TMI Blog2007 (5) TMI 364X X X X Extracts X X X X X X X X Extracts X X X X ..... to as the CIT(A) ] erred in confirming the order of the Income-tax Officer 3(2)(4), Mumbai (hereinafter referred to as AO ) thereby assessing income at Rs. 2,40,41,710 as against NIL returned income, on the ground that appellant had not commenced the business of Life Insurance, since no life insurance policies were issued." 5. Ground No. 2 is in the nature of arguments, hence, the same would be considered while deciding ground No. 1 and no separate decision shall be given thereon. 6. In Ground No. 3, the assessee is disputing the head of assessability of interest income earned by the assessee. 7. In Ground No. 4, the assessee is aggrieved by the decision of learned CIT(A) in allowing only 5% of interest income as expenditure incurred for earning such interest income against the claim of Rs. 166.92 lakhs made by the assessee. 8. The facts, relating to Ground No. 1, are that the assessee-company was formed on 31-8-2000 to carry on the Life Insurance business. The share, capital stood at Rs. 101 crores contributed by M/s. Kotak Mahindra Finance Ltd. which held 74% of the share capital and Old Mutual Plc.UK. The assessee-company, though earned interest of Rs. 3,31, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s made before the Assessing Officer were reiterated. The assessee also referred to provisions of section 27 of the Insurance Act, 1938 to contend that it had invested controlled funds comprising of shareholder funds in approved securities, hence, it had commenced the business although no policies were issued during the year. The assessee also contended that it had been granted registration by Insurance Regulatory and Development Authority on 10-1-2000 after compliance of statutory requirements. The assessee also relied on the decision of the Tribunal in the case of HSBC Securities India Holdings (P.) Ltd. v. Dy. CIT [IT Appeal No. 3181 (Mum.) of 1999, dated 28-11-2001] wherein it was held that it was a question of fact as to when the business was set up and this question had to be decided on consideration of all facts and circumstances of the case because each step taken by the assessee before the commencement of business was important having regard to the nature of business. The learned CIT(A), after considering the submis- sions of the assessee, held that in the case of assessee, the business of life insurance could said to have been established but not commenced because the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he assessee would result in to business loss, being eligible for set off as per the provisions of the Act. The learned counsel also contended that even if it was assumed that First Schedule did not apply to the assessee, but that would not mean that assessee was not in the business. Thereafter, the learned counsel referred to the judicial decisions in support of his various contentions which are briefly stated as under. The learned counsel contended that assessee s business had already commenced as it completed various essential steps of its business and for this proposition, the learned counsel relied on following decisions : (1) CIT v. Saurashtra Cement Chemical Industries Ltd. [1973] 91 ITR 170 (Guj.). (2) Sarabhai Management Corpn. Ltd. v. CIT [1976] 102 ITR 25 (Guj.). (3) CIT v. Sarabhai Management Corpn. Ltd. [1991] 192 ITR 151 (SC). ( ii ) As regards the head of interest income being profits and gains of business or profession, the learned counsel relied on the following judicial decisions and Board Circular No. 22R. BIS 51(14) IT-47, dated 23-9-1947. ( i ) CIT v. Karnataka State Co-operative Apex Bank [2001] 251 ITR 194 (SC). ( ii ) CIT v. Ra ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... facturing/trading companies, whereas the assessee-company was engaged in life insurance business, hence, those were not applicable. It was further contended that these decisions were of the period before the period of insertion of section 35D of the Act, hence, were not relevant as on date. The learned D.R. also contended that the licence given by IRDA was a step enabling the assessee to carry on the life insurance business but this by itself was not sufficient to hold that the assessee s business commenced thereafter because assessee by its own act of not effecting any insurance policy refrained itself from doing business of life insurance. In this regard, the learned D.R. referred to the press release dated 16th May, 2001 of Old Mutual Plc, being a constituent of the assessee, wherein it was mentioned that first product for the Indian Market was launched on 16th May, 2001 and this date was chosen to coincide with the 156th anniversary of the founding in Cape Town South Africa of Old Mutual Plc, one of its two shareholders. The learned D.R. also referred to other press release of the assessee dated 9-1-2002 wherein 1st year of operation was mentioned as ended on December, 2001, he ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iness and not merely to get a registration from IRDA, therefore, the interest income was liable to be taxed as business income. The learned counsel also referred to para 18 of the decision of the Tribunal in the case of HSBC Securities India Holdings (P.) Ltd. v. Dy. CIT [IT Appeal No. 3181 (Mum.) of 1999 for assessment year 1995-96, order dated 28-11-2001] and contended that all the activities undertaken by the assessee till the grant of registration by IRDA were similar to the activities undertaken by the share broker in the aforesaid case, hence, the ratio of this decision was squarely applicable and accordingly expenses incurred by the assessee after 10th January, 2001 were allowable as deduction and if a loss was computed, the same was eligible to be set off and/or carry forward to the subsequent years. The learned counsel also distinguished the case of Jt. CIT v. Sardar Sarovar Narmada Nigam Ltd. [2005] 93 ITD 321 (Ahd.) by stating that in that case even a brick was not laid whereas in the present case substantial activities had been undertaken which resulted in the commencement of business. 12. We have considered the submissions made by both sides, material on re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g of clause ( 11 ) shows that by the expression life insurance business is meant the business of effecting contracts of insurance upon human life. The only question which we have to consider in this regard is what is meant by effecting contracts of Insurance . According to Mr. Mehta this only means issuing new policies of insurance, whereas, according to Mr. Joshi, even the servicing of old policies would amount to carrying on insurance business. We find that the Dictionary meaning of the verb effect which is appropriate to the present case, is to take or to take out ( see Concise Oxford Dictionary of current English , Fifth Edition, page 389). What we have to consider is whether the said expression in section 2(11) of the I.T. Act should be given more extensive meaning than the aforesaid dictionary meaning. We see no reason to do any such thing. It is clear from the order of the Tribunal that the result of giving a wider meaning to the expression effecting contract of insurance upon human life would be to limit the permissible management expenses in the manner laid down in sub-rule (2) of the said Schedule, which would obviously be unfair in a case like this. It is not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r the purpose of taxation based upon various judicial decisions which are also distinguishable on facts. We are further of the opinion that the word "set up" used in section 3 is for different purposes and is not relevant for the purpose of considering the allowance or disallowance of expenses because the deduction are to be allowed under specific heads subject to satisfaction of the conditions specified therein. Section 44 and rule I of First Schedule, both refer to business carried on by an assessee and the words "carry on" means to continue i.e. remain in existence/operation or to keep happening without stopping or to start again in the present case, the assessee cannot be said to have stated operation for merely the reason that it has deposited the funds raised in Bank/approved securities because every prudent person would do so and would not keep the funds idle even if it is not required to make investments in a specified securities by law. What is relevant in the present case is issuance of life insurance policy which the assessee has not done, hence, it has not commenced the business. Further, the assessee has stated that agents are not required but from the reply to the I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sions of section 35D would not be applicable in subsequent year because of overriding effect of provisions of section 44 of the Act. Therefore, assessee would be deprived of amortization of expenses under section 35D as well. Be it so, the allowability of an expenditure is dependent upon the express provisions of law, hence, if the assessee does not meet the requirements of law, the expenses cannot be allowed. Having stated so, the position is that section 44 is overriding provision only with respect of computation of profits and gains of life insurance business, hence, the charging section remains section 28 which also mandates carrying on of business in the previous year as a pre-requisite for allowability of the expenses. Since it has already been held that assessee has not carried on the business in the year under consideration, the assessee cannot get any deduction of expenses incurred by it either before or after 10th January, 2001, being the date of registration granted by IRDA, till 31-3-2001. Thus, the contention of the assessee for allowances of expenses as business expenses is rejected. 14. As regards the head of assessability of interest income earned by the assesse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bona fide understanding of law and relying upon certain judicial pronouncements, therefore, it was merely a case of genuine difference of opinion on matters of law between the assessee and Assessing Officer and which was clearly outside the scope of Explanation 1 to section 271(1)( c ) of the Act. The learned CIT(A), however, held that the word deliberately had been deleted from the section 271(1)( c ) of the Act, therefore, it could be held that the assessee concealed the particulars of its income. The learned CIT(A), accordingly, confirmed the penalty but reduced the quantum thereof to Rs. 83,21,997. Still aggrieved, the assessee is in appeal before us. 20. The learned counsel for the assessee, initiated his arguments by stating that levy of penalty was invalid as there was no satisfaction recorded by the Assessing Officer in the quantum assessment order and for this proposition, he relied on the following decisions: 1. Diwan Enterprises v. CIT [2000] 246 ITR 571 (Delhi). 2. CIT v. Globe Sales Corpn. [2005] 145 Taxman 530 (Delhi). The learned counsel further pointed out that the appellant made a full disclosure and acted in a bona fide manner, therefore, ..... X X X X Extracts X X X X X X X X Extracts X X X X
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