Insurance business computation under section 44 prevails over section 14A disallowance, with pension deficit and dividend exemption allowed.

Section 44 and the First Schedule govern the computation of profits and gains of insurance business, so the general disallowance mechanism under section 14A could not be invoked to disturb that special computation. The pension business deficit was also part of the insurance business and had to be reflected in the actuarial computation, so it was allowed. Dividend income did not lose exemption under section 10(34) merely because it entered the insurance surplus computation, and the exemption remained available where statutory conditions were satisfied. The assessee succeeded on all substantive issues.

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Issues: (i) whether disallowance under section 14A could be made in the case of an insurance business governed by section 44 and the First Schedule; (ii) whether the deficit incurred in the pension business segment could be rejected while computing insurance income; (iii) whether dividend income could be denied exemption under section 10(34) while computing the surplus of an insurance business.

Issue (i): whether disallowance under section 14A could be made in the case of an insurance business governed by section 44 and the First Schedule.

Analysis: Section 44 contains a non obstante clause and mandates that the profits and gains of insurance business be computed only in accordance with the First Schedule. The special statutory mode of computation excludes resort to the general disallowance machinery under section 14A. The settled view consistently applied in earlier coordinate bench decisions was followed.

Conclusion: The disallowance under section 14A was not sustainable and the issue was decided in favour of the assessee.

Issue (ii): whether the deficit incurred in the pension business segment could be rejected while computing insurance income.

Analysis: The pension fund remained part of the insurance business and its loss was to be taken into account in the actuarial computation under section 44 read with the First Schedule. The exemption of income from the pension fund did not take that segment outside the insurance business regime, and the actuarial surplus could not be altered on that basis.

Conclusion: The deficit in the pension business segment was allowable and the issue was decided in favour of the assessee.

Issue (iii): whether dividend income could be denied exemption under section 10(34) while computing the surplus of an insurance business.

Analysis: Exemption under section 10 remained available where the statutory conditions were met, even in the case of insurance business computed under section 44. Dividend income could not be mechanically included in the taxable surplus merely because it formed part of the actuary's computation.

Conclusion: Dividend income was entitled to exemption under section 10(34) and the issue was decided in favour of the assessee.

Final Conclusion: The special computation regime for insurance business controlled the assessment, the assessee succeeded on all substantive issues raised by the Revenue, and the assessee's appeal was allowed while the Revenue's appeal failed.

Ratio Decidendi: Where income of an insurance business is required to be computed under section 44 and the First Schedule, the Assessing Officer cannot apply the general disallowance provisions to disturb that computation, and exemptions under section 10 remain available if otherwise satisfied.

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