2019 (8) TMI 574 - HC - Income Tax

High Court affirms ITAT on Income Tax Act Section 44 for insurance business profits

The High Court affirmed the ITAT's decision on the interpretation of Section 44 of the Income Tax Act for insurance business profits. It held that ... Taxability of income from investments reflected in the Shareholders’ Account - computation of life insurance business u/s 44 r.w Rule 2 of the First Schedule - HELD THAT:- This Court is not persuaded to take a view different from that of the Mumbai Bench of the ITAT ICICI Prudential Insurance Co. Ltd. v. ACIT [2012 (11) TMI 13 - ITAT MUMBAI] which has been affirmed by the Bombay High Court VERSUS ICICI PRUDENTIAL INSURANCE CO. LTD. [2015 (7) TMI 1259 - BOMBAY HIGH COURT]. Indeed on a conjoint reading of Section 44 with Rule 2 of the First Schedule to the Act, the Court is unable to discern any distinction between the income earned on the policy holder’s account and income from investments shown in the shareholder’s account for computation of the profits and gains of life insurance business for the purposes of taxation. In the considered view of the Court, the only question which would require consideration is about the computation of the actuarial surplus in the non-linked Participating Policyholder’s Account (non-technical). The following substantial questions of law are framed for consideration: (1) Whether the ITAT in the facts and circumstances of the case was right in accepting the Assessee’s computation of the actuarial surplus, which includes deductions on the ground of future appropriations and allocation of bonus to policy holders? (2) Was the ITAT right in invoking the rule of consistency in accepting the Assessee’s case? Disallowance u/s 14A - computation of life insurance business u/s 44 - HELD THAT:- As regards applicability of Section 14 A in the context of exempt income, once it is clear that this Section 44 read with Rule 2 of the First Schedule to the Act alone would apply when it comes to computing the profits and gains of life insurance business, the question of resorting to any other provision for individual items of income and expenditure would not arise. - on this issues this Court declines to frame questions thereby affirming the impugned order of the ITAT . Issues:1. Interpretation of Section 44 of the Income Tax Act, 1961 for determining profits and gains of insurance business.2. Whether deductions taken into account while arriving at actuarial surplus in life insurance business should be permitted.3. Whether income from investments in Shareholders Account forms part of profits and gains of insurance business.4. Applicability of Section 14 A of the Act in the context of exempt income.Analysis:Issue 1 - Interpretation of Section 44 for Insurance Business Profits:The High Court considered the statutory scheme under Section 44 of the Income Tax Act, which governs the taxation of profits and gains of insurance business. The Court emphasized the significance of Section 44, which starts with a non-obstante clause, indicating its paramount importance in determining taxable income from insurance activities.Issue 2 - Permissibility of Deductions in Actuarial Surplus Calculation:The dispute centered around whether certain deductions, such as bonuses to policyholders and funds for future appropriations, should be allowed in calculating the actuarial surplus in a life insurance business. The Revenue contended that these deductions should not be permitted, while the ITAT disagreed with this stance, leading to a detailed analysis of the relevant provisions.Issue 3 - Treatment of Income from Investments in Shareholders Account:The Court examined whether income from investments reflected in the Shareholders Account should be considered part of the profits and gains of insurance business. The ITAT highlighted that the reporting format changes mandated by IRDA Regulations did not alter the computation mechanism under Section 44 and Rule 2 of the First Schedule to the Act, emphasizing that the surplus from Shareholders Account is not to be taxed separately.Issue 4 - Applicability of Section 14 A in Exempt Income Context:Regarding the application of Section 14 A of the Act concerning exempt income, the Court clarified that Section 44 read with Rule 2 of the First Schedule to the Act governs the computation of profits and gains from insurance business, eliminating the need to resort to other provisions for individual items of income and expenditure.Conclusion:The High Court affirmed the ITAT's decision, supported by the Bombay High Court, regarding the treatment of actuarial surplus and income from investments in the insurance business. The Court framed substantial questions of law related to the computation of actuarial surplus, emphasizing consistency in decision-making. The judgment declined to address additional issues raised by the Revenue, maintaining the focus on the core matters at hand. Both parties were given the opportunity to present their arguments on the framed questions, ensuring a comprehensive review of the key legal aspects involved in the case.