TMI Blog2011 (7) TMI 391X X X X Extracts X X X X X X X X Extracts X X X X ..... e - This course of action is not permissible within the scope of rule 5 - Therefore, partly approve the view taken by the learned CIT by holding that the deduction on account of pension is admissible for a sum of Rs. 365.08 crore and towards gratuity for a sum of Rs. 101.33 crore. Leave Encashment - The assessee admittedly paid a sum of Rs. 27.91 crore as relating to the instant year thereby leaving the unpaid amount at Rs. 27.83 crore which was voluntarily added back to its income in the computation of the total income - It is held that the course of action adopted by the assessee is perfectly in order inasmuch as it claimed deduction of Rs. 55.74 crore representing the amount debited to the profit and loss account and also disallowed the amount unpaid under section 43B as per clause (a) of rule 5 - The learned CIT has directed to disallow the entire sum of Rs. 55.74 which is not correct for the reason that the amount debited to the profit and loss account is required to be deducted to the extent it is actually paid on or before the due date under section 139(1) - By the action of the learned CIT the assessee has been denied the deduction for the amount debited to the Profit and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rroneous and prejudicial to the interest of the Revenue. Through the last para of the impugned order, he set aside the assessment order in respect of all the issues except those which were taken up and decided in the first appeal with the observation that some obvious errors were pointed out by him in his order and the remaining points involving infraction of the provisions of section 44 read with the First Schedule may be examined by the Assessing Officer in the fresh assessment to be done de novo after allowing the assessee a reasonable opportunity of being heard. 3. We have heard the rival submissions and perused the relevant material on record. The assessee is a subsidiary of General Insurance Corporation of India. Total income of an ordinary assessee is finalized as per the regular provisions of the Act. However if a special provision is made to deal with the assessment of particular type of assessees or particular type of business, then such special provisions are applied and the regular provisions governing the computation of total income take the back seat. We are dealing with the assessment of an assessee who is engaged in the insurance business. A special provision is c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (a) subject to the other provisions of this rule, any expenditure or allowance including any amount debited to the profit and loss account either by way of a provision for any tax, dividend, reserve or any other provision as may be prescribed which is not admissible under the provisions of sections 30 to 43B in computing the profits and gains of business shall be added back; (b) (since omitted). (c) such amount carried over to a reserve for unexpired risks as may be prescribed in this behalf shall be allowed as a deduction." 6. When we view the provisions of section 44 in juxtaposition to the First Schedule, it becomes patent that the profits and gains of the present assessee are required to be computed in accordance with the above referred rule 5. A plain reading of this rule signifies that the profit as disclosed by the annual accounts prepared in accordance with the relevant Schedules of Insurance Act, 1938 is to be taken as the total income subject to the adjustments specifically provided in clauses (a) and (c). Here it is important to mention that clause (b) was omitted by the Finance Act, 1988 with effect from 1-4-1989. We are not concerned with the reinsertion ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed to the profit and loss account with a view to determine their deductibility or inclusion in the total income of the assessee as per the provisions of the Act. Once the Profit and loss account is prepared as per the Insurance Act, the amount of profit so disclosed gives the foundation, amenable only for the adjustments expressly sanctioned by the mandate of clauses (a) and (c) of rule 5, for computing the total income. To such amount of the profit, the items specified as per clause (a) require additions and the item as per clause (c) require deduction. 9. If the Assessing Officer holds the opinion that a particular deduction claimed is of the nature which is not permissible as per the regular provisions of the Act, his hands are tied so long as the Profit and loss account has been drawn as per the Insurance Act. He cannot make such addition. As the Profit and loss account so drawn is binding on the Assessing Officer, so is the case with the assessee as well. If certain amount has been credited to the Profit and loss account so prepared and the assessee holds the opinion that it cannot be subjected to tax either because of exemption under the normal provisions of the Act or for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rying on insurance business and satisfying the requirements of the Insurance Act is final and cannot be altered by the Assessing Officer. If a particular item is debited to the profit and loss account of the insurance company which satisfies the requirements of the Insurance Act but is otherwise not deductible as per the provisions of the Income-tax Act, the same will slice out the amount of profit and the Assessing Officer will have no power to add back the same by resorting to the general provision of the Act. In the like manner if a particular item is credited to the Profit and loss account of the insurance company which satisfies the requirements of Insurance Act but is otherwise not chargeable to tax, the same would stand included in the total income and the assessee will not be justified in arguing that this particular item although includible in the Profit and loss account as per the Insurance Act but is otherwise not chargeable to tax and hence the same be excluded. The very rationale of section 44 making the provisions of sections 28 to 43B as ineffective but for the purposes of making additions as per Rule 5(a) of the First Schedule, makes it explicitly clear that in comp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al High Court in the case of Forbes Forbes Campbell and Co. Ltd. v. CIT [1994] 206 ITR 495/74 Taxman 268 (Bom.) has quoted the above maxim with approval. It has also been applied by the Hon'ble Madras High Court in the case of CIT v. Copes Vulcan Inc. USA [1987] 167 ITR 884/30 Taxman 549 (Mad.), in which case it was held that section 9(1)(i) is general in nature and section 9(1)(vii) refers to a particular type of income and is a special provision dealing with even for technical services rendered by the foreign company. After considering the arguments from both sides it was held that section 9(1)(vii) would apply. The Hon'ble Supreme Court in the case of Britania Industries Ltd. v. CIT [2005] 278 ITR 546/148 Taxman 468 has also reiterated the same principle by holding that the expenditure towards rent, repairs, maintenance of guest house used in connection with the business is to be disallowed under section 37(4) because this is a special provision overriding the general provision. It therefore, follows that if a specific provision is made then that matter is excluded from the general provision. The above rule of Generalia specialibus non derogant has been expressly incorporated in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Rule 5(a). In his opinion this amount was not allowable as deduction. 15.2 The assessee initially debited a sum of Rs. 16.43 crore to its Profit and loss account representing the investments written off in this year. At the same time a sum of Rs. 17.29 crore (Rs. 6.20 crore + Rs. 11.09 crore) was credited to the Profit and Loss account representing reversal of the provision for diminution of investments made in earlier years, which was not required because of appreciation or gains on the realization of investments. However while computing the total income, the amount of Rs. 16.43 crore which was debited to the Profit and Loss Account was added back and the sum of Rs. 17.29 crore which was credited to the Profit and Loss account was reduced from the figure of Profit before tax as deduced from its annual accounts. Here it is important to mention that the amount of Profit before tax taken by the assessee in its computation of total income has been determined as per the Profit and loss account drawn in accordance with the Insurance Act. The ld. CIT has not disputed this fact. His only grievance is that the said amount of Rs. 86 lakh is not deductible. 15.3 At this juncture it woul ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the benefit of policy holders, it is proposed to provide for exemption of the profits earned by them on the sale of investments. As a corollary, it is proposed to provide that the losses incurred by the General Insurance Corporation on the realization of investment shall not be allowed as deduction in computing the profits chargeable to tax. To achieve this object clause (b) of rule 5 of the First Schedule to the Income-tax Act is proposed to be deleted." 15.5 Further the Note on clauses clarify the position that with the omission of clause (b) the profits and gains on investments made by the insurance companies shall be exempt. Circular No. 528 dated 16-12-1998 also throws light on this position vide para 45.1 as under: "To enable the General Insurance Corporation and its subsidiaries to play a more active role in capital markets for the benefit of policy-holders, the Finance Act has amended sub-rule (b) of rule 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the learned CIT held the assessment order as erroneous and prejudicial to the interest of the revenue has been discussed in para 6 of the impugned order. It was seen that the assessee claimed deduction for and then added back the following amounts to its income. Item No. 7 Pension debited to your account 365,08,89,500 Item No. 8 Gratuity debited to your account 101,33,54,300 As against that, the deduction was claimed in the computation of total income as under: Item No. 11 Pension paid to the fund 404,00,00,000 Item No. 12 Gratuity paid to the fund 110,00,00,000 The ld. CIT noticed that the sum was provided by the assessee in its books of account but was not actually paid during the year and was thus hit by section 43B which required addition to the income. 16.1 While computing the total income the assessee disallowed the above referred two sums as per item No. 7 and item No. 8 and also simultaneously claimed deduction of the items given below vide items 11 and 12. In other words, the assessee debited its Profit and loss account with a sum of Rs. 365.08 crore towards pension and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat extent, the excess so paid cannot be allowed by taking recourse to the provisions of section 43B in the context of rule 5(a), which brings within its sweep the amounts to be added to the total income and does not permit deductions. It is impermissible to claim deduction for a sum more than that debited to the profit and loss account. What is contemplated for deduction from the profits as per annual accounts is subject matter of clause (c) of rule 5. This clause does not refer to any amount of the nature which is presently in dispute. Further it is not the case of the assessee that the deduction for the excess sales tax paid be allowed as per clause (c). As clause (a) talks of only making additions to the amount of profit as per the Profit and loss account, the same cannot be taken recourse to for allowing any further deduction. 16.2 Both the sides are in agreement that that facts and circumstances of the claim for gratuity are mutatis mutandis similar to that of the pension. The assessee debited a sum of Rs. 101.33 crore in its profit and loss account but claimed deduction for Rs. 110 crore. This course of action is not permissible within the scope of rule 5. We, therefore, p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Profit and Loss account and also paid as well before the due date. We, therefore, do not approve the view taken by the learned CIT on this issue. IV. Interest and incomes relating to earlier year 18. The next item considered by the learned CIT is the adjustment in respect of income and expenditure not relating to current year. In the computation of income the assessee added back income and expenditure of earlier year. It also claimed deduction in respect of certain interest and incomes relating to earlier year but accounted for in the current year as under: Premium Income-taxed in F.Y. 02-03 under clause 13 of Form 3CD but accounted in F.Y.03-04 1492844 Balance amount of provisions not allowed in earlier years and paid during the P.Y. (as per clause 21 (10 Annex XI of Tax Audit Report) 784747 Interest charged under section 234B for A.Y. 1996-97 paid and disallowed in A.Y. 1999-2000 waived and accounted in F.Y. 2004-05 (Annexure-3) 278732314 Interest charged under section 234B C for A.Y. 1998-99 paid and disallowed in assessment year 2000-01 waived and accounted in F.Y.03-04. 51870052 It was held by the ld. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... atters especially regarding non-compliance of IRDA Regulations and the Assessing Officer failed to verify these amounts from the angle of taxability. 20. The qualifications of the auditors to which the learned CIT is referring to can be found on pages 84 and 85 of the Annual report of the assessee-company. It is important to mention that in the same Annual report on page 50, referring to pages 84 and 85, clearly states that : "However, this non-compliance do not have any impact on the working results of the company". It is, therefore, clear that the qualification made by the Auditors did not have any impact on the working results of the company. The learned CIT has not pointed out as to how the income of the assessee was not fully brought to tax by non-compliance of the IRDA Regulations. We, therefore, do not find any merit on the view point taken by him on this issue, which is otherwise a general observation not referring to any specific item of income which made the assessment order erroneous and caused loss to the revenue. 21. In paras 12 and 13 the learned CIT has referred to computation of income under section 115JB. We have gone through the order passed by the Assessing O ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t case through the last para of the impugned order is sanctioned, then in every case the CIT may exercise his power under section 263 without depicting as to how the assessment order is erroneous and prejudicial to the interest of the revenue, which would, in turn, give unlimited jurisdiction to the Assessing Officer to take up the assessment time and again, which is contrary to the scheme of the Act. As the learned CIT has dealt with certain specific issues in the impugned order on which the assessment order in his opinion was erroneous and also caused loss to the revenue, we are convinced that he was justified in assuming jurisdiction and deciding such issues as per his point of view. But we are not persuaded to uphold his observations in the last para by which he directed the Assessing Officer to examine any other point in the fresh assessment. Our view is fortified by the judgment of the Hon'ble Calcutta High Court in CIT v. Hindusthan Coconut Oil Mill [2002] 255 ITR 428/[2003] 127 Taxman 96 in which it has been held that even if the revisional authority sets aside the entire assessment order and calls for the assessment to be made again, the ITO has no jurisdiction to touch on ..... X X X X Extracts X X X X X X X X Extracts X X X X
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