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2018 (1) TMI 845
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....he facts and circumstances of the case and in law, the Ld. C1T(A) erred in holding that the profit disclosed by the Appellant in the Shareholder's Profit and Loss Account (Form A-PL) was not the profit of the life insurance business of the Appellant and consequently, erred in holding that the provisions of Section 44 of the Act read with the First Schedule thereto do not apply to the said profit. 3.That on the facts and circumstances of the case and in law, the Ld. CIT(A) erred in not appreciating the Appellant's contention that its income was to be computed taking into account the surplus of the actuarial valuation done in accordance with the Insurance Act. 1938 as represented in Form I ('Old Form I"). 4. That on the facts and circumstances of the case and in law. the Ld. C1T(A) erred in making an enhancement of Rs. 42,18,54,000 to the taxable income of the Appellant by considering the amount appropriated as Funds for Future Appropriation ("FFA") as part of the actuarial surplus being liable to tax under Section 44 read with Rule 2 of the First Schedule of the Act. 5. That on the facts and circumstances of the case and in law. the Ld. CIT(A) ....
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....0(34) of the Act with respect to aforesaid dividend income. However, the assessee had inadvertently not claimed the said exemption in the Income-tax and, therefore, raised this ground. It was contended that since the said ground is legal ground and no facts are to be investigated, therefore, the said ground can be admitted in view of the decision of Hon'ble Supreme Court in the case of National Thermal Power Co. Ltd Vs CIT 229ITR 383 (SC) and Jute Corporation of India Ltd. 187 ITR 688.. Further, reliance was also placed in the case of Ashok Vardhan Birla vs. CWT 208 ITR 958, wherein the Hon'ble Bombay High Court in the context of Wealth tax Act, has observed that the powers of the appellate authorities are the same as the powers of the assessing authority. Additional grounds can be entertained so long as they relate to the subject-matter of the proceedings which were before the Assessing Officer or before the appellate authority. The learned DR, on the other hand, relied on the decision of Hon'ble Bombay High Court in the case of Ultratech Cement Ltd. vs. Additional CIT in ITA 1060 of 2014, dated 18th April 2017, and on that basis contended that the ground taken by the assessee is ....
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....ia Limited and New York Life International Holdings Ltd. Max Life is an Indian insurance company and has been allowed a life insurance business license by the Insurance Regulatory and Development Authority (IRDA) as it fulfills the criterion laid down in section 2(7A) of the Insurance Act 1938. For the impugned assessment year the assessee filed its income tax return on 08.10.2010 declaring 'nil' income. Subsequently, the assessment was made u/s. 143(3) at an income of Rs. 167,934,800/- by making the following additions: S. No. Particulars Amount (in Rs. ) 1. Profit from sale of investment 71,043,000 2. Provision for bad debts 2,160,000 3. Penalty/ Fines paid 164,000 4. Short deduction and payment of taxes deducted at source 69,565,300 5. Donation paid 25,000,000 6. Share issue expenses 2,500 Total additions 167,934,800 7. The assessee went in appeal before the CIT(A). The CIT(A) deleted the addition in respect of the sum of 71,043,000/-, Rs. 69,565,300/- and Rs. 1,64,000/- but enhanced the addition of Rs. 21,60,000/- to Rs. 24,18,300/- i.e. by Rs. 1,86,24,61,000/- consisting of Rs. 42,18,54,000....
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....is pointed out that under the erstwhile Insurance Act, 1938, life insurance companies were preparing/submitting to the Controller of Insurance, the following key account statements (a) Consolidated Revenue Account [Form G], (b) Summary and Valuation of Policies [Form H] (c) Valuation Balance Sheet [Form-I] notified under the relevant schedules of the said Act. The consolidated Revenue Account was prepared without segregating income/ expenses for policyholders as well as shareholders. It was further stated that IRDA, the insurance regulator, has made specific rules for presentation of insurance accounts as prescribed in IRDA (Preparation of Financial Statements and Auditor's Report of Insurance companies) Regulations 2002. Under these norms, Profit & loss of insurance company is divided into a technical account (Policy holders account in Form A-RA) also called as revenue account and non-technical account (shareholder's account represented as Form A-PL) also called Profit and loss account. The technical account deals with all the transactions relating to and includes income from premium and expenditure in relation to the Policyholders account and rel....
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.... 11. With regard to the scope of section 44, reliance was placed on the decision of Hon'ble Bombay High Court in Life Insurance Corporation of India vs. CIT 119 ITR 900. Our attention was also invited to the decision of Hon'ble Supreme Court in the case of General Insurance Corporation of India vs. CIT 240 ITR 139. Thus, it was contended that on a combined reading of the provisions of the First Schedule of the Act and the filing requirement laid out under Section 11 of the Insurance Act, the taxable surplus /deficit of a company in the business of life insurance is represented by the annual surplus/ loss disclosed under the audited accounts filed with the IRDA. It is further submitted that the AO have completed the tax assessments of the assessee upto FY 2012-13 and CIT(A) has passed orders upto FY 2008-09 basis adopted approach by the assessee. It is submitted that if the taxable surplus had been determined in accordance with old Form H (Consolidated Revenue Account), Form I (Valuation Balance sheet) along with the other attendant statements, the results would have been same as per the approach currently followed by the assessee. 12. The learned AR submitted before us that th....
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....ibunal was challenged by the Revenue before the Bombay High Court raising amongst several questions, the following question of law: "8) Whether on the facts and in the circumstances of the case and in law, the Tribunal is correct in allowing relief to the assessee by holding that surplus available in Share Holders Account is not to be taxed separately as "income from other sources" and at the normal corporate rate and holding that surplus from Share Holders Account was only part of income from insurance business arrived at after "combining" surplus available in Share Holders Account with the surplus available in Policy Holders Account and then and taxing this 'net surplus' arrived at, at the rate specified u/s. 115B of the Act?" 15. Although Hon'ble Bombay High Court admitted the appeal of the Revenue on other substantial questions of law, but with respect to the aforesaid question, the Bombay High Court in the case reported as CIT vs. ICICI Prudential Insurance Co. Ltd. : 242 Taxman 159 did not admit the Revenue's appeal. When a query was raised whether any SLP has been filed, the learned AR was fair enough to concede that the SLP of the Revenue has been ad....
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....determination of income under the head "profits and gains of business or profession", section 145 of the Act provides that the income of the assessee has to be determined in accordance with the method of accounting consistently and regularly followed. The assessee is regularly and consistently following aggregating / consolidating, both, the policyholders' and shareholders' account for purposes of arriving at the deficit / surplus from the life insurance business is not only in accordance with law as held by the Mumbai bench of the Tribunal in the case of ICICI Prudential Insurance (supra) but has consistently and regularly been followed and accepted by the Revenue over the years. Therefore, it was contended that on the principle of consistency the Revenue cannot discard the aforesaid method of determination of taxable income, which has been accepted by the Revenue consistently, without there being any change in facts or in law. In this regard reliance was placed on the decision of Hon'ble Supreme Court in the case of Radhasoami Satsang Saomi Bagh vs. CIT 193ITR 321 which at page 328 following the passage from Hoystead v. Commissioner of Taxation 1926 AC 155 (PC) is mention....
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....er, liability for the present value of future bonuses is an actuarially determined liability which is also considered at the time of determining "Net Liability under business" as per earlier Form H; separately, the provision for future bonus liability is expressly included in the incremental valuation liability, i.e., change in valuation of liability against life policies in force. It was submitted that even when there was a deficit in the policyholders' account in the initial years, the funds have to be transferred from the shareholders' account in order to declare bonus on the participating policies, which is being done based on the advice of the Appointed Actuary. Reference is made to a sample insurance policy and the terms and conditions attached thereto. The relevant conditions are reproduced under: "Benefits 7.1 Subject to the provisions of section 8 (Suicide Exclusion), on the occurrence of the Insured Event, the Company will pay the following benefits (the "Benefits"): (a) the Sum Insured; and (b) the accrued bonus. 12. Policy Holder Bonus and Bonus Options No bonus is payable for the first two Policy ye....
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....of bonus declared, which the assessee is mandatorily bound to declare in terms of the contract of insurance in respect of participating policies, cannot be held back by the assessee and has to be transferred to the account of the policy holder. Therefore, such bonus is ascertained liability accrued to the assessee while determining the acturial surplus and such bonus has to be taken into account while determining the actuarial surplus, subject of taxation under section 44 of the Act read with the First Schedule thereto. It was submitted that "actuarial surplus" has not been defined in the Insurance Act/IRDA Act. Its meaning therefore has to be gathered from the ordinary commercial principles governing life insurance business and relevant rules, guidelines and norms governing actuarial valuation of life insurance contracts. In this regard attention was drawn towards the observation of the Mumbai bench of the Tribunal in the case of ICICI Prudential Insurance Co. Ltd. (supra) as under: " ... An actuary is responsible for analysing possible outcomes of the types of events that would potentially cost policy holders to make claims against their insurance policies. Insurance com....
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....The deductibility of an item would not depend upon treatment / presentation in the accounts but with reference to the provisions of the Act. Since payment of bonus is a contractual obligation in terms of the clauses of the outstanding par policies, the amount of bonus declared is an accrued and ascertained liability deductible in computing profits from the life insurance business. It was further submitted that up to A.Y. 1976-77, while there were two methods for calculating profits and gains of life insurance business, a specific deduction was allowed of 80% of the amount paid to or reserved on behalf of the policyholder. The Finance Act, 1976 amended the First Schedule to the Indian Income-tax Act, deleting Rule 3. 21. Further, our attention was also drawn towards Explanatory Notes to the Finance Act, 1976(specially para 40.20) explained the purpose of the amendment and clarified that no further deduction would be permitted for amount paid or reserved on behalf of the policyholders. Further he contended that the amendment made by Finance Act 1976, cannot be read in a manner so as to take away the right of an assessee carrying on life insurance business to treat bonus declared a....
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....likely payouts on that account in respect of the contracts of life insurance already in force. At this juncture, the learned AR referred to the matching principle and on that basis he contended that the premiums earned have to be off-set by the estimated liability to make available future benefits, as actuarially declared. Such provision in the form of FFA represents in essence, provision for future bonuses. The same is in the nature of an ascertained but unallocated liability, which has necessarily to be taken into account while computing actuarial surplus. The liability of the assessee to make available the stipulated benefits to a particular insured may be contingent, such liability is definite and certain towards all insured taken together. In addition to the actuarial reserves, the assessee keeps aside a part of excess in participating funds as FFA for declaring or smoothening bonuses in future. It represents policyholders' reasonable expectation of future bonus on account of performance participating funds over the years. Thus, it was contended that FFA, in this view represents provision for a definite and ascertained liability, which is a necessary charge on the profits ....
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....ty. Accordingly the High Court has answered the question in the negative, that is, in favour of the Revenue and against the assessee. .... ...." While answering the question in the affirmative, the Apex Court laid down the following dictum of law : "The law is settled if a business liability has definitely arisen in the accounting year, the deduction should be allowed although the liability may have to be quantified and discharged at a future date. What should be certain is the incurring of the liability. It should also be capable of being estimated with reasonable certainty though the actual quantification may not be possible. If these requirements are satisfied the liability is not a contingent one. The liability is in present though it will be discharged at a future date. It does not make any difference if the future date on which the liability shall have to be discharged is not certain." It was pointed out that while coming to the aforesaid conclusion, the Court took note of the principles laid down in the case of Metal Box Co. of India Ltd. Vs. Their Workmen 73 ITR 53 wherein the Apex Court allowed provision for gratuity payable on termination of employees....
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....pects that need to be satisfied in order that the provision made is not regarded as a contingent liability, and hence not deductible in computing business profits: (i) the provision relates to present obligation; (ii) it arises out of obligating events; (iii) it involves outflow of resources; and (iv) it involves reliable estimation of obligation. It was pointed out that the ratio laid down by the Apex Court in the case of Rotork Controls (supra), has been applied by Hon'ble the Delhi High Court in the case of CIT vs. Whirlpool Of India Ltd. 242 CTR 245 where deduction for incremental warranty provision made in the relevant previous year was allowed, based on actuarial valuation, after taking into consideration the existing warranty provisions vis-a-vis the expected claims that might be received with respect to products sold and covered under warranty. 24. Thus, it was contended that FFA being provision for expectation of future bonuses and its smoothening satisfies all the four parameters above, inasmuch as the obligation to make available future benefits arises out of preexisting contracts of insurance in respect of which premiums h....
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....d by overriding title. Dismissing the appeal of the Revenue, the Supreme Court held that realizations made by the assessee from its customers towards dharmada was being validly earmarked for charity or charitable purposes, could not be regarded as assessee's income chargeable to tax. Reliance was also placed on the decision of Hon'ble Allahabad High Court in the case of U.P. Bhumi Sudhar Nigam vs. CIT 280 ITR 197 (All ) for the proposition of the law of diversion of income by overriding title. It was pointed out that recently, Mumbai Bench of the Tribunal in the case of Addl. CIT vs. Mumbai International Airport P. Ltd. 184 TTJ 229 (Mum) held that passenger service fee collected by the assessee airport operator from passengers was not in the nature of income and alternatively diverted by overriding title, on the ground that the amount was collected with the clear understanding and stipulation that the same was meant for the security agencies. 27. Reliance was also placed on the recent judgment of the Hon'ble Supreme Court decision in the case of CIT vs. Modipon 87 taxmann.com 275 (SC) wherein it was clarified that amounts deposited in the Personal Ledger Account ("PLA") ....
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....t appears that there was no change in the rate of tax for the assessment year 1983-84 with which we are concerned. The question, therefore, is only with regard to the year of deduction and it is a pity that all of us have to expend so much time and energy only to determine the year of taxability of the amount. 19. Be that as it may, we answer the question in the negative, in favour of the assessee and against the Revenue" It was further pointed out that on the ground of consistency, the Revenue is not entitled to disturb the consistent and accepted history of the case wherein the amount standing to the credit of FFA in the earlier years has not been treated as part of the actuarial surplus liable to tax, in terms of section 44 of the Act read with Rule 2 of the First Schedule thereto. 29. Thus, it was contended that on the basis of the above referred decisions that if the assessee has discretion in the manner and timing of declaration of (future) bonuses, would not result in the FFA representing provision for future payouts to policyholders being treated as part of income of the assessee, when there is a legal antecedent obligation to spend such amounts for payment t....
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....wances as stipulated in ground nos. 6,7 & 8. Therefore, the additions in respect of these disallowances must be deleted. 32. The learned DR also went on to explain the brief history of taxation of the Insurance companies by referring various provisions of Income tax Act, Insurance Act and IRDA as pointed out by learned AR also and stated that in the case of Insurance companies carrying on life insurance business, there are two separate funds, the shareholder's fund and the policyholder's fund. Unlike in other industries shareholder's fund does not play an active role in running the business and remains invested. It was contended that Total Income of life Insurance companies is equal to (Investment Income - Expenses) of Shareholder's funds + Profits and Gains of life insurance business. 33. Further it was submitted that globally the Profits and Gains of life insurance business (Policy Holder's funds) are computed by two methods a) Investment Income - Allowable Expenses = Net Income b) Investment Income + Premium Income + Miscellaneous Income - Allowable Management Expenses - Payments to Policy Holders - Increase in liability = Valuation Su....
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....was simplified with the insertion of section 115B to the Finance Act 1976, which provided that the Profits and Gains of life insurance business shall be taxed at 12.5 % of Gross Valuation Surplus, rather than at 52.5 % (excluding surcharge) earlier and remaining income shall be taxed at normal rate of tax. Rule 2 of the First Schedule was amended and it provided that only the Gross Valuation Surplus would be taxed. Adjustment u/s 30 to 43 A, Computation under the Income from House Property, rules of profits/loss from realization of investment and Rule 3 were omitted. 35. Prior to amendment i.e. in A.Y. 1976-77, the Profits and Gains of life insurance business were taxed at 52.5 % (excluding surcharge). As per Life Insurance Corporation Act, 95% of its valuation surplus has to be allocated to policyholders. This means that {100 - 80% of 95} % i.e. 24% of Valuation Surplus was to be taxed at 52.5 %. If this is applied to whole surplus, it will give that valuation surplus was to be taxed @ 12.6%. Therefore, in other words Net Valuation Surplus was to be taxed at 52.5 % OR the Gross Valuation Surplus was to be taxed at 12.6 %. This was the rationale of withdrawing deduction of alloc....
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....efore, the scope of enhancement in the decisions pertaining to the period after 01.06.2001 is much wider. Prior to 01.06.2001 the CIT (A) could set aside an assessment order for de-novo assessment in which everything was open before the Assessing Officer. It was in this background that there were certain decisions holding that in case of new sources of income (which is not the case in present appeal) the CIT (A) should remand [set aside] the matter to the ITO to deal with the same rather than enhancing (Reference 161 ITR 82)]. After 01.06.2001, the word "set aside" has been removed, so that the assessments attain finality at the first appellate level. Therefore, the scope of enhancement gets further increased after 01.06.2001. Any contrary interpretation will create a situation, wherein the CIT (A) can neither set aside not enhance, but the Revenue can move before ITAT for setting aside the matter and Hon'ble ITAT may set aside to the Assessing Officer for de-novo assessment. The powers to set aside an issue to the Assessing Officer for de-novo assessment by the Tribunal is well settled. However, if CIT (A) cannot enhance, it would restrict the powers of Hon'ble ITAT to set....
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....has itself added Royalty paid and debited in this account in the computation of Income, there by accepting that normal provisions of the act apply to this account. Even old form 'G' debits profit transferred to P & L Account and Credits the loss transferred to P & L Account, thereby establishing that P & L Account was independent of forms 'G', 'H' and 'I'. 40. As regards the decisions relied upon by the assessee, the factual and legal aspects of the present appeal as discussed in the order of CIT(A), the learned DR submitted that none of the decisions relied upon are applicable. They have not discussed or considered all the factual cum legal aspects of this appeal. Therefore, those decisions do not apply in present case. Reliance is also placed on the decisions in the case of Vinay Extraction (P) Ltd (271 ITR 450), Iskraemeco Regent Ltd (331 ITR 312), Blue Star Ltd ( 217 ITR 514) and ITA No 3451/Ahd/2014 dated 13.11.1017(ITAT 'A' Bench ITAT) which deal with the issue of binding nature of decisions. All the decisions relied upon by the assessee are Sub-Silentio as far as the issues involved in this appeal are concerned. Some decisions are i....
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.... insurance companies and general insurance companies. General insurance is short term insurance and often year to year basis. So, the concept of actuary valuation of present value of long term liabilities does not have any role to play in general insurance. Sub-section 7 of section 64VA (as amended by IRDA Act 1999) also talks of Actuary for Life Insurance Business and Auditor for General Insurance Business. Thus, it was submitted that the accounts of General Insurance Business are maintained as per normal accountancy principles subject to certain restrictions in corresponding insurance regulations. This is similar to the provisions of section 115JB which talks of accounts to be maintained as per Company Law. As per Rule 5, profits and gains of non-life insurance business is taken to be profits disclosed in the annual account, copies of which were required to be furnished to the Controller of Insurance under the Insurance Act, 1938 (4 of 1938), subject to adjustments for unexpired risk and disallowances under section 30 to Section 43B. The Insurance Act, 1938 was amended in 1999 and the Insurance Regulatory Development Authority (IRDA) was created. In the financial year 2001-02, IR....
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....e arising from life insurance business and not assessable under the head income from other sources. [Not relevant in this appeal as far as rate of taxation is concerned, as there is loss in Share Holder's A/c for other issues], He relied on the order of CIT(A) and submissions made in this appeal. (e) Adjustment of total surplus as per form I on account of negative reserves is not permissible as AO has no power to modify the amount of actuarial valuation in view of the decision of Apex Court reported in 51 ITR 773 in the case of LIC. (No such Ground is taken there in present appeal) (f) Adjustment on account of depreciation cannot be made by AO. (No such Ground is taken there in present appeal) (g) Old form I is to be considered for actuarial surplus and not new form-1.(This is not relevant as far as enhancement on account of FFA and surplus allocated to policy holders is concerned). Thus, it was contended that except issue in above para (d) which is relevant only for ground no. 2(legal), ground no.6 (Rs. 2,41,83,000), ground no 7. (Rs. 2,50,00, 000) and ground no 8 (Rs. 2,500), no other issue is relevant. 47. Without prejudice to the above, l....
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....fferent meaning than what is normally understood and the same interpretation has to continue for the purpose of section 44 and first schedule of Income Tax for harmonious construction. All these submissions are based on written submissions dated 11.12.2017, which were also brought to our knowledge. 50. It was clarified that submissions filed on 24.10.2017 and submissions made here only contain synopsis of the order of CIT(A) and written submissions of the Revenue. The annexures thereto mainly consist of relevant pages of Income Tax Act, Insurance Act, CBDT circulars, case laws and annual accounts of the assessee, which have been reproduced in the order of CIT(A) also, for ready reference, though the same could have been filed during the course of hearing also. So, it does not contain any factual evidence in the form of any statement, document or any other paper and does not fall under the definition of Paper Book under ITAT Rules. 51. Subsequently, the learned DR made following written submissions dated 12.12.2017: "1. At the outset, the Revenue wishes to submit that assessee raised following specific grounds related to section 44 of the IT Act before the....
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....51(2) vide notices/order sheet dated 23.9.2016, 24.10.2016 and 4.11.2016. The order was passed on 7.11.2016 after several hearings since the first hearing. The records of proceedings and notices issued have been reproduced in the order of CIT(A). So the principles of natural justice were also complied with. 3. As discussed from para 8 onwards of the order of CIT(A), the taxation of life insurance companies needs to be explained first. The taxation of life insurance companies in India has gone through several changes over the last hundred years. Globally, there are two methods of assessing taxable income of life insurance business. In life Insurance companies, these are two funds, the shareholder's fund and the policyholder's fund. Unlike in other industries share holder's fund does not play an active role in running the business and remains invested. The profits and gains from life insurance business can be computed by two methods. 3.1 In the first method, the profits and gains of life Insurance business is defined as income minus expenses or net income. The income here means, the investment income only. Not all the expenses are allowed as deduction. ....
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....ck to policy holders. Since then, representations were made by respective associations and the manner of assessments of life insurance companies underwent several changes. After nationalization of life insurance business, we only had Life Insurance Corporation of India. 3.6 Prior to A.Y. 1977-78 the profits and gains of life insurance business were taxed at 52.5 % (excluding surcharge). The profits and gains of life insurance business were taken a greater of the Net Income (First Method) and Valuation Surplus (Second Method). While computing valuation surplus a deduction of 80 % of valuation surplus allocated to policy holders was also allowed Regarding other expenses also ceiling was prescribed. The allowable deduction of valuation surplus allocated to policy holders was 50 % earlier. Income Tax Investigation Commission appointed in 1948 had rejected the demand of industry for raising the limit of deduction of valuation surplus allocated to policy holders from 50 % to 100 %. However, Income Tax Act 1961 [Rule 2(1) of first schedule] raised it to 80 %. 3.7 The rate of 52.5 % was lower than corporate rate of taxation of 55 % at that time and LIC of India was the on....
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.... circular No. 202 dated 5-7-1976 as well which clarities that after introduction of section 115B, Bonus to policy holders is not an allowable deduction. 3.9 A paper by R. Ramakrishnan, Consultant Actuary published in "The Actuary India October 2008" also explains the history of taxation of Life Insurance Business in India. Relevant pages of that are also enclosed for reference. 4 . For the year under appeal, the taxation of insurance companies is governed by section 44, read with First Schedule of the Income Tax Act. As per the same, the profits and gains shall be the valuation surplus at the end of the year after excluding from it any surplus or deficit included therein of earlier assessment years. Thought, the First Schedule talks of average surplus, that is no longer relevant as actuarial valuation is now done every year as against once in three to five years earlier. 4.1 The Apex Court in the case of Life Insurance Corporation of India, reported in 51 ITR 773 held that ITO has no power to make any adjustment in actuarial valuation, except u/r 3(b) with the permission of Controller of Insurance. This decision has been relied on by the Apex Court in the....
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....by the regulations made by the Authority". 4.4 So the actuary report as per new regulations has to form basis of taxation. However, as explained from para 7.1 onwards of the order of CIT(A), and more particularly para 9.2.1 onwards, there is no fundamental difference in old and new reports in the sense that both lead to same results. 4.5 Without prejudice to the same Para 11 of the order of CIT(A) is also reproduced herein under; "For reference para I.I of appellants reply dated 05.10.2016 is reproduced here is under:- 1.1 it is respectfully submitted that the taxable income of a life insurance company since 1976 is to be determined on the basis of the earlier Revenue Account and Valuation Balance Sheet (erstwhile Insurance Act, 1938) which account for all incomes and outgoings of the life insurance company including premiums, dividends income, interest and the associated outgo. It is further respectfully submitted that the current reporting requirement (in Form A-RA and A-PL) is pari materia to the old reporting requirement i.e. earlier Revenue Account and Valuation Balance sheet ('Form I'). Therefore, the assessee has determined his tax....
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....sp; 853984(000) Less: Incremental FFA 457438(000) Income as per computation of income as per appellant 400506(000) 13.4 From the above reconciliation it is apparent that the dispute is not related to old form G, H, I or new form I, H, A-PL and A- RA. The dispute is only about following two items Incremental FFA (Rs.62,29,38,000- Rs. 16,94,60,000) of Rs. 45,34,78,000/- Allocation of surplus as bonus to policy holders of Rs.143,28,62,000/- This is so as once we aggregate Share Holder's Account (A-PL) and Policy Holder's Account (A-RA), the transfer from A-PL to ARA of Rs. 58,62,00,000/- cancels out and the issue of its reduction become irrelevant. Since A-RA shows the surplus after allocation of bonus to policy holder's account, the dispute of Rs. 143,28,62,000/- remains. Moreover, since, FFA has not been considered as a part of taxable income the issue of Rs. 45,34,78,000/-also remains. If we take profits of life insurance business as per new form I, then also the dispute is of these two amounts only. 13.6 The detailed analyses in preceding paragraphs has been made only to explain the computational complicat....
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....e of life Insurance funds shown in balance sheet 93367246 Mathematical Reserves excluding cost of bonuses allocated (Present actuarial liability of policies) 90277986 Surplus 3089260 Participating Policies Linked Policies Total Surplus(break up) 2194332 894928 3089260 Allocation of surplus as perform A-RA i.e. Policy Holder's Account To Policy holders 1432862 0 1432862 To Share holders 138532 894928 1033460 Carried Forward Unappropriated-FFA 622938 0 622938 2194332 3089260 5.2.1The above surplus includes un-appropriated surplus of earlier years of Rs. 169460 thousands. The remaining surplus of earlier years had already been appropriated/allocated and not included in above REVENUE ACCOUNT (POLICY HOLDER'S ACCOUNT) All figures are in thousand rupees PREMIUMS RECEIVED (NET) 48605388 RE INSURANCE CEDED (-)596797 INCOME FROM INVESTMENTS 19896451 CONTRIBNITION FROM SHAREHO....
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....urplus or deficit included therein which was made in any earlier intervaluation period". This essentially precludes carry forward of losses. The set off of carried forward losses under section 72 is a part of computation of income under the head business or profession The provision of Section 72, are of general nature and since the special provisions in the legislation always override the general provisions, the provisions of the First Schedule would override the provisions of section 72 so far as life insurance business is concerned. 6.3 An illustration of impact of deficit in actuarial valuation is given as under: YEAR 1 CLOSING POSITION Year 1, A Year 1,B Year 2, C Increase in Funds Year 2, D Increase in liabilities Funds 80 40 30 20 Liabilities 40 50 25 30 Surplus 40 (-)10 5 (-)10 YEAR 2 CLOSING POSITION A+C A+D B + C B + D Funds 110 100 70 60 Liabilities 65 70 75 80 Surplus 45 30 (-)5 (-)20 Break up of surplus 40 + 5 40-10 -10 + 5 -10 - 10 6.3.1 However, if surplus of year 1 is distributed/allocated, the....
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.... mainly for maintaining solvency margin. 5. The concept of Life Insurance Fund and Total Funds of business is different. The returns from investments of Life Insurance funds forms part of actuary surplus whose distribution to policy holders and shareholders is regulated. The return on shareholder's funds does not go as allocation of profit (or surplus) to policy holders. So it is not a part of actuarial surplus. The situation before privatization and after privatization is not the same. 6. The concept of profit of life insurance business u/s 44 read with first schedule is a legal fiction and general concepts of profit cannot be imported into it. A legal fiction is to construed strictly. Concept of surplus is a premium linked issue as liability is incurred in respect of premium and not shareholder's funds, which are required only for maintaining solvency margin. The income on that is business income, which may, in common parlance, even be called income from life insurance business but it is not the same as artificially(legally) defined " profits of life insurance business" u/s 44 read with first schedule which alone is taxable u/s. 115B(1)(i). The income of....
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.... set off of carried forward losses is to be examined in the year in which the set off is claimed. b) In the order u/s 154 of CIT(A) dated 7.2.2017, which merges with the order under appeal, the CIT(A) has given an illustration in para 5.1 of the order on the issue of set off of losses. Revenue relies on the same. c) On the issue of admissibility of additional ground of appeal filed by assessee, the Revenue relies on the decisions reported in 111 ITR OOl(SC), 301 ITR 17 (Alld) and the decision in the case of Ultra Tech Cement Ltd, dated 18.4.2017 of Hon'ble Bombay High Court in ITA No. 1040 of 2014 and submits that the additional ground should not be admitted as no such claim was made in the return. The Revenue also relies on the decision of the Apex Court in the case of Goetze India Ltd. d) On merits of additional ground of the assessee, the Revenue submits that section 10(23AAB), being exemption of income of pension funds has been specifically given to assessee. For section 10(34), the section 44 read with First Schedule would apply, and exemption would not be available as far as policyholders funds are concerned. For shareholder's funds, if it h....
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.... 12.5% on the profits and gains of Life Insurance business was explained as under: "40.2 Under the amendment made by the Finance Act, 1976, the method of determining the profits on the basis of gross external incomings, as stated at (a) in the preceding paragraph has been dropped and the profits and gains of a life insurance business will, in all cases 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 in respect of the last inter-valuation period ending before the commencement of the assessment year, so as to exclude therefrom any surplus or deficit which was made in any earlier inter-valuation period. No further adjustment to the annual average of the surplus so arrived at will be made. In other words, no further deduction will be allowed in respect of any portion of the amount paid or reserved or expended on behalf of the policy-holders nor will the expenditure and allowances which are not deductible under the provisions of section 30 to 43A be added back. The profits and gains of life insurance business so arrived at will be charged to tax at the ....
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....s entitlements of policy holders). Attention was also invited to Clause 12 (b) and Clause 43 of IRDA Regulations 2013. As per Clause 12B, it is mandatory to declare bonus annually while Clause 43 provides that all insurance products shall provide the prospective policyholder a customized benefit illustration, illustrating the guaranteed and nonMax guaranteed benefits at gross investment returns of 4% and 8% respectively and as specified by IRDA or Life Insurance Council from time to time. It is also required that the benefit illustration shall be signed by both the prospective policyholder & the intermediary and shall form part of the policy document. He also invited our attention towards the definition of )"non-par policies" or "policies without participation in profits" as defined by IRDA (Actuarial Report and Abstract of Life Insurance Business) Regulations 2016 and on that basis contended that participating policy holders are entitled to participate in the surplus/profits. Before us reliance was also placed on sample benefit illustration. The relevant extract thereof is reproduced hereunder: "(4) Accrued Reversionary Bonus: Reversionary Bonus will be declared each year....
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....plus / Actuarial Surplus and under this method there is no such restriction for allowing deduction to 80% of bonus. With reference to the reliance placed on the CBDT Circular No. 202 dated 05.07.1976, it was submitted that the words in the explanatory memorandum were only meant for Rule 2 as it existed prior to the amendment allowing use of greater of the two methods. It was not meant to limit the scope of the meaning of actuarial surplus, which has not gone through any amendment. If the legislature intends to change the meaning of actuarial surplus by disallowing deductions for bonus and FFA in calculating the actuarial surplus, the statute should and would have expressly provided for the same. Deduction of bonus/FFA arises not because the statute provides for these amounts as deductions but because the actuary recognizes the same as accrued liabilities. The CBDT Circular can be used as an aid of construction only when there is lack of clarity regarding a statutory provision. In this regard, reliance is placed on the judgments of Nawab Sir Mir Osman Ali Khan vs. Commissioner of Wealth-tax 162 ITR 888 (SC); Principle Chief Conservator of Forest & Anr. vs. JK Johnson 10 SCC 794 and ....
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....tation of income from life insurance business and on the other states that there is no difference between the new and old forms. A deduction which is otherwise allowable as accrued liability cannot be taken away by way of CBDT Circular. 59. Under the rule of literal interpretation, the term actuarial surplus is to be interpreted in its ordinary meaning. And such surplus is the amounts available after providing for all determined by the actuary. It is not correct to say that CBDT Circular controls the interpretation of Rule 2. Its application is to be necessarily limited to amounts paid or reserved or expended on behalf of the policyholders. It does not use the same expression as used in erstwhile Rule 3 (a) - "amounts paid to or reserved for or expended on behalf of policy holders". The CBDT circular has limited application to situation where the insurance benefits are assigned to third parties and where benefits are to be paid/reserved/expended on behalf of the policyholders for the assignees. Under these circumstances, the company acts as an agent for the benefit of the policyholder. The term "on behalf of", as per the definition contained in the Law Dictionary by D.P Mittal a....
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....the written submissions, contented that the submission made by the DR is contrary to the decision of the Tribunal in the case of ICICI Prudential Life Insurance Co. Ltd (supra), wherein it has been held that a Life Insurance company is entitled to claim exemption of dividend income under section 10(34) of the Act, which was also confirmed by the Hon'ble Bombay High Cour57. 64 We have heard the rival submissions and carefully considered the same along with the order of the tax authorities below. We have also gone through the case laws, relevant provisions of the Income Tax Act, Insurance Act as well as IRDA regulations notified from time to time and referred to before us during the course of the hearing from both the sides along with the material and the documents brought and referred to during the course of hearing. 65. Ground no.1 is general and therefore does not require any adjudication. Ground no.2 and 3 deals with finding of the CIT(A) that the profit disclosed by the assessee in the shareholder's Profit and loss account (Form A-PL) is not the profit derived from Life Insurance business and therefore the provisions of section 44 read with Schedule First of the Income Tax....
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....all be given for the annual average of the income-tax paid by deduction at source from interest on securities or otherwise during such period." Section 115B of the Act provides the rate of tax leviable on profits and gains of life insurance business. The said section reads as under:- "Section 115B - Tax on profits and gains of life insurance business. (1) Where the total income of an assessee includes any profits and gains from life insurance business, the income-tax payable shall be the aggregate of - (i) the amount of income-tax calculated on the amount of profits and gains of the life insurance business included in the total income, at the rate of twelve and one-half percent; and (ii) the amount of income-tax with which the assessee would have been chargeable had the total income of the assessee been reduced by the amounts of profits and gains of the life insurance business. (2) Notwithstanding anything contained in sub-section (1) or in any other law for the time being in force or any instrument having the force of law, the assessee shall, in addition to the payment of income-tax computed under sub-section (1), deposit, during [the p....
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....d by the Finance Act, 1976 w.e.f. 1.4.1977. These Rules when in existence read as under:- "Old Rule 2 read as follows: "2. Computation of profits of life insurance business. - (1) The profits and gains of life insurance business shall be taken to be the greater of the following:- (a) the gross external incomings of the previous year from that business, less the management expenses of that year; (b) 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 (IV 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 and any expenditure or allowance which is not deductible under the provisions of section 30 to 43 in computing income chargeable under the head "Profits and gains of business or profession". (2) The amount to be allowed as management expenses under sub-rule (1) shall not exceed the aggregate of the following:- (a) 71/2 per cent of the premiums....
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.... liability in respect of outstanding policies is materially inconsistent with the valuation of investments so as artificially to reduce the surplus, such adjustment shall be made to the allowance for depreciation or to the amount to be included in the surplus in respect of appreciation of such investments as shall increase the surplus for the purposes of these provisions to a figure which is fair and just; (c) interest received during the inter-valuation period in respect of any securities of the Central Government which have been issued or declared to be income-tax free, shall not be excluded, but no incometax shall be payable on the annual average of the amount of such interest". 67. CBDT issued Circular No. 202 dated 5th July, 1976 [105 ITR (St pg 22, 43 and 45)] being the explanatory memorandum, with respect to, the Amendment made by Finance Act, 1976, which read as under and has been vehemently referred to by the learned CIT(DR) again and again for the purpose of interpreting why the income-tax rate under section 115B has been reduced from 52.5 per cent to 12.5 per cent for the assessee carrying on life insurance business:- "9.2 No separate rate schedule h....
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....r expended on behalf of the policy-holders. The figure so arrived at is increased by the amount of expenditure and allowances which are not deductible under the provisions of sections 30 to 43A in computing income chargeable under the head "Profits and gains of business or profession. 40.2 Under the amendment made by the Finance Act, the method of determining the profits on the basis of gross external incomings, as stated at (i) in the preceding paragraph has been dropped and the profits and gains of a life insurance business will, in all cases, 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 in respect of the last inter-valuation period ending before the commencement of the assessment year, so as to exclude there from any surplus or deficit which was made in any earlier inter-valuation period. No further adjustment to the annual average of the surplus so arrived at will be made. In other words, no further deduction will be allowed in respect of any portion of the amount paid or reserved or expended on behalf of the policy-holders nor will the expe....
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....s of the life insurance business on the basis of gross external income and deducting therefrom the management expenses. New Rule 2 prescribes the profits and gains of the life insurance business to be taken 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 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 intern valuation period. 69. We noted that Supreme Court in LIC of India v. CIT : (1964) 51 ITR 773 at Page 778 made the following pertinent observations while interpreting the provisions relating to the computation of taxable income of the life insurance company: "It is clear that the Income Tax Act contemplates that the assessment of insurance companies should be carried out not according to the ordinary principles applicable to business concerns as laid down in section 10, but in quite a different manner. Insurance companies do not compute their profits in the ordinary way because premiums cover risks which run into fut....
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....poration of India vs. CIT : [1999] 240 ITR 139. The pertinent observations at pg 144 of the said judgement are reproduced hereunder: "Section 44 of the Income-tax Act is a special provision governing computation of taxable income earned from business of insurance. It opens with a non-obstante clause and thus has an overriding effect over other provisions contained in the Act. It mandates the assessing authorities to compute the taxable income for business of insurance in accordance with the provisions of the First Schedule." There is change in the reporting format for companies carrying on insurance business pursuant to enactment by IRDA Regulations. Such change in the reporting format for companies carrying on life insurance business pursuant to change in the regulatory framework and pursuant to enactment by IRDA of Regulations, 2000 and Regulations, 2002 was noticed by the Bombay High Court in ICICI Prudential Life Insurance Co. Ltd. Vs. ACIT : 325 ITR 471 in the following words : (pages 474-476] "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 amende....
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....The composition of surplus, inter alia, includes the surplus shown by Form I, interim bonuses, loyalty additions and sums transferred from shareholder's funds during the inter-valuation period. The Authority has also notified the Insurance Regulation and Development Authority (Preparation of Financial Statements and Auditor's Report of Insurance Companies) Regulations, 2002. Part V deals with the provision of financial statements. Every insurer is required to prepare (i) a revenue account which is also described as a policyholder's account; and (ii) a profit and loss account, which is also described as a shareholder's account, apart from a balancesheet. 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 policyholders, and (ii) a profit and loss account of shareholder....
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....ny tax, dividend, reserve or any other provision as may be prescribed which is not admissible under the provisions of section 30 to 43B in computing the profits and gains of a business shall be added back: (b) (i) any gain or loss on realisation of investments shall be added or deducted, as the case may be, if such gain or loss is not credited or debited to the Profit & Loss A/c; (c) such amount carried over to a reserve for unexpired risks as may be prescribed in this behalf shall be allowed as a deduction. This indicates that the legislature consciously omitted incorporating the provisions of IRDA or the Regulations made there under in Rule 2, which still refers to the Insurance Act 1938 only. 28. Further, we also notice that the Insurance Act itself was amended along with the introduction of IRDA Act 1999. Along with the said IRDA Act there are various amendments proposed in the Insurance Act in tune with I(RDA Act by amending the relevant provisions of Insurance Act, 1938. However, since the Rule 5 was amended in the First Schedule by specifically referring to the IRDA Act 1999 or the Regulations made there under, we are of the opinion that t....
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....oration 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 policyholder's and shareholders account and arriving at the actuarial deficit, without taking into consideration the transfer of funds from the shareholder's account to policyholder's account. 31. After introduction of IRDA Act, the entire Regulation of insurance business has gone to the authority and in order to protect the interest....
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....or the inter valuation period has to be taken in to consideration under the regulations in financial accounts as well. 32. IRDA Regulations specifically require to maintain the policyholder's account and the shareholder's account separately and permits transfer of funds from shareholder's account to policyholder's account as and when there is a deficit in policyholder's account. As rightly noted by the Hon'ble Bombay High Court, as a policy company is transferring funds/assets from shareholder's account to policyholders account even during the year periodically as and when the actuarial valuation was arrived at in policyholder's account. Most of the companies are required to submit quarterly accounts under the Company Law, there is requirement of actuarial valuation report periodically and accordingly assessee was transferring funds from the shareholder's account to policyholder's account. Since the insurance business will not yield the required profits in the initial 7 to 10 years, lot of capital has to be infused so as to balance the deficit in the policyholder's account. During the year as already stated assessee has issued fresh capital to the extent of Rs.250 crores a....
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.... and then add taxing this 'net surplus' arrived at, the rate specified u/s.115B of the Act?" Although the appeal filed by the Revenue was admitted on other substantial questions of law, with respect to the aforesaid question, the Bombay High Court in the case reported as CIT vs. ICICI Prudential Insurance Co. Ltd. : 242 Taxman 159 did not admit the Revenue's appeal and held as under: "5) So far as Question No. 8 is concerned, the grievance of the revenue is that the income on shareholders' account has to be taxed as income from other sources. This on the ground that the income earned on shareholders' account is not an income which represents income on account of Life Insurance Business. Therefore, it is the revenue's contention that it has to be taxed as income from other sources. The impugned order while allowing the assessee's appeal holds that income earned on shareholders' amount has to be considered as arising out of Life Insurance Business. Moreover, in terms of Section 44 of the Act, such income has to be taxed in accordance with First Schedule as provided therein. None of the authorities under the Act or even before us is it urged that the assessee is carrying o....
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....ourt is binding law. It is not of scriptural sanctity but of ratio-wise luminousity within the edifice of facts where the judicial lamp plays the legal flame. Beyond those walls and dehors the milieu we cannot impart eternal vernal value to the decision, exalting the precedents into a prison house of bigotry, regardless of the varying circumstances and myriad developments. Realism dictates that a judgement has to be read, subjec6 to the fact directly presented for consideration and not affecting the matters which may lurk in the dark." We noted in the decision of Ahmadabad Bench the bench noted the facts that the approval u/s 151(2) was first duly given by the joint commissioner which was apparent from the facts therein and therefore the bench decided against the assessee while upholding the validity of the approval u/s 151. The learned DR Also relied on the decision of Blue star Ltd. Vs. CIT 217 ITR 514 (Mum) for the proposition of law that a case is only an authority for what is actually decides. In this decision it was held "Every judgment must be read as applicable to the particular facts proved or assumed to be proved, since the generally of the expressions which may be found ....
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....ance Act which enables IRDA to cancel the registration of an insurer if the insurer carries on any business other than the life insurance business or any prescribed business. In other words, a life insurer, such as the assessee, is not permitted to carry on any other business other than that of life insurance; the manner of investment is strictly regulated by IRDA, implying thereby that investments made out of shareholder funds is an integral and inextricable part of the life insurance business and not an independent business. Respectfully following the decision of coordinate bench on this issue, we allow ground no.2. Even we noted that the assessee is consistently following the same method for determining the income under the head profits and gains of business or profession by aggregating/consolidating, both the policyholders and shareholders account for the purposes of arriving at the deficit/surplus from the life insurance business and this has duly been accepted by the revenue upto financial year 2008-09. On the principle of consistency this method in our view until and unless is held to be illegal cannot be discarded. We have gone through the decisions as relied before us. We ....
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....ami Satsang was entitled to exemption under Sections 11 and 12 of the Income Tax Act of 1961." 74. The aforesaid dictum of law was reiterated recently by the Supreme Court in CIT vs. Excel Industries Ltd. : 358 ITR 295. "It appears from the record that in several assessment years, the Revenue accepted the order of the Tribunal in favour of the Assessee and did not pursue the mater any further but in respect of some assessment years the matter was taken up in appeal before the Bombay High Court but without any success. That being so, the Revenue cannot be allowed to flip-flop on the issue and it ought let the matter rest rather spend the tax payers money in pursuing litigation for the sake of it." 75. We therefore respectfully following the decision of this Tribunal in the case of ICICI Prudential Insurance Co. Ltd (supra), set aside the order of CIT(A) on this issue and direct the assessing officer to take profit shown in shareholders' profit and loss account i.e. Form A-PL to be part of the income derived from life insurance business. Thus these grounds are allowed. 76. Since the learned AR has argued ground 5 first, which relates to the enhancement of income by ....
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....345 - Advertisement and publicity 640,370 508,469 - Travel, conveyance and vehicle running expenses 14,713 - - Training expenses 29,211 - - Consultancy charges 53,877 - - Other miscellaneous expenses 44,269 861 - Depreciation 104,799 1 63 Bad debts written off - - Contribution to the Policyholders Account (Technical Account) - Participating Individual Life Policies - - - Participating Pension Policies - - - Non-participating Individual Life Policies 296,880 643,362 - Non-participating Health Insurance Policies 128,443 310,115 - Non-participating Group Policies 160,877 5,709 - Non-participating Individual Linked Policies - 2,470,055 - Non-participating Linked Pension Policies - 195,992 - Non-participating Linked Group Policies - 90,569 MAX NEW YORK LIFE INSURANCE COMPANY LIMITED REGISTRATION No.104; DATE OF REGISTRATION WITH IRDA : NOVEMBER 15, 2000 Profit and Loss Account for the year ended March 31, 2010 FORM A-PL SHAREHOLDERS' ACCOUNT (NON-TECHNICAL ACCOUNT) ....
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.... 3,238,382 (b) Profit on sale/redemption of investments 13,142 - 81 - - 6,943,309 259,960 6,796 7,23,288 (c) (Loss) on sale/redemption of investments (22) - - - (1) (844,202) (131,294) (5,098) (980,617) (d) Transfer/Gain on revaluation/change in fair value - - - - - 9,637,935 633,294 20,096 10,291,325 (e) Amortisation of discount/(premium) 9,202 (328) 775 (10) (298) (513) 15 - 8,843 (f) Appropriation /Expropriation Adjustment Account - - - - - 108,618 6,689 (77) 115,230 Other Income Contribution from the Shareholders' Account - - 296,880 128,443 160,877 - - - 586,200 Miscellaneous Income Total (A) 1,136 1 73 1,718 35 1,552 110 4 44,629 14,513,678 119,137 1,190,673 244,930 487,991 48,494,532 3,019,544 425,386 68,495,871 Commission 2 1,314,531 864 131,003 27,610 3,863 2,660,168 73,959 89 4,212,087 Operating Expenses related to Insurance....
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....- - - - - (b) Allocation of Bonus to Policyholders 1,418,584 14,278 - - - - - - 1,432,862 (c) Surplus shown in the Revenue Audit 614,203 147,267 - - - 883,226 6,759 4,943 1,656,398 (d) Total Surplus : [(a) + (b) + (c)] 2,032,787 161,545 - - - 883,226 6,759 4,943 3,089,260 77. Revenue Account Form A-RA as reproduced hereinabove shows that the assessee had allocated bonus to the policy holders to the extent of Rs. 141,85,84,000/-. According to the assessee the said amount represent bonus declared for the impugned assessment year on the participating policies. It is not disputed that the taxation of the insurance companies is governed by section 44 read with First Schedule of the Income Tax Act. As per Rule 2 of the First Schedule, 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, in respect of the last inter valuation period ending before the commencement of the assessment year....
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....ly transferred from the share holders account for declaring bonus on participating policies, which is done based on the advice of the Appointed Actuary. The assessee during the impugned assessment year declared bonus for participating policy holders to the extent of Rs. 141,85,84,000/-. The contention of the Revenue is that the assessee is not entitled for the deduction of the said bonus and it will form part of the actuarial surplus. While the contention of the assessee is that it is part of the actuarial liability and as per Rule 2 of First Schedule to the Income tax Act it represents the liability accrued towards the participating policy holders. We noted that the change in the reporting format has duly been acknowledged by the Hon'ble Bombay High Court in the case of ICICI Prudential Life Insurance Co. Ltd. vs. ACIT 325 ITR 471, in the following manner: "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....
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....ds during the inter-valuation period. The Authority has also notified the Insurance Regulation and Development Authority (Preparation of Financial Statements and Auditor's Report of Insurance Companies) Regulations, 2002. Part V deals with the provision of financial statements. Every insurer is required to prepare (i) a revenue account which is also described as a policyholder's account; and (ii) a profit and loss account, which is also described as a shareholder's account, apart from a balancesheet. 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 policyholders, and (ii) a profit and loss account of shareholders. ... ..." 78. The determinative issue for arriving at the taxable income u/s. 44 read with Rule 2 of the First Schedule, in our opinion, is "w....
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....mandated under the insurance laws are not available for the shareholders. The basis of taxation for a life insurance company is the actuarial surplus, which in our view will mean the amount repayable to the policy holders under the contract or under the statute. The amounts set aside for policy holders are in the nature of liability/charge on the income. No doubt under the IRDA Rules in Form A-RA the terms "surplus" and "appropriation" cannot be used interchangeable with "actuarial surplus" and "appropriation of income" respectively. 80. We have gone through the copy of insurance policy terms especially terms 7.1 and 12, which relates to the benefit to the insured persons detailed as under: "Benefits 7.1 Subject to the provisions of section 8 (Suicide Exclusion), on the occurrence of the Insured Event, the Company will pay the following benefits (the "Benefits"): (a) the Sum Insured; and (b) the accrued bonus. 12. Policy Holder Bonus and Bonus Options No bonus is payable for the first two Policy years. Thereafter, a bonus as declared by the Company, will be paid, from the surplus arising from the actuarial valuation of ....
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.... intermediary and shall form part of the policy document. c. The benefit illustration as approved under the File and Use Procedure shall be part of the sales literature and shall be furnished to the prospective policyholder along with the sales literature before concluding the sale." We, also noted that as per clause 43 of the Insurance Regulatory and Development Clause the benefits which are granted to the policy holders should form part of the sales literature and must be furnished to the prospective policy holder along with the sales literature before concluding the sale. We noted that as per clause 6 of Schedule A of the Preparation of Financial Statements and Auditor's Report of Insurance Companies Regulations, 2000, Notification dated 14.08.2000, the Appointed Actuary has to estimate the liability against the life policies in force on the basis of annual investigation of the life insurance business. All these prove that bonus is to be declared in terms of the contract of the insurance and is an inherent right of participating policyholder, enforceable in law to participate in distribution of the surplus arising in the life policy holders fund. This is view is ....
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....ed persons who are not the share holder but customers of the assessee, therefore, when it is declared it becomes ascertained liability towards the customers. No doubt in form A-RA (Actuarial Report and Abstract) Regulations 2000, this forms part of the distribution of the surplus. Section 8 of the said Regulation on Statement of composition of surplus and distribution of surplus in respect of policyholders fund states as under: "Composition of surplus as: 1. Surplus shown under Form I 2. Interim bonuses paid... 3. Terminal bonuses paid... 4. Loyalty additions.... 5. Sum transferred from shareholder's funds... 6. Amount of surplus, from policyholders' funds brought forward from preceding valuation... 7. Total surplus [total of the items (1) to (6)] Distribution of surplus as: Policyholder's fund: 1. To interim bonuses paid 2. To Terminal bonuses paid 3. To Loyalty Additions... 4. ...... 5. ...... 6.... 7. As carried forward un-appropriated." ; I RDAI (Preparation of Financial Statements and Auditor's Report of Insurance Compa....
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....ial surplus. The format prescribed under the IRDA Act or for that matter Insurance Act, 1938 cannot determine the quantum of actuarial surplus. These formats have been prescribed by IRDA to protect the interests of the policyholders and to ensure better regulation of the insurance sector. The deductibility of an item while computing taxable income would not be dependent upon treatment / presentation in the accounts - the same would have to be determined with reference to the provisions of the Act. From the sample contract and the notified regulations under the IRDA, it is apparent that payment of bonus is contractual obligation on the outstanding participating policies. Therefore bonus declared is not only ascertained liability but has also accrued to the policy holders in computing the profit from the life insurance business. No doubt there is change in Rule 2 of First Schedule by the Finance Act 1976 and explanatory notes to Finance Act 1976, as notified under Circular 202 in para 40.2 while clarifying the purpose of amendment states that no further deduction would be permitted in respect of any portion of the amount paid or reserved or expended on behalf of the policy-holders. B....
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....ance Act 1938 clearly provide for the same. ITAT Bench in the case of ICICI Prudential Insurance Co. Ltd. (supra) has already held that accrual surplus or deficit has to be determined in the manner provided in old Form G, H & I. This decision of the co-ordinate Bench is binding on us. Therefore, any amount which is recognized as accrual liability has to be necessarily reduced while arriving at the actuarial surplus. Although IRDA has prescribed a new method of presentation i.e. share holders account and policy holders account to be shown separately though a consolidated balance sheet to be drawn up. But the norms regarding the actuarial valuation have not been altered so that recognition of the accrual liabilities by way of bonus allocation to the policy holders be excluded. We do agree that the term accrual surplus is not defined under the act. The CBDT Circular cannot control the interpretation of Rule 2. We find force in the submissions of the learned Sr. Advocate that CBDT Circular has limited application to a situation where the insurance benefits are assigned to third parties, where the benefits are to be paid/reserved/expended on behalf of the policy holder or the assignee. ....
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....s it is part of the actuarial surplus, while learned AR contended that it is not a part of actuarial surplus. As we noted from the Form A-RA this is an unallocated surplus relating to the participating policy holder. In fact, this fund has to be used by assessee in future to meet its contracted obligation towards policy holders. The contention of the learned AR is that this is akin to the policy holders liability which has been determined through due process of the actuarial valuation. If it is part of the liability while working out the actuarial valuation this fund will not form part of the accrual surplus. From provisions of section 44 read with Rule 2 of Schedule A, it is apparent that the profits and gains of a life insurance company has to be computed on the basis of the actuarial surplus. The assessee company is contractually bound in terms of the insurance policies taken out to provide various benefit to its policy holders including, inter alia, survival benefits, cash or reversionary bonuses and other payouts / benefits linked to the happening of future uncertain events. The premiums earned by the assessee, therefore, in our opinion, have embedded obligation to make availa....
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....ers are entitled to earned leave calculated at the rate of 2.5 days per month, i.e., 30 days per year. The staff (other than officers) is entitled to vacation leave calculated at the rate of 1.5 days per month, i.e., 18 days in a year. The earned leave can be accumulated upto 240 days maximum while the vacation leave can be accumulated upto 126 days maximum. The earned leave/vacation leave can be encashed subject to the ceiling on accumulation. The officers may at their option avail the accumulated leave or in lieu of availing the leave apply for encashment whereupon they would be paid salary for the period of leave earned but not availed. So does the scheme extend facility of encashment to the staff in respect of vacation leave. Any leave earned beyond the said ceiling limit of 240/126 days cannot be accumulated and goes a waste. It can neither be availed nor encashed. The appellant company has created a fund by making a provision for meeting its liability arising on account of the accumulated earned/vacation leave. In the assessment year 1978- 1979 an amount of Rs.62,25,483/- was set apart in a separate account as provision for encashment of accrued leave. It was claimed as a ded....
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.... is getting income by way of premium i.e. whether the amount in FFA a/c is a liability which is deductible while working out acturial surplus. This is an undisputed fact that the assessee cannot utilise these funds for shareholders or distributing them as dividends to the shareholders. On the basis of this decision of Hon'ble SC, one can say that the amount allotted to the FFA a/c is a provision for a definite liability although it may arise when the bonus is distributed out of this. Therefore, since the amount is earmarked for policyholders, it cannot form part of the acturial surplus rather it has to be reduced while working out the actuarial surplus under Rule 2 Schedule A of the Income Tax Act for determining profit and gains of assessee from life insurance business. We have also gone through the decision of Delhi HC in case of CIT v Triveni Engineering 336 ITR 374 as relied by Senior Advocate. This decision in our view will not apply to the facts of the case. In that case, the contract receipts taken as income includes the unbilled revenue for which bills to be raised in succeeding year. Therefore, the provision for forseeable losses towards completion of contract was allowed ....
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.... amount towards the excise duty liability which is to be discharged in future but in the case of the assessee amount remains with the assessee. We have also gone through decision of Mumbai HC in CIT v Nagri Mills 33 ITR 681 as well as Delhi HC in CIT v Shriram Pistons & Rings 220 CTR 404. These decisions cannot be applied in the impugned case as these decisions relate to the issue of allowing deduction but does not relate to the issue of computation of actuarial surplus. Whether while computing acturial surplus, amount appropriated towards FFA will form part of acturial liabilities or not. learned DR basically reiled Rule 3 & old Rule 2 which were in existence prior to the amendment made by the Finance Act 1976 and also given the logic as has been mentioned by us earlier why the rate of tax on the company carrying on life insurance business has been reduced from 52.5% to 12.5% as well as para 40.2 of Circular No. 202 dt 05/09/1976 which deals with the Explanatory Notes in respect of the amendment made by Finance Act,1976 as well as the decisions as discussed by us while disposing off ground no. 5. We have already taken a view while disposing off ground no. 5 that the golden rule of....
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....ught to have been done " and though the conveyance had not been executed in favour of the vendee, and the legal title vested with the vendor, the property should be treated as belonging to the vendee and not to the assessee. I had occasion to discuss thoroughly this aspect of the matter with my learned brother and since in view of the position that legal title still vests with the assessee and the authorities, we have noted, are preponderantly in favour of the view that the property should be treated as belonging to the assessee in such circumstances, I shall not permit my doubts to prevail upon me to take the view that the property belongs to the vendee and not to the assessee. I am conscious that it will work some amount of injustice in such a situation because the assessees would be made liable to bear the tax burden in such situations without having the enjoyment of the property in question. But times perhaps are yet not ripe to transmute equity on this aspect in the interpretation of law-much as I would have personally liked to do that. As Benjamin Cardozo has said, " The judge, even when he be free, is not wholly free ". The judge cannot innovate at pleasure. It may ....
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..... In view of this specific provision, in our view the Revenue cannot apply the normal provisions of the Income Tax Act for computing the income under the Income Tax Act. From form A - P & L a/c i.e. shareholders a/c pg 178 of the audited balance sheet and P & L a/c, it is apparent that the assessee has made provision for doubtful debts amounting to Rs. 2,41,83,000/-. We noted that Revenue on the one side disallowed provision for doubtful debts but on the other side has taken the provision to the extent there is increase in value of investment other than temporary decline, as part of the income. This implies that CIT(A) has just taken the contrary view. We have also examined the contention of the learned DR that the assessee himself added back the royalty while computing the shareholders income. This implies that the assessee has accepted the view of the Revenue that the income in the shareholders a/c has to be computed under the normal provisions of the computation of income in Income Tax Act. Royalty paid by the assessee in our view cannot be regarded to be an expense relating to the life insurance business. Therefore there is nothing wrong caused to the Revenue as Royalty cannot ....
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.... income from insurance business has to be allowed as per the provision of section 28 to 43B. The learned Senior Advocate did not advance any argument that the claim of the donation made by the assessee would have been eligible for deduciton under section 37 of the Income tax Act while computing the income under the head "Income from buisness or profession" had it not been the question of determining the profit and gains of business of life insurance. We, therefore, dismiss ground no.7 taken by the assessee and confirm the disallowance of Rs. 2,50,00,000/- as there is no submission or argument made on behalf of the assesee that the assessee is eligible for deduction under section 80G of the Income tax Act and the assessee had complied with the conditions as stipulated under section 80G. It is also not the case of the assessee that the assessee has incurred these expenses eligible for deduction under section 35CCA, 35CCB, 35CCC or 35CCD so that we have taken a view that while computing the income from insurance business, in view of specific provisions of section 44 no disallowance could have been made. 95. On the basis of this finding given in preceding para, while deleting the en....
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....directed AO to recompute c/f losses of AY 2002-03 & other earlier years. This direction in fact amounts to order of remand and the opening of assessment of prior years. Learned Sr. Advocate contended that these directions are illegal as the Appellate Authority does not have any power beyond the assessment year in question. We noted that SC in the case of ITO v Murlidhar Bhagwandas 52 ITR 335 has clearly laid down that the jurisdiction of Appellate Authority are restricted to the assessment year in question. It cannot extend to assessment of the year which is not subject matter of the appeal. Similar view has been taken in the case of CIT v Manekshaw Sons 74 ITR 1. In this regard at the outset the learned DR contended that as per First Schedule profit and gains of life insurance business are to be taken at gross valuation surplus after excluding the earlier years surplus over deficit. Therefore, question of setoff of loss of earlier years does not arise. S. 72 is a part of computation of total income. He also referred to the order passed by CIT(A) u/s 154 dt 07/02/2017 contending that whether income has correctly been computed in the year for which the losses are b/f & setoff is cla....
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....n by learned DR, we are of the view that in case, Assessing Officer feels that mistake has been committed or there is underassessment by computing the loss in the earlier AY, the action should be taken in that AY in accordance with provisions of the Income Tax Act u/s 154, 147 or 263 whichever is applicable but the Assessing Officer of the AY in which the setoff of b/f losses is claimed cannot re-compute taxable income of the AY re-determining the losses to be c/f & setoff in the subsequent AY. We have gone through the decision of Lodhi properties Co Ltd of Delhi Bench of Tribunal reported in 36 SOT 128 on which learned DR has heavily relied upon. In our opinion, this decision will not apply to the facts of the impugned case. The issue in that case was whether assessee shall be entitled to c/f & setoff loss in any subsequent year. Tribunal decided this issue shall be decided by Assessing Officer of subsequent AY in which such claim is made. Tribunal nowhere in that decision held that the loss determined in the AY for which setoff has been claimed has to be re-determined or re-computed by Assessing Officer of the AY in which assessee has claimed setoff. This decision in fact relates....
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....ich any claim of set off of loss is made by the assessee to decide whether the assessee shall be entitled to setoff of the loss of the present AY against the profits and gains of business of the subsequent AY. It is, therefore, held that the AO's order is erroneous and prejudicial to the interests of the Revenue to the extent the AO has made an observation that loss to be carried forward. The expression "to be carried forward" mentioned by the AO in his assessment order is undoubtedly rendering the assessment order erroneous and prejudicial to the interests of the Revenue. The issue whether the assessee shall be entitled to carry forward and set off of this loss in any subsequent year shall be decided by the AO of the subsequent AY, in which such claim is made by the assessee. In this respect, therefore, the CIT was very much justified in holding that the assessment order is erroneous and prejudicial to the interests of the Revenue in so far as the observation to the effect "loss to be carried forward" made by the AO is concerned and he, accordingly, was justified in setting aside the assessment on the above issue to be made afresh after giving opportunity of being heard to the ass....
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....is entitled to exemption u/s 10(34) for the dividend income. We also noted while disposing of ground relating to applicability of S. 14A for disallowance of expenditure in respect of income not forming part of Total Income. This Tribunal Mumbai Bench in the aforesaid case under para 45-46 took the view that since S. 44 creates a specific exception to the applicability of S. 28-43B, therefore purpose object & purview of S. 14A has no apllicability to profits and gains of an insurance business. This decision of co-ordinate Bench is binding on us. The learned DR in this regard although referred to decision of Delhi Tribunal in the case of assessee reported in 86 Taxman.com 239 for AY 2002-03 dt 17/10/2017, we noted Tribunal took the view when the question of application of provision of S. 92 came before it, it took the view that S. 92 applied to an assessee carrying on insurance business. In case of computation of determination of ALP of International transaction, we are concerned with S. 92 in the case of an assesse carrying on life insurance business, there has to be two staged computation of income. First income has to be computed as per S. 44 read with First Schedule & while compu....
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....as per shareholders P & L A/c, there is a net loss of Rs. 20,91,40,000/- which has been arrived at after considering the said income of Rs. 7,10,43,000/- and a loss of Rs. 98,84,000/- from sale/redemption of investment. CIT(A) took the view irrespective of whether this profit/loss pertains to life insurance business or not, the addition of the same cannot be made as it will lead to inclusion of this amount twice in Total Income. He therefore deleted said addition as in his opinion disputes remain only whether income in shareholders a/c is an income from insurance business. we noted from form A-PL i.e. P & L a/c appearing at page 177 & 178 of audited final a/cs that income amounting to Rs. 7,10,43,000/- has duly been shown by assessee under the head 'income from investment' and is duly included in the gross receipt of Rs. 1,43,19,19,000/- and loss of Rs. 20,91,40,000/- has been arrived at after considering said income. Therefore we find that CIT(A) has correctly observed that this is a double addition in income of assessee and he has rightly deleted the said addition. We do not find any illegality or infirmity in the order of CIT(A) while deleting the said addition. Thus the cross o....