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ORIENTAL INSURANCE COMPANY Versus COMMISSIONER OF INCOME TAX, DELHI

2015 (9) TMI 757 - DELHI HIGH COURT

Reopening of assessment - Addition on account of income arising on sale of investments - disallowance of claim for “Investments Written Off” - Whether ITAT was correct in law in holding that the income earned on sale/redemption of investment is chargeable to tax? - Held that:- It is not disputed that the reasons that led the AO to reopen the assessment were factually incorrect. It is not disputed that the Assessee was carrying on only one business - General Insurance Business, which is regulated .....

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this reason to believe that the Assessee’s income had escaped assessment is clearly without any factual basis.

The assumption that the Assessee had not credited the profits in question to the Profit and Loss Account is also, admittedly, factually incorrect. Thus, the reasons which led the AO to form a belief that income of the Assessee had escaped assessment are admittedly based on palpably incorrect assumptions. It is well established that reasons to believe that income had escaped .....

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ion of investments. The income from profit on sale/redemption of investments is now sought to be taxed as income which had escaped assessment. This, in our view, clearly represents a change in the opinion with regard to the taxability of the income in question. It is well settled that the power under Section 147 of the Act is not a power of review but a power to reassess. Permitting reopening of assessment on a change of opinion as to the taxability of the income of the Assessee is, thus, outsid .....

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Counsel with Mr Shikhar Garg. JUDGMENT VIBHU BAKHRU, J 1. This appeal under Section 260A of the Income Tax Act, 1961 (hereafter the Act ), has been filed by the Oriental Insurance Company (hereafter the Assessee ) impugning an order dated 22nd July, 2011 passed by the Income Tax Appellate Tribunal (hereafter the Tribunal ) in ITA No. 3910/Del/2007. The said appeal was filed by the Assessee challenging an order dated 16th August, 2007 passed by the Commissioner of Income Tax (Appeals) [hereafter .....

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ents in spite of the fact that no addition on account of grounds mentioned in the reasons to believe has been sustained? (2) Whether the Income Tax Appellate Tribunal was correct· in law in holding that the income earned on sale/redemption of investment is chargeable to tax? At the outset, the learned Senior Counsel appearing for the Revenue submitted that the present appeal also raises the issue whether the AO s decision to tax income arising on sale of investments was the result of chan .....

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Background 3. The relevant facts necessary to address the aforesaid issues are briefly stated as under:- 3.1 The Appellant Company is a subsidiary of General Insurance Corporation of India and is engaged in the business of General Insurance comprising of Fire, Marine and Miscellaneous Insurance Business. According to the Assessee, it invests its policy holder s funds as per the statutory guidelines provided under The Insurance Act, 1938 and IRDA (Investment) Regulations, 2000. 3.2 The AO compute .....

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Rule 5 of the First Schedule of Income Tax Act w.e.f. 01.04.1989 and in terms of the CBDT Circular No. 528 dated 16th December, 1988, providing explanatory notes to Finance Act, 1988. The Assessee also claimed deduction of ₹ 3,57,54,000/- on account of amount written off in respect of depreciated investments in support of which, it relied upon an order passed by the Tribunal in its own case for an earlier assessment year. 3.4 The AO, however, disallowed the claim for Investments Written O .....

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to the said notice, the Appellant stated that the return of income filed on 29th October, 2004 be treated as its return in compliance of the notice. Thereafter, notices under Sections 143(2) and 142(1) of the Act were issued by the AO. The Assessee responded to the said notices by a letter dated 22nd January, 2007, inter alia, claiming that the profits on sale of investments were exempt in view of the omission of Rule 5(b) of the First Schedule of the Act. The AO, however, was not satisfied with .....

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e CIT(A) upheld the reassessment order dated 25th January, 2007. In so far as the issue of assumption of jurisdiction is concerned, the CIT(A) held that the AO had recorded adequate reasons to believe and, therefore, the AO had the jurisdiction to issue a notice under Section 148 of the Act. Insofar as the merits of the addition were concerned, CIT(A) upheld the addition of ₹ 505.33 crores to the total income of the Assessee. The CIT(A) held that: (i) in absence of a specific statutory pro .....

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98/Del/93). 3.8 The Assessee appealed against the aforesaid order of CIT(A), before the Tribunal, inter alia, contending that the AO had initiated the reassessment proceedings solely on the basis of a change of opinion , which was not permissible. The Assessee also urged that the reasons to believe recorded by the AO were based on erroneous factual assumptions that the assessee was carrying on business other than Non-Life Insurance business, and that the assessee had credited a sum of ₹ 50 .....

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said Circular, Rule 5 of the First Schedule of the Act was amended to provide tax exemption in respect of profits earned by General Insurance Companies on sale of investments. The provisions of clause (b) to Rule 5 were re-instated by virtue of the Finance (No.2) Act, 2009 w.e.f. 01-04-2011. It was further submitted by the Assessee that Circular No.5 of 2010, dated 3rd June, 2010 indicated the reasons for the statutory amendment. The said Circular indicated that post introduction of Insurance R .....

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vious Year 2003-04 was not taxable. 3.10 The Tribunal did not accept the submissions made by the Assessee and rejected the appeal. 4. Before the Tribunal, it was conceded by the Revenue that the reasons recorded by the AO for issuing notice under Section 148 of the Act were erroneous. Concededly, the profit and loss on sale of investments had been credited to the Profit & Loss Account and not entered directly to the General Reserve Account as assumed by the AO. The second reason provided by .....

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ch an issue should have been brought to the notice of the Assessing Officer specially, failing which it can be held that special circumstances exist by way of facts on record so as to lead to the conclusion that the Assessing Officer had reason to believe that income had escaped assessment . The Tribunal was of the view that since relevant information had been withheld from the AO, it was within the powers of the AO to reopen the assessment. Submissions 5. Mr Syali, learned counsel appearing on .....

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ies to sustain re-opening of assessment under Section 147 of the Act on grounds other than those indicated as reasons for forming the belief that income had escaped assessment and for issuance of notice under Section 148 of the Act. He relied upon the decision of this Court in Ranbaxy Laboratories Ltd. v. CIT: 336 ITR 136 and CIT v. Software Consultants: 341 ITR 240 in support of his contentions. 6. Mr Syali further argued that the AO had no jurisdiction to reopen the assessment for taxing the p .....

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and gains on sale/redemption of investments were not chargeable to tax. He submitted that the notice under Section 148 of the Act was occasioned by a change of opinion on the issue of taxability of profits from sale/redemption of investments and the same was not permissible. 7. Mr Sawhney, learned counsel for the Revenue countered the arguments made on behalf of the Assessee and submitted that the decisions of this Court in Ranbaxy Laboratories (supra) and Software Consultants (supra) were whol .....

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reason to believe that the income chargeable to tax has escaped assessment. It has been held in several decisions that reason to believe must be based on tangible material and cogent facts; the powers under Section 147 of the Act cannot be exercised merely on suspicion or on an apprehension that the income of an Assessee has escaped assessment. 9. A bona fide reason to believe that income has escaped assessment is a necessary pre-condition that clothes the AO with the power to reopen the assess .....

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amount to reason to believe. As it is the beginning of the inquiry, having a prima facie opinion is sufficient; and irrebuttable conclusive evidence or finding is not required. But the prima facie formation of belief should be rational, coherent and not ex facie incorrect and contrary to what is on record. 10. In the present case, the reasons recorded by the AO for issuance of notice under Section 148 of the Act are quoted as under:- Under the prescribed statutory provisions only the profits and .....

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of Rule 5(b) of first schedule of the I.Tax Act, 1961, with effect from A.V. 1989-90, the assessee has been crediting directly the profits on the realization of investments/sale of shares of companies and redemption of such investment into the balance sheet Under the head general reserve account without subjecting it to the profit and loss account of the corresponding year. Since this part of the profit and gains is not attributable to the insurance business, the same does not constitute a vali .....

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e previous year under consideration the assessee has inter-alia credited a sum of ₹ 5,05,33,63,209/- directly into the General Reserve Accounts in the· Balance Sheet as "profit on sale of investment" without routing it through the profit and loss account of the corresponding year. Thus the income of ₹ 5,05,33,63,209'- has escaped assessment within the meaning of section 147 of the I.Tax Act, 1961 during the previous year relevant to the assessment year under cons .....

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gulatory authority has found the Assessee to be in default of any provisions of The Insurance Act, 1938. The learned counsel for the Revenue also did not dispute that the AO s assumption that the Assessee was carrying on two streams of business was incorrect. Thus, this reason to believe that the Assessee s income had escaped assessment is clearly without any factual basis. 12. The assumption that the Assessee had not credited the profits in question to the Profit and Loss Account is also, admit .....

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ly erroneous assumptions. The reason to believe must be predicated on tangible material or information. A reason to suspect cannot be a reason to believe; the belief must be rational and bear a direct nexus to the material on which such a belief is based. In the present case, the very assumption on the basis of which the AO is stated to have formed his belief that the Assessee s income had escaped assessment has been found to be erroneous. There was no basis for the AO to assume that the Assesse .....

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roceed further. In the event such reasons are found to be erroneous, the AO would not have the jurisdiction to make an assessment and any proceedings initiated on the basis of palpably erroneous reasons would be without authority of law. Therefore, even if it is assumed that, infact, the Assessee s income has escaped assessment, the AO would have no jurisdiction to assess the same if his reasons to believe were not based on any cogent material. In absence of the jurisdictional pre-condition bein .....

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cisions relate to the jurisdiction of the AO to tax other income - being income other than the income which the AO has reason to believe has escaped assessment and has occasioned issuance of notice under Section 148 of the Act - that has escaped assessment and comes to the notice of the AO during the course of the proceedings initiated under Section 147 of the Act. This Court had held that other income chargeable to tax could be assessed only once the income which the AO had reason to believe ha .....

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d with this issue in the decisions referred above. 16. The next issue to be addressed is whether the AO would have jurisdiction to examine the question as to the taxability of the profits and gains from sale of securities as it is contended that the AO had already expressed his opinion in that regard in the initial assessment. According to the Assessee, the decision of the AO to tax profits and gains from sale of investments, amounts to a change of opinion, which is impermissible under Section 1 .....

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her than life insurance shall be taken to be the profit before tax and appropriations as disclosed in the profit and loss account prepared in accordance with the provisions of the Insurance Act, 1938 (4 of 1938) or the rules made thereunder or the provisions of the Insurance Regulatory and Development Authority Act, 1999 (4 of 1999) or the regulations made thereunder, subject to the following adjustments:- (a) subject to the other provisions of this rule, any expenditure or allowance including a .....

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count of appreciation of or gain on the realization of investment shall be treated as part of the profits and gains. (c) such amount carried over to a reserve for unexpired risks as may be prescribed in this behalf shall be allowed as a deduction. 18. By virtue of Finance Act, 1988, clause (b) of Rule 5 of the First Schedule of the Act was deleted. In the initial assessment proceedings relevant to the Assessment Year 2004-05, the Assessee claimed a deduction in respect of a sum of ₹ 3,57,5 .....

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ions of section 44 of the Income Tax Act, the profits and gains of any insurance business is computed in accordance with the rules contained in the first Schedule to the Act. In Rule 5 of this Schedule, profits and gains of any business of insurance, other than life insurance, are taken to be balance of profits disclosed in the annual accounts furnished to the Controller of Insurance subject to certain adjustments. One of the adjustments provided therein is in respect of an amount either written .....

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he profits earned by them on the sale of investments. As a corollary, it is proposed to provide that the losses incurred by the General Insurance Corporation on the realization of investment shall not be allowed as deduction in computing the profits chargeable to tax. To achieve this objective, clause (b) of Rule 5 of the First schedule of the Act will take effect from 1st April, 1989, and will, accordingly, apply in relation to the assessment year 1989-90 and subsequent years. 19. The AO reject .....

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ssee is taken into consideration by me and I think that the assessee has not understood the provision of clause 5(b) in totality. When clause 5(b) stood in the Income Tax statute, it talked about for not allowing deduction for all type of losses from investments either it is due to writing off or reserved in the account to meet depreciation of investment or it is due to loss in the realisation of investments and simultaneously it talked about taking the amount as part of profits and gains, which .....

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he assessee is concerned, firstly the Memorandum is not law and secondly this explains the basic idea behind an amendment and does not give the exact effect of an amendment. Therefore, in general term it has been explained that when profit on sale of investment is not being taxed, loss on the realisation of investment will not be deducted. However, while applying provision of a particular clause or section we have to see its effect in totality. Had the intention of legislature been that only los .....

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by way of depreciation or loss on the realization of investments are to be disallowed. Once depreciated value of investment is written off, no loss would be incurred by the assessee on realization of these investments. Therefore, it is quite logical and also in consonance with the deletion of clause 5(b) that any loss booked by the assessee company on depreciation in value of investment should not be allowed. (emphasis added) 20. It is at once clear from the above that the AO had expressed its f .....

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s under:- Profit/loss on sale/redemption of investment amounting to ₹ 5,05,33,63,209/- during the year ended on 31.03.2004 has been credited to revenue and profit and loss account as per IRDA requirement made applicable from the F.Y. ending 31.03.2002. Till 31.03.2001, this amount was being credited directly to General Reserve as per our consistent accounting policy and was treated as exempt by us and also accepted by the Assessing Officer. We, therefore, deducted ₹ 5,05,33,63,209/- .....

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taxability of the income in question. It is well settled that the power under Section 147 of the Act is not a power of review but a power to reassess. Permitting reopening of assessment on a change of opinion as to the taxability of the income of the Assessee is, thus, outside the scope of Section 147 of the Act. The Supreme Court in the case of Commissioner of Income-Tax v. Kelvinator of India Ltd.: 320 ITR 561 (SC) had held as under:- 6. On going through the changes, quoted above, made to sec .....

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ion to reopen the assessment. Therefore, post-1st April, 1989, power to reopen is much wider. However, one needs to give a schematic interpretation to the words " reason to believe" failing which, we are afraid, section 147 would give arbitrary powers to the Assessing Officer to reopen assessments on the basis of " mere change of opinion", which cannot be per se reason to reopen. We must also keep in mind the conceptual difference between power to review and power to reassess .....

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sing Officer has power to reopen, provided there is "tangible material" to come to the conclusion that there is escapement of income from assessment. Reasons must have a live link with the formation of the belief. Our view gets support from the changes made to section 147 of the Act, as quoted hereinabove. Under the Direct Tax Laws (Amendment) Act, 1987, Parliament not only deleted the words " reason to believe" but also inserted the word " opinion" in section 147 o .....

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pression ' reason to believe' in section 147.-A number of representations were received against the omission of the words ' reason to believe' from section 147 and their substitution by the ' opinion' of the Assessing Officer. It was pointed out that the meaning of the expression, ' reason to believe' had been explained in a number of court rulings in the past and was well settled and its omission from section 147 would give arbitrary powers to the Assessing Offic .....

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cision of the Supreme Court in Kelvinator of India (supra) and earlier decisions of this Court and held as under:- 18. In view of the dictum of the Supreme Court in the case of Kelvinator of India Ltd. (supra), the Full Bench of this court in Kelvinator of India Ltd. (supra) and Usha International (supra), the present case would fall in the category of "change of opinion" as the "reasons to believe" proceed on the premise that the opinion formed in the original assessment ord .....

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