TaxTMI 
TaxTMI 
2021 (5) TMI 298
X X X X Extracts X X X X
X X X X Extracts X X X X
....Rs. 5,40,08,000/- made by the AO without appreciating the provisions of Insurance Act, 1938 and Regulations." 3. The brief facts of the case are that the assessee filed its return of income on 28.11.2013 declaring total loss of Rs. 64,98,65,416/-. The case was selected for scrutiny. Notices u/s 143(2) & 142(1) of the Act were issued and served upon the assessee. The assessee company was licensed by IRDA to carry on the business of Life Insurance. The assessee claimed the exemption on dividend income of Rs. 83,96,134/- u/s 10(34) of the I. T. Act, 1961. The notice was given and after the reply of the assessee, the exemption was declined and the sum of Rs. 83,96,134/- was added to the income of the assessee. On appraisal of the Form No.1, the negative reserves of Rs. 5,40,08,000/- was found. The notice was given and after the reply of the assessee, the same was declined and added to the income of the assessee. The expenses u/s 14A r.w. Rule 8d was also computed in sum of Rs. 4,12,710/- and added to the income of the assessee. The total income of the assessee was assessed to the tune of Rs. 58,74,61,282/-. Feeling aggrieved, the assessee filed an appeal before the CIT(A) who allowe....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ional ITAT in the Life Insurance Corporation vs CIT (ITA No 6221/Mum/2012) wherein it has been held that:- "3.4. We find that the issue of admissibility of provisions of Section 10(34) has been considered by the 'F Bench of Mumbai Tribunal while deciding the appeals filed by the AO in the cases of lClCl Prudential Insurance (ITA No. 7765/Mum/2010 AY.2005-06 dt 14-09-2012). Ground No.3 filed by the AO reads as under "On the facts and in the circumstances of the case and in law, the learned CIT(A)erred in allowing the dividend income of the assessee of Psi, 56,09,2221-as exempted under section 10(34) of the Income-tax Act,1961 ignoring the facts that dividend income is considered as part of Income of Life Insurance Business and is included as an income by the actuary." While dealing with the issue, whether exemption u/s. 10 can be allowed to an Insurance company when income is computed u/s. 44 of the Act, Tribunal held that issue was covered in favour of the assessee and against the AO by the orders of the General Insurance Company of India in lT4r4c* 33541Mum12011 where in the issue of deduction u/s. 10 of the Act was considered and allowed following t....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ions of section 30 to (43B) in computing the profits and gains of a business shall be added back; (b)(....) (c)Such amount carried over to a reserve for unexpired risks as may be prescribed in this behalf shall be allowed as a deduction". The Assessing Officer has in the reasons for reopening the assessment proceeded on the premise that in computing the profits and gains of business for an assessee who carries on general insurance business no other section of the Act would apply and that the computation could be carried out only in accordance with section 44 read with Rule 5 of the First Schedule. In Life Insurance Corporation of India, v. Commissioner of Income Tax Bombay City-Ill a Division Bench of this Court construed the provisions of section44 and of the First Schedule. The assessee in that case which carried on life insurance business had made a claim to exemption under section 10(15) and section 19(1). In a reference before the Court, the questions referred included whether in computing the profits and gains of the business of insurance under section 44 read with the Schedule certain items-which were ordinarily not includible .,,...., the....
X X X X Extracts X X X X
X X X X Extracts X X X X
....n the context of an assessee which- carried on life insurance business to whom Rules 1 to 4 of the First Schedule applied whereas in the case of the assessee in this case which carries on general insurance business Rule 5 could apply. According to the Assessing Officer, Rule 5 would not permit any adjustment to the balance of profit as per annual account prepared under the Insurance Act, and hence the 0dwpent would not be applicable. The Assessing Officer has clearly not noticed that the decision in Life Insurance Corporation (supra) though rendered in the context of an assessee which carries on life insurance business, followed an earlier decision of a Division Bench of this Court in Commissioner of Income-Tax v. New India Assurance Co Ltd. That was a case of an assessee which carried on non-life insurance business. In New India Assurance Co. Ltd. the Division Bench dealt inter alia with the provisions-of section 1 9(7) of the Income Tax Act, 1922. The questions referred to this Court included whether the assessee was entitled to claim an exemption from tax under section 15B and 15C (4) and in respect of interest on a government loan under a notification issued u....
X X X X Extracts X X X X
X X X X Extracts X X X X
....43A.The Supreme Court held that the sum of Rs. 3 crores in that case which was set apart as a provision for redemption of preference shares could not have been treated as an expenditure and hence could not have been added back under rule 5(a). In that context- the Supreme Court held as follows: "There is another approach to the same issue. Section 44 of the Income-tax Act read with the rules contained in the First Schedule to the Act lays down an artificial computing the profits and gains of insurance business. For the purpose of income-tax, the figures in the accounts of the assessee drawn up in accordance with the provisions of the First Schedule to the Income-tax Act and satisfying the requirements of the Insurance Act are binding on the Assessing Officer under the Income-tax Act and he has no general power to correct the errors in the accounts of an insurance business and under the entries made. The question whether an assessee who carries on general insurance business would be entitled to avail of an exemption under section 10 did not arise. The issue as to whether the assessee which carries on the business of general insurance would be entitled to the benefi....
X X X X Extracts X X X X
X X X X Extracts X X X X
....de Ground No.l in favour of the assessee. My view is also supported by following decisions of Hon'ble Jurisdictional ITAT as well Hon'ble High Court:- DCIT vs IDBI Federal Life Insurance Company Ltd [ITA 6282/Mum/2012] General Insurance Corporation of India Vs. DCIT [342 ITR 0027 Bom) CIT vs New Insurance Assurance Company Ltd [71 ITR 0761 Bom] Life Insurance Corporation of India Ltd vs C/T [115 ITR 0045 Bom) Respectfully following the decision of Hon'ble Jurisdictional ITAT as well as High Court, the AO's action of taxing the dividend income is held as unjustified and contrary to the provision of the Act. Therefore, addition made by the AO is deleted. 3.2.4 Since the facts and circumstances of the case are the same for this assessment year, except for the amount, following my own order for assessment year 2012-13 above, the addition made by the AO to the total income on this ground is deleted. This ground of appeal is allowed." 5. On appraisal of the above mentioned finding, we noticed that the CIT(A) has allowed the claim of the assessee on the basis of the finding of earlier assessment of the asses....
X X X X Extracts X X X X
X X X X Extracts X X X X
....he Assessment Order wherein addition of Rs. 5,40,08,000/- is discussed at Pam 7.1 to 7.12 on Page 7 to 11 of Assessment order. This issue had also come up before me in the appellant's appeal for A.Y. 2012-13 wherein vide order No. CIT(A)-8/IT-217/2016-17 dated 20.08.2018, I have decided this issue in favour of the appellant. Relevant extract of my decision is reproduced hereunder: The A0 has held that the negative reserves constitute income of appellant, receivable over the span of policy sold, therefore, the same is the income of the appellant. I have also perused the written submissions filed by the appellant wherein appellant has submitted that negative reserve is the net premium receivable by the insurance company coupled with uncertainty of receiving the same, therefore, the same cannot be considered as income unless there is some certainty of receiving the premium on insurance policy. I have considered the submission of appellant and agree that being an insurance company, its books of account are agreed to be maintained as per IRDA regulation and income is to be disclosed under section 44 of the Act. The insurance company also needs to take valuation report in ac....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ample, if an insurer had two policies, one with a reserve of 100 and the other with a reserve of - '10, it might think of its liabilities at 100 rather than 90 to take into account the eventuality in case the second policy lapsed. This process is called eliminating negative reserves. As mentioned earlier, a policy which has a negative reserve is in nature of an asset. 4.3.2. We find that in the case of ICICI Prudential Insurance Co.(supra) AO had disallowed negative reserve related to Life Insurance business of the assessee. In appellate proceedings FAA allowed the appeal of the assessee. AO challenged the order of the FAA before the Tribunal, as stated earlier. Disposing his appeal, Tribunal held as under: "After considering the rival submissions and examining the method of accounting and the mandate given by regulations to appoint Actuarial on the concept of mathematical reserves we do not see any reason to interfere with the order of the CIT(A). The mathematical reserve is a pan of Actuarial valuation and the surplus as discussed in Form-I under Regulation to takes in to consideration this mathematical reserve also. Therefore, the order of the orde....