DCIT- CIRCLE- 14 (1)(1), MUMBAI vs. KOTAK MAHINDRA LIFE INSURANCE COMPANY LTD., MUMBAI

Grounds raised in assessment year 2016-17

1. Whether, on the facts and circumstances of the case and in Law, the Ld ClT(A) was justified in holding that the surplus in the Shareholders Account cannot be considered 'income from other business activity' and cannot be taxed separately."

2. "Whether, on the facts and circumstances of the case and in Law, the Ld CIT(A) was justified in holding that provisions of Section 14A of the Act did not apply to Insurance Business.

3. The Appellant prays that the order of the CIT(Appeals) on the above ground be set aside and that of the Ld. A.O. be restored.

4. The Appellant craves leave to amend or alter any ground or to submit additional new ground, which may be necessary.

Grounds raised in assessment year 2017-18.

1. Whether, on the facts and circumstances of the case and in Law, the Ld ClT(A) was justified in holding that the surplus in the Shareholders Account cannot be considered a income from other business activity' and cannot be taxed separately." 2 Whether, on the facts and circumstances of the case and in Law, the Ld CIT(A) was justified in holding that provisions of Section 14A of the Act did not apply to Insurance Business,"

3. Whether, on the facts and circumstances of the case and in Law, the Ld CIT(A) was justified in directing the AO to calculate the tax @12.5% as applicable u/s 115B, based on his decision in treating the surplus in Shareholder's Account as integral part of Life Insurance business."

4. Whether, on the facts and circumstances of the case and in Law, the Ld CIT(A) erred in deleting the addition made by the AO of Rs. 29,93,62,227/- on account of incremental Negative reserve without appreciating that negative reserve has an impact of reducing the 'taxable surplus' as per Form-I and therefore corresponding adjustment for 'negative need to be made to arrive at 'taxable surplus."

4. The Appellant craves leave to amend or alter any ground or to submit additional new ground, which may be necessary.

Briefly stated facts of the case are that assessee company was 3. engaged in carrying Life Insurance business. The assessee filed return of income for Assessment Year 2014-15, 2016-17 and 2017-18 declaring total income of Rs. 173,32,53,127/- , Rs. 186,08,11,827/- and Rs. 234,01,88,077/- respectively. Against return of income filed by the assessee, the Ld. Assessing Oficer (AO) completed the assessment under Section 143(3) of a Income Tax Act 1961 (hereinafter in short ”the Act”) after making certain addition / disallowance. Aggrieved with the order of the Ld. AO, the Assessee preferred appeal before the Ld. FAA. After considering submission of assessee, appeals in all the three captional A.Y. were allowed partly in favor of the assesee. Aggrieved with the finding of the Ld. FFA the Revenue is in appeal before the Tribunal, raising the grounds as reproduced above.

At the outset, the Id. Counsel for the assessee stated that this issue is squarely covered in assessee's own case by the Tribunal's decisions in for A.Y. 2007-08, in ITA No. 2004 & 2233/Mum/2012 for A.Y. 2008-09 and ITA No. 6223/Mum/2014 for A.Y. 2011-12. The ld. Counsel for the assessee drew our attention to ITA No. 6223/Mum/2014 for A.Y. 2011-12, vide order dated 20.12.2013 and relevant para 3, wherein the tribunal has considered that the shareholders funds constituted an integral and indivisible part of assessee's Life Insurance Business and assessee's sole business purpose was to carry on Life Insurance Business as per extant regulations and, hence, these two accounts formed part and parcel of the assessee's business. The Tribunal in para no. 3 followed earlier orders and observed as under:

Even though the assessee has arrived at the surplus of Annuity Business after considering the expenditure attributable to earning income of Annuity Business, still provision of section 14A are nonetheless applicable as the assessee has received Dividend income. However, without prejudice to the above, the assessee company has contended that the investment activity of the company is managed by its treasury division and cost incurred by the said division is worked out to Rs.7,47,68,270. Without prejudice to its contention that no disallowance can be made u / s 14A, the assessee company has claimed that if at all any disallowance u / s 14A can be made than it has to be worked out in proportion of dividend income to the total income of treasury division which works out to 4.6225% in the present year and after applying the said percentage to the cost of treasury division, the disallowance u / s 14A works out to Rs.34,56,155. The assessee company has further contented that without prejudice to above contentions 10% of the cost of the treasury division i.c. 10% of Rs.7,47,68,270 amounting to Rs.74,76,827 should only be considered for disallowance relying upon Mumbai Tribunal decision in the case of group company of the assessee. Alternatively, without prejudice to their submissions, the assesse company has claimed that disallowance u / s 14A should be made in respect of cost of treasury division in the ratio of average investments in shares} the average total investment of the company and an amount of 229,85,107may be disallowed u/s 14A(1) The Assessee claimed that Rule Man 8D should not be invoked.

As per Rule 8D (Rs.) a) The amount of expenditure directly NIL relating to income which does not form part of total income NIL b) In a case where the assessee has incurred expenditure by way of interest during the previous year which is not directly attributable to any particular income or receipt, Interest Expenditure X Average Investments Average Total asset as per Balance Sheet c) One-half per cent of the average of the value of investment, income from which does not or shall not form part of the total income. Investment in shares as on 1-04-2013 4031,87,54,360 Less: Investments relating to annuity 469,63,67,447 3562,23,86,913 business Investment in shares as on 31-03-2014 3933,89,41,617 Less: Investments relating to annuity 4,04,88,92,709 3529,00,48,907 business Average Investments 3545,62,17,910 0.5% Of Average Investments Rs. 17,72,81,090 Total Disallowance u/s 14A r.w. Rule 8D 17,72,81,090

I have considered the facts of the case and the submissions made by the appellant. This ground is covered by the decision of the Ld. CIT(A) order No. CIT(A)2/IT- 235/2014-15 Dated 01.09.2015 of the appellant's own case for A.Y. 2012-13. In this order Ld. CIT(A) decided the issue in the favour of the appellant. Relevant portion of the order is reproduced.

I have examined the facts of the case, the stand taken by the Ld. A.O. in the assessment order and the contentions of the appellant. It is seen that this issue is already covered by the decision of Hon'ble Mumbai Tribunal in appeal no.2901/M/2010 dated 30.09 2011 in the Appellant's own case for the A.Y.'s 2007-08 to 2011-12 wherein the issue has been decided in the favour of the Appellant Company and Hon'ble Tribunal has held that provisions of section 14A are not applicable to the Appellant company being Life Insurance company and had deleted the disallowance of expenses made the Ld. A.O. under section 14A of the Income-Tax Act.

Further, the Appellant argued that this issue was taken up before my predecessor CIT(A)s for AY 2008-09, 2009-10, 2010-11 and 2011-12 wherein it was held provisions of section 14A are not applicable to the Appellant Company being Life Insurance company. It is submitted that similar view was taken by the Hon'ble Mumbai Tribunal in the case of ICICI Prudential Insurance Co. Ltd".

Furthermore, in the appellant's own case for AY. 2013-14, the CIT(A) has passed an order dated 28.02.2019 in Appeal No.CIT(A)22/1TO14(2)(4) IT-10188/2016-17, allowing the appeal of the appellant after drawing reference to the above orders of CIT(A) and Hon'ble ITAT, in appellant’s own case

Revenue has gone in appeal before the Hon'ble TAT against orders of CIT(A) for successive A.Y.’s since A.Y. 2007-08. Revenue's appeals have been dismissed by the Hon'ble ITAT since A.Y. 2007-08. The operative part of Hon'ble ITAT's order in for 2007-08 is as under:

11. Ground no.2 is with regard to disallowance of sum of Rs.2,77,69,215/- in accordance with Rule 8D 2 Sec. 14A is expenditure incurred for earning end dividend income. The CIT(A) held as follows:

"At the outset it is clarified that the activity of annuity business is permitted business activity which can be undertaken separately and independently of insurance business and the disallowance being considered is only in respect of exempt income of this annuity business. The only objection taken against the disallowance made by Ld. A.O. is that Rule 8D goes beyond the authority given to CSDT by Section 14 A of the Income-tax Act. It is contended that the rule only detet772ines the notional cost of holding investments which may or may not yield any exempt income and such notional cost for holding investment has no relationship with the actual expenditure incurred by appellant. It has been accordingly contended that the disallowance made by Ld. A.O. needs to be deleted I have perused die facts of the case. I find that the issue of disallowance u15.14 A has been considered by Hon’ble Mumbai PAT in several cases and it has been held that Rule SD Is perfectly justified and is required to be invoked in all cases of disallowance u/s 14A. It is accordingly hold that Ld. A.O. has rightly invoked Rule 80 for making the disallowance. The disallowance made by Ld. A.O. is consequently confirmed and the ground of appeal is rejected."

12. Aggrieved the assessee is on appeal before us. In the case of Bajaj Alliance General Insurance Company Ltd v/s Additional Commissioner of Income Tax 38 DTR 282 Pune, it has been held that Sec. 14A is not applicable in the case of Insurance business, which is governed by specific provisions of 44 and Schedule 1. In the case of Reliance General Insurance Co Ltd v/s Deputy Commissioner of Income Tax, Mumbai Bench, similar view has been taken. Similarly in the case of Birla Sunlife Insurance Co Ltd v/s Additional Commissioner of Income Tax 1TA 2253/M/2006 has held as follows:

"We have carefully considered the submissions of the rival parties and perused the material available on record. We find merit in the plea of the Ld. Counsel for the assessee that the Ld. A.O. after examining the relevant details as discussed in para 16 and 5.17 of the assessment order has disallowed the expenses of Rs.30,18,496 for earning dividend income, therefore, the plea taken by the Ld.DR that the issue may be set aside to the file of the Ld. A.O. is devoid of any merit This being so, and keeping in view that the Tribunal in Oriental Insurance co Ltd v/s Ad (2009) TIOL_172 ITAT-DEL after discussing the identical issue at length has held that Sec. 44 provides for application of special provisions for computation of profits and gains of insurance business in accordance with Rule 5 of Schedule 1 and, therefore, it is not permissible to the Ld. A.O. to travel beyond Sec. 44 and Schedule-I and make disallowance by applying Sec. 14A of the Act. The above order has consistently been followed by the Tribunal in the above three cases relied on by the Ld. Counsel for the assessee. In the absence of any distinguishing feature brought on record by the Ld. DR we respectfully, following the consistent view of the Tribunal hold that it is not permissible to the Ld. A.O. to travel beyond Sec 44 and Schedule-1 and make disallowance by applying Soc.14A of the Act and accordingly the disallowance of Rs.30,18,496 made by the Ld. A.O. and sustained by the Ld. CIT(A) is deleted. The ground taken by the assessee is therefore, allowed."

Respectfully following the above decisions of the co-ordinate Benches, we delete the entire disallowance made under sec. 14A amounting to Rs.2,77,69,215 is no expenditure is incurred for earning exemption dividend income."

Respectfully following the decisions of the Hon'ble ITAT and Ld. CIT(A), this ground of appeal is allowed.

As stated by the Appellant in its submission, this issue has been decided by the predecessor CsIT (A) in appellant's favour in the appeals filed for the earlier A.Y.s. including AY. 2013-14 in Appeal No.CIT (A)-22/ITO 14(2)(4) /IT- 10188/2016-17 wherein the CIT (A) has stated as follows:

"I have considered the facts of the case and the submissions made by the appellant. This issue in this ground of appeal has been considered by the CIT(A) in the appellant's own case for AY 2011

12. The CIT(A) deleted the addition in his order and allowed the appellant's ground of appeal. The relevant portion of the CIT(A) order is as under.

I have examined the facts of the case, the stand taken by the AO in the assessment order and the contentions of the appellant. This issue is covered by the decisions of the Hon'ble Jurisdictional Mumbai Tribunal in the case of ICICI Prudential Insurance Co Ltd, v/s ACIT reported in 140 ITD 41. The issue has been discussed at length by the Hon'ble Tribunal and the relevant finding at para 59 of the said order is reproduced as under:

7.4 Further, the Appellant argued that this issue was taken up before me for A.Y. 2010-11 wherein it was held that Negative Reserve cannot be brought to tax

7.5 Since the facts in the Appellant's case are identical to that of ICICI Prudential's (supra) case and also those in the Appellant's own case for A.Y. 2010-11, respectfully following the order of the Hon'ble Mumbai Tribunal, the Ld. A.O. is directed to exclude the Negative Reserve of Rs.399,05,98,960/- from the taxable surplus while computing the total income of the Appellant company. 7.6 Accordingly, this ground of appeal is decided in favour of the Appellant Company." Following the decisions of CIT(A) & Hon'ble ITAT, this ground of appeal is allowed.