M/S. THE ORIENTAL INSURANCE CO. LTD.,NEW DELHI vs. ACIT, NEW DELHI

We find this is a legacy issue being carried over from earlier years. The Hon‟ble Jurisdictional High Court in assessee‟s own case for AY 2005-06 reported Page | 2 in 407 ITR 658 (Del) vide order dated 30.08.2017 had addressed the very same issue. The questions raised before the Hon‟ble Delhi High Court was as under: –

The Hon‟ble High Court observed as under:-

As already noticed, Section 44 of the Act is specific to 'Insurance Business'. It states that, notwithstanding anything to the contrary contained in the Act relating to the computation of income chargeable under different heads 'interest on securities', 'income from house property', 'capital gains' or 'income from other sources', the profits and gains of any business of insurance shall be computed in accordance with rules contained in the First Schedule of the Act. Therefore, in the case of the Assessee which is carrying on general insurance business, the profits and gains of its business have to be computed only in terms of the First Schedule. Analysis of Rule 5 (b) 32. The First Schedule sets out the Rules under Part 'B'. We are concerned with Rule 5(b) which stood omitted by the Finance Act, 1988 and was re- introduced by the Finance Act, 2009 with effect from 1st April 2011. The rationale for omitting Rule 5(b) was to exempt profits and gains in investments by the General Insurance Corporation of India and the four companies formed under Section 16 of the General Insurance Business (Nationalisation) Act, 1972.

Rule 5 in First Schedule to the Act, i.e. the provisions relating to "Computation of profits and gains for other Insurance business" reads as under: "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 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:-

The current clause (b) of Rule 5 was substituted by the Finance Act, 2010 with effect from 1st April 2011 for the previous clause (b) which stood re-inserted by the Finance (No. 2) Act, 2009 with effect from 1 st April 2011 after its omission by the Finance Act, 1988 with effect from 1st April 1989. The clause, prior to substitution, read as under:- "Computation of profits and gains of other insurance business.- 5. [...] (a) [...] (b) (i) deduction in respect of any amount either written off or provided in the account to meet diminution in or loss on realisation of investments in accordance with the regulations made by the Insurance Regulatory and Development Authority; (ii) increase in respect of any amount taken credit for in the account on account of appreciation of or gains on realisation of investments in accordance with the regulations made by the Insurance Regulatory and Development Authority; (c) [...]"

Prior to this, while proposing deletion of Clause (b) of Rule 5 of the First Schedule with effect from 1st April 1989, the explanation offered in the Memorandum to the Finance Bill, 1988 was as under: "Liberalization of provisions in respect of taxation of profits and deduction of tax at source applicable to the General Insurance Corporation and its subsidiaries 17. Under the existing provisions of Section 44 of the Income Tax Act, the profits and gains of any insurance business is computed in accordance with the rules contained in the First Schedule to the Act. In rule 5 of this Schedule, profits and gains of any business of insurance, other than life insurance, are taken to be balance of profits disclosed in the annual accounts furnished to the Controller of Insurance subject to certain adjustments. One of the adjustments provided therein is in respect of any amount either written off or reserved in the accounts to meet depreciation or loss on the realisation of investment which is allowed as deduction. Similarly, any sum taken credit for in the account on account of appreciation of or gain on the realisation of investments is taken as part of the profits and gains of the business. With a view to enable the General Insurance Corporation and its subsidiaries to play a more active role in the capital markets for the benefit of policy holders, it is proposed to provide for exemption of the profits earned by them on the sale of investments. As a corollary, it is proposed to provide that the losses incurred by the General Insurance Corporation on the realisation of investment shall not be allowed as deduction in computing the profits chargeable to tax. To achieve this objective, clause (b) of rule 5 of the First Schedule to the Income tax Act is proposed to be deleted. This amendment will take effect from 1st April, 1989, and will, accordingly, apply in relation to the assessment year 1989-90 and subsequent years."

Simultaneous with the omission of Rule 5 (b) in 1988, Circular No. 528 dated 16th December 1988 was issued by the Central Board of Direct Taxes ('CBDT') which purported to introduce through the Rules a policy of 'Liberalisation of provisions in respect of taxation of profits and deduction of tax at source applicable to the holding company' of the Assessee, that is, the GIC and its subsidiaries (including the Assessee). Thus what an insurance company was deprived of by omission of Rule 5 (b) was provided to it by the above Circular. Whether this was permissible in law is the central question in the present case.

To complete the chronological sequence, when again a change was brought about in 2009 to Rule 5, the Memorandum appended to the Finance (No. 2) Bill, 2009, explained the rationale thus: "Taxation of Investment Income/loss of Non-life Insurance business. The profits and gains of non-life insurance business is computed under section 44 read with rule 5 of the First Schedule. As per Rule 5, profits and gains of non-life insurance business is taken to be profits disclosed in the annual account, copies of which are required under the Insurance act, 1938 (4 of 1938), to be furnished to the Controller of Insurance, subject to adjustments for unexpired risk and disallowances under Section 30 to Section 43B. The Insurance Act, 1938 was amended in 1999 and the Insurance Regulatory Development Authority (IRDA) was created. In the financial year 2001-02, IRDA introduced "IRDA (Preparation of Financial Statements and Auditor's Report of Insurance Companies) Regulations, 2002". The regulations mandated new guidelines and formats for preparation of accounts by General Insurers. According to these changed norms, a non-life insurance company has to include profit or loss on realization/sale of investment in the profit and loss account or revenue account. This is also consistent with international best practice on taxation of investment income of non-life insurance companies."

Thus, the major change, therefore, sought to be brought about by the 2009 amendment was to align it with the IRDA Regulations regarding preparation of accounts of general insurance companies. The changed norms, in terms of said Regulations, required a non-life insurance company to include in its Profit and Loss ('P&L') Account or Revenue Account "profit or loss on realisation/sale of investment". This was said to be consistent with the international standards.

With the Assessee carrying on a general insurance business, it was bound by the provisions of the IA as well as the IRDA Regulations referred to hereinbefore. Even the CBDT, in its Circular No. 5/2010 dated 3rd June 2010, acknowledged that, after the introduction of the IRDA Regulations in 2002, non-life insurance companies are required to credit income from the sale of investments directly to the P&L Account. This requirement, which would make the income so earned amenable to tax, was made applicable only from AY 2011-12. Prior to 1st April 2011, there was no provision which required the Revenue to disallow the deduction of loss on sale of investments.

As explained by the Supreme Court in CIT v. Karnataka State Co- operative Apex Bank (supra) in the context of Section 80 P (2) (a) (i) of the Act, where an entity is obliged to place a part of its funds with the State Bank or the Reserve Bank of India to enable it to carry on its banking business, then "any income derived from funds so placed arises from the business carried on by it and the assessee has not, by reason of section 80P(2)(a)(i), to pay income-tax thereon. The placement of such funds being imperative for the purposes of carrying on the banking business, the income derived therefrom would be income from the assessee's business." 41. In the AY in question, the AO did not accept the case of the Assessee that the income earned on the sale/redemption is not chargeable to tax because, in the past, the profit on sale of investment was sometimes shown in the balance sheet and sometimes in the P&L account. According to the AO, the entire income of the Assessee was assessable as 'business income'. According to the AO, Circular No. 528 dated 16th December 1988 of the CBDT did not create a dent insofar as it stated that both profit and loss on sale of investments will not be taken into account in calculation of insurance profits. Binding nature of the Circular 42. The above approach of the AO in relation to Circular No. 528 and its binding nature as far as the Revenue is concerned, appears to be flawed. In Principal Commissioner of Income Tax v. National Insurance Company Ltd. [2017] 393 ITR 52 (Cal), it was held that Circular No. 528 of 1988 did not permit the AO to add back the profits arising from the sale of investments made by the Assessee in that case which was also carrying on a general insurance business. The Calcutta High Court in the above decision referred to the decision in Paper Products Ltd. v. Commissioner of Central Excise [2001] 247 ITR 128 (SC) where it was held that the circulars issued under Section 37B of the Central Excise Act, 1944 would be binding on the Department and that, "it does not lie in the mouth of the Revenue to repudiate a circular issued by the Board on the basis that it is inconsistent with the statutory provisions. Consistency and discipline are, according to Page | 6 this Court, of far greater importance than the winning or losing of Court proceedings." It is, therefore, too late in the day for the Revenue to disown its own Circular No. 528 and contend that it does not apply to the facts of the present case.

In CIT v. Ashok Mittal [2013] 357 ITR 245 (Del), the Court reiterated the well settled position that, where the CBDT circular has not been withdrawn and is beneficial to the Assessee, it would be binding on the AO and other Revenue authorities. The Court was merely reiterating what has been held in a large number of cases including Navnitlal C. Zaveri v. K.K. Sen (supra) and CIT v. Milk Food Ltd. [2006] 280 ITR 331 (Del).

The ITAT itself has taken a consistent stand that the taxability of income in the case of insurance companies is not on commercial profits but on such profits as are computed in accordance with the provisions of the IA, subject to the permissible adjustments under the Act. In other words, the taxability of profits in the hands of the insurance companies is confined to profits in terms of annual accounts of such insurance companies drawn up in accordance with the IA.

Indeed, the legislative policy appears to be clear. Where it is intended to bring the profit on sale of investments to tax, the legislature has chosen to re-introduce the earlier provision by virtue of the amendment effective from AY 2011-12. The intention behind omitting Rule 5(b) was clearly expressed in the Circular. If the Circular was not intended to fill the gap brought about by the omission of Rule 5(b), viz., to exempt the profits on sale of investments made by the insurance companies from tax, there was no need to re- introduce Rule 5(b) with effect from AY 2011-12. The resultant position is that for the period during which there was no Rule 5(b) the profits on sale of investments were not taxable in the hands of the Assessee. Further, the Assessee has itself clarified that it is not claiming the loss suffered on the writing off of the investments in compliance with the CBDT Circular No. 528.

The different benches of the ITAT have, in other cases, consistently held that during the period when Rule 5(b) was not operational the profit on sale of investments made by general insurance companies cannot be brought to tax. In Bajaj Allianz General Insurance Co. Ltd. v. Additional Commissioner of Income Tax (2010) 130 TTJ (Pune) 398, the ITAT addressed the specific question of whether a logical conclusion could be drawn that an income that is not taxed in terms of Rule 5(b) could, even after such amendment was deleted, be taxed in the hands of the insurance company. It was held that income which was earlier taxable under one specific clause could not be brought to tax after the deletion of such clause.

It is futile, therefore, for the Revenue to seek to bring to tax profits on sale of investment because in some earlier year the Assessee may have taken what appears to be a contradictory stand. In any event, the Assessee appears to have explained that the issue that arose in the earlier case was regarding investments written off and not profit on sale/redemption of investments. The observations of the ITAT in its order for AY 1990-91 with regard to the profit on sale/redemption of investment could, at best, be treated as obiter since that was not in issue in the case before it. Page | 7

The Court is, therefore, unable to subscribe to the submission of Mr. Manchanda that the Circular No. 528 has no application to the present case. The decision in J.K. Synthetics v. CBDT (supra) relied upon by him has no application to the facts of the case. Furthermore, it is not even the case of the Revenue that the said Circular is ultra vires of the Act.

The question framed in of 2015 is accordingly answered in the negative, in favour of the Assessee and against the Revenue, by holding that the ITAT erred in holding that the income earned on sale/redemption of investment was chargeable to tax.” 7. We find that the coordinate bench of this tribunal in assessee‟s own case for assessment year 2010-11 in dated 30.06.2021 had decided this issue in favour of the assessee.

Respectfully following the aforesaid judicial precedents, the Ground No. 1 raised by the assessee is hereby allowed.

In view of our decision in Ground No. 1, the Ground No. 1.1 becomes infructuous.

Ground Nos. 2 and 2.1 raised by the assessee are challenging the action of ld CITA upholding the disallowance of ₹10,15,15,933/- out of total depreciation allowance of ₹35,00, 54,939/- claimed by the assessee u/s 32 of the Act.

Ground No. 3 raised by the assessee is challenging the upholding of disallowance of ₹42, 53,000/- made on account of prior period expenses.

We have heard the rival submissions and perused the material available on record. The ld AO noticed that the assessee had disallowed the prior period expenses by the assessee in the sum of ₹2,78,37,000/- in the computation of Income. The ld AO noted that this sum represents net prior period expenses after adjusting prior period income of ₹42,53,000/-. Since the gross figure need to be disallowed, accordingly, he added this figure of ₹42,53,000/- to the total income of the assessee.

We find that assessee had debited only the net prior period expenses of ₹2,78,37,000/- instead of 3,20,90,000/-. We hold that the addition of ₹42,53,000/- had been rightly made by the ld AO in the assessment which stood confirmed by the CIT(A). Accordingly, Ground No. 3 raised by the assessee is dismissed.

Ground Nos. 4 to 6 raised by the assessee are challenging the upholding of disallowance of provision made for expenses as under:-

During the course of assessment, assessee vide its written submission dated 26th November, 2007 submitted that Hon'ble High Court of Delhi under ITR 144-46/1984, ITR 288/1984, ITR 289/1984, ITR 290/1984, ITR 383/1985, ITR 256/1986, ITR 538/1986 and ITR 536/1986 deleted the addition in respect of provision for bad and doubtful debts and thus decided these cases in favour of assessee and against Revenue. The revenue department‟s appeal in this regard in Civil Appeal Nos. 2741 to 2745 from A.Y. 1974-75 to 1979-80 has been dismissed by Hon'ble Supreme Court reported in 291 ITR 370 (SC). In view of Hon‟ble Apex Court decision, provision of bad and doubtful debt was claimed as Page | 10 a deduction. The ld AO completely ignored the claim made by the assessee, while framing the assessment.

The ld CIT(A) relied on the note given by the assessee vide Note-7 to Computation of Income, wherein it was mentioned that provision of bad and doubtful debts was not claimed as deduction by the assessee in view of returned loss and it may be considered while framing The assessment. The ld CIT(A) having noted the fact that this issue is covered in favour of the assessee by the decision of the Hon'ble Supreme Court, in assesses‟s own case for earlier years reported in 291 ITR 370, proceeded to dismiss the claim of the assessee by applying the decision of Hon'ble Supreme Court in the case of Goetze India Ltd reported in 284 ITR 323. We find that in the last paragraph of the decision of Goetze referred (supra), it has been categorically made clear that the power to entertain fresh claim of the assessee has been curtailed only for the AO and not for the appellate authorities. Hence, we hold that ld CIT(A) grossly erred in not following the decision of Hon'ble Supreme Court in assessee‟s own case reported in 291 ITR 370 on the impugned issue. Accordingly, the ground No. 6 raised by the assessee is allowed.

With regard to provision in respect of claims which have been repudiated by the company but contested by the claimants in court/ ombudsman/ arbitration, etc, it was submitted that based on the proceedings of the case in the court, the management of the assessee company was of the opinion that the awards of such proceedings are expected to go against the assessee company. Hence, the management of the assessee company had decided to provide for all such accepted claims or liabilities as a matter of prudent accounting policy and make a provision for all claims. Claims for all litigations are not provided in the profit and loss account, but provision is made only for those claims in which Page | 11 management is almost certain that award would go against the company, thereby making it a ascertained liability and not a contingent liability. The assessee submitted in this regard before the ld AO as under:-

In this regard, it would be relevant to take the observations made by the Hon‟ble Supreme Court in assessee‟s own case reported in 291 ITR 370 wherein in the context of liability for provision for bad and doubtful debt, Hon'ble Supreme Court observed as under:-

The said principle has been applied by this Court in Bharat Commerce & Industries Ltd. v. Commissioner of Income Tax, Central-II [(1998) 3 SCC 510], stating : "6. The expenses in that case were incurred for a very different purpose from the purpose for which the assessee has paid interest in the present case. When interest is paid for committing a default in respect of a statutory liability to pay advance tax, the amount paid and the expenditure incurred in that connection is in no way connected with preserving or promoting the business of the assessee. This is not expenditure which is incurred and which has to be taken into account before the profits of the business are calculated. The liability in the case of payment of income tax and interest for delayed payment of income tax or advance tax arises on the computation of the profits and gains of business. The tax which is payable is on the assessees income after the income is determined. This cannot, therefore, be considered as an expenditure for the purpose of earning any income or profits. The ratio of Birla Cotton Mills case is not applicable in the present case."

It is, therefore, evident that the provision of income tax being not an expenditure, the Assessing Officer could not have exercised its jurisdiction in relation thereto.

Reliance has been placed by the learned Additional Solicitor General on Madras Motor & General Insurance Co. Ltd. v. Commissioner of Income Tax, Madras [1979 (117) ITR 534]. In the said decision also, the Madras High Court categorically held that the provision for payment of income-tax is a liability and not an expenditure. The question again came up for consideration recently in General Insurance Corporation of India v. Commissioner of Income Tax, Bombay [(1999) 8 SCC 60] wherein this Court rejected the contention of the learned counsel for the assessee therein, in the fact situation obtaining in that case, opining :

Section 40(a)(ii) of the 1961 Act, it will bear repetition to state, provides for a non-obstante clause. It is of wide magnitude. Sections 32 to 38 of the 1961 Act refer to expenditure admissible under the Act. Section 40, however, seeks to make an exception thereto stating that some expenditures would not be allowed. Section 40(a)(ii), however, does not say that the income-tax would be an expenditure. It does not provide as to how a total income of a person should be computed. It provides for other types of taxes. The said provision has, therefore, no application in the instant case.

So far as the question of 'bad and doubtful claims' is concerned, again the same is not an expenditure. Section 36(1)(vii) of the Act whereupon the learned Additional Solicitor General placed strong reliance, cannot be said to have any application whatsoever in the instant case. It is not relevant for computing the profit under the 1961 Act. In any event, Section 44 of the Act provides for a non -obstante clause and, thus, would prevail over the former.”

We find that the ld AO had not looked into the aspect as to whether the provisions made by the assessee are “expenditure“ or not? Hence, we deem it fit and appropriate to restore this issue to the file of ld AO to enable the ld AO to give a factual finding on the said provisions as to whether it constitutes an expenditure or not, and accordingly decide the issue in accordance with law for the assessee company. Accordingly, Ground No. 5 raised by the assessee is allowed for statistical purposes.

With regard to Ground No. 4, the observation made by us hereinabove for Ground No. 5 shall apply mutatis mutandis for Ground No. 4 also. Accordingly Ground No. 4 is allowed for statistical purposes.

Ground Nos. 7 and 8 raised by the assessee are general in nature and does not require any specific adjudication.

In the result, the appeal of the assessee is partly allowed for statistical purposes.