2016 (9) TMI 1418 - AT - Income Tax

ITAT allows aggregation of surplus/deficit in shareholders' account with policyholders' account for profit/loss determination under

The ITAT allowed the appeal of the assessee, directing the aggregation of surplus/deficit in the shareholders' account with the policyholders' account for ... Computation of income from business of life insurance - Manner of computation of income under Section 44 - Held that:- As section 44 of the Act is applied, distinction between various heads of income paled into insignificance. Assessee had in, its return, separately shown the revenue in its shareholders account and revenue derived from its policy holders account. Revenue account for policy holders account clearly reflected the change in valuation of liability in respect of life-policies which were accounted. Surplus/deficit as per shareholders account may be aggregated with surplus/deficit of the policy holders account for determining the income of the assessee u/s. 44 of the Act. - Decided against revenue Not allowing set-off of losses under policyholders' account in accordance with the provisions of Section 70 while computing the total income of the Appellant - Held that:- As we have held that surplus/deficit as per shareholders account should be aggregated with surplus/deficit in the policy holders account for determining the profile/loss in the policy holders account for determining the profile/loss of the assessee u/s 44, and such aggregation would results in a loss of ₹ 34,45,94,000/- as per the impugned order, the view of setting off of losses against income u/s 70,72 would be academic and hence not decided. Issues Involved:1. Manner of computation of income under Section 44 of the Income Tax Act.2. Taxation of income from shareholders' account versus policyholders' account.3. Set-off of losses under Sections 70 and 72 of the Income Tax Act.Detailed Analysis:1. Manner of Computation of Income under Section 44 of the Income Tax ActThe assessee filed its return of income declaring a total loss of Rs. 34,45,94,000, computed by aggregating its reporting under the shareholders' account and policyholders' account as prescribed under IRDA. The Assessing Officer (AO) completed the assessment under Section 143(3), increasing the loss from life insurance business to Rs. 58,61,84,000 and considered Rs. 24,15,90,000 reported under the shareholders' account as income from non-life insurance business.The Commissioner of Income Tax (Appeals) [CIT(A)] held that the computation of profit/loss from the business of life insurance is governed by special provisions of Section 44 of the Income Tax Act, 1961, and is distinct from the income earned from the shareholders' account. The CIT(A) dismissed the grounds of appeal, stating that the facts of the appellant's case are distinguishable from the case law of ICICI Prudential Insurance Co. Ltd., and the decision of the Mumbai Tribunal in favor of the assessee was not followed as the facts were different.2. Taxation of Income from Shareholders' Account versus Policyholders' AccountThe CIT(A) held that income under different sources must be separately taxed, and losses arising from any segment of the business must be carried forward and set off against profits derived under the same head as per provisions under Sections 71, 72, and 73 of the Income Tax Act. The CIT(A) upheld the AO's action of not allowing the set-off of losses from the insurance business against the profits of the shareholders, stating that the computation of profit or loss from the life insurance business is governed by special provisions of Section 44 and is distinct from income earned from the shareholders' account, which is to be taxed at normal rates.3. Set-off of Losses under Sections 70 and 72 of the Income Tax ActThe assessee contended that the deficits in the policyholders' account should be set off against the surplus in the shareholders' account under Section 70, as both constitute a single business, and Section 70 permits inter-unit set-off. Additionally, the loss of the business of the assessee for earlier years should be set off against the income of the current year under Section 72.The ITAT, following its decision in the assessee's own case, held that both the policyholders' and shareholders' accounts should be consolidated for the purpose of arriving at the deficit or surplus. The ITAT found that the AO was aware of the method of aggregation followed by the assessee and had taken a lawful and possible view. Therefore, the ITAT allowed the grounds from 1 to 8, stating there was no error in the AO's order that could be rectified under Section 263 jurisdiction.As regards grounds 9 to 13, the ITAT noted that these were alternate grounds. Since the aggregation of surplus/deficit in the shareholders' account with the policyholders' account would result in a loss of Rs. 34,45,94,000, the issue of setting off losses against income under Sections 70 and 72 became academic and was not decided.ConclusionThe appeal of the assessee was allowed, and the ITAT directed that the surplus/deficit in the shareholders' account should be aggregated with the surplus/deficit in the policyholders' account for determining the profit/loss under Section 44 of the Income Tax Act. The ITAT did not address the set-off of losses under Sections 70 and 72, as the aggregation of accounts rendered this issue academic. The order was pronounced in the open court on 22nd September 2016.