TMI Blog2017 (9) TMI 172X X X X Extracts X X X X X X X X Extracts X X X X ..... First Schedule of the Act. Therefore, in the case of the Assessee which is carrying on general insurance business, the profits and gains of its business have to be computed only in terms of the First Schedule. With the Assessee carrying on a general insurance business, it was bound by the provisions of the IA as well as the IRDA Regulations referred to hereinbefore. Even the CBDT, in its Circular No. 5/2010 dated 3rd June 2010, acknowledged that, after the introduction of the IRDA Regulations in 2002, non-life insurance companies are required to credit income from the sale of investments directly to the P&L Account. This requirement, which would make the income so earned amenable to tax, was made applicable only from AY 2011-12. Prior to 1st April 2011, there was no provision which required the Revenue to disallow the deduction of loss on sale of investments. The Court is, therefore, unable to subscribe to the submission of Mr. Manchanda that the Circular No. 528 has no application to the present case. The decision in J.K. Synthetics v. CBDT (1971 (4) TMI 3 - SUPREME COURT ) relied upon by him has no application to the facts of the case. Furthermore, it is not even the case o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h of the appeals differ. In the Assessee s appeal, i.e. ITA No. 372/2015, by an order dated 7th July 2015, the following question of law was framed for determination:- Whether the ITAT was correct in law in holding that the income earned on sale/redemption of investment is chargeable to tax? 3. In ITA No. 447/2015, the question framed by the order dated 17th May 2016 reads: Whether the Tribunal was correct in holding that the provisions of Section 115JB of the Income Tax Act are not applicable to insurance companies? 4. As far as ITA No. 448/2015 is concerned, notice was issued by the order dated 18th September 2015 on only one of the four questions projected by the Revenue, viz.: Whether the ITAT was correct in upholding the decision of the CIT (A) in deleting the addition of ₹ 3,39,60,000/- made by the Assessing Officer ( AO ) on account of the investment written off? 5. At one stage, the above appeals were directed to be listed with ITA No. 174 of 2013 which was the Assessee s appeal for AY 2006-07. One of the questions framed in the said appeal by the order dated 10th July 2013 was: Whether the ITAT was correct in law in holding that the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ber 1988 reported in 176 ITR 154 (St) was not applicable. It was held that once Rule 5 (b) stood omitted the benefit/adjustments arising from that Rule also is destroyed and cannot be enjoyed. Order of the CIT (A) 12. Aggrieved by the above order, the Assessee went before the Commissioner of Income Tax (Appeals) [ CIT (A) ]. By the order dated 2nd July 2012, the CIT (A) confirmed the additions made by the AO. On the question of profits/gains from the sale/redemption of investments, the ITAT s order for AY 2004-05 was followed. As for the provision of diminution of the value of investment, the disallowance was upheld in view of the order of the ITAT for AY 2003-04. Order of the ITAT 13. Both the Assessee and the Revenue filed appeals before the ITAT. Both appeals were disposed of by the impugned common order dated 21st November 2014 upholding the additions made by the AO. 14. On the issue of addition on account of profit on the sale of investments, the ITAT followed its own order in the Assessee s case for AY 2004-05 and accordingly rejected the Assessee s appeal on this ground. On the issue of addition on account of diminution in the value of investments, the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... losses from the sale of investment are not to be taxed. The mere fact that, in some earlier year, the Assessee may have taken a stand to the contrary cannot act as an estoppel. In support of this proposition, reliance was placed on the decisions in CIT v. Mr. P. Firm, [1965] 56 ITR 67 (SC) and Chryscapital Investment Advisors v. DCIT [2015] 376 ITR 183 (Del). Contentions on behalf of the Revenue 18. In reply Mr. Ashok Manchanda, learned Senior Standing counsel appearing on behalf of the Revenue, first traced the background to the changes brought about by the IA and the Insurance Regulatory Development Authority Act, 1999 ( IRDA Act ). Mr. Manchanda maintained that the investments made by the Assessee have to be treated as its stock-in-trade. He submitted that this was the Assessee s own case in its grounds of appeal in ITA No. 372 of 2015. He pointed out that the long term capital gains (LTCG) on the investments in equity shares alone qualified for exemption under Section 10 (38) of the Act and not investments in debentures, bonds, preference shares and other securities. 19. According to Mr. Manchanda, such long term capital assets constitute only a very small p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... see itself has brought the profits into the P L Account, it cannot be claimed that, for the purposes of taxation, they should not be treated as taxable. Reliance in this regard is placed on J.K. Synthetics Ltd. v. CBDT [1972] 83 ITR 335 (SC). 23. According to Mr. Manchanda, there was no occasion for Rule 5 not to apply during the AY since the investment in question was not exempt for the purpose of clauses (a) and (c) thereof. There was no question of excluding the profit from the sale of such investment for the purposes of computation of taxable income. He also noted that, for AY 1990-91, the Assessee had argued before the ITAT that Circular No. 528 is not applicable and this was accepted by the ITAT. The ITAT had held that Section 44 of the Act read with Rule 5 of the First Schedule gives only method of computation of the income of a company carrying on the business of insurance. It does not provide for taxing or not taxing of any particular income. Rule 5(b) also impacted the writing off of investments. Once Rule 5(b) stood omitted, any loss suffered by the Assessee could not be allowed. 24. Mr. Manchanda supplemented his oral submissions with a 16 page written note of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s regard requires to be rejected as not being consistent with either the factual position or the legal position. Profits on sale/redemption of investments 30. Since the Assessee s case with respect to the addition of profits earned on sale/redemption of investments essentially rests on Circular No. 528, this circular requires to be examined in some detail. Before reference is made to the said Circular, the background requires to be traced. 31. As already noticed, Section 44 of the Act is specific to Insurance Business . It states that, notwithstanding anything to the contrary contained in the Act relating to the computation of income chargeable under different heads interest on securities , income from house property , capital gains or income from other sources , the profits and gains of any business of insurance shall be computed in accordance with rules contained in the First Schedule of the Act. Therefore, in the case of the Assessee which is carrying on general insurance business, the profits and gains of its business have to be computed only in terms of the First Schedule. Analysis of Rule 5 (b) 32. The First Schedule sets out the Rules under Part ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... count on account of appreciation of or gains on realisation of investments in accordance with the regulations made by the Insurance Regulatory and Development Authority; (c) [...] 35. Prior to this, while proposing deletion of Clause (b) of Rule 5 of the First Schedule with effect from 1st April 1989, the explanation offered in the Memorandum to the Finance Bill, 1988 was as under: Liberalization of provisions in respect of taxation of profits and deduction of tax at source applicable to the General Insurance Corporation and its subsidiaries 17. 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. 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 any amount either written off or reserved in the accounts to meet depreciation or loss on the realisation of investment which i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ment Authority (IRDA) was created. In the financial year 2001-02, IRDA introduced IRDA (Preparation of Financial Statements and Auditor s Report of Insurance Companies) Regulations, 2002 . The regulations mandated new guidelines and formats for preparation of accounts by General Insurers. According to these changed norms, a non-life insurance company has to include profit or loss on realization/sale of investment in the profit and loss account or revenue account. This is also consistent with international best practice on taxation of investment income of non-life insurance companies. 38. Thus, the major change, therefore, sought to be brought about by the 2009 amendment was to align it with the IRDA Regulations regarding preparation of accounts of general insurance companies. The changed norms, in terms of said Regulations, required a non-life insurance company to include in its Profit and Loss ( P L ) Account or Revenue Account profit or loss on realisation/sale of investment . This was said to be consistent with the international standards. 39. With the Assessee carrying on a general insurance business, it was bound by the provisions of the IA as well as the IRDA R ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d. v. Commissioner of Central Excise [2001] 247 ITR 128 (SC) where it was held that the circulars issued under Section 37B of the Central Excise Act, 1944 would be binding on the Department and that, it does not lie in the mouth of the Revenue to repudiate a circular issued by the Board on the basis that it is inconsistent with the statutory provisions. Consistency and discipline are, according to this Court, of far greater importance than the winning or losing of Court proceedings. It is, therefore, too late in the day for the Revenue to disown its own Circular No. 528 and contend that it does not apply to the facts of the present case. 43. In CIT v. Ashok Mittal [2013] 357 ITR 245 (Del), the Court reiterated the well settled position that, where the CBDT circular has not been withdrawn and is beneficial to the Assessee, it would be binding on the AO and other Revenue authorities. The Court was merely reiterating what has been held in a large number of cases including Navnitlal C. Zaveri v. K.K. Sen (supra) and CIT v. Milk Food Ltd. [2006] 280 ITR 331 (Del). 44. The ITAT itself has taken a consistent stand that the taxability of income in the case of insurance co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nts. The observations of the ITAT in its order for AY 1990-91 with regard to the profit on sale/redemption of investment could, at best, be treated as obiter since that was not in issue in the case before it. 48. The Court is, therefore, unable to subscribe to the submission of Mr. Manchanda that the Circular No. 528 has no application to the present case. The decision in J.K. Synthetics v. CBDT (supra) relied upon by him has no application to the facts of the case. Furthermore, it is not even the case of the Revenue that the said Circular is ultra vires of the Act. 49. The question framed in ITA No. 372 of 2015 is accordingly answered in the negative, in favour of the Assessee and against the Revenue, by holding that the ITAT erred in holding that the income earned on sale/redemption of investment was chargeable to tax. On the disallowance of investments written off 50. The disallowance of the investments written off is the subject matter of the Revenue s ITA No. 448/2015. The ITAT has in the impugned order while setting aside the disallowance, followed its decision for AYs 2000-01 and 2001-02. The ITAT held that the guidelines issued by the GIC permitted insur ..... X X X X Extracts X X X X X X X X Extracts X X X X
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