TMI Blog2009 (8) TMI 810X X X X Extracts X X X X X X X X Extracts X X X X ..... ere that the assessee company is in the business of general insurance and due to this reason governed by the provisions of s. 44 of IT Act. It is worth to mention at the out set that to determine the profits and gains of the insurance business the Act has provided s. 44 in the statute however this section is a special section in the sense that it starts with a non obstante clause, to quote verbatim, "notwithstanding anything to the contrary contained in the provisions of this Act............... the profits and gains of any business of insurance............... shall be computed in accordance with the rules contained in the First Schedule." The profits and gains earned through the business of insurance including any such business carried on by a mutual insurance company is to be computed in accordance with the rules contained in the First Schedule. The First Schedule has two major segments prescribing the method of computation of profit for life insurance business and the other one is prescribing the method of computation for other insurance business. Rest of the rules of this Schedule relevant for resolving the issue in hand, shall be discussed at the appropriate place hereinbelow i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nhancement resulted due to the order of CIT(A). Therefore now, hereinbelow, we shall proceed accordingly. (A) Revenue's C.O. No. 52/Pn/2007: 3. Grounds of the Revenue are as under: "1. On the facts and in the circumstances of the case and in law, the CIT(A) has erred in deleting the addition of Rs. 1,32,87,419 made on account of disallowances of exemption of proper claim on sale/redemption of investments. 2. On the facts and in the circumstances of the case, the CIT(A) erred in relying upon the decision of Hon'ble Tribunal, Delhi in the case of Dy. CIT vs. Oriental General Insurance Co. Ltd. (2005) 92 TTJ (Del) 300, wherein it was ruled that investments written off in insurance business were a loss and not an expenditure or allowance and therefore, they could not be added as income. The CIT(A) erred in not considering the AO's contention that there was no specific provision in r. 5 of the First Schedule allowing for such exemption and in the absence of a specific provision under the Act to exempt such income, no exemption would be available." 3.1 Few words about this company is that it was incorporated in India under the provisions of Company's Act, 1956 as a joint ventur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... are taken to be balance of profits disclosed in the annual accounts furnished to the Controller of Insurance subject to certain adjustment. One of the adjustments provided therein is in respect of any amount either written off or reserved in the accounts to meet depreciation or loss on the realization of investment which is to be allowed as deduction. Similarly, any sum credited to the account, due to appreciation of or gain on the realization of investment is taken as part of the profits and gains of the business. To enable the General Insurance Corporation and its subsidiaries to playa more active role in capital markets for the benefit of policyholders, the Finance Act have amended sub-r. (b) of r. 5 of the First Schedule to provide for exemption of the profits earned by them on the sale of investment. As a corollary, it has also been provided that the losses incurred by the General Insurance Corporation on the realization of the investment shall not be allowed as deduction in computing the profits chargeable to tax." 4.1 The first appellate authority has drafted an elaborate order. However, to cut the long story short the verdict was that the effect of deletion of r. 5(b) fr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t prior to amendment there was a r. 5 sub-r. (b) which stood deleted from 1st April, 1989. In view of this, the short and straight question before us can be framed that: "Whether on deletion of sub-r. (b) the taxability of a particular income still survives particularly when the law does not specifically grant an exemption to that income?" Before its deletion the sub-rule was drafted in the manner already reproduced ante. Whether its deletion had automatically granted an exemption or taxability of that particular income still existed which was earlier taxed in the hands of the insurance company due to the presence of r. 5(b) of the Act. 5.1 To answer this problem we can take the shelter of the legislative history and this approach has duly been recognized by the Hon'ble Supreme Court as held in the case of 1mpenal Chit Funds (P) Ltd. vs. 1TO (1996) 133 CTR (SC) 505 : (1996) 219 ITR 498 (SC) that due importance tan be given to legislative history and the background of a fiscal statute that had led to its enactment. The Hon'ble Kerala High Court in the case of Bhagavathy Tea Estates Ltd. Ors. vs. Stare of Kerala Ors. (1989) 179 ITR 508 (Ker) has also made an observation that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... wed that construction which defeats the very object sought to be achieved by the legislature must be avoided. Likewise in a landmark decision of K.P. Varghese vs. ITO (1981) 24 CTR (SC) 358 : (1981) 131 ITR 597 (SC) the Hon'ble Court has expressed that there must not be an absurd or unjust interpretation. In an appeal propounding the theory of equity the Hon'ble Supreme Court in the case of CIT vs. J.H. Gotla (1985) 48 CTR (SC) 363 : (1985) 156 ITR 323 (SC) has said that the statutory construction should result in equity rather than injustice. On the basis of a plethora of judgment of several Hon'ble Courts we can draw a conclusion that even a literal interpretation in the present case should also result into the exemption in respect of profit on sale of investment. There was no conflicting intention in the cited amendment as expressed by Finance Act, 1998. Also there is no dispute that even in case of contraries or conflicts an interpretation should go in favour of the assessee as propounded in the case of CIT vs. Kulu Valley Transport Co. (P) Ltd. (1970) 77 ITR 518 (SC) and CIT vs. Vegetable Products Ltd. 1973 CTR (SC) 177 : (1973) 88 ITR 192 (SC). 6. The learned CIT(A) has cal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 7. In addition to the above contentions there was no dispute that the independent code is enacted by the introduction of s. 44 in IT Act which independently prescribed the mode and manner for assessment of insurance business. This section since contains non obstante clause therefore notwithstanding anything contained in any of the sections of the Act, the profits and gains of insurance business including any such business carried on by a mutual insurance company or by a co-operative society shall be computed in accordance with the rules contained in First Schedule. Accordingly, there could not be any other income taxable other than insurance business because s. 44 overrules all other provisions of the IT Act. 8. A conclusion can be drawn on the basis of the above elaborate discussion that the deletion of sub-r. (b) from r. 5 of the First Schedule was with a specific purpose. This Schedule not only prescribes the method of computation of income of insurance business in Part (A) but also prescribes the method of computation of other insurance business in Part (B). Rule 5 is within Part (B) and earlier it has prescribed the method of taxation of profit on sale of investments which ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... demption of investment and in enhancing the assessment based on such disallowance. Ground No. 2 The learned CIT(A) has erred in computing disallowance under s. 14A of Rs. 15.36 crores against profit from sale/redemption of investments of Rs. 1.33 crores held as non-taxable on various grounds." 10.1 Grounds of appeal also contained reasonings and arguments below the ground No. 2, which have not been reproduced. 10.2 After holding that the income/gain arising on sale of securities was exempt in the hands of assessee, learned CIT(A) thereafter proceeded against the assessee by invoking the provisions of s. 251 (2) of IT Act on the ground that why the expenditure was not to be allocated towards the income claimed exempted as prescribed under s. 14A of IT Act. Learned CIT(A) has proceeded on three grounds discussed hereinbelow: (a) His first observation was that the investment in securities was financed out of the loans, hence the interest is to be allocated against the exempted income. He has mentioned certain figures and thereupon came to the conclusion that the source of investment in securities was out of loans therefore, expenditure of interest was to be allocated against ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... A 66,69,02,277 financial year ended 31st March, 2003 -------------------------------------------------------------------- Gross investment turnover B 95,47,48,414 -------------------------------------------------------------------- Gross taxable turnover for C 3,19,16,29,974 financial year ended 31st March, 2003 -------------------------------------------------------------------- Insurance turnover (gross C(i) 2,99,75,17,965 premium) -------------------------------------------------------------------- Interest turnover (interest C(ii) 19,38,67,654 income) -------------------------------------------------------------------- Dividend turnover (dividend C(iii) 2,44,355 income) -------------------------------------------------------------------- Expenses in relation to D=(A*B)/(B+C) 15,35,61,453 earning of exempt income subject to disallowance under s. 14A -------------------------------------------------------------------- Thus it was held that the AO should have allocated the expenditure of Rs. 15,34,61,453 in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of Chapter III of IT Act. For this proposition reliance was placed on Wallfort Shares Stacie Brokers Ltd. vs. ITO (2005) 96 TTJ (Mumbai)(SB) 673. His another plank of argument was that there are certain incomes which are not taxable under Chapter IV of IT Act, however in those category of income there is no applicability of s. 14A of the Act. An example was quoted that as, per the provisions of s. 23(2) of IT Act the annual value of self-occupied property is to be assessed as "nil", while s. 24 provides for deduction of interest paid on loan taken in respect of such self-occupied property. In no case Revenue can disallow the deduction of payment of interest by invoking the provisions of s. 14A of IT Act. He has also argued that if at all s. 14A and r. 8D are applicable, those are not in respect of income from investment which do not form part of total income. But in assessee's case s. 14A is not applicable to profits on sale or redemption of investment. 12. From the other side learned CIT-Departmental Representative, Shri R. Kaushal has vehemently supported the action of the learned CIT(A) by stating that an expenditure incurred in relation to an income not includible in the t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... irection of ours shall not prejudice in any manner the main grievance of the assessee about the applicability of the provisions of s. 14A of IT Act in the present situation. 14. Reverting back to the grievance, the issue of the applicability of s. 44 has already been settled by the Hon'ble apex Court in the case of General Insurance Corporation of India vs. CIT which says in clear terms that s. 44 is a special provision governing computation of taxable income earned from business of insurance. For ready reference relevant held portion is reproduced below: "Sec. 44 of the IT Act, 1961, is a special provision governing computation of taxable income earned from business of insurance. It opens with a non obstante clause and thus has an overriding effect over other provisions contained in the Act. It mandates the assessing authorities to compute the taxable income for business of insurance in accordance with the provisions of the First Schedule. A plain reading of r. 5(1) of the First Schedule. There is another approach to the same issue. Sec. 44 of the IT Act read with the rules contained in the First Schedule to the Act lays down an artificial mode of computing the profits and g ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 4A applies to the income contained in Chapter III of IT Act. The confusion had cropped up only because of the way a quotation was made within inverted comas but in the very next lines that was not confirmed. The factual position is that while dealing with this issue the respected Co-ordinate Bench has stated that they had not accepted the argument of applicability of Chapter III of the Act. Rather the respected Bench has said that there was no conflict between Chapter III and s. 14A. It was further clarified that the provisions of s. 14A cannot be considered defunct or redundant for the reason only that these provisions should have been inserted in Chapter III and not in Chapter TV, after all both Chapter III and Chapter IV are integral part of the same enactment. For ready reference para 108 is reproduced verbatim below: "108. The main provision of s. 14A inserted by the Finance Act, 2001, with retrospective effect from 1st April, 1962 reads as under: '14A. For the purposes of computing the total income under this chapter, no deduction shall be allowed in respect of expenditure incurred by the assessee in relation to income which does not form part of the total income under th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to by way of harmonious construction. Provisions of s. 14A cannot be considered defunct or redundant for the reason only that these provisions should have been inserted in Chapter III and not Chapter IV. After all both Chapter III and Chapter IV are integral part of the same enactment. We also do not agree with the arguments of the assessee that it amounts to artificial enhancement of sale price by the amount of dividend. The case of Revenue is based on disallowance of expenditure (purchase price), not enhancement of sale proceeds. We also do not see proviso to s. 14A having any application. It is not the case of reopening any closed matter. It is, therefore, open to us to take note of the retrospect provisions of s. 14A." Respectfully following the verdict of the respected Five Member Special Bench we hereby disapprove the, argument of learned Authorised Representative that the provisions of s. 14A are applicable only in respect of income that fall within the purview of Chapter III of IT Act. 17. Finally the question to be answered is about the applicability of s. 14A in respect of sale of investment which is not taxed under the special circumstances of deletion of a sub-rule ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... elhi High Court have held that no question of law, much less a substantial question of law survives for their consideration. In other words, order of the Tribunal has been affirmed. Following the same reasoning, addition made by the AO is deleted. 18. The next common dispute relates to the order of the CIT(A) in sustaining the action of AO in allowing only 50 per cent of the management expenses by invoking the provisions of s. 14A of the Act. The addition is made by the AO on the plea that the provisions of s. 14A was inserted by Finance Act, 2001 w.e.f. 1st April, 1962. It is stated that the investments made by the assessee are both taxable as well as tax free. An estimated disallowance of 50 per cent out of the management expenses incurred and as claimed in the P L a/c is treated as expenses incurred in connection with the looking after tax-free investment. 19. The learned counsel for the assessee vehemently argued that the income of the assessee is to be computed under s. 44 r/w r. 5 of Sch. I of the IT Act. Sec. 44 is a non obstante clause and applies notwithstanding anything to the contrary contained within the provisions of the IT Act relating to computation of income cha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... thstanding anything to the contrary contained within the provisions of the IT Act relating to computation of income chargeable under different heads. We agree with the learned counsel that there is no requirement of head-wise bifurcation called for while computing the income under s. 44 of the Act in the case of an insurance company. The income of the business of insurance is essentially to be at the amount of the balance of profits disclosed by the annual accounts as furnished in the Controller of Insurance. The actual computation of profits and gains of insurance business will have to be computed in accordance with r. 5 of the First Schedule. In the light of these special provisions coupled with non obstante clause the AO is not permitted to travel beyond these provisions. 24. Sec. 14A contemplates an exception for deductions as allowable under the Act are those contained under ss. 28 to 43B of the Act. Sec. 44 creates special application of these provisions in the cases of insurance companies. We therefore, agree with the assessee and delete the act as according to us, it is not permissible to the AO to travel beyond s. 44 and First Schedule of the IT Act." 18. It may not be ..... X X X X Extracts X X X X X X X X Extracts X X X X
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