TMI Blog2013 (6) TMI 377X X X X Extracts X X X X X X X X Extracts X X X X ..... was done, which was the basis for assessment under Rule 2 of 1st Schedule r.w.s.44 of the I.T. Act. The principle laid down in LIC vs.CIT [1963 (12) TMI 5 - SUPREME Court] about the power of the Assessing Officer also restricted the scope and adjustment by the AO. In view of this uphold the order of the CIT(A) and dismiss the Revenue's ground. In favour of assessee. Addition of income from shareholder's funds credited directly to the shareholder's Account - Held that:- There is no doubt that income had accrued to the assessee and same was transferred to the share holders' account. Once income is earned by the assessee and later on it is applied for some specific purpose it cannot be treated as charge on profit. It is application of income. Preparation of books of accounts as per the Insurance account is different from determining the tax liability under income tax. Income transferred to policy holders' a/c. was not application of income-it was charge on income and therefore AO had rightly excluded it from taxation. Income earned by the assessee-corporation on dividend and interest, in a strict sense, cannot be held to be earned from the insurance business. Initial capital contr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... .5,61,40,41,42,022/-. Authorised Representative (AR) submitted that Grounds of Appeal No. 1-3 were the effective grounds to be adjudicated upon. 3. During the course of assessment proceeding AO found that the assessee had claimed dividend from domestic companies amounting to Rs.29,38,05,67,922/- to be exempt u/s.10(34) of the Act and had reduced the same from the income worked out as per Rule 2 of the Schedule-I of Act.AO directed the assessee to explain the reasons for claiming this exemption. After considering the submissions of the assessee, AO held that the computation of income in the case of Insurance business was to made as per provisions of section 44 of the Act, that said section provided that dividend income under the head 'income from other sources' could not be taken as separate from profit and gains of insurance business, that the dividend income which fell under the head income from other sources was not eligible for claiming exemption u/s.10(34) of the Act.AO further held that a Life Insurance company normally accepted premia from policyholders and invested the same in the various- investments including loans, deposits, bonds, shares etc., that the incomes received ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... led to exemption u/s. 10(34) of the Act. He relied upon the cases of LIC vs.CIT (115 ITR 45) and General Insurance Corporation of India (17 taxmann. com 247 delivered by the Hon'ble Bombay High Court. He also relied upon the order of the ITAT 'F' Bench delivered in the case of ICICI Prudential Insurance Co. Ltd., (ITA Nos. 6854, 6855, 6856 and 6059/Mum/2010). Departmental Representative (DR) relied upon the orders of the FAA. 3.3. We have heard the rival submissions and perused the material put before us. After Government of India through the Schedule dealing with Insurance Business, we find that Schedule-I deals with the computation of income in Insurance Companies. It is further found that Rule Nos. 1 to 4 of the schedule are about Life Insurance business, whereas Rule 5 onwards deal with General Insurance Business. While deciding the issue against the assessee, AO and the FAA have referred to Rule 5 of the Schedule. In our opinion comparing the General Insurance Business with Life Insurance Business was not proper. Even in the 1922 Act both the businesses were dealt separately. In these circumstances, we hold that relying upon Rule 5 of the schedule and denying benefit on that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es 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 I to 4 deals with profits of life insurance business while Part B consisting of Rule 5 deals with computation of profits and gains of Other insurance business. Rule 5 provides as follows: "5. The profits 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; ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rned, therefore, is that the provisions of section 44 will prevail notwithstanding the fact that there are contrary provisions in the Act relating to computation of income chargeable under the four heads mentioned in section 44. The only other overriding effect of section 44 is that its provisions operate notwithstanding the provisions of section 191 and of section 28 to 43A. Thus, the only effect of section 44 is that the operation of the provisions referred to therein is excluded in the 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ever riot make any difference to- the principle laid .... down by the Court in the earlier decision in the case of New India Assurance Co. Ltd. Accordingly, the decision of Life Insurance Corporation (Supra)could not have- been ignored by the Assessing- Officer on the supposition that the decision was rendered in the context of an assessee who carried on life insurance business and was, therefore, not available to an assessee which carries on general insurance business. 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (38) of section 10 where the Assessing Officer had rejected the claim for exemption in the original order of assessment under section 143(3). The Assessing Officer above all was bound by the communication of the CBDT. Having followed that in the order under section 143(3) he could not have taken a different view while purporting to reopen the assessment. Having applied his mind specifically to the issue and having taken a view on the basis of the communication noted 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.." Respectfully following the order of the Hon'ble jurisdictional High Court and taking note of the decision of the coordinating bench (F Bench in the case of ICICI Prudentail Insurance Co.), we reverse the order of the FAA and decide Ground No.1 in favour of the assessee. 4. Next Ground of Appeal is about confirmation of add ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ccordance with the Insurance Act and IRDA Regulations. Accordingly, the Negative Reserve reported by actuary amounting to Rs.38,075.39 Crores was added back to the income of the assessee as surplus of Actuarial Valuation of Life Insurance business of the assessee-company. 4.1. Assessee preferred an appeal before the First Appellate Authority (FAA). After considering the submissions of the assessee and the assessment order, FAA held that under IRDA, Negative Reserves were to be taken under specific situations and not as a general rule, that the appellant corporation wanted to take un-due advantage by reducing its taxable surplus by the amount of Negative Reserves, that the value of Negative Reserves was taken as '0', that same had been reduced from the taxable surplus and total income of the assessee, that the total income of the assessee had been under stated, that actuarial had erred in applying Insurance Act correctly and properly in the case under consideration. Referring to Provisions of IRDA he held that negative reserve was to be taken at Zero in specific situations only -under Rule 5(ii) of Schedule IIA, that said mandate was not applicable in all situation as argued by th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e, that the AO had tampered with the net valuation surplus as determined by the Appointed Actuary, that action of the AO was contrary to the provisions of section 44 of the Act r.w. First Schedule to the Act. He relied upon the cases of CIT vs.LIC (51 ITR 773) and GIC vs. CIT (240 ITR 139). He also relied upon the order of the ICICI Prudential Insurance Co.(supra) delivered by the Mumbai Tribunal. He referred to Circular No.202 dtd.05.07.1976 issued by the CBDT explaining and scope of effect of the changes made by the Finance Act, 1976 in the First Schedule to the Act. Alternatively, he submitted that treatment to negative reserve should not result in double taxation, that figures of negative reserves should be considered for one AY only, that appropriate deduction should for earlier year's reserves should be given in subsequent year. DR strongly supported the orders of the AO and the FAA. 4.3. We have considered the rival submissions. We find that similar issue was raised by the AO of the ICICI Prudential Insurance Co.(supra) in the appeal filed by him for AY 2006-07. Ground filed by him read as under: ""On the facts and in the circumstances of the case and in law, the lear ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he 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 principle laid down by the Hon'ble Supreme Court in LIC vs.CIT 51 ITR 773 about the power of the Assessing Officer also restricted the scope and adjustment by the AO. In view of this uphold the order of the CIT(A) and dismiss the Revenue's ground." Respectfully following the above order of the Coordinating Bench we decide Ground No.2 in favour of the assessee. 5. Next Ground relates to income in share holders' Account. During the assessment proceedings AO found that the assessee had prepared its revenue and profit and loss account in two parts-first part was called technical account or policyholders' account whereas the second part was called non-technical account or shareholders' account. In the first part premium, other receipts, expenses etc. relating to insurance policies issued by the assessee were accounted for and in the second part surplus from first account was carried forward. He further found that in the non-technical account, apart from the transfer from technical account income from ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... isions of the Act, that income in shareholders' account was distinct from income from life insurance business which was reflected in policyholders' account and not in shareholders' account, that the nature of income in shareholders' account was such that it was not business income at all and therefore provisions of section 44 would clearly not be applicable on this income. As a result, income of Rs.2816.15 lacs appearing in share holders' account was taxed by him at normal tax rate. 5.2. Assessee preferred an appeal before the FAA. After considering the submissions of the assessee-corporation and the assessee he held that the issue under consideration was decided against the assessee-corporation by him while adjudicating upon the appeal for AY 2007-08,that amount in question was not derived by the assessee from Life Insurance Business. We find that in the appellate order for the AY 2007-08 FAA had discussed the issue extensively. In that year he had held that stand of the appellant corporation was not correct, that Government of India had contributed initial capital of Rs.5 Crores to the LIC, that Government had become a stakeholder in the appellant corporation, that the funds of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e. He relied upon the order of the FAA passed for AY 2007- 08. 5.4. We have rival submissions and perused the material on record. Basic question to be decided by us is whether the income respect of shareholders' account should be taxed in the hands of the assessee or not? The undisputed facts relevant for deciding the issue can be summarised as under: i. LIC was established by the LIC Act,1956, ii. In that year Government of India had contributed Rs.5 Crores towards capital of the Corporation. iii. No shares were issued by the LIC to Government of India. iv. Assessee corporation had prepared its accounts as per the guidelines issued by competent authorities. v. AO did not tax the sum appearing in the policy-holders' a/c., whereas amount appearing in the shareholders a/c. was treated as income of the assessee by him and taxed accordingly. 5.4.1. We find that the basis for allocation for profit between the share holder and the Government of India is the provisions of section 28 of the LIC Act. From Page no. 313 and 114 of the paper book it becomes clearly that profit was allocated by the assessee on the basis of a particular formula. There is no doubt tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... elied upon by the AR of the assessee, question of taxability of particular items of income under the head income from other sources was not before the Tribunal. Therefore, upholding the order of the FAA we decide Ground of appeal no.3 against the assessee. 6. Ground No.4 is about erroneous interpretation of provisions of the Act and the IRDA Act and regulations. Before us, AR submitted that the ground was of general nature. Ground stands dismissed for statistical purposes. 7. Last Ground appeal relating to levy of interest u/s.234D of the Act was not pressed by the AR during the course of hearing before us. So, same is treated as dismissed. As a result appeal filed by the assessee, for the AY 2009-10 stands partly allowed. ITA No. 3702/Mum/2012- AY.2007-08 and ITA No. 3703/Mum/2012-AY.2008-09 8. Following grounds of appeal have been filed by the assessee, challenging the orders dtd. 06.03.2012 of the CIT(A)-2, Mumbai for the AYs.2007-08 and 2008-09: AY.2007-08 The under mentioned Grounds of Appeal are without prejudice to one another: (i)The CIT (Appeals) erred in holding that the Appellant was not entitled to the exemption under Section 10(34) of Income Tax Act, ..... X X X X Extracts X X X X X X X X Extracts X X X X
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