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Income Tax Appellate Tribunal, DELHI BENCH ‘E’ : NEW DELHI
Before: SHRI KULDIP SINGH & SHRI PRASHANT MAHARISHI
Date of Hearing : 27.08.2019 Date of Order : 17.09.2019
O R D E R PER KULDIP SINGH, JUDICIAL MEMBER : Since common questions of facts and law have been raised in the aforesaid appeals, the same are being disposed off by way of consolidated order to avoid repetition of discussion.
2. Appellant, M/s. Max Life Insurance Company Ltd. (hereinafter referred to as the ‘Revenue’) by filing the present appeals sought to set aside the impugned orders all dated 02.03.2015 passed by the Commissioner of Income - tax (Appeals)-22, New Delhi qua the assessment years 2007-08, 2008-08 & 2009-10 on the identical grounds except the difference in amount inter alia that :-
“1. That on the facts and circumstances of the case and in law, the Hon'ble Commissioner of Income-tax (Appeals)-22, New Delhi ('Hon'ble CIT (A)') has erred in confirming the addition made by Assistant Commissioner of Income Tax, Large Tax Payer Unit, New Delhi ('learned AO') (amounting to Rs.2,70,19,000/-, Rs.6,35,02,000/- & Rs.6,53,52,580/- for AYs 2007- 08, 2008-08 & 2009-10 respectively) representing income from sale of investment. 1.1 That on the facts and circumstances of the case and in law, the Hon'ble CIT (A) has erred in treating the income from sale of investment as an income not in the nature of income from life insurance business without appreciating the fact that as per the Insurance Regulatory Development and Authority Act, 1999 ('IRDA Act') a life insurance company cannot carry on any other business other than the business of life insurance in India.
1.2 That on the facts and circumstances of the case and in law, the Hon'ble CIT(A) has erred in completely disregarding the provisions of Section 44 of the Act read with the First Schedule, which is a self-contained code in the Act for computation of income for asses sees engaged in Life Insurance business, and the judicial precedents relied upon by the appellant. 1.3 That on the facts and circumstances of the case and in law, the Hon'ble CIT (A) erred in not appreciating the fact that the said issue has reached finality in the case of the appellant itself for the A Y 2005-06, wherein the issue has been decided in favour of the appellant, by the Hon'ble CIT(A)'s predecessor and no further appeal in this regard has been preferred by the Income Tax Department before the Hon'ble Income Tax Appellate Tribunal.
2. Without prejudice to ground 1 above, that on the facts and circumstances of the case and in law, the Hon'ble CIT(A) has erred in referring back the matter on issue of set off of business loss against income from sale of investment under section 70(1) of the Act, instead of disposing off the said ground.
3. That on the facts and circumstances of the case and in law, the Hon'ble CIT (A) has erred in confirming the disallowance made by learned AO (amounting to AYs 2007-08, 2008-08 & 2009-10 respectively) on account of disallowance of FBT provision by completely disregarding the provisions of Section 44 of the Income tax Act, 1961 which prohibits any adjustment to be made under Section 28 to 43B of the Act in case of a life Insurance Company.
4. That on the facts and circumstances of the case and in law, the Hon'ble CIT (A) has erred in confirming the learned AO's action of initiating penalty proceedings under section 271 (1 )(c) of the Act.”
Briefly stated the facts necessary for adjudication of the issue at hand are : Assessee company was engaged in the business of life insurance. During the years under assessment, Assessing Officer (AO) made addition of Rs.2,70,19,000/-, Rs.6,35,02,000/- & Rs.6,53,52,580/- on account of income from sale of investment pertaining to AYs 2007- 08, 2008-08 & 2009-10 respectively. AO also made disallowance of Rs.3,11,43,000/-, Rs.4,68,91,311/- & Rs.7,94,30,019/- on account of Fringe Benefit Tax (FBT) provision made by the assessee for AYs 2007-08, 2008-08 & 2009-10 respectively and thereby assessed the total loss at (-) Rs.50,23,01,690/-, (-) Rs.1,34,71,61,048/- & (-)
Rs.3,04,49,38,322/- AYs 2007-08, 2008-08 & 2009-10 respectively.
4. Assessee carried the matter by way of appeals before the ld. CIT (A) who has partly allowed the appeals. Feeling aggrieved, the assessee has come up before the Tribunal by way of filing the present appeals.
We have heard the ld. Authorized Representatives of the parties to the appeal, gone through the documents relied upon and orders passed by the revenue authorities below in the light of the facts and circumstances of the case.
GROUNDS NO.1 & 2 OF AYs 2007-08, 2008-09 & 2009-10
6. At the very outset, the ld. AR for the assessee contended that the issue in controversy has already been decided in favour of assessee by the coordinate Bench of the Tribunal vide order dated 22.04.2019 in for AY 2006-07 in assessee’s own case. This factual position has not been controverted by the ld. DR for the Revenue who has not brought on record any decision from the higher forum in contradiction to the decision relied upon by the ld. AR for the assessee rendered in case of the assessee for AY 2006-07 (supra).
Coordinate Bench of the Tribunal decided the issue in controversy in assessee’s own case for AY 2006-07 (supra) by returning following findings :-
“23. Now we come to ground number 4 of the appeal wherein the addition of INR 9 048000/– from sale of investments credited to the profit and loss account separated from income from the business of insurance by the learned assessing officer and taxed as a non-life insurance business income. Thereby denying the benefit of provisions of section 44 of the act on the above sum. During the course of assessment proceedings the learned assessing officer noted that assessee has earned income of INR 9 048000/– on account of sale of investments. The learned AO was of the view that nature of income emanating from sale of investment partakes the character of income not from insurance business of the assessee however assessee has considered it is part of business of insurance. The main reason given by the assessee is that life insurance companies in India are governed by the provisions of the insurance act 1938 and insurance regulatory development authority act 1999 and rules framed there under. The assessee is in Indian insurance company and has been allowed the life insurance business license by IrDA. He further stated before the assessing officer that according to section 2 (7A) defines the Indian insurance company wherein according to clause (C) it provides that whole sole purpose of the company is to carry on life insurance business are general insurance business or reinsurance business. According to the provisions of section 2 (11) of the insurance act 1938 provides the definition of life insurance business. Provisions of section 3 (4) of the it act was also pressed into service by the assessee wherein it is provided that it can cancel the registration of any insurance if the insurer fails to comply with the provisions of section 7, 98 with respect to the deposits and according to clause at if the insurer carries on any business other than insurance business or any prescribed business. Therefore the main argument of the assessee is that assessee is not allowed to carry on any other business other than what is directed by the era and that particular insurance act. It was further pressed into service that the insurance business has to comply with the potential investment guidelines laid down by the radar relating to investment of policyholders and shareholders fund and therefore this entire process of investment and disposal of the investment of a life insurance companies also governed by IRDA. It was further stated that insurance companies are required to invest their funds in accordance with the return’s and derives interest income from those investments and further similarly any profit or loss on realization of such investment also draws the same treatment as is applicable to other business income earned by the assessee. The assessee also referred to circular number 22 dated 23/09/1947 wherein it is provided that any income derived by the life insurance company from sale of any investment which forms part of investment of insurance business would be treated at par with the business income even if the main section governing taxation of insurance company does not cover specifically so. Assessee also relied on the decision rendered by the authority of advance ruling in case of potential. It was therefore submitted that provisions of income tax act relating to computing the taxability of income of a life insurance company as provided under section 44 read with 4 schedule are harmonious with the above requirements as they preclude the application for other chapters of the income tax act. It was further argued by the assessee that the above petition has been accepted by the revenue in earlier years and also consistent with the various decisions of the honourable Supreme Court. The learned AO considered the explanation of the assessee and rejected it as according to him the provisions of section 44 of the income tax act restricts only to the extent of income derived from life insurance business and in respect of other sources of income the normal charging sections are mandatorily applicable. Hence profit from sale of investment does not qualify to be income from life insurance business. With respect to the fact that in earlier year no such treatment has been given by the learned assessing officer and in past such profit on sale of investments has been considered as part of the insurance business, the learned AO stated that principles of res judicata do not apply to the income tax proceedings and if it is a mistake it ought to be rectified. Therefore he considered the income from sale of investment of INR 9 048000/– to be business income falling within section 28 of the act and added to the total income of the assessee separately. The learned DR P also upheld the action of the learned assessing officer wide para number 3 © of the act stating that activity of earning profit from sale of investment cannot be considered as business of insurance. Therefore the assessee aggrieved with the above order of the learned assessing officer has challenged it by ground number 4 of the appeal.
The learned authorised representative vehemently contested the above ground on following counts:- i. The assessee is engaged in the business of life insurance and is not permitted to carry on any other business other than life insurance business according to the provisions of it act, insurance act et cetera. He referred to the various provisions of the redeye act and insurance act to support its case. ii. He submitted that in the past years the identical situation has been accepted by the revenue and therefore now the same cannot be challenged. He pressed into service the role of consistency for this argument. He specifically referred to the facts for assessment year 2005 – 06 wherein identical issue arose in the assessment proceedings and the learned assessing officer has made the addition. The learned CIT appeal decided the above issue in favour of the assessee and AO did not challenge the same before the coordinate bench. Therefore it was submitted that now this issue cannot be once again agitated by the AO. iii. He also stated that all the investment made by the assessee are as per the direction of a mandate of the act to carry on the insurance business only and therefore the profit arising from such sale of investments does not fall into the category of a separate business but of insurance business. He further stated that had this investment been not paid by the assessee it would not have been allowed to carry on the insurance business itself and therefore these
are a mandatory investment made by the assessee for the purpose of carrying on the business of insurance. iv. He further referred to the decision of the coordinate bench in assessee’s own case for assessment year 2010 – 11 wherein the coordinate bench has held that investment are integral part of the insurance business and inexplicable to the business of life insurance. He therefore submitted that the claim of the AO is patently wrong that profits arising to the assessee on sale of investment are altogether a separate business. v. He further stated that identical issue has been considered by authority of advance ruling in petition number 445 of 98 dated 30/04/2001 with squarely covers the issue in favour of the assessee.
In view of this is submitted that the order of the learned assessing officer is not correct in treating the profits and gains of investment as separate business income. Alternatively in ground number 4.1 he raised the plea and stated that if this issue as per ground number 4 is decided against the assessee the assessee is eligible for relief as claimed in the ground number 4.1.
The learned departmental representative vehemently supported the order of the learned AO. The learned departmental representative mostly reiterated the argument that has been raised by the assessing officer in his order.
We have carefully considered the rival contention and perused the orders of the lower authorities. The only issue involved in this ground of appeal is whether the profit earned by the assessee on sale of its investment is chargeable to tax as part of insurance business or as a separate business. The provisions of section 44 of the income tax act is culled out earlier specifically provides that profits of insurance business specifically required to be computed as per the mandate of section 44 of the income tax act with specific reference to schedule 1 to the act. The income tax act does not define what ‘insurance businesses". Therefore it is necessary to go to the insurance act 1938 wherein in section 2 it provides certain definitions which are very important to decide the above issue. Such definitions are with respect to what is life insurance business, what is insurance company, what is investment required to be made by such companies.
(3) "approved securities" means— (i) Government securities and other securities charged on the revenues of the Central Government or of the Government of a 6[***] State or guaranteed fully as regards principal and interest by the Central Government, or the Government of any 6[***] State; (ii) debentures or other securities for money issued under the authority of any Central Act or Act of a State Legislature by or on behalf of a port trust or municipal corporation or city improvement trust in any presidency-town; (iii) shares of a corporation established by law and guaranteed fully by the Central Government or the Government of a 6[***] State as to the repayment of the principal and the payment of dividend; (iv) securities issued or guaranteed fully as regards principal and interest by the Government of any Part B State and specified as approved securities for the purposes of this Act by the Central Government by notification in the Official Gazette; 7[and] (v) 8[***]. 9[Explanation.—In sub-clauses (i) and (iii), "Government of a State" in relation to any period before the 1st November, 1956, means the Government of a Part A State;] [ (7A ) "Indian insurance company" means any insurer, being a company which is limited by shares, and,— (a) which is formed and registered under the Companies Act, 2013 (18 of 2013) as a public company or is converted into such a company within one year of the commencement of the Insurance Laws (Amendment) Act, 2015; (b) in which the aggregate holdings of equity shares by foreign investors, including portfolio investors, do not exceed forty-nine per cent of the paid-up equity capital of such Indian insurance company, which is Indian owned and controlled, in such manner as may be prescribed. Explanation.—For the purposes of this sub-clause, the expression "control" shall include the right to appoint a majority of the directors or to control the management or policy decisions including by virtue of their shareholding or management rights or shareholders agreements or voting agreements; (c) whose sole purpose is to carry on life insurance business or general insurance business or re-insurance business or health insurancebusiness; ]
(11) "life insurance business" means the business of effecting contracts of insurance upon human life, including any contract whereby the payment of money is assured on death (except death by accident only) or the happening of any contingency dependent on human life, and any contract which is subject to payment of premiums for a term dependent on human life and shall be deemed to include— (a) the granting of disability and double or triple indemnity accident benefits, if so provided in the contract of insurance, (b) the granting of annuities upon human life, and (c) the granting of superannuation allowances and 22[benefit] payable out of any fund applicable solely to the relief and maintenance of persons engaged or who have been engaged in any particular profession, trade or employment or of the dependents of such persons. 23[Explanation.—For the removal of doubts, it is hereby declared that "life insurance business" shall include any unit linked insurance policy or scrips or any such instrument or unit, by whatever name called, which provides a component of investment and a component of insurance issued by an insurer referred to in clause (9) of this section;]
IRDA Investment Regulation Act 2000 has a specified rule for investments and according to that all Insurance companies hall invest in specified securities only of all its controlled funds. Approved Investments 3. (a) No insurer shall invest or keep invested any part of its Controlled Fund, as defined under Sec. 27A/Assets as defined under Sec. 27 (2) of the Act, read together with Sec 27E of the Act, otherwise than in approved securities, as per Section 2(3) of Insurance Act, 1938, as amended from time to time and in any of the following approved investments, namely:—
1. debentures secured by a first charge on any immoveable property plant or equipment of any company which has paid interest in full 2. debentures secured by a first charge on any immovable property, plant or equipment of any company where either the book value or the market value, whichever is less, of such property, plant or equipment is more than three times the value of such debentures 3. first debentures secured by a floating charge on all its assets of any company which has paid dividends on its equity
shares 4. preference shares of any company which has paid dividends on its equity shares for at least two consecutive years immediately preceding 5. equity shares of any listed company on which not less than ten percent dividends have been paid for at least two consecutive years immediately preceding 6. immovable property situated in India, provided that the property is free of all encumbrances; 7. loans on policies of life insurance within their surrender values issued by him or by an insurer whose business he has acquired and in respect of which business he has assumed liability; 8. Fixed Deposits with banks included for the time being in the Second Schedule to the Reserve Bank of India Act, 1934 (2 of 1934) and; such other investments as the Authority may, by notification in the Official Gazette, declare to be Approved Investments. (b) In addition the following investments shall be deemed as Approved Investments
All rated debentures (including bonds) and other rated & secured debt instruments as per Note appended to Regulations 4 to 9. Equity shares, preference shares and debt instruments issued by All India Financial Institutions recognized as such by Reserve Bank of India – investments shall be made in terms of investment policy guidelines, benchmarks and exposure norms, limits approved by the Board of Directors of the insurer.
Bonds or debentures issued by companies, rated not less than AA or its equivalent and A1 or equivalent ratings for short term bonds, debentures, certificate of deposits and commercial papers by a credit rating agency, registered under SEBI (Credit Rating Agencies) Regulations 1999 3. Subject to norms and limits approved by the Board of Directors of the insurer's deposits [including fixed deposits as per Regulation 3 (a) (8)] with banks (e.g. in current account, call deposits, notice deposits, certificate of deposits etc.) included for the time being in the Second Schedule to Reserve Bank of India Act, 1934 (2 of 1934) and deposits with primary dealers duly recognized by Reserve Bank of India as such.
Collateralized Borrowing & Lending Obligations (CBLO) created by the Clearing Corporation of India Ltd and recognized by the Reserve Bank of India and exposure to Gilt, G Sec and liquid mutual fund forming part of Approved Investments as per Mutual Fund Guidelines issued under these regulations and money market instrument/investment.
5. Asset Backed Securities with underlying Housing loans or having infrastructure assets as underlying as defined under 'infrastructure facility' in Regulation 2 (h) as amended from time to time.
Commercial papers issued by All India Financial Institutions recognized as such by Reserve Bank of India having a credit rating of A1 by a credit rating agency registered under SEBI (Credit Rating Agencies) Regulations 1999 7. Money Market instruments as defined in Regulation 2(j) of this Regulation, subject to provisions of approved investments.
Explanation: All conditions mentioned in the 'note' appended to Regulation 4 to 9 shall be complied with.
(c) The board of the insurer, to comply with the provisions of Section 27A (2) (ii) of the Act, may delegate to Investment Committee, for investments already made and the continuance of such investments from controlled fund/assets, in otherwise than in an approved investments, and in All India Financial Institutions recognized as such by RBI for investments carrying a rating of less than AA and being part of Approved Investment. The investment committee shall be responsible for the details, analysis and review of non-performing assets of investments on a quarterly periodicity. The insurer shall report compliance of this provision to the Authority through Form 4.
(d) Unless specifically permitted by the Authority, no investment shall be made in any entity not formed under laws relating to companies in India and in any private limited company or one person company or a company formed under section 8 of the Companies Act, 2013 or erstwhile Section 25 of the Companies Act, 1956.
As provided under the insurance act 1938 any company carrying on the life insurance business shall invest or keep invested any part of his controlled fund in a specified securities as under:-
Further provisions regarding investments.
27A. (1) No insurer carrying on life insurance business shall invest or keep invested any part of his controlled fund and no insurer carrying on general business shall invest or keep invested any part of his assets otherwise than in any of the approved investments as may be specified by the regulations subject to such limitations, conditions and restrictions therein
On Conjoint reading of all these provisions it is apparent that insurance companies are required to invest according to the rules provided by the IRDA of all its controlled funds. It is not the case of the assessee that assessee has invested funds other than its controlled funds. To get out of the provisions of section 44 of the income tax act it is the duty of the assessing officer to show that investment is not part of the insurance business of the assessee. However on our reading of the various regulatory provisions concerning the life insurance business, we find that assessee is investments are part of its insurance business. In view of this we do not subscribe to the view of the learned AO that investment is a separate and identifiable business of the assessee separate from life insurance business.
Further in case of the assessee for assessment year 2005 – 06 this issue arose and decided by the learned CIT – A in assessee’s own case in favour of the assessee holding that profit or loss arising on the sale of investment is not chargeable to tax separately, in nutshell, beyond the provisions of section 44 of the act. In view of this we do not find any reason to hold that the profit and loss on by the assessee out of the investment is not part of the life insurance business of the assessee. Accordingly ground number 4 of the appeal is allowed.”
Following the decision rendered by the coordinate Bench of the Tribunal for AY 2006-07 in assessee’s own case (supra), we are of the considered view that investment made by the assessee are part and parcel of insurance business and the assessee has rightly treated the income from sale of investment as part of business of insurance.
Moreover, in 2005-06, the Revenue itself has decided this issue in favour of the assessee by holding that profit and loss arising from the sale of investment is not chargeable to tax separately. In other words, it is beyond the purview of section 44 of the Act. Consequently, we are of the considered view that AO/CIT(A) have erred in making addition on account of income from sale of investment and as such are ordered to be deleted, thus grounds no.1 & 2 of AYs 2007-08, 2008-09 & 2009-10 are determined in favour of the assessee.
GROUND NO.3 OF AYs 2007-08, 2008-09 & 2009-10
At the very outset, ld. AR for the assessee contended that the disallowance made by the AO on account of Fringe Benefit Tax (FBT) provisions by AO and confirmed by the ld. CIT (A) is not sustainable as this issue has been decided in favour of the assessee in its own case for AY 2006-07 (supra), which position of facts and law has not been controverted by the ld. DR for the Revenue by bringing on record any other case law.
Coordinate Bench of the Tribunal decided the issue in controversy in favour of the assessee by returning following findings :-
“22. Now coming to the 3rd issue of this ground with respect to the disallowance of provision of the fringe benefit tax, it is clear that fringe benefit tax is not allowable as a deduction under the provisions of section 40 (ic) of the act, which falls under the bracket of the provisions of section 28 to section 43B of the act. The fringe benefit tax has also been included in the definition of tax under provisions of section 2 (43) of the act as under [(43) "tax"77 in relation to the assessment year commencing on the 1st day of April, 1965, and any subsequent assessment year means income-tax chargeable under the provisions of this Act, and in relation to any other assessment year income-tax and super-tax chargeable under the provisions of this Act prior to the aforesaid date 79[and in relation to the assessment year commencing on the 1st day of April, 2006, and any subsequent assessment year includes the fringe benefit tax payable under section 115WA] ; Therefore it cannot be said that it is different than income tax. There is no mandate in rule 2 of schedule 1 to the income tax act to make any such addition to the income of life insurance business. Further the reasons given by the coordinate bench in assessee’s own case for assessment year 2010 – 11, also supports the view that any adjustment mentioned in the provisions of section 28 to 43B of the income tax act are not required to added/reduced from the income of the assessee from life insurance business. In view of this, we do not find any merit in the addition made by the learned assessing officer of fringe benefit tax. Accordingly ground number 3 of the appeal of the assessee is allowed.”
Following the order passed by the coordinate Bench of the Tribunal in case of assessee for AY 2006-07 (supra), we are of the considered view that the addition made by the AO and confirmed by the ld. CIT (A) on account of FBT provisions is not sustainable on the ground that in Rule 2 of Schedule 1 of the Act, there is no mandate to make any such addition on the income of life insurance business.
Moreover, any adjustment in the provisions of section 28 to 43B of the Act is not required to be added/reduced from the income of the assessee from life insurance business. So, in view of the matter, addition made by the AO and confirmed by ld. CIT (A) to the tune of Rs.3,11,43,000/-, Rs.4,68,91,311/- & Rs.7,94,30,019/- for AYs 2007-08, 2008-09 & 2009- 10 respectively is not sustainable, hence ordered to be deleted. Ground No.3 of AYs 2007-08, 2008-09 & 2009-10 is determined in favour of the assessee.
GROUND NO.4 OF AYs 2007-08, 2008-09 & 2009-10
Ground No.4 of AYs 2007-08, 2008-09 & 2009-10 of AYs 2007- 08, 2008-09 & 2009-10 being premature needs no specific findings.
The assessee by moving application sought to raise an additional ground to the following effect :-
“that on the facts and circumstances of the case and in law, the CIT (A)/AO erred in not allowing exemption under section 10(34) of the Act in respect of dividend income of Rs.2,48,79,503/- earned by the Appellant during the previous year relevant to subject AY.” on the grounds inter alia that the assessee is entitled to avail exemption u/s 10(34) of the Act in respect of dividend income earned; that due to inadvertence, the assessee could not claim this exemption in the income- tax return filed during the year under assessment. Keeping in view the fact that the appellate authorities can allow the ground even if the claim for relief/exemption has not been made part of the original or revised return. Even otherwise, to decide the controversy once for all and to stop the multiplicity of the proceedings, the assessee is entitled to raise the additional ground because the issue in controversy has also been decided in favour of the assessee by the Tribunal in AY 2006-07. Consequently, additional ground raised by the assessee is hereby allowed.
14. Resultantly, all the three appeals being 3067/Del/2015 & 3068/Del/2015 for AYs 2007-08, 2008-09 & 2009-10 respectively are allowed. Order pronounced in open court on this 17th day of September, 2019.