The Commissioner Of Income-Tax vs Life Insurance Corporation Of ...
1970 Latest Caselaw 280 Del

JUDGMENT

V.S. Deshpande, J.

(1) Under section 66(1) of the Income Tax Act, 1922, the following questions have been referred to this Court for opinion:- "1. Whether the Tribunal was justified in allowing the sum of Rs. 39,763 in the assessment year 1958-59 ? 2. Whether the Tribunal was justified in allowing the assessed's claim of Rs. 32.518 in the assessment year 1959-69 ? 3. Whether in the alternative the assessed is entitled under Proviso to Rule 2 of the Schedule to management expenses at the prescribed percentage on the total premiums (i.e., premiums without deduction of premium paid on re-insurances) for both the assessment years ?"

(2) The facts leading to the reference are undisputed. The Bharat Insurance Company Limited [hereinafter called the assessed] carried on the business of life insurance in the relevant previous years, namely, those ending on 31st December 1957 and 31st December 1958, the income accruing therein being assessable in the assessment years 1958-59 and 1959-60. As an insurer, the assessed received premia from the insured and had to pay commission to the insurance agents who had brought in the business resulting in the issue of insurance policies. The assessed, however, covered itself in respect of a part of the risk by taking out re-insurance policy from another company in respect of a part of the amount for which the assessed had issued insurance policies.

(3) In its balance-sheet, the assessed showed consolidated figures of income and expenditure in this respect. On the side of income, the assessed showed the receipt of premia less re-insurance, that is to say, only that premia was shown as received by the assessed which related to the amount for the payment of which the assessed alone was liable on the insurance policies. The amount of premia received for the other policies which were covered by the re-insurance was not shown as income inasmuch as the said premia had to be paid to the re-insurer. Similarly, on the expenditure side, the assessed showed only that such commission as was paid to the insurance agents for that part of the business for which no re-insurance policy was taken. The rest of the commission paid for the business which was the subject of re-insurance was not showed as expenditure inasmuch as that commission was payable by the re-insurer to the insurance agents.

(4) The insurer received the amounts of Rs. 39,763 and Rs. 32,518.00 as re-insurance commission for the abovementioned two years from the re-insurer. According to section 10(7) of the Income Tax Act, 1922. 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 said Act. According to rule 2(a) of the said Schedule, 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) . . . (not relevant in the present case).

(5) The Income Tax Officer included Rs. 39,763 and Rs. 32,518.00 as receipts of the assessed in making the assessments for the years 1958-59 and 1959-60 respectively. The appellate Assistant Commissioner confirmed the assessment. The Income Tax Appellate Tribunal, however, considered that in the circumstances of the case. the method followed by the assessed in computing its original return was sound and, therefore. it accepted the assessed's claim that the re-insurance commission should not be included in the total income. The reference was, however, made at the instance of the Revenue.

(6) In paragraph 4 of the assessment order itself, it is conceded that actually the assessed had paid the total commission to the insurance agents for canvassing the whole of the insurance business. When, therefore. a part of the business was transferred by the assessed to the reinsurer. the assessed was entitled to the reimbursement of such commission paid-by the assessed to the agents as was payable by the reinsurer on the part of the business transferred to the re-insurer from whom the assessed took out the re-insurance policy. Had the assessed shown this part of the agency commission as commission paid to insurance agents under the management expenses in its revenue account at page 10 of the reference, then the assessed would have been bound to show the reimbursement of the said part of agency commission to it by the re-insurer as a part of its gross external incomings on the income side. But the assessed adopted the alternative of not showing the said part of the agency commission as management expenses. As the assessed had actually incurred this expenditure but had not shown it as such in its revenue account, it follows that the payment of the so-called re-insurance commission was only reimbursement of the expenditure insured by the assesses but not shown as expenditure incurred by it in its revenue account. The method adopted by the assessed was, therefore, correct. The alternative method was to include the said agency commission in the management expenses and then to show it as a part of the gross external incomings. The result would be the same. What the Income Tax Officer and the Appellate Assistant Commissioner did was to allow the revenue account of the assessed as it is on the expenditure side showing only the net expenditure while at the same time changing the income side by inclusion of the so-called re-insurance commission. But the re-insurance commission, as observed above, was only the reimbursement of actual expenditure incurred by the assessed but not shown in the revenue account. This part of the assessment was not, therefore, correct and the Tribunal was, therefore, right in deleting the inclusion of the so-called re-insurance commission in both the assessment years in the total income of the assessed. It is true that re-insurance commission paid to the assessed by the re-insurer fell within the definition of "gross external incomings" as defined in rule 5(ii) of the Schedule to the Act. But it is equally true that the commission paid to the agents by the insurer on the amount of the business transferred to the re-insurer also fell within the definition of "management expenses" in rule 5(iii) of the said Schedule. Therefore, it is only if the insurer had claimed the commission paid to the agents on the business transferred to the re-insurer under the management expenses that the insurer would have been bound to show the re-insurance commission under the gross external incomings. The amounts paid to the agents as commission were exactly equal to the re-insurance commission, Therefore, it made no difference whether these amounts are cither included on both the income and the expenditure sides or are excluded from both the sides. The assessed followed the latter alternative and there was no point in compelling it to follow the former one as the result would be the same in either case.

(7) It may be pointed out that rule 17-D(v) of the Insurance Rules. 1939 framed under the Insurance Act, 1938 limits the expenses of management in life insurance business to an amount computed on the basis of the percentages for the time being appropriate to the duration of the insurer's life insurance business specified in the table set out there under. It is significant that the percentage of the premiums stated therein is less reinsurance. The assessed was, therefore, right in not including the premiums received in the business transferred to the reinsurer as well as the agency commission paid to the agents in respect of such business transferred to the re-insurer in its revenue account.

(8) Our answers to the questions referred to us are, therefore, as follows:- 1.The Tribunal was justified in allowing the sum of Rs. 39,763.00 in the assessment year 1958-69. 2. The Tribunal was justified in allowing the assessed's claim of Rs. 32.518.00 in the assessment year 1959-60. 3. Does not arise.

(9) We make no order as to costs.