DCIT CIR 6(3)(1), MUMBAI vs. IDBI FEDERAL LIFE INSURANCE CO. LTD, MUMBAI

51. ITR 778 without appreciating the fact that these decisions are not accepted by the Department and further appeals have been filed.”

4. Briefly stated, the facts of the case are that the assessee company is engaged in the business of life insurance and filed its return of income for assessment year 2012-13 declaring a loss of Rs.83,17,14,360/- on account life insurance business. The AO noted that the assessee has aggregated the surplus/deficit of policy holders account and share holders account in order to arrive at surplus/deficit in view of section 44 of the Act r.w. Rule 2 of the First Schedule. The AO noted the computation of income/loss, which is reproduced in the assessment order as well in the order of the CIT(A). The assessee disclosed the surplus at Nil in policy holders account, whereas deficit of Rs.69.86 crores in share holders account. After aggregating both, In 6948 & 6970/Mum/2017 assessee arrived a deficit of Rs.69.86 crores and the same was considered as profit and gains of the insurance business as per section 44 of the Act r.w. Rule 2 of the First Schedule. The assessee claimed exemption of dividend income of Rs.12.70 crores and pension business income of Rs.60.00 cores included therein under the provisions of section 10(34) and 10(23AAB) of the Act. Accordingly, the assessee worked out the loss at Rs.83.17 crores. According to the AO, the assessee is not following the principle of the provisions of section 44 of the Act. According to the AO as per section 44 of the Act, the profits and gains of the life insurance business shall be computed in accordance with Rule-2 contained in First Schedule of the Act. Accordingly, the AO noted that as per Rule-2 of the First Schedule, which is relevant for the business of life insurance carried on by the assessee, which provides that profits and gain of life insurance business shall be taken to be the average value of the surplus arriving at by adjusting the surplus or deficit disclosed by actuarial valuation made in accordance with the Insurance Act, 1938 in respect of the less inter valuation period ending before the commencement of the assessment year so as to include it from any surplus/deficit included therein which was made in any inter valuation period. The AO carried out the entire exercise consistently from the earlier years. Accordingly, the AO did not accept the computation of profit and gains from the life insurance business made by the assessee. Aggrieved, the assessee preferred an appeal before the CIT(A).

5. The CIT(A) relying on the decision of ITAT in the case of ICICI Prudential Life Insurance Co. Ltd.(supra) allowed the claim of the In 6948 & 6970/Mum/2017 assessee. The CIT(A) also relied upon the ITAT order dated 09/08/2017 in assessee’s own case for assessment years 2009-10 & 2010-11 in ITA Nos. 6282/Mum/2012, 6281/Mum/2012, 5567/Mum/2014 (assessee’s appeal) & ITA Nos. 6306/Mum/2012 & 5378/Mum/2014 (Revenues appeal). Accordingly, the CIT(A) directed the AO to compute the surplus/deficit in share holders account without adding back the amount of Rs.122.41 crores that has been transferred from the share holders account to the policy holders account. Aggrieved, now the Revenue is in appeal before the Tribunal.

In 6948 & 6970/Mum/2017 7. The second issue in this appeal of Revenue is against the order of CIT(A) in holding that transfer between share holders account and policy holders account is tax neutral and not taxable u/s. 44 of the Act r.w. Rule-2 of the First Schedule. For this the Revenue has raised the following Ground:-

2. 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 the case of ICICI Prudential Life Insurance CO. Ltd. for the earlier years and in the case of IDBI Federal Life Insurance CO. Ltd. for A.Y. 2009-10 and 2010-11 respectively, in concluding that transfer between shareholders Account and Policy Holders Account is tax neutral and not taxable u/s 44 of the Act r.w. Rule 2 of the First Schedule, without appreciating the fact that this decision of the ITAT were not accepted by the department and further appeals have been filed.

3. 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 I.T. Act?”

In 6948 & 6970/Mum/2017 10. We have heard the rival contentions and gone through the facts and circumstances of the case. We noted that the assessee has claimed 100% depreciation in respect of assets costing less than Rs.20,000/-. The AO disallowed the claim of assessee of 100% deprecation in respect of assets costing less than Rs.20,000/- amounting to Rs.81,50,646/-. The CIT(A) allowed the claim of the assessee by following the Tribunal’s decision in assessee’s own case for assessment years 2009-10 and 2010-11 in ITA Nos. 6282/Mum/2012, 6281/Mum/2012, 5567/Mum/2014 (assessee’s appeal) & ITA Nos. 6306/Mum/2012 & 5378/Mum/2014 (Revenues appeal) and for assessment year 2008-09 vide ITA Nos.1562/Mum/2013 &1488/Mum/2013. As there is no dispute on facts, the claim of assessee is that it has been consistently following the policy of providing depreciation @ 100% on the value of assets costing less than Rs.20,000/-. The contention of the assessee is that since computation of profits and gains of the business of assessee, being in the business of life insurance, is in accordance with the provisions of section 44 of the Act, which over rides section 28 to 43B of the Act are not applicable to the assessee for determining the income from life insurance business. We noted that this issue is now settled and Revenue could not point out any distinguishing facts from earlier years. Hence, we confirm the order of the CIT(A) and dismiss this Ground of Revenue’s appeal.

In 6948 & 6970/Mum/2017

4. 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 Insurance Business and is included as an 'income' by the actuary?”

In 6948 & 6970/Mum/2017 13. The next issue, which is common in both the appeals i.e. appeal of the assessee and Revenue. The common issue as regards the disallowance of expenses relatable to exempt income by the Assessing Officer and restricted by CIT(A) by applying the provisions of section 14A of the Act r.w. Rule 8D of the Rules. In this appeal Revenue has raised the following Ground:

“5. On the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in deleting the addition made u/s 14A r.w.r. 8D on protective basis without appreciating the fact that the Ld. CIT(A) has allowed dividend as exempt income, then , the disallowance has to be made u/s 14A r.w.r. 8D of the Act and on the contrary, the department is in appeal for allowing the claim of assessee u/s 10(34) of the Act.

The assessee has raised the following Grounds of appeal: - “2. Application of Rule 8D.

On the facts and in the circumstances of the case and in law, the Learned CIT(A) erred in confirming the action of the DCIT that the provisions of rule 8D of the Income-tax Rules, 1962, are applicable even though it has been explicitly held the provisions of section 14A of the Income-tax Act, 1961 ('the Act') are not applicable to the facts of the case.

In 6948 & 6970/Mum/2017 The Appellant prays that it be held the rule 8D is not applicable to the facts of the case.

3. Amount of disallowance Without prejudice to Ground no 2 above, having held that provisions of rule 8D were applicable in the case of the Appellant, the learned CIT(A) erred in confirming the action of the DCIT in determining the working of the disallowance at Rs.11,08,65,980 instead of the 'without prejudice' working of Rs. 2,35,04,388 as computed and submitted by the Appellant during the course of the assessment proceedings The appellant prays that the amount of expenditure under Rule 8D be determined at ₹ 2,36,04,388/- instead of ₹ 11,08,65,980/-.

The assessee has raised the following Ground No.4. “On the facts and circumstances of the case and in law, the CIT(A) ought to have directed the DCIT to set off the brought forward business of loss of earlier years while computing the total income of the Appellate for the subject year.”

“61. I have carefully considered the facts of the case, the assessment order and the written submissions of the appellant. The appellant has contended that it has brought forward business losses aggregating to Rs.371.12 crores for A.Y.2008-09 to 2011-12 if the orders giving effect to the orders of the CIT(A) for the A.Ys 2008-09 and 2011-12 and order of the Hon'ble Tribunal for A.Ys 2009-10 & 2010-11 are passed by the AO and the same ought to have been allowed set off In 6948 & 6970/Mum/2017 against the income determined for the present A.Y.2012-13:

“7. On the facts and 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 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 ?”

In 6948 & 6970/Mum/2017 We noted that this issue is covered in favour of the assessee and, hence, we also uphold the findings of CIT(A). This issue of Revenue’s appeal is dismissed.

The Appellant prays that decrease in Negative Reserves be allowed as a deduction from profits if at all the increase in Negative Reserves is treated as income in the earlier years.”

“6.3. We have heard rival submissions and perused the material before us. We are of the opinion that treatment given to negative reserves by actuary cannot be disturbed by the AO. Here, it would be useful to understand meaning of negative reserve in simple terms. While making actuarial valuation, requirement of reserve to service insurance policies issued is ascertained. Such In 6948 & 6970/Mum/2017 reserve (called mathematical reserve or value of liability) is equal to present value of future benefits payable and future expenses to be incurred less present value of future premium receivable. When the present value of future premium is more than the present value of future benefits payable and future expenses to be incurred, this amount becomes negative, known as ‘negative reserve’. In simple words, it means that the insurance contracts under consideration do not warrant any provision and is, in fact, an asset. However, in certain circumstances, such as for following IRDA guidelines, insurers may not treat policies as assets and they set any negative reserves to zero. For example, if an insurer had two policies, one with a reserve of 100 and the other with a reserve of - 10, it might think of its liabilities at100 rather than 90 to take into account the eventuality in case the second policy lapsed. This process is called eliminating negative reserves. As mentioned 21 ITA No. 2203/Mum/2012 & Ors. HDFC Standard Life Insurance Company Ltd earlier, a policy which has a negative reserve is in nature of an asset.

We find that in the case of ICICI Prudential Insurance Co.(supra), AO had disallowed negative reserve related to Life Insurance business of the assessee. In appellate proceedings FAA allowed the appeal of the assessee.AO challenged the order of the FAA before the Tribunal. We find that AO has raised the following ground of appeal in the appeal filed by him for AY 2006-07. In 6948 & 6970/Mum/2017 “On the facts and in the circumstances of the case and in law, the learned CIT(A)erred in not subjecting the negative reserve amounting to Rs.27.27 Crores ignoring the facts that negative reserves has impact of reducing the taxable surplus as per From I.”

Disposing his appeal, Tribunal held as under:

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 a part of Actuarial valuation and the surplus as discussed in Form-I under Regulation 4 takes in to consideration this mathematical reserve also. Therefore the order of the order of the CIT(A) is approved.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 principle laid down by the Hon’ble Supreme Court in LIC vs.CIT 51ITR773 about the power of the Assessing Officer also restricted the scope and adjustment by the AO. In view of this uphold the order of the CIT(A) and dismiss the Revenue’s ground.

In 6948 & 6970/Mum/2017 Respectfully, following the above we decide effective ground of appeal against the Assessing Officer”

25. The CIT(A) only on this basis allowed the claim of assessee of negative reserve. Since the issue is covered in favour of the assessee in regard to actuarial valuation, we uphold the order of CIT(A). The issued raised by the assessee in regard to negative reserve has become academic and, hence, infructuous.

26. Now we may take up the appeals of the Revenue for assessment years 2013-14 & 2014-15. Since the Grounds raised

by the Revenue for both assessment years are identical, the grounds raised for assessment year 2013-14 are reproduced below: - “1. On the facts and in the circumstances of the case and in law, the Ld CIT(A) erred, in relying on the order of ITAT in the case of ICICI Prudential Life Insurance CO. Ltd. for earlier years and in the case of IDBI Federal Life Insurance CO. Ltd. for A.Y. 2009-10 and 2010-11 respectively, in interpreting the provisions of Section 44 of the I.T. Act read with Rule 2 of the First Schedule along with provisions of Insurance Act 1938, Insurance Regulatory and Development Authority Act 1 999 and regulations there under and accordingly allowing adjustment from the 'surplus' worked as per "actuarial valuation" [and as shown by the assesses in Form-1] in violation of the ratio of the Apex Court in the case of LIC vs CIT

51. ITR 778 without appreciating the fact that these In 6948 & 6970/Mum/2017 decisions are not accepted by the Department and further appeals have been filed.

2. 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 the case of ICICI Prudential Life Insurance CO. Ltd. for the earlier years and in the case of IDBI Federal Life Insurance CO. Ltd. for A.Y. 2009-10 and 2010-11 respectively, in concluding that transfer between shareholders Account and Policy Holders Account is tax neutral and not taxable u/s 44 of the Act r.w. Rule 2 of the First Schedule, without appreciating the fact that this decision of the ITAT were not accepted by the department and further appeals have been filed.

3. 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 I.T. Act?

In 6948 & 6970/Mum/2017 4. 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?

6. On the facts and circumstances of the case and in law, the Ld. CIT(A) has erred in allowing the claim of exemption u/s. 10(23AAB) of the I T Act o Rs. 0.97 crs in respect of surplus in pension line of business?

8. On the facts and circumstances of the case and in law, the Ld. CIT(A) has erred in allowing the carry forward of In 6948 & 6970/Mum/2017 losses which is assessed under the head "Income from Other Sources" without considering the restriction of carry forward of losses under section 74A of the Act to set off against the business income in the current year."

9. On the facts and 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 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.H5BoftheAct ?

In 6948 & 6970/Mum/2017 28. Now we may take up the appeals of the assessee for assessment years 2013-14 & 2014-15. Since the Grounds raised by the assessee for both assessment years are identical, the grounds raised for assessment year 2013-14 are reproduced below:-

“The Appellant submits the following grounds of appeal, which are independent and without prejudice to one another:

1. Deduction for decrease in negative reserve On the facts and in the circumstances of the case and in law, the Learned CIT(A) erred in not directing the Assistant Commissioner of Income tax ("ACIT or AO") to allow deduction for an amount of Rs. 50,78,22,283 representing the decrease in the Negative Reserves from last year, despite the fact that the ACIT had herself treated an increase in the Negative Reserves as taxable income in the earlier years' assessments.

The Appellant prays that decrease in Negative Reserves be allowed as a deduction from profits if at all the increase in Negative Reserves is treated as income in the earlier years.

2. Application of rule 8D On the facts and in the circumstances of the case and in In 6948 & 6970/Mum/2017 law, the Learned CIT(A) erred in confirming the action of the ACIT that the provisions of rule 8D of the Income-tax Rules, 1962, are applicable even though it has been explicitly held the provisions of section 14A of the Income- tax Act, 1961 ('the Act') are not applicable to the facts of the case.

The Appellant prays that it be held the rule 8D is not applicable to the facts of the case.

5.Interest u/s 234B of the Act In 6948 & 6970/Mum/2017 On the facts and circumstances of the case and in law, the CIT(A) erred in not holding that provisions of section 234B of the Act & are not applicable in the Appellant's case.

6. Initiation of penalty proceedings On the facts and the circumstances of the case, and in law, the CIT(A) ought to have directed the ACIT to drop the penalty proceedings initiated under section 27i(i)(c) of the Act.”

Order pronounced in the open court on 24th July, 2019. (मनोज कुमार अग्रवाल / MANOJ KUMAR AGGARWAL) (महावीर ससिंह /MAHAVIR SINGH) (लेखा सदस्य / ACCOUNTANT MEMBER) (न्याययक सदस्य/ JUDICIAL MEMBER) मुिंबई, ददनािंक/ Mumbai, Dated: 24.07.2019 स दीप सरकार, व.यिजी सधिव / Sudip Sarkar, Sr.PS