2024 (1) TMI 1464 - AT - Income Tax

Profit on Sale/Redemption of Investments - denying benefit of exemption u/s 10(38) - HELD THAT - We hereby direct the AO to verify about the status of the STT payment and accordingly allow the exemption u/s 10(38) of the Act. Accordingly the issues involved in ground No.1 and its sub ground are remanded to the file of the Ld. AO for fresh consideration. Disallowance being provision made for standard assets - The Co-ordinate Bench of the Tribunal in Assessee s own case for AY 2010-11 2021 (7) TMI 92 - ITAT DELHI deleted the similar disallowance as held there is no enabling mechanism in Rule 5(a) mandating an adjustment to disclosed profits by making an addition on account of provision made for Standard Assets. Adjustment made by the AO while computing the taxable book profits - We direct the AO to re-compute the book profit u/s 115JB of the Act by giving reasons for making adjustment and giving an opportunity of being heard to the assessee.

Summary

1. ISSUES PRESENTED and CONSIDERED

The core legal questions considered in these appeals are:

(a) Whether the addition to total income on account of profit on sale/redemption of investments is justified, and whether exemption under section 10(38) of the Income Tax Act is rightly denied.

(b) Whether the assessee is entitled to the concessional tax rates under sections 111A and/or 112 of the Income Tax Act.

(c) Whether the disallowance of part of the depreciation allowance claimed under section 32 is justified.

(d) Whether the disallowance of provision made for standard assets is sustainable.

(e) Whether the provisions of section 115JB relating to Minimum Alternate Tax (MAT) are applicable to the assessee, and whether the computation of book profits under this section is correct.

(f) Legality and validity of the assessment order passed under section 143(3) and the appellate order of the Commissioner of Income Tax (Appeals).

2. ISSUE-WISE DETAILED ANALYSIS

Issue (a): Addition to Income on Profit on Sale/Redemption of Investments and Denial of Exemption under Section 10(38)

Relevant legal framework and precedents: Section 10(38) provides exemption for long-term capital gains arising from transfer of equity shares or units of equity-oriented mutual funds, subject to payment of Securities Transaction Tax (STT). The Tribunal's earlier decisions in the assessee's own cases for AY 2013-14 and AY 2016-17 have held that the exemption under section 10(38) is available upon verification of STT payment.

Court's interpretation and reasoning: The Tribunal found that the present issue is squarely covered by its earlier decisions where it was held that exemption under section 10(38) is available if STT is paid. The Tribunal directed the Assessing Officer (AO) to verify the status of STT payment and allow exemption accordingly.

Key evidence and findings: The facts in the present appeals are on parity with those in the earlier years where the Tribunal had allowed the exemption subject to STT verification.

Application of law to facts: Following consistency and precedent, the Tribunal remanded the matter to AO for verification of STT payment and allowed exemption under section 10(38) if STT was paid.

Treatment of competing arguments: The Revenue's reliance on denial of exemption was rejected in light of earlier Tribunal rulings and statutory provisions.

Conclusion: The addition to income on account of profit on sale/redemption of investments is not sustainable if STT is paid; the exemption under section 10(38) is to be allowed after verification.

Issue (b): Denial of Concessional Tax Rates under Sections 111A and/or 112

This ground was consequential to issue (a) and did not require separate adjudication.

Issue (c): Disallowance of Depreciation Allowance under Section 32

Relevant legal framework and precedents: Section 32 allows depreciation on assets used for business. The Tribunal's earlier decisions for AY 2013-14 and AY 2016-17 had remanded similar issues for fresh consideration by the AO.

Court's interpretation and reasoning: The Tribunal noted that all necessary details relevant to the depreciation claim were on record unlike earlier years and directed the AO to decide the issue afresh.

Key evidence and findings: The assessee had submitted requisite details for depreciation; the AO's disallowance was not supported by distinguishing facts.

Application of law to facts: Following consistency with earlier decisions, the Tribunal remanded the issue for fresh adjudication by the AO.

Treatment of competing arguments: The Revenue's arguments were not found to be supported by facts or law in light of prior rulings.

Conclusion: The disallowance of depreciation was set aside and the issue remanded for fresh consideration.

Issue (d): Disallowance of Provision Made for Standard Assets

Relevant legal framework and precedents: The assessee is engaged in general insurance business governed by section 44 and the First Schedule of the Income Tax Act, which mandates computation of profits as per the Insurance Act, subject to specified adjustments under Rule 5 of the First Schedule. The provision for standard assets is made as per IRDA guidelines, which require a general provision of 0.40% on standard assets, classified as those not disclosing any problem or non-performing assets (NPAs).

The Hon'ble Supreme Court has held that provisions or reserves created without a known or anticipated liability are reserves and not expenditure. The distinction between "provision" and "reserve" is well settled, with reserves not being deductible or allowable as expenditure.

Court's interpretation and reasoning: The Tribunal analyzed Rule 5 of the First Schedule and held that only adjustments specified therein are permissible. Rule 5(a) allows addition back of any expenditure or allowance not admissible under sections 30 to 43B. The provision for standard assets is a reserve for contingent loss, not an expenditure or allowance under the Act. Further, no CBDT notification expands the scope of adjustment to include such reserves.

The Tribunal relied on the Supreme Court's decision distinguishing provisions from reserves and held that the provision for standard assets is a reserve and therefore should not be disallowed by addition back under Rule 5(a).

Key evidence and findings: The assessee complied with IRDA prudential norms mandating the provision. The provision does not represent an actual or anticipated liability but a conservative reserve. No statutory provision mandates adding back such provision.

Application of law to facts: The Tribunal applied the statutory provisions and judicial precedents to conclude that the disallowance of provision for standard assets made by the AO and upheld by CIT(A) was incorrect.

Treatment of competing arguments: The Revenue relied on a decision involving a bank, which was distinguished on facts and law since the insurance business is governed by distinct provisions under the First Schedule. The CIT(A)'s order was found to have misread the statutory provisions.

Conclusion: The disallowance of provision for standard assets was deleted and ground No.4 allowed.

Issue (e): Applicability of Section 115JB (Minimum Alternate Tax) and Computation of Book Profits

Court's interpretation and reasoning: The Tribunal directed the AO to re-compute book profits under section 115JB, giving reasons for any adjustments and providing the assessee an opportunity to be heard.

Conclusion: Ground No.5 was partly allowed for statistical purposes, with directions for fresh computation.

Issue (f): Validity of Assessment and Appellate Orders

These grounds were not separately adjudicated upon in the present appeals.

3. SIGNIFICANT HOLDINGS

"Accordingly, the issue is decided in favour of the assessee and Ld. AO is directed to verify about the status of STT payment and accordingly allow the exemption u/s 10(38) of the Act."

"Section 44 read with Rule 5 of the First Schedule makes the figure of profit disclosed by the Profit and Loss account drawn as per the Insurance Act as absolute and binding. Only the adjustments specified in clauses (a) and (c) can be given effect to while computing the total income."

"The term 'expenditure' came up for consideration of this Court in Indian Molasses Co (P) Ltd vs. CIT [1959] 37 ITR 66. It was held: 'Spending' in the sense of 'paying out or away' of money is the primary meaning of 'expenditure'. 'Expenditure' is what is paid out or away and is something which is gone irretrievably. Expenditure, which is deductible for income-tax purposes, is one which is towards a liability actually existing at the time, but the putting aside of money which may become expenditure on the happening of an event is not expenditure.'"

"If the transfer of amount is made ad hoc, when there is no known or anticipated liability, such fund will only be treated as reserve."

"There is no enabling mechanism in Rule 5(a) mandating an adjustment to disclosed profits by making an addition on account of provision made for Standard Assets."

Core principles established include:

• The exemption under section 10(38) is available if STT is paid, and the AO must verify this fact.
• The computation of profits for insurance business under section 44 and Rule 5 of the First Schedule is sacrosanct except for specified adjustments.
• Provisions made as reserves for contingent losses, such as provision for standard assets mandated by IRDA, are not expenditure and cannot be added back under Rule 5(a).
• Minimum Alternate Tax computations under section 115JB require reasoned adjustments and opportunity of hearing.

Final determinations:

• Ground No.1 and its sub-grounds remanded to AO for verification of STT and allowance of exemption under section 10(38).
• Ground No.2 being consequential requires no separate adjudication.
• Ground No.3 remanded to AO for fresh consideration of depreciation claim.
• Ground No.4 allowed by deleting the disallowance of provision for standard assets.
• Ground No.5 partly allowed directing fresh computation of book profits under section 115JB.
• Ground No.6 requires no adjudication.
• Both appeals partly allowed for statistical purposes.