Case Law Details

Case Name : CIT, Mumbai Vs Life Insurance Corporation Of India Ltd. (Bombay High Court)
Appeal Number : Income Tax Appeal No. 3693 of 2010
Date of Judgement/Order : 02/08/2011
Related Assessment Year :
Courts : All High Courts (3668) Bombay High Court (661)

CIT, Mumbai Vs Life Insurance Corporation Of India Ltd.- (Bombay High Court)- The object of inserting Section 10(23AAB) as per the Board Circular No. 762 dated 18th February 1998 was to enable the assessee to offer attractive terms to the contributors. Thus, the object of inserting Section 10(23AAB) was not with a view to treat the pension fund like Jeevan Suraksha Fund outside the purview of insurance business but to promote insurance business by exempting the income from such fund. Therefore, in the facts of the present case, the decision of the Income Tax Appellate Tribunal in holding that even after insertion of Section 10(23AAB), the loss incurred from the pension fund like Jeevan Suraksha Fund had to be excluded while determining the actuarial valuation surplus from the insurance business under Section 44 of the Income Tax Act, 1961 cannot be faulted. Accordingly, questions (c) and (d) are answered in the affirmative, that is, in favour of the assessee and against the Revenue.

Whether provision for solvency margin made as per the directions of IRDA constitutes un ascertained liability so as to include the same in the actuarial valuation surplus  – Revenue’s Appeal dismissed

CIT, Mumbai Vs Life Insurance Corporation of India Ltd

Bombay High Court

Income Tax Appeal No. 3693 of 2010, 3623 OF 2010,

3691 OF 2010, 3692 OF 2010, 5001 OF 2010

Date: 2nd August, 2011

ORAL JUDGEMENT:

(Per : J.P. Devadhar, J.)

1. Since the questions of law raised in all these appeals are common, all these appeals are heard together and disposed off by this common judgment.

2. For the sake of convenience, we set out the facts in Tax Appeal No.3693 of 2010, which relates to AY 2002-03.

3. Tax Appeal No.3693 of 2010 is admitted on the following substantial questions of law:-

(a) Whether on the facts and in the circumstances of the case and in law the Tribunal was justified in deleting the addition made on account of provision of solvency margin by the Assessing Officer even though the provision for solvency margin was made as per the directive of IRDA for a period of three years only and does not form the method of actuarial valuation made in accordance with the Insurance Act, 1938?

(b) Whether on the facts and in the circumstances of the case and in law the Tribunal was right in deleting the addition made on account of provision on solvency margin by the Assessing Officer which was not an ascertained liability eligible for deduction?

(c) Whether on the facts and in the circumstances of the case and in law the Tribunal was justified in deleting the addition made by the Assessing Officer on account of loss from Jeevan Suraksha Fund ignoring the settled position of law that income includes loss and that the income from Jeevan Suraksha Fund does not form part of the total income of the Assessee Corporation u/s. 10(23AAB) of the Income Tax Act, 1961?

(d) Whether on the facts and in the circumstances of the case the Tribunal was justified in ignoring the fact that the non obstante clause in section 44 is not extended to section 10(23AAB) of the Income Tax Act, 1961?

Counsel for the parties state that the decision on the above questions would apply to the other tax appeals as well.

4. The assessee is engaged in the Life Insurance Business. The profits and gains of insurance business are liable to be computed as per Section 44 read with the First Schedule to the Income Tax Act, 1961.

5. In the revised return of income filed for the assessment year in question, the actuarial valuation surplus was computed by excluding the provision for reserve on account of solvency margin amounting to Rs.3,500 crores and loss in Jeevan Suraksha Fund amounting to Rs.638.33 crores.

6. The Assessing Officer disallowed the claim of the assessee and passed the assessment order by adding the amount on account of the provision for solvency margin and loss from Jeevan Suraksha Fund, inter alia on the ground that the provision for solvency margin was not an ascertained liability and that income from Jeevan Suraksha Fund being exempt under Section 10(23AAB), the loss incurred from the said fund cannot be adjusted against the taxable income.

7. On appeal filed by the assessee, the Commissioner of Income Tax (Appeals) confirmed the additions made by the Assessing Officer.

8. On further appeal filed by the assessee, the Income Tax Appellate Tribunal by the impugned order deleted the said additions. Hence, the revenue has filed these appeals under Section 260A of the Income Tax Act, 1961.

9. As regards questions (a) and (b) are concerned, it is not in dispute that the provision for solvency margin was made as per the directions given by the Insurance Development Regulatory Authority (IRDA). The question is, whether such provision for solvency margin made as per the directions of IRDA constitutes unascertained liability so as to include the same in the actuarial valuation surplus ?

10. Rule 2 of the First Schedule to the Income Tax Act, 1961 reads thus :

“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.”

11. Plain reading of the above rule makes it clear that the annual average of the surplus from the insurance business has to be arrived at by adjusting the surplus or deficit disclosed by the actuarial valuation made in accordance with the Insurance Act, 1938.

12. In the present case, the Chairman of IRDA by his letter dated 4th September 2002 had directed that the present solvency calculations of the assessee do not conform to the requirements of the regulations that have been stipulated by the Regulatory Authority. It was further directed that the deficiency in the solvency margin was to the extent of Rs.10,000 crores and that the assessee was directed to set right the said deficiency over a period of three years by making a provision which shall be kept apart in the policy- holders fund and no part of the said provision would be available for distribution either to the policy-holders or to the Government of India. Accordingly, the assessee had set apart Rs.3,500 crores towards solvency margin in the assessment year in question.

13. The Income Tax Appellate Tribunal after considering various decisions of the Apex Court as also, this Court and Section 64(VA) of the Insurance Act, 1938 held that the amounts set apart towards the solvency margin as per the directions given by the IRDA were ascertained liability which were required to be set apart as per the regulations framed by IRDA and hence liable to be excluded while computing the actuarial valuation surplus.

14. It is neither the case of the Revenue that the provision for solvency margin is contrary to the provisions of the Insurance Act, 1938 nor it is the case of the Revenue that the solvency margin has been wrongly or excessively calculated by the actuarial as it was mandatory for the assessee to set apart the funds towards solvency margin and hence excludible while determining the annual average surplus under Section 44 read with the Rules contained in the First Schedule to the Income Tax Act, 1961. In these circumstances, the decision of the Income Tax Appellate Tribunal in holding that the funds set apart as solvency margin have to be excluded while determining the distributed profits of the assessee cannot be faulted. Accordingly, questions (a) and (b) are answered in the affirmative, that is, in favour of the assessee and against the revenue.

15. As regard questions (c) and (d) are concerned, the dispute is whether the loss incurred by the assessee from Jeevan Suraksha Fund is liable to be excluded in computing the actuarial valuation surplus in view of the fact that the income from Jeevan Suraksha Fund is exempt under Section 10(23AAB) of the Income Tax Act, 1961.

16. The argument of the Revenue is that with the insertion of Section 10(23AAB) by Finance (No.2) Act, 1996 with effect from 1st April 1997, the profits as well as loss arising from Jeevan Suraksha Fund would not be includible in the total income of the assessee and, therefore, while determining the distributed profits of the assessee, the loss from Jeevan Suraksha Fund ought not to be allowed to be adjusted against the taxable income.

17. It is not in dispute that the Jeevan Suraksha Fund is a pension fund approved by the Controller of Insurance appointed by the Central Government to perform the duties of the Controller of Insurance under the Insurance Act, 1938. The loss incurred in the Jeevan Suraksha Fund has been considered by the actuary as a business loss, as per the valuation report as on the last day of the financial year, allowable under Section 44 read with the First Schedule to the Income Tax Act, 1961. The fact that the income from such fund has been exempted under Section 10(23AAB) with effect from 1st April 1997, does not mean that the pension fund ceases to be insurance business, so as to fall outside the purview of the insurance business covered under Section 44 of the Income Tax Act, 1961. In other words, the pension fund like Jeevan Suraksha Fund would continue to be governed by the provisions of Section 44 of the Income Tax Act, 1961 irrespective of the fact that the income from such fund are exempted, or not. Therefore, while determining the surplus from the insurance business, the actuary was justified in taking into consideration the loss incurred under Jeevan Suraksha Fund.

18. The object of inserting Section 10(23AAB) as per the Board Circular No.762 dated 18th February 1998 was to enable the assessee to offer attractive terms to the contributors. Thus, the object of inserting Section 10(23AAB) was not with a view to treat the pension fund like Jeevan Suraksha Fund outside the purview of insurance business but to promote insurance business by exempting the income from such fund. Therefore, in the facts of the present case, the decision of the Income Tax Appellate Tribunal in holding that even after insertion of Section 10(23AAB), the loss incurred from the pension fund like Jeevan Suraksha Fund had to be excluded while determining the actuarial valuation surplus from the insurance business under Section 44 of the Income Tax Act, 1961 cannot be faulted. Accordingly, questions (c) and (d) are answered in the affirmative, that is, in favour of the assessee and against the Revenue.

20. In the result, all the appeals are dismissed with no order as to costs.

(A.A. Sayed, J.) (J.P. Devadhar, J.)

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