Commissioner of Income Tax vs Bharat Insurance Co. Ltd.

S.S. Chadha, J.—This is a reference u/s 256(1) of the income tax Act, 1961 (hereinafter referred to as "the Act"), by which the following question has been referred to this Court for opinion:

Whether, on the facts and in the circumstances of the case, the assessee- company was carrying on any business during any or all the accounting periods relevant to any or all the assessment years 1962-63, 1964-65 to 1969-70?

Bharat Insurance Co. Ltd., the assessee, is a limited company. The assessment years in dispute are the years 1962-63 and 1964-65 to 1969-70. while the previous years were the years ended 31-12-1961 and 31-12-1963 to 31-12-1968. At the relevant time, the assessee derived income under the head "Interest on securities" and there is no dispute to this head of income. The dispute is to the claim of the assessee that it carried on business in the relevant years of account. When the Insurance Act, 1938 came into force, the assessee was carrying on the business of life insurance, fidelity guarantee bonds, guaranteeing the Calcutta Administrators, Receivers, etc., and the fire insurance in respect of which the assessee was acting as employer of agents only. In addition to life insurance, the assessee was thus conducting miscellaneous insurance business under the High Court Guarantee Bonds. The assessee obtained in 1939 the requisite registration under the Insurance Act for that class of business also. A separate deposit of Government securities was made with the Reserve Bank of India, Calcutta, as security required u/s 7 of the Insurance Act, 1938, in respect of that class of business, in addition to its life insurance business. From 1939 to 1943, the assessee carried on the business of issuing bonds directly and in or about 1943, the assessee entered into an arrangement with Bharat Fire & General Insurance Co. Ltd., whereby the management of the bonds so far issued was taken over by Bharat Fire & General Insurance Co. Ltd. and new bonds were issued by Bharat Fire & General Insurance Co. Ltd. in the name of the assessee. These bonds were in turn re-insured for the full amount with Bharat Fire & General Insurance Co. Ltd. This arrangement worked up to 1949 in which year the assessee ceased to issue any new bonds, either sold by it or through Bharat Fire & General Insurance Co. Ltd. The assessee continued the registration under the Insurance Act, for the miscellaneous insurance business from year to year. The Controller of Insurance cancelled the registration for this miscellaneous insurance business with effect from 15-6-1956 for non-renewal of registration.

Before the ITO, the assessee contended that the assessee should be deemed to be carrying on the business in respect of the High Court Guarantee Bonds during the relevant years. The ITO negatived that contention and held that no business was carried out by the assessee. He came to the conclusion that the company could not carry on general insurance business without the licence under the provisions of the Insurance Act, 1938, and the assessee had not even renewed its licence for general insurance after the life business was taken over by the Life Insurance Corporation with the result that the licence stood cancelled almost for good. The ITO also found that no miscellaneous business was conducted by the assessee since 1952 or so and that the conduct of the assessee over a period of more than a decade clearly showed that there was no intention whatsoever to do insurance business in future. The ITO further found that it could not be said that there was merely a period of lull so far as the carrying on of the business was concerned as furnishing of fidelity bonds through the agent Bharat Fire & General Insurance Co. Ltd. further indicated that the assessee had no insurance business as such and that any commitment relating to the above business which had ceased to exist was sought to be covered by virtue of an internal arrangement between the assessee and Bharat General Re-Insurance Co. The AAC concurred with the view taken by the ITO on the ground that in the relevant years, there was not even a single transaction of business and that the assessee did not have any licence under the provisions of the Insurance Act for carrying on any general insurance business in the relevant years of account. The AAC also noticed that the assessee had got its memorandum and articles of association amended in the year 1969-70 so that insurance business ceased to be one of the objects of the assessee.

The assessee thereupon appealed to the Tribunal. The Tribunal upheld the contentions put forward on behalf of the assessee and held that in all the relevant years of account, the assessee did carry on business of miscellaneous insurance. The Tribunal found that insofar as the fidelity bonds originally issued were concerned, there was no closure of the assessee''s business, that the risk underlying the transactions continued to be borne by the assessee, although it was to a great extent neutralised by the cover of re-insurance but nonetheless the risk remained and that meant not merely incurring of a liability but also the possibility of making a profit or a loss. The Tribunal further observed that the mere fact that the memorandum and articles of association was amended subsequently did not change the factual position and the legal inference deducible therefrom for the relevant years in question.

"Business" is a term of wide amplitude which includes any trade, commerce or manufacture or any adventure or concern in the nature of trade, commerce or manufacture. Even though the words are wide, but under lying each of them is the fundamental idea of continued exercise of an activity. The frequency or repetition of activity, though at times a decisive factor, is by no means an unfailable test, and transaction though repeated may not amount to a trade or an adventure in the nature of trade. Conversely, an isolated adventure may fall within the definition of "business". Ordinarily, business implied a continuous activity in carrying on a particular trade or a vocation, but it may also include an activity which may be called quiescent. The Tribunal found that the assessee did carry on the business of miscellaneous insurance in connection with the fidelity bonds which it had already issued, although on an extremely small scale in the relevant years of account. This carrying on business was because of the statutory provisions of the Insurance Act. Section 3(5B) of the Insurance Act says that when a registration, is cancelled, the insurer shall not, after the cancellation has taken effect, enter into any new contracts of insurance, but all rights and liabilities in respect of contracts of insurance entered into by him before such cancellation takes effect shall, subject to the provisions of sub-section (5D), continue as if the cancellation had not taken effect. By the deeming fiction of the statute, all rights and liabilities in respect of the fidelity bonds originally issued by the assessee continued as the cancellation of the registration had no effect. The transactions of fidelity bonds is in the nature of an activity carried on under the statutory control and amounts to carrying on business within the meaning of the Act. The primary liability was, and continued on the existing bonds, to be that of the assessee, which in turn was duly covered by re-insurance with Bharat General Re-insurance Co. There was no substitution of the assessee by the reinsurer and it was only re-insurance of a risk by the assessee. There was no contract of guaranteeing the Calcutta. High Court, for fidelity of trustees, administrators, receivers, etc., by the re-insurer. The liability continued on the existing bond to be that of the assessee and, to that extent, it amounts to the carrying on business. The reference is answered in the affirmative, i.e., in favour of the assessee and against the revenue. On the facts and circumstances, there will be no order as to costs.