LIFE INSURANCE CORPORATION OF INDIA vs. COMMISSIONER OF INCOME TAX

CIVIL APPEAL No. 295/1979Supreme Court[1996] 2 S.C.R. 79519 February 1996Bench: 2 JudgesAuthor: J.S. VERMA, K. VENKATASWAMI INSURANCE CORPORATION OF INDIA A12 pages
AI SummaryAllowed

What were the facts?

The Life Insurance Corporation of India (LIC), a statutory corporation established in 1956, received a refund of Rs. 3,02,90,898 in income tax for the assessment year 1963-64. This refund pertained to excess tax paid by its predecessor insurers prior to the appointed day. The Income Tax Officer treated the entire refund as revenue. The Appellate Assistant Commissioner allowed exclusion of Rs. 2,73,50,939, disallowing the balance. The Income Tax Appellate Tribunal affirmed the Appellate Assistant Commissioner's order. The High Court, on reference, upheld the Tribunal's decision, finding Rule 2(1)(b) of the Income Tax Act irreconcilable with Section 7 of the Life Insurance Corporation Act.

What did the Supreme Court hold?

The Supreme Court allowed the appeal of the Assessee. It held that due to the legal fiction in Section 7(2) of the Life Insurance Corporation Act, the refund amount, though received later, must be deemed to be included in the inherited opening balance of the earlier inter-valuation period of the Corporation. This satisfies the requirement of Rule 2(1)(b) of the Income Tax Act. The Court emphasized a harmonious construction of Section 7 of the Life Insurance Corporation Act and Rule 2(1)(b) of the Income Tax Act, stating that unless this construction is adopted, full effect cannot be given to Section 7. The principle is that an amount forming part of the surplus, even if not explicitly shown in accounts, should not be taxed again if it was part of an earlier inter-valuation period. The High Court and Tribunal's judgments were set aside, and the question was answered in favour of the assessee.

What were the issues?

1. Whether the sum of Rs. 23,39,959 (a portion of the total refund) received by the Corporation as a refund of income-tax for the period up to assessment year 1956-57, paid by erstwhile insurers, should be allowed as a deduction while computing the income of the assessee under Rule 2(1)(b) of the First Schedule to the Income-tax Act, 1961? Assessee's Contention: The payment of taxes giving rise to the refund was made prior to the Corporation's formation by its predecessors. Under Section 7 of the Life Insurance Corporation Act, the Corporation steps into the shoes of its predecessors for all legal consequences, including refunds received as a successor. Revenue's Contention: Under Section 44 read with Rule 2(1)(b) of the First Schedule, only adjustments to the surplus disclosed by actuarial valuation are permissible. The phrase 'included therein' in Rule 2(1)(b) implies that the surplus or deficit must relate to the Corporation itself and not its predecessor. The Tribunal accepted this contention.

Which sections of the Income-tax Act were involved?

Section 44,Section 7,Section 9,Section 256(1)

AI-generated summary — verify with the full judgment below

LIFE INSURANCE CORPORATION OF INDIA A v. COMMISSIONER OF INCOME TAX [J.S. VERMA A.Nb K. VENKATASWAMY JJ.) FEBRUARY 19, 1996 B Income Tax Act, 1961/Life Insurance Corporation Act, 1956-Section 44 read with Rule 2(1)(b) of the First Schedule/S.7-Life Insurance Busi- ness-Computation of Income-Refund of amount of excess tax paid by predecessor insurer prior to appointed day in 1956--Held, an allowable deduc- C tion-Cannot be disallowed on mere ground of not having been included in the surplus in any earlier inter-valuation perio~Hamwnious construction of Rule 2(1)(b) of Income Tax Act and Section 7 of Life Insurance Corporation Act wa1Tants such constmction.

Interpretation of Statutes-Hmmonious co11stmtion : Legal Maxim : "Lex 11011 cogit ad impossibilia" applicability of D The assessee, Life Insurance Corporation of India, a statutory Cor- poration established under the Life Insurance Corporation Act which was E established with effect from 1 September, 1956, received during the relevant assessment year 1963-64 refunds of income-tax aggregating to Rs. 3,02,90,898 in life insurance business. The Income Tax Officer treated the entire amount on revenue account and n

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