2011 (9) TMI 1048 - AT - Income Tax

Confirming taxation of dividend income - denying the exemption claimed by the Appellant u/s.10(34) - Held that - Sec. 44 provides that computation of income of Insurance companies under various heads should be as per the First Schedule. But what we are considering is an income falling under Chapter-III which is to be excluded from total income. We are of the opinion that under the scheme of Act no income falling within the various clauses of Sec.10 of the Act is to be compulsorily excluded in computing the total income of the assessee and the provision of Sec.44 in relation to computation of profits and gains of business of insurance do not include incomes otherwise exempt u/s.10 (34). Therefore the dividend income of Rs. 6, 78, 13, 292 is treated as exempt u/s.10 (34) of the Act has to be excluded from the computation of total income of the assessee Disallowance in accordance with Rule 8D 2 Sec.14A - Held that - We delete the entire disallowance made under 14A as no expenditure is incurred for earning exemption dividend income.

Summary

Issues Involved:
1. Taxability of dividend income in the computation of taxable income of an insurance company under Section 44 read with Section 10(34) of the Income-tax Act, 1961.
2. Disallowance of expenditure incurred for earning dividend income under Section 14A of the Income-tax Act.

Issue 1: Taxability of Dividend Income:
The Appellate Tribunal, ITAT Mumbai, heard an appeal by the assessee, a corporate entity engaged in life insurance business, against the inclusion of dividend income of Rs. 6,78,13,292 in the taxable income under Section 44 despite its exemption under Section 10(34). The assessee argued that the dividend income, being exempt, should be excluded from the computation of taxable income. The Assessing Officer contended that once the actuary valued the surplus or deficit, no further adjustment was permissible under Section 44. The CIT(A) upheld the taxability of the dividend income, stating that for computing taxable income, the actuary's valuation should be considered without adjustments beyond those prescribed in Schedule 1. The Tribunal, referring to relevant case laws, held that income falling under Chapter III, exempt under Section 10, should be excluded from total income. It concluded that the dividend income should be treated as exempt under Section 10(34) and excluded from the assessee's total income.

Issue 2: Disallowance of Expenditure for Dividend Income:
The second issue raised by the assessee concerned the disallowance of Rs. 2,77,69,215 as expenditure incurred for earning dividend income under Section 14A. The CIT(A) supported the Assessing Officer's disallowance, citing Rule 8D as justifiable for all Section 14A disallowances. The assessee argued that Rule 8D's notional cost of holding investments did not relate to actual expenditure. The Tribunal referred to various decisions, including Bajaj Alliance General Insurance Company Ltd and Reliance General Insurance Co Ltd, where it was held that Section 14A was not applicable to insurance businesses governed by Section 44 and Schedule 1. Following these precedents, the Tribunal deleted the entire disallowance under Section 14A, as no expenditure was incurred for earning exempt dividend income.

In conclusion, the Appellate Tribunal allowed the assessee's appeal, holding in favor of the assessee on both issues. The judgment emphasized the exclusion of exempt income from total income under Section 10 and the inapplicability of Section 14A disallowances to insurance businesses governed by Section 44 and Schedule 1.