SAAD SAOOD JAN, J.--This is an appeal by special leave from the judgment dated 16-5-1975 of the High Court of Sindh and Baluchistan, Karachi, deciding a question formulated in a reference under Section 66(1), Income-Tax Act, against the assessee. The facts giving rise to the appeal are as follows:
2. Appellant No. 1 is a public limited company and is engaged in the business of insurance. In 1972, consequent upon the promulgation of the Life Insurance (Nationalization) Order, its business in so far as it related to life insurance was taken over by appellant No.2. The dispute in this appeal relates to the income of appellant No.1 arising out of life insurance business during the assessment year---s 1960-61, 1961-62 and 1962-63. For the purpose of computing income-tax, its income for these years was worked out in accordance with Rule 2(b) of the First Schedule to the Income-Tax Act. The amount so calculated included income arising out of house property. It claimed exemption from payment of income-tax in respect of this income on the basis of clause (xii) of section 4(3) of the Income-Tax Act on the ground that the house property in question had been constructed within the period specified in the clause. Its claim in this regard was rejected by the Income-Tax Officer who, relying on the authority of a decision of the Bombay High Court in the case of Commissioner of Income-Tax v. The Asian Insurance Co. Ltd. (1962) 46 I.T.R. 560), held that as the income, profits and gains of an insurance company were chargeable to tax under the special provisions of the First Schedule the exemption created by the said clause was not available to the assessee.
3. Aggrieved by the order of the Income-Tax Officer, appellant No. 1 preferred an appeal before the Income-Tax Appellate Tribunal. The learned Tribunal by a majority accepted the appeal and held that such income of appellant No.1 as fell within the purview of the aforementioned clause was exempt from income-tax. However, on the request of the Commissioner of Income-Tax the learned Tribunal made a reference to the High Court for its opinion, alongwith another, on the following question: "Whether the assessee insurance company whose income from life insurance business is computed under Rule 2(b) of the First Schedule read with section 10(7) of the Income-tax Act, 1922, is not entitled to exemption from tax in respect of income from newly constructed property granted by section 4(3) (xii) of the said Act for the assessment years 1960-61, 1961-62 and 1962-63."
After considering the question at some length the High Court held that the exemption claimed was not available to the assessee and expressed its opinion accordingly. From the judgment of the High Court the assessee has come in appeal to this Court.
4. To appreciate the contentions raised in this appeal, it will be of advantage to take notice of certain provisions of the Income-tax Act, 1922. Section 3 states that where any Central Act enacts that income-tax shall be charged for any year at any rate, tax at that rate shall be charged for that year in accordance with and subject to the provisions of this Act in respect of the total income of the previous years of every person. The expression "total income" has been defined in Section 2(15) to mean the total amount of income, profits and gains referred in section 4(1) computed in the manner laid down in the Act. Section 4(1) identifies what is to be regarded as the total income of a person. However, subsection (3) of the same section excludes certain categories of incomings from the total income of a person. Thus, clause (xii) excludes from the "total income" of a person such income as is chargeable under the head "Income from property" which arises out of a building which has been erected within certain specified periods. For the purpose of computing taxable income section 6 divides incomes, profits and gains under different heads. One of the heads relates to "Income from property". Sections 7, 8, 9 and 10 prescribe the manner in which the taxable income falling under the various heads is to be worked out. However, subsection (7) of section 10 makes an exception in respect of the profits and gains relating to business of insurance for it states that notwithstanding anything to the contrary contained in section 8, 9, 10, 12 or 18 profits and gains of business of insurance and the tax payable thereon shall be computed in accordance with the rules contained in the First Schedule to the Act. The First Schedule prescribes special rules for the computation of the profits and gains of insurance business. Rule 2 of the Schedule which deals with the business of life insurances lays down two alternative methods for determining the profits and gains. Thus, the profits and gains of life insurance business are to be taken either--
(i) the gross external incomings of the preceding year from that business less the management expenses of that year; or
(ii) the annual average of the surplus arrived at by adjusting the surplus or deficit disclosed by the actuarial valuation made by the last intervaluation period ending before the year of which the assessm ent 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 the expenditure which may under the provisions of section 10 of the Act be allowed for computing the profits and gains of a business.
The income of the appellant No. 1 during the assessment years in dispute was computed in accordance with the second mentioned method.
5. The question for consideration before us is whether the income which the appellant received from the newly constructed property was not chargeable to income-tax in view of the provisions of clause (xii) section 4(3) of the Income-tax Act. On behalf of the appellants it was contended that despite the special procedure laid down for computing the profits and gains arising out of life insurance business the appellants were entitled to the benefit of the clause as the income arising out of house property did not, by operation of the said clause, form part of the total income as defined in the Act. It was also pointed out that before the High Court the revenue had conceded that for the assessm ent year 1962-63 the income which the appellant No. 2 had received as dividends was not chargeable to income-tax. It was argued that if the income flowing from dividends was not taxable there was no reason why the same view should not have been taken in respect of the income accruing from house property.
6. It is difficult to accept the contention of the learned counsel. As already noticed, 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 Act and special rules for that purpose have been prescribed. As held by this Court in Commissioner of Income-tax v. Alpha Insurance Co. Ltd. Karachi PLD 1981 SC 293, the rules set out in the First Schedule to the Income-tax Act completely, exhaustively and to the exclusion of every other provision not expressly incorporated, govern the computation of profits and gains of the insurance business. Thus, in computing profits and gains of the insurance business the categorisation of heads as made in section 6 and the manner of determining the taxable income under the different heads as set out in sections 7, 8, 9 and 10 are irrelevant. No doubt, the rules laid down in the First Schedule would lead to only notional or artificial results but then that is how the Act state that the income of a person engaged in the said business should be worked out for the purpose of taxation. Now, clause (xii) of section 4(3), in terms refers only to such incomes as are chargeable under the head "Income horn property". This clause would, therefore, only be attracted where the income of an assessee being calculated in accordance with the provisions of section 9. Consequently, where the income of an assessee is not being calculated in accordance with section 9 the said clause would not apply. On a plain construction of the clause it is not possible to extend the exemption created by it to a case where the income is to be calculated not under the head "Income from property" but on a notional or artificial basis on account of the peculiar features of the business. For this reason, the judgment of the Calcutta High Court in North Br. And Mercantile Insurance Co. (1937) 5 I.T.R. 349 upon which the appellants rely had no relevance to the case before us.
7. The view which we take is similar to that which found favour with the Indian Supreme Court in Vanguard Fire and General Insurance Co. Ltd. v. Commissioner of Income-tax (1966) 60, I.T.R. 490. In that case too, the exemption made by section 4(3) (xii) of the Income-tax Act in respect of income from house property was sought to be invoked by an insurance company whose profits and gains had been computed in accordance with the provisions of First Schedule. Although the insurance company was not engaged in the business of life insurance but the construction placed by the Court on clause (xii) is equally applicable to life insurance. The Court held that it was impossible to apply the provisions of the said clause to an assessment made under section 10(7) of the Act read with paragraph 6 of the Schedule for there was no income chargeable under the head "Income from property" so far as the business of insurance was concerned; consequently, the company was not entitled to the exemption created under the clause in respect of the income accruing to it from house property.
8. There is also no merit in the contention that as the revenue had not contested the exemption granted to the assessee in respect of dividend income there was no reason why a similar exemption with regard to income from house property should have been denied to them. It is to be noticed that exemption in respect of dividend income was allowed to the appellants under an entirely different provision of the Income-tax Act, namely, sub-paragraph I (a) of paragraph B of para.1 of the Fourth Schedule. The exemption envisaged by that provision is not before us for examination; all that we can say at this stage is that the said provision had no bearing whatsoever on the construction of clause (xii) ibid, upon which alone the appellants have founded their case in this appeal.
9. For the reasons stated above, we find no merit in this appeal which is hereby dismissed with costs.