2021 (10) TMI 975 - HC - Income Tax

High Court decision: Tax treatment of surplus from shareholders' account and pension fund losses clarified

The High Court ruled in favor of the assessee in a tax case involving the taxation of surplus from shareholders' account and the carry forward of losses ... Assessment of income from life insurance business - surplus arising from “shareholder account” as separate income and not as income arising from life insurance business - Tribunal allowing claim of assessee made on account of surplus from shareholders account being treated as income from other business by holding that “surplus” available both in Policy Holders Account and Share Holders’ Account is to be consolidated and only “net surplus” is to be taxed as income from insurance business - HELD THAT:- This Court has dealt with this substantial question of law in extenso in M/S. PNB Metlife India) [2021 (10) TMI 928 - KARNATAKA HIGH COURT] and the same is applicable to the facts of the present case. Accordingly, substantial question of law No.1 is answered in favour of the assessee and against the revenue. Disallowance in respect of claim of losses from pension fund not allowed to be carried forward - losses incurred from pension fund is exempt under section 10(23AAB) - taxability of income from life insurance business is governed by section 44 of the Act with the first schedule of the Act even though when section 10 of the Act is applicable and income is exempt from tax, it follows that losses are also not allowed to be set off nor can be carried forward - HELD THAT:- The insurance business has to be considered by the actuary valuation as per the valuation report allowable under Section 44 read with First Schedule to the Act. Merely for the reason that the income from pension fund is exempted under Section 10(23AAB) with effect from 01.04.1997, it cannot be held that the loss incurred under the fund cannot be carried forward or given a set-off. The Clause 13.1 of the C.B.D.T. Circular No.762, dated 18.02.1998, provides that the Life Insurance Corporation of India (LIC) has started a new personal-cum-family pension scheme. The scheme offers attractive terms to its contributors and has a provision for payment of a life-time widow’s pension in the event of the death of the contributor during the contribution period. Clause 13.3 provides that in order to enable the LIC to offer attractive terms to the contributors, exemption from income-tax has been provided to the income of such funds which the LIC has set up on or after the August 1, 1996, under the scheme to which contributions are made by the contributors. Clause 13.5 contemplates that the amendment will take effect from April 1, 1997, and will, accordingly, apply in relation to the assessment year 1997-98 and subsequent years. The object of inserting Section 10(23AAB) being made clear as per the said Circular, the same cannot be equated with the provisions of Section 10A of the Act. Section 44 of the Act begins with a non-obstante clause and overrides the other provisions of the Act relating to computation of income under the various heads of income including income under the head profit and gains of business of insurance. Thus, the provisions under Sections 28 to 43 of the Act would not be applicable to the assessee coming within the ambit of Section 44, Judgment in Harprasad [1975 (2) TMI 2 - SUPREME COURT] is distinguishable. These aspects were considered by the Hon’ble High Court of Bombay in Life Insurance Corporation of India Ltd., [2011 (8) TMI 47 - BOMBAY HIGH COURT]and following the said decision, the Tribunal has dismissed the appeals filed by the revenue, which indeed was applied for the earlier assessment year. We do not find any perversity or irregularity in the finding of the Tribunal in answering these issues. Hence, we answer the second substantial question of law also in favour of the assessee and against the revenue. Issues Involved:1. Taxation of surplus from shareholders' account as income from other business.2. Carry forward of losses from the pension fund under Section 10(23AAB) of the Income Tax Act.Issue-wise Detailed Analysis:1. Taxation of Surplus from Shareholders' Account:The primary issue was whether the surplus from the shareholders' account should be treated as income from other business or consolidated with the policyholders' account and taxed as income from the insurance business. The Tribunal had allowed the claim of the assessee by consolidating the surplus from both accounts and taxing only the net surplus as income from the insurance business. The revenue argued that income from other business should be taxed separately as it is not covered by Section 44 of the Income Tax Act, which pertains to the computation of income from the insurance business.The High Court referred to its previous judgment in ITA Nos.128/2018, 181/2017, and 436/2018, which dealt extensively with this issue and held that Rule 2 to the First Schedule of Section 44 applies to the business of life insurance, not Rule 5 of Part B of the First Schedule. Thus, the court answered this substantial question of law in favor of the assessee, affirming that the net surplus should be taxed as income from the insurance business.2. Carry Forward of Losses from Pension Fund:The second issue was whether the losses from the pension fund, which are exempt under Section 10(23AAB), could be carried forward and set off against the income from the insurance business. The revenue contended that since the income from the pension fund is exempt, the losses should not be allowed to be carried forward. The assessee argued that the business of life insurance is governed by Section 44 of the Act, which is a self-contained code, and the profit and loss should be computed on an actuarial valuation basis, not under Sections 28 to 43 of the Act.The High Court referred to the judgment of the Bombay High Court in the case of Life Insurance Corporation of India Ltd., which held that the pension fund continues to be governed by Section 44 irrespective of the exemption under Section 10(23AAB). The court also noted that Section 44 begins with a non-obstante clause, overriding other provisions of the Act relating to the computation of income under various heads, including profits and gains of the insurance business. The court found no irregularity in the Tribunal's decision to allow the losses from the pension fund to be carried forward and set off against the income from the insurance business.Conclusion:The High Court dismissed both appeals, answering both substantial questions of law in favor of the assessee and against the revenue. The surplus from the shareholders' account should be consolidated with the policyholders' account and taxed as income from the insurance business. Additionally, losses from the pension fund, despite being exempt under Section 10(23AAB), can be carried forward and set off against the income from the insurance business as governed by Section 44 of the Income Tax Act.