TaxTMI 
TaxTMI 
TaxTMI 
2026 (3) TMI 175
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....270A in respect of the disallowance made of the expenditure in excess of limit prescribed under the IRDA Regulations read with Section 40C of the Insurance Act, 1938, without properly appreciating the explanations and evidences furnished during the proceedings, and the same ought to be deleted. 2) That without prejudice to the contention raised in Ground No. (1) above, the Ld. Commissioner of Income-tax (Appeals), NFAC failed to appreciate that there had not occurred any case of misreporting of Income which could lead to the levying of any Penalty u/s 270A and thus he erred in confirming levying of Penalty of Rs. 11,52,05,880. 3) That the appellant craves leave to add, delete or modify any Ground or Grounds of Appeal before or at the time of the Hearing of the Appeal." II. ITA No.: 2804/KOL/2025: "1. That the Ld. Commissioner of Income-tax (Appeals), NFAC was wrong in confirming the action of the Assessing Officer in disallowing Rs. 16,64,44,000/- being the Expenditure incurred in excess of the specified limit u/s 40C of the Insurance Act, 1938, read with IRDAI Regulations, debited to the Profit and Loss Account. 2. That without prejudic....
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....come-tax Act. 4. That the appellant craves leave to add, delete or modify any Ground or Grounds of Appeal before or at the time of the Hearing of the Appeal." IV. ITA No.: 2806/KOL/2025: "1. That the Ld. Commissioner of Income-tax (Appeals), NFAC was wrong in confirming the action of the Assessing Officer in disallowing Rs. 15,84,24,02,000/- being the Expenditure incurred in excess of the specified limit u/s 40C of the Insurance Act, 1938, read with IRDAI Regulations, debited to the Profit and Loss Account. 2. That without prejudice to the contention raised in Ground No. (1) above, the Ld. Commissioner of Income-tax (Appeals), NFAC failed to appreciate that the Expenses aggregating to Rs. 15,84,24,02,000/- having been incurred wholly and exclusively for the purposes of the Business of the appellant, should have been held to be allowable u/s 37(1) of the Income-tax Act, 1961 and thus he erred in confirming the disallowance of the said Expenses of Rs. 15,84,24,02,000/-. 3. That without prejudice to the contentions raised in Grounds Nos. (1) and (2) above, the Ld. Commissioner of Income-tax (Appeals) erred in holding that the excess managem....
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....that Section 40C of the Insurance Act, 1938, read with corresponding IRDA (Expenses of Management of Insurers transacting general insurance business) Regulations, prescribes an upper limit on expenses of management. The sum of Rs. 16,64,44,000 was shown as excess over the prescribed ceiling, but still claimed as deductible in the P&L account. The AO held that such excess, being in clear violation of statutory and regulatory prescription, and not "related to insurance business" within the meaning of Rule 5 of the First Schedule, was not allowable. The appellant argued that the IRDA limit merely determines what can be debited to the policyholder (revenue) accounts, and any excess, though not chargeable to policyholder, can be borne by the shareholders and is therefore claimed in the P&L as a business expense. It further submitted that there is no bar under Rule 5 to claiming genuine business expenditure, even if in excess of IRDA limit, so long as it is not penal in nature. Upon scrutiny of the IRDAI (Expenses of Management of Insurers transacting General Insurance Business) Regulations, 2016, it is clear that Regulation 4(1), read with Section 40C(1) of the Insuran....
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....h the order of the Ld. CIT(A), the Assessee has filed the appeal before the Tribunal. 5. Rival contentions were heard and the submissions made have been examined. It was submitted by the Ld. AR in the course of the appeal that the assessee is in the insurance business and the income is to be computed as per section 44 of the Act with Rule 5 of the First Schedule of the Act. It was submitted that the assessee had debited certain expenses which, according to IRDA, had to be allocated insurance sector-wise so as to get the correct picture. However, the Ld. CIT(A) granted relief in respect of other additions but upheld the disallowance on account of such expenses claimed by holding that Explanation 1 to sub-section (1) of section 37 of the Act is applicable. It was submitted that it was an accounting adjustment so as to get the correct picture as per the statutory rules and there was no infraction of any law so as to attract Explanation 1 to section 37(1) of the Act which has been incorrectly applied by the Ld. CIT(A). The assessee has also filed detailed submission as under: "(1) The appellant is a Public Sector Company engaged in providing General Insurance Services and i....
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....1,000, had been allocated to: (i) Fire Revenue Account Rs. 175,36,54,000 (ii) Marine Revenue Account Rs. 21,03,40,000 (iii) Miscellaneous Revenue Account Rs. 2699,50,13,000 (iv) Profit and Loss Account (Excess over allowable limit) Rs. 16,64,44,000 Total: Rs. 2912,54,51,000 The appellant submitted that all the above-mentioned expenses having been incurred for the purposes of business of the appellant there should not be any disallowance of any portion of Rs. 2912,54,51,000. On receipt of the Assessment Order it was found that the NaFAC stated therein that the appellant had allegedly not given any explanation in this regard and it disallowed Rs. 16,64,44,000. (2) In the Appeal before the Ld. Commissioner of Income-tax (Appeals), NaFAC, the appellant duly submitted all the details regarding the charging of Rs. 16,64,44,000 to its Profit and Loss Account. However, Ld. CIT(Appeals), NaFAC, without appreciating the actual facts and the explanations furnished by the appellant considered the above-mentioned sum of Rs. 16,64,44,000 as allegedly an infringement or contravention of law and was allegedly hit by the Explanat....
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....y the Ld. CIT(Appeals), NaFAC, may kindly be held to be unjustified and accordingly the said disallowance may kindly be deleted. The appellant further submits that in the Appeals for the Assessment Years 2O22-23(ITA No. 2805/ Koi/ 2025) and 2023-24(ITA No. 2806/K0I/2025) the same issue of disallowance of excess expenses over the prescribed limit, has been appealed against. In respect of those two Appeals also the appellant prays before your Honours kindly to consider the appellant's submissions as made hereinabove to be applicable there also. In respect of the Appeal filed against the Penalty of Rs. 11,52,05,880 imposed u/s 270A for the Assessment Year 2018-19 (ITA No. 2803/ Kol/2025), the appellant submits that this Penalty was levied by the NaFAC on the basis of several additions and disallowances including the disallowance of Rs. 16,64,44,000 being related to the excess Management expenses. In the Appeal filed against the Penalty, the Ld. CIT(Appeals) confirmed the levy of Penalty in relation to the disallowance made for excess Management expenses, on the basis of his confirmation of the disallowance so made in the assessment. For this Penalty case the appellan....
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....r deducted, as the case may be, if such gain or loss is not credited or debited to the profit and loss account; (ii) any provision for diminution in the value of investment debited to the profit and loss account, shall be added back; (c) such amount carried over to a reserve for unexpired risks as may be prescribed in this behalf shall be allowed as a deduction: Provided that any sum payable by the assessee under section 43B, which is added back in accordance with clause (a) of this rule, shall be allowed as deduction in computing the income under the said rule in the previous year in which such sum is actually paid." 9. Rule 5 refers to the profit and loss account prepared in accordance with the provisions of the Insurance Act, 1938 or the rules made thereunder or the provision of the Insurance Regulatory and Development Authority Act, 1999 (4 of 1999), the regulations made thereunder for the subjects specified therein. The assessee has enclosed a copy of section 40C of the Insurance Act, 1938 which is as under: "40C. Limitation of expenses of management in general, health insurance and re-insurance business.-Every insurer transacting insurance busine....
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....of the Act and override anything to the contrary contained in the provision of this Act relating to the computation of income chargeable under the Act; profits and gains of any business of insurance in sections 28 to 43B or in section 199 of the Act. The disallowance u/s 37(1) of the Act is therefore, excluded in view of the specific provision of section 44 of the Act. However, as per clause (a) of Rule 5, the disallowance can be made if the expenditure or allowance debited to the profit and loss account is not admissible under the provisions of sections 30 to 43B of the Act in computing the profits and gains of a business. For the purpose of section 43B of the Act, the expenditure shall be allowed in the year in which such sum is actually paid. The Ld. CIT(A) has merely mentioned that the allocation of expenses as per IRDA was hit by the provision of Explanation 1 to sub-section 1 of section 37 of the Act and therefore, was not allowable while the facts remain that the assessee had merely made inter-head adjustments for fire revenue account, marine revenue account, miscellaneous account and the balance as per the guidelines of IRDA mentioned in the written submission, was to be al....
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.... section 39. The object of these rules is entirely different. These rules lay down the manner in which the profits, if any, and other monies received by the General Insurance Corpn. may be dealt with. The concept behind rule 2(2)(a) is to permit the Corporation to enter the amount of reserve in the profit and loss account on the expenditure side which would not have been permissible otherwise because the amount set apart in a reserve cannot be expenditure. The rule puts a stamp of permissibility on something not permissible otherwise. This rule itself is suggestive of the fact that the amount set apart in a reserve is not an expenditure in its commercial sense. The extent of the GIB Rules does not go beyond providing an accounting method. These Rules cannot be pressed into service for altering the basic character of the amount which is not an expenditure. Merely because rule 2(2)(a) permits the amount to be set apart for redemption of preference shares being debited to the profit and loss account, the amount so set apart does not become the amount of an expenditure to all intent and purposes so as to fall within the meaning of the term 'expenditure 'as employed in rule 5(a)....