2021 (3) TMI 1488 - AT - Income Tax

Insurer's long-term share sale gains u/s44/Rule 5: s.10(38) exemption allowed for STT-paid transactions

Whether an insurer whose income is computed under s.44 read with Rule 5 of the First Schedule can claim exemption under s.10(38) for long-term capital ... Claim of exemption u/s 10(38) of the Act in respect of income from long term capital gains on sale of shares - Assessee is into general insurance company, whose taxable income is computed under section 44 read with Rule 5 of the First Schedule - HELD THAT:- We are conscious of the fact that Rule 5(b) of First Schedule to the Act has been amended with effect from Asst Year 2011-12. Recognising the said amendment, we find that the assessee itself had duly offered to tax such profits on sale of investments which are not subjected to STT. We find that the assessee had claimed exemption u/s 10(38) of the Act only for long term capital gains on sale of shares which had been subjected to STT. The assessee had duly considered and complied with the amendment brought in Rule 5(b) of First Schedule to the Act with effect from Asst Year 2011-12. Wherever the specific conditions stipulated u/s 10(38) of the Act were not complied with the assessee, we find that the assessee had duly offered the profits on sale of investments to tax in subsequent asst years as tabulated above, pursuant to the amendment in Rule 5(b) of First Schedule to the Act. AR further argued that prior to amendment in Rule 5(b) of First Schedule to the Act from Asst Year 2011-12 (i.e upto Asst Year 2010-11), by drawing specific reference to the relevant page of the factual paper book, the assessee’s claim was that entire profits on sale of investments were not subject to tax. Hence it could be seen that the above treatment of the assessee in respect of profit on sale of investments from Asst Year 2011-12 onwards clearly establishes beyond doubt that the amendment with effect from Asst Year 2011-12 to Rule 5(b) of the First Schedule to the Act, has in no way been nullified / rendered ineffective / rendered nugatory by the assessee’s claim that it is entitled to the exemption under Section 10(38) of the Act. We find from perusal of computation of income, the assessee had indeed made a claim of exemption u/s 10(38) of the Act in respect of profit on sale of investments that were subjected to STT. If it was not claimed, then how the ld AO could have even resorted to deny the claim of exemption u/s 10(38) of the Act in the assessment. With regard to the first round of proceedings where this tribunal had remanded to ld CITA for fresh adjudication, we find that this argument of the ld Special Counsel for the Revenue is misconceived as this tribunal had only remanded the matter to ld CITA for “fresh examination”, without in any way examining or pronouncing upon the merits of the assessee’s entitlement to the exemption u/s 10(38) of the Act. We hold that the assessee is eligible for claim of exemption u/s 10(38) of the Act in the facts and circumstances of the instant case and accordingly Ground raised by the assessee are allowed. 1. ISSUES PRESENTED AND CONSIDERED 1) Whether a general insurance company, whose taxable income is computed under section 44 read with Rule 5 of the First Schedule, can be denied exemption under section 10(38) on long-term capital gains arising from sale of equity shares where the sale is on a recognised stock exchange and is subject to Securities Transaction Tax. 2) Whether profits arising on sale of such equity share investments could be treated as business income (and not long-term capital gains) so as to defeat the section 10(38) exemption claim. 2. ISSUE-WISE DETAILED ANALYSIS Issue 1: Interplay of section 44/Rule 5 computation provisions with section 10(38) exemption for STT-paid long-term capital gains Legal framework (as discussed by the Court): The Court examined section 44 (non obstante provision for computation of profits and gains of insurance business in accordance with the First Schedule), Rule 5 of the First Schedule (profit before tax per insurance accounts, with specified adjustments including gain/loss on realisation of investments), and section 10(38) (exemption for income arising from transfer of a long-term capital asset being an equity share, where the transaction is chargeable to STT and other conditions are met). Interpretation and reasoning: The Court rejected the revenue's position that section 44 read with Rule 5 makes the profit as per insurance accounts 'absolute' and permits only Rule 5 adjustments, thereby disabling a section 10(38) exemption. It held that section 44 addresses computation of income of an insurance business, whereas section 10(38) is a specific exemption provision applicable when its statutory conditions are satisfied. The Court also found it significant that exemption under section 10 was in fact allowed by the tax authority for other categories (including dividend and tax-free interest), undermining the attempt to single out section 10(38) as inapplicable solely because section 44 applies. The Court considered the revenue's reliance on the amendment to Rule 5(b) effective from the relevant assessment year, and reasoned that the amendment did not displace the section 10(38) exemption where the statutory conditions are fulfilled. The Court noted that the assessee itself offered to tax profits on sale of investments where STT conditions were not met, while claiming section 10(38) only for the STT-paid long-term portion; this demonstrated that allowing section 10(38) did not render the Rule 5(b) amendment ineffective. Conclusions: The Court conclusively held that long-term capital gains arising from sale of equity shares on a recognised stock exchange and subjected to STT are eligible for exemption under section 10(38) even for a general insurance company governed by section 44 read with Rule 5; the computation regime for insurance business does not, on these facts, override or negate the statutory exemption. Issue 2: Characterisation of gains on sale of equity share investments-capital gains versus business income Legal framework (as discussed by the Court): The Court examined the objection that the assessee was not an 'investor' and that the gains were part of regular business. It relied on the record and on the departmental circular discussed in the judgment concerning treatment of listed shares held for more than 12 months, and also considered the judicial view noticed in the judgment that regulatory restrictions on insurers prevent treating investments as stock-in-trade. Interpretation and reasoning: The Court rejected the lower authorities' approach of treating profits on sale of investments as business income to deny section 10(38). It accepted the proposition advanced that section 44's overriding effect is limited to computation of taxable income and does not operate to pull exempt incomes into the tax base. It further accepted that, given the nature of insurance-company investments and the restrictions noted in the judgment, the investments could not be characterised as stock-in-trade so as to convert the surplus into business income. The Court also addressed and dismissed factual assertions that no exemption claim was made, finding from the computation that the exemption was claimed and was the subject of denial in assessment. Conclusions: The Court concluded that the profits on sale of the relevant equity share investments were not to be recharacterised as business income so as to deny the exemption; the assessee's long-term gains on STT-paid listed share sales retained eligibility for section 10(38) treatment on the facts found.