2013 (10) TMI 1072 - AT - Income Tax

Assessee prevails in tax case on life insurance profits: Tribunal supports accounting method and income computation

The Tribunal largely ruled in favor of the assessee in the case concerning taxation of profits from a life insurance business. The Tribunal supported the ... Determination of income of insurance business - actuarial valuation made in accordance with the Insurance Act, 1938 - Held that:- the 'actuarial valuation made in accordance with the Insurance Act, 1938' do mean that the actuarial valuation done in accordance with the Insurance Act, 1938. - actuarial valuation has to be done in accordance with the Regulations contained in erstwhile Fourth schedule Part-I and Part-II - following the decision in ICICI PRUDENTIAL INSURANCE CO LTD [2012 (11) TMI 13 - ITAT MUMBAI] followed - Decided in favor of assessee. Whether treatment given to negative reserves by actuary cannot be disturbed by the AO - If an insurer had two policies, one with a reserve of 100 and the other with a reserve of10, it might think of its liabilities at100 rather than 90 to take into account the eventuality in case the second policy lapsed. This process is called eliminating negative reserves – Held that:- Assessing Officer has no power to modify the amount after actuarial valuation was done, which was the basis for assessment under Rule 2 of 1st Schedule r. w. s. 44 of the I. T. Act. The principle laid down by the Hon'ble Supreme Court in LIC vs. CIT [1963 (12) TMI 5 - SUPREME Court] about the power of the Assessing Officer also restricted the scope and adjustment by the AO – Decided against the Revenue. Loss from pension income to be adjusted from the business income – Exemption u/s 10(23AAB) – Held that:- Reliance has been placed upon the case of Life Insurance Corporation of India [2011 (8) TMI 47 - BOMBAY HIGH COURT], wherein it has been held that The fact that the income from such fund has been exempted under section 10(23AAB) with effect from April 1, 1997, does not mean that the pension fund ceases to be insurance business, so as to fall outside the purview of the insurance busi- ness covered under section 44 of the Income-tax Act, 1961 - pension fund like the Jeevan Suraksha Fund would continue to be governed by the provisions of section 44 of the Income-tax Act, 1961, irrespective of the fact that the income from such fund are exempted, or not. Therefore, while determining the surplus from the insurance business, the actuary was justified in taking into consideration the loss incurred under the Jeevan Suraksha Fund. The object of inserting section 10(23AAB) was to enable the assessee to offer attractive terms to the contributors. Thus, the object of inserting section 10 (23 AAB) was not with a view to treat the pension fund like the Jeevan Suraksha Fund outside the purview of insurance business but to promote the insurance business by exempting the income from such fund – Decided in favor of Assessee. Disallowance u/s 14A of the Income tax in Insurance Business – Held that:- Provisions of section 14A of the Act did not apply to the assessee carrying of insurance business. As the assessee is engaged in the business of Life Insurance so provisions of section 14A r. w. r 8D of Rules (supra) cannot be applied in its case - Sec. 14A contemplates an exception for deductions as allowable under the Act are those contained under ss. 28 to 43B of the Act. Sec. 44 creates special application of these provisions in the cases of insurance companies – Decided in favor of Assessee. Issues Involved:1. Taxation of profits from life insurance business2. Basis of computing surplus/deficit as per Rule 23. Determination of taxable income from life insurance business4. Transfer of funds5. Set off of deficit in the Shareholders' Account6. Adjustment of earlier years' surplus7. Taxability of income in the Shareholders' Account8. Disallowance under section 14A9. Disallowance as per Rule 8D10. Amount of disallowance under section 14A11. Disallowance of liability towards employee retirement benefits12. Set off of brought forward business losses and unabsorbed depreciation allowance13. Applicable rate of tax14. Interest under section 234B of the Act15. Interest under section 234D of the ActDetailed Analysis:1. Taxation of profits from life insurance business:The Tribunal held that the taxation of profits from life insurance business must be computed according to section 44 of the Income Tax Act and Rule 2 of the First Schedule. The assessee's income should be assessed based on the actuarial valuation as per the unamended Insurance Act, 1938, and not the IRDA guidelines. This was supported by the case of ICICI Prudential Life Insurance Co. Ltd.2. Basis of computing surplus/deficit as per Rule 2:The Tribunal agreed with the assessee that the surplus/deficit should be computed based on Form I in the Fourth Schedule to the Insurance Act, 1938, prior to its amendment by the Insurance (Amendment) Act, 2002. This was in line with the decision in the ICICI Prudential Life Insurance Co. Ltd. case.3. Determination of taxable income from life insurance business:The Tribunal concluded that the entire income, including that in the Shareholders' Account, should be considered as arising from the life insurance business and taxed as such. This was based on the principle that all activities carried out by the assessee pertain to the life insurance business, following the ICICI Prudential Life Insurance Co. Ltd. case.4. Transfer of funds:The Tribunal held that the transfer of funds from the Shareholders' Account to the Policyholders' Account did not result in income chargeable to tax. This was consistent with the decision in the ICICI Prudential Life Insurance Co. Ltd. case.5. Set off of deficit in the Shareholders' Account:The Tribunal decided that any deficit in the Shareholders' Account should be set off against the Policyholders' surplus, following the precedent set in the ICICI Prudential Life Insurance Co. Ltd. case.6. Adjustment of earlier years' surplus:The Tribunal ruled that the actuarial surplus should be adjusted to exclude the surplus or deficit from earlier years, as per Rule 2 of the First Schedule. This was supported by the ICICI Prudential Life Insurance Co. Ltd. case.7. Taxability of income in the Shareholders' Account:The Tribunal held that the income in the Shareholders' Account should be taxed under the head 'income from business and profession' and not 'income from other sources', following the ICICI Prudential Life Insurance Co. Ltd. case.8. Disallowance under section 14A:The Tribunal concluded that section 14A did not apply to insurance companies, as their income is computed under section 44 of the Act, which overrides other provisions. This was consistent with the decisions in various cases, including Birla Sun Life Insurance Co. Ltd.9. Disallowance as per Rule 8D:The Tribunal ruled that Rule 8D could not be invoked unless the AO was not satisfied with the correctness of the assessee's claim. This was supported by the case of Birla Sun Life Insurance Co. Ltd.10. Amount of disallowance under section 14A:The Tribunal held that the disallowance under section 14A should be computed as per the assessee's claim unless the AO could demonstrate its incorrectness. This was in line with the decisions in various cases.11. Disallowance of liability towards employee retirement benefits:The Tribunal decided that the provision for employee retirement benefits made as per AS-15 should be allowed as a deduction, as it was a legitimate business expense. This was supported by the decision in the Life Insurance Corporation of India case.12. Set off of brought forward business losses and unabsorbed depreciation allowance:The Tribunal ruled that the assessee was entitled to set off brought forward business losses and unabsorbed depreciation allowance as per section 72 of the Act. This was consistent with the provisions of the Income Tax Act.13. Applicable rate of tax:The Tribunal held that the income of the assessee from life insurance business should be taxed at the rate specified in section 115B of the Act. This was supported by the decision in the ICICI Prudential Life Insurance Co. Ltd. case.14. Interest under section 234B of the Act:The Tribunal concluded that interest under section 234B should not be levied if the assessee had bona fide estimated its income as nil and was not liable to pay advance tax. This was consistent with the decision in the Indian Airlines Ltd. case.15. Interest under section 234D of the Act:The Tribunal ruled that the levy of interest under section 234D was consequential and should be computed based on the final determination of income. This was consistent with the provisions of the Income Tax Act.Conclusion:The appeals filed by the assessee were largely allowed, with the Tribunal ruling in favor of the assessee on most issues, including the computation of income from life insurance business, the applicability of section 14A, and the rate of tax. The appeals filed by the AO were dismissed, with the Tribunal upholding the assessee's method of accounting and computation of income.