TaxTMI 
TaxTMI 
2025 (3) TMI 26
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....ted (IBNR) and Claims Incurred But Not Enough Reported (IBNER) of Rs. 1582,52,00,000/- in the computation of income under normal provisions of the Act; b. Rs. 13,45,79,000/- being amortization of premium paid on purchase of securities. 2. The CIT(A) erred in upholding the disallowance of the provision made by the Appellant for claims made towards IBNR and IBNER as an contingent/unascertained liability and therefore not allowable u/s 37(1) of the Act even though the provisions were made based on scientific evaluations by a registered and approved actuary and in accordance with the directions of the Appellant regulator viz., the IRDAI. 3. The CIT(A) failed to appreciate that the amortization of premium paid on purchase of securities is neither an expense nor an allowance that can be disallowed under Rule 5 of First Schedule of Act and that the AO as per the provisions of Section 44 of the Act has the power to disallow only the expenses which are not admissible under the provisions of section 30 to 438 of the Act. 4. The CIT(A) failed to appreciate that in respect of investments for which amortization of premium has been claimed: (a) related interes....
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....in pursuance of the General Insurance Business (Nationalization) Act, 1972 and is also a notified public financial institution u/s 2(72)(iv) of the Companies Act, 2013. The assessee carries on General Insurance business in accordance with the law as laid down by the legislature and the Insurance Regulatory and Development Authority of India ('IRDAI'). Its shares are fully owned by the Government of India (Ministry of Finance) and are under the administrative control of the Insurance Division of Department of Financial Services (Ministry of Finance), Government of India. The assessee, being an insurance company is assessable to income tax as per section 44 of the Income Tax Act, 1961 ("the Act") which is a complete code by itself. The assessment was completed and order u/s 143(3) of the Act was passed on 26th September 2022, wherein the following additions / disallowances, were made by the Assessing Officer. No. Particulars Amount (Rs.) Under the normal provisions of the Act (i) Default in TDS payment u/s 200A of the Act 4,13,03,271 (ii) Reinsurance Premium paid to reinsurers situated overseas u/s 40(a)(i) of the Act 1322,83,76,744 (iii) P....
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.... Disallowance of provision towards IBNR/IBNER claims Dismissed against the assessee by the ITAT and matter pending before the High Court. Para 10-14 (Page Nos. 11-15 of the Order) (iii) Amortization premium paid on securities Dismissed against the of assessee by the ITAT and assessee's appeal is pending before High Court. Para 8-9 (Page Nos. 9-11 of the Order) (iv) Disallowance 40(a)(i) in respect of commission paid to non-resident agents Allowed in favor of the assessee by the ITAT and upheld by the High Court. Para 20 (Page 36-38 of the Order) (v) Survey fees paid Allowed in favor of the assessee by the ITAT and upheld by the High Court. Para 21 (Page 39-40 of the Order) However, the ld. Counsel for the assessee pointed out that on the issue of disallowance of provision towards IBNR/IBNER claims, the order of the Co- ordinate bench of the Tribunal in 1085/Chny/2017 dated 19.07.2024 & ITA No.1585/Chny/2019 dated 19.07.2024 passed in the cases of the assessee has been diluted by the Co-ordinate bench in the case of DCIT Vs M/s Royal Sundaram General Insurance Company Limited [ITA Nos.493, 494, 495 & 496/Chny/2018 for AYs 2011-12, 20....
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.... the Income Tax Act, 1961. 12. On the other hand, the Ld.Sr. Standing Counsel for the Revenue submitted that the assessee has created provision in anticipation of settlement of claims that were not ascertained. What is reported to the assessee is damage/ loss caused to the insured persons. According to the Sr. Standing Counsel, the assessee is yet to assess loss and determine amount to be compensated. Therefore, it is unascertained liability and same cannot be allowed as deduction. The Sr. Standing Counsel further submitted that this issue is covered by the decision of the ITAT., Chennai in assessee's own case for earlier assessment years, where the Tribunal has held that provision made for IBNR and IBNER is not deductible, because merely incident happened during the year which is basis for making claim, that cannot be a reason for allowing compensation payable by the assessee in the subsequent financial years. 13. After hearing both the parties and going through the material on records, we find that an identical issue has been considered by the Tribunal in assessee's own case in ITA Nos. 2107/Chny/2008 &Ors. vide order dated 28.08.2018 for relevant assessment yea....
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....ned CIT(A) on this issue for the assessment years 2014-15, 2015-16, 2016-17, 2018-19 & 2019-20 and reject grounds taken by the assessee. Further, the assessee has also pleaded that with respect to AY 2017-18, the amount disallowable with respect to provisions for IBNR and IBNER claims cannot exceed Rs. 1250.89 crores being the amount debited to the revenue accounts of the assessee. The assessee submitted that the additional amount of Rs. 1582.58 crores being the amount not debited to the profit & loss account be deleted. We are in conformity with the views of the assessee that amount of monies, as provisions, not debited to the profit & loss account cannot be a part of the disallowance. Accordingly, the AO is directed to recalculate the disallowance with respect to provisions for IBNR and IBNER claims and restrict it to the extent of the amounts debited to profit & loss account as per law during the assessment year 2017-18. Accordingly, the grounds of appeal raised by the assessee on this issue for AYs 2014-15 to 2016-17 and 2018-19 & 2019-20 are dismissed and that of the AY 2017-18 is treated as allowed for statistical purposes''. However, we also find that order of the Co-ordi....
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....e Ld.AO to delete the addition. 13.1 We heard rival submissions in the light of the material available on records. The Ld. Revenue's counsel vehemently protested against the impugned action of the Ld.First Appellate Authority and argued that IBNR and IBNER claims are unascertained contingent liabilities and hence cannot be allowed as deduction u/s 37(1). The Ld. Counsel for the revenue heavily relied upon the decision of the Hon'ble Co-ordiante Bench of this tribunal in the case of United India insurance company limited vide ITA No.1085/Chny/ 2017 dated 19.07.2024 and invited our reference to the following parts of the decision and accordingly requested for restoring the order of the Ld. Assessing Officer:- "......10. The next common issue that came up for our consideration in the appeals of the assessee for the assessment years 2014-15, 2015-16, 2016-17, 2017-18, 2018-19 & 2019-20 is disallowance of provision for IBNR and IBNER. 11. The learned counsel for the assessee submitted that during the relevant assessment years, the assessee has made provision for claims incurred, but were not reported (IBNR) and claims incurred, which were not enough reported (....
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....d. Admittedly, the assessee made provision in respect of claims incurred but not reported and in respect of claims incurred but not enough reported. The compensation for making insurance claim arises on the date of loss or damage occurred to the insured property. But, the actual liability to make the payment arises on the date on which the loss or damage was assessed and the amount was determined. In this case, the accident or loss was reported to the assessee but the actual loss or compensation was not determined during the assessment year 2009- 10. Therefore, as rightly submitted by the according to the Ld. Sr. Standing Counsel for the Revenue, the liability to make the payment accrues to the assessee only in the year in which the loss or damage was ascertained and compensation payable to insured person is determined. Admittedly, the compensation payable to insured person was not determined during the assessment year 2009-10. Therefore, this Tribunal is of the considered opinion that merely because the incident happened during the year which is the basis for making claim, that cannot be a reason for allowing the compensation payable by the assessee for the assessment year 2009-10....
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....le decisions of Hon'ble High Court in favour of revenue on the impugned subject. The revenue was asked to provide copies of the impugned orders for consideration, but the same were not placed on records. The Ld. Counsel for the assessee countered that even if there are any such favorable decisions of Hon'ble High Court in favour of revenue on the impugned subject, the same would not be helpful for the revenue given the ratio laid down by the Hon'ble Apex Court in the case of Vegetable Products. 13.3 Hon'ble Coordinate Bench of ITAT, Mumbai in the case of M/s.TATA AIG general insurance company limited ITA no.14 / mum/ 2021 dated 08.03.2022 has ruled as under:- ".....06. The learned Departmental Representative vehemently supported the order of the learned Assessing Officer and merely referred to the order of the learned Assessing Officer and learned CIT (A) stating relevant paragraph of the issues involved. It was submitted that the issues are decided in favour of the assessee by the co-ordinate Bench in assessee's own case; however, the above disallowance should not have been deleted by the learned Commissioner of Income-Tax (Appeals) for the reason given in assessment o....
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....ted by the actual valuation and hence, he disallowed Rs.148,43, 01,915/-. The ld CIT (A) after considering the decision of the honourable Supreme Court in case of Rotork controls India private limited versus Commissioner of income tax 314 ITR 62 considered that if there is a present obligation with respect to the provision, and it arises out of events involving outflow of resources and can be based on reliable estimation of such obligation then the liability incurred by the assessee company is allowable. He further held that the methodology to determine the liability is also certified by actuary in accordance with guidelines and norms issued by the Institute of actuaries of India and insurance regulatory and development authority of India. He further held that such provisioning relates to present obligation and involves outflow of resources. He further considered the provisioning made by the assessee in different years and actual utilization of such provision with respect to those financial years and then he found that the provision was made less than the actual amount incurred in settling those claims. He further held that the coordinate bench in case of DCIT vs. National Insuranc....
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....king a provision as the liability to pay to the insurer agreed during the year. The learned Assessing Officer held that it is an anticipation of settlement of claim and therefore it cannot be said to be a definite liability. We find that identical issue arose in the case of DCIT vs. Export Credit Guarantee Corporation of India Ltd. in ITA No.7657/Mum/2014, wherein the co-ordinate Bench vide order dated 11.10.2017 vide para No.3.3 has allowed the identical claims. The learned CIT(A) while deciding the issue has relied upon the decision co-ordinate Bench in DCIT vs. National Insurance Company Limited (supra) has held that the provisions made available the above claim are based on scientific calculation with a proper and rational and therefore, it could only be termed as ascertain liability. Though the above decision was rendered with respect to the computation of book profit under section 115JB of the Act, however, the learned CIT (A) applied it and allowed the claim of assessee for deduction under section 37(1) of the Act for the reason that the claim of the assessee is ascertained claim, supported by Actuarial valuation and also made on a scientific basis. To reach at this calculat....
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.... "3.6 We have heard the rival submissions and gone through facts and circumstances of the case. We find that the Ld CIT(A) had given a categorical finding that the provision made for liabilities incurred but not reported (IBNR) made by the assessee as per the regulations framed by Insurance Regulatory Development Authority (IRDA) based on a scientific calculation with a proper rationale could only be termed as ascertained liability. Hence, the same need not be added back by treating the same was unascertained liability whi1e computing the book profits u/s115JB of the Act. The revenue was not able to controvert the findings given by the Ld CITA before us. Hence, we find no infirmity in the order of the Ld. CITA in this regard and accordingly dismiss the Ground No. l raised by the revenue." Thus, as said provision has been created by it to meet ascertained liabilities, the Company is entitled to claim a deduction of the same IT APPEAL NOS. 674, 982 & 983 (KOL.) OF 2012 while computing its income under the head 'profits & gains from business and profession'. Therefore, respectfully following the decision of the Hon'ble ITAT in the case of National Insurance above, ....
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....at the statistical method is most appropriate for the estimation of Outstanding claims, the Appointed Actuary may use the appropriate statistical method of claims reserving instead of following case by case method. In such cases, the claims outstanding reserve shall be certified by Appointed Actuary. Where the Appointed Actuary identifies material changes in the claims handling practices, their impact on the outstanding claims reserve pattern shall be taken into account and reported. (3) Incurred But Not Reported (IBNR) Claims Reserve (a) The incurred but not reported (IBNR) claims reserve shall be determined using actuarial principles and methods detailed in clause 4 below (b) The IBNR shall be estimated using appropriate actuarial principles and shall be certified by the Appointed Actuary. (c) The Appointed Actuary shall estimate IBNR on both net of reinsurance and gross of reinsurance basis. (d) The Appointed Actuary shall estimate the provision for IBNR for each year of occurrence and the figures shall be aggregated to arrive at the total amount to be provided. (e) If estimate of IBNR provision for any year of occurrence is ....
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....Mr. Vohra had sought to draw a parallel between IBNR and warranties that may be issued by entities and the various judgments rendered with respect to the latter. 11. Having heard learned counsels for respective sides at some length, we find merit in the stand as struck by the respondents for reasons which are set out hereunder. One of the seminal decisions rendered by the Supreme Court in the context of warranties and whether provisions made in respect thereof would amount to contingent liabilities is the one rendered in Rotork Controls India Private Limited. vs. Commissioner of Income Tax, Chennai 9. In the aforesaid matter, the Supreme Court was concerned with whether a standard warranty which had been provided by the assessee in respect of claims likely to arise could be construed to be a contingent liability and thus not allowable as a deduction under Section 37. 12. While expounding upon the concept of a provision being made in the books of account, the Supreme Court pertinently observed as follows:- "22. What is a provision? This is the question which needs to be answered. A provision is a liability which can be measured only by using a substantial degree of es....
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....ame integral part of the sale price of the valve actuator(s). In other words, warranty stood attached to the sale price of the product. These aspects are important. As stated above, obligations arising from past events have to be recognised as provisions. These past events are known as obligating events. 26. In the present case, therefore, warranty provision needs to be recognised because the appellant is an enterprise having a present obligation as a result of past events resulting in an outflow of resources. Lastly, a reliable estimate can be made of the amount of the obligation. In short, all three conditions for recognition of a provision are satisfied in this case. " 13. As is evident from the principles enunciated above, the Supreme Court explained the concept of provisioning for liabilities as being based upon a present obligation which may come to be owed by an enterprise as a result of a past event and the probability of an outflow of resources that may be required to settle that obligation. One of the crucial aspects which was highlighted in this regard was of the enterprise being entitled to make a reliable estimate and whether such an estimation could be mad....
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....fect over Section 28 as well as Section 37 of the 1961 Act. Consequently, the deduction allowable on general principles was ruled out as Section 40- A(1) made it clear that Section 40-A had effect notwithstanding anything contained in Sections 30 to 39 of the 1961 Act. In other words, as regards deduction in respect of gratuity, the assessee was required to comply with the provisions of Section 40-A(7) after the Finance Act, 1975. 38. It is interesting to note that prior to 1-4-1973 actual payment or provision for payment was eligible for deduction either under Section 28 or under Section 37 of the 1961 Act. This has been reiterated in Shree Sajjan Mills [(1985) 4 SCC 590 : 1986 SCC (Tax) 82 : (1985) 156 ITR 585]. The position got altered only after 1-4-1973. Before that date, provision made in the profit and loss account for the estimated present value of the contingent liability properly ascertained and discounted on an accrued basis could be deducted either under Section 28 or Section 37 of the 1961 Act. This has been explained in Shree Sajjan Mills [(1985) 4 SCC 590 : 1986 SCC (Tax) 82 : (1985) 156 ITR 585] at p. 599. 39. Section 40-A(7) deals only with the ca....
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.... account, for the estimated liability under a gratuity scheme by ascertaining its present value on accrued basis and claiming it as an ascertained liability to be deducted in the computation of profit and gains of the previous year either under Section 28 or under Section 37 of the 1961 Act. However, the above principle would not apply after insertion of Section 40-A(7) w.e.f. 1-4-1973. It may be stated that the principles of commercial accounting, mentioned above, formed the basis of the judgment of this Court in Metal Box Co. of India [AIR 1969 SC 612 : (1969) 73 ITR 53] and those principles are affirmed by the judgment of the Supreme Court in Shree Sajjan Mills [(1985) 4 SCC 590 : 1986 SCC (Tax) 82 : (1985) 156 ITR 585] up to 1-4-1973. " 14. What follows from the above is the right of an enterprise to make provisions for a liability which could be measured by and as the Supreme Court described a "substantial degree of estimation". It was thus held that as long as a liability is properly ascertainable on the basis of empirical data or a known methodology, the same cannot possibly be held to be a contingent liability. 15. The Supreme Court ultimately in Rotork Controls held ....
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....ovision made for warranty in respect of the army of such sophisticated goods would be entitled to deduction from the gross receipts under Section 37 of the 1961 Act. It would all depend on the data systematically maintained by the assessee. 51. It may be noted that in all the impugned judgments before us the assessee(s) has succeeded except in Civil Appeals Nos. 3506-10 of 2009 -- arising out of SLPs (C) Nos. 14178-82 of 2007 -- Rotork Controls India (P)Ltd. v. CIT, in which the Madras High Court has overruled the decision of the Tribunal allowing deduction under Section 37 of the 1961 Act. However, the High Court has failed to notice the "reversal" which constituted part of the data systematically maintained by the assessee over last decade. " 16. A lucid explanation of the concept of contingent liabilities is then found in The Commissioner of Income Tax vs. Whirpool of India Ltd. 10 In the facts of that case, this Court found that the assessee there had been consistently making provisions on the basis of actuarial valuation in respect of machines sold and warranty claims lodged. Both the AO as well as the CIT(A) in that case had taken the view that claims pertaining t....
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....cutta Co.Ltd. v. CIT [1959]37 ITR1 (SC) wherein this Court has held that the liability on the assessed having been imported, the liability would be an accrued liability and would not convert into a conditional one merely because the liability was to be discharged at a future date. There may be some difficulty in the estimation thereof but that would not convert the accrued liability into a conditional one; it was always open to the tax authorities concerned to arrive at a proper estimate of the liability having regard to all the circumstances of the case. Applying the above said settled principles to the facts of the case at hand we are satisfied that the provision made by the appellant-company for meeting the liability incurred by it under the leave encashment scheme proportionate with the entitlement earned by employees of the company, inclusive of the officers and the staff, subject to the ceiling on accumulation as applicable on the relevant date, is entitled to deduction out of the gross receipts for the accounting year during which the provision is made for the liability. The liability is not a contingent liability. The High Court was not right in taking the view to the contr....
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....charge is deferred to a future date. Once an assessed is maintaining his accounts on the mercantile system, a liability is accrued, though to be discharged at a future date, would be a proper deduction while working out the profits and gains of his business, regard being had to the accepted principles of commercial practice and accountancy" 18. After noticing the judgment in Rotork Controls, the Court held:- "17. The Court then proceeded to determine as to what would be the most appropriate method for making a provision for 'product warranty', based on historical trend and held that:- (a) It should be based on historical trend and for determining a proper historical trend, the company should have proper accounting system for capturing of sales, warranty provisions made and the actual expenses incurred subsequently. (b) A detailed assessment of the warranty provisioning policy is required particularly if the experience suggests that warranty provisions are generally reversed if they remained unutilized based on past experience. (c) The warranty provision for the product should be based on estimate at year end of future warranty expense.....
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....ich are liable to be adopted in accordance with the IRDA Regulations. We consequently find no error in the view ultimately taken by the Tribunal...." 13.5 We have also noted that the latest decision on the subject has been delivered by Hon'ble Bombay High Court in the Writ petition No.2271 of 2019 as at 422 ITR 248 in the case of General Insurance Corporation of India holding as under:- ".....11. So far as Issue No.1 above is concerned, the Petitioner submits that same stands concluded in its favour by virtue of the decision dated 11 October 2017 of the Mumbai Bench of the Tribunal in Dy. CIT V. ECGC (IT Appeal No. 7657 (Mum.) of 2014] and the Kolkata Bench of the Tribunal in the case of Dy. CIT v. National Insurance Co. Ltd. [2016] 72 taxmann.com 116 in favour of the Petitioner. However, the impugned order still directed a deposit of 10% of disputed demand on this Court in view of the decision of Chennai Bench of the Tribunal in the case of United India Insurance Co. Ltd. v. Jt. CIT [2018] 97 taxmann.com 466. We note that the Chennai Bench decision of the Tribunal has ignored the co-ordinate bench decision of Mumbai and Kolkata benches of the Tribunal. Therefore,....
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....s were not available on records while adjudicating the appeal in the case of United India Insurance as at ITA 1085/Chny/2017 dated 19.07.2024." Hence, respectfully following the Co-ordinate bench order in the case of DCIT Vs M/s Royal Sundaram General Insurance Company Limited (referred supra), we also decide this ground in favour of the assessee. Accordingly, this ground of assessee is allowed. Amortization of premium paid on securities: At the outset, the ld. Counsel for the assessee fairly conceded that this issue has been decided by the Tribunal in assessee's own case up to AY 2019-20 and assessee's appeal is pending adjudication before the High Court. The Coordinate Bench in assessee's own case held as under: ''8. The second common ground raised by the assessee is with regard to disallowance towards amortization of premium paid on purchase of securities for the assessment years 2013-14 to 2019-20. The learned counsel for the assessee submitted that similar issue had been raised by the assessee for consideration in the assessment year 2003-04, wherein the Ld.CIT(A) decided the issue against the assessee by following his predecessor's order and on further appea....
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.... ground has been decided in favour of assessee by the Co-ordinate bench of the Tribunal in assessee's own case in ITA No.1085/Chny/2017 for AY 2013-14 dated 19.07.2024 which held as under: 5. The first and foremost common issue raised by the assessee in its appeals for our consideration relevant to assessment years 2013-14to 2016-17 and by the Revenue for the assessment years 2017-18 to 2019-20 is against disallowance upto the extent of 15% of the reinsurance premium ceded by the Appellant to non-resident reinsurers (NRRs) u/s 40(a)(i) of the Act. At the outset, the learned counsel for the assessee submitted that an identical ground has been raised by the Revenue in assessee's own case for the assessment year 2007-08 and the co-ordinate Bench of this Tribunal in ITA No.1692/Chny/2011 dated 28.06.2023 has considered the issue at length as per directions of the Hon'ble High Court of Madras, since the assessee preferred an appeal before the Hon'ble High Court, in favour of the assessee and dismissed the ground raised by the revenue by following the earlier decision of the Tribunal in ITA Nos.1673, 1688, 1689, 1691/Chny/2011 dated 26.08.2022 in assesses own case for assessment....
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....contracts. The reinsurance contract is completely independent of contract of insurance between insured and insurer. The term 'reinsurance' was not defined under the Insurance Act, 1938 until 2015. However, by Insurance Laws (Amendment) Act, 2015, definition of term 'reinsurance' was inserted in the Insurance Act, 1938. As per which, the term 'reinsurance' means insurance of part of one insurer's risk by another insurer, who accepts risk for mutually acceptable premium. Therefore, the assessee being in general insurance business as part of their strategy has taken reinsurance policy with reinsurance companies. Further, every insurance company in India has to place their reinsurance program 45 days prior to commencement of financial year before the IRDAI in terms of para 3.4 of IRDAI (General insurance, Reinsurance) Regulation, 2000, and within 30 days of commencement of the financial year, every insurance company has to file reinsurance treaty slips with IRDAI in terms of para 3.5 of IRDAI (General insurance, Reinsurance) Regulation, 2000. As per IRDAI Regulation, 2000, the insurance companies in India have to mandatorily reinsure with the Indian reinsurer being General Insurance Co....
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.... by the assessee to NRRI in light of provisions of Income Tax Act, 1961, and relevant DTAA between India and other contracting States............................................................................................. ......................................................................................................... 19. In this view of the matter and considering facts and circumstances of the case and also by following various case laws discussed hereinabove, we are of the considered view that reinsurance premium ceded to non-resident reinsurer is not taxable in India under the Income Tax Act, 1961 or under DTAA between India and respective countries where NRRs are tax residents and thus, on impugned payments the assessee is not liable to deduct TDS u/s. 195 of the Income Tax Act, 1961. Consequently, payments made to NRR cannot be disallowed u/s. 40(a)(i) of the Act, 1961. Hence, we direct the Assessing Officer to delete additions made towards disallowance of reinsurance premium ceded to NRRs u/s 40(a)(i) of the Act. 7. In this view of the matter and consistent with view taken by the coordinate Bench in the assessee's own case, we are inclined to up....
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....ndia and there is also there is business connection between the assessee and non-resident insurance companies. However, on appeal, the Ld.CIT(A) by following decision of the Tribunal in assessee's own case in ITA Nos.1753 to 1610/Chny/2011 &Ors dated 28.08.2018 for assessment years 2007-08 to 2013-14 allowed the claim of the assessee holding that amounts have been paid to non-residents, who do not have any permanent establishment or any distinct business activities in India and further, amounts paid to non-residents were liable for taxation for the respective foreign countries and thus, provision of section 195 is not attracted in the present case. The learned counsel for the assessee submitted that this has been decided against the Revenue by the Hon'ble High Court of Madras in TCA No.323 of 2019 in assessee's own case and a copy of which is placed on record as Annexure-3 at pages 162 to 173 of the paper book filed by the assessee. In the impugned order, the Hon'ble jurisdictional High Court, relying upon their own decision in the case of M/s. Royal Sundaram Alliance Insurance Company Ltd. In TCA No.41 of 2019, held that assessee is not liable to deduct tax at source, qua, payment....