TMI Blog2012 (11) TMI 13X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee. Disallowance u/s 14A - held that:- the provisions of section 14A are not applicable. - section 44 has overriding effect. Surplus of pension schemes - exemption u/s 10(23AAB) - AO did not allow the amounts on the reason that these incomes are part of income of life insurance business and it is included as income by the actuary, therefore, they cannot be exempted. - held that:- exemption under Sec 10 allowed. Taxability of incomes in Shareholder’s account - held that:- Capital gains or Income from other sources. - Being non-obstante clause, sec. 44 mandates that the profits and gains of insurance business shall be computed in accordance with the rules contained in First Schedule. - Therefore, the incomes in Shareholder’s account are to be taxed as part of life insurance business only, as they are part of same business and investments are made as part of solvency ratio of same business. - AO is directed to treat them as part of Life Insurance Business and tax them u/s 115B. Regarding the issue of treating negative reserve and disallowing the amount. - held that:- The mathematical reserve is part of Actuarial valuation and the surplus as discussed in Form-I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ompany was incorporated on July 20, 2000 with the object of carrying on Life Insurance Business. The activities of the insurance are governed by the Insurance Act, 1938, Insurance Regulatory and Development Authority (IRDA) Act, 1999 as amended from time to time, IRDA rules and Regulations from time to time made there under. The return of income for AY 2005-06 was filed on 27.10.2005 declaring a loss of Rs.150,46,83,807/-. The case was selected for scrutiny and AO while accepting that assessee is in the business of life insurance considered that income of assessee from insurance business is assessable as per section 44 of the Income Tax Act. He has considered the Actuarial Valuation Report submitted in Form-I extracted in the assessment order which is as under: Form-I of the Actuarial Report: Item No. Description Balance of fund shown in Balance Sheet (Rs.) Mathematical reserves (excluding cost of bonus allocated)(Rs.) Surplus (Rs.) Negative Reserves (Rs.) Surrender value deficit reserved (Rs.) (1) (2) (3) (4) (5) (6) (7) 01 Business within India Par policies ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Rs.63,09,19,492/- before setting of the brought forward losses. He also made disallowance under section 14A to an extent of Rs.4,42,584/- even though no adjustment was made in the computation of income. 5. The matter was contested before the CIT (A) and assessee made elaborate submissions. The main contention was that Form-I is a report prepared as a part of actuarial report and abstracts under the IRDA Regulations to ascertain segment-wise cumulative allowability of actuarial valuation shown as mathematical errors. It was submitted that Form I does not provide the Profit Loss A/c of entire business but shows the asset- liability position of only . It was further explained that IRDA has made specific rules to segregate the account and shareholder s account and revised the form for presentation of insurance accounts as prescribed in IRDA(Preparation of Financial statements and Auditor s Report of Insurance companies) Regulations 2002. According to the Regulations, Profit Loss A/c of life insurance company is divided into a technical account (policy holder s account) also called as revenue account and non-technical account (shareholder s account) also called Profit Loss A/ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... corresponding amount from shareholder s account. Accordingly during the year, assessee has transferred an amount to the extent of Rs.233.35 crores from shareholder s account to policyholder s account. As the transfer should be supported by assets, assessee has issued shares afresh to the extent of Rs.250 crores and increased the capital to that extent. Since the amount transferred from shareholder s account is nothing but transfer of capital from shareholder s account to policyholder s account, it was the submission that the surplus arrived at after the transfer of the capital cannot be considered as income of assessee. It was like taxing the capital receipt/ sum which can not be regarded as income. Without prejudice to the claim, it was also submitted that assessee has filed the returns consolidating the policyholder s account and shareholder s account and the credit in the policyholder s account is matched by the debit in the shareholder s account. This is tax neutral. Therefore, AO was not correct in considering the surplus which arose due to transfer of share capital as per the IRDA Regulations. 8. The learned Counsel also explained the history of the case. It was the submis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Rule-2. Therefore, the manner of taxing the life insurance companies has not been realigned with the changes as prescribed by the IRDA. It was further submitted that there is a deficit of Rs.233,34,76,828/- in the policyholder s account format-A-RA which has been made good by transfer of funds from the shareholder s account. Therefore, the figures that appeared in Form-I are subsequent to this transfer from shareholder s account. It was further submitted that the earlier format did not provide for segregating insurance business into and shareholder s and therefore, the requirement to transfer funds from one account to other and the need thereof for aggregating two accounts to reflect the outcome of surplus or deficit did not arise at that time. In order to arrive at the actuarial surplus/ deficit as per the Insurance Act, 1938 it was submitted that the accounts are aggregated and accordingly assessee has filed the return of income. As per the account before transfer of the amounts, there was a deficit to an extent of Rs.161,40,61,362/- and surplus in shareholder s account of Rs.10,93,77,555/-. In view of this assessee arrived at a loss of Rs.150,46,83,807/- for the valuation year e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d order. It is true that the consequences of a suggested construction cannot alter the meaning of a statutory provision where such meaning is plain and unambiguous, but they can certainly help to fix its meaning in case of doubt or ambiguity. Let us examine what would be the consequences of the construction contended for on behalf of the revenue. If the construction put forward on behalf of the revenue were accepted, then as already pointed out above, no trust or institution whose purpose is promotion of an object of general public utility, would be able to carry on any business, even though such business is held under trust or legal obligation to apply its income wholly to the charitable purpose or is carried on by the trust or institution for the purpose of earning profit to be utilized exclusively for feeding the charitable purpose. If any such business is carried on, the purpose of the trust or institution would cease to be charitable and not only the income from such business but the entire income of the trust or institution from whatever source derived, would lose the tax exemption. The result would be that no trust or institution established for promotion of an object ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e annual accounts, various forms and Regulations and filed reconciliation statements placed before authorities to explain the rationale of arriving at surplus/deficit as was done by assessee company. 15. In reply the learned DR submitted that there is no relevance of the proceedings initiated under section 263 and 147 to the issue in present as their actions are under different provisions and are different matter altogether. It was his submission that the ITAT order against appeal on order under section 263 had no impact as ITAT considered the issue in the context of erroneous and prejudice to the interest of Revenue. Likewise dismissal of SLP does not establish any law and the factual position was not affected by the orders of the High Court or Supreme Court. He then referred to the provisions of law under section 44 of the Income Tax Act, Rule-2 of first schedule and the actuarial report placed on record to submit that assessee has prepared the actuarial surplus under the IRDA Regulations which AO has accepted as per the provisions of law. There may be credit or transfer from shareholder s funds but AO has no option than to arrive at the surplus as disclosed in Form-I as per th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t defined. As per Rule 4 of the IRDA Regulations, actuarial report was abstracted in a statement to be prepared by the actuary as per procedure. In view of this the actuarial report provided in Form-I is the base for the assessment for AO. The Regulations 8 of the IRDA starts as a statement showing total amount of surplus arisen during the inter valuation period. Further it depends on the composition of surplus which consist of A to F items and item J talks about the total surplus (a to i). Since Form I indicate surplus for the total business, the total surplus has to be considered as actuarial surplus for the purpose of Rule-2 for the inter valuation period. He also further referred to the guidelines issued in IRDA circular 2004 to state that transfer of funds shall not be reversible in nature. He also referred to AO s order passed in assessment year 2008-09 which is little more elaborate than the order in assessment year 2005-06 to support the stand of the Revenue that the surplus arrived at in Form I is the actuarial surplus to be brought to tax under the rules. The learned DR in his submission also referred to the Hon'ble Supreme Court judgment in the case of LIC vs. CIT 51 ITR ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... income-tax payable for that year, credit shall not be given in accordance with section 199 for the income-tax paid in the previous year, but credit shall be given for the annual average of the income-tax paid by deduction at source from interest on securities or otherwise during such period . Rule-7 defines life insurance business means life insurance business as defined in clause-2 of section 2 of Insurance Act 1938. Assessee incorporated after the enactment of the IRDA 1999, is in the life insurance business and there is no dispute with that. As per section 44 for a business involved in insurance business notwithstanding contained in any other head of income like interest on securities, house property, capital gains and other sources, the income from profits and business are to be computed according to the first schedule. Primacy of Sec.44 and power of AO to compute as per Rule 2 of First Schedule was also decided by Hon ble Supreme Court in number cases relied on by both parties. As the dispute is not with the above, there is no need to reiterate those principles or discuss cases in this order. 19. Rule-2 is the main computation provision which is applicable to the life in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 04) (1,360,152,000) 7,579,972,000 1,426,033,160 2008-09 8,233,771,502) (3,251,153,000) 16,063,495,000 3,029,120,030 21. The dispute in this case is in adopting the amount of surplus or deficit as per actuarial valuation. There is no dispute with method of actuarial valuation. The dispute is centered around the amounts represented in Form-I as per the IRDA Regulations. Consequent to changes brought by IRDA Act, and its Regulations the revised format in Form I deviates from the Form-I prescribed under Insurance Act 1938. Assessee reconciles the form with old Regulations and filed return of income/ loss. The AO adopts the Total Surplus stated in Form-I under new Regulations ignoring the assessee submissions about changes in accounting procedures and need for reconciliation. This aspect was examined by the Hon'ble Bombay High Court in the assessee own case of ICICI Prudential Life Insurance Co. Ltd. vs. ACIT 325 ITR 471 (Bom.). The facts examined by the Hon'ble Bombay High Court pertain to the assessment year 2003-04 wherein consequent to the reopening of the assessment under section 148, the matter was challenged before the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and revenue account in accordance with the Regulations made by the Authority. Section 13(1) provides that every insurer carrying on life insurance business shall, inter alia, in respect of the life insurance business transacted in India, cause an investigation to be made each year by an actuary into the financial condition of the life insurance business carried on by him, including a valuation of his liabilities and shall cause an abstract of 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. 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 app ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ected a nil deficit consequent upon the transfer of an amount of Rs. 158.37 crores from the shareholder s' account to the policyholder s account. The source for making a transfer of Rs. 158.37 crores from the shareholder s' account originated in the infusion of capital from shareholder s during the course of the previous year relevant to the assessment year in question. During the course of the assessment proceedings for the assessment year 2003-04, 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 shareholder s' operations and policyholder s' 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 policyholder ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... deficit disclosed by the actuarial valuation in Form I was shown to be nil. In response to the audit query, the petitioner addressed a letter dated December 29, 2005, contending that the First Schedule to the Income-tax Act did not refer to any particular form for calculating the taxable surplus and instead mentions that the actuarial surplus calculated under the provision of the Insurance Act, 1938, has to be considered. The petitioner reiterated its position that Form I showed a zero surplus because, it has already considered, inter alia, the transfers made from the shareholder s' account to the policyholder s' 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 . It was further observed vide Para 18 (Page No.480) as under: The record before the court shows that the assessee had in its computation of income disclosed that the policyholder s' 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ner who engages in the business of life insurance. Section 13(1) of the Insurance Act, 1938 which was inserted by the Insurance Regulatory Authority Act, 1999 requires every insurer upon the commencement of the Act to maintain separate accounts in respect of the insurance business transacted by the insurer and in respect of the shareholder s funds. Regulations 3 and 4 of the Regulations of 2000 provide the procedure and requirements in the preparation of the actuarial report and abstract. Form I, it may be noted, is one of the summary statements that is required to be prepared by the insurer under Regulation 4(2). Part V of the 2000 Regulations deals with the preparation of the financial statement and requires the insurer to prepare; (i) a revenue account, also called a policyholder s' account ; and (ii) a profit and loss account, also called the shareholder s' account. Form A-RA is the form in which the policyholder s' 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, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... submitted that those years has no effect on deciding this issue, we are aware about consequential effects in later years and the need to follow uniform methodology. Therefore an attempt was made to examine and reconcile the various contentions in this order. It was the assessee contention that the surplus or deficit amount should be arrived at after adjusting both Accounts there by neutralising the transfer of capital funds from Shareholder s account to policyholder s account as per Regulations and prudent business practice and international practices being followed by assessee company. AO s contention is based on amounts referred in Form I. Import of Insurance Act 1938: 24. Before analyzing the issue, it is necessary to discuss the principles of incorporation of Insurance Act 1938 into the Income Tax Act 1961. As rightly pointed out by the learned Counsel, the reference to the Insurance Act 1938 in the Income Tax Act as such can only be considered as legislation by incorporation . The principles of legislation by incorporation and legislation by reference are discussed by the Hon'ble Supreme Court in a number of cases, more so in the following cases. 25. In the case ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ppellant and the argument of the respondents was that the maintainability of the appeal was, therefore, required to be judged by reference to the ground specified in the new Section 100 and the appeal could be entertained only if there was a substantial question of law. The respondents leaned heavily on Section 8(1) of the General Clauses Act, 1897 which provides: Where this Act or any Central Act or Regulation made after the commencement of this Act, repeals and re-enacts, with or without modification, any provision of a former enactment, then references in any other enactment or in any instrument to the provision so repealed shall, unless a different intention appears, be construed as references to .the provision so reenacted and contended that the substitution of the new Section 100 amounted to repeal and re-enactment, of the former Section 100 and, therefore, on an application of the rule of interpretation enacted in Section 8(1), the reference in Section 55 to Section 100 must be construed as reference to the new Section 100 and the- appeal could be maintained only on ground" specified in the new Section 100, that IS, on a substantial question of law. We do not think thi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... This was the rule applied by the Judicial Committee of the Privy Council in Secretary of State' for India in Council v; Hindustan Co-operative Insurance Society Ltd.". The Judicial Committee pointed out in this case that the provisions of the Land Acquisition Act, 1894 having been incorporated in the Calcutta Improvement Act, 1911 and become an integral part of it, the subsequent amendment of the Land Acquisition Act, 1894 by the addition of sub-section (2) in Section 26 had no effect on the Calcutta Improvement Act, 1911 and could not be read into it. 'Sir George Lowndes delivering the opinion of the Judicial Committee observed at page 267 : In this country it is accepted that where a statue is incorporated by reference into a second statute, the repeal of the first statute does not affect the second: see the cases collected in Craies on Statue Law 3rd ed. pp. 349, 350 The independent existence of the two Acts is, therefore, recognized; despite the death of the parent Act, its offspring survives in, the incorporating Act. It seems to be no less logical: to I hold that where certain provisions from an existing Act, have been incorporated into a subsequent Act, no addit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tor Vehicles Act, 1939 nor any .amendment in, it would affect the definition of 'motor vehicle' in Section 2 (c) of the - Taxation Act. It is, therefore, clear that if there is mere reference to a provision. of one statute in another without incorporation, then, unless a different intention clearly appears, Section 8(1) would apply and the reference- would ; be construed as a reference to the provision as may be in force from time to time in the former statute. But if a provision of one statute is incorporated in another, any subsequent. amendment in the former statute or even its total repeal would not affect the provision as incorporated in the latter statute. The question is to which category the present case belongs. 9. We have no doubt that Section 55 is an instance of legislation by incorporation and not legislation by reference. Section 55 provides for an appeal to this Court on' "one or more of the grounds specified in Section 100". It is obvious that the legislature did not want to confer an unlimited right of appeal, but wanted to restrict it and turning to Section 100, it found that the grounds there set out were appropriate for restricting the right of appeal and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ated by the Legislature? - The Legislature clearly 'intended that the e should be a right of appeal, though on limited grounds, and it would be absurd to place on the language of Section 55 an interpretation which might, in a given situation, result in denial of the right of appeal altogether and thus defeat the plain object and purpose of the section. We must, therefore, hold that on a proper interpretation the grounds specified in the then existing Section 100 were incorporated in Section 55 and the substitution of the new Section 100 did not affect or restrict the grounds as incorporated and since the present appeal admittedly raises questions of law, it is clearly maintainable under Section 55. We may point out that even if the right of appeal under Section 55 were restricted to the ground specified in the new Section 100, the present appeal would still be maintainable, since it involves a substantial question of law relating to the interpretation of section 13(2). What should be the test for determining whether a question of law raised in an appeal is substantial has been laid. down by this Court in Sir Chunilal V. Mehta and Sons Ltd. N. The Century Spinning and Manufacturing ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... itation of one statute in another and incorporation by reference. Legislation by incorporation is a common legislative device where the legislature, for the sake of convenience of drafting incorporates provisions from an existing statute by reference to that statute instead of verbatim reproducing the provisions, which it desires to adopt in another stature. Once incorporation is made, the provision incorporated becomes an integral part of the statute in which it is transposed and thereafter there is no need to refer to the statute from which the incorporation is made and any subsequent amendment made in it has no effect on the incorporating statute. On the contrary, in the case of a mere reference or citation, a modification, repeal or re-enactment of the statute, that is referred will also have effect on the stature in which it is referred. The effect of "incorporation by reference" was aptly stated by Lord Esher, M.R. In re: Wood's Estate, Ex parte Her Majesty's Commissioners of Works and Buildings in the following words at page 615: "If a subsequent Act brings into itself by reference some of the clauses of a former Act, the legal effect of that, as has often been held, i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... In that case this Court was considering the question regarding the interpretation of Section 2(c) of the Bihar and Orissa Motor Vehicles Taxation Act, 1930 (for short "the Taxation Act"). This Section when enacted adopted the definition of "motor vehicle" contained in Section 2(18) of the Motor Vehicles Act, 1939. Subsequently, Section 2(18) was amended by Act 100 of 1956 but no corresponding amendment was made in the definition contained in Section 2(c) of the Taxation Act. The argument advanced was that the definition in Section 2(c) of the Taxation Act was not a definition by incorporation but only a definition by reference and the meaning of "motor vehicle" in Section 2(c) must, therefore, be taken to be the same as defined from time to time in Section 2(18) of the Motor Vehicles Act, 1939. The argument was rejected by this Court and it was held that this was a case of incorporation and not reference and the definition in Section 2(18) of the Motor Vehicles Act, 1939, as then existing, was incorporated in Section 2(c) of the Taxation Act and neither repeal of the Motor Vehicles Act, 1939 nor any amendment in it would affect the definition of "motor vehicle" in Section 2(c) of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... other view is adopted. Therefore, the kind of language used in the provision, the scheme and purpose of the Act assume significance in finding answer to the question. (See:Collector of Customs vs. Sampathu Chetty Anr.). The doctrinaire approach to ascertain whether the legislation is by incorporation or reference is, on ultimate analysis, directed towards that end. (See: Maharashtra State Road Transport Corporation vs. State of Maharashtra Ors.) Thus, the question for determination is to which category the present case belongs. 21. The plain language of Section 2(bb) of the ID Act makes the intention of the legislature very clear and we have no hesitation in holding that reference to Section 5 of the Banking Companies Act, 1949 in the said provision is an instance of legislation by incorporation and not legislation by reference. 22. Section 2(bb) of the ID Act as initially introduced by Act 54 of 1949 used the word "means.. and includes" and was confined to a "Banking Company" as defined in Section 5 of the Banking Companies Act, 1949, having branches or other establishments in more than one province and includes Imperial Bank of India. Similarly, Section 2(kk), whi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion. 25. At this juncture, we may also consider an alternative submission made on behalf of the Bank that even if it is assumed that the provisions of Section 5 of the BR Act were introduced into Section 2(bb) of the ID Act by way of legislative incorporation, two of the exceptions, namely, exceptions (c) and (d), carved out by this Court in State of Madhya Pradesh vs. M.V. Narasimhan and reiterated in P.C. Agarwala's case (supra), would apply in the instant case. The exceptions so enumerated are: (a) Where the subsequent Act and the previous Act are supplemental to each other; (b) Where the two Acts are in pari materia; (c) Where the amendment in the previous Act, if not imported into the subsequent Act also, would render the subsequent Act wholly unworkable and ineffectual; and (d) Where the amendment of the previous Act, either expressly or by necessary intendment, applies the said provisions to the subsequent Act. 26. In our view, there is no substance in the contention. The ID Act is a complete and self contained Code in itself and its working is not dependant on the BR Act. It could not also be said that the amendments in the BR Act either ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e, 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 section 30 to 43B in computing the profits and gains of a business shall be added back: (b) (i) any gain or loss on realization of investments shall be added or deducted, as the case may be, if such gain or loss is not credited or debited to the Profit Loss A/c ; (c) such amount carried over to a reserve for unexpired risks as may be prescribed in this behalf shall be allowed as a deduction . (emphasis supplied) This indicates that the legislature consciously omitted incorporating the provisions of IRDA or the Regulations made there under in Rule 2 which still refers to the Insurance Act 1938 only. 28. Further, we also notice that the Insurance Act itself was amended along with the introduction of IRDA Act 1999. Along with the said IRDA Act, there are various amendments proposed in the Insurance Act in tune with IRDA Act by amending the relevant provisions of Insurance Act 1938. However, since the Rule 5 was amended in t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Fourth Schedule of the Insurance Act 1938 was omitted by the Insurance Amendment Act 2002 after incorporation of the relevant schedules in the IRDA Act. Even though the said schedules were omitted from the Insurance Act, 1938, we are of the opinion that as far as Rule-2 is concerned by the principle of Legislation by incorporation unamended Insurance Act, 1938 is applicable and the actuarial valuation has to be made in accordance with the then existing Part-I of the Fourth Schedule and in conformity with the requirements of Part-II of that schedule. Therefore, assessee s contention that the IRDA Regulations even though are applicable to assessee since it has commenced business after the commencement of the IRDA Act, 1999, for the purpose of Rule-2, the actuarial valuation has to be done in accordance with the Regulations contained in erstwhile Fourth schedule Part-I and Part-II. This is what assessee is contending and merging the accounts of policyholder s and shareholder s account and arriving at the actuarial deficit, without taking into consideration the transfer of funds from the shareholder s account to policyholder s account. 31. After introduction of IRDA Act, the entire ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mpanies) Regulations 2002. The surplus or deficit arrived at by the actuary in his valuation for the inter valuation period has to be taken into consideration under the regulations in financial accounts as well. 32. IRDA Regulations specifically require to maintain the policyholder s account and the shareholder s account separately and permits transfer of funds from shareholder s account to policyholder s account as and when there is a deficit in policyholder s account. As rightly noted by the Hon'ble Bombay High Court, as a policy, company is transferring funds/assets from shareholder s account to policyholder s account even during the year periodically as and when the actuarial valuation was arrived at in policyholder s account. Most of the companies are required to submit quarterly accounts under the Company Law, there is requirement of actuarial valuation report periodically and accordingly assessee was transferring funds from the shareholder s account to policyholder s account. Since the insurance business will not yield the required profits in the initial 7 to 10 years, lot of capital has to be infused so as to balance the deficit in the policyholder s account. During the y ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... m new Form-I prescribed under the IRDA Regulations. In fact the old form -I has this format: The Insurance Act, 1938 Form I Valuation of Balance Sheet of as at 19 Net liability under business as shown in the summary and valuation of policies Rs. Balance of Life Insurance Fund as shown in the Balance sheet Rs. Surplus, if any Deficiency, if any .. NOTE If the proportion of surplus allocated to the insurer, or in the case of an insurance company to shareholder s, is not uniform in respect of all classes of insurances, the surplus must be shown separately for the classes to which the different proportions relate. New Form-I under the IRDA Actuarial Report and Abstracts 2000 is as under which was prescribed under the Regulations 4. (Form-I) (See Regulation 4) Insurance Regulatory and Development Authority (Actuarial Report and Abstract) Regulations, 2000 Valuation Results as at 31st March, 20 Form Code Name of Insurer: Regn.No . Date of Regn. Item No. Description Balance of Fund shown in Balance Sheet Mathemat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... seen from these two forms, there is variation in the amounts are presented, as these forms serve different purposes. The Form I which was prescribed under Regulations 8 is after arriving at the distribution surplus under Regulations 6. The Regulations 6, 7 and 8 are as under: Distribution of Surplus: 6. The basis adopted in the distribution of surplus as between the shareholder s and the policyholder s, and whether such distribution was determined by the instruments constituting the company or by its Regulations or by-laws or how otherwise shall be mentioned. Principles adopted in distribution of profits: 7. The general principles adopted in distribution of profits among policyholder s, including statements on following points, shall be furnished: (i) Whether the principles were determined by instruments constituting the insurer, or by its Regulations or by-laws or how otherwise: (ii) The number of years premium to be paid, period to elapse and other conditions to be fulfilled before a bonus is allotted; (iii) Whether the bonus is allocated in respect of each year s premium paid or in respect of each calendar year or year of assurance ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rnished. Thus as can be seen from above Regulations, the Form I under Regulation 8 represent the total surplus for the purpose of distribution of bonuses/ dividends to policy holders and does not represent surplus or deficit of actuarial valuation for the purposes of balance sheet. This amount is represented in Form I prepared under Regulation 4 for the purpose of financial accounts. Reconciliation of amounts: 36. As seen from the orders of the authorities, the Total surplus prepared under Regulation 8 was taken as basis ignoring the Form- I of Regulation 4. While accepting the Ld.CIT DR argument that for the purposes of Life insurance business the act provides for surplus of valuation to be taxed at lesser rate, we can not accept the argument that surplus is Total surplus including Transfers from share holder s account. Basically transfers are tax neutral as a credit in one account gets cancelled by debit in other account when accounts are consolidated. What the Rule.2 prescribed was only average surplus arrived by adjusting the surplus disclosed in the actuarial valuation made with regard to the Insurance Act, 1938 in respect of inter valuation period. Assessee in the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Rupees 000) Particulars Mar-05 Mar-04 Particulars Mar-05 Mar-04 Claims under policies, less re-insurance: Balance of fund at the beginning year 95,97,898 26,58,698 By Death 1,11,348 59,627 Premiums: By Maturity 2,539 - 1st year premiums 1,45,43,024 62,91,180 Annuities, less reinsurance - - Renewal premiums 77,94,747 23,84,328 Surrenders (incl. sur bonus) less reinsurance 9,286 4,076 Single premiums Less: Reinsurance 13,00,401 (38,177) 12,17,250 (19,075) Bonuses in cash, less re-insurance - - Consideration for Annuities granted, less reinsurance Bonuses in reduction of premiums 56,434 17,904 Interest, Dividends and Rents 6,92,979 6,27,033 Other benefit Fees and Charges 23,629 2,348 Expenses of Management: Linked Income 4,92,380 3,61,463 Commission 17,79,564 8,65,104 Other incom ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Deficit funding transfers from shareholder s fund (Page 8PB) 2,33,34,74,000 Advance funding based on estimates (Note 1) 4,12,09,280 (2,37,46,82,280) Less: Round off (12,808) Deficit in account (2,01,59,99,808) Surplus for participating business 10,41,05,196 Deficit for non-participating business (36,30,236) Surplus for participating annuities (Pension Business) 21,33,71,824 Deficit for linked business (1,66,59,51,826) Deficit for linked pension business (63,09,19,492) Deficit for linked group business (3,29,75,274) Deficit in policyholder s account (2,01,59,99,808) Add: surplus in shareholder s account 10,93,77,555 Income as per Rule 2 of Schedule 1 of the Act (1,90,66,22,253) Exemption under section 10(23AAB) Less: Surplus for participating pension business (21,33,71,824) Add: Deficit for linked pension business 63,09,19,492 41,75,47,668 Exemption under section 10(34) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ntire amount shown under the new Regulations including transfer from shareholder s account is not correct. Instead of AO in taking the surplus at Regulation 8(1)(a) which is the actuarial surplus / deficit for the year took the amount as disclosed at Regulation 8 (1) (f) (total surplus after transfer from Shareholder s account) which is not at all correct. 41. Learned Counsel in the course of the argument also placed reconciliation of the various figures as under: Table: Statement of deficit in policyholder s account (PHA), Shareholder account (SHA) funding and Net deficit: S.No Particulars Amount (Rs. In crs.) Amount (Rs. In crs.) Paper book page reference Deficit in PHA a/c 233.34 Page 70 Part of Actuarial Report and also Page 8 Revenue A/c Met by transfer from SHA a/c amounting to: 237.46 a.Transfer to meet the deficit b.Additional Transfer 233.34 4.12 237.46 Page 70 Part of Actuarial Report and also at Page 8 Revenue Account I SCENARIO 1: If transfer disregarded as income: The amount transferred cann ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sis. Assessee offered an amount of Rs.1,44,377/- as against the dividend income mostly claimed at Rs.1,56,09,222/- arrived at in participating life insurance business. Assessee gave methodology in contributing the expenses. However, AO did not accept and took the estimation 0.5% of the average investment thereby making the addition. The CIT (A) following the judgment of the Hon'ble Bombay High Court in the case of Godrej Boyce vs. DCIT dated on 12/08/2010 directed AO to workout on a reasonable basis. Assessee has raised the additional ground of appeal as under: Ground: AO and the CIT (A) erred in invoking the provisions of section 14A of the Income Tax Act 1961 and disallowing expenses attributable to earning exempted income, without appreciating the fact that the provisions of section 14A are not applicable to Insurance Companies . 44. The learned Counsel submitted that in view of the provisions of section 44, the provisions of section 14A are not applicable. He relied on the orders of Bajaj Alliance General Insurance Co. vs. Addl.CIT in ITA No.1447/Mum/2007 dated 31/08/2009, JCIT vs. Reliance General Insurance Company in ITA No.3085/Mum/2008 and other cases whe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e. It is not questioned that the impugned profit was non-taxable per se rather the accepted legal position is that the impugned profit was very much taxable in the past .Now it has been informed that this controversy in respect of insurance company set at rest by a decision of Tribunal , Delhi Bench verdict in the case of Oriental Insurance Co. Ltd. (ITA Nos. 5462 5463/Del /2003) asst. yrs. 2000-01 and 2001-02 order dt. 27th Feb. 2009 [reported as Oriental Insurance Co. Ltd. v. Asstt. CIT [2010] 130 TTJ (Delhi)388: [2010] 38 DTR (Delhi 225-Ed.]. Therefore considering the vehement reliance of learned Authorized Representative it is worth to mention at the outset itself that the issue now stood resolved by this latest decision of Delhi, Tribunal in the case of Oriental Insurance Co. Ltd. (supra), the relevant portion reproduced below: "17. We have heard rival submissions of the parties and have gone through the material available on record. Identical issue arose in assessee's own case for asst. yr. 1985-86. The Tribunal accepted the plea of the assessee and in fact the issue went up to the Hon'ble Delhi High Court in asst . yrs. 1986-87 to 1988-89, which is reported a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 t ravel 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 out of place to mention that the respected Co-ordinate Bench has duly taken the note of an earlier decision of that very Bench decided in the case of that very assessee vide order dt. 29th Sep ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e at the amount of the balance of profits disclosed by the annual accounts as furnished to the Controller of Insurance under the Insurance Act, 1938. The said balance of profits is subject only to adjustments there under. The adjustments do not refer to disallowance under s. 14A of the Act. (b) Profits and gains of business as refer red to in (a) above have only to be computed in accordance with r. 5 of the First Schedule. 22. Sec. 44 creates a specific except ion to the applicability of ss. 28 to 43B. Therefore, the purpose, object and purview of s. 14A has no applicability to the profits and gains of an insurance business. 21. The learned Departmental Representative strongly justified the act ion of the AO and that of the CIT(A) in the light of the clear provisions of s. 14A of the Act . Since the view has al ready been expressed by respected Co-ordinate Bench therefore, we have no reason to take any other view except to follow the same. With the result we hereby accept the argument of learned Authorized Representative to the extent that in the present situation the provisions of s. 14A need not to apply while granting exempt ion to an in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vour of assessee and against the Revenue by the orders of the General Insurance Company of India in ITA No.3554/Mum/2011 wherein the issue of deduction under section 10 have been considered and allowed following the Hon'ble Bombay High Court judgment in writ petition No.2560 of 2011 dated 1.12.2011. The order in the case of GIC of India in ITA No.3554/Mum 2011 vide Para 7 to 8 is as under: 7. Issue No.5: Availability of Section 10 Exemption (Modified Ground of Appeal No.2 Original Ground of Appeal No.2.1 2.2) . The issue arises in a peculiar manner in this assessment year. While dealing with the issue of profit on sale of investments, the Assessing Officer proposed to differ from assessee stand and bring to tax the profit on sale of investment. The assessee alternately submitted that the deduction under section 10(38) in respect of long term capital gain was available. When this issue came up before the CIT (A), the CIT (A) not only rejected the claim under section 10(38) but also considered and elaborately discussed how and why the assessee was not eligible for deductions already allowed by the Assessing Officer in respect of interest on tax free bonds amounting to Rs ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ofits and gains of any business of insurance other than life insurance shall be taken to be the balance of the profits disclosed by the annual accounts, copies of which are required under the Insurance Act, 1938 (4 of 1938), to be furnished to the Controller of Insurance subject to the following adjustments: (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 section 30 to (43B) in computing the profits and gains of a business shall be added back; (b) ( ) (c) Such amount carried over to a reserve for unexpired risks as may be prescribed in this behalf shall be allowed as a deduction . The Assessing Officer has in the reasons for reopening the assessment proceeded on the premise that in computing the profits and gains of business for an assessee who carries on general insurance business no other section of the Act would apply and that the computation could be carried out only in accordance wit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he case of an assessee who carried on insurance business and in whose case the provisions of rule 2 of the First Schedule are attracted. If the deductions which are claimed by the assessee do not fall within the provisions which are referred to in section 44, it will have to be held that the applicability of those provisions in the case of an assessee whose assessment is governed by section 44 read with rule 2 in the First Schedule is not excluded . This judgment is sought to be distinguished by the Assessing Officer while disposing of the objections on the ground that the decision was rendered in the context of an assessee which carried on life insurance business to whom Rules 1 to 4 of the First Schedule applied whereas in the case of the assessee in this case which carries on general insurance business Rule 5 could apply. According to the Assessing Officer, Rule 5 would not permit any adjustment to the balance of profit as per annual accounts prepared under the Insurance Act, and hence the judgment would not be applicable. The Assessing Officer has clearly not noticed that the decision in Life Insurance Corporation (supra) though rendered in the context of an assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 12. In General Insurance Corporation of India v. Commissioner of Income-Tax, the Supreme Court considered in an appeal arising out of a judgment of the High Court the issue as to whether a sum of Rs.3 crores, being a provision for redemption of preference shares, was not liable to be added back in the total income of the assessee for AY 1977-78?. The Supreme Court held that a plain reading of rule 5(a) of the First Schedule made it clear that in order to attract the applicability of the provision the amount should firstly be an expenditure or allowance and secondly it should be one not admissible under the provisions of section 30 to 43A. The Supreme Court held that the sum of Rs.3 crores in that case which was set apart as a provision for redemption of preference shares could not have been treated as an expenditure and hence could not have been added back under rule 5(a). In that context the Supreme Court held as follows: There is another approach to the same issue. Section 44 of the Income-tax At read with the rules contained in the First Schedule to the Act lays down an artificial mode of computing the profits and gains of insurance business. For the purpose of i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... earlier, the act of reopening the assessment would have to be regarded as a mere change of opinion which has also not been based on any tangible material. Consequently, we hold that the reopening of the assessment is contrary to law. The Petition would have, therefore, to be allowed . Respectfully following the above, we hold that the assessee is entitled for exemption under section 10. The enhancement made by the CIT (A) is therefore, cancelled. Ground is accordingly allowed . 49. In view of the above and respectfully following the same, we hold that assessee is entitled to exemption under section 10. Therefore, we do not see any reason to differ from the order of the CIT (A) where he has allowed assessee s claim of exemption under section 10(23AAB) of surplus of Participating Pension Business and also dividend under section 10(34). Accordingly Revenue ground on this issue is rejected. 50. In the result, assessee appeal in ITA No.6854/Mum/2010 for the assessment year 2005-06 is allowed and Revenue appeal in ITA No.7765/Mum/2010 for the assessment year 2005-06 is dismissed. ITA No.6855/Mum/2010- AY 2006-07 51. This is an assessee appeal wherein assessee has rais ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rs account is separate investment account of assessee and incomes are to be taxed under the head income from other sources . An amount of Rs.27,33,67,000, adjusted by assessee in deficit in policy holders account, was brought to tax separately, while considering the Total surplus in Life insurance business. The CIT(A) upheld the same stating that income of Life insurance activity is to be computed as per Form I and since there is income from other activities not included in Form I, same should be subjected to tax as income from other sources. 55. We have heard the rival contentions. As briefly discussed while deciding the issue of taxing surplus, assessee is in life Insurance business and it is not permitted to do any other business. All activities carried out by assessee are for furtherance of Life Insurance business. Maintaining adequate capital is necessary to comply with IRDA( Assets, Liabilities and Solvency margin of insurers)Regulations,2000. Income earned on capital infused in business is integral part of Life Insurance business. The LD. CIT(A) gives a finding that assessee is exclusively in Life Insurance business. However, since he gave primacy to Form I proforma he co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , the learned CIT (A) erred in allowing the dividend income of assessee of Rs.2,24,05,934/- as exempted under section 10(34) of the Income Tax Act, 1961 ignoring the facts that dividend income is considered as part of income of Life Insurance Business and is included as an income by the actuary . 57. Ground No. 1 is on the issue of treating negative reserve and disallowing the amount. While completing the assessment of life insurance business the AO, after taking the total surplus from Form-I, reduced the negative reserve amounting to Rs.27.27 crores. Assessee submitted before the CIT(A) as under: - Method of Determination of Mathematical Reserves - (1) Mathematical Reserves shall be determined separately for each contract by a prospective method of valuation in accordance with sub-paras (2) to (4). (2) The valuation method shall take into account all prospective contingencies under which any premiums (by the policyholder) or benefits (to the policyholder/beneficiary) may be payable under the policy, as determined by the policy conditions. The level of benefits shall take into account the reasonable expectations of policyholders (with regard to bonuses, inclu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es as they arise. Mandate to Appointed Actuary under regulations Sub-Rule 4 mandates Appointed Actuary to have prudent assumption of all relevant parameters and to include an appropriate margin for adverse deviations that may result in an increase in the amount of mathematical reserves. Sub-Rule 5 defines such margin as Negative Reserve , which is being disclosed in column 6 of the Form 1. Further, clause (iii) to sub-Rule 5 mandates appointed actuary to provide for negative reserve in mathematical reserve, accordingly not to include in distributable surplus as per Section 49 of the Insurance Act, 1938. Clause (ii) to sub-Rule 5 mandates appointed actuary to include negative reserve in mathematics reserve only at the time of Amalgamation and transfer of insurance business and otherwise. Taxable surplus Since taxation of Life Insurance Business is on surplus disclosed as per Section 49 which is covered by Rule 2(5)(iii), where in appointed actuary is mandated to arrive at surplus after excluding negative reserve. In view of the above we humbly submit before your goodself to kindly not treat negative reserve as taxable. Sub-Rule 4 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f claiming 100% depreciation in its financial statements has been consistently followed by the appellant and has also been duly accepted by the IRDA. The appellant has stated that the assets on which depreciation has been claimed have been initially capitalized in the books and then 100% depreciation has been claimed on these assets. Taxation of Life Insurance is presumptive taxation with only the surplus as disclosed by Form I being subjected to tax. In my view, as per the provisions of law only those adjustments which are expressly not prohibited under section 44 of the Act could be made. Consequently depreciation which has been debited in the audited accounts as per the consistently followed and accepted accounting policy need not be disallowed. 62. After considering the rival submissions, we are of the opinion that the action of the CIT(A) in deleting the amount is consistent with the accounting principles followed and the provisions of section 44 read with Rule 2 of the 1st Schedule. Therefore we uphold the order of the CIT(A) and dismiss the ground raised by the Revenue. 63. Ground No. 3 is on the issue of claim of exemption under section 10(34) on the dividend income ea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Ground No. 6 pertains to the issue of disallowance under section 14A and assessee also raised additional ground on the reason that section 14A is not applicable once incomes are assessed under section 44. This issue is also considered in A.Y. 2005-06 in ITA No. 6854/Mum/2010 in ground No. 4. For the reasons stated therein, following the above, this ground and the additional ground are allowed. AO is directed to do accordingly. ITA No.7767/Mum/2010 - A.Y. 2007-08 68. The Revenue in this appeal has raised the following two grounds: 1. On the facts and circumstances of the case and in law, the learned CIT (A) erred in deleting the addition made on account of claim of 100% depreciation of Rs.76,60,380/- ignoring the facts that Actuarial surplus is determined on the basis of the total assets of the company and therefore by not capitalizing the above assets, the assets of the assessee company are under stated in the books and thereby it has an impact of reducing the surplus of or increase in the deficit and therefore, the assets so written off are also considered as part of the surplus and taxable under section 44 of the I.T. Act. 2. On the facts and circumstances of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... plicable to insurance companies. 7. The CIT (A) has erred upholding that the amount of disallowance as computed by AO under section 14A of the Act is appropriate ignoring the amount offered by the Appellant under section 14A in return of income. 8. The CIT (A) has erred in confirming that the income in the shareholder s account is taxable at the normal corporate rate of tax instead of rate specified in section 115B of the Act. 72. Grounds No. 1,2,3 5 are on the issue of actuarial surplus. This issue was discussed elaborately in AY 2005-06 vide grounds 1 to 3 in ITA No 6854/Mum/2010 above and for the detailed reasons stated there in the grounds are allowed. AO is directed to modify the order accordingly. 73. Grounds No. 4 8 are on the issue of treating the income in shareholders account as income from other sources. This issue is already decided in grounds No. 4 7 in ITA No. 6855/Mum/2010 for A.Y. 2006-07. For the reasons stated therein vide paras 54 55 we direct the AO to treat the income in shareholders account as part of life insurance business only. Grounds are allowed. 74. Grounds No. 6 7 pertain to the issue of disallowance under section 14A and as ..... X X X X Extracts X X X X X X X X Extracts X X X X
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