Loading judgment…
Facts
The assessee, an insurance company, filed appeals against orders related to disallowance of expenses exceeding IRDA limits and a penalty. The Assessing Officer disallowed expenses exceeding limits prescribed under the IRDA Regulations and Section 40C of the Insurance Act, 1938, and levied a penalty under Section 270A. The CIT(A) upheld the disallowance and penalty.
Held
The Tribunal held that the reallocation of expenses as per IRDA guidelines was for accounting purposes and did not constitute a violation of law. The expenses were incurred wholly and exclusively for business purposes. The Tribunal considered Section 44 of the Income Tax Act, which governs the computation of profits for insurance businesses, and Rule 5 of the First Schedule, which allows for add-backs only if expenditures are not admissible under specific sections.
Key Issues
Whether expenses incurred by an insurance company in excess of the limits prescribed by IRDA regulations, but otherwise incurred for business purposes, are allowable as deductions under the Income Tax Act, and whether the penalty levied on such disallowance is justified.
Sections Cited
270A, 40C, 37(1), 143(3), 14A, 8D, 10(34), 44, 30, 43B, 43A
AI-generated summary — verify with the full judgment below
Income Tax Appellate Tribunal, KOLKATA ‘C’ BENCH AT KOLKATA
Before: SHRI GEORGE MATHAN & SHRI RAKESH MISHRA
order : 12-February-2026 ORDER PER RAKESH MISHRA, ACCOUNTANT MEMBER: These four appeals filed by the Assessee are against the separate orders of the Commissioner of Income Tax (Appeals)-NFAC, Delhi [hereinafter referred to as Ld. 'CIT(A)'] passed u/s 250 of the Income Tax Act, 1961 (hereinafter referred to as ‘the Act’) for AYs 2018-19, 2022-23 & 2023-24 dated 25.09.2025. Since the issues are common or related, all the appeals were heard together and are being decided vide this common order for the sake of convenience and brevity.
The assessee is in appeal before the Tribunal raising the following grounds of appeal: I. ITA No.: 2803/KOL/2025: “1) That the Ld. Commissioner of Income-tax (Appeals), NFAC was wrong in sustaining the Penalty of Rs. 11,52,05,880 levied u/s 270A in respect of the disallowance made of the expenditure in excess of limit prescribed under the IRDA Regulations read with Section 40C of the Insurance Act, 1938, ITA Nos.: 2803, 2804, 2805 & 2806/KOL/2025 AYs: 2018-19, 2022-23 & 2023
24. National Insurance Company Limited. without properly appreciating the explanations and evidences furnished during the proceedings, and the same ought to be deleted. 2) That without prejudice to the contention raised in Ground No. (1) above, the Ld. Commissioner of Income-tax (Appeals), NFAC failed to appreciate that there had not occurred any case of misreporting of Income which could lead to the levying of any Penalty u/s 270A and thus he erred in confirming levying of Penalty of Rs.11,52,05,880. 3) That the appellant craves leave to add, delete or modify any Ground or Grounds of Appeal before or at the time of the Hearing of the Appeal.” II. ITA No.: 2804/KOL/2025:
1. 1. 1. That the Ld. Commissioner of Income-tax (Appeals), NFAC was wrong in confirming the action of the Assessing Officer in disallowing Rs.16,64,44,000/- being the Expenditure incurred in excess of the specified limit u/s 40C of the Insurance Act, 1938, read with IRDAI Regulations, debited to the Profit and Loss Account.
1. 2. That without prejudice to the contention raised in Ground No. (1) above, the Ld. Commissioner of Income-tax (Appeals), NFAC failed to appreciate that the Expenses aggregating to Rs. 16,64,44,000/- having been incurred wholly and exclusively for the purposes of the Business of the appellant, should have been held to be allowable u/s 37(1) of the Income-tax Act, 1961 and thus he erred in confirming the disallowance of the said Expenses of Rs. 16,64,44,000/-.
3. That without prejudice to the contentions raised in Grounds Nos. (1) and (2) above, the Ld. Commissioner of Income-tax (Appeals) erred in holding that the excess management expenditure was hit by Explanation 1 to Section 37(1), failing to appreciate that the disallowance under the IRDA/Insurance Act regulations related only to the allocation of expenses and had not rendered the expenditure itself illegal or unlawful for the purpose of disallowance under the Income-tax Act.
4. That the appellant craves leave to add, delete or modify any Ground or Grounds of Appeal before or at the time of the Hearing of the Appeal. IIII. ITA No.: 2805/KOL/2025:
1. That the Ld. Commissioner of Income-tax (Appeals), NFAC was wrong in confirming the action of the Assessing Officer in disallowing Rs.8,74,19,000/- being the Expenditure incurred in excess of the specified limit u/s 40C of the Insurance Act, 1938, read with IRDAI Regulations, debited to the Profit and Loss Account.
2. That without prejudice to the contention raised in Ground No. (1) above, the Ld. Commissioner of Income-tax (Appeals), NFAC failed to appreciate that the Expenses aggregating to Rs.8,74,19,000/- having been incurred ITA Nos.: 2803, 2804, 2805 & 2806/KOL/2025 AYs: 2018-19, 2022-23 & 2023-24 National Insurance Company Limited. wholly and exclusively for the purposes of the Business of the appellant, should have been held to be allowable u/s 37(1) of the Income-tax Act, 1961 and thus he erred in confirming the disallowance of the said Expenses of Rs.8,74,19,000/-.
3. That without prejudice to the contentions raised in Grounds Nos. (1) and (2) above, the Ld. Commissioner of Income-tax (Appeals) erred in holding that the excess management expenditure was hit by Explanation 1 to Section 37(1), failing to appreciate that the disallowance under the IRDA/Insurance Act regulations related only to the allocation of expenses and had not rendered the expenditure itself illegal or unlawful for the purpose of disallowance under the Income-tax Act.
4. That the appellant craves leave to add, delete or modify any Ground or Grounds of Appeal before or at the time of the Hearing of the Appeal.” IV. ITA No.: 2806/KOL/2025:
1. That the Ld. Commissioner of Income-tax (Appeals), NFAC was wrong in confirming the action of the Assessing Officer in disallowing Rs.15,84,24,02,000/- being the Expenditure incurred in excess of the specified limit u/s 40C of the Insurance Act, 1938, read with IRDAI Regulations, debited to the Profit and Loss Account.
2. That without prejudice to the contention raised in Ground No. (1) above, the Ld. Commissioner of Income-tax (Appeals), NFAC failed to appreciate that the Expenses aggregating to Rs.15,84,24,02,000/- having been incurred wholly and exclusively for the purposes of the Business of the appellant, should have been held to be allowable u/s 37(1) of the Income- tax Act, 1961 and thus he erred in confirming the disallowance of the said Expenses of Rs.15,84,24,02,000/-.
3. That without prejudice to the contentions raised in Grounds Nos. (1) and (2) above, the Ld. Commissioner of Income-tax (Appeals) erred in holding that the excess management expenditure was hit by Explanation 1 to Section 37(1), failing to appreciate that the disallowance under the IRDA/Insurance Act regulations related only to the allocation of expenses and had not rendered the expenditure itself illegal or unlawful for the purpose of disallowance under the Income-tax Act.
4. That the appellant craves leave to add, delete or modify any Ground or Grounds of Appeal before or at the time of the Hearing of the Appeal.” A. We shall first take up the appeal in for AY 2018-19.
Brief facts of the case are that the assessee is a company, engaged in the insurance business and had e-filed its original return of income ITA Nos.: 2803, 2804, 2805 & 2806/KOL/2025 AYs: 2018-19, 2022-23 & 2023-24 National Insurance Company Limited. u/s 139(1) of the Act for the AY 2018-19 showing total loss of ₹(-) 23,88,13,38,152/-. The case was selected for scrutiny under Computer Assisted Scrutiny Selection (in short 'CASS') and accordingly, a notice u/s 143(2) of the Act was issued to the assessee. Since the assessee did not respond to the notices issued, the Assessing Officer (hereinafter referred to as Ld. 'AO') noted that the claim of the assessee amounting to ₹1,48,87,000/- was not an allowable expenditure and added the same to the total income of the assessee. Further, the Ld. AO disallowed an amount of ₹38,40,909/- u/s 14A of the Act r.w. rule 8D of the Income Tax Rules, 1962 on account of expenses related to exempt income. An amount of ₹3,20,31,000/- on account of amortisation of premium on investments, ₹16,64,44,000/- on account of expenditure in excess of the limits specified as per section 40C of the Insurance Act, 1938 and a sum of ₹2,26,67,51,810/- on account of claim of exemptions u/s 10(34) of the Act was also added to the total income of the assessee and the Ld. AO assessed the total income of the assessee at ₹2139,73,83,433/- u/s 143(3) of the Act and penalty of ₹171,66,35,574/- was also imposed u/s 270A of the Act. Aggrieved with the assessment order, the assessee filed an appeal before the Ld. CIT(A), who partly allowed the appeal of the assessee by dismissing the ground of disallowance of expenses exceeding the prescribed limit of Insurance Regulatory and Development Authority of India (IRDAI/IRDA) amounting to ₹16,64,44,000/- and has held as under: “Ground No 6-Disallowance of Expenses over IRDA Limit (Rs. 16,64,44,000/-): Assessing Officer contended that Section 40C of the Insurance Act, 1938, read with corresponding IRDA (Expenses of Management of Insurers transacting general insurance business) Regulations, prescribes an upper limit on expenses of management. The sum of Rs. 16,64,44,000 was shown as excess over the prescribed ceiling, but still claimed as deductible in the ITA Nos.: 2803, 2804, 2805 & 2806/KOL/2025 AYs: 2018-19, 2022-23 & 2023-24 National Insurance Company Limited. P&L account. The AO held that such excess, being in clear violation of statutory and regulatory prescription, and not "related to insurance business" within the meaning of Rule 5 of the First Schedule, was not allowable. The appellant argued that the IRDA limit merely determines what can be debited to the policyholder (revenue) accounts, and any excess, though not chargeable to policyholder, can be borne by the shareholders and is therefore claimed in the P&L as a business expense. It further submitted that there is no bar under Rule 5 to claiming genuine business expenditure, even if in excess of IRDA limit, so long as it is not penal in nature. Upon scrutiny of the IRDAI (Expenses of Management of Insurers transacting General Insurance Business) Regulations, 2016, it is clear that Regulation 4(1), read with Section 40C(1) of the Insurance Act, 1938, mandates that "No insurer shall, in respect of insurance business transacted by him in India, spend as expenses of management in any financial year any sum in excess of the prescribed limits." The relevant limit is a statutory cap, violation of which is not a mere internal allocation or guidance it is a binding legal ceiling. As observed by the Supreme Court in General Insurance Corporation of India v. CIT (1999) 240 ITR 139 (SC), and cited further in CIT v. Oriental Fire & General Insurance Co. Ltd. (2007) 291 ITR 371 (SC), the computation of income for non-life insurers is governed strictly by Section 44 and the First Schedule. However, Rule 5(b), First Schedule explicitly provides that "any expenditure other than expenditure which is not admissible under the provisions of sections 30 to 43B in computing the profits and gains of a business" must be considered. Crucially, any expense incurred in infringement or contravention of law, or in breach of a regulatory cap, is hit by Explanation 1 to section 37(1) of the Act, which disallows expenses incurred for an unlawful purpose or in violation of law, even where otherwise incurred "wholly and exclusively for business. The restriction on management expenses is mandatory. The IRDA regulations do not merely allocate expense between shareholder and policyholder accounts but create a hard limit on the deductibility for tax purposes. In United Commercial Bank Ltd. v. CIT (1969) 72 ITR 62 (SC), it was clarified that expenditures contrary to statutory rule or regulation cannot be allowed as deduction under business profits In CIT v. Piara Singh (1980) 124 ITR 40 (SC), it was held that expenses incurred in violation of law (or to defeat the law) cannot be allowed, even if motivated by the exigencies of business ITA Nos.: 2803, 2804, 2805 & 2806/KOL/2025 AYs: 2018-19, 2022-23 & 2023-24 National Insurance Company Limited. Having considered the statutory framework, regulatory prohibition, and Supreme Court principles, I am of the considered view that expenses incurred in excess of the IRDA/Insurance Act statutory ceiling are, by their very nature, not allowable as a deduction under the Act. Allowing such an excess would frustrate the legislative intent of the cap and render the regulatory limit meaningless for tax computation. Accordingly, the addition/disallowance of Rs. 16,64,44,000 sustained by the AO is confirmed. The ground of appeal
is dismissed.”
4. Aggrieved with the order of the Ld. CIT(A), the Assessee has filed the appeal before the Tribunal.
5. Rival contentions were heard and the submissions made have been examined. It was submitted by the Ld. AR in the course of the appeal that the assessee is in the insurance business and the income is to be computed as per section 44 of the Act with Rule 5 of the First Schedule of the Act. It was submitted that the assessee had debited certain expenses which, according to IRDA, had to be allocated insurance sector-wise so as to get the correct picture. However, the Ld. CIT(A) granted relief in respect of other additions but upheld the disallowance on account of such expenses claimed by holding that Explanation 1 to sub-section (1) of section 37 of the Act is applicable. It was submitted that it was an accounting adjustment so as to get the correct picture as per the statutory rules and there was no infraction of any law so as to attract Explanation 1 to section 37(1) of the Act which has been incorrectly applied by the Ld. CIT(A). The assessee has also filed detailed submission as under: “(1) The appellant is a Public Sector Company engaged in providing General Insurance Services and its Income is required to be assessed in accordance with the provisions of Section 44 read with Rule 5 of the First Schedule of the Income-tax Act, 1961. During the assessment proceedings, the National Faceless Assessment Centre, Delhi (NaFAC) had asked the appellant as to why expenditure in excess of the limit specified as per 40C of the Insurance Act, ITA Nos.: 2803, 2804, 2805 & 2806/KOL/2025 AYs: 2018-19, 2022-23 & 2023-24 National Insurance Company Limited. 1938, would not be disallowed. In response, the appellant submitted before the NaFAC that the appellant had incurred expenses of Management in excess of the limit prescribed under the IRDA Regulations for the Financial Year 2017-18 (relevant for the Assessment Year 2018-19) and such excess expenditure had been Rs.16,64,44,000. As per the IRDA Regulations if the expenses of Management would exceed the prescribed limit for charging to the Revenue Accounts (Policy Holders’ Accounts) such concerned excess expenses would have to be charged to the Shareholders Account, i.e., Profit and Loss Account. It was clarified by the appellant that the limit of Management expenses had been prescribed by IRDA for deciding as to upto what extent the expenses could be charged to the Revenue Accounts, viz., Fire Revenue, Marine Revenue and Miscellaneous Revenue Accounts of the appellant. It was submitted by the appellant that the reason behind prescribing the limit was for having a control over the fixation of the premium for various types of General Insurance business. Accordingly, as per the IRDA Regulations the excess expenses would have to be borne by the Shareholders. Therefore, these excess expenditure had to be debited to the Profit and Loss Account instead of being charged to the Revenue Account. Copy of the “Insurance Regulatory and Development Authority of India (Expenses of Management of Insurers Transacting General or Heath Insurance Business) Regulations 2016” (hereinafter referred to as the IRDA Regulations,2016), was submitted by the appellant to the NaFAC. It was pointed out that Clauses 3,12 and I4(i) of the IRDA Regulations,2016, dealt with the expenses on Management and how to deal with the cases where the expenses on Management would exceed the limit prescribed by the IRDA. It was pointed out by the appellant to the NaFAC that Schedule 4 of the Annual Reports and Accounts gave details of Operating Expenses related to Insurance Business wherein it was shown that the total expenses on Management of Rs.2912,54,51,000, had been allocated to: (i) Fire Revenue Account Rs. 175,36,54,000 (ii) Marine Revenue Account Rs. 21,03,40,000 (iii) Miscellaneous Revenue Account Rs. 2699,50,13,000 (iv) Profit and Loss Account (Excess over Rs. 16,64,44,000 allowable limit) Total: Rs. 2912,54,51,000