2025 (6) TMI 1488 - HC - Income Tax

Profit on sale of investments - Assessee carrying on a general insurance business - HELD THAT - Question answered in favour of the assessee in light of the judgement of United India Insurance Co 2020 (5) TMI 755 - SC ORDER (LB) affirming the decision of this Court in United India Insurance Co 2019 (7) TMI 387 - MADRAS HIGH COURT as held with the Assessee carrying on a general insurance business it was bound by the provisions of the IA as well as the IRDA Regulations referred to hereinbefore. Even the CBDT in its Circular No.5/2010 dated 3rd June 2010 acknowledged that after the introduction of the IRDA Regulations in 2002 non-life insurance companies are required to credit income from the sale of investments directly to the P L Account. This requirement which would make the income so earned amenable to tax was made applicable only from AY 2011-12. Prior to 1st April 2011 there was no provision which required the Revenue to disallow the deduction of loss on sale of investments. In terms of the above decision prior to 1st April 2011 there was no provision which required the Revenue to disallow the deduction of loss on sale of investments. MAT/115 JB on Insurance Companies the said issue is answered in favour of the assessee in light of the decision of Royal Sundaram Alliance Insurance Co. Ltd. 2019 (2) TMI 923 - MADRAS HIGH COURT as ITAT held Insurance Companies prepare profit and loss account as per the guidelines issued by the Insurance Regulatory and Development Authority of India and not as per Part II and III of Schedule VI of Companies Act. Furthermore the applicability of Schedule VI of the Companies Act was specifically excluded in respect of Insurance Companies. The revenue has not been able to dislodge this finding before us in these appeals. We find that the conclusion arrived at by the Tribunal in this regard is proper and valid. Commission paid for receipt of re-insurance are also answered in favour of the assessee in light of the decision of Royal Sundaram Alliance Insurance Co. Ltd 2019 (2) TMI 923 - MADRAS HIGH COURT as noted that as a matter of industrial practice it was termed as commission on reinsurance premium received however in substance it is discount on re-insurance premium received by an Insurance Company from another Insurance Company. We find that the Tribunal rightly decided the issue in favour of the assessee. TDS on the payments made to surveyors outside the Country - Whether they are not taxable in India? - HELD THAT - Issue answered in favour of the assessee in light of the decision in Royal Sundaram Alliance Insurance Co. Ltd. 2019 (2) TMI 923 - MADRAS HIGH COURT as held disallowance u/s 40(a)(i) can be made only if taxes are not withheld on income chargeable to tax in India. On facts it held that the payment was made to Royal and Sun Alliance U.K. to settle the amounts of various surveyors on cost to cost basis and the surveyor does not make available any technical knowledge which can independently be applied by the assessee and consequently held that the payment by the assessee would not be taxable as fees for technical services in the hands of the recipient. As noted that in the absence of permanent establishment the income in the hands of the recipient is also not taxable in India. Depreciation on UPS answered in favour of the assessee in light of the decision of the Madras High Court in T.V.Sundaram Iyengar Sons Ltd 2021 (11) TMI 1220 - MADRAS HIGH COURT as held assessee was entitled to depreciation at 60%. Disallowance u/s 14A - Clause (b) states that gain or loss on realisation of investments if not credited or debited to profit and loss account shall be added back and similarly provision for diminution in the value of investments debited to profit and loss account are to be added back. Clause (c) states that any amounts carried over to a reserve for unexpired risks as may be prescribed are to be allowed as a deduction. Barring the aforesaid adjustments there can be no other adjustments contemplated to the scheme of computation of profits and gains of other insurance businesses. Reference to Section 14A thus does not arise in the context of such computation. In the scheme as we have set out above the legislative intent is clear to put in place a distinct and different scheme for computation of profits from other insurance business. The substantial question of law in relation to this issue is thus answered in favour of the assessee and against the revenue. Disallowing the re-insurance premium under Section 40(a)(i) - We find from the records that the Department had contested the issue of liability under Section 40(a)(i) upto A.Y.2014-15 upto the level of the High Court under Section 260A of the Act for A.Ys.2015-16 and 2018-19 before the Income Tax Appellate Tribunal and has not contested the issue from A.Y.2020-21 onwards accepting the stand of the assessee in full at the stage of assessment. Hence the ratio of the judgements in C.K.Gangadharan 2008 (7) TMI 10 - SUPREME COURT and J.K.Charitable Trust 2008 (11) TMI 8 - SUPREME COURT are distinguishable. As far as the decision in CIT V. Oswal Agro Mills Ltd 2008 (2) TMI 398 - SC ORDER is concerned the issue that arose for consideration there is related to eligibility of deduction of expenses incurred as management expenses . The Tribunal and the High Court had acceded to the stand of the assessee on the basis of Rule of consistency. Those orders were reversed the Supreme Court expressing the view that that ought not to have been the sole basis for answering the substantial questions of law. We have in the present order also looked into the substantive issue of liability under Section 40(a)(i) and invocation of the Rule of consistency is additional intended only to buttress on conclusion. Hence and in light of the discussion as aforesaid we see no necessity to admit the substantial questions of law now raised under the Miscellaneous Petitions.

Summary

The core legal questions considered by the Court in these appeals arising from multiple assessment years primarily relate to the tax liabilities and deductions of an insurance company under the Income Tax Act, 1961. The issues adjudicated include the liability to deduct tax at source (TDS) on payments made to foreign surveyors and reinsurance commissions, the taxability of profits on sale of investments, the rate of depreciation applicable to certain assets such as UPS and motor vehicles, the applicability of Section 14A disallowance provisions, and the applicability of Minimum Alternate Tax (MAT) under Section 115JB to insurance companies.

Issue 1: Liability to Deduct Tax at Source on Payments to Surveyors Outside India

The question was whether the assessee was liable to deduct tax at source on payments made to surveyors located outside India and whether such payments were taxable in India. The Tribunal had held against the Revenue, finding no liability to deduct tax at source.

The Court analyzed relevant precedents including decisions where it was held that surveyors engaged to assess damage to goods in transit, without a permanent establishment in India, do not render taxable technical services in India. The Court noted that the surveyors did not share technical knowledge with the assessee and that payments were made on a cost-to-cost basis through a foreign entity without any permanent establishment in India. Reliance was placed on authoritative decisions holding that reimbursements or payments for services without taxable presence or technical service character are not subject to TDS. The Court found no material to counter the Tribunal's factual findings and upheld the Tribunal's view that payments to foreign surveyors were not taxable in India and thus not subject to TDS deduction.

Issue 2: Liability to Deduct Tax at Source on Commission Paid for Receipt of Reinsurance Premiums

The issue was whether the assessee was liable to deduct tax at source on commission payments related to reinsurance premiums. The Tribunal had ruled in favor of the assessee.

The Court considered the industrial practice and factual matrix, noting that the commission was essentially a discount on reinsurance premiums and not income chargeable to tax in India. The Court referred to the Tribunal's finding that the payments were made to non-resident reinsurers (NRRs) outside India and that the brokers involved acted merely as facilitators without authority to conclude contracts or constitute permanent establishments. The Court found no grounds to interfere with the Tribunal's decision and held that the assessee was not liable to deduct tax at source on such commissions.

Issue 3: Taxability of Profit on Sale of Investments

The question was whether the profit on sale of investments was exempt from tax, despite arguments that such profits were hypothetical or unrealized.

The Court relied on binding Supreme Court and High Court precedents which clarified that for general insurance companies, profits or losses on sale of investments are to be included or excluded in accordance with Rule 5(b) of the First Schedule to the Income Tax Act. This rule was omitted in 1988 and reintroduced in 2011, creating a period during which profits on sale of investments were not taxable. The Court cited decisions holding that prior to 1st April 2011, no provision required disallowance of losses or taxation of profits on sale of investments by insurance companies. The Court held that the Tribunal was justified in exempting such profits for the relevant years and answered the question in favor of the assessee.

Issue 4: Rate of Depreciation on UPS and Computer-Related Equipment

The issue concerned whether UPS (Uninterrupted Power Supply) units should be treated as part of computer equipment eligible for higher depreciation at 60%, or as plant and machinery eligible for 15% depreciation.

The Court referred to earlier decisions including those of the Madras High Court and the Delhi High Court, which held that UPS and related equipment integral to computers are entitled to higher depreciation at 60%. The Court noted the absence of evidence that UPS had independent use outside of computers and upheld the Tribunal's finding allowing depreciation at 60%. The Court rejected Revenue's contention for lower depreciation and confirmed the higher rate.

Issue 5: Applicability of Section 14A Disallowance in Computing Income of Insurance Companies

The question was whether disallowance under Section 14A (which denies deduction for expenditure incurred to earn exempt income) applies to insurance companies whose income computation is governed by Section 44 read with Rule 5 of the First Schedule.

The Court examined the statutory framework, emphasizing the non-obstante clause in Section 44 which mandates that profits and gains of insurance business be computed strictly as per the First Schedule rules, excluding application of Sections 28 to 43B and Section 199. Rule 5 of the First Schedule provides a self-contained methodology for computing profits and gains of insurance business, including specific adjustments. The Court held that Section 14A does not apply to insurance companies because the computation is governed exclusively by Section 44 and Rule 5. This interpretation was consistent with the legislative intent to create a distinct computation regime for insurance companies. The Court thus answered the question in favor of the assessee, holding that Section 14A disallowance is excluded in their case.

Issue 6: Depreciation Rate on Motor Vehicles

The question was whether the assessee was entitled to a higher depreciation rate of 50% on motor vehicles used in the business, despite the Appendix I to Rule 5 specifying higher rates only for vehicles used on hire.

The Court noted that this issue was not pursued by the Revenue and hence returned the question unanswered.

Issue 7: Applicability of Minimum Alternate Tax (MAT) under Section 115JB to Insurance Companies

The question was whether insurance companies are subject to MAT provisions under Section 115JB, which require computation of book profits as per the Companies Act.

The Court referred to prior decisions holding that insurance companies prepare accounts as per Insurance Regulatory and Development Authority (IRDA) guidelines, not under Part II and III of Schedule VI of the Companies Act. The applicability of Schedule VI was specifically excluded for insurance companies. The Court found no basis to disturb the Tribunal's conclusion that MAT provisions under Section 115JB do not apply to insurance companies. The question was answered in favor of the assessee.

Additional Issues Raised in Miscellaneous Petitions: Liability under Section 40(a)(i) for Non-Deduction of TDS on Reinsurance Premiums

The Revenue sought to admit substantial questions of law regarding the disallowance under Section 40(a)(i) for failure to deduct tax at source on reinsurance premiums ceded to non-resident reinsurers (NRRs) and whether such premiums are taxable in India.

The Court examined the history of litigation on this issue, noting that the Department had contested the matter up to various appellate levels for earlier years but had acquiesced in later years (from AY 2020-21 onwards) by not raising the issue and accepting the assessee's stand. The Court also referred to prior judgments including the Supreme Court's overruling of the Bombay High Court's decision in the Vodafone case and the Madras High Court's ruling that payments to NRRs are not taxable in India under the Act or relevant Double Taxation Avoidance Agreements (DTAAs).

The Tribunal's detailed factual findings established that the brokers involved did not constitute permanent establishments or business connections in India, and acted only as facilitators under IRDAI regulations. The Court observed that the Department failed to produce evidence to contradict these findings. The Court further noted the principle of consistency, whereby once the Department accepts a legal position in a given factual matrix, it should not take a contrary stand for other years without compelling reasons.

Considering these factors, the Court declined to admit the substantial questions of law sought by the Department, holding that no substantial question arises for consideration. The Court dismissed the miscellaneous petitions accordingly.

Significant Holdings and Legal Principles Established

1. Payments to foreign surveyors without a permanent establishment or taxable presence in India are not subject to TDS under Indian tax laws.

2. Commission payments related to reinsurance premiums paid to non-resident reinsurers are not taxable in India and are not subject to TDS deduction, especially where brokers act only as facilitators without authority to conclude contracts.

3. Profits on sale of investments by general insurance companies are exempt from tax for assessment years prior to 1st April 2011 due to the omission of Rule 5(b) of the First Schedule during that period.

4. UPS and related equipment integral to computers are entitled to higher depreciation at 60% rather than the lower rate applicable to plant and machinery.

5. Section 14A disallowance provisions do not apply to insurance companies whose income computation is governed exclusively by Section 44 and Rule 5 of the First Schedule, which provide a distinct methodology excluding Sections 28 to 43B and Section 199.

6. Minimum Alternate Tax under Section 115JB does not apply to insurance companies as their accounts are prepared under IRDA guidelines, not under the Companies Act schedules applicable to other companies.

7. The principle of consistency in tax administration prevents the Department from reopening settled issues without compelling justification, especially where it has acquiesced in later years.

8. The Court emphasized that the Tribunal's factual findings regarding the role of brokers and the absence of permanent establishment were unchallenged and form a binding basis for the legal conclusions.

In conclusion, the Court upheld the Tribunal's decisions on all substantial questions of law raised by the Revenue, dismissed the appeals, and declined to admit additional substantial questions sought by the Department, thereby affirming the tax treatment favorable to the assessee for the relevant assessment years.