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2016 (7) TMI 12 - ITAT BANGALORE

2016 (7) TMI 12 - ITAT BANGALORE - TMI - Revision u/s 263 - non inclusion of income from shareholders account - Held that:- Not only was the AO aware about the method of aggregation followed by the assessee, he had also taken a lawful and possible view. In the circumstances we do not find any error in the order of the AO which can be vested by a Section 263 jurisdiction. The twin conditions viz., there should be an error and such error should be prejudicial to the interests of Revenue are not sa .....

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ome-tax Act, 1961 ('the Act' in short). 2. Facts apropos are that assessee engaged in life-insurance business had filed its return declaring loss of ₹ 2,75,96,87,000/- . Assessment was completed by the AO on 15.03.2013 u/s.143(3) of the Act, accepting the loss returned by the assessee, after seeking and obtaining explanations of the assessee on various aspects of the return filed. Thereafter on 22.04.2014, a show-cause notice was issued by the CIT requiring the assessee to explain .....

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ns of life-insurance business had to be carved out of the total income of the assessee which was not done by the AO. As per the CIT profits and gains of life-insurance business could alone be taxed at the concessional rate of 12.5%, whereas the balance of income which related to shareholders' account was to be taxed at normal rates. Thus according to him there was omission to bring to tax income of ₹ 24,31,68,000/- appearing in the shareholders account. 3. Assessee in its reply mention .....

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ribed under IRDA (Preparation of Financial Statements and Auditors Report of Insurance Companies) Regulations, 2002, presentation of accounts of life-insurance companies had to be done in a segregated manner, one as shareholders profit and loss account and the other as policy holders surplus/deficit account. Assessee also pointed out that the issue regarding aggregation of results in the shareholders account and revenue account had come up before the Mumbai Tribunal in the case of ICICI Prudenti .....

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icy holders fund and shareholders fund for meeting solvency margin requirements. Again as per the assessee, Section 27A of the Insurance Act, 1938 required a life-insurance company to place investment out of a controlled fund, which meant all funds of an insurer without any distinction between shareholders fund and policy holders fund. Argument of the assessee was that the segregation done was only for working out the solvency margin. According to it, the balance sheet was only one. In any case .....

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profits pertaining to shareholders account. He was of the opinion that the entire issue required fresh consideration by the AO. He set aside the order of the AO with a direction to the AO to redo the assessment afresh. 5. Now before us, Ld. AR submitted that all the required particulars regarding computation of income was asked for by the AO during the course of assessment proceedings and furnished by the assessee. According to him the division of profit and loss account into two viz., revenue .....

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L and A-BS respectively. Thus assessee had to comply with the such regulations and was required to separately prepare its profit and loss account for the policy holders and for the shareholders account. This according to him did not mean that assessee was doing two types of business. Assessee as per the Ld. AR was doing one business which was of life-insurance. Ld. AR submitted that liability in respect of life-insurance policies based on actuarial valuation was considered in the revenue account .....

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rse of assessment proceedings. Relying on the decision of Mumbai bench in the case of ICICI Prudential Co. Ltd (supra), Ld. AR submitted that similar issue had come up and it was held that the entire transactions both under policy holders and shareholders account had to be consolidated into one. As per the Ld. AR, transfer from one account to another remained tax neutral. Thus according to him, the view taken by the AO was not only a possible one under law, but the only one that could have been .....

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shareholders account. IRDA regulations mandated separation of accounts so as to ensure safety of the policy holders money. Thus there was a clear demarcation between shareholders fund which were used for the purpose of insurance and shareholders funds which were used for other purposes. The profits from latter, as per the Ld. DR, was not eligible for any beneficial tax treatment. In any case, as per the Ld. DR, AO had not verified correctly the basis on which the assessee had prepared its revenu .....

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ue for the following reasons : The AO s order is erroneous and prejudicial to the revenue due to the fact that, the income from shareholders account amounting to ₹ 24,31,68,000/- has been failed to be taxed. Therefore, revisionary proceedings u/s.263 are initiated in this case. As per the CIT though assessee was a single entity, total income of the entity having been divided into profits of shareholders and profits from investments done by shareholders, former alone would be eligible for c .....

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erstanding on the rules of aggregation. According to it, Rule 2 of first schedule of Income-tax Act, provided for aggregation of profits as per policy holders account and shareholders account. No doubt, assessment order passed by the AO which has been subjected to 263 proceedings before us is cryptic without any reference to the above mentioned letter submitted by the assessee. However, it is clear from the above mentioned reply given by the assessee, that AO had required the assessee to explain .....

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surance business as regulated by the IRDA. CIT himself has mentioned that assessee was engaged in lifeinsurance business. Question whether policy holders account and shareholders account, in the case of an assessee carrying on only the business of life-insurance business was to be separated or consolidated, had come before the Tribunal in ICICI Prudential Ltd, (supra). Para 32 of this order dt.14.09.2012 is reproduced below : 32. IRDA Regulations specifically require to maintain the policyholder .....

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submit quarterly accounts under the Company Law, there is requirement of actuarial valuation report periodically and accordingly assessee was transferring funds from the shareholder s account to policyholder s account. Since the insurance business will not yield the required profits in the initial 7 to 10 years, lot of capital has to be infused so as to balance the deficit in the policyholder s account. During the year as already stated assessee has issued fresh capital to the extent of Rs. .25 .....

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44. Therefore, there is a valid argument raised by assessee that both the policyholder s & shareholder s account has to be 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 .....

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