TaxTMI 
TaxTMI 
2009 (8) TMI 810
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....ny business of insurance............... shall be computed in accordance with the rules contained in the First Schedule." The profits and gains earned through the business of insurance including any such business carried on by a mutual insurance company is to be computed in accordance with the rules contained in the First Schedule. The First Schedule has two major segments prescribing the method of computation of profit for life insurance business and the other one is prescribing the method of computation for other insurance business. Rest of the rules of this Schedule relevant for resolving the issue in hand, shall be discussed at the appropriate place herein below in this order. The appellant has claimed an exemption in respect of profit on sale of investment amounting to Rs. 17,44,603. The AO has disallowed the said claim of exemption. The crux of disallowance is the omission of sub-r. (b) of r. 5 from the First Schedule w.e.f. 1st April, 1989. There is no dispute as far as the omission of r. 5(b) is concerned stated to be effective from 1st April, 1989 and prior to its omission it was like this: "(b) any amount either written off or reserved in the accounts to meet depr....
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....ed in relying upon the decision of Hon'ble Tribunal, Delhi in the case of Dy. CIT vs. Oriental General Insurance Co. Ltd. (2005) 92 TTJ (Del) 300, wherein it was ruled that investments written off in insurance business were a loss and not an expenditure or allowance and therefore, they could not be added as income. The CIT(A) erred in not considering the AO's contention that there was no specific provision in r. 5 of the First Schedule allowing for such exemption and in the absence of a specific provision under the Act to exempt such income, no exemption would be available." 3.1 Few words about this company is that it was incorporated in India under the provisions of Company's Act, 1956 as a joint venture between Bajaj Auto Ltd. India with 74 per cent of share capital and on the other part Allianz AG, Germany having 26 per cent of share capital and nomenclature given was Bajaj Allianz General Insurance Co. (in short 'B.A. General'). The appellant is therefore in the business of fire, marine, motor and miscellaneous (workmen, compensation employers liability, public product liability, engineering, aviation, health, personal accident, etc.) insurance business. ....
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....estment is taken as part of the profits and gains of the business. To enable the General Insurance Corporation and its subsidiaries to playa more active role in capital markets for the benefit of policyholders, the Finance Act have amended sub-r. (b) of r. 5 of the First Schedule to provide for exemption of the profits earned by them on the sale of investment. As a corollary, it has also been provided that the losses incurred by the General Insurance Corporation on the realization of the investment shall not be allowed as deduction in computing the profits chargeable to tax." 4.1 The first appellate authority has drafted an elaborate order. However, to cut the long story short the verdict was that the effect of deletion of r. 5(b) from the First Schedule, as duly been clarified by CBDT, an empowering authority, relevant portion reproduced, was with the intention to grant exemption on the profits earned by an insurance company on sale of investment. The learned CIT(A) has expressed his view that the Explanatory Note provided a useful aid for an interpretation of the provisions of law. So he has commented that the CBDT has provided a useful insight for the reason of deletion. Vide....
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.... deletion had automatically granted an exemption or taxability of that particular income still existed which was earlier taxed in the hands of the insurance company due to the presence of r. 5(b) of the Act. 5.1 To answer this problem we can take the shelter of the legislative history and this approach has duly been recognized by the Hon'ble Supreme Court as held in the case of 1mpenal Chit Funds (P) Ltd. vs. 1TO (1996) 133 CTR (SC) 505 : (1996) 219 ITR 498 (SC) that due importance tan be given to legislative history and the background of a fiscal statute that had led to its enactment. The Hon'ble Kerala High Court in the case of Bhagavathy Tea Estates Ltd. & Ors. vs. Stare of Kerala & Ors. (1989) 179 ITR 508 (Ker) has also made an observation that the history of an enactment and the reasons which led to its implementation may be used as aids to its construction. In the like manner an amendment or an omission in the statute has also to be seen in a holistic manner and a logical interpretation should be given in conjunction with the object of amendment. The Hon'ble Orissa High Court in the case of CIT vs. Pyarilal Kasam Manji & Co. (1992) 101 CTR (Ori) 247: (1992) 198....
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..... J.H. Gotla (1985) 48 CTR (SC) 363 : (1985) 156 ITR 323 (SC) has said that the statutory construction should result in equity rather than injustice. On the basis of a plethora of judgment of several Hon'ble Courts we can draw a conclusion that even a literal interpretation in the present case should also result into the exemption in respect of profit on sale of investment. There was no conflicting intention in the cited amendment as expressed by Finance Act, 1998. Also there is no dispute that even in case of contraries or conflicts an interpretation should go in favour of the assessee as propounded in the case of CIT vs. Kulu Valley Transport Co. (P) Ltd. (1970) 77 ITR 518 (SC) and CIT vs. Vegetable Products Ltd. 1973 CTR (SC) 177 : (1973) 88 ITR 192 (SC). 6. The learned CIT(A) has called for a remand report from the AO. When the same was handed over to this assessee the point-wise contentions were as follows: (a) The appellant is not a public financial institution as prescribed under s. 4(A) of the Companies Act hence, it was wrong on the part of the AO to allege that in addition to the insurance business the assessee company has also acted as a public financial ....
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....s and gains of insurance business including any such business carried on by a mutual insurance company or by a co-operative society shall be computed in accordance with the rules contained in First Schedule. Accordingly, there could not be any other income taxable other than insurance business because s. 44 overrules all other provisions of the IT Act. 8. A conclusion can be drawn on the basis of the above elaborate discussion that the deletion of sub-r. (b) from r. 5 of the First Schedule was with a specific purpose. This Schedule not only prescribes the method of computation of income of insurance business in Part (A) but also prescribes the method of computation of other insurance business in Part (B). Rule 5 is within Part (B) and earlier it has prescribed the method of taxation of profit on sale of investments which was later on scraped. Even by applying a reverse logic we must arrive at the same conclusion that had the impugned income was earlier taxable under one specific clause but even on its deletion no clause was introduced or replaced to prescribe the method of taxation of such income; therefore the Revenue Department has no right to tax such an income in the absence....
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....contained reasonings and arguments below the ground No. 2, which have not been reproduced. 10.2 After holding that the income/gain arising on sale of securities was exempt in the hands of assessee, learned CIT(A) thereafter proceeded against the assessee by invoking the provisions of s. 251 (2) of IT Act on the ground that why the expenditure was not to be allocated towards the income claimed exempted as prescribed under s. 14A of IT Act. Learned CIT(A) has proceeded on three grounds discussed hereinbelow: (a) His first observation was that the investment in securities was financed out of the loans, hence the interest is to be allocated against the exempted income. He has mentioned certain figures and thereupon came to the conclusion that the source of investment in securities was out of loans therefore, expenditure of interest was to be allocated against the exempted income. Sale on securities was amounted to Rs. 95,47,48,414. Availability of funds were said to be from the premium accrued amounting to Rs. 299.75 crores, reinsurance for covering risk was Rs. 118.99 crores as against that the claim made was Rs. 103.98 crores. He has worked out that Rs. 76.78 crores was a....
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....ion to earning of exempt income subject to disallowance under s. 14AD=(A*B)/(B+C) 15,35,61,453 Thus it was held that the AO should have allocated the expenditure of Rs. 15,34,61,453 in relation to those investments, the income out of which was not includible in total income of the appellant. As against income of Rs. 1,32,87,419 not includible in total income, the view of learned CIT(A) was that there was a loss of Rs. 14,02,74,036 (i.e. Rs. 15,35,61,455 - Rs. 1,32,87,419) arising as a result of expenditure incurred in relation to income not includible in total income as prescribed under s. 14A of the Act. The conclusion thereupon arrived at was that since income from sale of investment was not includible in total income therefore the loss of Rs. 14,02,74,036 so worked out represented loss from sale of investment could also not be allowed as deduction while computing the total income as per IT Act, 1961. The said proposed enhancement is the cause of grievance of the assessee. 11. Argument of learned counsel Mr. Percy Pardiwalla though elaborate but can be concised mainly due to the reason that the issue of applicability of the provisions of s. 14A have already been exhausti....
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....arned CIT-Departmental Representative, Shri R. Kaushal has vehemently supported the action of the learned CIT(A) by stating that an expenditure incurred in relation to an income not includible in the total income ought to be disallowed. He has contested that no deduction is to be allowed in respect of a direct or indirect expenditure in relation to income which has not formed part of the total income. It was contested that the AO has to determine the amount of expenditure incurred in relation to an income which has not formed the part of the total income under the Act in accordance with such methods as prescribed under r. 8D of IT Rules. Even AO has to apply the said method of determination of expenditure though assessee has claimed that no expenditure has been incurred by him in relation to such income which does not form part of the total income. Learned Departmental Representative has further contested and negated the argument of the learned counsel of the assessee that in the absence of any mention of Chapter III in s. 14A it is not permissible to read something which is written in the statute. Sec. 14A applies to all types of income claimed as non-taxable under the Act, he has....
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....lain reading of r. 5(1) of the First Schedule. There is another approach to the same issue. Sec. 44 of the IT Act read with the rules contained in the First Schedule to the Act lays down an artificial mode of computing the profits and gains of insurance business. For the purpose of income-tax, the figures in the accounts of the assessee drawn up in accordance with the provisions of the First Schedule to the IT Act and satisfying the requirements of the Insurance Act are binding on the AO under the IT Act and he has no general power to correct the errors in the accounts of an insurance business and undo the entries made therein. The amount set apart by the General Insurance Corporation for redemption of preference shares and treated as expenditure under r. 2(2)(a) of the General Insurance Business (Nationalisation) Rules is so treated for the purpose of the Insurance Act, 1938. The reserve is not an expenditure in the ordinary commercial sense of the term. It cannot be added back for computing the profits and gains of business by including it in 'expenditure not admissible under the provisions of ss. 30 to 43A of the IT Act' by reference to r. 5(a) of the F....
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.... from 1st April, 1962 reads as under: '14A. For the purposes of computing the total income under this chapter, no deduction shall be allowed in respect of expenditure incurred by the assessee in relation to income which does not form part of the total income under this Act.' On a plain reading of the above quoted provisions, we find that if any part of the expenditure claimed by the assessee as deduction against his income chargeable to tax is found or determined to have been incurred by the assessee in relation to income received by the assessee from the mutual funds, the expenditure claimed by the assessee as deduction against his income chargeable to tax has to be disallowed to that extent. We do not see much force in the contention of the assessee that while the provisions of s. 10(33) exempting the assessee's income on units of mutual funds fall under Chapter III, the provisions of s. 14A have been inserted in Chapter IV only. The import of the words 'income which does not form part of the total income under this Act' unmistakably takes us to Chapter III titled as 'Incomes which do not form part of total income'. One may as well re....
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....thorised Representative that the provisions of s. 14A are applicable only in respect of income that fall within the purview of Chapter III of IT Act. 17. Finally the question to be answered is about the applicability of s. 14A in respect of sale of investment which is not taxed under the special circumstances of deletion of a sub-rule from the statute. It is not questioned that the impugned profit was non-taxable per se rather the accepted legal position is that the impugned profit was very much taxable in the past. Now it has been informed that this controversy in respect of insurance company set at rest by a decision of Tribunal, Delhi Bench verdict in the case of Oriental Insurance Co. Ltd. (ITA Nos. 5462 & 5463/Del/2003) asst. yrs. 2000-01 and 2001-02 order dt. 27th Feb., 2009 [reported as Oriental Insurance Co. Ltd. vs. Asstt. CIT (2010) 130 TTJ (Del) 388 : (2010) 38 DTR (Del) 225-Ed.]. Therefore considering the vehement reliance of learned Authorised Representative it is worth to mention at the outset itself that the issue now stood resolved by this latest decision of Delhi, Tribunal in the case of Oriental Insurance Co. Ltd., the relevant portion reproduced below: ....
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....looking after tax-free investment. 19. The learned counsel for the assessee vehemently argued that the income of the assessee is to be computed under s. 44 r/w r. 5 of Sch. I of the IT Act. Sec. 44 is a non obstante clause and applies notwithstanding anything to the contrary contained within the provisions of the IT Act relating to computation of income chargeable under different heads, other than the income to be computed under the head 'Profit and gains of business or profession'. For computation of profits and gains of business or profession the mandate to the AO is to compute the said income in accordance with the provisions of ss. 28 to 43B of the Act. In the case of the computation of profits and gains of any business of insurance, the same shall be Clone in accordance with the rules prescribed in First Schedule of the Act, meaning thereby ss. 28 to 43B shall not apply. No other provision pertaining to computation of income will become relevant. According to the learned counsel, two presumptions that follow on a combined reading of ss. 14, 14A, 44 and r. 5 of the First Schedule are: (a) That no head-wise bifurcation is called for. The income, inter a....