2017 (9) TMI 1994 - AT - Income Tax

Tribunal rules in favor of assessee on key tax issues including dividend income and reserves

The Tribunal upheld the decisions in favor of the assessee on various issues including the deletion of addition made on account of loss from Jeevan ... Loss from pension fund (Jeevan Suraksha Fund) set off against taxable surplus despite exemption under section 10(23AAB) - non obstante clause in section 44 not excluding the operation of section 10 exemptions - exemption of dividend income under section 10(34) vis a vis computation of insurance profits under section 44 - actuarial valuation (Form I) and mathematical reserves as binding for computation of insurance surplus - negative reserves reducing taxable surplus (impact of negative mathematical reserves) - utilisation of surplus under section 28 of the Life Insurance Corporation Act, 1956 - dividend distribution tax provisions under section 115 O and deemed default under section 115Q not attracted to LIC payments to the Central Government - taxability of shareholders' funds credited directly to shareholders' accountLoss from pension fund (Jeevan Suraksha Fund) set off against taxable surplus despite exemption under section 10(23AAB) - non obstante clause in section 44 not excluding the operation of section 10 exemptions - Deletion of addition for loss from Jeevan Suraksha Fund upheld in favour of the assessee - HELD THAT: - The Tribunal followed the decision of the Hon'ble Bombay High Court which held that the object of inserting section 10(23AAB) was to promote insurance business by exempting income from such funds and that the loss from pension funds like Jeevan Suraksha Fund must be excluded while determining actuarial valuation surplus under section 44. The non obstante clause in section 44 does not operate to pull within section 44 the exclusionary effect of section 10(23AAB) so as to deny set off of the loss; earlier coordinate Bench and High Court decisions were held to govern and were followed.Grounds disallowing set off of Jeevan Suraksha Fund loss dismissed; deletion of addition confirmed in favour of the assessee.Exemption of dividend income under section 10(34) vis a vis computation of insurance profits under section 44 - Dividend income claimed as exempt under section 10(34) held allowable despite computation of insurance profits under section 44 - HELD THAT: - The Tribunal and the Hon'ble Bombay High Court decisions in coordinating matters were followed, holding that section 44's non obstante clause does not oust application of section 10 exemptions where conditions of the exemption are satisfied; earlier coordinate Bench decisions (including ICICI Prudential and GIC Ltd. jurisprudence) and High Court rulings were relied upon to conclude that dividend income could be treated as exempt under section 10(34). The Revenue did not produce contrary higher authority.Addition on account of dividend income rejected; exemption under section 10(34) upheld in favour of the assessee.Actuarial valuation (Form I) and mathematical reserves as binding for computation of insurance surplus - negative reserves reducing taxable surplus (impact of negative mathematical reserves) - Challenge to exclusion of negative mathematical reserves from taxable surplus dismissed; actuarial valuation binding - HELD THAT: - Following coordinate Bench and High Court authority, the Tribunal held that the mathematical reserve forms part of actuarial valuation and is reflected in Form I; the Assessing Officer has no power to alter amounts fixed by actuarial valuation for the purpose of computing insurance surplus under section 44 and the First Schedule. The principle in LIC v. CIT (supra) that the AO cannot modify actuarial valuation was applied to reject the Revenue's addition.Addition relating to negative reserves rejected; taxable surplus adjusted in accordance with actuarial valuation.Utilisation of surplus under section 28 of the Life Insurance Corporation Act, 1956 - Issue of interim bonus / utilisation of surplus remitted for factual examination - HELD THAT: - Section 28 of the LIC Act provides that ninety five per cent (or such higher percentage as approved) of surplus shall be allocated to policy holders and the remainder paid to or utilised as directed by the Central Government. The Tribunal directed the Assessing Officer to examine the factual matrix and utilisation of the surplus and to decide in accordance with law, giving the assessee an opportunity to substantiate its claim. The point was not finally adjudicated on merits but remanded for verification.Matter remitted to the Assessing Officer for factual examination and decision in accordance with law; ground allowed for statistical purposes.Dividend distribution tax provisions under section 115 O and deemed default under section 115Q not attracted to LIC payments to the Central Government - Provisions of section 115 O r.w.s.115Q held not applicable to amounts paid by LIC to the Central Government under statutory obligation - HELD THAT: - Tribunals in the assessee's own earlier years and coordinate Bench decisions were followed: the Central Government is not a shareholder in LIC in the sense required for section 115 O; payments to the Government under sections 28/28A of the LIC Act are not dividends as defined under section 2(22) and therefore dividend distribution tax and related deemed default provisions do not apply. Earlier ITAT and High Court decisions were treated as binding precedent and were followed.Addition under section 115 O/115Q deleted; provisions not applicable to LIC in the facts of the case.Taxability of shareholders' funds credited directly to shareholders' account - Addition on account of income from shareholders' funds credited to shareholders' account confirmed against the assessee - HELD THAT: - In the assessee's appeal for Assessment Year 2011 12 the Tribunal observed that identical issues had been decided against the assessee in its own earlier year (order dated 07/03/2017 for AY 2010 11) and the assessee conceded the applicability of that precedent. The Tribunal applied the earlier reasoning and authorities to conclude that the credit to shareholders' account constituted assessable income in the hands of the assessee for that year; the assessee did not controvert the factual matrix or supply a contrary binding authority.Addition confirmed; the assessee's appeal for this ground dismissed.Final Conclusion: Following binding decisions of the Hon'ble Bombay High Court and coordinate Bench precedents, the Tribunal (i) upheld deletion of additions relating to loss from Jeevan Suraksha Fund, dividend exemption under section 10(34), negative reserves and non applicability of section 115 O/115Q to LIC payments; (ii) remitted the issue of interim bonus/utilisation of surplus under section 28 of the LIC Act to the Assessing Officer for factual examination; and (iii) dismissed the assessee's appeal on the shareholders' funds addition. The Revenue's appeal is partly allowed for statistical purposes; the assessee's appeal is dismissed. Issues Involved:1. Deleting the addition made on account of loss from Jeevan Suraksha Fund.2. Dividend income of the assessee held as exempt under Section 10(34) of the Income Tax Act, 1961.3. Negative reserves and their impact on taxable surplus.4. Addition made on account of interim bonus paid.5. Applicability of provisions of Section 115-O read with Section 115Q of the Income Tax Act.6. Income from shareholders' funds credited directly to the shareholders' account.Issue-wise Detailed Analysis:1. Deleting the Addition Made on Account of Loss from Jeevan Suraksha Fund:The Tribunal examined whether the loss from Jeevan Suraksha Fund could be set off against taxable income of the assessee corporation despite being covered under Section 10(23AAB) of the Income Tax Act. The Tribunal noted that the issue was already covered in favor of the assessee by the Hon'ble Bombay High Court in previous cases (Assessment Years 2002-03 to 2006-07) and by the Tribunal itself in ITA No.4874/Mum/2014. The High Court emphasized that the object of Section 10(23AAB) was to promote insurance business by exempting income from such funds, not to exclude the loss incurred from these funds while determining the actuarial valuation surplus under Section 44. Respectfully following these decisions, the Tribunal found no infirmity in the First Appellate Authority's conclusion and dismissed the grounds raised by the Revenue.2. Dividend Income of the Assessee Held as Exempt Under Section 10(34):The Tribunal addressed whether the dividend income of the assessee, engaged in life insurance business, should be exempt under Section 10(34). The Tribunal noted that this issue was covered in favor of the assessee by earlier decisions of the Tribunal and the Hon'ble Bombay High Court. Specifically, the Tribunal referenced the decision in the case of ICICI Prudential Insurance, where it was held that the assessee was entitled to exemption under Section 10, including Section 10(34). The Hon'ble High Court also dismissed the Revenue's appeal on similar grounds. Consequently, the Tribunal upheld the First Appellate Authority's decision and dismissed the Revenue's ground.3. Negative Reserves and Their Impact on Taxable Surplus:The Tribunal examined whether negative reserves should impact the taxable surplus. The Tribunal noted that this issue was covered in favor of the assessee in previous decisions for Assessment Years 2007-08 to 2009-10 and 2010-11. The Tribunal in those cases held that the mathematical reserve is part of actuarial valuation and should not be modified by the Assessing Officer. The Hon'ble High Court also dismissed the Revenue's appeal, affirming that the Assessing Officer had no power to modify the actuarial valuation. Respectfully following these decisions, the Tribunal affirmed the First Appellate Authority's stand and dismissed the Revenue's ground.4. Addition Made on Account of Interim Bonus Paid:The Tribunal considered whether the addition made on account of interim bonus paid was justified. The Tribunal noted that 95% of the surplus from life insurance business must be allocated to policyholders, with the remainder going to the government, as per Section 28 of the Life Insurance Corporation Act, 1956. The Tribunal directed the Assessing Officer to examine the factual matrix and utilization of the surplus and decide in accordance with the law, giving the assessee an opportunity to substantiate its claim. This ground was allowed for statistical purposes.5. Applicability of Provisions of Section 115-O Read with Section 115Q:The Tribunal examined whether the provisions of Section 115-O read with Section 115Q were applicable to the assessee. The Tribunal noted that this issue was already decided in favor of the assessee by the Tribunal in earlier years (Assessment Years 2006-07, 2007-08, and 2008-09). The Tribunal held that the amount paid from the profits of life insurance business to the Central Government under statutory obligation is not in the nature of dividend, and thus, Section 115-O is not applicable. Respectfully following these decisions, the Tribunal found no infirmity in the First Appellate Authority's order and dismissed the Revenue's ground.6. Income from Shareholders' Funds Credited Directly to the Shareholders' Account:The Tribunal addressed whether the income from shareholders' funds credited directly to the shareholders' account should be taxed. The Tribunal noted that this issue was decided against the assessee in earlier years (Assessment Year 2010-11). The Tribunal held that once income is earned by the assessee and later applied for a specific purpose, it cannot be treated as a charge on profit but as an application of income. The Tribunal upheld the Assessing Officer's decision to tax the income from shareholders' funds. Consequently, this ground in the assessee's appeal was dismissed.Finally, the appeal of the Revenue was partly allowed for statistical purposes, whereas the appeal of the assessee was dismissed.