SBI LIFE INSURANCE COMPANY LIMITED ,MUMBAI vs. PRINCIPAL COMMISSIONER OF TAX -1, MUMBAI

Brief facts of the case are that assessee is a company carrying business of almost all types of insurance as recorded by assessing officer (ld. AO) in para 3.2.3 of assessment order. The assessee filed its return of income for A.Y. 2019-20 declaring income of Rs. 1033.67 crores. The case was selected for scrutiny. The assessment was completed under section 143(3) r.w.s. 144B on 28.09.2022 by making various additions and assessed total income at Rs. 1512.40 crores. The assessment order was revised by Pr. CIT in its order dated 25.03.2025 passed under section 263. Before revising the assessment order, the assessing officer recorded that Additional Commissioner Range 1(3) in its letter dated 31.03.2025 raised objection on allowing provision for expenses as deductible expenses, on the basis of which the ld. PCIT independently verified the record and recorded gist of his observation on page 1 & 2 of his order. The ld. PCIT issued show cause notice under section 263 dated 20.03.2025. The ld. PCIT has not recorded the contents of his show cause notice under section 263 in his order. However, copy of such show cause notice is filed on record by assessee. In the show cause notice, the ld. PCIT recorded that segregation of financial reporting by assessee is done into two distinct accounts: (i) Policyholders Account (Technical Account) and (ii) Shareholders Account (non-technical Account). The policyholders account records all income and expenses relating to shareholders account such as premium receipts and claim settlements, whereas in shareholders account, it records income from investment and other non-insurance activities reflecting the interests of shareholders. In A.Y. 2019-20, the provision made for tax across these two accounts is significantly higher than the actual tax liability computed. The ld. PCIT recorded such provision in his show cause notice in the following manner:

On the basis of aforesaid observation, the ld. PCIT was of the view that primary issue arising from such discrepancy is that an excessive tax provision results in an underestimation of the actual taxable surplus, which has direct implications on revenue collection and against the fundamental principle of taxation and that deductions should correspond the genuine expenses. The ld. PCIT in para 6 of his show cause notice also noted that section 44 of Income Tax Act r.w. Rules of First Schedule governs the taxation of insurance company. This provision ensures that only legitimate expenses are deducted and any over statement of expenses are distorts the taxable surplus calculation. Further, IRDAI regulation also provide guidelines of financial reporting and provisioning which also requires that provision be made reasonable estimate of liability rather than arbitrary or excessive amount. On the basis of which ld. PCIT was of the view that assessing officer did not conduct independent verification of the reasonableness and correctness of provision before finalising assessment. The assessee was asked to file reply on or before 25.03.2025.

The assessee filed its reply on 24.03.2025. The main contentions of reply furnished by assessee is recorded in para 2 of impugned order. The assesseein sum and substance submitted that assessee is maintaining books of account with the direction issued by IRDAI which mandates preparation of ‘policyholders’ and ‘shareholders’ account separately and balance sheet as a whole. The case of assessee was selected for scrutiny and assessment order was passed by making various additions which was subject-matter of appeal wherein the assessee was allowed relief on various grounds except deduction under section 80JJAA of the Act and further, appeal of department is pending before Tribunal. In the show cause notice, it is specified that excessive tax provision of Rs. 164.25 crores lad to an understatement of income resulting loss of revenue. The assessee objected against issuance of notice under section 263 being bad in law and that twin conditions of section 263 are not satisfied. It was also stated that during assessment, the assessee company furnished all relevant evidence and record pertaining to computation of income and financial statement, which were examined by ld. AO during scrutiny assessment and passed the assessment order after considering Rule 2 of First Schedule and section 44 of Income Tax Act. The provision of tax appears explicitly in the financial statement were made available to the assessing officer. The assessing officer thoroughly examined the computation of income including provision before determining taxable income. The provision for expenses form part of actuarial surplus/deficit. The case was selected for scrutiny for refund made in the return of income, the basis of scrutiny was also mentioned in the reply. The assessee further stated that assessing officer applied his mind, examined all the details related to claim of refund and passed the assessment order and it cannot be said that assessment order is erroneous. During assessment, the claim of various expenses under various heads was explained by assessee company in the computation mechanism of Life Insurance Company. The assessment which was passed after thorough verification cannot be construed as erroneous.

The assessee also relied on various case laws. The reply of assessee was not accepted by ld. PCIT. The ld. PCIT held that even if provisions for taxes are be allowed as deductions, these have to be done in harmony with the basic accounting and the norms of disclosure. If goes by the stand taken by the assessee, then assessee can wilfully create provision for taxes such that the liability side is say 99, then pay 12.5% on Rs. 1.00 and claim the entire amount of prepaid taxes/advance taxes etc. as the refund. Claim that this was the way authorized by IRDA, without any supporting evidence does not cut any Ice. The AR of the assessee is seen to be sincere in their misguided belief that this was the accounting policy mandated by IRDA. The relevant IRDA regulation pointed out is enclosed for ready guidance of the AO. As per this guideline, amount in excess of the reasonable and necessary expense will be treated as reserve and not a provision. This clearly puts the whole arguments of authorized representative on a weak wicket. As a result assessment is to be revised on the limited issue of over calculation of provision for tax as indicative of attempts at tax avoidance, which if found to be deliberate would call for penal consequences but for which only the assessing officer may form an opinion on the facts after due opportunity to the assessee. As this is an accounting policy issue the AO may consider whether any other year would need to be revised/reopened/rectified so as to protect the interests of the revenue. The assessment is hence set-aside do be done again with the limited issue of revenue recognition and of allowability of provision for expenses as per the IRDA. The ld. PCIT set aside the assessment order with the direction to assessing officer to pass the assessment order afresh.

Aggrieved by the order of ld. PCIT, the assessee has filed present appeal before Tribunal.

We have heard the submissions of Sh. Farooq Irani Senior Advocate with Ms Amruta Lele Advocate / authorised representative (ld. AR) of the assessee and the learned commissioner of income tax – departmental representative (ld. CIT-DR) for the revenue. The ld. AR of the assessee submits that computation of income of assessee, which is Insurance Company, is governed by section 44 read with rules contending of First Schedule of Income Tax Act. The assessee accordingly prepared its books of account in accordance with section 44 and First Schedule of Income Tax Act. Further, section 44 of the Income Tax Act overrides only computation provision and insurance company is eligible for the benefits available under provisions other than computational provision covered by the said section as has been held in various decisions of different High Courts and Hon’ble Supreme Court. If the deductions which are claimed by the assessee do not fall within the provisions which are referred to in section 44, then the applicability of those provisions is governed by section 44 r.w.r. 2 in the First-Schedule, as has been held by Bombay High Court in Life Insurance Corporation vs CIT 115 ITR 45 (Bombay) and other. The assessee has duly complied with the manner laid down in section 44 r.w.r. 2 and the alleged disallowance indentified by ld PCIT about excess provision for taxation is untenable and bad in law. To support such view, the ld. AR of the assessee relied upon the decision of Pune Tribunal in DCIT vs Bajaj Allianz Life Insurance Company & 654/Pun 2024 wherein in the said decision, the bench considering the issue of excess tax provisioning of policyholders account and shareholders account on the basis of decision of Hon’ble Apex Court in Life Insurance Corporation of India 51 ITR 773. The assessing officer has no power to make any adjustment to the actuarial surplus computed as per the provisions of section 44 r.w.r. 2 of First Schedule. The assessing officers while completing the assessment consider all such factors and accepted the claim of assessee. Once the assessing officer has accepted the claim of assessee which is reasonable, plausible and legally sustainable view, it cannot be revised by exercising jurisdiction under section 263.

The ld. AR of the assessee further submits that assessee company being a life insurance provider also prepared its financial statement in compliance with IRDAI regulation 2002. The assessee company in line with the IRDAI regulation determines its tax provision at the yearend upon finalisation accounts based on historical estimates and reasonable judgement. Such approach of the assessee has been consistently accepted by assessing officer in past as well as in current assessment year. The assessment order is in accordance with law and cannot be branded to be erroneous. Moreover, the ld. PCIT in his order has not specified as to how the assessment order is erroneous. The ld. PCIT has not given any specific finding on the detail written submission filed in response to show cause notice before him. The ld. AR submits that the issue is highly debatable and if the assessing officer has adopted one of the reasonable views it cannot be substituted by the view of ld. PCIT. The ld. AR of the assessee submits that order passed by ld. PCIT is not sustainable order and is liable to be set aside. To support his various submission, the ld. AR of the assessee relied upon the following decision:  DCIT vs Bajaj Allianz Insurance Co. Ltd. & 657/Pun/2021  Life Insurance Corpn. Of India vs CIT (1964) 51 ITR 773 (SC)  DCIT vs Bajaj Allianz Insurance Co. Ltd. (supra)  CIT vs Howrah Four Mills Ltd. (1999) 236 ITR 156 (Calcutta)  CIT vs Jagadhri Electric Supply & Industrial Co. (1981) 7 Taxman 56 (Punjab & Haryana)  CIT vs Chandrika Educational Trust (1994) 207 ITR 108 (Kerala)  CIT vs Max India Ltd. (2008) 166 Taxman 188 (SC)  CIT vs Paville Projects (P) Ltd. (2023) 149 taxmann.com 115 (SC)

On the other hand, the ld. CIT-DR for the revenue submits that order of Pune Tribunal is not applicable on PCIT -1, Mumbai, who is not under the territorial jurisdiction of Pune Tribunal. And in case, the issue is debatable, the view taken by ld. PCIT has to be prevailed. The assessing officer has not examined the issue and not applied his mind on the issue identified by ld. PCIT while revising the assessment order. The ld. PCIT in para 5 of his order clearly held that claim of assessee about books of account in accordance with IRDAI is without any supporting evidence. The business carried out by assessee cannot be basis for making such huge provisions. The assessing officer has not applied his mind. To support his submission the ld. DR relied upon the decision of Paville Projects (P) Ltd. vs CIT (2024) 160 taxmann.com 759 (SC).

In the rejoinder submission, the ld. AR of the assessee submits that in the show cause notice there is no averment to the effect that assessing officer has not applied his mind or that deduction given by ld. AO is wrong. The revision is not based on the fact that assessing officer has not made any enquiry. In fact, the ld. PCIT has not given any specific finding on the reply furnished before him.

We have considered the rival submissions of both the parties and have gone through the order of ld. PCIT as well as the assessment order framed by assessing officer. We have also deliberated on various case laws. We find that during the assessment, the assessing officer issued show cause notice dated 23.03.2022. Though, show cause notice is not placed on record by either of the party. However, from the contents of assessment order, we find that the assessing officer in para 3.4.1 of his order has mentioned about raising question about actuarial surplus in Form-I. The assessee filed its reply dated 28.03.2022. The assessing officer after considering the reply of assessee noted that pursuant to the IRDAI Act, Insurance Act was amended with retrospective effect. The assessing officer referred section 13(1) of IRDAI Act and recorded that as per second proviso in section 13(1), the abstract is prepared by actuary in accordance with regulation laid down by IRDAI. As

We find that the ld. PCIT revised the assessment order on similar line except on provision of income tax, which we have set aside, therefore, following the principle of consistency, the order passed by ld. PCIT for A.Y. 2020-21 is also set aside with similar direction.

In the result, both the appeals of the assessee are allowed.