TaxTMI 
TaxTMI 
2022 (4) TMI 1271
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....he first schedule to the Income Tax Act, 1961 (hereinafter referred to as "Act"). The computation of income of insurance company would be prepared on these accounts subject to the adjustments that are provided in Rule 2 and Rule 5 of the first schedule of the Act. In effect as per Rule 5 of the first schedule to the Act, the assessee"s income would be profits as disclosed in the profit and loss account prepared as per the Insurance Act, 1938 excluding the amounts disallowable u/s. 30 to 43B of the Income Tax Act. This has been duly followed by the assessee in the instant case. 3. The ground Nos. 3 & 4 raised by the assessee are challenging the disallowance of re-insurance premium paid to non-resident reinsurers, who do not have a place of business / branch in India, u/s.37(1) of the Act. The alternative disallowance that was made by the ld. AO in this regard was u/s.40(a)(i) of the Act for payments made without deduction of tax at source. 3.1. We have heard rival submissions and perused the materials available on record. We find that assessee is in the business of general insurance. During the year, the assessee paid an amount of Rs. 681,13,22,176/- to non-resident companies ....
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....ompanies was in violation of provisions of the Insurance Act and consequently whether the provisions of Explanation to Section 37(1) of the Act after 26/12/2014 could be brought into force ? b) Whether reinsurance payment made would be in violation of provisions of Section 40(a)(i) of the Act ? 3.4. We find that the ld. AO had heavily placed reliance on the decision of the Co-ordinate Bench of Chennai Tribunal in the case of DCIT vs. Cholamandalam MS General Insurance Co. Ltd where the provisions of Section 2(9) r.w.s. 101A(7) of the Insurance Act, 1938 were dealt with and the issue in dispute was decided against the assessee. In this regard, it would be relevant to reproduce the provisions of Section 2(9) and Section 101A of the Insurance Act, 1938 as under:- (9) "Insurer" means- (a) any individual or unincorporated body of individuals or body corporate incorporated under the law of any country other than India, carrying on insurance business not being a person specified in sub-clause (c)of this clause which- (i) carries on that business in India, or (ii) has his or its principal place of business or is domiciled in India, or ....
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....ccount premiums on re-insurance ceded or accepted) in respect of such business during that year Explanation- For the purposes of this-section. the year 1961 shall be deemed to mean the period from the 1st April to the 31st December of that year. (4) A notification under subsection (2) may also specify the terms and conditions in respect of any business of re-insurance required to be transacted under this section and such terms and conditions shall be binding on Indian re-insurers and other insurers. (5) No notification under sub-section (2) shall be issued except after consultation with the Advisory Committee constituted under Section 101B. (6) Every notification issued under this section shall be laid before each House of Parliament, as soon as may be, after it is made. (7) For the removal of doubts, it is hereby declared that nothing in subsection (I) shall be construed as preventing an insurer from reinsuring with any Indian re-insurer or other insurer the entire sum assured on any policy or any portion thereof in excess of the percentage specified under sub-section (2)." 3.5. Further w.e.f. 26/12/2014, Insurance Laws (Amendment) A....
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....ction 101A(7) of the Insurance Act alone is reproduced hereunder:- 101A(7): "For the removal of doubts, it is hereby declared that nothing in sub-section (1) shall be construed as preventing an insurer from re-insuring with any Indian re-insurer or other insurer the entire sum assured on any policy or any portion thereof in excess of the percentage specified under sub-section (2)." 3.8. From the aforesaid provision, the expression "other insurer" assumes significance. Whether the aforesaid expression "other insurer" would include foreign re-insurers? If the answer is in the affirmative, then the assessee has not violated any provisions of the Insurance Act, 1938 and consequently there cannot be any disallowance in terms of Explanation 1 to Section 37(1) of the Income Tax Act. If the answer is in the negative, then the assessee had violated the provisions of Insurance Act and consequently would be liable for disallowance in terms of Explanation 1 to Section 37 of the Income Tax Act. 3.9. As stated earlier, the provisions of Insurance Act i.e. Section 2(9) and Section 101A(7) were subject matter of adjudication by the Chennai Tribunal in the case of Cholamandalam MS....
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....mium ceded to non-resident reinsurers. The assessees have raised the following substantial questions of law for consideration:- "(i) Whether the ITAT erred in deciding the validity of reinsurance ceded to the non-resident reinsurers when such issue was not even raised before it by either the Department or the Appellant? (ii) Whether the ITAT erred in holding that the IRDA (General Insurance - Reinsurance) Regulation, 2000 is contrary to section 101A of the Insurance Act, 1938 when it does not have the power to decide the validity of regulations made by the IRDA? (iii) Whether the ITAT erred in holding that reinsurance payments to non-residents are prohibited by law and therefore hit by Explanation 1 to section 37 of the Act? (iv) Whether the ITAT erred in failing to follow co-ordinate bench decisions on the very question of reinsurance payments to non-residents when it ought to have referred the matter to a larger bench if it disagreed with such judgments?" 3.11. The Hon"ble Madras High Court considered Cholamandalam MS General Insurance Co. Ltd case in TCA No.754 of 2018 as the lead case. Out of the aforesaid four questions, the question Nos.....
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....transaction as illegal under the provisions of the Insurance Act or the Regulations framed thereunder. The Income- tax Officer can examine as to whether any income accrued in the hands of the assessee is required to be taxed. In the instant case, neither the Assessing Officer, nor the Commissioner of Income-tax (Appeals)-II (for brevity "the CIT(A)") has made any such endeavour, but the Tribunal has done such an exercise which, in our considered opinion, was without jurisdiction. Nevertheless, as we have heard elaborate arguments on the side of the assessees as well as the Revenue, we are constrained to test the correctness of the order passed by the Tribunal in this regard. Thus, we have to decide as to whether there is a prohibition under law for insurance payments to non-residents so as to attract the rigour of Explanation 1 to Section 37 of the Act. 16.In this regard, we may straightaway refer to the statement of objects and reasons for the Insurance (Amendment) Bill, 1961, which was introduced in the Lok Sabha on 14th February, 1961. This Bill was passed and the Insurance Act stood amended. The Hon'ble Finance Minister for the Union of India would state that re-in....
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....h business, re-insure with Indian re-insurers such amount out of the first surplus in respect of that business as he thinks fit, so however that, the aggregate amount of the premiums payable by him on such re-insurance in any year is not less than the said percentage of the premium income (without taking into account premiums on re-insurance ceded or accepted) in respect of such business during that year. Explanation .-For the purposes of this sub- section, the year 1961 shall be deemed to mean the period from 1st April to the 31st December of that year. (4) A notification under sub-section (2) may also specify the terms and conditions in respect of any business of re-insurance required to be transacted under this section and such terms and conditions shall be binding on Indian re-insurers and other insurers. (5) No notification under sub-section (2) shall be issued except after consultation with the Advisory Committee constituted under section 101B. (6) Every notification issued under this section shall be laid before each House of Parliament, as soon as may be, after it is made. (7) For the removal of doubts, it is hereby declared that....
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....e cannot be any extended meaning, which can be given to the term "other insurer". Thus, it held an Indian insurer cannot have any reinsurance arrangement with reinsurance company other than the insurer, as defined in Section 2(9) of the Insurance Act. In our considered view, the conclusion of the Tribunal is not \ sustainable. We support such conclusion with the following reasons. 19.In exercise of the powers under Section 114A of the Insurance Act, and Sections 14 and 26 of the Insurance Regulatory and Development Authority Act, 1999, the Central Government framed the Insurance Regulatory and Development Authority Regulations pertaining to General Insurance - Reinsurance called Insurance Regulatory and Development Authority (General Insurance - Reinsurance) Regulations, 2000. Chapter II of the said Regulations deals with procedure to be followed for re-insurance arrangements and it would be beneficial to refer to the said provision, which reads as follows:- "Chapter II:- 3. Procedure to be followed for Reinsurance Arrangements:- (1) The Reinsurance Programme shall continue to be guided by the following objectives to: a) maximise retenti....
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....to all insurers and assist in maintaining the retention of business within India as close to the level achieved for the year 1999-2000 as possible. The arrangements so made shall be submitted to the Authority within three months of these regulations coming into force, for approval. (9) Surplus over and above the domestic reinsurance arrangements class wise can be placed by the insurer independently with any of the reinsurers complying with sub-regulation (7) subject to a limit of 10% of the total reinsurance premium ceded outside India being placed with any one reinsurer. Where it is necessary in respect of specialised insurance to cede a share exceeding such limit to any particular reinsurer, the insurer may seek the specific approval of the Authority giving reasons for such cession. (10) Every insurer shall offer an opportunity to other Indian insurers including the Indian Reinsurer to participate in its facultative and treaty surpluses before placement of such cessions outside India. (11) The Indian Reinsurer shall retrocede at least 50% of the obligatory cessions received by it to the ceding insurers after protecting the portfolio by suitable excess o....
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....e is the only national re-insurer operating in India and also has re-insurance business in international market and its share of international business is 44 per cent. The Chairman of the General Insurance Corporation (GIC), who is one of the respondents in these appeals, has deposed before the Standing Committee on Finance and would state that the legal position as of 2008, there was no bar on doing re-insurance business by any foreign re-insurance company in India. The Chairman, GIC expressed deep concern that when GIC has to transact international business in various countries, they are subjected to lot of crosschecks and regulation and there is no corresponding regulation in India, as a result of which, foreign re-insurance companies can accept re-insurance business without taking any licence and without opening any branch in India. Thus, the suggestion was there is a need for regulation for any foreign country coming into India and doing re-insurance business. Ultimately, the Standing Committee on Finance noted that there is no bar on foreign re-insurance business companies carrying on re- insurance business in the country without any licence or opening a branch, nor there was....
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....d. Furthermore, the Reserve Bank of India, Exchange Control Department, Central Office, Mumbai notified the Foreign Exchange Management (Insurance) Regulations, 2000. The major changes in the procedure as per the memorandum of Exchange Control Regulations relating to General Insurance in India (GIM) were summarised and the relevant Regulation, pertaining to re- insurance arrangement, is as follows:- S.No. Subject Matter Changes 1 Reinsurance Arrangement The reinsurance arrangement of public sector general insurance companies registered with ITDA are to be decided by the Reinsurance respective Boards of the insurance companies and IRDA is to be kept informed. ADs designated by these insurance companies are now permitted to make remittances falling under such approved reinsurance arrangements without reference to the bank. 24.The above will clearly show that re-insurance arrangement with a foreign insurance company is permissible. Thus, it is evidently clear that on and after the introduction of Section 101A to the Insurance Act, there is a mandatory requirement for other insurer to re-insure with the Indian re-insurers and such percentage is put to a maxim....
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....fore the Assessing Officer or before the CIT(A) or before the Tribunal, when they filed appeals challenging that portion of the order passed by the CIT(A), which was against the Revenue. 26.The Tribunal while upholding the order of the Assessing Officer did not assign any independent reasons. The discussion in the impugned order relates to the validity of re-insurance business outside India done by an Indian insurer. The Tribunal did not consider the correctness of the order passed by the Assessing Officer or that of the CIT(A). Therefore, the Tribunal could not have held that the Assessing Officer rightly disallowed the re-insurance premium under Section 40(a)(i). This finding is not supported with any reasons. Therefore, the Tribunal misdirected itself, exceeded the scope of remand as ordered by the Division Bench and ventured into a jurisdiction, which is wholly prohibited in the light of the plain language of Section 254(1) of the Act. 27.Thus, for the above reasons, we are of the clear view that the order passed by the Tribunal calls for interference. Accordingly, the appeals, filed by the assessee are allowed and the substantial questions of law framed are a....
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....ar 2014-15, IRDA had addressed a letter of the assessee dated 27/04/2015 approving the requests of the assessee. This goes to prove that the reinsurance premium sought to be paid to foreign reinsurers outside India was taken due cognizance by the IRDA, being the regulatory authority for insurance companies, and had not found anything adverse or in any violation of provisions of Insurance Act and insurance regulations thereon. Further we find that IRDA vide letter dated 12/02/2020 had given clarification in respect of assessment proceedings of the assessee company for A.Y.2016-17 and 2017-18 directly addressed to the ld. AO, wherein, it was specifically clarified that the reinsurance premium paid by the assessee to foreign reinsurers outside India who do not have any business presence in India, was permitted in law and was permitted activity under the insurance Act 1938 and IRDA (General Insurance-Reinsurance) Regulations issued by the authority. It was also mentioned in the said letter that the regulations issued by the authority i.e. IRDA are subordinate legislation which are also placed before both the Houses of Parliament. Hence, in view of the above, it could be safely conclude....
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....igh Court's decision that Indian insurance companies can reinsure with non-resident companies. However once when specific provisions have been incorporated in the Insurance Act relating to reinsurance as well as non resident reinsurance the applicability of "other insurer" becomes redundant as far as non resident reinsurance is concerned. AO therefore has rightly held that payments made in respect of reinsurance premium to non-resident reinsurance companies were in violation of the Insurance Act, 1938 (Insurance Act) and not admissible as business expenditure as per Explanation (1) to section of 37 of the Act. 4.2.6 Further, the said amount was also disallowed without prejudice basis under section 40(a){i) of the Act as no TDS was deducted by the appellant company. Income-tax Appellate Tribunal (ITAT) in the case of DCIT vs. Cholamandalam Ms General insurance Company Ltd held that the profit of non-resident reinsurance company or the person in India who has standing contract with underwriters, who are members of the Lloyds, is taxable in India. Accordingly, it was held that the insurance companies had to necessarily deduct tax on the premium paid to foreign companies f....
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....d opinion, is wrong. 3.17. Let us now examine the applicability of provisions of Section 40(a)(i) of the Act in respect of reinsurance premium paid to foreign reinsurers. We find that the ld. CIT(A) had placed reliance on the decision of Chennai Tribunal in the case of Cholamandalam MS General Insurance Co. Ltd to drive home the point that the said payment shall be liable for deduction of tax at source in terms of Section 40(a)(i) of the Act. We find that though the Hon"ble Madras High Court in para 26 had held that Chennai Tribunal decision in confirming the action of the ld. AO in invoking provisions of Section 40(a)(i) of the Income Tax Act was not supported with any reasons, finally in para 28, the Hon"ble Madras High Court had remanded this question to the Tribunal to decide whether the ld. AO was right in disallowing the reinsurance premium u/s. 40(a)(i) of the Act. Hence, that question needs to be decided by the Tribunal. Accordingly, the issue of applicability of provisions of section 40(a)(i) of the Act is adjudicated by us independently. We find that the Co-ordinate Bench of this Mumbai Tribunal in the case of DCIT vs. ICICI Lombard General Insurance Co. Pvt. Ltd., in ....
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....ulate, we may note that the appellant is a global re-insurance company which has entered into re-insurance contracts with various Indian insurance companies. For underwriting the risks of the Indian insurance companies, assessee earns reinsurance premiums, which is the subject-matter of dispute before us. So far as the nature of receipts in question is concerned, there is a convergence between the assessee and the Revenue that the same are in the nature of business receipts. It is quite well understood that in such like cases where the foreign company earns business income, the same can be taxed in India only if it has a PE in India or 'business connection' so as to fall within the scope of Indian tax laws. At the outset, it has been asserted by the appellant before us that in such situations, the onus is on the Revenue to establish that the foreign company has a 'business connection' or a PE in India so as to invite any tax liability under the Indian tax laws. Ostensibly, the aforesaid is supported by the judgment of the Hon'ble Supreme Court in the case of E funds IT Solution Inc vs ADIT, (2017) 86 taxmann.com 240. Therefore, in this background, we may now exa....
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.... may now address the point as to whether the operations of the Indian subsidiary, which have indeed been carried out from India, can be construed as enabling invoking of 'business connection' of the assessee as envisaged under Section 9(1)(i) of the Act or whether the Indian subsidiary constitutes a PE of assessee in India. Article 5(1) of the India- Germany Tax Treaty provides that PE means a fixed place of business through which the business or enterprise is wholly or partially carried on. On this aspect, the case set-up by the Revenue is that the key functions of reinsurance business, namely, actuarial services and underwriting services are provided by the Indian subsidiary. Such discussion is contained in paras 9.7.2 to 9.8 of the final order of the Assessing Officer. On this aspect, we have carefully examined the contentions put forth by the Revenue as well as the material on record, namely, the Master Service Agreement and the Addendum to the Master Service agreement between assessee and the Indian subsidiary and find that the approach of the Assessing Officer is quite misdirected. In fact, the services that have been provided by the Indian subsidiary are support serv....
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....a or not. Factually or legally speaking, the place of business of Indian subsidiary per-se can in no way be equated to mean the fixed place of business of the assessee in India. In fact, in this connection, the observations of the Hon'ble Supreme Court in the case of E funds IT Solution Inc (supra) are very apt. In para 12 of its order, the Hon'ble Supreme Court has dealt with in detail, by making reference to the findings of the Hon'ble High Court, and concluded that there was no fixed place PE of the assessee before it on the facts of the case before it.One of the points noted by the Hon'ble High Court was that the foreign company was dependent on the Indian subsidiary for earning its income. This aspect was specifically negated and held not to be a relevant criteria to determine whether there existed a fixed place PE or not. Similarly, the manner and mode of carrying on of transaction was also not found to be a proper test to determine as to whether there existed a fixed place of business or not. Taking a cue from the reasoning approved by the Hon'ble Supreme Court, in the present case too, the mere rendering of support services in connection with actuarial o....
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....ewhat similar situations, foreign companies engaged in reinsurance business have not been found to be having a fixed PE or an agency PE in India in the form of an Indian subsidiary. In this context, reference has been invited to the decision of the Mumbai Bench of the Tribunal in the case of Swiss re-Insurance Co. Ltd. vs DDIT(IT), [2015] 55 taxmann.com 520 (Mumbai - Trib.), which according to the learned representative, is directly on the point. We have perused the said decision and find that the factual matrix which prevails in the instant case before us is similar to what has been considered in the case of Swiss re-Insurance Co. Ltd. (supra). In para 2.1 of the order, the relevant facts have been noted and the discussion reveals that the facts before us are quite similar to the case before our co-ordinate Bench. It was the case of a reinsurance company based in Switzerland which was receiving income for providing reinsurance to various insurance companies in India. Swiss re-Insurance company had a wholly owned subsidiary in India which was rendering administrative, market intelligence and other risk assessment services, which is quite similar to the services being rendered to as....
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....he stand of the assessee. As a consequence, so far as Ground of appeal nos. 1 to 4 are concerned, the same are treated as allowed. 3.19. Similar view was taken by the Co-ordinate Bench of Pune Tribunal in the case of Bajaj Alliance General Insurance Co. Ltd. ,vs. DCIT in ITA No.2560/PN/2012 for A.Y.2008-09 dated 03/02/2016 vide paras 26-43. For the sake of brevity, the relevant operative portion of that Pune Tribunal order is not reproduced herein. 3.20. It is a fact that in the impugned case of the assessee before us, i.e. Tata AIG Insurance, it is not in dispute that foreign reinsurer does not have any place of business or branch or any business connection or permanent establishment in India. Hence, the payments made by the assessee company to the said foreign insurer is not chargeable to tax in India in the hands of the foreign reinsurer in terms of Section 195(1) of the Income Tax Act. Hence, there is no obligation on the part of the assessee payer to deduct tax at source thereon. Reliance in this regard is placed on the decision of the Hon"ble Supreme Court in the case of GE India Technology Centre Pvt. Ltd., vs CIT reported in 327 ITR 456. Accordingly, the provisions of....
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.... that Article 5(4) of the treaty does not apply to reinsurer. Moreover, the ld. CIT(A) accepts the existence of independent brokers involved and if it is so, it cannot constitute a PE. 3.24. Hence, the entire observations of the lower authorities had been duly addressed in the aforesaid findings by us. At the cost of repetition, we would like to reiterate the fact that there is absolutely no dispute that the foreign reinsurers does not have any place of business in India / permanent establishment in India / branch established in India / Liaison office in India. Hence, any payment made by the assessee company to such foreign insurers would not be chargeable to tax in the hands of the foreign reinsurers in India in terms of Section 195(1) of the Act. Accordingly, as stated earlier, there would be no obligation on the part of the assessee, being a payer, to deduct tax at source and consequently there cannot be any disallowance u/s.40(a)(i) of the Act. Accordingly, assessee succeeds on this ground also. 3.25. Accordingly, in view of the aforesaid observations the ground Nos.3 & 4 raised are allowed. 4. The ground No.10 raised by the assessee is with regard to claim of deprecia....
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....rovisions mentioned in Rule 5 of first schedule to the Income Tax Act applicable for insurance companies cannot be given a literal interpretation as it manifestly produces unjust result. Reliance in this regard has been rightly placed by the ld. AR on the decision of the Hon"ble Supreme Court in the case of CIT vs. J H Gotla reported in 156 ITR 323 wherein the relevant portion is reproduced hereunder:- "46. Where the plain literal interpretation of a statutory provision produces a manifestly unjust result which could never have been intended by the Legislature, the Court might modify the language used by the Legislature so as to achieve the intention of the Legislature and produce a rational construction. The task of interpretation of a statutory provision is an attempt to discover the intention of the Legislature from the language used. It is necessary to remember that language is at best an imperfect instrument for the expression of human intention. It is well to remember the warning administered by judge, the learned hand that one should not make a fortress out of dictionary but remember that statutes always have some purpose or object to accomplish and sympathetic and ....
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....to the condition that any expenditure debited to the profit and loss account which is not admissible under the provisions of sections 30 to 43B shall be added back; any gain or loss on realisation of investment shall be added or deducted, as the case may be, if the same is not credited or debited to the profit and loss account; any provision for diminution in the value of investment debited to the profit and loss account shall be added back. Thus, there is no specific provision, in this rule, in the case of other insurance companies, to allow deduction for any payment of certain expenses specified in section 43B if they are paid in subsequent previous year. There is a possibility that such sum may not be allowed as deduction in the previous year in which the payment is made. This has not been the intention of the legislature. Therefore, it is proposed to insert a proviso after clause (c) of the said rule 5 to provide that any sum payable by the assessee which is added back under section 43B in accordance with clause (a) of the said rule shall be allowed as deduction in computing the income under the rule in the previous year in which such sum is actually paid. Thi....
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.... computation provisions mentioned in Rule 5 of the first schedule of the Income Tax Act workable. In view of the above observations, we direct the ld. AO to grant allowance of depreciation u/s.32 of the Act for the year under consideration. Needless to mention that the ld. AO should rework the depreciation of subsequent years accordingly due to change in the written down value of the block of assets. Accordingly, the ground No.10 raised by the assessee is allowed. 5. The ground Nos. 5 to 9 raised by the assessee are in the same line of ground No.10 wherein certain deductions were claimed by the assessee. The same are detailed hereinbelow:- (a) Ground No.5 is seeking deduction in respect of profit on sale of fixed assets from the assessee"s total income - Since we have already directed the ld. AO to grant depreciation as per Ground No.10 hereinabove u/s.32 of the Act, then consequently on sale of fixed assets would also have to be as per the provisions of Income Tax Act, hence, this ground No.5 becomes consequential in nature. (b) Ground No.6 is challenging the action of the ld. CIT(A) not excluding the reversal of expenses credited by the assessee to its profit....