TaxTMI 
TaxTMI 
2021 (3) TMI 1334
X X X X Extracts X X X X
X X X X Extracts X X X X
....t on several legal grounds. Since this is a preliminary issue on assumption of jurisdiction by the ld AO, we deem it fit and appropriate to address the grounds raised in the cross objections of the assessee first and simultaneously address the grounds raised by the revenue on merits. 3. The assessee has raised the following grounds of appeal in its cross objections :- ― "1. That the Commissioner of Income Tax (Appeals) ['CIT(A)'] erred on facts and in law in upholding the validity of reassessment order dated 31.03.2015 passed by the assessing officer under section 143(3) read with section 147 of the Income Tax Act, 1961 ('the Act'). 1.1 That the CIT(A) erred on facts and in law in not appreciating that the reassessment order dated 31.03.2015 passed by the assessing officer is illegal and bad in law, being barred by limitation in terms of proviso to section 147 of the Act. 1.2 That the CIT(A) erred on facts and in law in upholding validity of reassessment proceedings, despite the same having been initiated on the basis of mere change of opinion, without any new tangible material/ information coming to the possession of the assessin....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... case of ICICI Prudential Life Insurance Company Ltd. and HDFC Life Insurance Company without appreciating that they are not applicable in the present case as there was no attempt on the part of the Assessing Officer to disturb the actuarial valuation given by actuary." 5. The appellant prays that the order of the Ld.CIT (A) on the grounds be set aside and that of the Assessing Officer be restored. 6. The appellant craves leave to amend or alter any grounds or add a new ground which may be necessary. 4. We have heard the rival submissions and perused the materials available on record. We find that the assessee was incorporated on 27.10.2005 under the Companies Act, 1956 to undertake and carry on the business of life insurance. The assessee had obtained a license from the Insurance Regulatory and Development Authority (IRDA) on 14.7.2006 for carrying on the business of life insurance. The assessee company commenced its commercial activities on 22.8.2006. The return of income for the Asst Year 2007-08 was filed by the assessee company on 31.10.2007 declaring total loss of Rs. 80,42,56,839/-. The return of income was attached with the detailed notes thereon as und....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... 44 read with Rule 2 of the First Schedule to the Act, which requires the assessee engaged in life insurance business to determine taxable income on the basis of actuarial surplus in accordance with Insurance Act, 1938. During the course of original assessment proceedings, the ld AO had showcaused the assessee as to why the amount paid to Talisma Corporation Pvt Ltd and Indigo Systems & Technology Consulting India Private Limited for purchase of software and website development should not be treated as capital expenditure. In response to this query, the assessee had replied vide its letter dated 18.11.2010 (enclosed in pages 60 & 61 of the paper book filed before us) that income of the assessee is determined based on section 44 read with Rule 2 of First Schedule to the Act and that the said provision overrides other computational provisions such as capital gains , income from house property etc including provisions of section 28 to 43B dealing with computation of income under the head " profits and gains of business or profession‟. The assessee also placed reliance on the decision of Co-ordinate bench of Mumbai Tribunal in the case of Birla Sun Life Insurance Company Limited ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....us / deficit shown in Form -I as against section 44 of the Act and addition of negative reserves of Rs. 2,74,91,000/-. 4.4. We find that the ld CITA had dismissed the grounds raised by the assessee on the validity of reopening of assessment and assumption of jurisdiction by the ld AO thereon. However, the ld CITA had deleted the additions made on merits except the transfer pricing adjustment. The ld CITA specifically observed that the addition made on account of transfer pricing adjustment had emanated out of original assessment proceedings and was subject matter of appeal before this tribunal in an independent proceeding and hence no finding need to be given by him thereon. 4.5. Aggrieved by the aforesaid order of the ld CITA, the revenue is in appeal before us on merits of additions and assessee had preferred cross objections challenging the validity of reopening of assessment and assumption of jurisdiction by the ld AO. 4.6. We find that the reasons recorded by the ld AO as furnished to the assessee by the ld AO are as under :- "Reassessment proceeding in your case has been initiated vide notice u/s 148 doted 29.03.2014, in compliance to this notice vide your S....
X X X X Extracts X X X X
X X X X Extracts X X X X
....2 of first schedule. f. In view of the above, treatment of a mere transfer of funds from the shareholders' account as loss eligible to be carried forward was not correct. As the amount of surplus as per actuarial valuation is not available on record, the exact underassessment of income and tax effect cannot be determined. However same will be not less than Rs. One lakh." 3. The reasons for reopening have been provided to you in the lines of principle enumerated by the Hon'ble SC in the case of GKN Driveshaft (I) Ltd. 4. You are requested to file your objection if any within 05 days of receipt of this communication." 4.7. The ld DR at the time of hearing before us vide letter dated 6.1.2021 furnished the copy of complete reasons recorded for reopening the assessment together with the prescribed proforma in which approval in terms of section 151 of the Act was obtained from the superior officers. The full text of the reasons recorded for reopening the assessment and the statutory proforma for obtaining approval in terms of section 151 of the Act are reproduced hereunder for the sake of convenience :- 1. The assessee M/s Bharti AXA Life I....
X X X X Extracts X X X X
X X X X Extracts X X X X
....efore, I have reason to believe that assessee's income is escaped amount within the meaning of section 147 of the IT Act 961 by the reason of omission of the part of the assessee by way of disclosing the income as per aforesaid provisions of the I.T. Act 1961. Therefore I am satisfied that this case is fit case to issue notice u/s148 r.w.s.147 of the I.T.Act, 1961. 5. The relevant assessment year being A.Y. 2007-08, the period of re-opening is within 6 years. Hence, approval & satisfaction of the Commissioner of Income tax is sought for re-opening the case as per provisions of section 151(1) of the I.T.Act. 4.8. The various contentions raised by the ld AR before us could be summarised as under:- a) The issue of notice u/s 148 of the Act is time barred as per first proviso to section 147 of the Act. b) Reasons recorded for reopening the assessment to be furnished by the ld AO within a reasonable time. In the instant case, the reasons for reopening were communicated almost after 10 months. c) The reopening of assessment is merely on the basis of mere change of opinion which is against the well settled principles laid down in number of judici....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... the reasons ; (iv) the exercise of considering the assessee's objections to the reopening of assessment is not a mechanical ritual. It is a quasi-judicial function. The order disposing of the objections should deal with each objection and give proper reasons for the conclusion. No attempt should be made to add to the reasons for reopening of the assessment beyond what has already been disclosed. Moreover, in the said extract of reasons recorded as submitted to the assessee by the ld AO, there was no mention of the failure on the part of the assessee in furnishing full and true information necessary for the purpose of assessment, thereby violating the statutory requirement as mandated in the proviso to section 147 of the Act. Reliance in this regard was placed on the decision of Hon'ble Jurisdictional High Court in the case of Hindustan Lever Ltd vs R B Wadkar reported in 268 ITR 332 (Bom). It is pertinent to note that the full text of the reasons recorded for reopening the assessment were furnished by the ld DR at the time of hearing before us for the first time to the assessee. It was also pointed out by the ld AR by drawing specific reference to the pages 2,3, 48 to....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... ACIT reported in 346 ITR 443 (Bom). It was argued that grant of approval by an officer other than the one authorized u/s 151 of the Act including a superior officer, is a jurisdictional defect in the issue of notice u/s 148 of the Act. Reliance in this regard was placed on the decisions of Hon'ble Delhi High Court in the case of CIT vs SPL's Siddhartha LTd reported in 345 ITR 223 (Del) and CIT vs Soyuz Industrial Resources Ltd reported in 58 taxmann.com 336 (Del). It was argued that it is trite law that if the law requires an act to be done in a particular manner, more particularly acts conferring jurisdiction like the present one, then, such act has to be done in that manner alone. Section 151 of the Act clearly demarcates the situation in which approval is required from different authorities and in the present case, authorization was required to be taken from the ld PCIT alone. The ld Additional CIT had no locus standi in the present case and was therefore, not competent to grant any satisfaction. The action of the ld Additional CIT, therefore, in granting sanction and then forwarding the same to ld PCIT, vitiated the entire legal process of obtaining sanction from ld PCIT alone....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... ld AO. We find that the ld DR had duly furnished the full text of the reasons recorded for reopening the assessment which was also duly placed before the competent authority while seeking approval in terms of section 151 of the Act. In the said full text of reasons, omission on the part of the assessee was mentioned as a general and vague statement without specifically pointing out as to what was the clear omission or failure on the part of the assessee in not furnishing the requisite information that was necessary for the assessment. Infact the reasons recorded starts with "On verification of records ...... ". This statement itself very clearly proves that the entire information was very much available with the ld AO in the records which alone enabled him on bare perusal, to come to a conclusion that income of the assessee had escaped assessment. Hence in this scenario, how failure or omission could be attributed on the part of the assessee. Once there is no failure on the part of the assessee in providing requisite information, then the basic premise on which the entire reassessment was framed by recording reasons, vanishes in thin air. This makes the entire reassessment proceed....
X X X X Extracts X X X X
X X X X Extracts X X X X
....;s, case (supra), the Assessing Officer is entitled to re-open the Assessment for whatever reasons and the same cannot be subjected to jurisdictional review, is preposterous. First of all, taking out a word or sentence from the entire judgment, divorced from the context and relying upon it, is not permissible (see CIT v. Sun Engg. Works (P.) Ltd. [1992] 64 Taxman 442/198 ITR 297 (SC)). It may be useful to reproduce the context in which the sentence in Rajesh Jhaveri Stock Brokers (P.) Ltd.'s case (supra) being relied upon by the Revenue to support its case, was made. The context, is as under:- "The scope and effect of section 147 as substituted with effect from April 1, 1989, as also sections 148 to 152 are substantially different from the provisions as they stood prior to such substitutions. Under the old provisions of section 147, separate clauses (a) and (b) laid down the circumstances under which income escaping assessment for the past assessment years could be assessed or reassessed to confer jurisdiction under section 147(a) two conditions were required to be satisfied : firstly the Assessing Officer must have reason to believe that income, profits or gains charg....
X X X X Extracts X X X X
X X X X Extracts X X X X
....e context of the material obtained that there is an escapement of income. Otherwise, no meaning is being given to the words 'to believe' as found in Section 147 of the Act. Therefore, the words 'whatever reasons' in Rajesh Jhaveri Stock Brokers (P.) Ltd.'s, case (supra), only means whatever the material, the reasons recorded must indicate the reasons to believe that income has escaped assessment. This is so as reasons as recorded alone give the Assessing Officer power to re-open an assessment, if it reveals/indicate, reasons to believe that income chargeable to tax has escaped assessment. 12. The re-opening of an Assessment is an exercise of extra-ordinary power on the part of the Assessing Officer, as it leads to unsettling the settled issue/assessments. Therefore, the reasons to believe have to be necessarily recorded in terms of Section 148 of the Act, before re-opening notice, is issued. These reasons, must indicate the material (whatever reasons) which form the basis of re-opening Assessment and its reasons which would evidence the linkage/nexus to the conclusion that income chargeable to tax has escaped Assessment. This is a settled position as ob....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... instant case, admittedly it has been proved beyond doubt that the assessee was provided only with incomplete reasons upto the stage of coming to this tribunal in the re-assessment proceedings. Hence respectfully following the aforesaid decision of Hon'ble Jurisdictional High Court, we have no hesitation in holding that the entire reassessment becomes bad in law. 4.9.2. We further find that the sanction obtained in terms of section 151 of the Act was not provided to the assessee along with the reasons recorded despite assessee asking for the same in writing before the ld AO. This, in our considered opinion, is against the settled principles of natural justice as reopening of an assessment is an extraordinary power available to the ld AO and it should not be done in a cavalier manner. That is why the legislature in its wisdom had put lot of restrictions by imposing conditions for seeking approval and sanction from a superior officer in terms of section 151 of the Act. Hence the said approval obtained from competent authority ought to have been furnished by the ld AO along with the reasons recorded for reopening the assessment to the assessee. Moreover, in the instant case, the ap....
X X X X Extracts X X X X
X X X X Extracts X X X X
....rson appointed to be a Joint Commissioner of Income Tax or an Additional Commissioner of Income Tax under section 117(1). In the present case, the record before the Court indicate that the Assessing Officer submitted a proposal on 28 March 2011 to the CIT(1) Thane through the Additional Commissioner of Income-Tax Range (1) Thane. On 28 March 2011, the Additional CIT forwarded the proposal to the CIT and after recording a gist of the communication of the Assessing Officer stated that : "As requested by the A.O. Necessary approval for issue of notice u/s. 148 may kindly be granted in case, if approved." On this a communication was issued on 29 March 2011 from the office of the CIT(1) conveying approval to the proposal submitted by the Assessing officer. There is merit in the contention raised on behalf of the Assessee that the requirement of Section 151(2) could have only been fulfilled by the satisfaction of the Joint Commissioner that this is a fit case for the issuance of a notice under Section 148. Section 151(2) mandates that the satisfaction has to be of the Joint Commissioner. That expression has a distinct meaning by virtue of the definition infection 2(28C)....
X X X X Extracts X X X X
X X X X Extracts X X X X
....Addl. CIT: Yes. I am satisfied. It is a fit case to re-open the case u/s. 147 of the Act. The notice u/s. 148 may be issued subject to CIT approval. Sd/- (VIRENDRA OJHA) Addl. Commissioner of Income Tax, Central Range 10, Mumbai." It, thereafter, was examined by the Commissioner of Income Tax who expressed his approval in the following form: "13. Remark of the CIT Yes, I am satisfied that in view of facts, ... as indicated in the Annexure, it is a fit case for issue of notice u/s. 148 of the I.T. Act. Sd/- (H.C.JAIN) Commissioner of Income Tax, Central IV, Mumbai." 7. Further, the learned Counsel for the parties also produce before us a letter dated 24th March, 2011 addressed by the Additional Commissioner of Income Tax to the Commissioner of Income Tax and letter dated 25th March, 2011 from the office of the Commissioner of Income Tax to the Additional Commissioner of Income Tax. The letter dated 24th March, 2011 records the view of Additional Commissioner of Income Tax that he agrees with the reasons given by the Assessing Officer to issue the re-opening notice and seeks permission of the Commissioner of Income Tax to enable the Assessing....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ent. Further, it is the Commissioner of Income Tax who directed the issuance of the notice under Section 148 of the Act to the Assessing Officer. Thus, it is very clear that the final sanction/ approval was that of the Commissioner of Income Tax as indicated in the Form and also in the two letters dated 24th March, 2011 and 25th March, 2011. 10. This Court in Ghanshyam K Khabrani (supra) while dealing with almost similar/ identical situation has observed as under:- " The approval which has been granted is not by the Additional Commissioner of Income Tax but by the Commissioner of Income Tax. There is no statutory provision here under which a power to be exercised by an officer an be exercised by a superior officer. When the statute mandates the satisfaction of a particular manner, it has to be done in that manner. In a similar situation, the Delhi High Court in CIT v. SPL's Siddhartha Ltd. (ITA No. 836 of 2011 decided on September 14, 2011) - since reported in [2012] 345 ITR 223 (Delhi) held that powers which are conferred upon a particular authority have to be exercised by that authority and the satisfaction which the statute mandates of a distinct authority ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....he Income-tax Officer to the Commissioner and the order of the Commissioner was produced. The order sheet recording the reasons of the Income-tax Officer as required by section 148(2) was not produced. Here in below, we have set out the report of the Income-tax Officer as well as the order of the Commissioner: "Report in connection with the starting of proceedings under section 147 of the Income-tax Act, 1961. Name of district Ward or Circle.................. A-Ward, Muzaflarpur G.I.R. No...................... 303-C. 1. Name and address of the assessee M/s. Chugamal Rajpal, Muzaffarpur 2. Status - R.F. 3. Assessment year for which notice under s. 148 is proposed to be issued. - 1960-61. 4. Whether it is a new case or one in which reassessment (or recomputation) has to be made. - Reassessment. 5. If a case of reassessment (or re- computation) the income (or loss or depreciation allowance) origin ally assessed/determined. - Rs. 73,604 6. Whether the case falls under cl. (a) or (b) of s. 147. - 147(a) 7. Brief reasons for starting proceed-ings unde....
X X X X Extracts X X X X
X X X X Extracts X X X X
....g action under section 148. Further his report mentions : "Hence proper investigation regarding these loans is necessary". In other words his conclusion is that there is a case for investigating as to the truth of the alleged transactions. That is not the same thing as saying that there are reasons to issue notice under section 148. Before issuing a notice under section 148, the Income-tax Officer must have either reasons to believe that by reason of the omission or failure on the part of the assessee to make a return under section 139 for any assessment year to the Income-tax Officer or to disclose fully and truly all material facts necessary for his assessment for that year, income chargeable to tax has escaped assessment for that year or alternatively notwithstanding that there has been no omission or failure as mentioned above on the part of the assessee, the Income-tax Officer has in consequence of information in his possession reason to believe that income chargeable to tax has escaped assessment for any assessment year. Unless the requirements of clause (a) or clause (b) of section 147 are satisfied, the Income-tax Officer has no jurisdiction to issue a notice under section ....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... the said decisions, the reopening of assessment deserves to be declared as void ab initio for improper sanction u/s 151 of the Act also. 4.10. Since reopening of assessment is quashed for more than one reason as enumerated above, we do not deem it fit to address the other legal issues raised by the ld AR as they would be purely academic in nature and hence they are left open. Accordingly , the cross objections raised by the assessee are allowed in view of the abovementioned terms. 5. We find that the revenue had raised the grounds only on merits of the additions. At the cost of repetition, we find that the Act provides for a specific mechanism for computation of taxable profits of an insurance company and the taxable profits of an insurance company are required to be computed under the provisions of section 44 read with First Schedule to the Act which is a self contained code in itself. Rule 2 of First Schedule to the Act specifically provides that profits and gains of life insurance business is to be computed as per surplus / deficit disclosed by the actuarial valuation made in accordance with the Insurance Act, 1938. In line with this mandate, the assessee had computed its....
X X X X Extracts X X X X
X X X X Extracts X X X X
....nsolidated Revenue Account was prepared without segregating income/ expenses for policyholders as well as shareholders. Therefore, the said Form-1 reflected the surplus/ deficit of the business as a whole (i.e.. considering shareholders" as well as policyholders" account) since in those days there was no bifurcation of the accounts of insurance companies into policyholders and shareholders accounts. 5.1.3. It is further pointed out that post introduction of IRDA Regulations, 2000. 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 life insurance company is divided into a technical account (policy holder's account represented in Form A-RA) also called as revenue account and non-technical account (shareholder's account represented as Form A-PL) also called Profit & Loss A/c. The technical account deals with all the transactions relating to and includes income from premium and expenditure in relation to the Policyholders account and related investment income. 5.1.4. Fu....
X X X X Extracts X X X X
X X X X Extracts X X X X
.....e. only a part of the income of the Company would be subjected to tax [i.e., surplus / deficit in the Policy Holders Account ("PHA")] and the balance part of the income viz. surplus / deficit in the Shareholder's Account ["SHA"] would be ignored. This does not appear to be the intention of the law. Accordingly, for the period under consideration, surplus/deficit as per Form-1 (prepared as per IRDA Regulations, 2000) cannot, it is submitted, be considered as the basis for computing the taxable income of the Company. 6.1.2. Without prejudice to the above, it is submitted that even if the internal transfers of Rs. 8,46,669 (in 000's) from Shareholders" A/c to Policyholders' A/c are ignored, the profit and loss of the company as a whole will remain the same, i.e., loss of Rs. 804.257 (in 000's) and hence is tax neutral. The same is summarized in the abridged table as under: (Rs. in -000's) Particulars Including internal transfer Excluding internal transfer Surplus/ (Deficit) in Policyholders' A/c NIL (846.669) Surplus/ (Deficit) in Shareholders' A/c (804.257) 42.412 Total surplus/ deficit (804,257) (804,257) 6.1.3. F....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ddition made on account of negative reserve of Rs. 2,74,91,000/-, we find that the ld AO in the reassessment order made an addition on account of negative reserves reflected in Form -I ignoring the fact that it is a mere disclosure requirement stipulated by IRDA till March 2016 which has no impact on the total income of the assessee company. We find that it does not have any impact on the financial statements. 7.1. It is submitted that at the valuation date, present value of future liabilities on every policy is estimated [using actuarial techniques prescribed by IRDA and Institute of Actuaries of India (MAT)]. This is also known as actuarial reserves. This reserve, at a policy level, is estimated by projecting future payouts [on the happening of the insured event (i.e. death, illness, etc.), future payouts on survival (i.e. annuity, maturity, survival benefits, surrender, lapse, etc.), future expenses associated with the policy (e.g. commission, policy maintenance expense, claims expense, etc.)] and future premiums receivable (after considering estimated deaths, lapses, surrenders, etc). This net cash flow for each future period (i.e.. net of future payouts / and future receiva....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... submitted that the AO be directed to delete the addition of negative reserves amounting to Rs. 2,74,91,000. 7.16. In view of the aforesaid observations, we do not find any infirmity in the order of the ld CITA granting relief in respect of negative reserves in the sum of Rs. 2,74,91,000/-. 8. Accordingly, the grounds raised by the revenue are dismissed. 9. In the result, the appeal of the revenue is dismissed and cross objection of the assessee is allowed. Order pronounced on 31/03/2021 by way of proper mentioning in the notice board. ============= Document 1 FORM FOR RECORDING THE REASONS FOR INITIATING PROCEE SECTION 148 AND FOR OBTAINING THE APPROVAL. COMMISSIONER OF INCOME-TAX -9, MUMBAI. Name and address of the assessee Permanent Account No. Status District/Circle/Range Assessment Year in respect of which it is proposed to issue notice u/s. 148 The quantum of income which has escaped assessment : : : : M/s.Bharti Axa Life Insurance Co.Ltd AACCB7227P Company DCIT-9(1), Mumbai 2007-08 Not quantifiable 234567 Whether the provisions of Sec. 147(a) or 147(b) are applicable or both the sections....