COMMISSIONER OF INLAND REVENUE, Appellant, and LIFE INSURANCE CORPORATION OF IND

026-NLR-NLR-V-77-COMMISSIONER-OF-INLAND-REVENUE-Appellant-and-LIFE-INSURANCE-CORPORATION-OF-IND.pdf


Commissioner of Inland Revenue v. Life Insurance Corporation of India 147
1973 Present: H. N. G. Fernando, C.J., and Deheragoda, J.
COMMISSIONER OF INLAND REVENUE, Appellant, andLIFE INSURANCE CORPORATION OF INDIA,Respondent
S. C. 1 and 2 of 1971—Income Tax Board, of Review No. BRA/351
Income , tax—Non-resident life insurance company—Ascertainment ofprofits of such company—Tax payable on income from interestdue on Ceylon Government securities—Inland Revenue Act of1963 as amended by Act No. 18 of 1965, ss. 2, 27 (I) (2), 65 (1),66 (I), (2)(3).
The assessee-respondent was an insurance company not residentin Ceylon. It carried on the business of life insurance and heldshares in Ceylon Companies and also securities issued by theGovernment of Ceylon. The question disputed in the present CasesStated related to the assessment of the income tax payable in respectof the income from interest due on Ceylon Government securitiesheld by the assessee. It was agreed that the law applicable wascontained in the Inland Revenue Act of 1963 as amended by ActNo. 18 of 1965.
. Held, (i) that the gross amount of interest payable to the assesseeon securities of the Government of Ceylon must be taken intoaccount in the ascertainment of profits for the purposes of theproviso to section 65 of the Inland Revenue Act.
(ii) that the assessee was entitled to a set-off against the amountof tax actually assessed in all these cases, on account of deductionsof tax made by the Central Bank from the gross amount of suchinterest.
C ASES stated under the Income Tax Act.
V. S'. A. Pullenayegum, Deputy Solicitor-General, with ShivaPasupati, Senior State Counsel, and Faiz Mustapha, StateCounsel, for the Commissioner of Inland Revenue in bothappeals.
148 H. N. G. FERNANDO, C.J.—Commissioner of Inland Revenue v. Life
Insurance Corporation of India
S. Ambalavanar, with C. Pathmanathan, P. C. Tittawela, P.Sivaloganathan and Ranil Wickramasinghe, for the assessee-respondent in both appeals.
Cur. adv. vult.
November 13, 1973. H. N. G. Fernando, C.J.—
The Assessee in these cases is the “ Life Insurance Corporationof India ”, which has been carrying on in Ceylon the business oflife insurance and which has held shares in Ceylon companiesand securities issued by the Government of Ceylon. TheAssessee has, for the purposes of our Income Tax law, been re-garded as a company not resident in Ceylon ; Counsel appearingfor the Assessee did not seek to controvert in these cases theposition that the Assessee is a company, although he doubted thecorrectness of that position.
The two Cases Stated relate to the assessment of the income ofthe Assessee for the years of assessment 1963/64 and 1964/65, andto the income tax paid or payable in respect of that income. Butthese are in the nature of “ Test cases ”, and it has been agreedthat the opinions of this Court on the questions decided will beapplicable in respect of certain other past years of assessment.Although reference was frequently made to sections of theformer Income Tax Ordinance, it has also been agreed that thelaw applicable in all the cases is contained in the InlandRevenue Act of 1963 as amended by Act No. 18 of 1965.
Under Section 65 (1) of the Act of 1963, the profits of aCompany from the business of life insurance shall be “ the invest-ment income of the Life Insurance Fund ”, less deductions formanagement expenses. But in the case of a non-resident company,the Proviso to this sub-section requires that the profits from life
insurance business “shall be ascertained by reference to
the same proportion of the total investment income of the LifeInsurance Fund of the company as the premiums from lifeinsurance business in Ceylon bear to the total life insurancepremiums received by it ”.
In the case of the Assessee, there was income from dividends onshares held by the Assessee in Ceylon companies and also incomefrom interest payable on Ceylon Government securities held bythe Assessee. In computing the total investment income of theAssessee for the purposes of the Proviso to Section 65, the InlandRevenue has taken into account the gross dividends payable to
H. If. G. PERXAIfDO, C.J.—Commissioner of Inland Revenue v. Life 149
Insurance Corporation of India
the Assessee on these shares and the gross interest payable to theAssessee on these securities. The correctness of this practicewas not disputed before us.
Section 27 (1) of the Act provides that a resident company isentitled to deduct, from the amount of any dividend payable toany shareholder, income tax equal to 33 1/3 per cent, of thatamount ; and sub-section (2) of this Section enables the Commis-sioner to order that a deduction at a higher rate than 33 1/3 percent, be made for such dividends. Deductions under these provi-sions were in fact made by resident companies from dividendspayable on shares held by the Assessee.
Section 66 (1) of the Act provides for similar deductions ofincome tax to be made by a person who pays or credits to anyperson or partnership outside Ceylon any sum falling due(inter alia) as interest on debentures, mortgages, loans, depositsor advances. Under this provision, the Central Bank of Ceylon,in making payments of interest to the Assessee on securities ofthe Government of Ceylon, made deductions of 33 1/3% or morefrom the sums falling due as interest. Although the Board of.Review decided in these test cases that these deductions werenot lawfully made, Counsel for the Assessee did riot seek duringthe argument before us to contest their legality ; we ourselvescan think of no substantial ground for such a contest. It isagreed that the amounts deducted under S. 27 (1) or under S. 66(1) from dividends or interest payable to the Assessee were infact paid over to the Inland Revenue.
Section 66 (2) of the Act requires that a person who deductsincome tax under sub-section (1) from any sum shall thereuponissue a statement in writing showing inter alia the date andamount of the tax so deducted.
It is necessary to quote in full at this stage sub-section (3) ofS. 66 : —
“ Where the assessable income of a person includes a sumfrom which income tax has been deducted in accordance withsub-section (1), he shall be entitled, on production of a state-ment relating to such sum issued in accordance with sub-section (2), to a set-off against the tax payable by him of theamount of tax shown on such statement. ”
The substantial dispute between the Assessee and the InlandRevenue in these cases concerns the construction of this sub-section (3), the contention for the Inland Revenue being thatthis sub-section has no application in a case in which deductions
1** — A 07900 (74/06)
150 H. N. G. FERNANDO, C.J.—Commissioner of Inland Revenue v. Life
Insurance Corporation of India
have been made from interest payable to a non-resident Insu-rance Company. If this contention be correct, then the Assesseeis liable to pay the full amount of income tax for which he isassessed, no account being taken of the fact that there has beena pre-payment of income tax by means of deductions madeunder S. 66 (1).
The argument on behalf of the Commissioner has been thatthe set off for which s. 66 (3) provides is allowable only if incometax has been deducted from a sum which is included in theassessable income of a person, and that in the present cases theassessable income of the Assessee does not include any suchsum.
In these cases, the assessable income of the Assessee is not,as in an ordinary case, computed merely by the additiontogether of profits from various sources ; instead, the profits areascertained by the application of the formula specified in theProviso to Section 65 (1). Strictly speaking therefore it has to beconceded that the interest payable to the Assessee on Govern-ment securities was not actually included in the assessableincome of the Assessee.
I cannot agree however that this strict construction must beapplicable, particularly in a taxing statute, if such a constructionleads to the startling result that the total sum actually recoveredas tax upon the income of a tax-payer is greater than the sumlawfully leviable on the tax payer’s income. Such a constructionmust be avoided unless a Court is compelled to it by the provi-sions of the Statute.
The object of S. 66 of the Act is easily understood. When inter-est is payable to a non-resident person, the debtor is authorisedby sub-section (1) to deduct from the gross interest 33 1/3% ormore as income tax ; if the deduction of tax is made, the amountdeducted is remitted by the debtor to the Commissioner. In thisway, the collection of some amount, in respect of income taxanticipated to be payable by the non-resident, is ensured. Thecertificate issued by the debtor under sub-section (2) evidencesthe fact that this amount of tax has been so collected. When theassessment of income tax payable by the non-resident is subse-quently made by the Inland Revenue, the amount of tax alreadycollected has to be set-off under sub-section (3) against theamount of tax as subsequently assessed.
Thus S. 66 only provides for the collection in advance, throughdeductions made by the debtor or a non-resident person, of someamount in anticipation of a subsequent assessment of the actual
H. N. G. PERN ANDO, C. J.—Commissioner of Inland Revenue v. Life 161
Insurance Corporation of India
tax liability of the non-resident. Sub-section (3) then quiteunderstandably provides that when the subsequent assessmentof tax liability is actually made, a set-off against the amount ofthat liability must be allowed because a part of that liability hasalready been discharged and collected.
Clearly then, S. 66 is intended only to facilitate the collectionof income tax payable by a non-resident, and not to impose acharge of income tax. As far as I am aware the charge of incometax is imposed only by S. 2 of the Inland Revenue Act. Havingregard to this clear intention of the Legislature in S. 66 toprovide only a means of collecting tax in anticipation of a subse-quent assessment of tax liability, and of allowing what is socollected to be set off against the assessed liability, the questionis whether the language of S. 66 (3) requires the set-off to bemade in these cases.
Although in these cases, the interest on Government securitiesis not included in the assessable income of the Assessee, theamount of such interest^ is in fact included in computing thetotal investment income of the Assessee’s Life Insurance Fund,and this total becomes a dominant factor in ascertaining underthe Proviso to S. 65 of the Act the profits upon which theAssessee is assessed for income tax. Since the interest is thustaken into account in the ascertainment of the assessable incomeof the Assessee, I am satisfied that the assessable income of theAssessee does include this interest in the sense contemplated inS. 66 (3).
Although the Central Bank in fact made deductions frominterest payable to the Assessee, the Bank was only entitled byS. 66 (1) to do so, and was not bound to make these deductions.In fact there are probably many instances in which interest onloans or mortgages is paid to persons out of Ceylon without suchdeductions of income tax being made at the time of payment.
If then the Central Bank had not made these deductions frominterest, the amount legally recovered as tax from the Assesseewould have been only the amount (let me call this amount“ Rs. T ”), which is leviable on the profits ascertained in accord-ance with the Proviso to s. 65. If however the contention for theCommissioner is correct, the fact that the Bank chose to makethe deductions has the consequence that the amount actuallycollected from the Assessee will be Rs. T plus all the sumsdeducted under s. 66 (1). The Legislature could surely not haveintended that the amount actually collected as tax can be greaterthan the amount lawfully chargeable from an Assessee, merely
162 H. X. G. FERNANDO, C.J.—Commissioner of Inland Revenue v. Life
Insurance Corporation of India
because the Central Bank or any other debtor has chosen to makethe deductions permitted by s. 66 (1). I repeat in this contextthat s. 66 (1) does not impose a charge of tax on income, butonly permits deductions of tax to be made in anticipation of asubsequent assessment of tax.
The learned Deputy Solicitor-General, on behalf of theCommissioner, insistently argued that the judgment of theHouse of Lords in the case of Inland Revenue Commissioners v.Australian Mutual Provident Society1 (1947 A. C. p. 605) has animportant bearing on the question which arises in the presentcases.
Rule 46 in a Schedule to the Income Tax Act of 1918 providedthat a non-resident Company is exempt from income tax inrespect of interest and dividends from certain United Kingdomsecurities. The Act contained another rule (Rule 3 of Case III)which made special provision, similar to the Proviso to our s. 65,for ascertaining the profits of a non-resident insurance Company.According to this Rule 3, a certain proportion of the incomefrom investments of the Life assurance fund of such a Companywas deemed to be profits on which income tax was to becharged.
The Mutual Provident Society received interest on certainsecurities referred to in the Rule 46. The Society claimed that,because dule 46 exempted this interest from tax, the amount ofthe inte est should be excluded in ascertaining its income frominvestor nts under Rule 3. The House of Lords rejected thisclaim. T- so doing, Viscount Simon pointed out that Rule 3 didnot tax mcome from investments, but instead taxed “ a conven-tional sum calculated as the Rule directs ”. That conventional sumhad to be calculated by reference to the income from investmentsof the life assurance fund ; these words plainly meant all theincome from such investments, and they could not justifiably beread to mean the income from such part of the investments of thefund as are not exempt from income tax. The fact that Rule 46exempted certain income from tax was not a ground for givingto the language of Rule 3 a meaning different from the plainmeaning.
In the present cases, we are primarily concerned with themeaning of our s. 66 (3), which provides for a set-off, i.e. forgiving credit on account of a deduction of tax previously madefrom an Assessee’s income. If, as already stated, s. 66 (3) readby itself is fairly open to the construction that the Legislature
1 {1947) A. C. 605.
H. N. G- I’ERN'AUNTDO, C.J.—Commissioner of Inland Revenue v. Life 153
Insurance Corporation of India
intended a set-off to be allowed in cases of this nature, then thefact that s. 65 provides for an unusual mode of ascertainingprofits in such cases is at best only a secondary consideration.
The learned Deputy Solicitor-General appears to have formed,the impression that the judgments of the House of Lords in the1947 case had decided the question concerning a right to a set-off,which has now arisen before us. A claim for a set-off was in factraised in that case, but it was rejected for the simple reason thatthe English Rule quite naturally and correctly allowed a set-offonly if some amount had previously been paid or deducted astax : since in that case there had been no deduction of tax inadvance, the provision for a set-off could not apply. We on thecontrary are concerned with cases in which such deductions oftaxe have actually been made from income payable to theAssessee.
Counsel for the Assessee did not argue before us, either thatdividends payable to the Assessee by certain Ceylon companiesshould be excluded for the purpose of the ascertainment of theprofits of the Assessee, or that a set-off should be allowed onaccount of deductions of tax made from such dividends.Accordingly, in these two test cases, and in the other cases whichwere in dispute between the Assessee and the Commissionerbefore these cases were stated for the opinion of this Court, thegross dividends payable to the Assessee by those companies willbe taken into account for the purposes of s. 65 of the Act, andno set-off will be allowed on account of deductions of tax madeat the source from such dividends. But we do not have toexpress an opinion on the correctness of that position.
It is thus only necessary for us to state the following-opinions : —
That the gross amount of interest payable to the
Assessee on securities of the Government of Ceylonmust be taken into account in the ascertainment of -profits for the purposes of the Proviso to s. 65 ;
That the Assessee is entitled to a set-off against the
amount of tax actually assessed in all these cases, onaccount of deductions of tax made by the Central Bankfrom the gross amount of such interest.
We make no order as to costs.
Deheragoda, J.—I agree.
Appeals dismissed on the disputed question,,