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Income Tax Appellate Tribunal, “G” BENCH, MUMBAI
Before: SHRI NARENDRA KUMAR BILLAIYASHRI SANDEEP SINGH KARHAIL
Date of Hearing – 25/02/2025 Date of Order - 05/05/2025
O R D E R PER BENCH
The present batch of appeals have been filed by the Revenue against the separate impugned orders passed by the learned Commissioner of Income Tax (Appeals) – National Faceless Appeal Centre, Delhi, [“learned CIT(A)”], , 1427, 1428, 4208, 4185 & 4247/Mum/2023 (A.Y. 2015-16 to 2020-21) 2 under section 250 of the Income Tax Act, 1961 (“the Act”), for the assessment years 2015-16 to 2020-21.
Since the present appeals pertain to the same assessee, raising similar issues arising out of the similar factual matrix, these appeals were heard together as a matter of convenience and are being decided by way of this consolidated order. With the consent of the parties, the appeal by the Revenue for the assessment year 2015-16 is considered as a lead case, and the decision rendered therein shall apply mutatis mutandis to other appeals filed by the Revenue.
3. In its appeal for assessment year 2015-16, the Revenue has raised the following grounds: - “
1. Whether on the facts and in the circumstances of the case and in law the Ld. CIT(A) was correct in concluding that transfer from Shareholder's account to Policy Account And Shown As Part Of 'surplus' in the actuarial valuation was only transfer of capital asset and not taxable u/s 44 of the Act read with Rule 2 of the First Schedule?
2. Whether on the facts and in the circumstances of the case and in law the Ld. CIT(A) was correct in allowing relief to the assessee by holding that 'surplus' available both in Policy Holders Account and Share Holder's account is to be consolidated and only 'net surplus' is to be taxed as income from Insurance Business?
3. Whether, on the facts and in the circumstances of the case and in law, the Ld. CIT(A) was justified in upholding the claim of the assessee that its dividend income is exempt under section 10(34) of the I.T. Act 1961.
4. Whether, on the facts and in the circumstances of the case and in law, the Ld. CIT(A) was justified in allowing the claim of the assessee that its dividend income is exempt under section 10(34) of the I. T. Act 1961 made by the assessee, ignoring the fact that dividend income is considered as part of income of the Life Insurance Business and is included as an income by the actuary 5. Whether, on the facts and in the circumstances of the Rs. 22,70,75,637/- case and in law, the Ld. CIT(A) was justified in deleting the addition made by , 1427, 1428, 4208, 4185 & 4247/Mum/2023 (A.Y. 2015-16 to 2020-21) 3 the AO on the exemption of income from pension fund u/s 10(23AAB) and that the income from Pension Fund does not form part of the total income of the Assessee u/s 10(23AAB) of the I.T. Act 1961? 6. Whether, on the facts and in the circumstances of the case and in law, the Ld. CIT(A) is correct in allowing exemption of the interest on Tax Free Bonds Rs. 3,79,43,965/-amounting to Rs. 11,16,32,729/- without appreciating that Sec 10 of the I T Act is not applicable to Insurance business?"
7. Whether, on the facts and in the circumstances of the --case and in law, Ld. CIT(A) was justified in ignoring the fact that the non obstante clause is not extended to section 10(23AAB) of the I. T. Act 1961 in view of the fact that section 10 and all its subsections are not non obstante? 8. Whether on the facts and in the circumstances of the case and in law, the Ld. CIT(A) is correct in failing to appreciate that the negative reserve has an impact of Rs. 1,15,00,294/- reducing taxable surplus as per Form-l and therefore corresponding adjustment for "negative reserve" need to be made to arrive at "taxable surplus"? 9. Whether on the facts and in circumstances of the case and in Law, Sec.10 of IT Act is applicable to Insurance business when total income of Insurance activity is governed and computed under Schedule 1 of the I T Act independent of various computational provisions as prescribed u/s 44 of the Act.?"
10. Whether on the facts of the case and in law, the decision of Ld. CIT(A) that provision of not non obstante sections 10(15), 10(34) and 10(23AAB) are applicable to the case despite operation of non-obstante section 44 whereas section 14A which is anon obstante section will be not applicable is perverse.”
Vide its application dated 12.10.2023, the Revenue sought admission of the following revised grounds of appeal, duly supported by an Authorization Memo issued by the concerned Pr.CIT-1, Mumbai. The revised grounds of appeal raised by the Revenue vide the aforesaid application are reproduced as follows: -
"1. Whether the shareholders account is subjected to the 'eligibility criteria' within the meaning of Rule -2 read with Rule - 7 of the First Schedule of the Act? If yes, whether the shareholders funds is subjected to any contract with policyholders within the meaning of Section 2(11) of the Insurance Act read with Rule - 2 read with Rule-7 of the First Schedule of the Act? 2. "Whether the nature and character of income accrued to and claimed exempt by assessee u/s 10(38) of the Act is 'capital gains'"? 3. " Whether the nature and character of the income accrued to and claimed by assessee u/s 10(15) or 10(25) or as defined u/s 2(228) viz. interest on , 1427, 1428, 4208, 4185 & 4247/Mum/2023 (A.Y. 2015-16 to 2020-21) 4 securities and income accrued to and claimed exempt by assessee u/s 10(38) viz. dividend is 'income from other sources' under provisions of the Act." 4. "Whether the income claimed by assessee from business of insurance under section 44 of the Act read with Rule 2 read with Rule 7 of the First Schedule of the Act read with section 2(11) of Insurance Act, 1938 (4 of 1938) includes 'dividend income", 'income from house property', 'income from other sources' and income from capital gains' within the meaning of provisions of the IT Act, 1961" 5. "Whether the provisions of Section 44 of the IT Act overrides section relating to the computation of income chargeable under the head "Interest on securities", "Income from house property", "Capital Gains" or "Income from other sources", or in section 199 or in sections 28 to 43B?" 6. “Whether the nature or character of income accrued to and claimed exempt by assessee u/s 10(38), 10(34) and 10(23AAB), is income from "business of insurance" within the meaning of section 44 of the Act read with Rule 2 read with Rule 7 of the First Schedule of the Act? If yes, whether it is chargeable to tax u/s 44 of the Act by virtue of overriding effect of section 44 of the Act" 7. “Whether section 10 of the Act prescribed any overriding provision contrary to provision u/s 44 to postulate legal disharmony with the provisions under section 44 to disenable applicability of section 44 with respect to computation of income accrued to and claimed by assessee u/s 10(38) of the Act i.e. 'capital gains and income accrued to and claimed by assessee u/s 10(15) or 10(25) or defined u/s 2(28B) viz. 'interest on securities' and income accrued to and claimed by assessee u/s 10(38) viz. 'income from other sources' under the respective provisions of the Act? If no, whether a contrary interpretation or construction may postulate a legally identifiable and inadmissible absurdity or perversity?" 8. "The appellant prays that the order of the CIT(A) on the above ground be set aside and that of the AO be restored."
5. The assessee vide its written submission dated November 2023 objected to the admission of revised grounds of appeal filed by the Revenue. We shall deal with these objections while considering the revised grounds filed by the Revenue.
The issue arising in revised grounds of appeal no.1 raised by the Revenue pertains to the nature of income in shareholders’ account and policyholders’ account maintained by the assessee.
, 1427, 1428, 4208, 4185 & 4247/Mum/2023 (A.Y. 2015-16 to 2020-21) 5
At the outset, from the perusal of the revised grounds of appeal no.1 raised by the Revenue, we find that the same is merely a re-articulation of grounds no.1 and 2 originally raised by the Revenue. Therefore, the objection of the assessee regarding revised grounds of appeal no.1 raised by the Revenue is immaterial.
The brief facts of the case pertaining to this issue, as emanating from the record, are: The assessee is carrying on the business of life insurance, including life annuity linked, non-linked term, whole term assurance, pension business, long term health insurance, family insurance, group insurance, etc. For the year under consideration, the assessee filed its original return of income on 29.11.2015, declaring a total income of Rs.445,83,69,050/-. The assessee subsequently filed its return of income on 01.12.2015, declaring a total income of Rs.445,83,69,050/-. The return filed by the assessee was selected for scrutiny under CASS, and statutory notices under section 143(2) and section 142(1) were issued and served on the assessee. During the assessment proceedings, it was observed that the assessee has income in the shareholders' account but treated the same as income from the insurance business. Accordingly, the assessee was asked to show cause as to why the net profit from shareholders' account should not be taxed as income from business activities rather than income from insurance business. In response, the assessee submitted that the amount of Rs.115,61,93,060/-, which is a profit from shareholders’ account, cannot be treated as profit/loss from other than insurance business. The assessee submitted that it is engaged in the business of life insurance and is debarred under the statute to indulge in other , 1427, 1428, 4208, 4185 & 4247/Mum/2023 (A.Y. 2015-16 to 2020-21) 6 business vide sub-section (4)(h) of section 3 of the Insurance Act, 1938. The assessee further submitted that keeping separate accounts for the business as a whole, viz., shareholders’ account and policyholders’ account is a requirement prescribed by the Insurance Regulatory and Development Authority of India with a sole purpose of presenting the annual result in such a manner that the policyholders are assured of the financial solvency and the capacity of the company to honour its long term commitments to the policyholders with whom the company stands in fiduciary relationship. Thus, it was submitted that the separation of total profit in two different accounts is merely a way of presentation of results without in any way affecting the real nature of the profit, which remains profits from life insurance business. The assessee further submitted that the deficiency, if any, in the policyholders’ account is offset by transfer of an equal amount from the shareholders' account as per the IRDA Regulation and Circulars issued thereunder. Therefore, the assessee submitted that the two accounts are inseparable and for arriving at the profit of the insurance business as a whole, one has to see the combined result in the two accounts. In support of the aforesaid submission, the assessee placed reliance upon the decision of the Tribunal in ICICI Prudential Insurance Co. Ltd. vs. ACIT, in and the decision rendered in its own case by the Tribunal for the assessment years 2003-04 to 2006-07.
9. The Assessing Officer (“AO”), vide order passed under section 143(3) of the Act, held that as per section 44 of the Act, the income of life insurance business alone is taxable on the basis of actuarial surplus and the same is , 1427, 1428, 4208, 4185 & 4247/Mum/2023 (A.Y. 2015-16 to 2020-21) 7 accounted by the assessee in Form A-RA, i.e., policyholders’ account, and therefore, the actuarial report in case of a life insurance is prepared on the basis of asset in the policyholders’ account only. The AO further held that the income of the assessee in shareholders' account has to be taxed separately, and since the assessee is not permitted to do any business activity other than life insurance, the income in shareholders’ account is taxable under the head “Income from Other Sources”. The AO held that the income from policyholders’ accounts is the income from life insurance business and is taxable as per section 44 of the Act r.w. Rule 2 of Schedule-1. However, the income from the shareholders' account is not the income of the assessee from life insurance business, and it is the income of the assessee from the investment of funds available to it in the shareholders’ account. Thus, it was held that the income of the assessee earned in the shareholders’ account is different and distinct from the income in the policyholders’ account, and the same has to be taxed separately and under the normal provisions of the Act and not under section 44 of the Act. Accordingly, the income of the assessee as per the shareholders’ account, without giving the benefit of deduction on account of transfer of funds from the shareholders’ account to the policyholders’ account, was held to be taxable as income of the assessee under the head “Income from Other Sources” at normal rates. As a result, an income of Rs.283,02,93,218/- in shareholders’ account was assessed as “Income from Other Sources” other than insurance business and was subjected to normal tax rate by the AO vide order passed under section 143(3) of the Act.
, 1427, 1428, 4208, 4185 & 4247/Mum/2023 (A.Y. 2015-16 to 2020-21) 8
The learned CIT(A), vide impugned order, noted that this issue has been repeatedly decided in favour of the assessee in its own case for the earlier assessment years, i.e., 2002-03 to 2016-17. The learned CIT(A) also took into consideration the decision of the Co-ordinate Bench in the case of other taxpayers, wherein it has been held that income from shareholders’ account is assessable as income from insurance business. Accordingly, following the decisions of the Co-ordinate Benches of the Tribunal, the learned CIT(A) directed the AO to compute the income arising from shareholders’ account as income from insurance business under the head “Profits and Gains of Business or Profession”. Being aggrieved, the Revenue is in appeal before us.
We have considered the submissions of both sides and perused the material available on record. We find that the issue, whether the income in the shareholders’ account is to be taxed under the head “Income from Other Sources”, came up for consideration before the Co-ordinate Bench of the Tribunal in ICICI Prudential Company Ltd. vs. ACIT, reported in (2012) 28 taxman.com 257 (Mumbai). From the perusal of the aforesaid decision, we find that in the facts of the case, the AO was of the view that policyholders’ account represents life insurance business to be taxed under section 44 of the Act, whereas the shareholders’ account is a separate investment account of the assessee and the income in the shareholders’ account is to be taxed under the head “Income from Other Sources”. While deciding the issue in favour of the taxpayer, the Co-ordinate Bench of the Tribunal in the aforesaid decision held that the life insurance company is mandated to maintain separate account as per the IRDA Regulation and just because separate account are , 1427, 1428, 4208, 4185 & 4247/Mum/2023 (A.Y. 2015-16 to 2020-21) 9 maintained, the income in shareholders’ account does not become separate from the life insurance business, as all the income are part of the one business only as per the Insurance Act, 1938, and these incomes are to be considered as part of the same business. Therefore, the Co-ordinate bench held that the incomes in shareholders’ accounts are to be taxed as part of the life insurance business only, as they are part of the same business and the investments are made as part of the solvency ratio of the same business. The relevant findings of the Co-ordinate Bench, in the aforesaid decision, are reproduced as follows:
“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 whereas 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 , 1427, 1428, 4208, 4185 & 4247/Mum/2023 (A.Y. 2015-16 to 2020-21) 10
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.”
We find in appeal filed by the Revenue against the aforesaid decision of the Co-ordinate Bench of the Tribunal, the Hon’ble Jurisdictional High Court vide order dated 20.07.2015 passed in CIT vs. ICICI Prudential Co. Ltd., in ITAs No.688 and 711 of 2013, upheld the findings of the Tribunal on this issue, by observing as follows: -
“So far as Question No.8 is concerned, the grievance of the revenue is that the income on shareholders' account has to be taxed as income from other sources. This on the ground that the income earned on shareholders' account is not an income which represents income on account of Life Insurance Business. Therefore, it is the revenue's contention that it has to be taxed as income from other sources. The impugned order while allowing the assessee's appeal holds that income earned on shareholders' amount has to be considered as arising out of Life Insurance Business. Moreover in terms of Section 44 of the Act, such income has to be taxed in accordance with First Schedule as provided therein. None of the authorities under the Act nor even before us is it urged that the assessee is carrying on separate business other than life insurance business. Accordingly, the impugned order holding that the income from shareholders' account is also to be taxed as a part of life insurance business cannot be found fault with in view of the clear mandate of Section 44 of the Act. Accordingly Question No.8 also does not raise any substantial question of law. Thus not entertained.”
We find that when the similar issue came up for consideration in assessee’s own case in SBI Insurance Co. Ltd. vs. JCIT, in etc., for the assessment years 2003-04 to 2006-07, the Co-ordinate Bench of the Tribunal vide order dated 23.05.2014 decided the issue in favour of the assessee, by observing as follows: -
“2. Core issue common in AYs under consideration- Income nature of the funds transferred from shareholders' Accounts to the Policyholders' Account to meet out the deficiencies: During the proceedings before us and at the outset, in connection with the appeals of the assessee, F.V. Irani and Shri Manoj Purohit, Ld Counsels for the assessee stated that the assessee in the present case is , 1427, 1428, 4208, 4185 & 4247/Mum/2023 (A.Y. 2015-16 to 2020-21) 11 an insurance company and the provisions of section 44 of the Income tax Act are applicable here. Further, bringing our attention to the core issue raised in all the grounds 1 to 4 of the appeal for the AY 2003-04, which is common in all the AYs under consideration, he mentioned that under the provisions of IRDA Act, the assessee is under obligation to maintain separate accounts namely 'policy holders account' and the 'shareholders account'. In case, there is income deficiency in policy holders' account, the funds are transferred from the shareholders account otherwise, both these accounts are part of the business of the assessee and it is case of transfer of funds from one hand to the other of the same person. Such transfer of funds to policy holders' accounts should not be treated as income as it is a case of transfer of funds from one hand to the other. It is a tax neutral transaction. This issue is now settled by the decisions of the Tribunal in the case of ICICI Prudential Insurance vs. ACIT vide to 6856, 6509, 7765 and 7213/Mum/2010. He brought our attention to para 40, 42, and 55 of the said order of the Tribunal which read as under: “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.
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 le. 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.
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 , 1427, 1428, 4208, 4185 & 4247/Mum/2023 (A.Y. 2015-16 to 2020-21) 12 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.”
Further, Ld. Counsel also brought our attention to the another decisions of the Tribunal in the cases of (i) M/s. Kotak Mahindra Old Mutual Life Insurance Ltd vide ii) HDFC Standard Life Insurance Company Ltd s. DCIT vide (para 2.5); iii) LIC vs. CIT, 51 ITR 773 and many others to strengthen the above views. In this regard, Ld. Counsel filed a composite chart involving the grounds of all the appeals of the assessee as well as the revenue and, for consolidated adjudication of the common grounds, he mentioned that ground no.1, 2, 3 and 4 for the A Ys 2003-04; 2004-05 and 2005-06 and grounds no.1 and 2 of AY 2006-07 are one and the same. All these grounds stand covered by the above extracted ratio of the judgments.”
We find that similar findings have been rendered by the Co-ordinate Bench of the Tribunal in assessee’s own case in preceding years and it was held that the assessee is engaged only in one line of business, i.e., life insurance business and the two accounts, i.e., shareholders’ account and policyholders’ account have been maintained separately for the purpose of meeting with the requirement of law. Therefore, we find that this issue has consistently been adjudicated in favour of the assessee by the Co-ordinate Benches of the Tribunal and the income from the shareholders’ account was held to be taxable as income from life insurance business.
Vide its written submission dated 20.01.2025, the learned Departmental Representative (“learned DR”) submitted that the assessee be directed to compute the income from insurance business as per the decision of the Hon’ble Supreme Court in Life Insurance Corporation of India vs. CIT, reported in (1964) 51 ITR 773 (SC). From the perusal of the aforesaid decision, we find , 1427, 1428, 4208, 4185 & 4247/Mum/2023 (A.Y. 2015-16 to 2020-21) 13 that the issue under consideration before the Hon’ble Supreme Court was whether the AO has the power to make adjustments to the accounts of the Life Insurance Company on the basis that its securities are undervalued. Thus, we find that the issue under consideration before the Hon’ble Supreme Court was different from the issue under consideration before us. Therefore, we are of the considered view that the reliance placed by the learned DR on the aforesaid decision of the Hon’ble Supreme Court is completely misplaced. In this regard, the following observation of the Hon’ble Supreme Court in CIT vs. Sun Engineering Pvt. Ltd. reported in (1992) 198 ITR 287 (SC) become relevant: -
“It is neither desirable nor permissible to pick out a word or a sentence from the judgment of the Court, divorced from the context of the question under consideration and treat it to be the complete 'law' declared by the Court. The judgment must be read as a whole and the observations from the judgment have to be considered in the light of the questions which were before the Court. A decision of the Court takes its colour from the questions involved in the case in which it is rendered and while applying the decision to a latter case, the Courts must carefully try to ascertain the true principle laid down by the decision of the Court and not to pick out words or sentences from the judgment, divorced from the context of the questions under consideration by the Court, to support their proceedings.”
Therefore, respectfully following the decision of the Co-ordinate Benches of the Tribunal, which has also been affirmed by the Hon’ble Jurisdictional High Court, we do not find any infirmity in the findings of the learned CIT(A) in directing the AO to compute the income arising from shareholders’ account as income from insurance business under the head “Profits and Gains of Business or Profession”. As a result, the revised grounds of appeal no.1 raised by the Revenue is dismissed.
, 1427, 1428, 4208, 4185 & 4247/Mum/2023 (A.Y. 2015-16 to 2020-21) 14
The next issue that arises for our consideration is whether the assessee is entitled to claim exemption under section 10(34) and section 10(23AAB) of the Act when its income is computed under section 44 of the Act.
The brief facts of the case pertaining to this issue, as emanating from the record, are: During the assessment proceedings, the assessee was asked to show cause as to why the dividend income claimed exempted under section 10(34) of the Act and why it should not be treated as income from other business activity. In response, the assessee submitted that it is entitled to claim exemption of dividend income earned during the year under consideration under section 10(34) of the Act. The assessee submitted that the manner of computation of profits and gains of any business of insurance as provided under section 44 of the Act overrides the normal provisions of law for computation of income from business, and since income which falls under the provisions of section 10 are not included in total income of a person, hence such income would not be included in total income of the assessee. The assessee further submitted that the dividend income is not exempted by virtue of any provision relating to any head of income or as contained in sections 28 to 43B of the Act. Thus, the assessee submitted that the dividend is exempted by virtue of provisions of section 10(34) of the Act, which is independent of the provisions relating to head of income or sections 28 to 43B of the Act and the same is not overridden by the provisions of section 44 of the Act.
The AO, vide assessment order, disagreed with the submission of the assessee and held that an amount which is credited to the Profit and Loss account of the assessee engaged in the business of insurance, being either , 1427, 1428, 4208, 4185 & 4247/Mum/2023 (A.Y. 2015-16 to 2020-21) 15 profit on sale of shares or dividend cannot be taken out and reduced for computing profit and gains of business by treating the same as exempt under section 10 of the Act by reference to the First Schedule of the Act. Accordingly, the AO held that the exemption under section 10(34) is not available to the assessee who has business of life insurance. Similarly, the AO denied the exemption claimed by the assessee under section 10(23AAB) of the Act.
The learned CIT(A), vide impugned order, following the decision of the Hon’ble Jurisdictional High Court in Life Insurance Corporation of India vs. CIT, reported in (1978) 115 ITR 45 (Bom), and the decision of the Co-ordinate Bench of the Tribunal rendered in assessee’s own case for the preceding years held that section 44 of the Act overrides sections 28 to 43B and not the provisions of section 10 of the Act. Accordingly, the learned CIT(A) directed the AO to delete the addition made by the AO on account of the exemption claimed under section 10(34) and section 10(23AAB) of the Act. Being aggrieved, the Revenue is in appeal before us.
We have considered the submissions of both sides and perused the material available on record. We find that the Hon’ble Jurisdictional High Court in Life Insurance Corporation of India (supra) held that the applicability of only certain provisions is excluded by section 44 of the Act, and other provisions which deal with allowable deduction will have to be held applicable, unless they are expressly excluded. The relevant findings of the Hon’ble Jurisdictional High Court, in the aforesaid decision, are reproduced as follows:
“Section 44, which deals with computation of profits and gains of business of insurance, begins with a non-obstante clause, the effect of which is that the , 1427, 1428, 4208, 4185 & 4247/Mum/2023 (A.Y. 2015-16 to 2020-21) 16 provisions of the Act relating to the computation of income chargeable under the head "Interest on securities", "Income from house property", "Capital gains" or "Income from other sources" do not apply in the case of computation of income from insurance business. The effect of the non-obstante clause so far as the earlier part of section 44 is concerned, therefore, is that the provisions of section 44 will prevail notwithstanding the fact that there are contrary provisions in the Act relating to computation of income chargeable under the four heads mentioned in section 44. The only other overriding effect of section 44 is that its provisions operate notwithstanding the provisions of section 191 or sections 28 to 43A. Thus, the only effect of section 44 is that the operation of the provisions referred to therein is excluded in the case of an assessee who carries on insurance business and in whose case the provisions of rule 2 of the First Schedule are attracted. If the deductions which are claimed by the assessee do not fall within the provisions which are referred to in section 44, it will have to be held that the applicability of those provisions in the case of an assessee whose assessment is governed by section 44 read with rule 2 in the First Schedule is not excluded.”
We find that following the aforesaid decision of the Hon’ble Jurisdictional High Court, the Co-ordinate Bench of the Tribunal in assessee’s own case in SBI Life Insurance Company Ltd. vs. ACIT, in etc., for the assessment years 2007-08 to 2010-11, vide order dated 23.12.2016, observed as follows: -
“32. We have considered the submissions made by both the sides, facts of the case, earlier order of the Tribunal as well as Order Giving Appeal Effect passed by the AO as was brought before us. It is noted that identical issue came up before the Tribunal which was sent back to the file of the AO after deciding the issue principally in favour of the assessee. In the order giving appeal effect proceedings, the AO verified the facts and granted the benefit of exemption with following observations:- "6. Exclusion from total income the exempted income u/s 10(34), 10(38) and 10(23AAB) of the Act. 6.1 The AO included income exempted D/s 10(34), 10(38) and 10(23AAB) of the Act while computing the total income of the assessee company. The CIT(A) allowed the claim of the assessee. The Department went into appeal before IT AT on this issue. The IT AT directed the AO to re-adjudicate the matter keeping in view the decisions of Hon'ble ITAT, Mumbai in the case of ICICI Prudential Insurance Vs ACIT Vide to 6856, 7765 and nl3/Mum/2010 and LIC Vs CIT (115 ITR 45,51 ITR 773 and 119 ITR 900). 6.2 In the case of ICICI Prudential Insurance Vs ACIT Vide to 6856, 7765 and 7213 um/2010, the Hon'ble ITAT,Mumbai held as under:- "49. In view of the above and respectfully following the same, we hold that assessee is entitled to exemption under section 10. Therefore, we do not , 1427, 1428, 4208, 4185 & 4247/Mum/2023 (A.Y. 2015-16 to 2020-21) 17 see any reason to differ from the order of the CIT (A) where he has allowed assessee's claim of exemption under section 10(23AAB) of surplus of Participating Pension Business and also dividend under section 10(34). Accordingly, Revenue his issue is rejected." 6.3 In view of the above, the claim of the assessee company u/s. 10(34), 10(38) and 10(23AAB) are to be excluded before computation of income from life insurance business under Section 44 read with Rule 1 & 2 of the First Schedule of the Act. This issue was already decided in favour of the assessee as per the decision and directions of the CIT(A) and made part of the order giving to appellate order of CIT(A) 1154 of the Act, as mentioned above."
33. We have gone through the order passed by Ld. CIT(A) also and find that the benefit of exemption was granted by the Ld. CIT(A) relying upon the judgement of the Hon'ble Bombay High Court in the case of Life Insurance Corporation of India vs CIT 115 ITR 45 (Bom) as well as judgement of Mumbai Bench of the Tribunal in the case of ICICI Prudential Insurance Co Ltd vs ACIT (supra). The AO in Order Giving Effect has also granted relief to the assessee by relying upon these judgements. Under these circumstances, we do not find it necessary to interfere in the finding of Ld. CIT(A) and therefore, the order of the Ld. CIT(A) is upheld. These Grounds raised by the Revenue are dismissed.”
Therefore, respectfully following the decisions cited supra, we do not find any infirmity in the findings of the learned CIT(A) in directing the AO to grant the exemption to the assessee claimed under section 10(34) and section 10(23AAB) of the Act.
From the perusal of revised grounds of appeal no.2 to 7 filed by the Revenue, we find that apart from challenging the findings of the learned CIT(A) granting exemption to the assessee claimed under section 10(34) and section 10(23AAB) of the Act, the Revenue has raised various other grounds pertaining to various other aspects and exemption provided in other provisions of section 10 of the Act, which we find do not arise from the facts and circumstances of the present case for the assessment year 2015-16. As noted above, exemption claimed under section 10(34) and section 10(23AAB) of the Act was only denied by the AO vide assessment order, which was overturned by the learned CIT(A) following the judicial precedent in assessee’s , 1427, 1428, 4208, 4185 & 4247/Mum/2023 (A.Y. 2015-16 to 2020-21) 18 own case and the decision of the Hon’ble Jurisdictional High Court as noted above. Accordingly, we do not deem it necessary to render any findings in respect of these grounds/aspects raised by the Revenue, as the same do not arise from the facts and circumstances of the present case, and thus the same are dismissed. Therefore, the objections raised by the assessee against these revised grounds of appeal become infructuous.
Insofar as grounds challenging the grant of exemption under section 10(34) and section 10(23AAB) of the Act, the same are dismissed in view of our aforesaid findings. Accordingly, revised grounds of appeal no.2 to 7 raised in Revenue’s Appeal are dismissed.
Before concluding our findings in respect of Revenue’s appeal for assessment year 2015-16, for completeness, we may note that in its original grounds of appeal, the Revenue has also challenged the findings of the learned CIT(A) in respect of the addition on account of incremental negative reserves. However, we find that in its revised grounds of appeal filed vide application dated 12.10.2023, the Revenue has not raised any ground pertaining to this issue. We further find that even in the written submission dated 20.01.2025, the learned DR has also not made any submissions in respect of this ground. Accordingly, it is sufficiently evident that the Revenue has accepted the findings of the learned CIT(A) qua the aforesaid issue.
In the result, the appeal by the Revenue for assessment year 2015-16 is dismissed.
, 1427, 1428, 4208, 4185 & 4247/Mum/2023 (A.Y. 2015-16 to 2020-21) 19
In its appeal for assessment years 2016-17 and 2017-18, the Revenue has filed revised grounds of appeal, identical to the revised grounds of appeal filed in the assessment year 2015-16.
From the perusal of the assessment order for the assessment years 2016-17 and 2017-18, we find that the AO also denied the exemption claimed by the assessee under section 10(15) of the Act on the similar basis on which the exemption claimed under section 10(34) and section 10(23AAB) of the Act was denied. We find that in further appeal, the learned CIT(A), vide impugned order following the decision of the Hon’ble Jurisdictional High Court in Life Insurance Corporation of India vs. CIT, reported in (1978) 115 ITR 45, directed the AO to, inter alia, grant the exemption claimed under section 10(15) of the Act. Therefore, the revised grounds of appeal filed by the Revenue pertaining to the claim of exemption by the assessee under section 10(15) of the Act in its appeal for the assessment years 2016-17 and 2017- 18 become relevant in the facts of these two appeals as they arise from the facts and circumstances of these years. However, in view of our findings rendered in respect of claim of the assessee for exemption under section 10(34) and section 10(23AAB) in Revenue’s appeal for assessment year 2015- 16, we do not find any infirmity in the findings of the learned CIT(A) in also directing the AO to grant exemption to the assessee under section 10(15) of the Act.
Insofar as other issues are concerned, our findings/conclusions/observations as rendered in Revenue’s appeal for the assessment year 2015-16 shall apply mutatis mutandis to the Revenue’s , 1427, 1428, 4208, 4185 & 4247/Mum/2023 (A.Y. 2015-16 to 2020-21) 20 appeal for assessment years 2016-17 and 2017-18, and the revised grounds of appeal filed by the Revenue are dismissed.
In the result, the Revenue’s appeal for the assessment years 2016-17 and 2017-18 are dismissed.
In its appeal for the assessment years 2018-19, 2019-20 and 2020-21, the Revenue though has not filed any application seeking admission of revised grounds of appeal
, however, we find that in its original grounds of appeal itself, the Revenue has raised grounds similar to the revised grounds of appeal raised in the earlier years. For ready reference, the grounds of appeal filed by the Revenue in its appeal for assessment year 2018-19 are reproduced as follows: -
1. "Whether on the facts and in the circumstances of the case and in law, the Ld. CIT(A) was correct in concluding that transfer from Shareholder's account to Policy Account And Shown As Part Of surplus' in the actuarial valuation was only transfer of capital asset and not taxable us 44 of the Act read with Rule 2 of the First Schedule?
2. "Whether on the facts and in the circumstances of the case and in law the Ld. CIT(A) was correct in allowing relief to the assessee by holding that 'surplus" available both in Policy Holders Account and Share Holder's account is to be consolidated and only 'net surplus' is to be taxed as income from Insurance Business?”
3. Whether, on the facts and in the circumstances of the case and in law, the Ld. CIT(A) was justified in upholding the claim of the assessee that its dividend income is exempt under section 10(34) of the I. T. Act 1961.
4. Whether, on the facts and in the circumstances of the case and in law, the Ld. CIT(A) was justified in allowing the claim of the assessee that its dividend income is exempt under section 10(34) of the I. T. Act 1961 made by the assessee, ignoring the fact that dividend income is considered as part of income of the Life Insurance Business and is included as an income by the actuary. 5. "Whether, on the facts and in the circumstances of the case and in law, the Ld. CIT(A) was justified in deleting the addition made by the AO on the , 1427, 1428, 4208, 4185 & 4247/Mum/2023 (A.Y. 2015-16 to 2020-21) 21 exemption of income from pension fund u/s 10(23AAB) and that the income from Pension Fund does not form part of the total income of the Assessee u/s 10(23AAB) of the I.T. Act 19612" 6. "Whether, on the facts and in the circumstances of the case and in law, the Ld. CIT(A) is correct in allowing exemption of the interest on Tax Free Bonds amounting to Rs. 10,80,05,566/- without appreciating that Sec 10 of the 1 T Act is not applicable to Insurance business?"
7. Whether, on the facts and in the circumstances of the case and in law, Ld. CIT(A) was justified in ignoring the fact that the non obstante clause is not extended to section 10(23AAB) of the I. T. Act 1961. 8. "Whether on the facts and in circumstances of the case and in Law, Sec. 10 of IT Act is applicable to Insurance business when total income of Insurance activity is governed and computed under Schedule 1 of the / T Act independent of various computational provisions as prescribed u/s 44 of the Act.?"
Whether the shareholders account is subjected to the 'eligibility criteria' within the meaning of Rule -2 read with Rule - 7 of the First Schedule of the Act? If yes, whether the shareholders funds is subjected to any contract with policyholders within the meaning of Section 2(11) of the Insurance Act read with Rule -2 read with Rule-7 of the First Schedule of the Act? 10. "Whether the nature and character of income accrued to and claimed exempt by assessee u/s 10(38) of the Act is 'capital gains. 11. "Whether the nature and character of the income accrued to and claimed by assessee u/s 10(15) or 10(25) or as defined us 2(228) viz. interest on securities and income accrued to and claimed exempt by assessee u/s 10(38) viz. dividend is 'income from other sources' under provisions of the Act." 12. " Whether the income claimed by assessee from business of insurance under section 44 of the Act read with Rule 2 read with Rule 7 of the First Schedule of the Act read with section 2(11) of Insurance Act, 1938 (4 of 1938) includes dividend income, 'income from house property; 'income from other sources' and income from capital gains within the meaning of provisions of the IT Act, 1961." 13. "Whether the provisions of Section 44 of the IT Act overrides section relating to the computation of income chargeable under the head "Interest on securities", "Income from house property", "Capital Gains" or "Income from other sources", or in section 199 or in sections 28 to 43B? 14. "Whether the nature or character of income accrued to and claimed exempt by assessee u/s 10(38), 10(34) and 10(23AAB), is income from "business of insurance" within the meaning of section 44 of the Act read with Rule 2 read with Rule 7 of the First Schedule of the Act? If yes, whether it is chargeable to tax u/s 44 of the Act by virtue of overriding effect of section 44 of the Act." 15. "Whether section 10 of the Act prescribed any overriding provision contrary to provision us 44 to postulate legal disharmony with the provisions under section 44 to disenable applicability of section 44 with respect to computation , 1427, 1428, 4208, 4185 & 4247/Mum/2023 (A.Y. 2015-16 to 2020-21) 22
of income accrued to and claimed by assessee u/s 10(38) of the Act i.e. 'capital gains and income accrued to and claimed by assessee u/s 10(15) or 10(25) or defined u/s. 2(28B) viz. 'interest on securities' and income accrued to and claimed by assessee u/s 10(38) viz. 'income from other sources' under the respective provisions of the Act? If no, whether a contrary interpretation or construction may postulate a legally identifiable and inadmissible absurdity or perversity? 16. The appellant prays that the order of the CIT(A) on the above ground be set aside and that of the AO be restored.”
Since these issues have already been considered by us while deciding Revenue’s appeal for assessment year 2015-16, therefore, our findings/conclusions/observations as rendered in Revenue’s appeal for the assessment year 2015-16 shall apply mutatis mutandis to the Revenue’s appeal for the assessment years 2018-19, 2019-20 and 2020-21. Accordingly, the grounds of appeal filed by the Revenue in these appeals are dismissed.
In the result, the Revenue’s appeal for the assessment years 2018-19, 2019-20 and 2020-21 are dismissed.
To sum up, all the appeals by the Revenue are dismissed.
Order pronounced in the open Court on 05/05/2025