Chakravartti, J.
1. The principal question submitted to us by this Reference relates to an apparent difficulty in computing, under the Income-tax Act, the taxable profits of a life Insurance business, where such business includes sale or granting of annuities. In the particular case where the question has arisen, the business consists solely in granting of annuities and in such cases the difficulty appears to be greater.
2. In order to explain what the question is and how it has arisen, it is necessary to refer to the relevant provisions of the Act before stating the facts. At the present stage the reference need be only in broad outline. Before the amending Act of 1939, the profits and gains of life insurance business, in the case of companies incorporated in British India, were to be computed mainly under Rule 25 of the Rules framed under Section 59 of the Act. That rule prescribed a single straight-cut method and directed that the profits for any particular year were to be determined by simply taking the annual average of the total profits disclosed by the last actuarial valuation of the business and making certain additions thereto. The amendment of 1939 introduced a more complicated rule and prescribed what one may call a two-pronged method. It added a schedule to the Act and provided by Section 10(7) that the profits and gains of any business of insurance must be computed in accordance with the rules contained in the schedule. The schedule deals with all varieties of insurance, but the general method of computing the profits of a life insurance business is laid down in Rule 2. That rule prescribes two alternative methods of computation and directs that of the two sums arrived at by the application of the two methods, the greater shall be taken to be the profits and gains of the business The rule, as it stood at the relevant time and as it stands now, is in the following terms:
3. The profits and gains of life insurance business shall be taken to be either-
(a) the gross external incomings of the preceding year from that business less the management expenses of that year or
(b) the annual average of the surplus arrived at by adjusting the surplus or deficit disclosed by the actuarial valuation for the last inter-valuation period ending before the year for which the assessment is to be made, so as to exclude from it any surplus or deficit included therein which was made in any earlier inter-valuation period and any expenditure which may under Section 10 of this Act be allowed for in computing the profits and gains of a business, whichever is the greater.
4. Broadly speaking, the profits under the first method are the 'incomings' received during the relevant year, less expenses while under the second method they are only the average of the actuarial surplus, as disclosed by the last valuation, subject to certain adjustments. Under the first method, an attempt is to be made to ascertain the actual profits of the year by reference to the receipts and disbursements. Under the second, no such attempt is to be made and the surplus disclosed by the last actuarial valuation, after making certain adjustments, is to be divided by the number of years for which the valuation was made and the amount thus arrived at is to be taken as the profits of the year.
5. So far there, is no difficulty. The two methods would appear to be mutually exclusive, as logically they ought to be, if the amounts respectively arrived at by their application are to be compared and the greater of the two is to be taken to be the profits. But a difficulty is created by the definition of 'gross external incomings', referred to in Rule 2(a). That term is defined in Rule 5(ii) as follows:
''Gross external incomings' means the full amount of incomings from interest, dividends, fines and fees and all other incomings from whatever source derived (except premiums received from policy-holders and interest and dividend on any annuity fund) and includes also any profits from reversions and on the sale or the granting of annuities, but excludes profits on the realisation of securities.'
There is a proviso to the definition to which it is not material to refer.
6. It will be noticed that 'gross external incomings' includes 'profits on the sale' or the granting of annuities. What profits are to be included under that head and how are such profits to be computed? The answer depends on what is meant by 'annuities'. Annuities may be annuities certain or they may be annuities dependent on human life. Where they are of the latter kind, a business of selling or granting them would be life insurance business within the meaning of the schedule, because Rule 5(iv) adopts the definition of life insurance business as given in Section 2(11), Insurance Act, 1938 and the definition there given is 'inter alia' to the effect that 'life insurance business' includes 'annuity business, that is to say, the business of effecting contracts of insurance for the granting of annuities on human life'. But if 'sale or the granting of annuities' in the definition of 'gross external incomings' means carrying on life insurance business of the annuity type, a difficulty arises in applying the two parts of Rule 2 to the computation of the profits of companies which carry on such business.
It is well known that to ascertain the profits of a life insurance business for any particular year by application of the ordinary methods of profit-calculation is practically impossible and such profits can only be ascertained, in a somewhat artificial way, by reference to the last actuarial valuation. The term 'gross external incomings' occurs in Rule 2(a). If the word 'annuities', occurring in the definition of that term, means insurance annuities and if the profits from the sale of such annuities are to be ascertained by reference to the actuarial valuation, which is the only way in which it can be done, the effect will be to import the actuarial method into Rule 2(a) and the mutual exclusiveness between that Rule and Rule 2(b) will be destroyed. Where a company carries on life insurance business of the ordinary kind and also annuity business, it will be destroyed partially, but where annuity business is the only business done, the destruction will be complete. Basically, the same method of computation will then have to be applied under both the Sub-rules, in part in one case and wholly in the other and the direction that the two sums ascertained by the two methods are to be compared with a view to taking the greater of them as the income of the year, will, to a certain extent at least, become unreal. The controversy under the principal question in this Reference relates to this difficulty and the question is whether in the case of the asses-see company which does only annuity business, the Income-tax Officer was right in taking the annual average of the actuarial surplus disclosed by the last valuation as the 'gross external incomings', less management expenses, for the purposes of Rule 2(a), subject to certain adjustments. The other question referred concerns the nature of the annuity business carried on by the assessee company.
7. The facts of the case may now be stated. The assessee company was established in the year 1870 and carries on the business of granting terminable pensions or annuities, dependent on human life, in favour of subscribers to the pension fund or their nominees. It issues four kinds of policies, known as Class A, Class B, Class C and Class D. In the case of the first three classes of policies, the beneficiary is a nominee of the subscriber and the contingency upon which a pension becomes payable is the subscriber's death. Under class A policies, the pension is payable to the wife of the subscriber for the remainder of her life, under Class B to a son until the age of 24 years and under class C to a daughter until her marriage. In the case of Class D policies, the beneficiary is the same person as the subscriber. The contingency upon which the pension becomes payable is the attainment of a selected age and it continues to be payable for the remainder of the subscriber's life.
This class of policies is divided into two subclasses, DM and DP, the first being for male lives and the second for female lives. The pension payable is Rs. 100/- per month in the case of A and D policies and Rs. 80/- per month in the case of B and C policies, or multiples thereof, according to the premium paid. In each type of policy there is provision for a refund of the premium paid if the benefit stipulated for is not entered upon, as for example, in the case of the first three classes, if the beneficiary dies before the death of the subscriber and in the case of the fourth class, if the subscriber dies before attaining the selected age. There is also a provision for certain minimum benefits payable in certain circumstances to the legal representatives of the beneficiary or the beneficiary himself or herself. Besides issuing these four types of policies, the company does no other business. Its business is thus solely confined to the 'sale or the granting of annuities'.
8. The reference covers assessments of the company for four assessment years, viz., 1943-44, 1944-45, 1945-46 & 1946-47, & the same points have been raised in respect of all the assessments. What the points are will be better understood if we explain first how the assessments have been made. It appears that the assessments for the first three years are assessments on a remand made by the Appellate Assistant Commissioner, while the assessment for the year 1946-47 is an original assessment. The method adopted in making the assessments can be ascertained only from the original assessment orders in respect of the first three years which have not been included in the Paper Book & without reference to which neither the conteq-tions of the parties, nor the findings of the Appellate Tribunal are intelligible.
It appears that in making the original assessments for the first three years, the Income-tax Officer first computed the profits under Rule 2(b) by reference to the last actuarial valuation which was a triennial valuation for the period ending on 31-12-1942. There is no question that this computation was correctly made. The Income-tax Officer next proceeded to make a computation under Rule 2 (a) and for that purpose he had to ascertain the 'gross external incomings' of the preceding year, as defined in Rule 5(ii) and deduct therefrom the 'management expenses' as defined in Rule 5(iii). As has been seen from the definition quoted earlier, under 'gross external incomings' fall to be included
(a) interest;
(b) dividends (but not interest and dividends from an annuity fund); (c) fines;
(d) fees;
(e) incomings from all other sources (but not premiums received from policy-holders);
(f) profits from reversions;
(g) profits on the sale or the granting of annuities (but not profits on the realisation of securities).
9. In determining the 'gross external incomings' of the preceding year, the Income-tax Officer had thus to include therein the profits of the annuity business for that year, which meant the profits of the entire business of the company, since it did no business other than annuity business. But the company had submitted no annual Profit and Loss Accounts. In those circumstances, the Income-Tax Officer apparently thought that since he had to take the profits of the whole business of the company under the head 'g', he had nothing to take under the remaining heads; and since in. the absence of an annual actuarial valuation and a profit and Loss Account based thereon the profits of the preceding year could be ascertained only by reference to the last triennial valuation, he had no alternative but to take the average of the actuarial surplus as such profits. 'In the case of a purely annuity business' he observed, 'such as that of the assessee, 'gross external incomings' mean the actuarial surplus'. This observation was not wholly accurate, because the actuarial surplus would be the equivalent of not the gross external incomings, but such incomings, less management expenses. In fact, that was the basis on which the Income-tax Officer actually proceeded, for while adopting the adjusted actuarial surplus determined under Rule 2(b) as the profits to be included in 'gross external incomings' for the purposes of Rule 2 (a), he made no deduction on account of management expenses. He allowed a small deduction on account of depreciation in the value of furniture and as he found that the profits determined under B. 2(a) in accordance with the above method were greater than those determined tinder Rule 2(b), he took the former as the taxable profits. Assessments for all the three years, i.e., 1943-44, 1944-45 and 1945-46, were made in the same manner.
10. From these assessments, the company appeared to Appellate Assistant Commissioner. The Assistant Commissioner did not hold that if the provision contained in tne definiton of 'gross external incomings' for including therein the 'profits on the sale or the granting of annuities' was applicable to tne case, the method of computation adopted by the Income-tax Officer was still wrong. What he held was that the said provision applied only to 'purely annuity business', but not to cases where the contract was 'an admixture between an annuity and life insurance'. In his opinion, the policies issued by the company required closer examination and, in that view, he remanded the cases to the Income-tax Officer for matting fresh assessments after studying the various schemes evidenced by the policies. There can be no doubt that by 'purely annuity business' the Assistant Commissioner meant annuities certain or at least annuities not dependent on human life.
11. It appears that thereafter the attempt on each side was to adjust its case to the observations made by the Assistant Commissioner. The Income-tax Officer, before he took up the fresh assessments for the first three years, completed the assessment for the year 1946-47. The company contended that the contracts embodied in its policies were admixtures of annuity and life insurance, but expressed its inability to dissect its accounts and show the results of its annuity and life insurance business separately, as it was required by the Income-tax Officer to do, if he was to apply Rule 5(ii) on that basis. The Income-tax Officer held that there was 'no element of life insurance' in any of the contracts which were 'purely annuity policies' and that therefore he was entitled to take in the profits of the annuity business and compute them for the purposes of Rule 2(a), read with Rule 5(ii), in the way he had done. Accordingly, he adopted the figure of the annual adjusted surplus which he had already worked out for the earlier assessments and taking that to represent the profits computed under B. 2(a), as before, he determined the net business income for 1946-47 after allowing a certain deduction on account of depreciation in the value of furniture. He did so, because the company had submitted its return even for the year 1946-47 on the basis of the 1942 valuation and a further valuation for the period ending on 31-12-1945, which had since been made, was not brought to his notice.
12. As regards fresh assessments for the three earlier years, the Income-tax Officer repeated the original assessments, in the orders recorded by him, he merely mentioned the amount of the income he had already computed under Rule 2(a) in the original assessment and referred for his rea-sons to the assessment order for 1946-47.
13. The assessment orders printed in the Paper Book are these reassessment orders for the first three years and the assessment order for 1946-47, none of which shows the actual process of computation to which the principal question referred to this Court relates. The Tribunal itself had to refer to the original assessment orders but did not yet direct their inclusion in the Paper Book.
14. It may be pointed out at once that the whole business of the company is annuity busi-ness and if there was no element of life insurance in that business, as the Income-tax Officer held, it is impossible to see how he could have applied Rule 2 of the Schedule at all. In the application for a reference, it was sought to be made out that what the Income-tax Officer had held was that the company did no other the insurance busi-ness than granting of annuities, but that is cer-tainty not what his order says. The Appellate Assistant Commissioner who had to deal with these four assessments, upheld them, but he did not proceed on the basis adopted by the income-tax Officer. Before him, the company repeated its contention that it carried on a mixed type of business and also advanced a fresh contention that its business was ordinary life insurance business and not annuity business at all, the only difference being that the insured amount was paid in instalments instead of in a lump sum. Both these contentions were rejected by the Appellate Assistant Commissioner. He held that the business carried on by the company was life insurance business of the annuity type, as defined in the insurance Act of 1938, and being thus life-insurance business within the meaning of the schedule, the sale and granting of annuities in which it consisted came within the purview of Rule (sic) and accordingly the points of the company from the granting of annuities were to be included in the gross external incomings'. The view attributed to the Appellate Assistant Commissioner in the Statement of the Case does no appear to be correct. He proceeded to hold that in the absence of a Profit and Loss Accounts for the previous year, the Income-tax Officer had to make an estimate of the profits of the previous year and the way in which he had done so was the only way possible in the circumstances and correct in all its details.
15. On further appeal by the company, the Tribunal held that the business carried on by the company was 'in a way life insurance business'. It held further that the method followed by the Income-tax Officer in making the computation under Rule 2(a) was incorrect and accordingly it set aside all the four assessments and directed fresh assessments to be made 'by following to the letter of the law the provisions contained in Rule 2(a)' and by working out the profits independently under the provisions of that Rule 'without resorting to the actuarial valuation report'.
16. Thereupon, the Commissioner of Income-tax asked for a reference of the following question of law:
'Whether on the facts of the case and on a proper construction of the provisions of the Schedule to the Income-tax Act, the Tribunal was right in holding that the method followed by the Income-tax Officer in determining the profits of the assessee under Rule 2(a) of the said Schedule was an incorrect method?'
The Tribunal, however, had referred the following two questions:
1. Whether in the facts and circumstances of the case, the business of the Assessee-Com-pany consisted wholly of annuity business or whether it contained some elements of ordinary life insurance business as distinct from annuity business?
2. Whether the Income-tax Officer was justified in making an estimate under Rule 2(a) of the Schedule attached to Section 10(7), Income-tax Act?
17. It is not easy to understand why the first question was referred at all or what the point of referring it, in the facts of the present case, is. Nobody wanted it or indeed any question about the nature of the company's business to be referred. The Tribunal had found that the company's business was life insurance business 'in a way'. Not only did the Commissioner of Income-tax, who was the applicant for a reference, not challenge that finding or propose any question about it for reference, but in his observations on the draft Statement of the case, he expressly admitted that 'the Contracts A to D came under the expression 'life insurance business' '. As for the company, it did not ask for a reference of any question at all and also did not reuse any question about the nature of its business in its reply to the Commissioners application. It is true that in his application for a reference the Commissioner said that what the Income-tax Officer had held was that the company did 'no other life insurance business than the granting of annuities' and thereby he tried to explain away the inconsistency in the Officer's action in holding that the company's business had 'no element of life insurance' in it and yet apply-ing Rule 2 of the Schedule to the computation of its profits. That explanation, as I have a ready pointed out, is not acceptable, but the Tribunal held nothing contrary to the view wrongly attributed to the Income-tax Officer and its finding that the company's business was life insurance business 'in a way' was not questioned by anybody. The expla-nation attempted by the Commissioner of what the Income-tax Officer had held could therefore be no occasion for referring the first question.
18. Apart from the fact that the reference of the question is an unwanted reference, it is not very clear what the question, as framed, really means. Surely it does not ask whether the company's business consisted in granting annuities dependent on human life or in ganting annuities not so dependent, for the contrast it draws is not between annuity and life insurance, but between annuity and 'ordinary life insurance'. Had the former been the question, one might have thought the Tribunal was thinking of the Income-tax Officer's 'purely annuity policies' with 'no element of life insurance' in them and the company's contention that its policies were 'admixtures of annuity and life insurance' contracts. It is true that the question speaks of the company's business containing 'some elements of ordinary life insurance business as distinct from annuity business', which would suggest that the same business might have those two elements in it. but it is meaningless to speak of any such co-existence of two separate elements of annuity and life insurance in a business of issuing annuity policies. An annuity contract is either a life insurance contract or it is not so. If it provides for the payment of annuities and if the right to payment is governed by the happening of a contingency which depends in any way upon the duration of human life, the business of effecting such contracts is life insurance business under the definition of that term. It is nothing else and cannot be anything else at the same time, at least for the purposes of the Insurance and Income-tax Acts. If, therefore, any intelligible meaning is to be given to the question, as framed, it can only mean whether the company's business consisted wholly in life insurance business in the form of granting annuities or whether a part of the business was such business and a part was life insurance business of the ordinary kind. If so the question contemplates what was nobody's case before the authorities below and really it does not arise out of the Tribunal's order.
19. But the question having been referred, it was contended by Mr. Mitra on behalf of the company that the business carried on by it was wholly life insurance business of the ordinary kind and not annuity business at all. In any event, it was further contended, the business relating to the A, B and C classes of policies was not annuity business. The first and the extreme part of this contention, it will be remembered, was the new contention advanced for the first time before the Appellate Assistant Commissioner, but there is no trace or hint of it in the appellate order of the Tribunal. As far as can be seen from that order, the contest before the Tribunal was as to whether the policies had or had not in them an element of life insurance. That contest might well arise on and out of the Income-tax Officer's order, but why the parties engaged in it before the Tribunal and why the order of the Assistant Commissioner, holding that the company's policies were life insurance policies, were totally ignored both by the Tribunal and the parties, is by no means clear. Be that as it may, the extreme contention of Mr. Mitra is clearly not within the question referred, for the alternatives contemplated by it do not cover a case of the company not doing any annuity business at all. In any event, I am of opinion that neither of the contentions of Mr. Mitra is tenable and the view taken by the Tribunal, though somewhat curiously expressed, is correct.
20. The object of Mr. Mitra's contentions was clear. If he could establish that the business of the company was not annuity but ordinary life insurance business, either wholly or in part, then to the extent he succeeded in his contention, no profits would be liable to be included in the com-putation of 'gross external incomings' under the head 'profits on the sale or the granting of annuities'. The contention, it mrst be noticed, was not that the contrasts evidenced by the policies were not life insurance contracts: the only contention was that, although life insurance contracts of annuities. I am entirely unable to see how they were not, at least in the case of the first three classes of policies, contracts for the payment of annuities. I am entirely unable to see how that contention could be sustained. An ordinary contract of life insurance is one 'under which the insurers undertake to pay a specified sum of money upon the death of a particular person in consideration of a premium which is to be paid during the continuance of the life insured'.
I am ignoring the variations that can be found in the stipulation for the payment of a premium and also the various other ways in which the right to payment may depend on the duration of a life. But the common feature is that the sum insured is a sppcified sum. In the case of the A, B and C policies, the contingency upon the happening of which the right to payment arises is indeed the death of the subscriber but the payment stipulated for is not payment of a fixed gross sum, but recurrent payments of monthly sums which are not instalments of any specified amount and which are terminable on the happening of another contingency. An annuity is a fixed sum paid every year as income, at one or more regular intervals, during the life-time of the recipient or a shorter period and it has been judicially defined; though from another point of view, as an annual income purchased with capital, where the capital has disappeared and has been. converted into an annuity: -- 'Foley (Lady) v. Fletcher', (1858) 3 H. & N. 719 at p. 784. No point was made by Mitra of the fact that the payments are monthly payments and none could be made, because in considering whether there is an annuity 'regard must be raid not to the length of the in-tervals between the payments, but the length of the total period during which they are payable' and monthly or weekly payments may well be payments of an annuity. -- 'Bebb v. Bunny', (1834) 1 K. B. & J. 216; 'In re Cooper: Cooper v. Cooper', (1917) 88 L. J. Ch. 105; -- 'In Re Janes Settlement; Wasmouth v. Jones, (1918) 2 Ch. 54. It is thus clear that the payments stipulated for under the A, B and C policies are payments of annuities and it life insurance business includes 'annuity business, that is to say, the business of ejecting contracts of insurance for the grunting of annuities on human life', as under the definition it does, annuity business contemplated by the definition can only be business of the kind represented by those policies. The business done by the assessee comply under the A, B and C policies is therefore the specific variety of life insurance business defined by the Act as annuity business and not life insurance business of the ordinary kind. The case of the D policies was hardly argued. Under them, the subscriber secures for himself a monthly pension commencing from a selected age and lasting upto the end of his life and there can be no doubt that what he secures is a life annuity commencing from the selected age. It need hardly be pointed out that the subsidiary provisions contained in all the policies as to the refund of the premium in certain circumstances or the payment of certain minimum or additional benefits do not affect the fundamental character of the contracts which are contracts for the payment of annuities. Since the company does no business other than the business of issuing the four kinds of policies mentioned above, it follows that its business is wholly a business of granting annuities on human life and no part of its business is ordinary life insurance business. The answer to the first question must ac-cordingly be to the above effect, though, as I have pointed out, the question does not strictly arise out of the Tribunal's order
21. I may now pass on the second and the principal question. That question which, again, is not very accurately expressed, is whether in determining the profits of the company s business for the preceding year under Rule 2 (a), the Income-tax Officer was justified in adopting and adjusting the estimated profits under the actuarial valuation instead of himself making calculations from receipts and disbursements. I hope I shall be doing no injustice to Mr. Mitra if I point out that his argument on the second question was not always on the same basis and was not consistent. On the one hand, he contended that the profits of a business of granting annuities on human life could be ascertained without reference to the actuarial valuation as according to him, was done in the case of -- 'Gresham Life Assurance Society v. Styles', (189?) A. C. 309. On the other hand, he admitted that the profits of such a business, like the profits of all other kinds of life insurance business could only be ascertained by actuarial calculations, but his contention was that such profits were not at all liable to be included in 'gross external incomings'.
22. I may point out at once that the second contention raised a point which is entirely foreign to the question referred. The question does not contemplate that in computing the 'gross external incomings' of the preceding year for the purposes of Rule 2 (a), nothing might have to be included under the head 'profits on the sale or the granting of annuities', but only asks whether, given that the profits of the annuity business were to be computed and included, the method of computation followed by the Income-tax Officer was correct. But since Mr. Mitra raised the point, I shall deal with it shortly. His argument was that the words 'annuities in the definition of gross external incomings' meant not life insurance annuities, but annuities certain. According to him, the definition contemplated a case where a life insurance company, while carrying on life insurance business, also carried on a business of granting or selling annuities certain & it was only in such cases that the profits of the subsidiary business of granting annuities certain were to be included in the 'gross external incomings' under the head 'pro-fits on the sale or the granting of annuities'. The computation of the profits of such an annuity business would require no actuarial valuation and it was contended that since such construction of the definition, would avoid the overlapping between Rules 2 (a) and 2 (b), it ought to be adopted as the practically feasible construction. In my opinion, this contention is plainly untenable. Rules 1 to 5 of the Schedule contain provisions for the computation of the profits of not life insurance companies, but life insurance business. No business which is not life insurance business is germane to those Rules of the Schedule, although such business may be carried on by a life insurance company. 'Life insurance business', according to its definition given in the Insurance Act which the Schedule adopts, includes the business of 'granting annuities on human life'.
Mr. Mitra himself pointed out, by reference to the language used in -- 'Gresham's case', (1892) A. C. 309, that in the case of a business in insurance annuities, 'sale' and 'granting' was synonymous and so the use of the word 'sale' does not point to the annuities contemplated by Rule 5 (ii) being annuities certain. There can thus be no doubt that, since Rules 1 to 5 of the Schedule are concerned only with life insurance business, the annuities contemplated by Rule 5 (ii) can only be annuities on human life such as are included in the definition of 'life insurance business' and such 'as the assessee company grants or sells. The Forms relating to life insurance business contained in the First, Third and Fourth schedules to the Insurance Act all treat such business in two parts, viz., ordinary life insurance and annuities, and the same structure of a life insurance business is clearly contemplated by Rule 5 (ii) of the Schedule.
23. If then, in determining the profits under Rule 2 (a) and computing for that purpose the 'gross external incomings' of the preceding year, the profits of the annuity business had to be in-eluded, the next question is how, in the facts of the present case, those profits could be ascertained or rather, since the profits from the annuity business were the whole profits of the company, how Rule 2 (a) could be applied to those profits. As the Appellate Assistant Commissioner has pointed out, the company submitted no Profit and Loss Accounts for the relevant preceding years. Nor had there been any yearly actuarial valuation which might give the actual surplus for each year. In the absence of such materials, the Income-tax Officer adopted the average annual surplus, determined according to the last triennial valuation, as representing the gross external incomings, less management expenses and did not take any figures either of incomings or of expenses, item by item. The Tribunal has condemned that method, with some severity of language, as not in accordance with Rule 2 (a) and has directed the Income-tax Officer to make a fresh computation 'by following to the letter of the law' the provisions contained in the Rule and without reference to the actuarial valuation report. It has not said how that could be done.
24. Since the objection is that Rule 2 (a) was not correctly applied and the direction of the Tribunal is that its provisions are to be followed 'to the letter of the law' I may now examine in greater detail what the Rule directs & what the Income-tax Officer has done. Under the Rule, he had first to compute for each year 'the gross external incomings' of the preceding year, as defined in Rule 5 (ii), and then deduct therefrom the 'management expenses' of that year, as defined in Rule 5 (iii). In carrying out the first part of his task, he had to take in (i) interest and dividends (but not those on the annuity fund), (ii) fees, (iii) fines, (iy) incomings from all other sources (but not premiums received from policy-holders), (v) profits on the sale or the granting of annuities and (vi) profits from reversions. The complaint against the Income-tax Officer is that he did not take the incomings under the several heads, item by item, but confined himself to the total profits of the annuity business and that for those profits, he adopted the annual average of the actuarial surplus. I shall take the two parts of the criticism separately. As regards the first part, in a case where apart from annuity business, the company also does life insurance business of the ordinary kind, it may be possible to apply Rule 2 (a) 'to the letter of the law' and proceed by way of taking some incoming under each head, for while the incomings of the annuity business will go into the profits of that business, to be taken in as a whole under item (v) above, there will still be the incomings of the general business and therefore something to take in under items (i) to (iv) and (vi) provided there are receipts under those heads.
But where, as in the present case, the only business done is annuity business and the profits of that business are to be taken as a whole under item (v) above, such profits will necessarily cover all the incomings of the business and there can be nothing to be included again under the remaining heads. The management expenses will also be covered, for the profits could be arrived at only after deducting the expenses, and therefore there can be no expenses to be deducted again. To put it shortly, under Rule 2 (a) the profits of the whole life insurance business of a company are equal to gross external incomings, (including profits of the annuity business, if any) 'minus' management expenses. It is obvious that where annuity business is the only business done, the profits of that business are all the profits and once they are taken in, there can be nothing else to add or subtract under the formula contained in the Rule. I am accordingly of opinion that in confining himself to the profits of the annuity business and performing no other operation under Rule 5 (ii) or Rule 5 (iii), the Income-tax Officer did not contravene Rule 2 (a), but followed the only course possible in the peculiar facts of the case. Of the several component items of 'gross external incomings', he had to take in the present case only what I have put under 'v' above. Mr. Meyer pointed out that, in any event, if the Income-tax Officer did not take in anything under the remaining heads, his action went in favour of the assessee. While that may be a fact, it is not relevant to the question as to whether the method followed by the Income-tax Officer was correct.
25. I may pause here to observe that Rule 2(a) appears to me to be adapted primarily to a case where a company does life insurance business of the ordinary kind, but may also be doing annuity business in addition. Under the Rule, read with Rule 5 (ii), profits from annuity business are only a part of the total profits of a business of life insurance. That, coupled with the specific provision that in taking interest and dividends, those 'on any annuity fund' are to be excluded --which must mean 'interest and dividends on an annuity fund, if any clearly suggested that the business contemplated in the main is a business of ordinary life insurance, but there may be an annuity business as well. It is to be noticed further that the profits of an annuity business are not only treated separately as a distinct item, but also differently. While Rule 2(a), read with Rules 5(ii) & 5(iii), purports to prescribe an investment income minus expenses method of computing the profits of a life insurance business, it at the same time lays down that one of the items to be included on the receipt side is profits from the sale or the granting of the annuities, taken as a whole.
The method of taking the individual items of certain kinds of receipt and deducting the expenses, as defined in Rule 5(iii), from the sum-total which is generally directed by the Rule, is not applied to annuity business but, on the other hand, the direction with regard to such business is to take the resultant profits in a lump. Such profits, it will be noticed, will include the premiums received on the annuity policies, although under the general rule, premiums received from policy-holders are to be excluded. But the main point is that where, as in the present case, the only business done is annuity business and the whole profits of the business are to be taken in under the clear directions of Rule 5(ii), such profits will necessarily represent the balance of all incomings left after deduction of all expenses and it is impossible to see what else will remain to be done under Rule 2(a), read with Rules 5(ii), and 5(iii), except perhaps making some further adjustments on facts peculiar to the year of assessment.
At first sight, it might seem that 'profits on the sale or the granting of annuities' means only the profits arising solely from the sale of annuities, i.e. the excess of the present value of the premia receivable over the present value of the liabilities under the policies, but apart from the fact that there can never be any such excess in a life insurance business, there being always a net actuarial liability, such cannot be the meaning of the phrase. If it had been so, there could be no reason why under the first and the second heads of 'gross external incomings interest and dividends on the annuity fund should have been excluded. They are excluded obviously for the reason that they would be included in the profits of the annuity business; otherwise, they would be excluded altogether. 'Profits on the granting of annuities' must therefore mean, as it means under the corresponding provision of the English law, profits from the whole administration of the annuity fund and therefore a case where annuity business is the only business done, there is no scope for the remaining items in Rule 2(a), read with Rules 5(ii) and 5(iii) or indeed for the process prescribed by those Rules. I greatly doubt whether in enacting Rule 2(a), the Legislature had at all present to its mind a case where a life insurance company might do only annuity business, but since it has made no exception, the Rule must be applied as best it can be done.
26. The next criticism of the Income-tax Officer's action is that in applying Rule 2(a), he adopted for the profits of each year the annual average of the surplus as ascertained from the last actuarial valuation or, as the Tribunal has put it, 'allowed himself to be entirely guided by the actuarial valuation which helps to determine profits under Rule 2(b)'. The criticism involves two points, viz., (i) whether the Income-tax Officer was justified in referring to the actuarial valuation report at all and (ii) whether he was justified in making use of it in the way he did. As regards the first point, the Tribunal has held that in applying ft. 2 (a), reference to the actuarial valuation report is permissible and it has directed the Income-tax Officer to make a fresh computation 'without resorting to' the report. There can be no doubt that the view taken by the Tribunal is wrong. A business of granting annuities on human life is life insurance business and it is now a matter of elementary knowledge that the profits of such a business cannot be ascertained in the ordinary way: -- 'Commr. of Income-tax, Bengal v. Himalaya Assurance Co., Ltd.', 43 Cal WN 926 at p. 932 (PC), per Lord Romer; and that they can be ascertained only by an actuarial valuation: -- 'Scottish Union and National Insurance Co. v. Smiles', (1889) 2 Tax Cas 551; -- 'Liverpool London and Globe Insurance Co. v. Bennet', (1913) A. C. 610 at p. 617. The obvious reason is that the amount of the premia receivable and the sums payable under the policies issued must necessarily vary with the incidence of mortality among the insured and therefore anything like profits can be ascertained only by intricate actuarial calculations of the present value of the permia receivable under the policies and that of the liabilities thereunder on the basis of mortality expectations. The difference between the two is the 'net actuarial liability' which is an indispensable item in the computation of the profits of a life insurance business. An ordinary Revenue Account of a life insurance business would not disclose the profit or loss of the business at all, because it does not incorporate the net actuarial liability. A reference to the valuation report is therefore indispensable and as this was ultimately admitted by Mr. Mitra, I need not pursue the point further.
27. As regards the second point, it was contended by Mr. Mitra that if the actuarial surplus was adopted for the purpose of Rule 2(a), 'the primary requirement' of that Rule that the method to be followed under it was to be different from that prescribed by Rule 2(b) and that under the Rule only 'external' incomings were to be taken, would at once be violated. He contended further that if such was the consequence to which application of the Rule led, there was a lacuna in the Act, but such consequence ought not to be held to have been intended. We are, however, to take the Act as it stands and I have already pointed out that Rule 2(a) is extremely ill-adapted to a case where the only business done is annuity business. I shall presently deal with the objection to taking the actuarial surplus, but may first deal with the objection as to overlapping. Now, it is noteworthy that Rule 2(a) does not direct that with regard to the profits of an annuity business also, the method of computation prescribed by the Rule is to be followed. On the other hand, it merely directs such profits to be taken. It follows that the profits are to be computed by the process of which they are ordinarily susceptible & if that process is the process of actuarial valuation prescribed by Rule 2(b), the adoption of the process has the sanction of Rule 2(a) itself and it is a mistake to suppose that the latter Rule requires the whole computation under it to be by a different method.
It is instructive to notice that the position is precisely the same under the English law. Under that law, the Crown has an option of assessing a life insurance company either under Case I of Schedule D, i.e. on the balance of its profits and gains or under case II, IV or V of that Schedule, i.e. on the profits determined by the investment income less expenses method. Broadly speaking, the first method corresponds to Rule 2(b) and the second method to Rule 2(a). When a company is assessed according to the second method, it is entitled to claim refund of tax on an amount equal to the expenses of management, but from such expenses must be deducted fines, fees, income from untaxed sources, profits from reversions (Income-tax Act, 1918, Section 33(1)(to)) and profits arising from the granting of annuities of human life (Finance Act, 1923, Section 16(1) ). The process under the English law is thus the converse of that under the Indian Act, for, whereas under the Indian Law deductions are made when computing the assessable income, under the English law, tax is first suffered on the gross income and a refund of tax on the amount of the allowable deductions is then granted. But what is important to notice is that for the purposes of the deduction, the profits of the annuity business are to be computed in accordance with the Rules of Case I of Schedule D (Finance Act, 1923 Section 16(2) ). It will thus appear that while the computation in one case is on the balance of profit basis, corresponding to Rule 2(b) and in the other case on the investment income 'minus' expenses basis, corresponding to Rule 2 (a), still, the computation of the profits of the annuity business even for the purposes of the second case is to be on the balance of profit basis. I am referring to the English law only for an analogy and for pointing out that the precise overlapping complained of occurs under that system as well and that there is nothing inherently shocking in such overlapping.
28. Mr. Mitra referred repeatedly to the case of -- 'Gresham Life Assurance Society v. Styles', (1892) AC 309, and contended that that case was illustrative of the correct method of computation applicable in the present case for the purposes of Rule 2(a). I am entirely unable to see what relevancy the case cited has to the question before us. All that it decided was that in computing its assessable income under Case I Schedule D, i.e. on the balance of profits & gains basis, an insurance company was entitled to deduct as expenses the amounts of the annuity payments made. The Whole question in the case was whether the annuities were payable 'out of the profits and gains', deduction of which was forbidden under Rule 4 applicable to Cases I and II, now Rule 3(b), or whether they were expenses 'incurred in earning the profits and therefore deductible in arriving at the profits and gains. Their Lordships held that in the case of an insurance company dealing to annuity policies, the annuities paid were the cost of procuring the policy contracts in which the comany traded and therefore the payments were expenses laid out for the purpose of earning the profits & not application of profits after the same had been earned- The annuities were accordingly held to be not 'payable out of the profits & gains' and the payments were held to be deductible. I cannot see how the case affords any guidance in deciding in what manner the profits of an insurance company, doing only annuity business, are to be computed under Rule 2(a) which prescribes an investment income 'minus' expenses method or how it discountenances adoption of the actuarial surplus. In the first place, the company to the case cited was doing both ordinary insurance and annuity business and the profits computed were the profits of the whole undertaking; in the second place, the income was computed on the balance of profit basis; and in the third, the method adopted in computing the profits was in fact to take the annual average of the actuarial surplus (see p. 310 of the report). As regards the actual decision nothing contrary thereto has been done in the present case, for it is nobody's contention that in determining the actuarial surplus, the annuity claims paid were not deducted.
29. I have already pointed out that the profits of an annuity business under Rule 2(a) are to b& ascertained by the particular method of commercial accounting of which such profits are susceptible but that reference to the actuarial valuation can in no case be avoided. Yet, although such reference is required and the net actuarial liability on the relevant dates must always be taken into account, adoption of the annual average of the actuarial surplus will not always be necessary. Three kinds of cases are possible, viz., (i) where a company does both annuity business and insurance business of the ordinary kind, but maintains-a common fund and a combined Revenue Account; (ii) where a company does business of both kinds, but maintains a separate Annuity Fund and a separate Revenue Account for the annuity business; and (iii) where the company does annuity business only. We are concerned here only with the third case. In none of the cases, however, can the profits of the annuity business for any particular period be ascertained without taking into account the net actuarial liability at the beginning of the period and at the end. That liability can be found only from the actuarial valuation report. Under Rule 2(a), the period for which the profits are to be ascertained is the preceding year. If there be a yearly actuarial valuation, the figures of the net actuarial liability at the beginning and at the end of the year will be available and, in such a case, the Revenue Account and the Actuarial Valuation Balance Sheet can be combined into a Profit and Loss Account for the year, showing, on the one side -- broadly speaking -- the annuity claims paid, the expenses of management and the net actuarial liability under the policies as at the end of the year and, on the other side, the profits brought forward, the premia received, the investment income and the net actuarial liability at the beginning. Such an account will show the surplus, if any, as at the end of the year and if, where there is a surplus, the profits brought forward from the previous year are deducted from it, the profits for the year concerned will emerge.
In the first of the three cases mentioned above, a pro forma Revenue Account for the annuity business will first have to be constructed by appropriate apportionments, but there will be no question in any of the cases of taking the annual average of the actuarial surplus. Indeed, there being an annual valuation, there will be no question of any average at all. But where there is no annual but only a triennial or quinquennial valuation, figures for the net actuarial liability at the beginning and at the end of the year will not be available and consequently it will not be possible to draw up a Profit and Loss Account of the kind mentioned above, nor to apply the process of computation indicated. The ordinary annual Revenue Account or even the Profit and Loss Account, prescribed by Section 11, Insurance Act, will be of no help, since they do not take note of the net actuarial liability on policies still current. The latter can be ascertained only from the documents prescribed by Section 13, read with Schedule 4, Part II, particularly the Summary and valuation and the valuation Balance Sheet, but they will give the figures for the beginning and the end of the particular year only when there is a yearly actuarial valuation. Where there is no such valuation and no Profit and Loss Account of the kind mentioned or of any kind has been submitted by the company, it is not possible for the Income-tax Officer to make any computations himself of the profits of the particular years with which he is concerned and he must necessarily fall back on the computation made by the Actuary for the last valuation period and take the annual average of the surplus found by him, as representing the profits of each of the years. In the present case, there was no annual actuarial valuation and as the Appellate Assistant Commissioner has pointed out, no Profit and Loss Account of any kind for the relevant preceding years was submitted by the company at all. In those circumstances, the Income-tax Officer, in my opinion, had no alternative to adopting the annual average of the actuarial surplus as representing the basic profits for each of the years. The direction of the Tribunal to make a computation in some different manner by, as it says, following the provisions of Rule 2(a) 'to the letter of the law' and without reference to the actuarial valuation report is not a practicable one and the Tribunal has not said, nor was it pointed to us, how it could be carried out.
30. In my opinion, when the only business done by an insurance company is to issue annuity policies dependent on human life, the Income-tax Officer, in computing the profits of the business under Rule 2 (a) of the Schedule to the Income-tax Act, has to take for 'gross external incomings' only the 'profits on the sale or granting of annuities' out of the items included in the definition of the former term and in computing such profits, he must needs proceed on the basis of the last actuarial valuation. Further, where there is no yearly valuation and no Profit and Loss Account based thereon or any Profit and Loss Account relating to the relevant year, the Income-tax Officer must needs proceed on the basis of the annual average of the surplus disclosed by the last valuation and make such further adjustments as may be required by the special facts of the case before him. That was what the Income-tax Officer did in the present case and, in my opinion, the method followed by him was, in the circumstances of the case, correct.
31. No question as to the adjustments made was raised before us and none is covered by the question referred. The question only asks whether the Income-tax Officer was justified in following the method of an estimate instead of a method of calculations.
32. In the result, the answers to the questions referred should, in my opinion, be as follows: Question 1: The question does not strictly arise out of the Tribunal's order, but the answer is that the business of the company consisted wholly in life insurance business in the form of granting annuities on human life. Question 2: Yes.
33. We cannot part with this case without remarking on the extreme carelessness on the part of the Tribunal in preparing the Paper Book. As regards its contents, the most important documents viz., the original assessment orders for the first three years without reference to which the impugned method of computation cannot be understood at all and to which the Tribunal itself felt bound to refer in its appellate order, have not been included. In the second place, the inefficiency of the proof-reading betrayed by almost every page of the Paper Book is shocking. Not only have whole sentences been left out or long phrases and clauses transposed, taut gross misprints such as 'some pension' for 'same person', 'age' for 'paid', 'local representative' for 'legal representative' appear throughout. We must record a warning that if Paper Books of this kind are submitted in future, we shall feel compelled to decline to hear the Reference till a proper Paper Book is prepared and filed.
34. The Commissioner of Income-tax will have the costs of the Reference.
S.R. Das Gupta, J.
35. I agree.