TaxTMI 
TaxTMI 
2013 (10) TMI 1072
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....r the AY. 2008-09 is main order and orders for other AYs. are based on it. Therefore, first we will decide the grounds raised in the said appeal. We find that re-opening of the earlier years' assessment largely is based on the finding given in the order for the AY. 2008-09. Ground of appeal filed by the assessee for the that AY. (ITA/3004/ Mum/2012)read as under: "The Appellant submits the following grounds of appeal which are independent and without prejudice to one another: Ground No. 1: Taxation of profits from life insurance business On the facts and circumstances of the case and in law, the CIT(A) erred in upholding the assessment order passed by the Deputy Commissioner of Income-tax-1(1)('DCIT') which was not in accordance with section 44 of, read with Rule 2 in the First Schedule to, the Act. He ought to have held that the Appellant should be assessed on a total income of Rs. 239, 95, 21, 874 (loss). Ground No. 2: Basis of computing surplus/deficit as per Rule 2 The Appellant prays that for the purposes of computing the surplus deficit disclosed by the actuarial valuation as per Rule 2 of the First Schedule, the surplus deficit should be computed b....
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.... On the facts and Circumstances of the case and in law, the CIT(A) erred in confirming the action of the DCIT in not allowing disallowance under section 14A of the Act at Rs. 58, 72, 778 as offered by the Appellant, instead of directing the DCIT to compute the same. Ground No. 11: Disallowance of liability towards employee retirement benefits On the facts and circumstances of the case and in law, the CIT(A) erred in confirming the action of the DCIT of not allowing deduction for provision made as per the applicable accounting standard ('AS-15') towards incremental liability of Rs. 270, 32, 488 on account of employee retirement benefits pertaining to earlier years. Ground No. 12: Set off of brought forward business losses and unabsorbed depreciation allowance On the facts and circumstances of the case and in law, the CIT(A) ought to have directed the DCIT to set off brought forward business losses and unabsorbed depreciation allowance of earlier years, as assessed in the relevant years, while computing the total income of the Appellant. Ground No. 13: Applicable rate of tax On the facts and circumstances of the case and in law, the CIT(A) ought to have h....
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....t, 1961 ('the Act'), were not satisfied and therefore, the reassessment order was illegal and bad in law. We would like to tabulate the grounds of appeal for the remaining AYs. for better understanding of the issues involved:- 2. Assessee-company, engaged in the business of Life Insurance. We would like to tabulate details of dates of filing of returns, incomes returned, dates of assessment, assessed incomes, and dates of orders of the CIT(A), for all the AYs. involved, except for the AY. 2008-09:- AY. Dt. of filing of Return Returned Income (Rs. ) Date of assessment Assessed Income Dt. of orders of CIT(A) 2002-03 31. 10. 2002 (-) 21, 24, 32, 066/- 30. 12. 2009 38, 50, 68, 890/- 27. 02. 2012 2003-04 28. 11. 2003 (-) 52, 52, 19, 573/- 24. 12. 2010 35, 53, 78, 120/- 24. 02. 2012 2004-05 30. 10. 2004 (-) 26, 08, 48, 080/- 30. 12. 2009 128, 71, 69, 520/- 28. 02. 2012 2005-06 31. 10. 2005 (-) 36, 06, 38, 799/- 24. 12. 2010 2, 78, 57, 89, 140/- 27. 02. 2012 2006-07 27. 11. 2006 (-) 58, 65, 27, 766/- 29. 12. 2008 498, 30, 11, 000/- 31. 03. 2011 2007-08 ....
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....e of life insurance was accounted by the assessee in Form A- RA, that the actuarial report in the case of the assessee was prepared on the basis of assets in Policy-holders'accounts only, that the taxation of surplus as per the actuarial report was taxation of income of the assessee from the business of life insurance only, that the assessee was earning income from the activities other than the life insurance business i. e. from account of share-holders, that the income from the Share-holders' account had to be taxed separately, that the assessee was not permitted to do any business activity other than the life insurance, that the income in Share- holders'account had to be taxed as income from other sources. He found that assessee had gross income from investments amounting to Rs. 30. 88 Crores, that the expenditure incurred for earning this income was of Rs. 1. 25 Crores, that the Net income in this account was Rs. 29. 62 Crores, that the said income was earned by the assessee in Share-holders' account, that the assessee had prepared two Profit & Loss Accounts, that the first was Policy-holders'account (technical account-Form A-RA), that the second account was ....
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....ersy was whether the surplus of Rs. 138. 17 Crores as declared in Form I (IRDA) Regulation 2000) should be adopted as the surplus or only the incremental surplus disclosed by the valuation balance sheet, that the assessee had not given any explanation to the AO for not adopting the surplus at Rs. 138. 17Crores. Referring the Regulation No. 8 of the IRDA Guidelines, he, held that the revenue account relating to policy holder as on 31. 03. 2008 in Form A-RA revealed a surplus on Rs. 164. 81 Crores, that the P&L Account also called Share-holders' account in Form A-PLrevealed investment income of Rs. 30. 88 Crores and expenditure of Rs. 1. 26 Crores, that there was a surplus of Rs. 29. 62 Crores, that the life insurance companies were mandated to prepare the accounts as per Form A-RA and A-PL besides the balance sheet in form A-BS, that the Hon'ble Apex Court in the case of LIC(51 ITR773)did not postulate any adjustment in assets created by transfer from other account. He directed the assessee the explain as why the surplus on previous year ought to be reduced from the surplus as on 31. 03. 2008. As per FAA, assessee did not file any explanation in this regard. He also observed....
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....138. 17 Crores was to be adopted as the taxable surplus. With regard to basis of comp -uting surplus/deficit as per Rule 2 (ground no. 2. ), he held that the income of the assessee had to be assessed as per the provisions of section 44 of the IT Act from life insurance business on the basis of surplus/deficit determined as per actuarial report submitted before IRDA, that the it had derived income of Rs. Rs. 29. 62 Crores on investment from activities other than life insurance business, that Section 115B provided that the gains from life insurance business were taxable at 12. 5%whereas the other income was taxable at the corporate rate, that the income from share holder account had to be treated as income from business other than life insurance, that same was taxable at 30%. 2. 3. Before us, Authorised representative(AR) submitted that basic question was how to compute income of the assessee and while computing the income from life insurance business what treatment should be given to certain items, that for computing surplus or deficit should have been computed as per Form I in the Fourth Schedule to the Insurance Act, 1938 prior to its amendment by the Insurance (Amendment)Act, ....
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....mputing surplus/deficit disclosed by the actuarial valuation as per rule 2 of the First Schedule. As per the assessee, surplus/deficit had to be calculat -ed in form I of the fourth schedule to the Insurance Act, 1938 prior to its amendment by the Insurance(Amendment)Act, 2002. We find that similar issue had arisen in the case IPLIC (supra). Deciding the matter Mumbai Bench of the Tribunals has dealt the issue as under : 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 schedule with reference to 'other insurance business' did incorporate the IRDA and its Regulations as amended by the Finance Act 2009 w. e. f. 1. 4. 2011 which is as under: "B- Other Insurance Business: Computation of profits and gains of other insurance business. 5. The profits and gains of any business of insurance other than life insurance shall be taken to be....
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....Amendment Act 2002 after incorporation of the relevant schedules in the IRDA Act. Even though the said schedules were omitted from the Insurance Act, 1938, we are of the opinion that as far as Rule-2 is concerned by the principle of 'Legislation by incorporation' unamended Insurance Act, 1938 is applicable and the actuarial valuation has to be made in accordance with the then existing Part-I of the Fourth Schedule and in conformity with the requirements of Part-II of that schedule. Therefore, assessee's contention that the IRDA Regulations even though are applicable to assessee since it has commenced business after the commencement of the IRDA Act, 1999, for the purpose of Rule-2, the actuarial valuation has to be done in accordance with the Regulations contained in erstwhile Fourth schedule Part-I and Part-II. This is what assessee is contending and merging the accounts of Policy-holders' and Share-holders' account and arriving at the actuarial deficit, without taking into consideration the transfer of funds from the Share-holders' account to Policy- holders' account. " Respectfully, following the same we hold that the actuarial valuation has to be d....
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....s have been transferred from Share-holders' account to the Policy-holders' account at the gross level while ignoring such transfer in Share-holders' account, while bringing to tax only the incomes declared in the Share-holders' 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 Share-holders' account is to be taxed as other sources of income. But once the provisions of section 44 of IT Act are invoked anything contained in the heads of income like income from other sources, capital gains, house property or even interest on securities does not come into play and only first schedule has to be invoked to arrive at the profit. Therefore, in our opinion both the Policy-holders' and Share- holders' account has to be consolidated for the purpose of arriving at the deficit or surplus. . . . . . . . . . . . . . . . . We have heard the rival contentions. As briefly discussed while deci....
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....n the case of IPLIC(supra). Holding that transfer of funds from Share-holders' account to the Policy -holders'account did not result in income chargeable to tax, Tribnal, in the matter of IPLIC, (supra), held as under: ". . . . As seen from the orders of the authorities, the 'Total surplus' prepared under Regulation 8 was taken as basis ignoring the Form-I of Regulation 4. While accepting the Ld. CIT DR argument that for the purposes of Life insurance business the act provides for surplus of valuation to be taxed at lesser rate, we cannot accept the argument that surplus is Total surplus including Transfers from share holder's account. 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. . . . . . . . . In our opinion what assessee has done in reconciling the IRDA f....
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....and Share-holders' account pertained to the life insurance business only, that the assessee was not permitted to do any other business, that once assessee was in the life insurance business the computation had to be made in accordance with the Rule-2 as per provisions of section 44, that both the Policy-holders' and Share -holder's account had to be consolidated into one and transfer from one account to another was tax neutral, that the AO had taxed the surplus after the funds had been transferred from Share -holder's account to the Policy-holders' account at the gross level while ignoring such transfer in share holder's account, that as per the provisions of section 44 of Act heads of income like income from other sources, capital gains, house property or even interest on securities did not come into play and only first schedule had to be invoked to arrive at the profit, that both accounts-the Policy- holders' and Share-holders' account- had to be consolidated for the purpose of arriving at the deficit or surplus. We further find that the Hon'ble Bombay Court in the case of IPLIC has also dealt with issue as has held that any deficit in the Shar....
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....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. " Respectfully following the above ground no. 6 is decided in favour of the assessee. 2. 5. 6. Last ground of appeal, related with life insurance business(Ground no. 7) is about taxability of income in Share-holder's account. While deciding the Ground no. 3 we have held that amount disclosed in Share-holder's account (Rs. 29. 62 Crores) is not to be taxed under the head 'income from other sources', but same has to be assessed under the head income from business and profession. We are of the opinion that business carried out by the assessee is governed by the provisions of section 44 of the Act. Therefore, Rs. 29. 62 appearing in Share-holder's account has to be assessed as business income. Ground no. 7 is decided in favour of the assessee. 2. 5. 7. Grounds. no 11 and 13 are also related with the life insurance business of the assessee. First we would take ground no. 11. During the assessment proceedings AO found that the assessee had made provision during the year in the Share-holders'Account ....
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....ciding ground no. 1 to7, we have held that income of the assessee doing the business of life insurance has to be assessed u/s. 44 of the Act r. w. Schedule I of the Act. As the effective ground of computation of income of life insurance has been decided in favour of the assessee. So, issue before us is held to be academic in nature. We are of the opinion that AOs are not allowed to disturb the actuarial valuation, as held by the Hon'ble Apex Court in the case of Life Insurance Corporation of India (supra). Therefore, ground no. 11 is allowed in favour of the assessee for statistical purposes. 2. 5. 8. Ground no. 13 also pertains to the business of Life Insurance. It is about rate of tax applicable in the case of assessee. During the assessment proceedings, as stated earlier, AO held that income under the head Share-holder's Account had to be taxed at the 30% and not at 12, 5%. Assessee filed an appeal before the FAA. Referring to the provisions of section 115B of the Act, FAA held that the total taxable income in the case of a life insurance company could be taken as the sum of the investment income, net of expenses, in the Shareholders' fund taxable @30% and the sur....
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....are allowed. AO is directed to treat them as part of Life Insurance Business and tax them u/s 115B. " Respectfully, following the order of the Tribunal, ground no. 13 is decided in favour of the assessee-company. As a result, all the grounds related with life insurance business of the asseessee-Grounds no. 1-7, 11, 13(total 9 grounds)are decided in its favour. 3. Second effective ground of appeal(Grounds no. 8-10)is about disallowance to be made u/s. 14A of the Act. During the year under consideration, AO found that assessee had received exempt dividend income of Rs. 30. 16 Crores, that the assessee had not made any disallowance as per the provisions of section 14A of the Act. He called for an explanation from the assessee in this regard. After considering the submissions of the assessee, AO held that assessee-company was claiming exemption of dividend income, that as per section 14A of the Act no deduction was allowable for the expenditure incurred in relation to the income not includible in total income, that the expenditure incurred in relation to dividend income needed to be disallowed. He proposed to calculate the expenses inadmissible to section 14A of the Act by fol....
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....s 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 (supra) 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. 4Original 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. Addl. CIT in ITA No. 1447/PN/2007 for the assessment year 2003-04 order dated 31. 08. 2009. This Tribunal in the case of JCIT v. M/s Reliance General Insurance co. in ITA No. 3085/Mum/2008 for the assessment year 2005-06 vide orde....
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....rom 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. 14A, as held in the case of General Insurance Corporation of India v. CIT [1999life insurance business 156 CTR(SC) 425 :[1999life insurance business240 ITR 139 (SC), where -in 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 the AO is deleted. . . . . . . . . . s. 44 applies notwithstanding anything to the contrary contained with....
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....incurred and as claimed in the P&L a/c is treated as expenses incur red in connect ion with the looking after tax-free investment. 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. 1 of the IT Act. Sec. 44 is a non obstinate 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 done 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 Sched....
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.... forward its business losses, other than speculation business losses, for a period up to eight Assessment years for set off against subsequen -t year's business profits. AO rejected the claim made by the assessee. In appellate proceedings FAA held that the AO had not deliberated the issue in assessment order. He directed the AO to determine the brought forward losses of earlier year as per his record and then allow the same, if admissible in accordance to the respective provisions of law. He allowed ground of appeal for statistical purposes. 4. 1. Before us, AR submitted that FAA should have directed the AO to set off brought forward losses and unabsorbed depreciation of earlier years while computing the total income of the assessee. DR submitted that FAA had already directed the AO do needful as per law. 4. 2. We are of the opinion that provisions of section 72 of the Act are very clear in this regard. As per the provisions of said section, assessees are entitled to set off of brought forward business losses/ unabsorbed depreciation allowance as finally assessed in relevant assessment years. FAA found that AO had not dealt with the issue and had directed him to pass orde....
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....of the Act, arose and hence, no advance tax was payable, that section 234B of the Act had no application in the case of the assessee, that once an assessee estimateed bona fide that his income was nil it followed that he was not liable under section 208 and was therefore not liable to pay interest under section 234B of the Act, that the fact that the Appellant acted bona fide in not paying any advance tax was borne out by the return of income filed over the years by the assessee and also by the fact that the initial assessments of the assesseedid not result in any "assessed tax" as defined in section 234B of the Act. He placed reliance on the decision of Mumbai Tribunal in the case of Indian Airlines Ltd. (59ITD 353). He also referred to the judgment of Prime Securities Limited (333ITR464). DR supported the order of the FAA. 5. 2. We have heard the rival submissions and perused the material before us. We find that assessee was filing returns of income for last so many years and it was supposed to calculate advance tax on the basis of such returns. If on the basis of past returns and after considering the income for the year under consideration asssessee arrived at a bona fide co....
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....imination of such negative results gave unrealistic picture and understated the surplus. AO further held that provisions of Sec. 44 r. w. schedule I of the Act provided that surplus worked out by actuarial valuation was to be adopted for computing income from life insurance business, that it did not mean the figure taken by the appointed actuary automa -tically became assessed total income, that schedule I of the Act prescribed that profits and gains of life insurance business would be on the basis of actuarial valuation made in accordance with Insurance Act, 1938, that in the case under consideration the actuarial valuation in respect of sum of policies was resulting in mathematical reserve to be negative, that as a conservative method of accounting the same had been taken as Zero, that it had increased the figure of overall mathematical reserve and accordingly reduced figure of surplus, that the accounting policy followed by the assessee might be in accordance with the regulation prescribed by IRDA, that surplus had been understated by the assessee to the extent of INR. Analysing the provisions of IRDA, he held that issue of negative reserves to be taken as Zero was specific to s....
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....nt of the Hon'ble Apex Court delivered in the case of LIC. (supra). He referred to the case of IPLCI(supra). 6. 3. We have heard rival submissions and perused the material before us. We are of the opinion that treatment given to negative reserves by actuary cannot be disturbed by the AO. Here, it would be useful to understand meaning of negative reserve in simple terms. While making actuarial valuation, requirement of reserve to service insurance policies issued is ascertained. Such reserve (called mathematical reserve or value of liability)is equal to present value of future benefits payable and future expenses to be incurred less present value of future premium receivable. When the present value of future premium is more than the present value of future benefits payable and future expenses to be incurred, this amount becomes negative, known as 'negative reserve'. In simple words, it means that the insurance contracts under consideration do not warrant any provision and is, in fact, an asset. However, in certain circumstances, such as for following IRDA guidelines, insurers may not treat policies as assets and they set any negative reserves to zero. For example, if ....
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....ground no. 1-7 in favour of the assessee . Ground no. 8 is about apportionment of depreciation allowance. Before us, AR submitted that if ground no. 2 was decided in favour of the assessee , ground no. 8 will be academic in nature. As we have already decided ground no. 2 in favour of the assessee , therefore, ground no. 8 is allowed for statistical purposes. Ground no. 9 is about set off of brought forward business losses. While deciding the Ground no. 12 of for the AY. 2008-09 we have adjudicated the said ground against the assessee . Following the same Ground no. 9 stands dismissed. Next Ground pertaining to charging of interest u/s. 234 B of the Act has been decided in favour of the assessee for the AY. 2008-09. Following the same Ground no. 10 is allowed. Last ground of appeal is about reopening of assessment. Before us, AR submitted that the assessee did not want to press the said ground. Therefore, Ground no. 11 stands dismissed as not pressed. 7. 1. In the appeal filed by the AO for the year under consideration only issue is INR. Following our order for AY 2008-09 we decide the issue against the AO. Appeal filed by the assessee is allowed in part and appeal....
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....Grounds of appeal no. 1-10 and 13-14 respectively filed by the assessee for the AY 2008-09. Following the order of that year, we decided above 12(10+2) Grounds in favour of the assessee . Ground no. 12 is about carry forward of losses. Following the orders of the earlier years GOA. 12 is decided against the assessee. 10. 1. Following our order for the AY 2008-09, we dismiss the only ground filed by the AO with regard to INR. Appeal filed by the assessee is allowed in part. AO's appeal stands dismissed. ITA No. 4959/Mum/2011 & ITA No. 5494/Mum/2011(AY. 2006-07) 11. For the year under consideration, except one ground rest of the grounds are covered in favour of the assessee by our order for the year 2008-09. Following our main order (grounds no. 2-10) Grounds no. 1-9 for the year under consideration stand allowed. We find that similarly, grounds no. 12 and 13 have been decided in favour of the assessee by us, while deciding the appeal for the AY. 2008-09. Therefore, both the grounds regarding applicable rate of tax and charging of interest u/s. 234B of the Act stand allowed. Ground no. 11, pertains to carry forward of losses of earlier years. Following our decision fo....
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....allowed to be adjusted against the taxable income. It is not in dispute that the Jeevan Suraksha Fund is a pension fund approved by the Controller of Insurance appointed by the Central to perform the duties of the Controller of Insurance under the Insurance Act, 1938. The loss incurred in the Jeevan Suraksha Fund has been considered by the actuary as a business loss, as per the valuation report as on the last day of the financial year, allowable under section 44 read with the First Schedule to the Income-tax Act, 1961. The fact that the income from such fund has been exempted under section 10(23AAB) with effect from April 1, 1997, does not mean that the pension fund ceases to be insurance business, so as to fall outside the purview of the insurance busi- ness covered under section 44 of the Income-tax Act, 1961. In other words, the pension fund like the Jeevan Suraksha Fund would continue to be governed by the provisions of section 44 of the Income-tax Act, 1961, irrespective of the fact that the income from such fund are exempted, or not. Therefore, while determining the surplus from the insurance business, the actuary was justified in taking into consideration the loss incurre....
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....lier year, appeal of the assessee is allowed in part and the appeal of the AO is dismissed. ITA No. 4960 /Mum/2011 & ITA No. 5493/Mum/2011(AY. 2007-08) 14. Grounds No. 1 to 9, for the year under consideration, are same as grounds no. 2 -10 for the AY. 2008-09. Following our order for that year, grounds no. 1 to 9 are allowed in favour of the assessee. Ground no. 10 and 11 filed by the assessee are identical to the grounds of appeal no. 12 and 14 for the AY 2008-09. Following our order for the year 2008-09, ground no. 11 is decided in favour of the assessee. Ground no. 10(ground no. 12 for the AY 2008-09), related brought forward of losses, is decided against the assessee. 15. Grounds of appeal no. 1and 2 filed by the AO are similar to grounds filed by him for last AY. As we have decided both the grounds against the AO while adjudicating the appeal for that year , so, following the same we dismiss the grounds1-2 filed by him. ITA No. 5591/Mum/2012 & ITA No. 5506/Mum/2012(AY. 2009-10) 16. Ground No. 1 to 7 for the year under consideration are similar to the grounds of appeal filed for the AY 2008-09. Following our order for that year, first seven grounds are decided in....