Judgment :- SRINIVASAN J. For the assessment year 1956-57, the return of income of the assessee-insurance company was Rs. 4, 93, 065. It is not in dispute that this was computed in accordance with rule 2(b) of the Rules for the computation of the profits and gains of insurance business. The average actuarial valuation for the two year period ended on December 31, 1954, disclosed the average surplus of Rs. 51, 38, 221. In order to arrive at the taxable profits, certain sums have to be deducted under rule 3. One of those is 80 per cent. of the amounts paid to, or reserved for, or expended on behalf of the policy-holders. The company declared Rs. 42, 58, 246 as bonus to the policy-holders and this sum was credited to the accounts of the various policy-holders. It would follow from rule 3(a) that 80 per cent. of this amount has to be deducted in arriving at the surplus for the purpose of rule 2. Accordingly, a sum of Rs. 34, 06, 597 was claimed as deduction. It appears that subsequently it was discovered that a mistake had occurred in the determination of the actuarial surplus due to certain figures being taken in excess of actual realisations. The correct figure of surplus was re-determined under the direction of the Controller of Insurance at Rs. 44, 87, 338. It naturally followed that the amount distributable to the policy-holders had to be recomputed and it came to Rs. 36, 66, 225. The company informed the Income-tax Officer that the sum of Rs. 42, 58, 246 having already been declared as bonus and having been credited to the accounts of the several policy-holders, that sum might be taken for the purpose of computing the deduction under rule 3. The Income-tax Officer however allowed only 80 per cent. of the sum of Rs. 36, 66, 225. The result was that the deduction claimed under rule 3(a) of the Schedule was disallowed to the extent of Rs. 4, 73, 617 This disallowance was disputed by the assessee-company and it appealed. The Appellate Assistant Commissioner however held that what was properly allowable on the basis of the assessee's correct actuarial surplus had been allowed by the Income-tax Officer, and dismissed the appeal. 4, 73, 617 This disallowance was disputed by the assessee-company and it appealed. The Appellate Assistant Commissioner however held that what was properly allowable on the basis of the assessee's correct actuarial surplus had been allowed by the Income-tax Officer, and dismissed the appeal. The further appeal to the Tribunal also failed, the Tribunal holding that on the admission that there was a mistake in the bonus declared in favour of the policy-holders, the Income-tax Officer was entitled to adopt the correct figureOn the application of the assessee, this court directed the submission of the following question for determination "Whether, on the facts and in the circumstances of the case, the Tribunal was justified in sustaining the disallowance of a sum of Rs. 4, 73, 617 out of the sum claimed as deduction under rule 3(a) of the Schedule ?" * It seems to us that the question has to be answered in favour of the assessee and that the departmental authorities and the Tribunal have misconstrued the entire position. The Schedule to the Act contains rules for the computation of profits and gains of insurance business. It is an artificial income that is so determined based on the surplus disclosed by actuarial valuation. In the case of such insurance companies, the actuarial valuation is made generally not at the end of each year but at an interval of a number of years. The annual average surplus as disclosed by such two consecutive actuarial valuations is adopted after making certain adjustments as provided in the Rules. In order to arrive at the profit, certain deductions are allowed. One of these deductions is specified in rule 3(a) in this manner : " In computing the surplus for the purpose of rule 2, --(a) four-fifths of the amounts paid to, or reserved for, or expended on behalf of, the policy-holders shall be allowed as a deduction. There are two provisos to this rule which are not relevant in the present case. The rule clearly states in a mandatory form that four-fifths of the amounts paid to, or expended on behalf of, the policy-holders shall be allowed as a deduction. It would follow in terms of this rule that whenever it is established that a certain amount has been paid to, or reserved for, or expended on behalf of, the policy-holders, four-fifths of that amount has to be deducted. It would follow in terms of this rule that whenever it is established that a certain amount has been paid to, or reserved for, or expended on behalf of, the policy-holders, four-fifths of that amount has to be deducted. No discretion is vested in the Income-tax Officer to vary the sum for any reason whatsoever. It is true that the declaration of the bonus to the policy-holders rests upon the approval of the Controller of Insurance, and the insurance company generally limits the grant of bonus to such figure as is authorised by the Controller of Insurance. It is not however the law that the company cannot, if it has the approval of the Controller of Insurance, expend the whole of its surplus for the purpose of the policy-holders. In the present case, the average annual surplus was initially determined at a particular figure and on the basis of that figure, the Controller of Insurance sanctioned the declaration of bonus to the extent of Rs. 42, 58, 246. It is stated by the learned counsel that though the mistake of actuarial valuations was discovered later, the declaration of bonus had already been made and those amounts credited to the accounts of the policy-holders. In several cases, the policies had matured and there had been a final payment of the accumulated bonus to the policy-holders. The company, in its letter to the Income-tax Officer, informed him that by reason of the mistake, excess payments had been made to the policy-holders and that in the next declaration of the bonus, such excess would be adjusted in the accounts of the policy-holders. This intimation was wholly unnecessary, for the Income-tax Officer was not concerned with the quantum of bonus paid. That had no relation to the determination of the surplus for the purpose of the rule. Even where an excess payment by way of bonus is made, the insurance company is entitled under the rule to a deduction of four-fifths of the amount actually paid out or reserved. Any adjustment which the company could make in the accounts of the policy-holders was a matter of concern only as between the company and the policy-holders. It was not relevant to the determination of the profits or gains of the businessMr. Any adjustment which the company could make in the accounts of the policy-holders was a matter of concern only as between the company and the policy-holders. It was not relevant to the determination of the profits or gains of the businessMr. Balasubrahmanyan, learned counsel for the department, is not able to say that there is any rule or law which limits the quantum of bonus which could be declared by the company. While it is true that normally only a certain percentage of the profits is declared as a bonus, it depends upon the direction of the Controller of Insurance. In the present case, as has been pointed out, the Controller of Insurance did sanction the declaration of bonus to the extent of Rs. 42, 00, 000 and odd, and that order, which is not shown to be an invalid one, had in fact been given effect to. In terms of the rule, the department has no reserve power to limit the quantum of bonus for the purpose of deduction contemplated in rule 3(a) A decision of the Bombay High Court in Commissioner of Income-tax v. Crown Life Insurance Company was cited before the Appellate Assistant Commissioner, who thought that this decision had no application. In that case, the actuarial valuation of the insurance company had not taken into account a sum of Rs. 75, 411, which represented the income from certain securities which had been placed at the disposal of the Bombay branch of the insurance company by the head office in Canada. The income-tax department sought to correct the actuarial valuation by adding the sum and thereby to increase the surplus. The learned judges of the Bombay High Court categorically ruled that the actuarial valuation could be regulated only by the provisions of rule 2(b) and the correction attested by the department was not permissible thereunder. This decision certainly established that the department's right of interference in the manner of computation of the average annual surplus is exceedingly limited As we have pointed out, the rule in question clearly declares that 80 per cent. of whatever amount had been paid out to the policy-holders shall be deducted. Unless it can be postulated that what can be paid out by the insurance company is subject to the control of the income-tax authorities, the stand taken by the department cannot be accepted. of whatever amount had been paid out to the policy-holders shall be deducted. Unless it can be postulated that what can be paid out by the insurance company is subject to the control of the income-tax authorities, the stand taken by the department cannot be accepted. It follows that the company is entitled to the deduction of 80 per cent. of Rs. 42, 58, 246. The question is, accordingly, answered in favour of the assessee. The assessee will be entitled to its costs. Counsel's fee Rs. 250Question answered in favour of the assessee.