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Income Tax Appellate Tribunal, “G” Bench, Mumbai
O R D E R Per B.R. Baskaran (AM) :-
The appeal filed by the Revenue is directed against the order dated 30.7.2015 passed by the learned CIT(A)-8, Mumbai and it relates to A.Y. 2011- 12. The Revenue is aggrieved by the decision of the learned CIT(A) on following issues :- (a) Assessment of profit arising on sale of equity shares. (b) Disallowance u/s. 14A of the I.T. Act. (c) Disallowance of club expenses.
The assessee is engaged in the business of providing insurance services. First issue relates to assessment of profit arising on sale of investment amounting to ` 5888.85 crores. The assessee claimed the same as exempt u/s. 10(38) of the Act. The Assessing Officer took the view that the profit of the assessee is required to be computed as per Rule 5 of Schedule I, which does not provide for exemption u/s. 10(38) of the Act. He took support of the decision rendered by Hon'ble Supreme Court in the case of GIC Vs. CIT (240 ITR 139).
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The learned CIT(A) allowed the claim of the assessee by following the decision rendered by the Coordinate Bench of the ITAT in assessee’s own case for A.Y. 2008-09 in ITA No. 8824/Mum/2011. Hence, the Revenue has filed this appeal before us.
Learned DR submitted that new clause (b) has been inserted by the Finance Act, 2010 w.e.f. 1.4.2011. He drew our attention to Rule 5 of I Schedule as amended by the Finance Act, 2010.
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 and loss account prepared in accordance with the provisions of the Insurance Act, 1938 (4 of 1938) or the rules made thereunder or the provisions of the Insurance Regulatory and Development Authority Act, 1999 (4 of 1999) or the regulations made thereunder,] subject to the following adjustments:— (a) 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 sections 30 to [43B] in computing the profits and gains of a business shall be added back; (b) (i) any gain or loss on realisation of investments shall be added or deducted, as the case may be, if such gain or loss is not credited or debited to the profit and loss account; (ii) any provision for diminution in the value of investment debited to the profit and loss account, shall be added back;] (c) such amount carried over to a reserve for unexpired risks as may be prescribed in this behalf shall be allowed as a deduction.
5. Inviting our attention to clause b(i), learned DR submitted that the gain arising on realization of investment shall be added to the profit of the assessee, if the same has not been credited to profit and loss account, meaning thereby, Rule specifically provides that gains arising on realisation of investment shall form part of profit and gains of business of the assessee. Learned DR submitted that the learned CIT(A) has decided the issue without considering the amendment brought out by the Finance Act, 2010. In view of the new
3 M/s. General Insurance Corporation of India amendment cited above, learned DR submitted that the decision rendered in the hands of the assessee in earlier years cannot be taken support of.
Learned AR, on the contrary, submitted that Rule 5 only provides methodology of computation of income of the non-life insurance companies. He submitted that Rule 5 in I Schedule has been enacted in pursuance provision of section 44 of the Act. He submitted that provisions of section 44 override provisions relating to computation of income chargeable under head “interest on securities”, income from house property, capital gains or income from other sources or section 199 or section 28 to 43B of the Act. It does not override provisions of section 10 of the Act. Accordingly, he submitted that exemption provided under section 10 of the Act could always be availed by the assessee. He submitted that various Tribunals and High Courts have allowed exemption to the assessee on the basis of above said reasoning only. Accordingly, he submitted that the amendment made to Rule 5 of I Schedule by the Finance Act, 2010 will not alter above said legal position.
We have heard the rival contentions on this issue and perused the record. Admittedly, clause (b) of Rule 5 to the I Schedule has been inserted by the Finance Act, 2010 w.e.f. 1.4.2011 and the above said amendment will be applicable to the year under consideration. Admittedly, the learned CIT(A) did not examine the effects of the above said amendment while deciding this issue. Accordingly, we are of the view that this issue requires fresh examination at the end of the learned CIT(A) by duly considering the above said amendment. Accordingly, we set aside the order passed by the learned CIT(A) on this issue and restore the same to his file for adjudicating the same afresh by duly considering the effect of amendment brought in by the Finance Act, 2010.
Next issue relates to disallowance made u/s. 14A of the Act. Both the parties agreed that this issue has been decided in favour of the assessee by the Coordinate Bench of the Tribunal in assessee’s own case in A.Y. 2010-11 (ITA No. 4926/Mum/2014 dated 2.3.2016). This issue was originally considered by 4 M/s. General Insurance Corporation of India the Tribunal in A.Y. 2006-07 (ITA No. 6260/Mum/2008) and the same has been followed by the Tribunal in the subsequent years. Relevant observations made by the Tribunal in A.Y. 2006-07 are extracted below : “Grounds of appeal
No. 4 regarding the expenditure u/s. 14A.
8. 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. CIT in for the assessment year 2003-04 order dated 31.08.2009. This Tribunal in the case of JCIT V/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 question 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. Asstt. CIT [2010] 130 TTJ (Delhi) 388 : [2010] 38 DTR (Delhi) 225—Ed.]. Therefore considering the vehement reliance of learned Authorised Representative it is worth to mention at the outset itself that the issue now stood resolved by this latest 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 obstnate 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
5 M/s. General Insurance Corporation of India 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. It 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 question of law, much less a substantial question of law survives for their 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 non obstante clause the AO is not permitted to travel 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."
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It 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 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.
18. The next common dispute relates to the order of the CIT(A) in sustaining the action of AO in allowing 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 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 incurred in connection 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 obstante 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 called 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 the Insurance Act, 1938. The said balance of profits is subject only to adjustments thereunder. The adjustments do not refer to disallowance under s. 14A of the Act.
(b) Profits and gains of business as referred to in (a) above have only to be computed in accordance with r. 5 of the First Schedule.
22. Sec. 44 creates a specific exception 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.
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The learned Departmental Representative strongly justified the action 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 already 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 Authorised Representative to the extent that in the present situation the provisions of s. 14A need not to apply while granting exemption 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 consequent thereupon ground No. 2 automatically goes in favour of the assessee.
Accordingly, by following the earlier orders of this Tribunal, we decide this issue in favour of the assessee.”
9. Consistent with the view taken by the Coordinate Bench in assessee’s own case, we are of the view that the learned CIT(A) was justified in deleting the addition made by the Assessing Officer u/s. 14A of the Act.
Next issue relates to disallowance of club expenses. Identical issue has been considered by the Coordinate Bench of the Tribunal in assessee’s own case in A.Y. 2010-11 (referred supra) and the disallowance has been deleted by the Tribunal with following observations :-
9. The next issue in the appeal of the Revenue is that the Ld. CIT(A) erred in allowing club expenses without appreciating the fact that assessee failed to establish that these expenses are for business purposes.
10. The AO while completing the assessment disallowed club expenses holding that assessee has not incurred these expenses for the purpose of business. The Ld. CIT(A) deleted the disallowance.
11. The Ld. DR vehemently supports the order of the A.O on disallowing the club expenses. The Ld. Counsel for the assessee supports the order of the Ld. CIT(A) and further placing reliance on the decision of the Hon’ble Bombay High Court in the case of Otis Elevator Co (India) Ltd Vs CIT (195 ITR 682) submits that the club expenses incurred by the assessee enables to improve the relations and prospects. The Ld. Counsel submits that it is impossible to keep record of every person visiting to the club and what kind of business dealings have been made from the visits of the club. Therefore, he submits that the expenses are definitely business expenses.
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12. Heard both sides and perused the orders of the lower authorities. The case of Otis Elevator Co (India) Ltd (supra), the Bombay High Court held that the lower authorities categorically found that the payment of club fees was with a view to enable the assessee to improve its business relations and prospects. Therefore the payment of club fees was business expenditure not falling u/s. 40(a)(v) of the Act.
The Hon’ble High Court of Delhi in the case of CIT Vs Samtel Color Ltd (326 ITR 425) has held that admission fee paid to Corporate Membership was an expenditure incurred wholly and exclusively for the purposes of business and not towards capital account as it only facilitated the smooth and efficient running of a business enterprise and did not add to the profit earning apparatus of a business enterprise. Similar view has been taken by the Full Bench of Punjab & Haryana High Court in the case of CIT Vs Groz Beckert Asia Ltd (351 ITR 196). In this case it was held that the Corporate Membership to Golf club that was obtained for running the business with a view to produce profit therefore the Corporate Membership fee paid to Golf club is a revenue expenditure. In view of the above decisions, we uphold the order of the Ld. CIT(A) deleting the disallowance.
Consistent with the view taken by the Coordinate Bench (referred supra), we hold that the order passed by the learned CIT(A) on this issue is justified.
In the result, appeal filed by the Revenue is treated as partly allowed. Order has been pronounced in the Court on 3.8.2018.