TMI Blog2010 (3) TMI 709X X X X Extracts X X X X X X X X Extracts X X X X ..... 938. The petitioner is by the mandate of law required to maintain its accounts in accordance with the provisions of the Insurance Regulatory and Development Authority (Preparation of Financial Statements and Auditor's Report of Insurance Companies) Regulations, 2002 read with section 211 of the Companies Act, 1956. 3. The three petitions under article 226 of the Constitution relate to the reopening of assessments for the assessment years 2002-03, 2003-04 and 2004-05. The facts, as they pertain to the assessment year 2003-04 are representative, and can be narrated. The difference in so far as the notices for the reopening of assessments are concerned is that for the assessment years 2002-03 and 2003-04, the assessments have been sought to be reopened beyond a period of four years of the expiry of the relevant assessment year. The reopening of the assessment for the assessment year 2004-05 is within four years. 4. During the course of the assessment year 2003-04, the petitioner filed a return of income on November 27, 2003, reporting a net loss of Rs. 98.70 crores. The statement of the computation of profits and gains from busi-ness shows an actuarial deficit of Rs. 158.37 cr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the report of such actuary to be made in accordance with the regulations laid down in Part I of the Fourth Schedule and in conformity with the requirements of Part II of that Schedule. The fifth proviso to section 13 stipulates that on or after the commencement of the IRDA Act, 1999 every insurer shall cause an abstract of the report of the actuary to be made in the manner specified by the regulations made by the Authority. 7. In exercise of the powers conferred by section 114A of the Insurance Act, 1938, the IRDA notified the Insurance Regulatory and Development Authority (Actuarial Report and Abstract) Regulations, 2000. Regulations 3 and 4 stipulate the procedure for preparation of actuarial reports and abstracts and the requirements applicable. Under regulation 3(4)(v), each abstract and statement is to be accompanied by a certificate signed by the appointed actuary, inter alia, stating that in his opinion, the mathematical reserves are adequate to meet the insurer's future commitments under contracts and the reasonable expectation of policyholders. Each insurer is required to prepare statements which are to be annexed to the abstract and a list of those statements is set ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 003-04, the petitioner furnished a note to the computation of income. The salient aspects which were highlighted in the note were as follows : (i) The erstwhile format for the presentation of surplus/deficit required each insurance company to aggregate the results relating to shareholders' operations and policyholders' operations. The impact of the consolidated revenue account was transferred to the actuary's valuation balance-sheet in Form I which disclosed the surplus/deficit for the year ; (ii) The format for presentation of the insurance accounts was amended by the Regulations of 2000 and by the revised format, the impact of the actuarial valuation was transferred to the revenue account relating to the policyholders for the year and the surplus/deficit was disclosed therein ; (iii) The profit and loss for shareholders and the surplus/deficit for policyholders are since segregated into two separate accounts after the amended regulations ; (iv) For the financial year ending March 31, 2003, the actuarial valuation as disclosed in Form I shows a nil surplus/deficit as regards the business of policyholders. The actual deficit of Rs. 158.37 crores in the policyholders' account (Form ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ter alia, the transfers made from the shareholders' account to the policyholders' account to nullify the deficit as per the IRDA Regulations. The same position has been reiterated by a letter dated December 30, 2005 to the Assessing Officer. 12. The Assessing Officer issued an order of assessment under section 143(3) on December 30, 2005 for the assessment year 2003-04. The assess-ment order accepts that there was a loss to the extent of Rs. 98.70 crores and that it was allowed to be carried forward. After the order of assess-ment, the provisions of section 263 were invoked by the Commissioner of Income-tax on August 25, 2008. While invoking section 263, the Commis-sioner was of the view that it needed to be examined as to whether the income shown in shareholders' account was liable to be taxed under the head of "Business" or from "Other sources". Aggrieved by the invocation of section 263, the assessee filed an appeal to the Tribunal which was allowed on January 22, 2009. During the course of its judgment, the Tri-bunal noted that it was not disputed by the Commissioner that there is a deficit in the policyholders' account. The Tribunal noted that the assessee had adjusted the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , according to the Assessing Officer, has made a misleading statement for computing the total income. The assessments for all the three years have been reopened on these grounds. 14. In assailing the grounds on which the assessment is sought to be reopened, counsel appearing on behalf of the petitioner submitted that (i)the reopening of the assessment is bad in law because, there was no fail-ure on the part of the assessee to disclose fully and truly all material facts relevant to the assessment for the assessment years 2002-03 and 2003-04 ; (ii) as a matter of fact, there is no escapement of income, because an inter-nal transfer from the shareholders' account to the policyholders' account does not result in any income to the assessee ; (iii) though this is merely an internal transfer, the Revenue still wants to treat it as income and which the Revenue asserts will reduce the extent of loss in the shareholders' account ; (iv) the Assessing Officer has by reopening the assessment sought to reduce the loss not by expenditure which has been disallowed but by setting off the capital receipts comprising the shareholders' funds in the shareholders' account. Counsel submitted that thi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Assessing Officer that income chargeable to tax has escaped assessment. By the proviso to section 147, where an assessment under section 143(3) has been made and it is sought to be reopened beyond a period of four years from the end of the relevant year, the exercise of power is subject to the condition that income should have escaped assessment by a failure of the assessee to disclose fully and truly all material facts necessary for assessment for that assessment year. For the assessment years 2002-03 and 2003-04, the validity of the notice for reopening the assessments must, therefore, depend upon whether there was, as a matter of fact, a failure on the part of the assessee to disclose fully and truly all material facts necessary for the assessment. 18. The record before the court shows that the assessee had in its computation of income disclosed that the policyholders' account showed that (i) there was a deficit of Rs. 109.90 crores (comprising Rs. 158.37 crores minus Rs. 48.47 crores arising out of exempt pension funds) ; (ii) there was a transfer of funds to the extent of Rs. 158.37 crores from the shareholders' account to the policyholders' account ; and (iii) that the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to the exercise of the jurisdiction to reopen the assessments for the assessment years 2002-03 and 2003-04, beyond a period of four years from the end of the relevant assessment year was, therefore, not fulfilled. The notices for the reopening of assessments for the assessment years 2002-03 and 2003-04 will, therefore, have to be quashed on that ground. Parliament has made the invocation of the power to reopen an assessment beyond four years conditional on compliance with a statutory requirement. Once that requirement is not fulfilled, the invocation of the power has to be regarded as extraneous to the statute and hence, invalid. 20. For the assessment year 2004-05, it would be necessary to note that dur-ing the course of the assessment proceedings, the petitioner submitted replies similar to those which were submitted during the course of the ear-lier assessment years. Since the nature of the explanation has already been set out while dealing with the previous assessment years, it would not be necessary to reiterate the contents of the replies, save and except to record that the disclosure by the petitioner was with reference to a query raised by the Assessing Officer on Nove ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and requires the insurer to prepare ; (i) a revenue account, also called a policyholders' account ; and (ii) a profit and loss account, also called the shareholders' account. Form A-RA is the form in which the policyholders' account is to be filed. Form A-RA requires a disclosure of (a) premiums earned, income from investments and other income ; (b) commission, operating expenses, provision for doubtful debts, debts written off, provision for tax and other than taxation ; (c) benefits, interim bonuses and change in valuation of liability in respect of life policies. The surplus/deficit is computed at the foot of the account by deducting the amounts computed under (b) and (c) above from the figures of income in (a). 22. During the course of the assessment, the assessee had set out the com-putation in the policyholders' account and in the shareholders' account. According to the assessee, the net result of the operations is reflected in the policyholders' account which has been made good by transfer from the shareholders'account. A circular has been issued on March 23, 2004 by the Insurance Regulatory Development Authority, to specify the conditions which are required to be fulfi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessment proceedings. 23. Though the power to reopen an assessment within a period of four years of the expiry of the relevant assessment year is wide, it is still structured by the existence of a reason to believe that income chargeable to tax has escaped assessment. The Supreme Court, in a recent judgment in Kelvinator of India Ltd. [2010] 320 ITR 561 while drawing upon the legislative history of section 147 held that the expression "reason to believe" needs to be given a schematic interpretation in order to ensure against an arbitrary exercise of power by the Assessing Officer. The judgment of the Supreme Court emphasises that the power to reopen an assessment is not akin to a power to review the order of assessment and a mere change of opinion would not justify a recourse to the power under section 147. Unless the Assessing Officer has tangible material to reopen an assessment, the power cannot be held to be validly exercised. The Supreme Court has held thus (page 564) : "Therefore, post-1st April, 1989, power to reopen is much wider. However, one needs to give a schematic interpretation to the words `reason to believe' failing which we are afraid section 147 would g ..... X X X X Extracts X X X X X X X X Extracts X X X X
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