VEERASWAMI J.

These references arise out of the same order of the Tribunal and relate to the same assessment year 1957-58. Two of them come up at the instance of the Commissioner of Income-tax, one under section 66(1 and the other under section 66(2) of the Income-tax Act, 1922, and the third at the instance of the assessee under section 66(1) of the Act. The assessee is a public limited company which carried on life insurance business. The Life Insurance (Emergency Provisions) Ordinance, 1956 (Ordinance No. 1 of 1956), was promulgated on January 19, 1956, which was replaced by the Life Insurance (Emergency Provisions) Act, 1956 (Act 9 of 1956), which came into operation on March 21, 1956. Pursuant to the provisions of the Ordinance, the management of the assessee vested in the Central Government with effect from January 19, 1956. The Life Insurance Corporation Act, 1956 (Act 31 of 1956), received the assent of the President on June 18, 1956, and came into force on July 1, 1956. The Life Insurance Corporation as a corporation sole was brought into existence and on and from that date, by section 3, all the assets and liabilities of the assessee appertaining to its controlled business stood transferred to and were vested in the Corporation. In September, 1957, the assessee received Rs. 63, 034 as managerial compensation determined under section 6 of Act 9 of 1956, and in October, 1957, Rs. 14, 70, 293, towards acquisition compensation. An additional sum of Rs. 1, 61, 318 was also received as acquisition compensation by the assessee in October, 1958, thus in all Rs. 16, 31, 611. In response to a notice under section 22(2) of the Income-tax Act, the assessee filed a return showing "nil" income. But in Section D of the return, the assessee showed these amounts. The Income-tax Officer found that the business income of the assessee for the period January 1, 1956, to January 18, 1956, worked out to Rs. 42, 257 and the proportionate tax deducted to Rs. 22, 091. He also considered that the sum of Rs. 63, 034 was chargeable to tax as from other sources under section 12. As regards acquisition compensation, he was of the view that the fair market value of the assets of the assessee as on January 1, 1954, should be determined at Rs. 10, 81, 688 and that on that basis the capital gains liable to tax amounted to Rs. 5, 49, 923. The Appellate Assistant Commissioner of Income-tax concurred with the Income-tax Officer and dismissed the assessees appeal. But, the Tribunal, on a further appeal by the assessee, directed certain modifications. In its opinion, the period for which the business income of the assessee should be computed was from January 1, 1956, to August 31, 1956, and the proportionate income on the head of "business" would, therefore, come to Rs. 5, 63, 429 and the proportionate tax deducted to Rs. 2, 34, 543. The sum of Rs. 63, 034, according to the Tribunal, would fall within section 10(7) of the Act and not under section 12. The Tribunal also held that the fair market value as computed by the assessee at Rs. 16, 54, 969 was correct and it followed that there was no capital gain made by the assessee. We may mention that the accounting period relevant to the assessment year is January 1, 1956, to December 31, 1956 In Tax Case No. 141 of 1963, the questions raised are

"1. Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the profits relating to the period January 19, 1956, to August 31, 1956, computed under section 10(7) of the Act should be assessed in the hands of the assessee-company and the credit for tax paid during that period given to it and

2. Whether, on the facts and in the circumstances of the case, the interim compensation of Rs. 63, 034 is assessable in the hands of the company under section 12 of the Income-tax Act " *

The first question depends on whether the assessee carried on the controlled business during the period January 19, 1956, to August 31, 1956. The departmental view, as we already indicated, was that it did not so carry on. The Tribunal, however, opined that, having regard to the provisions of the Ordinance and Act 9 of 1956, the assessee continued to carry on business in life insurance until its assets were transferred to the Life Insurance Corporation with effect from September 1, 1956. In our opinion, the view of the Tribunal is correct

The Ordinance was intended to provide for the taking over, in the public interest, of the management of life insurance business pending nationalisation of such business. The Ordinance was necessitated because, pending such nationalisation, adequate steps were required to be taken to protect the interests of policyholders. This Ordinance by sub-section (2) of section 2 defines "controlled business" which, broadly speaking, means the life insurance business. Among the other expressions defined by the section are "custodian" and "insurer". " Insurer " is said to mean an insurer, as defined in the Insurance Act, who carries on life insurance business in India. By section 3, on and from the appointed day, which was January 19, 1956, the management of the controlled business of all insurers vested in the Central Government. Pending the appointment of a custo. dian for the controlled business of any insurer, the section directed that the persons in charge of the management of such business immediately before the appointed day should, on and from the appointed day, be in charge of the management of the business for and on behalf of the Central Government; and the controlled business of the insurer should be carried on by them subject to other provisions in the section. Sub-section (3) states that no insurer should, without the previous approval of the person specified by the Central Government in this behalf in respect of that insurer, do certain acts which were specified. It is of significance in the context of this case to note that clause (g) of sub-section (3) presupposes that an insurer may enter, even after the appointed date, into contracts relating to the issue of new policies of life insurance. Section 4(1) confers power on the Central Government to appoint a custodian, and by sub-section (2) it is provided that on such appointment, all persons in charge of the management of the controlled business of the insurer shall cease to be in charge of such management. Sub-section (3) of section 4 reserves to the Central Government in effect the power to give instructions to the custodian as to the manner in which he shall conduct the management of the controlled business of the insurer or in relation to any matter arising in the course of such management. Power is given to the custodian under section 5 in relation to the controlled business of an insurer to exercise all or any of the powers which the Controller of Insurance or an administrator appointed under section 52A of the Insurance Act may exercise. Then follows section 6 which provides for compensation to be paid for the management of the controlled business vested in the Central Government and the mode of its computation. This Ordinance, as we mentioned, was replaced by Act 9 of 1956, the provisions of which, but for slight changes, are substantially the same as those of the OrdinanceWith reference to these provisions, the contention of Mr. Balasubrahmanyan, for the revenue, is that on and from the appointed day, the management of the controlled business having vested in the Central Government, the controlled business of the insurer was no longer carried on by the insurer. Learned counsel recognises that the effect of the Ordinance and the Act, which replaced it, was not to vest the assets of the insurer in the Central Government, but he says that the taking over of the management of the insurer is analogous to requisition of property in which no transfer of property is involved, but in which possession and the actual control of the property are taken. He adds that for purposes of section 10 all that is necessary is that the person sought to be charged should be one that carried on the business and that it is not necessary that he should also be the owner of the business. On that question, there is no difficulty. A comparison between section 9 and section 10 of the Income-tax Act brings out the distinction that whereas, for purposes of the former section, the person charged or sought to be charged must be the owner of the property, under section 10(1) it will suffice if the assessee carried on the business in the previous year. In Executors of the Estate of Dubash v. Commissioner of Income-tax, which was concerned mainly with sections 25(4) and 26(2) of the Income-tax Act, the Supreme Court in the course of its judgment observed

"There seems to be no warrant, therefore, to insist on a transfer of ownership as the decisive test of succession within the meaning of section 26(2) or section 25(4) any more than for insisting on the ownership of the business by the person carrying on a business, for the purposes of section 10. I do not, of course, wish to be understood to say that a clerk or an agent in management of a business would be an assessee liable to be taxed in respect of its profits and gains. Some kind of title there must be, though not of a beneficial character." *

Saifuddin Alimohamed. v. Commissioner of Income-tax is more directly in point. There, the Bombay High Court held

Under section 10 of the Indian Income-tax Act, 1922, it is the person who carries on the business who is liable to pay tax. What is emphasised is not the ownership of the business but the fact of the business being carried on by the assessee.

"The same High Court reiterated that view in Commissioner of Income-tax v. Balwantrai Jethalal Vaidya though in a slightly different context. It said" *

It is true that in that case (Saifuddin Alimohamed v. Commissioner of Income-tax ) we did say that a person liable to pay tax on business income was a person who carried on business; and we pointed out the difference in language used in section 10 and section 9. Whereas section 9 imposed the tax upon the owner of a property, section 10 imposed the tax upon a person who carried on business.

"There can, therefore, be no doubt that in order to attract section 10, ownership of the assets or business is not a requisite and it will suffice if the assessee as of right factually carried on the business in the previous year the income from which is in question

But, the point is whether, having regard to the provisions of the Ordinance and Act 9 of 1956, it can be said that the insurer continued to carry on the controlled business from January 19, 1956, to August 31, 1956. On that question, as we read the Ordinance and the Act, we are of the view that there is no warrant in them to suppose that, by reason of their provisions, the insurer ceased to carry on the controlled business subsequent to January 19, 1956. The effect of the Ordinance and the Act, in our view, was only to freeze the management of the insurer and take it over as distinct from the controlled business itself. In other words, in effect, what the Ordinance and the Act did was to substitute the board of management of the insurer in relation to the controlled business by the Central Government. Mere replacing or substitution of the management of the insurer does not ipso facto operate as a deprivation of the carrying on of the controlled business from the insurer. The whole purpose of the Ordinance and the Act, as it seems to us, was to protect the interests of the policyholders in view of the impending nationalisation. Lest the assets of the insurer in relation to the controlled business were frittered away or dealt with in a manner prejudicial to the interests of the policy holders, the legislature thought fit to freeze the management so that effective control over the manner in which the controlled business is carried on and the assets of such insurer might be secured. In fact, there are indications in the Ordinance and the Act that the insurer, even after its management is taken over, was to continue to transact and enter into contracts in the issue of new life insurance policies. Sub-section (3) of section 3, which places certain restraints on the insurer with effect from January 19, 1956, does not anywhere state that on and from the appointed day, the insurer should cease to carry on its controlled business. Section 6 of the Ordinance, in fact, throws light upon the effect of section 3, for it only provided for compensation in respect of taking over of the management of the controlled business. Even after the appointed day, the business of the insurer was to be transacted as before in the name of the insurer and on its behalf. The only change that was brought over by the Ordinance and the Act was that, instead of the old management, the Central Government or the custodian, when one is appointed, would step into its shoes, but the business of the insurer was left unaffected. It could carry on the controlled business as before until, of course, the assets of the insurer including the controlled business stood transferred with effect from September 1, 1956But it is contended for the revenue that when section 3(1) stated that, pending the appointment of a custodian for the controlled business of an insurer, the person in charge of the management of such business should on and from the appointed day, be in charge of the management for and on behalf of the Central Government, and the" *

controlled business of the insuser shall be carried on by them subject to the provisions contained in sub-sections (3) and (5)

", the intention is manifest that the controlled business on and from the appointed day would be carried on by those in charge of the management for and on behalf of the Central Government, and it follows, therefore, that on and from the appointed day, the controlled business was carried on by the Central Government and not the insurer. We are unable to accept this view of section 3(1). The first part of sub-section (1) indicates that the management of the controlled business of an insurer on and from the appointed day vested in the Central Government. That is why the latter part of the sub-section says that those in charge of the management immediately before the appointed day should continue to carry on the management for and on behalf of the Central Government

That is not to say that the controlled business of the insurer is to be carried on for and on behalf of the Central Government. What is carried on for and on behalf of the Central Government from that date is the management and not the controlled business of the insurer. That construction receives support from the other provisions of the Ordinance and the Act. Take for instance the board of directors of an insurer in controlled business. Can it be said that because the board of directors in charge of the management effectively controls, directs and secures the affairs of the life insurance business of the insurer, such board of directors carries on the business of the insurer. Obviously, the person who carries on the business is the insurer and the board of directors only manages the business carried on by the insurer. That precisely is the position even after the appointed day with this difference that, instead of the erstwhile management, the Central Government and the custodian on his appointment comes into management. We are of the view, therefore, that the Tribunal was correct in its finding that the assessee carried on its business in life insurance until August 31, 1956. The first question in this reference is answered against the revenueOn the second question, the point is whether the sum of Rs. 63, 034 was rightly held by the Tribunal to fall within the purview of section 10(7) of the Act. That provision says that notwithstanding anything to the contrary contained in sections 10 and 12, among other sections, the profits and gains of any business of insurance and the tax payable thereon shall be computed in accordance with the rules contained in the Schedule to the Act. Rule 1 in the Schedule read with section 10(7) charges a person who carried on life insurance business in the previous year and provides for computation separately of the income from such business. Since we have held that the assessee carried on the controlled business even subsequent to January 19, 1956, and up to August 31, 1956, it follows that section 12 will stand eliminated and the provision that would be properly applicable would be section 10(7) and the Schedule mentioned in the sub-section. No question has been raised before us as to the character of the income, and the only question argued was whether section 10(7) or section 12 that would be applicable. We uphold the view of the Tribunal on this question and answer the same against the revenue

That takes us to Tax Case No. 142 of 1963, in which the questions are"

1. Whether the provisions of section 12B applied to the compulsory acquisition of controlled business of insurance by operation of law

2. Whether the transfer of the controlled business of the applicant company took place on January 19, 1956, or September 1, 1956, the appointed date

"The first question is really covered by Wilfred, Pereira Ltd. v. Commissioner of Income-tax in which a Division Bench of this court held that the word "transfer" in section 12B included both a transfer by act of parties and transfer by operation of law. We are of the same view, and the Tribunal rightly applied section 12BOn the second question, the Life Insurance Corporation Act, 1956, is quite clear. We have already held that the effect of the Ordinance and the Act that substituted it was not to transfer the controlled business itself as from the appointed date to the Central Government. The transfer took place under the Life Insurance Corporation Act. Section 3(1) of this Act established a corporation with effect from the date specified by the Central Government by notification. The corporation in this provision was brought into being with effect from September 1, 1956. By section 7(1) of the Act, on the appointed day, that is when the corporation came into existence, all the assets and liabilities of the insurer appertaining to the controlled business stood transferred to and were vested in the corporation. Both the questions in Tax Case No. 142 of 1963, are, therefore, answered against the assessee

There remains Tax Case No. 84 of 1965, which relates to the mode of computation of fair market value for purposes of section 12B of the Income tax Act. The question referred to us reads" *

Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the method adopted by the Income-tax Officer for computing the market value of the business as on January 1, 1954, was correct

"The Income-tax Officer calculated the fair market value on the same basis as adopted for computing the compensation in accordance with the First Schedule to the Life Insurance Corporation Act, 1956. The formula adopted by the Life Insurance Corporation has been briefly and correctly summarized by the Income-tax Officer as follows" *

(i) Firstly, the actuarial valuation surplus of the previous 5 years (1950 to 1954) is noted ;

(ii) Secondly, 5% of each years surplus is attributed as the shareholders surplus although, according to section 49 of the Insurance Act, the company can credit a higher percentage of the surplus to the shareholders credit and in the case of this company a higher percentage has actually been credited as shareholders surplus ;(iii) Thirdly, the average of the shareholders surplus for the 5 years is taken ;

(iv) Fourthly, this average is multiplied by 20 times ; and

(v) Lastly, this figure is multiplied by a figure which represents the proportion that the average business in force from the calendar years 1950 to 1955 bears to the average business in force from the calendar years 1950 to 1954 comprised in the period between the date on which the actual investigation immediately preceding the earliest of the relevant actuarial investigation was made and the date as at which the last of such investigation was made (In the instant case, it is the average business in force during the calendar years 1950 to 1954).

"This scheme is to be found in the rules contained in the First Schedule to the Life Insurance Corporation Act. Explanation 2 to paragraph 1 in Part A of the First Schedule to the Act reads

For the purposes of paragraph 1, where an insurer has allocated to shareholders more than 5 per cent. of any such surplus as is referred to therein, the insurer shall be deemed to have allocated only 5 per cent. of the surplus and where an insurer has not allocated any such surplus to shareholders or has allocated to shareholders less than 31 per cent. of any such surplus, the insurer shall be deemed to have allocated 3 1/2 per cent. of the surplus." *

It is with reference to this Explanation, the Income-tax Officer considered that although the surplus allotted to shareholders amounted actually to 7 1/2 per cent. in this case, it should be limited to 5 per cent. on the principle of the above Explanation. It is this view that is pressed by the revenue for our acceptance. The Tribunal held that the 5 per cent. limited by the Explanation was only for purposes of computation of compensation for acquisition of assets under the Life Insurance Corporation Act and the principle did not necessarily apply to a determination of a fair market value for purposes of section 12B. Section 12B(2), proviso 3, is the provision that was applied by the revenue, and there is no dispute as to its application to the facts. But the controversy, as we indicated, is confined to the application of the principle of the second Explanation we referred to, relating to the percentage of the surplus, to a determination of the fair market value for purposes of computing capital gains. In the statement of the case, it was pointed out that the average total surplus allocated per annum to the shareholders over a period of six years during the periods 1947 to 1949 and 1950 to 1952 was Rs. 78, 266.50P. Under the proviso to section 49 of the Insurance Act, 1956, the share of any surplus allocated to shareholders shall not exceed 7 1/2 per cent. of the surplus. The Income-tax Officer worked out the fair market value by applying this formula51, 155 x 20 x 1.057265 = Rs. 10, 81, 688

But the assessee worked out the fair market value thus

78, 266.50 x 20 x 1.057265 = Rs. 16, 54, 969

The figure 20 and the quotient applied both by the revenue as also by the assessee are on the basis of the First Schedule to the Life Insurance Corporation Act. But the first figure in the two formulae depended on whether the surplus allocated to the shareholders should be limited to 5 per cent., while in fact the surplus worked out to 7 1/2 per cent. as permitted by the provisions of the Insurance Act. While the revenue says that 5 per cent. is reasonable, the assessee asserts that when the surplus worked out to 7 1/2 per cent., it is not unreasonable to take it as the basis for determination of the fair market value. In a matter like that, there is no particular rule or principle that should invariably apply. What is necessary is to find the market value and the market value determined should be a fair market value. What is fair and what is not fair will depend on particular facts and circumstances. The Tribunal, in our view, rightly considered that when the Insurance Act itself permitted allocation of surplus up to 7 1/2 per cent. to shareholders, there is no reason why the actual percentage of surplus that was paid over during the relevant period to the shareholders should not be adopted in computing the fair market value. This is what the Tribunal stated

"We are of the opinion that whatever may be the relevance of limiting to 5 per cent. in the context of computation of the value of the business for the purpose of payment of compensation, that cannot apply to the arriving at the market value under the provisions of section 12B for arriving at the capital gains, for, section 49 of the Insurance Act, the provisions of which have been applied by the Income-tax Officer in this very case for arriving at the income of Rs, 42, 257 for the first 18 days of the year 1956, allows the assessee to pay the surplus up to 7.49 per cent. to the shareholders and, so long as this provision is not infringed and, in pursuance thereof, the assessee had credited Rs. 78, 266.50 P. long before there was any question of any transfer, this computation of market value cannot be questioned. We, therefore, hold that the calculation of the Income-tax Officer by which he arrived at Rs. 10, 81, 688 as being the value of the business on the basis that Rs. 3, 06, 930 was the share of surplus payable to the shareholders is wrong and that the market value must be placed at Rs. 16, 54, 969." *

We are unable to hold that, in taking that view, the Tribunal was unreasonable. We answer the question in this reference against the revenue. The assessee is entitled to its costs. Counsels fee Rs. 250, one set.