Life insurance income computation under special tax rules covered investment sale gains, disallowed FBT add-back, and allowed dividend exemption.

For a life insurance company, income from sale of investments held as part of regulated insurance funds falls within the special computation scheme under section 44 read with the First Schedule, so it cannot be taxed as a separate source; the related addition was deleted. A provision for fringe benefit tax was also not liable to be added back in computing life insurance business income because the First Schedule did not require that adjustment; the disallowance was deleted. The appellate authority further accepted an additional legal ground and allowed exemption for dividend income under section 10(34), noting that the relevant facts were already on record.

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Issues: (i) Whether income arising from sale of investments held by a life insurance company forms part of life insurance business and is governed by section 44 and the First Schedule; (ii) Whether provision for fringe benefit tax could be added back in computing the income of a life insurance business; (iii) Whether exemption under section 10(34) could be allowed in respect of dividend income by way of an additional ground.

Issue (i): Whether income arising from sale of investments held by a life insurance company forms part of life insurance business and is governed by section 44 and the First Schedule.

Analysis: The business of a life insurer is regulated by the insurance law framework, under which investments are made as part of the insurer's controlled funds and in accordance with mandatory investment norms. Such investments are integrally connected with the carrying on of life insurance business. The computation of income of a life insurance business is governed by section 44 of the Income-tax Act, 1961 read with the First Schedule, and the profit on sale of investments cannot be carved out as a separate source of income outside that regime.

Conclusion: The income from sale of investments is part of the life insurance business and cannot be assessed separately; the addition was unsustainable and was deleted in favour of the assessee.

Issue (ii): Whether provision for fringe benefit tax could be added back in computing the income of a life insurance business.

Analysis: The computation of income under the special scheme for life insurance business does not contemplate an adjustment for fringe benefit tax provision. Since the First Schedule does not mandate such an add-back, and adjustments under sections 28 to 43B do not govern the computation in the manner applied by the revenue, the disallowance lacked authority under the special computation provision.

Conclusion: The disallowance of the fringe benefit tax provision was not sustainable and was deleted in favour of the assessee.

Issue (iii): Whether exemption under section 10(34) could be allowed in respect of dividend income by way of an additional ground.

Analysis: An appellate authority may entertain a pure legal claim even if it was not raised in the return, when the relevant facts are already on record and allowing the claim avoids multiplicity of proceedings. The dividend income claim fell within that principle and was allowed as an additional ground.

Conclusion: The additional ground for exemption under section 10(34) was allowed in favour of the assessee.

Final Conclusion: The appeals succeeded on the substantive tax issues, resulting in deletion of the disputed additions and acceptance of the additional exemption claim.

Ratio Decidendi: For a life insurance company, income from sale of investments forming part of its regulated investment activities is computed under section 44 read with the First Schedule, and provisions not contemplated by that special scheme cannot be independently added back.

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