2020 (2) TMI 931 - AT - Income Tax

Tax Tribunal Rules in Favor of Assessee on Assessments for 2013-14 and 2014-15

The Tribunal held that the initiation of proceedings under section 263 by the Principal Commissioner of Income Tax (PCIT) for the Assessment Years 2013-14 ... Revision u/s 263 - expenditure claimed for incurred but not reported (IBNR) and incurred but not enough reported (IBNER) - HELD THAT:- Adverting to the scope of section 263 of the Act. The prerequisite of the exercise of jurisdiction of section 263 by PCIT or CIT is that order of AO is erroneous in so far as prejudicial to the interest of revenue. The twin condition that order is erroneous and it is prejudicial to the interest of revenue must be fulfilled together. If anyone of them is absent- the recourse cannot be had to section 263. Further, if the Assessing Officer has adopted one of the courses permissible under the law and pass the assessment order, the same cannot be branded as erroneous unless the order passed by Assessing Officer is unsustainable in law. Thus, the twin conditions of section 263 are not fulfilled in the present case. We may reiterate here that though there is no reference in the assessment order about the examination of issues related with provisions for IBNR and IBNER. The assessee during the assessment furnished the relevant extract of IBNR and IBNER report for the year ended 31st March 2014 duly certified by the appointed actuary and copy of which was again furnished to the ld. PCIT. The ld. PCIT has not commented on the detailed reply furnished by assessee. Assessee while making submission has vehemently submitted that issue is debatable and when two views are possible, the revision of assessment order is not permissible. The Hon'ble Supreme Court in Max India Ltd.'s case 2007 (11) TMI 12 - SUPREME COURT] held that when two views are inherently possible, the provision of section 263 would not attract. Order passed by ld. PCIT under section 263 is set-aside. - Decided in favour of assessee. Issues Involved:1. Initiation of proceedings under section 263 of the Income Tax Act.2. Treatment of the assessment order as erroneous and prejudicial to the interest of the revenue.3. Directions to re-examine and redo the assessment concerning IBNR and IBNER provisions.4. Allowability of IBNR and IBNER claims as expenditure.5. Consideration of judicial precedents from different ITAT benches.Issue-wise Detailed Analysis:1. Initiation of Proceedings under Section 263:The Principal Commissioner of Income Tax (PCIT) initiated proceedings under section 263 for the Assessment Years (AY) 2013-14 and 2014-15, arguing that the assessment orders passed by the Assistant Commissioner of Income-tax (ACIT) were erroneous and prejudicial to the interests of the revenue. The PCIT issued a show-cause notice to the assessee, highlighting that the provisions for claims incurred but not reported (IBNR) and claims incurred but not enough reported (IBNER) were unascertainable liabilities and, therefore, not allowable under the Income Tax Act.2. Treatment of the Assessment Order as Erroneous and Prejudicial to the Interest of the Revenue:The PCIT contended that the ACIT did not make proper inquiries into the claims for IBNR and IBNER, thus rendering the assessment orders erroneous and prejudicial to the revenue. The PCIT directed the ACIT to re-examine these provisions in light of the Chennai ITAT's decision in the case of Cholamandalam MS General Insurance Co. Ltd., which held that such provisions were unascertainable and should not be allowed.3. Directions to Re-examine and Redo the Assessment Concerning IBNR and IBNER Provisions:The PCIT directed the ACIT to re-examine the expenditure claimed for IBNR and IBNER provisions, arguing that the ACIT had accepted these claims without proper scrutiny. The PCIT emphasized that only ascertained liabilities should be allowed as deductions, and since the IBNR and IBNER provisions were based on estimates, they should be disallowed.4. Allowability of IBNR and IBNER Claims as Expenditure:The assessee argued that the provisions for IBNR and IBNER were made in accordance with the Insurance Regulatory and Development Authority of India (IRDAI) regulations and were based on actuarial principles. The assessee contended that these provisions were recognized liabilities under the IRDAI guidelines and should be allowed as deductions. The assessee also cited favorable decisions from the Kolkata ITAT and Mumbai ITAT, which allowed similar claims.5. Consideration of Judicial Precedents from Different ITAT Benches:The assessee highlighted that the Mumbai ITAT and Kolkata ITAT had allowed similar claims for IBNR and IBNER provisions in previous cases. The assessee argued that these decisions should be considered, and the revisionary powers under section 263 should not be exercised as the issue was debatable and two views were possible. The assessee also pointed out that the Kolkata High Court had upheld the ITAT's decision in favor of allowing IBNR and IBNER provisions.Tribunal's Decision:The Tribunal concluded that the ACIT had made inquiries into the IBNR and IBNER provisions during the assessment proceedings, and the claims were supported by the auditor's report and actuarial valuation. The Tribunal noted that the issue was debatable, with different ITAT benches taking divergent views. Therefore, the Tribunal held that the revisionary powers under section 263 could not be exercised as the twin conditions of the order being erroneous and prejudicial to the revenue were not fulfilled. The Tribunal set aside the PCIT's order and allowed the assessee's appeals for both AY 2013-14 and 2014-15.Conclusion:The Tribunal's decision emphasized that when two views are possible, the exercise of revisionary powers under section 263 is not warranted. The Tribunal upheld the assessee's claims for IBNR and IBNER provisions, considering the IRDAI regulations and favorable judicial precedents from the Kolkata and Mumbai ITAT. The appeals for both AY 2013-14 and 2014-15 were allowed in favor of the assessee.