For income tax Purpose Working of actuarial surplus in accordance with rule 2 of First Schedule to insurance Act is valid

TG Team 28 Dec 2012 5,845 Views 0 comment Print Income Tax | Judiciary

Case Law Details

Case Name : ICICI Prudential Insurance Co. Ltd. Vs Assistant Commissioner of Income-tax (ITAT Mumbai)

Appeal Number : IT Appeal Nos. 6059, 6854-6856, 7213 & 7765 to 7767 (MUM.) of 2010

Date of Judgement/Order : 14/10/2012

Related Assessment Year : 2005-06 to 2008-09

Courts : All ITAT ITAT Mumbai

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IN THE ITAT MUMBAI BENCH ‘F’

ICICI Prudential Insurance Co. Ltd.

versus

Assistant Commissioner of Income-tax

IT APPEAL NOS. 6059, 6854-6856, 7213 & 7765 to 7767 (MUM.) OF 2010

[ASSESSMENT YEARS 2005-06 TO 2008-09]

SEPTEMBER 14, 2012

ORDER

Per Bench

These appeals are by assessee for the assessment years 2005-06 to 2008-09 and cross appeals by revenue for the respective assessment years. These appeals are on common issues, even though amounts vary from year to year. Therefore, all the appeals were heard together and common order is passed.

2. We have heard the learned Counsel Shri S.E. Dastur and the learned CIT (DR) Shri Subachan Ram in detail and also perused the submissions made by the respective parties and reliance on various case law and paper books placed on record in respective years. Their arguments were incorporated wherever necessary. For the sake of convenience, the issues in assessment year 2005-06 are discussed elaborately.

ITA No.6854/Mum/2010 – AY 2005-06:

3. This is an assessee’s appeal in which assessee has raised the following grounds:

“1. The CIT (Appeals) has erred in not accepting the loss of Rs.150.45 crores returned by the appellant.

2. The CIT (Appeals) erred in holding that the surplus as reflected in Form-I is the taxable income of the appellant.

3. The CIT(Appeals) erred in upholding the taxable income for the year at Rs.98.96 crores by holding that the amount transferred from the shareholder’s account to account is not to be reduced from the surplus disclosed in Form-I. It is prayed that the surplus considered for computing taxable income should be after removing the effect of transfer from Shareholder’s account to account.

4. The CIT (Appeals) has erred in not accepting disallowance under section 14A offered in revised return of income is on reasonable basis but directed AO to decide the issue afresh”.

4. The facts in brief are that assessee is a Public Limited Company registered under the Companies Act, 1956. The Company was incorporated on July 20, 2000 with the object of carrying on Life Insurance Business. The activities of the insurance are governed by the Insurance Act, 1938, Insurance Regulatory and Development Authority (IRDA) Act, 1999 as amended from time to time, IRDA rules and Regulations from time to time made there under. The return of income for AY 2005-06 was filed on 27.10.2005 declaring a loss of Rs.150,46,83,807/-. The case was selected for scrutiny and AO while accepting that assessee is in the business of life insurance considered that income of assessee from insurance business is assessable as per section 44 of the Income Tax Act. He has considered the Actuarial Valuation Report submitted in Form-I extracted in the assessment order which is as under:

Form-I of the Actuarial Report:

*Item No.*	*Description*	*Balance of fund shown in Balance Sheet (Rs.)*	*Mathematical reserves (excluding cost of bonus allocated) (Rs.)*	*Surplus (Rs.)*	*Negative Reserves (Rs.)*	*Surrender value deficit reserved (Rs.)*
(1)	(2)	(3)	(4)	(5)	(6)	(7)
1	Business within India Par policies	6702408920	6411682550	290726370	12539400	00
2	Non Par Policies	28131258270	28064221830	67969900	59423230	00
3	Totals	34833667190	34475904380	358696280	71962640	00
4	Total business par policies	6702408920	6411682550	290726370	12539400	00
5	Non par policies	28131258270	28064221830	67969900	59423230	00
6	Total	34833667190	34475904380	358696280	71962640	00

Since there is a surplus declared at Rs.35,86,92,280/- in the form I AO asked assessee to explain why the computation is not made according to the ‘actuarial valuation’ It was the contention of assessee that the actuarial valuation has resulted in deficit which were shown as loss whereas the Form-I represents the total surplus after transfer of assets from shareholder’s account to the account as per the IRDA rules. The surplus has to be shown in order to declare dividend, bonus etc. under the rules and the amount was transferred by way of infusion of fresh capital into the company and transferred to the Policyholder’s account. It was submitted that the transfer of shareholder’s funds does not give rise to any income and the actuarial surplus arrived at was a deficit on which the return was filed and in case AO has to consider the surplus in Form-I, then transfer of funds from shareholder’s account should be reduced from the above amount as it is only transfer of capital assets and not income. AO, however, relying on the principles laid down by the Hon’ble Supreme Court in the case of Life Insurance Corpn. of India (LIC) v. CIT [1964] 51 ITR 773 wherein it was held that the assessment of the profits of an insurance business is completely governed by the rules under the schedules and there is no power to do anything not contained in it. Further he also relied on the judgment of the Hon’ble Bombay High Court in the case of Life Insurance Corpn. of India (LIC) v. CIT [1978] 115 ITR 45 to come to a conclusion that AO has no power to make adjustment once provisions of section 44 were invoked. Accordingly he took the surplus as declared in Form-I as the basis for computation of income and accordingly arrived at the surplus at Rs.35,86,96,280/-. He also made an addition of deficit from Pension Scheme at Rs.63,09,19,492/- before setting of the brought forward losses. He also made disallowance under section 14A to an extent of Rs.4,42,584/- even though no adjustment was made in the computation of income.

5. The matter was contested before the CIT (A) and assessee made elaborate submissions. The main contention was that Form-I is a report prepared as a part of actuarial report and abstracts under the IRDA Regulations to ascertain segment-wise cumulative allowability of actuarial valuation shown as mathematical errors. It was submitted that Form – I does not provide the Profit & Loss A/c of entire business but shows the asset- liability position of only . It was further explained that IRDA has made specific rules to segregate the account and shareholder’s account and revised the form for presentation of insurance accounts as prescribed in IRDA(Preparation of Financial statements and Auditor’s Report of Insurance companies) Regulations 2002. According to the Regulations, Profit & Loss A/c of life insurance company is divided into a technical account (policy holder’s account) also called as revenue account and non-technical account (shareholder’s account) also called Profit & Loss A/c. It was further submitted that technical accounts deals with all the transactions relating to the including income from premium and expenditure and actuarial provision shown segment-wise. All the transactions relating to shareholder’s like funding the deficit of the account, income earned on investment of share capital and reserves are dealt with the non technical account called shareholder’s account. As per the Regulations the format for presentation of account, the impact of actuarial valuation is shown in the Revenue Account relating to for the year and the surplus/deficit is arrived at. It was submitted that in order to compute the effect for the Income Tax computation result of account and shareholder’s account needs to be combined and accordingly assessee filed surplus/deficit calculated after combining the and shareholder’s accounts.

6. The learned CIT (A) however, did not agree with the above contentions and stated that section 44 r.w. part-A of first schedule to the Income Tax (Rule 2) provides for mechanism of arriving at the surplus of the insurance business and the actuarial surplus as disclosed in Form-I which is part of the actuarial report duly certified by the appointed Actuary of the Company should be considered as income from life insurance business as per the Act. Therefore, he agreed with AO’s action and rejected assessee’s contention. Assessee is aggrieved on this issue and raised grounds no 1 to 3.

7. The learned Counsel drawing our attention to the special scheme of assessment as provided in section 44 of the Income tax Act and First schedule of Income tax act and more particularly Rule-2 submitted that insurance business was governed by the actuarial valuation and not by the general Profit & Loss A/c prepared in other company. Insurance business is regulated by the Insurance Act 1938 and further by the IRDA Act 1999. As per the Regulations issued by the IRDA which assessee has to follow, as it was incorporated after the legislation of the IRDA Act, it has to maintain the accounts as per the new Regulations and accordingly shown policy holder’s account and shareholder’s account. There was a negative balance in policyholder’s account to an extent of Rs.201.60 crores. The law requires the deficit in policyholder’s account should be made good before declaring any bonus or dividend and this deficit should be fulfilled by transferring corresponding amount from shareholder’s account. Accordingly during the year, assessee has transferred an amount to the extent of Rs.233.35 crores from shareholder’s account to policyholder’s account. As the transfer should be supported by assets, assessee has issued shares afresh to the extent of Rs.250 crores and increased the capital to that extent. Since the amount transferred from shareholder’s account is nothing but transfer of capital from shareholder’s account to policyholder’s account, it was the submission that the surplus arrived at after the transfer of the capital cannot be considered as income of assessee. It was like taxing the capital receipt/ sum which can not be regarded as income. Without prejudice to the claim, it was also submitted that assessee has filed the returns consolidating the policyholder’s account and shareholder’s account and the credit in the policyholder’s account is matched by the debit in the shareholder’s account. This is tax neutral. Therefore, AO was not correct in considering the surplus which arose due to transfer of share capital as per the IRDA Regulations.

8. The learned Counsel also explained the history of the case. It was the submission that this issue of examining the actuarial surplus was first time taken up under section 263 in assessment years 2003-04 and 2004-05, for the first time by the CIT and this matter has been contested before the ITAT. ITAT vide ITA No.3270 and 4685/Mum/2008 dated 22.01.2009 has set aside the orders of the CIT as there was no prejudice caused to the Revenue in the order under section 143(3). This order was contested before the Hon’ble High Court which dismissed the Revenue appeal and further contested before the Hon’ble Supreme Court which also did not admit and dismissed Revenue appeals. However, the Revenue took proceedings under section 147 and reopened assessment from assessment years 2002-03 to 2004-05 on the very same issue which was contested by way of writ petition filed before the Hon’ble High Court. The Hon’ble High Court vide orders dated 19/03/2010 ICICI Prudential Life Insurance Co. Ltd. v. Asstt. CIT [2010] 325 ITR 471 (Bom.) quashed the notices under section 148 issued in this regard. The Hon’ble High Court also considered on merits all the issues and rejected the Revenue contentions. So, it was submitted that upto the assessment year 2004-05 assessee’s computation of actuarial deficit i.e. loss arrived at in the life insurance business was accepted.

9. Referring to the notes to the computation, the learned Counsel drew our attention to various notes (page-5 of the paper book) to submit that consequent to the IRDA recommendations, the insurance companies are maintaining the account as per the format prescribed under Insurance Act 1938 for presentation of insurance accounts and as per the revised format for the presentation of accounts in the new Regulations under IRDA, the impact of the actuarial valuation is transferred to the revenue account relating to policy holders for the year and the surplus/deficit is disclosed therein. It was further submitted that the earlier formats for presentation of accounts aggregated the results relating to shareholder’s and policyholder’s and thus the surplus/deficit was including the impact of both. There is a scheme of presentation of accounts currently in force for life insurance companies and the new formats were prescribed for complying with the IRDA Regulations. It was the submission that even though amendment was brought in Rule 5 in First Schedule for General Insurance business to incorporate changes brought by I R D Act no such amendment was brought in Rule-2. Therefore, the manner of taxing the life insurance companies has not been realigned with the changes as prescribed by the IRDA. It was further submitted that there is a deficit of Rs.233,34,76,828/- in the policyholder’s account format-A-RA which has been made good by transfer of funds from the shareholder’s account. Therefore, the figures that appeared in Form-I are subsequent to this transfer from shareholder’s account. It was further submitted that the earlier format did not provide for segregating insurance business into and shareholder’s and therefore, the requirement to transfer funds from one account to other and the need thereof for aggregating two accounts to reflect the outcome of surplus or deficit did not arise at that time. In order to arrive at the actuarial surplus/ deficit as per the Insurance Act, 1938 it was submitted that the accounts are aggregated and accordingly assessee has filed the return of income. As per the account before transfer of the amounts, there was a deficit to an extent of Rs.161,40,61,362/- and surplus in shareholder’s account of Rs.10,93,77,555/-. In view of this assessee arrived at a loss of Rs.150,46,83,807/- for the valuation year ended 31.03.2005 by combing both accounts. The learned Counsel referred to the actuarial valuation report placed in the paper book and also reconciliation statement as per Rule-2 and submitted that the reconciliation statement is as per the rules under Insurance Act, 1938.

10. It was further submitted that even if one were to accept the flipside of the accounting, AO cannot take only one side of the account to tax the surplus arrived after transfer of capital funds from the shareholder’s account. If one were to accept the transfer from one account to another, the surplus in policyholder’s account will get nullified by deficit in shareholder’s account consequent to transfer from one to another. If the method is to be followed as per the Insurance Act, 1938, then the combined account which assessee has followed is correct method and AO has no option than to accept the accounts as prepared under the Insurance Act, 1938.

11. The learned Counsel referring to Rule-2 submitted that the actuarial valuation made in accordance with the Insurance Act, 1938 (Act No.4 of 1938) should be read to mean that it is an incorporation into the Income Tax Act and not a mere reference. Therefore, it was his submission that the actuarial valuation has to be computed in accordance with the Insurance Act, 1938 then existing and not with reference to the subsequent amendments made in the formats under the IRDA Act. He then referred to the principle of ‘legislation by incorporation’ and ‘legislation by reference’ and referred to the decisions of the Hon’ble Supreme Court of India in the case of Mahindra & Mahindra Ltd. v. Union of India [1979] 2 SCC 529 given in the context of MRTP Act, 1969 and Bharat Co-operative Bank Mumbai Ltd. v. Cooperative Bank Employees Union AIR 2007 SC 2320

12. The learned Counsel also submitted that in case the language of the statutory provision is ambiguous and capable of two constructions, that construction must be adopted which will give meaning and effect to the other provisions of the enactment rather than that which will give none. He referred to the decision of the Hon’ble Supreme Court in the case of Addl. CIT v. Surat Art Silk Cloth Manufacturers Association [1980] 121 ITR 1/[1979] 2 Taxman 501 (SC) to submit that the construction which is in tune with the provisions of the Act can only be adopted and referred to the following from the above said order.

“It is true that the consequences of a suggested construction cannot alter the meaning of a statutory provision where such meaning is plain and unambiguous, but they can certainly help to fix its meaning in case of doubt or ambiguity. Let us examine what would be the consequences of the construction contended for on behalf of the revenue. If the construction put forward on behalf of the revenue were accepted, then as already pointed out above, no trust or institution whose purpose is promotion of an object of general public utility, would be able to carry on any business, even though such business is held under trust or legal obligation to apply its income wholly to the charitable purpose or is carried on by the trust or institution for the purpose of earning profit to be utilized exclusively for feeding the charitable purpose. If any such business is carried on, the purpose of the trust or institution would cease to be charitable and not only the income from such business but the entire income of the trust or institution from whatever source derived, would lose the tax exemption. The result would be that no trust or institution established for promotion of an object of general public utility would be able to engage in business for fear that it might lose the tax exemption altogether and a major source of income for promoting objects of general public utility would be dried up. It is difficult to belief that the legislature could have intended to bring about a result so drastic in its consequence. If the intention of the legislature were to prohibit a trust or institution established for the promotion of an object of general public utility from carrying on any activity for profit, it would have provided in the clearest terms that no such trust or institution shall carry on any activity for profit, instead of using involved and obscure language giving rise to linguistic problems and promoting interpretative litigation. The legislature would have used language leaving no doubt as to what was intended and not left its intention to be gathered by doubtful implication from an amendment made in the definition clause and that too in language far from clear”.

13. The learned Counsel further relied on principle laid down by Hon’ble Himachal Pradesh High Court decision in Yogendra Chandra v. CWT [1991] 187 ITR 58 to submit that if a literal interpretation as suggested by Revenue is accepted, it would lead to a manifestly absurd result which is not the intention of legislature. In this case the capital transfer was considered as income in the pretext of relying on Form I. He referred to AO’s order to submit that the Hon’ble Supreme Court in the case of Life Insurance Corpn. of India (LIC) (supra) had approved that AO has to arrive at the profits of the insurance business as per first schedule and he was not empowered to make any variation. To that extent, the accounts that were prepared under the Insurance Act, 1938 are to be accepted. However, it was submitted that reliance on the Hon’ble Bombay High Court judgment in Life Insurance Corpn. of India (LIC) (supra) is not correct as that judgment was reversed by the Hon’ble Supreme Court in Life Insurance Corpn. of India v. CIT [1996] 219 ITR 410/85 Taxman 313. Therefore, it was submitted that AO relied on the over-ruled judgment to deny assessee the benefit of combining the accounts. It was submitted that the rules and provisions has to be implemented by making a harmonious reading of the provisions and internal transfer should be permitted which was made as per IRDA Regulations for which the Income Tax Act was not amended to incorporate the changes.

14. Ld. Counsel also referred to the annual accounts, various forms and Regulations and filed reconciliation statements placed before authorities to explain the rationale of arriving at surplus/deficit as was done by assessee company.

15. In reply the learned DR submitted that there is no relevance of the proceedings initiated under section 263 and 147 to the issue in present as their actions are under different provisions and are different matter altogether. It was his submission that the ITAT order against appeal on order under section 263 had no impact as ITAT considered the issue in the context of erroneous and prejudice to the interest of Revenue. Likewise dismissal of SLP does not establish any law and the factual position was not affected by the orders of the High Court or Supreme Court. He then referred to the provisions of law under section 44 of the Income Tax Act, Rule-2 of first schedule and the actuarial report placed on record to submit that assessee has prepared the actuarial surplus under the IRDA Regulations which AO has accepted as per the provisions of law. There may be credit or transfer from shareholder’s funds but AO has no option than to arrive at the surplus as disclosed in Form-I as per the rules. He also referred to Form-I and the surplus as per the actuarial valuation extracted by AO in the assessment order itself. He relied on the principles laid down by the Hon’ble Supreme Court in the case of CIT v. Vegetable Products Ltd. [1973] 88 ITR 192 with reference to the provisions for interpretation of law and further in the case of Hindustan Construction Co. Ltd. v. CIT [1994] 208 ITR 291/[1993] 68 Taxman 471 (Bom.).

16. Ld CIT DR further submitted that in case there are any transfers from one account to another account, that issue is not for AO to examine as the actuary arrived at the surplus and reported in Form-I which is the basis for assessment under Rule-2 of first schedule to the Income Tax Act. Whether there is a surplus or not in the actuarial report can only be verified by AO under Rule-2 and he is duty bound to act on the basis of form as prescribed under the Regulations which indicate surplus during the year which AO has accepted as mandated by the statutory provisions and the legal interpretations. It was further submitted that as far as life insurance business is concerned, the old provisions will apply and as there is no amendment to the Act as such the IRDA can only modify the format of reporting. He also submitted that there is no contradiction in the old and new format prescribed under the IRDA and relied on the decision of the Hon’ble Supreme Court in the case of Surana Steels (P.) Ltd. v. Dy. CIT [1999] 104 Taxman 188 to submit that reference to the other provisions are not required when the Act is very clear. It was further submitted that the regulatory provisions for other insurance businesses have taken profit as Profit & Loss A/c as basis for the computation but for the life insurance business, they have taken a different method of calculation based on determination of actuarial surplus/deficit. It was submitted that as far as life insurance business is concerned, the intention of the legislature is not to consider capital or revenue but only to arrive at surplus or deficit. It was further submitted that even though amendment was made to Rule-5, no such amendment was made in Rule-2 of Part-A of first schedule and virtually there was no change from the situation from Insurance Act 1938 to IRDA Act1999. It is very clear that actuarial report is nothing to do with shareholder’s but only.

17. Ld. CIT DR further submitted that meaning of actuarial surplus used in Rule-2 is not defined. As per Rule 4 of the IRDA Regulations, actuarial report was abstracted in a statement to be prepared by the actuary as per procedure. In view of this the actuarial report provided in Form-I is the base for the assessment for AO. The Regulations 8 of the IRDA starts as a statement showing total amount of surplus arisen during the inter valuation period. Further it depends on the composition of surplus which consist of A to F items and item J talks about the total surplus (a to i). Since Form I indicate surplus for the total business, the total surplus has to be considered as actuarial surplus for the purpose of Rule-2 for the inter valuation period. He also further referred to the guidelines issued in IRDA circular 2004 to state that transfer of funds shall not be reversible in nature. He also referred to AO’s order passed in assessment year 2008-09 which is little more elaborate than the order in assessment year 2005-06 to support the stand of the Revenue that the surplus arrived at in Form I is the actuarial surplus to be brought to tax under the rules. The learned DR in his submission also referred to the Hon’ble Supreme Court judgment in the case of Life Insurance Corpn. of India (LIC) (supra) for the primacy of section 44 and Rule-2 in arriving at the actuarial valuation. He supported the order of AO and the CIT (A).

18. We have considered the submissions and perused the record and relevant provisions and the case laws relied upon. There is no dispute with the taxability of insurance business as governed by the provisions of section 44 of the Act r.w. First schedule of Income Tax Act 1961. Section 44 provides as under:

“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 co-operative society, shall be computed in accordance with the rules contained in the First Schedule.

The First schedule contains three parts A, B & C. Part-A pertains to life insurance business, Part-B for other business and Part-C other provisions. The relevant rules in Part A for life insurance business are as under:

“Profits of Life Insurance business to be computed separately

1. In the case of a person who carries on or at any time in the previous year carried on life insurance business, the profits and gains of such person from hat business shall be computed separately from his profits and gains from any other business.

Computation of profits of life insurance business

2. 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 (4 of 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.

Deductions

3. Omitted

Adjustment of tax paid by deduction at source

4. Where for any year an assessment of the profits of life insurance business is made in accordance with the annual average of a surplus disclosed by a valuation for an inter-valuation period exceeding twelve months, then in computing the income-tax payable for that year, credit shall not be given in accordance with section 199 for the income-tax paid in the previous year, but credit shall be given for the annual average of the income-tax paid by deduction at source from interest on securities or otherwise during such period”.

Rule-7 defines ‘life insurance business’ means life insurance business as defined in clause-2 of section 2 of Insurance Act 1938. Assessee incorporated after the enactment of the IRDA 1999, is in the life insurance business and there is no dispute with that. As per section 44 for a business involved in insurance business notwithstanding contained in any other head of income like interest on securities, house property, capital gains and other sources, the income from profits and business are to be computed according to the first schedule. Primacy of Sec.44 and power of AO to compute as per Rule 2 of First Schedule was also decided by Hon’ble Supreme Court in number cases relied on by both parties. As the dispute is not with the above, there is no need to reiterate those principles or discuss cases in this order.

19. Rule-2 is the main computation provision which is applicable to the life insurance business. As per Rule-2 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, in respect of the last inter valuation period so as to exclude any surplus or deficit included therein which was made in any inter valuation period. According to the rule the surplus or deficit between two valuation periods can only be taken as income or loss of the period. Thus if there is a surplus in earlier valuation of ‘Y’ amount and surplus in the later valuation at ‘X’ amount, the difference between X & Y will be the income of the inter valuation period for the purpose of Rule 2. Therefore, actuarial evaluation done in respective periods has importance. Before the IRDA Act, only Life Insurance Corporation was permitted to involve itself in life insurance business. The actuarial valuation was not undertaken every year but once in three years. Therefore, the rule provides for only average of the surplus to arrive between two inter valuation periods. However, with the enactment of IRDA Act 1999 and Regulations therein not only the private participants were permitted to do business but presentation of accounts and reports were modified.

Past history of the assessee company:

20. Assessee company was governed by the IRDA Act and its Regulations from its inception. In earlier years attempts were made by Revenue to disturb the Incomes or losses assessed both under Sec. 263 and Sec. 147, as briefly stated in Ld. Counsel’s arguments. The incomes and Losses shown by assessee in various assessment years are as under:

A.Y.	Returned Income/(loss)	Surplus/(deficit) as per A-RA	Amount transferred from SHA	Surplus as per Form I
2001-02	(204,359,146)	(206,619,000)	–	–
2001-03	(854,736,440)	177,434,000	1,241,806,000	–
2003-04	(987,036,885)	22,000	1,583,784,000	–
2004-05	(1,742,378,630)	(22,000)	2,367,746,000	–
2005-06	(1,505,539,430)	(317,487,000)	2,333,474,000	358,696,280
2006-07	(2,005,534,043)	1100,641,000)	2,306,655,000	775,734,930
2007-08	(4,128,758,204)	(1,360,152,000)	7,579,972,000	1,426,033,160
2008-09	8,233,771,502)	(3,251,153,000)	16,063,495,000	3,029,120,030

21. The dispute in this case is in adopting the amount of surplus or deficit as per actuarial valuation. There is no dispute with method of actuarial valuation. The dispute is centered around the amounts represented in Form-I as per the IRDA Regulations. Consequent to changes brought by IRDA Act, and its Regulations the revised format in Form I deviates from the Form-I prescribed under Insurance Act 1938. Assessee reconciles the form with old Regulations and filed return of income/ loss. The AO adopts the ‘Total Surplus’ stated in Form-I under new Regulations ignoring the assessee submissions about changes in accounting procedures and need for reconciliation. This aspect was examined by the Hon’ble Bombay High Court in the assessee own case of ICICI Prudential Life Insurance Co. Ltd. (supra). The facts examined by the Hon’ble Bombay High Court pertain to the assessment year 2003-04 wherein consequent to the reopening of the assessment under section 148, the matter was challenged before the Hon’ble Bombay High Court. The entire scheme, various Regulations applicable, change in formats and method of accounts were elaborately discussed by the Hon’ble Bombay High Court as under:

“During the course of the assessment year 2003-04, the petitioner filed a return of income on November 27, 2003, reporting a net loss of Rs. 98.70 crores. The statement of the computation of profits and gains from business shows an actuarial deficit of Rs. 158.37 crores. After excluding a deficit of Rs. 48.47 crores, arising out of pension schemes exempt under section 10(23AAB), the deficit in the account stood at Rs. 109.90 crores. The petitioner had an income surplus in the shareholder’s account of Rs. 11.20 crores. As a result, the deficit from the insurance business was Rs. 98.70 crores.

Section 44 of the Income-tax Act, 1961, provides that notwithstanding anything contained to the contrary in 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” or in section 199 or in sections 28 to 43B the profits and gains of any business of insurance shall be computed in accordance with the rules contained in the First Schedule to the Act. Rule 2 of the First Schedule provides as follows:

“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.”

Before 1999, companies engaged in the business of life insurance were required to prepare one consolidated account. Section 11 of the Insurance Act, 1938 was amended so as to include sub-sections (1A) and (1B). Subsection (1A) to section 11 provides that every insurer, on or after the commencement of the IRDA Act, 1999, in respect of insurance business transacted by him and in respect of shareholder’s’ funds, shall, at the expiration of each financial year, prepare with reference to that year, a balance sheet, a profit and loss account, a separate account of receipts and payments, and revenue account in accordance with the Regulations made by the Authority. Section 13(1) provides that every insurer carrying on life insurance business shall, inter alia, in respect of the life insurance business transacted in India, cause an investigation to be made each year by an actuary into the financial condition of the life insurance business carried on by him, including a valuation of his liabilities and shall cause an abstract of the report of such actuary to be made in accordance with the Regulations laid down in Part I of the Fourth Schedule and in conformity with the requirements of Part II of that Schedule. The fifth proviso to section 13 stipulates that on or after the commencement of the IRDA Act, 1999 every insurer shall cause an abstract of the report of the actuary to be made in the manner specified by the Regulations made by the Authority.

In exercise of the powers conferred by section 114A of the Insurance Act, 1938, the IRDA notified the Insurance Regulatory and Development Authority (Actuarial Report and Abstract) Regulations, 2000. Regulations 3 and 4 stipulate the procedure for preparation of actuarial reports and abstracts and the requirements applicable. Under Regulation 3(4)(v), each abstract and statement is to be accompanied by a certificate signed by the appointed actuary, inter alia, stating that in his opinion, the mathematical reserves are adequate to meet the insurer’s future commitments under contracts and the reasonable expectation of policyholder’s. Each insurer is required to prepare statements which are to be annexed to the abstract and a list of those statements is set out in Regulation 4(2). Regulation 8 provides that a statement showing the total amount of surplus arising during the inter-valuation period and allocation of such surplus, shall be furnished separately for participating business and for non-participating business, together with the particulars as mentioned in the Regulation. The composition of surplus, inter alia, includes the surplus shown by Form I, interim bonuses, loyalty additions and sums transferred from shareholder’s’ funds during the inter-valuation period.

The Authority has also notified the Insurance Regulation and Development Authority (Preparation of Financial Statements and Auditor’s Report of Insurance Companies) Regulations, 2002. Part V deals with the provision of financial statements. Every insurer is required to prepare (i) a revenue account which is also described as a policyholder’s’ account; and (ii) a profit and loss account, which is also described as a shareholder’s’ account, apart from a balance-sheet. The statutory forms are prescribed by the Regulations. Form A-RA is prescribed for the preparation of the revenue account or the policyholder’s’ account. Form A-RA reflects the surplus or, as the case may be, the deficit generated in the revenue account for the year ending 31st March.

As a result of the Regulations, the petitioner which is engaged in the business of life insurance is required to prepare and maintain two accounts namely, (i) a revenue account of policyholder’s, and (ii) a profit and loss account of shareholder’s. For the previous year which ended on March 31, 2003, the policyholder’s’ account reflected a deficit of Rs. 158.37 crores. This deficit was made good by the transfer of an amount of Rs. 158.37 crores from the shareholder’s’ account to the policyholder’s account. This was essentially an internal transfer of funds. Form I which has been prepared by the petitioner in pursuance of the IRDA Regulations of 2000 reflected a nil deficit consequent upon the transfer of an amount of Rs. 158.37 crores from the shareholder’s’ account to the policyholder’s account. The source for making a transfer of Rs. 158.37 crores from the shareholder’s’ account originated in the infusion of capital from shareholder’s during the course of the previous year relevant to the assessment year in question.

During the course of the assessment proceedings for the assessment year 2003-04, the petitioner furnished a note to the computation of income. The salient aspects which were highlighted in the note were as follows:

(i) The erstwhile format for the presentation of surplus/deficit required each insurance company to aggregate the results relating to shareholder’s’ operations and policyholder’s’ operations. The impact of the consolidated revenue account was transferred to the actuary’s valuation balance-sheet in Form I which disclosed the surplus/deficit for the year;

(ii) The format for presentation of the insurance accounts was amended by the Regulations of 2000 and by the revised format, the impact of the actuarial valuation was transferred to the revenue account relating to the policyholder’s for the year and the surplus/deficit was disclosed therein ;

(iii) The profit and loss for shareholder’s and the surplus/deficit for policyholder’s are since segregated into two separate accounts after the amended Regulations;

(iv) For the financial year ending March 31, 2003, the actuarial valuation as disclosed in Form I shows a nil surplus/deficit as regards the business of policyholder’s. The actual deficit of Rs. 158.37 crores in the policyholder’s’ account (Form A-RA) was made good by a transfer of an equivalent sum from the shareholder’s’ account. Hence, the figures showing a nil deficit in Form I were subsequent to the transfer;

(v) The total deficit in the policyholder’s’ account for tax purposes was Rs. 109.90 crores (Rs.158.37 crores less an amount of Rs. 48.47 crores on account of exempt pension schemes);

(vi) In the shareholder’s’ account, there was a net surplus of Rs. 11.19 crores;

(vii) Consequently, while there was a net surplus in the shareholder’s’ account of Rs. 11.19 crores, there was a net deficit in the policyholder’s’ account of Rs. 109.90 crores;

(viii) Consequently, in determining the profits and gains under section 44 read with rule 2, the loss was computed at Rs. 98.70 crores by aggregating the surplus in the shareholder’s’ account with the deficit in the policyholder’s’ account for the purposes of taxation.

During the course of the assessment proceedings, letters were addressed to the Assessing Officer specifically in order to clarify the position of the deficit in the policyholder’s’ account. By its letter dated December 27, 2005, the petitioner clarified that the deficit in the policyholder’s’ account as reflected by Form A-RA had been met by a transfer from the shareholder’s’ account. The figures relating to surplus/deficit in Form I were subsequent to the internal transfer of funds. The assessee contended that the transfer from the shareholder’s’ to the policyholder’s’ account was an internal adjustment and was tax neutral. Before the assessment proceedings came to be concluded for the assessment year 2003-04, an audit query was raised with reference to the assessment year 2002-03. The audit report dated May 4, 2005 specifically raised a question as to whether the petitioner should have been allowed to claim a deficit in the policyholder’s’ account since the deficit disclosed by the actuarial valuation in Form I was shown to be nil. In response to the audit query, the petitioner addressed a letter dated December 29, 2005, contending that the First Schedule to the Income-tax Act did not refer to any particular form for calculating the taxable surplus and instead mentions that the actuarial surplus calculated under the provision of the Insurance Act, 1938, has to be considered. The petitioner reiterated its position that Form I showed a zero surplus because, it has already considered, inter alia, the transfers made from the shareholder’s’ account to the policyholder’s’ account to nullify the deficit as per the IRDA Regulations. The same position has been reiterated by a letter dated December 30, 2005 to the Assessing Officer”.

It was further observed vide Para 18 (Page No.480) as under:

The record before the court shows that the assessee had in its computation of income disclosed that the policyholder’s’ account showed that (i) there was a deficit of Rs. 109.90 crores (comprising Rs. 158.37 crores minus Rs. 48.47 crores arising out of exempt pension funds) ; (ii) there was a transfer of funds to the extent of Rs. 158.37 crores from the shareholder’s’ account to the policyholder’s’ account ; and (iii) that the deficit in the policyholder’s’ account was adjusted only by an internal transfer of funds from the shareholder’s’ account to the policyholder’s’ account. By its letters dated December 27, 2005 and December 30, 2005, which were filed in response to queries raised by the Assessing Officer, the assessee disclosed (a) the manner in which the profits and gains under section 44 read with the First Schedule were arrived at, so as to reflect a loss of Rs. 98.70 crores ; (b)the fact that the nil surplus shown in the report of the actuarial valuation in Form I was subsequent to the transfer of funds from the shareholder’s’ account to the policyholder’s’ account. When the assessment proceedings pertaining to the assessment year 2003-04 were pending, an audit query came to be raised in regard to a similar claim for loss during the assessment year 2002-03. The petitioner responded to the audit query by its letter dated December 29, 2005. The letters addressed by the petitioner, including the note appended to the computation of income clearly set out the fact that there was a surplus in the shareholder’s’ account and that the deficit in the policyholder’s’ account was met by a transfer from the share holders’ account to the policyholder’s’ account. The petitioner disclosed that in Form I, the surplus/deficit was shown to be nil and submitted that the position reflected in Form I was subsequent to the internal transfer of funds which took place from the shareholder’s’ to the policyholder’s’ account. It is after the petitioner had filed its explanation by several letters that the Assessing Officer passed an order of assessment under section 143(3)”.

22. Further vide Para 21 (Page 482), the method of accounting and Regulations were further analysed as under:

While dealing with the reopening of the assessment for the assessment year 2004-05, the principal question before the court is as to whether there was any tangible material before the Assessing Officer to form a reason to believe that income chargeable to tax had escaped assessment. In the prefatory part of this judgment, a reference has been made to the relevant provisions of the Insurance Act, 1938 and to the Regulations of 2000 and 2002, which have a bearing on the formulation of the accounts, of an assessee like the petitioner who engages in the business of life insurance. Section 13(1) of the Insurance Act, 1938 which was inserted by the Insurance Regulatory Authority Act, 1999 requires every insurer upon the commencement of the Act to maintain separate accounts in respect of the insurance business transacted by the insurer and in respect of the shareholder’s funds. Regulations 3 and 4 of the Regulations of 2000 provide the procedure and requirements in the preparation of the actuarial report and abstract. Form I, it may be noted, is one of the summary statements that is required to be prepared by the insurer under Regulation 4(2). Part V of the 2000 Regulations deals with the preparation of the financial statement and requires the insurer to prepare; (i) a revenue account, also called a policyholder’s’ account ; and (ii) a profit and loss account, also called the shareholder’s’ account. Form A-RA is the form in which the policyholder’s’ account is to be filed. Form A-RA requires a disclosure of (a) premiums earned, income from investments and other income ; (b) commission, operating expenses, provision for doubtful debts, debts written off, provision for tax and other than taxation ; (c) benefits, interim bonuses and change in valuation of liability in respect of life policies. The surplus/deficit is computed at the foot of the account by deducting the amounts computed under (b) and (c) above from the figures of income in (a).

During the course of the assessment, the assessee had set out the computation in the policyholder’s’ account and in the shareholder’s’ account. According to the assessee, the net result of the operations is reflected in the policyholder’s’ account which has been made good by transfer from the shareholder’s’ account. A circular has been issued on March 23, 2004 by the Insurance Regulatory Development Authority, to specify the conditions which are required to be fulfilled where an insurer intends to declare a bonus when there is a deficit in the life fund. The condition which is prescribed in the circular is that the accumulated deficit in the policyholder’s’ account must be made good by a transfer of funds from the shareholder’s’ account to the policyholder’s’ account. The circular clarifies that the transfer from the shareholder’s’ account can be out of the profit and loss account, balance or reserves in the shareholder’s’ account or by drawing upon the paid up capital of the insurer. The transfer of funds made from the shareholder’s’ account to the policyholder’s’ account is to be irreversible. What the circular emphasizes is that an insurer who intends to declare a bonus has to ensure, in the event that there is a deficit in the policyholder’s’ account, that the deficit is effaced by a transfer of funds from the shareholder’s’ account”.

The Assessing Officer, while reopening the assessment has not put forth any tangible material on the basis of which he could have formed a reasonable belief that income chargeable to tax has escaped assessment. He has merely altered or changed the opinion which was formed during the assessment proceedings”. (emphasis supplied)

The Hon’ble Bombay High Court on the facts of the case held that reopening is bad in law. In arriving at that decision, the Hon’ble High Court examined the entire scheme of presentation of accounts and arriving at surplus. Therefore not only the Regulations which are binding on the assessee were discussed but computation made there under was also considered in the above decision.

23. The dispute in these years is also similar. Eventhough Ld.CIT DR submitted that those years has no effect on deciding this issue, we are aware about consequential effects in later years and the need to follow uniform methodology. Therefore an attempt was made to examine and reconcile the various contentions in this order. It was the assessee contention that the surplus or deficit amount should be arrived at after adjusting both Accounts there by neutralising the transfer of capital funds from Shareholder’s account to policyholder’s account as per Regulations and prudent business practice and international practices being followed by assessee company. AO’s contention is based on amounts referred in Form I.

Import of Insurance Act 1938:

24. Before analyzing the issue, it is necessary to discuss the principles of ‘incorporation’ of Insurance Act 1938 into the Income Tax Act 1961. As rightly pointed out by the learned Counsel, the reference to the Insurance Act 1938 in the Income Tax Act as such can only be considered as ‘legislation by incorporation’. The principles of ‘legislation by incorporation’ and ‘legislation by reference’ are discussed by the Hon’ble Supreme Court in a number of cases, more so in the following cases.

25. In the case of Mahindra & Mahindra Ltd. (supra), the Hon’ble Supreme Court on the principles of interpretation of statutes on section 8(1) of general Clauses Act 1897 held as under:

Interpretation of Statutes – Legislation by reference and by incorporation-Difference – In former case Section 8(1) of General Clauses Act applicable – But in latter case subsequent repeal or amendment of the provision incorporated does not affect the incorporating statute -General Clauses Act, 1897, Section 8(1) (paras 8 and 9)

“8. The first question that arises for consideration on the preliminary objection of the respondents is as to what is the true scope and ambit of an appeal under Section 55., That section provides inter alia that any person aggrieved by an order made by the Commission under Section 13 may prefer an appeal to this Court on “one or more of ‘the grounds specified in Section 100 of the Code of Civil Procedure, 1908”. Now at the pate when Section 55 was enacted, namely, December 27, 1969, being the date of coming into force of the Act, Section 100 of the Code of Civil Procedure specified three grounds on which a second appeal could be, brought to the High Court and one of these grounds was that the decision appealed against was contrary It was sufficient under Section 100 as it stood then that there should be a question of law in order to attract the jurisdiction of the High Court in second appeal and, therefore, if the reference in Section 55 were to the grounds set out in the then existing Section 100, there can be no doubt that an appeal would lie to this Court under Section 55 on a question of law. But subsequent to the enactment of Section 55, Section 100 of the Code of Civil Procedure was substituted by a new section by Section 37 of the Code of Civil Procedure (Amendment) Act, J 976 with effect from February 1, 19’77 and the new Section 100 provided that a second appeal shall lie to the High Court only if the High Court is satisfied that the case involves a substantial question of law. The three grounds on which a second appeal could lie under the former Section 100 were abrogated and in their place only one ground was substituted which was a highly stringent ground, namely, that there’ should be a substantial question of law. This was the new Section 100 which was in force on the date when the present appeal was ‘preferred by the appellant and the argument of the respondents was that the maintainability of the appeal was, therefore, required to be judged by reference to the ground specified in the new Section 100 and the appeal could be entertained only if there was a substantial question of law. The respondents leaned heavily on Section 8(1) of the General Clauses Act, 1897 which provides:

Where this Act or any Central Act or Regulation made after the commencement of this Act, repeals and re-enacts, with or without modification, any provision of a former enactment, then references in any other enactment or in any instrument to the provision so repealed shall, unless a different intention appears, be construed as references to .the provision so re-enacted and contended that the substitution of the new Section 100 amounted to repeal and re-enactment, of the former Section 100 and, therefore, on an application of the rule of interpretation enacted in Section 8(1), the reference in Section 55 to Section 100 must be construed as reference to the new Section 100 and the- appeal could be maintained only on ground” specified in the new Section 100, that IS, on a substantial question of law. We do not think this contention is well founded. It ignores the ‘distinction between a mere reference to or citation’ of one statute in another and an incorporation which in effect means bodily lifting a provision of one enactment and making it a part of another. Where there is mere reference to or citation of one enactment in another without incorporation; Section 8(1) applies and the repeal and re-enactment of the provision referred to or cited, has the effect set out in that section and the reference to the provision repealed is required to be construed, as reference to the provision as’ ‘re-enacted. Such was the case in the Collector of Customs v. Nathella Sampathu Chetty” and New Central Jute Mills Co. Ltd. v. Assistant Collector of Central Excise. But where a provision of one statute is Incorporated in another, ‘the repeal or amendment of the former does not affect the latter. The effect of incorporation is as if ‘the provision incorporated were written’ out in the incorporating statute and were a part of it. Legislation by incorporation is a common legislative device employed by the legislature, where the legislature for convenience of drafting incorporates provisions from an existing statute by reference to: that statute instead of setting out for itself at length the provisions which it desires to adopt. Once the incorporation is made, the provision incorporated becomes an integral part of the statute in which it is transposed and thereafter there is no need to refer to the statute from which the incorporation is made and any’ subsequent amendment made in it has no effect on the incorporation statute. Lord Esher, M. R.” while dealing with legislation in incorporation in In re Wood’s Estate” pointed out at page 615 :

If a subsequent Act brings into itself by reference some of the clauses of a former Act, the legal effect of that, as has often been held, is to write those sections into the new Act, just as if they’ had been actually written in it with the pen, or printed in it, and, the .moment you pave those clauses in the later Act, you have no occasion to refer to .the former Act at all. ‘

Lord Justice Brett, also observed to’ the same effect in ‘Clarke v. Bradlaugh“: ….. there is a’ rule of construction that, where statute is incorporated by reference into a second . statute, the repeal of the first statute by a third statute does not affect the second. This was the rule applied by the Judicial Committee of the Privy Council in Secretary of State’ for India in Council v; Hindustan Co-operative Insurance Society Ltd.”. The Judicial Committee pointed out in this case that the provisions of the Land Acquisition Act, 1894 having been incorporated in the Calcutta Improvement Act, 1911 and become an integral part of it, the subsequent amendment of the Land Acquisition Act, 1894 by the addition of sub-section (2) in Section 26 had no effect on the Calcutta Improvement Act, 1911 and could not be read into it. ‘Sir George Lowndes delivering the opinion of the Judicial Committee observed at page 267 :

In this country it is accepted that where a statue is incorporated by reference into a second statute, the repeal of the first statute does not affect the second: see the cases collected in Craies on Statue Law 3rd ed. pp. 349, 350 … The independent existence of the two Acts is, therefore, recognized; despite the death of the parent Act, its .offspring survives in, the incorporating Act.

It seems to be no less logical: to hold that where certain provisions from an existing Act, have been incorporated into a subsequent Act, no addition to the former Act, which is not expressly made applicable to the subsequent Act, can be deemed to be incorporated in it, at all events if it is possible for the subsequent Act to function effectually without the addition.

So also in Ram Sarup v. M Munshi, it was held by this Court that since the definition of ‘agricultural land’ in the Punjab Alienation, of Land’ Act, 1900 as bodily incorporated, in the Punjab Pre-emption Act, 1913, the’ repeal of the former Act .had no effect on the continued operation of, the latter. Rajagopala Ayyangar, J., “speaking for the Court observed at pages 868-869 of the Report :

Where the provisions of an Act are’ incorporated’ by reference in a later Act the’ ‘repeal ‘of ‘the’ earlier Act has, in general, no effect upon the construction or effect of the Act’ in which its provisions have been incorporated.

In the circumstances, therefore, the repeal of the Punjab Alienation of Land Act of 1900 has no effect on the continued operation of the Pre-emption Act and the expression~, ‘agricultural land’ in the later Act has to be read as if the definition in the Alienation of Land Act 1900, had been bodily transposed into it :

The decision of this Court in Bolani Ores Ltd. v. State of Orissa also proceeded on the same principle. There the question arose in regard to the interpretation of Section 2(c) of the Bihar and Orissa Motor Vehicles Taxation’ Act, 1930 (hereinafter referred to as the Taxation Act). This section when enacted adopted the definition of ‘motor vehicle’ contained in Section 2(18) of the Motor Vehicles Act, 1939. Subsequently, Section 2(18) was amended by Act 100 of 1956 but no corresponding amendment was made in the definition contained in Section 2(c) of the Taxation Act. The argument advanced before the Court was that the definition in Section 2(c) of the Taxation Act was not a definition by incorporation but only a definition by reference and the meaning of ‘motor vehicle’ in Section 2(c) must, therefore, be taken to be the same as defined from time. to time in Section 2(18) of the’ Motor Vehicles Act, 1939. This argument was negatived by the Court and it was held that this was a case of incorporation and not reference and the definition’ in Section 2(18) of the Motor Vehicles Act, 1939 as then existing was incorporated in Section 2(c) of the ‘Taxation Act and neither repeal of the Motor Vehicles Act, 1939 nor any .amendment in, it would affect the definition of ‘motor vehicle’ in Section 2 (c) of the.-Taxation Act. It is, therefore, clear that if there is mere reference to a provision. of one statute in another without incorporation, then, unless a different intention clearly appears, Section 8(1) would apply and the reference- would ; be construed as a reference to the provision as may be in force from time to time in the former statute. But if a provision of one statute is incorporated in another, any subsequent. amendment in the former statute or even its total repeal would not affect the provision as incorporated in the latter statute. The question is to which category the present case belongs.

9. We have no doubt that Section 55 is an instance of legislation by incorporation and not legislation by reference. Section 55 provides for an appeal to this Court on’ “one or more of the grounds specified in Section 100”. It is obvious that the legislature did not want to confer an unlimited right of appeal, but wanted to restrict it and turning to Section 100, it found that the grounds there set out were appropriate for restricting the right of appeal and hence it incorporated them in Section 55. The right of appeal was clearly intended to be limited to the grounds set out in the then existing Section 100. Those were the grounds which were before the Legislature and to which the Legislature could have applied its mind and it is reasonable to assume that it was with reference to those specific and known grounds that the Legislature intended to restrict the right of appeal. The Legislature could never have been intended to limit the right of appeal to any ground or grounds which might from time to time find place in Section 100 without knowing what those grounds were. The grounds specified in Section 100 might be changed from’ time to time having regard to the legislative policy relating to second appeals and it is difficult to see’ any valid reason why the Legislature should have thought it necessary that these changes should also be reflected in Section 55 which deals with the right of appeal in a totally different context. We fail to appreciate what relevance the legislative policy in ‘regard to second appeals has to the right of appeal under Section 55 so that Section 55 should be inseparably linked or yoked to .Section 100 and whatever changes take place in Section 100 must be automatically read into Section 55. It must be remembered that the Act is a self-contained Code dealing with monopolies and restrictive trade practices and it is not possible to believe that the Legislature could have made the right of ‘appeal under such a code. dependent on the vicissitudes through which a section in another statute might pass from time to time. The scope and ambit of the appeal could not have been intended to fluctuate or vary with every change in the grounds set out in Section 100. Apart from the absence of any rational justification for doing so, such an indissoluble linking of Section 55 with Section 100 could conceivably lead to a rather absurd and startling result. Take for example a situation where Section 100 might be repealed altogether by the Legislature – a situation which cannot be regarded as wholly unthinkable. If the construction contended for on behalf of the respondents were accepted, Section 55 would in such a case be reduced to futility and the right of appeal would be wholly gone, because then there would be no grounds on which an appeal could lie. Could such a consequence ever have been contemplated by the Legislature? – The Legislature clearly ‘intended that the e should be a right of appeal, though on limited grounds, and it would be absurd to place on the language of Section 55 an interpretation which might, in a given situation, result in denial of the right of appeal altogether and thus defeat the plain object and purpose of the section. We must, therefore, hold that on a proper interpretation the grounds specified in the then existing Section 100 were incorporated in Section 55 and the substitution of the new Section 100 did not affect or restrict the grounds as incorporated and since the present appeal admittedly raises questions of law, it is clearly maintainable under Section 55. We may point out that even if the right of appeal under Section 55 were restricted to the ground specified in the new Section 100, the present appeal would still be maintainable, since it involves a substantial question of law relating to the interpretation of section 13(2). What should be the test for determining whether a question of law raised in an appeal is substantial has been laid. down by this Court in Sir Chunilal v. Mehta and Sons Ltd. N. The Century Spinning and Manufacturing Co. Ltd.” and it has been held that the proper test would be whether the question of’ law – is of general public importance or whether it directly and substantially affects, the rights of the’ parties, and if so, whether it is ‘either an open question in the sense that it is not finally settled by this Court or ‘by the ‘Privy Councilor by the Federal Court or is not free from difficulty or calls for discussion of alternative’ views.

The question of interpretation of Section 13(2) which arises in the present appeal directly and substantially affects the rights of the parties and it is an open question in the sense that it is not finally settled by this Court and it is, therefore, clearly a substantial question of Jaw within the meaning of. this test. We must, therefore, reject the preliminary objection raised on behalf of the respondents against the maintainability of the present appeal:

26. Further in the case of Bharat Co-operative Bank (Mumbai) Ltd. (supra) this issue was considered by the Hon’ble Supreme Court vide Paras 12 to 29 and held as under:

“12. The main question raised for determination is whether the afore-noted amendments to the BR Act, particularly insertion of Section 56 in the new format w.e.f. 1st March, 1966, after the insertion of the definition of “Banking Company” in the ID Act by Act 54 of 1949 will apply mutatis mutandis to the matters governed by the ID Act?

13. As there is no indication in the ID Act as to the applicability or otherwise of the subsequent amendments in the BR Act, the question posed has to be answered in the light of the two concepts of statutory interpretation, namely, incorporation by reference and mere reference or citation of one statute into another. Thus, answer to a rather intricate question hinges on the test whether at the time of insertion of the definition of the term “Banking Company” in the form of sub-section (bb) of Section 2 of the ID Act by the 1949 Act it was a mere reference to the Banking Companies Act, 1949 (later re-christened as the Banking Regulation Act) or the intendment of the legislature was to incorporate the said definition as it is in the ID Act?

14. Before adverting to the said core issue, we may briefly notice the distinction between the two afore-mentioned concepts of statutory interpretation, viz., a mere reference or citation of one statute in another and incorporation by reference. Legislation by incorporation is a common legislative device where the legislature, for the sake of convenience of drafting incorporates provisions from an existing statute by reference to that statute instead of verbatim reproducing the provisions, which it desires to adopt in another stature. Once incorporation is made, the provision incorporated becomes an integral part of the statute in which it is transposed and thereafter there is no need to refer to the statute from which the incorporation is made and any subsequent amendment made in it has no effect on the incorporating statute. On the contrary, in the case of a mere reference or citation, a modification, repeal or re-enactment of the statute, that is referred will also have effect on the stature in which it is referred. The effect of “incorporation by reference” was aptly stated by Lord Esher, M.R. In re: Wood’s Estate, Ex parte Her Majesty’s Commissioners of Works and Buildings in the following words at page 615:

“If a subsequent Act brings into itself by reference some of the clauses of a former Act, the legal effect of that, as has often been held, is to write those sections into the new Act just as if they had been actually written in it with the pen, or printed in it, and, the moment you have those clauses in the later Act, you have no occasion to refer to the former Act at all.”

15. The Privy Council in Secretary of State for India in Council v. Hindustan Co-operative Insurance Society Ltd. while amplifying the doctrine of incorporation, observed as follows:

“Their Lordships regard the local Act as doing nothing more than incorporating certain provisions from an existing Act, and for convenience of draft doing so by reference to that Act, instead of setting out for itself at length the provisions which it was desired to adopt. The independent existence of the two Acts is therefore recognized; despite the death of the parent Act, its offspring survives in the incorporating Act. Though no such saving clause appears in the General Clauses Act, their Lordships think that the principle involved is as applicable in India as it is in this country.”

16. The doctrine of legislation by incorporation and its effect has been dealt with by this Court in a catena of decisions. In Ram Sarup v. Munshi & Ors. a Constitution Bench held that repeal of Punjab Alienation of Land Act, 1900 had no effect on the continued operation of the Punjab Pre-emption Act, 1913 and that the expression “agricultural land” in the later Act had to be read as if the definition of the Alienation of Land Act had been bodily transposed into it. After referring to what Brett, L.J. said on the effect of incorporation in Clarke v. Bradlaugh, namely, “where a statute is incorporated, by reference, into a second statute the repeal of the first statute by a third does not affect the second”, it was observed as follows:- “Where the provisions of an Act are incorporated by reference in a later Act the repeal of the earlier Act has, in general, no effect upon the construction or effect of the Act in which its provisions have been incorporated. In the circumstances, therefore, the repeal of the Punjab Alienation of Land Act of 1900 has no effect on the continued operation of the Pre- emption Act and the expression ‘agricultural land’ in the later Act has to be read as if the definition in the Alienation of Land Act had been bodily transposed into it.”

17. The same principle was applied in Bolani Ores Ltd. v. State of Orissa. In that case this Court was considering the question regarding the interpretation of Section 2(c) of the Bihar and Orissa Motor Vehicles Taxation Act, 1930 (for short “the Taxation Act”). This Section when enacted adopted the definition of “motor vehicle” contained in Section 2(18) of the Motor Vehicles Act, 1939. Subsequently, Section 2(18) was amended by Act 100 of 1956 but no corresponding amendment was made in the definition contained in Section 2(c) of the Taxation Act. The argument advanced was that the definition in Section 2(c) of the Taxation Act was not a definition by incorporation but only a definition by reference and the meaning of “motor vehicle” in Section 2(c) must, therefore, be taken to be the same as defined from time to time in Section 2(18) of the Motor Vehicles Act, 1939. The argument was rejected by this Court and it was held that this was a case of incorporation and not reference and the definition in Section 2(18) of the Motor Vehicles Act, 1939, as then existing, was incorporated in Section 2(c) of the Taxation Act and neither repeal of the Motor Vehicles Act, 1939 nor any amendment in it would affect the definition of “motor vehicle” in Section 2(c) of the Taxation Act.

18. The decision of this Court in Mahindra & Mahindra Ltd. v. Union of India & Anr. also proceeded on the same principle. There the question was in regard to the effect of subsequent amendment in Section 100 of the Code of Civil Procedure, 1908 on Section 55 of the Monopolies and Restrictive Trade Practices Act, 1969 (for short “The MRTP Act”). Section 55 of the MRTP Act provides for an appeal to this Court against the orders of the Monopolies and Restrictive Trade Practices Commission on “one or more of the grounds specified in Section 100 of the Code of Civil Procedure, 1908”. Section 100 of the Code of Civil Procedure was substituted by a new Section in 1976, which narrowed the grounds of appeal under that Section. In construing Section 55 of the MRTP Act this Court held that Section 100 of the Code as it existed in 1969 was incorporated in Section 55 and the substitution of new Section in the code, abridging the grounds of appeal, had no affect on the appeal under Section 55 of the MRTP Act.

19. The principle laid down in these decisions was reiterated in U.P. Avas Evam Vikas Parishad v. Jainul Islam & Anr. and lately in P.C. Agarwala v. Payment of Wages Inspector, M.P. & Ors. It is, therefore, clear from the afore-noted decisions that if there is a mere reference to a provision of one statute in another without incorporation, then, unless a different intention clearly appears, the reference would be construed as a reference to the provision as may be in force from time to time in the former statute. But if a provision of one statute is incorporated in another, any subsequent amendment in the former statute or even its total repeal would not affect the provision as incorporated in the latter statute.

20. However, the distinction between incorporation by reference and adoption of provisions by mere reference or citation is not too easy to highlight. The distinction is one of difference in degree and is often blurred. The fact that no clear-cut guidelines or distinguishing features have been spelt out to ascertain whether it belongs to one or the other category makes the task of identification difficult. The semantics associated with interpretation play their role to a limited extent. Ultimately, it is a matter of probe into legislative intention and/or taking an insight into the working of the enactment if one or the other view is adopted. Therefore, the kind of language used in the provision, the scheme and purpose of the Act assume significance in finding answer to the question. (See: Collector of Customs v. Sampathu Chetty & Anr.). The doctrinaire approach to ascertain whether the legislation is by incorporation or reference is, on ultimate analysis, directed towards that end. (See: Maharashtra State Road Transport Corporation v. State of Maharashtra & Ors.) Thus, the question for determination is to which category the present case belongs.

21. The plain language of Section 2(bb) of the ID Act makes the intention of the legislature very clear and we have no hesitation in holding that reference to Section 5 of the Banking Companies Act, 1949 in the said provision is an instance of legislation by incorporation and not legislation by reference.

22. Section 2(bb) of the ID Act as initially introduced by Act 54 of 1949 used the word “means.. and includes” and was confined to a “Banking Company” as defined in Section 5 of the Banking Companies Act, 1949, having branches or other establishments in more than one province and includes Imperial Bank of India. Similarly, Section 2(kk), which was also introduced by Act 54 of 1949, defines Insurance Company as “an Insurance Company defined in Section 2 of the Insurance Act, 1938 (IV of 1938), having branches or other establishments in more than one province”. It is trite to say that when in the definition clause given in any statute the word “means” is used, what follows is intended to speak exhaustively. When the phrase “means” is used in the definition, to borrow the words of Lord Esher M.R. in Gough v. Gough, it is a “hard and fast” definition and no meaning other than that which is put in the definition can be assigned to the same. (Also see: P. Kasilingam and Ors. v. P.S.G. College of Technology and others). On the other hand, when the word “includes” is used in the definition, the legislature does not intend to restrict the definition; makes the definition enumerative but not exhaustive. That is to say, the term defined will retain its ordinary meaning but its scope would be extended to bring within it matters, which in its ordinary meaning may or may not comprise. Therefore, the use of the word “means” followed by the word “includes” in Section 2(bb) of the ID Act is clearly indicative of the legislative intent to make the definition exhaustive and would cover only those banking companies which fall within the purview of the definition and no other.

23. Moreover, Section 2(bb) has subsequently been amended from time to time by various amendments to include certain specified banks and institutions, which would otherwise not fall within the exhaustive definition of the “Banking Company” in Section 2(bb) read with Section 5(c), 5(b) and 5(d) of the BR Act. It is plain that if the Parliament had intended an expansive interpretation of the original words, then there would have been no reason whatsoever to keep amending the definition from time to time. In our view, therefore, the language of Section 2(bb) clearly demonstrates the legislative intent not to bring within its ambit all the banks transacting the business of banking in India.

24. We are, therefore, of the opinion that introduction of the Banking Companies Act, 1949 in clause (bb) of Section 2 of the ID Act is a case of incorporation by reference; it has become its integral part and therefore, subsequent amendments in the BR Act would not have any effect on the expression “Banking Company” as defined in the said Section.

25. At this juncture, we may also consider an alternative submission made on behalf of the Bank that even if it is assumed that the provisions of Section 5 of the BR Act were introduced into Section 2(bb) of the ID Act by way of legislative incorporation, two of the exceptions, namely, exceptions (c) and (d), carved out by this Court in State of Madhya Pradesh v. M.V. Narasimhan and reiterated in P.C. Agarwala’s case (supra), would apply in the instant case. The exceptions so enumerated are:

(a) Where the subsequent Act and the previous Act are supplemental to each other;

(b) Where the two Acts are in pari materia;

(c) Where the amendment in the previous Act, if not imported into the subsequent Act also, would render the subsequent Act wholly unworkable and ineffectual; and

(d) Where the amendment of the previous Act, either expressly or by necessary intendment, applies the said provisions to the subsequent Act.

26. In our view, there is no substance in the contention. The ID Act is a complete and self contained Code in itself and its working is not dependant on the BR Act. It could not also be said that the amendments in the BR Act either expressly or by necessary intendment applied to the ID Act. We, therefore, reject the contention advanced by learned counsel for the appellant on this aspect as well.

27. Further, as noticed above, the definition of the “Banking Company” in clause (bb) of Section 2 of the ID Act being exhaustive, it is only with respect to the “Banking Company” falling within the ambit of the said definition in the ID Act, that the Central Government would be the appropriate government, which admittedly is not the case here.

28. In the light of the analysis we have made of the provision contained in Section 2(bb) of the ID Act, we deem it unnecessary to dilate on the impact of the IDBIC Act on the ID Act.

29. For all these reasons, we have no hesitation in upholding the view taken by the High Court that for the purpose of deciding as to which is the “appropriate government”, within the meaning of Section 2(a) of the ID Act, the definition of the “Banking Company” will have to be read as it existed on the date of insertion of Section 2(bb) and so read, the “appropriate government” in relation to a multi-state co-operative bank, carrying on business in more than one state, would be the State Government”.

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 arriving at the above decision we have also taken into consideration that Rule-5 in Part-B of the first schedule with reference to ‘other insurance business’ did incorporate the IRDA and its Regulations as amended by the Finance Act 2009 w.e.f. 1.4.2011 which is as under:

“B- Other Insurance Business:

Computation of profits and gains of other insurance business.

5. The profits and gains of any business of insurance other than life insurance shall be taken to be the profit before tax and appropriations as disclosed in the Profit & Loss A/c prepared in accordance with the provisions of the Insurance Act, 1938 (4 of 1938) or the rules made thereunder or the provisions of the Insurance Regulatory and Development Authority Act, 1999 (4 of 1999) or the Regulations made thereunder subject to the following adjustments:-

(a) subject to the other provisions of this rule, any expenditure or allowance including any amount debited to the profit and loss account either by way of a provision for any tax, dividend, reserve or any other provision as may be prescribed which is not admissible under the provisions of section 30 to 43B in computing the profits and gains of a business shall be added back:

(b) (i) any gain or loss on realization of investments shall be added or deducted, as the case may be, if such gain or loss is not credited or debited to the Profit & Loss A/c ;

(c) such amount carried over to a reserve for unexpired risks as may be prescribed in this behalf shall be allowed as a deduction”. (emphasis supplied)

This indicates that the legislature consciously omitted incorporating the provisions of IRDA or the Regulations made there under in Rule 2 which still refers to the Insurance Act 1938 only.

28. Further, we also notice that the Insurance Act itself was amended along with the introduction of IRDA Act 1999. Along with the said IRDA Act, there are various amendments proposed in the Insurance Act in tune with IRDA Act by amending the relevant provisions of Insurance Act 1938. However, since the Rule 5 was amended in the First schedule by specifically referring to the IRDA Act 1999 or the Regulations made there under, we are of the opinion that the legislature intended not to modify or amend the Rule-2. This indicates the intention of legislature that the actuarial valuation has to be made in accordance with the unamended Insurance Act, 1938. 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.

29. We also notice that the actuarial report and abstracts under the Insurance Act 1938 has to be prepared vide section 13 of that Act in accordance with the Regulations contained in Part-I of the Fourth schedule and in conformity with the requirement of Part-II of that schedule. Section 13 of Insurance Act 1938( as amended now) is as under:

“13. Actuarial report and abstract.

(1) Every insurer carrying on life insurance business shall, in respect of the life insurance business transacted by him in India, and also in the case of an insurer specified in sub- clause (a) (ii) or sub- clause (b) of clause (9) of section 2 in respect of all life insurance business transacted by him,(every year) cause an investigation to be made by an actuary into the financial condition of the life insurance business carried on by him, including a valuation of his liabilities in respect thereto and shall cause an abstract of the report of such actuary to be made in accordance with the Regulations contained in Part I of the Fourth Schedule and in conformity with the requirements of Part II of that Schedule:

Provided that the Authority may, having regard to the circumstances of any particular insurer, allow him to have the investigation made as at a date not later than two years from the date as at which the previous investigation was made:

Provided ….

Provided…..

Provided….

Provided also that every insurer on or after the commencement of the Insurance Regulatory and Development Authority Act, 1999 shall cause an abstract of the report of the actuary to be made in the manner specified by the Regulations made by the Authority”.

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 be done in accordance with the Regulations contained in erstwhile Fourth schedule Part-I and Part-II. This is what assessee is contending and merging the accounts of policyholder’s and shareholder’s account and arriving at the actuarial deficit, without taking into consideration the transfer of funds from the shareholder’s account to policyholder’s account.

31. After introduction of IRDA Act, the entire Regulation of insurance business has gone to the authority and in order to protect the interests of holders of insurance policies, to regulate, to promote and ensure orderly growth of insurance industry number of regulations have been prescribed by the IRDA. One such is, Insurance Regulatory and Development Authority (IRDA) (Actuarial Report and Abstract) Regulations 2000 by which method of preparation of actuaries report and abstracts were prescribed. An actuary is responsible for analysing possible out comes of the types of events that would potentially cost policy holders to make claims against their insurance policies. Insurance companies need to make sure that the money they are charging and collecting from policy holders is adequate to cover the costs of certain claims that might beneficially be made by policy holders as well as their other expenses. In fact, the work that actuaries perform is crucial to an insurance company’s ability to remain in business. Actuaries are involved at all stages in product development and in the pricing risk assessment and marketing of the products. Their job involves making estimates of ultimate out-come of insurable events. In the business of insurance the product cost is an abstraction, depending on the timing issues, variability issues and risk parameters. One big function actuaries provide is making reserves to insure that insurance companies keep enough money on their balance sheets to make good of all the claims they will have to pay. This involves arriving at actuarial surplus or deficit depending on various factors. In order to ensure a fair play in the business, the IRDA prescribed regulations according to which various norms were prescribed in order to ensure that Life Insurance business (even other insurance business) are done according to healthy business practices. As per the above regulations, Regulation 4 prescribes number of abstracts and statements in respect of (a) linked business; (b) non-linked business and (c) health insurance business. As part of this Regulation 4(2)(d) item No. iv, Form-“I” was prescribed for the purpose of valuation results and to indicate the surplus or deficit in the life insurance business of a company. Apart from the above regulations, IRDA also prescribed Insurance Regulatory and Development Authority (Preparation of Financial Statements and Auditor’s Report of Insurance Companies) Regulations 2002. The surplus or deficit arrived at by the actuary in his valuation for the inter valuation period has to be taken into consideration under the regulations in financial accounts as well.

32. IRDA Regulations specifically require to maintain the policyholder’s account and the shareholder’s account separately and permits transfer of funds from shareholder’s account to policyholder’s account as and when there is a deficit in policyholder’s account. As rightly noted by the Hon’ble Bombay High Court, as a policy, company is transferring funds/assets from shareholder’s account to policyholder’s account even during the year periodically as and when the actuarial valuation was arrived at in policyholder’s account. Most of the companies are required to submit quarterly accounts under the Company Law, there is requirement of actuarial valuation report periodically and accordingly assessee was transferring funds from the shareholder’s account to policyholder’s account. Since the insurance business will not yield the required profits in the initial 7 to 10 years, lot of capital has to be infused so as to balance the deficit in the policyholder’s account. During the year as already stated assessee has issued fresh capital to the extent of Rs.250 crores and transferred funds to the extent of Rs.233 crores from the shareholder’s account to policyholder’s account. Since assessee is having only one business of life insurance, the entire transactions both under the policyholder’s and shareholder’s account do pertain to the life insurance business only as it was not permitted to do any other business. Once assessee is in the life insurance business, the computation has to be made in accordance with the Rule-2 as per provisions of section 44. Therefore, there is a valid argument raised by assessee that both the policyholder’s & shareholder’s account has to be consolidated into one and transfer from one account to another is tax neutral. What AO has done is to tax the surplus after the funds have been transferred from shareholder’s account to the policyholder’s account at the gross level while ignoring such transfer in shareholder’s account, while bringing to tax only the incomes declared in the shareholder’s account that too under the head ‘other sources of income’. In fact while giving the finding that assessee is in the life insurance business only and incomes are to be treated as income from life insurance business, the CIT (A) surprisingly in subsequent assessment years appeals accepted AO’s contention that surplus in shareholder’s account is to be taxed as other sources of income. But once the provisions of section 44 of IT Act are invoked anything contained in the heads of income like income from other sources, capital gains, house property or even interest on securities does not come into play and only first schedule has to be invoked to arrive at the profit. Therefore, in our opinion both the policyholder’s and shareholder’s account has to be consolidated for the purpose of arriving at the deficit or surplus.

Comparison of Forms-I under the Insurance Act and the IRDA Regulations.

33. Let us examine whether AO’s action in adopting Form-I prescribed under the IRDA Regulations same as that of actuarial valuation made in accordance with the Insurance Act 1938. Even though Insurance Act 1938 also refers to Form-I, there is substantial difference in the formats. Both AO and the CIT (A) has given credence to Form I without understanding that the old form-I prescribed under the Insurance Act 1938 is entirely different from new Form-I prescribed under the IRDA Regulations. In fact the old form -I has this format:

The Insurance Act, 1938

Form I

Valuation of Balance Sheet of as at 19

Net liability under business as shown in the summary and valuation of policies	Rs.	Balance of Life Insurance Fund as shown in the Balance sheet	Rs.
Surplus, if any……		Deficiency, if any…..

NOTE

If the proportion of surplus allocated to the insurer, or in the case of an insurance company to shareholder’s, is not uniform in respect of all classes of insurances, the surplus must be shown separately for the classes to which the different proportions relate.

New Form-I under the IRDA Actuarial Report and Abstracts 2000 is as under which was prescribed under the Regulations 4.

(Form-I)

(See Regulation 4)

Insurance Regulatory and Development Authority (Actuarial Report and Abstract) Regulations, 2000

Valuation Results as at 31st March, 20__

		Form Code_______
Name of Insurer:	Regn.No.	Date of Regn.

Item No.	Description	Balance of Fund shown in Balance Sheet	Mathematical reserves (excluding cost of bonus allocated)	Surplus	Negative Reserve	Surrender Value Deficiency Reserve
(1)	(2)	(3)	(4)	(5)	(6)	(7)
01	Business within India Par policies
02	Non-Par Policies
03	Total
04	Total Business Par Policies
05	Non Par Policies
06	Totals

34. Not only that another format of the Form-I is prescribed in the IRDA recommendations under Regulation 8 in the following format:

Statement of composition and distribution of surplus in respect of policyholder’s’ fund as prescribed in Regulation 8:

(1) A statement showing total amount

Composition of Surplus;

(a) Surplus shown under Form I;

(b) Interim Bonus paid during the inter-valuation period;

(d) Loyalty additions or other forms of bonuses, if any, paid during the inter-valuation period;

(e) Sum transferred from shareholder’s funds during the inter valuation period;

(f) Amount of surplus from policyholder’s’ funds, brought forward from preceding valuation;

(g) Total Surplus (total of the items (a) to (f)

35. We have specifically asked the CIT DR to explain what is the surplus shown under Form I ie. at column (a) above. Regulation 8 as shown above has Column (a) ‘surplus shown under Form I’. In Col.(e) one has to represent sum transferred from shareholder’s fund during the inter valuation period. Item (g) refers to the ‘total surplus’ after taking into account items (a) to (f). Under Col.(a) surplus shown in Form I is a deficit as per Form AR-A in the policyholder’s deficit account in this year. This corresponds the ‘actuarial valuation surplus or deficit’ referred to under the Insurance Act, 1938. This amount also tallies with Form I prescribed under Regulation 4. IRDA Regulations however, after arriving at the surplus or deficit in the Form I also prescribes a separate statement again as Form I with details of (a) to (f) under Regulation 8. As can be seen from these two forms, there is variation in the amounts are presented, as these forms serve different purposes. The Form I which was prescribed under Regulations 8 is after arriving at the distribution surplus under Regulations 6. The Regulations 6, 7 and 8 are as under:

“Distribution of Surplus:

6. The basis adopted in the distribution of surplus as between the shareholder’s and the policyholder’s, and whether such distribution was determined by the instruments constituting the company or by its Regulations or by-laws or how otherwise shall be mentioned.

Principles adopted in distribution of profits:

7. The general principles adopted in distribution of profits among policyholder’s, including statements on following points, shall be furnished:

(i) Whether the principles were determined by instruments constituting the insurer, or by its Regulations or by-laws or how otherwise:

(ii) The number of years premium to be paid, period to elapse and other conditions to be fulfilled before a bonus is allotted;

(iii) Whether the bonus is allocated in respect of each year’s premium paid or in respect of each calendar year or year of assurance or how otherwise and

(iv) Whether the bonus vests immediately on allocation or if not conditions of vesting.

Statements of composition of surplus and distribution of surplus in respect of policyholder’s’ funds:

(8) A statement, showing total amount of surplus arising during the inter valuation period and the allocation of such surplus, shall be furnished separately for participating business and for non participating business, with the particulars as mentioned below:

Composition of Surplus:

(a) Surplus shown under Form I

(b) Interim Bonuses paid during the inter-valuation period;

(d) Loyalty Additions or other forms of bonuses, if any, paid during the inter valuation period.

(e) Sum transferred from shareholder’s funds during the inter valuation period;

(f) Amount of surplus, from policyholder’s’ funds, brought forward from preceding valuation;

(g) Total surplus (total of the items (a) to (f).

Distribution of Surplus:

Policyholder’s’ Fund:

(a) To Terminal Bonuses paid;

(b) To Terminal Bonuses;

(d) Among policyholder’s with immediate participation giving the number of policies which participated and the sums assured thereunder (excluding bonuses);

(e) Among policyholder’s with deferred participation, giving the number of policies which participated and the sums assured thereunder (excluding bonuses);

(f) Among policyholder’s in the discounted bonus class giving the number of policies which participated and the sums assured thereunder (excluding bonuses);

(g) To every reserve fund or other fund or account (any such sums passed through the accounts during the inter valuation period to be separately stated);

(h) As carried forward un-appropriated.

Shareholder’s’ Fund:

(i) To the shareholder’s funds (any such sums passed through the accounts during the inter-valuation period to be separately stated);

Totals:

(j) Total surplus allocated: (total of the items (a) to (j)

(2) Specimen of Bonuses allotted to policies for one thousand rupees together with the amounts apportioned under the various manners in which the bonus is receivable for each type of participating produce, shall be furnished.”

Thus as can be seen from above Regulations, the Form I under Regulation 8 represent the total surplus for the purpose of distribution of bonuses/ dividends to policy holders and does not represent surplus or deficit of actuarial valuation for the purposes of balance sheet. This amount is represented in Form I prepared under Regulation 4 for the purpose of financial accounts.

Reconciliation of amounts:

36. As seen from the orders of the authorities, the ‘Total surplus’ prepared under Regulation 8 was taken as basis ignoring the Form-I of Regulation 4. While accepting the Ld.CIT DR argument that for the purposes of Life insurance business the act provides for surplus of valuation to be taxed at lesser rate, we can not accept the argument that surplus is Total surplus including Transfers from share holder’s account. Basically transfers are tax neutral as a credit in one account gets cancelled by debit in other account when accounts are consolidated. What the Rule.2 prescribed was only ‘average surplus’ arrived by adjusting the surplus disclosed in the actuarial valuation made with regard to the Insurance Act, 1938 in respect of inter valuation period. Assessee in the course of the assessment proceedings has furnished general balance sheet in Form-A which is as under:

Form-A General Balance Sheet

General Balance Sheet of ICICI Prudential Life Insurance Company Limited as at March 31, 2006

(Amount in Rupees ‘000)

Particulars	Mar-05	Mar-04	Particulars	Mar-05	Mar-04
Share Capital	92,50,000	67,50,000	Loans	25,225	21,619
Share Application Money	–	–	Investments	3,75,88,023	1,64,46,429
Employee stock option outstanding	–	–	Agents Balances
Reserve for contingency			Outstanding premiums	84,426	61,287
General Reserve	–	–	Interest, Dividend and Rents outstanding	1,47,531	77,589
Share Premium	–	–	Int. Dividend and Rents accrued but not due	1,86,899	1,48,778
Property Revaluation Reserve	–	–	Amount due from other persons or bodies carrying on Insurance Business
Investment Reserve			Sundry Debtors, Advances and Deposits	2,95,504	1,78,792
Property Insurance Reserve			Fixed Assets	6,30,124	5,48,131
Profit & Loss Appropriate A/c			Cash: At Bankers on Deposit Account	3,00,000	44,900
Balance of funds	2,78,28,554	95,97,898	At Bankers on Notice Deposit Account	–	–
Debenture stock			At Bankers on current account and in hand	16,95,868	4,58,304
Estimated liability in respect of outstanding claims, whether due or intimated
Annuities due and unpaid
Amount due to other persons or bodies carrying on Insurance Business	–	–
Current Liabilities & Provisions	38,75,046	16,37,931
Total Rs.	4,09,53,600	1,79,85,829	Total Rs.	4,09,53,600	1,79,85,829

Likewise it also given Form-G consolidating Revenue Account as under :

Form-G Consolidated Revenue Account

Revenue Account of ICICI Prudential Live Insurance Company Limited as at March 31, 2006

(Amount in Rupees ‘000)

Particulars	Mar-05	Mar-04	Particulars	Mar-05	Mar-04
Claims under policies, less re-insurance:			Balance of fund at the beginning year	95,97,898	26,58,698
By Death	1,11,348	59,627	Premiums:
By Maturity	2,539	–	1st year premiums	1,45,43,024	62,91,180
Annuities, less reinsurance	–	–	Renewal premiums	77,94,747	23,84,328
Surrenders (incl. sur bonus) less reinsurance	9,286	4,076	Single premiumsLess: Reinsurance	13,00,401 (38,177)	12,17,250 (19,075)
Bonuses in cash, less re-insurance	–	–	Consideration for Annuities granted, less reinsurance
Bonuses in reduction of premiums	56,434	17,904	Interest, Dividends and Rents	6,92,979	6,27,033
Other benefit			Fees and Charges	23,629	2,348
Expenses of Management:			Linked Income	4,92,380	3,61,463
Commission	17,79,564	8,65,104	Other income	1,055	1,098
Other operating Expenses	46,20,211	29,79,714	Registration fees	–	–
Bad Debts			Loss transferred to Profit & Loss A/c
UK, Indian, Dominion and foreign taxes			Transferred from Appropriation A/c
Provision for tax
Fringe Benefit Tax
Profit transferred to Profit & Loss A/c	2,78,28,554	95,97,898
Total Rs.	3,44,07,936	1,35,24,323	Total Rs.	3,44,07,936	1,35,24,323

Form-I – Valuation Balance Sheet has been furnished as under:

Form-I Valuation Balance Sheet

Valuation Balance Sheet of ICICI Prudential Life Insurance Company Limited as at March 31, 2005

Particulars	Mar-05	Mar-04	Particulars	Mar-05	Mar-04
Actuarial Valuation Liability	3,44,75,905	1,43,38,641	Balance of fund as shown in General Balance Sheet	2,78,28,554	95,97,898
Surplus			Deficit	66,47,351	47,40,743
Total Rs.	3,44,75,905	1,43,38,641	Total Rs.	3,44,75,905	1,43,38,641
Particulars				Amount (Rs.’000)
Deficit as at March 31,2005				(664,73,51)
Less: Deficit as at March 31,2004				(474,07,43)
Deficit for the year ended on March 31,2005				(190,66,08)
Income offered in return of income before claiming exemption under section 10 of the Income Tax Act, 1961				(190,66,08)

37. Thus as can be seen, the deficit for the year ended March, 2005 was arrived at Rs. 190,66,08/- (‘000) which was also tallying with assessee’s computation of income. Further assessee also furnished the reconciliation of Form-I ‘total surplus’ with return of income:

ICICI Prudential Life Insurance Company Limited FY 2004-05/ AY 2005-06:

Reconciliation of Form-I Surplus with Return of Income

Particulars	Amount (Rs.)	Amount (Rs.)
Form-I Surplus as on 31.3.2005 (Page-14B		35,86,96,280
Less Form I Surplus as at 31.3.2004		–
Surplus for FY 2004-05/AY 2005-06		35,86,96,280
Less: Shareholder’s funding
Deficit funding transfers from shareholder’s fund (Page 8PB)	2,33,34,74,000
Advance funding based on estimates (Note 1)	4,12,09,280	(2,37,46,82,280)
Less: Round off		(12,808)
Deficit in account		(2,01,59,99,808)
Surplus for participating business	10,41,05,196
Deficit for non-participating business	(36,30,236)
Surplus for participating annuities (Pension Business)	21,33,71,824
Deficit for linked business	(1,66,59,51,826)
Deficit for linked pension business	(63,09,19,492)
Deficit for linked group business	(3,29,75,274)
Deficit in policyholder’s account	(2,01,59,99,808)
Add: surplus in shareholder’s’ account		10,93,77,555
Income as per Rule 2 of Schedule 1 of the Act		(1,90,66,22,253)
Exemption under section 10(23AAB)
Less: Surplus for participating pension business	(21,33,71,824)
Add: Deficit for linked pension business	63,09,19,492	41,75,47,668
Exemption under section 10(34)
Dividend Income	2,21,29,204
Less: In pension scheme	(65,19,982)
Less: Disallowance under section 14A	(1,44,377)	(1,54,64,845)
Total Surplus/(Deficit) from Life Insurance Business		(1,50,45,39,430)

38. The above statement furnished is in accordance with the Insurance Act, 1938, therefore, it cannot be stated that assessee returned income is not in accordance with the Insurance Act, 1938. There is no basis for AO to take Form-I ‘total surplus’ as surplus of the Life insurance business ignoring transfer from shareholder’s account.

39. It is also on record that assessee followed the IRDA recommendations and accordingly prepared the actuarial valuation report including the surplus or deficit. However, Rule-2 prescribes only actuarial valuation in accordance with the Insurance Act, 1938. Therefore, AO is duty bound to insist on actuarial valuation in accordance with the Insurance Act, 1938, so as to bring to tax the surplus or deficit. What we notice is that AO, ignoring Rule-2, has relied on the actuarial valuation report prescribed under the IRDA recommendations under Regulation 8 that too at ‘Total surplus’, which is at variance with the Insurance Act, 1938. Since no amendment was brought to Rule-2 to incorporate IRDA recommendations, we are of the opinion that the action of AO in relying on the IRDA Regulations is not according to the law. Assessee had submitted its accounts as stated above, which are in accordance with the Insurance Act, 1938. Instead of examining these statements, just because assessee has shown total surplus in the accounts in similarly named Form-I( under Regulation 8), AO wants to tax the amount which is after taking into account the transfer of assets by way of fresh capital from shareholder’s account. This in a way is taxing fresh capital infused into business indirectly which cannot be done as this is not business surplus but infusion of capital directly.

40. In our opinion what assessee has done in reconciling the IRDA format with that of old Insurance Form is correct and accordingly the loss disclosed in the computation of income is according to the actuarial surplus/deficit under the Insurance Act, 1938 prescribed under Rule 2 of the first schedule part-A. In view of this, we are of the opinion that insistence by AO to bring to tax the entire amount shown under the new Regulations including transfer from shareholder’s account is not correct. Instead of AO in taking the surplus at Regulation 8(1)(a) which is the actuarial surplus / deficit for the year took the amount as disclosed at Regulation 8 (1) (f) (total surplus after transfer from Shareholder’s account) which is not at all correct.

41. Learned Counsel in the course of the argument also placed reconciliation of the various figures as under:

Table: Statement of deficit in policyholder’s account (PHA), Shareholder account (SHA) funding and Net deficit:

S.No	Particulars	Amount (Rs. In crs.)	Amount (Rs. in crs.)	Paper book page reference
	Deficit in PHA a/c		233.34	Page 70 – Part of Actuarial Report and also Page 8 Revenue A/c
	Met by transfer from SHA a/c amounting to:		237.46
	a. Transfer to meet the deficitb. Additional Transfer	233.34 4.12	237.46	Page 70 Part of Actuarial Report and also at Page 8 Revenue Account
I	SCENARIO 1: If transfer disregarded as income:			Page 8 Revenue account (31.74-233.33)
	The amount transferred cannot be of income nature, if disregarded, there will be a net deficit in the PHA of Add:		-201.59 10.93	Page 9 Profit & Loss A/c (11.34-0.41)
	Surplus in SHA		-190.66
II	SCENARIO 2: If transfer disregarded as income:			Page 8 Revenue account (Surplus/Deficit)
	If amount transferred is regarded as income nature, the surplus in PHA account will be		31.74	Page – 9 Profit & Loss A/c (Profit/Loss before Tax)
	Deficit in SHA		-222.40
	Net Deficit		190.66
	Net Deficit as per the return on income (before claiming exemptions under section 10)			Page 8 – Revenue account (surplus/deficit)
	Deficit in PHA		-201.59	Page 9 Profit & Loss A/c (Profit/Loss) before tax.
	SHA Income		10.93
	Details as per return before claiming exemptions		-190.66
	Conclusion:Both scenarios give the same result and reflect the actual deficit as disclosed in the return of income filed (before claiming exemptions under section 10).
NOTE	Due to excess funding done, the surplus as disclosed by the actuarial valuation is more than the surplus disclosed in the financials:			Page 8 Revenue account (surplus/deficit)
	The surplus as per financials		31.74	Page 70 Part of Actuarial Report excess funding disclosed by way of a note (Amount not mentioned)
	Add Excess funding done		4.12	Page 14 – Actuarial Valuation in Form-I
	Surplus as per actuarial valuation		35.86	Page 14 – Actuarial Valuation in Form-I

42. In view of the above, looking at the issue in any way what we notice is that the computation made by assessee is in accordance with Rule-2 of the Insurance Act 1938 according to which only AO can base his computation. This also corresponds to the way incomes were assessed in earlier years i.e. the correct method as per Rule 2 and Sec 44 of IT ACT. In view of the discussion above and after analyzing the Forms, Regulations and Provisions we have no hesitation to hold that the assessee working of actuarial surplus/ deficit is in accordance with Rule 2 of First Schedule. Therefore, assessee grounds on this issue are allowed and AO is directed to modify the order accordingly. Ground Nos.1 to 3 are considered allowed.

43. Ground No.4 pertains to disallowance under section 14A offered in revised return on reasonable basis. Assessee offered an amount of Rs. 1,44,377/- as against the dividend income mostly claimed at Rs.1,56,09,222/- arrived at in participating life insurance business. Assessee gave methodology in contributing the expenses. However, AO did not accept and took the estimation 0.5% of the average investment thereby making the addition. The CIT (A) following the judgment of the Hon’ble Bombay High Court in the case of Godrej & Boyce Mfg. Co. Ltd. v. Dy. CIT [2010] 194 Taxman 203 (Bom.) directed AO to workout on a reasonable basis. Assessee has raised the additional ground of appeal as under:

Ground:

“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”.

44. The learned Counsel submitted that in view of the provisions of section 44, the provisions of section 14A are not applicable. He relied on the orders of Bajaj Alliance General Insurance Co. v. Addl.CIT in ITA No.1447/Mum/2007 dated 31/08/2009, Jt. CIT v. Reliance General Insurance Company in ITA No.3085/Mum/2008 and other cases wherein the Coordinate Bench have already decided the provisions of section 14A are not applicable. He also placed on reliance in the case of General Insurance Corporation of India v. Addl. CIT in ITA No.3554/Mum/2011 dated 15/02/2012 to submit that the provisions of section 14A does not apply to the Insurance business.

45. The learned DR however, relied on the orders of AO and the CIT (A) and the fact that assessee itself has offered income disallowing under section 14A.

46. 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 that this issue is also considered by the Coordinate Bench in assessee’s own case for 2006-07 vide Para 7 to 9:

7. Grounds of appeal no.4 regarding the expenditure under section 14A.

8. We have heard the rival contentions and perused the relevant record. We note that this issue has been considered and decided by the Pune Bench of this Tribunal in the case of Bajaj Allianz General Insurance Company limited v. Addl. CIT in ITA No.1447/PN/2007 for the assessment year 2003-04 order dated 31.08.2009. This Tribunal in the case of JCIT v. M/s Reliance General Insurance co. in ITA No.3085/Mum/2008 for the assessment year 2005-06 vide order dated 26.2.2010 has considered this issue and decided in favour of the assessee. This order was followed by this Tribunal while deciding the issue in ITA No.781/Mum/2007 vide order dated 30.4.2010. Thus, this issue has been consistently decided in favour of the assessee and against the revenue by this Tribunal. The Pune Bench of this Tribunal in the case of Bajaj Allianz General Insurance Company limited v. Addl. CIT (supra) has decided this issue in paragraphs 17 to 20 as under:

“17. Finally the quest ion to be answered is about the applicability of s. 14A in respect of sale of investment which is not taxed under the special circumstances of deletion of a sub-rule from the statute. It is not questioned that the impugned profit was non-taxable per se rather the accepted legal position is that the impugned profit was very much taxable in the past. Now it has been informed that this controversy in respect of insurance company set at rest by a decision of Tribunal, Delhi Bench verdict in the case of Oriental Insurance Co. Ltd. (ITA Nos. 5462 & 5463/Del /2003) asst. yrs. 2000-01 and 2001-02 order dt. 27th Feb. 2009 [reported as Oriental Insurance Co. Ltd. v. Asstt. CIT [2010] 130 TTJ (Delhi)388 : [2010] 38 DTR (Delhi ) 225-Ed.]. Therefore considering the vehement reliance of learned Authorized Representative it is worth to mention at the outset itself that the issue now stood resolved by this latest decision of Delhi, Tribunal in the case of Oriental Insurance Co. Ltd. (supra), the relevant portion reproduced below:

“17. We have heard rival submissions of the parties and have gone through the material available on record. Identical issue arose in assessee’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] 179 CTR (Delhi) 85 : [2002] 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 gifts 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. 144, as held in the case of General Insurance Corporation of India v. CIT [1999] 156 CTR (SC) 425 : [1999] 240 ITR 139 (SC), wherein their Lordships of the apex Court have categorically held that the provisions of s. 44 being a special provision govern computation of taxable income earned from business of insurance. It mandates the tax authorities to compute the taxable income in respect of insurance business in accordance with the provisions of the First Schedule to the Act. In the light of these, their Lordships of Delhi High Court have held that no quest ion of law, much less a substantial question of law survives for their consideration. In other words, order of the Tribunal has been affirmed. Following the same reasoning, addition made by the AO is deleted.

22. We have considered the rival contentions and gone through the records. The provisions of s. 44 read as under:

“44. Insurance business.-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 s. 199 or in ss. 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 co operative society, shall be computed in accordance with the rules contained in the First Schedule”‘.

23. The above provision makes it very clear that s. 44 applies notwithstanding anything to the contrary contained within the provisions of the IT Act relating to computation of income chargeable under different heads. We agree with the learned counsel that there is no requirement of head-wise bifurcation called for while computing the income under s. 44 of the Act in the case of an insurance company. The income of the business of insurance is essentially to be at the amount of the balance of profits disclosed by the annual accounts as furnished in the Controller of Insurance. The actual computation of profits and gains of insurance business will have to be computed in accordance with r. 5 of the First Schedule. In the light of these special provisions coupled with non obstante clause the AO is not permitted to travel beyond these provisions.

24. Sec. 14A contemplates an exception for deductions as allowable under the Act are those contained under ss. 28 to 43B of the Act. Sec. 44 creates special application of these provisions in the cases of insurance companies. We therefore, agree with the assessee and delete the act as according to us, it is not permissible to the AO to travel beyond s. 44 and First Schedule of the IT Act.”

18. It may not be out of place to mention that the respected Co-ordinate Bench has duly taken the note of an earlier decision of that very Bench decided in the case of that very assessee vide order dt. 29th Sept. 2004 bearing ITA Nos. 7815/Del/1989, 3607 to 3609/Del /1990; 5035/Del / 1998 and 3910/Del /2000 named as Dy. CIT v. Oriental General Insurance Co. Ltd. [2005] 92 TTJ (Delhi) 300. As seen from the Paras reproduced above on due consideration of the relevant provisions as applicable to resolve this issue a conclusion was drawn that since the Courts have held, s. 44 creates a special provision in the cases of assessment of insurance companies therefore it was not permissible to the AO to travel beyond s. 44 of First Schedule of IT Act.

18.1 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.

19. 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 or profession’. For computation of profits and gains of business or profession the mandate to the AO is to compute the said income in accordance with the provisions of ss. 28 to 43B of the Act. In the case of the computation of profits and gains of any business of insurance, the same shall be done in accordance with the rules prescribed in First Schedule of the Act, meaning thereby ss. 28 to 43B shall not apply. No other provision pertaining to computation of income will become relevant. According to the learned counsel, two presumptions that follow on a combined reading of ss. 14, 14A, 44 and r. 5 of the First Schedule are:

(a) That no head-wise bifurcation is cal led for. The income, inter alia, of the business of insurance is essentially to be at the amount of the balance of profits disclosed by the annual accounts as furnished to the Controller of Insurance under the Insurance Act, 1938. The said balance of profits is subject only to adjustments there under. The adjustments do not refer to disallowance under s. 14A of the Act.

(b) Profits and gains of business as refer red to in (a) above have only to be computed in accordance with r. 5 of the First Schedule.

22. Sec. 44 creates a specific except ion to the applicability of ss. 28 to 43B. Therefore, the purpose, object and purview of s. 14A has no applicability to the profits and gains of an insurance business.

23. The learned Departmental Representative strongly justified the act ion of the AO and that of the CIT(A) in the light of the clear provisions of s. 14A of the Act. Since the view has al ready been expressed by respected Co-ordinate Bench therefore, we have no reason to take any other view except to follow the same. With the result we hereby accept the argument of learned Authorized Representative to the extent that in the present situation the provisions of s. 14A need not to apply while granting exempt ion to an income earned on sale of investment primarily because of the reason of the withdrawal or deletion of sub-r. 5(b) to First Schedule of s. 44 of IT Act. Once we have taken this view therefore the enhancement as proposed by learned CIT(A) is reversed and the directions in this regard are set aside. Resultantly ground No. 1 is allowed consequent thereupon ground No. 2 automatically goes in favour of the assessee”.

Accordingly, by following the orders of this Tribunal, we decide this issue in favour of the assessee. Therefore, the ground is allowed”.

Respectfully following the same, we modify the order of the CIT (A) and delete the addition made by AO. The ground and additional grounds are considered as allowed.

Revenue Appeal in ITA No.7765/Mum/2010, AY 2005-06

47. The Revenue in its appeal has raised the following grounds:

“1. On the facts and in the circumstances of the case and in law, the learned CIT (A) erred in deleting the deficit from pension schemes of Rs. 63,09,19,492/- ignoring the facts that the surplus of pension schemes do not form part of total income as per section 10(23AAB), so the deficit would also not form part of total income.

2. On the facts and in the circumstances of the case and in law, the learned CIT (A) erred in holding that the income from surplus of participating annuities business represent surplus from “Participating Pension Business” and accordingly allowing the relief to assessee of Rs. 21.34 crores”.

3. On the facts and in the circumstances of the case and in law, the learned CIT (A) erred in allowing the dividend income of assessee of Rs. 1,56,09,222/- as exempted under section 10(34) of the Income Tax Act, 1961 ignoring the facts that dividend income is considered as part of Income of Life Insurance Business and is included as an income by the actuary”.

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, assessee claimed certain exempt incomes under section 10(23AAB) with reference to Pension Business and dividend under section 10(34). AO did not allow the amounts on the reason that these incomes are part of income of life insurance business and it is included as income by the actuary, therefore, they cannot be exempted. This issue is covered in favour of assessee and against the Revenue by the orders of the General Insurance Company of India (supra) wherein the issue of deduction under section 10 have been considered and allowed following the Hon’ble Bombay High Court judgment in General Insurance Corpn. of India v. CIT [2012] 204 Taxman 587/17 taxmann.com 247. The order in the case of General Insurance Corpn. of India (supra) vide Para 7 to 8 is as under:

7. “Issue No.5: Availability of Section 10 Exemption (Modified Ground of Appeal No.2 – Original Ground of Appeal No.2.1 & 2.2) -. The issue arises in a peculiar manner in this assessment year. While dealing with the issue of profit on sale of investments, the Assessing Officer proposed to differ from assessee stand and bring to tax the profit on sale of investment. The assessee alternately submitted that the deduction under section 10(38) in respect of long term capital gain was available. When this issue came up before the CIT (A), the CIT (A) not only rejected the claim under section 10(38) but also considered and elaborately discussed how and why the assessee was not eligible for deductions already allowed by the Assessing Officer in respect of ‘interest on tax free bonds’ amounting to Rs. 3,45,19,352/- under section 10(15) and dividend income amounting to Rs. 270,66,46,489/- under section 10(34). He has elaborately discussed this issue from Para 6 onwards and ultimately made an enhancement of income to an extent of Rs. 274,11,65,844/- the amount which was allowed by the Assessing Officer as exempt under section 10. The contention of the CIT (A) was that the assessee was not eligible for deduction under section 10, once the incomes are brought to tax under section 44 r.w. Rule 5 of First Schedule to the Income Tax Act, 1961.

8. There is no need to consider the arguments of the CIT (A) and how he has arrived at that conclusion in this order as this issue was decided by the Hon’ble Bombay High Court in favour of the assessee in writ petition No.2560 of 2011 in the assessee’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 of any business of insurance of a mutual insurance company shall be computed in accordance with the rules in the First Schedule. Part ‘A’ of the First Schedule containing Rules 1 to 4 deals with profits of life insurance business while Part B consisting of Rule 5 deals with computation of profits and gains of other insurance business. Rule 5 provides as follows:

“5. The profits and gains of any business of insurance other than life insurance shall be taken to be the balance of the profits disclosed by the annual accounts, copies of which are required under the Insurance Act, 1938 (4 of 1938), to be furnished to the Controller of Insurance subject to the following adjustments:

(a) Subject to the other provisions of this rule, any expenditure or allowance (including any amount debited to the profit and loss account either by way of a provision for any tax, dividend, reserve or any other provision as may be prescribed) which is not admissible under the provisions of section 30 to (43B) in computing the profits and gains of a business shall be added back;

(b) (………)

(c) Such amount carried over to a reserve for unexpired risks as may be prescribed in this behalf shall be allowed as a deduction”.

The Assessing Officer has in the reasons for reopening the assessment proceeded on the premise that in computing the profits and gains of business for an assessee who carries on general insurance business no other section of the Act would apply and that the computation could be carried out only in accordance with section 44 read with Rule 5 of the First Schedule. In Life Insurance Corporation of India, Bombay v. Commissioner of Income Tax Bombay City-III, a Division Bench of this Court construed the provisions of section 44 and of the First Schedule. The assessee in that case which carried on life insurance business had made a claim to exemption under section 10(15) and section 19(1). In a reference before the Court, the questions referred included whether in computing the profits and gains of the business of insurance under section 44 read with the First Schedule certain items which were ordinarily not includible in the total income were rightly included in the taxable surplus. The Division Bench of this Court held as follows:

“The question which essentially falls to be determined in this reference is whether, in view of the provisions in section 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 computation of income chargeable under the four heads mentioned in section 44. The only other overriding effect of section 44 is that its provisions operate notwithstanding the provisions of section 191 and of section 28 to 43A. Thus, the only effect of section 44 is that the operation of the provisions referred to therein is excluded in the case of an assessee who carried on insurance business and in whose case the provisions of rule 2 of the First Schedule are attracted. If the deductions which are claimed by the assessee do not fall within the provisions which are referred to in section 44, it will have to be held that the applicability of those provisions in the case of an assessee whose assessment is governed by section 44 read with rule 2 in the First Schedule is not excluded”.

This judgment is sought to be distinguished by the Assessing Officer while disposing of the objections on the ground that the decision was rendered in the context of an assessee which carried on life insurance business to whom Rules 1 to 4 of the First Schedule applied whereas in the case of the assessee in this case which carries on general insurance business Rule 5 could apply. According to the Assessing Officer, Rule 5 would not permit any adjustment to the balance of profit as per annual accounts prepared under the Insurance Act, and hence the judgment would not be applicable. The Assessing Officer has clearly not noticed that the decision in Life Insurance Corporation (supra) though rendered in the context of an assessee which carries on life insurance business, followed an earlier decision of a Division Bench of this Court in Commissioner of Income-Tax v. New India Assurance Co Ltd. That was a case of an assessee which carried on non life insurance business. In New India Assurance Co. Ltd. the Division Bench dealt inter alia with the provisions of section 19(7) of the Income Tax Act, 1922. The questions referred to this Court included whether the assessee was entitled to claim an exemption from tax under section 15B and 15C (4) and in respect of interest on a government loan under a notification issued under section 60. Section 10(7) of the Income Tax Act, 1922 provided that notwithstanding anything to the contrary contained in section 8,9,10,12 or 18, the profits and gains of any business of insurance and the tax payable thereon shall be computed in accordance with the 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 decision of Life Insurance Corporation (Supra) could not have been ignored by the Assessing Officer on the supposition that the decision was rendered in the context of an assessee who carried on life insurance business and was, therefore, not available to an assessee which carries on general insurance business.

12. In General Insurance Corporation of India v. Commissioner of Income-Tax, the Supreme Court considered in an appeal arising out of a judgment of the High Court the issue as to whether a sum of Rs. 3 crores, being a provision for redemption of preference shares, was not liable to be added back in the total income of the assessee for AY 1977-78?. The Supreme Court held that a plain reading of rule 5(a) of the First Schedule made it clear that in order to attract the applicability of the provision the amount should firstly be an expenditure or allowance and secondly it should be one not admissible under the provisions of section 30 to 43A. The Supreme Court held that the sum of Rs. 3 crores in that case which was set apart as a provision for redemption of preference shares could not have been treated as an expenditure and hence could not have been added back under rule 5(a). In that context the Supreme Court held as follows:

“There is another approach to the same issue. Section 44 of the Income-tax At read with the rules contained in the First Schedule to the Act lays down an artificial mode of computing the profits and gains of insurance business. For the purpose of income-tax, the figures in the accounts of the assessee drawn up in accordance with the provisions of the First Schedule to the Income-tax Act and satisfying the requirements of the Insurance Act are binding on the Assessing Officer under the Income-tax Act and he has no general power to correct the errors in the accounts of an insurance business and undo the entries made therein”.

The question whether an assessee who carries on general insurance business would be entitled to avail of an exemption under section 10 did not arise. The issue as to whether the assessee which carries on the business of general insurance would be entitled to the benefit of an exemption under clauses (15), (23G) and (33) of section 10 is directly governed by the decision rendered by the Division Bench in Life Insurance Corporation v. Commissioner of Income-tax (Supra) following the earlier decision in Commissioner 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 by the communication of the CBDT. Having followed that in the order under section 143(3) he could not have taken a different view while purporting to reopen the assessment. Having applied his mind specifically to the issue an having taken a view on the basis of the communication noted earlier, the act of reopening the assessment would have to be regarded as a mere change of opinion which has also not been based on any tangible material. Consequently, we hold that the reopening of the assessment is contrary to law. The Petition would have, therefore, to be allowed”.

Respectfully following the above, we hold that the assessee is entitled for exemption under section 10. The enhancement made by the CIT (A) is therefore, cancelled. Ground is accordingly allowed”.

49. In view of the above and respectfully following the same, we hold that assessee is entitled to exemption under section 10. Therefore, we do not see any reason to differ from the order of the CIT (A) where he has allowed assessee’s claim of exemption under section 10(23AAB) of surplus of Participating Pension Business and also dividend under section 10(34). Accordingly Revenue ground on this issue is rejected.

50. In the result, assessee appeal in ITA No.6854/Mum/2010 for the assessment year 2005-06 is allowed and Revenue appeal in ITA No.7765/Mum/2010 for the assessment year 2005-06 is dismissed.

ITA No.6855/Mum/2010- AY 2006-07

51. This is an assessee appeal wherein assessee has raised the following grounds:

“1. The CIT (A) has erred in not accepting the loss of Rs. 200.55 crores returned by the Appellant.

2. The CIT (A) erred in holding that the insurance income of the appellant which is taxable is the amount of surplus disclosed in Form I.

3. The CIT (A) has erred in upholding the computation of taxable income for the year at Rs. 27.34 crores by holding that the amount transferred from the shareholder’s account to account is not to be reduced from the surplus disclosed in Form I.

4. The CIT (A) has erred in holding that the income of Rs. 27.34 crores in shareholder’s account is separately taxable under the head “income from other sources”.

5. The CIT (A) has erred in rejecting the alternate plea that in an event the income in policyholder account is computed after considering transfers from shareholder’s account to account, then income in shareholder’s account should be computed by allowing a corresponding deduction of transfers to account.

6. The CIT (A) has erred in not accepting the disallowance under section 14A offered in revised return of income is on reasonable basis but directed AO to decide the issue afresh.

7. The CIT (A) has erred in confirming that the income in the shareholder’s account is taxable at the normal corporate rate of tax instead of rate specified in section 115B of the Act.”

52. In assessee appeal ground nos.1, 2, 3, 5 is on taxing the transfer from share holders fund, while considering the total surplus as surplus for purposes of Rule 2. This issue was discussed elaborately in AY 2005-06 vide grounds 1 to 3 in ITA no 6854/M/2010 above and for the detailed reasons stated there in the grounds are allowed. AO is directed to modify the order accordingly.

53. Ground no 6 and Additional Ground raised are similar to the grounds raised in AY 2005-06 on the issue of disallowance u/s 14A. This issue was also elaborately considered in appeal no ITA no 6854/M/2010 above in ground no.4. For the reasons stated there in following coordinate bench decisions, these grounds are allowed.

54. Ground no 4 and 7 is on the issue of treating incomes in shareholders account as income from other sources. This issue arises for the first time in this year. The assessing officer was of the view that policy holders account represent life insurance business to be taxed u/s 44 where as shareholders account is separate investment account of assessee and incomes are to be taxed under the head ‘income from other sources’. An amount of Rs.27,33,67,000, adjusted by assessee in deficit in policy holders account, was brought to tax separately, while considering the Total surplus in Life insurance business. The CIT(A) upheld the same stating that income of Life insurance activity is to be computed as per Form I and since there is income from other activities not included in Form I, same should be subjected to tax as income from other sources.

55. We have heard the rival contentions. As briefly discussed while deciding the issue of taxing surplus, assessee is in life Insurance business and it is not permitted to do any other business. All activities carried out by assessee are for furtherance of Life Insurance business. Maintaining adequate capital is necessary to comply with IRDA (Assets, Liabilities and Solvency margin of insurers) Regulations, 2000. Income earned on capital infused in business is integral part of Life Insurance business. The LD. CIT(A) gives a finding that assessee is exclusively in Life Insurance business. However, since he gave primacy to Form I proforma he concluded that other incomes are not of Life Insurance business. We have already considered and decided that assessee was mandated to maintain separate accounts by IRDA Regulations. Just because separate accounts are maintained the incomes in Shareholder’s account does not become separate from Life insurance business. As per Insurance Act 1938 all incomes are part of one business only and these incomes are considered as part of same business. Therefore, the incomes in Shareholder’s account are to be considered as arising out of Life insurance business only. More over Sec 44 mandates that only First Schedule will apply for computing incomes and excludes other heads of income like, Interest on Securities, income from house property, Capital gains or Income from other sources. Being non-obstante clause, sec. 44 mandates that the profits and gains of insurance business shall be computed in accordance with the rules contained in First Schedule. Therefore, the incomes in Shareholder’s account are to be taxed as part of life insurance business only, as they are part of same business and investments are made as part of solvency ratio of same business. The grounds are allowed. AO is directed to treat them as part of Life Insurance Business and tax them u/s 115B.

ITA No. 7766/Mum/2010 A.Y 2006-07

56. In this appeal, the Revenue has raised the following three grounds:

“1. On the facts and circumstances of the case and in law, the learned CIT (A) erred in not subjecting the negative reserve amounting to Rs. 27.27 crores ignoring the facts that negative reserve has an impact of reducing the taxable surplus as per Form-I.

2. On the facts and circumstances of the case and in law, the learned CIT (A) erred in deleting the addition made on account of claim of 100% depreciation of Rs. 15,79,707/- ignoring the facts that Actuarial surplus is determined on the basis of the total assets of the company and therefore by not capitalizing the above assets, the assets of the assessee company are under stated in the books and thereby it has an impact of reducing the surplus of or increase in the books and thereby it has an impact of reducing the surplus of or increase in the deficit and therefore, the assets so written off are also considered as part of the surplus and taxable under section 44 of the I.T. Act.

3. On the facts and circumstances of the case and in law, the learned CIT (A) erred in allowing the dividend income of assessee of Rs. 2,24,05,934/- as exempted under section 10(34) of the Income Tax Act, 1961 ignoring the facts that dividend income is considered as part of income of Life Insurance Business and is included as an income by the actuary”.

57. Ground No. 1 is on the issue of treating negative reserve and disallowing the amount. While completing the assessment of life insurance business the AO, after taking the total surplus from Form-I, reduced the negative reserve amounting to Rs. 27.27 crores. Assessee submitted before the CIT(A) as under: –

“Method of Determination of Mathematical Reserves –

(1) Mathematical Reserves shall be determined separately for each contract by a prospective method of valuation in accordance with sub-paras (2) to (4).

(2) The valuation method shall take into account all prospective contingencies under which any premiums (by the policyholder) or benefits (to the policyholder/beneficiary) may be payable under the policy, as determined by the policy conditions. The level of benefits shall take into account the reasonable expectations of policyholders (with regard to bonuses, including terminal bonuses, if any) and any established practices of an insurer for payment of benefits.

(3) The valuation method shall take into account the cost of any options that may be available to the policyholder under the terms of the contract.

(4) The determination of the amount of liability under each policy shall be based on prudent assumptions of all relevant parameters. The value of each such parameter shall be based on the insurer’s expected experience and shall include an appropriate margin for adverse deviations (hereinafter referred to as MAD) that may result in an increase in the amount of mathematical reserves.

(5) (1) The amount of mathematical reserve in respect of a policy, determined in accordance with sub-para (4), may be negative (called “negative reserves”) or less than the guaranteed surrender value available (called “guaranteed surrender value deficiency reserves”) at the valuation date.

The appointed actuary shall, for the purpose of section 35 of the Act, use the amount of such mathematical reserves without any modification.

The appointed actuary shall, for the purpose of sections 13, 49, 64V and 64VA of the Act, set the amount of such mathematical reserve to zero, in case of such negative reserve, or to the guaranteed surrender value, in case of such guaranteed surrender value deficiency reserves, as the case may be.

(6) The valuation method shall be called “Gross Premium Method”.

(7) If in the opinion of the appointed actuary, a method of valuation other than the Gross Premium Method of valuation is to be adopted, then, other approximations (e.g. retrospective method) may be used.

Provided that the amount of calculated reserve is expected to be atleast equal to the amount that shall be produced by the application of Gross Premium Method.

(8) The method of calculation of the amount of liabilities and the assumptions for the valuation parameters shall not be subject to arbitrary discontinuities for one year to the next.

(9) The determination of the amount of mathematical reserves shall take into account the nature and term of the assets representing those liabilities and the value placed upon them and shall include prudent provision against the effects of possible future changes in the value of assets on the ability to the insurer to meet its obligations arising under policies as they arise.

Mandate to Appointed Actuary under regulations

Sub-Rule 4 mandates Appointed Actuary to have prudent assumption of all relevant parameters and to include an appropriate margin for adverse deviations that may result in an increase in the amount of mathematical reserves.

Sub-Rule 5 defines such margin as “Negative Reserve”, which is being disclosed in column 6 of the Form 1.

Further, clause (iii) to sub-Rule 5 mandates appointed actuary to provide for negative reserve in mathematical reserve, accordingly not to include in distributable surplus as per Section 49 of the Insurance Act, 1938.

Clause (ii) to sub-Rule 5 mandates appointed actuary to include negative reserve in mathematics reserve only at the time of Amalgamation and transfer of insurance business and otherwise.

Taxable surplus

Since taxation of Life Insurance Business is on surplus disclosed as per Section 49 which is covered by Rule 2(5)(iii), where in appointed actuary is mandated to arrive at surplus after excluding negative reserve.

In view of the above we humbly submit before your goodself to kindly not treat negative reserve as taxable. Sub-Rule 4 mandates Appointed Actuary to have prudent assumption of all relevant parameters and to include an appropriate margin for adverse deviations that may result in an increase in the amount of mathematical reserves.”

58. The CIT(A), in his brief order vide para 17, considered the detailed explanation above and accepted that the negative reserve disclosed in Form-I does not give rise to distributable surplus. Accordingly he disallowed the same.

59. After considering the rival submissions and examining the method of accounting and the mandate given by regulations to appoint Actuarial on the concept of mathematical reserves, we do not see any reason to interfere with the order of the CIT(A). The mathematical reserve is part of Actuarial valuation and the surplus as discussed in Form-I under Regulation 4 takes into consideration this mathematical reserve also. Therefore the order of the CIT(A) is approve. Moreover the Assessing Officer has no power to modify the amount after actuarial valuation was done, which was the basis for assessment under Rule 2 of 1st Schedule r.w.s. 44 of the I.T. Act. The principles laid down by the Hon’ble Supreme Court in Life Insurance Corpn. of India (LIC) (supra) about the powers of Assessing Officer also restricts the scope and adjustments by the AO. In view of this we uphold the order of the CIT(A) and dismiss the Revenue ground.

60. Ground No. 2 is about deletion of addition made on account of claim of 100% depreciation of Rs. 15,79,707/-. It was the contention of the Revenue that the CIT(A) ignored the actuarial surplus determined on the basis of the total assets if the company and therefore not capitalized in the above assets. The assets of assessee to that extent are not stated, therefore, it has an impact of reducing the total surplus.

61. Before the CIT(A) it was submitted that the assessee prepared its accounts as per the format prescribed by the IRDA in tune with the Insurance Act 1938. The assets were originally capitalized in the books and being eligible for 100% depreciation they are written off. The CIT(A), after considering the submissions, accepted the contention as under: –

“19. The appellant has to prepare its accounts as per the formats prescribed by the IRDA under the Insurance Act, 1938. These accounts have accordingly been prepared by the appellant and have been subject to statutory audit. Further, the accounting policy of claiming 100% depreciation in its financial statements has been consistently followed by the appellant and has also been duly accepted by the IRDA. The appellant has stated that the assets on which depreciation has been claimed have been initially capitalized in the books and then 100% depreciation has been claimed on these assets. Taxation of Life Insurance is presumptive taxation with only the surplus as disclosed by Form I being subjected to tax. In my view, as per the provisions of law only those adjustments which are expressly not prohibited under section 44 of the Act could be made. Consequently depreciation which has been debited in the audited accounts as per the consistently followed and accepted accounting policy need not be disallowed.”

62. After considering the rival submissions, we are of the opinion that the action of the CIT(A) in deleting the amount is consistent with the accounting principles followed and the provisions of section 44 read with Rule 2 of the 1st Schedule. Therefore we uphold the order of the CIT(A) and dismiss the ground raised by the Revenue.

63. Ground No. 3 is on the issue of claim of exemption under section 10(34) on the dividend income earned by the assessee, which was allowed by the CIT(A). This ground is already considered vide paras 48 & 49 of the above in ITA No. 7765/Mum/2010 for A.Y. 2005-06. Therefore, ground No. 3 raised by the Revenue is accordingly dismissed.

ITA No. 6856/Mum/2010 – A.Y. 2007-08.

64. Assessee in this appeal has raised seven grounds which is extracted below:

“1. The CIT (A) has erred in not accepting the loss of Rs. 412.88 crores returned by the Appellant.

2. The CIT (A) erred in holding that the Appellant’s taxable income from insurance is the amount of surplus disclosed in Form I.

3. The CIT (A) has erred in upholding the computation of taxable income for the year at Rs. 31.72 crores by holding that the amount transferred from the shareholder’s account to policyholder’s account is not to be reduced from the surplus disclosed in Form I.

4. The CIT (A) has erred in holding that income of Rs. 31.72 crores in shareholder’s account is separately taxable under the head “income from other sources”.

6. The CIT (A) has erred in not holding disallowance under section 14A offered in revised return of income is on reasonable basis but directed AO to decide the issue afresh.

7. The CIT (A) has erred in confirming that the income in the shareholder’s account is taxable at the normal corporate rate of tax instead of rate specified in section 115B of the Act”.

65. Grounds No. 1,2,3 & 5 are on the issue of actuarial surplus. This issue was discussed elaborately in AY 2005-06 vide grounds 1 to 3 in ITA No 6854/Mum/2010 above and for the detailed reasons stated there in the grounds are allowed. AO is directed to modify the order accordingly.

66. Grounds No. 4 & 7 on the issue of treating the income in shareholders account as income from other sources. This issue is already decided in grounds No. 4 & 7 in ITA No. 6855/Mum/2010 for A.Y. 2006-07. For the reasons stated therein vide paras 54 & 55 we direct the AO to treat the income in shareholders account as part of life insurance business only. Grounds are allowed.

67. Ground No. 6 pertains to the issue of disallowance under section 14A and assessee also raised additional ground on the reason that section 14A is not applicable once incomes are assessed under section 44. This issue is also considered in A.Y. 2005-06 in ITA No. 6854/Mum/2010 in ground No. 4. For the reasons stated therein, following the above, this ground and the additional ground are allowed. AO is directed to do accordingly.

ITA No. 7767/Mum/2010 – A.Y. 2007-08

68. The Revenue in this appeal has raised the following two grounds:

“1. On the facts and circumstances of the case and in law, the learned CIT (A) erred in deleting the addition made on account of claim of 100% depreciation of Rs. 76,60,380/- ignoring the facts that Actuarial surplus is determined on the basis of the total assets of the company and therefore by not capitalizing the above assets, the assets of the assessee company are under stated in the books and thereby it has an impact of reducing the surplus of or increase in the deficit and therefore, the assets so written off are also considered as part of the surplus and taxable under section 44 of the I.T. Act.

2. On the facts and circumstances of the case and in law, the learned CIT (A) erred in allowing the dividend income of assessee as exempted under section 10(34) of the Income Tax Act, 1961 ignoring the facts that dividend income is considered as part of Income of Life Insurance Business and is included as an income by the actuary”.

69. Ground No. 1 is about deletion of addition made on account of claim of 100% depreciation of Rs. 76,60,380/-. This ground is already considered vide ground No.2 in ITA No. 7766/Mum/2010 for A.Y. 2005-06. Therefore, for the reasons mentioned therein ground No. 2 raised by the Revenue is accordingly dismissed.

70. Ground No. 2 is on the issue of claim of exemption under section 10(34) on the dividend income earned by the assessee, which was allowed by the CIT(A). This ground is already considered vide paras 48 & 49 of the above in ITA No. 7765/Mum/2010 for A.Y. 2005-06. Therefore, ground No. 3 raised by the Revenue is accordingly dismissed.

ITA No. 6059/Mum/2010 – A.Y. 2008-09

71. Assessee in this appeal raised the following grounds:

“1. The CIT (A) has erred in not accepting the loss of Rs. 823.38 crores returned by the Appellant,

2. The CIT (A) erred in holding that the Appellant’s taxable income from insurance is the amount of surplus disclosed in Form I.

3. The CIT (A) has erred in upholding the computation of taxable income for the year at Rs. 228.98 crores by holding that the amount transferred from the shareholder’s account to policyholder’s account is not to be reduced from the surplus disclosed in Form I.

4. The CIT (A) has erred in holding that income of Rs. 61.09 crores in shareholder’s account is separately taxable under the head “income from other sources”.

6. Section 14A is not applicable to insurance companies as this section contemplates to restrict the deductions as allowable under the Act which are contained under section 28 to 43B of the Act. Section 44 creates a special exception to the applicability of these provisions in the cases of insurance companies and therefore, section 14A is not applicable to insurance companies.

7. The CIT (A) has erred upholding that the amount of disallowance as computed by AO under section 14A of the Act is appropriate ignoring the amount offered by the Appellant under section 14A in return of income.

8. The CIT (A) has erred in confirming that the income in the shareholder’s account is taxable at the normal corporate rate of tax instead of rate specified in section 115B of the Act.”

72. Grounds No. 1,2,3 & 5 are on the issue of actuarial surplus. This issue was discussed elaborately in AY 2005-06 vide grounds 1 to 3 in ITA No 6854/Mum/2010 above and for the detailed reasons stated there in the grounds are allowed. AO is directed to modify the order accordingly.

73. Grounds No. 4 & 8 are on the issue of treating the income in shareholders account as income from other sources. This issue is already decided in grounds No. 4 & 7 in ITA No. 6855/Mum/2010 for A.Y. 2006-07. For the reasons stated therein vide paras 54 & 55 we direct the AO to treat the income in shareholders account as part of life insurance business only. Grounds are allowed.

74. Grounds No. 6 & 7 pertain to the issue of disallowance under section 14A and assessee also raised additional ground on the reason that section 14A is not applicable once incomes are assessed under section 44. This issue is also considered in A.Y. 2005-06 in ITA No. 6854/Mum/2010 in ground No. 4. For the reasons stated therein, following the above, this ground and the additional ground are allowed. AO is directed to do accordingly.

ITA No. 7213/Mum/2010 – A.Y 2008-09

75. The Revenue in this appeal has raised the following four grounds:

“1. On the facts and circumstances of the case and in law, the learned CIT (A) erred in not upholding the findings of AO that assessee is earning income from activities other than Life Insurance Business ignoring the facts that assessee is getting dividend income and income from other sources also.

2. On the facts and circumstances of the case and in law, the learned CIT (A) erred in not subjecting the negative reserve amounting to Rs. 87.94 crores ignoring the facts that negative reserve has an impact of reducing the taxable surplus as per Form-I.

3. On the facts and circumstances of the case and in law, the learned CIT (A) erred in deleting the addition of Rs. 61,88,017/- ignoring the fact that Actuarial surplus is determined on the basis of the total assets of the company and therefore by not capitalizing the above assets, the assets of the assessee company are understated in the books and thereby it has an impact of reducing the surplus of or increase in the deficit and therefore, the assets so written off are also considered as part of the surplus and taxable under section 44 of the IT Act.

4. On the facts and in the circumstances of the case and in law, the learned CIT (A) erred in allowing the dividend income of assessee of Rs. 78,27,74,249/- as exempted under section 10(34) of the Income Tax Act, 1961 ignoring the facts that dividend income is considered as part of income of Life Insurance Business and is included as an income by the actuary”.

76. Grounds No. 1 & 2 are on the issue of actuarial surplus. This issue was discussed elaborately in AY 2005-06 vide grounds 1 to 3 in ITA No 6854/Mum/2010 above and for the detailed reasons stated there in the grounds are allowed. AO is directed to modify the order accordingly.

77. Ground No. 3 pertains to deletion of addition on deprecation claimed at 100%. This issue was discussed above in ITA No. 7766/Mum/2010 vide ground No. 2. For the reasons stated therein the ground raised by the Revenue is rejected.

78. Ground No. 4 is on the issue of claim of exemption under section 10(34) on the dividend income earned by the assessee, which was allowed by the CIT(A). This ground is already considered vide para 47, 48 & 49 of the above in ITA No. 7765/Mum/2010 for A.Y. 2004-06. Therefore, ground No. 3 raised by the Revenue is accordingly dismissed.

79. In the result appeals filed by assessee in ITA Nos. 6854 to 6856/Mum/2010, & 6059/Mum/2010 are allowed and the Revenue appeals in ITA Nos. 7765 to 7767/Mum/2010 & 7213/Mum/2010 are dismissed.

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