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Income Tax Appellate Tribunal, “I” BENCH, MUMBAI
Before: SHRI AMIT SHUKLA, JM &
& 3150/Mum/2018 The New India Assurance Company Ltd. O R D E R Per Padmavathy S, AM: These cross appeals by the assessee and the revenue are against the order of Commissioner of Income Tax (Appeals)- 9, Mumbai [In short ‘the CIT(A)’] dated 15.03.2018 for Assessment Year (AY) 2014-15. The Assessee and the Revenue raised the following grounds of appeal: Assessee’s Appeal “The under mentioned Grounds of Appeal are without prejudice to one another:
1. The CIT(Appeals) ought to have held that Foreign Dividend Income was assessable in the Appellant's hands only net of the foreign taxes of Rs.22,20,699/- thereon. 2.(i)The CIT(Appeals) erred in confirming the action of the AO, of disallowing the payments of Rs.183,11,32,413/- by the Appellant to Auto dealers. (ii) The CIT(Appeals) ought to have reversed the action of the AO, of disallowing the payments of Rs.183,11,32,413/- by the Appellant to Auto Dealers and ought to have held that the entire sum of Rs.183,11,32,413/-was allowable to the Appellant.” Revenue’s Appeal
1. Whether on the facts and circumstances of the case and in law, the Ld.CIT (A) was justified in holding that the profit on sale of investments has to be taxed as Income from Capital Gain and not Income from Business.
2. Whether on the facts and circumstances of the case and in law, the Ld.CIT (A) erred in holding that income of Rs.954,56,33,686/- is exempt u/s 10(38) of the I.T. Act, 1961.
3. Whether on the facts and circumstances of the case and in law, the Ld.CIT (A) has erred in not appreciating the fact that the amount of disallowance u/s 14A of the I.T. Act, 1961 has to be computed as per Rule 8D of I.T. Rules, 1962 when the computation of the assessee was not found to be correct and as & 3150/Mum/2018 The New India Assurance Company Ltd. held in the order of the Hon'ble High Court in the case of M/s. Godrej & Boyce Manufacturing Co. Ltd.
4. Whether on the facts and circumstances of the case and in law, the Ld.CIT (A) has erred in holding that the premium paid by the assessee on purchase of Government Securities, on Amortisation, was allowable as Revenue Expenditure without appreciating the fact that there is no provision for amortization of such premium in the I.T. Act, 1961.
5. Whether on the facts and circumstances of the case and in law, the Ld.CIT (A) has erred in holding that the premium paid by the assessee on purchase of Government Securities, on Amortisation, was allowable as Revenue Expenditure without appreciating the fact that such premium paid is capital in nature and hence not allowable u/s 37 of I.T. Act, 1961.
6. Whether on the facts and circumstances of the case and in law, the Ld.CIT (A) has erred in holding that the provisions of Section 115JB of the I.T. Act, 1961 are not applicable in the case of the assessee. 7. "The appellant prays that the order of CIT(A) on the above ground be set aside and that of the Assessing Officer be restored."
2. The Assessee is a public sector undertaking operating under the control of The Ministry of Finance, Government of India. The assessee is engaged in the business of General Insurance within and outside India. The assessee filed the return of income for AY 2014-15 on 29.11.2014 declaring total income of Rs. Nil under the normal provisions of the Act and Book Profit of Rs.937,72,74,424 under section 115JB of the Act. The return was selected for scrutiny and the statutory notices were duly served on the assessee. The Assessing Officer (AO) while completing the assessment under section 143(3) made various disallowances / additions to arrive at the assessed income of Rs.1211,85,34,530 under the normal provisions of the Act and also recomputed the book profits at Rs.954,81,45,852. Aggrieved, the assessee filed further appeal before the CIT(A) wherein the CIT(A) gave partial relief to the assessee. Both the assessee and the Revenue are in appeal before the Tribunal against the order of CIT(A).
& 3150/Mum/2018 The New India Assurance Company Ltd. ITA 2594/MUM/2018 – Assessee's appeal Ground No.1 – Addition towards Foreign dividend income
3. The assessee during the year under consideration earned foreign dividend of Rs. 4,55,71,441 on which tax of Rs. 22,20,699 was deducted in the foreign countries. The assessee offered to tax the net dividend of Rs. 4,33,50,741 i.e. the amount received after deducting TDS while filing the return of income. The AO held that the dividend income has to be offered on gross basis and accordingly made the addition of Rs. 22,20,699 to the total income of the assessee. On further appeal the CIT(A) confirmed the addition.
We heard the parties and perused the material on record. The ld AR during the course of hearing fairly conceded that the impugned issue is already considered by the coordinate bench in assessee's own case in for AY 2006-07 where it is decided against the assessee. We notice that the coordinate bench while considering the identical issue for AY 2016-17 has observed that – 28. After hearing both the parties, we find merit in the reasoning given by the AO as well as Ld. CIT(A) because taxed paid do not qualify as expenditure for the purpose of business and entire gross dividend should have accounted for in the P&L account. Thus Ground no. 5 is treated as dismissed.
There is no change to the facts pertaining to the issue for the year under consideration. Therefore respectfully following the above decision we see no reason to interfere with the decision of the CIT(A) in this regard. The ground raised by the assessee is dismissed.
Ground No.2 – Disallowance of payment made to auto dealers
During the course of assessment proceedings, the AO has received information from Addl. DG of Central Excise Intelligence that the General & 3150/Mum/2018 The New India Assurance Company Ltd. Insurance companies are selling insurance policies through auto dealers and that the commission towards soliciting the insurance is paid in the guise of payment towards infrastructure, placement of banners, advertisement etc which are not genuine. The AO further noticed that in the statement recorded by the Central Excise authorities from the auto dealers, they have accepted that no services as mentioned in the invoices are rendered. The AO also noticed that the assessee during the year under consideration has claimed an amount of Rs. 183,11,32,413/- as payment to auto dealers. The AO accordingly issued a show cause notice to the assessee to provide the relevant details with regard to the payments made to auto dealers and also to explain why the payments should not be disallowed on the ground that payment of commission is not allowed as per IRDA regulations. The assessee submitted that the auto dealers are independent parties and are not agents of the assessee. The assessee further submitted that IRDA regulations allow the assessee to outsource the activities such as those carried on by the auto dealers and therefore the payments should not be disallowed. The AO did not accept the submissions of the assessee stating that the IRDA regulations prohibit payment of any reward by way of commission and administrative or servicing charges. The AO also placed reliance on the statement recorded from the auto dealers by the Central Excise authorities and held that the invoices raised are not genuine. The AO accordingly disallowed the entire amount claimed towards payments made to auto dealers. On further appeal CIT(A) confirmed the same.
The ld. AR submitted that all motor vehicles are compulsorily required to have insurance and the buyers of the motor vehicles at the time of purchasing the vehicle from the auto dealer take decision regarding which insurance company he wishes to buy insurance from. The ld. AR further submitted that once the buyer takes the decision the insurance policy is issued by the concerned insurance & 3150/Mum/2018 The New India Assurance Company Ltd. company which is printed at the auto dealers premises itself. The ld AR also submitted that the auto dealers require certain infrastructure such as laptops, printers, data services and man power to carry out the outsourced service and the auto dealers therefore claim reimbursement towards the cost incurred in this regard. The ld AR drew our attention to the copies of invoices raised towards the services rendered by the auto dealers (page 7 to 27 of PB). The ld. AR argued that the contention of the Revenue that the assessee has incurred the expenses against the IRDA regulations is not correct. The ld AR further argued that as per the IRDA guidelines dated 1st February 2011, the IRDA has specifically sanctioned outsourcing of non-core activities and that the services rendered by the auto dealers fall within the purview of non-core activities. The ld AR also argued that as per the IRDA regulations, the non-core activities are to be reported periodically and that the assessee has been submitting reports to IRDA (page 25 of PB) which contain the details of payments made to auto dealers towards the services rendered. It is submitted by the ld AR that the sole basis for making the disallowance is the allegations made against the assessee by the service tax authorities and the statement recorded by the service tax from the auto dealers. It is further submitted that similar allegations made by the service tax authorities against other general insurance companies such as ICICI Lombard General Insurance company Ltd etc., has been reversed by the CESSTAT and in one of the cases even by the Hon'ble Madras High Court. The ld. AR submitted a paper book with the decisions of CESSTAT and Hon'ble Madras High Court in this regard. Accordingly the ld AR submitted that the allegations made by the AO that the payments made to the auto dealers in the guise of reimbursements are in reality commission payments is without any basis and therefore cannot be sustained.
& 3150/Mum/2018 The New India Assurance Company Ltd.
8. The ld. DR on the other hand, vehemently argued that the AO has relied on the statements made by the auto dealers before the Central Excise Authorities wherein they have admitted that no services as mentioned in the invoices have been rendered by them. The ld. DR further submitted that the insurance companies are prohibited from making payments towards commission / administrative/ servicing charges and as per the IRDA regulations the dealers cannot act as intermediaries of the insurance company. Therefore the ld. DR argued that the AO has correctly made the disallowances.
9. We heard the parties and perused the material on record. The AO during the course of assessment, based on the information received from DG Central Excise that the payments made by the assessee to auto dealers towards reimbursement of services, are bogus since the auto dealers have admitted that no services have been rendered by them. The AO alleged that the impugned payments are actually commission paid to auto dealers in the guise of reimbursement of cost towards services rendered. The AO did not accept the submissions of the assessee that the impugned payments are towards outsourced services as approved by IRDA regulations. The AO also did not consider the evidences submitted by the assessee in this regard. On perusal of the sample invoice submitted by the assessee before us, we notice that the reimbursement is claimed by the auto dealer towards services/cost incurred towards computing network, connectivity through Extranet, space, furniture and fixtures, manpower, printers etc. The main contention of the Revenue is that the insurance companies are prohibited from making payments towards administrative or servicing charges as per the IRDA guidelines and that the auto dealers are actually receiving commission for soliciting business. In this regard, we notice that, Guidelines on Outsourcing of Activities by Insurance Companies issued by IRDA dated 1st February 2011, wherein it is stated that & 3150/Mum/2018 The New India Assurance Company Ltd. certain activities which support the core activities may be outsourced as per risk management principles outlined in the said guidelines. The relevant extract of the guidelines are as given below:
“2. CORE ACTIVITIES 2.1 All activities relating to:- i. Underwriting, ii. Product design and all Actuarial functions and Enterprise wide Risk Management iii. Investment and related functions iv. Fund Accounting including NAV calculations v. Admitting or Repudiation of all Claims vi. Bank Reconciliation vii. Policyholder Grievances Redressal viii. Approving Advertisements ix. Market Conduct issues x. Appointment of Surveyors and Loss Assessors xi. Compliance with AML, KYC etc. xii. All integral components of the above activities shall be treated as Core Activities 2.2 Policy Servicing and related activities 2.3 Insurers shall not outsource any of the core activities listed in para 2.1.
NON CORE ACTIVITIES: i. Facility management i.e. Housekeeping, Security, Catering, etc. ii. PF Trust iii. Internal audit, Internal/branch/concurrent audit etc. (Note: However, the Board of Directors shall appoint the internal/branch/concurrent auditor based on the recommendation of the Audit Committee /Investment Committee respectively as mandated by the Authority in Corporate Governance Guidelines. The report of internal auditor /concurrent auditor shall be placed before the Audit Committee /Investment Committee / Board Meeting for their information and necessary action) iv. Website: Development and Management / Software and other IT Support v. Pay Roll Management vi. HR Services vii. Service Tex Consultancy and Support viii. TDS filing & 3150/Mum/2018 The New India Assurance Company Ltd. ix. Compliance with labour laws x. Data entry Including Scanning, Indexing Services xi. Printing and posting of reminders and other documents xii. Pre employment medical checkups xii. Reminders for Premium Payment xiv. Call Centre and outbound calling for registering complaints or answering enquiries xv. Claim Processing for Overseas Medical Insurance Contracts xvi. Tele-marketing xvii. Consultancy Services pertaining to Service Tax, Income Tax and any other taxes payable by insurer xviii. Other Employee Benefits xix Deployment of personnel within the premises / offices of the Insurer on a contract basis 4. ACTIVITIES SUPPORTING CORE ACTIVITIES: 4.1 Certain activities which support the core activities as listed in column 3 of Annexure may be outsourced as per risk management principles outlined in these guidelines subject to reporting requirements, 4.2 Activities in column 4 of Annexure I, which insurers normally assign to outside professionals, regulated either under different laws or provide outside expertise and economies, may be outsourced to such entity as otherwise legally permitted to carry out those activities.” Annexure I
10. From the combined perusal of the above guidelines and the nature of services rendered by the auto dealers, it is clear that the services rendered by the & 3150/Mum/2018 The New India Assurance Company Ltd. auto dealers are falling within the purview of specified activities that can be outsourced by the insurance companies. During the course of hearing, the ld. AR submitted that the outsource activities are periodically reported as per the IRDA guidelines and in this regard we notice that, the outsourcing expenses for the year ended 31st March 2014 to the tune of Rs.190.75 crores is reported in Form-A to the IRDA (Refer page no. 1-3 of PB). Therefore we see merit in the submission of the ld AR that disallowance cannot be made on the ground that the impugned payments are against the IRDA regulation. Further we notice that findings of the Central Excise authority alleging that the insurance companies are paying commission in the guise of reimbursement of expenses is reversed by different benches of CESSTAT and Hon'ble Madras High Court in the case of other insurance companies and therefore the disallowance by placing reliance on the findings of the Central Excise is no longer applicable.
Section 44 r.w. Schedule I of the Act, provides that the insurance companies are required to prepare the profit and loss account in accordance with the provisions of the Insurance Act, 1938 (4 of 1938) or the rules made there under or the provisions of the Insurance Regulatory and Development Authority Act, 1999 (4 of 1999) or the regulations made there under. In assessee's case we notice that the accounts are prepared as per the provisions as mentioned herein above and the same is approved by the Controller and Auditor General of India. The contention of the revenue that the payments made to auto dealers are not genuine and that the same is actually commission paid in the guise of reimbursement is solely based on findings of Central Excise which is subsequently reversed by the higher judicial forums. Accordingly the disallowance cannot be sustained on that ground. Further the submissions of the assessee that the payments are towards outsourced activities as per the IRDA guidelines which gets periodically reported is well substantiated.
& 3150/Mum/2018 The New India Assurance Company Ltd. Therefore we are of the considered view that the expenses claimed towards reimbursement of expenses for the outsourced activities as per the IRDA guidelines, cannot be disallowed. Accordingly we direct the AO to delete the disallowance made in this regard. The ground raised by the assessee is allowed.
In result the appeal of the assessee is partly allowed.
ITA 3150/MUM/2018 – Revenue's appeal Ground No.2 – Profit on Sale of Investment of Rs. 954,56,33,686/- exempt under section 10(38) 13. The assessee during the year has earned long term capital gain (LTCG) of Rs. 954,56,33,686 and the same is claimed as exempt under section 10(38) of the Act. The AO denied exemption under section 10(38) of the Act on the ground that the assessee's income is computed under section 44 of the Act read with First Schedule which is special regime applicable to the insurance companies for computation of total income and that entire income earned by insurance companies, including income taxable under House property, capital gains and income from other sources are taxed as business income. The AO further held that the exemption under section 10(38) of the Act is available only to income which chargeable under the head "capital gains", the assessee would not be eligible to claim exemption under section 10(38) of the Act.
The ld. AR at the outset submitted that the impugned issue stands decided in favour of the assessee by the decision of Bombay High Court in assessee's own case for AY 2006-07. The ld AR further submitted that the Bombay High Court while deciding the issue had relied on clarificatory letter bearing F No. 153/24/2006-TPL dated 21 February 2006 issued by the CBDT to IRDAI regarding exemption under section 10(38) available to all General Insurance & 3150/Mum/2018 The New India Assurance Company Ltd. Companies. The ld AR drew our attention to the relevant extract of the said clarificatory letter which is reproduced hereunder – "Exemption available to any other assessee under any clause of section 10 of the Income Tax Act, 1961 (including clause (38) of section 10 regarding long term capital gain) is also available to a person carrying on non-life insurance business subject to fulfillment of the conditions, if any, under a particular clause of section 10 under which exemption is sought. General insurance companies are, therefore, on par with other assessees who are entitled to or are eligible for exemption under section 10 of the Income-tax Act of long-term capital gains"
We heard the parties and perused the material on record. We notice that the issue of taxability of profit on sale of investment is considered by the Hon'ble Bombay High Court in assessee's own case where it has been held that – “8 The issue raised in the above question in GIC [ITX No.201 of 2011 (supra)) is not with regard to the exemption claimed under Section 10(38) of the Act as in the present proceedings. The question on which the above appeal has been admitted, is whether profits on sale investments are liable to be (included) taxed in the hands of the assesse i.e. profits on sale of investments being liable to be tax. It does not dealt with the benefit of exemption under Section 10(38) of the Act. The question as raised herein proceeds on the basis that even if sale of investments is liable to be taxed, yet to the extent it relates to long term capital gain falling under Section 10(38) of the Act, the exemption would be available. Thus, the question arising for our consideration in this appeal is different from the question on which the appeal of the GIC in ITX No. 201 of 2011 (Supra) was admitted.
Moreover, we find that this Court in General Insurance Corporation (supra) had also relied upon the communication dated 21st February, 2006 of the CBDT to the Chairman of the Insurance Regulatory and Developing Authority. In the above communication, it has been clarified that exemption available to any other assesee under clause 10(38) relating to long term capital would also be available to a person carrying on non-life Insurance business. Mr. Suresh Kumar very fairly states that the CBDT communication dated 21 February, 2006 addressed by the CBDT to the Chairman IRTA as well as the decision of this Court in GIC (supra) would be binding upon the Revenue.
& 3150/Mum/2018 The New India Assurance Company Ltd. 10. In view of the above, the question as framed does not give rise to any substantial question of law.” 16. We also notice that the coordinate bench while considering the similar issue in assessee's own case for AY 2007-08 has held that –
“9. We have heard the rival submissions and also perused the relevant finding given by the AO as well as Ld. CIT(A). The computation of taxable profit of an insurance company is governed by specific provision as given in section 44, read First schedule to the Income-Tax Act. Under the said scheme, only such adjustment can be made to the profits as disclosed in the annual accounts drawn under the Insurance Act, 1938, which are specifically provided under Rule 5. Prior to 01.04.1989, Clause b to Rule 5 read as under:- “(b) any amount either written off or reserved in the accounts to meet depreciation of or loss on the realization of investments shall be allowed as a deduction, and any sums taken credit for in the accounts on account of appreciation of or gains on the realization of investments shall be treated as part of the profits and gains: Provided that the Assessing Officer is satisfied about the reasonableness of the amount written off or reserved in the accounts, as the case may be, to meet depreciation of or loss on the realization of investment.” Such a provision was omitted by Finance Act, 1988, w.e.f. 01.04.1989. The notes and clauses to the Finance Act and the CBDT circular clarified that, it was omitted to provide exemption of the profits earned by the General Insurance Corporation on the sale of investment. The relevant note of clauses read as under:- “Under the existing provisions of section 44 of the income-tax ct, the profits and gains of any insurance business is computed in accordance with the rule contained in 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 to insurance subject to certain adjustments. One of the adjustments provided therein respect of any amount either written off or reserved in the accounts to meet depreciation or loss on the realization 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 realization 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 play a more active role in capital markets for the benefit of policy holders, it proposed to provide for exemption of the profits earned by them on the sale investments. As corollary, it is proposed to provide that the losses incurred by General Insurance Corporation on the realization of investment shall not be allowed as deduction in computing the profits chargeable to tax. To achieve this object clause (b) of rule 5 of the First Schedule to the Income-tax Act is proposed to deleted.”
Now again by Finance Act 2009, clause (b) have been introduced w.e.f. 01.04.2011 which reads as under:- “(b) (i) any gain or loss on realization of investments shall be added or deducted, as the case may be, if such gain or loss is not credited or debited to the profit and loss account; (ii) any provision for diminution in the value of investment debited to the profit and loss account, shall be added back;” This has been clarified by Finance Act that the amendment will be effective from A.Y. 2011-12 onwards. Thus, it is amply clear from the legislative intent that, prior to 01.04.2011, adjustment of such a gain on realization of investment cannot be added. This aspect of the matter have been dealt extensively and upheld by the Co-ordinate Benches of the Tribunal which have been referred to the learned counsel. Accordingly we hold that profit on sale of investment cannot be taxed. Thus, ground no. 2 as raised by the assessee is allowed.”
The facts for the year under consideration being identical, respectfully following the above decisions of the Hon'ble High Court and the coordinate bench, we see no infirmity in the decision of the CIT(A). Accordingly ground raised by the revenue is dismissed.
Ground No.3 – Disallowance under section 14A
The assessee for the year under consideration has earned an exempt income of Rs. 1317.75 crores and the AO by invoking section 14A read with Rule 8D of & 3150/Mum/2018 The New India Assurance Company Ltd. the Income tax Rules disallowed a sum of Rs. 17,08,71,428. The ld AR contended that section 14A is not applicable in the case of insurance companies which are governed by section 44, because it is non obstante provision wherein the income is to be computed as per P&L Account prepared under the Insurance Act 1938. The ld AR also submitted that this has been consistently held in favour of the assessee by the coordinate bench from AY 2000-01 to AY 2013-14 in assessee's case.
19. We heard the parties and perused material on record. We notice that the coordinate bench while considering identical issue for AY 2012-13 has held that – “9. The revenue being aggrieved with the deletion of the disallowance u/s 14A r.w Rule 8D of Rs. 13,05,70,512/-, has carried the matter in appeal before us. It was submitted by the Ld. A.R that the issue was squarely covered by the order of the Tribunal in the assessee's own case for A.Y 2011-12 in 5116/Mum/2016, dated 06.11.2019 Also, it was submitted by the Id. A.R that the issue that the provisions of Sec. 14A were not applicable in the case of the assessee was decided by the Tribunal in the assessee's own case for A.Y 2000-01 to 2010-11 (copies placed on record). We have perused the order passed by the Tribunal while disposing off the appeal of the assessee for A.Y 2011-12 in dated 06.11.2019, and find the aforesaid claim of the Id. A.R in order The Tribunal while disposing off the appeal of the assessee for the immediately preceding year i.e A.Y 2011-12 in ITA No. 5116/Mum/2016, dated 06.11.2019, had after relying on the view taken by a coordinate bench while disposing off the assessee's appeal for A.Y 2010-11, had observed, that the provisions of Sec. 14A has no applicability in the cases of General Insurance Companies, which are governed by the special provisions laid down in Sec. 44 of the Act. It was observed by the Tribunal in context of the issue under consideration, as under: 7. Coming to the Ground No.3 of the grounds of appeal the Ld. Counsel for the assessee submits that this issue also decided by the Tribunal in assessee's own case in the earlier Assessment Years right from A.Y 2000-01 to 2010-11 wherein it has been held that the provisions of section 14A r.w. Rule 8D have no application to the assessee an insurance company. Referring to the order passed by the Tribunal for the A.Y. 2010-11 in ITA. No 5013/Mum/2015 dated 28.03.2018. Ld. Counsel for the assessee submits that identical issue came up before the and the Tribunal dismissed the & 3150/Mum/2018 The New India Assurance Company Ltd. appeal of the Revenue following the earlier year's orders of the Tribunal wherein it has been held that no disallowance u/s. 14A of Act can be made.
Ld DR fairly submitted that this issue has been decided in assessee's favour in earlier years. However, he supports the order of the Assessing Officer.
9. Heard both sides, perused the orders of the Authorities below and the decision of the Tribunal in assessee's own case. We observe that the Tribunal while disposing of the appeal of the Revenue for the A.Y. 2010-11 in ITA.No. 5013/Mum/2015 dated 28.03.2018, held as under:- “15. The issue raised in ground No.3 is against the deletion of disallowance under section 14A read with rule 8D without appreciating the fact that the assessee was given the benefit of exemption under section 10 of the Act.
The Ld. A.R., at the outset, submitted that the issue involved in the present ground is covered in favour of the assessee by the decision of the Tribunal in the earlier years, and therefore prayed before the Bench that by following the same, this ground may be decided in favour of the assessee 17. The Ld. D.R. appeared to be fairly agreed to the contention of the Ld. A R 18. We have perused the decisions of the Tribunal in and ITA No 3180/M/2009 for AY. 2006-07 & 2007-08 wherein the Tribunal has decided the issue in favour of the assessee. The relevant extract is reproduced as under:- 11. In Ground no. 3, the assessee has challenged the disallowance of Rs 16 lakhs made u/s 14A on estimated basis. it has been admitted by both the parties that 7 ITA NO.5116/MUM/2016 (A.Y: 2011-12) The New India Assurance Co. Ltd provision of section 14A has no applicability in the cases of General Insurance Company, which are governed by specific provision laid down in section 44, as held by various decisions of the Tribunal including that, in assessee's own case for the A.Y 2000-01 & 2003-04 and in the case of other General Insurance Corporation of India specifically in ITA No. 3554/Mum/2011, for A.Y. 2007-08. In view of the aforesaid submissions and also on the perusal of various decisions of the Tribunal including that of the assessee, we find that it has been & 3150/Mum/2018 The New India Assurance Company Ltd. consistently held that, provision of section 14A is not applicable in the cases of Insurance company which are governed by section 44, because it is non obstante provision wherein the income is to be computed as per P&L account prepared under the Insurance Act 1938 Section 14A contemplates exception for deduction allowable under the act, whereas section 44 creates special application of provision of computation of profit as per the Insurance Act. Thus, no disallowance u/s 14A can be made and accordingly, ground no. 3 is allowed in favour of the assessee."
We, therefore, following the above decision of the Tribunal, dismiss the ground raised
by the Revenue.
10. Respectfully following the said decision, we uphold the order of the Ld.CIT(A) and reject Ground No.3 of the Revenue's appeal" As the facts and the issue in context of the aforesaid issue under consideration had not witnessed any change during the year before us, we thus respectfully follow the aforesaid view taken by the Tribunal in the assessee's own case for A.Y 2010-11 in dated 06.11.2019. Accordingly, finding no infirmity in the order of the CIT(A), who in our considered view had rightly vacated the disallowance of Rs 13,05,70,512/- made by the A.O u/s 14A r.w Rule 8D, uphold his order to the said extent. The Ground of appeal No. 3 is dismissed.”
20. For the year under consideration, the revenue did not bring any new material on record for us to controvert the above decision of the coordinate bench. Accordingly we see no reason to interfere with the decision of the CIT(A). The grounds the revenue is hereby dismissed.
Ground No.4 & 5 – Amortization of Premium on Securities
The assessee in the course of carrying of its insurance business is required to invest its fund in specific debts securities of government or PSU bonds or other securities in accordance with the Insurance Act, 1938 and IRDA regulations. The assessee has purchased securities at a price which was slightly higher than the face value of the security because of accumulated interest on such securities. The & 3150/Mum/2018 The New India Assurance Company Ltd. assessee during the year under consideration has claimed the amount of Rs. 652,39,452 as amortization of the premium paid on purchase of investments of securities over and above cost of acquisition which is amortised over the residual period of the securities. The AO disallowed the same stating that the same is in the nature of capital expenditure.
We heard the parties and perused material on record. We notice that the coordinate bench while considering identical issue in the case of AIG General Insurance Co. Ltd. vs. ITO (ITA No. 2597/M/2009), wherein the issue of Amortization of Premium on Securities has been explained by way of example. The relevant extracts of the same is reproduced hereunder – "2. We may first take up the assessee's appeal in ITA No: 2597/Mum/2009. The first ground relates to the disallowance of the assessee's claim for amortization of the premium paid on the purchase of investments amounting to Rs. 1,91,33,945/-. The brief facts in this connection may be noticed. In the course of carrying on the business the assessee is required to invest its funds in specific debt securities of Government or PSU Bands or other securities in accordance with the Insurance Act, 1938 and IRDA (Investment Regulations, 2000). During the relevant previous year the assessee purchased certain debt securities at a price which was slightly higher than the face value of the security because of accumulated interest. According to the terms of the issue of the securities, the assessee was entitled to get only the face value at the time of redemption on maturity. For example, if a security of the face value of 1,000/- was purchased by the assessee at '1,003/-, the difference of 3/- representing interest, the historical cost to the assessee would be '1,003/-. However, at the time of maturity, the assessee would get only 1,000/-. According to Schedule A to the IRDA (Auditor's Report) Regulations, 2002, which prescribes the accounting principles for preparation of financial statements in Part I thereof, the assessee was required to prepare the financial statements in the manner laid down in the said Schedule. We are concerned only with the manner in which the debt securities purchased by the assessee was to be disclosed in the Balance Sheet. Rule 6 of the Schedule prescribes the procedure to determine the value of investments. Clause (b) of Rule 6 provided that "Debt securities, including Government securities and redeemable preference shares, shall be considered as "held to maturity" securities and shall be measured at historical cost subject to amortization". Following this Rule, and taking the example given above further, the assessee & 3150/Mum/2018 The New India Assurance Company Ltd. was required to show the value of the security in its Balance Sheet at 1,003/- which was the historical cost and the difference between the face value of 1,000/- and the historical cost of `1,003/-, namely, 3/- was to be amortized. The amortization naturally was to be for a period from the date of purchase of the security and the date of maturity. For example, if the debt security was to mature in five years and the assessee had acquired it after two years from the date of issue, there will still be three years remaining for its maturity. In the example given above, the excess of '3/- paid by the assessee was to be amortized over the remaining period of three years. The basis behind this Rule, in our humble understanding, is to value the investment only at its face value which is what the assessee would get at the end of the period and any excess paid over the face value while acquiring the security though will have to be shown as part of the cost, but still would have to be amortized over the remaining period till the maturity of the security so that the excess paid is properly accounted for and also the true picture is shown in the Balance Sheet. This appears to be the rationale behind the requirement. (Emphasis supplied) 23. We further notice that the coordinate bench in assessee's own case for AY 2006-07 has followed the above decision and decided the issue favour of the assessee by holding that – “16. We have heard the rival submissions and also perused the relevant finding given in the impugned orders. The assessee in the course of carrying of its insurance business, is required to invest its fund in specific debts securities of government or PSU bonds or other securities in accordance with the Insurance Act, 1938 and IRDA regulations. The assessee has purchased securities at a price which was slightly higher than the face value of the security because of accumulated interest on such securities According to the terms of issue of the securities, the assessee was to get only the face value at the time of redemption or maturity. IRDA regulation prescribes, the accounting principle for preparation of financial statement, whereby the assessee is required to prepare the financial statements in the manner provided in the said regulation. The said regulation read with relevant rules given in the schedules therein, provides that debts securities including, Government securities shall be considered as “held to maturity” and shall be measured at historical cost subject to amortization. This IRDA regulation are binding on the insurance companies. The Tribunal in the case of Tata AIG General Insurance Company Ltd. has dealt this precise issue in detail after analyzing the relevant provision and the decision of the Hon’ble Supreme Court and observed and held as under:-
“7. On a careful consideration of the facts and the rival contentions, we are of the view that the amortization claim cannot be considered as 'an expenditure or allowance within the meaning of rule 5(a) of the First Schedule. As held by the Supreme Court in the case 01 Indian Molasses Co. (Private) Ltd. vs. CIT, West Bengal (1959)'37 ITR 66:(SC}, spending In the sense paying out or away of money is the primary meaning of expenditure. Expenditure is what is paid our or away and is something which is gone irretrievably Expenditure , which is deductible for income tax, is one which is towards a liability actually existing at the time, but the putting aside of money which may become expenditure on the happening of an event is not expenditure. If this meaning is to be given to the word "expenditure" occurring in rule 5(a)- the amortization claim cannot be considered as expenditure and, therefore, cannot be added back to the balance of the profits. In General Insurance Corporation (of India vs. CIT (1999) 240 ITR 139 (SC). the Supreme Court held that even if an item of debit is considered as an expenditure, it should further be such an expenditure contemplated in sections 30 to 43A and, therefore, unless there was a specific prohibition for such an allowance, the departmental authorities would not be justified in. adding back the amount under rule 5(a\., Therefore, even if the debit for amortization is considered as an expenditure, there is no specific prohibition against allowing such an expenditure under the provisions of sections 30 to 43B. The words "expenditure or allowance…… Which is not admissible under the provisions of sections 30 to 438" appearing in the sub-rule has been explained by the Supreme Court to mean that there should be a specific prohibition against the expenditure or allowance in which case alone the Assessing Officer can add back the same to the balance of profits. It is common ground that there Is no such specific prohibition against, the allowance of the expenditure in the above sections-of the Act. It may be noted that though rule 5(a) of the First Schedule considered by the Supreme Court in the above judgment was slightly different, but the words “ any expenditure or allowance which is not admissible under the provisions of section 30 to 43A” were present and the same words being present in the amended sub-rule, they have to be given the same meaning as was given by the Supreme Court. Therefore, even if the debit for amortization is considered as an expenditure or allowance, there being so specific prohibition against the expenditure or allowance in section 30 to 43B, the departmental authorities were not justified in adding back the amount of the balance of the profits. The judgment of the Supreme Court in the case of General Insurance Corporation of India (supra) takes care of all the arguments advanced on behalf of the Revenue. We, therefore, delete the addition of Rs.1,91,33,945/- and allow the first ground.”
Since, no contrary decision have been brought to our notice, therefore, respectfully following the same, we hold that such an amortization claimed by the assessee as revenue expenditure is allowable. Accordingly, assessee’s ground no. 5 is treated as allowed.” 24. The facts for the year being identical, respectfully following above decision we dismiss the ground raised by the revenue.
Ground No.6 – Applicability of provisions of Section 115JB of the Act
The ld AR submitted that the revenue has raised the ground incorrectly stating that the CIT(A) has erred in holding that provision of section 115JB of the Act are not applicable to the assessee. The ld AR further submitted that the actual issue is that the AO has added the disallowance made under section 14A to the book profits computed under section 115JB of the Act. The ld AR also submitted that in any case the impugned issue is covered by the various decisions of Hon'ble High Court and the coordinate benches of the Tribunal.
We heard the parties and perused the material on record. We notice that the ground of the revenue is not factually correct. We further notice that the AO has added the disallowance made under section 14A to the book profits while completing the assessment and that the CIT(A) has held the issue in favour of the assessee by holding that the AO is not correct in adding the disallowance to the book profits (refer para 10.2 in page 53 of CIT(A)'s order). It is a settled legal position that the disallowance under section 14A cannot be added to the book profit under section 115JB of the Act. Therefore we see no infirmity in the order of CIT(A). Accordingly the ground of the revenue is dismissed.
& 3150/Mum/2018 The New India Assurance Company Ltd. 27. Ground 1, 7 and 8 raised by the revenue are general not warranting any specific adjudication.
In result the appeal of revenue is dismissed.
In result the appeal of the assessee is partly allowed and the appeal of the revenue is dismissed.