Life insurance actuarial surplus must be computed on combined accounts; standalone Form I surplus and pension fund disallowance fail.

Taxable income from life insurance business is computed under Section 44 read with Rule 2 of the First Schedule on the basis of the combined actuarial surplus from policyholders' and shareholders' accounts; the surplus shown only in Form I, without consolidation, is not the complete taxable surplus. On that basis, the addition made from Form I surplus was deleted. The loss or surplus arising from the approved pension fund was also held to form part of the actuarial computation for life insurance business and could not be separately disallowed merely because the Revenue disputed earlier precedent. The disallowance relating to the pension fund was therefore deleted.

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Issues: (i) whether the surplus shown in Form I of the actuarial report, without consolidating policyholders' account and shareholders' account, could be brought to tax in respect of life insurance business; (ii) whether the loss or surplus arising from the pension fund could be disallowed while computing taxable income of the insurer.

Issue (i): Whether the surplus shown in Form I of the actuarial report, without consolidating policyholders' account and shareholders' account, could be brought to tax in respect of life insurance business.

Analysis: The computation of income from life insurance business is governed by Section 44 of the Income-tax Act, 1961 read with Rule 2 of the First Schedule. The insurer is required to maintain separate policyholders' and shareholders' accounts under the regulatory framework, and the taxable surplus has to be determined on the basis of the aggregate of both accounts. The reported surplus in Form I, by itself, does not represent the complete surplus of the insurance business.

Conclusion: The addition on account of surplus disclosed in Form I was not sustainable and the issue was decided in favour of the assessee.

Issue (ii): Whether the loss or surplus arising from the pension fund could be disallowed while computing taxable income of the insurer.

Analysis: Pension fund income remains governed by Section 44 of the Income-tax Act, 1961, and the exemption under Section 10(23AAB) does not alter the manner in which the actuarial surplus of the insurance business is computed. The loss or surplus from the approved pension fund forms part of the actuarial computation for life insurance business and cannot be separately disallowed merely because the Revenue has not accepted the earlier binding decisions.

Conclusion: The disallowance relating to the pension fund was deleted and the issue was decided in favour of the assessee.

Final Conclusion: The Revenue's challenge to the deletions made by the first appellate authority failed, and the assessment additions were not sustained.

Ratio Decidendi: For life insurance business, taxable income must be computed under Section 44 of the Income-tax Act, 1961 read with the First Schedule on the basis of the actuarial surplus derived from the combined insurance accounts, and pension fund results covered by the statutory regime cannot be separately disallowed contrary to binding precedent.

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