TaxTMI 
TaxTMI 
2023 (11) TMI 391
X X X X Extracts X X X X
X X X X Extracts X X X X
....of previous year relevant to assessment year under consideration. i.e. The surplus as on 31st March of the financial year as the income of the assessee from life insurance business without adjusting the opening surplus - Ground No.1 (ii) Not accepting the basis of computation as per section 44 read with rule No.2 of Schedule I - Ground Nos. 2 to 4 (iii) Not consolidating the policy holder account and share holders account for the purpose arriving at the income from life insurance business of the assessee - Ground No.5, 9 & 10 (iv) Transfer to revenue account from P&L account - Ground No.6 (v) Adding the negative reserves to the surplus of the actuarial valuation of the life insurance business - Ground No.7 (vi) Disallowance under section 14A r.w.r.8D in respect of negative income - Ground No.8 (vii) Denial of exemption under section 10 towards dividend income, interest income from tax free bonds and income from pension line of business - Ground No.11 to 13 3. The assessee is engaged in the business of life insurance which includes term insurance linked business, pension business, general annuity business, etc. falling within the definition of the term "life insurance b....
X X X X Extracts X X X X
X X X X Extracts X X X X
....d, relied on the order of the Assessing Officer. 7. We heard the parties and perused the material on record. The co-ordinate bench in assessee's own case (ITA No.2203 to 2206/Mum/2012 dated 20.09.2013) has considered the various issue with regard to the computation of income. The relevant extract with regard to each of the issues is extracted below - Computing taxable income as per section 44 read with rule No.2 of Schedule I 2.5.1. So, we would like to decide the issue of computing surplus/deficit disclosed by the actuarial valuation as per rule 2 of the First Schedule. As per the assessee, surplus/deficit had to be calculated in form I of the fourth schedule to the Insurance Act, 1938 prior to its amendment by the Insurance(Amendment)Act, 2002. We find that similar issue had arisen in the case IPLIC (supra). Deciding the matter Mumbai Bench of the Tribunals has dealt the issue as under : 27. Respectfully following the above principles and examining the provisions of IT Act, we are of the opinion that the 'actuarial valuation made in accordance with the Insurance Act, 1938' do mean that the actuarial valuation done in accordance with the Insurance Act, 1938. In arri....
X X X X Extracts X X X X
X X X X Extracts X X X X
....We are of the firm opinion that the unamended provisions of Insurance Act 1938 were only incorporated into the Income Tax Act as far as life insurance business is concerned. Therefore, AO's action in following the format prescribed under the Regulations of IRDA Act is not in accordance with the spirit of Rule-2 and provisions as made applicable under the Income Tax Act. 30. The First to Fourth Schedule of the Insurance Act 1938 was omitted by the Insurance Amendment Act 2002 after incorporation of the relevant schedules in the IRDA Act. Even though the said schedules were omitted from the Insurance Act, 1938, we are of the opinion that as far as Rule-2 is concerned by the principle of 'Legislation by incorporation' unamended Insurance Act, 1938 is applicable and the actuarial valuation has to be made in accordance with the then existing Part-I of the Fourth Schedule and in conformity with the requirements of Part-II of that schedule. Therefore, assessee's contention that the IRDA Regulations even though are applicable to assessee since it has commenced business after the commencement of the IRDA Act, 1999, for the purpose of Rule-2, the actuarial valuation has to ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ons therein not only the private participants were permitted to do business but presentation of accounts and reports were modified..... .... ...The profits and gains of life insurance business shall be taken to be the annual average of the surplus arrived at by adjusting the surplus or deficit disclosed by the actuarial valuation made in accordance with the Insurance Act, 1938, in respect of the last inter-valuation period ending before the commencement of the assessment year, so as to exclude from it any surplus or deficit included therein which was made in any earlier inter-valuation period." Respectfully following the above ground no.6 is decided in favour of the assessee. Surplus from Policy holder account and shareholder account to be consolidate and taxed under Income from Insurance business 2.5.4. Fifth Ground is about setoff of deficit in Share-holder's account. We find that identical issue had arisen in the case of IPLCI(supra).Deciding the issue in favour of the assessee, Tribunal held that IRDA Regulations specifically required to maintain the Policy-holder's account and the Share-holder's account separately and permitted transfer of funds from Share-holder's acc....
X X X X Extracts X X X X
X X X X Extracts X X X X
..... Respectfully following the above, we decide ground no.5 in favour of the assessee. 2.5.6. Last ground of appeal, related with life insurance business(Ground no.7) is about taxability of income in Share-holder's account. While deciding the Ground no.3 we have held that amount disclosed in Share-holder's account (Rs. 29.62 Crores) is not to be taxed under the head "income from other sources", but same has to be assessed under the head income from business and profession. We are of the opinion that business carried out by the assessee is governed by the 14 ITA No. 2203/Mum/2012 & Ors. HDFC Standard Life Insurance Company Ltd provisions of section 44 of the Act. Therefore, Rs. 29.62 appearing in Share-holder's account has to be assessed as business income. Transfer from shareholder account to policy holder account 2.5.3. Ground of appeal no.4 is about transfer of Rs. 324.82 Crores from Share-holder's account to the Policy-holder's account. We find that similar issue has been adjudicated by ITAT Mumbai in the case of IPLIC(supra).Holding that transfer of funds from Share-holder's account to the Policy -holder's account did not result in income chargeable to tax, Tribnal, in the ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....nt value of future premium is more than the present value of future benefits payable and future expenses to be incurred, this amount becomes negative, known as "negative reserve". In simple words, it means that the insurance contracts under consideration do not warrant any provision and is, in fact, an asset. However, in certain circumstances, such as for following IRDA guidelines, insurers may not treat policies as assets and they set any negative reserves to zero. For example, 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. 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. We find that AO has raised the following ground of appeal in the appeal filed b....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... section 14A. The Ld.AR in this regard submitted that the co-ordinate bench in assessee's own case (supra) has considered this issue also wherein it is held that - 3.3. We find that similar issue had arisen in the case of IPLCI(supra)also. We would like to reproduce the ground raised before the tribunal : "AO and the CIT (A) erred in invoking the provisions of section 14A of the Income Tax Act 1961 and disallowing expenses attributable to earning exempted income, without appreciating the fact that the provisions of section 14A are not applicable to Insurance Companies". Deciding the issue in favour of the assessee Tribunal held as under : "This issue is already decided by the Coordinate Benches in various cases. For the sake of record, the order in the case of General Insurance Corporation of India (supra) vide Para 9 is as under: 9. "Issue No.6 Non applicability of provisions of section 14A. (Modified Ground of Appeal No.3.1 to 3.4 - Original Ground of Appeal No.3.1 to 3.5). The issue is with reference to the applicability of section 14A and disallowance of expenditure in respect of sale of investment which are not taxed. We have heard the rival contentions. We also note....
X X X X Extracts X X X X
X X X X Extracts X X X X
....'s own case for asst. yr. 1985-86. The Tribunal accepted the plea of the assessee and in fact the issue went up to the Hon'ble Delhi High Court in asst . yrs. 1986-87 to 1988-89, which is reported as CIT v. Oriental Insurance Co. Ltd. [2003 life insurance business 179 CTR (Delhi) 85 : [2002 life insurance business 125 Taxman 1094 (Delhi), decided the issue in favour of the assessee by holding that s. 44 of the Act is a special provision dealing with the computation of profits and gains of business of insurance. It being a non obstinate provision, has to prevail over other provisions in the Act. It clearly provides that income from insurance business has to be computed in accordance with the rule contained in the First Schedule. It is not the case of the Revenue that the assessee has not computed the profits and gains of its insurance business in accordance with the said rules. Reliance was placed on the scope of s. 14A, as held in the case of General Insurance Corporation of India v. CIT [1999 life insurance business 156 CTR(SC) 425 :[1999 life insurance business 240 ITR 139 (SC), where -in their Lordships of the apex Court have categorically held that the provisions of s. ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ses of assessment of insurance companies therefore it was not permissible to the AO to travel beyond s. 44 of First Schedule of IT Act. The next common dispute relates to the order of the CIT (A) in sustaining the act ion of AO in al lowing only 50 per cent of the management expenses by invoking the provisions of s. 14A of the Act. The addition is made by the AO on the plea that the provisions of s.14A was inserted by Finance Act, 2001 w.e.f. 1st April, 1962. It is stated that the investments made by the assessee are both taxable as well as tax free. An estimated disallowance of 50 per cent out of the management expenses incurred and as claimed in the P&L a/c is treated as expenses incur red in connect ion with the looking after tax-free investment. The learned counsel for the assessee vehemently argued that the income of the assessee is to be computed under s.44 r/w r. 5 of Sch. 1 of the IT Act. Sec. 44 is a non obstinate clause and applies notwithstanding anything to the contrary contained within the provisions of the IT Act relating to computation of income chargeable under different heads, other than the income to be computed under the head 'Profit and gains of business o....
X X X X Extracts X X X X
X X X X Extracts X X X X
....favour of the assessee. Therefore, the ground is allowed". Respectfully following the orders of the coordinating benches we decided ground no.8 in favour of the assessee. As the ground no.8 has been decided in favour of the assessee, so the grounds no.9 and 10 become academic. Both the grounds are decided in favour of the assessee for statistical puoposes." 12. Respectfully following the above decision, we hold that the provisions of section 14A are not applicable in assessee's case and allow the ground raised in this regard in favour of the assessee. 13. The next issue is with respect to claiming exemption towards dividend income, interest income from tax free bonds and income from pension line of business. We notice in this regard that the coordinate bench in the case of ICICI Prudential Insurance Co. Ltd vs ACIT [2012] 28 taxmann.com 257 (Mum.) has considered the issue of claiming exemption towards income from pension line of business and dividend income and held that - 48. All the above three grounds are on the issue whether exemption under Sec 10 can be allowed when incomes are computed under Sec.44 of the IT Act. In arriving at the deficit from the insurance business, a....
X X X X Extracts X X X X
X X X X Extracts X X X X
....;s own case dated 1.12.2011. Consequent to the findings of the CIT(A) in AY 2007-08 (impugned AY ) the Assessing Officer seems to have issued notice under section 148 for reopening the assessment for the AY 2006-07 on the reason that the assessee was not eligible for claiming income as exempt under sub-sections 15, 23G, 34 and 38 of Section 10 and assessee challenged the issue by way of writ petition. The Hon'ble Bombay High Court not only disapproved the reopening of the assessment but gave the findings on merit also which are as under:- "11. Section 44 of the Income Tax Act, 1961 stipulates as follows: "44. Notwithstanding anything to the contrary contained in the provisions of this Act relating to the computation of income chargeable under the head "interest on securities", "Income from house property", "Capital gains" or "Income from other sources", or in section 199 or in sections 28 to (43B), the profits and gains of any business of insurance, including any such business carried on by a mutual insurance company or by a cooperative society, shall be computed in accordance with the rules contained in the First Schedule". Section 44 provides that the profits and gains ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....n 44 or rule 2 of the first Schedule, the Life Insurance Corporation will not be entitled to claim the deductions which are otherwise admissible in the case of an assessee, computation of whose income is governed by the other provisions of the Act. The argument of Mr. Kolah for the Life Insurance Corporation is that unless there are express provisions which disable the Corporation from claiming the deductions referred to above, the Corporation cannot be deprived of the benefit of the provisions referred to in the questions Nos. 1 to 6. Section 44, which deals with computation of profits and gains of business of insurance, begins with a non-obstante clause, the effect of which is that the provisions of the Act relating to the computation of income chargeable under the head "Interest on securities", "Income from house property", "Capital gains" or "Income from other sources", do not apply in the case of computation of income from insurance business. The effect of the non-obstante clause so far as the earlier part of section 44 is concerned, therefore, is that the provisions of section 44 will prevail notwithstanding the fact that there are contrary provisions in the Act relating to c....
X X X X Extracts X X X X
X X X X Extracts X X X X
....e rules contained in the Schedule to the Act. The Division Bench held that upon the language of sub-section (7) of section 10 read along with rule 6 it was impossible to hold that the provisions relating to exemptions stood excluded from operation. In that context the Division Bench held as follows: "It is only after the profits and gains of a business are computed that any question of granting exemptions arises and if the latter stage were intended to be excluded by the law we should have thought that a clearer provision than is made in sub-section (7) of section 10 and in rule 6 would have been made". In the subsequent judgment of the Division Bench in Life Insurance Corporation (supra), the Division Bench noted that there was a difference in the language of section 10(7) of the Act of 1922 when compared with section 44 of the Act of 1961 since section 44 does not refer to the computation of tax but merely to the computation of profits and gains in the business of insurance. The Division Bench held that this would however not make any difference to the principle laid down by the Court in the earlier decision in the case of New India Assurance Co. Ltd. Accordingly, the decisio....
X X X X Extracts X X X X
X X X X Extracts X X X X
....r of Income-tax v. New India Assurance Co. Ltd (supra). The Assessing Officer could not have ignored the binding precedent contained in the two Division Bench decisions of this Court. Moreover, the Assessing Officer in allowing the benefit of the exemption in the order of assessment under section 143(3) specifically relied upon the view taken by the CBDT in its communication dated 21 February 2006 to the Chairman of IRDA. The communication clarifies that the exemption available to any other assessee under any clauses of section 10 is also available to a person carrying on non-life insurance business subject to the fulfillment of the conditions, if any, under a particular clause of section 10 under which exemption is sought. It needs to be emphasized that it is not the case of the Assessing Officer that the assessee had failed to fulfill the condition which attached to the provisions of the relevant clauses of section 10 in respect of which the exemption was allowed. This of course is apart from clause (38) of section 10 where the Assessing Officer had rejected the claim for exemption in the original order of assessment under section 143(3). The Assessing Officer above all was bound....