1. SALEEM AKHTAR, J.---The respondent carried on life and general insurance business during the assessm ent year 1972-73 and 1973-74. The Income Tax Officer for both these years made addition of Rs.6,705 and Rs.1,008 under section 10(2-A) of the Income Tax Act for outstanding trading liability.
2. In appeal it was maintained by the Appellate Assistant Commissioner. The respondent filed appeal before the Tribunal which directed the deletion of these additions mainly on the ground that applicability of section 10 of the Income Tax Act has been ousted in case of insurance business and profits and gain are to be computed in accordance with Rules made in the First Schedule to the Income Tax Act. On the application of the department, the following question has been referred:-- "Whether, on the facts and in the circumstances of the case the learned Appellate Tribunal is justified in deleting the addition of outstanding trading liability of Rs.6,705 under section 10(2-A) of the Income Tax Act on the ground that section 10 is not applicable in the case?"
3. This question has been settled by the dictum laid down by the Supreme Court in Commissioner of Income Tax v. Alpha Insurance Co. PLD 1981 SC 293. The income of insurance business is to be computed under Rules of the first Schedule to the Act. In this regard reference can also be made to section 10(7) of the Act which excludes the applicability of sections 8, 9 and 10 to the extent they are inconsistent with the Rules of the First Schedule. Reference can also be made to C.I.T. v. Alpha Ins.
4. Co. Ltd. PLD 1981 SC 293, and 1989 PTD 210 (sic). Our reply is in the affirmative.
5. During the assessm ent year 1973-74 as the life insurance business had been nationalised on 31-10- 1972 the Income Tax Officer framed assessment on the basis of annual average for ten months only. The Appellate Assistant Commissioner agreed with such treatment but the Tribunal in an appeal filed by the respondent held that under rule 2 of the First Schedule the profit and loss was to be calculated for the whole year on the basis of acturial valuation and therefore, the valuation once determined has to be considered in its entirety whether it was surplus or deficit. Therefore, apportionment on time basis was not allowed. At the instance of the Department following question has been referred:-- "Whether on the facts and in the circumstances of the case, the Tribunal was justified in holding that the loss of Life Insurance Business was admissible under Rule 2 on the basis of actuarial valuation?"
6. The company carried on life insurance business which is governed by the Rules mentioned in the First Schedule to the Act. Rules 1 to 5 applied to the life insurance business. The assessment of life insurance business was to be made according to the First Schedule to the Income Tax Act. The accounting year of an insurance company is the calendar year as provided by the Insurance Act.
7. According to the First Schedule the assessment is to be made on the basis of Annual Average of the surplus disclosed by actuarial valuation. It is not the actual income of the previous year but the notional income as determined by, actuarial valuation which is the basis for framing assessment.
8. Only such adjustments can be made which are permissible under the Rules. The Assessing Officer has thus, to take into account the actuarial valuation and cannot make any change or alteration except as provided by the Rules contained in the First Schedule. In Commissioner of Income-tax v.
9. Alpha Insurance Co. Ltd. PLD 1981 SC 293, it was observed that "the rules contained 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 the Profits and Gains of insurance business".
10. In Calcutta Insurance Co. Ltd. v. Commissioner of Income-tax (1952) 21 I T R 404, it was observed that "the Scheme of Schedule obviously is that subject to the adjustments specifically indicated, the actuarial surplus must stand". According to Kanga & Palkivala "it is not open to the Department to make any additions to the surplus other than the adjustments specifically provided in the Schedule, even if an item of income escapes tax as a result of not being taken into account in making the actuarial valuation". The Income Tax Officer, therefore, cannot make adjustment on any basis except as provided by the Rules. The alteration sought to be made by the department will interfere with the actuarial valuation which is not permissible. Where entire basis of assessment is on notional and not real income actual calculations have no part to play.
11. Our reply is in the affirmative.
12. M.B.A./C-178/K Questions replied in the affirmative.