CHOLAMANDALAM MS GENERAL INSURANCE CO. LTD.,CHENNAI vs. PCIT-4, CHENNAI

and “incurred but not enough reported” (hereinafter referred to as ‘IBNER‘) of Rs.351.7 Crs which was allowed by the AO in its entirety, when the actual utilization was only of an amount of Rs.342.32 Crs. And the Ld.PCIT in this regard noted that this Tribunal vide order dated 26.08.2022 for AY 2009-10 in assessee’s own case had held that expenses claimed under the head ‘IBNR & IBNER’ are unascertainable/contingent liability and therefore, such provision can’t be allowed as deduction and that it can be allowed as deduction on actual utilization basis. Therefore, according to the Ld.PCIT, the AO without proper verification, allowed deduction for the entire amount of provisions made under the head ‘IBNR & IBNER’ of Rs.351.7 Crs as against the deduction which can be allowed on actual utilization basis of Rs.342.32 Crs. Therefore, he issued show cause notice (SCN) ‘as to why’ revisional jurisdiction shouldn’t be invoked against the action of the AO; and pursuant to it, the assessee replied to it [which reply has been reproduced by the Ld.PCIT from Page Nos.2-12 of the impugned order], by rebutting the allegation of the Ld.PCIT that the AO didn’t conduct any verification/inquiry on the issue regarding the ‘IBNR & IBNER’ and pointed out that the AO had indeed inquired about it vide his notice dated 26.10.2023 and the assessee has replied to it vide reply dated 08.11.2023, hence the allegation of non-enquiry by on this issue was misconceived. However, the Ld.PCIT was of the view that the action of the AO to allow the entire provision as erroneous in the light of the Tribunal order in the assessee’s own case for AY 2009-10, wherein, it was held that deduction shall be allowed only on actual utilization basis.

Being aggrieved by the impugned order of the Ld.PCIT, the assessee preferred the present appeal before us and inter-alia, has raised legal issue/jurisdiction of the Ld.PCIT to have invoking the revisional jurisdiction u/s.263 of the Act.

Pursuant to the aforesaid query, the assessee is noted to have replied vide letter dated 08.11.2023 [a copy of which is found placed at Page Nos.59-72 of the Paper Book], wherein, the assessee replied to this query [a copy of which is found at Page No.60 as well as detailed reply at Page No.67 onwards to Page No.71 of the Paper Book]. From the contents of the reply, it is noted that assessee in all fairness has brought to the notice of the AO that the Chennai Tribunal had held in its own case for AY 2009-10 that it is not entitled for deduction towards provision created for ‘IBNR & IBNER’ but is entitled for deduction in respect of actual utilization of ‘IBNR & IBNER’ and also annexed copy of the Tribunal order dated 26.08.2022 and also reproduced relevant portion of the Tribunal order in its reply to the AO refer Page Nos.78 & 79 of the Paper Book at Para Nos.40 & 41 of the Tribunal order at Page Nos.69-70 and also the decision in its favour passed by the Mumbai Tribunal/Kolkata Tribunal, viz DCIT v.

According to the Ld.AR, in the light of the aforesaid detailed submissions, the AO has decided to allow the entire amount of provisions made for expenses under the head ‘IBNR & IBNER’ of Rs.351.7 Crs as deduction which is on the basis of ratio laid down by the Mumbai & Kolkata Tribunals (supra) as well as later by the Hon’ble Bombay High Court in the case of M/s. GIC v. ACIT reported in 422 ITR 248 wherein the Hon’ble Bombay High Court even made an observation that the Chennai Tribunal view in this regard [in the assessee’s own case for AY 2009-10 following the view in M/s. United India Insurance Co. Ltd. v.

Per contra, the Ld.CIT-DR vehemently opposed the submissions of the Ld.AR and supported the action of the Ld.PCIT interfering with the assessment order after finding it to be erroneous and prejudicial to the interest of the Revenue. According to the Ld.DR when the issue regarding claim of deduction in respect of provisions made for expenses under the head ‘IBNR & IBNER’ has been decided by the jurisdictional Tribunal (Chennai) in the assessee’s own case for earlier years; and even after knowing about this fact has chosen not to follow, it shows total non- application of mind on the part of the AO while deciding this issue.

In his rejoinder, the Ld.AR submitted that no adverse view can be drawn if the AO after having enquired about an issue doesn’t records about it explicitly in his assessment order and referred to the decision of the Hon’ble Bombay High Court [Nagapur Bench] in the case of MOIL LH of 2016 dated 26.04.2017 wherein it was held that if a query was raised during the assessment proceedings and the query is responded to by the assessee, the mere fact that the query was not dealt with in the assessment order, wouldn’t lead to a conclusion that no mind has been applied by the AO to it. [And also referred to similar view expressed in the decision of the Hon’ble Bombay High Court in the case of CIT v. Nirav Modi [ITA No.17 & 119 of 2014 dated 16.06.2016]. Therefore, according to the AR, even though, assessment order doesn’t mention about allowing deduction claimed by the assessee on this issue, it can’t be held that the AO has not inquired about it or applied his mind while allowing the claim made by the assessee. Thus, according to the Ld.AR, there is no substance in the submission made by the Revenue in this regard and wants us to quash it.

We have heard both the parties and perused the records placed before us. In the several grounds raised in the appeal, the assessee has in sum & substance challenged the jurisdiction of the Ld. PCIT to pass the impugned order u/s 263 of the Act. Before adverting to the facts of the case, it is first necessary to examine the scope of revisional jurisdiction u/s. 263 of the Act. For that, let us take the guidance of decision rendered by the Hon'ble Apex Court in Malabar Industrial Co. Ltd. v. CIT (243 ITR 83) wherein their Lordship have held that twin conditions should be satisfied before jurisdiction u/s 263 of the Act is exercised by the ld. CIT.

In the circumstances enumerated above, the order passed by the Assessing Officer can be termed as erroneous for the purpose of invoking the revisionary powers under Section 263 of the Act. It has to be borne in mind that, even if the Ld. PCIT finds that the assessment order is erroneous, he cannot invoke the revisional jurisdiction u/s 263 of the Act without satisfying the requirement of second limb i.e., the Ld. PCIT has to show that due to the erroneous assessment order, prejudice has been caused to the interest of revenue. This proposition of law has been laid down by the Hon'ble Supreme Court in the case of Malabar Industrial (supra) wherein their Lordship's held that this phrase i.e., "prejudicial to the interest of the revenue'' has to be read in conjunction with an "erroneous" order passed by the Assessing Officer. Further the Hon'ble Supreme Court held that ‘for invoking powers conferred by section263 of the Act, the CIT should not only show that the AO's order is erroneous as a result of any of the situations enumerated above but CIT must also further show that as a result of an erroneous order, some loss is caused to the interest of the revenue'. At this juncture, one has to understand what is prejudicial to the interest of revenue. Their Lordship explaining the same in the said judgment held that, every loss of revenue as a consequence of an order of Assessing Officer cannot be treated as prejudicial to the interest of the revenue. It was explained that, when the Assessing Officer adopts one of the courses permissible in law and it has resulted in loss to the Revenue, or where two views are possible and the Assessing Officer has taken one view with which the Ld. CIT does not agree, it cannot be treated as an order prejudicial to the interest of the revenue unless the view taken by the Assessing Officer is unsustainable in law.

In the light of the above position of law, we now revert back the facts of the present case, the first question before us is whether the Ld.PCIT was justified in exercising jurisdiction vested u/s.263 of the Act and revising the assessment order dated 27.02.2024 by holding that the AO has wrongly allowed the entire amount of provisions made for expenses under the head ‘IBNR & IBNER’ to the tune of R Rs.351.7 Crs instead of allowing only the actual utilization of amount of Rs.342.32 Crs and setting aside this issue back to the file of the AO for re-adjudicating the issue afresh. Having taken into consideration the relevant facts as narrated in the preceding paragraphs, it is noted that the case of the assessee was selected for scrutiny under CASS on nine (9) issues, out of which, business expenses was one of the item and the AO during assessment proceedings has asked specific queries on the claim of deduction from the profits on account of claims ‘incurred but not reported’ (IBNR) and claims ‘incurred but not enough reported’ (IBNER) and further, show caused the assessee vide notice dated 03.11.2023 u/s.142(1) proposing to deny the deduction claimed in respect of ‘IBNR & IBNER’ [refer Page Nos.55-59 of the Paper Book and especially Page No.57 at Item No.5 supra]. To this notice, the assessee is noted to have furnished its explanation vide letter dated 08.11.2023, in which, it furnished the details of net provision towards ‘IBNR & IBNER’ claimed after utilization adjustment during the AY 2022-23 and provided details of the same for the past assessment years also which facts are found in the reply [a copy of which is found placed at Page Nos.59-72 of the Paper Book and especially at Page Nos.60 & 67-71 of the Paper Book]. The assessee is noted to have submitted in its reply that being a General Insurance Company, the provisions in respect of claim for ‘IBNR & IBNER’ were prepared as per the guideline of the Insurance Regulatory Development Authority [IRDA] and that the claims are outstanding claims from the contractual obligations and can’t be termed as provision. It was clarified that the amount provided for are not mere provisions but the liability which could be subject to assessment/confirmation on further processing of the claims. The assessee is noted to have filed the Actuary Certificate giving the closing balance of ‘IBNR & IBNER’ as on 31.03.2022 and asserted that the provisions/claim made in respect of the expense under the head ‘IBNR & IBNER’ has been made on scientific basis which were certified by the Actuary with respect to the methodology adopted in making such provision and urged that it was an ascertained liability by relying on the decision of the Hon’ble Supreme Court in the case of Bharat Earth Movers (supra). The Ld.AR submitted that since liability has arisen during the relevant year, and which claim was raised/prepared on scientific basis, and estimated/certified by actuary as per the guidelines of the IRDA, the liability thus worked out was with reasonable certainty and therefore, can’t be termed to be unascertainable and therefore, it is an ascertained liability which need to be allowed and cited the decision of the Mumbai Tribunal in the case of DCIT v. Tata AIG General Insurance Co.

Hence, on this admitted factual position and having regard to the position of law as explained in the case of Malabar Industrial Co. Ltd., in CA No.3646 of 1993 dated 10.02.2020, the Ld.PCIT in the present case can be held to have validly assumed jurisdiction u/s.263 of the Act only if he himself conducts inquiry on this issue and record his categorical findings which would show that AO’s view despite inquiry was patently erroneous or unsustainable in law thereby causing prejudice to the interest of the Revenue. From the order of the Ld.PCIT, it is noted that the Ld.PCIT has found fault with the action of the AO on this issue only on the reason that the AO has not followed the decision of this Tribunal in the assessee’s own case, wherein, it was held that expenses claimed under the head ‘IBNR & IBNER’ are unascertained liability and hence, can’t be allowed as deduction and the deduction to be allowed only on actual utilization basis. Thereafter, the Ld.PCIT having taken note of the outstanding ‘IBNR & IBNER’ provisions claimed from 31.03.2016 onwards till the subsequent AY 2023-24 was of the view that the outstanding IBNR & IBNER provisions are increasing every year at rates which vary from [-] 9.1% to 96.9% whereas turnover is fluctuating from [-] 6.8% to 25.5% which results made the Ld.PCIT wonder ‘whether the claim of assessee that the provisions made are on the basis of scientific/actuarial basis and was of the view, if it was scientifically/actuarial method, then the turnover should have shown the same trend, which is not the case;” and the Ld.PCIT concluded that provisions are not being made scientifically on the basis of past experience and concurred with the view of this Tribunal (supra) in the assessee’s own case holding the provisions in respect of expenses under the head ‘IBNR & IBNER’ are unascertained liability and can be allowed as a deduction on actual utilization basis. For these reasons, the Ld.PCIT is noted to have held that the AO’s action of allowing the entire claim of expenses under the head ‘IBNR & IBNER’ was erroneous and prejudicial to the interest of the Revenue for having been passed without making inquiries or verification and without due application of mind and therefore, partly setting aside the action of the AO on this issue and directed him to pass fresh orders on this issue. This action of the Ld.PCIT has been challenged before us as without jurisdiction.

In the light of the above findings of the Ld.PCIT, the issue which now requires our adjudication is whether the view adopted by the AO allowing the entire amount of provisions made for expenses under the head ‘IBNR & IBNER’ after making inquiry into the same can be termed as erroneous or view which is unsustainable in law and therefore, whether the Ld.PCIT had validly assumed jurisdiction u/s.263 of the Act. As noted (supra), we find that the issue that has been raked-up by the Ld.PCIT has been inquired into by the AO during assessment proceedings and the assessee has given detailed reply giving the relevant facts as well as it fairly brought to the notice of the AO that in earlier years, the Tribunal has held against the assessee and has allowed the deduction only on actual utilization basis and also furnished the copy of Chennai ITAT order as well as it filed its own submissions in support of its claim by relying on the decision of the Mumbai Tribunal in the case of M/s.Tata AIG General Insurance Co. Ltd. (supra) and Kolkata Tribunal in the case of M/s.

In the light of the aforesaid submissions in respect of the issue reporting deduction claimed as provision for IBNR/IBNER, the AO is noted to have considered the liability incurred as provision and after considering the judicial precedents on the subject, he is noted to have deviated from the decision of the Tribunal in the assessee’s own case for earlier years and has allowed the claim of liability in its entirety, which action of the AO at any rate can’t be held to be unsustainable in law, because, the AO’s action is inconsonance with the view expressed by the Mumbai Tribunal in the case of Tata AIG General Insurance Co. Ltd., and Kolkata Tribunal in the case of National Insurance Co. Ltd., which decision has been upheld by the Hon’ble Calcutta High Court by order dated 16.07.2019 [ITA No.76 of 2019], and further we find that the Hon’ble Bombay High Court in the case of GIC v. ACT reported in 422 ITR 248 (Bombay-HC) & the Hon’ble Delhi High Court in the case of PCIT v. M/s.Care Health Insurance Ltd., has upheld such a view of the Mumbai & Kolkata Tribunals. Moreover, we find that this Tribunal [Chennai] in the case of M/s.Royal Sundaram General Insurance Co. Ltd., [ITA No.491/Chny/2018 dated 08.01.2025] has deviated from the earlier view expressed by this Tribunal in the assessee’s own case for AY 2009-10 and has taken the same view with that of the AO i.e. of Mumbai & Kolkata Tribunal as discussed supra; and further note that in assessee’s own case for AY 2012-13 [ITA No.470/Chny/2024] order dated 19.03.2025, has concurred with the Ld.CIT(A)’s view allowing the deduction claimed on provisions similarly made on IBNR/IBNER. Therefore, in the facts and circumstances discussed supra, we are of the view that the AO has discharged his dual role as that of Investigator [by inquiring into the issues] and an Adjudicator by deciding the issue which is inconsonance with the judicial view on the same. Therefore, the impugned action of the Ld.PCIT to interfere with the action of the AO on the issue viz., claim of deduction in

In the result, appeal filed by the assessee is allowed.