GENERAL INSURANCE CORPORATION OF INDIA,MUMBAI vs. ASST CIT 3(1)(2), MUMBAI

आदेश / O R D E R PER M. BALAGANESH (A.M):

This appeal in ITA No.1080/Mum/2019 for A.Y.2011-12 arises out of the order by the ld. Commissioner of Income Tax (Appeals)-8, Mumbai in appeal No.CIT(A)-8/10136/2018-19 dated 28/01/2019 (ld. CIT(A) in short) against the order of assessment passed u/s.143(3) of the Income Tax Act, 1961 (hereinafter referred to as Act) dated 27/02/2014 by the ld. Dy. Commissioner of Income Tax-1(3), Mumbai (hereinafter referred to as ld. AO).

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3.1. We have heard the rival submissions and perused the materials available on record. We find that the assessee is engaged in the business of General Insurance wherein the 100% of share capital was held by the Central Government. We find that the assessee had filed its return of income for the Asst Year 2011-12 on 29.9.2011 declaring total income of Rs 204,39,85,482/-. We find that the assessee had claimed exemption u/s 10 as under in the return of income :-

Income from LTCG on transfer of shares Exempt u/s 10(38) Rs 588,85,02,720/- Income from VCF as tax is paid by Fund Rs 22,52,211/- Interest on Tax Free Bonds u/s 10(15)(i) Rs 1,76,12,403/- Dividend income received from VCF u/s 10(34) Rs 4,40,105/- Dividend income u/s 10(34) Rs 388,58,24,247/- 3.2. We find that out of the aforesaid claim of exemption u/s 10 of the Act is concerned, the ld AO granted exemption in respect of all except on Long Term Capital Gains on transfer of shares u/s 10(38) of the Act in the sum of Rs 588,85,02,720/-.

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3.3. We find that the assessee, being a General Insurance Corporation, is governed strictly by the provisions of Section 44 of the Act read with Rule 5 of the First Schedule to the Act. For the sake of convenience, the relevant provisions of section 44 of the Act and Rule 5 of the First Schedule to the Act are reproduced below:

―Section 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 in Section 199 or in Sections 28 to 43B, the profits and gains of any business of insurance, including any such business carried on by a mutual insurance company or by a co operative society, shall be computed in accordance with the rules contained in the First Schedule‖.

―Rule 5 - The profits and gains of any business of insurance other than life insurance shall be taken to be the profit before tax and appropriations as disclosed in the profit and loss account prepared in accordance with the provisions of the Insurance Act, 1938 (4 of 1938) or the rules made thereunder or the provisions of the Insurance Regulatory and Development Authority Act, 1999 (4 of 1999) or the regulations made thereunder, subject to the following adjustments: (a) ………………………………. (b) (i).. any gain or loss on realisation 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 …………………………………………………………‖

3.4. For the sake of convenience, the relevant provisions of section 10(38) of the Act are reproduced below:- ―Section 10. In computing the total income of a previous year of any person, any income falling within any of the following clauses shall not be included – ……………………………………………….

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(38). any income arising from the transfer of a long-term capital asset, being an equity share in a company or a unit of an equity oriented fund (or a unit of a business trust) where – (a) the transaction of sale of such equity share or unit is entered into on or after the date on which Chapter VII of the Finance (No.2) Act, 2004 comes into force; and (b) such transaction is chargeable to Securities Transaction Tax under that chapter: ………………………………………………………….”

3.5. We find that the ld AO denied the claim of exemption u/s 10(38) of the Act in respect of income from long term capital gains on sale of shares in the sum of Rs 588,85,02,720/- by holding that :-

“ a) section 44 read with rule 5 of the First Schedule makes the figure of profit disclosed by the Profit and Loss account drawn as per the Insurance Act as absolute and binding both on the assessee as well as the revenue, and only the adjustments specified in clauses to Rule 5 of the First Schedule can be given effect to while computing the total income. b) the appellant does not have any income which can be classified as "Long Term Capital Gains"(LTCG) rather the same forms part of its regular business activities and as such it cannot claim any exemption u/s. 10(38) which is applicable to LTCG. Equity shares forms part of appellant's business activities during the previous year as appellant cannot be considered as an "investor" of shares.‖ 3.6. We find that the assessee had pleaded that section 44 of the Act deals only with the computation of income chargeable under various heads and it does not affect the exemption provisions of section 10 of the Act and hence does not override them. It was further pleaded that section 44 of the Act is a special provision which provides that the profits and gains of any business of insurance carried on by an insurance company shall be computed in accordance with the rules contained in the First Schedule. Thus, provisions of section 44 of the Act is only for the purpose of computation of income of insurance business but other provisions of the Act would still be applicable to the assessee as it does

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not bar the applicability of other provisions of the Act. Profit on sale of investment consists of the income from sale of Long term Capital Asset being shares held for more than 12 months which were sold on recognised stock exchange and were subject to STT and therefore, benefit of exemption u/s 10(38) of the Act could not be denied to the assessee. We find that the case of the ld DR is that section 44 of the Act and Rule 5 of First Schedule disentitle the assessee to such exemption , as allowing the assessee to claim the exemption u/s 10(38) of the Act would nullify the amendment to Rule 5(b) of the Act w.e.f. Asst Year 2011-12.

3.7. We find that the ld AO himself had indeed granted exemption u/s 10 of the Act in respect of -

Income from VCF as tax is paid by Fund Rs 22,52,211/- Interest on Tax Free Bonds u/s 10(15)(i) Rs 1,76,12,403/- Dividend income received from VCF u/s 10(34) Rs 4,40,105/- Dividend income u/s 10(34) Rs 388,58,24,247/-

We are unable to persuade ourselves to accept to the contentions of the revenue as to how the claim of exemption u/s 10(38) of the Act alone would be different from the aforesaid 4 items of claim of exemption u/s 10 of the Act. We find once the transactions on sale of shares are carried out on a recognised stock exchange and which had been duly subjected to STT, then the long term capital gains arising therefrom are exempt under the specific provisions of section 10(38) of the Act. This does not get disturbed , in our considered opinion, by the provisions of section 44 of the Act , which talks only about the computation of income from business of insurance company.

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3.8. We find that the assessee’s claim for the exemption under Section 10(38) of the Act in respect of the profits made by it on the sale of equity shares which have been subjected to STT, has been disputed by the revenue by relying upon the amendment made with effect from Asst Year 2011-12 in Rule 5(b) of the First Schedule to the Act. In our considered opinion, there are two independent , distinct and separate issues which need to be addressed herein :-

(i) whether profits and gains made by a general insurance corporation, on the sale of investments, are generally taxable? whether, if such profits and gains are taxable, such a (ii) corporation is entitled to the benefit of the exemption in Section 10(38) of the Act?

3.8.1. We find that the fact that the above two issues are distinct and separate has been recognised by the Hon'ble Jurisdictional High Court in the case of PCIT vs New India Assurance Co. Ltd reported in 254 Taxman 238 (Bom) where the issue in dispute is squarely addressed by the Court. The question raised before the Hon’ble Court for the Asst Year 2006-07 is as under:- “Whether on the facts and in the circumstance of the case and in law, the Tribunal was justified in law in allowing exemption to the assessee u/s 10 of the I.T. Act, 1961?‖

3.8.2. We find that the Hon’ble Jurisdictional High Court disposed of the aforesaid question by holding as under:- 6. Mr. Suresh Kumar draws our attention to the order dated 29th July, 2011 passed by the Tribunal in respect of the same Respondent for the Assessment Year 2004-05. The above decision arose from a Revision under Section 263 of the Act of an Assessment Order. The aforesaid decision arose out of writing off Investments while determining the income of the Assessee. It did not even

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remotely deal with the issue of exemption under Section 10(38) of the Act i.e. sale of investment as long term capital gain. Thus, it can have no application to the facts of the present case. Further, the decision of the Apex Court in GIC (supra), relied upon by the Revenue also does not deal with the claim for exemption under Section 10(38) of the Act and would have no application to the present facts. The Revenue was unable to point out the manner in which the above decision of the Apex Court applies to the present facts. 7. Mr. Suresh Kumar, next submits that on an identical issue in GIC (supra). This Court has admitted the following question on 25th February, 2013 as substantial question of law as under:— "Whether on the facts and in the circumstance of the case and in law the Tribunal was justified in holding that profit on sale of investments are not liable to be taxed in the hands of the assessee in the year under appeal?" Therefore, he submits that the question as formulated be admitted. 8. The issue raised in the above question in GIC (supra) is not with regard to the exemption claimed under Section 10(38) of the Act as in the present proceedings. The question on which the above appeal has been admitted, is whether profits on sale of investments are liable to be (included) taxed in the hands of the assessee i.e. profits on sale of investments being liable to be tax. It does not deal with the benefit of exemption under Section 10(38) of the Act. The question as raised herein proceeds on the basis that even if sale of investments is liable to be taxed, yet to the extent it relates to long term capital gain falling under Section 10(38) of the Act, the exemption would be available. Thus, the question arising for our consideration in this appeal is different from the question on which the appeal of the GIC (supra) was admitted. (Underlining provided by us) 9. Moreover, we find that this Court in General Insurance Corpn. (supra) had also relied upon the communication dated 21st February, 2006 of the CBDT to the Chairman of the Insurance Regulatory and Developing Authority.. In the above communication, it has been clarified that exemption available to any other assessee under clause 10(38) relating to long term capital, would also be available to a person carrying on non-life Insurance business. Mr. Suresh Kumar very fairly states that the CBDT communication dated 21st February, 2006 addressed by the CBDT to the Chairman, IRTA, as well as the decision of this Court in GIC (supra) would be binding upon the Revenue. 10. In view of the above, the question as framed does not give rise to any substantial question of law. 11. Accordingly, Appeal dismissed. No order as to costs.

3.9. We find that the Hon’ble Jurisdictional High Court on recognizing this difference, dismissed the revenue’s appeal challenging the grant of the exemption u/s 10(38) of the Act, even though it had earlier admitted a

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Revenue appeal regarding the taxability of profit on sale of investments.

3.10. Even otherwise, we find that the assessee’s eligibility for the exemption u/s 10(38) of the Act is confirmed by the letter dated 21st February 2006 addressed by the Central Board of Direct Taxes (“CBDT”) to the Chairman of the Insurance Regulatory Development Authority (“IRDA”) in F.NO.153/24/2006-TPL specifically pointing out that the exemption u/s 10(38) of the Act was available to General Insurance Companies who were at par with other assessees who are eligible for the exemption u/s 10(38) of the Act for Long Term Capital Gain. For the sake of convenience, this letter dated 21.2.2006 is reproduced hereunder:-

F.N0.153/24/2006-TPL Government of India Ministry of Finance Department of Revenue Central Board of Direct Taxes (TPL Division) Room No. 147B-II, North Block New Delhi, the 21 st February, 2006 To, Shri C.S. Rao , Chairman Insurance Regulatory Development Authority (IRDA) Parishrama Bhawanam 5-9-58/B, Bashser Bagh Hvderabad-500 004. Subject: Profit/Loss on sale/redemption of investments - Income tax thereon. Sir, The undersigned is directed to refer to the write-up on the captioned subject submitted by you during the month to the Hon'ble Finance Minister and Secretary (Revenue).

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3.10.1. The ld AR drew our attention that this letter has not been withdrawn by the CBDT and, therefore, still holds the field.

3.11. We are conscious of the fact that Rule 5(b) of First Schedule to the Act has been amended with effect from Asst Year 2011-12. Recognising the said amendment, we find that the assessee itself had duly offered to tax such profits on sale of investments which are not subjected to STT. We find that the assessee had claimed exemption u/s 10(38) of the Act only for long term capital gains on sale of shares which had been subjected to STT. In this regard, the ld AR drew our attention to the relevant page of the factual paper book wherein against a total profit on sale of investment of Rs.715,60,30,000/-, the assessee had claimed an exemption u/s 10(38) of the Act for only Rs.588,85,02,720/- and paid tax on the balance of Rs.126,75,27,280/- as shown below: Total profit on sale of investment Rs. 715,60,30,000/- Less : Exemption claimed u/s 10(38) of the Act Rs.588,85,02,720/- ___________________ Balance Capital Gains chargeable to tax and offered to tax Rs.126,75,27,280/-

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3.11.1. Hence it could be safely concluded that the assessee had duly considered and complied with the amendment brought in Rule 5(b) of First Schedule to the Act with effect from Asst Year 2011-12.

3.12. We also find that the ld AR drew our attention to the fact that the same practice has been consistently followed by the assessee for all the subsequent Asst Years as would be evident from the tabulation below:-

Particulars Amount (Rs.) A.Y.2011-12 A.Y.2012-13 A.Y.2013-14 A.Y.2014-15 A.Y.2015-16 A.Y.2016-17 A.Y.2017-18 A.Y.2018-19 Total profit on sale of investments 7,156,030,000 3,889,942,000 10,091,973,000 10,944,812,000 18,182,683,000 15,656,361,000 17,291,588,000 20,051,115,000 Less: Exemption claimed u/s.10(38) of the Act 5,888,502,720 2,794,596,358 4,159,618,911 9,549,165,332 16,794,900,739 14,815,914,867 15,927,581,738 18,591,429,590 Balance Capital Gains CHARGEABLE TO TAX and offered to tax 1,267,527,280 1,095,345,642 5,932,354,089 1,395,646,668 1,387,782,261 840,446,133 1,364,006,262 1,459,685,410

3.13. Hence wherever the specific conditions stipulated u/s 10(38) of the Act were not complied with the assessee, we find that the assessee had duly offered the profits on sale of investments to tax in subsequent asst years as tabulated above, pursuant to the amendment in Rule 5(b) of First Schedule to the Act. The ld AR further argued that prior to amendment in Rule 5(b) of First Schedule to the Act from Asst Year 2011-12 (i.e upto Asst Year 2010-11) , by drawing specific reference to the relevant page of the factual paper book, the assessee’s claim was that entire profits on sale of investments were not subject to tax. Hence it could be seen that the above treatment of the assessee in respect of profit on sale of investments from Asst Year 2011-12 onwards clearly establishes beyond doubt that the amendment with effect from Asst Year 2011-12 to Rule 5(b) of the First Schedule to the Act, has in no way been nullified / rendered ineffective / rendered nugatory

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by the assessee’s claim that it is entitled to the exemption under Section 10(38) of the Act. (Emphasis supplied by us)

3.14. With regard to yet another observation of the lower authorities that the profits on sale of investments would not be construed as long term capital gains for the assessee and rather the same would be business income for the assessee and consequently the provisions of section 44 of the Act would come into operation (which is an overriding provision), we find that the ld AR argued that Section 44 of the Act is applicable to insurance business having overriding power only for the limited purpose of computation of income chargeable under that head. The ld AR argued that Section 44 of the Act can have no application to incomes enumerated in Section 10 of the Act which are ab initio excluded at source from total income. In other words, as incomes enumerated in Section 10 of the Act [including Section 10(38)] do not enter into the scope of total income at all, they are not hit by Section 44 of the Act which specifically applies only to incomes chargeable under different heads. With regard to shift in head of income from capital gains to business income by the lower authorities with regard to profit on sale of investment, the ld AR relied on the CBDT Circular No. 6/2016 dated 29.2.2016 wherein it was stated that all investments sold by the assessee on which shares that were held for more than 12 months shall be eligible for exemption u/s 10(38) of the Act and the same shall not be disturbed by the revenue. For the sake of convenience, the said CBDT Circular (which is binding on the department) is reproduced hereunder:-

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CIRCULAR NO.6/2016 [F.NO.225/12/2016-ITA-II] SECTION 45, READ WITH SECTION 28(i), OF THE INCOME-TAX ACT, 1961 - CAPITAL GAINS, CHARGEABLE AS - ISSUE OF TAXABILITY OF SURPLUS ON SALE OF SHARES AND SECURITIES - CAPITAL GAINS OR BUSINESS INCOME - INSTRUCTIONS IN ORDER TO REDUCE LITIGATION CIRCULAR NO.6/2016 [F.NO.225/12/2016-ITA-II], DATED 29-2-2016 Sub-section (14) of section 2 of the Income-tax Act, 1961 ('Act') defines the term "capital asset" to include property of any kind held by an assessee, whether or not connected with his business or profession, but does not include any stock-in- trade or personal assets subject to certain exceptions. As regards shares and other securities, the same can be held either as capital assets or stock-in- trade/trading assets or both. Determination of the character of a particular investment in shares or other securities, whether the same is in the nature of a capital asset or stock-in-trade, is essentially a fact-specific determination and has led to a lot of uncertainty and litigation in the past. 2. Over the years, the courts have laid down different parameters to distinguish the shares held as investments from the shares held as stock-in-trade. The Central Board of Direct Taxes ('CBDT') has also, through Instruction No. 1827, dated August 31, 1989 and Circular No. 4 of 2007 dated June 15, 2007, summarized the said principles for guidance of the field formations. 3. Disputes, however, continue to exist on the application of these principles to the facts of an individual case since the taxpayers find it difficult to prove the intention in acquiring such shares/securities. In this background, while recognizing that no universal principal in absolute terms can be laid down to decide the character of income from sale of shares and securities (i.e. whether the same is in the nature of capital gain or business income), CBDT realizing that major part of shares/securities transactions takes place in respect of the listed ones and with a view to reduce litigation and uncertainty in the matter, in partial modification to the aforesaid Circulars, further instructs that the Assessing Officers in holding whether the surplus generated from sale of listed shares or other securities would be treated as Capital Gain or Business Income, shall take into account the following— (a) Where the assessee itself, irrespective of the period of holding the listed shares and securities, opts to treat them as stock-in-trade, the income arising from transfer of such shares/securities would be treated as its business income, (b) In respect of listed shares and securities held for a period of more than 12 months immediately preceding the date of its transfer, if the assessee desires to treat the income arising from the transfer thereof as Capital Gain, the same shall not be put to dispute by the Assessing Officer. However, this stand, once taken by the assessee in a particular Assessment Year, shall remain applicable in subsequent Assessment Years also and the taxpayers shall not be allowed to adopt a different/contrary stand in this regard in subsequent years; (c) In all other cases, the nature of transaction (i.e. whether the same is in the

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nature of capital gain or business income) shall continue to be decided keeping in view the aforesaid Circulars issued by the CBDT. 4. It is, however, clarified that the above shall not apply in respect of such transactions in shares/securities where the genuineness of the transaction itself is questionable, such as bogus claims of Long Term Capital Gain/Short Term Capital Loss or any other sham transactions. 5. It is reiterated that the above principles have been formulated with the sole objective of reducing litigation and maintaining consistency in approach on the issue of treatment of income derived from transfer of shares and securities. All the relevant provisions of the Act shall continue to apply on the transactions involving transfer of shares and securities.

3.14.1. The ld AR further drew our attention to the decision of Hon’ble Delhi High Court in the case of Oriental Insurance Co. Ltd vs DCIT reporte din 407 ITR 658 (Del) wherein at pages 666 and 667 thereon, the Hon'ble High Court had held that in view of the strict restrictions imposed on Insurance Companies by the Insurance Act, it is not open to a company carrying on general insurance business to treat any part of its investments as “stock-in-trade”. Hence at any stretch of imagination, the investments held by the assessee engaged in insurance business, could be construed to have held as stock in trade. On this count, also, the observations of the lower authorities are dismissed.

3.15. We find that the learned Special Counsel for the Revenue argued vehemently by stating that the assessee had not made any claim of exemption u/s 10(38) of the Act and in the first round of proceedings, this tribunal had remanded the issue back to the file of ld CITA for fresh adjudication. We find both these arguments advanced by the ld Special Counsel for the Revenue to be factually incorrect. We find from perusal of computation of income, the assessee had indeed made a claim of exemption u/s 10(38) of the Act in respect of profit on sale of investments that were subjected to STT. If it was not claimed, then how

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the ld AO could have even resorted to deny the claim of exemption u/s 10(38) of the Act in the assessment. With regard to the first round of proceedings where this tribunal had remanded to ld CITA for fresh adjudication, we find that this argument of the ld Special Counsel for the Revenue is misconceived as this tribunal had only remanded the matter to ld CITA for “fresh examination”, without in any way examining or pronouncing upon the merits of the assessee’s entitlement to the exemption u/s 10(38) of the Act.

3.16. In view of our detailed observations and respectfully following the various judicial precedents relied upon hereinabove, we hold that the assessee is eligible for claim of exemption u/s 10(38) of the Act in the facts and circumstances of the instant case and accordingly Ground Nos. 1.1 to 1.3 raised by the assessee are allowed.

3.17. As stated earlier, the Ground No. 1.4 raised by the assessee would become academic in nature in view of our above decision on other grounds.

Order pronounced on 30/03/2021 by way of proper mentioning in the notice board.

Sd/- Sd/- (MAHAVIR SINGH) (M.BALAGANESH) VICE PRESIDENT ACCOUNTANT MEMBER Mumbai; Dated 30/03/2021 KARUNA, sr.ps

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Copy of the Order forwarded to : The Appellant 1. The Respondent. 2. The CIT(A), Mumbai. 3. CIT 4. DR, ITAT, Mumbai 5. 6. Guard file. //True Copy//

BY ORDER,

(Asstt. Registrar) ITAT, Mumbai