DCIT-CC5(3), MUMBAI vs. ICICI LOMBARD GENERAL INSURANCE CO LTD, MUMBAI

1. Whether on the facts & circumstances of the case and in law, the Ld. CIT(A) erred in interpreting the provisions of Section 44 of the Income Tax Act, 1961 [the Act") read with Rule 2 of the First Schedule along with provisions of Insurance Act, 1938, insurance Regulatory and Development Authority Act, 1999 and regulations made there under and accordingly allowing adjustment from the 'surplus' worked out as per 'actuarial valuation’?

2. Whether on the facts and in the circumstances of the case and in law, the Ld. CIT(A) has erred in deleting the addition made on account of deduction claimed on dividend income u/s. 10(34), of the Act without considering the fact that such dividend income was assessable under the head income from business and profession and cannot be computed separately to claim exemption u/s. 10(34) of the Income Tax Act, 1961 as this will amount to violation of provision of section 44 of the Income Tax Act?

3. Whether on the facts & circumstances of the case and in law, the Ld.CIT(A) erred in holding that the exemption u/s. 10(34) of the Act is to be provided on the amount of dividend earned and not on the net basis as the provisions of S. 14A are not applicable to the insurance companies?

4. Whether on the facts and in the circumstances of the case and in law, the Ld. CIT(A) has erred in deleting the addition made on account of exemption claimed on Long term Capital gain u/s. 10(38) and interest income u/s 10(15) of the act without considering the fact that such income was assessable under the head income from business and profession and cannot be computed separately to claim exemption u/s 10(38) and 10/15) of the Income Tax Act, 1961 as this will amount to violation of provision of section 44 of the Income Tax Act?

5. Whether on the facts and in the circumstance of the case and in law, the Ld.CITA) erred in holding that the exemption under section 10(38), 10(15) and 10(34) of the Act were allowable to the assessee while calculating its income under section 44 read with First Schedule of the Act?

& 3841/MUM/2024 ICICI Lombard General Insurance Co. Ltd. 6.Whether on the facts & circumstances of the case and in law, the Ld.CIT(A) erred in not appreciating the facts that the valuation of the insurance companies is done under the Insurance Act, therefore, what can be reduced is only what is specifically provided in schedule 1 Rule 2 and nothing else. Therefore, exemption under section 10 i.e 10(38), 10(15) & 10(34) cannot be granted to an assessee engaged in business of life insurance where income is computed u/s 44 of the I.T Act? 7. Whether on the facts & circumstances of the case and in law, the Ld. CIT(A) erred in interpreting that on account of "legislation by incorporation", 'only' the "un- amended' Insurance Act 1938 and the Regulations there under became part of section 44 r. w rule 2 of the First Schedule of the I.T Rules?”

by the revenue under appeal are inter related, hence for the sake of convenience, all the grounds are being considered together. The issue is no more res-integra. It is evident that the dispute pertaining to the assessee’s claim of exemption as referred above is a recurring issue and has been the subject matter of dispute from the preceding assessment years. The Tribunal, while deciding the issue in assessee’s own case in preceding assessment years has categorically held that assessee’s claim of exemption relating to profit on sale of shares and securities is allowable u/s. 10(38), interest on securities is allowable u/s. 10(15) and dividend on shares is allowable u/s. 10(34) of the Act. We find that all the issue in dispute under present appeal are covered by the order dated 19.01.2018 passed by the co-ordinate bench of this Tribunal in for A.Y. 2010-11. The relevant paras 7 and 8 are reproduced as under: “

7. We have heard rival contentions and perused material on record. It is evident, the assessee has claimed exemption from taxation the following income received by it in the relevant previous year; (i) Long term capital gain and short term capital gain out of sale of shares and securities of ₹ 215,89,01,045, (ii) interest on securities of ₹ 21,23,56,066; (iii) dividend on shares of 8,13,33,370. However, the Assessing Officer has disallowed assessee's claim of exemption only on the reasoning that the assessee's income has to be computed under section 44 r/w rule 5 of the first Schedule of the Act, though, he has agreed that in the preceding assessment years assessee's claim of exemption have been allowed by the Tribunal. It is evident, the dispute pertaining to assessee's claim of exemption as referred to above is a recurring issue and has been subject matter of dispute from the preceding assessment years. The Tribunal while deciding the issue in assessee’s own case in preceding assessment years was of the consistent view that assessee’s claim of exemption & 3841/MUM/2024 ICICI Lombard General Insurance Co. Ltd. relating to profit on sale of shares and securities, interest on securities, dividend on share are allowable under section 10(38), 10(15) and 10(34) respectively. In the latest order of the Tribunal in and 6832/Mum./2014 dated 4th December 2016, relating to assessment year 2005-06 and 2009-10, the Tribunal while allowing assessee's claim has held in the following manner:- 3.1. We have considered the rival submissions and perused the material available on record. In view of the above, we are reproducing hereunder the relevant portion from the aforesaid order dated 31/08/2016 (ITA No.3698/Mum./2013) for ready reference and analysis. - 2. The captioned assessee is engaged in the business of General Insurance and for assessment year under consideration, it filed a return of income declaring an income of Rs. 111,10,82,730/-. The Assessing Officer assessed the total income at Rs.224,99,28,526/ under the normal provisions of the Act. This income was deduced after disallowing the exemptions 3. In this background, we may now take up the appeal of Revenue, wherein the Grounds of appeal read as under:- "On the facts and in the circumstances of the case and in law, the Ld CIT(A)'s erred in 1. i) allowing the deduction u/s.10(38) for gains/loss on sale of investment aggregating to Rs. 54,18,03,880/-; thereby ignoring the fact that the assessee company is engaged in the insurance business and that Computation of its Income from insurance business is to be governed as per special section 44 of the Income Tax Act r.w.Rule 5 contained in the First Schedule. ii) in not appreciating that the provisions of sec. 10(15), 10(34) and 10(38) were not applicable in the case of assessee company. 2. i) Deleting the disallowance of AO made on account of interest Rs. 14,11,04,910/- claimed by assessee company as exempt u/s. 10(15) and dividend Rs.5,87,77,006/- exempt u/s. 10(34/35) of the Act ignoring the fact that the assessee company is engaged in the insurance business and that Computation of its Income from insurance business is to be governed as per special section 44 of the Income Tax Act r.w.Rule 5 contained in the First Schedule. ii) in not appreciating that the provisions of sec. 10(15), 10(34) and 10(38) were not applicable in the case of assessee company. xxxxxxxxxxxxxxxxxxxxx

4. The issue raised by the Revenue in Ground of appeal no. 1 arises from the action of CIT(A) in holding that assessee was eligible for claim of exemption u/s 10(38) of the Act with respect to gain/loss on sale of investments aggregating to Rs.54,18,03,880/-. On this aspect, it was a common point between the parties that such issue had come up before the Tribunal in earlier assessment years also and the claim of & 3841/MUM/2024 ICICI Lombard General Insurance Co. Ltd. the assessee has been upheld. In this context, it is noticed that CIT(A) has followed the decision of the Tribunal for Assessment Year 2003-04 vide order dated 10.10.2012 in ITA No. 2398/Mum/2009. The relevant discussion in the order of Tribunal dated 10.10.2012 (supra) reads as under :- "5. We have considered the rival submissions as well as the relevant material on record. There is a special provision for computation of income chargeable under the head "profits and gain" inter-alia in the business of Insurance under section 44 of the IT Act and the same shall be computed in accordance with the Rule containing in first schedule of the Act. The profits and gains of business of insurance other than the life insurance shall be computed as per Rule 5 of First Schedule as under:

5. The profits and gains of any business of insurance other than life insurance shall be taken to be the profit before tax and appropriations as disclosed in the profit and loss account prepared in accordance with the provisions of the Insurance Act, 1938 (4 of 1938) or the rules made thereunder or the provisions of the insurance Regulatory and Development Authority Act, 1999(4 of 1999) or the regulations made thereunder, subject to the following adjustments; a. Subject to the other provisions of this rule, any expenditure or allowance including any amount debited to the profit and loss account either by way of a provision for any tax, dividend, reserve or any other provision as may be prescribed which is not admissible under the provisions of sections 30 to 43B in computing the profits and gains of a business shall be added back; b. (i) any gain or loss on realisation 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; c. such amount carried over to a reserve for unexpired risks as may be prescribed in this behalf shall be allowed as a deduction." 5.1 The bare reading of the amended provisions of Rule 5 of First Schedule makes it clear that the profits and gains shall be taken to be the profit before the tax and appropriately disclosed in the P&L Account prepared in accordance with the Insurance Act, 1938 or the Rule made there under or the provisions of IRDA Act. There is no dispute that the assessee before us has included the profit on sale of investments in the profit and gain as declared in the accounts prepared in accordance with the provisions of Insurance Act 1938. It is also not the case of the assessee that the profits/gains on sale of investments is not required to be included in the P&L Account prepared in accordance with the provisions of Insurance Act. Therefore, once the profit on sale of investment is required to be & 3841/MUM/2024 ICICI Lombard General Insurance Co. Ltd. included in the P& L account in accordance with the provisions of Insurance Act, then as per the Rule 5 of First Schedule of the IT Act, no adjustment is required to be made on account of the amount of profits on sale of investment already included in the P&L Account. Thus, we find force and substance in the contention of the Id DR that once the assessee has included the gain on sale of investments in the P&L account prepared as per the provisions of the Insurance Act, 1938, then the said amount cannot be reduced while computing the income as per provisions of sec. 44 r.w First Schedule of the IT Act. 5.2 However, in the series of decisions of the Tribunal a view has been taken that the amendment vide Finance Act 1988 w.e.f 1.4.89, the sub rule (b) of Rule 5 of First Schedule was omitted with the purpose to grand exemption to the insurance companies with regard to the profit on sale of investments. The Tribunal has taken note of the fact that in the corollary, it has been provided in the circular no.528 dated 16.12.1988 that the loss incurred by the general insurance companies on realization of investment shall not be allowed as deduction in computing the profit chargeable to tax. 5.3 In the latest decision dated 22.10.2010, this Tribunal in the case of Tata AIG General Insurance Co Ltd vs ACIT in after considering the earlier decisions of the Tribunal has held in paras 18 to 20 as under:

"18. We have carefully considered the rival contentions. There is no dispute that under the guidelines issued by the IRDA (Auditors Report) Regulations of 2002, for preparation of financial statements, the profit on sale of investments is to be credited to the Profit and Loss Account of the insurance company. There is also no dispute that the assessee has credited the Profit and Loss Account with such profit the question is whether such profit can be excluded and exemption can be claimed. Rule 5(b), as it stood before being omitted from 01.04.1989, was as follows:- 'any amount either written off or reserved in the accounts to meet depredation 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 depredation of or loss on the realization of investment.

& 3841/MUM/2024 ICICI Lombard General Insurance Co. Ltd. The argument on behalf of the assessee primarily is that when the rules for preparation of the final accounts provide that the profit on sale of investments, should be shown in the credit side of the Profit and Loss Account, then there was no question of rule 5(b) being applicable and that was the reason why the said rule was omitted with effect from 01.04.1989 and the effect of the omission is that where the Profit and Loss Account already includes the profit on sale of investments, the same shall stand excluded. The effect of the omission of the rule was considered by the Pune Bench of the Tribunal in its order dated 31 August 2009, in the case of Bajaj Allianz General Insurance Company, in ITA No: 1447/PN/2007 and CO No:521PN12007 (assessment year 2003-04). A copy of the said order has been filed before us. The Tribunal has also considered the Circular No.528 dated 16.12.1988. After analyzing the impact of the omission of rule 5(b) and the Circular, the Tribunal held as under. - ‘8. A conclusion can be drawn on the basis of the above elaborate discussion that the deletion of sub rule (b) from Rule 5 of the First Schedule was with a specific purpose. This Schedule not only prescribes the method of computation of income of Insurance Business in part (A) but also prescribe the method of computation of other Insurance Business in Part (B). Rule 5 is within Part (B) and earlier it has prescribed the method of taxation of profit on sale of investments which was later on scraped. Even by applying a reverse logic we must arrive at the same conclusion that had the impugned income' was earlier taxable under one specific clause but even on its deletion no clause was Introduced or replaced to prescribe the method of taxation of such income;. Therefore the Revenue Department has no right to tax such an income in the absence of any enabling provision. Naturally, such a deletion cannot be treated a superfluous action but this change had to give a definite judicial meaning. We have to ascribe a logical conclusion to the said deletion of sub rule (b) from Rule 5 and the natural meaning is that after the deletion the income described therein is out of the purview of computation of Insurance Business from the First schedule therefore consequently cannot be taxed u/s 44 of IT Act. After expressing this view we hereby dismiss the cross objection of the revenue". 19: The aforesaid order of the Pune Bench, which was in the case of a company carrying on general insurance business, was followed by the Mumbai Bench Of the Tribunal in its order dated 17.09.2010, in the case of HDFC ERGO General Insurance Company Ltd., in ITA No: 338/Mum/2009 (assessment year 2004-05) as also in its Order dated 30.04.2010, in the case of Reliance General Insurance Co. Ltd., in:

& 3841/MUM/2024 ICICI Lombard General Insurance Co. Ltd. (and other appeals). Copies of these orders have also been filed before us. In these orders it has been held that the profit on sale of investment in the case of an assessee carrying on general insurance business cannot be brought to tax after the omission of rule 5(b) and as per the Circular cited above. Since the controversy before us is identical, respectfully following the orders of the Pune and Mumbai Benches of the Tribunal cited above, we direct the Assessing Officer to exclude the profit of 247,45,699/ on the sale of investments from the assessment. V 20. The learned CIT DR, however, argued that the effect of the omission of rule 5(b) is just the opposite of what the assessee has contended. According to him, after 01.04.1989 the exemption was taken away. He submitted further that the profit on sale of the investment has already been included in the Profit and Loss Account and there is no authority to take it out even under rule 5(b) as it existed before 01.04.1989. According to him, there was no scope for applying the rules of interpretation when the statutory provisions are clear. Since the matter is concluded by the orders of the Tribunal cited supra, where all these aspects have been considered, we are unable to take a different view of the matter. Thus Ground No. 4 is allowed." 5.4 Since the Tribunal has been taking a consistent view on this issue in a series of decisions as relied upon by the Id AR of the assessee; therefore, to maintain the rule of consistency and uniformity on this aspect, we decide this issue in favour of the assessee and against the revenue."

5. It is pointed out that in Assessment Year 2004-05 also the Tribunal vide its order dated 18.09.2013 in followed its earlier decision dated 10.10.2012 (supra) and allowed the claim of the assessee. Similarly, in Assessment Years 2005-06 and 2006-07, the Tribunal has upheld its earlier decisions vide order dated 05.06.2014 in ITA Nos. 1714 & 1715/Mum/2011. It has also been pointed out that in ssessment Year 2007-08 also, the Tribunal vide its order dated 12.02.2015 in ITA Nos. 7844 & 7619/Mum/2011 has decided the issue in favour of the assessee. Apart therefrom, the learned representative for the assessee pointed out that the view of the Tribunal is also in consonance with the clarification issued by CBDT vide Circular dated 21.02.2006, which has indeed been referred by the CIT(A) in the impugned order.

6. For all the above reasons, and in the absence of any contrary decision brought to our notice, the action of CIT(A) is hereby affirmed. Thus, Revenue fails in Ground of appeal no. 1.

& 3841/MUM/2024 ICICI Lombard General Insurance Co. Ltd. 7. Insofar as Ground of appeal no. 2 is concerned, same relates to the decision of CIT(A) in holding that assessee is eligible for claiming exemption u/s 10(15) and 10(34/35) of the Act of Rs. 14,11,04,910/- and Rs.5,87,77,006/- respectively. On this aspect, it is seen that the CIT(A) allowed the plea of assessee by referring to the clarification issued by CBDT dated 21.02.2006 whereby it is clarified that exemption available to any other assessee under any of the clauses of Sec. 10 of the Act shall also be made available to a person carrying on non-life insurance business. Apart therefrom, at the time of hearing the learned representative for the assessee has referred to the decision of Tribunal in the case of assessee for Assessment Year 2007

08. (supra), wherein similar issue has been decided in favour of the assessee following precedents in the case of ICICI Prudential Insurance Co. Ltd. (supra) and New India Assurance Co. Ltd. (supra). The relevant discussion in the order of Tribunal dated 12.02.2015 reads as under:-

3. The issues raised vide Ground No. 2 have been considered by the Tribunal in the case of ICICI Prudential Insurance Company Ltd. in 6855, 6856 & 6859/Mum/2010. The Tribunal has considered the issue at page 59 of its order and at page 60 the Tribunal has considered the decision of Life Insurance Corporation of India vs. CIT (Bom) and at page 62 the Tribunal has considered the decision in the case of New India Assurance Company Ltd. and finally at bara 49 of this order the Tribunal concluded that the assessee is entitled to get exemption under section 10 of Act, 1961. A similar issue was considered by the Hon'ble Jurisdictional High Court in Writ Petition No. 2560 of 2011 dated 1/12/2011, wherein Hon'ble High Court has quashed and set aside the notice issued for reopening of the assessment when the Revenue sought to reopen the completed assessment for disallowing the claim of deduction allowed under section 10 of the Act. In the original assessment order. Respectfully following the aforesaid judicial decision we confirm the findings of the Ld. CIT(A) on this issue and dismiss ground No. 2 of the appeal. Following the aforesaid precedent, and the basis on which CIT(A) has allowed the relief, we find no reason to interfere with his ultimate decision, which is hereby affirmed. Thus, Ground of appeal no. 2 raised by the Revenue is also dismissed." 3.2. In the aforesaid order, the Tribunal has deliberated upon the issue in hand and found that for earlier Assessment years, the Tribunal has decided the issue in favour of the assessee. Respectfully following the aforesaid order of the Tribunal and in the absence of any contrary decision brought to our notice by either side and more & 3841/MUM/2024 ICICI Lombard General Insurance Co. Ltd. specifically the Revenue, we affirm the stand of the Ld. Commissioner of Income Tax (Appeal), resultantly, the appeal of the Revenue is having no merit, therefore, dismissed.”

8. There being no difference in fact brought to our notice and there being no contrary decision brought to our notice by the learned Departmental Representative, respectfully following the view expressed by the Tribunal in assessee's own case as referred to above, we uphold the order of the first appellate authority by dismissing the ground raised

.”

9. In the aforesaid order, the co-ordinate bench of this Tribunal has deliberated upon the issue in dispute. It is further noticed that the issue has been consistently decided for the preceding years in favour of the assessee. It is further noticed that the view of the co-ordinate bench is also in consonance with the clarification issued by CBDT vide circular letter dated 21.02.2006, which has indeed been referred by learned CIT(A). In absence of any contrary decision, the impugned order passed by learned CIT(A) does not warrant any interference and is accordingly affirmed and the grounds raised by the revenue under appeal stand determined against the revenue and in favour of the assessee. The revenue’s appeal, thus, has no merit and is liable to be dismissed.

(Assessment Year : 2014–15)