Case Law Details
Brief : In a recent ruling, the Mumbai Income-tax Appellate Tribunal (“the Tribunal”) in the case Birla Sun life Insurance Company Ltd. Vs. DCIT [2010-TIOL-535- 1TAT-MUM]’, held that no dis allowance under section 14A of the Income-tax Act, 1961 (“the Act”) is attracted in the case of a life insurance company.
The Tribunal also held that dis allowance of software expenses and of expenses incurred for increase in authorized share capital, is not attracted in view of the special provisions of section 44 of the Act read with the relevant rules in the First Schedule to the Act.
Citation : Birla Sun life Insurance Company Ltd. v. DCIT [2010-TIOL-535- 1TAT-MUM]
Court : Mumbai Income-tax Appellate Tribunal
Facts of the case
· The assessee company, engaged in the business of life insurance, had filed an income-tax return for assessment year 2004-05 declaring losses. In the return, the assessee company had claimed exemption under section 10(33) of the Act for dividend income, without offering any expenses relating to earning of such exempt dividend income for dis allowance under section 14A of the Act.
· During the course of assessment proceedings, the assessee company, relying on certain judicial precedents, claimed that no dis allowance would be attracted under section 14A of the Act. Maintaining this stance, the assessee company also provided details of expenses relating to dividend income to the Assessing Officer (“the AO”). The expenses were worked out on the basis of the ratio of total investment to total expenses of the investment department.
· The AO disregarded the claim of the assessee company and, following the assessment orders of the earlier years, calculated the dis allowance under section 14A of the Act. The AO determined the ratio of the dividend income to the total receipts and applying this ratio to the operating expenses.
· In addition to the above, the AO disallowed software expenses and the expenses incurred for increase in share capital by treating these as capital in nature.
· In an appeal, the Commissioner of Income-tax Appeals (“the CIT(A)”), relying on the decision of the Special Bench in the case of ITO v. Daga Capital Management Pvt. Ltd [2008] 312 ITR 1 (Mumbai), confirmed the addition made by the AO under section 14A of the Act. The addition made by the AO, of expenses incurred for increase in share capital, was also confirmed by the CIT(A). Further, the CIT(A) also confirmed the dis allowance of software expenses, relying on the decision of the Rajasthan High Court in the case of CIT v..Arawali Constructions Co. Pvt. Ltd. [2002] 259 ITR 30 (Raj.).
Tribunal ruling
· Before the Tribunal, the Revenue raised a plea to set aside the issue of dis allowance under section 14A of the Act, for ascertaining the details of expenses incurred to earn exempt income. The Tribunal rejected this plea observing that the AO had made dis allowance after examining the details provided by the assessee company during the course of assessment proceedings.
· As regards the dis allowance under section 14A of the Act, the assessee contended that the issue was directly covered in favor of assessee by the decision of the Tribunal in various cases (See Note 1 for list of some cases). The Tribunal observed that an identical issue was discussed at length by the Delhi Tribunal in the case of Oriental Insurance Co. Ltd. v. ACIT [2010] 40 SOT 19 (Delhi) (URO) wherein it was held that section 44 of the Act provides for application of special provisions for computation of profits and gains of insurance business in accordance with Rule 5 of the First Schedule and therefore, it is not permissible for the AO to travel beyond the provisions of section 44 and the First Schedule and make dis allowance by applying section 14A of the Act in the case of an insurance company.
· The Tribunal further observed that this decision of the Delhi Tribunal had consistently been followed by the Tribunal (including by the Mumbai Tribunal) in the other three cases relied upon by the assessee. Thus, the Tribunal held that, in the absence of any distinguishing feature brought on record and following the consistent view of the Tribunal in earlier decisions, it is not permissible for the AO to travel beyond section 44 and the First Schedule and make dis allowance by applying section 14A of the Act.
· As regards the other dis allowances, as to the expenses for increase in share capital and software expenses, the Tribunal referred to the decision of the Supreme Court in the case of Life Insurance Corporation of India v. CIT [1964] 51 ITR 773 (SC) wherein it was held that “the assessment of profits of an insurance business is completely governed in the Schedule to the Income-tax Act and the Income-tax officer has no power to do anything not contained in it; there is no general right to correct errors in the accounts of an insurance business.”
· Applying the aforesaid ratio of the Supreme Court, the Tribunal observed that, in the case of a company engaged in life insurance business, the provisions of section 44 read with rules in the First Schedule to the Act should apply and the AO has no power to do anything not contained in section 44 of the Act. Considering that these special provisions have a non-obstante clause, the Tribunal held that the AO is not permitted to travel beyond these provisions. Accordingly, the dis allowance on account of expenses for increase in share capital, and on account of software expenses, was not called for.
Conclusion
The decision of the Tribunal has reiterated the position taken by the Tribunal in earlier decisions that the dis allowance under section 14A of the Act is not called for in the case of an insurance company. While the earlier decisions of the Tribunal were with regard to non life companies this is one of the firsts for a life insurance company and therefore, assumes importance for life insurance players.
The Tribunal has also reiterated the well established principle that the provisions of section 44 read with the rules in the First Schedule to the Act are special provisions having an overriding effect over other provisions. In view of this, an AO is not permitted to travel beyond these provisions to disallow of expenses not specifically permitted by such provisions.
Note-1
1.Oriental Insurance Co. Ltd. [2009] 130 TTJ 388 (Delhi),
2. Bajaj Allianz General Insurance Co. Ltd.v.ACIT [2009] 130 TTJ 398 (Pune),
3. JCIT v. Reliance General Insurance Co. [2010] 7 ITATIndia 700 (Mum),
4.) Reliance General Insurance Co. v. DCIT [2010] 14 ITAT India 679 (Mum) for Assessment Year 2003-04 and [2010-TIOL-363-ITAT-363-ITAT- Mum] for Assessment Years 2004-05 and 2006-07.
