2019 (6) TMI 36 - AT - Income Tax

Tribunal upholds decisions on accrued interest & disallowance under Section 14A, rules against Revenue

DCIT, Circle 1, LTU, New Delhi. Versus M/s. Oriental Insurance Co. Ltd.

The Tribunal upheld the Commissioner of Income-tax (Appeals)'s decision to delete the addition of Rs. 67,49,59,000/- on account of accrued interest, ... Income recognition - addition on account of accrued interest on loans, debentures and bonds - computation of taxable income earned from business of insurance u/s 44 - HELD THAT:- Following the order passed by the Tribunal for AY 2011-12 [2019 (4) TMI 959 - ITAT DELHI] and order passed by the Hon’ble Delhi High Court in assessee’s own case for AYs 1986-87 and 1988-89 [2002 (9) TMI 44 - DELHI HIGH COURT] , we are of the considered view that the CIT (A) has rightly deleted the addition by not recognizing an amount of accrued interest on bonds, debentures and investment as income for the years under assessment as per policies framed by the Insurance Regulatory and Department Authority (IRDA). Disallowance u/s 14A - HELD THAT:- in view of the fact that the income of the assessee is to be computed as per section 44 read with Rule 5 of First Schedule coupled with non-obstante clause and in these circumstances, AO is not empowered to travel beyond these provisions. in case of insurance company, the assessee in this case, the income is to be computed as per provisions contained u/s 44 read with Rule 5 of First Schedule, coupled with non-obstante clause and in these circumstances, the AO is not empowered to travel beyond these provisions. Even otherwise, section 14A contemplates an exception for deduction as allowable under the Act are those contained under sections 228 to 438 of the Act and section 44 creates special application of these provisions in case of the insurance companies. - Decided against the Revenue. Issues Involved:1. Deletion of addition on account of accrued interest on loans, debentures, and bonds.2. Deletion of disallowance under Section 14A concerning expenditure incurred in relation to income not includible in the total income.Issue-wise Detailed Analysis:GROUND NO. 1: Deletion of Addition on Account of Accrued InterestThe Revenue challenged the deletion of an addition amounting to Rs. 67,49,59,000/- on account of accrued interest on loans, debentures, and bonds made by the Assessing Officer (AO). The AO had noticed that the assessee, engaged in the insurance business other than life insurance, did not offer this interest income for taxation. The AO added this amount to the taxable income, but the Commissioner of Income-tax (Appeals) [CIT(A)] deleted the addition.The CIT(A)'s decision was based on precedents from earlier assessment years (AYs), including AY 2011-12, where similar additions were deleted and upheld by the Tribunal and the Hon’ble Delhi High Court. The Tribunal, in its order dated 25.02.2019 for AY 2011-12, confirmed that the income of an insurance company should be computed in accordance with Section 44 of the Income-tax Act, 1961, which is a special provision that overrides other provisions of the Act. This section mandates that the taxable income for insurance businesses be computed as per the rules in the First Schedule of the Act.The Tribunal referred to its previous orders and the Hon’ble Delhi High Court's decisions, which consistently held that the income from insurance business must be computed as per Section 44, and any addition on account of accrued interest was not justified. The Tribunal noted that the assessee had rightly not recognized the amount as income according to its accounting policy and the guidelines issued by the Insurance Regulatory and Development Authority (IRDA).Conclusion for Ground No. 1:The Tribunal upheld the CIT(A)'s decision to delete the addition of Rs. 67,49,59,000/- on account of accrued interest, determining the issue against the Revenue.GROUND NO. 2: Deletion of Disallowance Under Section 14AThe Revenue also contested the deletion of a disallowance made under Section 14A read with Rule 8D, amounting to Rs. 36,21,92,118/-. The AO had disallowed this amount, considering it as expenditure incurred in relation to income not includible in the total income. However, the CIT(A) deleted this disallowance, and the Tribunal was asked to review this decision.The Tribunal referred to its order for AY 2011-12, where it had confirmed the CIT(A)'s decision to delete a similar disallowance. The Tribunal reiterated that the computation of income for an insurance company is governed by Section 44 read with Rule 5 of the First Schedule, which contains a non-obstante clause. This clause means that the provisions of Section 44 override other provisions of the Act, including Section 14A.The Tribunal cited its previous decisions and the Hon’ble Supreme Court's ruling in General Insurance Corporation of India vs. CIT, which clarified that Section 44 is a special provision for computing the taxable income of insurance businesses. The Tribunal concluded that the AO is not permitted to apply Section 14A to insurance companies, as their income computation is strictly governed by Section 44 and the First Schedule.Conclusion for Ground No. 2:The Tribunal upheld the CIT(A)'s decision to delete the disallowance under Section 14A, determining the issue against the Revenue.Final Order:The appeal filed by the Revenue was dismissed, and the Tribunal's order was pronounced in open court on May 27, 2019.