TaxTMI 
TaxTMI 
2012 (11) TMI 13
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....0 - AY 2005-06: 3. This is an assessee's appeal in which assessee has raised the following grounds: "1. The CIT (Appeals) has erred in not accepting the loss of Rs.150.45 crores returned by the appellant. 2. The CIT (Appeals) erred in holding that the surplus as reflected in Form-I is the taxable income of the appellant. 3. The CIT(Appeals) erred in upholding the taxable income for the year at Rs.98.96 crores by holding that the amount transferred from the shareholder's account to account is not to be reduced from the surplus disclosed in Form-I. It is prayed that the surplus considered for computing taxable income should be after removing the effect of transfer from Shareholder's account to account. 4. The CIT (Appeals) has erred in not accepting disallowance under section 14A offered in revised return of income is on reasonable basis but directed AO to decide the issue afresh". 4. The facts in brief are that assessee is a Public Limited Company registered under the Companies Act, 1956. The Company was incorporated on July 20, 2000 with the object of carrying on Life Insurance Business. T....
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.... shareholder's account should be reduced from the above amount as it is only transfer of capital assets and not income. AO, however, relying on the principles laid down by the Hon'ble Supreme Court in the case of LIC vs. CIT, 51 ITR 773 wherein it was held that the assessment of the profits of an insurance business is completely governed by the rules under the schedules and there is no power to do anything not contained in it. Further he also relied on the judgment of the Hon'ble Bombay High Court in the case of LIC vs. CIT, 115 ITR 45 to come to a conclusion that AO has no power to make adjustment once provisions of section 44 were invoked. Accordingly he took the surplus as declared in Form-I as the basis for computation of income and accordingly arrived at the surplus at Rs.35,86,96,280/-. He also made an addition of deficit from Pension Scheme at Rs.63,09,19,492/- before setting of the brought forward losses. He also made disallowance under section 14A to an extent of Rs.4,42,584/- even though no adjustment was made in the computation of income. 5. The matter was contested before the CIT (A) and assessee made elaborate submissions. The main contention was that Form-I is a re....
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....rovided in section 44 of the Income tax Act and First schedule of Income tax act and more particularly Rule-2 submitted that insurance business was governed by the actuarial valuation and not by the general Profit & Loss A/c prepared in other company. Insurance business is regulated by the Insurance Act 1938 and further by the IRDA Act 1999. As per the Regulations issued by the IRDA which assessee has to follow, as it was incorporated after the legislation of the IRDA Act, it has to maintain the accounts as per the new Regulations and accordingly shown policy holder's account and shareholder's account. There was a negative balance in policyholder's account to an extent of Rs.201.60 crores. The law requires the deficit in policyholder's account should be made good before declaring any bonus or dividend and this deficit should be fulfilled by transferring corresponding amount from shareholder's account. Accordingly during the year, assessee has transferred an amount to the extent of Rs.233.35 crores from shareholder's account to policyholder's account. As the transfer should be supported by assets, assessee has issued shares afresh to the extent of Rs.250 crores and increased the cap....
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....tation of insurance accounts and as per the revised format for the presentation of accounts in the new Regulations under IRDA, the impact of the actuarial valuation is transferred to the revenue account relating to policy holders for the year and the surplus/deficit is disclosed therein. It was further submitted that the earlier formats for presentation of accounts aggregated the results relating to shareholder's and policyholder's and thus the surplus/deficit was including the impact of both. There is a scheme of presentation of accounts currently in force for life insurance companies and the new formats were prescribed for complying with the IRDA Regulations. It was the submission that even though amendment was brought in Rule 5 in First Schedule for General Insurance business to incorporate changes brought by I R D Act no such amendment was brought in Rule-2. Therefore, the manner of taxing the life insurance companies has not been realigned with the changes as prescribed by the IRDA. It was further submitted that there is a deficit of Rs.233,34,76,828/- in the policyholder's account format-A-RA which has been made good by transfer of funds from the shareholder's account. Theref....
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....e decisions of the Hon'ble Supreme Court of India in the case of Mahindra & Mahindra Ltd vs. Union of India & Others (1979) 2 Supreme Court cases 529 given in the context of MRTP Act, 1969 and Bharat Cooperative Bank Mumbai Ltd vs. Cooperative Bank Employees Union AIR 2007 (SC) 2320 12. The learned Counsel also submitted that in case the language of the statutory provision is ambiguous and capable of two constructions, that construction must be adopted which will give meaning and effect to the other provisions of the enactment rather than that which will give none. He referred to the decision of the Hon'ble Supreme Court in the case of Addl. CIT vs. Surat Art Silk Cloth Manufacturers Association 121 ITR 1(SC) to submit that the construction which is in tune with the provisions of the Act can only be adopted and referred to the following from the above said order. "It is true that the consequences of a suggested construction cannot alter the meaning of a statutory provision where such meaning is plain and unambiguous, but they can certainly help to fix its meaning in case of doubt or ambiguity. Let us examine what would be the consequences of the constructio....
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....1 ITR 773 had approved that AO has to arrive at the profits of the insurance business as per first schedule and he was not empowered to make any variation. To that extent, the accounts that were prepared under the Insurance Act, 1938 are to be accepted. However, it was submitted that reliance on the Hon'ble Bombay High Court judgment in LIC vs. CIT 115 ITR 45 is not correct as that judgment was reversed by the Hon'ble Supreme Court in 219 ITR 410. Therefore, it was submitted that AO relied on the over-ruled judgment to deny assessee the benefit of combining the accounts. It was submitted that the rules and provisions has to be implemented by making a harmonious reading of the provisions and internal transfer should be permitted which was made as per IRDA Regulations for which the Income Tax Act was not amended to incorporate the changes. 14. Ld. Counsel also referred to the annual accounts, various forms and Regulations and filed reconciliation statements placed before authorities to explain the rationale of arriving at surplus/deficit as was done by assessee company. 15. In reply the learned DR submitted that there is no relevance of the proceedings initiated under section 2....
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.... clear. It was further submitted that the regulatory provisions for other insurance businesses have taken profit as Profit & Loss A/c as basis for the computation but for the life insurance business, they have taken a different method of calculation based on determination of actuarial surplus/deficit. It was submitted that as far as life insurance business is concerned, the intention of the legislature is not to consider capital or revenue but only to arrive at surplus or deficit. It was further submitted that even though amendment was made to Rule-5, no such amendment was made in Rule-2 of Part-A of first schedule and virtually there was no change from the situation from Insurance Act 1938 to IRDA Act1999. It is very clear that actuarial report is nothing to do with shareholder's but only. 17. Ld.CIT DR further submitted that meaning of actuarial surplus used in Rule-2 is not defined. As per Rule 4 of the IRDA Regulations, actuarial report was abstracted in a statement to be prepared by the actuary as per procedure. In view of this the actuarial report provided in Form-I is the base for the assessment for AO. The Regulations 8 of the IRDA starts as a statement showing total amo....
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....mputed separately from his profits and gains from any other business. Computation of profits of life insurance business 2. The profits and gains of life insurance business shall be taken to be the annual average of the surplus arrived at by adjusting the surplus or deficit disclosed by the actuarial valuation made in accordance with the Insurance Act, 1938 (4 of 1938) in respect of the last inter-valuation period ending before the commencement of the assessment year, so as to exclude from it any surplus or deficit included therein which was made in any earlier inter-valuation period. Deductions 3. Omitted Adjustment of tax paid by deduction at source 4. Where for any year an assessment of the profits of life insurance business is made in accordance with the annual average of a surplus disclosed by a valuation for an intervaluation period exceeding twelve months, then in computing the income-tax payable for that year, credit shall not be given in accordance with section 199 for the income-tax paid in the previous year, but credit shall be given for the ....
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....sessee company was governed by the IRDA Act and its Regulations from its inception. In earlier years attempts were made by Revenue to disturb the Incomes or losses assessed both under Sec. 263 and Sec. 147, as briefly stated in Ld. Counsel's arguments. The incomes and Losses shown by assessee in various assessment years are as under: A.Y. Returned Income/(loss) Surplus/(deficit) as per A-RA Amount transferred from SHA Surplus as per Form I 2001-02 (204,359,146) (206,619,000) - - 2001-03 (854,736,440) 177,434,000 1,241,806,000 - 2003-04 (987,036,885 22,000 1,583,784,000 - 2004-05 (1,742,378,630) (22,000) 2,367,746,000 - 2005-06 (1,505,539,430) (317,487,000) 2,333,474,000 358,696,280 2006-07 (2,005,534,043) 1100,641,000) 2,306,655,000 775,734,930 2007-08 (4,128,758,204) (1,360,152,000) 7,579,972,000 1,426,033,160 2008-09 8,233,771,502) (3,251,153,000) 16,063,495,000 3,029,120,030 21. The dispute in this case is in adopting the amount of surplus or deficit as per actuarial valuation. There is no dispute with method of actuarial valuation. The disput....
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....e surplus or deficit disclosed by the actuarial valuation made in accordance with the Insurance Act, 1938, in respect of the last intervaluation period ending before the commencement of the assessment year, so as to exclude from it any surplus or deficit included therein which was made in any earlier inter-valuation period." Before 1999, companies engaged in the business of life insurance were required to prepare one consolidated account. Section 11 of the Insurance Act, 1938 was amended so as to include sub-sections (1A) and (1B). Subsection (1A) to section 11 provides that every insurer, on or after the commencement of the IRDA Act, 1999, in respect of insurance business transacted by him and in respect of shareholder's' funds, shall, at the expiration of each financial year, prepare with reference to that year, a balance sheet, a profit and loss account, a separate account of receipts and payments, and revenue account in accordance with the Regulations made by the Authority. Section 13(1) provides that every insurer carrying on life insurance business shall, inter alia, in respect of the life insurance business transacted in India, cause an investigation to....
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....balance-sheet. The statutory forms are prescribed by the Regulations. Form A-RA is prescribed for the preparation of the revenue account or the policyholder's' account. Form A-RA reflects the surplus or, as the case may be, the deficit generated in the revenue account for the year ending 31st March. As a result of the Regulations, the petitioner which is engaged in the business of life insurance is required to prepare and maintain two accounts namely, (i) a revenue account of policyholder's, and (ii) a profit and loss account of shareholder's. For the previous year which ended on March 31, 2003, the policyholder's' account reflected a deficit of Rs. 158.37 crores. This deficit was made good by the transfer of an amount of Rs. 158.37 crores from the shareholder's' account to the policyholder's account. This was essentially an internal transfer of funds. Form I which has been prepared by the petitioner in pursuance of the IRDA Regulations of 2000 reflected a nil deficit consequent upon the transfer of an amount of Rs. 158.37 crores from the shareholder's' account to the policyholder's account. The source for making a transfer of Rs. 158.37 crores from the shareh....
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....sp; (viii) Consequently, in determining the profits and gains under section 44 read with rule 2, the loss was computed at Rs. 98.70 crores by aggregating the surplus in the shareholder's' account with the deficit in the policyholder's' account for the purposes of taxation. During the course of the assessment proceedings, letters were addressed to the Assessing Officer specifically in order to clarify the position of the deficit in the policyholder's' account. By its letter dated December 27, 2005, the petitioner clarified that the deficit in the policyholder's' account as reflected by Form A-RA had been met by a transfer from the shareholder's' account. The figures relating to surplus/deficit in Form I were subsequent to the internal transfer of funds. The assessee contended that the transfer from the shareholder's' to the policyholder's' account was an internal adjustment and was tax neutral. Before the assessment proceedings came to be concluded for the assessment year 2003-04, an audit query was raised with reference to the assessment year 2002-03. The audit report dated May 4, 2005 specifically raised a question as to wh....
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....ote appended to the computation of income clearly set out the fact that there was a surplus in the shareholder's' account and that the deficit in the policyholder's' account was met by a transfer from the share holders' account to the policyholder's' account. The petitioner disclosed that in Form I, the surplus/deficit was shown to be nil and submitted that the position reflected in Form I was subsequent to the internal transfer of funds which took place from the shareholder's' to the policyholder's' account. It is after the petitioner had filed its explanation by several letters that the Assessing Officer passed an order of assessment under section 143(3)". 22. Further vide Para 21 (Page 482), the method of accounting and Regulations were further analysed as under: While dealing with the reopening of the assessment for the assessment year 2004-05, the principal question before the court is as to whether there was any tangible material before the Assessing Officer to form a reason to believe that income chargeable to tax had escaped assessment. In the prefatory part of this judgment, a reference has been made to the relevant provisions of the Insurance Act,....
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....rcular clarifies that the transfer from the shareholder's' account can be out of the profit and loss account, balance or reserves in the shareholder's' account or by drawing upon the paid up capital of the insurer. The transfer of funds made from the shareholder's' account to the policyholder's' account is to be irreversible. What the circular emphasizes is that an insurer who intends to declare a bonus has to ensure, in the event that there is a deficit in the policyholder's' account, that the deficit is effaced by a transfer of funds from the shareholder's' account". The Assessing Officer, while reopening the assessment has not put forth any tangible material on the basis of which he could have formed a reasonable belief that income chargeable to tax has escaped assessment. He has merely altered or changed the opinion which was formed during the assessment proceedings". (emphasis supplied) The Hon'ble Bombay High Court on the facts of the case held that reopening is bad in law. In arriving at that decision, the Hon'ble High Court examined the entire scheme of presentation of accounts and arriving at surplus. Therefore not only the Regulations which are....
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....on 55 was enacted, namely, December 27, 1969, being the date of coming into force of the Act, Section 100 of the Code of Civil Procedure specified three grounds on which a second appeal could be, brought to the High Court and one of these grounds was that the decision appealed against was contrary It was sufficient under Section 100 as it stood then that there should be a question of law in order to attract the jurisdiction of the High Court in second appeal and, therefore, if the reference in Section 55 were to the grounds set out in the then existing Section 100, there can be no doubt that an appeal would lie to this Court under Section 55 on a question of law. But subsequent to the enactment of Section 55, Section 100 of the Code of Civil Procedure was substituted by a new section by Section 37 of the Code of Civil Procedure (Amendment) Act, J 976 with effect from February 1, 1977 and the new Section 100 provided that a second appeal shall lie to the High Court only if the High Court is satisfied that the case involves a substantial question of law. The three grounds on which a second appeal could lie under the former Section 100 were abrogated and in their place only one ground....
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.... the incorporating statute and were a part of it. Legislation by incorporation is a common legislative device employed by the legislature, where the legislature for convenience of drafting incorporates provisions from an existing statute by reference to: that statute instead of setting out for itself at length the provisions which it desires to adopt. Once the incorporation is made, the provision incorporated becomes an integral part of the statute in which it is transposed and thereafter there is no need to refer to the statute from which the incorporation is made and any' subsequent amendment made in it has no effect on the incorporation statute. Lord Esher, M. R." while dealing with legislation in incorporation in In re Wood's Estate" pointed out at page 615 : If a subsequent Act brings into itself by reference some of the clauses of a former Act, the legal effect of that, as has often been held, is to write those sections into the new Act, just as if they' had been actually written in it with the pen, or printed in it, and, the .moment you pave those clauses in the later Act, you have no occasion to refer to .the former Act at all. ' ....
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..... In the circumstances, therefore, the repeal of the Punjab Alienation of Land Act of 1900 has no effect on the continued operation of the Pre-emption Act and the expression~, 'agricultural land' in the later Act has to be read as if the definition in the Alienation of Land Act 1900, had been bodily transposed into it. : The decision of this Court in Bolani Ores Ltd. v. State 'of Orissa" also proceeded on the same principle. There the question arose in regard to the interpretation of Section 2(c) of the Bihar and Orissa Motor Vehicles Taxation' Act, 1930 (hereinafter referred to as the Taxation Act). This section when enacted adopted the definition of 'motor vehicle' contained in Section 2(18) of the Motor Vehicles Act, 1939. Subsequently, Section 2(18) was amended by Act 100 of 1956 but no corresponding amendment was made in the definition contained in Section 2(c) of the Taxation Act. The argument advanced before the Court was that the definition in Section 2(c) of the Taxation Act was not a definition by incorporation but only a definition by reference and the meaning of 'motor vehicle' in Section 2(c) must, therefore, be taken to be t....
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....e Legislature should have thought it necessary that these changes should also be reflected in Section 55 which deals with the right of appeal in a totally different context. We fail to appreciate what relevance the legislative policy in 'regard to second appeals has to the right of appeal under Section 55 so that Section 55 should be inseparably linked or yoked to .Section 100 and whatever changes take place in Section 100 must be automatically read into Section 55. It must be remembered that the Act is a self-contained Code dealing with monopolies and restrictive trade practices and it is not possible to believe that the Legislature could have made the right of 'appeal under such a code. dependent on the vicissitudes through which a section in another statute might pass from time to time. The scope and ambit of the appeal could not have been intended to fluctuate or vary with every change in the grounds set out in Section 100. Apart from the absence of any rational justification for doing so, such an indissoluble linking of Section 55 with Section 100 could conceivably lead to a rather absurd and startling result. Take for example a situation where Section 100 might be repealed al....
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....reliminary objection raised on behalf of the respondents against the maintainability of the present appeal: 26. Further in the case of Bharat Co-operative Bank (Mumbai) Ltd vs. Co-operative Bank Employees Union, (supra) this issue was considered by the Hon'ble Supreme Court vide Paras 12 to 29 and held as under: "12. The main question raised for determination is whether the afore-noted amendments to the BR Act, particularly insertion of Section 56 in the new format w.e.f. 1st March, 1966, after the insertion of the definition of "Banking Company" in the ID Act by Act 54 of 1949 will apply mutatis mutandis to the matters governed by the ID Act? 13. As there is no indication in the ID Act as to the applicability or otherwise of the subsequent amendments in the BR Act, the question posed has to be answered in the light of the two concepts of statutory interpretation, namely, incorporation by reference and mere reference or citation of one statute into another. Thus, answer to a rather intricate question hinges on the test whether at the time of insertion of the definition of the term "Banking Company" in the form of sub-section (bb) of Se....
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....dopt The independent existence of the two Acts is therefore recognized; despite the death of the parent Act, its offspring survives in the incorporating Act. Though no such saving clause appears in the General Clauses Act, their Lordships think that the principle involved is as applicable in India as it is in this country." 16. The doctrine of legislation by incorporation and its effect has been dealt with by this Court in a catena of decisions. In Ram Sarup vs. Munshi & Ors. a Constitution Bench held that repeal of Punjab Alienation of Land Act, 1900 had no effect on the continued operation of the Punjab Pre-emption Act, 1913 and that the expression "agricultural land" in the later Act had to be read as if the definition of the Alienation of Land Act had been bodily transposed into it. After referring to what Brett, L.J. said on the effect of incorporation in Clarke vs. Bradlaugh, namely, "where a statute is incorporated, by reference, into a second statute the repeal of the first statute by a third does not affect the second", it was observed as follows:- "Where the provisions of an Act are incorporated by reference in a later Act the repeal of the earlier A....
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....was substituted by a new Section in 1976, which narrowed the grounds of appeal under that Section. In construing Section 55 of the MRTP Act this Court held that Section 100 of the Code as it existed in 1969 was incorporated in Section 55 and the substitution of new Section in the code, abridging the grounds of appeal, had no affect on the appeal under Section 55 of the MRTP Act. 19. The principle laid down in these decisions was reiterated in U.P. Avas Evam Vikas Parishad vs. Jainul Islam & Anr. and lately in P.C. Agarwala vs. Payment of Wages Inspector, M.P. & Ors. It is, therefore, clear from the afore-noted decisions that if there is a mere reference to a provision of one statute in another without incorporation, then, unless a different intention clearly appears, the reference would be construed as a reference to the provision as may be in force from time to time in the former statute. But if a provision of one statute is incorporated in another, any subsequent amendment in the former statute or even its total repeal would not affect the provision as incorporated in the latter statute. 20. However, the distinction between incorporatio....
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....signed to the same. (Also see: P. Kasilingam and Ors. vs. P.S.G. College of Technology and others ). On the other hand, when the word "includes" is used in the definition, the legislature does not intend to restrict the definition; makes the definition enumerative but not exhaustive. That is to say, the term defined will retain its ordinary meaning but its scope would be extended to bring within it matters, which in its ordinary meaning may or may not comprise. Therefore, the use of the word "means" followed by the word "includes" in Section 2(bb) of the ID Act is clearly indicative of the legislative intent to make the definition exhaustive and would cover only those banking companies which fall within the purview of the definition and no other. 23. Moreover, Section 2(bb) has subsequently been amended from time to time by various amendments to include certain specified banks and institutions, which would otherwise not fall within the exhaustive definition of the "Banking Company" in Section 2(bb) read with Section 5(c), 5(b) and 5(d) of the BR Act. It is plain that if the Parliament had intended an expansive interpretation of the original words, then there w....
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....ould be the appropriate government, which admittedly is not the case here. 28. In the light of the analysis we have made of the provision contained in Section 2(bb) of the ID Act, we deem it unnecessary to dilate on the impact of the IDBIC Act on the ID Act. 29. For all these reasons, we have no hesitation in upholding the view taken by the High Court that for the purpose of deciding as to which is the "appropriate government", within the meaning of Section 2(a) of the ID Act, the definition of the "Banking Company" will have to be read as it existed on the date of insertion of Section 2(bb) and so read, the "appropriate government" in relation to a multi-state co-operative bank, carrying on business in more than one state, would be the State Government". 27. Respectfully following the above principles and examining the provisions of IT Act, we are of the opinion that the 'actuarial valuation made in accordance with the Insurance Act, 1938' do mean that the actuarial valuation done in accordance with the Insurance Act, 1938. In arriving at the above decision we have also taken into consideration that Rule-5 in Part-B of the first sched....
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....ce Act, 1938. We are of the firm opinion that the unamended provisions of Insurance Act 1938 were only incorporated into the Income Tax Act as far as life insurance business is concerned. Therefore, AO's action in following the format prescribed under the Regulations of IRDA Act is not in accordance with the spirit of Rule-2 and provisions as made applicable under the Income Tax Act. 29. We also notice that the actuarial report and abstracts under the Insurance Act 1938 has to be prepared vide section 13 of that Act in accordance with the Regulations contained in Part-I of the Fourth schedule and in conformity with the requirement of Part-II of that schedule. Section 13 of Insurance Act 1938( as amended now) is as under: "13. Actuarial report and abstract. (1) Every insurer carrying on life insurance business shall, in respect of the life insurance business transacted by him in India, and also in the case of an insurer specified in sub- clause (a) (ii) or sub- clause (b) of clause (9) of section 2 in respect of all life insurance business transacted by him,(every year) cause an investigation to be made by an actuary into the financial ....
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....ustry number of regulations have been prescribed by the IRDA. One such is, Insurance Regulatory and Development Authority (IRDA) (Actuarial Report and Abstract) Regulations 2000 by which method of preparation of actuaries report and abstracts were prescribed. An actuary is responsible for analysing possible out comes of the types of events that would potentially cost policy holders to make claims against their insurance policies. Insurance companies need to make sure that the money they are charging and collecting from policy holders is adequate to cover the costs of certain claims that might beneficially be made by policy holders as well as their other expenses. In fact, the work that actuaries perform is crucial to an insurance company's ability to remain in business. Actuaries are involved at all stages in product development and in the pricing risk assessment and marketing of the products. Their job involves making estimates of ultimate out-come of insurable events. In the business of insurance the product cost is an abstraction, depending on the timing issues, variability issues and risk parameters. One big function actuaries provide is making reserves to insure that insurance....
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.... Since assessee is having only one business of life insurance, the entire transactions both under the policyholder's and shareholder's account do pertain to the life insurance business only as it was not permitted to do any other business. Once assessee is in the life insurance business, the computation has to be made in accordance with the Rule-2 as per provisions of section 44. Therefore, there is a valid argument raised by assessee that both the policyholder's & shareholder's account has to be consolidated into one and transfer from one account to another is tax neutral. What AO has done is to tax the surplus after the funds have been transferred from shareholder's account to the policyholder's account at the gross level while ignoring such transfer in shareholder's account, while bringing to tax only the incomes declared in the shareholder's account that too under the head 'other sources of income'. In fact while giving the finding that assessee is in the life insurance business only and incomes are to be treated as income from life insurance business, the CIT (A) surprisingly in subsequent assessment years appeals accepted AO's contention that surplus in shareholder's account ....
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....bsp; 02 Non-Par Policies 03 Total 04 Total Business Par Policies 05 Non Par Policies 06 Totals 34. Not only that another format of the Form-I is prescribed in the IRDA recommendations under Regulation 8 in the following format: Statement of composition and distribution of surplus in respect of policyholder's' fund as prescribed in Regulation 8: (1) A statement showing total amount Composition of Surplus; a) Surplus shown under Form I; b) Interim Bonus paid during the inter-valuation period; c) Terminal Bonuses paid during the inter-valuation period; d) Loyalty additions or other forms of bonuses, if any, paid during the inter-valuation period; e) Sum transferred from shareholder's funds during the inter valuation period; &....
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....her the bonus vests immediately on allocation or if not conditions of vesting. Statements of composition of surplus and distribution of surplus in respect of policyholder's' funds: (8) A statement, showing total amount of surplus arising during the inter valuation period and the allocation of such surplus, shall be furnished separately for participating business and for non participating business, with the particulars as mentioned below: Composition of Surplus: (a) Surplus shown under Form I (b) Interim Bonuses paid during the inter-valuation period; (c) Terminal Bonuses paid during the inter-valuation period; (d) Loyalty Additions or other forms of bonuses, if any, paid during the inter valuation period. (e) Sum transferred from shareholder's funds during the inter valuation period; (f) Amount of surplus, from policyholder's' funds, brought forward from preceding valuation; (g) Total surplus (total of the items (a) to (f). Distribution of Surp....
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.... Basically transfers are tax neutral as a credit in one account gets cancelled by debit in other account when accounts are consolidated. What the Rule.2 prescribed was only 'average surplus' arrived by adjusting the surplus disclosed in the actuarial valuation made with regard to the Insurance Act, 1938 in respect of inter valuation period. Assessee in the course of the assessment proceedings has furnished general balance sheet in Form-A which is as under: Form-A General Balance Sheet General Balance Sheet of ICICI Prudential Life Insurance Company Limited as at March 31, 2006 (Amount in Rupees '000) Particulars Mar-05 Mar-04 Particulars Mar-05 Mar-04 Share Capital 92,50,000 67,50,000 Loans 25,225 21,619 Share Application Money - - Investments 3,75,88,023 1,64,46,429 Employee stock option outstanding - - Agents Balances Reserve for contingency Outstanding premiums 84,426 61,287 General Reserve - - Interest, Dividend and Rents outstanding 1,47,531 77,589 Share Premium - - Int. Dividend and Rents accrued but not due 1,86,899 1,....
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.... 1,055 1,098 Other operating Expenses 46,20,211 29,79,714 Registration fees - - Bad Debts Loss transferred to Profit & Loss A/c UK, Indian, Dominion and foreign taxes Transferred from Appropriation A/c Provision for tax Fringe Benefit Tax Profit transferred to Profit & Loss A/c 2,78,28,554 95,97,898 Total Rs. 3,44,07,936 1,35,24,323 Total Rs. 3,44,07,936 1,35,24,323 Form-I - Valuation Balance Sheet has been furnished as under: Form-I Valuation Balance Sheet Valuation Balance Sheet of ICICI Prudential Life Insurance Company Limited as at March 31, 2005 Particulars Mar-05 Mar-04 Particulars Mar-05 Mar-04 Actuarial Valuation Liability 3,44,75,905 1,43,38,641 Balance of fund as shown in General Balance Sheet 2,78,28,554 95,97,898 Surplus Deficit 66,47,351 47,40,743 Total Rs. 3,44,75,905 1,43,38,641 Total Rs., 3,44,75,905 1,43,38,641 Parti....
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.... 38. The above statement furnished is in accordance with the Insurance Act, 1938, therefore, it cannot be stated that assessee returned income is not in accordance with the Insurance Act, 1938. There is no basis for AO to take Form-I 'total surplus' as surplus of the Life insurance business ignoring transfer from shareholder's account. 39. It is also on record that assessee followed the IRDA recommendations and accordingly prepared the actuarial valuation report including the surplus or deficit. However, Rule-2 prescribes only actuarial valuation in accordance with the Insurance Act, 1938. Therefore, AO is duty bound to insist on actuarial valuation in accordance with the Insurance Act, 1938, so as to bring to tax the surplus or deficit. What we notice is that AO, ignoring Rule-2, has relied on the actuarial valuation report prescribed under the IRDA recommendations under Regulation 8 that too at 'Total surplus', which is at variance with the Insurance Act, 1938. Since no amendment was brought to Rule-2 to incorporate IRDA recommendations, we are of the opinion that the action of AO in relying on the IRDA Regulations is not according to the law. Assessee had submitted its acc....
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....rplus in PHA account will be Deficit in SHA Net Deficit 31.74 -222.40 190.66 Page 8 Revenue account (Surplus/Deficit) Page - 9 Profit & Loss A/c (Profit/Loss before Tax) Net Deficit as per the return on income (before claiming exemptions under section 10) Deficit in PHA SHA Income Details as per return before claiming exemptions -201.59 10.93 -190.66 Page 8 - Revenue account (surplus/deficit) Page 9 Profit & Loss A/c (Profit/Loss) before tax. Conclusion: Both scenarios give the same result and reflect the actual deficit as disclosed in the return of income filed (before claiming exemptions under section 10). NOTE Due to excess funding done, the surplus as disclosed by the actuarial valuation is more than the surplus disclosed in the financials: The surplus as per financials Add Excess funding done Surplus as per actuarial valuation 31.74 4.12 35.86 Page 8 Revenue account (surplus/deficit) Page 70 Part of Actuarial Report excess funding disclosed by way of a note (Amount not mentioned) Page 14 - Actuarial Valuation in Form-I 42. In v....
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....r, relied on the orders of AO and the CIT (A) and the fact that assessee itself has offered income disallowing under section 14A. 46. This issue is already decided by the Coordinate Benches in various cases. For the sake of record, the order in the case of General Insurance Corporation of India in ITA No.3554/Mum/2011 vide Para 9 is as under: 9. "Issue No.6 Non applicability of provisions of section 14A. (Modified Ground of Appeal No.3.1 to 3.4 - Original Ground of Appeal No.3.1 to 3.5). The issue is with reference to the applicability of section 14A and disallowance of expenditure in respect of sale of investment which are not taxed. We have heard the rival contentions. We also note that this issue is also considered by the Coordinate Bench in assessee's own case for 2006- 07 vide Para 7 to 9: 7. Grounds of appeal no.4 regarding the expenditure under section 14A. 8. We have heard the rival contentions and perused the relevant record. We note that this issue has been considered and decided by the Pune Bench of this Tribunal in the case of Bajaj Allianz General Insurance Company limited V/s Add. CIT in ITA No.1447/....
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....nd gifts of business of insurance. It being a non obstinate provision, has to prevail over other provisions in the Act. It clearly provides that income from insurance business has to be computed in accordance with the rule contained in the First Schedule. It is not the case of the Revenue that the assessee has not computed the profits and gains of its insurance business in accordance with the said rules. Reliance was placed on the scope of s. 144, as held in the case of General Insurance Corporation of India v. CIT [1999] 156 CTR (SC) 425 : [1999] 240 ITR 139 (SC), wherein their Lordships of the apex Court have categorically held that the provisions of s. 44 being a special provision govern computation of taxable income earned from business of insurance. It mandates the tax authorities to compute the taxable income in respect of insurance business in accordance with the provisions of the First Schedule to the Act. In the light of these, their Lordships of Delhi High Court have held that no quest ion of law, much less a substantial question of law survives for their consideration. In other words, order of the Tribunal has been affirmed. Following the same reasoning, addition made by....
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....r dt. 29th Sept. 2004 bearing ITA Nos. 7815/Del/1989, 3607 to 3609/Del/1990; 5035/Del/1998 and 3910/Del/2000 named as Dy. CIT v. Oriental General Insurance Co. Ltd. [2005] 92 TTJ (Delhi) 300. As seen from the Paras reproduced above on due consideration of the relevant provisions as applicable to resolve this issue a conclusion was drawn that since the Courts have held, s. 44 creates a special provision in the cases of assessment of insurance companies therefore it was not permissible to the AO to travel beyond s. 44 of First Schedule of IT Act. 18. The next common dispute relates to the order of the CIT (A) in sustaining the act ion of AO in al lowing only 50 per cent of the management expenses by invoking the provisions of s. 14A of the Act. The addition is made by the AO on the plea that the provisions of s.14A was inserted by Finance Act, 2001 w.e.f. 1st April, 1962. It is stated that the investments made by the assessee are both taxable as well as tax free. An estimated disallowance of 50 per cent out of the management expenses incurred and as claimed in the P&L a/c is treated as expenses incur red in connect....
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....he view has al ready been expressed by respected Co-ordinate Bench therefore, we have no reason to take any other view except to follow the same. With the result we hereby accept the argument of learned Authorized Representative to the extent that in the present situation the provisions of s. 14A need not to apply while granting exempt ion to an income earned on sale of investment primarily because of the reason of the withdrawal or deletion of sub- r. 5(b) to First Schedule of s. 44 of IT Act. Once we have taken this view therefore the enhancement as proposed by learned CIT(A) is reversed and the directions in this regard are set aside. Resultantly ground No. 1 is allowed consequent thereupon ground No. 2 automatically goes in favour of the assessee". Accordingly, by following the orders of this Tribunal, we decide this issue in favour of the assessee. Therefore, the ground is allowed". Respectfully following the same, we modify the order of the CIT (A) and delete the addition made by AO. The ground and additional grounds are considered as allowed. Revenue Appeal in ITA No.7765/Mum/2010, AY 2005-06 47. The Revenue in its appeal has raised the followi....
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....The assessee alternately submitted that the deduction under section 10(38) in respect of long term capital gain was available. When this issue came up before the CIT (A), the CIT (A) not only rejected the claim under section 10(38) but also considered and elaborately discussed how and why the assessee was not eligible for deductions already allowed by the Assessing Officer in respect of 'interest on tax free bonds' amounting to Rs.3,45,19,352/- under section 10(15) and dividend income amounting to Rs.270,66,46,489/- under section 10(34). He has elaborately discussed this issue from Para 6 onwards and ultimately made an enhancement of income to an extent of Rs.274,11,65,844/- the amount which was allowed by the Assessing Officer as exempt under section 10. The contention of the CIT (A) was that the assessee was not eligible for deduction under section 10, once the incomes are brought to tax under section 44 r.w. Rule 5 of First Schedule to the Income Tax Act, 1961. 8. There is no need to consider the arguments of the CIT (A) and how he has arrived at that conclusion in this order as this issue was decided by the Hon'ble Bombay High Court in favour of the assess....
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.... under the provisions of section 30 to (43B) in computing the profits and gains of a business shall be added back; (b) (.........) (c) Such amount carried over to a reserve for unexpired risks as may be prescribed in this behalf shall be allowed as a deduction". The Assessing Officer has in the reasons for reopening the assessment proceeded on the premise that in computing the profits and gains of business for an assessee who carries on general insurance business no other section of the Act would apply and that the computation could be carried out only in accordance with section 44 read with Rule 5 of the First Schedule. In Life Insurance Corporation of India, Bombay v. Commissioner of Income Tax Bombay City-III, a Division Bench of this Court construed the provisions of section 44 and of the First Schedule. The assessee in that case which carried on life insurance business had made a claim to exemption under section 10(15) and section 19(1). In a reference before the Court, the questions referred i....
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....with rule 2 in the First Schedule is not excluded". This judgment is sought to be distinguished by the Assessing Officer while disposing of the objections on the ground that the decision was rendered in the context of an assessee which carried on life insurance business to whom Rules 1 to 4 of the First Schedule applied whereas in the case of the assessee in this case which carries on general insurance business Rule 5 could apply. According to the Assessing Officer, Rule 5 would not permit any adjustment to the balance of profit as per annual accounts prepared under the Insurance Act, and hence the judgment would not be applicable. The Assessing Officer has clearly not noticed that the decision in Life Insurance Corporation (supra) though rendered in the context of an assessee which carries on life insurance business, followed an earlier decision of a Division Bench of this Court in Commissioner of Income-Tax v. New India Assurance Co Ltd. That was a case of an assessee which carried on non life insurance business. In New India Assurance Co. Ltd. the Division Bench dealt inter alia with the provisions of section 19(7) of the Income Tax ....
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....tion of preference shares, was not liable to be added back in the total income of the assessee for AY 1977-78?. The Supreme Court held that a plain reading of rule 5(a) of the First Schedule made it clear that in order to attract the applicability of the provision the amount should firstly be an expenditure or allowance and secondly it should be one not admissible under the provisions of section 30 to 43A. The Supreme Court held that the sum of Rs.3 crores in that case which was set apart as a provision for redemption of preference shares could not have been treated as an expenditure and hence could not have been added back under rule 5(a). In that context the Supreme Court held as follows: "There is another approach to the same issue. Section 44 of the Income-tax At 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 Income-tax Act and satisfying the requirements of the I....
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....aterial. Consequently, we hold that the reopening of the assessment is contrary to law. The Petition would have, therefore, to be allowed". Respectfully following the above, we hold that the assessee is entitled for exemption under section 10. The enhancement made by the CIT (A) is therefore, cancelled. Ground is accordingly allowed". 49. In view of the above and respectfully following the same, we hold that assessee is entitled to exemption under section 10. Therefore, we do not see any reason to differ from the order of the CIT (A) where he has allowed assessee's claim of exemption under section 10(23AAB) of surplus of Participating Pension Business and also dividend under section 10(34). Accordingly Revenue ground on this issue is rejected. 50. In the result, assessee appeal in ITA No.6854/Mum/2010 for the assessment year 2005-06 is allowed and Revenue appeal in ITA No.7765/Mum/2010 for the assessment year 2005-06 is dismissed. ITA No.6855/Mum/2010- AY 2006-07 51. This is an assessee appeal wherein assessee has raised the following grounds: "1. The CIT (A) has erred in not accepting the loss of Rs.20....
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....reholders account is separate investment account of assessee and incomes are to be taxed under the head 'income from other sources'. An amount of Rs.27,33,67,000, adjusted by assessee in deficit in policy holders account, was brought to tax separately, while considering the Total surplus in Life insurance business. The CIT(A) upheld the same stating that income of Life insurance activity is to be computed as per Form I and since there is income from other activities not included in Form I, same should be subjected to tax as income from other sources. 55. We have heard the rival contentions. As briefly discussed while deciding the issue of taxing surplus, assessee is in life Insurance business and it is not permitted to do any other business. All activities carried out by assessee are for furtherance of Life Insurance business. Maintaining adequate capital is necessary to comply with IRDA( Assets, Liabilities and Solvency margin of insurers)Regulations,2000. Income earned on capital infused in business is integral part of Life Insurance business. The LD. CIT(A) gives a finding that assessee is exclusively in Life Insurance business. However, since he gave primacy to Form I profor....
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....3. On the facts and circumstances of the case and in law, the learned CIT (A) erred in allowing the dividend income of assessee of Rs.2,24,05,934/- as exempted under section 10(34) of the Income Tax Act, 1961 ignoring the facts that dividend income is considered as part of income of Life Insurance Business and is included as an income by the actuary". 57. Ground No. 1 is on the issue of treating negative reserve and disallowing the amount. While completing the assessment of life insurance business the AO, after taking the total surplus from Form-I, reduced the negative reserve amounting to Rs.27.27 crores. Assessee submitted before the CIT(A) as under: - "Method of Determination of Mathematical Reserves - (1) Mathematical Reserves shall be determined separately for each contract by a prospective method of valuation in accordance with sub-paras (2) to (4). (2) The valuation method shall take into account all prospective contingencies under which any premiums (by the policyholder) or benefits (to the policyholder/beneficiary) may be payable under the policy, as determined by the policy conditions. The level of benef....
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....d term of the assets representing those liabilities and the value placed upon them and shall include prudent provision against the effects of possible future changes in the value of assets on the ability to the insurer to meet its obligations arising under policies as they arise. Mandate to Appointed Actuary under regulations Sub-Rule 4 mandates Appointed Actuary to have prudent assumption of all relevant parameters and to include an appropriate margin for adverse deviations that may result in an increase in the amount of mathematical reserves. Sub-Rule 5 defines such margin as "Negative Reserve", which is being disclosed in column 6 of the Form 1. Further, clause (iii) to sub-Rule 5 mandates appointed actuary to provide for negative reserve in mathematical reserve, accordingly not to include in distributable surplus as per Section 49 of the Insurance Act, 1938. Clause (ii) to sub-Rule 5 mandates appointed actuary to include negative reserve in mathematics reserve only at the time of Amalgamation and transfer of insurance business and otherwise. Taxabl....
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.... for 100% depreciation they are written off. The CIT(A), after considering the submissions, accepted the contention as under: - "19. The appellant has to prepare its accounts as per the formats prescribed by the IRDA under the Insurance Act, 1938. These accounts have accordingly been prepared by the appellant and have been subject to statutory audit. Further, the accounting policy of claiming 100% depreciation in its financial statements has been consistently followed by the appellant and has also been duly accepted by the IRDA. The appellant has stated that the assets on which depreciation has been claimed have been initially capitalized in the books and then 100% depreciation has been claimed on these assets. Taxation of Life Insurance is presumptive taxation with only the surplus as disclosed by Form I being subjected to tax. In my view, as per the provisions of law only those adjustments which are expressly not prohibited under section 44 of the Act could be made. Consequently depreciation which has been debited in the audited accounts as per the consistently followed and accepted accounting policy need not be disallowed." 62. After considering the riva....
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....4/Mum/2010 above and for the detailed reasons stated there in the grounds are allowed. AO is directed to modify the order accordingly. 66. Grounds No. 4 & 7 on the issue of treating the income in shareholders account as income from other sources. This issue is already decided in grounds No. 4 & 7 in ITA No. 6855/Mum/2010 for A.Y. 2006-07. For the reasons stated therein vide paras 54 & 55 we direct the AO to treat the income in shareholders account as part of life insurance business only. Grounds are allowed. 67. Ground No. 6 pertains to the issue of disallowance under section 14A and assessee also raised additional ground on the reason that section 14A is not applicable once incomes are assessed under section 44. This issue is also considered in A.Y. 2005-06 in ITA No. 6854/Mum/2010 in ground No. 4. For the reasons stated therein, following the above, this ground and the additional ground are allowed. AO is directed to do accordingly. ITA No.7767/Mum/2010 - A.Y. 2007-08 68. The Revenue in this appeal has raised the following two grounds: "1. On the facts and circumstances of the case and in law, the learned CIT (A) erred in deleting the addition ma....
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.... the alternate plea that in an event the income in policyholder account is computed after considering transfers from shareholder's account to account, then income in shareholder's account should be computed by allowing a corresponding deduction of transfers to policyholder's account. 6. Section 14A is not applicable to insurance companies as this section contemplates to restrict the deductions as allowable under the Act which are contained under section 28 to 43B of the Act. Section 44 creates a special exception to the applicability of these provisions in the cases of insurance companies and therefore, section 14A is not applicable to insurance companies. 7. The CIT (A) has erred upholding that the amount of disallowance as computed by AO under section 14A of the Act is appropriate ignoring the amount offered by the Appellant under section 14A in return of income. 8. The CIT (A) has erred in confirming that the income in the shareholder's account is taxable at the normal corporate rate of tax instead of rate specified in section 115B of the Act." 72. Grounds No. 1,2,3 & 5 are on the issue of actuarial surplus. Th....