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Income Tax Appellate Tribunal, “E” BENCH, MUMBAI
Before: HON’BLE SHRI MAHAVIR SINGH, VP & HON’BLE SHRI MANOJ KUMAR AGGARWAL, AM
O R D E R Manoj Kumar Aggarwal (Accountant Member) 1. Aforesaid appeal by revenue for Assessment Year [in short referred to as ‘AY’] 2012-13 contest the order of Ld. Commissioner of Income- Tax (Appeals)-8, Mumbai, [in short referred to as ‘CIT(A)’], Appeal No. CIT(A)-8/IT-217/2016-17 dated 20/08/2018 on following grounds: -
1. "Whether on facts and circumstance of the case and in law, the Ld. CIT(A), is correct in allowing exemptions u/s. 10(34) of the Income Tax Act, 1961, amounting to Rs.17,92,987/- on account of dividend income which was denied by the Assessing Officer on the basis the fetters prescribed in Section 44 of the Income 2 M/s. Edelweiss Tokio Life Insurance Ltd. Assessment Year :2012-13 Tax Act, 1961 and CIT(A) ignoring the facts that the revenue was contesting the case of DCIT v/s. IDBl Federal Life Insurance Company Ltd (ITA 6282/Mum/2012) and ACIT 1(2)(1), Mumbai v/s. Kotak Mahindra Old Mutual Life Insurance Limited (ITA 5655/Mum/2015) in Bombay High Court.
2. Whether on facts and circumstance of the case and in law, the Ld. CIT(A), is correct in deleting the disallowance u/s. 14A of the Income Tax Act, 1961, amounting to Rs. 39,388/-, which was made by the Assessing Officer on the basis the fetter prescribed in Section 44 of the Income Tax Act, 1961.
3. Whether on facts and circumstance of the case and in law, the Ld. CIT(A), is correct in deleting the addition on account of negative reserves amounting to Rs.8,41,35,000/-, which was made by the Assessing Officer, and CIT(A) without appreciating the provision of Insurance Act, 1938 and IRDA Regulations & ignoring the fact that revenue was contesting the case DCIT v/s. IDBI and LIC of India v/s. Addl.CIT(ITA/622/Mum/2012) (Civil Appeal No. 11278) in Bombay High Court."
The Ld. Authorized Representative for assessee (AR), Shri Jitendra Jain, drawing attention to the grounds of appeal, submitted that the issues stood covered in assessee’s favor by following binding judicial precedents: - i) Pr. CIT vs. ICICI Prudential Life Insurance Co. Ltd. [2019] 415 ITR 389 dated 03/07/2018. ii) Life Insurance Corporation of India vs. Addl. CIT, (Mumbai Tribunal, order dated 03/04/2013. iii) ACIT vs. Kotak Mahindra Old Mutual Life Insurance Ltd. (Mumbai Tribunal ITA No. 5655/Mum/2015 dated 27/09/2017. The copies of the decisions have been placed on record. Our attention has been drawn to the fact that Ld. CIT(A) has followed the same and therefore, the impugned order would not require any interference on our part. The Ld. DR, Shri Amit Pratap Singh, on the other hand, submitted that the issues have not attained finality and revenue is contesting the same before higher judicial authorities. However, no contrary decision has been placed on record. In the above background, our adjudication to the subject matter of appeal would be as given in succeeding paragraphs.
3 M/s. Edelweiss Tokio Life Insurance Ltd. Assessment Year :2012-13 Dividend Income & disallowance u/s 14A 3.1 The assessee being resident corporate assessee is stated to be engaged in the business of Life Insurance. An assessment was framed for the year under consideration u/s. 143(3) on 31/03/2016, wherein the returned Loss of Rs.1575.40 Lacs was reduced to Rs.716.12 Lacs after certain additions / disallowances. 3.2 During assessment proceedings, it transpired that the assessee earned dividend income of Rs.17.92 Lacs and claimed the same to be exempt u/s.10(34). However, the Ld. Assessing Officer opined that since the income in case of insurance business was to be computed in terms of provisions of Section 44, which starts with non-obstante clause, and therefore, dividend income as offered under the head income from other sources could not be taken as separate from profit and gains of insurance business. Hence, dividend income which falls under the head income from other sources could not be computed separately to claim exemption u/s. 10(34) as it would violate the provisions of Sec.44. Further, Life Insurance company normally accepts premium from policyholders and invests the same by way of loans, deposits, bonds, shares etc. The Income so received from these investments would be nothing but income from normal business and was to be assessed under the head income from business or profession. Therefore, the exemption u/s. 10(34) was in contradiction with non-obstante provisions of Section 44 and therefore, the same would not be allowable to the assessee. In the alternative, Ld. AO proposed indirect expense disallowance u/s 14A 4 M/s. Edelweiss Tokio Life Insurance Ltd. Assessment Year :2012-13 r.w.r. 8D(2)(iii), being 0.5% of average investments which worked out to be Rs.39,388/-. 3.3 Upon further appeal, Ld. CIT(A), relying upon the cited order of Mumbai Tribunal in Life Insurance Corporation of India vs. Addl. CIT (supra) held that taxing the dividend income would be unjustified and would run contrary to the provisions of the act. Similar was the ratio of following decisions: - (i) DCIT V/s IDBI Federal Life Insurance Company Ltd. (ITA 6282/Mum/2012) (ii) General Insurance Company Ltd. V/s DCIT (342 ITR 27 Bom) (iii) CIT V/s New India Assurance Company Ltd. (71 ITR 761 Bom) (iv) Life Insurance Corporation of India Ltd. V/s CIT (115 ITR 45 Bom)
Therefore, the action of Ld. AO in taxing the dividend income was reversed. 3.4 The alternative disallowance u/s 14A, as proposed by Ld. AO was deleted by observing that the provisions of Sec.14A would not apply in case of insurance companies as held in following judicial decisions: -
(i) ACIT V/s Kotak Mahindra Old Mutual Life Insurance Ltd. (ITA No. 5655/Mum/2015) (ii) ACIT V/s ICICI Prudential Insurance Co. Ltd. (ITA Nos. 7765-7767/M/2010) (iii) ACIT V/s ICICI Prudential Insurance Co. Ltd. (ITA No. 5529/M/2013)
Aggrieved, the revenue is in further appeal before us. 4. Upon due consideration, it is quite evident that Ld. CIT(A) has relied upon host of binding decisions to arrive at the conclusion that exemption u/s 10(34) with respect to dividend income would be available to the assessee and further, the provisions of Sec. 14A would not apply to insurance company. No contrary decision has been placed before us. The Hon’ble Bombay High Court in the case of Pr. CIT V/s ICICI 5 M/s. Edelweiss Tokio Life Insurance Ltd. Assessment Year :2012-13 Prudential Life Insurance Co. Ltd. for AYs 2010-11 & 2011-12 (ITA Nos.1305 & 1306 of 2015 dated 03/07/2018) refused to admit the ground raised by revenue qua allowability of dividend income exemption u/s 10(34) wherein vide para-4, it was noted that revenue had raised similar grounds for AYs 2006-07 & 2008-09 but the same was not admitted vide of 2013 & 688 of 2013 order dated 20/07/2015 and therefore, facts being similar, same view was to be taken in the matter. Respectfully following the same, we would hold that the exemption u/s 10(34) could not be denied to the assessee. Further, as held in the cited decisions, the provisions of Sec.14A would not apply to insurance company. Ground, thus, raised, stands dismissed. Adjustment of Negative Reserves 5.1 This issue arises due to negative reserves. Upon perusal of Actuarial Report in Form-1, it was observed that actuarial valuation was arrived at by ignoring the negative reserves of Rs.841.35 Lacs. While making actuarial valuation, requirement of reserve to service the insurance policies issued by the company was to be ascertained. Such reserve (called mathematical reserve or value of liability) would be equal to present value of future benefits payable & future expenses to be incurred less present value of future premium payable. When the present value of future premium is more than the present value of future benefits & future expenses, this amount becomes negative which is known as ‘negative reserves’. In simple words, it would mean that the insurance contract under consideration would not warrant any provision and is, in fact, an asset. However, following IRDA guidelines, insurers may not 6. M/s. Edelweiss Tokio Life Insurance Ltd. Assessment Year :2012-13 treat the policies as an asset and they would set any negative reserve to zero. The Ld. AO opined that ignoring such negative reserves would give unrealistic picture and understate the surplus. Though the assessee submitted that income of the Life insurance business was to be assessed on the basis of actuarial valuation only and the surplus worked out by the actuary could not be disturbed by Income Tax Authority, however, the same could not convince Ld. AO and accordingly, the surplus of actuarial valuation were increased by the amount of negative reserves i.e. Rs.841.35 Lacs. In other words, returned loss was reduced to that extent. 5.2 Upon further appeal, Ld. CIT(A) observed that assessee’s income was to be computed as per Sec. 44 of the Act and the assessee would be required to take Actuarial valuation Report in accordance with insurance Act, 1938. The negative reserves would be nothing but premium receivable by the insurance company. However, there would always be a chance that policyholder might not continue with the insurance polity bought by him which would result in non-receipt of premium which was otherwise receivable by the insurance company. Therefore, the same could not be taxed. Relance was placed on following decisions while arriving at adjudication: - (i) Life Insurance Corporation of India Ltd. V/s Addl.CIT (ITA No. 6221/Mum/2012 (ii) IDBI Federal Life Insurance Company Ltd. (ITA No. 6282/Mum/2012) (iii) ACIT V/s Kotak Mahindra Old Mutual Life Insurance Ltd. (ITA No. 5655/Mum/2015) Aggrieved, the revenue is in further appeal before us.