TMI Blog2023 (11) TMI 391X X X X Extracts X X X X X X X X Extracts X X X X ..... the income of the assessee and has held that in assessee s case the income should be computed as per the provisions of section 44 and accordingly, to be taxed under section 115B. Therefore respectfully following the above, we see no reason to interfere with the decision of the CIT(A). Disallowance u/s 14A - We hold that the provisions of section 14A are not applicable in assessee s case while granting exemption to an income earned on sale of investment primarily because of the reason of the withdrawal or deletion of sub-r.5(b) to First Schedule of s. 44 of IT Act, thus allow the ground raised in this regard in favour of the assessee. Exemption towards dividend income, interest income from tax free bonds and income from pension line of business - We notice in this regard that the coordinate bench in the case of ICICI Prudential Insurance Co. Ltd [ 2012 (11) TMI 13 - ITAT MUMBAI] has considered the issue of claiming exemption towards income from pension line of business and dividend income and held that the only effect of section 44 is that the operation of the provisions referred to therein is excluded in the case of an assessee who carried on insurance business and in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of negative income Ground No.8 (vii) Denial of exemption under section 10 towards dividend income, interest income from tax free bonds and income from pension line of business Ground No.11 to 13 3. The assessee is engaged in the business of life insurance which includes term insurance linked business, pension business, general annuity business, etc. falling within the definition of the term life insurance business' under the Insurance Act, 1938. The assessee is regulated by the Insurance Act, the Insurance Regulatory Development Authority Act, 1999 (IRDA) and the rules and regulations there under. ITA No.1775/Mum/2023 CO No.75/Mum/2023 4. The assessee filed the return of income for A.Y. 2017-18 on 31/10/2017 declaring a total income of Rs. 504, 60, 59, 780/-. The case was selected for scrutiny and statutory notices were duly served on the assessee. The assessee disclosed its income on the basis of surplus of Form I which is the actuarial valuation as prescribed by the IRDA. The Assessing Officer made recomputed the income from insurance business of the assessee by modifying the computation by making adjustments as listed above. Aggrieved, the assessee p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2. We find that similar issue had arisen in the case IPLIC (supra). Deciding the matter Mumbai Bench of the Tribunals has dealt the issue as under : 27. Respectfully following the above principles and examining the provisions of IT Act, we are of the opinion that the 'actuarial valuation made in accordance with the Insurance Act, 1938' do mean that the actuarial valuation done in accordance with the Insurance Act, 1938. In arriving at the above decision we have also taken into consideration that Rule-5 in Part-B of the first schedule with reference to 'other insurance business' did incorporate the IRDA and its Regulations as amended by the Finance Act 2009 w.e.f. 1.4.2011 which is as under: B- Other Insurance Business: Computation of profits and gains of other insurance business. 5. The profits and gains of any business of insurance other than life insurance shall be taken to be the profit before tax and appropriations as disclosed in the Profit Loss A/c prepared in accordance with the provisions of the Insurance Act, 1938 (4 of 1938) or the rules made thereunder or the provisions of the Insurance Regulatory and Development Authority Act, 1999 (4 of 1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nsurance Act, 1938 is applicable and the actuarial valuation has to be made in accordance with the then existing Part-I of the Fourth Schedule and in conformity with the requirements of Part-II of that schedule. Therefore, assessee's contention that the IRDA Regulations even though are applicable to assessee since it has commenced business after the commencement of the IRDA Act, 1999, for the purpose of Rule-2, the actuarial valuation has to be done in accordance with the Regulations contained in erstwhile Fourth schedule Part-I and Part-II. This is what assessee is contending and merging the accounts of Policy-holder s and Share-holder s account and arriving at the actuarial deficit, without taking into consideration the transfer of funds from the Share-holder s account to Policyholder s account. Respectfully, following the same we hold that the actuarial valuation has to be done in accordance with the Regulations contained in erstwhile Fourth schedule Part-I and Part-II. Grounds no. 1 and 2 are decided in favour of the assessee. Adjustment of earlier year surplus 2.5.5. Sixth Ground of appeal is about adjustment of earlier years surplus. While completing the assess ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt to be consolidate and taxed under Income from Insurance business 2.5.4. Fifth Ground is about setoff of deficit in Share-holder s account. We find that identical issue had arisen in the case of IPLCI(supra).Deciding the issue in favour of the assessee, Tribunal held that IRDA Regulations specifically required to maintain the Policy-holder s account and the Share-holder s account separately and permitted transfer of funds from Share-holder s account to Policy-holder s account as and when there was a deficit in Policy-holder s account, that Hon'ble Bombay High Court had held that as a policy, company was transferring funds/assets from Shareholder s account to Policy-holder s account even during the year periodically as and when the actuarial valuation was arrived at in Policy-holder s account, that most of the companies were required to submit quarterly accounts under the Company Law, that there was requirement of actuarial valuation report periodically and accordingly assessee was transferring funds from the Share-holder s account to Policy-holder s account, that the insurance business would not yield the required profits in the initial 7 to 10 years, that lot of capital ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sed as business income. Transfer from shareholder account to policy holder account 2.5.3. Ground of appeal no.4 is about transfer of Rs. 324.82 Crores from Share-holder s account to the Policy-holder s account. We find that similar issue has been adjudicated by ITAT Mumbai in the case of IPLIC(supra).Holding that transfer of funds from Share-holder s account to the Policy -holder s account did not result in income chargeable to tax, Tribnal, in the matter of IPLIC, (supra), held as under: .As seen from the orders of the authorities, the 'Total surplus' prepared under Regulation 8 was taken as basis ignoring the Form-I of Regulation 4. While accepting the Ld.CIT DR argument that for the purposes of Life insurance business the act provides for surplus of valuation to be taxed at lesser rate, we cannot accept the argument that surplus is Total surplus including Transfers from share holder's account. Basically transfers are tax neutral as a credit in one account gets cancelled by debit in other account when accounts are consolidated. What the Rule. 2 prescribed was only 'average surplus' arrived by adjusting the surplus disclosed in the actuarial valu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... inating negative reserves. As mentioned earlier, a policy which has a negative reserve is in nature of an asset. We find that in the case of ICICI Prudential Insurance Co.(supra), AO had disallowed negative reserve related to Life Insurance business of the assessee. In appellate proceedings FAA allowed the appeal of the assessee.AO challenged the order of the FAA before the Tribunal. We find that AO has raised the following ground of appeal in the appeal filed by him for AY 2006-07. On the facts and in the circumstances of the case and in law, the learned CIT(A)erred in not subjecting the negative reserve amounting to Rs. 27.27 Crores ignoring the facts that negative reserves has impact of reducing the taxable surplus as per From I. Disposing his appeal, Tribunal held as under: After considering the rival submissions and examining the method of accounting and the mandate given by regulations to appoint Actuarial on the concept of mathematical reserves we do not see any reason to interfere with the order of the CIT(A).The mathematical reserve is a part of Actuarial valuation and the surplus as discussed in Form-I under Regulation 4 takes in to consideration this mathemat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... various cases. For the sake of record, the order in the case of General Insurance Corporation of India (supra) vide Para 9 is as under: 9. Issue No.6 Non applicability of provisions of section 14A. (Modified Ground of Appeal No.3.1 to 3.4 - Original Ground of Appeal No.3.1 to 3.5). The issue is with reference to the applicability of section 14A and disallowance of expenditure in respect of sale of investment which are not taxed. We have heard the rival contentions. We also note that this issue is also considered by the Coordinate Bench in assessee's own case for 2006-07 vide Para 7 to 9: 7. Grounds of appeal no.4 regarding the expenditure under section 14A. 8. We have heard the rival contentions and perused the relevant record. We note that this issue has been considered and decided by the Pune Bench of this Tribunal in the case of Bajaj Allianz General Insurance Company limited v. Addl. CIT in ITA No.1447/PN/2007 for the assessment year 2003-04 order dated 31.08.2009. This Tribunal in the case of JCIT v. M/s Reliance General Insurance co. in ITA No.3085/Mum/2008 for the assessment year 2005-06 vide order dated 26.2.2010 has considered this issue and decided in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ith the rule contained in the First Schedule. It is not the case of the Revenue that the assessee has not computed the profits and gains of its insurance business in accordance with the said rules. Reliance was placed on the scope of s. 14A, as held in the case of General Insurance Corporation of India v. CIT [1999 life insurance business 156 CTR(SC) 425 :[1999 life insurance business 240 ITR 139 (SC), where -in their Lordships of the apex Court have categorically held that the provisions of s. 44 being a special provision govern computation of taxable income earned from business of insurance. It mandates the tax authorities to compute the taxable income in respect of insurance business in accordance with the provisions of the First Schedule to the Act. In the light of these, their Lordships of Delhi High Court have held that no quest ion of law, much less a substantial question of law survives for their consideration. In other words, order of the Tribunal has been affirmed. Following the same reasoning, addition made by the AO is deleted. s. 44 applies notwithstanding anything to the contrary contained within the provisions of the IT Act relating to computation of income ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... red in connect ion with the looking after tax-free investment. The learned counsel for the assessee vehemently argued that the income of the assessee is to be computed under s.44 r/w r. 5 of Sch. 1 of the IT Act. Sec. 44 is a non obstinate clause and applies notwithstanding anything to the contrary contained within the provisions of the IT Act relating to computation of income chargeable under different heads, other than the income to be computed under the head 'Profit and gains of business or profession'. For computation of profits and gains of business or profession the mandate to the AO is to compute the said income in accordance with the provisions of ss. 28 to 43B of the Act. In the case of the computation of profits and gains of any business of insurance, the same shall be done in accordance with the rules prescribed in First Schedule of the Act, meaning thereby ss. 28 to 43B shall not apply. No other provision pertaining to computation of income will become relevant. According to the learned counsel, two presumptions that follow on a combined reading of ss. 14, 14A, 44 and r. 5 of the First Schedule are: (a) That no head-wise bifurcation is called for. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ee bonds and income from pension line of business. We notice in this regard that the coordinate bench in the case of ICICI Prudential Insurance Co. Ltd vs ACIT [2012] 28 taxmann.com 257 (Mum.) has considered the issue of claiming exemption towards income from pension line of business and dividend income and held that 48. All the above three grounds are on the issue whether exemption under Sec 10 can be allowed when incomes are computed under Sec.44 of the IT Act. In arriving at the deficit from the insurance business, assessee claimed certain exempt incomes under section 10(23AAB) with reference to Pension Business and dividend under section 10(34). AO did not allow the amounts on the reason that these incomes are part of income of life insurance business and it is included as income by the actuary, therefore, they cannot be exempted. This issue is covered in favour of assessee and against the Revenue by the orders of the General Insurance Company of India (supra) wherein the issue of deduction under section 10 have been considered and allowed following the Hon'ble Bombay High Court judgment in General Insurance Corpn. of India v. CIT [2012] 204 Taxman 587/17 taxmann.com ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... contrary contained in the provisions of this Act relating to the computation of income chargeable under the head interest on securities , Income from house property , Capital gains or Income from other sources , or in section 199 or in sections 28 to (43B), the profits and gains of any business of insurance, including any such business carried on by a mutual insurance company or by a cooperative society, shall be computed in accordance with the rules contained in the First Schedule . Section 44 provides that the profits and gains of any business of insurance of a mutual insurance company shall be computed in accordance with the rules in the First Schedule. Part 'A' of the First Schedule containing Rules 1 to 4 deals with profits of life insurance business while Part B consisting of Rule 5 deals with computation of profits and gains of other insurance business. Rule 5 provides as follows: 5. The profits and gains of any business of insurance other than life insurance shall be taken to be the balance of the profits disclosed by the annual accounts, copies of which are required under the Insurance Act, 1938 (4 of 1938), to be furnished to the Controller of Insu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a non-obstante clause, the effect of which is that the provisions of the Act relating to the computation of income chargeable under the head Interest on securities , Income from house property , Capital gains or Income from other sources , do not apply in the case of computation of income from insurance business. The effect of the non-obstante clause so far as the earlier part of section 44 is concerned, therefore, is that the provisions of section 44 will prevail notwithstanding the fact that there are contrary provisions in the Act relating to computation of income chargeable under the four heads mentioned in section 44. The only other overriding effect of section 44 is that its provisions operate notwithstanding the provisions of section 191 and of section 28 to 43A. Thus, the only effect of section 44 is that the operation of the provisions referred to therein is excluded in the case of an assessee who carried on insurance business and in whose case the provisions of rule 2 of the First Schedule are attracted. If the deductions which are claimed by the assessee do not fall within the provisions which are referred to in section 44, it will have to be held that the applicabi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... judgment of the Division Bench in Life Insurance Corporation (supra), the Division Bench noted that there was a difference in the language of section 10(7) of the Act of 1922 when compared with section 44 of the Act of 1961 since section 44 does not refer to the computation of tax but merely to the computation of profits and gains in the business of insurance. The Division Bench held that this would however not make any difference to the principle laid down by the Court in the earlier decision in the case of New India Assurance Co. Ltd. Accordingly, the decision of Life Insurance Corporation (Supra) could not have been ignored by the Assessing Officer on the supposition that the decision was rendered in the context of an assessee who carried on life insurance business and was, therefore, not available to an assessee which carries on general insurance business. 12. In General Insurance Corporation of India v. Commissioner of Income-Tax, the Supreme Court considered in an appeal arising out of a judgment of the High Court the issue as to whether a sum of Rs. 3 crores, being a provision for redemption of preference shares, was not liable to be added back in the total income of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lfillment of the conditions, if any, under a particular clause of section 10 under which exemption is sought. It needs to be emphasized that it is not the case of the Assessing Officer that the assessee had failed to fulfill the condition which attached to the provisions of the relevant clauses of section 10 in respect of which the exemption was allowed. This of course is apart from clause (38) of section 10 where the Assessing Officer had rejected the claim for exemption in the original order of assessment under section 143(3). The Assessing Officer above all was bound by the communication of the CBDT. Having followed that in the order under section 143(3) he could not have taken a different view while purporting to reopen the assessment. Having applied his mind specifically to the issue an having taken a view on the basis of the communication noted earlier, the act of reopening the assessment would have to be regarded as a mere change of opinion which has also not been based on any tangible material. Consequently, we hold that the reopening of the assessment is contrary to law. The Petition would have, therefore, to be allowed . Respectfully following the above, we hold that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... urther the assessing officer made an addition towards the negative reserves as per the actuarial report. IN addition to these adjustments the assessing officer also held that the assessee is not entitled to claim exemption of pension business under section 10(23AAB), interest under section 10(15)(iv)(h) and dividend income under section 10(34) / 10(35). And also made a disallowance under section 14A. Further, the Assessing Officer treated the income from life insurance business as income under section 44 taxable at 12.5% and treated the profit as per shareholder s account as Income from other sources which has to be taxed at normal rate i.e. at 30%. Aggrieved, the assessee preferred further appeal before the CIT(A). The CIT(A) gave relief to the assessee by placing reliance on the decision of the co-ordinate bench in assessee s own case for A.Y. 2008-09. Against the order of the CIT(A), the Revenue is in appeal before the Tribunal. 17. The issues contended in the appeal for A.Y. 2018-19 are identical to the issues and facts of A.Y. 2017-18; therefore, the decision arrived at therein while disposing of the appeal for A.Y. 2017-18 shall apply mutatis mutadis to this appeal and t ..... X X X X Extracts X X X X X X X X Extracts X X X X
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