1. ' SHAFIUR RAHMAN, J.-The assessee Habib Insurance Company Limited was granted leave to appeal to examine whether the High Court of Sind had on a reference made to it under section 66(1) of the Income-tax A Act correctly interpreted the provisions of section 10(7) of the Income-tax Act read with rules 3 and 6 of the Rules set out in the first schedule of the Income-tax Act.
2. ' The appellant had also applied under section 66-A(2) of the Income-tax Act, 1922 and had been granted by the Sind High Court a certificate of fitness for appeal to this Court. It is dated 22nd of May, 1970. The appellant a public limited company was incorporated in 1943 with the object of carrying on primarily insurance business. It started fire insurance business in January 1943 and other classes of insurance business in May 1943. Its authorized capital was Rs, 1,00,00,000 subscribed capital Rs, 50,00,000 and paid-up capital Rs, 25,00,000. In October 1943 the Company purchased eight immovable properties in Bombay of the total value of Rs, 10,47,100. In 1944 another such property was purchased for Rs, 1,52 552. It is not denied that the investment was made out of the paid-up share capital and not out of its premium income. In 1949 two of the properties appreciated in book value to the tune of Rs, 1,59,954: One property was sold at a profit of Rs, 76,462.
3. In 1950 the other properties appreciated in book value to the tune of Rs, 5,00,000. In May 1943 the Company had purchased 10,000 preference shares of Rs, 100 each of the Habib Bank at the total cost of Rs, 5,00,000. In the same year the Company purchased 461 ordinary shares of Rs, 100 each of the same Bank at a cost of Rs, 37,249-11-0. In 1946 the Bank converted the preference shares into ordinary shares of the same value at a premium of Rs,
20. The total of this premium Rs, 2,00,000 on 10,000 shares was paid by the Company by debiting its investment account. The total cost, therefore, amounted to Rs, 7,37,250 in round figures. At the end of the calendar year 1950 the Company re-valued the investment in shares at Rs, 40,22,250 with the result that its value appreciated by Rs, 32,85.000.
4. In the assessm ent year 1950-51, the Income-tax Officer brought under assessment, inter alia, appreciation in the value of immovable properties (Total Rs, 1.59,954) and appreciation of properties and surplus arising out of sale of another property (Rs, 76,462). For the assessment year 1951-52 appreciation in the value of immovable property was taken to be Rs, 4,89,640 and appreciation in the shares of Habib Bank was taken to be Rs, 32,85,000 and surplus arising out of sale at Rs, 10,360.
5. ' Before the Income-tax Officer the contention of the appellant was that the properties whose appreciation, surplus or gains were sought to be taxed were acquired from the initial subscribed capital and not out of any insurance fund and therefore, it could not be brought to charge under section 10(7) of the Act read with rules 3 and 6 of the First Schedule of the Income-tax Act. It was claimed by the appellant that these investments were a part of its functioning as an investor in terms of the memorandum and were not assimilable to insurance business at all. Another contention of the assessee-appellant was that notional appreciation in value could not be dealt with as income and charged to tax under rules 3 and 6 (ibid).
6. ' The Income-tax Officer by two separate orders rejected these contentions on the ground that :- "The assets do stand under the heading "General" which represents Non-Life Insurance Business.
7. Irrespective of the sources, of purchases of these properties, assessee has himself categorised them as Insurance Business assets and the explanation as to why he had done so is not sound.
8. ' It is not necessary that there should be realization on sales of assets. Mere artificial appreciation of which the assessee takes credit is enough to make the amount of appreciation taxable under rule 6 read with rule 2(3) (b)."
9. ' In the next year's assessm ent a similar objection was rejected with the following observations: "The Company thus seeks to make a distinction between assets created out of initially subscribed capital and assets created out of funds accumulated out of Insurance Business. But rule 3(b) of the schedule does not make any sach distinction. Moreover, assessee has itself, throughout the years of its existence, categorised the assets as assets of its insurance business-Life and general. In fact it has never declared any income from business other than insurance business and, therefore, cannot at this juncture take the plea that the assets in question are not those of insurance business or that it is necessary that the assets should have been created out of profits of insurance business. I, therefore, include the amount of appreciation in the surplus in accordance with the provisions of rules 6 and 3 (b) of the Schedule."
10. ' Appeals were filed against such a treatment as was afforded by the Income-tax Officer but the two appeals were dismissed by the Assistant Commissioner by a consolidated order. The matter came up before the Tribunal. The Tribunal dismissed the appeal observing as follows :- "In our judgment, therefore, the share capital and the investments made out of such capital were specifically appropriated to non-life insurance business ; they were treated as such in the balance-sheet ; the income from such investments were taken to the profits and loss account pertaining to the general insurance business. The reason why the share capital was in the first instance appropriated to the non-life business may be found in the fact that the assessee started fire insurance business first. As and when necessity arose or it was found to be expedient in the interest of the business as a whole, some of the investments were taken to the life insurance department. The rest remained in the non-life insurance business. It is common ground that the company had taken credit for the sums on account of appreciation of or gains on the realisation of these assets in the relevant years of account. The fact that the credit was taken in the balance- sheet, in the first instance, and not in the revenue account, does not affect the Department's case . . . .
11. ' On appellant's request the Tribunal framed and referred under section 66(1) of the Income-tax Act the following question of law arising in the case :- "Whether, in the facts and circumstances of the case, the Tribunal is correct in holding that (a) the appreciation in the book-value of the investments and (b) realisation in respect of properties sold during the relevant years on accounts were charg able to tax under the provisions of section 10(7) of the Income-tax Act, read with rules 3 and 6 of the rules set out in the First Schedule to the said Act."
12. ' The High Court of Sind by the impugned judgment held that under the Insurance Law as it then stood, there was no bar to an Insurance Company undertaking also a business other than that of insurance .But in respect of the appellant it was held that according to Memorandum of Association, primary purpose of its existence and incorporation was to carry on insurance business and it was not entitled to carry on an independent business of investment but it could do so only as ancillary to the insurance business. It was further held that the investment of amounts in immovable properties by the appellant and shares did not qualify as business as such to be exempted from the operation of section 10(7) of the Income-tax Act read with rules 3 and 6 of its First Schedule. It also held that the appellant had himself throughout the years treated these investments as ancillary to its insurance business and had not filed any separate returns other than those prescribed under the Insurance Act. The appreciation in value was held to be liable to tax under the law as rules 3 and 6 of the First Schedule of Income-tax Act dealt with notional incomes.
13. ' The learned counsel for the appellant contended that it was never the case of the assessee that it was doing any business other than that of. Insurance or that it was simultaneously engaged in the business of an investor. What was contended all through was that before applying section 10(7) of the Income-tax Act and on its strength going over to First Schedule, it should have been determined whether the disputed amount was a part of income from business of insurance. Only after answering this question in the affirmative the provisions of first schedule got attracted and became applicable. This was according to the learned counsel pointed out in the written arguments (p. 54) submitted in the High Court in the following words.
14. "The case of the Company was not that it was carrying on any other business such as the business of a dealer in shares or properties, but that it was functioning as an investor which just like any other individual or Company, it was entitled to do in law."
15. ' This question, according to the learned counsel for the appellant, acquired importance because the source of these Funds was share capital of the Company, as distinguished from the premium income. It was outside the statutory investments required to be made under sections 7 and 27 of the Insurance Act. It was not even approved as investment under section 2(3-A) of that Act. In his written arguments submitted in this Court the learned counsel for the appellant has clarified this further in the following words :- "The main submission being advanced on behalf of the Appellant Company is that the disputed investments did not pertain to the business of Insurance and hence were not liable to tax under section 10(7) of the Income-tax Act read with rules 3 and 6 of the Rules set out in the First Schedule to the said Act. The case of the Company was not that it was carrying on the business of investments but that it had made certain investments, as all companies do from time to time, and the making of these investments should not be confused with the carrying on either of the business of Insurance or the business of investments or dealing in shares."
16. ' The learned counsel for the appellant sought strength for his stand in the very words of section 10, subsection (7) of the Income-tax Act in so far as it mentions Business of Insurance. Subsection (7) of section 10 of the Income-tax has over-ridden in express words sections 8, 9, 10, 12 and 18 of the Income-tax Act but has preserved section 12-B. Section 12-B deals with Capital Gains. According to the learned counsel for the appellant, the specific income which is in dispute and the subject- matter of reference has been brought to tax on the basis of the balance-sheet prepared under Insurance Act and provisions made for its adoption by the Income-tax Act in rules 3 and 6 of the First Schedule. According to the learned counsel such an assessment was never done before. It was never done after for years in dispute. In making these Capital Gains from the investment of surplus funds the appellant-Company was acting as an ordinary investor of surplus funds and was not using it as stock in trade for the purposes of business of Insurance and the receipts could not be categorised as business income.
17. Once it is conceded that the appellant-Company was doing no other business except that of Insurance, it follows that all its assets, income, gains become relatable to the business of insurance.
18. The only question is whether the disputed income arises directly from the business of Insurance or for the purposes of tax can be treated outside it. In this matter th distinction between an ordinary trader (individual or company) and banking or Insurance Company, which the learned counsel for the appellant, ably tried to obliterate must be kept clearly in view. It is well brought out in British Tax Encyclopeadia at page 1244 in following words :- ' A trader who has money in hand and temporarily invests it in shares is nor regarded as performing a trading operation, if he later wants the money and realises his investment at a profit, such profit is not taxable. But if he carries on a trade in which investing money is a normal part of that trade, then any profits or losses he makes on investments will be brought into his tax computation. Thus an insurance company and a bank have been held taxable on profits made on realising investments as the buying of investments is part of insurance or banking business ; conversely any loss may be deducted. Interest received by a trading company from its bankers on its daily bank balance has been held to be part of its trading profits."
19. ' An argument exactly similar as is now advanced by the learned counsel for the appellant was raised in Liverpool and London and Globe Insurance Company v. Banett (1), (Suveyor of taxes) (1).
20. Lord Shaw of Dunfermline dealt with it in following words :- "Not only was the entire business one business, but in the present instance it was so in a very special sense. Of these investments abroad there were three classes, 'A' was the class where the investments were actually required as a condition of the company carrying on insurance business in the United. States. This was substantially the case with class '13', which enabled the company to accept risks beyond certain limits in New York and Canada. With regard to class 'C', that consisted of sums which the company in its own interest, and not by reason of any legal obligation, invested in the United States, Canada, and Australia. The Commissioners state, and the fact must be so accepted, that these sums 'are available' like any other property owned by the company, for any other purpose of the company whenever the company may think fit or necessary'. There can be no doubt whatsoever that these same, one and all, whether invested in colonies or countries abroad by reason of an obligation to comply with local laws, or as a matter of business to add to the stability of the company, its profit-earning, or its attractiveness to foreign and colonial insurers, were in every sense of the term a business investment, that is to say, an investment in the course of business and for the purpose of business. No accountant, auditor, or actuary could exclude the interest arising from such investments from the category of the earnings and profits of the company. If the company itself attempted to do so, it would quoad hoc sterilize that portion of the account, compelling the interest from investments not only to be paid up as part of accumulations of capital, but not to be accounted as profits of the business. It would be ceasing to conduct correct accounting, and by the device of treating the interest as no part of the profits of the year, it would be, so to speak, treating itself as out of business quoad these investments and as treating the interest upon them as not arising from its own trade. The whole of this argument is a mass of confusion because it is founded upon unreality, the simple fact being that this interest is part of the profits of the company. It is treated as such quite properly in its accounts, and it is divisible as such among its shareholders."
21. ' Earl Loreburn repelled the argument advanced on the basis of similarity of trading by an individual and an Insurance Company in the following words :- "An argument was urged upon us on behalf of the company that it should be treated in the same way as an individual, for example a banker, whose private fortune would be available to pay his banking debts in the last resort, though the annnal income from it would not be profits of his banking adventure. An infinite number of illustrations might be given of instances in which part of a trader's income is or is not profit of his trade, and it will be time enough to decide each case when it actually arises. I know of no formula which can discriminate in all circumstances what are and what are not profits of a trade. Probably that is the reason why the statute does not contain a closer definition."
(1) 1913 A C 610 - ' Finally Lord Mersey dealt with the same question in the following words :- "It is well-known that in, the course of carrying on an insurance business large sums of money derived from premiums collected and from other sources accumulate in the hands of the insurers, and that one of the most important parts of the profits of the business is derived from the temporary investment of these moneys. These temporary investments are also required for the formation of the reserve funds, a fund created to attract customers and to serve as a stand-by in the event of sudden claims being made upon the insurers in respect of losses. It is, according to my view, impossible to say that such investments do not form part of this company's insurance business, or that the returns flowing from them do not form part of its profits. In a commercial sense the directors of the company owe a duty to their shareholders and to their customers to make such investments, and to receive and distribute in the ordinary course of business, whether in the form of dividends, or in payment of losses, or in the formation of reserves, the moneys collected from them. I make no distinction between the three classes of investments (A, B and C)."
22. It, therefore, follows that the assets, incomes, gains of the appellant-Company which is doing no other business except that of Insurance ar all relatable to Business of Insurance and consequently on the strength of subsection (7) of section 10 of the Income-tax Act, the computation of tax has to take place in accordance with first schedule. Provisions of First C Schedule are self-contained and complete. It is true as contended by the learned counsel for the appellant that in Revenue cases one must look at the substance of the thing and not at the manner in which the account is stated.
23. This broad proposition is controlled in certain respects by First Schedule. Rule 6 is in three parts. The first part provides as follows :- "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 to be furnished to the Controller of Insurance."
24. ' The second part provides and actually defines the limits of the powers of the Taxing authorities to :- "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 business."
25. ' The third part which has a direct relevance to the case of the appellant provides :- "Profits and losses on the realisation of investments, and depreciation and appreciation of the value of investments shall be dealt with as provided in rule 3 for the business of life insurance."
26. ' The relevant portion of rule 3 so made applicable provides :- "Any sums taken credit for in the accounts or actuarial valuation balance sheet on account of appreciation of or gains on the realisation of the securities or other assets shall be included in the surplus."
27. ' It is not the contention of the appellant that the Tax Officer has misapplied these rules to its case.
28. The case of the appellant is that the appellant twice showed these appreciation and gains which the appellant may not have shown at all and the Tax Officer should do what the appellant could do but did not do. This is something quite different from reaching at substance of the thing ignoring the manner in which the account is stated. It would amount to unsettling a statutory return.
29. The completeness and the importance of the accounts prescribed under Insurance Act for a company carrying on business of Insurance, even for purposes of Income-tax will be apparent from a close examination of its provisions. Section 11 of the Act enjoins an insurer to prepare at the expiration of each calendar year a balance-sheet, a profit and loss account, and a revenue account in the prescribed form to be authenticated in the manner indicated. Rule 6 of the First Schedule to the Act provides :- "There shall be appended to the balance sheet a statement in Form AA as set out in Part II of this Schedule showing the market value and the book value of the assets in Pakistan."
30. ' Form AA at Serial No, 15 mentions Land and House property in Pakistan. The book value, the market value and the system of their computation are required to be disclosed. The Profit and Loss Account (Part II Second Schedule Form B) requires disclosures and inclusion of "Profit on realisation of Investment (not credited to Reserve or any particular Fund or Account)" and of "Appreciation of Investments (not credited to Reserves or any particular fund or Account)". Market value has been defined to mean "as respects any assets the market value thereof as ascertained from published market quotations, or if there be no such value, its fair value, as between a willing buyer and a willing seller". In the classified summary of Assets in Pakistan (Form AA) alone it is stated "The market values need not be shown separately where they are not less than the book values and a certificate to that effect is appended to statement". Section 15 of the Act provides that the audited accounts and the statements referred to in section 11 shall be printed and furnished to the Controller of Insurance. The balance-sheet is required to be certified by the auditor (Regulation 7(d) (ii) of First Schedule) as under "(ill) In the case of a combined balance-sheet, that he has audited the balance-sheet and accounts of every insurer whose assets and liabilities are incorporated therein, or that any such balance-sheet and accounts which have not been audited by him have been certified by independent auditors. The said certificate shall contain a reference to such reservations, if any, as may have been made by any auditor upon any report or certificate given by him with respect to the balance-sheet and accounts of any insurer whose assets and liabilities are incorporated in the combined balance-sheet."
31. ' Section 21 of the Act authorises the Controller of Insurance to get further information about returns, to examine the books of account, to' decline to accept the returns unless defect is removed.
32. ' Section 22 authorizes him to order revaluation.
33. ' Part II Form 'A' (Form of Balance Sheet) requires disclosure of the value of "other ordinary stocks and shares of companies incorporated (i) in Pakistan, (ii) out of Pakistan" ; "holdings in subsidiary companies ; "House Property (i) in Pakistan, (ii) out of Pakistan". The profit and loss account (Part II Form B) requires disclosure inter alia of "Loss on realiza lion of Investments (not charged to Reserve .Or any particular Fund or Account" ; Depreciation of Investment (not charged to Reserves or any particular Fund or Account) ; Profit on realization of Investments (not credited to Reserves or any particular Fund or Account) ; "Appreciation of Investments (not credited to Reserves or any particular Fund or Account).
34. It is such a statement of account which under section 10(7) First Schedule of the Income-tax Act serves as the basis for the Income-tax E Officer as would appear from rule 6 :- "6. 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. Profits and losses on the realization of investments and depreciation and appreciation of the value of investments shall be dealt with as provided in rule 3 for the business of life Insurance."
35. Rule 3 provides as follows :- "3. In computing the surplus for the purpose of rule 2 :- ' any amount either written off or reserved in the accounts or through the actuarial valuation balance sheet to meet depreciation of or loss on the realisation of securities or other assets shall be allowed as a deduction, and any sums taken credit for in the accounts or actuarial valuation balance sheet on account of appreciation of or gains on the realisation of the securities or other assets shall be included in the surplus : ' Provided that if upon investigation it appears to the Income-tax Officer after consultation with the Controller of Insurance that having due regard to the necessity for making reasonable provision for bonuses to participating policy-holders and for contingencies, the rate of interest or other factor employed in determining the liability in respect of outstanding policies is materially inconsistent with the valuation of the securities and other assets so as artificially to reduce the surplus, such adjustment shall be made to the allowance for depreciation of, or to the amount to be included in the surplus in respect of appreciation of, such securities and other assets, as shall increase the surplus for the purposes of these rules to a figure which is fair and just."
36. It was from such a statutory statement that the disputed amounts were picked up and brought to charge. It was not, on the facts ascertained,! Within the competence of the Taxing Officer to exclude them from the accounts, or to ignore them as a component of the business of insurance.
37. ' The argument by reference to section 128 of the Income-tax Act is not available to the appellant because this provision was introduced on 18-4-1947 by Income-tax and Excess Profit Tax (Amendment) Act, 1947 (Act XXII of 1947) affecting transactions made after 31st March 1946. By another amendment (Act XXVI of 1950) the period was restricted to 1st April, 1949. The taxing provision was thereafter revived as from 7th day of June, 1963 (Act XVI of 1963). There was not such provision in the field during the assessment years in question.
38. ' Considering all the aspects of the case, we find that there is no merit in this appeal and the same is dismissed with costs.