TMI Blog2023 (1) TMI 1202X X X X Extracts X X X X X X X X Extracts X X X X ..... have completely failed to take note of it and Ld. AO reached a erroneous conclusion that the assessee was doing two different business, one of general insurance business and second other business‟. In the present assessment year the ld AO has himself allowed exemption u/s 10(15)(iv)(h) of the Act in regard to investment of tax free in public sector bonds. But still the Ld. AO, without citing reasons as to how u/s 10(15)(iv)(h) of the Act is applicable and Section 10(38) of the Act is not applicable, made the distinction and made the addition avoiding Section 10 of the Act. As observed that Profits and gains of business‟ is one of the classified heads of the income as per Section 14 of the Act. To arrive at the income by way of Profits and gains of business‟ for the purpose of Section 14 of the Act, the scope of total income provided under Section 5 of the Act has to be read with Section 10 of the Act, which as part of Chapter III of the Act, falls under the heading incomes which do not form part of Total Income . So, in any case the income by way of Profits and gains of business‟ which here in case of assessee means Profits and gains of insuran ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... see had filed the return of income on 20.09.2011 declaring total loss at Rs.12,75,16,33,152/- and computed a book loss at Rs. 2,68,13,01,144/- u/s 115JB of the Act. The return was processed u/s. 143(1) of the Income Tax Act, 1961. The case was selected for scrutiny by issue of a notice u/s. 143(2) dated 07.08.2012. The regular assessment u/s 143(3) of the Act was completed vide order dated 13.01.2014, assessing the loss at Rs. 1,12,37,16,049/- under normal provisions of the Income Tax Act, 1961 and also computed book loss at Rs.2,18,28,09,334/- u/s. 115JB of the Act after making the following additions/disallowances: (a) Profit on sale of investments R s. 10,27,94,88,259/- (b) Interest not recognized as Income R s. 80,52,21,000/- (c) Disallowance of Depreciation R s. 1,04,90,324/- (d) Disallowance u/s 14A R s. 49,84,91,810/- (e) Guest House Expenses R s. 47,43,236/- (f) Provision for Standard Assets R s. 2,94,82,474/- 3. The Id. Assessing Offic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e ld CIT(A) had upheld the disallowances and rejected the claim of the assessee for not computing income u/s 115JB of the Act. Accordingly, the assessee is in appeal raising following grounds of appeal:- 1. That on the facts and in law the CIT(A) erred in upholding an addition to total income of Rs. 10,27,94,88,259/- on account of Profit on Sale/Redemption of Investments. 1.1 That on facts and in law the CIT(A)/AO erred in not appreciating that by virtue of CBDT Circular No. 528 dated 16th December 1988 income earned by the appellant from Profit or Sale/Redemption of Investments is not liable to tax. 2. Without prejudice, on facts and in law the CIT(A) / AO erred in not appreciating that Profit on Sale / Redemption of Investments will be chargeable to tax as income under the head Capital Gains . 2.1 Without prejudice, that on facts and in law the CIT(A) erred in upholding the action of AO in denying benefit of exemption u/s 10(38) of the Income Tax Act. 2.2 Without prejudice, on facts and in law the CIT(A) erred in upholding the action of AO in denying benefit of concessional rate of tax as per section 111A and / or section 112 of the Income Tax Act. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o any other assessee under any clauses of section 10 is also available to General insurance business company subject to fulfillment of the conditions attached to the relevant provisions and it was submitted that assessee fulfilled both the conditions. Ld counsel relied on the judgment of the Hon ble Bombay High Court in case of Life Insurance Corporation of India Vs. CIT (1978) 115 ITR 45 (Bombay) to contend that the Hon ble High Court has held that there is no bar by virtue of section 44 of the Insurance Act and the insurance business corporation are entitled to claim deduction it was otherwise admissible in the case when the assessee computation of income is governed by the other provisions of the Act. It was submitted that Bombay High Court in CIT Vs. New India Assurance Company Ltd 71 ITR 761 allowed benefit of exemption to assessee engaged in the business of general insurance and also allowed the benefit of exemption claimed by LIC. Reliance was placed on the Mumbai ITAT decision in the case of New India Assurance Company Ltd for Assessment Year 2002-03 and 2003-04 in ITA No. 6498 and 6499/Mumbai/2005 to contend that the Tribunal has sustained the claim of general insurance bu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Section 27B (4) states that an insurer shall not invest or keep invested any part of his assets in the shares of any one banking company or investment company to the extent of more than (a) 10% of his assets, or (b) 2% of the subscribed share capital and debentures of the banking company or investment company concerned, whichever is less. 26. Section 27B(16)(b) of the IA clarifies that assets means all assets required to be shown in the balance-sheet as per Form A, in Part II of the First Schedule but excludes any items against the head Other Accounts (to be specified) . Section 27D of the IA also specifies the manner and conditions of investment. Section 28 of the IA pertains to statement and return of investment of assets. 27. A conspectus of the above provisions of the IA makes it clear that there is no option with a company carrying on general insurance business, like the Assessee, to treat any part of its investment as stock-in-trade as is sought to be contended by the Revenue before the Court. These investments are, at best, floating assets . The argument that these constitute stock-in-trade is ingenious but does not find resonance in the provisions of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rative Apex Bank (supra) in the context of Section 80 P (2) (a) (i) of the Act, where an entity is obliged to place a part of its funds with the State Bank or the Reserve Bank of India to enable it to carry on its banking business, then any income derived from funds so placed arises from the business carried on by it and the assessee has not, by reason of section 80P(2)(a)(i), to pay income-tax thereon. The placement of such funds being imperative for the purposes of carrying on the banking business, the income derived therefrom would be income from the assessee's business. 41. In the AY in question, the AO did not accept the case of the Assessee that the income earned on the sale/redemption is not chargeable to tax because, in the past, the profit on sale of investment was sometimes shown in the balance sheet and sometimes in the P L account. According to the AO, the entire income of the Assessee was assessable as 'business income'. According to the AO, Circular No. 528 dated 16th December 1988 of the CBDT did not create a dent insofar as it stated that both profit and loss on sale of investments will not be taken into account in calculation of insurance profit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ection 10(38) of the Act. However, in principle the Rule 5b and CBDT Circular 528 as interpreted in favour of the assessee in assessee‟s own case in 407 ITR 658 (Del), can be reasonably interpreted to hold that as the assessee is required to make investments within the statutory frame work of the Insurance Act and the IRDA guidelines. Also that the assessee being in general insurance business cannot operate into any other business. So, the investments made by the assessee in insurance business regulated by the Insurance Act, cannot be treated as stock in trade for the purpose of the Act. 14. Infact, if we look at Section 44 of the Act, the same provides; 44. Insurance business Notwithstanding anything to the contrary contained in the provisions of this Act relating to the computation of income chargeable under the head Interest on securities ', Income from house property , Capital gains or Income from other sources , or in section 199 or in sections 28 to 6 43B], the profits and gains of any business of insurance, including any such business carried on by a mutual insurance company or by a cooperative society, shall be computed in accordance with the rules c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s:- 97. Now coming to the additional ground taken by the assessee which relates to the claim of deduction by the assessee u/ 10 (34) in respect of dividend income, we noted that this issue is duly covered by decision of Mumbai Bench of this Tribunal in case of ICICI Prudential Insurance Company Ltd v ACIT 140 ITD 41 in which under para 47 while dealing with similar issue following decision of General Insurance Corp of India v CIT 204 Taxman.com 587 by Bombay HC gave clear cut finding that assessee is entitled to exemption u/s 10(34) for the dividend income. We also noted while disposing of ground relating to applicability of S. 14A for disallowance of expenditure in respect of income not forming part of Total Income. This Tribunal Mumbai Bench in the aforesaid case under para 45-46 took the view that since S. 44 creates a specific exception to the applicability of S. 28-43B, therefore purpose object purview of S. 14A has no apllicability to profits and gains of an insurance business. This decision of coordinate Bench is binding on us. The learned DR in this regard although referred to decision of Delhi Tribunal in the case of assessee reported in 86 Taxman.com 239 for Assess ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Act. In arriving at the deficit from the insurance business, assessee claimed certain exempt incomes under section 10(23AAB) with reference to Pension Business and dividend under section 10(34). AO did not allow the amounts on the reason that these incomes are part of income of life insurance business and it is included as income by the actuary, therefore, they cannot be exempted. This issue is covered in favour of assessee and against the Revenue by the orders of the General Insurance Company of India(supra) wherein the issue of deduction under section 10 have been considered and allowed following the Hon'ble Bombay High Court judgment in General Insurance Corpn. of India v. CIT [2012] 204 Taxman 587/17 taxmann.com 247. The order in the case of General Insurance Corpn. of India (supra) vide Para 7 to 8 is as under: 7. Issue No.5: Availability of Section 10 Exemption (Modified Ground of Appeal No.2 - Original Ground of Appeal No. 2.1 2.2) -. The issue arises in a peculiar manner in this assessment year. While dealing with the issue of profit on sale of investments, the Assessing Officer proposed to differ from assessee stand and bring to tax the profit on sale of inve ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he First Schedule . Section 44 provides that the profits and gains of any business of insurance of a mutual insurance company shall be computed in accordance with the rules in the First Schedule. Part 'A' of the First Schedule containing Rules 1 to 4 deals with profits of life insurance business while Part B consisting of Rule 5 deals with computation of profits and gains of other insurance business. Rule 5 provides as follows: 5. The profits and gains of any business of insurance other than life insurance shall be taken to be the balance of the profits disclosed by the annual accounts, copies of which are required under the Insurance Act, 1938 (4 of 1938), to be furnished to the Controller of Insurance 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 section 30 to (43B) in computing the profits and gains of a business shall be added back; (b) ( ; (c) Such amount car ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... evail notwithstanding the fact that there are contrary provisions in the Act relating to computation of income chargeable under the four heads mentioned in section 44. The only other overriding effect of section 44 is that its provisions operate notwithstanding the provisions of section 191 and of section 28 to 43A. Thus, the only effect of section 44 is that the operation of the provisions referred to therein is excluded in the case of an assessee who carried on insurance business and in whose case the provisions of rule 2 of the First Schedule are attracted. If the deductions which are claimed by the assessee do not fall within the provisions which are referred to in section 44, it will have to be held that the applicability of those provisions in the case of an assessee whose assessment is governed by section 44 read with rule 2 in the First Schedule is not excluded . This judgment is sought to be distinguished by the Assessing Officer while disposing of the objections on the ground that the decision was rendered in the context of an assessee which carried on life insurance business to whom Rules 1 to 4 of the First Schedule applied whereas in the case of the assessee in t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Court in the earlier decision in the case of New India Assurance Co. Ltd. Accordingly, the decision of Life Insurance Corporation (Supra) could not have been ignored by the Assessing Officer on the supposition that the decision was rendered in the context of an assessee who carried on life insurance business and was, therefore, not available to an assessee which carries on general insurance business. 12. In General Insurance Corporation of India v. Commissioner of Income-Tax, the Supreme Court considered in an appeal arising out of a judgment of the High Court the issue as to whether a sum of Rs. 3 crores, being a provision for redemption of preference shares, was not liable to be added back in the total income of the assessee for AY 1977-78?. The Supreme Court held that a plain reading of rule 5(a) of the First Schedule made it clear that in order to attract the applicability of the provision the amount should firstly be an expenditure or allowance and secondly it should be one not admissible under the provisions of section 30 to 43A. The Supreme Court held that the sum ofRs. 3 crores in that case which was set apart as a provision for redemption of preference shares could ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... im for exemption in the original order of assessment under section 143(3). The Assessing Officer above all was bound by the communication of the CBDT. Having followed that in the order under section 143(3) he could not have taken a different view while purporting to reopen the assessment. Having applied his mind specifically to the issue an having taken a view on the basis of the communication noted earlier, the act of reopening the assessment would have to be regarded as a mere change of opinion which has also not been based on any tangible material. Consequently, we hold that the reopening of the assessment is contrary to law. The Petition would have, therefore, to be allowed . Respectfully following the above, we hold that the assessee is entitled for exemption under section 10. The enhancement made by the CIT (A) is therefore, cancelled. Ground is accordingly allowed . 49. In view of the above and respectfully following the same, we hold that assessee is entitled to exemption under section 10. Therefore, we do not see any reason to differ from the order of the CIT (A) where he has allowed assessee's claim of exemption under section 10(23AAB) of surplus of Partic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... after taking into consideration all the material facts available on record. Accordingly this ground raised by assessee stands allowed for statistical purposes. 9.1 In the year under consideration also, the relevant details for addition made to fixed assets in Financial Year 2009-10 have been placed on record by the assessee. The AO has, however, failed to take the same into consideration. We are, therefore, inclined to set aside this issue to the records of the AO for a de novo verification of the relevant facts. In the result, Grounds 3 and 3.1 are partly allowed for statistical purposes. 21. The ld AO here has also erred in comparing facts with the earlier assessment years while making a disallowance ignoring that requisite details were filed as Annexure of the Tax Audit Report which have also been made available with the paper booked titled as Index of Papers‟. As the facts are similar to AY 2010-11, the issue is decided in favour of the assessee for statistical purposes and issue is restored to file of Ld. AO for afresh determination, as supra. 22. In regard to issue No. 4 the admitted state of affairs again is that in assessee‟s own case for Assess ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ase of M/s Oriental Fire and General Insurance Company Ltd., reported in 291 ITR 370, wherein the Apex Court has held that the provision is deducted from an asset and is made against anticipated losses, while the reserve is an appropriation of profit and remains as proprietors interest in the balance sheet. The Apex Court further held that a provision made for bad and doubtful debts against an anticipated loss, is not an expenditure and since rule 5of first schedule of Income Tax Act provides for adding back of only an expenditure or allowance, the provision for bad and doubtful debts cannot be added back. The appellant also relied on the decision of the Apex Court in the case of General Insurance Corporation of India reported in 240 ITR 139. However, the said decision is also in respect of AY77-78 and it deals with the provision for redemption for preference shares, which was held to be not an expenditure covered by section 30 to section 43B. 5.2 In view of amendment to Rule 5 including rule 5(a) w.e.f., 01-04-2011, the decisions of the Apex Court relied upon by the appellant, no longer apply and the word expenditure or allowed‟ referred to in section 5(a) now include ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ase in 407 ITR 658 (Del) the issue has been discussed in pra No. 54 to 56 as below:- 54. Turning now to ITA No. 447/2015, the question concerns the applicability of Section 115JB of the Act to insurance companies. The ITAT has permitted the Assessee to raise this question since, in a large number of judgments of the ITAT, the question has been answered in favour of the Assessee. 55. It is plain, from a reading of Section 44 read with the First Schedule of the Act, that insurance companies are required to prepare accounts as per the IA and the regulations of the IRDA and not as per Parts II and III of Schedule VI of the Companies Act. The Assessee prepares its accounts as per the IRDA principles. The IRDA Regulations govern the preparation of the auditor's report. 56. Consequently, the question framed in ITA No. 447/2015 is answered in the affirmative, i.e. in favour of the Assessee and against the Revenue by holding that Section 115JB of the Act does not apply to insurance companies. 25. The ld CIT(A) had failed to take into cognizance the aforesaid accordingly, the ground Nos. 5, 5.1, 5.2 are decided in favour of the assessee. 26. Accordingly, the ap ..... X X X X Extracts X X X X X X X X Extracts X X X X
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