LIFE INSURANCE BUSINEE- LOSS OF EXEMPTED SCHEMES ALLOWED- supports views of author that loss of LTCG (with STT) is loss eligible for set off and carry forward.

[C.A. DEV KUMAR KOTHARI]

Commissioner of Income Tax – 1, Versus Life Insurance Corporation of India Limited, 2011 -TMI - 204940 - BOMBAY HIGH COURT

Section 44 of Income-tax Act, 1961

Rules contained in the First Schedule to the Income Tax Act, 1961.

Insurance Act, 1938.

Section 10 (23AAB) of Income-tax Act, 1961.

Section 10 (38) of the income-tax Act, 1961.

CIT Vs, LICI 2011 TMI 204940:

In this case two issues were involved however, for the present write-up we are concerned with only one issue that is whether the Tribunal was correct in allowing set off of loss in a scheme, when income of such scheme would be exempt u/s 10(23AAB).

Questions before the High Court:

On the above issue with which we are concerned in this write-up, the following substantial questions of law were formulated (reproduced with the same number as found in the judgment but with highlights:

(c) Whether on the facts and in the circumstances of the case and in law the Tribunal was justified in deleting the addition made by the Assessing Officer on account of loss from Jeevan Suraksha Fund ignoring the settled position of law that income includes loss and that the income from Jeevan Suraksha Fund does not form part of the total income of the Assessee Corporation u/s. 10(23AAB) of the Income Tax Act, 1961?  

(d) Whether on the facts and in the circumstances of the case the Tribunal was justified in ignoring the fact that the non obstante clause in section 44 is not extended to section 10(23AAB) of the Income Tax Act, 1961 ?

Facts of the case:

In the revised return the assessee (LICI) inter alia claimed set off of loss suffered in Jeevan Suraksha Fund of amounting to Rs.638.33 crores for set off against other income from business of life insurance.

The AO disallowed the same on the ground that positive income of this fund would is exempted u/s 10 (23AAB), that income includes loss (negative income), and therefore the loss of such scheme is not eligible for set off (added by author- impliedly carry forward also). The CIT(A) confirmed the order of the AO. On appeal the Tribunal allowed claim of assessee- LICI. Revenue preferred appeal before the High Court. The High Court affirmed the order of Tribunal and answered questions in favour of assessee and dismissed appeal of the revenue. 

Regarding adjustment of loss of Jeevan Suraksha Fund the High Court observed that the object of inserting Section 10(23AAB) was not with a view to treat the pension fund like Jeevan Suraksha Fund outside the purview of insurance business but to promote insurance business by exempting the income from such fund.

Therefore, in the facts of the present case, the decision of the Income Tax Appellate Tribunal in holding that even after insertion of Section 10(23AAB), the loss incurred from the pension fund like Jeevan Suraksha Fund had to be excluded while determining the actuarial valuation surplus from the insurance business under Section 44 of the Income Tax Act, 1961.

From the judgment of the High Court on relevant points(with highlights added by author for analysis):

1. Counsel for the parties state that the decision on the above questions would apply to the other tax appeals as well.  
2.   The assessee is engaged in the Life Insurance Business. The profits and gains of insurance business are liable to be computed as per Section 44 read with the First Schedule to the Income Tax Act, 1961.  
3.   In the revised return of income filed for the assessment year in question, the actuarial valuation surplus was computed by excluding XXX loss in Jeevan Suraksha Fund amounting to Rs.638.33 crores.
4.    TheAO disallowed the claim of the assessee and passed the assessment order by adding xxx, loss from Jeevan Suraksha Fund, inter alia on the ground that xxx   that income from Jeevan Suraksha Fund being exempt under Section 10(23AAB), the loss incurred from the said fund cannot be adjusted against the taxable income.  
5.   On appeal filed by the assessee, the Commissioner of Income Tax (Appeals) confirmed the additions made by the Assessing Officer.  
6.   On further appeal filed by the assessee, the Income Tax Appellate Tribunal by the impugned order deleted the said additions. Hence, the revenue has filed these appeals under Section 260A of the Income Tax Act, 1961.  
7.  As regard questions (c) and (d) are concerned, the dispute is whether the loss incurred by the assessee from Jeevan Suraksha Fund is liable to be excluded in computing the actuarial valuation surplus in view of the fact that the income from Jeevan Suraksha Fund is exempt under Section 10(23AAB) of the Income Tax Act, 1961.
8.   The argument of the Revenue is that with the insertion of Section 10(23AAB) by Finance (No.2) Act, 1996 with effect from 1st April 1997, the profits as well as loss arising from Jeevan Suraksha Fund would not be includible in the total income of the assessee and, therefore, while determining the distributable profits of the assessee, the loss from Jeevan Suraksha Fund ought not to be allowed to be adjusted against the taxable income.  
9.   Jeevan Suraksha Fund is a pension fund approved by the Controller of Insurance appointed by the Central Government to perform the duties of the Controller of Insurance under the Insurance Act, 1938.
10. The loss incurred in the Jeevan Suraksha Fund has been considered by the actuary as a business loss, as per the valuation report as on the last day of the financial year, allowable under Section 44 read with the First Schedule to the Income Tax Act, 1961.
11. The fact that the income from such fund has been exempted under Section 10(23AAB) with effect from 1st April 1997, does not mean that the pension fund ceases to be insurance business, so as to fall outside the purview of the insurance business covered under Section 44 of the Income Tax Act, 1961.
12. The pension fund like Jeevan Suraksha Fund would continue to be governed by the provisions of Section 44 of the Income Tax Act, 1961 irrespective of the fact that the income from such fund are exempted, or not.
13. Therefore, while determining the surplus from the insurance business, the actuary was justified in taking into consideration the loss incurred under Jeevan Suraksha Fund.  
14.  The object of inserting Section 10(23AAB) as per the Board Circular No.762 dated 18th February 1998 was to enable the assessee to offer attractive terms to the contributors.
15. The object of inserting Section 10(23AAB) was not with a view to treat the pension fund like Jeevan Suraksha Fund outside the purview of insurance business but to promote insurance business by exempting the income from such fund.
16. Therefore, in the facts of the present case, the decision of the Income Tax Appellate Tribunal in holding that even after insertion of Section 10(23AAB), the loss incurred from the pension fund like Jeevan Suraksha Fund had to be excluded while determining the actuarial valuation surplus from the insurance business under Section 44 of the Income Tax Act, 1961 cannot be faulted.
17. Accordingly, questions (c) and (d) are answered in the affirmative, that is, in favour of the assessee and against the Revenue.  

Authors point of view:

The judgment of the High Court is correct and deserves to be accepted by revenue and revenue should not challenge the same. Besides the reason applied by the Bombay High court author also want to add as follows:

1. a.      The concept that ‘income includes loss’ is not applicable in all cases and all situations.  This is applicable in case of determination of net income after set offs. After judgment of the Supreme Court on this aspect Explanation 2 was inserted in section 64, and the Explanation clearly says that it is for the purpose of section 64.  The Explanation reads as follows:

Explanation 2.—For the purpose of this section, “income” includes loss.

Therefore, in view of the author the revenue was not correct while contending that concept income includes loss should be applied. The Bombay High Court has not considered this aspect, for reason that it applied other aspect that Jeevan Suraksha Fund is also a part of business of assessee and exemption is granted for promoting such schemes and business. Therefore, perhaps the counsels need not to argue on the aspect that concept that income includes loss is not applicable.

1. b.      When a source of income or head of income is not exempt, loss arising under such head will be eligible for set off, even if the positive income would be exempt, loss can be computed , set off and carry forwarded unless specifically prohibited for any reason. When a source itself is exempt or is not subject to tax at all, then only position will be different. But when a particular business or source of income is not exempt, the loss can be allowed.
2. c.       In case of loss any exemption provision is not at all applicable and it would be meaningless. It cannot be said that the legislators have made provisions of exemption in situations where exemption will be of no meaning and purpose. There is no need to say that income tax shall not be payable on loss suffered from any activity or business. This is because income-tax cannot be imposed on loss. Loss is never chargeable to income-tax. 
3. d.      Generally a loss computed under the head ‘house property’ ‘capital gains’ or ‘business or profession’, or ‘other sources’ can be set off and carried forward, subject to compliance of necessary preconditions. Therefore, exercise of computing loss, setting it off and carrying forward the balance will be a purposeful exercise and not an exercise in vacuum.

Earlier article:

On the subject the readers can read other articles written by the author and webhosted on this website, in which author has expressed view that long-term capital  loss under the head capital gains will be eligible for set off and carry forward even when security transaction tax has been levied at the time of sale of securities and positive income would be exempt u/s 10(38).