judgement:
Appeal No. 999 of 1964.
Appeal by special leave from the order dated March 25, 1954 of the Life Insurance Tribunal, Bombay in Case No. 27 of 1962.
C. K. Daphtary, Attorney General, section J. Banaji, Atiqutor Rehman and K. L. Hathi, for the appellant.
N. A. Palkhivala, section J. Sorabjee, J. B. Dadachanji, 0.
C. Mathur and Ravinder Narain, for the respondent.
The Judgment of the Court was delivered by Wanchoo J.
The only question that arises for determination in this appeal by special leave from the order of the Life Insurance Tribunal, Bombay, is the interpretation of the words "life insurance fund" as used in paragraph 4 of Part B of the First Schedule to the , No. 31 of 1956, (hereinafter referred to as the Act).
The question arose in connection with the payment of compensation to the respondent, the Crown Life Insurance Company, which is incorporated in Canada, by the appellant, the Life Insurance Corporation of India on the taking over of the business of the respondent by the appellant under the Act.
The respondent claimed Rs. 27,86,658 as compensation while the appellant was prepared to pay Rs. 1, 1 1,466.
The respondent claimed that as its life insurance fund was always in deficit before the Act came into force, there was no liability on it under cl.(d) of paragraph 4 of Part B of the First Schedule to the Act.
The appellant on the other hand claimed that under that cl.
(d), there was a surplus of Rs. 27,86,658 and therefore under cl.
(d) a sum of Rs. 26,75,192 was to be debited towards the liabilities of the respondent.
That is how the appellant arrived at the compensation of Rs. 1,11,466.
The appellant claimed that the words "life insurance fund" in cl.
(d) meant the difference between the total assets and the liabilities under cls.
(a) and (c) of the said paragraph 4.
The respondent on the other hand contended that the words "life insurance fund" in cl.
(d) had the same meaning as those words had under the , No. 4 of 1938 (hereinafter referred to as the ).
The respondent therefore claimed that as there was always a deficit in its working as shown by form 1 of the Fourth Schedule to the , no amount was to be deducted as liability under cl.
(d) of the said paragraph 4.
It is this difference in the meaning assigned to the words "life insurance fund" by the parties 477 that is responsible for the large difference in the amount claimed by the respondent and offered by the appellant.
The Insurance Tribunal has accepted the contention put for ward on behalf of the respondent and has held that the words "life insurance fund" in cl.
(d) of the said paragraph 4 have the same meaning as in the , and that there is only one meaning of these words in the .
It has rejected the contention raised on behalf of the appellant and has in consequence awarded compensation at Rs. 27,86,658.
Aggrieved by this order, the appellant got special leave from this Court; and that is how the matter has come up before us.
The sole question that falls for determination therefore de pends on the interpretation of the words "life insurance fund" and for that purpose we shall have to consider certain provisions of the as well as of the Act.
We may at the outset refer to section 2 (10) of the Act, which is as follows: " In this Act, unless context otherwise require (10) all other words and expression used herein but not defined and defined in the shall have the meanings respectively assigned to them in that Act.
" It is not in dispute that the words "life insurance fund" appear In the though not in the definition section thereof.
Section 2 (10) of the Act however does not refer only to the definitions in the definition section of the ; it lays down generally that any words and expressions used in the Act and defined in the shall have the meanings assigned to them in the (and that means anywhere in the ) unless the context otherwise requires.
We have therefore to turn to the first to find out the meaning of the words "life insurance fund" as given therein and then to see whether the context of cl.
(d) of the said paragraph 4 requires otherwise.
If we come to the conclusion that it does not require otherwise, the words "life insurance fund" in cl.
(d) of the said paragraph 4 will have the same meaning as in the .
Let us therefore turn to the to see what the words "life insurance fund" mean under that Act.
It has been urged in the first place on behalf of the appellant that the words "life insurance fund" under the have not one meaning only and therefore it is not possible to give that meaning to these words in cl.
(d) with which we are concerned.
In the alternative it is urged that the context requires that even if the words "lift insurance fund" have only one meaning under the , they have a different meaning under cl.
We have therefore to find out what the words "life insurance fund" mean under the and whether they have the same meaning throughout the Act.
We have already pointed out that the words "life insurance fund" have not been defined in section 2 (N)4SCI 4 478 of the insurance Act, which is the definition section.
But there is no doubt that in section 10 of the , these words have been given a specific meaning to which we shall now refer.
The was concerned not only with life insurance business but also with insurance business of other kinds, namely, marine, fire and miscellaneous.
It was open to an insurance company to carry on either the life insurance business only or life insurance business along with insurance business of other kinds also.
Therefore, section 10(1) of the provided that where an insurer carried on business of more than one kind, he was boUnd to keep a separate account of all receipts and payments in respect of each kind of business.
Section 10(2) dealt specifically with life insurance and we therefore read the relevant part of that sub section: "Where the insurer carries on the business of life insurance, all receipts due in respect of such business shall be carried to and shall form a separate fund to be called the life insurance fund the assets of which shall. be kept distinct and separate from all other assets of the insurer and the deposit made by the insurer in respect of life insurance business shall be deemed to be part of the assets of such fund and every insurer sHall. furnish to the Controller a statement showing in detail such assets as at the close of every calendar year duly certified by an auditor or by a person qualified to audit under the law of the insurer 's country"; There are three provisos to this section to which it is unnecessary for our purposes to refer.
Sub section (3) of section 10 is also material and runs as follow: "The life insurance fund shall be as absolutely the security of the life policy holders as though it belonged to an insurer carrying on no other business s than life insurance business and shall not be liable for any contracts of the insurer for which it,would not have been liable had the business of the insurer been only that of life insurance and shall not be applied directly or indirectly for any purposes other than those of the life insurance business of the insurer. " Section II (c) then provides for keeping a revenue account in form D of the Third Schedule in respect of each insurance business for which separate account was required to be kept under section 10(1).
Regulation 1 of of the Third Schedule provides that form D as set out in is appropriate for life insurance business.
A perusal of form D shows what items have to be entered on the ,receipts side of the form and these items are: premiums of an kinds, consideration for annuities, interest, dividends and rents (obviously from assets of the life insurance fund); regulation fees and other income.
It is thus clear that the revenue account on the receipt side mainly has income from premiums and income arising 479 out of 'Investments from life fund and this forms the main basis of the life insurance fund.
On the expenditure side of form D there is provision for claims under policies, annuities, surrenders, bonuses in cash, bonuses in reduction of premiums, expenses of management (i.e. salaries etc., travelling expenses, directors ' fees, auditors ' fees, and charges for advertisements, printing and stationary, other expenses of management, rents for offence belonging to and occupied by the insurer, rent of other offices kept by the insurer), bad debts and other expenditure.
Thereafter a balance has to be struck and this balance is the balance of the life insurance fund.
This balance is arrived at after taking into account the balance of the fund at the beginning of the year and after making adjustments with respect to profit and loss and transfers from appropriation account.
It is this balance which goes into the balance sheet form A provided in the First Schedule of the as life insurance fund and includes as provided in section 10(2) the deposit made by the insurer in respect of life insurance business.
There is no doubt therefore that the words "life insurance fund" under the have got the meaning assigned to it under section 10(2) read with section 11 and form D of the Third Schedule.
It is equally clear that all the assets of an insurance company doing life insurance business do not form part of the life insurance fund, for example, if the insurance company has got share capital that is not part of the life insurance fund even though the deposit required by law to be made for life insurance business is part of the fund.
So far therefore as section 10(2), section 1 1 and form D are concerned, life insurance fund has a definite meaning.
The working of a life insurance company is in some respects different from that of ordinary companies inasmuch as it is not open to a life insurance company to distribute dividends unless there is surplus computed under the .
This surplus is determined thus: First of all the life insurance fund as disclosed by revenue account in form D is found out.
Then the valuation of the policies in force as on a certain date is determined by actuarial valuation which has to be made at least once in three years under section 13(1) of the .
After valuation of the policies of different kinds they are grouped under different heads and their summary is set out in form H of the Fourth Schedule.
Form 1 of the said Schedule provides for determining the surplus or deficit.
This form is known as valuation balance sheet and the surplus or deficit is the difference between net liability in business as shown in form H and the life insurance fund as shown in balance sheet form A. Surplus will only result if the balance of life insurance fund is greater than the net liability under form H.
Where however the balance of life insurance fund is less than the net liability under form H, there will be a deficiency and not surplus.
Section 49(1) of the insurance Act then provides that no amount of the life insurance fund will be used to pay any dividend to share holders or any bonus to policy holders or for making any payment in service of any debenture, unless the valuation balance sheet in form 1 of the Fourth Schedule 480 shows a surplus.
It is further provided that out of the surplus only 71 per centum shall be allocated to or reserved for shareholders with the consequence that the balance of 92 1/2 per centum of the surplus remains in the fund for policyholders or may be allocated as bonus to policyholders.
The life insurance find as defined in section 10(2) is an absolute security of the life policy holders and cannot be used in any manner except in accordance with the provisions to which we have already referred.
Thus the words "life insurance fund" have a definite meaning under the under section 10(2), read with section 1 1 and form D of the and the words "surplus" and "deficiency" have also special meaning appearing from a combined reading of section 13 of the and form H and form 1 of the Fourth Schedule.
The next question is whether the words "life insurance fund" have any other meaning under the .
These words appear in a number of provisions of that Act.
It is not necessary however to refer to all of those provisions for it is not in dispute that in most of the provisions the words have the meaning assigned to them under section 10(2) of the .
But three provisions have been specifically brought to our notice where it is said that the words have a different meaning.
The first is section 56 which deals with winding up of insurance companies.
In sub section (2) thereof reference is made to surplus of assets over liabilities and how such surplus which is called prima facie surplus in the sub section is to be dealt with.
It will however be seen that the sub section does not use the words "life insurance fund" when speaking of prima facie surplus which is the difference between all assets and all liabilities.
But it is urged that the marginal note to the section which is in these words "application of surplus assets of life insurance fund in liquidation or insolvency" shows that for the purpose of this section, the words "life insurance fund" as used in the marginal note may have a different meaning.
We are however of opinion that this is not so.
Sub section (2) after speaking of prima facie surplus, which is equal to total assets minus total liabilities, provides how the prima facie surplus is to be dealt within winding up proceedings.
The sub section provides that this prima facie surplus would be divided into two parts and one part would be in proportion to the profits of the insurer allocated to policy holders.
This part will naturally be determined with respect to form 1 of the Fourth Schedule which deals with life insurance fund and surplus or deficiency.
The sub section thus provides that out of the prima facie surplus a certain amount will be deducted in proportion to the profit allocated to the policy holders, and remaining will be the amount which may go to shareholders in winding up.
Therefore as we read sub section (2) we find that it deals with entire assets and these entire assets will certainly include the life insurance fund.
The marginal note indicates how out of the prima facie surplus indicated in sub section (2) the surplus in the life insurance fund as arrived at in form shall be used.
The argument that the words "life insurance fund" in 481 section 56(2) has a different meaning therefore has no force for two reasons.
In the first place the section does not use the words "life insurance fund" and in the second place when the marginal note refers to surplus assets of life insurance fund it means in reality the surplus to be found in form 1, for the prima facie surplus will include that.
We cannot therefore accept the contention that for the purposes of section 56(2) the words "life insurance fund" have a different meaning in view of the marginal note of section 56.
The next section to which reference is made in this connection is section 58(3).
Section 58 deals with schemes for partial winding up of insurance companies, i.e. winding up of one kind of business while another kind of business goes on.
Section 58(3) provides that the, provisions of this Act relating to valuation of liabilities of the in , surer in liquidation and insolvency and to the application of surplus assets of the life insurance fund in liquidation or insolvency shall apply to the winding up of any part of the affairs of the company.
It is argued that the words "life insurance fund" here are used in a different sense .
We are of opinion that this is not so.
Sub section (3) of section 58 has to be read along with section 56 and in particular with Sub section (2) thereof and as we have already indicated the words "life, insurance fund" in the marginal note of section 56 have no different meaning from that to be found in section 10(2) the same applies to the use of the words "life insurance fund" in section 58(3) mutates mutandis.
Lastly reference was made to regulation 7 of of the First Schedule, which provides for a certificate that no part of the assets of the life insurance fund has been directly or indirectly applied in contravention of the provisions of the relating to the application and investment of life insurance funds.
It is urged that the use of the plural suggests that a different meaning is to be given to the words "life insurance fund" here.
We are unable to agree with this contention either.
The use of the words "life insurance funds" in plural is merely due to the exigencies of grammar in this provision and does not mean that the words have a meaning different from that assigned to them in section 10(2) to which we have already referred.
We must therefore reject the contention on behalf of the appellant that the words "life insurance fund" have any meaning other than that assigned to them in section 10(2) of the so far as that Act is concerned.
Reference is then made to section 27(1) of the which requires that every insurer shall invest and at all times keep invested assets equivalent to not less than the sum of the amount of his liabilities to holders of life insurance policies in India on account of matured claims and the amount required to meet the liability on policies of life insurance maturing for payment in India subject to certain deductions.
It is urged that this provision lays down that an insurer is required to keep certain sums invested to meet his liabilities mentioned therein and this shows that the entire assets of the insurer are security for the policy holders.
It is true that this provision requires an insurer to keep certain assets invested and those 482 have to be equal to his liabilities on policies matured and policies yet to mature.
This provision is for the protection of the policyholders ' interest.
It has however in our opinion nothing to do with the life insurance fund as such.
What in fact it provides is that when the life insurance fund shows a deficit in form it would be the duty of the insurer to see that he has further assets to cover the deficit, and that these assets are always kept invested in accordance with the ; but the section does not provide that the assets brought in to cover the deficit would become part of the life insurance fund.
It is not in dispute that there is no other provision in the which requires that whenever.
the life insurance fund is in deficit the insurer must put sufficient money in that fund itself to 'cover the deficit.
It is true that form D of the Third Schedule includes an item "other income" but that does not mean that any sum kept invested by an insurer for the purposes of section 27(1) in order to cover the deficit in the life insurance fund becomes part of that fund.
Note (e) which appertains to "other income" of the said form makes it clear that all the amounts received by the insurer directly or indirectly whether from his head office or from any other source outside 'India shall also be shown separately in the revenue account except such sums as properly appertain to the capital account.
Therefore sums invested for purposes of section 27(1) of the do not necessarily form part of the life insurance fund.
It is only such moneys which are included in form D and which are not of capital nature that form part of the life insurance fund.
In the present case it is not in dispute that the business of the respondent 1 in India always had shown a deficit in form .
It is also not in dispute that in order to meet that deficit as required by s, 27(1), the respondent took advantage of section 27(6) which provides that the assets required by this section to be held invested by an insurer incorporated or domiciled outside India shall subject to certain exceptions be held in India and all such assets shall be held in trust for the discharge 'of the liabilities of the nature referred to in sub section
(1) and shall be vested in trustees resident in India and approved by the Central Government and the instrument of trust under this sub section shall be executed by the insurer with the approval of the Central Government and shall define the manner in which alone the subject matter of the trust shall be dealt with.
Such an instrument of trust was executed by the respondent and the State Bank of India was the trustee of the fund required to be kept under section 27(1) read with section 27(6).
But that in our opinion did not make the whole of this trust fund part of the life insurance fund as defined in section 10(2).
The money required to cover the deficit in form I could only become part of the life insurance fund if that was included in the revenue account form D and in such a case there would then be no deficit left in the life insurance fund.
It is not ill dispute that in this case funds brought in by the respondent from outside to cover the deficit were never put in the revenue account and were never made part of the life insurance fund, though 483 they remained vested in the trustee for the purpose of section 27(1) read with section 27(6).
The appellant 's contention always was that the case of the respondent, for purpose of compensation, was covered by part B of the First Schedule to the Act and not by its Part A, and this was because there was a deficit in form I submitted by the respondent throughout its working.
It appears that in spite of this deficit in the Indian working of the respondent, the respondent used to pay bonuses to its policy holders out of its global surplus and these payments were made in cash.
Even so the appellant insisted and rightly that as form I showed deficit at the relevant time the respondent was not entitled to take advantage of Part A. of the First Schedule to the Act for purposes of compensation.
In such circumstances it seems strange when admittedly there was always a deficit in form I submitted by the respondent in connection with its.
Indian.
business that the appellant should now say for the purpose of compensation that there is a surplus disclosed by the business of the respondent, 96 per centum of which would go to the appellant under cl.
(d) of the aforesaid 4th paragraph, We are.
therefore of opinion that the appellant cannot take advantage of section 27(1) and ask us to hold that all the funds which are mentioned in.s.
27(1) to be kept invested are part of the life insurance fund.
Part B applies to. ' two kinds of insurance companies viz., those which had deficits and those which had surplus but had not distributed it at the relevant time.
It is the latter class of companies that cl.
(d) is really meant to cover.
As we have already.
said section 27(1) has nothing to do with the life insurance fund and is meant only as a safety device for policyholders, particularly in cases where there is deficit in the life insurance fund.
: But where such deficit is made up for the purpose of section 27(1), the extra amount so invested by the insurer to make up the deficit does not automatically become part of the life insurance fund unless it is put through the revenue account form D. That was admittedly never done in this case and form I always showed a deficit in the case of the respondent.
Section 27(1) therefore does not help the appellant, for it is not in dispute that an insurer is not bound to make up the deficit by putting money in the life insurance fund though he is bound to keep assets invested to make up the deficit; but such assets may be kept outside the life insurance fund.
Now we come to the last question whether there is anything in the Act which requires that we should give a different meaning to the words "life insurance fund" in cl.
(d) of the aforesaid 4th paragraph.
We have already referred to section 2(10) of the Act which lays down that all other words and expressions used in the Act but not defined and defined in the shall have the meanings respectively assigned to them in that Act.
Prima facie, therefore, the words "life insurance fund" used in cl.
(d) of the aforesaid 4th paragraph have the same meaning as in the , and the question is whether the context of the Act requires that we should give a different meaning to these words.
We are of opinion 484 that there is nothing in the context of the Act which requires that a different meaning should be given to these words.
If anything, the Act shows that these words have the same meaning in cl.
(d) of the aforesaid 4th paragraph as in the .
In the first place we have to see what is the reason for the provision in cl.
(d) of the aforesaid 4th paragraph.
We have no doubt that the provision in cl.
(d) is related to the provision in section 49(1) of the .
We have already referred to that section and it requires that 921% of the surplus in form I shall be kept for the policy holders.
Where therefore there is surplus in form 1, 921/2 per centum thereof is meant for the policy holders under this provision.
Secondly when transfer of life insurance business from the life insurance companies to the Life Insurance Corporation took place a provision had to be made to carry out the effect of section 49(1) in connection with the transfer.
That provision is to be found in cl.
It lays down that where there is a surplus in the life insurance fund as a result of the actuarial valuation of policy liabilities made under cl.
(b) of the aforesaid paragraph 4, 96 per centum of such surplus shall be shown as a liability.
This means that just as under section 49(1), 921 per centum of the surplus in form I was meant for the policy holders so in the case of transfer, 96 per centum or that surplus shall go to the Life Insurance Corporation in order to meet the liabilities arising under section 49(1) of the for past surplus and to that extent the compensation to be paid to the insurance company from which the Life Insurance Corporation was taking over business would have to be reduced.
This was with reference to the past and could not be with reference to the future, for so far as the future was concerned, the Life Insurance Corporation alone was responsible.
But if there was a deficit in form I of the insurance company which was being taken over by the Life Insurance Corporation there could be no allocation to the policy holders under section 49(1) of the and there would be no liability for the past.
So there would be no liability for the past under cl.
(d) on the insurer whose business was being taken over by the Life Insurance Corporation.
In the present case admittedly there was no surplus in form I in the case of the respondent and therefore there would be no liability on the respondent under cl.
(d) of the aforesaid 4th paragraph.
This in our opinion is the rationale behind the provision in cl.
(d) and as there was always a deficit in connection with the working of the respondent, there could be no liability on the respondent under cl.
But apart from this rationale behind cl.
(d) we find that the language of Part A and Part B of the First Schedule relating to principles for determining compensation also leads to the same inference.
Part A provides that compensation to be given to an insurer having a share capital on which dividend or bonus is payable who has allocated as bonus to policy holders the whole or any part of the surplus as disclosed in the abstracts prepared in accordance with of the Fourth Schedule to the in 485 respect of the last actuarial investigation relating to his controlled business as at a date earlier than January 1, 1955 shall be computed under that part.
Clearly therefore this provision in Part A refers to surplus to be found by looking at form of the Fourth Schedule to the .
Part B of the First Schedule to the Act then speaks of compensation to be given to an insurer having a share capital on which dividend or bonus is payable but who has not made any such allocation as is referred to in Part A. This immediately brings in the opening words of Part A and shows that Part B applies also to those insurers who having a surplus in form I have not allocated the whole or any part of such surplus to policyholders.
The surplus in form I is arrived at as already indicated when the life insurance fund is larger than the liabilities on the policies still to mature.
Clearly, Part B provides how compensation is to be paid to companies who had no surplus as disclosed in form 1 of the Fourth Schedule to the or who if they had any surplus in that form had made no allocation to policy holders.
Therefore when cl.
(d) of the aforesaid 4th paragraph speaks of the life insurance fund being in surplus that surplus has to be determined in accordance with form 1 of the Fourth Schedule to the subject to modifications indicated in Part B in the matter of valuation under form H and not in the manner suggested on behalf of the appellant.
The word "surplus" in cl.
(d) cannot have a meaning different from what it has in the opening words of Part B which come therein from Part A.
The context therefore instead of showing that there is any other meaning of the words "life insurance fund" in cl.
(d) shows that they have the same meaning in that clause as in form 1 of the Fourth Schedule to the .
Another reason which points to the same conclusion,namely, that the words "life insurance fund" in cl.
(d) have the same meaning as in form 1 of the Fourth Schedule to the , is to be found in section 35(1) and (2) of the Act.
Section 35(1) permits a foreign insurer to repatriate certain assets.
It says that an insurer incorporated outside India may, before the appointed day, make an application to the Central Government stating that among the assets appertaining to the controlled business of the insurer there are assets brought into India by him for the purpose of building up his life insurance business in India which should not be transferred to and vested in the Life Insurance Corporation.
On receipt of such an application, the Central Government has to determine the value of the assets of the insurer appertaining to his controlled business in existence on December 31, 1955 in accordance with the provisions contained in paragraph 3 of Part B of the First Schedule to the Act and deduct therefrom the total amount of the liabilities of the insurer appertaining to his controlled business as on December 31, 1955 computed in accordance with the provisions contained in the Second Schedule to the Act; and if there is any excess, the Central Government may direct that such assets equivalent in value to the excess shall not be transferred to or vested in 486 the Life Insurance Corporation.
It is obvious from these provisions that where the legislature intended to refer to all the assets and liabilities it said so in terms and did not use the words "life insurance fund".
The use of the words "life insurance fund" in cl.
(d) of the aforesaid 4th paragraph therefore must have the special significance assigned to these words in the and cannot be equated to the difference between the total assets and liabilities apart from liabilities towards policies yet to mature.
Besides we are of opinion that if the words "life insurance fund" in cl.
(d) are to be given the meaning for which the appellant is contending there will be a clear inconsistency between cl.
(d) and it.
35 of the Act.
Section 35 permits a foreign insurer to take away what may be called excess assets but a foreign insurer is not bound to make an application under section 35.
Now take the case of the respondent.
It is not in dispute that the respondent has taken away excess assets with the permission of the Central Government under section 35, to the tune of about rupees fifteen or sixteen lakhs.
But if the respondent had not, chosen to make the application under section 35, all Ms assets would have to be considered under Part B relating to compensation.
If that Was so, according to the contention put forward on behalf of the appellant as to the meaning of the words "life insurance fund", the total compensation under Part B of the First Schedule to 'which the respondent would have been entitled, would be Rs. 1.74,408.
This means that as by making an application the respondent was able to take away Rs. 15,73,540 under section 35(2) he would further get Rs. 1,11,466 as compensation under Part B of the First Schedule to the Act.
But if he had not made the application under section 35, he would only get Rs. 1,74,408 in all.
There is no doubt that the legislature could not have intended such a result, namely, that the insurer should get away with a much larger amount if he applies under section 35 and should get a much smaller amount if he does not choose to apply under section 35.
On the other hand, if we accept the contention of the respondent as to the meaning of the words " 'life insurance fund" it would make no difference to the compensation whether the insurer applies under section 35 or not.
We must hold that the legislature intended that in either case an insurer would get the same amount whether it comes to him as compensation in one sum or comes to him as compensation plus repatriation of excess assets.
If the words "life insurance fund" are interpreted to mean what the respondent says, the result would be this.
If it applies for repatriation it would get Rs. 15,73,540 as repatriation of excess assets and Rs. 27,86,658 as compensation under Part B: total Rs. 43,60,198.
If it does not apply for repatriation and if cl.
(d) has the meaning urged on behalf of the respondent, its total compensation would come to the same figure, namely, Rs. 43,60,198.
This clearly shows that the legislature intended the words "life insurance fund" to mean what they meant in section 10(2) for that would give in our opinion the same result whether an insurer applied under section 35 or not.
487 We have already said that cl.
(d) provides for past surplus in form 1, the responsibility for which passes on to the Life Insurance Corporation when it takes over the life business of an insurer.
So far as the future is concerned, cl.
(b) of the aforesaid 4th paragraph provides for a higher valuation for with profits policies with the result that the liability which the insurer whose business is being taken over has to bear with respect to with profits policies is higher.
The appellant apparently claimed an amount under cl.
(d) on the ground that at future valuation the bonus payable to the policy holders would be reduced.
Now cl.
(d) in our opinion provides for cases where there have been surpluses in the past while the provision for the future in respect of profit policies is to be found in cl.
The appellant therefore cannot lay claim to anything under cl.
(d) unless there were surpluses in the past in form 1 of the Fourth Schedule to the .
The contention that the appellant is likely to suffer if the meaning contended for by the respondent is given to the words "life insurance fund", particularly with respect to with profit policies has in the circumstances no force, for there is already a weightage in favour of calculating liability for with profit policies under cl.
(b) of the 4th.
paragraph of Part B of the First Schedule to the Act.
Lastly there will be another curious result if the words "life insurance fund" in cl.
(d) is given the meaning contended for on behalf of the appellant.
Take the case of an Indian company which has shares but which has always been showing deficit in form 1 of the Fourth Schedule to the .
If its life insurance fund for the purposes of cl.
(d) is calculated in the manner contended for on behalf of the appellant the result would be that the share capital of such a company would also come into the assets and if as a result of the share capital going into assets the deficit in form is converted into surplus such a company would in conceivable circumstances lose 96 per centum of its share capital as if it was part of the life insurance fund.
It is obvious that the share capital of an insurance company cannot be a part of the life insurance fund; but on the interpretation urged on behalf of the appellant even 96 % of the share capital may be lost to an insurance company, whose business is being taken over by the Life Insurance Corporation if the words "life insurance fund" are given the wide meaning for which the appellant is contending.
We have therefore no doubt that the tribunal was right in its conclusion that the words "life insurance fund" as used in cl.
(d) of the aforesaid 4th paragraph have the same meaning as that given to them in section 10(2) of the read with section 1 1 and form D of the Third Schedule to the .
In this view of the matter, the appeal must fail.
We therefore dismiss the appeal with costs to the respondent.
The respondent will be at liberty to withdraw the money deposited in this Court towards compensation.
Appeal dismissed.

summary:
Under section 10(2) of the , where an insurer carries on the business of life insurance, all receipts due in respect of such business shall be carried to and form a separate fund called the life insurance fund.
Section 11 (c) provides for keeping a revenue account in Form D of the Third Schedule, which applies to life insurance business also.
This account, on the receipt side, has mainly income from premiums and out of investments from life fund and, on he expenditure side, all expenses and bad debts connected with the life business.
A balance is struck after taking into account the balance of the fund at the beginning of the year and after making some adjustments and transfers, and the "life insurance fund" is arrived at.
Form 1 of the Fourth Schedule to the , provides for determining the surplus or deficit, which is the difference between the net liability in business determined by actuarial valuation of policies in force and the Life Insurance Fund.
If there is a surplus, section 49(1) of the provides, that 712 1/2 % of the surplus shall be allocated to shareholders, and the balance shall remain in the fund for policy holders.
When transfer of life insurance business from the life insurance companies to the Life Insurance Corporation took place, a provision had to be made for carrying out the effect of s.49(1).
That provision was made in Cl.
(d) of para.
4 of Part B of the First Schedule to the , according to which, where there is surplus in the life insurance fund, as a result of the actuarial valuation of policy liabilities under Cl.
(b) of the same Para.
4, 96 % of such surplus shall be shown as a liability, that is, 96% of that surplus shall go to the Corporation in order to meet the liabilities, and to that extent the compensation to be paid to the insurance company would be reduced.
Part B applies to those insurers, who, having a surplus in Form 1 have not allocated the whole or any part of such surplus to policy Holders, and also provides, how compensation is to be paid to companies who had no surplus as disclosed in Form T.
In the latter case, that is, if there was a deficit in Form 1, there could be no allocation to the policy holders under s.49(1) of the , and there would be no liability under Cl.
On the taking over of the business of the respondent, a life insurance company incorporated in Canada, by the appellants, under the , the respondent claimed Rs. 27 lacs and odd as compensation.
The respondent contended that the words "life insurance fund" in Cl.
(d) referred to above had the same meaning as those words in the , and since there was deficit in its working as shown by Form 1.
no amount was to be deducted as liability under Cl.
The appellant was prepared to Day only Rs. 1 lac and odd, on the basis that, the words "life insurance fund" in Cl.
(d) meant the difference between the total assets and the liabilities 475 under Cls.
(a) and (c) and since there was a surplus of Rs. 27 lacs 'And odd, a sum of Rs. 26 lacs and odd, forming, 96% of it, was to be debited towards the liabilities of the respondent.
The Insurance Tribunal accepted the respondent 's contention and awarded the compensation claimed by it.
In its appeal to this Court, the appellant contended that: (i) the words "life insurance fund" under the have more than one meaning under that Act, and therefore it was not possible to give the meaning, claimed by the respondent, to those words in Cl.
(d) under the Corporation Act, and (ii) even if those words have only one meaning under the , they have a different meaning under the Cl.
HELD: (i) A combined reading of sections 10(2), 11 and 13 of the and Form D of the Third Schedule and Form 1 of the Fourth Schedule to the , shows, that the words "life insurance fund", "surplus" and "deficit" have only the definite meaning set out above, as contended by the respondent.
[480B C] The contention, that the words "life insurance fund" have different meanings in sections 56(2) and 58(3), and in regulation 7 of of the First Schedule to the , has no force, because when the marginal note of section 56(2) refers to surplus assets of life insurance fund it means in reality the surplus to be found in Form 1 and the same applies to section 58(3); and as regards regulation 7, the plural is used in the words "life insurance funds" merely due to exigencies of grammar.
[46OF: 481D E F G] It cannot be said that because section 27(1) of the lays down that an insurer is required to keep certain sums invested to meet his liabilities mentioned therein, the entire assets of the insurer are security for the policy holders and not merely the life insurance fund.
This section only provides that when life insurance fund shows a deficit in Form 1 it would be the duty of the insurer to see that he has further assets to cover the deficit, and that these assets are always kept invested in accordance with the ; but the section does not provide that the assets brought in to cover the deficit would become part of the life insurance fund.
It is only such moneys which are included in the revenue account, Form D, and which are not of a capital nature that form part of the life insurance fund.
Since, in the instant case the business of the respondent in India had admittedly shown a deficit in Form 1, and the funds brought in by the respondent from outside to cover the deficit were never put in the revenue account, they were never made part of the life insurance fund, though they remained vested in a trustee under section 27(6) of the .
[48 2B G] (ii) The Tribunal was right in its conclusion that the words "life insurance fund" as used in Cl.
(d) of the aforesaid fourth paragraph have the same meaning as that given to them in section 10(2) of the read with section 11 and Form D of the Third Schedule to the .
[483H] When Cl.
(d) speaks of the life insurance fund being in surplus that surplus has to be determined in accordance with Form 1 subject to certain modifications indicated in Part B of the Corporation Act.
The context.
therefore, instead of showing that there is any other meaning of the words "life insurance fund" in Cl.
(d), shows that they have the same meaning in that clause as in Form J. [485D, E] Section 35(1) and (2) of the Corporation Act also point to the same conclusion.
because, these provisions show that where the legislature intended to refer to all the assets and liabilities it said so in terms and did not use the words "life insurance fund", Besides, if these 476 words were given the meaning for which the appellant contended, there would be an inconsistency between Cl., (d) and section 35, in that, the insurer would get away with a much larger amount if he applied for repatriation of excess assets under section 35, and would get a much smaller amount if he did not choose to apply under the section, a result which the legislature could not have intended.
Moreover, the share capital of an insurance company cannot obviously form ptrt of the life insurance fund; but on the interpretation urged on behalf of the appellant, even 96% of the share capital may be lost to an insurance company, as part of the life insurance fund in conceivable,, circumstances, [486A C, F; 487G].


judgement:
vil Appeal No. 308 of 1964.
Appeal by special leave from the judgment and order dated September 10, 1962 of the Calcutta High Court in Income tax Reference No. 115 of 1957.
A.V. Viswanatha Sastri, B. Sen Gupta and P.K. Ghosh, for the appellant.
N.D. Karkhanis and R.N. Sachthey, for the respondent.
The Judgment of the Court was delivered by Shah, J.
The appellant is a Hindu undivided family and carries on business as a dealer in "iron scrap and hardware".
Messrs Hoare Miller and Company Ltd. hereinafter called 'the Company ' were owners of a jute pressing factory installed on a piece of land belonging to the Company.
Adjacent to that land were two pieces of land: one was leasehold, and the other held by the Company as a licensee from the Government of West 604 605 Bengal.
On January 21, 1941 the Company leased out to one Ramnath Bajoria the jute pressing factory together with the machinery standing on the land owned by the Company for ten months commencing from January 10, 1941.
Ramnath Bajoria failed to vacate and deliver up possession of the premises demised to him, after the expiry of the period of the lease, and the Company instituted a suit in ejectment against him.
By an agreement dated October 31, 1942 the appellant agreed to purchase all the rights of the Company in the factory and the appurtenant premises for Rs. 2,45,000.
On November 14, 1942 the Company delivered to the appellant possession of the property agreed to be sold, save and except the factory demised under the lease to Ramnath Bajoria and the machinery included in the lease.
On February 26, 1943 the Company executed a conveyance in favour of the appellant conveying the factory and the appurtenant premises.
On June 12, 1943 the appellant agreed to sell to one Ranada Prasad Saha the property purchased from the Company for Rs. 4,73,364/3/6 free from all encumbrances.
On August 10.
1943 the appellant was substituted as a plaintiff in the suit filed by the Company against Ramnath Bajoria, and obtained possession of the factory premises.
By a deed of conveyance dated September 30, 1943 the appellant conveyed to Ranada Prasad Saha the factory and the appurtenant premises and delivered possession thereof.
In the deed of conveyance the property sold was described in three separate Schedules.
Schedule I, Press House, office, residential buildings and three warehouses on land owned by the Company: Schedule 11 ; leasehold land together with a warehouse known as Kalibari godown: Schedule II1; two warehouses on land held as licensee by the Company from the Government of West Bengal.
The Income tax Officer.
District Ii(1), CAlcutta.
brought to tax in the hands of the appellant Rs. 2,24,864 bring the profit arising out of the sale of the property to Ranada Prasad Saha.
The Income tax Appellate Tribunal partially modified the order and reduced the total income by Rs. 7,000.
The Tribunal then drew up a statement of case and referred the following question to the High Court of Judicature at Calcutta: "Whether on the facts and in the circumstances of the case, the Tribunal was right in holding that the surplus of Rs. 2,35,211 received by the assessee as a result of the sale of the jute press referred to in the Appellate order arose out of an adventure in the nature of trade and was therefore rightly assessed to tax?" The High Court answered the question in the affirmative.
With special leave granted by this Court, the appellant has appealed to this Court.
L/P(N)4SCI 12 606 At the material time, capital gains were not taxable, and the only question failing to be determined is whether profit made by the appellant by sale of the property to Ranada Prasad Saha was taxabIe under section 10 of the Indian Income tax Act.
The Tribunal found the following facts proved: The appellant was carrying on business in iron scrap and hardware and never carried on any business in jute or in pressing jute.
At the material time when the purchase of the Jute Press was made, the appellant had, because of abnormal conditions prevailing in the town of Calcutta, closed its business in iron scrap and hardware.
The appellant purchased the jute press and the premises appurtenant thereto subject to litigation pending in the High Court, effected certain repairs and kept the factory in running condition, but made no attempt to start or organise the business of pressing jute, and his plea that he was not able to secure labour for working the press was not true.
Soon after he bought the factory, the appellant received an offer from Ranada Prasad Saha to buy the factory and he immediately accepted the offer to sell it to him.
These facts in the view of the Tribunal indicated that the appellant purchased the jute press, subject to litigation, with the sole object of reselling at profit at the earliest opportunity, and therefore the transaction was in the nature of a trading venture.
The High Court substantially agreed with this view.
Section 10 of the Indian Income tax Act, 1922 makes profits and gains of business, profession or vocation carried on by an assessee taxable.
The expression "business" is defined in section 2(4) as inclusive of "any trade, commerce, or manufacture or any adventure or concern in the nature of trade, commerce or manufacture".
It is common ground that the transaction of purchase and sale of the factory and appurtenant premises was an isolated venture.
To reiterate the sequence of material events: the appellant agreed to purchase the Jute Press from the Company on October 31, 1942 subject to litigation pending in the High Court of Calcutta: possession of the property except the premises in the occupation of the tenant was obtained on November 14, 1942 and the sale deed was obtained on February 26, 1943: on June 12, 1943 the appellant agreed to sell the press to Ranada Prasad Saha: on August 10, 1943 the appellant was substituted as plaintiff in the suit flied by the Company against Ramnath Bajoria, and after obtaining possession of the demised premises the appellant executed on September 30, 1943 a sale deed conveying the property and delivered possession to Ranada Prasad Saha.
Do these facts make out the case that the transaction was an adventure in the nature of trade? It is for the revenue to establish that the profit earned in a transaction is within the taxing provision and is on that account liable to be taxed as income.
The nature of the transaction must 607 be determined on a consideration of all the facts and circumstances which are brought on the record of the income tax authorities.
It has consistently been held by this Court that the question whether profit in a transaction has arisen out of an adventure in the nature of trade is a mixed question of law and fact: see G. Venkataswami Naidu & Company vs The Commissioner of Income tax(1) in which case this Court held that the expression "adventure in the nature of trade" in sub section
(4) of section 2 of the Act postulates the existence of certain elements in the adventure which in law would invest it with the character of trade or business and that a tribunal while considering a question whether a transaction is or is not an adventure in the nature of trade, before arriving at its final conclusion on facts, has to address itself to the legal requirements associated with the concept of trade or business.
Such a question is one of mixed law and fact and the decision of the tribunal thereon is open to consideration under section 66(1) of the Act.
See also Saroj Kumar Maiumdar vs Commissioner of Income tax, West Bengal(2).
A large number of cases were cited at the Bar in support of the respective contentions of the Commissioner and the assessee.
Passages from judgments in the same case were often cited claiming support for the respective contentions.
No useful purpose would be served by entering upon a detailed analysis and review of the observations made in the light of the relevant facts, for no single fact has decisive significance, and the question whether a transaction is an adventure in the nature of trade must depend upon the collective effect of all the relevant materials brought on the record.
But general criteria indicating that certain facts have dominant significance in the context of other facts have been adopted in the decided cases.
If, for instance, a transaction is related to the business which is normally carried on by the assessee, though not directly part of it, an intention to launch upon an adventure in the nature of trade may readily be inferred.
A similar inference would arise where a commodity is purchased and sub divided, altered, treated or repaired and sold, or is converted into a different commodity and then sold.
Magnitude of the transaction of purchase, the nature of the commodity, subsequent dealings and the manner of disposal may be such that the transaction may be stamped with the character of a trading venture: for instance, a man who purchases a large quantity of aeroplane linen and sells it in different lots, and for the purpose of selling starts an advertising campaign, rents offices, engages an advertising manager, a linen expert and a staff of clerks, maintains account books normally used by a trader, and passes receipts and payments in connection with the linen through a separate banking account: Martin vs Lowry(3): a person who carries on a money lending business purchases very cheaply a (2) [1959] Supp. 1 S.C.R. 640.
(2) (3) 608 vast quantity of toilet paper and within a short time thereafter sells the whole consignment at a considerable profit: Rutledge vs The Commissioner of Inland Revenue(1); a person even though he has no special knowledge of the trade in wines and spirits, purchases a large quantity of whisky sells it without taking delivery of it at a considerable profit: Commissioners of Inland Revenue vs Fraser(2), may be presumed having regard to the nature of the commodity and extent of the transaction coupled with the other circumstances, to be carrying on an adventure in the nature of trade.
These are cases of commercial commodities.
But a transaction of purchase of land cannot be assumed without more to ' be a venture in the nature of trade.
A director of a company carrying on the business of ware houseman purchasing a number of houses with a view to resale, and selling them at a profit some years after the purchase: Commissioners of Inland Revenue vs Reinhold(3): a person carrying on business in various lines, including an Engineering Works, purchasing land which was under requisition by the Government, negotiating sale thereof before the land was derequisitioned, and selling it after the land was released: Saroj Kumar Mazumdar vs Commissioner of Income tax, West Bengal(4); and a syndicate formed to acquire, an option over a rubber estate with a view to earn profit, and finding the estate acquired too small acquiring another estate and selling the two estates at a profit: Leeming vs Jones(3) may not be regarded as commencing a venture in the nature of trade.
These are cases in which the commodity purchased and sold is not Ordinarily commercial, and the manner of dealing with the commodity does not stamp the transaction as a trading venture.
It may be emphasized from an analysis of these cases that a profit motive in entering a transaction is not decisive, for, an accretion to capital does not become taxable income, merely because an asset was acquired in the expectation that it may be sold at profit.
Purchase of the property by the appellant was an isolated transaction not related to the business of the appellant.
The Tribunal and the High Court were, in our judgment, in error in holding that the right of the Company was not sold to the appellant in the lands in Sch.
II and Sch.
III properties.
The land in Sch.
II was leasehold, and on it was constructed a warehouse and the land in Sch.
III was held as a licensee and two warehouses were standing thereon.
The conveyance by the Company to the appellant is not on the record, but the recitals in the deed dated September 30, 1943 definitely indicate that the rights of the Company without any reservation were purchased by the appellant, and the appellant sold its entire rights in the properties in Schs.
I, (1) (2) (3) (4) 11 T.C.297.
(5) 15 T.C.333.
609 II and III without any reservation.
It is true that the appellant had put the factory in a working condition, but had not organized a jute pressing business, had not obtained a licence for working the factory, had not attempted to secure orders for pressing jute, and had not employed labourers, The appellant 's claim that it was not s9 done because the appellant could not secure labourers has not been accepted.
But that is not a decisive circumstance.
The factory was in the occupation of the lessee Ramnath Bajoria and possession was obtained after August 10, 1943.
But before the 10th of August an agreement of sale was executed by the appellant in favour of Ranada Prasad Saha.
In the light of the sequence of events, the inference that the appellant had no intention to commence doing jute pressing business does not necessarily follow.
Even if that inference be regarded as binding upon the Court it cannot be presumed that the sole intention of the appellant was to start a venture in the nature of trade.
Barring the expectation of profit and realization of profit by sale of the property, there is no evidence bearing on the intention with which the property was purchased.
In the deed of conveyance dated September 30, 1943 there is a reference to delivery of "joists, girders, fabricated steel, C.I. roofs, bolts, nuts, hooks and ceiling planks, being portions of the materials of the godowns and structures" standing on the land described in the third schedule.
It was submitted that after purchasing the factory and the appurtenant premises the appellant demolished "certain godowns" in Sch.
III land and sold the material as scrap.
This, it was claimed, was if not part of the business = a venture similar to the normal business of the appellant.
But there is no evidence on the record as to how many warehouses stood originally on Sch.
III land.
The sale deed dated September 30, 1943 clearly states that there were two warehouses on steel frames on the land held as licensee by the Company and possession of these was given to the purchaser Ranada Prasad Saha.
Beside these warehouses there were three warehouses on the land described in Sch.
I and one warehouse on the land described in Sch.
It is not claimed that these warehouses were insufficient for carrying on the business of jute pressing: nor is there any evidence that the warehouse or warehouses which were demolished were in a serviceable condition.
The only fact which may be taken to be established is that a warehouse or warehouses were demolished by the appellant and the materials were sold as part of the property sold under the deed dated September 30.
From this circumstance, an inference that the entire property was purchased with intent to demolish and dispose of as scrap cannot be raised.
Granting that the appellant made a profitable bargain when he purchased the property.
and granting further that the appellant had when he purchased it a desire to sell the property if a favourable offer was forthcoming.
these could not without other 610 circumstances justify an inference that the appellant intended by purchasing the property to start a venture in the nature of trade.
Absence of advertisement inviting offers for purchasing the property, and absence of brokers in the negotiations for sale between the appellant and Ranada Prasad Saha, are circurmtances which lead to no positive inference.
There is nothing to show that the appellant desired to convert the property to some other use.
No brokers were employed for entering into a transaction of sale.
It appears that Ranada Prasad Saha on coming to learn that the factory was for sale approached the Company after the sale deed was executed in favour of the appellant and he was informed that it had already been sold to the appellant.
Thereafter Saha contacted the appellant and agreed to purchase the property.
The property purchased was not sudh that an inference that a venture in the nature of trade must have been intended by the appellant in respect thereof may be raised.
A person purchasing a jute press may intend to start his own business even if he is not already in that business, or he may let it out on favourable terms.
The property purchased by the appellant was capable of being let out and it had in fact been let out by the Company before the date of sale in favour of the appellant.
It was capable of fetching annual income, and there is no evidence that at the material time it could not be reasonably let out.
We therefore discharge the answer given by the High Court in respect of the question submitted by the Tribunal and record a negative answer.
The appeal is allowed.
The Commissioner to pay the costs in this Court and the High Court.
Appeal allowed.

dataset_name: IN-Abs

summary:
The assessee who was dealing in iron scrap and hardware had purchased a jute press and sold it at a profit.
The Income tax Officer brought to tax in the hands of the assessee, the profit arising out of this sale.
The Appellate Tribunal modified the order and reduced the total income.
At the instance of assessee the Tribunal referred to the High Court, the question, whether the surplus received by the assessee as a result of the sale of the jute press arose out of an adventure in the nature of trade and was, therefore, liable to tax.
The High Court answered the question in affirmative.
In appeal; HELD: The question must be answered in the negative.
Granting that the assessee made a profitable bargain when he purchased the property and granting further that the assessee had, when he purchased it, a desire to sell the property, if a favourable offer was forthcoming, these could not without other circumstances, justify an inference that the assessee intended by purchasing the property to start a venture in the nature of trade.
[609H 610A] A profit motive in entering a transact on is no decisive, for, an accretion to capital does not become taxable income, merely because an asset was acquired in the expectation that it may be sold at a profit.
[608F] Purchase of the property by the assessee was an isolated transaction not related to the business of the assessee.
[608G] Case law referred to.


judgement:
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 lyengar, B.R.L. Iyengar and D.N. Gupta, for the respondents.
The Judgment of the Court was delivered by Sikri, J.
These appeals by certificate granted by the High Court of Calcutta under section 66(A)(2) of the Indian Income Tax Act, 1922, are directed against the judgment of the said High Court answering two questions referred to it against the Revenue.
The questions are: (1) Whether the profit arising to the assessee company from miscellaneous insurance transactions of mutual character was assessable under the Indian Income Tax Act, and (2) If the answer to question No. (1) 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 profit 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 Limited, hereinafter referred to as the assessee, is a mutual insurance concern carrying on miscellaneous insurance business.
The principal objects for which the Association was established were: (1) By means of insurance on the mutual principle to provide, or help towards providing, anywhere in the world for the expense of accommodation and treatment in hospitals 634 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, medical, surgical, nursing and allied services as before mentioned, of supporting and assisting hospitals, in Calcutta or elsewhere; of relieving members or then dependants, in whole or in part from the payment of hospital and other charges while in receipt of such hospital, medical, surgical, nursing and allied services; and of reimbursing and repaying to members or their dependants in whole or in part, all payments for such hospital and other charges which they may have incurred or made which 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 bench its other than maternity, for which the waiting period was one year.
Benefits and privileges became available as from the first day of the fifth calendar month of registration (in respect of Maternity the 13th month) and continued to be available thereafter so long as the subscriptions were not in 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 included 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 depreciation.
The balance of this account being the balance of profit and loss account was transferred.
to the profit and toss appropriation account.
Therefrom, in one year, ended 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 is not necessary 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 account, which showed a profit of Rs. 1,653/ , 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 decision of the Bombay High Court in Bombay Mutual Life Assurance Society Ltd., vs Commissioner of Income Tax, Bombay City (1) 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 permissible 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 section 2(6C) of the Income Tax Act, according to its true interpretation, 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 profits 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. vs Commissioner of Income Tax, Bombay City(1) on the ground that the Bombay decision was a life insurance decision and although it was a mutual life insurance society, nevertheless different and special rules applied to life insurance and the rules with which the Bombay decision was concerned were rules 2 and 3 which did 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 of objects and articles of association of the assessee.
Section 2(6C) at the relevant time defined 'income ' to include " . . profits of any business of insurance carried on by a mutual insurance association computed in accordance with Rule 9 in Schedule.
" We may mention that another section 2(6C) was substituted by Act XV of 1955, and the wording substituted by this Act in (1) 20 I.T.R.189.
636 sub clause (vii) is "the profits and gains of any business of insurance carried on by a mutual insurance association 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 surance 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 gains 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 , to be furnished to the Superinte ndent of Insurance after adjusting such balance so as to exclude from it 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.
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 holding that "section 2(6C) imports into the definition of 'income ', which is to be found in the charging section 3, these profits which 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 extension 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 artificial income is included into the meaning of Section 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. vs Commissioner of Inland Revenue,(1) contends that the Legislature has not made its intention clear because it has used the word 'profits ' in section 2(6C) under a misapprehension that the surplus of a mutual insurance company (1) 637 carrying on insurance business is profits.
He says that in Arvshire Employers Mutual Insurance Association case(1) the Legislature had proceeded on a similar misapprehension and the House of Lords held that section 31(1) of the Finance Act, 1933 (23 & 24 Geo.
V.c. 19) did not succeed in making the profits of a mutual insurance 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(1) is quite simple.
It assumes that a surplus arising from the transactions of an incorporated 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 comp any with its members, shall be deemed to be something which it is not, namely, a surplus arising from transactions of the company with non members.
The hypothesis 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 unfortunately 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 section has not the meritorious object of preventing evasion of taxation, but the less laudable 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 section 31 of the Finance Act, 1933.
Section 31(1) enacted: "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 to profits or gains shall be deemed to include a reference to a profit or surplus arising from trans (1)T. C. 331.
638 actions of the company 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 with 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 arising from transactions with non members would be so determined.
" The Section adopted the device of a deeming provision.
The profits arising from the transactions of a company or society with its members were deemed to be profits arising from transactions with non members.
Parliament assumed that the latter were taxable.
As this hypothesis was wrong, Parliament failed in its objective.
But the Indian Legislature did not adopt any deeming device.
It defined 'income ' to include profits of any business of insurance carried on by a mutual insurance association.
What are those profits is then explained by reference to the Schedule.
The effect of this in substance is to incorporate r. 6 into the definition.
If the legislature 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 is, 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.
The Superintendent of Insurance is not concerned with taxable profits.
What he is concerned with, inter alia, is the balance of profits for the purpose of the .
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 , 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 strict 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 accede to this contention.
It was well established that such profits would be taxable apart from the new definition, We cannot understand why it was necessary 639 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 deals with balance of profits as a composite thing.
It is impossible to dissect 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 section 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 section 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 disclosed 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 section 10 be allowed for in computing 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 in connection with the Schedule in Pandvan Insurance Company Ltd., Madurai vs The Commissioner Income Tax, Madras(1) and arrived at the conclusion that the "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, 640 except that the Income Tax Officer would be entitled to exclude expenditure other than expenditure permissible under the provisions of section 10 of the Act .
It is common ground in this case that these serves which were added to the balance of profits were not expenditure.
Accordingly, agreeing with the High 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 .

summary:
The respondent Association was a mutual insurance concern carrying on miscellaneous insurance business.
The objects of the Association included provision of help anywhere in the world in respect of expenses of accommodation and treatment in nursing homes for members and their dependents.
The members were required to pay a monthly premium.
In the assessments for the assessment years 1949 50 to 1953 54 the Income tax Officer taxed the reserves for payment of income tax which had been debited to the profit and loss account.
The Appellate Assistant Commissioner as well as the Appellate Tribunal upheld the Income tax Officer 's order.
The questions arising in the proceedings were; (1) whether the balance of profits of a mutual insurance concern were included in the definition of the word 'income ' and if so (2) whether reserves for income tax could be taxed.
At the instance of the respondent a reference was made to the High Court.
That Court held that the surplus, miscalled profit, arising to the 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 reserves.
The Revenue appealed to this Court with certificate.
HELD: (i) In section 2(6C), the Legislature has evinced a clear intention to include the balance of profits under r. 6 within the meaning of the word 'income ' in 6. 3 of the Indian Income Tax Act, and accordingly such balance of profits is taxable.
[639B C] Ayrshire Employers Mutual Insurance Association Ltd. vs Commissioner of Inland Revenue, , distinguished.
"Profits." in r. 6 cannot be said to mean "taxable profits".
Rule 6 refers to 'balance of profits ' as disclosed in the accounts submitted to the.
Superintendent of Insurance.
The Superintendent of Insurance is not concerned with taxable profits.
What he is concerned with is the balance of profits under the Insurance Act.
[638E F] Nor can the term 'profits ' in r. 6 be interpreted in the narrow sense of including only profits from investments and other activities of a mutual insurance company.
Rule 6 deals with "balance of profits" as a composite thing.
It is impossible to dissect this composite thing.
[639A B] Bombay Mutual Life Assurance Society Ltd. vs Commissioner of Income tax, Bombay City, , affirmed.
(ii) 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 r. 6 should be construed in the light of this background.
[639G H] 633 Pandyan Insurance Company Ltd. Madurai vs The Commissioner Income tax, Madras, ; , referred to.
Examining r. 6 in the light of this background.
the intention of the rule seems to be 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, except that the Income Tax Officer would be entitled to exclude expenditur.e other than expenditure permissible under the provisions of section 10 of the Act.
In the present case it was common ground between the parties that the reserves which were added to the balance of profits were not expenditure.
The High Court rightly held that the reserve for income tax could not be taxed.
[639H 640B]