TaxTMI 
TaxTMI 
2022 (4) TMI 1018
X X X X Extracts X X X X
X X X X Extracts X X X X
....he facts and the circumstances of the case and in law in deleting the addition of Rs. 9,93,95,544/- on account of disallowance of claim of exemption of profit on sale/redemption of investment. 3. The Ld. Commissioner of Income-tax (Appeals) erred on the facts and in the circumstances of the case and in law in deleting the disallowance u/s 14A of the Income tax Act 1961, amounting Rs. 4,45,94,697/-. 4. The Ld. Commissioner of Income-tax (Appeals) erred on the facts and in the circumstances of the case and in law in holding that holding that section 14A contemplates an exception for deductions allowable under the Act as contained u/s 28 to 43B of the Act and that Section 44 creates special application of these provisions in the cases of insurance companies which prohibits the Assessing Officer to travel beyond section 44 and First Schedule of the Income-tax Act. 5. The Ld. Commissioner of Income-tax(Appeals) erred on the facts and circumstances of the case and in law in not considering that section 44 of the Income-tax Act, 1961 nowhere restricts the applicability. of section 14A of the Income-tax Act 1961 6. The Ld. Commissioner of Income-tax(Appe....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... without prejudice to one another: 1. Cross Objection No.1: Challenging the disallowance under section 14A in respect of non-taxable Profits on sale! redemption of investments and exempt dividend income: 1.1 The action of the learned CIT(A) in concluding that the provisions of section 14A is not applicable in respect of non-taxable profits on sale/ redemption of investments and exempt dividend income is justifiable under the law and in accordance with the Hon'ble Tribunal's ruling for earlier years in the Respondent's own case. 2. Cross Objection No.2: Without prejudice to Cross Objection No.1 above, challenging the computation of disallowance under section 14A 2.1 Without prejudice to above, in case if section 14A is held to be applicable, the disallowance in relation to non-taxable profits on sale! Redemption of investments and exempt dividend income should be restricted to Rs. 11,56,172 as determined by the Assessee based on 'Net Income Method'. The Respondent craves leave to add, alter, delete or modify all or any of the above grounds of cross objections on or before or at the time of hearing of the appeal, so as ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....s investment activity is concerned and hence, as per RBI Guidelines the income from non-banking activity of financial institution has to be recognized as income. Accordingly, the assessee is also entitled to the benefit of provisions of section 43D of the Act with regard to income recognition and also section 36(1)(2ia) of the Act with regard to provision for doubtful debts. ii. Investments in securities of shares being non-obligatory, cannot be considered as a part of legitimate insurance business. iii. There is no specific provision excluding the profits on sale/redemption of investments under Rule 5 of the First Schedule to the Act. iv. The department has preferred an appeal against the favourable order of the Pune Tribunal for A.Y. 2003-04. v. The loss on account of amortization of securities is rightly added back to its computation of income, though it is charged to profit and loss account as there is no specific provision under Rule 5 of the First Schedule to allow amortization debited to the profit and loss account. 8. The ld. CIT(A) has upheld the addition by placing reliance on the order of the erstwhile CIT(A) passed for A.Y. 2009-10....
X X X X Extracts X X X X
X X X X Extracts X X X X
....of factual aspect it is undisputed that there was profit on sale/redemption of certain investments and there was also loss on account of amortization of securities as debited to profit and loss account. There is no dispute that the provisions of sec 44 of the Act applies for computation of income of Insurance Business and the Rules for such computation are contained in First Schedule of the Act. It was also not in dispute that prior to amendment as a rule 5 sub rule (b) which stood deleted from 01-04-1989. In view of this, the short and straight question before us can be frame that - whether on deletion of sub rule (b) the taxability of a particular income still survive particularly when the law do not specifically grant n exemption to that income?' Before its deletion, the sub rule was drafted in the manner already reproduced ante. Whether its deletion had automatically granted an exemption or taxability of that particular income still existed which was earlier taxed in the hands of the Insurance Company due to the presence of Rule 5(b) of the Act 51. To answer this problem we can take the shelter of ~he legislative history and this approach has duly been recognized by the Hon....
X X X X Extracts X X X X
X X X X Extracts X X X X
....nature of dispute. 5.3 The Hon'ble Courts have' pronounced a theory of reasonable construction in a situation of change in the law. In the case of Keshavji Ravji and Co, v. CIT 183 ITR 1. The Hon'ble Supreme Court has said an interpretation should lead to a result intended by the legislation. likewise in the case of CIT v S. Teja Singh 35 ITR 408 it was viewed that construction which defeats the very object sought to be achieved by the legislature must be avoided. likewise in a landmark decision of K.P. Varghese VS. ITO 131 ITR 597 the Hon'ble Court has expressed that there must not be an absurd or unjust interpretation. In an appeal propounding the theory of equity the Hon'ble Supreme Court in the case of CIT v. J.H. Golta 156 ITR 323 has said that the statutory construction should result in equity rather than injustice. On the basis of a plethora ~f judgment of several Hon'ble Courts we can draw a conclusion that even a lite1al interpretation in the present case should also result into the exemption in respect of profit on sale of investment. There was no conflicting intention in the cited amendment as expressed by Finance Act 1998. Also there is ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ity, d) The applicability of provisions of sec 43(0) and section 36(1)(vii a) have also been denied. The contention of the assessee was that these provisions are applicable to Public Financial Institutions (PFI) and the assessee company do not fall under that category. 7, In addition to the above contentions there was no dispute that the independent code is enacted by the introduction of sec. 44 in I. T. Act which independently' prescribed the mode and manner for assessment of Insurance Business. This section since contains non-obstante clause therefore notwithstanding anything contained in any of the sections of the Act, the profits and gains of Insurance Business including any such business carried on by a Mutual Insurance Company or by an Co-operative Society shall be computed in accordance with 'the rules contained in First Schedule. Accordingly, there could not be 'any other income taxable other than Insurance Business because sec. 44 over-rules all other provisions of the I.T. Act. 8. A conclusion can be drawn on the basis of the above elaborate discussion that the deletion of sub rule (b) from Rule 5 of the First Schedule was with a spe....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ic finance institution. The Assessing Officer was also of the view that the income from non-banking activity of financial institution had to be recognized as income in view of the RBI guidelines. The case of the assessee on the other hand, was that under Rule 5 of First Schedule, the manner was prescribed, under which profits and gains of insurance business, other than the life insurance business, had to be computed. The assessee further pointed out that in view of the amendment in Rule 5 of First Schedule, by which the said Rule was omitted, the profit earned in respect of the investments is not taxable in the hands of assessee. The assessee thus, did not include/reduce the profit on sale / redemption of investment of about Rs. 50 crores and net loss on amortization of Rs. 3.10 crores in the computation of income filed for the year under consideration. The said Rule 5(b) of First Schedule has been re-inserted by the Finance (No.2) Act, 2009 w.e.f. 01.04.2011, which was further substituted by the Finance Act, 2010 w.e.f. 01.04.2011. Prior to its substitution, clause (b) was omitted by the Finance Act, 1988 w.e.f. 01.04.1989. The year under appeal before us is assessment year 2008-0....
X X X X Extracts X X X X
X X X X Extracts X X X X
....e taxable income of the assessee. The order of Tribunal in assessment year 2003-04 has been subsequently followed by the Tribunal in assessment year 2004-05 in ITA No.600/PN/2008, order dated 10.12.2010, in assessment year 2002-03 in ITA No.1579/PN/2008, order dated 31.01.2011, in assessment year 2005-06 in ITA No.1508/PN/2012, ITA No.1406/PN/2012 and CO No.42/PN/2013, order dated 23.10.2013 and in assessment year 2006-07 in ITA No.119/PN/2011, order dated 06.05.2013. In view of the issue being decided in favour of the assessee in various assessment years and following the same parity of reasoning, we allow the ground of appeal No.1 raised by the assessee." 14. Here, the Tribunal has given relief by following the decision for A.Y. 2003-04 (supra) and thereafter has observed that even for other assessment years also for A.Y. 2004-05 and for A.Y. 2002-03, A.Y. 2005-06 and 2006-07, this issue has been consistently decided in favour of the assessee. Similarly we also find that for A.Y. 2009-10 and 2011-12 in ITA No. 1071 and 1072/PUN/2015 the Tribunal vide paras 15 and 16 of its order had followed the decision in assessee"s own case for A.Y. 2008-09 dated 3-2-2016 and has provided r....
X X X X Extracts X X X X
X X X X Extracts X X X X
....culars issued under section 37B of the said Act are binding on the Department and the Department cannot be permitted to take a stand contrary to the instructions issued by the Board. These judgments have also held that the position may be different with regard to an assessee who can contest the validity or legality of such instructions but so far as the Department is concerned, such right is not available. (see Collector of Central Excise v. Usha Martin Industries [1997] 7 SCC 47; [1997] 94 ELT 460 (SC). In the case of Ranadey Micronutrients v. Collector of Central Excise [1996] 10 SCC 387; [1996] 87 ELT 19, this court held that the whole objective of such circulars is to adopt a uniform practice and to inform the trade as to how a particular product will be treated for the purposes of excise duty. The court also held that it does not lie in the mouth of the Revenue to repudiate a circular issued by the Board on the basis that it is inconsistent with a statutory provision (emphasis supplied). Consistency and discipline are, according to this court, of far greater importance than the winning or losing of court proceedings. In the case of Collector of Central Excise v. Jayant Dalal P....
X X X X Extracts X X X X
X X X X Extracts X X X X
....bution to the Environmental Fund Liability collected under the Public Liability Fund Act, 1999 as disallowable u/s 43B of the Act. Subsequently, the assessee had revised its return of income, considering the contribution to Environment Fund Liability as allowable expenditure. The ld. A.O did not accept the aforesaid claim of the assessee and disallowed the contribution made towards Environment Relief Fund u/s 43B of the Act based on the following contentions. i) The Contribution being received in the course of its Insurance business, the receipt of contribution does not lose the character of "Income"; ii) If these were no rules for remittance and no remittance was made, the liability is not established; and iii) The amount of contribution so collected remained in the common pool of funds and hence, the assessee had control over such funds. 18. The ld. A.O has given his findings at para 6.2 of his order as under: "6.2: The submission of the assessee is not accepted as the facts in the assessee"s case are different. The assessee has not indicated as to when and how the amount collected was ultimately paid out. If the amount collected was to rema....
X X X X Extracts X X X X
X X X X Extracts X X X X
....mitted that the ground raised by the assessee is covered in favour of the assessee in view of the decision by the Coordinate Bench Pune in assessee"s own case, the lead year being A.Y. 2006-07 in ITA No. 1653/PUN/2015 dated 21-1-2019. The said appeal was filed by the assessee in the second round of proceedings before the Tribunal, wherein in earlier round vide order dated 6-5-2013 the matter was set aside to the file of the A.O. In the second round of assessment proceedings, the ld. A.O continued with disallowance u/s 43B of the Act. The CIT(A) upheld the order of the A.O. However, the Tribunal decided this issue in favour of the assessee vide its order dated 21-1-2019 and held as follows: "10. We have heard the rival contentions and perused the record. The assessee was a joint venture between Bajaj Allianz General Insurance Company Limited, India and Allianz SE, Germany, incorporated on 31.03.2007. The assessee received the registration certificate and approval on 02.05.2001 from Insurance Regulatory and Development Authority (IRDA) to carry on general insurance business in India. The assessee was engaged in Fire, Marine, Motor and Miscellaneous (Workmen Compensation Empl....
X X X X Extracts X X X X
X X X X Extracts X X X X
....oposed insured and the Government. The liability to contribute to the said fund arises when the owner (insured) pays the additional remuneration to the insurer. As per clause 4(2D) of PLI Act, the liability of insurer was to remit the amount received from the owner under subsection (2C) to the Relief Fund, in such manner and within such period as may be prescribed; and where the insurer fails to so remit the amount, such amount shall be recoverable from insurer as arrears of land revenue or of public demand. In other words, the liability of assessee (insurer) is to deposit the said sum collected from the owner (insured), to the relief fund. However, the manner to deposit and the period within which the same is to be deposited, is to be prescribed by the Government of India. The assessee though collects the amount from the owner (insured) but it is not the income of the assessee. The assessee at best is a conduit for depositing the amount to the relief fund on behalf of the owner (insured). In such circumstances, the collection of the contribution to ERF account cannot be regarded as income of the assessee. At best it is governed by the principle of diversion of Income by overriding....
X X X X Extracts X X X X
X X X X Extracts X X X X
....he word "cess" means tax and generally used when the levy is for such specifically administrative expenses which the name indicates i.e. health cess, education cess, road cess, etc. The said levy (i.e. cess) is an additional levy with tax and is within the powers of State Legislature to levy the same. Applying the said principle to the facts of the case, where the levy is prescribed under the PLI Act, cannot be said to be a State levy of "cess". Thus, we find no merit in the order of the CIT(A) in this regard. Allowing the claim of the assessee, we hold that the fund collected by the assessee was neither fee, tax or cess and, hence, do not come within the ambit of section 43B of the Act. 15. The last point for the adjudication is the special manner of determination of income of the insurance companies as prescribed under rule 5 of Schedule 1 of the Act. The Profit and Loss Account disclosed by the assessee i.e. its annual accounts are sacrosanct. The said rule provides that the income to be determined is subject to clause 8 i.e. if any expenditure is debited to the Profit and Loss Account, then the same can be added back. As pointed out in the paras above, the assessee had....
X X X X Extracts X X X X
X X X X Extracts X X X X
....rt is obtained before entering into an insurance contract with the insured to analyse the risk involved and form a preliminary opinion as to whether it makes commercial sense to bear the risk. The risk inspection charges are paid to surveyors and their services typically includes visit to the relevant sites, analysis of various hazards and evaluation of risks, etc. and providing a final assessment report for taking an informed underwriting decision. Inputs received from such assessment reports are general guides which help the assessee to analyse risk from a company and portfolio level as to the type of risks and accounts that are acceptable (or not acceptable); to understand operational and occupational hazards in different industries; to decide on what types of risks and companies that it could possibly underwrite and what risks are likely to fit within its portfolio. The process of risk selection and customer prospecting in the general insurance industry depends on collection of substantial amount of data on the market trends as well as specific risk factors related to the companies and the industries in which they operate. Inputs from these assessment reports are an important p....
X X X X Extracts X X X X
X X X X Extracts X X X X
....d that the assessee should produce the surveyors for cross-examination. The assessee, in the absence of any authority, was not able to enforce physical attendance of the surveyors. Without prejudice to the bonafide deductibility of these expenses, having regard to materiality of the amount involved and to buy peace of mind, the assessee decided to forgo its claim of deduction for the risk inspection charges paid to the specified parties for the A.Y. 2007-08 amounting to Rs. 84,27,955/-. In this regard, the assessee thereafter had filed a letter with the ld. A.O explaining the aforesaid background on 19-8-2009. In the assessment order, the A.O referred to the statements of third parties [Mr. Sitani and Mr. Gupta] to allege that the risk inspection charges paid to specified parties is non-genuine expenditure in the nature of accommodation entries. Accordingly, the A.O disallowed an amount of Rs. 1,72,09,983/- which was in relation to such specified parties. Moreover, the ld. A.O questioned the entire risk inspection charges of Rs. 33,58,00,000/- and sought various party-wise details. The same was provided on time to time basis in the course of assessment proceedings. However, the ld.....
X X X X Extracts X X X X
X X X X Extracts X X X X
....issue. 27. Before us, the ld. Senior Counsel for the assessee submitted in a tabular form, the findings of the Tribunal while adjudicating on the issue in other assessment years which is as follows: Sr.No. A.Y. ITA No. Held by Tribunal 1. 2006-07 119/PUN/2011 The ITAT held that the disallowance made in respect of payments made to the specified parties be sustained, however, the assessee will not be precluded from agitating this issue in the penalty proceedings [refer para 7.3; page 28 of the ITAT order] 2. 2008-09 2560/PN/2012 Absence of a purchase order cannot form the basis of disallowance. However, in view of the evidence collected, an adhoc disallowance of 25% was sustained after giving credit of the amount covered by the purchase orders [Refer para 49; page 70 to 74 of the paper book of the ITAT order. 3. 2009-10 1071/PUN/2015 Mere absence of purchase orders would not disentitle the assessee from the claim of risk inspection charges. The Hon"ble ITAT found merit in the plea that in absence of any adverse evidences collected during the year, no disallowance is to be made. [Refer para 39: page 103 of the paper book] - ITAT or....
X X X X Extracts X X X X
X X X X Extracts X X X X
....n the impugned issue wishes to put an end to this litigation and hence requests the Tribunal to consider the conjoint reading of the orders passed for A.Y. 2008-09 and 2009-10 to A.Y. 2011-12 and sustain the disallowance of Rs. 1,72,09,983/- which pertains to specified parties and delete the disallowance of Rs. 5.00 crores made on adhoc basis since the assessee has submitted ample evidences to substantiate the genuineness of the transactions and considering the same no such disallowances have been made in future years. 29. The ld. D.R before us did not raise any specific objection to the submissions of the assessee. The ld. D.R fairly also conceded that the disallowance which the assessee wants to be sustained i.e. Rs. 1,72,09,983/- which pertains to specific parties and the disallowance of Rs. 5.00 crores which was made on adhoc basis by the A.O it was restricted to Rs. 1.63 crores by the CIT(A) and the very purpose of reduction by the ld. CIT(A) was that in the very first place, the addition was made on an adhoc basis only by the A.O. 30. Having heard the parties herein and on perusal of the documents on record and considering the submissions of the parties, we find that in....
X X X X Extracts X X X X
X X X X Extracts X X X X
....his will not preclude the assessee to agitate the issue in the penalty proceedings. We also find that the A.O had made a disallowance of Rs. 5.00 crores on adhoc basis which was restricted to Rs. 1.63 crores by the ld. CIT(A). In this regard, the ld. Sr. Counsel submitted that on a conjoint reading of the orders of the Tribunal for A.Y. 2008-09, 2009-10, 2010-11 and 2011-12 there were no evidences of payments to Mr. S.K. Gupta and Mr. Sandeep Sitani and thus no disallowance was made and that further no disallowance can be made on an adhoc basis by the revenue authorities. That in the Tribunal"s order for A.Y. 2009-10 at para 39, the Tribunal gives a categorical finding that there is merit in the plea of the assessee that in the absence of any adverse evidences collected during the year no disallowance can be made in the hands of the assessee in the instant assessment year. This signifies that there cannot be any disallowance on adhoc basis. Taking totality of the facts and circumstances and the rationale imbibed in the decision of the Tribunal in assessee"s own case for other assessment years, we hold that no disallowance on adhoc basis is permissible in the realm of direct tax sta....
X X X X Extracts X X X X
X X X X Extracts X X X X
....e Method". 33. The relevant facts on the issue are that the taxability of the assessee is governed by the special and non-obstante provisions of sec.44 of the Act read with Rule 5 of the Frist Schedule which provides for specified adjustments. The said provisions do not specify adjustment u/s 14A of the Act and hence, the assessee claims that disallowance under the said section is not applicable. That while computing the taxable income for A.Y. 2007-08, the assessee had conservatively considered disallowance u/s 14A of the Act of Rs. 11,56,172/- in respect of expenses attributable to profits on sale/redemption of investments and dividend income as the lead order of the Tribunal for A.Y. 2003-04 was awaited as on the date of filing the return of income. The assessee had reserved its right to claim the non-applicability of sec. 14A of the Act in the facts of the present case and hence, sought during the course of assessment proceedings that the decision of the Tribunal should be applied and the disallowance conservatively offered to tax should be withdrawn. The said disallowance was computed based on "Net Income method" wherein, all direct expenses incurred in earning investment i....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... favour of the assessee in the light of the decision by the Hon"ble Delhi High Court in the case of Pr. CIT New Delhi Vs. Oriental Insurance Co. Ltd. (2020) 118 Taxmann.com. 248) (Del). In this case, there was a categorical finding that sec. 44A of the Act over-rides sec. 14A of the Act and hence, no disallowance can be made in the hands of the assessee. Further, the ld. Sr. Counsel brought to our notice that for A.Y. 2008-09 the Tribunal had sustained the disallowance to the extent suo moto disallowed by the assessee in its return of income as per the net income method which in fact relates to without prejudice to ground raised by the assessee in case sec. 14A is held to be applicable. Thus, for A.Y. 2007-08 the assessee submits that disallowance of Rs. 11,56,172/- suo moto made by the assessee while filing its return of income should be deleted in this regard and placed strong reliance on the decision of the Hon"ble Madras High Court in the case of Marg Ltd. Vs. CIT Chennai (2020) 120 taxmann.com 84 (Mad) which stipulates the principles that the Tribunal is bound to follow the law and provide relief even if it results in reduction of suo moto disallowance calculated by the assess....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... of business or profession. Section 44 specifically excludes the provisions of the Act relating to computation of income, inter alia, those contained in "Section 28 to 43B". Thus, the exclusion would take within its sweep Section 14A which is an exemption for deductions as allowable under the Act, as provided under Section 28 to 43B. Further, Section 44 is a special provision applicable in the cases of insurance companies and applies, notwithstanding anything to the contrary contained in the provisions of the Income Tax Act relating to the computation of income chargeable under different heads. For computing the profits and gains of the business of insurance company, the AO had to resort to Section 44 and the prescribed rules, and could not have applied Section 28 to 43B, since the same were excluded from the purview of Section 44. This necessarily includes the exception provision enshrined under Section 14A of the Act. Therefore, in our view, the AO could not have travelled beyond Section 44 in the first schedule of the Act. Besides, the tribunal has also invoked the rule of consistency since the same view of the Tribunal has prevailed in respect of the earlier assessment years i.....