Life insurance income must follow the statutory computation scheme, and pension fund loss remains adjustable in that computation.

For a life insurance business, taxable income must be computed strictly under section 44 read with Rule 2 of the First Schedule, so actuarial surplus shown in Form-I cannot be taxed by ignoring the statutory computation scheme and the relevant insurance accounts; the addition based on Form-I was deleted. The Tribunal also held that a pension fund forming part of the life insurance business remains within that computation even if its income is exempt under section 10(23AAB), so the loss from the pension fund could be taken into account and the disallowance was deleted.

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Issues: (i) Whether the surplus disclosed in Form-I of the actuarial report of a life insurance company could be brought to tax by ignoring the computation scheme under section 44 read with Rule 2 of the First Schedule; (ii) Whether the loss from pension fund could be disallowed despite the exemption under section 10(23AAB).

Issue (i): Whether the surplus disclosed in Form-I of the actuarial report of a life insurance company could be brought to tax by ignoring the computation scheme under section 44 read with Rule 2 of the First Schedule.

Analysis: The dispute concerned the correct method of computing taxable income of a life insurance business. The Tribunal noted that the statutory scheme requires profits to be determined under section 44 read with Rule 2 of the First Schedule, and that actuarial surplus or deficit has to be worked out in accordance with the insurance business accounts as recognised by the applicable regulatory framework. It was found that the earlier decisions in the assessee's own case had already held that the surplus cannot be taxed by mechanically adopting the new form in isolation and that the computation must reflect the combined effect of the relevant accounts.

Conclusion: The addition made by treating the surplus in Form-I as taxable income was not sustainable and the relief granted by the CIT(A) was in favour of the assessee.

Issue (ii): Whether the loss from pension fund could be disallowed despite the exemption under section 10(23AAB).

Analysis: The Tribunal accepted that the pension fund formed part of the life insurance business and that exemption of income under section 10(23AAB) did not exclude the fund from the ambit of section 44. It followed the binding view that, while determining the surplus from insurance business, the actuary was justified in taking into account the loss arising from the pension fund, and therefore the disallowance made by the Assessing Officer was contrary to the settled position.

Conclusion: The disallowance of loss from pension fund was rightly deleted and the finding was in favour of the assessee.

Final Conclusion: The Revenue's challenge failed because both additions were deleted on the basis of the settled method of computing income from life insurance business and the pension fund loss was held to be adjustable in that computation.

Ratio Decidendi: For a life insurance business, taxable income must be computed strictly under section 44 read with Rule 2 of the First Schedule, and actuarial surplus or deficit cannot be determined by disregarding the applicable insurance accounts; a pension fund that is part of the insurance business remains within that computation even if its income is exempt under section 10(23AAB).

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