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Income Tax Appellate Tribunal, “C”
Before: SHRI S. RIFAUR RAHMAN, AM & SHRI RAM LAL NEGI, JM
IN THE INCOME TAX APPELLATE TRIBUNAL “C” BENCH, MUMBAI BEFORE SHRI S. RIFAUR RAHMAN, AM & SHRI RAM LAL NEGI, JM आयकरअपीलसं./ I.T.A. No. 384/Mum/2015 (निर्धारणवर्ा / Assessment Year: 2012-13)
ACIT Circle 6(1), ICICI Prudential Life R. No. 506, 5th floor, Insurance Company Ltd. बिधम/ Aayakar Bhavan, 1089, Appasaheb Marathe Vs. M. K. Road, Marg, Prabhadevi, Mumbai- 400 025 Mumbai-400 020 स्थायीलेखासं./जीआइआरसं./PAN No. AAACI7351P (अपीलाथी/Appellant) (प्रत्यथी / Respondent) : & आयकरअपीलसं./ I.T.A. No. 632/Mum/2015 (निर्धारणवर्ा / Assessment Year: 2012-13)
ICICI Prudential Life DCIT Circle 6(3)(1), R. No. 522, 5th floor, Insurance Company Ltd. बिधम/ 1089, Appasaheb Marathe Aayakar Bhavan, Vs. Marg, Prabhadevi, M. K. Road, Mumbai-400 020 Mumbai- 400 025 (अपीलाथी/Appellant) (प्रत्यथी / Respondent) :
अपीलाथीकीओरसे/ Appellant by : Ms. Arati Vissanji, AR प्रत्यथीकीओरसे/Respondentby : Shri Awangshi Gimson, DR
2 I.T.A. No. 384 & 632/Mum/2015 ICICI Prudential Life Insurance Company Ltd सुनवाईकीतारीख/ : 18.09.2019 Date of Hearing घोषणाकीतारीख / : 22.11.2019 Date of Pronouncement आदेश / O R D E R PER S. RIFAUR RAHMAN (JUDICIAL MEMBER): The present two Appeals have been filed by the assessee and revenue against the order of Commissioner of Income Tax (Appeals)-14, Mumbai, dated 07.11.14 for AY 2012-13 respectively.
Since the issues raised in both the appeals are identical, therefore, for the sake of convenience, these appeals are clubbed, heard and disposed of by this consolidated order.
I.T.A. No. 384/Mum/2015 (AY 2012-13) 3. First of all we take up assessee’s appeal in I.T.A. No. 384/Mum/2015 for AY 2012-13 on the grounds mentioned herein below:-
1) The CIT (A) erred in not accepting the basis of computation adopted by the Appellant in the return filed for the relevant year.
3 I.T.A. No. 384 & 632/Mum/2015 ICICI Prudential Life Insurance Company Ltd 2) The CIT (A) erred in not following the ITAT order in Appellant's own case for assessment years 2005-06 to 2008-09. 3) The CIT (A) erred in holding that Income from annuity is similar to Pension Business and loss from Pension Scheme is not adjustable against taxable business income.
4) The CIT (A) erred in holding that Rule 5 is applicable to income from Health Schemes, Group Schemes and others treated as non-life insurance schemes.
5) The CIT (A) erred in holding that the appellant also carries on investment activity and activities other than life insurance, the income from which is assessable under respective heads other than sec. 44. 6) The CIT (A) erred in holding that the actuarial surplus determined for the purpose of the Insurance Act must be the same as the surplus for the purpose of Rule 2 of the First Schedule
7) (a) The CIT (A) erred in not accepting the principle laid down by the Hon'ble Tribunal the case of the Appellants that any transfers between Shareholder Funds and Policyholders funds inter-se should be regarded tax neutral for the Company as a whole.
4 I.T.A. No. 384 & 632/Mum/2015 ICICI Prudential Life Insurance Company Ltd (b) The CIT (A) erred in holding that funds transferred from Shareholders account to Policyholders account and vice versa in respect of Pension schemes eligible for exemption under section 10(23AAB) of the Income tax Act, 1961 ('Act'), could result in allowing double exemption / deduction under section 10(23AAB) of the Act.
8) The CIT (A) erred in upholding the decision of the AO in taxing twice amount transferred from policyholder's account to Shareholder's account, once in surplus shown in Form I and again in Shareholder's income.
9) The CIT (A) erred in upholding the order of the AO subjecting the amount of negative reserve to tax.
10) The CIT (A) erred holding that provisions of section 14A of the Act are applicable to the Appellants.
11) Without prejudice to the Ground No. 10, the CIT (A) has erred in holding that Rule 8D should be applied for the purposes of computing disallowance under section 14A of the Act.
12) The CIT (A) erred in applying the normal corporate rate of tax instead of rate specified in Section 115B of the Act to income treated as other than from the business of insurance.
5 I.T.A. No. 384 & 632/Mum/2015 ICICI Prudential Life Insurance Company Ltd The Appellant craves leave to add, alter, amend or withdraw all or any of the Grounds of Appeal herein and to submit such statements, documents and papers as may be considered necessary either at or before the appeal hearing.
The brief facts of the case are that assessee is engaged in the business of life insurance and filed its return of income for the year under consideration on 26.10.12 declaring total income at Rs. 17,92,47,890/-. Subsequently, the case was selected for scrutiny and after serving statutory notice and seeking reply, order of assessment u/s 143(3) was passed by AO thereby making addition and assessed total income of Rs. 12,56,37,89,820/-. 5. Aggrieved by the above order of AO, assessee preferred appeal before Ld. CIT(A) and Ld. CIT(A) after considering the case of both the parties partly allowed the appeal of the assessee.
Now before us, the assessee has preferred appeal by raising the above grounds.
6 I.T.A. No. 384 & 632/Mum/2015 ICICI Prudential Life Insurance Company Ltd Ground No. 1 & 2 7. These grounds raised by the assessee are inter related and inter connected and relates to challenging the order of Ld. CIT(A) in not accepting the basis of computation adopted by the assessee in the returned filed for the relevant year and also not following the order of ITAT in assessee’s own case for AY 2005- 06 to 2008-09, therefore we thought it fit to dispose of the same by this common order.
At the outset, Ld. AR appearing on behalf of the assessee submitted before us that these ground are squarely covered by the consolidate order of Coordinate Bench of Hon’ble ITAT for AY 2005-06 to 2008-09, 2009-10, 2010-11 & 2011-12 in assessee’s own case on merits.
On the other hand, Ld. DR fairly conceded that these grounds are covered by the order of ITAT.
We have heard counsels for both the parties at length and we have also perused the material placed on record as well as the 7 I.T.A. No. 384 & 632/Mum/2015 ICICI Prudential Life Insurance Company Ltd orders passed by revenue authorities. We find that the identical ground raised in the present appeal has already been decided by the Coordinate Bench of ITAT for AY 2005-06 to 2008-09, 2009-10, 2010-11 & 2011-12 in assessee’s own case on merits. The operative portion of the order of ITAT for AY 2005-06 to 2008-09 is contained in para no. 36 to 38 at page no. 39 to 43 and the same is reproduced below:-
Reconciliation of amounts:
As seen from the orders of the authorities, the ‘Total surplus’ prepared under Regulation 8 was taken as basis ignoring the FormI of Regulation 4. While accepting the Ld.CIT DR argument that for the purposes of Life insurance business the act provides for surplus of valuation to be taxed at lesser rate, we can not accept the argument that surplus is Total surplus including Transfers from share holder’s account. Basically transfers are tax neutral as a credit in one account gets cancelled by debit in other account when accounts are consolidated. What the Rule.2 prescribed was only ‘average surplus’ arrived by adjusting the surplus disclosed in the actuarial valuation made with regard to the Insurance Act, 1938 in respect of inter valuation period. Assessee in the course of the assessment proceedings has furnished general balance sheet in Form-A which is as under:
Form-A General Balance Sheet
8 I.T.A. No. 384 & 632/Mum/2015 ICICI Prudential Life Insurance Company Ltd General Balance Sheet of ICICI Prudential Life Insurance Company Limited as at March 31, 2006 (Amount in Rupees ‘000) Particulars Mar-05 Mar-04 Particulars Mar-05 Mar-04 Share Capital 92,50,000 67,50,000 Loans 25,225 21,619 ~ Share Application Money " Investments 3,75,88,023 1,64,46,429 ~ ~ Agents Balances Employee stock option outstanding Reserve for contingency 84,426 61,287 Outstanding premiums General Reserve 1,47,531 77,589 Interest, Dividend and Rents outstanding Share Premium 1,86,899 1,48,778 Int. Dividend and Rents accrued but not due Property Revaluation Amount due Reserve from other persons or bodies carrying on Insurance Business Investment Reserve 2,95,504 1,78,792 Sundry Debtors, Advances and Deposits Fixed Assets 6,30,124 5,48,131 Property Insurance Reserve 3,00,000 44,900 Profit & Loss Appropriate Cash: At A/c Bankers on Deposit Account Balance of funds 2,78,28,554 95,97,898 At Bankers on Notice Deposit Account Debenture stock 16,95,868 4,58,304 At Bankers on current account and in hand
9 I.T.A. No. 384 & 632/Mum/2015 ICICI Prudential Life Insurance Company Ltd Estimated liability in respect of outstanding claims, whether due or intimated Annuities due and unpaid
Amount due to other persons or bodies carrying on Insurance Business 38,75,046 16,37,931 Current Liabilities & Provisions Total Rs. 4,09,53,600 1,79,85,829 Total Rs 4,09,53,600 1,79,85,829
Likewise it also given Form-G consolidating Revenue Account as under:
Form-G Consolidated Revenue Account Revenue Account of ICICI Prudential Live Insurance Company Limited as at March 31, 20O6 (Amount in Rupees'000) Particulars Mar-05 Mar-04 Particulars Mar-05 Mar-04 95,97,898 26,58,698 Claims under policies, less Balance of fund at the re-insurance: beginning year By Death 1,11,348 59,627 Premiums: By Maturity 2,539 - 1st year premiums 1,45,43,024 62,91,180 ~ ~ Renewal premiums 77,94,747 23,84,328 Annuities, less re- insurance 9,286 4,076 Surrenders (incl. sur Single premiums Less: 13,00,401 12,17,250 Reinsurance (38,177) (19,075) bonus) less re- insurance Bonuses in cash, less re- Consideration for insurance Annuities granted, less reinsurance 56,434 17,904 6,92,979 6,27,033 Bonuses in reduction of Interest, Dividends and premiums Rents Other benefit Fees and Charges 23,629 2,348
10 I.T.A. No. 384 & 632/Mum/2015 ICICI Prudential Life Insurance Company Ltd Linked Income 4,92,380 3,61,463 Expenses of Management: Commission 17,79,564 8,65,104 Other income 1,055 1,098 ~ 46,20,211 29,79,714 Registration fees " Other operating Expenses Bad Debts Loss transferred to Profit & Loss A/c UK, Indian, Dominion and Transferred from foreign taxes Appropriation A/c Provision for tax Fringe Benefit Tax 2,78,28,554 95,97,898 Profit transferred to Profit & Loss A/c Total Rs. 3,44,07,936 1,35,24,323 Total Rs. 3,44,07,936 1,35,24,323
Form-I - Valuation Balance Sheet has been furnished as under: Form-I Valuation Balance Sheet Valuation Balance Sheet of ICICI Prudential Life Insurance Company Limited as at March 31, 2005 Particulars Mar-05 Mar-04 Particulars Mar-05 Mar-04 Actuarial 3,44,75,905 1,43,38,641 Balance of fund 2,78,28,554 95,97,898 Valuation as shown in Liability General Balance Sheet
Surplus Deficit 66,47,351 47,40,743 Total Rs. 3,44,75,905 1,43,38,641 Total Rs, 3,44,75,905 1,43,38,641
Particulars Amount (Rs.'000) Deficit as at March 31,2005 (664,73,51) Less: Deficit as at March 31,2004 (474,07,43) Deficit for the year ended on March 31,2005 (190,66,08)
11 I.T.A. No. 384 & 632/Mum/2015 ICICI Prudential Life Insurance Company Ltd Income offered in return of income before claiming (190,66,08) exemption under section 10 of the Income Tax Act, 1961
Thus as can be seen, the deficit for the year ended March, 2005 was arrived at Rs.190,66,08/- ('000) which was also tallying with assessee's computation of income. Further assessee also furnished the reconciliation of Form-I total surplus' with return of income:
ICICI Prudential Life Insurance Company Limited FY 2004-05/ AY 2005-06: Reconciliation of Form-I Surplus with Return of Income Particulars Amount (Rs.) Amount (Rs.) Form-I Surplus as on 31.3.2005 (Page-14B 35,86,96,280 Less Form I Surplus as at 31.3.2004 - Surplus for FY 2004-05/AY 2005-06 35,86,96,280 Less: Shareholder's funding Deficit funding transfers from shareholder's fund 2,33,34,74,000 ) (Page 8PB) Advance funding based on estimates (Note 1) 4,12,09,280 (2,37,46,82,280) Less: Round off (12,808) Deficit in account (2,01,59,99,808) Surplus for participating business 10,41,05,196 Deficit for non-participating business (36,30,236) Surplus for participating annuities 21,33,71,824 (Pension Business) Deficit for linked business (1,66,59,51,826) Deficit for linked pension business (63,09,19,492) Deficit for linked group business (3,29,75,274) Deficit in policyholder's account (2,01,59,99,808) Add: surplus in shareholder's' account 10,93,77,555
12 I.T.A. No. 384 & 632/Mum/2015
Income as per Rule 2 of Schedule 1 of the Act (1,90,66,22,253) Exemption under section 10(23AAB) Less: Surplus for participating pension business (21,33,71,824) Add: Deficit for linked pension business 63,09,19,492 41,75,47,668 Exemption under section 10(34) Dividend Income 2,21,29,204 Less: In pension scheme (65,19,982) Less: Disallowance under section 14A 1,44,377) (1,54,64,845) Total Surplus /(Deficit) from Life Insurance (1,50,45,39,430) Business
The above statement furnished is in accordance with the Insurance Act, 1938, therefore, it cannot be stated that assessee returned income is not in accordance with the Insurance Act, 1938. There is no basis for AO to take Form-I 'total surplus' as surplus of the Life insurance business ignoring transfer from shareholder's account.
After having gone through the aforementioned orders, we
find that the identical issue has already been decided by the Coordinate Bench of Hon’ble ITAT in AY 2005-06 to 2008-09,
2009-10, 2010-11 & 2011-12 in assessee’s own case on merits.
Therefore, respectfully following the decision of the coordinate
bench of ITAT which is applicable mutatis mutandis in the present case, we allow these grounds raised by the assessee.
13 I.T.A. No. 384 & 632/Mum/2015
Ground No. 3
This ground raised by the assessee relates to challenging the order of Ld. CIT(A) in holding that income from annuity is similar to Pension Business and loss from Pension Scheme is not adjustable against taxable business.
The brief facts relating to this ground are, the Ld. CIT(A) directed the AO to compute exemption u/s 10 (23AAB) after considering the loss under annuity schemes and also to take remedial action for earlier year assessments. He observed that the assessee has deficit in PHA of annuity non-participating business of Rs. 1,24,33,93,000/-, the premium for which is eligible for deduction u/s 80CCC of the Act, therefore both pension schemes and annuity schemes are similar in nature and premium in both the cases is eligible for deduction u/s 80CCC of the Act. Hence, income of the assessee from both the schemes would be exempt u/s 10(23AAB) of the Act. Further, he observed that assessee has claimed the income from pension funds as exemption, but adjusted the loss from annuity schemes against taxable business income and as per law, the income includes loss and he observed
14 I.T.A. No. 384 & 632/Mum/2015 ICICI Prudential Life Insurance Company Ltd that even loss from annuity schemes would be exempt u/s 10(23AAB) of the Act and would not enter into computation of total income for the purpose of determination of income u/s 44 of the Act.
Considering the rival submission and material placed on record, we notice that Ld. CIT(A) misunderstood the provisions of section 80CCC and 10(23)AAB of the Act and try to merge the insurance business of annuity plan and pension plan and also presumed that assessee’s line of business of annuity and pension are different and also assessee can claim benefit u/s 80CCC of the Act, which is not correct. The deduction u/s 80CCC also available only to the individual assessee, not to the insurance company. Since assessee’s line of business are only with life cover and other benefits are extended benefits allowed to the policy holders alongwith life cover, therefore presumption drawn by Ld. CIT(A) is not proper and accordingly direction given by the Ld. CIT(A) to enhance assessment is accordingly dismissed. Accordingly, ground raised by the assessee is allowed.
15 I.T.A. No. 384 & 632/Mum/2015 ICICI Prudential Life Insurance Company Ltd Ground No. 4
This ground raised by the assessee relates to challenging the order of Ld. CIT(A) in holding that Rule 5 is applicable to income from Health Schemes, Group schemes and others treated as non-life insurance schemes.
The brief facts relating to this ground are, the Ld. CIT(A) directed the AO to assess the income from insurance companies other than life insurance separately and income from the health schemes, group schemes, etc is assessable under Rule 5 in the first schedule and similarly he directed the AO to determine the assessable income from the non-life insurance schemes in all the earlier years also with the observation that health schemes, group schemes, etc are not life insurance schemes, therefore income from these schemes is assessable under Rule 5. Aggrieved with the above direction and enhancement of the assessment order, assessee is in appeal before us.
Before us, Ld. AR submitted a brief note on this ground, which is reproduced below:-
Note on Ground No. 4
16 I.T.A. No. 384 & 632/Mum/2015 ICICI Prudential Life Insurance Company Ltd 1. License granted by IRDA (Insurance Regulatory and Development Authority) permits Appellant to carry on only life insurance business :
Sec. 3 (1) of the Insurance Act 1938 prohibits any person from carrying on any class of insurance business unless certificate of registration for the particular class of business is obtained. The Appellant has been granted a certificate under 3(1) of the Insurance Act to carry on life insurance business (pg.1 of the paper book). It is therefore not open to the Appellant to carry on any other class of insurance business as held by the CIT(A). Under section 3(4)(h) of the Insurance Act, IRDA (the regulatory authority established under the Insurance Regulatory Act, 1999) is empowered to cancel the registration of an insurer if the insurer carries on any business other than that allowed by the license. In fact, all products introduced by the Appellant require prior approval of the IRDA.
Meaning of Life Insurance Business:
The term 'life insurance business' has not been defined in the Income Tax Act, 1961 ('the Act') which makes it necessary to refer to the Insurance Act 1938 ('Insurance Act'). Section 2(11) of the Insurance Act defines life insurance businesses under: " life insurance business" means the business of effecting
17 I.T.A. No. 384 & 632/Mum/2015 ICICI Prudential Life Insurance Company Ltd 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 annuities 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
[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;]
18 I.T.A. No. 384 & 632/Mum/2015 ICICI Prudential Life Insurance Company Ltd Significantly, the definition of life insurance business' in sec. 2(11) of the Insurance Act is not confined to contracts of insurance where payment is made only on death of the Life Assured. The definition is an inclusive one. It includes contracts of insurance under which payment of money is assured on 'the happening of any contingency dependent on human life' such as a terminal illness.
Type of products offered by the Appellant during the relevant year:
The products offered by the Appellant at the relevant time and approved by the Insurance Regulatory and Development Authority ('IRDA') can be classified into 2 broad categories :
(i) Policies where the benefit is payable on death of the Life Assured or on the Life Assured surviving the specified date i.e. the maturity date,
(ii) Policies similar to (i) above with an add on benefit related to the health of the policyholder.
(iii) Policies where the benefit is payable on the diagnosis of a specified disease. Some of the products gave a lump-sum benefit on 19 I.T.A. No. 384 & 632/Mum/2015 ICICI Prudential Life Insurance Company Ltd diagnosis of critical illness. For some products the incurrence of medical expenditure by the policyholder was not a criterion for the entitlement to the lump sum amount.
Appellant's products fall within the definition of life insurance'.
Considering the nature of the products offered by the appellant during the relevant year in light of the definition of 'life insurance business' it is clear that the said products fall within either one or both the limbs of the definition in sec.2(11) of the Insurance Act namely, payment of money assured (a) on death and/or (b) on the happening of any contingency dependent upon human life, the contingency being a life threatening illness. These products have been filed with IRDA prior to their launch as required by its circular CIRCULAR NO. IRDA/ACTL/FUP/VER 1.0/ NOV 2000 dated November 01, 2000 (Pg no- 46 to 52). The CIT(A) is therefore incorrect in his conclusion that these products are not life insurance products. Had that been so, the IRDA would not have permitted the Appellant to introduce the said products.
In view of the above, the CIT(A)'s conclusion in paragraph 5.14, pg. 16 that the surplus from the health
20 I.T.A. No. 384 & 632/Mum/2015 ICICI Prudential Life Insurance Company Ltd schemes of the Appellant is assessable under Rule 5 of the First Schedule is erroneous.
Additional reasons why Rule 5 of the First Schedule is not applicable:
The additional reasons set out herein below also support the Appellant's submission that the surplus realised by the Appellant from the class of products referred to in paragraph
3(ii) above was assessable and has been rightly assessed by the AO under Rule 2 of the First Schedule:
(i) Rule 5 deals with general insurance.
(ii) The term 'general insurance' has not been defined under the Act. It has been defined in sec.2(6B) of the Insurance Act to mean 'fire, marine or miscellaneous insurance business whether carried on singly or in combination with one or more of them '
(iii) Health schemes clearly do not fall within the purview of either 'fire' or 'marine' insurance which have been defined sec. 2(6A) and 2(13A) of the Insurance Act ( definitions given below). Nor are these products covered under 'miscellaneous insurance business' which is defined in sec.2(13B) of the 21 I.T.A. No. 384 & 632/Mum/2015 ICICI Prudential Life Insurance Company Ltd Insurance Act to mean 'the business of effecting insurance which is not principally or wholly included in clauses (6A), (11) and (13A).
The relevant definitions are reproduced below for ready reference:
Section 2(6A): "fire insurance business" means the business of effecting, otherwise than incidentally to some other class of insurance business, contracts of insurance against loss by or incidental to fire or other occurrence customarily included among the risks insured against in fire insurance policies;
Section 2(13A): "marine insurance business" means the business of effecting contracts of insurance upon vessels of any description, including cargoes, freights and other interests which may be legally insured, in or in relation to such vessels, cargoes and freights, goods, wares, merchandise and property of whatever description insured for any transit by land or water, or both and whether or not including warehouse risks or similar risks in addition, or as incidental to such transit, and includes any other risks customarily included among the risks insured against in marine insurance policies;
Section 13(B): "miscellaneous insurance business" means the business of effecting contracts of insurance
22 I.T.A. No. 384 & 632/Mum/2015 ICICI Prudential Life Insurance Company Ltd which is not principally or wholly of any kind or kinds included in clauses (6A), (11) and (13A);
(iv) As explained hereinabove in paragraph 1, the Appellant's policies fall within the ambit of sec.2(11). The Appellant's life insurance products provide life cover with add-on riders related to health and /or provide cover on the happening of a contingency dependent on life. Policies which are covered by sec.2(11) are excluded from miscellaneous insurance business.
Hence the surplus/deficit from these products is assessable as part of the life insurance business under Rule 2 of the First Schedule.
Appellant's entire business is one and profit from some products cannot be carved out and assessed separately as directed by CIT(A) :
The Appellant further submits that it has disclosed the profits from the Policyholders' Account under Rule 2 of the First Schedule and the same has been assessed as such. A substantial part of the expenses incurred by the Appellant are common to its entire business which includes all types of life insurance products. Actuarial principles are applied in preparation of the Policyholders Account which will not match with the provisions of Rule 5. Therefore, the CIT(A)'s direction
23 I.T.A. No. 384 & 632/Mum/2015 ICICI Prudential Life Insurance Company Ltd to carve out and compute profits of one class of products of the Appellant applying the provisions of Rule 5 is not possible.
Principle of consistency:
Further the profits/deficit disclosed by the Appellant have, in the preceding as well as subsequent years, been assessed under Rule 2 of the First Schedule. The well-settled principle of consistency must be followed especially since there is no change in the factual position.
8 Pure health policies issued by the largest public sector Life Insurer i.e. Life Insurance Corporation of India as also by HDFC Life Insurance Co. Ltd. have been recognized and accepted as part of the life insurance business.
Brochures of the Appellant's products existing in the relevant year are enclosed at (pgs. 1 to 26) along with brochures of pure health policies being currently issued by the Life Insurance Corporation of India (pgs. 27 to 33) and by HDFC Life Insurance Co. Ltd. (pgs. 34 to 45).
Annuity plans are covered under sec.2(1 1)(b) of the definition of life insurance
24 I.T.A. No. 384 & 632/Mum/2015 ICICI Prudential Life Insurance Company Ltd In view of the above it is therefore respectfully submitted that the CIT(A)'s conclusion that the surplus from health schemes and annuity plans be assessed under Rule 5 of the First Schedule be reversed.
On the other hand, Ld. DR relied on the orders passed by Ld. CIT(A) and submitted that scheme offered by the assessee are not fall under life cover.
Considering the rival submission and material placed on record and after considering the schemes offered by the assessee to the policy holders, we notice that all the basic policy are offered by the assessee in term basis insurance plan or life based insurance plan and these plans are offered alongwith additional benefits of saving, health, etc. Most of these plans are approved by IRDA and are term basis alongwith tax benefits includes deduction u/s 80C not u/s 80D. The schemes referred by Ld. CIT(A) are all those schemes which are not term based and it does not have life cover whereas these schemes are purely on health based and covering a short tenure of one year or two year alongwith having a tax benefit u/s 80D. These are the distinguishing features for the insurance plans which one can
25 I.T.A. No. 384 & 632/Mum/2015 ICICI Prudential Life Insurance Company Ltd distinguish from the type of schemes offered by the insurance companies. After careful reading of the schemes submitted before us, in our considered view, the plans offered by the assessee are of term basis and life cover with the extended benefit of health and savings, etc. Therefore, these schemes can only be classified as life insurance and which can be considered as part of the main activities of the assessee company. Accordingly, the directions given by Ld. CIT(A) are dismissed. Hence, ground raised by the assessee is allowed.
Ground Nos. 5, 7(a), 7(b) and 8. 20. These grounds raised by the assessee are inter related and inter connected and relates to challenging the order of Ld. CIT(A) in holding that assessee also carries on investment activity and activities other than life insurance and in not accepting the principle laid down by the Hon’ble Tribunal in assessee’s own case, therefore we thought it fit to dispose of the same by this common order.
26 I.T.A. No. 384 & 632/Mum/2015 ICICI Prudential Life Insurance Company Ltd 21. At the outset, Ld. AR appearing on behalf of the assessee submitted before us that this ground is squarely covered by the consolidate order of Coordinate Bench of Hon’ble ITAT for AY 2005-06 to 2008-09, 2009-10, 2010-11 & 2011-12 in assessee’s own case on merits.
On the other hand, Ld. DR fairly conceded that these grounds are covered by the order of ITAT.
We have heard counsels for both the parties at length and we have also perused the material placed on record as well as the orders passed by revenue authorities. We find that the identical ground raised in the present appeal has already been decided by the Coordinate Bench of Hon’ble ITAT for AY 2005-06 to 2008- 09, 2009-10, 2010-11 & 2011-12 in assessee’s own case on merits. The operative portion of the order of Coordinate Bench of ITAT for AY 2005-06 to 2008-09 is contained in para no. 32 at page no. 35 & 36 of its order and the same is reproduced below:- 32. IRDA Regulations specifically require to maintain the policyholder's account and the shareholder's account separately and permits transfer of funds from shareholder's
27 I.T.A. No. 384 & 632/Mum/2015 ICICI Prudential Life Insurance Company Ltd account to policyholder's account as and when there is a deficit in policyholder's account. As rightly noted by the Hon'ble Bombay High Court, as a policy, company is transferring funds/assets from shareholder's account to policyholder's account even during the year periodically as and when the actuarial valuation was arrived at in policyholder's account. Most of the companies are required to submit quarterly accounts under the Company Law, there is requirement of actuarial valuation report periodically and accordingly assessee was transferring funds from the shareholder's account to policyholder's account. Since the insurance business will not yield the required profits in the initial 7 to 10 years, lot of capital has to be infused so as to balance the deficit in the policyholder's account. During the year as already stated assessee has issued fresh capital to the extent of Rs.250 crores and transferred funds to the extent of Rs..233 crores from the shareholder's account to policyholder's account. Since assessee is having only one business of life insurance, the entire transactions both under the policyholder's and shareholder's account do pertain to the life insurance business only as it was not permitted to do any other business. Once assessee is in the life insurance business, the computation has to be made in accordance with the Rule-2 as per provisions of section 44. Therefore, there is a valid argument raised by assessee that both the policyholder's & shareholder's account has to be consolidated into one and transfer from one account to another is tax neutral. What AO has done is to tax the surplus after the funds have been transferred from shareholder's account to the policyholder's account at the gross level while
28 I.T.A. No. 384 & 632/Mum/2015 ICICI Prudential Life Insurance Company Ltd ignoring such transfer in shareholder's account, while bringing to tax only the incomes declared in the shareholder's account that too under the head 'other sources of income'. In fact while giving the finding that assessee is in the life insurance business only and incomes are to be treated as income from life insurance business, the CIT (A) surprisingly in subsequent assessment years appeals accepted AO's contention that surplus in shareholder's account is to be taxed as other sources of income. But once the provisions of section 44 of IT Act are invoked anything contained in the heads of income like income from other sources, capital gains, house property or even interest on securities does not come into play and only first schedule has to be invoked to arrive at the profit. Therefore, in our opinion both the policyholder's and shareholder's account has to be consolidated for the purpose of arriving at the deficit or surplus.
After having gone through the aforementioned orders, we find that the identical issue has already been decided by the Coordinate Bench of Hon’ble ITAT in AY 2005-06 to 2008-09, 2009-10, 2010-11 & 2011-12 in assessee’s own case on merits. Therefore, respectfully following the decision of the coordinate bench of Hon’ble ITAT which is applicable mutatis mutandis in the present case, we allow these grounds raised by the assessee.
29 I.T.A. No. 384 & 632/Mum/2015 ICICI Prudential Life Insurance Company Ltd Ground No. 6 25. This ground raised by the assessee relates to challenging the order of Ld. CIT(A) in holding that the actuarial surplus determined for the purpose of the Insurance Act must be the same as the First Schedule.
At the outset, Ld. AR appearing on behalf of the assessee submitted before us that this ground is squarely covered by the consolidate order of Coordinate Bench of Hon’ble ITAT for AY 2005-06 to 2008-09, 2009-10, 2010-11 & 2011-12 in assessee’s own case on merits.
On the other hand, Ld. DR fairly conceded that these grounds are covered by the order of ITAT.
We have heard counsels for both the parties at length and we have also perused the material placed on record as well as the orders passed by revenue authorities. We find that the identical ground raised in the present appeal has already been decided by the Coordinate Bench of Hon’ble ITAT for AY 2005-06 to 2008-
30 I.T.A. No. 384 & 632/Mum/2015 ICICI Prudential Life Insurance Company Ltd 09, 2009-10, 2010-11 & 2011-12 in assessee’s own case on merits. The operative portion of the order of Hon’ble ITAT for AY 2005-06 to 2008-09 is contained in para no. 39 to 42 at page no. 43 to 45 of its order and the same is reproduced below:-
It is also on record that assessee followed the IRDA recommendations and accordingly prepared the actuarial valuation report including the surplus or deficit. However, Rule-2 prescribes only actuarial valuation in accordance with the Insurance Act, 1938. Therefore, AO is duty bound to insist on actuarial valuation in accordance with the Insurance Act, 1938, so as to bring to tax the surplus or deficit. What we notice is that AO, ignoring Rule-2, has relied on the actuarial valuation report prescribed under the IRDA recommendations under Regulation 8 that too at 'Total surplus', which is at variance with the Insurance Act, 1938. Since no amendment was brought to Rule-2 to incorporate IRDA recommendations, we are of the opinion that the action of AO in relying on the IRDA Regulations is not according to the law. Assessee had submitted its accounts as stated above, which are in accordance with the Insurance Act, 1938. Instead of examining these statements, just because assessee has shown total surplus in the accounts in similarly named Form-I( under Regulation 8), AO wants to tax the amount which is after taking into account the transfer of assets by way of fresh capital from shareholder's account. This in a way is taxing fresh capital infused into business indirectly
31 I.T.A. No. 384 & 632/Mum/2015 ICICI Prudential Life Insurance Company Ltd which cannot be done as this is not business surplus but infusion of capital directly.
In our opinion what assessee has done in reconciling the IRDA format with that of old Insurance Form is correct and accordingly the loss disclosed in the computation of income is according to the actuarial surplus/deficit under the Insurance Act, 1938 prescribed under Rule 2 of the first schedule part- A. In view of this, we are of the opinion that insistence by AO to bring to tax the entire amount shown under the new Regulations including transfer from shareholder's account is not correct. Instead of AO in taking the surplus at Regulation 8(1)(a) which is the actuarial surplus / deficit for the year took the amount as disclosed at Regulation 8 (1) (f) (total surplus after transfer from Shareholder's account) which is not at all correct.
Learned Counsel in the course of the argument also placed reconciliation of the various figures as under:
Table: Statement of deficit in policyholder's account (PHA), Shareholder account (SHA) funding and Net deficit:
S.No Particulars Amount (?. Amount (? Paper book page In crs.) In crs.) reference Deficit in PHA a/c 233.34 Page 70 - Part of Actuarial Report and also Page 8 Revenue A/c 237.46 Met by transfer from SHA a/c amounting to:
32 I.T.A. No. 384 & 632/Mum/2015 ICICI Prudential Life Insurance Company Ltd 233.34 4.12 • 237.46 a.Transfer to meet the Page 70 Part of deficit Actuarial Report b. Additional Transfer and also at Page 8 Revenue Account I -201.59 10.93 SCENARIO 1: If Page 8 Revenue transfer disregarded as account (31.74- income: 233.33) The amount Page 9 Profit & Loss A/c (11.34-0.41) transferred cannot be of income nature, if disregarded, there will be a net deficit in the PHA of Add: Surplus in SHA -190.66
II 31.74 -222.40 SCENARIO 2: If Page 8 Revenue transfer disregarded as account (Surplus income: /Deficit) If amount transferred is Page - 9 Profit & regarded as income Loss A/c nature, the surplus in PHA (Profit/ Loss before account will be Tax) Deficit in SHA Net Deficit 190.66
-201.59 10.93 Net Deficit as per the Page 8 - Revenue return on income account (surplus /deficit) (before claiming exemptions under Page 9 Profit & Loss section 10) A/c (Profit/ Loss) before tax. Deficit in PHA SHA Income Details as per return before claiming exemptions -190.66
Conclusion: Both scenarios give the same result and reflect the actual deficit as 33 I.T.A. No. 384 & 632/Mum/2015 ICICI Prudential Life Insurance Company Ltd disclosed in the return of income filed (before claiming exemptions under section 10). 31.74 4.12 NOT Due to excess funding Page 8 E done, the surplus as Revenue account (surplus/ deficit) disclosed by the actuarial valuation is Page 70 Part more than the surplus of Actuarial disclosed in the Report excess financials: funding disclosed The surplus as per by way of a note financials (Amount not mentioned) Add Excess funding done Page 14 - Actuarial Valuation in Form-I Surplus as per actuarial valuation 35.86
In view of the above, looking at the issue in any way what we notice is that the computation made by assessee is in accordance with Rule-2 of the Insurance Act 1938 according to which only AO can base his computation. This also corresponds to the way incomes were assessed in earlier years ie. the correct method as per Rule 2 and Sec 44 of IT ACT. In view of the discussion above and after analyzing the Forms, Regulations and Provisions we have no hesitation to hold that the assessee working of actuarial surplus/ deficit is in accordance with Rule 2 of First Schedule. Therefore, assessee grounds on this issue are allowed and AO is directed to modify the order accordingly. Ground Nos. 1 to 3 are considered allowed.
After having gone through the aforementioned orders, we
find that the identical issue has already been decided by the 34 I.T.A. No. 384 & 632/Mum/2015 ICICI Prudential Life Insurance Company Ltd Coordinate Bench of Hon’ble ITAT in AY 2005-06 to 2008-09, 2009-10, 2010-11 & 2011-12 in assessee’s own case on merits. Therefore, respectfully following the decision of the coordinate bench of Hon’ble ITAT which is applicable mutatis mutandis in the present case, we allow this ground raised by the assessee.
Ground No. 9 30. This ground raised by the assessee relates to challenging the order of Ld. CIT(A) in upholding the order of AO subjecting the amount of negative reserve to tax.
At the outset, Ld. AR appearing on behalf of the assessee submitted before us that this ground is squarely covered by the consolidate order of Coordinate Bench of Hon’ble ITAT for AY 2005-06 to 2008-09, 2009-10, 2010-11 & 2011-12 in assessee’s own case on merits.
On the other hand, Ld. DR fairly conceded that these grounds are covered by the order of ITAT.
35 I.T.A. No. 384 & 632/Mum/2015 ICICI Prudential Life Insurance Company Ltd 33. We have heard counsels for both the parties at length and we have also perused the material placed on record as well as the orders passed by revenue authorities. We find that the identical ground raised in the present appeal has already been decided by the Coordinate Bench of Hon’ble ITAT for AY 2005-06 to 2008- 09, 2009-10, 2010-11 & 2011-12 in assessee’s own case on merits. The operative portion of the order of Hon’ble ITAT for AY 2005-06 to 2008-09 is contained in para no. 57 to 59 at page no. 56 to 58 of its order and the same is reproduced below:-
Ground No. 1 is on the issue of treating negative reserve and disallowing the amount. While completing the assessment of life insurance business the AO, after taking the total surplus from Form-I, reduced the negative reserve amounting to Rs. 27.27 crores. Assessee submitted before the CIT(A) as under: -
"Method of Determination of Mathematical Reserves - (1) Mathematical Reserves shall be determined separately for each contract by a prospective method of valuation in accordance with sub-paras (2) to (4). (2) The valuation method shall take into account all prospective contingencies under which any premiums (by the policyholder) or benefits (to the policyholder/beneficiary) may be payable under the policy, as determined by the policy conditions. The level of benefits shall take into account the 36 I.T.A. No. 384 & 632/Mum/2015 ICICI Prudential Life Insurance Company Ltd reasonable expectations of policyholders (with regard to bonuses, including terminal bonuses, if any) and any established practices of an insurer for payment of benefits. (3) The valuation method shall take into account the cost of any options that may be available to the policyholder under the terms of the contract.
(4) The determination of the amount of liability under each policy shall be based on prudent assumptions of all relevant parameters. The value of each such parameter shall be based on the insurer's expected experience and shall include an appropriate margin for adverse deviations (hereinafter referred to as MAD) that may result in an increase in the amount of mathematical reserves.
(5) (1) The amount of mathematical reserve in respect of a policy, determined in accordance with sub-para (4), may be negative (called "negative reserves") or less than the guaranteed surrender value available (called "guaranteed surrender value deficiency reserves") at the valuation date.
The appointed actuary shall, for the purpose of section 35 of the Act, use the amount of such mathematical reserves without any modification.
The appointed actuary shall, for the purpose of sections 13, 49, 64V and 64VA of the Act, set the amount of such mathematical reserve to zero, in case of such negative reserve, or to the guaranteed surrender value, in case of such guaranteed surrender value deficiency reserves, as the case may be.
37 I.T.A. No. 384 & 632/Mum/2015 ICICI Prudential Life Insurance Company Ltd (6) The valuation method shall be called "Gross Premium Method".
(7) If in the opinion of the appointed actuary, a method of valuation other than the Gross Premium Method of valuation is to be adopted, then, other approximations (e.g. retrospective method) may be used.
Provided that the amount of calculated reserve is expected to be at least equal to the amount that shall be produced by the application of Gross Premium Method.
(8) The method of calculation of the amount of liabilities and the assumptions for the valuation parameters shall not be subject to arbitrary discontinuities for one year to the next. (9) The determination of the amount of mathematical reserves shall take into account the nature and term of the assets representing those liabilities and the value placed upon them and shall include prudent provision against the effects of possible future changes in the value of assets on the ability to the insurer to meet its obligations arising under policies as they arise.
Mandate to Appointed Actuary under regulations Sub-Rule 4 mandates Appointed Actuary to have prudent assumption of all relevant parameters and to include an appropriate margin for adverse deviations that may result in an increase in the amount of mathematical reserves.
Sub-Rule 5 defines such margin as "Negative Reserve", which is being disclosed in column 6 of the Form 1. 38 I.T.A. No. 384 & 632/Mum/2015 ICICI Prudential Life Insurance Company Ltd Further, clause (iii) to sub-Rule 5 mandates appointed actuary to provide for negative reserve in mathematical reserve, accordingly not to include in distributable surplus as per Section 49 of the Insurance Act, 1938. Clause (ii) to sub-Rule 5 mandates appointed actuary to include negative reserve in mathematics reserve only at the time of Amalgamation and transfer of insurance business and otherwise.
Taxable surplus Since taxation of Life Insurance Business is on surplus disclosed as per Section 49 which is covered by Rule 2(5)(iii), where in appointed actuary is mandated to arrive at surplus after excluding negative reserve.
In view of the above we humbly submit before your goodself to kindly not treat negative reserve as taxable. Sub-Rule 4 mandates Appointed Actuary to have prudent assumption of all relevant parameters and to include an appropriate margin for adverse deviations that may result in an increase in the amount of mathematical reserves."
The CIT(A), in his brief order vide para 17, considered the detailed explanation above and accepted that the negative reserve disclosed in Form-I does not give rise to distributable surplus. Accordingly he disallowed the same.
After considering the rival submissions and examining the method of accounting and the mandate given by regulations to appoint Actuarial on the concept of mathematical reserves, we do not see any reason to interfere with the order of the CIT(A). The mathematical reserve is part of Actuarial
39 I.T.A. No. 384 & 632/Mum/2015 ICICI Prudential Life Insurance Company Ltd valuation and the surplus as discussed in Form-I under Regulation 4 takes into consideration this mathematical reserve also. Therefore the order of the CIT(A) is approve. Moreover the Assessing Officer has no power to modify the amount after actuarial valuation was done, which was the basis for assessment under Rule 2 of 1st Schedule r.w.s. 44 of the I.T. Act. The principles laid down by the Hon'ble Supreme Court in LIC vs. CIT 512 ITR 773 about the powers of Assessing Officer also restricts the scope and adjustments by the AO. In view of this we uphold the order of the CIT(A) and dismiss the Revenue ground.
After having gone through the aforementioned orders, we find that the identical issue has already been decided by the Coordinate Bench of Hon’ble ITAT in AY 2005-06 to 2008-09, 2009-10, 2010-11 & 2011-12 in assessee’s own case on merits. Therefore, respectfully following the decision of the coordinate bench of Hon’ble ITAT which is applicable mutatis mutandis in the present case, we allow this ground raised by the assessee.
Ground No. 10 & 11 35. These grounds raised by the assessee are inter connected and inter related and relates to challenging the order of Ld. CIT(A) in holding that provisions of section 14A of the Act are 40 I.T.A. No. 384 & 632/Mum/2015 ICICI Prudential Life Insurance Company Ltd applicable in the case of assessee, therefore we thought it fit to dispose of the same by this common order.
At the outset, Ld. AR appearing on behalf of the assessee submitted before us that these grounds are squarely covered by the consolidate order of Coordinate Bench of Hon’ble ITAT for AY 2005-06 to 2008-09, 2009-10, 2010-11 & 2011-12 in assessee’s own case on merits.
On the other hand, Ld. DR fairly conceded that these grounds are covered by the order of ITAT.
We have heard counsels for both the parties at length and we have also perused the material placed on record as well as the orders passed by revenue authorities. We find that the identical ground raised in the present appeal has already been decided by the Coordinate Bench of Hon’ble ITAT for AY 2005-06 to 2008- 09, 2009-10, 2010-11 & 2011-12 in assessee’s own case on merits. The operative portion of the order of Hon’ble ITAT for 41 I.T.A. No. 384 & 632/Mum/2015 ICICI Prudential Life Insurance Company Ltd AY 2005-06 to 2008-09 is contained in para no. 43 to 46 at page no. 45 to 49 of its order and the same is reproduced below:-
Ground No.4 pertains to disallowance under section 14A offered in revised return on reasonable basis. Assessee offered an amount of Rs..1,44,377/- as against the dividend income mostly claimed at Rs.1,56,09,222/- arrived at in participating life insurance business. Assessee gave methodology in contributing the expenses. However, AO did not accept and took the estimation 0.5% of the average investment thereby making the addition. The CIT (A) following the judgment of the Hon'ble Bombay High Court in the case of Godrej Boyce vs. DCIT dated on 12/08/2010 directed AO to workout on a reasonable basis. Assessee has raised the additional ground of appeal as under:
Ground: "AO and the CIT (A) erred in invoking the provisions of section 14A of the Income Tax Act 1961 and disallowing expenses attributable to earning exempted income, without appreciating the fact that the provisions of section 14A are not applicable to Insurance Companies".
The learned Counsel submitted that in view of the provisions of section 44, the provisions of section 14A are not applicable. He relied on the orders of Bajaj Alliance General Insurance Co. vs. Addl.CIT in ITA No.1447/Mum/2007 dated 31/08/2009, JCIT vs. Reliance General Insurance Company in ITA No.3085/Mum/2008 and other cases wherein the Coordinate Bench have already decided the provisions
42 I.T.A. No. 384 & 632/Mum/2015 ICICI Prudential Life Insurance Company Ltd of section 14A are not applicable. He also placed on reliance in the case of General Insurance Corporation of India vs. Addl. CIT in ITA No.3554/Mum/2011 dated 15/02/2012 to submit that the provisions of section 14A does not apply to the Insurance business.
The learned DR however, relied on the orders of AO and the CIT (A) and the fact that assessee itself has offered income disallowing under section 14A.
This issue is already decided by the Coordinate Benches in various cases. For the sake of record, the order in the case of General Insurance Corporation of India in ITA No.3554/Mum/2011 vide Para 9 is as under:
"Issue No.6 Non applicability of provisions of section 14A. (Modified Ground of Appeal No.3.1 to 3.4 -
Original Ground of Appeal No.3.1 to 3.5). The issue is with reference to the applicability of section 14A and disallowance of expenditure in respect of sale of investment which are not taxed. We have heard the rival contentions. We also note that this issue is also considered by the Coordinate Bench in assessee's own case for 2006- 07 vide Para 7 to 9:
Grounds of appeal no.4 regarding the expenditure under section 14A.
We have heard the rival contentions and perused the relevant record. We note that this issue has been considered and decided by the Pune Bench of this Tribunal in the case of Bajaj Allianz General Insurance Company limited V/s Add.
43 I.T.A. No. 384 & 632/Mum/2015 ICICI Prudential Life Insurance Company Ltd CIT in ITA No.1447/PN/2007 for the assessment year 2003- 04 order dated 31.08.2009. This Tribunal in the case of JCITV/s M/s Reliance General Insurance co. in ITA No.3085/Mum/2008 for the assessment year 2005-06 vide order dated 26.2.2010 has considered this issue and decided in favour of the assessee. This order was followed by this Tribunal while deciding the issue in ITA No.781/Mum/2007 vide order dated 30.4.2010. Thus, this issue has been consistently decided in favour of the assessee and against the revenue by this Tribunal. The Pune Bench of this Tribunal in the case of Bajaj Allianz General Insurance Company limited V/s Add. CIT (supra) has decided this issue in paragraphs 17 to 20 as under:
"17. Finally the quest ion to be answered is about the applicability of s. 14A in respect of sale of investment which is not taxed under the special circumstances of deletion of a sub-rule from the statute. It is not questioned that the impugned profit was non-taxable per se rather the accepted legal position is that the impugned profit was very much taxable in the past .Now it has been informed that this controversy in respect of insurance company set at rest by a decision of Tribunal , Delhi Bench verdict in the case of Oriental Insurance Co. Ltd. (ITA Nos. 5462 & 5463/Del /2003) asst. yrs. 2000-01 and 2001-02 order dt. 27th Feb. 2009 [reported as Oriental Insurance Co. Ltd. v. Asst t . CIT [2010] 130 TTJ (Delhi)388 : [2010] 38 DTR (Delhi ) 225-- Ed. ] . Therefore considering the vehement reliance of learned Authorized Representative it is worth to mention at the outset itself that the issue now stood resolved by this latest
44 I.T.A. No. 384 & 632/Mum/2015 ICICI Prudential Life Insurance Company Ltd decision of Delhi, Tribunal in the case of Oriental Insurance Co. Ltd. (supra), the relevant portion reproduced below: "17. We have heard rival submissions of the parties and have gone through the material available on record. Identical issue arose in assessee's own case for asst. yr. 1985-86. The Tribunal accepted the plea of the assessee and in fact the issue went up to the Hon'ble Delhi High Court in asst . yrs. 1986-87 to 1988-89, which is reported as CIT v. Oriental Insurance Co. Ltd. [2003] 179 CTR (Delhi ) 85 : [2002] 125 Taxman 1094 (Delhi ), decided the issue in favour of the assessee by holding that s. 44 of the Act is a special provision dealing with the computation of profits and gifts of business of insurance. It being a non obstinate provision, has to prevail over other provisions in the Act. It clearly provides that income from insurance business has to be computed in accordance with the rule contained in the First Schedule. It is not the case of the Revenue that the assessee has not computed the profits and gains of its insurance business in accordance with the said rules. Reliance was placed on the scope of s. 144, as held in the case of General Insurance Corporation of India v. CIT [1999] 156 CTR (SC) 425 : [1999] 240 ITR 139 (SC), wherein their Lordships of the apex Court have categorically held that the provisions of s. 44 being a special provision govern computation of taxable income earned from business of insurance. I t mandates the tax authorities to compute the taxable income in respect of insurance business in accordance with the provisions of the First Schedule to the Act. In the light of these, their Lordships of Delhi High Court have held that no quest ion of law, much less a substantial quest ion of law survives for their
45 I.T.A. No. 384 & 632/Mum/2015 ICICI Prudential Life Insurance Company Ltd consideration. In other words, order of the Tribunal has been affirmed. Following the same reasoning, addition made by the AO is deleted.
We have considered the rival contentions and gone through the records. The provisions of s. 44 read as under:
"44. Insurance business.--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 s. 199 or in ss. 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"'.
The above provision makes it very clear that s. 44 applies notwithstanding anything to the contrary contained within the provisions of the IT 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 under s. 44 of the Act in the case of an 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 in the Controller of Insurance. The actual computation of profits and gains of insurance business will have to be computed in accordance with r. 5 of the First Schedule. In the light of these special provisions coupled with 46 I.T.A. No. 384 & 632/Mum/2015 ICICI Prudential Life Insurance Company Ltd non obstante clause the AO is not permitted to t ravel beyond these provisions.
Sec. 14A contemplates an exception for deductions as allowable under the Act are those contained under ss. 28 to 43B of the Act. Sec. 44 creates special application of these provisions in the cases of insurance companies. We therefore, agree with the assessee and delete the act as according to us, it is not permissible to the AO to travel beyond s. 44 and First Schedule of the IT Act ."
I t may not be out of place to mention that the respected Co-ordinate Bench has duly taken the note of an earlier decision of that very Bench decided in the case of that very assessee vide order dt . 29th Sept. 2004 bearing ITA Nos. 7815/Del/1989, 3607 to 3609/Del /1990; 5035/Del / 1998 and 3910/Del /2000 named as Dy. CIT v.
Oriental General Insurance Co. Ltd. [2005] 92 TTJ (Delhi ) 300. As seen from the Paras reproduced above on due consideration of the relevant provisions as applicable to resolve this issue a conclusion was drawn that since the Courts have held, s. 44 creates a special provision in the cases of assessment of insurance companies therefore it was not permissible to the AO to travel beyond s. 44 of First Schedule of IT Act .
The next common dispute relates to the order of the CIT
(A) in sustaining the act ion of AO in al lowing only 50 per cent of the management expenses by invoking the provisions of s. 14A of the Act . The addition is made by the AO on the 47 I.T.A. No. 384 & 632/Mum/2015 ICICI Prudential Life Insurance Company Ltd plea that the provisions of s.14A was inserted by Finance Act, 2001 w.e.f. 1st April, 1962. It is stated that the investments made by the assessee are both taxable as well as tax free. An estimated disallowance of 50 per cent out of the management expenses incurred and as claimed in the P&L a/c is treated as expenses incur red in connect ion with the looking after tax- free investment.
The learned counsel for the assessee vehemently argued that the income of the assessee is to be computed under s. 44 r/w r. 5 of Sch. 1 of the IT Act. Sec. 44 is a non obstinate clause and applies notwithstanding anything to the contrary contained within the provisions of the IT Act relating to computation of income chargeable under different heads, other than the income to be computed under the head 'Profit and gains of business or profession' . For computation of profits and gains of business or profession the mandate to the AO is to compute the said income in accordance with the provisions of ss. 28 to 43B of the Act . In the case of the computation of profits and gains of any business of insurance, the same shall be done in accordance with the rules prescribed in First Schedule of the Act, meaning thereby ss. 28 to 43B shall not apply. No other provision pertaining to computation of income will become relevant. According to the learned counsel, two presumptions that follow on a combined reading of ss. 14, 14A, 44 and r. 5 of the First Schedule are:
(a)That no head-wise bifurcation is cal led for. The income, inter alia, 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 under 48 I.T.A. No. 384 & 632/Mum/2015 ICICI Prudential Life Insurance Company Ltd the Insurance Act, 1938. The said balance of profits is subject only to adjustments there under. The adjustments do not refer to disallowance under s. 14A of the Act.
(b) Profits and gains of business as refer red to in (a) above have only to be computed in accordance with r. 5 of the First Schedule.
Sec. 44 creates a specific except ion to the applicability of ss. 28 to 43B. Therefore, the purpose, object and purview of s. 14A has no applicability to the profits and gains of an insurance business.
The learned Departmental Representative strongly justified the act ion of the AO and that of the CIT(A) in the light of the clear provisions of s. 14A of the Act .
Since the view has al ready been expressed by respected Co- ordinate Bench therefore, we have no reason to take any other view except to follow the same. With the result we hereby accept the argument of learned Authorized Representative to the extent that in the present situation the provisions of s. 14A need not to apply while granting exempt ion to an income earned on sale of investment primarily because of the reason of the withdrawal or deletion of sub- r. 5(b) to First Schedule of s. 44 of IT Act. Once we have taken this view therefore the enhancement as proposed by learned CIT(A) is reversed and the directions in this regard are set aside.
Resultantly ground No. 1 is allowed automatically goes in favour of the assessee".
49 I.T.A. No. 384 & 632/Mum/2015 ICICI Prudential Life Insurance Company Ltd Accordingly, by following the orders of this Tribunal, we decide this issue in favour of the assessee. Therefore, the ground is allowed".
Respectfully following the same, we modify the order of the CIT (A) and delete the addition made by AO. The ground and additional grounds are considered as allowed.
After having gone through the aforementioned orders, we find that the identical issue has already been decided by the Coordinate Bench of Hon’ble ITAT in AY 2005-06 to 2008-09, 2009-10, 2010-11 & 2011-12 in assessee’s own case on merits. Therefore, respectfully following the decision of the coordinate bench of Hon’ble ITAT which is applicable mutatis mutandis in the present case, we allow these grounds raised by the assessee.
Ground No. 12 40. This ground raised by the assessee relates to challenging the order of Ld. CIT(A) in applying the normal corporate rate of tax instead of rate specified in section 115B of the Act to income treated as other than from the business of insurance.
50 I.T.A. No. 384 & 632/Mum/2015 ICICI Prudential Life Insurance Company Ltd 41. At the outset, Ld. AR appearing on behalf of the assessee submitted before us that this ground is squarely covered by the consolidate order of Coordinate Bench of Hon’ble ITAT for AY 2005-06 to 2008-09, 2009-10, 2010-11 & 2011-12 in assessee’s own case on merits.
On the other hand, Ld. DR fairly conceded that this ground is covered by the order of ITAT.
We have heard counsels for both the parties at length and we have also perused the material placed on record as well as the orders passed by revenue authorities. We find that the identical ground raised in the present appeal has already been decided by the Coordinate Bench of Hon’ble ITAT for AY 2005-06 to 2008- 09, 2009-10, 2010-11 & 2011-12 in assessee’s own case on merits. The operative portion of the order of Hon’ble ITAT for AY 2005-06 to 2008-09 is contained in para no. 55 at page no. 55 of its order and the same is reproduced below:- 55. We have heard the rival contentions. As briefly discussed while deciding the issue of taxing surplus, assessee is in life Insurance business and it is not permitted to do any other
51 I.T.A. No. 384 & 632/Mum/2015 ICICI Prudential Life Insurance Company Ltd business. All activities carried out by assessee are for furtherance of Life Insurance business. Maintaining adequate capital is necessary to comply with IRDA( Assets, Liabilities and Solvency margin of insurers)Regulations,2000. Income earned on capital infused in business is integral part of Life Insurance business. The LD. CIT(A) gives a finding that assessee is exclusively in Life Insurance business. However, since he gave primacy to Form I proforma he concluded that other incomes are not of Life Insurance business. We have already considered and decided that assessee was mandated to maintain separate accounts by IRDA Regulations. Just because separate accounts are maintained the incomes in Shareholder's account does not become separate from Life insurance business. As per Insurance Act 1938 all incomes are part of one business only and these incomes are considered as part of same business. Therefore, the incomes in Shareholder's account are to be considered as arising out of Life insurance business only. More over Sec 44 mandates that only First Schedule will apply for computing incomes and excludes other heads of income like, Interest on Securities, income from house property, Capital gains or Income from other sources. Being non-obstante clause, sec. 44 mandates that the profits and gains of insurance business shall be computed in accordance with the rules contained in First Schedule. Therefore, the incomes in Shareholder's account are to be taxed as part of life insurance business only, as they are part of same business and investments are made as part of solvency ratio of same business. The grounds are allowed. AO is directed to treat them as part of Life Insurance Business and tax them u/s 115B.
52 I.T.A. No. 384 & 632/Mum/2015
After having gone through the aforementioned orders, we find that the identical issue has already been decided by the Coordinate Bench of Hon’ble ITAT in AY 2005-06 to 2008-09, 2009-10, 2010-11 & 2011-12 in assessee’s own case on merits. Therefore, respectfully following the decision of the coordinate bench of Hon’ble ITAT which is applicable mutatis mutandis in the present case, we allow this ground raised by the assessee.
Consequently, the appeal filed by the assessee stands allowed. 46. Now we take up revenue appeal filed in ITA No. 632/Mum/2015 for Ay 2012-13 on the grounds mentioned herein below:-
Whether on the facts and in the circumstances of the case and in law, the Ld CIT(A) erred in interpreting the provisions of Section 44 of the I.T. Act read with Rule 2 of the First Schedule alongwith provisions of Insurance Act 1938, Insurance Regulatory and Development Authority
53 I.T.A. No. 384 & 632/Mum/2015 ICICI Prudential Life Insurance Company Ltd Act 1999 and regulations there under and accordingly allowing adjustment from the 'surplus' worked as per "actuarial valuation" [and as shown by the assessee in Form-1] in violation of the ratio of the Apex Court in the case of LIC vs CIT 51 ITR 778?
Whether on the facts and in the circumstances of the case and in law, the Ld CIT(A) erred in concluding that transfer from Share Holders Account(SHA) and Policy Holder's Account (PHA) is tax neutral and not taxable u/s 44 of the Act r.w Rule 2 of the first Schedule.
Whether on the facts and in the circumstances of the case and in law, the Ld CIT(A) erred in giving relief to the assessee, following the decision of Hon'ble /TAT in assessee own case for the earlier years, wherein Hon'ble tribunal held that on account of "legislation by incorporation", 'only' the "un-amended" Insurance Act 1938 and the Regulations there under became part of Section 44 r.w Rule 2 of the First Schedule of the I.T. Rules,; when an appeal against this order of /TAT has been filed & is pending with High Court, Bombay?
] Whether on the facts and in the circumstances of the case and in law, the Ld CIT(A) erred in giving relief to the assessee, following the decision of Hon'ble IT AT in assessee own case for the earlier years, wherein Hon'ble Tribunal held that the Legislature consciously omitted incorporation of the provision of Insurance Regulatory and Development Authority Act 1999 and Regulations made
54 I.T.A. No. 384 & 632/Mum/2015 ICICI Prudential Life Insurance Company Ltd thereunder in section 44 of the I.T. Act r.w. Rule 2 of the First Schedule which 'refers' only to un-amended Insurance Act 1938 and Regulations made there under; when an appeal against this order of /TAT has been filed & is pending with High Court, Bombay?
Whether on the facts and in the circumstances of the case and in law, the Ld CIT(A) erred in giving relief to the assessee, following the decision of Hon'ble /TAT in assessee own case for the earlier years, wherein Hon'ble Tribunal failed to take note that Section 28 of Insurance Regulatory and Development Authority Act 1999 clarifies that provisions of IRDA Act are in addition and not in derogation of Insurance Act 1938, which means IRDA Act and its regulation has been adopted in Section 44 of the I.T. Act r.w. Rule 2 of the First Schedule by way of "legislation by reference"; and when an appeal against this order of ITAT has been filed & is pending with High Court, Bombay?
Whether on the facts and in the circumstances of the case and in law, the Ld CIT(A) erred in giving relief to the assessee following the decision of Hon'ble /TAT in assessee's own case for the earlier years wherein Hon'ble Tribunal held that transfer from Share Holders Account to Policy Holder's Account and shown as part of 'surplus' in the "actuarial valuation" was only transfer of capital asset and not taxable u/s.44 of the Act r.w Rule 2 of the First Schedule; and when an appeal against this order of IT AT has been filed & is pending with High Court, Bombay?
55 I.T.A. No. 384 & 632/Mum/2015 ICICI Prudential Life Insurance Company Ltd 7. Whether on the facts and in the circumstances of the case and in law, the Ld CIT(A) erred in allowing the relief to the assessee by holding that "surplus" available both in Policy Holders Account and Share Holder's Account is to be consolidated and only "net surplus" is to be taxed as income from Insurance Business?
Whether on the facts and in the circumstances of the case and in law, the Ld CIT(A) erred in deleting the addition made on account of claim of 100% depreciation ignoring the facts that Actuarial surplus is determined on the basis of the total assets of the company and therefore by not capitalizing the above assets, the assets of the assessee company are under-stated in the books and thereby it has an impact of reducing the surplus or increase in the deficit and therefore, the assets so written off are also accordingly required to be considered as part of the surplus and taxable under section 44 of the IJ. Act?
Whether on the facts and in the circumstances of the case and in law, the Ld CIT(A) erred in allowing the dividend income of assessee as exempt u/s. 10(34) of the IJ. Act, 1961, ignoring the fact that dividend income is considered as part of income of Life Insurance Business and is included as an 'income' by the actuary?
Whether on the facts and in the circumstances of the case and in law, the Ld CIT(A) erred in allowing relief to the assessee by holding that surplus available in Share Holders Account is not to be taxed separately as "income
56 I.T.A. No. 384 & 632/Mum/2015 ICICI Prudential Life Insurance Company Ltd from other sources" and at the normal corporate rate and holding that surplus from Share Holders Account was only part of income from insurance business arrived at after "combining" surplus available in Share Holders Account with the surplus available in Policy Holders Account and then taxing this 'net surplus' arrived at, at the rates specified u/s. 115B of the Act ?
The appellant prays that the order of the Ld CIT(A) on the above grounds be set aside to the file of the AO or confirm the order of the AO.
The appellant craves leave to amend or alter any ground or add a new ground which may be necessary.
Ground No. 1 to 12 47. All the grounds raised by the revenue are inter connected and inter related and relates to challenging the order of Ld. CIT(A), therefore we thought it fit to dispose of the same by this common order.
At the outset, Ld. AR appearing on behalf of the assessee submitted before us that these grounds are squarely covered by the consolidate order of Coordinate Bench of Hon’ble ITAT for 57 I.T.A. No. 384 & 632/Mum/2015 ICICI Prudential Life Insurance Company Ltd AY 2005-06 to 2008-09, 2009-10, 2010-11 & 2011-12 in assessee’s own case on merits.
On the other hand, Ld. DR fairly conceded that these grounds are covered by the order of ITAT.
We have heard counsels for both the parties at length and we have also perused the material placed on record as well as the orders passed by revenue authorities. We find that the identical ground raised in the present appeal has already been decided by the Coordinate Bench of ITAT for AY 2005-06 to 2008-09, 2009-10, 2010-11 & 2011-12 in assessee’s own case on merits. The operative portion of the order of ITAT for AY 2010-11 to 2011-12 is contained in para no. 4 to 7.2 of its order and the same is reproduced below:-
The revenue has raised common grounds in both the appeals. The grounds raised for the assessment year 2010- 11 are as under :-
“1. Whether on the facts and in the circumstances of the case and in law, the Ld C1T(A) erred in interpreting the provisions of Section 44 of the I.T. Act read with Rule 2 of 58 I.T.A. No. 384 & 632/Mum/2015 ICICI Prudential Life Insurance Company Ltd the First Schedule alongwith provisions of Insurance Act 1938, Insurance Regulatory and Development Authority Act 1999 and regulations there under and accordingly allowing adjustment from the 'surplus worked as per 'actuarial valuation" [and as shown by the assessee in Form-I] in violation of the ratio of the Apex Court in the case of LIC vs CIT 51 ITR 778?
Whether on the facts and in the circumstances of the case and in law, the Ld CIT(A) erred in allowing the relief to the assessee by holding that 'surplus" available both in Policy Holders Account and Share Holder's Account is to be consolidated and only "net surplus" is to be taxed as income from Insurance Business?
Whether on the facts and in the circumstances of the case and in law, the Ld CIT(A) erred in giving relief to the assessee, following the decision of Hon'ble ITAT in assessee own case for the earlier years, wherein Hon’ble tribunal held that on account of 'legislation by incorporation', 'only' the "unamended" Insurance Act 1938 and the Regulations there under became part of Section 44 r.w Rule 2 of the First Schedule of the IT. Rules; when an appeal against this order of ITAT has been filed & is pending with High Court, Bombay?
Whether on the facts and in the circumstances of the case and in law, the Ld CIT(A) erred in giving relief to the assessee, following the decision of Hon 'ble ITAT in assessee own case for the earlier years, wherein Hon 'ble
59 I.T.A. No. 384 & 632/Mum/2015 ICICI Prudential Life Insurance Company Ltd Tribunal held that the Legislature consciously omitted incorporation of the provision of Insurance Regulatory and Development Authority Act 1999 and Regulations made thereunder in section 44 of the IT.Act r.w.Rule 2 of the First Schedule which 'refers' only to un-amended Insurance Act 1938 and Regulations made there-under; when an appeal against this order of ITAT has been filed & is pending with High Court, Bombay?
Whether on the facts and in the circumstances of the case and in law, the Ld CIT(A) erred in giving relief to the assessee, following the decision of Hon 'ble ITAT in assessee own case for the earlier years, wherein Hon’ ble Tribunal failed to take note that Section 28 of Insurance Regulatory and Development Authority Act 1999 clarifies that provisions of IRDA Act are in addition and not in derogation of Insurance Act 1938, which means IRDA Act and its regulation has been adopted in Section 44 of the I.T. Act r.w. Rule 2 of the First Schedule by way of "legislation by reference"; and when an appeal against this order of ITAT has been filed & is pending with High Court, Bombay?
Whether on the facts and in the circumstances of the case and in law, the LD CIT(A) erred in allowing the relief to the assessee by holding that "surplus" available both in Policy Holders Account and Share Holder's Account is to be consolidated; and only 'net surplus" is to be taxed as income from Insurance Business?
60 I.T.A. No. 384 & 632/Mum/2015 ICICI Prudential Life Insurance Company Ltd 7. Whether on the facts and in the circumstances of the case and in law, the Ld CIT(A) erred in concluding that transfer between Share Holders Account and policy Holder's Account is tax neutral and not taxable u/s 44 of the Act r.w Rule 2 of the first Schedule.
Whether on the facts and in the circumstances of the case and in law, the Ld CIT(A) erred in deleting the addition made on account of claim of 100% depreciation ignoring the facts that Actuarial surplus is determined on the basis of the total assets of the company and therefore by not capitalizing the above assets, the assets of the assessee company are under-stated in the books and thereby it has an impact of reducing the surplus or increase in the deficit and therefore, the assets so written off are also accordingly required to be considered as part of the surplus and taxable under section 44 of the IT. Act?
Whether on the facts and in the circumstances of the case and in law, the Ld CIT(A) erred in allowing the dividend income of assessee as exempt u/s. 10(34) of the I.T. Act, 1961, ignoring the fact that dividend income is considered as part of income of Life Insurance Business and is included as an income by the actuary?
Whether on the facts and in the circumstances of the case and in law, the Ld CIT(A) erred in allowing relief to the assessee by holding that surplus available in Share Holders Account is not to be taxed separately as 'income from other sources' and at the normal corporate rate and 61 I.T.A. No. 384 & 632/Mum/2015 ICICI Prudential Life Insurance Company Ltd holding that surplus from Share Holders Account was only part of income from insurance business arrived at after "combining' surplus available in Share Holders Account with the surplus available in Policy Holders Account and then and taxing this 'net surplus' arrived at, at the rates specified u/s. 1 15B of the Act?
"The appellant prays that the order of Ld. CIT(A) on the above grounds be set aside to file of AO or confirm the order of the AO.
"The appellant craves leave to amend or alter any ground or add a new ground which may be necessary."
Ground No.1 to 6 regarding interpretation of the provision of section 44 of the Income tax Act r.w. Rule 2 of the 1st Schedule of the Income tax Act, 1938. 5.1 We have heard the ld. DR as well as the ld. AR and considered the relevant material on record. The issue involved in ground No.1 to 6 of the revenue’s appeal have been considered by this Tribunal in assessee’s own case for the assessment year 2005- 06 to 2008-09 in 140 ITD 41 in para nos. 23, 27, 32, 38, 40 and 42 which are as under :-
“27. Respectfully following the above principles and examining the provisions of IT Act, we are of the opinion that the 'actuarial valuation made in accordance with the Insurance Act, 1938' do mean that the actuarial valuation done in accordance with the Insurance Act, 1938. In arriving at the above decision we have also taken into 62 I.T.A. No. 384 & 632/Mum/2015 ICICI Prudential Life Insurance Company Ltd consideration that Rule-5 in Part-B of the first schedule with reference to 'other insurance business' did incorporate the IRDA and its Regulations as amended by the Finance Act 2009 w.e.f. 1.4.2011 which is as under:
"B- Other Insurance Business:
Computation of profits and gains of other insurance business.
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 & Loss A/c 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) subject to the other provisions of this rule, any expenditure or allowance including any amount debited to the profit and loss account either by way of a provision for any tax, dividend, reserve or any other provision as may be prescribed which is not admissible under the provisions of section 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 & Loss A/c ;
63 I.T.A. No. 384 & 632/Mum/2015 ICICI Prudential Life Insurance Company Ltd (c) such amount carried over to a reserve for unexpired risks as may be prescribed in this behalf shall be allowed as a deduction". (emphasis supplied)
This indicates that the legislature consciously omitted incorporating the provisions of IRDA or the Regulations made there under in Rule 2 which still refers to the Insurance Act 1938 only.
.. 32. IRDA Regulations specifically require to maintain the policyholder's account and the shareholder's account separately and permits transfer of funds from shareholder's account to policyholder's account as and when there is a deficit in policyholder's account. As rightly noted by the Hon'ble Bombay High Court, as a policy, company is transferring funds/assets from shareholder's account to policyholder's account even during the year periodically as and when the actuarial valuation was arrived at in policyholder's account. Most of the companies are required to submit quarterly accounts under the Company Law, there is requirement of actuarial valuation report periodically and accordingly assessee was transferring funds from the shareholder's account to policyholder's account. Since the insurance business will not yield the required profits in the initial 7 to 10 years, lot of capital has to be infused so as to balance the deficit in the policyholder's account. During the year as already stated assessee has issued fresh capital to the extent of Rs.250 crores and transferred funds to the extent of Rs.233 crores from the shareholder's account to policyholder's account.
64 I.T.A. No. 384 & 632/Mum/2015 ICICI Prudential Life Insurance Company Ltd Since assessee is having only one business of life insurance, the entire transactions both under the policyholder's and shareholder's account do pertain to the life insurance business only as it was not permitted to do any other business. Once assessee is in the life insurance business, the computation has to be made in accordance with the Rule-2 as per provisions of section 44. Therefore, there is a valid argument raised by assessee that both the policyholder's & shareholder's account has to be consolidated into one and transfer from one account to another is tax neutral. What AO has done is to tax the surplus after the funds have been transferred from shareholder's account to the policyholder's account at the gross level while ignoring such transfer in shareholder's account, while bringing to tax only the incomes declared in the shareholder's account that too under the head 'other sources of income'. In fact while giving the finding that assessee is in the life insurance business only and incomes are to be treated as income from life insurance business, the CIT (A) surprisingly in subsequent assessment years appeals accepted AO's contention that surplus in shareholder's account is to be taxed as other sources of income. But once the provisions of section 44 of IT Act are invoked anything contained in the heads of income like income from other sources, capital gains, house property or even interest on securities does not come into play and only first schedule has to be invoked to arrive at the profit. Therefore, in our opinion both the policyholder's and 65 I.T.A. No. 384 & 632/Mum/2015 ICICI Prudential Life Insurance Company Ltd shareholder's account has to be consolidated for the purpose of arriving at the deficit or surplus. ….
… 38. The above statement furnished is in accordance with the Insurance Act, 1938, therefore, it cannot be stated that assessee returned income is not in accordance with the Insurance Act, 1938. There is no basis for AO to take Form-I 'total surplus' as surplus of the Life insurance business ignoring transfer from shareholder's account. ….
..40. In our opinion what assessee has done in reconciling the IRDA format with that of old Insurance Form is correct and accordingly the loss disclosed in the computation of income is according to the actuarial surplus/deficit under the Insurance Act, 1938 prescribed under Rule 2 of the first schedule part-A. In view of this, we are of the opinion that insistence by AO to bring to tax the entire amount shown under the new Regulations including transfer from shareholder's account is not correct. Instead of AO in taking the surplus at Regulation 8(1)(a) which is the actuarial surplus / deficit for the year took the amount as disclosed at Regulation 8 (1) (f) (total surplus after transfer from Shareholder's account) which is not at all correct. ….
.. 42. In view of the above, looking at the issue in any way what we notice is that the computation made by assessee is in accordance with Rule-2 of the Insurance Act 1938 according to which only AO can base his computation. This also corresponds to the way incomes were assessed in earlier years i.e. the correct method as per Rule 2 and Sec
66 I.T.A. No. 384 & 632/Mum/2015 ICICI Prudential Life Insurance Company Ltd 44 of IT ACT. In view of the discussion above and after analyzing the Forms, Regulations and Provisions we have no hesitation to hold that the assessee working of actuarial surplus/ deficit is in accordance with Rule 2 of First Schedule. Therefore, assessee grounds on this issue are allowed and AO is directed to modify the order accordingly. Ground Nos.1 to 3 are considered allowed.
5.2 Following the earlier order of this Tribunal we do not find any error or illegality in the impugned order of the ld. CIT(A) qua this issue. Accordingly ground Nos. 1 to 6 are dismissed.
Ground No.7 is regarding the taxability of surplus of both policy and share holders account.
6.1 We have heard the ld. DR as well as the ld. AR and considered the relevant material on record. We find that this issue was decided by this Tribunal in assessee’s own case for the assessment year 2005-06 and assessment year 2008-09 in para no.55 as under :-
” 55. We have heard the rival contentions. As briefly discussed while deciding the issue of taxing surplus, assessee is in life Insurance business and it is not permitted to do any other business. All activities carried out by assessee are for furtherance of Life Insurance business. Maintaining adequate capital is necessary to comply with IRDA (Assets, Liabilities and Solvency margin of insurers) Regulations, 2000. Income earned on capital infused in business is 67 I.T.A. No. 384 & 632/Mum/2015 ICICI Prudential Life Insurance Company Ltd integral part of Life Insurance business. The LD. CIT(A) gives a finding that assessee is exclusively in Life Insurance business. However, since he gave primacy to Form I proforma he concluded that other incomes are not of Life Insurance business. We have already considered and decided that assessee was mandated to maintain separate accounts by IRDA Regulations. Just because separate accounts are maintained the incomes in Shareholder's account does not become separate from Life insurance business. As per Insurance Act 1938 all incomes are part of one business only and these incomes are considered as part of same business. Therefore, the incomes in Shareholder's account are to be considered as arising out of Life insurance business only. More over Sec 44 mandates that only First Schedule will apply for computing incomes and excludes other heads of income like, Interest on Securities, income from house property, Capital gains or Income from other sources. Being non-obstante clause, sec. 44 mandates that the profits and gains of insurance business shall be computed in accordance with the rules contained in First Schedule. Therefore, the incomes in Shareholder's account are to be taxed as part of life insurance business only, as they are part of same business and investments are made as part of solvency ratio of same business. The grounds are allowed. AO is directed to treat them as part of Life Insurance Business and tax them u/s 115B.”
68 I.T.A. No. 384 & 632/Mum/2015 ICICI Prudential Life Insurance Company Ltd 6.2 Following the earlier order of this Tribunal we do not find any error or illegality in the impugned order of the ld. CIT(A) and decide this issue against the revenue and in favour of the assessee.
Ground No.8 is regarding the claim of 100% depreciation on fixed assets.
7.1 We have heard the ld. DR as well as the ld. AR. Considered the relevant material on record. We find that this issue was decided by this Tribunal in assessee’s own case for the assessment year 2005-06 and assessment year 2008-09 in para nos. 60 to 62 as under :-
“60. Ground No. 2 is about deletion of addition made on account of claim of 100% depreciation of Rs. 15,79,707/-. It was the contention of the Revenue that the CIT(A) ignored the actuarial surplus determined on the basis of the total assets if the company and therefore not capitalized in the above assets. The assets of assessee to that extent are not stated, therefore, it has an impact of reducing the total surplus.
Before the CIT(A) it was submitted that the assessee prepared its accounts as per the format prescribed by the IRDA in tune with the Insurance Act 1938. The assets were originally capitalized in the books and being eligible for 100% depreciation they are written off. The CIT(A), after considering the submissions, accepted the contention as under: -
69 I.T.A. No. 384 & 632/Mum/2015 ICICI Prudential Life Insurance Company Ltd "19. The appellant has to prepare its accounts as per the formats prescribed by the IRDA under the Insurance Act, 1938. These accounts have accordingly been prepared by the appellant and have been subject to statutory audit. Further, the accounting policy of claiming 100% depreciation in its financial statements has been consistently followed by the appellant and has also been duly accepted by the IRDA. The appellant has stated that the assets on which depreciation has been claimed have been initially capitalized in the books and then 100% depreciation has been claimed on these assets. Taxation of Life Insurance is presumptive taxation with only the surplus as disclosed by Form I being subjected to tax. In my view, as per the provisions of law only those adjustments which are expressly not prohibited under section 44 of the Act could be made. Consequently depreciation which has been debited in the audited accounts as per the consistently followed and accepted accounting policy need not be disallowed.
After considering the rival submissions, we are of the opinion that the action of the CIT(A) in deleting the amount is consistent with the accounting principles followed and the provisions of section 44 read with Rule 2 of the 1st Schedule. Therefore we uphold the order of the CIT(A) and dismiss the ground raised by the Revenue.”
70 I.T.A. No. 384 & 632/Mum/2015 ICICI Prudential Life Insurance Company Ltd 7.2 Following the earlier order of this Tribunal we do not find any error or illegality in the impugned order of the ld. CIT(A). The issue involved in ground No. 8 is dismissed.
After having gone through the aforementioned orders, we find that the identical issue has already been decided by the Coordinate Bench of ITAT in AY 2010-11 & 2011-12 in assessee’s own case on merits. Therefore, respectfully following the decision of the coordinate bench of ITAT which is applicable mutatis mutandis in the present case, we dismiss these grounds raised by the revenue.
Consequently, the appeal filed by the revenue stands dismissed. 53. In the net result, the appeal filed by the assessee stands allowed and appeal filed by the revenue stands dismissed.
Order pronounced in the open court on 22nd Nov 2019. (Ram Lal Negi) (S. Rifaur Rahman) न्याययकसदस्य / Judicial Member लेखासदस्य / Accountant Member मुंबई Mumbai;यदनांक Dated : 22.11.2019 Sr.PS. Dhananjay
71 I.T.A. No. 384 & 632/Mum/2015
आदेशकीप्रनिनिनिअग्रेनर्ि/Copy of the Order forwarded to : 1. अपीलाथी/ The Appellant 2. प्रत्यथी/ The Respondent आयकरआयुक्त(अपील) / The CIT(A) 3. 4. आयकरआयुक्त/ CIT- concerned 5. यवभागीयप्रयतयनयि, आयकरअपीलीयअयिकरण, मुंबई/ DR, ITAT, Mumbai 6. गार्डफाईल / Guard File आदेशधिुसधर/ BY ORDER, .उि/सहधयकिंजीकधर (Dy./Asstt.