Calcutta High Court
Commissioner Of Income-Tax vs Hindusthan Co-Operative Insurance ... on 20 February, 1990
Equivalent citations: [1993]201ITR716(CAL)
Author: Suhas Chandra Sen
Bench: Suhas Chandra Sen
JUDGMENT Suhas Chandra Sen, J.
1. The Tribunal has referred to this court the following questions of law under Section 256(2) of the Income-tax Act, 1961 :
" 1. Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that, for the purpose of computing the fair market value of the capital asset of the assessee under Section 55(2) Of the Income-tax Act, 1961, the surplus to be taken into consideration was 3V: per cent., which was the minimum permissible under Explanation 2 to paragraph 1 of Part A of the First Schedule to the Life Insurance Corporation Act, 1956, and not the surplus allocated by the assessee to the shareholder during the relevant period ?
2. Whether, on the facts and in the circumstances of the case and on a proper interpretation of Section 55(1)(b) of the Income-tax Act, 1961, the Tribunal was right in holding that there was improvement in the capital asset of the assessee after January 1, 1954 ?
3. Whether there was any evidence to support the finding of the Tribunal that the improvement in the capital asset of the assessee could not be estimated at less than Rs. 3,98,000 and whether such findings were unreasonable or perverse ?"
2. The assessment year involved is 1957-58 for which the relevant year of accounting was the calendar year 1956.
3. The assessee-company was carrying on life insurance business which was taken over by the Life Insurance Corporation of India on January 19, 1956. Compensation was paid by the Government of India for the taking over of the assets of the assessee-company and the valuation date for calculation of compensation was fixed as January 1, 1954. The contention of the Revenue is that the assessee made capital gain liable to tax on account of the compensation paid for nationalisation of the life insurance business.
4. In order to justify this contention, the Revenue will have to show that the amount of compensation paid was higher than the market value of the assets as on January 1, 1954. Mr. S. K. Mitra, advocate on behalf of the Revenue, tried to draw our attention to the valuation rule which is contained in the First Schedule to the Life Insurance Corporation Act, 1956. Section 16 of the Life Insurance Corporation Act provides as follows :
"16. Compensation for acquisition of controlled business.--(1) Where the controlled business of an insurer has been transferred to and vested in the Corporation under this Act, compensation shall be given by the Corporation to that insurer in accordance with the principles contained in the First Schedule. ..."
5. Part A of the First Schedule to the Life Insurance Corporation Act, 1956, deals with the principles for determining compensation and provides as follows :
" The compensation to be given by the Corporation to an insurer having a share capital on which dividend or bonus is payable, who has allocated as bonus to policy-holders the whole or any part of the surplus as disclosed in the abstracts prepared in accordance with Part II of the Fourth Schedule to the Insurance Act in respect of the last actuarial investigation relating to his controlled business as at a date earlier than January 1, 1955, shall be computed in accordance with the provisions contained in paragraph 1 or paragraph 2, whichever is more advantageous to the insurer."
6. Paragraph 1 of the said Schedule provided as follows :
"Twenty times the annual average of the share of the surplus allocated to shareholders as disclosed in the abstracts aforesaid in respect of the relevant actuarial investigations multiplied by a figure which represents the proportion that the average business in force during the calendar years 1950 to 1955 bears to the average business in force during the calendar years comprised in the period between the date as at which the actuarial investigation immediately preceding the earliest of the relevant actuarial investigations was made and the date as at which the last of such investigations was made."
7. From this, Mr. Mitra has contended that the surplus is being paid to the assessee. In other words, Mr. Mitra has tried to contend that this is something more than the market value of the assets as on January 1, 1954. It appears that Mr. Mitra has completely overlooked the meaning of the word " surplus" used in Part A of the First Schedule to the Life Insurance Corporation Act. The Legislature was not intending to award any surplus amount, that is to say, an amount more than the market value of the assets to the insurer. What is surplus has been explained in Part A of the First Schedule. The amount of compensation payable to an insurance company will, inter alia, depend upon the annual average of the share of the surplus allocated to the shareholders. That is the rule for valuation of the compensation payable. The expression " the whole or any part of the surplus as disclosed in the abstracts prepared in accordance with Part II of the Fourth Schedule to the Insurance Act" mentioned in Part A of the First Schedule to the Life Insurance Corporation Act cannot be construed to mean that a surplus amount was to be paid to the insurance company.
8. Mr. Mitra next contended on the second question that there was no improvement in the capital assets of the assessee after January 1, 1954, and the finding of the Tribunal in this regard was unreasonable and perverse. The Tribunal, in its judgment, has observed as follows :
"... If the Department's stand is taken to its logical conclusion, it would mean that the value of the assets would become zero in case no part of the surplus was allocated to the shareholders. ..."
9. The last contention of the assessee before us was that the Income-tax Officer had omitted to add the cost of further improvement made to the business which was the capital asset in the present case, between January 1, 1954, and January 18, 1956.
10. Learned counsel for the assessee pointed out that there was considerable improvement in the business during 1954 and 1955. He submitted that, while the business done by the company in 1953 was only of Rs. 95.63 crores, it rose to Rs. 111 crores in 1954 and to Rs. 116 crores in 1955. He also submitted that the assessee had been assessed on income of Rs. 21.13 lakhs and Rs. 15.05 lakhs for 1954 and 1955, respectively, for which the corresponding assessment was that all those incomes amounting to over Rs. 36 lakhs should be taken to have gone for the improvement of the business or the capital asset and if this was added to the sum of Rs. 31,15,000 then there was actually capital loss.
11. The learned Departmental representative, on the other hand, submitted that since there was no change in the share capital of the assessee contributed by the shareholders during the period 1954 and 1955, it could not be said that there was any improvement to the cost of the capital asset as taken on January 1, 1954.
12. We have considered the submissions placed before us in the above context also. We do not agree with the submission of the learned Departmental representative that there was no improvement to the capital asset. The capital asset in the present case was the running business itself. The Appellate Assistant Commissioner dismissed this contention of the assessee by merely holding that the improvement in the value of the asset could be considered only in the case of depreciable assets and since the entire business of the assessee was taken over, the determination of the depreciable assets could not be conceived of. As already stated above, we are of the opinion that the capital asset in the present case was the running business itself. It would, therefore, be wrong to say that the improvement in the cost of the capital asset would relate only to depreciable assets."
13. The Tribunal next addressed itself to the cost of improvement in the present case and held as follows :
" As already stated above, there is no dispute that the total income assessed for 1954 and 1955 amounted to over Rs. 36 lakhs. We have no means to find out the actual amount out of this profit which went towards the improvement of the capital asset of the assessee. The assessee's counsel expressed his inability to furnish any further details. In our opinion, it would not be proper on our part to send back this case again to the lower authorities to find out only this fact when the position is not going to improve before them also. The business of the assessee was nationalised in 1956 and we are now in 1976. Twenty years have since passed and it would be harsh to the assessee if we become too technical and ask the departmental authorities to reopen the entire matter once again. We would, therefore, decide the issue on the basis of the facts as have been available to us. The facts available to us are that there was considerable improvement in the business in 1954 and 1955. The profits assessed were also substantial, i.e., over Rs. 36 lakhs falling to the account of the shareholders. In the context of these facts, it cannot be said that the improvement in the business of the assessee or in its capital asset could be estimated to be anything less than Rs. 3,98,000. Since this is the only surplus which, in our opinion, could at best be held to have arisen to the assessee on the basis of valuation of the capital asset as on January 1, 1954, we hold that on the date of the acquisition thereof, there would be no surplus at all which could be brought to tax as capital gains under Section 45 of the Act."
14. It cannot be said that the Tribunal's decision is without any basis and, as such, is perverse. The Tribunal had the entire evidence available on record and came to a decision on those facts in accordance with law. The Tribunal has pointed out that, after 20 years, it would not be fair to remand the case to the Department and ask the departmental authorities to look into the entire matter once again. On the basis of the available facts, the Tribunal has decided the case correctly and, in our opinion, the Tribunal has not done anything wrong in the way it has exercised its discretion in the matter.
15. In that view of the matter, question No. 1 is answered in the affirmative and in favour of the assessee.
16. Questions Nos. 2 and 3 are also answered in the affirmative and in favour of the assessee.
17. There will be no order as to costs.
Bhagabati Prasad Banerjee, J.
18. I agree.