1 provides :-
“In the case of any person who carries on, or at any time in the preceding year carried on, life insurance business, the profits and gains of such person from that business shall be computed separately from his income, profits or gains from any other business.”
Rule 2 provides :-
“The profits and gains of life insurance business shall be taken to be either -”
Then two alternatives are given, and it is the greater which is to be taken. In this case it is the second alternative, viz., that which is lettered (b) which is relevant, it provides : “the annual average of the surplus arrived at by adjusting the surplus or deficit disclosed by the actuarial valuation made 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 other than expenditure which may under the provisions of Section 10 of this Act be allowed for in computing the profits and gains of a business.”
But it is to rule 3 to which importance is attached in this case :-
“In computing the surplus for the purpose of rule 2, –
(a) one-half of the amounts paid to or reserved for or expended on behalf of policy-holders shall be allowed as a deduction.”
It is under that sub-rule that the three sums with which we are concerned are said to fall.
In remitting their supplemental case, the Tribunal has not raised any fresh question. Therefore, the questions which we have to consider are those which are to be found in the original case which are :-
(1) Whether income-tax deducted at source of Rs. 33,860 and the income-tax reserve created by the company of Rs. 1,00,770 are the amounts expended or reserved for or on behalf of the policy-holders within the meaning of rule 3(a) of the rules made under Section 10(7) of the Income-tax Act ?
(2) Whether the assessee is entitled to a deduction under rule 3(a) of half the amount of Rs. 14,142 being the unappropriated carry-forward to the subsequent valuation period ?
On behalf of the assessee, the insurance company, Sir Jamshedji Kanga has submitted that any amount which the company expends out of its life fund is an expenditure on behalf of its policy-holders, because they are virtually the owners of the fund. With regard to that submission the following further material is to be found in the supplemental case, paragraph 9 :-
“The actuary had taken into account in preparing the consolidated revenue account two items, viz., Rs. 33,860 as income-tax paid, and Rs. 1,00,770 being the reserve for income-tax and super-tax. Under rule 2(b) only such items are allowed as a deduction as are allowable under Section 10 of the Income-tax Act. Both these items cannot be allowed as an expenditure under Section 10 of the Income-tax Act. The assessee company does not object to the deduction of the above two items as provided under Section 10, but it is contended that the company is entitled to the deduction of one half of the above items, as these amounts have been paid to or reserved for or expended on behalf of the policy-holders, as provided under rule 3(a). In support of this contention the assessee company relied upon the following evidence :-”
Then are set out, first of all, a resolution and a quotation from the prospectus, the effect of which is to show that the policy-holders of participating policies are entitled to 90 per cent. of the life fund, whereas the remaining 10 per cent. goes to the shareholders.
On the other hand, Mr. Setalvad on behalf of the Income-tax authorities submits that income-tax paid by the insurance company is paid on behalf of itself and no one else, and in support of that proposition the case of Lalita v. Tata Iron and Steel Co., Ltd., is relied upon, as is also a case in the House of Lords : Cull v. Commissioners of Inland Revenue, in which Lord Atkin at page 56 said that the company pays income-tax in discharge of its own liability and not as agents for its shareholders. Be it observed that policy-holders are still further removed than shareholders in their relationship with the company and that their rights rest in the contracts provided by their policies. In my judgment this argument is well founded. So far as the sum of Rs. 33,860 is concerned, it represents the amount deducted at source from the interest payable to the company on its invested funds and it is, therefore, deducted in part discharge of the liability of the company to pay its own taxes. It is to be observed that there is no such provision, as Section 49B of the Income-tax Act, which could apply to policy-holders. That section was enacted to give special rights to shareholders in respect of income-tax paid by the company of which they are members. I cannot see how it can be said that this Rs. 33,860 has been paid on behalf of the policy-holders, especially is this so when there is no liability whatever on them to pay this amount.
With regard to Rs. 1,00,770, this is a provision which under the Insurance Act must be made by the insurance company, and it is a liability which must be provide for before the surplus can be shown in the revenue accounts of the life department. In the companys annual revenue accounts of the life department no figures in respect of income-tax are shown except a single separate figure for each of the three years; the total of these figures for the 3 years is the sum of Rs. 1,00,770. In each year there is in fact a separate amount reserved, and these annual reservations are no doubt adjusted when it is discovered whether the reserve of the preceding year was more or less than the actual amount which had to be paid to discharge the income-tax. In my opinion this sum of Rs. 1,00,770 cannot be said to be reserved for or expended on behalf of the policy-holders any more than the sum of Rs. 33,860. Even if it could, the deduction would have to be brought back again under the proviso to rule 3(a), whereby it is laid down that if any amount so reserved for policy-holders ceases to be so reserved, and is not paid to or expended on behalf of policy- holders one-half of such amount, if it has been previously allowed as a deduction, shall be treated as part of the surplus for the period in which the said amount ceased to be so reserved. But in my opinion that provision never becomes operative, because neither the Rs. 33,860 nor the Rs. 1,00,770 is a permissible deduction under rule 3(a).
That leaves the second question with regard to a sum of Rs. 14,141, which is to be found in the accounts described as a carry-forward to the credit of policy-holders. Sir Jamshedji Kanga on behalf of the insurance company has stated in this Court that the Rs. 14,141 is not only carried forward to the credit of the policy-holders, but is ear-marked for the policy-holders and that it will be used for no other purpose. On that statement by counsel being made Mr. Setalvad on behalf of the Commissioner does not press the matter further, and this sum must be treated as a permissible reserve for policy-holders within the terms of rule 3(a).
The answer to the questions, therefore, which I propose is that question No. 1 be answered in the negative and question No. 2 in the affirmative.
CHAGLA, J. – I agree.
The first contention raised by Mr. Setalvad is that the question referred to us, “whether the income-tax deducted at source of Rs. 33,860 and the income-tax reserve created by the company of Rs. 1,00,770 are the amounts expended or reserved for on behalf of the policy-holders within the meaning of rule 3(a) of the rules made under Section 10(7) of the Income-tax Act,” is a question of fact, and Mr. Setalvad says that inasmuch as the Tribunal has come to the conclusion that these sums are not reserved for nor expended on behalf of the policy-holders, we cannot go behind that finding of fact. I do not accept that contention of Mr. setalvad. The question referred to us is a question of law. We have been asked to consider whether the conclusion arrived at by the Tribunal from admitted or proved facts is a conclusion justified in law, whether the conclusion is justified on a true construction of rule 3(a) of the rules framed under the Income-tax Act.
Now, the question of the applicability of a section or the construction of a section is always a question of law. Mr. Setalvad has relied, and from his point of view rightly relied, on an expression used by Mr. Justice Kania, when he referred this matter back to the Tribunal for a further statement of facts, the expression being that the question whether the amount in question was paid to or reserved for or was expended on behalf of the policy-holders is a question of fact. I do not think it is fair to the learned Judge to wrench that expression from its context. When one looks at the context, it is clear, what the learned Judge means, and really, if the question referred to us was a question of fact, I fail to see the necessity for referring it back to the Tribunal for a further and better statement of the case.
Now, the scheme of rules 2 and 3 framed under Section 10(7) of the Income-tax Act to my mind is perfectly clear. The profits and gains of a life insurance business are to be assessed under rule 2(b) on the surplus arrived at on an actuarial valuation subject to certain deductions and additions. First the actual surplus arrived at by the actuary is to be taken as the basis. Then under rule 2(b) there is to be excluded from that surplus two amounts, first any surplus or deficit which is included in it which was made in any earlier inter-valuation period and does not belong to the valuation period under consideration and the second amount to be excluded is all such expenditure as is not permissible under Section 10 of the income-tax Act. Then under rule 3 certain deductions are allowed and the most important deduction and the one which we have got to consider for the purpose of this reference is the deduction permitted under rule 3(a) which is one-half of the amounts paid to or reserved for or expended on behalf of policy-holders. Now, under section 13 of the Insurance Act an actuarial report and abstract have got to be prepared as part of the statutory obligation of a life insurance company and in Schedule IV to that Act a form is given, Form G, which lays down the manner in which a consolidated revenue account has to be prepared. It is important to note that in this form one of the items of expenditure shown on the debit side is taxes paid in United Kingdom, British India, Dominion and foreign countries and on the credit side is shown interest, dividends and rents but less income-tax thereon, which undoubtedly means income-tax deducted at the source. Therefore, in order to arrive at a proper actuarial surplus, the Insurance Act requires that certain expenses must be first deducted and among those expenses are payments of income-tax. Therefore, before the surplus in this case of Rs 7,17,282-7-0 was arrived at by an actuarial calculation, the sum or Rs. 1,00,770-7-6 was debited as transferred to reserve for income-tax and super-tax and also the sum of Rs. 33,860 was deducted from the interest earned as income-tax deducted at the source. What the actuary was doing was what he was bound to do under the law, viz., to make these deductions before he certified that the surplus was Rs. 7,17,282-7-0.
Now I fail to understand, with great respect to Sir Jamshedji Kanga, the argument that if these two deductions were not provided for in the account books, the surplus would have been increased by the same amount. Whether entries were made to this effect in the account books or not, I fail to see how the surplus could have been increased which could have been divisible among the shareholders. The contract between the company and the shareholders, which is referred to in the supplementary statement, is that 90 per cent. of the profits, after making the necessary provisions, is to be apportioned among the holders of participating policies and it cannot possibly be urged that one of the necessary provisions is not the payment of income-tax. Therefore, and after all, the only relationship between the company and its policy-holders is a contractual one, under the contract a policy-holder can only claim to be entitled to 90 per cent. of the profits after proper expenditure has been incurred, and one of those items of expenditure would be the payment of income-tax.
The real question we have to consider is whether these two amounts have been reserved for or expended on behalf of the policy-holders. Sir Jamshedji Kanga has rightly conceded that there is no difference in principle between these two amount; the sum or Rs. 33,860-2-1 has been actually expended, the sum of Rs. 1,00,770-7-6 is not expended but it is kept in reserve to meet a liability similar to the liability for which Rs. 33,860-2-1 was expended.
It is not disputed and it cannot be disputed that the assessee in this case is the company. The liability to pay the tax is one the company. There is no liability to pay the tax on the policy-holders, and the amount of Rs. 33,860-2-1 was paid by the company not on anyone elses behalf but on its own behalf in order to discharge a liability which in law it has to discharge for paying income-tax. Similarly the sum or Rs. 1,00,770-7-6 is reserved by the company to meet a liability which again is in law its own liability and not the liability of the policy-holders. In face of that I find it very difficult to appreciate Sir Jamshedji Kangas argument that these two amounts were either expended or reserved on behalf of the policy-holders.
With regard to the sum or Rs. 14,142, I really fail to understand how the Tribunal in face of the appropriation account came to the conclusion that this was the unappropriated surplus. In the total which is placed to the credit of the policy-holders, viz., Rs. 6,50,734 the sum of Rs. 14,142 is included. Instead of paying out the whole of this amount, what the appropriation account does is, it pays out or makes provision for the payment of Rs. 6,32,063 to the policy-holders, provides for Rs. 4,530, which is the interim bonus already paid, and carries forward the balance or Rs. 14,141 to the credit of the policy-holders. It is already appropriated, remains appropriated and is carried forward as appropriated to the credit of the policy-holders. To remove all ambiguity Sir Jamshedji Kanga has made a statement, as referred to by the learned Chief Justice, on behalf of the company that this sum is ear-marked for the policy-holders and will not be utilise for any other purpose.
Under the circumstances I agree with the learned Chief Justice that the question referred to us should be answered in the manner he has suggested.
P.C. – We think that in the circumstances each party should pay his own costs.
Reference answered accordingly.