Disallowance of Dividend Income was deleted as sec. 44 overrides sec.14A in computation of income for Insurance Companies

ACIT Vs ICICI Prudential Life Insurance Company Limited (ITAT Mumbai)

Conclusion: Disallowance on dividend income claimed by ICICI Prudential Life Insurance was deleted as Section 44, being a non-obstante clause, overrides the provisions of Section 14A of the Income Tax Act, 1961, in computing income for life insurance companies.

Held: Assessee was a public limited company registered under the companies Act, 1956 engaged in the sole business of life insurance. The activities of insurance was governed by the Insurance Act 1938, Insurance Regulatory and Development Authority Act (IRDA),1999 as amended from time to time and the rules and regulations framed thereunder. Income shown in the return of income filed by assessee company declaring total income at Rs.5,38,70,21,322/- which assessee had adjusted against the brought forward losses as per computation. AO noticed that assessee had claimed exemption on account of dividend income reduced by dividend income from pension business, net claim of exemption came to Rs.3,76,77,25,000/- under section 10(34). Assessee had not offered disallowance under section 14A read with rule 8D. Declining the contentions raised by assessee, AO proceeded to make disallowance under section 14A to the tune of Rs.1,16,44,64,060/- by allowing the exemption for dividend to the tune of Rs.2,60,32,60,940/- only. However, CIT(A) deleted the disallowance on the ground that provision of section 14A did not apply to the insurance business which was ruled by section 44, which was a non obstante clause, by following the order passed by co-ordinate bench of Tribunal in assessee’s own case for A.Y. 2005–06 to 2008-09. It was held that Section 44, being a non-obstante clause, overrides Section 14A explaining disallowances related to exempt income did not apply to life insurance companies. Therefore, Tribunal upheld the decisions made by CIT(A) to delete the disallowance of assessee’s dividend income.

FULL TEXT OF THE ORDER OF ITAT MUMBAI

Since common question of law and facts have been raised in these inter-connected appeals, the same are being disposed of by way of composite order to avoid repetition of discussion.

2. The appellant Asst. Commissioner of Income Tax, Circle-6(1)(2), Mumbai (hereinafter referred to as ‘the Revenue’) by filing aforesaid appeals sought to set aside the impugned orders even dated 28.02.2023 passed by the National Faceless Appeal Centre(NFAC) [Commissioner of Income Tax (Appeals), Delhi] (hereinafter referred to as CIT(A)] qua the assessment years 2014-15, 2015-16, 2016-17, 2017-18 & 2017-18 on identically worded grounds except the difference in amount of addition/disallowance (grounds from A.Y. 2014-15 are taken for the sake of brevity) inter-alia that :-

“1. Whether on the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in interpreting the provision of Section 44 of the IT Act read with rule 2 of the First Scheduled along with provisions of Insurance Act 1938, Insurance Regulatory and Development Authority Act, 1999 and regulations there under and accordingly allowing adjustment from the ‘surplus work as per “actuarial valuation” [and as shown by the assessee in Form-1] in violation of the ratio of the Apex Court in the case of LIC vs 51 CIT 51 ITR 778?

2. Whether on the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in giving relief to the assessee following the decision of Hon’ble ITAT in assessee’s own case for the earlier years, wherein Hon’ble Tribunal held that on account of “legislation on incorporation”, ‘only’ the “un- amended insurance Act 1938 and the Regulations there under became part of Section 44 r.w. Rule 2 on the First Scheduled of the IT Rules, when an appeal against this order of ITAT has been filed & is pending with High Court Bombay?

3. Whether on the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in giving relief to the assessee, following the decision of Hon’ble ITAT in assessee own case for the earlier years, wherein Hon’ble Tribunal held that the Legislature consciously omitted incorporation of the provisions of Insurance Regulatory and Development Authority Act, 1999 and Regulations made thereunder in section 44 of the IT Act r w Rule 2 of the First Scheduled which ‘refers’ only to un-amended Insurance Act 1938 and Regulations made there under: when an appeal against this order of ITAT has been filed & is pending with High Court Bombay?

4. Whether on the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in giving relief to the assessee, following the decision of Hon’ble ITAT in assessee’s own case for the earlier years, wherein Hon’ble Tribunal failed to take note that section 28 of Insurance Regulatory and Development Authority Act 1999 clarifies that provisions of IRDA Act are in addition and not in derogation of Insurance Act 1938, which means IRDA Act and its regulations has been adopted in Section 44 of the IT Act r w Rule 2 of the First scheduled by way of “legislation by reference”; and when an appeal against this order of ITAT has been filed & is pending with High Court Bombay?

5. Whether on the facts and in circumstances of the case and in law, the Ld. CIT(a) erred in concluding that transfer from Share Holders Accounts (SHA) and Policy Holder’s Account (PHA) is tax neutral and not taxable u/s 44 of the Act r.w. Rule 2 of the First Scheduled?

6. Whether on the facts and in the circumstances of the case and in law. the Ld. CIT(A) erred in giving relief to the assessee following the decision of Hon’ble ITAT in assessee’s own case for the earlier years wherein Hon’ble Tribunal held that transfer from Share Holder’s Account to Policy Holder’s Account and shown as part of “surplus in the “actuarial valuation was only transfer of capital assets and not taxable u/s 44 of the Act r w Rule 2 of the First Scheduled; and when an appeal against this order of ITAT has been filed & is pending with High Court Bombay?

7. Whether on the facts and in the circumstances of the case and in law. the Ld. CIT(A) erred in allowing relief to the assessee by holding that “surplus” available both in Policy Holder’s Account and Share Holder’s Account is to be consolidated and only “net surplus to be taxed as income from Insurance Business?

8. Whether on the facts and in the circumstances of the case and in law. the Ld. CIT(A) erred in allowing relief to the assessee by holding that surplus available in Share Holder’s Account is not to be taxed separately as “income from other sources and at the normal corporate rate and holding that surplus from Share Holders Account was only part of income from insurance business arrived at after “combining surplus available in Share Holders Account with the surplus available in Policy Holders Account and then taxing this “net surplus” arrived at, the rates specified u/s 115B of the Act?

9. Whether on the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in deleting the addition made on account of claim of 100% depreciation 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 or increase in the deficit and therefore, the assets so written off are also accordingly required to be considered as part of the surplus and taxable under section 44 of the IT Act?

10. Whether on the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in failing to appreciate that negative reserve has an impact of reducing the taxable surplus as per Form I and therefore corresponding adjustment for negative reserve need to be made to arrive at taxable surplus?

11. Whether on the facts and in the circumstances of the case and in law. the Ld. CIT(A) erred in holding that provisions of Section 14A of the Act did not apply to insurance business, even when the Assessee has claimed exempted income under Section 10 of the Income Tax Act and has also itself made some disallowances u/s 14A of the Act in the return.

12. The Appellant prays that the order of the CIT(A) on the above grounds be set aside and that of the Assessing Officer be restored.

13. The appellant craves leave to amend, or alter any grounds or add a new grounds, which may be necessary.”

3. Briefly stated facts necessary for consideration and adjudication of the issues at hand are : the assessee is a public limited company registered under the companies Act, 1956 engaged in the sole business of life insurance. The activities of insurance is governed by the Insurance Act 1938, Insurance Regulatory and Development Authority Act (IRDA),1999 as amended from time to time and the rules and regulations framed thereunder. Income shown in the return of income filed by the assessee company declaring total income at Rs.5,38,70,21,322/- which the assessee has adjusted against the brought forward losses as per computation given is as under:

4. The Assessing Officer (AO) noticed that the assessee has worked out the computation of surplus in policy holder accounts (PHA) and has gone on to add surplus in the shareholders accounts (SHA) and reducing it by exemption claimed under section 10(34) of the Income Tax Act, 1961 (for short ‘the Act’) for the dividend income and under section 10(23AAB) for pension scheme, however under section 44 of the Act the profit and gains of the life insurance business shall be taken to 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 concerned assessment year. Since the assessee has not followed the principle of section 44 but has merely taken the value from the financial accounts of the assessee and not the actuarial value of the assessee, the AO rejected the computation made by the assessee company and has considered the actuarial valuation report submitted in form 1, accepted in the assessment order which is as under:

5. Declining the contentions raised by the assessee company the AO proceeded to take the surplus as per actuarial valuation report as per form 1 for inter valuation period i.e. difference between surplus figures of form 1 report as on 31/3/2013 and 31/3/2014 under section 44 of the Act and worked out the taxable surplus of the assessee for A.Y. 2014-15 as under:

6. The AO has also subjected the income of Rs.3,59,68,10,000/-in shareholders account to tax under the head income from other sources (A.Y. 2014-15) and has also applied the normal corporate rate of tax instead of rate specified under section 115B of the Act. AO has also added depreciation amount of Rs.3,63,155/- (for A.Y. 2014-15) as income without appreciating the fact that only those adjustments which are expressly permitted under section 44 of the Act can be made. The AO has also subjected negative reserve of Rs.8,11,95,90,000/- to tax on the ground that income of the assessee was from the insurance business. The AO has also made a disallowance under section 14A of the Act to the tune of Rs.1,16,44,64,060/- by allowing the exemption for dividend to the tune of Rs.2,60,32,60,940/- only after taking into account the disallowance under section 14A of the Act. Consequently the AO framed the assessment under section 143(3) of the Act at the total income of Rs.3,89,91,14,095/-.

7. The assessee carried the matter before the Ld. CIT(A) by way of filing appeal who has partly allowed the same. Feeling aggrieved with the impugned order passed by the Ld. CIT(A) the Revenue has come up before the Tribunal by way of filing present appeals.

8. We have heard the Ld. Authorised Representatives of the parties to the appeal, perused the orders passed by the Ld. Lower Revenue Authorities and documents available on record in the light of the facts and circumstances of the case and law applicable thereto.

Ground Nos.1 to 7 of ITA Nos.1453, 1454, 1455, 1456 & 1457/M/2023 for Assessment Years 2014-15, 2015-16, 2016-17, 2017-18 & 2017-18

9. Undisputedly activities of the insurance is governed by the Insurance Act, 1938, Insurance Regulatory and Development Authority Act (IRDA) 1999 as amended from time to time and the rules and regulations framed thereunder. It is also not in dispute that the AO assessed the income of the assessee for the years under consideration at the loss of Rs.3,89,91,14,095/- by ignoring the Nil total income based on the audited books of accounts self assessed by the assessee. The AO by relying upon the provisions contained under section 44 read with rule 2 computed the income for the years under assessment on the basis of form 1 submitted as part of the actuarial report and abstract by the assessee by disregarding the computation adopted by the assessee while filing the return of income. The AO also proceeded on the premise that the assessee has not denied that it is earning income from activities other than the life insurance business. However certificate of registration issued by IRDA under section 3(2a) of the Insurance Act shows that it has been granted the license to the assessee to carry out Life Insurance business and all other activities carried out by the assessee are for the furtherance of life insurance business.

10. The AO has also computed taxable income for the years under consideration without reducing from the surplus shown in form 1 the amount which was transferred from the shareholders account to policyholders account. The AO has also erred in taxing twice of amount transferred from policy holders account to shareholders accounts in surplus shown in form 1 and again in shareholders income. The AO has also subjected the income in shareholders income to tax under the head “income from other sources”. The AO has also applied the normal corporate rate of tax instead of rate specified under section 115B of the Act which prescribes rate of tax at 12.50% of the income. The AO has also held that assets on which 100% depreciation is provided are not capitalised and added depreciation amount of Rs.3,63,155/- as income without considering the fact that only those adjustments which are expressly permitted under section 44 of the Act can be made.

11. However vide impugned order Ld. CIT(A) decided ground No.1 to 7 in favour of the assessee by following the order passed by co-ordinate bench of the Tribunal in assessee’s own case in ITA No.6854/M/2010 & ors. for A.Y. 2005-06 to 2008-09 order dated 14.09.2012 Revenue has challenged the impugned order passed by Ld. CIT(A) which is strictly in accordance with the order passed by the Tribunal in assessee’s own case merely on the ground that the revenue department has not accepted the order (supra) passed by the Tribunal and appeal against the said order is pending consideration before the High Court of Bombay. Merely because of the fact that the revenue has challenged the order of the Tribunal before the higher forum is nothing but breach of judicial protocol.

12. We have perused the order passed by co-ordinate bench of Tribunal in assessee’s own case for A.Y. 2005 –06 to 2008-09 which is regarding identical issue and decided in favour of the assessee by returning following findings:

“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.

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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 `.250 crores and transferred funds to the extent of `.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.

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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. …………..

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……

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 ie. 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.”

13. So following the order passed by the coordinate bench of the Tribunal we are of the considered view that actuarial valuation made in accordance with the Insurance Act, 1938 means that actuarial valuation done in accordance with Insurance Act and the legislature has consciously omitted to incorporate the provisions of IRDA and the regulations made thereunder in the rules and that since the assessee is having only one business of life insurance the entire transactions both under the policy holders and shareholders account pertains to the life insurance business only as it was not permitted to do any other business. Once it is proved that the assessee is in the life insurance business the computation has to be made in accordance with rule 2 as per provisions of section 44 of the Act. So both the policyholders and shareholders account has to be consolidated for the purpose of arriving at the deficit or surplus. So in view of the matter we find no illegality or perversity in the impugned order passed by Ld. CIT(A), hence ground No.1 to 7 raised by the Revenue are hereby dismissed.

Ground No.8 of ITA Nos.1453, 1454, 1455, 1456 & 1457/M/2023 for Assessment Years 2014-15, 2015-16, 2016-17, 2017-18 & 2017-18

14. The Revenue has challenged the relief given by the Ld. CIT(A) to the assessee by holding that surplus available in shareholders account is not to be taxed separately as income from other sources at the normal corporate rate by observing that the surplus from shareholders account was only part of the income from insurance business arrived at after combining surplus available in shareholders account with the surplus available in policy holders account and then taxing the net surplus arrived at the rate specified under section 115B of the Act. The Ld. CIT(A) returned these findings after following the order passed by the Tribunal in assessee’s own case for A.Y. 2005 – 06 to 2008-09.

15. We have perused the findings returned by the Tribunal in assessee’s own case from para 46 to 57 of the order available at page 1 to 112 of the paper book which is on the identical issue. The Revenue has challenged the findings on the only ground that appeal before The Honourable Bombay High Court against these findings is pending consideration. Operative part of the finding is as under:

“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.”

16. So following the findings returned by co-ordinate bench of the Tribunal in assessee’s own case we are of the considered view that the income in shareholders account is required to be taxed as income from Life Insurance business only as they are part of the same business and investments are made as part of the solvency ratio of same business. Moreover as per section 44 only first schedule will apply for computing the income and excludes other heads of income like insurance, interest on security, income from house property, capital gain of income from other sources. So section 44 being a non obstante class provides that profits and gains of insurance business shall be computed in accordance with the rules contained in the first schedule. So finding no illegality or infirmity in the impugned findings returned by the Ld. CIT(A) challenged by the revenue, ground no.8 is determined against the Revenue.

Ground No.9 of ITA Nos.1453, 1454, 1455, 1456 & 1457/M/2023 for Assessment Years 2014-15, 2015-16, 2016-17, 2017-18 & 2017-18

17. The AO made addition on account of 100% claim of depreciation of the assessee on the ground that actuarial surplus is determined on the basis of total assets after company and therefore by not capitalizing the aforesaid assets, the assets of the assessee company are understated in the books of account and thereby it has an impact of reducing the surplus or increase in the deficit. So the AO has considered the assets so written off by the assessee as part of the surplus and taxed accordingly under section 44 of the Act.

18. However, the Ld. CIT(A) deleted the addition by following the order passed by co-ordinate bench of Tribunal in assessee’s own case for A.Y. 2005 – 06 to 2008 – 09 (supra). The Revenue has challenged the order passed by Ld. CIT(A) on the only ground that the revenue has not accepted the order passed by the Tribunal having already been challenged before the Honourable High Court. For the sake of repetition it is reiterated that this is nothing but breach of judicial protocol as the order passed by final fact finding authority, the Tribunal in this case cannot be thrown into the dustbin merely on the basis of non sustainable ground.

19. We have perused the order passed by co-ordinate bench of Tribunal which is on identical issue having been decided in favour of the assessee by returning following findings:

“60. Ground No.2 is about deletion of addition made on account of claim of 100% depreciation of `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.”

20. So in view of what has been discussed above we are of the considered view that when the assessee has not claimed any depreciation under section 32 of the Act on the ground that said section is not applicable for computation of income from Life Insurance business which has its own scheme, the depreciation so charged is not required to be added to the surplus as such an adjustment is barred under section 44 of the Act. So in view of the findings returned by co-ordinate bench of Tribunal on this issue we find no illegality or perversity in the impugned findings. So ground No.9 is determined against the Revenue.

Ground No.10

21. AO after noticing that the assessee is having negative reserve of Rs.69,48,41,27,210/- including negative reserve of Rs.17,23,86,03,020/- on account of pension proceeded to hold that these negative reserves have an impact of reducing the taxable surplus as per form No.1 and thereby held that the increase in negative reserve during the year under consideration as on 31/3/2013 as adjusted for negative reserve on account of pension fund amounting to Rs.8,11,95,90,000/- is also taxable as income of the assessee from insurance business.

22. The Ld. CIT(A) deleted the addition made by the AO by directing not to include the incremental negative reserve of Rs.8,11,95,90,000/- in the surplus to be taxed as profit and gains from the business of life insurance by following the order passed by Tribunal in assessee’s own case for A.Y. 2005 – 06 to 2008 – 09.

23. We have perused the order passed by co-ordinate bench of Tribunal (supra) on the identical issue the operative part of which is extracted for ready perusal as under:

“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 LIC vs. CIT 512 ITR 773 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.”

24. So following the order passed by Tribunal Ld. CIT(A) has legally and validly deleted the amount which is in consistence with the accounting principles followed by the assessee and the provisions contained under section 44 read with rule 2 of first schedule.

25. So we find no reason to interfere into the findings returned by Ld. CIT(A) hence ground No.10 raised by the Revenue is hereby dismissed.

Ground No.11 of ITA Nos.1453, 1454, 1455, 1456 & 1457/M/2023 for Assessment Years 2014-15, 2015-16, 2016-17, 2017-18 & 2017-18

26. The AO noticed that the assessee has claimed exemption on
account of dividend income of Rs.6,30,26,26,000/- reduced by dividend income from pension business amounting to Rs.25,34,90,100/-, net claim of exemption comes to Rs.3,76,77,25,000/- under section 10(34). The assessee has not offered disallowance under section 14A read with rule 8D of the Act. Declining the contentions raised by the assessee the AO proceeded to make disallowance under section 14A to the tune of Rs.1,16,44,64,060/- by allowing the exemption for dividend to the tune of Rs.2,60,32,60,940/- only. However Ld. CIT(A) deleted the disallowance on the ground that provision of section 14A of the Act does not apply to the insurance business which is ruled by section 44, which is a non obstante clause, by following the order passed by co-ordinate bench of Tribunal in assessee’s own case for A.Y. 2005–06 to 2008-09 (supra).

27. We have perused the order passed by co-ordinate bench of Tribunal in assessee’s own case which is exactly on identical issue, the operative part of which is extracted for ready perusal as under:

“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 in ITA No.3554/Mum/2011 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/s Add. CIT in ITA No.1447/PN/2007 for the assessment year 2003-04 order dated 31.08.2009. This Tribunal in the case of JCITV/s 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/s Add. 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. Asst t . 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 quest ion 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 t ravel beyond these provisions.

24. 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. 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.

21. 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.”

28. So following the order passed by the Tribunal the Ld. CIT(A) has rightly deleted the addition made by the AO on the ground that the income of the assessee is computed under section 44 of the Act which is a non obstante clause and applies notwithstanding anything contrary to the contents within the provisions of Income Tax Act. So we find no scope to interfere into the findings returned by Ld. CIT(A) hence ground No.11 is also decided against the Revenue.

29. In view of what has been discussed above aforesaid appeals filed by the Revenue for A.Y. 2014-15, 2015-16, 2016-17, 2017-18 & 2017-18 are hereby dismissed.

Order pronounced in the open court on 28.07.2023.