(On appeal from the judgment dated 3-11-1966 of the High Court in Civil Reference Case No.336 of 1960)

Income-tax Act (XI of 1922)---

----First Sched., Rr. 6 & 8---Insurance company doing non-life business-- Profits and gains of any such company shall be taken to be the balance of the profits disclosed by the annual accounts furnished to the Controller of Insurance by the company---Accounts of such company can be rejected in their entirety only if they were found to be fraudulent.

So far as the business of life insurance was concerned, the ordinary methods of computing profits and gains had been done away with by S. 10(7) of the Income-tax Act, 1922 and special rules for that purpose had been prescribed.

The First Schedule referred to in subsection (7) of S. 10 of the Income-tax Act divided the insurance business for the purpose of computation of tax into life insurance business and non-life insurance business. Rule 6 dealt with the computation of profits and gains of business of insurance other than insurance and had 5 subsections; while Rule 8 dealt with computation of profits and gains of an insurance company in the absence of "more reliable data".

The assessee in the present case was a non-resident limited company, incorporated in Australia doing Marine, Fire and Accident insurance business in Pakistan i.e. business other than life insurance. From the very beginning the company was being assessed in Pakistan on the basis of Pakistan Revenue Account as submitted to the Controller of Insurance. It was only for the year under appeal that the Income-tax Officer discarded the assessment on the basis of Pakistan Revenue Account under Rule 6 to the First Schedule and made the assessment under Rule 8 as he was of the opinion that the correct profits in

Pakistan had not been indicated in the data so far made available to him by the assessee company.

It is true that under Rule 8 in the absence of "more reliable data" the rule of thumb given therein can be applied. But this is not so in non-life insurance companies because the rule applicable to non-life insurance companies is rule 6, which provides that the profits and gains of any non-life insurance business shall be taken to be the balance of the profits disclosed by the annual accounts furnished to the Controller of Insurance. In the present case, the Pakistan Revenue Account submitted by the company had invariably been accepted by the Controller of Insurance. It was only in the assessment under appeal that the Income-tax Officer had asked the assessee to prove the receipts from insurance and re-insurance in respect of individual Pakistan Policies against which procuration expenses were incurred. Undoubtly this information was not submitted by the assessee-company on the ground that this was extremenly difficult to do as it involved arduous labour as the allocation of the business had been done in the company's head office in U.K. The company had to incur procuration expenses which were debited to Pakistan accounts and it was not easy to ascertain the exact figures. If this explanation was not considered satisfactory by the Income-tax Officer and he was of the opinion that the claim for deduction in respect of the expenses claimed was inproper, in the absence of the full details or that some of those expenses were concealed in some other accounts, he had, under the law; full authority to disallow these expenses and could make his own estimate by making suitable additions. But he could not discard the Pakistan Revenue Account in its entirety because Rule 6 contains provisions for making suitable adjustments in the relevant regard. The accounts could be rejected in their entirety only if they were found to be fraudulent.

Rule 6 provided an inbuilt mechanism to bring about all necessary adjustments in the accounts which were not found to be fraudulent or suffered from such large scale concealments which would not be corrected by ordinary adjustments. This was not the situation in the present case. Hence the whole sale rejection of the accounts and application of rule 8 was not called for.

Commissioner of Income Tax, Bombay City v: Great Eastern Life Assurance Company Ltd. 1949 (17) ITR 173, Motor Union Insurance Co. Ltd. v. Commissioner of Income Tax, Bombay (1945) 13 ITR 272 and Commissioner of Income-tax Central Karachi v. Messrs Alpha Insurance Co. Ltd. and another PLD 1981 SC 293 ref.

Shiek Hyder, Advocate Supreme Court instructed by Muzaffar Hussain, Advocate-on-Record for Appellant.

Makhdoom Ali Khan, Advocate Supreme Court instructed by Mrs., Majida Razvi,-Advocate-on-Record for Respondents.

Date of hearing: 1st September, 1991.

JUDGMENT

NASIM HASAN SHAH, J: --The facts, which form the background to this appeal, have been admirably summed up in the impugned judgment of the High Court as follows:

The assessee M/s. Queensland Insurance Co. Ltd., Karachi is a non -resident, non-life insurance company with its head office in Sydney, Australia' and is carrying on insurance business in Pakistan in fire, marine and accident. The accounting year of the company is the year ending September. The two relevant account years, with which this reference is concerned, ended on 30th September, 1954 and 30th September, 1955. Since the very beginning the company has been assessed on the basis of Pakistan Revenue Account as submitted to the Controller of Insurance but for the two assessment years in question the Income Tax Officer discarded the assessment on the basis of Pakistan Revenue Account under rule 6 of the First Schedule to the Income -tax Act, 1922 and made the assessment under Rule 8. The assessee appealed to the Appellate Assistant Commissioner who held that the assessment made by the Income-tax Officer could not be sustained and, accordingly, he set aside his order and directed him to make a `fresh' assessment under Rule 6.

The case was then taken to the Income Tax Tribunal which set aside the order of the Assistant Appellate Commissioner and approved that of the Income Tax Officer, observing:-

"The question, therefore, boils down to this whether the Income-tax Officer can be satisfied that Rule 6 applied in this case. The language of Rule 6 is mandatory. It is provided that the profits and gains of non life insurance company shall be taken to be balance of profits disclosed by the annual accounts. It would seem that there is certain amount of conflict between rule 6 and rule 8. Rule 6 applies both to' resident and non-resident non-life insurance company and rule 8 is intended for non-resident insurance companies. In the absence of `more reliable data' it is provided that an estimate of income should be made on the basis of proportion which the premium income derived from taxable territories bears to the total world premium income. It appears to us that in the facts of the case it was not unreasonable for the Income-tax Officer to hold that there was absence of `more reliable data' in this case and on this footing to have resorted to rule 8 of the First Schedule to the Income-tax Act. The order of the Appellate Assistant Commissioner is cancelled and the Income-tax Officer's order is restored. The two departmental appeals are allowed."

The High Court, on reference, found that in the case of life insurance business companies the Income-tax Authorities are bound by the mandatory provisions of Rule 6 which lays down that the profits and gains of such business shall be taken to be-the balance of the profits disclosed by the annual accounts, copies of which are required under the Insurance Act to be furnished to the Superintendent of Insurance. Whereas Rule 8 provides that in the absence of more reliable data the its and gains of a non-resident, company may -6e deemed to be the proportion of the total world income of the company. Thus Rule 8 is to be read subject to Rule 6 and in so-far as non-life insurance companies are concerned, the data which have been provided under the Insurance Act in the shape of a return to the Controller of Insurance must be taken for purposes of assessment of non-life insurance business unless there is some evidence of fraud appearing from the examination of such returns. It was further held that it is not permissible for the Income-tax authorities to apply the proportionate assessment provided by rule 8 except in such an eventuality and it was not the case of the department that any such fraud was discovered in the return filed by the assessee. Accordingly, the question referred to the High Court in the reference namely:-

"Whether in the facts of this case the Tribunal was right in holding that this was a case where there was absence of more reliable data and accordingly rule 8 should apply."

was answered in the negative. Hence this appeal, by leave of this Court.

So far as the business of life insurance is concerned, the ordinary methods of computing profits and gains have been done away with by Section 10(7) of the Income-tax Act, 1922 and special rules for that purpose have been prescribed.

According to Section 10(7):-

"Notwithstanding anything to the contrary contained in section 8, 9, 10, 12 or 18 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 First Schedule to this Act."

The First Schedule referred to in subsection (7) of Section 10 of the Income -tax Act divides the insurance business for the purpose of computation of tax into life insurance business and non-life insurance business. Rule 6 deals with the computation of profits and gains of business of insurance other than life insurance and has 5 subsections; while Rule 8 deals with computation of profits and gains of an insurance company in the absence of "more reliable data". The, relevant parts -of Rules 6 and 8 are re-produced below:-

Rule 6

"6. (1) The profits and gains of any business of insurance other than life insurance shall be taken to be the balance of the profits disclosed by the annual accounts, copies of which are required under the Insurance Act, 1938, to be furnished to the Controller of Insurance after adjusting such balance so as to exclude from it any expenditure, other than expenditure which may under the provisions of Section 10 of this Act be allowed for in computing the profits and gains of a business."'

Rule 8

"8. The profits and gains of the branches in Pakistan of an insurance company not resident in Pakistan, in the absence of more reliable data, may be deemed to be the proportion of the total world income of the company corresponding to the proportion which its premium income derived from Pakistan bears to its total premium income. For the purpose of this rule, the total world income of life insurance, companies not resident in Pakistan whose profits are periodically ascertained by actual valuation shall be computed in the manner laid down in these rules for the computation of the profits and gains of life insurance business carried on in Pakistan."

Now the assessee in this case is a non-resident limited company incorporated in Australia doing Marine, Fire and Accident insurance business in Pakistan i.e. business other than life insurance. From the very beginning the company is being assessed in Pakistan on the basis of Pakistan Revenue Account as submitted to the Controller of Insurance. It was only for the years under appeal that the Income-tax Officer discarded the assessment on the basis of Pakistan Revenue Account under Rule 6 to the First Schedule and made the assessment under Rule 8 as he was of the opinion that the correct profits in Pakistan had not been indicated in the data so far made available to him by the assessee company. In reaching this conclusion the Income-tax Officer appears to have relied on the well-known judgment of the Privy Council in Commissioner of Income Tax, Bombay City v. Great Eastern Life Assurance Company Ltd. (1949) 17 I.T.R. 173. This case, however, was a case in which basically the interpretation of Rule 8 was involved and is not, therefore, directly relevant. Although Mr. Shiek Hyder, learned counsel for the assessee, relying on a decision of the Bombay High Court in the case of The Motor Union Insurance Co. Ltd. v. Commissioner of Income Tax, Bombay (1945) 13 ITR 272 submitted that the rule of thumb laid down in rule 8 was applicable to all companies' whether doing life insurance business or otherwise but we are not persuaded to agree with this dictum. It is true that under rule 8 in the absence of "more reliable data" the rule of thumb given therein can be applied. But this is not so in non-life insurance companies because the rule applicable to non-life insurance companies is rule 6, which provides that the profits and gains of any non-life insurance business shall be taken to be the balance of the profits disclosed by the annual accounts furnished to the Controller of Insurance. In the present case, the Pakistan Revenue Account submitted by the company had invariably been accepted by the Controller of Insurance. It was only in the assessments under appeal that the Income-tax Officer had asked the assessee to prove the receipts from insurances and re-insurances is respect of individual Pakistani policies against which procuration expenses were incurred. Undoubtedly this information was not submitted by the assessee-company on the ground that this was extremely difficult to do as it involved arduous labour 3s the allocation of the business had been done in the company's head office in U.K. The Company had to incur procuration expenses which were debited to Pakistan Accounts and it was not easy to ascertain the exact figures. If this explanation was not considered satisfactory by the Income-tax Officer and he was of the opinion that the claim for deduction in respect of the expenses claimed was improper, in the absence of the full details or that some of those expenses were concealed in some other accounts, he had, under the law, full authority to disallow these expenses and could make his own estimate by making suitable additions. But he could not discard the Pakistan Revenue Account in its entirety because rule 6 contains provisions for making suitable adjustments in the relevant regard. The accounts could be rejected in their entirety only if, as the High Court pointed out, they were found to be fraudulent. Mr. Makhdum Ali Khan, learned counsel for the respondents drew our attention to the case of Commissioner of Income-tax, Central, Karachi v. Messrs Alpha Insurance Co. Ltd. and another (PLD 1981 SC 293) decided by this Court wherein it was held that an adjustment is possible under rule 6. In our opinion rule 6 provides an inbuilt mechanism to bring about all necessary adjustments in the accounts which are not found to be fraudulent or suffer from such large scale concealments which cannot be corrected by ordinary adjustments. This was not the situation in the present case. Hence the whole scale rejection of the accounts and application of rule 8 was not called for. The High Court took a correct view of the situation and the opinion it tendered is unexceptionable and eminently in accordance with law.

The upshot is that the impugned judgment of the High Court does not call for any interference and this appeal must fail. It is, accordingly dismissed hereby. No costs.

M.B.A/C-94/SAppeal dismissed.