1960-VIL-65-MAD-DT

Equivalent Citation: [1961] 42 ITR 547

MADRAS HIGH COURT

Case Referred No. 100 of 1956 and No. 89 of 1957

Dated: 14.12.1960

SALEM PROVIDENT FUND SOCIETY LTD

COMMISSIONER OF INCOME-TAX

Judgment / Order

STATEMENT OF CASE

By these applications under section 66(1) the assessee requires the Appellate Tribunal to refer a certain question of law said to arise out of the Tribunal's orders, I. T. A. Nos. 1723 and 1724 of 1955-56, dated November 28, 1955, to the High Court of Judicature, Madras. Inasmuch as a question of law does arise out of the Tribunal's orders, we hereby state a case and refer it to the High Court.

2. The assessee is a limited company formed on April 25, 1935, to carry on the business of insurance, under the Provident Fund Societies Act. It went into liquidation by an order of the court, dated August 4, 1950, with retrospective effect from March 23, 1948, and the official liquidator took charge of the assets for purposes of liquidation.

3. The business of insurance is assessable under section 10(7) (which overrides the general provisions of the Income-tax Act) and the rules made thereunder. Rule 2 of the said rules is as follows : " 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 arrived at by adjusting the surplus or deficit disclosed by the actuarial valuation made in accordance with the Insurance Act, 1938 (IV of 1938), in respect of the last intervaluation period ending before the year for which the assessmerit is to be made, so as to exclude from it any surplus or deficit included therein which was made in any earlier intervaluation period and 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, whichever is the greater. "

4. Under the aforesaid rule 2, the greater of the two alternative profit computations under rule 2(a) or 2(b) shall fix the assessment and tax payable.

5. The second actuarial valuation of the assessee company as made for the composite period of 4 years, 9 months and 16 days from March 14, 1941, to December 31, 1945, and thereafter annually for each of the calendar years 1946 and 1947. These disclose the following deficiencies as at the end of each valuation aforesaid Rs. December 31, 1945 ... 90,851 December 31, 1946 77,165 December 31, 1947 32,214

6. The assessee computed the loss for the calendar years 1946 and 1947, the " previous years " for assessment years 1947-48 and 1948-49 for purposes of rules 2(b) and 2(a) aforesaid, as follows:

Calendar Calendar year 1946 year 1947 (Assessment (Assessment year year 1947-48) 1948-49)

(1) (2) (3) (4) (5) Rs. Rs. Rs. Rs. Closing deficiency of the year ... 77,165 ... 32,214 Add : Opening deficiency of the year ... 90,851 ... 77,165 --------------- --------------- 1,68,016 1,09,379

Less : Organisation expenses 1,430 ... 2,000 ... Loss on sale of jutka 140 Tax deducted on interest on securities 1,052 829 ------------ ------------- 2,622 2.829 ------------ -------------- Net deficiency for the year for purposes of rule 2(b) 1,65,394 ------------- --------------- Loss computed for purposes of rule 2(a) 66,125 65,738 ------------- ----------------

7. On the basis of the above alternative computations, the assessee declared the following lower of the two losses computed under rule 2(a) for the following assessment years Rs. For 1947-48 66,125 For 1948-49 66,738 ----------- The Income-tax Officer accepted both the aforesaid returns under section 23(i) by his order, dated September 24, 1949.

8. After the assessments were completed in the above manner, the Income-tax Officer found the aforesaid computation of the deficiency for purposes of rule 2(b) was incorrect, as the opening deficiencies of each of the years in question were by a mistake added to, instead of being subtracted from, the closing deficiencies. The following correct computation is agreed and not disputed : Calendar year Calendar year 1946 1947 (Assessment year (Assessment year 1947-48) 1948-49) Rs. Rs. Closing deficiency as above 77,165 32,214 Less : Opening as above 90,851 77,165 -------------- -------------- Profit for the year 13,686 44,951 Add : Inadmissible deductions as above 2,622 2,829 -------------- --------------- Net assessable profit of the year under rule 2(b) 16,308 47,780 -------------- ----------------

9. On the basis of the aforesaid correct computation, it is not in dispute that the assessments should have been based only on the above computations under rule 2(b) which is greater, and not under rule 2(a) as originally assessed for both the aforesaid years.

10. The Income-tax Officer, on his coming into possession of the information that the losses had been excessively computed in the original assessments of both the aforesaid years, wrote on 17th November, 1951, to the official liquidator as the principal officer of the assessee company requesting him to show cause why the aforesaid mistakes in the computations should not be corrected under section 35. The official liquidator objected to the rectification in his letter dated 13th December, 1951. Copies of both these letters are annexed hereunto as annexures " A-1 " and " A-2 " and form part of the case.

11. The Income-tax Officer, in the above circumstances, issued notices under section 34 on December 29, 1951, to the official liquidator for both the aforesaid years 1947-48 and 1948-49. The assessee filed its returns on February 5, 1952, stating therein as follows : " Assessment year: 1947-48 : Rs 66,129-12-7 under section 2(a) already returned and loss determined at Rs 18,096. Assessment year: 1948-49: loss Rs 65,738 as worked out under section 2(a) and as such accepted by the Income-tax Officer. "

12. The Income-tax Officer completed the assessments under section 34 by his orders dated April 28, 1952, for both the aforesaid years on the basis of the aforesaid correct computations of Rs 16,308 and Rs 47,780 for the assessment years 1947-48 and 1948-49 respectively under rule 2(b) aforesaid.

13. The assessee appealed to the Appellate Assistant Commissioner against both the aforesaid assessments and contended that section 34 had been invoked without jurisdiction. The Appellate Assistant Commissioner in paragraph 4 of his order, copy whereof is annexed hereunto as annexure " B " and forms part of the case, held that the section had been correctly invoked.

14. The assessee thereupon appealed to the Tribunal contending likewise. The Tribunal held that the Income-tax Officer had information in his possession which could satisfy him in the manner required under section 34 of the Act, that the assessee was under-assessed and as the assessee was not agreeable to rectification of the assessments under section 35, the assessments were legal. The question of law that arises out of these decisions is set out in paragraph 16 infra.

15. In the aforesaid appeal before the Tribunal, the assessee contended that the determined loss for the assessment year 1946-47 was Rs 86,708 and not Rs 18,906 and accordingly Rs 86,708 required to be set off, against both the aforesaid assessments of 1947-48 and 1948-49 in the manner required by section 24(2). The Tribunal, however, considered that the sum of Rs 86,708 was only the cumulative deficiency for the full actuarial period of 4 years, 9 months and 16 days up to December 31, 1945, suitably adjusted for income-tax purposes, that the assessments of each of the years 1942-43, 1943-44, 1944-45 and 1945-46 had been already independently completed either under rule 2(a) or 2(b) as the case may be, on the basis of the valuation of the earlier quinquennium up to March 14, 1941, all of which had also become final and conclusive; that the loss to be considered for purposes of rule 2(b) for the calendar year 1945, the " previous year" for assessment year 1946-47, was only Rs 18,096, being the proportionate annual average loss on the basis of the loss of Rs 86,708 for the full actuarial period up to December 31, 1945, as aforesaid, which being more favourable to Revenue than the rule 2(a) computation, had to determine the loss of that year to be carried forward. The Tribunal accordingly held that the carry forward available to the assessee from assessment year 1946-47 for set-off against the aforesaid assessments of 1947-48 and 1948-49 was only Rs 18,096 which had also been accepted by the assessee in the assessment of that year, which was not appealed against, and thus rejected the contention. This decision of the Tribunal is clearly based upon a finding of fact from which no question of law can be spelled out.

16. From out of the aforesaid facts, the question of law that arises is : " Whether the reopening of the assessments of 1947-48 and 1948-49 under section 34 is legal ?

17. The departmental representative agrees to the statement. The counsel for the assessee agrees that all facts bearing on the above question have been correctly set out in paragraphs 2 to 14 supra and that no material fact has been omitted therefrom. SUPPLEMENTARY STATEMENT OF CASE In compliance with the directions of the High Court in C. M. P. Nos. 10735 and 10736 of 1956 dated March 29, 1957, we state a case and refer it to the High Court under section 66(2). The question of law on which the Tribunal has been directed to state the case is as follows :

" Whether the refusal to carry forward the unabsorbed loss of Rs 86,738 and to set off the same against the profits in the year of assessments 1947-48 and 1948-49 is valid ? We shall, therefore, confine ourselves, as far as possible, to the facts relevant to the above question. 2. The assessee is a limited company formed on 19th April, 1935, to carry on the business of life insurance under the Provident Fund Societies Act. Its first quinquennial valuation was for the period May 24, 1935, to March 14, 1941, comprising a term of five years, ten months and 19 days. This valuation revealed a surplus of Rs 5,131-5-1. 3. The second valuation was for the period March 14, 1941, to December 31, 1945, comprising a term of 4 years, 9 months and 16 days. This revealed a deficiency of Rs 90,851. The report of the actuary is dated November 8, 1946. 4. The business of insurance is assessable under section 10(7) of the Income-tax Act and the rules made thereunder, overriding the general provisions. Under rule 2 of such rules, the greater of the two alternative profit computations under rule 2(a) or under rule 2(b) fixed the assessment and the tax payable. 5. As the company was formed only on April 25, 1935, and the first valuation was made up to March 14, 1941, for the interim valuation years which covered all the assessment years up to 1941-42, the assessment had necessarily to be made only under rule 2(a), i.e., the gross external incomings of the preceding year less the management expenses of that year. 6. The first valuation surplus of Rs 5,131 adjusted in the manner required under rule 2(b) is as follows :

Amount. Rs. Surplus according to the actuarial valuation for the period from May 24, 1935, to March 14, 1941 ... 5,131 Add: Inadmissible expenses Dividend declared and paid to shareholders out of the profits for the year ended June 30, 1956. The annual surplus found on July 1, 1936, was reduced by this amount ... 147 Dividend declared and paid to shareholders out of the profits for the year ended 30 June, 1937 ... 231 Dividend declared and paid to shareholders out of the profits for the year ended June 30, 1938 ... 239 Dividend declared and paid to shareholders out of the profits for the year ended June 30, 1939 ... 242 Preliminary expenses written off from the profits for the year ended June 30, 1936 ... 196 Preliminary expenses written off from the profits for the year ended June 30, 1938 ... 282 Preliminary expenses written off from the profits for the year ended June 30, 1939 ... 93 Organisation expenses written off for the year ended June 30, 1938 ... 350 Actuary's test valuation fees for changing the scheming of insurance written off out of the profit for the year ended June 30, 1939 ... 150 Income-tax paid in the year ended June 30, 1938 (on assessment) ... 11 Profession tax paid in the year ended June 30, 1940 ... 2 Tax deducted at source on interest on securities Year ended June 30, 1939 ... 45 Year ended June 30, 1940 ... 93 Period up to December 30, 1940 ... 77 ----------- Total profit for the period of 5 years, 10 months and 19 days 7,289 ----------- The average for one year : Rs 1,238.

7. The assessments of 1942-43 onwards, as the valuation of the first quinquennium was available by that time, were required to be mad on the greater of the two alternative profit computations, under rule 2(a) or 2(b). These were accordingly completed as follows :

------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ I I Alternative I I I I I I computations I I I I I I-----------------------------------------------I I I I I I I I I I I Previous year I Assessment I 2(a) I 2(b) profit I Higher computa- I Less court-fee I Balance I Net I year I I I tion adopted I deducted I of loss I assessment I I I I adopted I I carried I I I I I I I forward I ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ (1) I (2) I (3) I (4) I (5) I (6) I (7) I (8) I I Rs. I Rs. I Rs. I Rs. I Rs. I Rs. I I I I I I I 1941 I 42-43 I 1,726 I 1,238 I 1,726 I 2,570 I 844 I Nil. I I (Profit) I I I I I I I I I I I I 1942 I 43-44 I 104 I 1,238 I 1,238 I 844 I - I 394 I I (Loss) I I I I I I I I I I I I 1943 I 44-45 I 6,520 I 1,238 I 1,238 I - I I 1,238 I I I I I I I 1944 I 45-46 I 15,183 I 1,238 I 1,238 I - I - I 1,238 I I (Loss) I I I I I I I I I I I I ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- Copies of the consolidated Income-tax Officer's order for 1942-43, 1943-44 and 1944-45 dated March 28, 1945 and his order for 1945-46 dated November 25, 1945, are collectively annexed hereunto as annexure " X " and form part of the case. 8. The second quinquennial valuation was completed as aforesaid up to the period of December 31, 1945. This revealed the following deficiency as adjusted for income-tax purposes Amount Rs. Rs. Actuarial deficiency at the end of the second quinquennium as aforesaid ... 90,851 Add : Surplus for the first quiquennium ... 5,131 ----------- Deficiency for the second quinquennium ... 95,982

Less : Profession tax ... 46 Tax deducted at source ... 2,697 Preliminary expenses ... 6,531 ------------ 9,274 -----------Net deficiency for the period Of 4 years, 9 months and 16 days 86,708 ----------- Average f or one year : Rs 18,096. 9. For the assessment year 1946-47, for which the -previous year " was the calendar year 1945, the Income-tax Officer declared the assessee exempt as both the alternative computations under rules 2(a) and 2(b) were losses. He determined the loss to be carried forward at Rs 18,096 being the loss computed under rule 2(b) as above, which was more favourable to the Department. 10. In the section 34 assessments completed on the assessee for the calendar years 1946 and 1947, the "previous years " for assessment years 1947-48 and 1948-49, the assessee inter alia contended that the actuarial deficiency for the second valuation period to 31st December, 1945, adjusted for income-tax purposes of Rs 86,708 as set out in paragraph 8 supra must be permitted to be carried forward and set off. The Income-tax Officer refused the set-off for the following reasons reproduced from his order for assessment year 1947-48 : " The only other submission made by the official liquidator was that the loss to be carried forward for 1947-48 assessment was Rs 86,708. This is not correct. According to the assessment order for 1946-47 the proportionate deficiency for the year determined was Rs 18,096 and this was the loss that was carried over to 1947-48 assessment year. Since then separate actuarial valuations for each of the years ended December 31, 1946, and December 31, 1947, were made and the company furnished the deficiencies reported by the actuary. It is on the basis of these figures available for each of the accounting years that the computations under rules 2(a) and 2(b) were made in the respective assessments for 1947-48 and 1948-49. The only mistake was the one in working out the computation under rule 2(b) already referred to above. Hence there is no question of any alteration in the method of calculation or change of law involved in the correction made in this order. 11. The assessee thereupon appealed to the Appellate Assistant Commissioner and agitated the above contention for the above years. The Appellate Assistant Commissioner dismissed both the appeals holding that the carry forward claim of Rs 86,708 was incorrect and further that the computation of the carry forward for assessment year 1946-47 by the Income-tax Officer at Rs 18,096 had already become final and conclusive as the assessee had not appealed against it in proper time. Extracts from paragraph 5 of his order setting out his reasoning and conclusions are furnished below : " In the assessment order, the Income-tax Officer has given the income that was determined in the case of the company for the preceding six assessments under rule 2(a) and rule 2(b) and the total income which was actually assessed. As a result of this he found that there was only an amount of Rs 18,096 which was to be carried forward as loss pertaining to the immediately preceding assessment 1946-47. The amount of Rs 86,708 claimed by the appellant represents the quinquennial loss for the five years ending 3ist December, 1945. The appellant claims that the loss for the five years totalling Rs 86,708 as worked out under rule 2(b) should be carried forward and set off against the income of the assessment years in question. As a matter of fact under the First Schedule to the Act an insurance company is assessed on the higher of the two incomes as worked out under rules 2(a) and 2(b). This determination has to be made every year and for the assessment years 1942-43 to 1945-46, the incomes finally assessed were after taking into consideration incomes that were worked out under rules 2(a) and 2(b). For the assessment year 1946-47 it was found that the loss suffered by the company as worked out under rule 2(a) was Rs 28,324 and under rule 2(b) Rs 18,096. The figure of Rs 18,096 was therefore taken for assessment for the year 1946-47. It is the appellant's contention that the figure of Rs 18,096 was not the correct figure, but that the correct figure ought to have been Rs 86,708 which was the loss suffered by the company according to the actuarial valuation of the five years ending 31st December, 1945. Under section 24(2) loss of a year not set off under section 24(1) is to be carried forward to the next year for set-off against income, profits and gains from the same business. Again under section 24(3) when in the course of the assessment of the total income of any assessee, it is established that a loss of profits or gains has taken place which he is entitled to have set off under the provisions of this section, the Incometax Officer shall notify to the assessee by order in writing the amount of the loss as computed by him for the purposes of this section. This order notifying the amount of loss computed for, the year 1946-47 was duly given to the appellant and no appeal was filed against the computation of loss so made by the Income-tax Officer for the year 1946-47. The amount of Rs 18,096 therefore became final and it is this amount which is to be carried forward and set off. against the profits of the year under assessment. The contention that a sum of Rs 86,708 should have been carried forward is not correct. This contention also fails. "

12. The assessee thereupon appealed to the Tribunal for both the above years. The Tribunal dismissed the contention in both the appeals in the following words : " The next contention in this appeal is that the carry forward available for the assessment year 1947-48 presently under appeal is the actuarial deficiency of Rs 86,708 as at the beginning of the calendar year 1946, the ' previous year '. This contention too is clearly untenable as the actuarial deficiency is only the cumulative deficiency ; the actual results of the earlier year have been separately computed and the carry forward of Rs 18,096 correctly arrived at. " 13. The assessee then applied to the Tribunal for a statement of the case to be drawn up and the following question, infer alia, referred to the High Court under section 66(1) : " Whether the refusal to carry forward the unabsorbed loss of Rs 86,708 and to set off the same against the profits in the years of assessment 1947-48 and 1948-49 is valid ? " The Tribunal refused to refer the above question as in its opinion the above decision was based on a finding of fact for the following reasons as set out in paragraph 15 of the statement of the case in R. A. Nos. 918 and gig of 1955-56 : " In the aforesaid appeal before the Tribunal, the assessee contended that the determined loss for the assessment year 1946-47 was Rs 86,708 and not Rs 18,096 and accordingly Rs 86,708 required to be set off against both the aforesaid assessments of 1947-48 and 1948-49 in the manner required by section 24(2). The Tribunal, however, considered that the sum of Rs 86,708 was only the cumulative deficiency for the full actuarial period of 4 years, 9 months and A days up to December 31, 1945, suitably adjusted for income-tax purposes; that the assessments of each of the years 1942-43, 1943-44, 1944-45 and 1945-46 had been already independently completed either under rule 2(a) or 2(b) as the case may be on the basis of the valuation of the earlier quinquennium up to March 14, 1941, all of which had also become final and conclusive ; that the loss to be considered for purposes of rule 2(b) for the calendar year 1945, the previous year for assessment year 1946-47, was only Rs 18,096 being the proportionate annual average loss on the basis of the loss of Rs 86,708 for the full actuarial period up to December 31, 1945, as aforesaid which being more favourable to revenue than the rule 2(a) computation had to determine the loss of that year to be carried forward. The Tribunal accordingly held that the carry forward available to the assessee from assessment year 194647 for set-off against the aforesaid assessments of 1947-48 and 1948-49 was only Rs 18,096 which had also been accepted by the assessee in Cases Referred No. 100 of 1956 and No. 89 of 1957, decided on December 14, 1960. JUDGMENT

RAJAGOPALAN, J. –

These two references, one under section 66(1) and the other under section 66(2) of the Income-tax Act, arose out of proceedings of the assessment years 1947-48 and 1948-49 to assess the income of the assessee company from its life insurance business which it carried on in the corresponding years of account 1946 and 1947.

As directed by section 10(7) of the Act, the profits of the assessee company had to be assessed each year either under rule 2(a) or under rule 2(b) of the Schedule to the Act, whichever was more favourable to revenue.

The assessee company commenced its business in 1935. The first actuarial report was for the period May 24, 1935, to March 14, 1941, and it showed a surplus of Rs 5,131-5-1. The assessment for the years of account between 1935 and 1940 had necessarily to be only on the application of rule 2(a). There was and there could have been no actuarial report for any antecedent period, without which there could be no recourse to rule 2(b). The next inter-valuation period for which an actuarial report was obtained was from March 14, 1941, to December 31, 1945. That showed a deficiency which, when adjusted under rule 2(b) to furnish the basis for assessment to income-tax, was ascertained as Rs 86,708. The average annual deficiency for that period 1941 to 1945 worked out to Rs 18,096. The second actuarial valuation report could furnish a basis for assessing the income of the assessee company under rule 2(b) only for 1945 and not any of the antecedent years. Subsequent to 1945 there were annual actuarial valuations for 1946 and 1947. The assessments for the years of account 1941 to 1944 were based on the first valuation report for the period that ended on March 14, 1941. That showed a surplus of Rs 5,131. The computation of the surplus under rule 2(b) worked out to Rs 7,280, and the annual average surplus was Rs 1,238. Under rule 2(b) therefore Rs 1,238 was the computed profit for each of the years 1941 to 1944, and it was on that basis the assessments were completed for the relevant assessment years 1942-43 to 1945-46. That the subsequent actuarial valuation for the same period included in the inter-valuation period 1941 to 1945 revealed a deficiency did not affect the validity or the finality of the assessments already completed for the assessment years 1942-43 to 1945-46. In other words, though there was a deficiency or loss in the years of account 1941 to 1944, which the actuarial report disclosed in 1946 the application of rule 2(b) resulted in the company being taxed on an annual profit of Rs 1,238 computed under that rule.

The assessment of the income for 1945 was on the basis of the second actuarial valuation report, and under rule 2(b) the average of Rs 18,096 was computed as the loss for 1945. That was more favourable to revenue than the computation of the loss for that year under rule 2(a).

When the income for the year 1946 had to be assessed in the assessment year 1947-48, the valuation report for 1946, the third valuation report, was available. The actuarial deficiency disclosed by the second report for the period that ended on December 31, 1945, was Rs 90,851, and the deficiency at the end of 1946 as disclosed by the third report was Rs 77,165. Therefore there was an actuarial surplus of Rs 13,686 for 1946. When the assessment was first completed in 1949 the Income-tax Officer committed a mistake. Instead of deducting Rs 77,165 from Rs 90,851, which would have resulted in an actuarial surplus of Rs 13,686 for 1946 he added both the sums and arrived at a deficiency of Rs 1,68,016. The computation of the loss in that manner was more favourable to revenue than a computation under rule 2(a).

A similar mistake was committed when the income for 1947 was first assessed in 1949 for the assessment year 1948-49. The actuarial deficiency at the end of 1947, for which there was a separate actuarial valuation, was Rs 32,124. Instead of deducting this from Rs 77,165 which would have shown an actuarial surplus of Rs 44,951 for 1947, the Income-tax Officer added both the figures and computed an actuarial deficiency of Rs 1,09,379. That again was more that the loss computed under rule 2(a) in 1947.

The Income-tax Officer subsequently discovered the mistakes in the computation, and on November 17, 1951, he issued notice to the liquidator, who represented the assessee company, which had meanwhile been ordered to be wound up, to show cause why the errors should not be rectified and the assessment revised under section 35 of the Act. The liquidator objected. The Income-tax Officer dropped the idea of applying section 35 and he issued notices under section 34 of the Act on December 29, 1951. The assessee company contended that the initiation of the proceedings under section 34 was not valid. The further contention of the assessee was that, even if the finality of the assessments could be validly reopened under section 34, the assessee was entitled to set off under section 24 the loss of Rs 86,708, which represented the total deficiency at the end of 1945 computed under rule 2(b) on the basis of the second actuarial report for the inter-valuation period which ended of December 31, 1945. Both the contentions were negatived by the Income-tax Officer. The appeals the assessee successively filed to the Appellate Assistant Commissioner and the Tribunal failed. The Tribunal upheld the validity of the reassessment under section 34. The Tribunal also upheld the contention of the Department, that all the loss the assessee was entitled to carry forward at the end of 1945 was Rs 18,096, against Rs 16,308, the profits for 1946 computed under computed under rule 2(b), leaving an unabsorbed loss of Rs 1,788. Rs 1,788 was deducted from Rs 47,779, the profits for 1947 computed under rule 2(b), and the assessee was taxed on the balance. The questions that were referred to this court were :

"1. Whether the reopening of assessments of 1947-48 and 1948-49 under section 34 is legal ? 2. Whether the refusal to carry forward the unabsorbed loss of Rs 86,708 and to set off the same against the profits in the year of assessments 1947-48 and 1947-48 and 1948-49 is valid ?"

The comparatively wide scope of section 34, with the use of the formula "if for any reason", was restricted when it was amended in 1939, requiring a correlation of the discovery of escape from assessment to definite information which had come into the possession of the Income-tax Officer. What section 34(1)(b) as amended in 1948 required was that the Income-tax Officer should, in consequence of information in his possession, have reason the believe that the income had escaped assessment.

Section 35 permits rectification where the mistake is apparent on the face of the record of assessment. The learned counsel for the Department could not challenge the correctness of the plea of the assessee, that the original assessments completed in 1949 for both the assessment years under consideration now could have been rectified under section 35. The mistakes were apparent on the face of the assessment orders themselves. What should have been subtracted was added to ascertain the deficiency disclosed by the actuarial reports. It should be remembered that the Income-tax Officer first contemplated recourse to section 35 but dropped it as the assessee did not agree.

The further contention of the learned counsel for the assessee was that where rectification was permissible under section 35, recourse to section 34 was barred : they was mutually exclusive.

In Commissioner of Income-tax v. Khemchand Ramdas their Lordships of the Privy Council observed :

"In their Lordships' opinion the provisions of the two sections (sections 34 and 35) are exhaustive, and prescribe the only circumstances in which and the only time in which such fresh assessments can be made and fresh notices of demand can be issued. In the present case it is a debatable question whether the circumstance were such as to being it within the provisions of section 34. It is not necessary to determine that question inasmuch as, in their Lordships' opinion, the case clearly would have fallen within the provisions of section 35 had the Incometax Officer exercised his powers under the section within one year from the date on which the earlier demand was served upon the respondents ... The Income-tax Officer took no further step, however, until May, 1929, and by then he was hopelessly out of time whichever of the two sections was applicable."

Their Lordships of the Privy Council did not decide the question whether in a given case section 34 and section 35 could be viewed as alternative remedies open to the Department, the choice being left to the Department, or whether they were mutually exclusive. In fact their Lordships had no occasion even to consider whether the two sections were mutually exclusive.

This passage in Commissioner of Income-tax v. Khemchand Ramadas([1938] 6 I. T. R. 414) was referred to by the Supreme Court in Maharana Mills (Private) Ltd. v. Income-tax Officer, Porbandar. But there there was not occasion then either for their Lordships of the Supreme Court to decide or even discuss whether section 34 and section 35 were mutually exclusive in their operation.

In Commissioner of Income-tax v. D. R. Naik Beaumont, C. J., observed :

"It is also suggested that this is really a mistake which ought to have been remedied under section 35; but even if that be so, the fact, that a mistake might be remedied under section 35, is no reason why the assessment should not be altered under section 34, if the case falls within that section. I see no reason for supposing that section 34 and 35 are mutually exclusive."

Section 34 that was considered in that case was as it stood before its amendment in 1939 which permitted the reopening of assessments under the wider formula "if for any reason". That decision is not direct authority on the scope of sections 34 and 35 as they now stand.

The real contention of the learned counsel for the assessee that we have to consider is that neither the test of "definite information that had come into the possession of Income-tax Officer" nor the requirement of "information is his possession" that is prescribed by the 1948 amendment of section 34, can be satisfied, unless the information is extraneous to the record of the original assessment which the Incometax Officer seeks to reopen under section 34. Another form in which the same contention was put forward was that a mistake apparent on the face of the order of assessment itself, as in this case, could not constitute information within the meaning of section 34, and that what is already on record, especially if it is a mistake readily discoverable by a mere scrutiny, cannot be information which has come into the possession of the Income-tax Officer, or information in his possession within the meaning of section 34.

The learned counsel for the assessee sought support for this contention in the observations of their Lordships of the Supreme Court in Maharaj Kumar Kamal Singh v. Commissioner of Income-tax. Referring to Raja Benoy Kumar Sahas Roy v. Commissioner of Income tax their Lordships pointed out that in that case it was held that information as to the true state or meaning of the law derived freshly from an external source of authoritative character was definite information within the meaning of section 34. Their Lordships proceeded :

"It appears that in construing the scope and effect of the provisions of section 34, the High Courts have had occasion to decide whether it would be open to the Income-tax Officer to take action under section 34 on the ground that he thinks that his original decisions in making the order or assessment was wrong without any fresh information from an external source or whether the successor of the Income-tax Officer can act under section 34 on the ground that the order of assessment passed by his predecessor was erroneous, and divergent views have been expressed on this point. Mr. Rajagopala Sastri, for the respondent, suggested that under the provisions of section 34 as amended in 1948, it would be open to the Income-tax Officer to act under the said section even if he merely changed his mind without any information from an external source and came to the conclusion that, in a particular case, he had erroneously allowed an assessee's income to escape assessment. We do not propose to express any opinion on this point in the present appeal."

We should like to emphasise even at the outset that we are not dealing with a case of a change of opinion on the part of the assessing authority, but with an error in computation obvious on the face of the order of assessment itself. That the real deficiency or surplus in each of the relevant years was to be ascertained by subtraction and not addition of the deficiency for each of the two years could never be challenged. Whether the discovery of such a mistake, which in its turn led to the further discovery of escape from assessment or under-assessment, constitutes information within the meaning of section 34(1) is what we have to decide in this case. We do not propose to cover any wider ground.

We are unable to accept the extreme proposition, that nothing that can be found in the record of the assessment, which itself would show escape of assessment or under-assessment, can be viewed as information which led to the belief that there has been escape from assessment or under-assessment. Suppose a mistake in the original order of assessment is not discovered by the Income-tax Officer himself on further scrutiny but it was brought to his notice by another assessee or even by a subordinate or a superior officer, that would appear to be information disclosed to the Income-tax Officer. If the mistake itself is not extraneous to the record and the informant gathered the information from the record, the immediate source of information to the Income-tax Officer in such circumstances is in one sense extraneous to the record.

It is difficult to accept the position that while what is seen by another in the record is "information" what is seen by the Income-tax Officer himself is not information to him. In the latter case he just informs himself. It will be information in his possession within the meaning of section 34. In such cases of obvious mistakes apparent on the face of the record of assessment, that record itself can be a source of information, if that information leads to a discovery or belief that there has been an escape of assessment or under-assessment.

The real question is not whether section 34 and section 35 are mutually exclusive in their operation, but whether in a given case, the statutory requirements are satisfied. If in a given case the requirements of both section 34 and section 35 are satisfied, the Income-tax Officer can have recourse to either. That in such a case there is overlapping will not bar recourse to either section at the choice of the assessing authority.

So the real question is whether the requirements of section 34 and in particular the requirements of information were satisfied in this case. We see no justification to accept the contention of the learned counsel for the assessee that to constitute information within the meaning of section 34, it must be wholly extraneous to the record or the original assessment. We hold that the mistake apparent on the face of the order of assessment itself constitutes information : whether someone else gave that information to the Income-tax Officer or whether he informed himself is immaterial. We are further of opinion that, in the circumstances of this case, the availability of the powers vested in the Income-tax Officer by section 35 did not bar recourse to the jurisdiction vested in him by section 34. The initiation of proceedings under section 34 was, in our opinion, valid.

The second question is, what is the quantum of the loss that the assessee company could carry forward when its income for 1946 and 1947 had to be reassessed. Section 24 is not one of the sections excepted by section 10(7) of the Act, and the statutory right to carry forward the loss could not be and was never denied. It was the extent of the relief permissible under section 34 that was in controversy.

The profits or losses of an assessee have to be ascertained with reference to each year of his account. Before the profits of any year are ascertained the losses of the previous year have to be set off or deducted within the limits prescribed by section 24. Did the assessee company sustain loss in the years that preceded 1946 and what was the extent of that loss have to be determined first.

In the case of the assessee the profits and losses in each of the years that preceded 1946 were computed and ascertained in the course of the assessment proceedings of the relevant assessment years. That computation was, and had to be on the application of rule 2(a) or rule 2(b), at the discretion of the Department, the department being given the right to choose the method of computation more favourable to revenue. We have already pointed out that the assessment for each of the years of account 1941 to 1944 was based on the first actuarial report for the inter-valuation period that ended on March 14, 1941. The factual position was as follows. In 1940 there was an assessed loss of Rs 2,870, assessed under rule 2(a), which the assessee was allowed to carry forward. The profits of 1941 were assessed again under rule 2(a) (Rs. 1,726) which was more favourable that the assessment under rule 2(b). That left an unabsorbed loss of Rs 844, which was set off towards the assessed profits of 1942. The profits of each of the years 1942, 1943 and 1944 were assessed under rule 2(b), and it had necessarily to be the same, Rs 1,238, in each of those years, because that was the annual average of the actuarial surplus of the preceding intervaluation period that had ended on March 14, 1941, adjusted under rule 2(b). There was no assessed loss to be carried forward in 1943, 1944 or 1945. When the income of 1945 had to be assessed, the second actuarial report furnished the basis of assessment and, as we have pointed out already, Rs 18,096 was assessed as the loss of that year under rule 2(b). That that was the correct computation of the loss for 1945 could not admit of any doubt. The assessee was not entitled to treat the entire deficiency disclosed by the second actuarial report for the period that ended on December 31, 1945, as loss sustained in the year of account 1945. The deficiency adjusted under rule 2(b) was Rs 86,708, but only the annual average of Rs 18,096 could be taken as loss for one year, 1945 even as Rs 1,238, the annual average of the surplus of the preceding period, was taken as the annual profits of each of the three years that preceded 1945.

What has to be borne in mind is that what is computed as profits and losses of a life insurance business for purposes of assessment of income-tax may have no relation to the actual trading profits or losses as disclosed in the balance-sheet. The assessment had to be under rule 2(a) or 2(b). In either case it is a notional profit or notional loss, computed only for purposes of assessment to tax. But that is the only basis for assessment. The assessment of profits and losses for each of the years 1941 to 1944 was, and necessarily had to be, with reference to the actuarial report of the period that preceded 1941, whatever were the actual trading profits as disclosed in the balance-sheets of those years. What happened in this case was that, while the actuarial report for the period 1941 to 1945 disclosed a deficiency, that could not be, and was not, the basis of assessment for any of the years 1941 to 1944. It was on a profit computed under rule 2(b) that the assessee was liable to be assessed and was in fact assessed up to the end of 1944. That notional profit could not be converted into a loss, again a notional loss, on the basis of the actuarial report, which could not be the basis of the assessment for any of the accounting years to the end of 1944. There was no loss that could be assessed as a loss under the special rules of computation applicable to the life insurance business in 1943 or 1944. There was nothing to be carried forward as a loss when computing the assessable income of 1945. The loss for 1945 was correctly computed under rule 2(b), and loss of Rs 18,960, alone was available to be carried forward in assessing the income of 1946. No doubt section 24 allowed the loss of more than one year to be carried forward; but in this case "factually" there were assessable profits in 1943 and 1944, which meant there was not loss to be carried forward to 1945, to be set off against the assessable income of that year. There was not loss that could be assessed as a loss under the special rules of compution applicable to the life insurance business in 1943 or 1944. There was nothing to be carried forward as a loss when computing the assessable income of 1945. The loss for 1945 was correctly computed under rule 2(b), and that loss of Rs 18,960, alone was available to be carried forward in assessing the income of 1946. No doubt section 24 allowed the loss of more than one year to be carried forward ; but in this case " factually " there were assessable profits in 1943 and 1944, which meant there was no loss to be carried forward to 1945, to be set off against the assessable income of that year.

The learned counsel for the Department pointed out that the assessment of profits and losses for each of the years that preceded 1946 had become final, and he relied on section 24(3) to bar the acceptance of the contention of the learned counsel for the assessee that the entire loss during the period that preceded 1946 should be allowed to be carried forward. It is really unnecessary to pronounce any concluded opinion of ours on the scope of the finality of the assessment of a loss communicated to an assessee under section 24(3). We have said that though there was a computed deficiency of Rs 86,708 at the end of the period that ended on December 31, 1945, the loss that the assessee could carry forward was only the computed loss of 1945, viz., Rs 18,096.

We answer both the questions in the affirmative and against the assessee. The assessee will pay the costs of the Department in R.C. No. 100 of 1956. Counsel's fee Rs 250.

Questions answered in the affirmative.