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Income Tax Appellate Tribunal, DELHI ‘F’ BENCH,
Before: SHRI N.K. BILLAIYA, & MS. SUCHITRA KAMBLE
PER N.K. BILLAIYA, ACCOUNTANT MEMBER,
This appeal by the Revenue is preferred against the order of the Commissioner of Income Tax [Appeals] - I, New Delhi dated 04.12.2015 pertaining to assessment year 2012-13.
The grievances raised by the revenue in this appeal read as under:
“1. On the facts and in the circumstances of the case the ld. CIT(A) erred in deleting the addition of Rs. 8,62,47,181/- being income from investment not included.
2. On the facts and in the circumstances of the case the ld. CIT(A) erred in deleting the addition on account of Rs. 75,29,079/- being disallowance u/s 14A of the Income tax Act, 1961 [hereinafter referred to as 'The Act' for short] r.w.r 8D of the I.T. Rules.”
Briefly stated, the facts of the case are that the assessee company has been set up to provide financial security to persons engaged in agriculture and elite activities, through insurance product and other support services, as per declared policy of the Government of India. The assessee company is promoted by the General Insurance Corporation of India (GIC), National Bank for Agriculture and Rural Development (NABARD) and four Public Sector Insurance Companies viz. National Insurance Company Ltd., New India Assurance Company Ltd., Oriental Insurance Company Ltd. and United India Insurance Company Ltd. As in the past, the assessee company is engaged in the business of Agriculture Corp Insurance.
During the course of scrutiny assessment proceedings, the Assessing Officer noticed that the assessee has invested its funds as per the investment pattern prescribed by the IRDA Regulations on Investments, and the company's Investment Policy. Gross income from investments amounted to Rs. 252.56 crores, which included an investment income of Rs. 8.62 crores. The Assessing Officer found that the profit and loss account excludes income from investment amounting to Rs. 8,62,47,181/-, which he found directly credited to the Corpus Fund of Central & State Government, as their share of income.
The assessee was asked to explain why the amount of Rs. 8.62 crores has not been credited to the Profit and Loss Account.
The assessee filed detailed reply explaining that this income is the proportionate income generated on the amount of corpus fund allocated in the ratio of corpus fund lying with the company to total investible funds, as the beginning of the year. It was strongly contended that the corpus fund held by the assessee is on behalf of the Government and the same is directly credited to the Corpus Fund at the end of the year.
The claim of the assessee did not find any favour with the Assessing Officer who proceeded by making an addition of Rs. 8,62,47,181/-. Proceeding further, the Assessing Officer noticed that in the preceding Assessment Year, the assessee has suo moto disallowed a sum of Rs. 43,88,951/- and u/s 14A of the Act r.w.r 8D of the Rules, further disallowed a sum of Rs. 2,50,038/-. However, the Assessing Officer found that during the year under consideration, no such disallowance was made. The Assessing Officer, accordingly, proceeded by computing the disallowance u/s 14A r.w.r 8D of the Act at Rs. 75,29,079/-.
The assessee carried the matter before the ld. CIT(A) and in respect of addition of Rs. 8.62 crores, the assessee reiterated its contentions before the ld. CIT(A) and placed strong reliance on the decision of the Hon'ble Supreme Court in the case of Associated Power 218 ITR 195 and further substantiated its claim of diversion of income by overriding titles.
After considering the facts and submissions, the ld. CIT(A) held as under:
“I have considered the submission of the appellant and observation of the Assessing Officer. It is seen that an amount of Rs. 8,62,47,181/- was added by the AO which was income received by the appellant from the investments and directly credited to the corpus fund. This corpus fund was created by the Government of India and State Governments with contributions received from the Government of India and State / U.T.s. This corpus fund is the public fund which is managed by implementing agency i.e. the Government of India has duly designated the appellant company to act as an implementing agency. The Ministry of Agriculture, Government of India had issued directions to the appellant company to credit the interest earned to corpus fund only as the income earned belongs to the Government. The Ministry of Agriculture, Department of Agriculture and Cooperation vide letter dated 28.06.2007 has directed the appellant company to add up the interest accrued in the corpus fund. The appellant has filed this copy of the letter as Annexure A to the submission.x The appellant has also filed the auditor’s observation and comments of the management on the objections raised by the CAG wherein it is mentioned that CAG has raised objections on the accounts of the appellant company and suggested that interest earned to be credited to corpus fund and it was to be accepted by the appellant company being a public sector company. The remark sheet has been attached by the appellant as Annexure B to the submission. It is submitted by the appellant that corpus fund belonged to and owned by the Government.' The company used the funds as per the investment guidelines of IRDA along with the normal business investment and credited the proportionate interest amount directly to the corpus fund as directed by the Government of India vide its letter dated 28.06.2007. Copy of the same is attached as Annexure A to the submission. Following the said direction, the appellant company earned total income of Rs.2,52,56,33,000/- which has been bifurcated to the policyholder fund, shareholder fund and corpus fund in the ratio of balances at the beginning of the year, the bifurcation of the interest income earned by the appellant company has been given by the appellant as per Annexure C to the submission. The appellant further argued that the observation of the AO that corpus fund belonged to the company is factually incorrect as the appellant company is factually incorrect as the appellant company is merely acting as an implementing agency. The AR also argued that this fund has been set up to meet the catastrophic losses to the agriculture sector and it has been credited with the contributions received from Government of India and States on the fifty-fifty basis. The income of this fund cannot be used by the appellant company at its option and it is absolutely outside the purview of the company. The income credited to the corpus fund is a statutory obligation and to be used as per the directions of the Government of India. Whenever a charge is created or an overriding title is created, the appellant company becomes only a collector of another’s income. In other words, the income of the appellant ceases to be his income, because the charge holder has the principle right by virtue of its overriding title to recover that income before it reaches in the hands of the appellant company. In this regard, the appellant has relied upon the judgment of Hon’ble Supreme Court in the case of Associated Power Vs. CIT 218 ITR 195 (SC) wherein the doctrine of diversion of income by overriding titles has been explained by the Hon’ble Supreme Court. In this case a consent decree was passed in favour of stepmother directing the son to pay fixed monthly sum to her and declared that maintenance was charge on ancestral estate. The Privy Council held that the sum received and paid as maintenance was not his income at all and it is diversion of income, thus not overriding title applies when, by reason of an overriding title or obligation income is diverted and never reaches the person in whose hands it is sought to be assessed; the profit earned by him is not really his profit, but belongs to somebody else and assessee has no title to it. Thus, in the instant case, the amount credited to corpus of the fund according to Government directives and guidelines should be excluded from the total income of the appellant company.”
After discussing certain other judicial decisions, the ld. CIT(A) observed that the income received from investments and credited to the corpus fund has been credited as per the directions of the Government of India and such income was earned out of the amount received from the Central Government and State Government in the corpus fund for specified purposes by the Government of India.
Accordingly, he deleted the addition of Rs. 8,62,47,181/-.
Before us, the ld. DR vehemently stated that the appellant’s activities in respect of investments out of corpus fund vis a vis other investments are same for which common expenses have been debited in the Profit and Loss Account. Further, the assessee has utilized the corpus funds, ownership/ right to use, vests with the assessee. The ld. DR further stated that the ld. CIT(A) has simply referred to the submissions of the assessee and has deleted the additions without any speaking order. Therefore, the matter should be restored to the file of the ld. CIT(A) for fresh adjudication.
Per contra, the ld. counsel for the assessee reiterated what has been stated before the lower authorities. In support, the ld. counsel for the assessee submitted the letter from Government of India, Ministry of Agriculture, Department Agriculture and Co-operation, which reads as under:
“I am directed to say that the funds under the Corpus Fund are provided by the Central and State Governments on 50:50 basis. As the Corpus Fund belongs to the Central and State Government, the interest accrued thereon also belong to the Government. Therefore, interest accrued on the Corpus Fund is required to be added in the Corpus Fund.”
We have given thoughtful consideration to the orders of the authorities below and have carefully considered the letter of the Government of India referred to hereinabove. The facts of the case, read with the aforesaid letter of the Government, clearly demonstrates that this is a case of diversion of income by overriding titles. Considering the fats of the case in the light of the letter of Government of India, we find that the reliance by the ld. CIT(A) on the ratio laid down by the Hon'ble Supreme Court in the case of Associated Power [supra] is well taken. The ratio laid down by the Hon'ble Supreme Court has been followed in various judgments, to name a few, CIT Vs. New Horizon Sugar Mill Pvt Ltd 244 ITR 738, Bijli Cotton Mills [P] Ltd 116 ITR 60, Dalmia Cement Ltd 237 ITR 617, etc. All these judicial decisions have been discussed elaborately by the ld. CIT(A) in his order. We, therefore, do not find any error or infirmity in the order of the ld. CIT(A). Accordingly, Ground No. 1 of the Revenue is dismissed.
In so far as the disallowance made u/s 14A of the Act is concerned, the ld. DR strongly supported the findings of the Assessing Officer and placed reliance on the decision of the Hon'ble Supreme Court in the case of Maxopp Investment Limited 402 ITR 640.
On the other hand, the ld. counsel for the assessee drew our attention to the decision of the co-ordinate bench in assessee’s own case for A.Y 2011-12 and pointed out that in the case of Insurance business, provisions of section 44 of the Act override all other provisions and no disallowance u/s 14A can be made in respect of persons carrying on insurance business.
We have carefully gone through the order of the coordinate bench in order dated 09th November 2017. We find that the coordinate bench has followed the earlier order of the coordinate bench in ITA No. 3115/DEL/2013. The relevant findings of the coordinate bench read as under:
“We have considered the rival contentions and gone through the records. The provisions of section 44 read as under.
'Insurance business, - 44 : Notwithstanding anything to the contrary contained in the provisions of this Act relating to the computation of income chargeable under the head 'interest on securities', 'income from house property', 'capital gains' or 'income from other sources' or profits and gains of any business of insurance, including any such business carried on by a mutual insurance company or by a cooperative society, shall be computed in accordance with the rules contained in the First Schedule.
The above provision makes it very clear that section 44 applies notwithstanding anything to the contrary contained within the 'provisions of the income-tax Act relating to computation of income chargeable under different heads. We agree with the learned counsel that there is no requirement of head-wise bifurcation called for while computing the income u/s 44 of the Act in the case of a insurance company: 'The income of the business of insurance is essentially to be at the amount of the balance of profits disclosed by the annual accounts as furnished to the Controller of Insurance. The actual computation of profits and gains of insurance business will have to be computed in accordance with Rule 5 of the First Schedule. In the light of these special provisions coupled with non obstante clause the AO is not permitted to travel beyond these provisions.
Section 14A contemplates an exception for deductions as allowable under the Act are those contained u/s 28 to 43B of the Act. Section 44 creates Special application of these provisions in the cases of insurance companies. We, therefore, agree with the assessee and delete the disallowance made by the AO which is based on the application of sec. 14A of the act as according to us, it is not permissible to the AO to travel beyond section 44 and First Schedule of the Income-tax Act.
Respectfully following the decision of the ITAT in the case of Oriental Insurance Co. Ltd. (supra), the additional ground raised by assessee is allowed. Accordingly, it is held that the provisions of section 14A are not applicable in the case of assessee. Therefore, the addition of Rs. 23,31,454/- stands deleted.
4. Respectfully following the order in ITA 3115/Del/2013, we allow the appeal of the assessee.
In the light of the above, Ground No. 2 is also dismissed.
In the result, the appeal of the Revenue in is dismissed.
The order is pronounced in the open court on 06.11.2019.