DCIT-CC-5(3), MUMBAI, MUMBAI vs. KOTAK MAHINDRA LIFE INSURANCE CO. LTD., MUMBAI

This appeal by the Revenue is directed against order dated 28.05.2024 passed by the Ld. Commissioner of Income-tax (Appeals) – 54 [in short ‘the Ld. CIT(A)’] for assessment year 2021- 22.

1. "Whether on the facts & circumstances of Whether on the facts & circumstances of the case and in law, the the case and in law, the Ld. THE LD. CIT(A)(A) erred in interpreting the provisions of Section Ld. THE LD. CIT(A)(A) erred in interpreting the provisions of Section Ld. THE LD. CIT(A)(A) erred in interpreting the provisions of Section 44 of the Income Tax, 1961 [“the Act’] read with Rule 2 of the First 44 of the Income Tax, 1961 [“the Act’] read with Rule 2 of the First 44 of the Income Tax, 1961 [“the Act’] read with Rule 2 of the First Schedule along with provisions of Insurance Act, 1938, insurance Schedule along with provisions of Insurance Act, 1938, insurance Schedule along with provisions of Insurance Act, 1938, insurance Regulatory and Development Regulatory and Development Authority Act, 1999 and regulations Authority Act, 1999 and regulations made there under and accordingly allowing adjustment from the made there under and accordingly allowing adjustment from the made there under and accordingly allowing adjustment from the ‘surplus’ worked out as per áctuarial valuation ‘surplus’ worked out as per áctuarial valuation.?" 2. "Whether on the facts and in the circumstances of the case and in Whether on the facts and in the circumstances of the case and in Whether on the facts and in the circumstances of the case and in law, the Ld THE LD. CIT(A)(A) erred in law, the Ld THE LD. CIT(A)(A) erred in allowing relief to the assessee allowing relief to the assessee by holding that surplus available in Share Holders Account is not to by holding that surplus available in Share Holders Account is not to by holding that surplus available in Share Holders Account is not to be taxed separately as ïncome from other sources”and at the normal be taxed separately as ïncome from other sources”and at the normal be taxed separately as ïncome from other sources”and at the normal corporate rate and holding that surplus from Share Holders Account corporate rate and holding that surplus from Share Holders Account corporate rate and holding that surplus from Share Holders Account with the surplus av with the surplus available in Policy Holders Account and then and ailable in Policy Holders Account and then and taxing this ‘net surplus’arrived at, at the rates specified u/s.115B”? taxing this ‘net surplus’arrived at, at the rates specified u/s.115B”? taxing this ‘net surplus’arrived at, at the rates specified u/s.115B”?. 3. "”Whether on the facts and in the circumstances of the case and in ”Whether on the facts and in the circumstances of the case and in ”Whether on the facts and in the circumstances of the case and in law, the Ld. THE LD. CIT(A)(A) is correct in falling to appreciate law, the Ld. THE LD. CIT(A)(A) is correct in falling to appreciate law, the Ld. THE LD. CIT(A)(A) is correct in falling to appreciate that negative reserve has an impact of reducing the ‘taxable surplus’ as negative reserve has an impact of reducing the ‘taxable surplus’ as negative reserve has an impact of reducing the ‘taxable surplus’ as per Form-I and therefore corresponding adjustment for “negative I and therefore corresponding adjustment for “negative I and therefore corresponding adjustment for “negative reserve” need to be made to arrive at “taxable surplus? reserve” need to be made to arrive at “taxable surplus? 3. The Learned DR relied on the orders of the Learned AO and The Learned DR relied on the orders of the Learned AO and The Learned DR relied on the orders of the Learned AO and mentioned that these issues were covered in favour of the Assessee ntioned that these issues were covered in favour of the Assessee ntioned that these issues were covered in favour of the Assessee in earlier years. But, the Revenue filed appeals in Bombay High in earlier years. But, the Revenue filed appeals in Bombay High in earlier years. But, the Revenue filed appeals in Bombay High Court which are pending. Court which are pending.

4. Per contra during the course of hearing before the Bench uring the course of hearing before the Bench uring the course of hearing before the Bench, Learned AR of the Appellant Company has m Learned AR of the Appellant Company has mentioned that all the entioned that all the three grounds of appeal

were covered in its favour by the earlier three grounds of appeal were covered in its favour by the earlier three grounds of appeal were covered in its favour by the earlier orders of Hon’ble Tribunal of Bombay. Hon’ble ITAT of Bombay has orders of Hon’ble Tribunal of Bombay. Hon’ble ITAT of Bombay has orders of Hon’ble Tribunal of Bombay. Hon’ble ITAT of Bombay has relied upon the decision of the Hon’ble Supreme Court while giving relied upon the decision of the Hon’ble Supreme Court while giving relied upon the decision of the Hon’ble Supreme Court while giving relief to the Appellant company. In relief to the Appellant company. In view of the same view of the same, the Learned AR of the Appellant has pleaded that the Revenues appeal may be AR of the Appellant has pleaded that the Revenues appeal may be AR of the Appellant has pleaded that the Revenues appeal may be dismissed. During the course of hearing dismissed. During the course of hearing’, the Learned AR of the the Learned AR of the appellant also submitted that the same issue also submitted that the same issues were raised by the were raised by the Revenue and from Assessment Year Revenue and from Assessment Year 2007-08 onwards 08 onwards, these issues were continuously continuously held in favour of the Appellant Company. held in favour of the Appellant Company. Accordingly, the Learned AR of the Appellant filed cop the Learned AR of the Appellant filed cop the Learned AR of the Appellant filed copies of the ITAT orders in its own case, f orders in its own case, from 2007-08 onwards till 2020 08 onwards till 2020-21, the latest being the order of ITAT for latest being the order of ITAT for the Assessment Year 2020 the Assessment Year 2020

21. ITA No.2352/Mum/2024. No.2352/Mum/2024.

5. Heard both the sides and perused the orders of the ITAT in the Heard both the sides and perused the orders of the ITAT in the Heard both the sides and perused the orders of the ITAT in the Appellant’s own case in earlier years. s own case in earlier years. From the order of ITAT, From the order of ITAT, Mumbai, 2020-21 it is observed that all 21 it is observed that all 21 ITA No.2352/Mum/2024, it is observed that all the 3 grounds raised by the Revenue were grounds raised by the Revenue were adjudicated adjudicated in favour of Assessee. Ground no. 1 & 2 pertain to interpretation/applicability Ground no. 1 & 2 pertain to interpretation/applicability Ground no. 1 & 2 pertain to interpretation/applicability of Section 44 of Act r.w. Rule 2 of first schedule and as mentioned of Section 44 of Act r.w. Rule 2 of first schedule and as mentioned of Section 44 of Act r.w. Rule 2 of first schedule and as mentioned above, the issues are covered. The operative portion of ITAT above, the issues are covered. The operative portion of ITAT above, the issues are covered. The operative portion of ITAT order at para 7. A.Y. 2020-21 is reproduced below: 21. ITA No. 2352/Mum/2024 is reproduced below: 21. ITA No. 2352/Mum/2024 is reproduced below:

“2. At the very outset, the Ld. Counsel for the assessee pointed At the very outset, the Ld. Counsel for the assessee pointed At the very outset, the Ld. Counsel for the assessee pointed out that the issue involved in the present appeal is squarely covered out that the issue involved in the present appeal is squarely covered out that the issue involved in the present appeal is squarely covered by the decision of the Tribunal in favour of the by the decision of the Tribunal in favour of the assessee in the case assessee in the case of ICICI Prudential Insurance Co. Ltd. Vs. ACIT in to of ICICI Prudential Insurance Co. Ltd. Vs. ACIT in to of ICICI Prudential Insurance Co. Ltd. Vs. ACIT in ITA Nos. 6854 to 6856 & 6059/Mum/2010. The Ld. Counsel for the assessee 6856 & 6059/Mum/2010. The Ld. Counsel for the assessee 6856 & 6059/Mum/2010. The Ld. Counsel for the assessee submitted the copy of the order of the Tribunal. submitted the copy of the order of the Tribunal.

"We have heard the rival contentions. As briefly discussed "We have heard the rival contentions. As briefly discussed "We have heard the rival contentions. As briefly discussed while deciding the issue of taxing surpl while deciding the issue of taxing surplus, assessee is in life us, assessee is in life Insurance business and it not permitted to do any other Insurance business and it not permitted to do any other Insurance business and it not permitted to do any other business. All activities carried out by assessee are for business. All activities carried out by assessee are for business. All activities carried out by assessee are for furtherance of Life Insurance business. Maintaining adequate furtherance of Life Insurance business. Maintaining adequate furtherance of Life Insurance business. Maintaining adequate capital is necessary to comply with IRDA (Assets, Liabilit capital is necessary to comply with IRDA (Assets, Liabilit capital is necessary to comply with IRDA (Assets, Liabilities and Solvency margin of insurers) Regulations, 2000. Income and Solvency margin of insurers) Regulations, 2000. Income and Solvency margin of insurers) Regulations, 2000. Income earned on capital infused in business is integral part of Life earned on capital infused in business is integral part of Life earned on capital infused in business is integral part of Life Insurance business. The Ld. CIT (A) gives a finding that Insurance business. The Ld. CIT (A) gives a finding that Insurance business. The Ld. CIT (A) gives a finding that assessee is exclusively in Life Insurance business. However, assessee is exclusively in Life Insurance business. However, assessee is exclusively in Life Insurance business. However, since he gav since he gave primacy to Form-l pro-forma he concluded that forma he concluded that other incomes are not of Life Insurance business. We have other incomes are not of Life Insurance business. We have other incomes are not of Life Insurance business. We have already considered and decided that assessee was mandated already considered and decided that assessee was mandated already considered and decided that assessee was mandated to maintain separate accounts by IRDA Regulations. Just to maintain separate accounts by IRDA Regulations. Just to maintain separate accounts by IRDA Regulations. Just because separate accounts are mainta because separate accounts are maintained the incomes in ined the incomes in Shareholder's account does not become separate from Life Shareholder's account does not become separate from Life Shareholder's account does not become separate from Life insurance business. As per Insurance Act 1938 all incomes are insurance business. As per Insurance Act 1938 all incomes are insurance business. As per Insurance Act 1938 all incomes are part of one business only and these incomes are considered as part of one business only and these incomes are considered as part of one business only and these incomes are considered as part of same business. Therefore, incomes in Shareholde part of same business. Therefore, incomes in Shareholde part of same business. Therefore, incomes in Shareholder's account are to be considered as arising out of Life insurance account are to be considered as arising out of Life insurance account are to be considered as arising out of Life insurance business only. Moreover Sec. 44 mandates that only First business only. Moreover Sec. 44 mandates that only First business only. Moreover Sec. 44 mandates that only First Schedule will apply for computing incomes and excludes other Schedule will apply for computing incomes and excludes other Schedule will apply for computing incomes and excludes other heads of income like, Interest on Securities, income from house heads of income like, Interest on Securities, income from house heads of income like, Interest on Securities, income from house property property, Capital gains or Income from other sources. Being , Capital gains or Income from other sources. Being non-obstante clause, sec. 44 mandates that the profits and obstante clause, sec. 44 mandates that the profits and obstante clause, sec. 44 mandates that the profits and gains of insurance business shall be computed in accordance gains of insurance business shall be computed in accordance gains of insurance business shall be computed in accordance with the rules contained in First Schedule. Therefore, the with the rules contained in First Schedule. Therefore, the with the rules contained in First Schedule. Therefore, the incomes in Shareholder's a incomes in Shareholder's account are to be taxed as part of life ccount are to be taxed as part of life insurance business only, as they are part of same business insurance business only, as they are part of same business insurance business only, as they are part of same business and investments are made as part of solvency ratio of same and investments are made as part of solvency ratio of same and investments are made as part of solvency ratio of same business. The grounds are allowed. AO is directed to treat them business. The grounds are allowed. AO is directed to treat them business. The grounds are allowed. AO is directed to treat them as part of Life Insurance Business as part of Life Insurance Business and tax them and tax them u/s. 115B."”

5.1 Similarly, Ground no. 3 is also c Similarly, Ground no. 3 is also covered by the above cited overed by the above cited order. The operative portion on this issue is mentioned The operative portion on this issue is mentioned The operative portion on this issue is mentioned at page 6 in assessee’s own case is reproduced below : assessee’s own case is reproduced below :

“7. The last ground of revenue's appeal assails del “7. The last ground of revenue's appeal assails del “7. The last ground of revenue's appeal assails deletion of addition on account of Negative reserve of Rs.399.05 crores by CIT (A). The on account of Negative reserve of Rs.399.05 crores by CIT (A). The on account of Negative reserve of Rs.399.05 crores by CIT (A). The AO added the same in taxable surplus on the premises that negative AO added the same in taxable surplus on the premises that negative AO added the same in taxable surplus on the premises that negative reserve means the insurance contract under consideration does not reserve means the insurance contract under consideration does not reserve means the insurance contract under consideration does not warrant any provision and in fact, is warrant any provision and in fact, is an asset. Relying upon an asset. Relying upon Tribunal judgment, CIT (A) deleted the same. The Ld. AR has Tribunal judgment, CIT (A) deleted the same. The Ld. AR has Tribunal judgment, CIT (A) deleted the same. The Ld. AR has supported the stand of CIT (A) and drawn our attention to various supported the stand of CIT (A) and drawn our attention to various supported the stand of CIT (A) and drawn our attention to various Tribunal decision in the case of companies carrying on insurance Tribunal decision in the case of companies carrying on insurance Tribunal decision in the case of companies carrying on insurance business, which we have perused. We find t business, which we have perused. We find that Tribunal in Tribunal in & others / Mum/2010 order dated 14/09/2012 titled as ICICI 6854 & others / Mum/2010 order dated 14/09/2012 titled as ICICI 6854 & others / Mum/2010 order dated 14/09/2012 titled as ICICI Prudential Insurance Co. Ltd. Vs. ACIT has concluded that such Prudential Insurance Co. Ltd. Vs. ACIT has concluded that such Prudential Insurance Co. Ltd. Vs. ACIT has concluded that such negative reserves do not give rise to distributable surplus. Similar negative reserves do not give rise to distributable surplus. Similar negative reserves do not give rise to distributable surplus. Similar view has been expressed in bunch of view has been expressed in bunch of appeals ITA No. 2203 & others appeals ITA No. 2203 & others titled as HDFC Standard LIC Ltd. vs. DCIT order dated 20/09/2013, titled as HDFC Standard LIC Ltd. vs. DCIT order dated 20/09/2013, titled as HDFC Standard LIC Ltd. vs. DCIT order dated 20/09/2013, copy of which has been placed before us. Respectfully following the copy of which has been placed before us. Respectfully following the copy of which has been placed before us. Respectfully following the settled position, we are inclined to dismiss this ground of revenue's settled position, we are inclined to dismiss this ground of revenue's settled position, we are inclined to dismiss this ground of revenue's appeal."”

5.2 Thus, all the 3 grounds raised by Revenue were covered Thus, all the 3 grounds raised by Revenue were covered Thus, all the 3 grounds raised by Revenue were covered against Revenue and in favour of against Revenue and in favour of Assessee company as mentioned company as mentioned above.

5.3 Respectfully following the decision of ITAT Respectfully following the decision of ITAT Respectfully following the decision of ITAT of earlier years and specifically the order for A.Y.2020 and specifically the order for A.Y.2020-21, the appeal of t the appeal of the Revenue is dismissed. Revenue is dismissed.

Order pronounced in the open Court on Order pronounced in the open Court on 01/01/2025 01/01/2025.