2018 (12) TMI 1939 - AT - Income Tax

Applicability of section 14A on insurance business - Addition u/s 14A r.w.r 8D - As argued applicant being insurance company and his total income is computed as per the provisions of section 44 provisions of section 14A read with rule 8D do not apply - HELD THAT - As decided in own case 2016 (11) TMI 598 - ITAT MUMBAI dismiss this ground of appeal of the revenue and direct the AO to delete the addition as held that Tribunal was justify in holding that provisions of section 14A of the Act did not apply to insurance business even when the assessee has claimed exempted income u/s 10 of the I.T. Act - Decided against revenue. Disallowance of carry forward of losses from pension business - HELD THAT - As decided in own case 2016 (11) TMI 598 - ITAT MUMBAI assessee followed the IRDA Recommendations and accordingly prepared the actuarial valuation report including the surplus or deficit. The Rule 2 prescribes only actual valuation in accordance with Insurance Act 1938. Looking at the issue we noticed that the computation made by the assessee is in accordance with Rule 2 of the Insurance Act 1938 according to which only AO can base his computation. The Revenue has not contested that the working of actuarial surplus / deficit is not in accordance with Rule 2 of 1st Schedule. Accordingly we are of the view that the CIT(A) has rightly deleted the addition and we confirmed the same. Disallowance of deduction/exemption claimed by the assessee u/s. 10(34) of the Act in respect of dividend income - HELD THAT - As decided in own case 2016 (11) TMI 598 - ITAT MUMBAI the exemption available to any other assessee under any clauses of section 10 is also available to a person carrying on non-life insurance business subject to the fulfilment 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 fulfil 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 - Decided against revenue.

Summary

Issues Involved:
1. Disallowance of expenses under section 14A of the Income Tax Act.
2. Rejection of claim for carry forward of losses from pension business.
3. Deletion of addition made by AO on account of negative reserve.
4. Deletion of disallowance of deduction/exemption claimed under section 10(34) of the Income Tax Act.

Issue-wise Detailed Analysis:

1. Disallowance of Expenses under Section 14A:
The first issue pertains to the disallowance of expenses related to exempt income under section 14A of the Income Tax Act, read with Rule 8D of the Income Tax Rules, amounting to Rs. 3,84,65,018/-. The appellant argued that section 14A does not apply to insurance companies, which are governed by section 44 read with the First Schedule of the Act. The tribunal referred to its previous decisions, including those in the cases of ICICI Prudential Insurance Co. Ltd. and Bajaj Allianz General Insurance Co. Ltd., which held that section 14A does not apply due to the non obstante clause of section 44. The tribunal consistently decided in favor of the assessee, stating that the AO cannot travel beyond section 44 and the First Schedule. The tribunal allowed the assessee's appeal, following its own precedents and pending substantial questions of law in higher courts.

2. Rejection of Claim for Carry Forward of Losses from Pension Business:
The second issue involves the rejection of the assessee's claim for carry forward of losses amounting to Rs. 11,52,53,672/- from the pension business segment. The tribunal noted that this issue was covered in favor of the assessee by previous decisions, including those in the cases of ICICI Prudential Insurance Co. Ltd. and LIC of India. The tribunal referred to the Bombay High Court's judgment, which held that losses from pension funds should be considered in the actuarial valuation of insurance business profits. The tribunal allowed the assessee's appeal, following the high court's ruling that section 10(23AAB) does not exclude such losses from the computation of insurance business profits.

3. Deletion of Addition Made by AO on Account of Negative Reserve:
The third issue concerns the deletion of an addition made by the AO on account of negative reserve, which purportedly reduced the taxable surplus. The tribunal cited the Bombay High Court's decision in the case of ICICI Prudential Insurance Co. Ltd., which held that the actuarial valuation, including mathematical reserves, should not be adjusted by the AO. The tribunal confirmed that the computation of actuarial surplus or deficit should be in accordance with Rule 2 of the Insurance Act, 1938, and upheld the CIT(A)'s deletion of the addition. The tribunal dismissed the revenue's appeal on this issue.

4. Deletion of Disallowance of Deduction/Exemption Claimed under Section 10(34):
The fourth issue involves the deletion of disallowance of deduction/exemption claimed by the assessee under section 10(34) for dividend income. The tribunal referred to its previous decision and the Bombay High Court's ruling in the case of ICICI Prudential Insurance Co. Ltd., which confirmed that exemptions under section 10 apply to insurance companies. The tribunal noted that the revenue could not provide any adverse precedent and upheld the CIT(A)'s order allowing the exemption. The tribunal dismissed the revenue's appeal on this issue.

Conclusion:
The tribunal allowed the assessee's appeal on the disallowance of expenses under section 14A and the carry forward of losses from the pension business. It dismissed the revenue's appeals on the issues of negative reserve adjustment and exemption under section 10(34). The tribunal's decisions were based on consistent precedents and higher court rulings, ensuring that the insurance business computations adhere to the specific provisions of section 44 and the First Schedule of the Income Tax Act.