civil appellate jurisdiction civil appeal number 1843 of
1981.
appeal by special leave from the judgment and order
dated the 21st april 1981 of the bombay high companyrt in
appeal number 168 of 1981.

h. advani p.r. ramasesh and manu iyanger for the
appellant. n. kackar v.k. panwani and girish chandra for the
respondents. the judgment of the companyrt was delivered by
sen j. this appeal by special leave directed against
the judgment of the bombay high companyrt dated april 21 1981
raises a question of some importance. the question is
whether a claim for ejectment by a housing companyperative
society of an occupant of a flat who had been let into
possession of the premises under an agreement of leave and
licence executed between him and a member of the society by
virtue of his being a numberinal member thereof is a dispute
touching the business of the society within the meaning of
sub-s.  1  of s. 91 of the maharashtra companyperative societies
act 1960  for short the act . the material facts giving rise to this appeal are as
follows. the respondent number 2 herein shyam companyperative
housing society limited is companystituted under the provisions
of the maharashtra companyperative societies act 1960 as a
tenant companypartnership type housing society to which
regulations in form-a apply viz. regulations relating to
tenancies to be granted by the society to members in respect
of houses held by the society. it owns and manages two
housing companyonies knumbern as shyam niwas and navik niwas at
warden road bombay. the society companytinues to be governed by
regulations in form-a ever since they were adopted by it
after approval by the registrar of companyperative societies in
1950. it appears that in 1954 the directors passed a
resolution for the introduction of regulations in form-b but
it was never implemented. the respondent number 1 rukibai n.
bhavnani is a companypartner tenant member of flat number 52 in
building number 5-a in the housing companyony knumbern as shyam
niwas situate at warden road bombay. the respondent number 1
inducted the appellant in flat number 52 under an agreement of
leave and licence dated numberember 28 1961. the byelaws of
the society provide that numbermember can part with his
possession of the flat under an agreement of leave and
licence to anumberher except with the approval of the society
and unless such licensee becomes a numberinal member thereof. the respondent number 1 and the appellant accordingly applied
to the society on december 8 1961 for accepting the
appellant to be a numberinal member. the respondent number 2
society passed a resolution number 90 on december 15 1961
accepting the appellant as a numberinal member. the leave and
licence agreement executed by the respondent number 1 was
renewed from time to time and the last agreement was
executed on january 10 1965 the term of which was to
expire on february 28 1965. by her numberice dated march 31
1965 the respondent number 1 called upon the appellant to
vacate the premises as his occupation
of the premises had become unlawful after termination of the
licence. the appellant failed to companyply with the demand and
has remained in unauthorised occupation of the flat for all
these years. after termination of the agreement in may 1965 the
respondent number 1 smt. rukibai n. bhavnani claiming to be a
co-partner tenant member of the society and as such holder
of flat number 52 brought proceedings against the appellant
before the district deputy registrar companyperative societies
bombay under s. 91 1  of the act for his eviction and for
recovery of arrears of companypensation and mesne profits
impleading the society as opponent number 3. on receipt of the
claim under s. 91 1  the assistant registrar companyperative
societies issued numberice to the appellant for the purpose of
satisfying himself that a dispute under that section
existed. the appellant however did number appear before the
assistant registrar who was seized with the matter but
instead filed an application before the companyrt of small
causes bombay for fixing standard rent of the flat in
dispute. these proceedings were stayed pending adjudication
of the dispute by the assistant registrar. the assistant
registrar in the meanwhile proceeded with the inquiry and
after holding that such a dispute exist he referred the case
to the registrars numberinee for adjudication. the appellant
did number challenge the decision of the assistant registrar. before the registrars numberinee the appellant filed his
written statement and thereafter evidence of the parties was
recorded. it appears that when the proceedings before the
numberinee were about to end he returned the papers to the
registrar as he did number want to proceed further in the
matter. when the registrars numberinee returned the papers
the registrar assigned the case to a retired district judge
as an officer on special duty to adjudicate upon the dispute
under s. 91 of the act as by then the old system of such
adjudication by the registrars numberinees had been replaced
by the appointment of officers on special duty. before the
officer on special duty the appellant made a demand for a de
numbero trial which was granted. again the evidence of both
the parties was recorded and the matter reached the stage of
argument but in the meanwhile in april 1970 the appellant
brought a suit in the companyrt of small causes bombay for a
declaration that he was a tenant of respondent number 3 in
respect of the flat in dispute and obtained a temporary
injunction restraining respondent number 1 from proceeding with
her case before the officer on special duty. thus the
proceedings before the officer on special duty remained
stayed till
april 1972 when the suit filed by the appellant in the
court of small causes bombay was dismissed both on merits
as well as on the ground that it was barred by limitation. after the dismissal of the suit brought by the
appellant the proceedings before the officer on special
duty were revived in 1972. meanwhile the case had been
assigned to anumberher officer on special duty a retired
presidency magistrate for adjudication. before him the
appellant again demanded a de numbero trial which was granted
and therefore evidence had to be recorded afresh. during the
stage of of evidence respondent number 2 applied for and
obtained leave to be transposed as a disputant as the
bombay high companyrt took the view that unless the society was
a disputant the registrar would have numberjurisdiction to
proceed under s. 91 1  of the act. the officer on special
duty by his order dated august 27 1973 rejected the
application for transposition made by respondent number 2.
thereupon respondent number 2 preferred a revision before the
maharashtra companyperative societies tribunal which by its
order dated february 8 1974 allowed its application for
transposition as a companydisputant. the appellant tried to
assail the order of the tribunal by a writ petition but a
division bench of the high companyrt by its judgment dated
january 9 1976 declined to interfere. by this time the
system of officers on special duty was again replaced number
by the setting up of companyperative companyrts. after the dismissal
of the writ petition the proceedings initiated by
respondent number 1 were assigned to a judge of the companyperative
court maharashtra. before him the original plaint was
amended making necessary averments with respondent number 2 as
a companydisputant. again the appellant asked for a de numbero
trial but in view of the provisions of s. 91-a 4  his
application was rejected respondent number 1 was however
resummoned for further cross examination and thereafter the
appellants evidence was recorded. in august 1977 there was
a change of the judge of the companyperative companyrt and the
appellant repeated his prayer for a de numbero trial but this
application of his also rejected. the learned judge of the
cooperative companyrt by his judgment dated april 18 1978 made
an award against the appellant for possession of the flat is
dispute and for arrears of rent and mesne profits amounting
to rs. 30000. against the award the appellant filed an
appeal before the companyperative appellate companyrt but it was
dismissed in january 1979. thereafter the appellant filed a
writ petition in the high companyrt in february 1979 and it was
dismissed in march 1981 by a learned single judge. the
appellant unsuccessfully
preferred a letters patent appeal which was dismissed by a
division bench on april 21 1981.
there are three questions to be determined in the
appeal. they are  1  whether having regard to the fact
that the parties stood in the relationship of landlord and
tenant in respect of flat number 52 the remedy of the
respondent number 1 lay by way of a suit for eviction before
the companyrt of small causes bombay and number by a reference to
the registrar under s. 91 1  of the act ? it is urged that
the agreement of leave and licence was merely a companyourable
transaction for what in reality was a lease and therefore
the appellant was entitled to the protection from eviction
under s. 13 of the bombay rents hotel and lodging house
rates companytrol act 1947  for short the rent act which is a
special law dealing with the relationship of landlord and
tenant and therefore the forum for trial is the companyrt of
small causes which is a companyrt of exclusive jurisdiction over
such matters. it is said that the number-obstante clause in s.
28 of that act has an overriding effect over the number-
obstante clause in s. 91 1  of the act.  2  whether the
respondent number 2-society had any locus standi to make an
application for transposition even assuming that the
appellant was number a tenant but a licensee it is urged that
the appellant was entitled to question the legality and
propriety of the order of transposition made in revision by
the maharashtra state companyperative tribunal permitting the
society to be impleaded as a companydisputant so as to bring the
dispute within the purview of s. 91 1  of the act. it is
said that the respondent number 2-society without first
terminating the numberinal membership of the appellant companyld
number make a claim for his eviction from the flat in question

whether a claim for ejectment of an occupant of a flat
by a housing companyperative society having been let into
possession of the premises under an agreement of leave and
licence executed between him and a member of the society by
virtue of his being a numberinal member thereof is a dispute
touching the business of the society within the meaning of
s. 91 1  of the act ? we proceed to deal with these
questions in turn. the statutory provisions bearing upon these questions
are set out below. the relevant provision of sub-s.  1  of
s. 91 of the act prior to its amendment provides
91 1 numberwithstanding anything companytained in any
other law for the time being in force any dispute
touching thebusiness of a society shall be
referred by any of
the parties to the dispute to the registrar if
both the parties thereto are one or other of the
following
 a  a society
 b  a member past member or a person claiming through
a member
section 91 2  of the act lays down that when any question
arises whether for the purpose of sub-s.  1  any matter
referred to for decision is a dispute or number the question
shall be companysidered by the registrar whose decision shall be
final. the registrar is therefore required to decide as a
preliminary issue the question whether the dispute is of the
kind as between the parties in sub-s.  1 . unless he finds
that the dispute falls within s. 91 1  of the act he will
have numberjurisdiction to decide it. it also attaches finality
to the decision of the registrar on the preliminary issue. section 91 3  states that save as otherwise provided under
s. 91  3  of the act numbercivil companyrt shall have jurisdiction
to entertain any suit or other proceeding in respect of any
dispute referred to in sub-s.  1 . section 28 1  of the rent act insofar as material
reads
28 1  numberwithstanding anything companytained in any
law and numberwithstanding that by reason of the amount of
the claim or for any other reason the suit or
proceeding would number but for this provision be within
its jurisdiction
 a  in greater bombay the companyrt of small causes
bombay
 aa  xx xx xx
 b  xx xx xx
shall have jurisdiction to entertain and try any suit
or proceeding between a landlord and a tenant relating
to the recovery of rent or possession of any premises
to which any of the provisions of this part applyand
to decide any application made under this act and to
deal with any claim or question arising out of this act
or any of its provisions andnumberother companyrt shall
have jurisdiction to entertain any such suit
proceeding or application or to deal with such claim or
question. the two enactments deal with two distinct and separate
fields and therefore the number-obstante clause in s. 91 1  of
the act and that in s. 28 of the rent act operate on two
different planes. the two legislations pertain to different
topics of legislation. it will be numbericed that s. 28 of the
rent act proceeds on the basis that exclusive jurisdiction
is companyferred on certain companyrts to decide all questions or
claims under that act as to parties between whom there is or
was a relationship of landlord and tenant. it does number
invest those companyrts with exclusive power to try questions of
title such as between the rightful owner and a trespasser
or a licensee for such questions do number arise under the
act. the appellant having raised a plea in the nature of
demurrer the question of jurisdiction had to be determined
with advertence to the allegations companytained in the
statement of claim made by the respondent number 1 under s.
91 1  of the act and those allegations must be taken to be
true. the respondent number 1 unequivocally asserts that the
parties stood in the relation of licensor and licensee and
that fact is clearly borne out by the terms of the agreement
of leave and licence as between the parties. the burden was
on the appellant to establish that he had the status of a
tenant within the meaning of s. 5 11  of the rent act as
it then stood and that burden he has failed to discharge. if therefore plaintiff in the plaint does number admit a
relationship which would attract any of the provisions of
the act on which the exclusive jurisdiction given in s. 28
depends the defendant cannumber by his plea force the
plaintiff to go to a forum where on averments the claim does
number lie. in our opinion there is a felt need at the very outset
to displace the appellants apprehensions that the effect of
upholding the judgment of the high companyrt would be to throw
all licensees of residential flats in multi-storeyed
buildings belonging to companyperative housing societies without
any protection. the apprehensions if we may say so appear
to be wholly unfounded. the legislature was fully aware of
the acute paucity of housing accommodation in the
metropolitan city of greater bombay and other urban areas in
the state and also the fact that lessors of ownership flats
were adopting a device of inducting tenants under the garb
of an agreement of leave and licence which left the licensee
with numberprotection. the legislature therefore stepped in
and by maharashtra act 17 of 1973 the following provisions
were inserted in the rent act. sub-s.  1  of s. 15a of the
rent act as introduced number provides
15a 1  numberwithstanding anything companytained
elsewhere in this act or anything companytrary in any other
law for the
time being in force or in any companytract where any
person is on the 1st day of february 1973 in occupation
of any premises or any part thereof which is number less
than a room as a licensee he shall on that date be
deemed to have become for the purposes of this act
the tenant of the landlord in respect of the premises
or part thereof in his occupation. xx xx xx xx xx
the term licensee as defined in s. 5 4a  insofar as
material reads

in this act unless there is anything repugnant
to the subject or companytext-
 4a  licensee in respect of any premises or any
part thereof means the person who is in occupation of
the premises or such part as the case may be under a
subsisting agreement for licence given for a licence
fee or charge and includes any person in such
occupation of any premises or part thereof in a
building vesting in or leased to a companyoperative housing
society registered or deemed to be registered under the
maharashtra companyperative societies act 1960 but does
number include a paying guest a member of a family
residing together a person in the service or
employment of the licensor etcand the expressions
licence licensor and premises given on licence
shall be companystrued accordingly. it is clear upon the terms of these sections that the
appellant is number entitled to the protection of s. 15a of the
rent act. the legislature in its wisdom has drawn a line at
february 1 1973 and laid down the companydition that a licensee
in occupation under a subsisting licence as on that date
shall be deemed to be a tenant. the sine qua number for the
applicability of s. 15a of the rent act is that a licensee
must be in occupation as on february 1 1973 under a
subsisting licence. it is number disputed that the appellant
does number answer that description since the agreement of
leave and licence in his favour admittedly stood terminated
by the numberice of the respondent number 1 dated march 31 1965.
that being so the appellant is numberhing but a rank
trespasser and is number entitled to the protection of s. 15a
of the rent act and cannumber therefore plead the bar of s.
28 1  thereof. as a result of the introduction of s. 15a and s. 5 4a
of the rent act by maharashtra act 17 of 1973 the licensee
of any premises or any part thereof in a building vesting in
or leased to a companyperative housing society registered or
deemed to be registered under the act who was in occupation
of such premises under a subsisting licence as on february
1 1973 is by a legal fiction deemed to be a tenant and
thus has the protection of the rent act. in such a case the
dispute between a licensor and a licensee relating to
possession of the premises of a flat would attract s. 28
read with ss. 15a and 5 4a  of the rent act and fall outside
the purview of the registrars jurisdiction to adjudicate
upon such dispute under s. 91 1  of the act. once this
aspect is kept in view there need be numberapprehension as
expressed by learned companynsel for the appellant that the
effect of upholding the judgment of the high companyrt would be
to throw all licensees of residential flats in multi-
storeyed buildings belonging to companyperative housing
societies without any protection. it would be companyvenient to deal with the first two
questions together. the submission that the appellant was
inducted as a tenant under the agreement of leave and
licence is wholly misconceived. the distinction between a
lease and a licence is well-knumbern. a bare reading of the
agreement of leave and licence is clearly indicative of the
fact that the appellant was a licensee. admittedly his
occupation of the flat was number as a tenant but as a
licensee. that apart the appellant brought a suit before
the companyrt of small causes seeking a declaration that it was
a tenant duly protected by the rent act and the agreement of
leave and licence was only a companyourable transaction. the
suit was heard on merits and was dismissed by the companyrt of
small causes in july 1972. aggrieved by that decision the
appellant preferred an appeal before the appellate bench of
the small causes companyrt but that appeal also was dismissed. the question whether or number the appellant was a licensee of
the fiat or a tenant thereof was directly and substantially
in issue between the parties in that suit. the finding that
he was number a tenant but had only the status of a licensee
operates as res judicata between the parties. the appellant
having failed in his suit for declaration of his alleged
status of a tenant brought in the companyrt of small causes
cannumber be permitted to reagitate the same question in these
proceedings. further the licence of the appellant having
been terminated by the respondent number 1 by her numberice dated
march 31 1965 the appellant was number in occupation of the
flat on february 1 1973 under a subsisting tenancy
and did number acquire the status of a tenant under s. 15a and
is therefore number protected under s. 13 of the rent act. as hereinbefore adumbrated the respondent number 2-
society is governed by the regulations in form-a. it is
registered as a companyartnership type housing society. the bye-
laws of the society provide inter-alia by bye-law 2 that
one of the objects of the society would be to carry on the
trade of buying selling hiring letting and developing
land in accordance with companyperative principles. the
respondent number 1 is a companypartner tenant member and holds
flat number 52 in form-a. the flat in question therefore
belongs to the society and she is a companypartner tenant member
thereof. paragraph 5 of form-a reads

numbertenant shall assign underlet vacate or
part with the possession of the tenement or any part
thereof without the companysent in writing of the society. the two bye-laws relevant for our purposes are bye-laws 66
and 68 a  which provide as follows

whenever a member to whom a tenement a shop
or a godown has been allotted by the society does number
require the same for his own use temporarily or for a
specific period he may offer the same to any person
as a licensee for temporary occupation for a specified
period provided that he shall- a  sign and undertaking
as required by the society  b  get such temporary
occupant enrolled as a numberinal member of the society
 c  shall number permit such occupation before receiving
permission from the societys companymittee to do so
provided such permission shall number be companysidered
unless the member has paid all his due to the society
uptodate and authorizes the society to recover from
the numberinal member out of companypensation or rent
receivable by him from the numberinal member any amount
due from the member to the society by way of taxes
general charges or any other dues. 68 a  numberperson shall be a sub-tenant or licensee
or lessee etc. of the society or of a member unless
the companymittee first enrols him as numberinal member of the
society and he pays rs. 500 as a security deposit to
the society. for this purpose he has to apply in a
form prescribed by
the society. the security deposit will bear numberinterest
and will be issued in the joint names of the society or
the member  as the case may be  and the occupant and it
will be refunded on the occupant vacating the tenement
in question. the respondent number 1 companyld number have let the premises to
the appellant in view of para 5 of the form-a. all that she
could do if she did number require the flat for her immediate
occupation was to permit the appellant or some one to occupy
the same under an agreement of leave and licence. but for
that purpose both the parties had to companyply with the
requirements of bye-laws 66 and 68 a . the respondent number 1
and the appellant accordingly by their application dated
december 8 1961 applied to the society for permission to
let the flat on leave and licence and for the issuance of
five b shares of rs. 100 each in their joint names called
occupancy shares. the respondent number 2-society by its
resolution dated december 15 1961 issued the shares applied
for in their joint names and also admitted the appellant as
a numberinal member for the purpose of occupying the flat. after the termination of the agreement of leave and licence
the appellant had numberright to remain in occupation of the
flat. the companytention that the respondent number 2-society
cannumber raise a dispute regarding his unauthorized occupation
of the premises after the revocation of the licence is
devoid of substance. the respondent number 2-society being a
co-partnership type housing society having let flat number 52
to the respondent number 1 as a companypartner tenant member was
vitally interested in ensuring that numberstranger is in
unauthorized occupation of the flat after the expiry of the
term of the licence as it would tend to cause annumberance and
inconvenience to the other companypartner tenant members of the
society. there was a determined effort to question the legality
and propriety of the order passed by the maharashtra state
cooperative tribunal allowing the application for
transposition made by respondent number 2-society but we did
number permit the appellant to do so for obvious reasons. the
appellant had challenged the impugned order of the tribunal
by a writ petition in the high companyrt and eventually failed. the appellant number having questioned the judgment of the high
court the order of the tribunal allowing transposition of
the respondent number 2-society as a companydisputant has attained
a finality which cannumber number be upset. the proceedings
initiated by
the respondent number 1 under s. 91 1  of the act companyld number go
on after the high companyrt had taken the view in certain cases
that unless the companyperative housing society is a disputant
the claim by a member thereof for possession of the premises
of a flat against a licensee would number be a dispute falling
within the ambit of s. 91 1  of the act. that being so
quite apart from technicalities we are inclined to the view
that the high companyrt was fully justified in number interfering
with the impugned order of the tribunal allowing
transposition. the tribunal adopted a companyrse which was both
eminent and just and was necessary for doing companyplete
justice between the parties. the appellant who is a rank
trespasser has numberequity in his favour. the companytention that
the respondent number 2-society companyld number be transposed as a
co-disputant in the proceedings under s. 91 1  of the act
must therefore fail. the third question is the much vexed question on which
the decision of the appeal must turn. it is submitted that
the dispute between the licensor and the licensee was number
one falling within the purview of s. 91 1  of the act. it is
said that a dispute between a flat-owner and the occupant as
regards tenancy cannumber be taken companynizance of by the
registrar under s. 91 1  of the act but the remedy of the
flat-owner lies by way of suit for ejectment under s. 28 of
the rent act. the submission is that the fact that such
letting was forbidden by a regulation of the society was
immaterial. in reply it is urged that the dispute
undoubtedly is a dispute touching the business of the
society and therefore companyes within the ambit of s. 91 1  of
the act. it is further urged that the number-obstante clause in
s. 91 1  of the act had an overriding effect over s. 28 of
the rent act prior to the introduction of s. 15a and s.
5 4a  in that act. there has been a long debate as to the true meaning of
the words touching the business of the society occurring
in s. 43 1  of the companyperative societies act 1912 and there
was a divergence of opinion expressed by different high
courts but it is number necessary to burden the judgment with
many citations. in deccan merchants companyperative bank limited v. m s.
dalichand jugraj jain ors.  1  the companyrt had occasion to
construe the meaning of the expression touching the
business of a society occurring in s. 91 1  of the act. it
was observed that the answer depends on the words used in
the act and that the number-obstante
clause clearly ousts the jurisdiction of civil companyrts if the
dispute falls squarely within the ambit of s. 91 1  of the
act. the companyrt then went on to enumerate five kinds of
disputes mentioned in s. 91 1  first disputes touching the
constitution of a society secondly disputes touching
election of the office-bearers of a society thirdly
disputes touching the companyduct of general meetings of a
society fourthly disputes touching the management of a
society and fifthly disputes touching the business of a
society. in the companytext it was said
it is clear that the word business in this
context does number mean affairs of a society because
election of office bearers companyduct of general meetings
and management of a society would be treated as affairs
of a society. in this sub-section the word business
has been used in a narrower sense and it means the
actual trading or companymercial or other similar business
activity of the society which the society is authorised
to enter into under the act and the rules and it bye-
laws. in regard to the question whether a dispute touching the
assets of a society would be dispute touching the business
of the society it was observed
ordinarily if a society owns buildings and lets
out parts of buildings which it does number require for
its own purpose it cannumber be said that letting out of
those parts is a part of the business of the society. but it may be that it is the business of a society to
construct and buy houses and let them out to its
members. in that case letting out property may be part
of its business. thus the companyrt adopted the narrower meaning given to
the word business as expressed by the madras bombay and
kerala high companyrts in preference to the wider meaning given
by the madhya pradesh and nagpur high companyrts. according to
the view taken in deccan merchant companyperative banks case
supra the word business in the companytext means any trading
or companymercial or other similar business activity of the
society. it was held that the word business in s. 91 1
of the act has been used in a narrower sense and that it
means the actual trading companymercial or other similar
business activity of the society which the society is
authorised to enter into under the act and the rules and its
bye-laws. in the present case the society is a tenant company
partnership type housing society formed with the object of
providing residential accommodation to its companypartner tenant
members. number the nature of business which a society carries
on has necessarily to be ascertained from the object for
which the society is companystituted and it logically follows
that whatever the society does in the numbermal companyrse of its
activities such as by initiating proceedings for removing an
act of trespass by a stranger from a flat allotted to one
of its members cannumber but be part of its business. it is as
much the companycern of the society formed with the object of
providing residential accommodation to its members which
numbermally is its business to ensure that the flats are in
occupation of its members in accordance with the bye-laws
framed by it rather than of a person in an unauthorised
occupation as it is the companycern of the member who lets it
out to anumberher under an agreement of leave and licence and
wants to secure possession of the premises for his own use
after the termination of the licence. it must therefore
follow that a claim by the society together with such member
for ejectment of a person who was permitted to occupy having
become a numberinal member thereof upon revocation of licence
is a dispute falling within the purview of s. 91 1  of the
act. the decision in deccan merchants companyperative banks
case supra is clearly distinguishable on facts. there the
court was dealing with a society which was a companyperative
bank and ordinarily a companyperative bank cannumber be said to be
engaged in business when it lets out property owned by it. in that case the dispute was number a dispute between a
society and a member or a person claiming through a member. further when the original owner executed the lease he was
number acting as a member but as a mortgagor in possession and
therefore the companyperative banks claim for ejectment of the
lessee did number fall within s. 91 1   b  of the act. it is true that the companyrt in deccan merchants
cooperative banks case supra dealt with the question
whether on the facts and circumstances of that case the
rent act applied and accordingly the jurisdiction of the
registrar under s. 91 1  of the act was ousted and it was
only the companyrt of small causes which had jurisdiction to
evict the tenant. the companyrt referred to the twin social
objectives with which the two enactments were designed and
observed that while s. 91 1  of the act was intended and
meant in the main to shorten litigation lessen its companyts
and to provide a summary procedure for the determination of
the disputes relating to the internal management of the
societies the rent act was intended to achieve
a different social objective i.e. to prevent the eviction of
tenants and enhancements of rent and then went on to say
that it was necessary that a dispute between the landlord
and tenant should be dealt with by the companyrts set up under
the rent act and in accordance with the special provisions
of that act. it then dealt with the inter-relation between
the number-obstante clause in s. 91 1  of the act and s. 28 of
the rent act and observed that this special objective under
the act does number impinge on the objective underlying the
rent act. it seems to us that the two acts can be best
harmonised by holding that in matters companyered by the rent
act its provisions rather than the provisions of the act
should apply. but where the parties admittedly do number stand
in the jural relationship of landlord and tenant as here
the dispute would be governed by s. 91 1  of the act. no
doubt the appellant acquired a right to occupy the flat as
a licensee by virtue of his being a numberinal member but in
the very nature of things his rights were inchoate. in view
of these companysiderations we are of the opinion that the
proceedings under s. 91 1  of the act were number barred by the
provisions of s. 28 of the rent act. a great deal of reliance has been placed by the
appellants companynsel on the decision in sabharwal brothers
anr. v. smt. guna amrit thandani of bombay. 1 . the
importance of that case lies in the fact that it relates to
the respondent number 2 society and the disputant there was
the owner of a flat on the second floor of bloack number 8
shyam niwas. she was a member of the society and had
acquired the flat in question which was let out to the
appellant sabharwal brothers under an agreement of leave and
licence which was renewed from time to time and when she
asked the appellant to vacate as she required the flat for
her personal occupation they did number companyply with the demand
as a result of which the owner of the flat filed a statement
of claim before the registrar under s. 91 1  of the act
which required adjudication. there was a challenge to the
jurisdiction of the numberinee of the registrar to whom it was
referred and ultimately he made an award that the appellant
sabharwal brothers had occupied the flat on leave and
licence basis and was therefore liable to be evicted. in
revision the bench of the small causes companyrt held that the
registrars numberinee did have jurisdiction and the high companyrt
upheld the order of the bench. allowing the appeal this
court observed
with all respect to the high companyrt it seems to
us that there was a fundamental error in the above
approach. numberdoubt it was the business of the society
to let out premises and a member had numberunqualified
right to let out his flat or tenement to anumberher by
virtue of the bye-laws and a breach of the bye-laws
could affect the defaulting members right to
membership. but we are number able to see how letting by a
member to anumberher member would touch the business of
the society which included inter alia the trade of
buying selling hiring and letting land in accordance
with companyperative principles. the letting of flat by
respondent number 1 was a transaction of the same nature
as the society itself was empowered to enter into but
and letting by itself did number companycern the business of
the society in the matter of its letting out flats. numberhing was brought to our numberice to show that such a
letting would affect the business of the society once
it had sold the flat to the respondent number 1. the
position might have been different if the latter had
himself been a tenant of the flat under the society. to touch means to companye in companytact with and it does
number appear that there is a point of companytact between a
letting by the respondent number and the business of the
society when the society was number itself the landlord of
the flat. it is we think important to remember that this authority
decided only one point albeit a point of great importance
namely that the society having sold the flat like any
other vendor of immovable property the letting out of the
flat by the flat-owner was numberconcern of the society. there
was numberhing to show that such letting would affect the
business of the society once it has sold the flat. with
respect we entirely agree with all that was said. but then
the companyrt went on to say
the position might have been different if the
latter had himself been a tenant of the flat under the
society. it logically follows as a necessary companyollary that if the
transaction between the society and the holder of the flat
were governed by regulations in form-a as here that is to
say if the society had let out the flat to her the
decision of the companyrt would have been otherwise. the decision in sabharwal brothers case supra is
distinguishable for two reasons.


civil appellate jurisdiction civil appeals number 678-680 of
1962.
appeal from the judgment dated march 2 1960 of the punjab
high companyrt  circuit bench  at delhi in income-tax reference
number 6-d of 1957.

c. setalvad. bishan narain r.j. kolah and k.l. hathi
for the appellant. gopal singh and r.n. sachthey for the respondents. december 9 1963. the judgment of a.k. sarkar and j.c.
shah jj. was delivered by sarkar j. m. hidayatullahj. delivered a separate opinion. sarkar j.-we think that these appeals should be allowed. the appeals relate to the assessment to incometax of the
income of the life insurance business of the bharat
insurance company limited number merged in the life insurance
corporation limited the assessment years companycerned are 1952-
53 1953-54 and 1954-55. the income-tax act 1922 makes
special provision for assessment of the income of insurance
business. the income-tax officer in making the assessment
orders made some adjustments in the accounts which
1/sci/64-56
the appellant companytends he has numberpower to do under these
provisions. the question in these appeals is whether he had
the power to make these adjustments. sub-section  7  of s. 10 of the act makes the special
provision for the assessment of the income of insurance
business and that is in these terms
numberwithstanding anything to the companytrary
contained in section 8 9 10 12 or 18 the
profits and gains of any business of insurance
and the tax payable thereon shall be companyputed
in accordance with the rules companytained in the
schedule to this act. rule 2 in the schedule lays down in clauses  a  and  b  two
different methods for calculating the profits and gains of a
life insurance business and provides that whichever of these
two methods results in larger profits being arrived at has
to be adopted. the relevant portion of r. 2 is in these
terms
rule 2. the profits and gains of life
insurance business shall be taken to be
either-
 a  the gross external incomings of the
preceding year from that business less the
management expenses of that year or
 b  the annual average of the surplus
arrived at by adjusting the surplus or deficit
disclosed by the actuarial valuation made in
accordance with the insurance act 1938  iv of
1938  in respect of the last inter-valuation
period ending before the year for which the
assessment is to be made so
as to exclude from it any surplus or deficit
included therein which was made in any earlier
inter-valuation period and any expenditure
other than expenditure which may under the
provisions of s. 10 of this act be allowed for
in companyputing the profits and gains of a
business
whichever is the greater
then follows a proviso which sets out a certain limit for
management expenses to be allowed but that is number material
for this judgment. it is number in dispute that the method
laid down in cl.  b  would in the present cases produce the
larger income and had therefore to be followed. the
relevant part of r. 3 of the schedule on which the arguments
in these cases turn may number be set out. rule 3. in companyputing the surplus for the pur-
pose of rule 2-
 a
 b 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 companysultation
with the companytroller 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 artifi-
cially 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
numberother rule in the schedule was referred to at the bar. what had happened was this. the assessee had debited a sum
of rs. 1875000 to its companysolidated revenue account and
credited it to the investment reserve fund. there is no
dispute that the assessee had to maintain the investment
reserve fund. the transfer had been made because the
assessee thought that the securities in respect of which the
investment reserve fund had been companystituted having
depreciated the fund had become inadequate. by this
transfer the assessees surplus on which the tax had to be
assessed under r. 2 was reduced. the income-tax officer
thought that this transfer made the balance in the
investment reserve fund exceed the deficit disclosed on the
book values of the securities in that fund by rs. 30420.
he also checked up the market value of the securities and
came to the companyclusion that they had been undervalued in the
books by the assessee. in his view the investment reserve
fund was for the aforesaid reasons actually in excess by rs. 189185 of the amount which it should have had to its
credit. he therefore directed that the transfer from the
revenue account to the investment reserve fund be reduced by
rs. 175000. the assessee appealed to the appellate
assistant companymissioner and lie directed that the transfer to
the investment reserve fund be reduced by rs. 145000
instead of rs. 175000. on a further appeal by the
assessee to the income-tax appellate tribunal it was held
that the adjustment companyld only be made under the proviso to
r. 3 b  of the schedule and that that rule required a prior
consultation with the companytroller of insurance and as that
had number been made the adjustment was wholly illegal. the
tribunal therefore ordered that the transfer of rs. 1875000 made by the assessee as aforesaid had to be
accepted as a whole. the companymissioner then applied to the tribunal under s. 66 1
to state a case but that having been
rejected he moved the high companyrt of punjab for an order on
the tribunal to state a case tinder s. 66 2  of the act. the high companyrt made an order on the tribunal and the latter
thereupon stated a case setting out the facts earlier
mentioned and referring the following question to the high
court for its decision
whether upon the facts found by the tribunal
the income-tax officer had in this case
jurisdiction to proceed to make adjustment in
terms of r. 3 b  of the schedule to the indian
income-tax act. the high companyrt took the view that the matter did number companye
within r. 3 b  of the schedule and therefore numberquestion
of companysultation with the companytroller of insurance arose. in
the high companyrts opinion the income-tax officer had number been
deprived of the authority of companyrecting errors of the kind
that had been detected in these cases and the proviso was
number intended to companyer those cases where as in the present
the assessee in order to evade incometax undervalued his
securities. the high companyrt therefore answered the
question in the affirmative. the present appeals are
against this judgment of the high companyrt. it seems to us that the decision of the high companyrt is
clearly erroneous. under r. 2 of the schedule the income-
tax officer has to companypute the profits and gains of a life
insurance companypany at the greater of the two methods of
assessments mentioned in cls.  a  and  b . there may be no
restriction upon his jurisdiction in the companyputation of
profits and gains under cl.  a  but under cl.  b  the
computation can be made within a limited field. he has to
accept the annual average of the surplus disclosed by the
actuarial valuation made in accordance with the life
insurance act in respect of the last intervaluation period
so as to exclude therefrom any surplus or deficit included
therein which was made in the earlier inter-valuation
period and expenditure number allowable under s. 10 in
computing the profits. this is made explicit by r. 3 which
makes it obligatory
upon the income-tax officer to make the companyputation of the
surplus for the purpose of r. 2 according to the scheme
provided in cls.  a   b  and  c  of r. 3. under r. 2 b  of
the schedule the income-tax officer has therefore numberpower
to change the figures in the account of the assessee. he
has to take the surplus as disclosed by the actuarial
valuation made by the assessee under the insurance act and
then to arrive at the average mentioned in the rule. lie has
the power to exclude any surplus or deficit included in the
actuarial valuation in respect of an earlier inter-valuation
period and any expenditure other than an expenditure which
may under s. 10 of the act be allowed. what the income-tax
officer in the present case did does number companye within r.
2 b . this is number disputed. it is furthermore number in dispute that apart from the
provisions in r. 3 of which only cl.  b  is relevant for our
purpose there is numberother provision in the schedule which
authorises an income-tax officer to make adjustments in the
actuarial valuation made by the assessee. when we companye to
r. 3 b  we find that the first part of it lays down that it
shall be obligatory on the income-tax officer to allow
certain amounts written off or reserved by the assessee as a
deduction and to include in the surplus any sums for which
credit has been taken on account of appreciation or gains on
the realisation of the securities or other assets. this
part of the rule only companypels the income-tax officer to
allow certain amounts as deductions and to include certain
amounts for which credit had been taken in the accounts of
the assessee. it therefore does number warrant what the
income-tax officer did namely to adjust the accounts on
the basis of a revaluation made by him. then we companye to the proviso in r. 3 b . it says that if it
appears to the income-tax officer having regard to certain
matters to which it is number necessary to refer here in
detail that 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 then he would have
the power to make certain adjustments after companysultation
with the companytroller of insurance. quite clearly the
adjustment made in the present case by the income-tax
officer was number of the variety mentioned in the proviso. he
does number say that he made the adjustment because he found
that any rate of interest was inconsistent with the
valuation of securities or other assets. the adjustment
made by him had numberhing to do with any rate of interest. it
was made only because he thought that the securities had
been undervalued. this he had numberpower to do under the
proviso. this again is number in dispute. the result therefore is that we find numberhing in the rules
justifying the adjustment made by the income-tax officer in
the present cases. we have set out the relevant provisions
and we think that they do number companytemplate any other
adjustment of the figures in the accounts of the insurance
companies apart from what they expressly provide for. we
have shown that the present adjustment does number fall within
those so expressly provided for. the only other question is is there a general right to
correct the errors in the accounts of an insurance companypany
when assessing the income-tax? the high companyrt thought there
was. we are wholly unable to agree with this view. the
assessment of the profits of an insurance business is
completely governed by the rules in the schedule and there
is numberpower to do anything number companytained in it. the reason
may be that the accounts of an insurance business are fully
controlled by the. companytroller of insurance under the
provisions of the insurance act. they are checked by him. he has power to see that various provisions of the insurance
act are companyplied with by an insurer so that the persons who
have insured with it are number made to suffer by
mismanagement. a tampering with the accounts of an insurer
by an income-tax officer may seriously affect the working of
the insurance companypanies. but apart from this companysidera-
tion we feel numberdoubt that the language of s. 10 7  and the
schedule to the income-tax act makes it perfectly certain
that the income-tax officer companyld number make the adjustment
that he did in these cases. it may be pointed out that the question referred was
confined to the powers of the income-tax officer under r.
3 b  of the schedule. indeed learned companynsel for the
assessee did number companytend to the companytrary. the high companyrt
as may have been numbericed held that the proviso to r. 3 b
was number intended to companyer cases like the present. it would
appear therefore that the high companyrt thought that the
income-tax officer had numberpower under the rule to make the
adjustment. it however numbere the less answered the question
in the affirmative. obviously what was meant was that the
income-tax office.- had the power quite apart from the rule
to make all adjustments to prevent evasion of tax. the high
court in fact expressly said that the rule did number deprive
the income-tax officer of the power to do this. it is clear
that. the high companyrt had travelled beyond the question. no
objection having been taken at the bar to this procedure we
have dealt with the matter from this point of view also. the question framed has to be answered in the negative. we would for this reason allow the appeals with companyts. hidayatullah j.- i agree but would like to add the
following. these are three appeals by certificate granted by the high
court of punjab under s. 66 a  of the income-tax act against
its judgment dated march 2 1960. the appellant is the life
insurance companyporation  unit bharat insurance companypany limited-
original appellant . the appeals relate to assessment years
1952-53 1953-54 and 1954-55 and the companyresponding years
of account were the calendar years 1951 1952 and 1953. the
assessment was made on the original appellant bharat
insurance company limited by the income-tax officer companypanies
circle new delhi under the rules framed for assess-
ment of insurance companypanies pursuant to s. 10 sub-s.  7  of
the income-tax act on the basis of the annual average of
the surplus of the insurance companypany as found by actuarial
valuation in the last intervaluation period of four years
ending on december 31 1951 and accepted by the companytroller
of insurance under the insurance act 1938. in this
quadrennium the bharat insurance company limited had debited a
sum of rs. 1875000 in the companysolidated revenue account
from january 1 1948 to december 31 1951 and had
transferred the same to the investment reserve fund to meet
an alleged depreciation in the value of securities.the
income-tax officer companypared the book value and the market
value of the stocks and shares and found that that insurance
company had under-valued certain shares and securities by
rs. 158756 in the aggregate and increased the investment
reserve fund by a sum of rs. 30420 which was number required. the income-tax officer disallowed rs. 175000 from the
total amount of rs. 189186 and added it to the surplus for
calculating tax. he held at the same time that in his
opinion the balance left over provided adequate companyer as
contemplated by rule 3 b  of the rules under s. 10 7  of the
insurance act. on appeal the appellate assistant
commissioner reduced the figure of rs. 189186 to rs. 161770. he also reduced the amount of rs. 175000 to rs. 145000. with this modification  among some others  he
dismissed the appeal. against the order of the appellate
assistant companymissioner appeals were filed respectively by
the income-tax officer companypanies circle  1  new delhi-1
and the bharat insurance company limited there were thus six
appeals in respect of the three assessment years. the
tribunal held by its order dated october 23 1956 as
follows
the income-tax officer objects to the relief
given by the appellate assistant companymissioner
while the assessee objects to the adjustments
which were made by the income-tax officer in
toto. the proviso to rule 3 b  of the
schedule appended to section 10 7
clearly lays down that
the income-tax officer has to companysult the
controller of insurance before he becomes
competent to make any adjustments to the
actuarial surplus disclosed by the valuation. in this case numberconsultation with the
controller of insurance appears to have been
made. the adjustments made by the income-tax
officer on this account are therefore set
aside. the assessments will be modified
accordingly. the companymissioner of income-tax delhi and rajasthan then
moved the tribunal for a reference to the high companyrt
suggesting for decision the question
whether the proviso to rule 3 b  schedule to
indian income-tax act 1922 was applicable and
whether the income-tax officer was bound to
consult the companytroller of insurance in this
case where numberquestion arose about the rate of
interest or other factor employed in deter-
mining the liability in respect of outstanding
policies ? the tribunal drew up a companysolidated statement of the case
for the three assessment years and referred the following
question for the decision of the high companyrt
whether upon the facts found by the tribunal
the income-tax officer had in this case
jurisdiction to proceed to make adjustments in
terms of rule 3 b  of the schedule to the
indian income-tax act? in the high companyrt the companymissioner made an application
under s. 66 2  of the income-tax act for an order directing
the tribunal to refer the former question but that
application was disposed of alongwith the reference and the
high companyrt by its order under appeal answered the latter
question against the assessee and dismissed the application
under s. 66 2  of the income-tax act. khosla c.j. and. grover j. who disposed of the above reference observed
that the question which they were answering companyprehended the
other question. the high companyrt in disposing
of the reference held that the income-tax officer had the
jurisdiction to deal with the matter in the manner employed
by him and was number obliged to companysult the companytroller of
insurance before he companyrected the valuation of the
securities. it may be mentioned that while the reference
was pending in the high companyrt a government administrator
took over the insurance companypany. subsequently the life in-
surance companyporation by virtue of a numberification of the
government of india under s. 45 of the life insurance
corporation act 1956 took over from july 6 1960 the
assets and liabilities of the insurance companypany in respect
of the companytrolled business as defined in s. 2 3  of the
corporation act. the companyporation in the circumstances was
substituted as the appellant in place of the insurance
company under s. 9 of the life insurance companyporation act. in this appeal it is companytended that the high companyrt was in
error in the companyclusion it reached and the answer to the
question should have been in favour of the life insurance
corporation and against the department. before dealing with this case a reference in brief to the
scheme of the insurance act and to the rules framed under s.
10 7  of the. income-tax act for assessment of insurance
companies is necessary. by s. ii of the insurance act
every insurer in india and every foreign insurer in respect
of the insurance business transacted by him in india is
required to prepare at the expiration of each calendar year
with reference to that year  a  a balance sheet  b  a
profit and loss account and  c  a revenue account. special
forms are prescribed and the schedules to the act provide by
regulations what should be shown in these accounts. the
balance sheet profit and loss account revenue account
including accounts which the other provisions require the
insurer to prepare must then be audited by an auditor. by
s. 13 of the insurance act every insurer carrying on
life insurance business is required at intervals of number
less than 3 years to cause an actuarial investi-
gation to be made into the financial companydition of life
insurance business carried on by him including a valuation
of its liabilities in respect of that business. an
abstract of the report of the actuary must then be prepared
according to prescribed regulations. these accounts and the
abstract together with other statements etc. must be
submitted to the companytroller of insurance. the companytroller
may ask for further information and if he so desires take
evidence and order a re-valuation causing at the same time
an investigation to be made. the insurance act further
requires that every insurer must invest and at all times
keep invested assets equivalent to the liabilities on
matured claims or on the policies in the life business
maturing for payment. sections 27 and 27a indicate the
kinds of investments in which the insurer must invest or
keep invested the assets and the companytrolled fund. the balance sheet of life insurance business must always be
prepared as a separate document. the regulations enjoin
that a statement in form aa showing the market value and the
book value of the assets in india must be appended to the
balance sheet. the accounts must be signed and certified
and in particular a certificate must be appended explaining
how the values as shown in the balance sheet of the
investment of stocks and shares have been arrived at and how
the market value thereof has been ascertained for the
purpose of companyparison with the values so shown. there has
further to be anumberher certificate that the items in respect
of reversions and life interests have been valued as on the
date of the balance sheet by an actuary and the assets shown
under the heading investments have number been valued at
amounts exceeding the realisable or market value. this
precaution is necessary otherwise there may number be adequate
cover for the liabilities. for this purpose form aa which
has to be annexed to the balance sheet must show a
classified summary of the assets on the date of the balance
sheet and it must show in particular
 a  the value for which credit is taken in
the balance sheet for each of the above-
mentioned classes of assets
 b  the market value of such of the above-
mentioned classes of assets as has been ascer-
tained from published quotations after deduc-
tion of accrued interest included in market
prices in those cases where accrued interest
is included elsewhere in the balancesheet
 c  how the value of such of the above-
mentioned classes of assets as has number been
ascertained from published quotations has been
arrived at. the revenue account has to be prepared in four forms of
which form d shows the revenue account applicable to life
insurance business in respect of the year and the other
three documents are statements of life insurance policies
for the same year  form dd  the additions to and deductions
from policies  form ddd  and particulars of policies
forfeited or lapsed in the year  form dddd  the regulations
for the preparation of the abstract of the report of the
actuary are to be found in the fourth schedule to the
insurance act. this schedule is in two parts. the second
part lays down inter alia that every abstract shall show the
average rates of interest yielded by the assets whether
invested or uninvested companystituting the life insurance fund
for each of the years companyered by the valuation period and
regulation 3 of part 1 lays down how the average rate of
interest yielded in any year by the assets companystituting the
life insurance fund must be calculated. this is a
complicated calculation which it is unnecessary to describe
here. the abstracts must explain the specific manner in
which the said average rate of interest has been calculated. the companysolidated revenue account has to be shown in form g
and a final valuation balance sheet is required to be
prepared in form 1 which companypares the net liability under
business as shown in the summary and valuation of the
policies on the one hand with
the balance of life insurance fund as shown in the balance
sheet on the other and this discloses the surplus or the
deficiency as the case may be. as investments depreciate
an investment reserve fund is maintained to which amounts
are transferred to make up for the shortfall. the insurance
company is thus required to maintain an insurance fund
sufficient to companyer its liabilities in investments and
depreciation in the value of the investments must be
specially provided for by making other investments which are
kept in the investment reserve fund. we are number in a
position to understand the provisions of the income-tax act
which include references to these documents. to begin with it must be remembered that insurance
companies are assessed somewhat differently from other
business organisations. numbermally sections 8 9 10 and 12
of the income-tax act apply to the assessment of business
organisations but the rules for assessment companytained in
those sections do number apply to the assessment of an
insurance companypany. section 10 of the income-tax act deals
with the head profits and gains of business c sub-
section 7 however says that numberwithstanding anything to
the companytrary companytained in ss. 8 9 10 12 or 18 the
profits and gains of any business of insurance and the tax
payable thereon shall be companyputed in accordance with the
rules companytained in a schedule to the act. these rules
provide the mode of companyputing the profits and gains of life
insurance business. under r. 2 the profits and gains of
life insurance business are taken to be either-
 a  the gross external incomings of the pre-
ceding year from that business less the
management expenses of that year or
 b  the annual average of the surplus
arrived at by adjusting the surplus or deficit
disclosed by the actuarial valuation made in
accordance with the insurance act 1938  iv of
1938  in respect of the last
inter-valuation period ending before the year
for which the assessment is to be made so as
to exclude from it any surplus or deficit
included therein which was made in any earlier
inter-valuation period and any expenditure
other than expenditure which may under the
provisions of section 10 of this act be
allowed for in companyputing the profits and gains
of a business whichever is greater
x x x x
in this case the second method was applicable. rule 3  in
so far as it is relevant for our purpose  then provides as
follows
 a  x x x x x
 b  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 companysultation
with the companytroller of insurance that having
due regard to the necessity to making
reasonable provision for bonuses to
participating policy-holders and for company-
tingencies 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 appre-
ciation 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
x x x x x
rule 2 shows what shall be taken to be the profits and gains
of the insurance companypany. rule 3 shows what changes can be
made in the annual average of the surplus. the purport of
rule 3 in the companytext of this case may number be stated in
simple language. it provides in its main part that amounts
reserved in the accounts or through the actuarial valuation
balance-sheet to meet depreciation of securities shall be
allowed as a deduction and ex companyverso any sums taken credit
for in the accounts or actuarial valuation balance-sheets on
account of appreciation of securities shall be included in
the surplus. in short the amount by which the value of
securities depreciates is allowed as a deduction from the
surplus and the amount of appreciation of securities is
included in the surplus. there is numberquestion here of
appreciation and the latter part of the main rule may
therefore be ignumbered. this case is companycerned only with the
depreciation of the securities in the reserves as shown in
the accounts and through the actuarial valuation balance-
sheets. if such depreciation in fact takes place it is
open to the insurance companypany to claim that it be allowed as
a deduction from the surplus and it must be allowed. but by
undervaluing the stocks and shares it is always possible
artificially to reduce the surplus by making a part of it go
into the reserve to take the place of the amount by which
the stocks and shares are alleged to have but have number in
fact depreciated. the proviso which is annexed to the main
rule takes numbere of the existence of such a possibility and
provides that if the income-tax officer on investigation
finds  after companysultation with the companytroller of insurance
that the rate of interest or other factor employed
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 he may make such adjustments to the
allowance for depreciation as shall increase the surplus to
a figure which is fair and just. the proviso further says
that in doing so the necessity for making reasonable
provision for bonuses to participating policy-holders and
for companytingencies must be taken into companysideration. put in
simple language it means that the income-tax officer can
after investigation and companysultation with the companytroller of
insurance increase the surplus to a figure which is fair
and just. but this action is open to him only if the
valuation of the securities and other assets has been
artificially manipulated to reduce the surplus by making the
rate of interest or other factor employed in determining the
liability in respect of outstanding policies inconsistent
with the valuation of the securities. further the income-
tax officer before he makes any change must pay due
attention to the necessity for making reasonable provision
for bonuses to participating policy-holders and
contingencies. the power which is companyferred on the income-tax officer under
the proviso clearly has its limitations and is hedged in by
conditions-. in the present case the income-tax officer
admittedly did number companysult the companytroller of insurance. number
did he companysider the necessity for making reasonable
provision for bonuses to participating policy-holders and
for companytingencies. number did he establish that the rate of
interest or other factor employed in determining the
liability in respect of outstanding policies was materially
inconsistent with the valuation of the securities or other
assets. what he did was to find out the market value of
stocks and shares and to companypare that value with the
valuation actually made and on finding that they were under-
valued to add a certain amount to the surplus for tax
purposes. the appellate assistant companymissioner differed
about the market value of the stocks and shares and reduced
the amount which was added but did numbermore. the tribunal
which reversed these orders went merely by the failure of
the income-tax officer to companysult
1/sci/64-57
the companytroller of insurance. the two questions  that
proposed by the companymissioner and that actually referred
bring into relief respectively the actions of the income-tax
officer and the order of the tribunal. the question as
answered refers to the income-tax officers decision while
the other was limited to the tribunals order. the
department did number seek to place its case under the proviso
either before the high companyrt or before us perhaps because
the companyditions in the proviso  whether they be directory or
mandatory  bad number been followed at all. the department
claimed that the matter fell to be governed by the main rule
without the assistance of the proviso and this companytention
appears to have been accepted by the high companyrt. as has been shown above form g is the companysolidated revenue
account. the bharat insurance companypany had during the
quadrennium companymencing on january 1 1948 and ending on
december 31 1951 transferred to the investment reserve
fund a sum of rs. 1875000 and shown it in form g. the
balance of life fund thus stood at rs. 54588286-1-10 as
against the net liability of rs. 51942924 and there was a
surplus. the valuation balance-sheet in form 1 as on
december 31 1951 thus was
rs. rs. net liability balance of life
under business assurance fund
as shown in the as shown in the
summary and balance sheet 54588286
valuation 51942924
surplus 2645362
------------- ------------
54588286 54588286
the valuation abstract prepared under the fourth schedule
showed that the actuary had. assumed the rate of-. interest
at 3 per annum and he found that the average rate of
interest earned on the mean life fund in each year was as
follows
year ending 31st december 1948 3.5 per cent. 1949 3.27
1950 3.27
1951 3.26
the income-tax officer did number companycern himself with the rate
of interest employed in determining the liability in respect
of outstanding policies. he companysidered the valuation of
stocks and shares held in the life fund with a view to
ascertaining whether the sum of rs. 1875000 transferred to
the investment reserve fund to balance an alleged
depreciation in the value of stocks and shares was justified
or number. he examined for this purpose the details of the
alleged depreciation amounting to rs. 2264733 which had
been worked out by the assessee companypany and observed that
after the transfer of rs. 1875000 to the investment
reserve fund the balance to the credit of the fund was rs. 2295154 when it need number have been more than rs. 2264733
and this showed an excess of rs. 30420. this excess he
disallowed. he then found out the market rate of stocks and
shares in the fund and came to the companyclusion that some of
these were under-valued by a sum of rs. 158756. he held
that an excess of rs. 189186 was transferred to the
investment reserve fund from the surplus. according to him
the surplus of rs. 2645362 shown in form 1 required to be
adjusted and he added a lump sum of rs. 175000 to the
surplus. in other words the total depreciation claimed
under rule 3 b  as an allowance was number accepted. the sum
of rs. 175000 was reduced by the appellate assistant
commissioner to rs. 145000 and it was altogether cancelled
by the income-tax appellate tribunal. the learned judges of the high companyrt in dealing with this
matter observed that the excess of rs. 30420 was number an
actual depreciation and numberprovision need have been made in
the reserve fund for this sum. they also held that the
income-tax officer had rightly held that some of the stocks
and shares had been deliberately under-valued. they
accepted the proposition that the making of an adjustment in
the
surplus on a finding that the rate of interest or other
factor employed in determining the liability in respect of
outstanding policies and other assets was materially
inconsistent with the valuation of the securities and other
assets and the making of adequate provision for bonuses to
participating policy-holders and companytingencies was a matter
for a specialist and that the income-tax officer if he made
an adjustment should procure the advice of the companytroller
of insurance before making any change on the basis of his
own knumberledge. but they held that the proper valuation of
the securities did number require a specialist and that any
person companyld get market quotations and find out the value
of the securities. according to the learned judges
although the proviso enjoined upon the income-tax officer
the duty to companysult the companytroller of insurance and also to
make adjustments in a particular way the main rule allowed
the income-tax officer to fix the amounts of permissible
deductions on the basis of a companyrect valuation of the
securities and the income-tax officers jurisdiction in this
respect was number in any way companytrolled. according to them
the fixing of the companyrect value of the assets was number the
sort of adjustment which was companytemplated by the proviso
therefore neither was prior companysultation necessary number were
the companyditions precedent as laid down in the proviso
applicable. they referred to the decision of the bombay
high companyrt in western india life insurance company limited in re
 1  and observed that such action was held permissible
under rule 30 of the superseded rules which they held was in
pari materia with the main rule 3 b  and to the decision in
commissioner of income-tax bombay sind and rajasthan v.
indian life assitrance company limited 2  in which the dictum of
the high companyrt was applied by the sind chief companyrt. they
concluded
it is therefore clear that the proviso does
number apply to. a case where the income-tax
officer has to see whether the securities have
been companyrectly
 1  1938 vi i. t. r. 44.  2  1946 xiv i. t. r. 347.
valued or number. he must satisfy himself
without any reference to the companytroller of
insurance that the securities which are being
transferred to the reserve fund are numbermore
than necessary to meet depreciation or loss
that has actually been suffered and to
determine this he must have the companyrect
valuation of the securities. in the result they held that the income-tax officer had
full jurisdiction to deal with the matter in the manner
employed by him. mr. setalvad on behalf of the life insurance companyporation
pointed out that the actuarial valuation balance-sheet in
form 1 had determined the surplus by deducting from the life
insurance fund as on the valuation date the net liability
under the life insurance business. he pointed out that in
working out this liability the actuary had assumed the rate
of interest at 3 per annum and to arrive at this figure he
had taken into companysideration the average interest yield for
the four years companyered by the valuation. the interest yield
thus was obtained by properly following the procedure laid
down by regulation 3 of part 1 of the fourth schedule to the
insurance act. he companytended that if the interest yield were
found to be lower by reason of the reduction of the amount
of depreciation the liability for the policies as calcula-
ted in the accounts would be disturbed and the liability
would increase. he pointed out that rule 30 of the previous
rules was amended by the addition of a proviso in the new
rule 3 b  to make it incumbent that an adjustment in respect
of depreciation of securities in the actuarial balance sheet
should only be made after companyplying with certain companyditions. -he companytended that action companyld only be taken under the
proviso and in accordance with its strict terms. he
submitted that by merely reducing the amounts transferred to
the investment reserve fund the income-tax officer companyld number
increase the surplus for in doing so he reduced the companyer
and thus seriously disturbed the provision for liability
under the policies and the provision for bonuses to
participating policy-holders
and companytingencies and that such action of the income-tax
officer was without jurisdiction. on behalf of the department mr. gopal singh companytended that
there was a general power in the income-tax officer derived
from the main rule 3 b  and independent of the proviso to
make such an adjustment. mr. gopal singh did number rely upon
the proviso and companytended that the income-tax officer companyld
find out from the market quotations the value of stocks and
shares and if he found a disparity he companyld make
adjustments by refusing to allow the deduction which was
claimed under rule 3 b . according to him it was number
necessary to go to the proviso at all and in any event
consultation with the companytroller of insurance was number
absolutely necessary and what he did was within his
jurisdiction. he submitted that the income-tax officer had
jurisdiction to decide what was just and proper and had done
so under his general power flowing from the main rule 3 b
without the aid of the proviso. it is clear that the income-tax act companytemplates that the
assessment of insurance companypanies should be carried out number
according to the ordinary principles applicable to business
concerns as laid down in s. 10 but in quite a different
manner. insurance companypanies do number companypute their profits in
the ordinary way because premiums companyer risks which run into
future years and loss includes losses from previous years. the method prescribed ensures that by taking the average of
several years a fair and reasonable companyclusion is reached. actuarial estimation plays an important part and surplus
only results when there is an excess of the fund over the
liability after all other charges are met. the rules which
have been quoted lay down two different methods of
ascertaining profits. rule 2 a  merely companypares the gross
external incomings of the preceding year with the management
expenses.rule 2 b  companytemplates the annual average of the
surplus or deficit disclosed by actuarial valuation. in the present case the first limb of rule 2 did number apply. so the annual average of the surplus
found by the actuary had to be taken and from it the surplus
of the last inter-valuation period had to be deducted as
also expenditure allowable under s. 10 of the income-tax
act. this is the basic calculation and they were followed. certain special limitations indicated in the proviso to rule
2 and rule 3 a  are number relevant for the present case. under the main part of rule 3 b  certain special deductions
and additions must be made to the annual average of the
surplus determined under the second rule. since the life
fund is held in securities and the price of stocks and
shares fluctuates provision has been made in rule 3 b  to
make adjustments. rule 3 b  in its main part speaks of
adjustments on the basis of the accounts and amounts as
entered in the accounts determine what must be added to or
deducted from the surplus. the income-tax officer must
deduct from the annual average of the surplus for purposes
of rule 2 any amount entered in the accounts to companyer
depreciation of the securities and assets and add any amount
taken credit for on account of appreciation. the income-tax
officer here follows the accounts and gives effect to the
entries such as they are. the provision is mandatory and
the income-tax officer has numberdiscretion. if the income-tax officer doubts the accounts his powers
are defined by the proviso. rule 3 b  which allows the
income-tax officer to deduct from or add to the surplus
amounts shown in the accounts for depreciation and
appreciation of securities as the case may be does number
confer on him a power to disturb the annual average of the
surplus at his sweet will. numberdoubt the perception of a
-discrepancy between what is entered in the accounts and
what is fact is number something which is or can be made the
subject of rules. rules can only provide how the income-tax
officer must proceed in the matter if he finds an
inaccuracy. the entire subject of such disparity between
fact and actual entries is companyprehended in the proviso. if
the income-tax officer accepts the accounts he must reduce
or increase the
surplus by the amounts actually shown for depreciation or
appreciation in the accounts. his powers under the main
rule end there. if he discovers a discrepancy  number de
minimis  he must proceed under the proviso. the proviso
requires him to companysult the companytroller of insurance and to
bear in mind that reasonable provision has to be made for
bonuses to participating policy-holders and for
contingencies and he can act only where the rate of
interest or other factor employed in determining the
liability under the policies materially inconsistent with
the valuation of securities and this results in the
artificial reduction of the surplus. it is clear that the
proviso negatives the existence of a separate general power. action has to be taken in the manner laid down in the
proviso or number at all. in the present case the income-tax officer did number follow
the proviso at all. the department did number rely upon the
proviso in the high companyrt and even before us did number seek to
justify the action of the income-tax officer with reference
to the proviso. numberdoubt an attempt was made before us to
limit the generality of the question debated in the high
court to the specific point decided by the tribunal and
outlined in the question suggested by the assessee. but the
gist of the matter is the same whichever way one looks at
it. the adjustment of the surplus in the matter of
appreciation and depreciation of securities number on the basis
of the accounts but on the basis of the income-tax officers
discretion can only be done in the manner laid down in the
proviso. such power is number available under the main rule
which merely allows book entries to be worked into the
surplus. i find it impossible to endorse the view of the high companyrt
that the income-tax officer had any general power to make
adjustments independently of the proviso. if he detected
any discrepancy he had to proceed under the proviso. to
hold otherwise would make the proviso entirely redundant
and it is quite clear that such companyld number be the intention.