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Income Tax Appellate Tribunal, DELHI BENCH “G” NEW DELHI
Before: SHRI R.K. PANDA & SHRI AMIT SHUKLA
PER AMIT SHUKLA, J.M.: The aforesaid cross appeals have been filed by the assessee as well as by the Revenue against impugned order dated 03.10.2016 passed by the Ld. CIT (Appeals)-22, New Delhi for the quantum of assessment passed u/s 143(3) for the AY 2009-10. 2. In assessee’s appeal the assessee has raised the following grounds: -
1. “That on the facts and in law the CIT(A) erred in upholding an addition to total income of Rs. 387,39,02,585/- on account of profit on sale/redemption of investments. 1.1That on facts and in law the CIT(A)/AO erred in not appreciating that by virtue of CBDT Circular No. 528 dated 16th December, 1988 income earned by the appellant from profit on sale/redemption of investments is not liable to tax.
2. Without prejudice, that on facts and in law the CIT(A) erred in upholding the action of AO in denying benefit of exemption u/s 10(38) of the Income Tax Act of Rs. 377,02,28,727/-.
3. That on facts and in law the CIT(A) erred in upholding levying interest under sections 234B, 234C and 234D of the Income Tax Act.
4. That on facts and in law the order of assessment u/s 143(3) passed by the Assessing Officer (hereinafter referred to as the “AO”) is bad in law and void ab-initio.
5. That on facts and in law the order passed by Commissioner of Income Tax {hereinafter referred to as the “CIT(A)”} to the extent it upholds the assessment order in part is bad in law and void ab-initio. The appellant craves leave to add, to modify, amend or withdraw any ground at any stage of the appeal.” Whereas, in the Revenue’s appeal, the following grounds have been raised: - 1. “On the facts and circumstances of the case and in law, Ld. CIT(A) has erred in deleting the addition on account of accrued interest on loans, debentures and bonds amounting to Rs. 73,90,48,000/- made by the AO.
2. On the facts and circumstances of the case and in law, Ld. CIT(A) has erred in deleting 50% disallowance of Rs. 39,92,202/- on account of expenses incurred on Guest House made by the AO.
3. On the facts and circumstances of the case and in law, Ld. CIT (A) has erred in deleting the addition of Rs. 36,38,68,375/- made u/s 14A of the I.T. Act by the AO.
On the facts and circumstances of the case and in law, Ld. CIT(A) has erred in deleting the disallowance made by the AO on account of deduction claimed by the assessee for investment written off aggregating to Rs. 9,14,39,000/-. 5. On the facts and circumstances of the case and in law, Ld. CIT(A) has erred in deleting the addition of Rs. 36,04,82,797/- made by the AO on account of book profit u/s 115JB. 6. The appellant craves leave to add, to alter, amend or vary from the above grounds of appeal at or before the time of hearing.”
3. Before us, Ld. Counsel for the assessee submitted that in so far as ground no. 1 & 1.1 is concerned, the same has been decided in favour of the assessee in assessee’s own case by the order of the Tribunal for AY 2007-08 and 2008-09; and further same has been confirmed by the Hon’ble Delhi High Court in a very detailed judgment in the case of the assessee, now reported in (2018) 407 ITR 658. Thus, this issue stands squarely covered. In so far as the issue raised in ground no. 2, he submitted that, since as per the judgment of Hon’ble Delhi High Court, profit on sale/consumption of investments is not chargeable to tax in terms of CBDT Circular No. 528, the claim for exemption u/s 10(38) becomes infructuous. Ground relating to levy of interest under sections 234B, 234C and 234D is consequential. With regard to the Revenue’s appeal also, he pointed out that the issue raised in ground no. 1 has been decided in favour of the assessee in assessee’s own case by the Tribunal right from the AY 2000-01 to AY 2011-12 which has now been confirmed by the Hon’ble Delhi High Court reported in 125 Taxman 1094. Ground no. 2 is also covered in favour of the assessee by the order of the Tribunal for the AY 2000-01 to AY 2011-12. Lastly, with regard to ground no. 3, he submitted that now it is well settled that income of the assessee is to be computed as per provisions of Section 44 read with Rule 5 of first schedule and, therefore, provision of section 14 is not applicable and this view has been confirmed by the Tribunal in all the years.
4. On the other hand, Ld. CIT DR submitted that reliance placed by the Ld. Counsel on the decision of Hon’ble Delhi High Court order pertains to AY 2005-06 and is distinguishable. Here in this case, investment has been declared in the profit and loss account and the accounts of the assessee are to be made in accordance with guidelines IRDA. As per the Rule 5 in First Schedule read with Section 44, he submitted that Rule 5(b)(i) is not applicable because it is applicable when amount is not credited to the profit and loss account. Thus, in this case Rule 5(b) is not applicable. Hence, it cannot be held that profit on sale of investment which has been claimed as exemption u/s 10(38) is not applicable. In view of Circular No. 528 dated 16.12.1988 is not justified. He submitted that taxability of the assessee is governed u/s 44 read with provisions contained in Rule 5 of First schedule, wherein profit and gains is taken to profit and loss account prepared in accordance with the provisions of Insurance Act, 1938 or under IRDA which is subject to certain adjustments. Clause (b) provides that any gain or loss on realization of investments shall be added or deducted if such gain or loss is not credited or debited to profit and loss account. Here in this case assessee has credited to the profit and loss account and assessee had shown income under the head “profit on sale on investment” at Rs. 387,39,03,000/- and out of this income Rs. 377,02,28,727/- has been claimed as exempt and remaining amount has been offered for taxation. The assessee cannot bifurcate single source of income in two parts, one as business income and another as long term capital gain. His main argument was that Rule 5(b) which has been amended from 1.04.2011 by Finance Act 2010 is not applicable in the case of the assessee, because assessee has itself declared the amount in the profit and loss account in the provisions of Rule 5(b)(i) is applicable and the amount is not credited to the profit and loss account. Thus, order of the authorities below needs to be confirmed.
5. After considering the aforesaid submission and going through the relevant findings given in the impugned order as well as various ITAT orders and judgment of the Hon’ble Delhi High Court, we find that prima facie all the issues are covered. Now in so far as the issue of addition of Rs. 387,39,02,585/- on account of profit on sale/redemption of investments, we find that the Hon’ble Delhi High Court in the assessee’s own case has discussed the issue in detail. The detailed discussion and the observation of the Hon’ble Delhi High Court on this issue read as under: “Profits on sale/redemption of investments 30. Since the Assessee's case with respect to the addition of profits earned on sale/redemption of investments essentially rests on Circular No. 528, this circular requires to be examined in some detail. Before reference is made to the said Circular, the background requires to be traced.
As already noticed, Section 44 of the Act is specific to 'Insurance Business'. It states that, notwithstanding anything to the contrary contained in the Act relating to the computation of income chargeable under different heads 'interest on securities', 'income from house property', 'capital gains' or 'income from other sources', the profits and gains of any business of insurance shall be computed in accordance with rules contained in the First Schedule of the Act. Therefore, in the case of the Assessee which is carrying on general insurance business, the profits and gains of its business have to be computed only in terms of the First Schedule. Analysis of Rule 5 (b) 32. The First Schedule sets out the Rules under Part 'B'. We are concerned with Rule 5(b) which stood omitted by the Finance Act, 1988 and was re-introduced by the Finance Act, 2009 with effect from 1st April 2011. The rationale for omitting Rule 5(b) was to exempt profits and gains in investments by the General Insurance Corporation of India and the four companies formed under Section 16 of the General Insurance Business (Nationalization) Act, 1972.
Rule 5 in First Schedule to the Act, i.e. the provisions relating to "Computation of profits and gains for other Insurance business" reads as under: "Computation of profits and gains of other insurance business.— 5. The profits and gains of any business of insurance other than life insurance shall be taken to be the balance of the profits disclosed by the annual accounts, copies of which are required under the Insurance Act, 1938 (4 of 1938) to be furnished to the Controller of Insurance, subject to the following adjustments:— (a) subject to the other provisions of this rule, any expenditure or allowance 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 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; (c) such amount carried over to a reserve for unexpired risks as may be prescribed in this behalf shall be allowed as a deduction."
The current clause (b) of Rule 5 was substituted by the Finance Act, 2010 with effect from 1st April 2011 for the previous clause (b)
which stood re-inserted by the Finance (No. 2) Act, 2009 with effect from 1st April 2011 after its omission by the Finance Act, 1988 with effect from 1st April 1989. The clause, prior to substitution, read as under:— "Computation of profits and gains of other insurance business.— 5. [. . . ] (a) [. . . ] (b) (i) deduction in respect of any amount either written off or provided in the account to meet diminution in or loss on realization of investments in accordance with the regulations made by the Insurance Regulatory and Development Authority; (ii) increase in respect of any amount taken credit for in the account on account of appreciation of or gains on realization of investments in accordance with the regulations made by the Insurance Regulatory and Development Authority; (c) [. . . ]"
Prior to this, while proposing deletion of Clause (b) of Rule 5 of the First Schedule with effect from 1st April 1989, the explanation offered in the Memorandum to the Finance Bill, 1988 was as under: "Liberalization of provisions in respect of taxation of profits and deduction of tax at source applicable to the General Insurance Corporation and its subsidiaries 17. Under the existing provisions of Section 44 of the Income Tax Act, the profits and gains of any insurance business is computed in accordance with the rules contained in the 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 of Insurance subject to certain adjustments. One of the adjustments provided therein is in 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 to play a more active role in the capital markets for the benefit of policy holders, it is proposed to provide for exemption of the profits earned by them on the sale of investments. As a corollary, it is proposed to provide that the losses incurred by the General Insurance Corporation on the realization of investment shall not be allowed as deduction in computing the profits chargeable to tax. To achieve this objective, clause (b) of rule 5 of the First Schedule to the Income tax Act is proposed to be deleted. This amendment will take effect from 1st April, 1989, and will, accordingly, apply in relation to the assessment year 1989-90 and subsequent years."
Simultaneous with the omission of Rule 5 (b) in 1988, Circular No. 528 dated 16th December 1988 was issued by the Central Board of Direct Taxes ('CBDT') which purported to introduce through the Rules a policy of 'Liberalisation of provisions in respect of taxation of profits and deduction of tax at source applicable to the holding company' of the Assessee, that is, the GIC and its subsidiaries (including the Assessee). Thus what an insurance company was deprived of by omission of Rule 5 (b) was provided to it by the above Circular. Whether this was permissible in law is the central question in the present case.
To complete the chronological sequence, when again a change was brought about in 2009 to Rule 5, the Memorandum appended to the Finance (No. 2) Bill, 2009, explained the rationale thus: "Taxation of Investment Income/loss of Non-life Insurance business. The profits and gains of non-life insurance business is computed under section 44 read with rule 5 of the First Schedule. As per Rule 5, profits and gains of non-life insurance business is taken to be profits disclosed in the annual account, copies of which are required under the Insurance act, 1938 (4 of 1938), to be furnished to the Controller of Insurance, subject to adjustments for unexpired risk and disallowances under Section 30 to Section 43B. The Insurance Act, 1938 was amended in 1999 and the Insurance Regulatory Development Authority (IRDA) was created. In the financial year 2001-02, IRDA introduced "IRDA (Preparation of Financial Statements and Auditor's Report of Insurance Companies) Regulations, 2002". The regulations mandated new guidelines and formats for preparation of accounts by General Insurers. According to these changed norms, a non-life insurance company has to include profit or loss on realization/sale of investment in the profit and loss account or revenue account. This is also consistent with international best practice on taxation of investment income of non-life insurance companies."
Thus, the major change, therefore, sought to be brought about by the 2009 amendment was to align it with the IRDA Regulations regarding preparation of accounts of general insurance companies. The changed norms, in terms of said Regulations, required a non-life insurance company to include in its Profit and Loss ('P&L') Account or Revenue Account "profit or loss on realization/sale of investment". This was said to be consistent with the international standards.
With the Assessee carrying on a general insurance business, it was bound by the provisions of the IA as well as the IRDA Regulations referred to hereinbefore. Even the CBDT, in its Circular No.5/2010 dated 3rd June 2010, acknowledged that, after the introduction of the IRDA Regulations in 2002, non-life insurance companies are required to credit income from the sale of investments directly to the P&L Account. This requirement, which would make the income so earned amenable to tax, was made applicable only from AY 2011-12. Prior to 1st April 2011, there was no provision which required the Revenue to disallow the deduction of loss on sale of investments.
As explained by the Supreme Court in Karnataka State Co operative Apex Bank (supra) in the context of Section 80 P (2) (a) (i) of the Act, where an entity is obliged to place a part of its funds with the State Bank or the Reserve Bank of India to enable it to carry on its banking business, then "any income derived from funds so placed arises from the business carried on by it and the assessee has not, by reason of section 80P(2)(a)(i), to pay income-tax thereon. The placement of such funds being imperative for the purposes of carrying on the banking business, the income derived there from would be income from the assessee's business."
In the AY in question, the AO did not accept the case of the Assessee that the income earned on the sale/redemption is not chargeable to tax because, in the past, the profit on sale of investment was sometimes shown in the balance sheet and sometimes in the P&L account. According to the AO, the entire income of the Assessee was assessable as 'business income'. According to the AO, Circular No. 528 dated 16th December 1988 of the CBDT did not create a dent insofar as it stated that both profit and loss on sale of investments will not be taken into account in calculation of insurance profits. Binding nature of the Circular 42. The above approach of the AO in relation to Circular No. 528 and its binding nature as far as the Revenue is concerned, appears to be flawed. In Principal Commissioner of Income Tax v. National Insurance Co. Ltd. [2017] 393 ITR 52/246 Taxman 176/79 taxmann.com 112 (Cal.), it was held that Circular No. 528 of 1988 did not permit the AO to add back the profits arising from the sale of investments made by the Assessee in that case which was also carrying on a general insurance business. The Calcutta High Court in the above decision referred to the decision in Paper Products Ltd. v. Commissioner of Central Excise [2001] 247 ITR 128/115 Taxman 147 (SC)where it was held that the circulars issued under Section 37B of the Central Excise Act, 1944 would be binding on the Department and that, "it does not lie in the mouth of the Revenue to repudiate a circular issued by the Board on the basis that it is inconsistent with the statutory provisions. Consistency and discipline are, according to this Court, of far greater importance than the winning or losing of Court proceedings." It is, therefore, too late in the day for the Revenue to disown its own Circular No. 528 and contend that it does not apply to the facts of the present case. 43. In CIT v. Ashok Mittal [2013] 357 ITR 245/31 taxmann.com 240/213 Taxman 197 (Mag.) (Delhi), the Court reiterated the well settled position that, where the CBDT circular has not been withdrawn and is beneficial to the Assessee, it would be binding on the AO and other Revenue authorities. The Court was merely reiterating what has been held in a large number of cases including Navnitlal C. Zaveri (supra) and CIT v. Milk Food Ltd. [2006] 280 ITR 331/152 Taxman 50 (Delhi).
The ITAT itself has taken a consistent stand that the taxability of income in the case of insurance companies is not on commercial profits but on such profits as are computed in accordance with the provisions of the IA, subject to the permissible adjustments under the Act. In other words, the taxability of profits in the hands of the insurance companies is confined to profits in terms of annual accounts of such insurance companies drawn up in accordance with the IA.
Indeed, the legislative policy appears to be clear. Where it is intended to bring the profit on sale of investments to tax, the legislature has chosen to re-introduce the earlier provision by virtue of the amendment effective from AY 2011-12. The intention behind omitting Rule 5(b) was clearly expressed in the Circular. If the Circular was not intended to fill the gap brought about by the omission of Rule 5(b), viz., to exempt the profits on sale of investments made by the insurance companies from tax, there was no need to re-introduce Rule 5(b) with effect from AY 2011-12. The resultant position is that for the period during which there was no Rule 5(b) the profits on sale of investments were not taxable in the hands of the Assessee. Further, the Assessee has itself clarified that it is not claiming the loss suffered on the writing off of the investments in compliance with the CBDT Circular No. 528. 46. The different benches of the ITAT have, in other cases, consistently held that during the period when Rule 5(b) was not operational the profit on sale of investments made by general insurance companies cannot be brought to tax. In Bajaj Allianz General Insurance Co. Ltd. v. Addl. CIT [2010] 130 TTJ 398 (Pune), the ITAT addressed the specific question of whether a logical conclusion could be drawn that an income that is not taxed in terms of Rule 5(b) could, even after such amendment was deleted, be taxed in the hands of the insurance company. It was held that income which was earlier taxable under one specific clause could not be brought to tax after the deletion of such clause. 47. It is futile, therefore, for the Revenue to seek to bring to tax profits on sale of investment because in some earlier year the Assessee may have taken what appears to be a contradictory stand. In any event, the Assessee appears to have explained that the issue that arose in the earlier case was regarding investments written off and not profit on sale/redemption of investments. The observations of the ITAT in its order for AY 1990-91 with regard to the profit on sale/redemption of investment could, at best, be treated as obiter since that was not in issue in the case before it.
The Court is, therefore, unable to subscribe to the submission of Mr. Manchanda that the Circular No. 528 has no application to the present case. The decision in J.K. Synthetics (supra) relied upon by him has no application to the facts of the case. Furthermore, it is not even the case of the Revenue that the said Circular is ultra vires of the Act.
The question framed in of 2015 is accordingly answered in the negative, in favour of the Assessee and against the Revenue, by holding that the ITAT erred in holding that the income earned on sale/redemption of investment was chargeable to tax.”
Once the Hon’ble Delhi High Court after discussing the relevant provisions of the Act, CBDT Circular and Rule 5 of the first schedule has decided the issue in favour of the assessee then it has to be followed as binding precedence and accordingly, the contentions raised by the Ld. CIT DR are rejected. Thus, grounds raised in the assessee’s appeal are allowed.
Since, we have allowed the ground no. 1 the issue raised in ground no. 2 is infructuous.
8. In the Revenue’s appeal, the grounds relating to deletion of addition on account of acute interest on loans, debentures and bonus amounting to Rs. 73,90,48,000/-, the Hon’ble Delhi High Court vide judgment order dated 17.09.2020 and also in another judgment of Delhi High Court order dated 04.03.2020 in of 2020 has decided this issue in favour of the assessee. The Ld. AO noted that assessee received interest income of Rs. 73,90,48,000/- which has not been offered for taxation. The Ld. AO held that the assessee should have offered interest income for taxation. The reasoning by the AO is as under: “The assessee company is providing for interest accruing to it every year on debentures, loans and bonds where recovery of the same is stated to be deferred and/or has remained due for six months or more. For such interest a separate account is being maintained. Whenever, any interest is realized, it is reduced from this account and taken in P&L account. After accrual of such interest, it neither decides to treat it as bad debt nor claim deduction u/s 36(2) of the Act but still maintains the separate account with diminished hope of recovery. Therefore, the ratio laid down by the Supreme Court in case of the State Bank of Travancore is fully applicable in case of the assessee company for taxing accrued interest of Rs. 73,90,48,000/- and taxation of this interest cannot be excluded by taking shelter under the provision of section 44 read with Rule 5 of First schedule because they only provide for method of computation of income of insurance company and does not provide for charging of income of Insurance company.”
9. The Ld. CIT(A) following the order of the AO for the AY 2007- 08 had allowed this issue in favour of the assessee.
It is undisputed fact that the assessee’s income has to be computed in accordance with Section 44 of the Act which is a special provision dealing with the computation of profits and gains of the business of Insurance. It is a non obstantive provision which clearly provides that the income of the Insurance business has to be computed in accordance with the first schedule. The AO has held that the taxable income cannot be computed in accordance with Section 44, because taxation of this interest cannot be excluded by taking shelter under the provision of section 44 read with Rule 5 of First schedule as it only provide for method of computation of income of insurance company and does not provide for charging of income of Insurance company. This reasoning is not tenable in view of Hon’ble Delhi High Court in assessee’s own case in & 98 of 2002 (supra) and also followed by the Tribunal vide AY 2000-01 to 2011-12, as it has been held that the other provisions of the Act to compute the income is not permissible in case of assessee and taxability is governed by section 44 read with Rule 5 of First schedule. Therefore, the addition made by the AO cannot be upheld. Accordingly, ground raised by the Revenue is dismissed.
Further, the disallowance of 50% on account of expenses incurred on Guest House also stands covered in favour of the assessee by the order of the Tribunal for AY 2000-01 to 2011-12 and, therefore, respectfully following the earlier year precedence the ground raised by the Revenue is treated as dismissed.
Lastly, with regard to deletion of addition of disallowance made u/s 14A, the Hon’ble Delhi High Court decision in the case of the assessee in of 2002 and decided this issue in favour of the assessee after observing and holding as under: “6. The Revenue has preferred the present appeal to assail the order dated 25.02.2019 passed by the Income Tax Appellate Tribunal (ITAT), Delhi Bench ‘C’, New Delhi in ITA No. 485/Del/2016 preferred by the Revenue in respect of the AY 2011-12. The Tribunal has dismissed the said appeal by placing reliance on its earlier order in relation to Respondent- assessee for AY 2005-06 which in turn placed reliance on the earlier orders of the Tribunal in relation to the same assessee for the AY 2000-01 and 2001-02. 7. The submission of Mr. Ajit Sharma, Ld. Senior Standing Counsel for the Appellant is that the applicability of Section 14A of the Income Tax Act, 1961 does not stand excluded upon reading of Section 44 read with the first schedule of the Act. He submits that the object of Section 14A is to prevent a double benefit being claimed by the assessee, by claiming deduction of expenditure incurred in deriving income which does not constitute part of the total income i.e. the taxable income.
He further submits that in any event, if in view of the Tribunal, Section 14A was not attracted, the Tribunal should have at least remanded the matter back to the Assessing Officer to ensure that the computation of income had been done in terms of the first schedule of the Act in relation to the Respondent- assessee, who is carrying on a business of insurance other than life insurance.
We have heard Ld. Counsels and are of the view that no substantial question of law arises for our consideration. The Tribunal has interpreted Section 44 read with the first schedule and concluded that applicability of Section 14A is excluded in relation to computation of income of an insurance company. We have examined the relevant provisions. Section 44 begins with a non-obstante clause and overrides the other provisions of the Act as mentioned therein including Section 14A. We are not convinced with the submission of Mr. Ajit Sharma that Section 14A would be applicable in respect of the Respondent. Section 14A does not have independent legs to stand on. Section 14A inter alia begins with the words “for the purposes of computing the total income under this chapter no deduction shall be allowed in respect of expenditure incurred……”. The chapter in question is chapter IV. This chapter also contains the provisions relating to computation of profits and gains of business or profession. Section 44 specifically excludes the provisions of the Act relating to computation of income, inter alia, those contained in “Section 28 to 43B”. Thus, the exclusion would taken within its sweep Section 14A which is an exemption for deductions as allowable under the Act, as provided under Section 28 to 43B. Further, Section 44 is a special provision applicable in the cases of insurance companies and applies, notwithstanding anything to the contrary contained in the provisions of the Income Tax Act relating to the computation of income chargeable under different heads. For computing the profits and gains of the business of insurance company, the AO had to resort to Section 44 and the prescribed rules, and could not have applied Section 28 to 43B, since the same were excluded from the purview of Section 44. This necessarily includes the exception provision enshrined under Section 14A of the Act. Therefore, in our view, the AO could not have travelled beyond Section 44 in the first schedule of the Act. Besides, the Tribunal has also invoked the rule of consistency since the same view of the Tribunal has prevailed in respect of the earlier assessment years i.e. 2000-01, 2001-02 and 2005-06.”
In the result, the grounds raised
by the Revenue are dismissed.
14. In the result, the appeal of the assessee is allowed and the Revenue’s appeal is dismissed. Order pronounced in the open Court on 31.08.2020.