TaxTMI 
TaxTMI 
2010 (10) TMI 764
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....sessee is required to invest its funds in specific debt securities of Government or PSU Bonds or other securities in accordance with the Insurance Act, 1938 and IRDA (Investment Regulations, 2000). During the relevant previous year the assessee purchased certain debt securities at a price which was slightly higher than the face value of the security because of accumulated interest. According to the terms of the issue of the securities, the assessee was entitled to get only the face value at the time of redemption on maturity. For example, if a security of the face value of Rs.1,000/- was purchased by the assessee at Rs.1,003/-, the difference of Rs.3/- representing interest, the historical cost to the assessee would be Rs.1,003/-. However, at the time of maturity, the assessee would get only Rs.1,000/-. According to Schedule A to the IRDA (Auditor's Report) Regulations, 2002, which prescribes the accounting principles for preparation of financial statements in Part I thereof, the assessee was required to prepare the financial statements in the manner laid down in the said Schedule. We are concerned only with the manner in which the debt securities purchased by the assessee was to b....
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....e three years. In such a case also entries for amortization and transfer to Profit and Loss Account are to be made. They will just be the reverse of the entries made in the case of the purchase price being more than the face value. To illustrate, the entry for amortization will be as follows:- Investments A/c........................... Dr To Amortization of investment A/c. The transfer entry to the Profit and Loss Account will be:- Amortization of investments A/c....... Dr To Profit and Loss A/c. 5. Section 44 of the Income Tax Act, 1961, makes provision for the computation of the profits and gains of any business of insurance. The normal provisions relating to computation of the income in sections 28 to 43B of the Act, relating to computation of business income, do not apply to an insurance company. The section further provides that the profits and gains of the business of insurance shall be computed in accordance with the rules contained in the First Schedule. The First Schedule to the Act provides for computation of the business income both for life insurance business and other insurance business in Parts A and B respectively. Part B conta....
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.... investment market. Even according to the assessee, the realizable value of the investments were higher than the cost incurred and, therefore, there was no justification for the claim of amortization. The fourth and last reason given by the Assessing Officer was that the purchase cost of the investment was capital in nature and can never be charged to the Profit and Loss Account. In other words, in the example given above, the purchase price of the security was Rs.1,003/- and no part thereof can be claimed as amortization allowance by debiting the same to the Profit and Loss Account. Such a debit was not authorized by the IRDA. For these reasons the Assessing Officer added back the amortization claim of Rs.1,91,33,945/- to the balance of profits. The decision of the Assessing Officer having been confirmed by the CIT(A), the assessee is in further appeal before the Tribunal. 6. The first and main contention on behalf of the assessee is that rule 5(a) would apply only to any expenditure or allowance and the amortization claim can neither be considered as expenditure nor as allowance. The further contention was that even if it is considered as expenditure or allowance, it is....
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....e departmental authorities would not be justified in adding back the amount under rule 5(a). Therefore, even if the debit for amortization is considered as an expenditure, there is no specific prohibition against allowing such an expenditure under the provisions of sections 30 to 43B. The words "expenditure or allowance............. Which is not admissible under the provisions of sections 30 to 43B" appearing in the sub-rule has been explained by the Supreme Court to mean that there should be a specific prohibition against the expenditure or allowance in which case alone the Assessing Officer can add back the same to the balance of profits. It is common ground that there is no such specific prohibition against the allowance of the expenditure in the above sections of the Act. It may be noted that though rule 5(a) of the First Schedule considered by the Supreme Court in the above judgment was slightly different, but the words "any expenditure or allowance which is not admissible under the provisions of sections 30 to 43A" were present and the same words being present in the amended sub-rule, they have to be given the same meaning as was given by the Supreme Court. Therefore, even if....
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....e expenditure does not relate to the year under consideration. He also agreed with the views expressed by the Assessing Officer and thus upheld the disallowance. 9. It is against the aforesaid decision of the CIT(A) that the assessee is in further appeal before the Tribunal. The main arguments on behalf of the assessee were that even under section 35D of the Act, capital expenditure is allowable as a deduction if it is incurred before commencement, but the section does not stipulate that any revenue expenses incurred before commencement are not allowable; that the spread over of the total pre-operative expenses over a period of five years is on a reasonable basis and, therefore, should be allowed; and that at any rate rule 5(a) of the First Schedule is not applicable because the claim is not in respect of any expenditure or allowance which is prohibited specifically by the provisions of sections 30 to 43B of the Act. Strong reliance has been placed on the judgment of the Delhi High Court in the case of Shriram Refrigeration Industries Ltd. vs. CIT (1981) 127 ITR 746 (Del) and the judgment of the Andhra Pradesh High Court in Coromandel Fertilizers Ltd. vs. CIT (1984) 148 I....
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....g 30th September 1965 relevant to the assessment year 1966-67. The question was whether the amount was allowable as revenue expenditure for the assessment year 1966-67. The Tribunal decided against the assessee by holding that the expenditure was capital in nature and that even assuming that it could be of the nature of revenue, it can be considered for allowance only in the assessment year 1966-67. On these facts the following two questions were referred to the Delhi High Court for opinion:- "(1) Whether, on the facts and in the circumstances of the case, the amount of Rs.2,39,084/- paid by the assessee to Westinghouse represented expenditure of a capital nature? (2) If the answer to question No.1 is in the affirmative, whether, on the facts and in the circumstances of the case, any portion of the amount is allowable as a deduction in each or either of the two assessment years 1966-67 and 1967-68?" On the first question, the High Court held in favour of the assessee, i.e. that the expenditure was revenue in nature. As regards the second question, the High Court held at pages 762 and 763 as follows:- "The second question referred to us procee....
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.... Ltd. (supra) is authority for the proposition canvassed on behalf of the assessee. 13. The judgment of the Madras High Court in CIT vs. Ennar Steel and Alloy (P) Ltd. (supra) cited on behalf of the Department shows that certain items of expenses which did not fall to be included under section 35D were sought to be included in that section and deduction was allowed accordingly by the Tribunal. The High Court held that this would amount to re-writing the section, which cannot be permitted. The precise controversy that has arisen in the present case was not before the Madras High Court. 14. As regards the argument of the Department that the claim was not made in the original return but was made only in the revised return, there is no prohibition in making the claim in the revised return. An assessee can correct any mistake or omission in the original return by filing a revised return, the validity of which has not been challenged. Therefore, this cannot be held against the assessee. 15. For the above reasons and respectfully following the judgment of the Delhi High Court in the case of Shriram Refrigeration Industries Ltd. vs. CIT (supra), we uphold the ....
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....ble. The Assessing Officer also held that rule 5(b) having been omitted by the Finance Act, 1988 with effect from 01.04.1989 and the assessee having credited the Profit and Loss Account by the profit on the sale of the investment, no exclusion of the same is permissible. In this view of the matter,, he added back the sum of Rs.47,45,859/-. The addition having been confirmed by the CIT(A), the assessee is in further appeal before the Tribunal. 18. We have carefully considered the rival contentions. There is no dispute that under the guidelines issued by the IRDA (Auditor's Report) Regulations of 2002, for preparation of financial statements, the profit on sale of investments is to be credited to the Profit and Loss Account of the insurance company. There is also no dispute that the assessee has credited the Profit and Loss Account with such profit. The question is whether such profit can be excluded and exemption can be claimed. Rule 5(b), as it stood before being omitted from 01.04.1989, was as follows:- "any amount either written off or reserved in the accounts to meet depreciation of or loss on the realization of investments shall be allowed as a deduction, an....
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....ning. We have to ascribe a logical conclusion to the said deletion of sub rule (b) from Rule 5 and the natural meaning is that after the deletion the income described therein is out of the purview of computation of Insurance Business from the First schedule therefore consequently cannot be taxed u/s 44 of I. T. Act. After expressing this view we hereby dismiss the cross objection of the revenue". 19. The aforesaid order of the Pune Bench, which was in the case of a company carrying on general insurance business, was followed by the Mumbai Bench of the Tribunal in its order dated 17.09.2010, in the case of HDFC ERGO General Insurance Company Ltd., in ITA No: 338/Mum/2009 (assessment year 2004- 05) as also in its order dated 30.04.2010, in the case of Reliance General Insurance Co. Ltd., in ITA No.781/Mum/2007 (and other appeals). Copies of these orders have also been filed before us. In these orders it has been held that the profit on sale of investment in the case of an assessee carrying on general insurance business cannot be brought to tax after the omission of rule 5(b) and as per the Circular cited above. Since the controversy before us is identical, respectfully foll....