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Judgment
Veeraswami, J.—These references arise out of the same order of the Tribunal and related to the same assessment year 1957-58. Two of
them come up at the instance of the Commissioner of Income Tax, one u/s 66(1) and the other u/s 66(2) of the Income Tax Act, 1922, and the
third at the instance of the assessee u/s 66(1) of the Act. The assessee is a public limited company which carried on life insurance business. The
Life Insurance (Emergency Provisions) Ordinance, 1956 (Ordinance No. 1 of 1956), was promulgated on January 19, 1956, which was replaced
by the Life Insurance (Emergency Provisions) Act, 1956 (Act 9 of 1956), which came into operation on March 21, 1956. Pursuant to the
provisions of the Ordinance, the management of the assessee vested in the Central Government with effect from January 19, 1956. The Life
Insurance Corporation Act, 1956 (Act 31 of 1956), received the assent of the President on June 18, 1956, and came into force on July 1, 1956.
The Life Insurance corporation as a corporation sole was brought into existence and on and from that date, by section 3, all the assets and
liabilities of the assessee appertaining to its controlled business to transferred to and were vested in the Corporation. In September, 1957, the
assessee received Rs. 63,034 as managerial compensation determined u/s 6 of Act 9 of 1956, and in October, 1957, Rs. 14,70,293, towards
acquisition compensation. An additional sum of Rs. 1,61,318 was also received as acquisition compensation by the assessee in October, 1958,
thus in all Rs. 16,31,611. In response to a notice u/s 22(2) of the Income Tax Act, the assessee filed a return showing ""nil"" income. But in Section
D of the return, the assessee showed these amounts. The Income Tax Officer found that the business income of the assess for the period January
1, 1956, to January 18, 1956, worked out to Rs. 42,257 and the proportionate tax deducted to Rs. 22,091. He also considered that the sum of
Rs. 63,034 was chargeable to tax as from other sources u/s 12. As regards acquisition compensation, he was of the view that the fair market value
of the assets of the assessee as on January 1, 1954, should be determined at Rs. 10,81,688 and that on that basis the capital in liable to tax
amounted to Rs. 5,49,923. The Appellate Assistant Commissioner of Income Tax concurred with the Income Tax Officer and dismissed the
assessees appeal. But, the Tribunal, on a further appeal by the assessee, directed certain modifications. In its opinion, the period for which the
business income of the assessee should be computed was from January 1, 1956, to August 31, 1956, and the proportionate income on the head of
business"" would, therefore, come to Rs. 5,63,429 and the proportionate tax deducted to Rs. 2,34,543. The sum of Rs. 63,034, according to the
Tribunal, would fall within section 10(7) of the Act and not u/s 12. The Tribunal also held that the fair market value as computed by the assessee at
Rs. 16,54,969 was correct and it followed that there was no capital gain made by the assessee. We may mention that the accounting period
relevant to the assessment year is January 1, 1956, to December 31, 1956.
In Tax Case No. 141 of 1963, the questions raised are :
Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the profits relating to the period January 19,
1956, to August 31, 1956, computed u/s 10(7) of the Act should be assessed in the hands of the assessee-company and the credit for tax paid
during that period given to it ? and
Whether, on the facts and in the circumstances of the case, the inter compensation of Rs. 63,034 is assessable in the hands of the company u/s
12 of the Income Tax Act ?
The first question depends on whether the assessee carried on the controlled business during the period January 19, 1956, to August 31, 1956.
The departmental view, as we already indicated, was that it did not so carry on. The Tribunal, however, opinion that, having regard to the
provisions of the Ordinance Act 9 of 1956, the assessee continued to carry on business in life insurance until its assets were transferred to the Life
Insurance Corporation with effect from September 1, 1956. In our opinion, the view of the Tribunal is correct.
The Ordinance was intended to provide for the taking over, in the public interest, of the management of life insurance business pending
nationalisation of such business. The Ordinance was necessitated because, pending such nationalisation, adequate steps were required to be taken
to protect the interests of policyholders. This Ordinance by sub-section (2) of section 2 defines ""controlled business"" which, broadly speaking,
means the life insurance business. Among the other expressions defined by the section are ""custodian"" and ""insurer"". ""Insurer"" is said to mean an
insurer, as defined in the Insurance Act, who carries on life insurance business in India. By section 3, on and from the appointed day, which was
January 19, 1956, the management of the controlled business of all insurers vests in the Central Government. Pending the appointment of a
custodian for the controlled business of any insurer, the section directed that the persons in charge of the management of such business immediately
before the appointed day should, on and from the appointed day, be in charge of the management of the business for and on behalf of the Central
Government; and the controlled business of the insurer should be carried on by them subject to other provisions in the section. Sub-section (3)
states that no insurer should, without the previous approval of the person specified by the Central Government in this behalf of that insurer, do
certain acts which specified. It is of significance in the context of this case to note that clause (g) of sub-section (3) presupposes that an insurer may
enter, even after the appointed date, into contracts relating to the issue of new policies of life insurance. Section 4(1) confers power on the Central
Government to appoint a custodian, and by sub-section (2) it is provided that on such appointment, all persons in charge of the management of the
controlled business of the insurer shall cease to be in charge of such management. Sub-section (3) of section 4 reserves to the central Government
in effect the power to give instructions to the custodian as to the manager in which he shall conduct the management of the controlled business of
the insurer or in relation to any matter arising in the course of such management. Power is given to the custodian u/s 5 in relation to the controlled
business of an insurer to exercise all or any of the powers which the Controller of Insurance or an administrator appointed u/s 52A of the Insurance
Act may exercise. Then follows section 6 which provides for compensation to be paid for the management of the controlled business vested in the
Central Government and the mode of its computation. This Ordinance, as we mentioned, was replaced by Act 9 of 1956, the provisions of which,
but for slight changes, are substantially the same as those of the Ordinance.
With reference to these provisions, the contention of Mr. Balasubrahmanyan, for the revenue, is that on and from the appointed day, the
management of the controlled business having vested in the Central Government, the controlled business of the insurer was no longer carried on by
the insurer. Learned counsel recognizes that the effect of the Ordinance and the Act, which replaced it, was not to vest the assets of the insurer in
the Central Government, but he says that the taking over of the management of the insurer is analogous to requisition of property in which no
transfer of property is involved, but in which possession and the actual control of the property are taken. He adds that for purposes of section 10
all that is necessary is that the person sought to be charged should be one that carried on the business and that it is not necessary that the should
also be the owner of the business. On that question, there is no difficulty. A comparison between section 9 and section 10 of the Income Tax Act
brings out the distinction that whereas, for purposes of the former section, the person charged or sought to be charged must be the owner of the
property, u/s it 10(1) will office if the assessee carried on the business in the previous year. In Executors of the Estate of Dubash v. Commissioner
of Income Tax, which was concerned mainly with sections 25(4) and 26(2) of the Income Tax Act, the Supreme Court in the course of its
judgment observed :
There seems to be no warrant, therefore, to insist on a transfer of ownership as the decisive test of succession within the meaning of section 26(2)
or section 25(4) any more than for insisting on the ownership of business by the person carrying on a business, for the purposes of section 10. I do
not, of course, wish to be understood to say that a clerk or an agent in management of a business would be an assessee liable to be taxed in
respect of its profits and gains. Some kind of title there must be, though not of a beneficial character.
Saifuddin Alimohamed v. Commissioner of Income Tax is more directly in point. There, the Bombay High Court held :
Under section 10 of the Indian Income Tax Act, 1922, it is the person who carries on the business who is liable to pay tax. What is emphasized is
not the ownership of the business but the fact of the business being carried on by the assessee.
The same High Court reiterated that view in Commissioner of Income Tax v. Balwantrai Jethalal Vaidya though in a slightly different context. It
said :
It is true that in that case Saifuddin Alimohamed v. Commissioner of Income Tax we did say that a person liable to pay tax on business income
was a person who carried on business; and we pointed out the difference in language used in section 10 and section 9. Whereas section 9 imposed
the tax upon the owner of a property, section 10 imposed the tax upon a person who carried on business.
There can, therefore, be no doubt that in order to attract section 10, ownership of the assets or business is not a requisite and it will suffice if the
assessee as of right factually carried on the business in the previous year the income from which is in question.
But, the point is whether, having regard to the provisions of the Ordinance and Act 9 of 1956, it can be said that the insurer continued to carry
on the contracted business from January 19, 1956, to August 31, 1956. On that question, as we read the Ordinance and the Act we are of the
view that there is no warrant in them to suppose that, by reason of their provisions, the insurer ceased to carry on the controlled business
subsequent to January 19, 1956. The effect of the Ordinance and the Act, in our view, was only to freeze the management of the insurer and take
it over as distinct from the controlled business itself. In other words, in effect what Ordinance and the Act did was to substitute the broad of
management of the insurer in relation to the controlled business by the Central Government. Mere replacing or substitution of the management of
the insurer does not ipso facto operate as a deprivation of the carrying on of the controlled business from the insurer. The whole purpose of the
Ordinance and the Act, as it seems to us, was to protect the interests of the policyholders in view of the impending nationalization. Lest the assets
of the insurer in relation to the controlled business were frittered away or dealt with in a manner prejudicial to the interests of the policy-holders, the
legislature thought fit to freeze the management so that effective control over the manner in which the controlled business is carried on and the
assets of such insurer might be secured. In fact, there are indications in the Ordinance and the Act that the insurer, even after its management is
taken over, was to continue to transact and enter into contracts in the issue of new life insurance policies. Sub-section (3) of section 3, which
places certain restraints on the insurer with effect from January 19, 1956, does not anywhere state that on and from the appointed day, the insurer
should cease to carry on its controlled business. Section 6 of the Ordinance, in fact, throws light upon the effect of section 3, for it only provided
for compensation in respect of taking over of the management of the controlled business. Even after the appointed day, the business of the insurer
was to be transacted as before in the name of the insurer and on its behalf. The only change that was brought over by the Ordinance and the Act
was that, instead of the old management, the Central Government or the custodian, when one is appointed, would step into its shoes, but the
business of the insurer was left unaffected. It could carry on the controlled business as before until, of course, the assets of the insurer including the
controlled business stood transferred with effect from September 1, 1956.
But it is contended for the revenue that when section 3(1) stated that, pending the appointment of a custodian for the controlled business of an
insurer, the person in charge of the management of such business should on and from the appointed day, be in charge of the management for and
on behalf of the Central Government, and the ""controlled business of the insurer shall be carried on by them subject to the provisions contained in
sub-section (3) and (5)"", the intention is manifest that the controlled business on and from the appointed day would be carried on by those in
charge of the management for and on behalf of the Central Government, and it follows, therefore, that on and from the appointed day, the
controlled business was carried on by the Central Government and not the insurer. We are unable to accept this view of section 3(1). The first part
of sub-section (1) indicates that the management of the controlled business of an insurer on and from the appointed day vested in the Central
Government. That is why the latter part of the sub-section says that those in charge of the management immediately before the appointed day
should continue to carry on the management for and on behalf of the Central Government. That is not to say that the controlled business of the
insurer is to be carried on for and on behalf of the Central Government. What is carried on for and on behalf of the Central Government from that
date is the management and not the controlled business of the insurer. That construction receives support from the other provisions of the
Ordinance and the Act. Take for instance the board of directors of an insurer in controlled business. Can it be said that because the broad of
directors in share of the management effectively controls, directs and secures the affairs of the life insurance business of the insurer, such board of
directors carries on the business of insurer. Obviously, the person who carries on the business is the insurer and the board of directors only
manages the business carried on by the insurer. That precisely is the position even after the appointed day with this difference that, instead of the
erstwhile management, the Central Government and the custodian on his appointment comes into management. We are of the view, therefore, that
the Tribunal was correct in its findings that the assessee carried on its business in life insurance until August 31, 1956. The first question in this
reference is answered against the revenue.
On the second question, the point is whether the sum of Rs. 63,034 was rightly held by the Tribunal to fall within the purview of section 10(7)
of the Act. That provision says that notwithstanding anything to the contrary contained in sections 10 and 12, among other sections, the profits and
gains of any business of insurance and the tax payable thereon shall be computed in accordance with the rules contained in the Schedule to the Act.
Rule 1 in the Schedule read with section 10(7) charges a person who carried on life insurance business in the previous year and provides for
computation separately of the income from such business. Since we have held that the assessee carried on the controlled business even subsequent
to January 19, 1956, and up to August 31, 1956, it follows that section 12will stand eliminated and that provision that would be properly
applicable would be section 10(7) and the Schedule mentioned in the sub-section. No question has been raised before us as to the character of the
income, the only question argued was whether section 10(7) or section 12 that would be applicable. We uphold the view of the Tribunal on this
question and answer the same against the revenue.
That takes us to Tax Case No. 142 of 1963, in which the question are :
Whether the provisions of section 12B applied to the compulsory acquisition of controlled business of insurance by operation of law ?
Whether the transfer of the controlled business of the applicant company took place on January 19, 1956, or September 1, 1956, the appointed
date ?
The first question is really covered by Wilfred Pereira Ltd. v. Commissioner of Income Tax, in which a Division Bench of this court held that
the word ""transfer"" in section 12B included both a transfer by act of parties and transfer by operation of law. We are of the same view, and the
Tribunal rightly applied section 12B.
On the second question, the Life Insurance Corporation Act, 1956, is quite clear. We have already held that the effect of the Ordinance and
the Act that substituted it was not to transfer the controlled business itself as from the appointed date to the Central Government. The transfer took
place under the Life Insurance Corporation Act. Section 3(1) of this Act established a corporation with effect from the date specified by the
Central Government by notification. The corporation in this provision was brought into being with effect from September 1, 1956. By section 7(1)
of the Act, on the appointed day, that is when the corporation came into existence, all the assets and liabilities of the insurer appertaining to the
controlled business stood transferred to and were vested in the corporation. Both the questions in Tax Case No. 142 of 1963, are, therefore,
answered against the assessee.
There remains Tax Case No. 84 of 1965, which relates to the mode of computation of fair market value for purposes of section 12B of the
Income Tax Act. The question refereed to us reads :
Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the method adopted by the Income Tax Officer
for computing the market value of the business as on January 1, 1954, was correct ?
The Income Tax Officer calculated the fair market value on the same basis as adopted for computing the compensation in accordance with the
First Schedule to the Life Insurance Corporation has been briefly and correctly summarized by the Income Tax Officer as follows :
(i) Firstly, the actuarial valuation surplus of the previous 5 years (1950 to 1954) is noted;
(ii) Secondly, 5% of each years surplus is attributed as the shareholders surplus although, according to section 49 of the Insurance Act, the
company can credit a higher percentage of the surplus to the shareholders credit and in the case of this company a higher percentage has actually
been credited as shareholders surplus;
(iii) Thirdly, the average of the shareholders surplus for the 5 years is taken;
(iv) Fourthly, this average is multiplied by 20 times; and
(v) Lastly, this figure is multiplied by a figure which represents the proportion that the average business in force from the calendar years 1950 to
1955 bears to the average business in force from the calendar years 1950 to 1954 comprised in the period between the date on which the actual
investigation was made and the date as at which the last of such investigation was made (In the instant case, it is the average business in force
during the calendar years 1950 to 1954).
This scheme is to be found in the rules contained in the First Schedule to the Life Insurance Corporation Act. Explanation 2 to paragraph 1 in
Part A of the First Schedule to the Act reads :
For the purposes of paragraph 1, where an insurer has allocated to shareholders more than 5 per cent of any such surplus as is referred to therein,
the insurer shall be deemed to have allocated only 5 per cent of the surplus and where an insurer has not allocated any such surplus to shareholders
or has allocated to shareholders less than 3 1/2 per cent of any such surplus, the insurer shall be deemed to have allocated 3 1/2 per cent of the
surplus.
It is with reference to this Explanation, the Income Tax Officer considered that although the surplus allotted to shareholders amounted actually
to 7 1/2 per cent in this case, it should be limited to 5 per cent on the principle of the above Explanation. It is this view that is pressed by the
revenue for our acceptance. The Tribunal held that the 5 per cent limited by the Explanation was only for purposes of computation of
compensation for acquisition of assets under the Life Insurance Corporation Act and the principle did not necessarily apply to a determination of a
fair market value for purposes of section 12B. Section 12B(2), proviso 3, is the provision that was applied by the revenue, and there is no dispute
as to its application to the facts. But the controversy, as we indicated, is confined to the application of the principle of the second Explanation we
referred to, relating to the percentage of the surplus, to a determination of the fair market value for purposes of computing capital gains. In the
statement of the case, it was pointed out that the average total surplus allocated per annum to the shareholders over a period of six years during the
periods 1947 to 1949 and 1950 to 1952 was Rs. 78,266.50P. Under the proviso to section 49 of the Insurance Act, 1956, the share of any
surplus. The Income Tax Officer worked out the fair market value by applying this formula :
51, 155 x 20 x 1.057265 = Rs. 10,81,688.
But the assessee worked out the fair market value thus :
78,266.50 x 20 x 1.057265 = Rs. 16,54,969.
The figure 20 and the quotient applied both by the revenue as also by the assessee are on the basis of the First Schedule to the Life Insurance
Corporation Act. But the first figure in the two formulae depended on whether the surplus allocated to the shareholders should be limited to 5 per
cent , while in fact the surplus worked out to 7 1/2 per cent as permitted by the provisions of the Insurance Act. While the revenue says that 5 per
cent is reasonable, the assessee asserts that when the surplus worked out to 7 1/2 per cent , it is not unreasonable to take it as the basis for
determination of the fair market value. In a matter like that, there is no particular rule or principle that should invariably apply. What is necessary is
to find the market value and the market value determined should be a fair market value. What is fair and what is not fair will depend on particular
facts and circumstance. The Tribunal, in our view, rightly considered that when the Insurance Act itself permitted allocation of surplus up to 7 1/2
per cent to shareholders, there is no reason why the actual percentage of should not be adopted in computing the fair market value. This is what
the Tribunal stated :
We are of the opinion that whatever may be the relevance of limiting to 5 per cent in the context of computation of the value of the business for the
purpose of payment of compensation, that cannot apply to the arriving at the market value under the provisions of section 12B for arriving at the
capital gains, for, section 49 of the Insurance Act, the provisions of which have been applied by the Income Tax Officer in this very case for
arriving at the income or Rs. 42,257 for the first 18 days of the year 1956, allows the assessee to pay the surplus up to 7.49 per cent to the
shareholders and, so long as this provision in not infringed and, in pursuance thereof, the assessee had credited Rs. 78,266.50 P. long before there
was any question of any transfer, this computation of market value cannot be questioned. We, therefore, hold that the calculation of the Income
Tax Officer by which he arrived at Rs. 10,81,688 as being the value of the business on the basis that Rs. 3,06,930 was the share of surplus
payable to the shareholders is wrong and that the market value must be placed at Rs. 16,54,969.
We are unable to hold that, in taking that view, the Tribunal was unreasonable. We answer the question in this reference against the revenue.
The assessee is entitled to its costs. Counsels fee Rs. 250, one set.
Questions answered accordingly.