TMI Blog2021 (3) TMI 1334X X X X Extracts X X X X X X X X Extracts X X X X ..... was the clear omission or failure on the part of the assessee in not furnishing the requisite information that was necessary for the assessment. The entire information was very much available with the ld AO in the records which alone enabled him on bare perusal, to come to a conclusion that income of the assessee had escaped assessment. Hence in this scenario, how failure or omission could be attributed on the part of the assessee. Once there is no failure on the part of the assessee in providing requisite information, then the basic premise on which the entire reassessment was framed by recording reasons, vanishes in thin air. This makes the entire reassessment proceedings void abinitio. Moreover, we also find that the ld AO had triggered the reopening only based on verification of records. This goes to prove beyond doubt that there was absolutely no tangible material available with the ld AO to form a belief that income of the assessee had escaped assessment. On this count also, the reopening of the assessment deserves to be declared as bad in law. We further find that the sanction obtained in terms of section 151 of the Act was not provided to the assessee along with the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... norms, profit loss of life insurance company is divided into a technical account (policy holder's account represented in Form A-RA) also called as revenue account and non-technical account (shareholder's account represented as Form A-PL) also called Profit Loss A/c. The technical account deals with all the transactions relating to and includes income from premium and expenditure in relation to the Policyholders account and related investment income. For negative reserves are nothing but discounted value of estimated future net income of the Company which cannot be brought to tax in the year under consideration. Reliance is placed on Mumbai Tribunal Judgment in the case of ICICI Prudential Insurance Co. Ltd. vs. ACIT [ 2012 (11) TMI 13 - ITAT MUMBAI] wherein it was held that negative reserve disclosed in Form-1 does not give rise to distributable surplus. As per IRDA (Actuarial Report and Abstract for Life Insurance Business) Regulations. 2016, the disclosure of negative reserves in the Form-1 is not required. Hence, this further proves the assessee's contention that negative reserves in Form-I is just a disclosure requirement. For the aforesaid cumulative reas ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat the CIT(A) erred on facts and in law in not testing/ examining the validity of the reopening strictly on the basis of the reasons recorded, and instead, referring to/ relying upon finding not mentioned therein. 1.4 That the CIT(A) erred on facts and in law in not appreciating that reassessment is barred by limitation in terms of section 149 of the Act, since reasons recorded (that too, without copy of sanction obtained under section 151) were communicated much after the expiry of limitation of 6 years as prescribed in that section. 1.5 That the CIT(A) erred on facts and in law in not appreciating that the reassessment order was without jurisdiction, illegal and bad in law, since sanction obtained under section 151 was not provided to the appellant, much less within limitation prescribed in section 149 of the Act. 3.1. The revenue has raised the following grounds of appeal in its appeal:- ― 1. Whether on the facts and circumstances of the case, the Ld. CIT(A) was right in deleting the disallowance of the claim of loss of ₹ 8,42,56,839/- which was merely due to accounting changes made by transfer of funds from shareholders Account to Policy holders acco ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t Schedule to the Act. The formats for presentation of insurance accounts have been amended by the IRDA (Actuarial Report and Abstract) Regulations, 2000 without a corresponding amendment to the First Schedule requiring the preparation of Policyholder s and Shareholder s Profit and Loss accounts distinctly. The earlier formats for presentation of accounts, aggregated the results relating to shareholders and policyholders and thus the surplus / deficit as computed included the impact of both. To give effect to the change in the presentation of the accounts of an insurance company as per IRDA Regulation, the results of the shareholders accounts and the policyholders accounts have been aggregated. The net deficit in the Revenue Account was ₹ 80,42,56,839/-. In view of the above, assessee s profits and gains under section 44 of the Act read with Rule 2 of the First Schedule to the Act has been computed at a loss of ₹ 80,42,56,839/- for the valuation year ended 31.3.2007. 2. Bharti Axa had incurred certain expenses prior to obtaining license to carry on life insurance business from the IRDA. These expenses are not disallowed while computing its taxable profit or loss un ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f India Limited in 51 ITR 773 , it was interalia held that software expenses claimed by the assessee cannot be disallowed in the light of the special provisions having non obstante clause governing the insurance sector. 4.2. The original assessment was completed u/s 143(3) read with section 144C(3) of the Act on 30.12.2010 determining total loss at ₹ 73,28,08,306/- after making addition u/s 92CA(3) in respect of transfer pricing adjustment of ₹ 7,14,48,533/-. In the said assessment order, there is a specific observation made by the ld AO that the income of the assessee life insurance company was determined in accordance with section 44 read with First Schedule to the Act. 4.3. Later this assessment was sought to be reopened by the ld AO vide issuance of notice u/s 148 of the Act on 29.3.2014 which was duly served on the assessee on 1.4.2014. This notice was admittedly issued beyond 4 years but within 6 years from the end of the relevant assessment year. The assessee filed a letter dated 22.4.2014 requesting the ld AO to consider the same as a return filed in response to notice u/s 148 of the Act and sought for copy of reasons recorded together with the approval fr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... otice u/s 148. 2. Further, you have requested to give reasons for reopening assessment u/s 148 vide your letter dated 22.04.2014. The reasons recorded for issuance of notice u/s 148 provided as under: a. The assessee M/s Bharti AXA Life Insurance Co, Ltd having PAN AACC87227P is assessed to tax in this charge. In this case return of income was e-filed on 31.10.2007 declaring total loss at ₹ 80,42,56,839/-. The assessment u/s 143(3) /144C (3) was passed on 30.12.2010 at loss of ₹ 73,28,08,306/-. b. On verification of records, it is noticed that the assessee has declared loss of ₹ 80,42,56,839 in the return of income and carried it forward to set It off against profits for subsequent years. The assessee, being a life Insurance company has claimed that its income has been computed as per section 44 read with First schedule to the I.T.Act. 1961. In the assessment order, the profits and gains from insurance business as declared by the assessee have been accepted subject to an addition of ₹ 7,14,48,533/- made in accordance with the order of the TPO. c. In this connection, it is necessary to reproduce provisions of sections 44 and Rule 2 of the First S ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 39/-. The assessment u/s 143(3) /144C (3) was passed on 30.12,2010 at loss of ₹ 73,28,08,306/-. 2. On verification of records it is noticed that the assessee has declared loss of ₹ 80,42,56,839 in the return of income and carried it forward to set it off against profits for subsequent years. The assessee, being a life insurance company has claimed that its income has been computed as per section 44 read with First schedule to the I.T.Act, 1961. In the assessment order, the profits and gains from insurance business as declared by the assessee have been accepted subject to an addition of ₹ 7,14,48,533/- made in accordance with the order of the TPO. 3. In this connection, it is necessary to reproduce provisions of sections 44 and Rule 2 of the First Schedule as follows: Not withstanding anything to the contrary contained in the provisions of this Act.......shall be computed in accordance with the rules contained in the First Schedule. Thus, the profits and gains of the insurance have to be determined in accordance with the surplus disclosed by the actuarial valuation made in accordance with the Insurance Act, 1938 in respect of the last inter-valuation pe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is of audit objection raised by revenue s internal audit team. Reliance in this regard was placed on the decisions of Hon ble Jurisdictional High Court in the case of DCIT vs DRM Enterprises reported in 230 Taxman 61 (Bom) and CIT vs Shankardas B Pahajani reported in 93 taxmann.com 248 (Bom). f) Only extract of reasons were provided to the assessee by the ld AO vide letter dated 13.2.2015 which was incomplete. This itself makes the entire reassessment proceedings as bad in law. Reliance in this regard was placed on the following decisions :- (i) Decision of Hon ble Jurisdictional High Court in the case of PCIT vs Shodiman Investments (P) Ltd reported in 93 taxmann.com 153 (Bom), wherein it was held that partial furnishing of reasons will render the reopening invalid and bad. (ii) Decision of Hon ble Delhi High Court in the case of Sabh Infrastructure Ltd vs ACIT reported in 398 ITR 198 (Del) wherein the Court at Para 19 of the order, laid down the following guidelines that ought to be followed by the Department in case of reopening of assessments:- (i) while communicating the reasons for reopening the assessment, the copy of the standard ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssee engaged in life insurance business to be in consonance with provisions of section 44 read with First Schedule to the Act (which is a self contained code by itself having non obstante clause) in the original assessment proceedings. Reliance in this regard was placed on the decision of the Hon ble Jurisdictional High Court in the case of Life Insurance Corporation of India vs CIT reported in 119 ITR 900 (Bom). The main reason adduced in the reasons recorded by the ld AO is that the assessee had failed to furnish the actuarial valuation certificate which was also vehemently argued by the ld DR as a failure on the part of the assessee. To this, the ld AR assailed the argument that the assessee failing to produce the valuation certificate is of no consequence, since it has no bearing on the computation of taxable income of the assessee under the provisions of the Act. The ld AR further stated that in terms of IRDA Regulations, 2000, which provides for specific rules for presentation of insurance accounts as prescribed in IRDA (Preparation of Financial Statements and Auditor‟s Report of Insurance Companies Rule 3 read with Rule 5 of Schedule A) Regulations, 2002, every insur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (i) Decision of Hon ble Jurisdictional High Court in the case of CIT vs Aquatic Remedies (P) Ltd reported in 406 ITR 545 (Bom) - Special Leave Petition of the revenue was dismissed by the Hon ble Apex Court in 269 Taxman 195 (SC). (ii) Decision of Hon ble Delhi High Court in the case of Yum Restaurants Asia Pte Ltd vs DDIT reported in 397 ITR 665 (Del). h) Approval u/s 151 of the Act by the ld PCIT and ld Additional CIT had been granted in the instant case without due application of mind as in the prescribed proforma, they had just stated that Yes I am satisfied . This tantamounts to improper sanction obtained and does not amount to judicial satisfaction after proper application of mind. It was argued by the ld AR that the ld PCIT had cryptically recorded his approval, without any application of mind. The ld PCIT had failed to even question the nature of information that was purportedly in the possession of the ld AO, on the basis of which he formed such reason to believe. Reliance in this regard was placed on the following decisions :- (i) Decision of Hon ble Supreme Court in the case of Chhugamal Rajpal vs S.P.Chaliha reported in 79 ITR 603 (SC) ; (ii) Decision of Ho ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o prove beyond doubt that there was absolutely no tangible material available with the ld AO to form a belief that income of the assessee had escaped assessment. On this count also, the reopening of the assessment deserves to be declared as bad in law. 4.9.1. We find that the assessee upto the completion of reassessment and first appellate proceedings thereon was supplied only with the extract of reasons recorded which was admittedly incomplete as narrated above. Even the said extract of reasons recorded were supplied to the assessee without furnishing the sanction obtained in terms of section 151 of the Act, though it was specifically sought for in writing by the assessee. In this regard, we find that the ld AR rightly placed reliance on the decision of Hon ble Jurisdictional High Court in the case of PCIT vs Shodiman Investments (P) Ltd reported in 93 taxmann.com 153 (Bom), wherein it was held as under:- 9. We find that at the time of re-opening of the Assessment, the Assessing Officer did not provide the reasons recorded in support of the re-opening notice in its entirety, to the Respondent-Assessee. This was contrary to and in defiance of the decision of the Apex Court in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on or failure on the part of the assessee to disclose fully or truly all material facts necessary for his assessment of that year. Both these conditions precedent to be satisfied before the Assessing Officer could have jurisdiction to issue notice under Section 148 read with section 147(a). But under the substituted section 147 existence of only the first condition suffices. Therefore, the sentence being relied upon was made in the context of the change in law that under the amended provision 'reason to believe' that in case of escaped assessment, is sufficient to re-open the assessment. This unlike the earlier provision of Section 147(a) of the Act which required two conditions i.e. failure to disclose fully and truly all facts necessary for assessment and reason to believe that income has escaped assessment. Thus, the observations being relied upon must be read in the context in which it was rendered. On so reading the submission, will not survive. 11. Further, a reading of the entire decision, it is clear that the reasonable belief on the basis of tangible material could be, prima facie, formed to conclude that income chargeable to tax has escaped assessment. Mr. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the belief. To the same effect, the Apex Court in ITO v. LakhmaniMerwal Das [1976] 103 ITR 437 had laid down that the reasons to believe must have rational connection with or relevant bearing on the formation of belief i.e. there must be a live link between material coming the notice of the Assessing Officer and the formation of belief regarding escapement of income. If the aforesaid requirement are not met, the Assessee is entitled to challenge the very act of re-opening of Assessment and assuming jurisdiction on the part of the Assessing Officer. 13. In this case, the reasons as made available to the Respondent- Assessee as produced before the Tribunal merely indicates information received from the DIT (Investigation) about a particular entity, entering into suspicious transactions. However, that material is not further linked by any reason to come to the conclusion that the Respondent-Assessee has indulged in any activity which could give rise to reason to believe on the part of the Assessing Officer that income chargeable to tax has escaped Assessment. It is for this reason that the recorded reasons even does not indicate the amount which according to the Assessing Officer, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing in the instant case had been done beyond 4 years from the end of the relevant assessment year, approval and sanction ought to have been granted only by ld PCIT alone. Hence this is a case where satisfaction of ld Additional CIT is also obtained in addition to the approval of ld PCIT, the said approval becomes invalid in terms of section 151 of the Act. It is trite law that if the law requires an act to be done in a particular manner, more particularly acts conferring jurisdiction like the present one, then, such act has to be done in that manner alone and the same cannot be compromised in any manner whatsoever. On perusal of the standard proforma for seeking approval in terms of section 151 of the Act, the legislature in its wisdom had prescribed such proforma, clearly demarcating and defining the circumstances under which the approval had to be granted by ld Additional CIT and circumstances under which the approval had to be granted by the ld PCIT. The said defined circumstances cannot be rendered otiose by obtaining approval from both Additional CIT as well as ld PCIT by the ld AO, as was done in the present case before us. 4.9.2.1. Reliance in this regard was rightly plac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Commissioner of Income Tax approval which has been granted is not by the Additional Commissioner of Income Tax but by the Commissioner of Income Tax. 'There is no statutory provision hereunder which a power to be exercised by an officer can be exercised by a superior officer. When the statute mandates the satisfaction of a particular functionary for the exercise of a power, the satisfaction must be of that authority. Where a statute requires something to be done in a particular manner, it has to be done in that manner. In a similar situation the Delhi High Court in CIT v. SPL'S Siddhartha Ltd. [2012] 204 Taxman 115/17 taxmann.com 138 (Delhi) held that powers which are conferred upon a particular authority have to be exercised by that authority and the satisfaction which the statute mandates of a distinct authority cannot be substituted by the satisfaction of another. We are in respectful agreement with the judgment of the Delhi High Court. 7. In view of the findings which we have recorded on submissions (i), (ii) and (iv), it is not necessary for the Court to consider submission (iii) which has been urged on behalf of the Assessee. Once the Court has come to the con ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to the Assessing Officer to issue a notice under Section 148 of the Act. All the three communications, referred to herein above in paragraphs 6 and in this paragraph, are taken on record and marked A, B C for identification. 8. Mr. Tejveer Singh, learned Counsel appearing for the Revenue submits that the Additional Commissioner of Income Tax is the jurisdictional Officer to grant sanction under Section 151 (2) of the Act. This, Officer he, submits has recorded his satisfaction with the reasons recorded by the Assessing Officer to issue the re-opening notice. Thus, the requirement of Section 151 (2) of the Act is satisfied inasmuch as the Additional Commissioner of Income Tax has found it to be a fit case for issuing of notice. It is further submitted that even though, the approval was obtained from the Commissioner of Income Tax for issuance of the notice, it does not take away the fact that the Additional Commissioner of Income Tax was satisfied with reasons recorded by the Assessing Officer. Therefore, it is submitted that the notice dated 25th March, 2011, cannot be said to be without jurisdiction. 9. It is undisputed position before us that in terms of Section 151(2) of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion of this Court in Ghanshyam K Khabrani (supra). Therefore, the question as framed does not give rise to any substantial question of law. Thus, not entertained. 12. Accordingly, Appeal dismissed. No order as to costs. The Special Leave Petition preferred by the revenue before the Hon ble Apex Court against this judgement was dismissed in 269 Taxman 195 (SC). 4.9.3. Moreover, in the instant case, on perusal of the sanction obtained in terms of section 151 of the Act, we find that the ld PCIT had merely recorded Yes, I am satisfied . The same, in our considered opinion, could not be regarded as a valid satisfaction as it does not reflect due application of mind of the sanctioning authority before granting satisfaction. This cryptic noting only leads to the inescapable conclusion that there was, in reality, no independent application of mind by the sanctioning authority while according approval in terms of section 151 of the Act. This clearly vitiates the purpose behind the inbuilt safeguards and checks provided by the statute on exercise of powers by the ld AO u/s 147/148 of the Act. It is trite law that the sanctioning authority is expected to judiciously review and th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e case falls under cl. (a) or (b) of s. 147. - 147(a) 7. Brief reasons for starting proceed-ings under s. 147 (indicate the items which are believed to have escaped assessment.) - Kindly see overleaf (Sd.) S.P. Chaliha, I.T.O., 30-4-66 A-Ward, Muzaffarpur. 8. Whether the Commissioner is satisfied that it is a fit case for the issue of notice under section 148. Yes (Sd.) K. Narain, 13-5-66. Commissioner of Income-tax, Bihar and Orissa, Patna. 9. Whether the Board is satisfied that it is a fit case for the issue of notice under s. 148. Secretary, Board of Revenue. During the year the assessee has shown to have taken loans from various parties of Calcutta. From D.I.'s Inv. No. A/P/Misc. (5) D.I./63-64/ 5623 dated August 13, 1965, forwarded to this office under C.I.T., Bihar and Orissa, Patna's letter No. Inv. (Inv.) 15/65-66/1953-2017 dated Patna September 24, 1965, it appears that these persons are name-lenders and the transa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ation in his possession reason to believe that income chargeable to tax has escaped assessment for any assessment year. Unless the requirements of clause (a) or clause (b) of section 147 are satisfied, the Income-tax Officer has no jurisdiction to issue a notice under section 148. From the report submitted by the Income-tax Officer to the Commissioner, it is clear that he could not have had reasons to believe that by reason of the assessee's omission to disclose fully and truly all material facts necessary for his assessment for the accounting year in question, income chargeable to tax has escaped assessment for that year; nor could it be said that he, as a consequence of information in his possession, had reasons to believe that the income chargeable to tax has escaped assessment for that year. We are not satisfied that the Income-tax Officer had any material before him which could satisfy the requirements of either clause (a) or clause (b) of section 147. Therefore, he could not have issued a notice under section 148. Further, the report submitted by him under section 151(2) does not mention any reason for coming to the conclusion that it is a fit case for the issue of a noti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... le to the Act specifically provides that profits and gains of life insurance business is to be computed as per surplus / deficit disclosed by the actuarial valuation made in accordance with the Insurance Act, 1938. In line with this mandate, the assessee had computed its taxable income for the Asst Year 2007-08 in accordance with section 44 read with Rule 2 of First Schedule to the Act i.e as per the surplus / deficit disclosed by the actuarial valuation made in accordance with Insurance Act, 1938. It is pertinent to note that the significant changes made to the formats of the financial statements and other reporting requirement of insurance companies as brought out by IRDA , has got no impact on taxability u/s 44 of the Act. One such change mandated by IRDA Regulations, 2000 was with respect to the preparation of financial statements. As per the formats for presentation of insurance accounts prescribed by IRDA, life insurance companies are required to present their accounts separately in the form of Policyholders‟ sub-account and Shareholders‟ sub-account being the Revenue Account and Profit and Loss Account, respectively. Thus, while IRDA regulations oblige, two separ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... resented as Form A-PL) also called Profit Loss A/c. The technical account deals with all the transactions relating to and includes income from premium and expenditure in relation to the Policyholders account and related investment income. 5.1.4. Further. Rule 3 read with the Rule 5 of Schedule A to the IRDA (Preparation of Financial Statements and Auditor's Report of Insurance Companies) Regulations, 2002 mandates a life insurance company to prepare its financial statements after taking into consideration the actuarial valuation. 5.1.5. The jurisdictional Bombay High Court in the case of Life Insurance Corporation of India vs. CIT: 119 ITR 900 summarized the scope of section 44 of the Act in the following terms:- ..... It is now well known that so far as the life insurance business is concerned, the computation of I he profits has to be made no! in the manner in which it is normally done in the case of an ordinary assessee hut according to the special and artificial mode prescribed in the First Schedule, having regard to the provisions of s. 44 of the I. T. Act. 1961. The effect of s. 44 of the I. T. Act, 1961, is that the provisions relating to interest on securitie ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Particulars Including internal transfer Excluding internal transfer Surplus/ (Deficit) in Policyholders' A/c NIL (846.669) Surplus/ (Deficit) in Shareholders' A/c (804.257) 42.412 Total surplus/ deficit (804,257) (804,257) 6.1.3. Further, the said internal transfer from Shareholders' A/c to Policyholders' A/c is clearly reflected in the financial statements of the company which was provided to the AO during the course of assessment. Therefore, the contention of the AO emerged out of nothing but a fresh application of mind on the existing records which is legally an invalid reason for reopening of assessment. 6.1.4. Reliance in this regard is placed on the decision of Mumbai Bench of Tribunal in the case of ICICI Prudential Insurance Co. Ltd. vs. ACIT [2012 140 ITD 41 (ICICI-2012') wherein it was held that surplus disclosed in Form-1 cannot form the basis of computation of taxable profits in the case of insurance company. The aforesaid decis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... happening of the insured event (i.e. death, illness, etc.), future payouts on survival (i.e. annuity, maturity, survival benefits, surrender, lapse, etc.), future expenses associated with the policy (e.g. commission, policy maintenance expense, claims expense, etc.)] and future premiums receivable (after considering estimated deaths, lapses, surrenders, etc). This net cash flow for each future period (i.e.. net of future payouts / and future receivables) is discounted at the valuation date. All the above valuations are based on the guidance and methods provided in regulations issued by IRDA and professional standards issued by the IAI. In case the resulting actuarial reserve is negative, it is known as 'Negative Reserve'. Regulations issued by IRDA mandate that the actuarial reserve for a policy should be the higher of zero, surrender value and the estimated actuarial reserve. The sum of such modified actuarial reserve for all policies is the total policy liabilities reported in the financial statements. 7.1.2 Therefore, based on the above discussion, negative reserves are nothing but discounted value of estimated future net income of the Company which cannot be brought ..... X X X X Extracts X X X X X X X X Extracts X X X X
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