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TMI Blog2012 (11) TMI 13X X X X Extracts X X X X X X X X Extracts X X X X ..... l in which assessee has raised the following grounds: "1. The CIT (Appeals) has erred in not accepting the loss of Rs.150.45 crores returned by the appellant. 2. The CIT (Appeals) erred in holding that the surplus as reflected in Form-I is the taxable income of the appellant. 3. The CIT(Appeals) erred in upholding the taxable income for the year at Rs.98.96 crores by holding that the amount transferred from the shareholder's account to account is not to be reduced from the surplus disclosed in Form-I. It is prayed that the surplus considered for computing taxable income should be after removing the effect of transfer from Shareholder's account to account. 4. The CIT (Appeals) has erred in not accepting disallowance under section 14A offered in revised return of income is on reasonable basis but directed AO to decide the issue afresh". 4. The facts in brief are that assessee is a Public Limited Company registered under the Companies Act, 1956. The Company was incorporated on July 20, 2000 with the object of carrying on Life Insurance Business. The activities of the insurance are governed by the Insuranc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Hon'ble Supreme Court in the case of LIC vs. CIT, 51 ITR 773 wherein it was held that the assessment of the profits of an insurance business is completely governed by the rules under the schedules and there is no power to do anything not contained in it. Further he also relied on the judgment of the Hon'ble Bombay High Court in the case of LIC vs. CIT, 115 ITR 45 to come to a conclusion that AO has no power to make adjustment once provisions of section 44 were invoked. Accordingly he took the surplus as declared in Form-I as the basis for computation of income and accordingly arrived at the surplus at Rs.35,86,96,280/-. He also made an addition of deficit from Pension Scheme at 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 mathema ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ation and not by the general Profit & Loss A/c prepared in other company. Insurance business is regulated by the Insurance Act 1938 and further by the IRDA Act 1999. As per the Regulations issued by the IRDA which assessee has to follow, as it was incorporated after the legislation of the IRDA Act, it has to maintain the accounts as per the new Regulations and accordingly shown policy holder's account and shareholder's account. There was a negative balance in policyholder's account to an extent of Rs.201.60 crores. The law requires the deficit in policyholder's account should be made good before declaring any bonus or dividend and this deficit should be fulfilled by transferring 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 s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the revenue account relating to policy holders for the year and the surplus/deficit is disclosed therein. It was further submitted that the earlier formats for presentation of accounts aggregated the results relating to shareholder's and policyholder's and thus the surplus/deficit was including the impact of both. There is a scheme of presentation of accounts currently in force for life insurance companies and the new formats were prescribed for complying with the IRDA Regulations. It was the submission that even though amendment was brought in Rule 5 in First Schedule for General Insurance business to incorporate changes brought by I R D Act no such amendment was brought in 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 69 and Bharat Cooperative Bank Mumbai Ltd vs. Cooperative Bank Employees Union AIR 2007 (SC) 2320 12. The learned Counsel also submitted that in case the language of the statutory provision is ambiguous and capable of two constructions, that construction must be adopted which will give meaning and effect to the other provisions of the enactment rather than that which will give none. He referred to the decision of the Hon'ble Supreme Court in the case of Addl. CIT vs. Surat Art Silk Cloth Manufacturers Association 121 ITR 1(SC) to submit that the construction which is in tune with the provisions of the Act can only be adopted and referred to the following from the above said 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re prepared under the Insurance Act, 1938 are to be accepted. However, it was submitted that reliance on the Hon'ble Bombay High Court judgment in LIC vs. CIT 115 ITR 45 is not correct as that judgment was reversed by the Hon'ble Supreme Court in 219 ITR 410. Therefore, it was submitted that AO relied on the over-ruled judgment to deny assessee the benefit of combining the accounts. It was submitted that the rules and provisions has to be implemented by making a harmonious reading of the provisions and internal transfer should be permitted which was made as per IRDA Regulations for which the Income Tax Act was not amended to incorporate the changes. 14. Ld. Counsel also referred to the 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 sect ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , they have taken a different method of calculation based on determination of actuarial surplus/deficit. It was submitted that as far as life insurance business is concerned, the intention of the legislature is not to consider capital or revenue but only to arrive at surplus or deficit. It was further submitted that even though amendment was made to Rule-5, no such amendment was made in Rule-2 of Part-A of first schedule and virtually there was no change from the situation from Insurance Act 1938 to IRDA Act1999. It is very clear that actuarial report is nothing to do with shareholder's but only. 17. Ld.CIT DR further submitted that meaning of actuarial surplus used in Rule-2 is not 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s shall be taken to be the annual average of the surplus arrived at by adjusting the surplus or deficit disclosed by the actuarial valuation made in accordance with the Insurance Act, 1938 (4 of 1938) in respect of the last inter-valuation period ending before the commencement of the assessment year, so as to exclude from it any surplus or deficit included therein which was made in any earlier inter-valuation period. Deductions 3. Omitted Adjustment of tax paid by deduction at source 4. Where for any year an assessment of the profits of life insurance business is made in accordance with the annual average of a surplus disclosed by a valuation for an intervaluation period exceeding twelve months, then in computing the 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 s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . Counsel's arguments. The incomes and Losses shown by assessee in various assessment years are as under: A.Y. Returned Income/(loss) Surplus/(deficit) as per A-RA Amount transferred from SHA Surplus as per Form I 2001-02 (204,359,146) (206,619,000) - - 2001-03 (854,736,440) 177,434,000 1,241,806,000 - 2003-04 (987,036,885 22,000 1,583,784,000 - 2004-05 (1,742,378,630) (22,000) 2,367,746,000 - 2005-06 (1,505,539,430) (317,487,000) 2,333,474,000 358,696,280 2006-07 (2,005,534,043) 1100,641,000) 2,306,655,000 775,734,930 2007-08 (4,128,758,204) (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. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Before 1999, companies engaged in the business of life insurance were required to prepare one consolidated account. Section 11 of the Insurance Act, 1938 was amended so as to include sub-sections (1A) and (1B). Subsection (1A) to section 11 provides that every insurer, on or after the commencement of the IRDA Act, 1999, in respect of insurance business transacted by him and in respect of shareholder's' funds, shall, at the expiration of each financial year, prepare with reference to that year, a balance sheet, a profit and loss account, a separate account of receipts and payments, 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 req ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the Regulations, the petitioner which is engaged in the business of life insurance is required to prepare and maintain two accounts namely, (i) a revenue account of policyholder's, and (ii) a profit and loss account of shareholder's. For the previous year which ended on March 31, 2003, the policyholder's' account reflected a deficit of Rs. 158.37 crores. This deficit was made good by the transfer of an amount of Rs. 158.37 crores from the shareholder's' account to the policyholder's account. This was essentially an internal transfer of funds. Form I which has been prepared by the petitioner in pursuance of the IRDA Regulations of 2000 reflected 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 asp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessment proceedings, letters were addressed to the Assessing Officer specifically in order to clarify the position of the deficit in the policyholder's' account. By its letter dated December 27, 2005, the petitioner clarified that the deficit in the policyholder's' account as reflected by Form A-RA had been met by a transfer from the shareholder's' account. The figures relating to surplus/deficit in Form I were subsequent to the internal transfer of funds. The assessee contended that the transfer from the shareholder's' to the policyholder's' account was an internal adjustment and was tax neutral. Before the assessment proceedings came to be concluded for the assessment year 2003-04, an audit query was raised with reference to the assessment year 2002-03. The audit report dated May 4, 2005 specifically raised a question as to whether the petitioner should have been allowed to claim a deficit in the policyholder's' account since the 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 parti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the position reflected in Form I was subsequent to the internal transfer of funds which took place from the shareholder's' to the policyholder's' account. It is after the petitioner had filed its explanation by several letters that the Assessing Officer passed an order of assessment under section 143(3)". 22. Further vide Para 21 (Page 482), the method of accounting and Regulations were further analysed as under: While dealing with the reopening of the assessment for the assessment year 2004-05, the principal question before the court is as to whether there was any tangible material before the Assessing Officer to form a reason to believe that income chargeable to tax had escaped assessment. In the prefatory part of this judgment, a reference has been made to the relevant provisions of the Insurance Act, 1938 and to the Regulations of 2000 and 2002, which have a bearing on the formulation of the accounts, of an assessee like the petitioner 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 se ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n insurer who intends to declare a bonus has to ensure, in the event that there is a deficit in the policyholder's' account, that the deficit is effaced by a transfer of funds from the shareholder's' account". The Assessing Officer, while reopening the assessment has not put forth any tangible material on the basis of which he could have formed a reasonable belief that income chargeable to tax has escaped assessment. He has merely altered or changed the opinion which was formed during the assessment proceedings". (emphasis supplied) The Hon'ble Bombay High Court on the facts of the case held that reopening is bad in law. In arriving at that decision, the Hon'ble High Court examined the entire scheme of presentation of accounts and arriving at surplus. Therefore not only the Regulations which are binding on the assessee were discussed but computation made there under was also considered in the above decision. 23. The dispute in these years is also similar. Eventhough Ld.CIT DR 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... law in order to attract the jurisdiction of the High Court in second appeal and, therefore, if the reference in Section 55 were to the grounds set out in the then existing Section 100, there can be no doubt that an appeal would lie to this Court under Section 55 on a question of law. But subsequent to the enactment of Section 55, Section 100 of the Code of Civil Procedure was substituted by a new section by Section 37 of the Code of Civil Procedure (Amendment) Act, J 976 with effect from February 1, 1977 and the new Section 100 provided that a second appeal shall lie to the High Court only if the High Court is satisfied that the case involves a substantial question of law. The three grounds on which a second appeal could lie under the former Section 100 were abrogated and in their place only one ground was substituted which was a highly stringent ground, namely, that there' should be a substantial question of law. This was the new Section 100 which was in force on the date when the present appeal was 'preferred by the appellant 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 i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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 incorporation statute. Lord Esher, M. R." while dealing with legislation in incorporation in In re Wood's Estate" pointed out 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, is to write those sections into the new Act, just as if they' had been actually written in it with the pen, or printed in it, and, the .moment you pave those clauses in the later Act, you have no occasion to refer to .the former Act at all. ' Lord Justice Brett, also observed to' the same effect in 'Clarke v. Bradlaugh": ..... there is a' rule of construction that, where statute is incorporated by reference into a second . statute, the repeal of the first statute by a third statute does not affect the second. This was the rule applied by the Judicial Committee of the Privy Council in Secretary of State' for India in Council v; ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Ores Ltd. v. State 'of Orissa" also proceeded on the same principle. There the question arose in regard to the interpretation of Section 2(c) of the Bihar and Orissa Motor Vehicles Taxation' Act, 1930 (hereinafter referred to as 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 before the Court 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. This argument was negatived by the 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 .am ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... place in Section 100 must be automatically read into Section 55. It must be remembered that the Act is a self-contained Code dealing with monopolies and restrictive trade practices and it is not possible to believe that the Legislature could have made the right of 'appeal under such a code. dependent on the vicissitudes through which a section in another statute might pass from time to time. The scope and ambit of the appeal could not have been intended to fluctuate or vary with every change in the grounds set out in Section 100. Apart from the absence of any rational justification for doing so, such an indissoluble linking of Section 55 with Section 100 could conceivably lead to a rather absurd and startling result. Take for example a situation where Section 100 might be repealed altogether by the Legislature - a situation which cannot be regarded as wholly unthinkable. If the construction contended for on behalf of the respondents were accepted, Section 55 would in such a case be reduced to futility and the right of appeal would be wholly gone, because then there would be no grounds on which an appeal could lie. Could such a consequence ever have been contemplated by the Legislat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d amendments to the BR Act, particularly insertion of Section 56 in the new format w.e.f. 1st March, 1966, after the insertion of the definition of "Banking Company" in the ID Act by Act 54 of 1949 will apply mutatis mutandis to the matters governed by the ID Act? 13. As there is no indication in the ID Act as to the applicability or otherwise of the subsequent amendments in the BR Act, the question posed has to be answered in the light of the two concepts of statutory interpretation, namely, incorporation by reference and mere reference or citation of one statute into another. Thus, answer to a rather intricate question hinges on the test whether at the time of insertion of the definition of the term "Banking Company" in the form of sub-section (bb) of Section 2 of the ID Act by the 1949 Act it was a mere reference to the Banking Companies Act, 1949 (later re-christened as the Banking Regulation Act) or the intendment of the legislature was to incorporate the said definition as it is in the ID Act? 14. Before adverting to the said core issue, we may briefly notice the distinction between the two afore-mentioned concepts of statutory interpre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lt with by this Court in a catena of decisions. In Ram Sarup vs. Munshi & Ors. a Constitution Bench held that repeal of Punjab Alienation of Land Act, 1900 had no effect on the continued operation of the Punjab Pre-emption Act, 1913 and that the expression "agricultural land" in the later Act had to be read as if the definition of the Alienation of Land Act had been bodily transposed into it. After referring to what Brett, L.J. said on the effect of incorporation in Clarke vs. Bradlaugh, namely, "where a statute is incorporated, by reference, into a second statute the repeal of the first statute by a third does not affect the second", it was observed as follows:- "Where the provisions of an Act are incorporated by reference in a later Act the repeal of the earlier Act has, in general, no effect upon the construction or effect of the Act in which its provisions have been incorporated. In the circumstances, therefore, the repeal of the Punjab Alienation of Land Act of 1900 has no effect on the continued operation of the Pre-emption Act and the expression 'agricultural land' in the later Act has to be read as if the definition in the Alienation of Land Act had been bodily transposed i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n in these decisions was reiterated in U.P. Avas Evam Vikas Parishad vs. Jainul Islam & Anr. and lately in P.C. Agarwala vs. Payment of Wages Inspector, M.P. & Ors. It is, therefore, clear from the afore-noted decisions that if there is a mere reference to a provision of one statute in another without incorporation, then, unless a different intention clearly appears, 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. 20. However, the distinction between incorporation by reference and adoption of provisions by mere reference or citation is not too easy to highlight. The distinction is one of difference in degree and is often blurred. The fact that no clear-cut guidelines or distinguishing features have been spelt out to ascertain whether it belongs to one or the other category makes the task of identification difficult. The semantics associated with interpretation play their role to a limit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ning may or may not comprise. Therefore, the use of the word "means" followed by the word "includes" in Section 2(bb) of the ID Act is clearly indicative of the legislative intent to make the definition exhaustive and would cover only those banking companies which fall within the purview of the definition and no other. 23. Moreover, Section 2(bb) has subsequently been amended from time to time by various amendments to include certain specified banks and institutions, which would otherwise not fall within the exhaustive definition of the "Banking Company" in Section 2(bb) read with Section 5(c), 5(b) and 5(d) of the BR Act. It is plain that if the Parliament had intended an expansive interpretation of the original words, then there would have been no reason whatsoever to keep amending the definition from time to time. In our view, therefore, the language of Section 2(bb) clearly demonstrates the legislative intent not to bring within its ambit all the banks transacting the business of banking in India. 24. We are, therefore, of the opinion that introduction of the Banking Companies Act, 1949 in clause (bb) of Section 2 of the ID Act is a case ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iate government", within the meaning of Section 2(a) of the ID Act, the definition of the "Banking Company" will have to be read as it existed on the date of insertion of Section 2(bb) and so read, the "appropriate government" in relation to a multi-state co-operative bank, carrying on business in more than one state, would be the State Government". 27. Respectfully following the above principles and examining the provisions of IT Act, we are of the opinion that the 'actuarial valuation made in accordance with the Insurance Act, 1938' do mean that the actuarial valuation done in accordance with the Insurance Act, 1938. In arriving at the above decision we have also taken into consideration that Rule-5 in Part-B of the first schedule with reference to 'other insurance business' did incorporate the IRDA and its Regulations as amended by the Finance Act 2009 w.e.f. 1.4.2011 which is as under: "B- Other Insurance Business: Computation of profits and gains of other insurance business. 5. The profits and gains of any business of insurance other than life insurance shall be taken to be the profit before tax and appropriations as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s to be prepared vide section 13 of that Act in accordance with the Regulations contained in Part-I of the Fourth schedule and in conformity with the requirement of Part-II of that schedule. Section 13 of Insurance Act 1938( as amended now) is as under: "13. Actuarial report and abstract. (1) Every insurer carrying on life insurance business shall, in respect of the life insurance business transacted by him in India, and also in the case of an insurer specified in sub- clause (a) (ii) or sub- clause (b) of clause (9) of section 2 in respect of all life insurance business transacted by him,(every year) cause an investigation to be made by an actuary into the financial condition of the life insurance business carried on by him, including a valuation of his liabilities in respect thereto and shall cause an abstract of the report of such actuary to be made in accordance with the Regulations contained in Part I of the Fourth Schedule and in conformity with the requirements of Part II of that Schedule: Provided that the Authority may, having regard to the circumstances of any particular insurer, allow him to have the investigati ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arging and collecting from policy holders is adequate to cover the costs of certain claims that might beneficially be made by policy holders as well as their other expenses. In fact, the work that actuaries perform is crucial to an insurance company's ability to remain in business. Actuaries are involved at all stages in product development and in the pricing risk assessment and marketing of the products. Their job involves making estimates of ultimate out-come of insurable events. In the business of insurance the product cost is an abstraction, depending on the timing issues, variability issues and risk parameters. One big function actuaries provide is making reserves to insure that insurance companies keep enough money on their balance sheets to make good of all the claims they will have to pay. This involves arriving at actuarial surplus or deficit depending on various factors. In order to ensure a fair play in the business, the IRDA prescribed regulations according to which various norms were prescribed in order to ensure that Life Insurance business (even other insurance business) are done according to healthy business practices. As per the above regulations, Regulation 4 pres ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e consolidated into one and transfer from one account to another is tax neutral. What AO has done is to tax the surplus after the funds have been transferred from shareholder's account to the policyholder's account at the gross level while ignoring such transfer in shareholder's account, while bringing to tax only the incomes declared in the shareholder's account that too under the head 'other sources of income'. In fact while giving the finding that assessee is in the life insurance business only and incomes are to be treated as income from life insurance business, the CIT (A) surprisingly in subsequent assessment years appeals accepted AO's contention that surplus in shareholder's account is to be taxed as other sources of income. But once the provisions of section 44 of IT Act are invoked anything contained in the heads of income like income from other sources, capital gains, house property or even interest on securities does not come into play and only first schedule has to be invoked to arrive at the profit. Therefore, in our opinion both the policyholder's and shareholder's account has to be consolidated for the purpose of arriving at the deficit or surplus. 33. Let us exami ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bsp; (1) A statement showing total amount Composition of Surplus; a) Surplus shown under Form I; b) Interim Bonus paid during the inter-valuation period; c) Terminal Bonuses paid during the inter-valuation period; d) Loyalty additions or other forms of bonuses, if any, paid during the inter-valuation period; e) Sum transferred from shareholder's funds during the inter valuation period; f) Amount of surplus from policyholder's' funds, brought forward from preceding valuation; g) Total Surplus (total of the items (a) to (f) 35. We have specifically asked the CIT DR to explain what is the surplus shown under Form I ie. at column (a) above. Regulation 8 as shown above has Column (a) 'surplus shown under Form I'. In Col.(e) one has to represent sum transferred from shareholder's fund during the inter valuation period. Item (g) refers to the 'total surplus' after taking into account items (a) to (f). Under Col.(a) surplus shown in Form I is a deficit as per Form AR-A in the policyholder's deficit account in this year. This ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... paid during the inter-valuation period; (d) Loyalty Additions or other forms of bonuses, if any, paid during the inter valuation period. (e) Sum transferred from shareholder's funds during the inter valuation period; (f) Amount of surplus, from policyholder's' funds, brought forward from preceding valuation; (g) Total surplus (total of the items (a) to (f). Distribution of Surplus: Policyholder's' Fund: (a) To Terminal Bonuses paid; (b) To Terminal Bonuses; (c) To loyalty Additions or any other forms of bonuses, if any; (d) Among policyholder's with immediate participation giving the number of policies which participated and the sums assured thereunder (excluding bonuses); (e) Among policyholder's with deferred participation, giving the number of policies which participated and the sums assured thereunder (excluding bonuses); (f) Among policyholder's in the discounted bonus class giving the number of policies which participated and the sums assu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... - - Investments 3,75,88,023 1,64,46,429 Employee stock option outstanding - - Agents Balances Reserve for contingency Outstanding premiums 84,426 61,287 General Reserve - - Interest, Dividend and Rents outstanding 1,47,531 77,589 Share Premium - - Int. Dividend and Rents accrued but not due 1,86,899 1,48,778 Property Revaluation Reserve - - Amount due from other persons or bodies carrying on Insurance Business Investment Reserve Sundry Debtors, Advances and Deposits 2,95,504 1,78,792 Property Insurance Reserve Fixed Assets 6,30,124 5,48,131 Profit & Loss Appropriate A/c Cash: At Bankers on Deposit Account 3,00,000 44,900 Balance of funds 2,78,28,554 95,97,898 At Bankers on Notice Deposit Account - - Debenture stock At Bankers on current account and in hand 16,95,868 4,58,304 Estimated liability in respect of outstanding claims, whether due or intimated Annuities due and unpaid Amount due to other persons or bodies carrying on Insurance Business - - ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (Rs.'000) Deficit as at March 31,2005 (664,73,51) Less: Deficit as at March 31,2004 (474,07,43) Deficit for the year ended on March 31,2005 (190,66,08) Income offered in return of income before claiming exemption under section 10 of the Income Tax Act, 1961 (190,66,08) 37. Thus as can be seen, the deficit for the year ended March, 2005 was arrived at Rs.190,66,08/- ('000) which was also tallying with assessee's computation of income. Further assessee also furnished the reconciliation of Form-I 'total surplus' with return of income: ICICI Prudential Life Insurance Company Limited FY 2004-05/ AY 2005-06: Reconciliation of Form-I Surplus with Return of Income Particulars Amount (Rs.) Amount (Rs.) Form-I Surplus as on 31.3.2005 (Page-14B 35,86,96,280 Less Form I Surplus as at 31.3.2004 - Surplus for FY 2004-05/AY 2005-06 35,86,96,280 Less: Shareholder's funding 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d Form-I( under Regulation 8), AO wants to tax the amount which is after taking into account the transfer of assets by way of fresh capital from shareholder's account. This in a way is taxing fresh capital infused into business indirectly which cannot be done as this is not business surplus but infusion of capital directly. 40. In our opinion what assessee has done in reconciling the IRDA format with that of old Insurance Form is correct and accordingly the loss disclosed in the computation of income is according to the actuarial surplus/deficit under the Insurance Act, 1938 prescribed under Rule 2 of the first schedule part-A. In view of this, we are of the opinion that insistence by AO to bring to tax the entire 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: Sta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 44 of IT ACT. In view of the discussion above and after analyzing the Forms, Regulations and Provisions we have no hesitation to hold that the assessee working of actuarial surplus/ deficit is in accordance with Rule 2 of First Schedule. Therefore, assessee grounds on this issue are allowed and AO is directed to modify the order accordingly. Ground Nos.1 to 3 are considered allowed. 43. Ground No.4 pertains to disallowance under section 14A offered in revised return on reasonable basis. 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in ITA No.781/Mum/2007 vide order dated 30.4.2010. Thus, this issue has been consistently decided in favour of the assessee and against the revenue by this Tribunal. The Pune Bench of this Tribunal in the case of Bajaj Allianz General Insurance Company limited V/s Add. CIT (supra) has decided this issue in paragraphs 17 to 20 as under: "17. Finally the quest ion 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 from the statute. 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 Auth ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... elating to the computation of income chargeable under the head ' Interest on securities'. 'Income from house property', 'Capital gains' or ' Income from other sources', or in s. 199 or in ss. 28 to 43B, the profits and gains of any business of insurance, 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 the First Schedule"'. 23. The above provision makes it very clear that s. 44 applies notwithstanding 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. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed within the provisions of the IT Act relating to computation of income chargeable under different heads, other than the income to be computed under the head 'Profit and gains of business or profession' . For computation of profits and gains of business or profession the mandate to the AO is to compute the said income in accordance with the provisions of ss. 28 to 43B of the Act . In the case of the computation of profits and gains of any business of insurance, the same shall be done in accordance with the rules prescribed in First Schedule of the Act, meaning thereby ss. 28 to 43B shall not apply. No other provision pertaining to computation of income will become relevant. According to the learned counsel, two presumptions that follow on a combined reading of ss. 14, 14A, 44 and r. 5 of the First Schedule are: (a)That no head-wise bifurcation is cal led for. The income, inter alia, of the business of insurance is essentially to be 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 subjec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... On the facts and in the circumstances of the case and in law, the learned CIT (A) erred in holding that the income from surplus of participating annuities business represent surplus from "Participating Pension Business" and accordingly allowing the relief to assessee of Rs.21.34 crores". 3. On the facts and in the circumstances of the case and in law, the learned CIT (A) erred in allowing the dividend income of assessee of Rs.1,56,09,222/- 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". 48. All the above three grounds are on the issue whether exemption under Sec 10 can be allowed when incomes are computed under Sec.44 of the IT Act. In arriving at the deficit from the insurance business, assessee claimed certain exempt incomes under section 10(23AAB) with reference to Pension Business and dividend under section 10(34). 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. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 0 and assessee challenged the issue by way of writ petition. The Hon'ble Bombay High Court not only disapproved the reopening of the assessment but gave the findings on merit also which are as under:- "11. Section 44 of the Income Tax Act, 1961 stipulates as follows: "44. Notwithstanding anything to the contrary contained in the provisions of this Act relating to the computation of income chargeable under the head "interest on securities", "Income from house property", "Capital gains" or "Income from other sources", or in section 199 or in sections 28 to (43B), the profits and gains of any business of insurance, including any such business carried on by a mutual insurance company or by a cooperative society, shall be computed in accordance with the rules contained in the First Schedule". Section 44 provides that the profits and gains of any business of insurance of a mutual insurance company shall be computed in accordance with the rules in the First Schedule. Part 'A' of the First Schedule containing Rules 1 to 4 deals with profits of life insurance business while Part B consisting of Rule 5 deals ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s whether, in view of the provisions in section 44 or rule 2 of the first Schedule, the Life Insurance Corporation will not be entitled to claim the deductions which are otherwise admissible in the case of an assessee, computation of whose income is governed by the other provisions of the Act. The argument of Mr. Kolah for the Life Insurance Corporation is that unless there are express provisions which disable the Corporation from claiming the deductions referred to above, the Corporation cannot be deprived of the benefit of the provisions referred to in the questions Nos. 1 to 6. Section 44, which deals with computation of profits and gains of business of insurance, begins with a nonobstante clause, the effect of which is that the provisions of the Act relating to the computation of income chargeable under the head "Interest on securities", "Income from house property", "Capital gains" or "Income from other sources", do not apply in the case of computation of income from insurance business. The effect of the non-obstante clause so far as the earlier part of section 44 is concerned, therefore, is that the provisions of section 44 will prevail notwithstanding the fact that there are ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ess of insurance and the tax payable thereon shall be computed in accordance with the rules contained in the Schedule to the Act. The Division Bench held that upon the language of sub-section (7) of section 10 read along with rule 6 it was impossible to hold that the provisions relating to exemptions stood excluded from operation. In that context the Division Bench held as follows: "It is only after the profits and gains of a business are computed that any question of granting exemptions arises and if the latter stage were intended to be excluded by the law we should have thought that a clearer provision than is made in sub-section (7) of section 10 and in rule 6 would have been made". In the subsequent judgment of the Division Bench in Life Insurance Corporation (supra), the Division Bench noted that there was a difference in the language of section 10(7) of the Act of 1922 when compared with section 44 of the Act of 1961 since section 44 does not refer to the computation of tax but merely to the computation of profits and gains in the business of insurance. The Division ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee which carries on the business of general insurance would be entitled to the benefit of an exemption under clauses (15), (23G) and (33) of section 10 is directly governed by the decision rendered by the Division Bench in Life Insurance Corporation vs. Commissioner of Income-tax (Supra) following the earlier decision in Commissioner of Income-tax vs. New India Assurance Co. Ltd (supra). The Assessing Officer could not have ignored the binding precedent contained in the two Division Bench decisions of this Court. Moreover, the Assessing Officer in allowing the benefit of the exemption in the order of assessment under section 143(3) specifically relied upon the view taken by the CBDT in its communication dated 21 February 2006 to the Chairman of IRDA. The communication clarifies that the exemption available to any other assessee under any clauses of section 10 is also available to a person carrying on non-life insurance business subject to the fulfillment of the conditions, if any, under a particular clause of section 10 under which exemption is sought. It needs to be emphasized that it is not the case of the Assessing Officer that the assessee had failed to fulfill the condi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... us disclosed in Form I. 4. The CIT (A) has erred in holding that the income of Rs.27.34 crores in shareholder's account is separately taxable under the head "income from other sources". 5. The CIT (A) has erred in rejecting the alternate plea that in an event the income in policyholder account is computed after considering transfers from shareholder's account to account, then income in shareholder's account should be computed by allowing a corresponding deduction of transfers to account. 6. The CIT (A) has erred in not accepting the disallowance under section 14A offered in revised return of income is on reasonable basis but directed AO to decide the issue afresh. 7. 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." 52. In assessee appeal ground nos.1, 2, 3, 5 is on taxing the transfer from share holders fund, while considering the total surplus as surplus for purposes of Rule 2. This issue was discussed elaborately in AY 2005-06 vide grounds 1 to 3 in ITA no 6854/M/2010 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... efore, the incomes in Shareholder's account are to be considered as arising out of Life insurance business only. More over Sec 44 mandates that only First Schedule will apply for computing incomes and excludes other heads of income like, Interest on Securities, income from house property, 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. The grounds are allowed. AO is directed to treat them as part of Life Insurance Business and tax them u/s 115B. ITA No.7766/Mum/2010 A.Y 2006-07 56. In this appeal, the Revenue has raised the following three grounds: "1. On the facts and circumstances of the case and in law, the learned CIT (A) erred in not subjecting the negative reserve amounting to Rs.27.27 crores ignoring the facts that negative reserve has an impact of reducing the taxable surplus as per For ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... prudent assumptions of all relevant parameters. The value of each such parameter shall be based on the insurer's expected experience and shall include an appropriate margin for adverse deviations (hereinafter referred to as MAD) that may result in an increase in the amount of mathematical reserves. (5) (1) The amount of mathematical reserve in respect of a policy, determined in accordance with sub-para (4), may be negative (called "negative reserves") or less than the guaranteed surrender value available (called "guaranteed surrender value deficiency reserves") at the valuation date. The appointed actuary shall, for the purpose of section 35 of the Act, use the amount of such mathematical reserves without any modification. The appointed actuary shall, for the purpose of sections 13, 49, 64V and 64VA of the Act, set the amount of such mathematical reserve to zero, in case of such negative reserve, or to the guaranteed surrender value, in case of such guaranteed surrender value deficiency reserves, as the case may be. (6) The valuation method shall be called "Gross Premium Method". (7 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... verse deviations that may result in an increase in the amount of mathematical reserves." 58. The CIT(A), in his brief order vide para 17, considered the detailed explanation above and accepted that the negative reserve disclosed in Form-I does not give rise to distributable surplus. Accordingly he disallowed the same. 59. After considering the rival submissions and examining the method of accounting and the mandate given by regulations to appoint Actuarial on the concept of mathematical reserves, we do not see any reason to interfere with the order of the CIT(A). The mathematical reserve is part of Actuarial valuation and the surplus as discussed in Form-I under Regulation 4 takes into consideration this mathematical reserve also. Therefore the order of the CIT(A) is approve. Moreover the Assessing Officer has no power to modify the amount after actuarial valuation was done, which was the basis for assessment under Rule 2 of 1st Schedule r.w.s. 44 of the I.T. Act. The principles laid down by the Hon'ble Supreme Court in LIC vs. CIT 512 ITR 773 about the powers of Assessing Officer also restricts the scope and adjustments by the AO. In view of this we uphold the order of the CIT(A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bove in ITA No. 7765/Mum/2010 for A.Y. 2005-06. Therefore, ground No. 3 raised by the Revenue is accordingly dismissed. ITA No.6856/Mum/2010 - A.Y. 2007-08. 64. Assessee in this appeal has raised seven grounds which is extracted below: "1. The CIT (A) has erred in not accepting the loss of Rs.412.88 crores returned by the Appellant. 2. The CIT (A) erred in holding that the Appellant's taxable income from insurance is the amount of surplus disclosed in Form I. 3. The CIT (A) has erred in upholding the computation of taxable income for the year at Rs.31.72 crores by holding that the amount transferred from the shareholder's account to policyholder's account is not to be reduced from the surplus disclosed in Form I. 4. The CIT (A) has erred in holding that income of Rs.31.72 crores in shareholder's account is separately taxable under the head "income from other sources". 5. The CIT (A) has erred in rejecting the alternate plea that in an event the income in policyholder account is computed after considering transfers from shareholder's account to account, then income in shareholder's ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e case and in law, the learned CIT (A) erred in allowing the dividend income of assessee 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". 69. Ground No. 1 is about deletion of addition made on account of claim of 100% depreciation of Rs.76,60,380/-. This ground is already considered vide ground No.2 in ITA No. 7766/Mum/2010 for A.Y. 2005-06. Therefore, for the reasons mentioned therein ground No. 2 raised by the Revenue is accordingly dismissed. 70. Ground No. 2 is on the issue of claim of exemption under section 10(34) on the dividend income earned by the assessee, which was allowed by the CIT(A). This ground is already considered vide paras 48 & 49 of the above in ITA No. 7765/Mum/2010 for A.Y. 2005-06. Therefore, ground No. 3 raised by the Revenue is accordingly dismissed. ITA No.6059/Mum/2010 - A.Y. 2008-09 71. Assessee in this appeal raised the following grounds: "1. The CIT (A) has erred in not accepting the loss of Rs.823.38 crores returned by the Appellant, 2. The CIT (A) erre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... unds are allowed. 74. Grounds No. 6 & 7 pertain 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.7213/Mum/2010 - A.Y 2008-09 75. The Revenue in this appeal has raised the following four grounds: "1. On the facts and circumstances of the case and in law, the learned CIT (A) erred in not upholding the findings of AO that assessee is earning income from activities other than Life Insurance Business ignoring the facts that assessee is getting dividend income and income from other sources also. 2. On the facts and circumstances of the case and in law, the learned CIT (A) erred in not subjecting the negative reserve amounting to Rs.87.94 crores ignoring the facts that negative reserve has an impact of reducing the taxable surplus as per Form-I. 3. On the facts and c ..... X X X X Extracts X X X X X X X X Extracts X X X X
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