TMI Blog2016 (2) TMI 1054X X X X Extracts X X X X X X X X Extracts X X X X ..... nt cannot be accepted for the reason that with the omission of cl. (b) of r. 5 it has been made clear that neither the loss on account of diminution in the value of investment shall be allowed as deduction nor any income on investment shall be subjected to tax. Both the items of loss and income from the investments are to be considered as neither deductible nor includible in the total income of the assessee. Therefore the CIT(A) was justified in deleting the addition made by the AO. We do not find any grounds to interfere with the order of the CIT(A). Accordingly the appeal of the revenue is dismissed. Addition u/s 14A - Held that:- The Assessee’s case being for the Assessment Year 2006-07, there cannot be any applicability of the above-referred subsection (2) of section 14A or Rule 8D in the Assessee's case for the Assessment Year 2006-07. In the given circumstances, the quantum of disallowance had to be decided in the light of the decisions rendered by the ITAT Kolkata Benches in the cases referred to by the CIT(A) in the impugned order. In those decisions, the ITAT, Kolkata Benches have consistently taken a view that 1% of the exempted income/dividend shall be considered as e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... siness Profit of the concerned Insurance Company. However, by the Finance Act, 1988 with effect from the Assessment Year 1989-90 the aforesaid requirement of treating the gains on realisation of investments as taxable income, was omitted. The CBDT vide its Circular No.528 dated 16-12-1988 clarified the reason as to why the omission had been made to enable the General Insurance Corporation and its subsidiaries to play a more active role in capital markets for the benefit of policyholders, the Finance Act has amended sub-rule (b) of rule 5 of the First Schedule to provide for exemption of the profits earned by them on the sale of investment . The same reads thus: FINANCE ACT, 1988 CIRCULAR NO.528, DATED 16-121988 FINANCE ACT, 1988 Liberalisation of provisions in respect of taxation of profits and deduction of tax at source applicable to the General Insurance Corporation and its subsidiaries 45.1 Under the existing provisions 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. Under rule 5 of this Schedule, profits and gains of any business of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hereinbelow: The First Schedule B.-Other insurance business 5. Computation of profits and gains of other insurance business.-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 disclosed in the profit and loss account prepared in accordance with the provisions of the Insurance Act, 1938 (4 of 1938) or rules made thereunder or the provision of the Insurance Regulatory and Development Authority Act, 1999 (41 of 1999) or regulations made thereunder, 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 sections 30 to 43B in computing the profits and gains of a business shall be added back; (c) such amount carried over to a reserve for unexpired risks as may be prescribed in this behalf shall be allowed as a deduction. 9. According to the AO, the profit as per annual accounts of the Assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... admissible under the provisions of ss. 30 to 43B in computing the profits and gains of business as per r. 5(a). The resultant figure of profit shall be reduced by the amount of reserves for unexpired risks as per cl. (c) of r. 5. No adjustment other than those specifically permitted as per r. 5 can be carried out to the amount of profit as per the P L a/c. As per cl. (b) of r. 5 of Sch. I in the pre-omission era, the amount of profit determined as per the annual accounts of the insurance company was required to be adjusted by way of deduction towards the depreciation reserve or loss on realization of investments and increment towards appreciation in or gains on the realization of investments. Clause (b) was omitted by the Finance Act, 1988 leading to the situation that now neither the loss written off or reserved in the accounts to meet depreciation is required to be reduced from the profits nor appreciation in or gain on the realization of investments is to be added. This position has been clarified by the Memorandum Explaining the Provision in the Finance Bill, 1988. As seen from the legislative intent made explicit through Memorandum Explaining the Provision, Notes and Clauses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on Tax Free Bonds and Dividend from Domestic Companies respectively and the Assessee s claim was accepted by the Assessing Officer. In the Return the Assessee itself computed a sum of ₹ 1,00,69,998 as expenses incurred in relation to the exempt income and offered the said sum of Rs.l,00,69,998 as disallowable u/s 14A. The Assessing Officer observed that according to him the aforesaid sum of Rs..1,00,69,998 was allegedly too low a sum for the disallowance and was of the view that the Assessee had allegedly not considered huge expenses debited as Bank Charges and other indirect expenses in Insurance Revenue Account for the calculation of disallowance u/s.14A of the Act. The Assessing Officer made a reference to the decision of the Special Bench ITAT, Mumbai in the case of Daga Capital Market Management (P) Ltd. in ITA No.85071M/03 dated 28-10-08 for considering the applicability of Rule 8D with retrospective effect. The Assessing Officer by applying the above-referred Rule 8D, computed a sum of Rs..30,28,25,750 as allegedly disallowable u/s 14A and made disallowance of the said sum of ₹ 30,28,25,750 instead of the sum of ₹ 1,00,69,998 as offered by the Assessee in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ter applying Rule 8D, should be held to bad. 21. Without prejudice to the above, the Assessee submitted that while computing the disallowable sum u/s 14A the Assessing Officer took into account all the investments from which the income that may be received, would be exempt from tax, irrespective of the fact as to whether any such income has actually been received or not. It was submitted that as per the language of section 14A, the expense which has been incurred in relation to income which does not form part of the total income for the year, is disallowable. Hence, there is no scope of considering any income which has not actually been earned during the year, for the purposes of section 14A. It was pointed out that the Assessing Officer considered even those investments from which no income was earned during the year. 22. The CIT(A) agreed with the submissions so made and held that only 1% of the exempt income can be disallowed u/s.14A of the Act. The following were the relevant observations of the CIT(A): 19. I have gone through the Assessment Order as well as the submissions made by the Authorised Representative. It is noted that the Assessing Officer applied Rule 8 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 7. Depreciation 7,157 8. Sundry Debtors written off 65,625 9. Miscellaneous Expenses 7,834 Total 1,52,18,000 The details of Investments on which Exempted Income received : Head of Investments Cost As on 31.3.2006 Cost As on 31.3.2005 Rs. Rs. 1. Unit Trust of India-64 Bond 35,03,435 35,62,803 2. Preference shares 14,76,387,474 14,88,77,070 3. Equity shares 640,87,13,316 630,28,33,447 4. Tax free Bond 8,00,00,000 23,,00,00,000 Total 663,98,55,225 668,52,73,320 Disallowable U/S 14A as per Appellant's Computation. Exempt ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r 2008-09. Further, the Bombay High Court also observed in the above-referred case that the Assessing Officer would first be required to check the concerned assessee's offer of disallowance and only after recording his dissatisfaction, if any, the Assessing Officer could commute the amount to be disallowed in accordance with sub-section (2) of section 14A. The abovereferred sub-section (2) of section 14A was inserted by the Finance Act, 2006, with effect from the Assessment Year 2007-08. The Assessee s case being for the Assessment Year 2006-07, there cannot be any applicability of the above-referred subsection (2) of section 14A or Rule 8D in the Assessee's case for the Assessment Year 2006-07. In the given circumstances, the quantum of disallowance had to be decided in the light of the decisions rendered by the ITAT Kolkata Benches in the cases referred to by the CIT(A) in the impugned order. In those decisions, the ITAT, Kolkata Benches have consistently taken a view that 1% of the exempted income/dividend shall be considered as expenses/expenditure relating to the earning of exempted income u/s 14A in the assessment years where the rule 8D was not applicable. Following ..... X X X X Extracts X X X X X X X X Extracts X X X X
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