Judgement Appeal (No. 73 of 1947) from a judgment of the High Court (March 26, 1945) Law Rep. 76 Ind. App. 1 ( 1948- 1949) Commissioner of Income-Tax v. Western India Life Insurance 227 which was delivered on a reference by the Income-tax Appellate Tribunal made under s. 66, sub-s. 1, of the Indian Income-tax Act, 1922. The following facts and statutory provisions are taken from the judgment of the Judicial Committee. The respondent company was resident in British India and carried on the business of life insurance in British India with its head office at Satara in the province of Bombay. It had no branches outside British India. All its profits were derived from its life insurance business. Among other investments owned by the company for the purposes of its business were certain foreign investments from which it received income. Such income was received by it abroad but was not actually brought into British India. By s. 4 of the Income-tax Act the respondent company, being a resident company, was liable to assessment to tax under the Act on all its income, profits and gains from every source, wherever such income accrued, arose or was received, the profits and gains of its life insurance business being assessable under the schedule to the Act. The company, however, claimed that under the third proviso to s. 4, sub-s. 1, of the Act it was entitled for assessment purposes to the allowance therein mentioned of Rs. 4,500 for each year of assessment in respect of the said investment income so accruing and arising to it outside British India and not brought into British India. Sections 4 and 42 and rr. 1 and 2 of the schedule were, so far as material, as follows "4.—(1.) Subject to the provisions of this Act, the total " income of any previous year of any person includes all " income, profits and gains from whatever source derived " which— * * * * * * " (b) if such person is resident in British India during "such year— * * * * * * " (ii.) accrue or arise to him without British India during " such year. * * * * * * [third proviso] " Provided further that if in any year the amount " of income accruing or arising without British India " exceeds the amount brought into British India in that year, " there shall not be included in the assessment of the income " of that year so much of such excess as does not exceed " four thousand five hundred rupees/ * * * * * * " Section 42 (1.).—All income profits or gains accruing or " arising whether directly or indirectly, through or from any " business connexion in British India, or through or from " any property in British India, or through or from any asset " or source of income in British India or through or from any " money lent at interest and brought into British India in " cash or in kind, shall be deemed to be income accruing " or arising within British India, and where the person " entitled to the income, profits or gains is not resident in " British India, shall be chargeable to income tax either in " his name or in the name of his agent and in the latter case " such agent shall be deemed to be for all the purposes of " this Act the assessee in respect of such income tax " “THE SCHEDULE. Law Rep. 76 Ind. App. 1 ( 1948- 1949) Commissioner of Income-Tax v. Western India Life Insurance 228 " Rules for the Computation of the Profits and Gains " of Insurance Business. " 1. In the case of any person who carries on, or at any " time in the preceding year carried on, life insurance " business, the profits and gains of such person from that “ business shall be computed separately from his income, " profits or gains from any other business. "2. " 1. In the case of any person who carries on, or at any " time in the preceding year carried on, life insurance " business, the profits and gains of such person from that “ business shall be computed separately from his income, " profits or gains from any other business. "2. 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 disclosed " by the actuarial valuation made for the last inter-" valuation period ending before the year for which the " assessment is to be made, after adjusting such surplus " so as to exclude from it any surplus or deficit included “therein which was made in any earlier inter-valuation " period and any expenditure other than expenditure " which may under the provisions of section 10 of the " Act be allowed for in computing the profits and gains " of a business, whichever is the greater " On September 6, 1941, the Income-tax Officer for Satara District made his assessment order in respect of the companys business profits for the year of assessment 1939-40, under and in accordance with the provisions of the schedule to the Act. For the years 1939- 1940 and 1940- 1941, he assessed the company under r. 2 (b) on the average of the surplus disclosed by the actuarial valuation made for the last inter-valuation period, a triennial period ending on December 31, 1938, without allowing the deduction of Rs. 4,500 under the proviso to s. 4, sub-s. 1. It was common ground that in each year of assessment and in each year of the triennial period the amount of the respondents income accruing or arising without British India exceeded the amount brought into India in that year. The company appealed to the Appellate Assistant Commissioner of Income-tax, Belgaum Range, Belgaum, the only material ground of appeal being that, in respect of the income accruing or arising without British India and not brought into India, there should be deducted from the surplus shown for the three years ended 1938 the total sum of Rs. 13,500, being Rs. The company appealed to the Appellate Assistant Commissioner of Income-tax, Belgaum Range, Belgaum, the only material ground of appeal being that, in respect of the income accruing or arising without British India and not brought into India, there should be deducted from the surplus shown for the three years ended 1938 the total sum of Rs. 13,500, being Rs. 4,500 for each year under the third proviso to s. 4, sub-s. 1, of the Act, in respect of the income of the company from its foreign securities which had been collected by the Midland Bank, Ld., in London and retained there. On September 19, 1942, the appellate assistant commissioner allowed the appeal and made a deduction of Rs. 4,500 for each of the three years, holding that under the third proviso to s. 4, sub-s. 1, of the Act, a deduction of Rs. 4,500 for unremitted foreign income was admissible in respect of each of the three years, and that the assessable income computed under r. 2 (b) of the schedule for the year 1939-40 should therefore be reduced by Rs. 4,500. He made a similar order in respect of the year of assessment I940-41 The income-tax officer appealed to the Income-tax Appellate Tribunal, who affirmed the decision of the appellate assistant commissioner on that particular point. The Commissioner of Income-tax, Bombay, thereupon applied to the Income-tax Appellate Tribunal to state a case in respect of each year of assessment, and refer it to the High Court of Bombay under s. 66, sub-s. i, of the Act for its opinion as to whether the company was entitled to the said deduction of Rs. 4,500. On June 22, 1944, the Income-tax Appellate Tribunal accordingly stated the case for the opinion of the High Court. On March 26, 1945, the High Court of Bombay (Kania and Chagla JJ.) delivered judgmen; holding that the view of the Income-tax Appellate Tribunal was correct. 1948. June 30, July 1, 2. Millard Tucker K.C. and Subba Row for the appellant. The " total income " on which the respondent company is assessable for each year of assessment under s. 3 of the Act is, by virtue of s. 2, sub-s. 15, the total income, profits and gains referred to in s. 4, sub-s. 1, computed in manner laid down in the Act. The " total income " on which the respondent company is assessable for each year of assessment under s. 3 of the Act is, by virtue of s. 2, sub-s. 15, the total income, profits and gains referred to in s. 4, sub-s. 1, computed in manner laid down in the Act. The manner in which the respondents profits from its business of life insurance are to be computed for assessment purposes is laid down by s. 10, sub-s. 7, and the Law Rep. 76 Ind. App. 1 ( 1948- 1949) Commissioner of Income-Tax v. Western India Life Insurance 229 schedule to the Act, exclusively. Where such profits are computed in accordance with r. 2 (b) of the schedule, the sum so arrived at is an artificial sum, ascertained by taking a yearly average of the net result of more than one years operations and receipts, and the amount so computed does not, and cannot, represent an actual amount of income accruing or arising in any particular year. There is no pro vision in the schedule for making any deduction from the total surplus of the period for which the average is to be taken, either at the rate of Rs. 4,500 per annum or in any other manner. The third proviso to s. 4, sub-s. 1, of the Act is clearly inappropriate to the case of a computation under r. 2 (b) of the schedule. Where the computation is made under r. 2 (b) proper effect could not be given to the words " in any year," " in that year M and V of that year " in the third proviso. That proviso is in terms confined to " income," and the words " profits and gains " do not appear in it. The whole of the income, part of which it is sought by the respondent to exclude from its assessable income under the third proviso, was rightly included in arriving at the surplus disclosed by the triennium valuation report ended December 31, 1938, and one-third of that surplus was rightly taken under r. 2 (b) as the assessable income of the respondent for each of the years 1939-40 and 1940-41. The effect of the argument is to make the third proviso altogether inapplicable in this case, because in the case of life insurance business the figure to be taken is a notional one, as in Inland Revenue Commissioners v. Australian Mutual Provident Society ([ 1947] A. C. 605.), which was similar to this case. It is a question here whether Hughes v. Bank of New Zealand ([ 1938] A. C. 366.) or the Australian Mutual Provident Society case ([ 1947] A. C. 605.) applies. [Reference was also made to In re North British and Mercantile Insurance Co., Ld. (I. L. R. [ 1937] 2 C. 540.) ; Commissioner of Income-tax v. Indian Life Assurance Co., Ld. (( 1941) A. I. R. (Sind) 17.) and Manufacturers Life Insurance Co. of Canada v. Commissioner of Income-tax, Bombay (( 1938) 6 I. T. R. 321.).] It would appear very doubtful whether the above cited authorities could stand in the light of the reasoning of the House of Lords in the Australian Mutual Provident Society case (1), where stress was laid on the fact that what was being taxed was a notional or conventional figure which was said by the statute to represent the profits. In the present case it is notional because what is taken is an average of a surplus arising from transactions which occurred wholly outside the previous year and therefore could not have any bearing on the results of that previous year. [Reference was also made to Maharaja of Pithapuram v. Commissioner of Income-tax, Madras (( 1945) L. R. 72 I. A. 141.).] Alternatively, the provisions of s. 42, sub-s. 1, of the Act apply equally to residents and non-residents in British India, and accordingly the whole of the foreign income of the respondent company must, under s. 42, sub-s. 1, be deemed to be income accruing or arising in British India within the meaning of s. 4 (b) (i.) of the Act Motor Union Insurance Co., Ld. v. Commissioner of Income-tax, Bombay (( 1945) 13 L T. R. 272.). On its true construction the third proviso to s. 4, sub-s. 1, has no application to any income which, although in fact accruing or arising without British India, is nevertheless deemed under the Act to accrue or arise in British India. Summarizing, there are three points. v. Commissioner of Income-tax, Bombay (( 1945) 13 L T. R. 272.). On its true construction the third proviso to s. 4, sub-s. 1, has no application to any income which, although in fact accruing or arising without British India, is nevertheless deemed under the Act to accrue or arise in British India. Summarizing, there are three points. First, reliance is placed on the principles of the Australian Mutual Provident Society case (1). Secondly, in any event the third proviso to s. 4, sub-s. I, is by its terms not applicable to any assessment made under r. 2 (b), because in any such assessment the income of the year in which the foreign income arose is not being assessed, because, first, an assessment is not being made on that income at all, and, secondly, because in making an assessment under r. 2 (b) it is not being made for the year in which the foreign income arose. The third point is that the proviso does not apply to income which is deemed to accrue in British India notwithstanding that in fact it accrues without British India. Mustoe for the respondent. The third proviso is dealing with the year the income of which is to be assessed in the next year, and the word “income " must mean the total income. If that is right, then it is in every way possible to apply the proviso. When the assessment comes to be made, whether it is an assessment on a single source of income or on a number of sources of income added together, the third proviso can still quite easily be applied merely by seeing whether in the previous year there was unremitted income within the description in the third proviso, and if there was, giving relief up to Rs. Law Rep. 76 Ind. App. 1 ( 1948- 1949) Commissioner of Income-Tax v. Western India Life Insurance 230 4,500. The submission is that no matter what actual income was received during the triennial period, and, indeed, even if no foreign income at all was received in that period, nevertheless, if it is established that in fact in the. previous year there was what may conveniently be called unremitted foreign income, then the assessment made in respect of the total income for that previous year must have deducted from it the whole of the unremitted foreign income up to Rs. 4,500. previous year there was what may conveniently be called unremitted foreign income, then the assessment made in respect of the total income for that previous year must have deducted from it the whole of the unremitted foreign income up to Rs. 4,500. It is conceded that if the words " the income of that year " in the third proviso mean the unremitted income taken in isolation the case would be governed by the Australian Mutual Provident Society case ([ 1947] A. C. 605.), but it is submitted that they could, not mean that. The practical effect of my case is that if in any given previous year there is unremitted income exceeding Rs. 4,500 then there should be deducted Rs. 4,500 from the amount of what the assessment would otherwise be. My case depends on the proposition that the phrase " the assessment of " the income " means the assessment of the total income ; the fact that the income has been computed in a notional figure does not alter the fact that what has been assessed is the very income of 1939 ; in 1939 there was unremitted income of more than Rs. 4,500, and if that is so, then the conditions of the proviso were fulfilled, namely, (a) that there must be unremitted income, (b) the amount brought into British India must be less than the total amount of unremitted income, and (c) there must be included in the assessment of the total income of the same year the unremitted income. If those conditions are satisfied, then the only thing left to be done is to apply the proviso by deducting Rs. 4,500 from what the amount of the assessment would otherwise be. [Reference was made to Whelan v. Henning ([ 1926] A. C. 293.) and Brown v. National Provident Institution ([ 1921] 2 A. C. 222.).] The third proviso is an exempting provision, and therefore, on proper canons of construction, should in a case of doubt be given an interpretation which is beneficent to the taxpayer. With regard to s. 42, neither by that section, as amended, nor otherwise, is the unremitted income to be deemed to have accrued or arisen in British India so as to be within sub-para, (i.) of para, (b) of s. 4 of the Act. With regard to s. 42, neither by that section, as amended, nor otherwise, is the unremitted income to be deemed to have accrued or arisen in British India so as to be within sub-para, (i.) of para, (b) of s. 4 of the Act. That income did not accrue or arise, directly or indirectly, through or from any business connexion in British India within the meaning of the phrase “business connexion " in s. 42, sub-s. 1, as amended. The assets or sources of income from which the unremitted income accrued or arose where securities, stocks and shares outside British India. Section 42 does not apply to this case. The judgment, of the High Court was correct. Millard Tucker K.C. replied. Oct. 21. The judgment of their Lordships was delivered by LORD OAKSEY. The question for determination in this appeal is whether the respondent company, being assessed to tax in respect of the profits and gains of its life insurance business under r. 2 (b) of the schedule to the Act, is entitled under the third proviso to s. 4, sub-s. 1, of the Act to a deduction of Rs. 4,500 in respect of certain income derived by it from the investment of part of its business funds outside British India, which income, however, was not brought into or received in British India. [His Lordship stated the facts set out above and continued ] The question which now arises was not argued in the High Court, the judgments of the learned judges being based on the construction of s. 42 of the Act, which they held only applied to non-residents and had no application to the present case in which the income in question had clearly accrued to the company outside British India. Their Lordships agree with the High Court that s. 42 has no application, but express no opinion on the question whether the section refers only to non-residents. The argument before their Lordships Board was principally directed to the construction of the third proviso to s. 4 and to the question of its applicability to an assessment of the profits and gains of a life insurance business under the schedule in view of the decision of the House of Lords in Inland Revenue Commissioners v. Australian Mutual Provident Society ([ 1947] A. C. 605.). It was contended on behalf of the appellant that assessments for the years 1939/ 1940 and 1940/ 1941 based on a computation of income under r. 2 (b) by reference to the annual average of the surplus disclosed by the actuarial valuation made for the last inter-valuation period, namely, the triennial period ending December 31, 1938, were assessments of a notional and not of the actual Law Rep. 76 Ind. App. 1 ( 1948- 1949) Commissioner of Income-Tax v. Western India Life Insurance 231 income of the year preceding the year of assessment, and that therefore the third proviso to s. 4 had no application since the income therein referred to must be the actual income of the year in question and not a notional income arrived at by computing an average income by reference to the income of other years. It could not, therefore, be said that there had been included in the assessment of the income of that year any part of the actual income of the year, whether derived from foreign investments or otherwise. Inland Revenue Commissioners v. Australian Mutual Provident Society ([ 1947] A. C. 605.) was decided on provisions of the British Income Tax Act of 1918, which are not the same as the proviso to s. 4 of the Act now in question, but the case does draw attention to the distinction between an assessment on actual income and an assessment on a notional income, and in so far as an average derived from a triennial period is the basis for computation of the income of one year in this Act the case has an important bearing. But apart from authority, their Lordships are of opinion that the appellants contention is correct, and they find it impossible to apply the words of the third proviso to s. 4 to an assessment under r. 2 (b) of the schedule, and they will therefore humbly advise His Majesty that this appeal should be allowed, with the costs of this appeal, and that the assessment of the income-tax officer for Satara should be restored. Their Lordships make no order as to the costs in the courts below as the question argued before them was not raised in those courts.