2007 (5) TMI 364 - AT - Income Tax

Assessee's Business Commencement Dispute Resolved: Expenses Disallowed, Interest Income Assessed

The Tribunal upheld that the business of the assessee had not commenced as no life insurance policies were issued, leading to the disallowance of expenses ... Insurance business, Income from other sources Issues Involved:1. Applicability of Section 44 and First Schedule of the Income-tax Act, 1961.2. Allowability of expenses incurred by the assessee.3. Head of assessability of interest income earned by the assessee.4. Allocation of expenses towards earning of interest.5. Levy of penalty under Section 271(1)(c) of the Income-tax Act, 1961.Issue-wise Detailed Analysis:1. Applicability of Section 44 and First Schedule of the Income-tax Act, 1961:The primary issue was whether the provisions of Section 44 and the First Schedule of the Income-tax Act, 1961, which relate to the computation of profits and gains of life insurance business, were applicable to the assessee. The assessee argued that it had commenced its life insurance business by investing funds in approved securities as required by the Insurance Act, 1938. However, the Assessing Officer (AO) and the Commissioner of Income-tax (Appeals) [CIT(A)] held that since no life insurance policies were issued during the year, the business had not commenced. The Tribunal upheld this view, stating that the issuance of life insurance policies was essential to consider the business as commenced. The Tribunal relied on the decision of the Hon'ble Bombay High Court in the case of Jupiter General Insurance Co. Ltd., which clarified that the business of life insurance means the business of issuing new policies.2. Allowability of Expenses Incurred by the Assessee:The assessee contended that the expenses incurred during the period should be allowed as business expenses since it had set up its business after obtaining registration from the Insurance Regulatory and Development Authority (IRDA). The Tribunal, however, held that merely setting up the business infrastructure did not equate to the commencement of business. Since the assessee had not issued any life insurance policies during the period, the business had not commenced, and thus, the expenses incurred could not be allowed as business expenses. The Tribunal also noted that the provisions of Section 35D, which allow for the amortization of preliminary expenses, were not applicable due to the overriding effect of Section 44.3. Head of Assessability of Interest Income Earned by the Assessee:The assessee had earned interest income from investments in bank deposits and approved securities. The AO and CIT(A) assessed this income under the head 'Income from other sources' instead of 'Profits and gains of business or profession.' The Tribunal upheld this view, stating that since the business of life insurance had not commenced, the interest income could not be treated as business income and was rightly assessed as income from other sources.4. Allocation of Expenses Towards Earning of Interest:The assessee claimed that the entire expenses incurred should be allowed against the interest income. The AO allowed only 5% of the interest income as expenses incurred for earning such income. The Tribunal upheld this allocation, reasoning that the majority of the expenses were related to setting up the life insurance business and not directly to earning the interest income. Therefore, only a nominal percentage of the interest income could be considered as expenses incurred to earn that income.5. Levy of Penalty Under Section 271(1)(c) of the Income-tax Act, 1961:The AO levied a penalty under Section 271(1)(c) for concealment of income, which was confirmed by the CIT(A). The assessee argued that the penalty was not justified as there was no deliberate concealment or furnishing of inaccurate particulars of income. The Tribunal observed that the assessee had made full disclosures and acted in a bona fide manner based on its understanding of the law and judicial pronouncements. The Tribunal held that the case was one of genuine difference of opinion between the assessee and the Revenue Authorities and not a fit case for the levy of penalty. Consequently, the penalty was cancelled on merits.Conclusion:- The appeal regarding the quantum assessment (ITA No. 8165/Mum./2004) was dismissed, confirming that the business had not commenced and the interest income was to be assessed as income from other sources.- The appeal regarding the penalty (ITA No. 397/Mum./2007) was allowed, cancelling the penalty imposed under Section 271(1)(c) on the grounds of genuine difference of opinion and full disclosure by the assessee.