DCIT-CC-5(3), MUMBAI, AIR INDIA, NARIMAN POINT vs. ADITYA BIRLA SUN LIFE INSURANCE COMPANY LIMITED, MUMBAI

WITHOUT PREJUDICE TO GROUND NO. I, & II ABOVE, GROUND NO. III: DISALLOWANCE OF COMMISSION EXPENSES AMOUNTING TO RS. 5,01,89,70,000/-: 1. On the facts and circumstances of the case and in law, the ld. CIT(A) erred in upholding the action of the ld. AO in disallowing commission expenses u/s 37(1) of the Act amounting to Rs. 5,01,89,70,000/-.

2. In light of section 44 read with First Schedule and even otherwise, the Appellant prays that the commission expenses amounting to Rs. 5,01,89,70,000/- be allowed as deduction while computing the income of the Appellant as per law

WITHOUT PREJUDICE TO GROUND NO. I& II ABOVE, GROUND NO. IV: ADDITION OF RS. 2,48,69,38,754/- AS UNEXPLAINED EXPENDITURE U/S 69C OF THE ACT: 1. On the facts and circumstances of the case and in law, the CIT(A) erred in upholding the action of the ld. AO in making addition of Rs. 2,48,69,38,754/- as unexplained expenditure u/s 69C of the Act.

2. In light of section 44 read with First Schedule and even otherwise, the Appellant prays that the addition made u/s 69C of the Act be deleted. WITHOUT PREJUDICE TO GROUND NO. I & II ABOVE: GROUND NO. V: LEVY OF INTEREST U/S. 234A & 234B OF THE ACT:

1. 1. On the facts and circumstances of the case and in law, the CIT(A) erred in upholding interest u/s.234A and further upholding levy of interest u/s.234B.

2. The Appellant prays that on facts, interest u/s.234A be deleted and interest u/s.234B be deleted or be appropriately reduced.

2.1. Grounds taken by the Revenue are reproduced as under: “Whether on the facts & circumstances of the case and in law, the ld. CIT(A) has erred in holding that it is not permissible to the AO to travel beyond section 44 and schedule-I and make disallowance by applying provision of section 14A, when the assessee itself has travelled beyond section 44 & schedule-1 by claiming exemption u/s. 10?”

3.1. According to the assessee, since its financial statements are governed by the provisions of the Insurance Act, 1938 and IRDAI regulations, accounts of the assessee are binding on the ld. Assessing Officer under the Act and he has no general power to correct the errors in the accounts of insurance business and undo the entries made therein. According to it, surplus arrived from the business of life insurance accounted and presented in accordance with the provisions of Insurance Act and IRDAI regulations is the starting point for making and 3044/MUM/2024 Aditya Birla Sunlife Insurance Co. Ltd., AY 2021-22 adjustment u/s.44 r.w. First Schedule of the Act. According to the assessee, computation provisions of section 44 r.w. First Schedule are non-obstanted which overwrites all the other provisions of the Act and therefore Assessing Officer cannot make any other adjustments provided under other sections of the Act. Thus, it is claimed that section 44 of the Act is a special provision governing computation of taxable income earned from business of insurance and has an overriding effect over other provisions contained in the Act. Income has to be computed in accordance with the rules contained in the First Schedule to the Act and no adjustments can be made therein and the ld. Assessing Officer cannot exercise his jurisdiction in relation thereto.

4.1. Further, First Schedule referred in aforesaid section 44 has three parts, viz. Part A which deals with life insurance business, Part B with other insurance business and Part C refers to other provisions. Part A of the First schedule containing rules 1 to 4 relevant to the present case before us are reproduced as under: “1. Profits of life insurance business to be computed separately.—In the case of a person who carries on or at any time in the previous year carried on life insurance business, the profits and gains of such person from that business shall be computed separately from his profits and gains from any other business.

3. [Deductions.] Omitted by the Finance Act, 1976 (66 of 1976), s. 23(w.e.f. 1-4- 1977). Earlier, the rule was first amended by the Finance Act, 1966 (13 of 1966), s. 36 (w.e.f. 1-4-1966) and by the Finance Act, 1965 (10 of 1965), s. 65 (w.e.f. 1- 4-1965).] 4. Adjustment of tax paid by deduction at source.—Where for any year an assessment of the profits of life insurance business is made in accordance with the annual average of a surplus disclosed by a valuation for an inter-valuation period exceeding twelve months, then, in computing the income-tax payable for that year, credit shall not be given in accordance with section 199 for the income- tax paid in the previous year, but credit shall be given for the annual average of the income-tax paid by deduction at source from interest on securities or otherwise during such period.”

6. On this issue, ld. Assessing Officer observed that assessee had reported investment in equities of Rs. 1,23,53,47,23,000/-, investment in debentures and bonds of Rs. 1,55,61,12,29,000/- and other investment of Rs. 20,00,00,000/-. Total investments of Rs. 2,79,34,59,52,000/- had been made in AY 2021-22. Further, assessee had reported investment in equities of Rs. 8536,00,37,000/-, investment in debentures and bonds of Rs. 12636,64,28,000/- and other investment of Rs. 50,00,000/- in AY 2020-21. It was noticed by the ld. Assessing Officer that assessee had not reported any expenditure attributable to income earned on these investments. In this regard, assessee was asked to provide computation of disallowance u/s 14A r.w.r 8D. and 3044/MUM/2024 Aditya Birla Sunlife Insurance Co. Ltd., AY 2021-22 6.1. During the course of assessment proceedings, assessee vide its submissions dated 29.11.2022 and 15.12.2022 substantiated the reasons for non-applicability of section 14A of the Act in terms of provisions of section 44 r.w. First Schedule. Further, assessee submitted that it had not claimed dividend income of Rs.148,80,28,000/- earned during the year as exempt but had offered the same for taxation in its return, so filed. According to the assessee, second proviso to section 10(34) was inserted w.e.f. 01.04.2021 whereby exemption available for dividend received on or after 01.04.2020 was withdrawn. Thus, dividend income earned by the assessee was chargeable to tax during the year under consideration and was not claimed as exempt. Accordingly, there was no occasion for invoking the provisions of section 14A for making any disallowance thereunder. However, ld. Assessing Officer did not accept the submissions made by the assessee.

6.2. Ld. Assessing Officer calculated the difference of investments in AY 2021-22 and AY 2020-21 which was Rs. 67,61,44,87,000/- and calculated the amount of disallowance u/s 14A r.w.r 8D at Rs. 67,61,44,870/- (being 1% of the difference of Rs.67,61,44,87,000/- so calculated) and added it to the total income of the assessee.

8.1. Ld. Counsel placed reliance on the decision in the case of other insurance companies in addition to its own cases wherein it has been held that applicability of section 14A is excluded in case of insurance companies. As section 44 begins with a non obstante clause and overwrites other provisions of the Act. The other judicial precedents referred by ld. Counsel are- i) PCIT v Oriental Insurance Co. Ltd. [2020] 118 taxmann.com 248 (Delhi HC) ii) JCIT TATA AIA Life Insurance Co. Ltd. in & 1757/Mum/2023 and 3044/MUM/2024 Aditya Birla Sunlife Insurance Co. Ltd., AY 2021-22 iii) Aegon Religare Life Insurance Co. Ltd. v ACIT in & 4130/Mum/2014 iv) DCIT v. Edelweiss Tokio Life Insurance Ltd. in ITA No. 6270/Mum/2018

12.1. Before the ld. CIT(A), assessee could not furnish the documents which remained to be placed before the AO due to administrative issues at its end for which an affidavit is placed on record. Assessee has stated in its affidavit that owing to change of frequent employees during the period of appellate proceedings, it could not file the copy of agreements and reconciliation statement. Thus, ld. CIT(A) upheld the disallowance so made by the ld. AO.

1. 1. Board approved policy for payment of commission or remuneration or reward to insurance agents and insurance intermediaries.

2. Schedule V of IRDAI (Payment of Commission or Remuneration or Reward to insurance agents or insurance intermediaries) Regulations, 2016 for FY 2020-21.

3. Relevant extract of Schedule 2 of Financial Statements for FY 2020-21 filed with IRDAI reflecting break-up of commission expenses.

4. Specimen copy of agreements entered into with insurance agents for payment of commission on sample basis.

5. Specimen copy of TDS certificates evidencing deduction of TDS on commission paid to insurance agents during AY 2021-22.

14.1. Further, assessee furnished relevant extracts of the audited financial statements in this respect giving details of name of agent, PAN and amount of commission paid. Ld. Counsel thus asserted that detailed explanation was given on what commission agents do, who are regulated by IRDAI. All these details were given in respect of agents aggregating to 45,566 in numbers which is a huge volume in itself. In respect of requirement of reconciliation, it was stated that owing to such a large volume of data, i.e., 45,566 commission agents, it is impracticable to reconcile each entry of payment of commission in the bank account, more particularly when the accounts of the assessee are audited and submitted to its regulator, i.e., IRDAI. Also, the agreements with the commission agents are standard agreements and are in accordance with IRDAI guidelines. In this respect, ld. Counsel referred to specimen copy of agreement entered into with the commission agents 14.2. Ld. Counsel also contended that payments to commission agents have been made through banking channels and necessary TDS compliances have been done. There are no proceedings initiated u/s. 201 of the Act to treat the assessee as assessee in default for TDS non compliances. He also asserted that under the IRDAI regulations, insurance companies are required to file their returns giving details of payments of commission, remuneration and reward which has to be filed within 45 days of expiration of each financial year in the prescribed format. Copy of the said return for the year under consideration is placed as part of the additional evidence before the Bench. In this respect, ld. Counsel stated that there is no notice received from the insurance regulator stating any adverse comment or observation or finding on the returns so filed by assessee.

14.3. In order to justify the furnishing of additional evidences u/r. 29 of the ITAT Rules, ld. Counsel submitted that genuineness of the commission payments has not been doubted by the ld. AO. The disallowance has been made only on account of assessee not furnishing the copies of agreements entered into by the assessee with the commission agents and reconciliation of the amounts appearing in profit and loss accounts and bank accounts for which the assessee was constrained owing to huge volume of 45,566 commission agents.

14.4. In light of these facts, ld. Counsel asserted and prayed that the issue need not be restored back to the authorities below but be decided by the Hon’ble Bench taking into consideration the factual matrix of the present case. He further submitted that assessee is engaged in the life and 3044/MUM/2024 Aditya Birla Sunlife Insurance Co. Ltd., AY 2021-22 insurance business, its profits and gains from such business is to be computed in a special manner laid down in accordance with the provisions of section 44 of the Act read with Rules contained in First Schedule. Moreover, such income from life insurance business is taxable at the rate of 12.5% plus applicable surcharge and cess under section 115B of the Act.

14.5. He also invited attention to the decision of the Hon'ble Supreme Court in the case of Life Insurance Corporation of India v. CIT [1964] 51 ITR 773 which held as under: “Under rule 2 of the Schedule the ITO has to compute the profits and gains of a life insurance company at the greater of the two methods of assessments mentioned in clauses (a) and (b). There may be no restriction upon his jurisdiction in the computation of profits and gains under clause (a) but under clause (b) the computation can be made within a limited field. He has to accept the annual average of the surplus disclosed by the actuarial valuation made in accordance with the Life Insurance Act in respect of the last inter-valuation period, so as to exclude therefrom any surplus or deficit included therein which was made in the earlier inter-valuation period, and expenditure not allowable under section 10 in computing the profits. This is made explicit by rule 3 which makes it obligatory upon the ITO to make the computation of the surplus for the purpose of rule 2 according to the scheme provided in clauses (a), (b) and (c) of rule 3. Under rule 2(b) of the Schedule the ITO has, therefore, no power to change the figures in the accounts of the assessee. He has to take the surplus as disclosed by the actuarial valuation made by the assessee under the Insurance Act and then to arrive at the average mentioned in the rule. He has the power to exclude any surplus or deficit included in the actuarial valuation in respect of an earlier inter- valuation period and any expenditure other than an expenditure which may under section 10 of the Act be allowed. What the ITO in the present case did not come within rule 2(b).

It is clear that the Act contemplates that the assessment of insurance companies should be carried out not according to the ordinary principles applicable to business concerns as laid down in section 10, but in quite a different manner. Insurance companies do not compute their profits in the ordinary way because premiums cover risks which run into future years and loss includes losses from previous years. The method prescribed ensures that by making the average of several years a fair and reasonable conclusion is reached. Actuarial estimation plays an important part and surplus only results when there is an excess of the fund over the liability after all other charges are met. The rules which have been quoted lay down two different methods of ascertaining profits. Rule 2(a) merely compares the gross external incomings of the preceding year with the management expenses. Rule 2(b) contemplates the annual average of the surplus of deficit disclosed by actuarial valuation. [emphasis supplied by us by underline] and 3044/MUM/2024 Aditya Birla Sunlife Insurance Co. Ltd., AY 2021-22 14.6. Thus, on first principles, since the computational provisions of section 44 read with rules contained in First Schedule override all other provisions of the Act, therefore the other provisions of the Act are not applicable. Further, neither the Id. AO nor the ld. CIT(A) in their respective orders, have commented on the applicability of section 44 of the Act, contended the ld. Counsel for the assessee.

14.7. He also placed reliance on the decision of Hon’ble Delhi High Court in the case of Sahara India Life Insurance Co. Ltd. vs. ACIT [2023] 457 ITR 548(Delhi HC), wherein it has been specifically observed that provisions under sections 28 to 43B of the Act would not be applicable to the Life Insurance Companies. Thus, no disallowance of commission expenses could be made by the Id. AO by applying the provisions of section 37(1) of the Act.

16.1. Assessee had given names, PAN details and the amounts paid to each of the commission agents, totalling to a voluminous number of 45,566 such commission agents. For want of agreements with commission agents, it is noted that specimen copy along with other related documents has been placed on record by way of an additional evidence u/r 29 of the ITAT Rules. Considering the facts on record, submissions made before us including the additional evidences filed u/r 29 of ITAT Rules, we admit the additional evidences furnished by the assessee u/r 29 of the ITAT Rules. Since these documents forms the basis of addition made by the ld. Assessing Officer and were not verified, we find it appropriate to remit the matter back to the file of ld. Jurisdictional Assessing Officer (JAO) for the limited purpose of verification of the same and consider the claim of the assessee subject to the said verification and provisions of law. Needless to say that assessee be given reasonable opportunity of being heard. Accordingly, ground no.3 is allowed for statistical purposes.

17.1. In this respect, assessee had contended that ld. Assessing Officer nowhere specified the monetary value of the alleged transactions and provided details of the vendors who have been alleged to be non-filers of return or those showing lower turnover. A very short window of 3 days was provided to submit voluminous data which was subsequently limited to 147 parties. In this respect, assessee submitted that it had never entered into any transaction with 75 vendors during the year and for the remaining 72 vendors, it had supplied the details containing their names, PANs, nature of purchase and sample copies of invoices. It was also claimed that all the payments to the vendors are through banking channels and necessary TDS compliance has been done wherever required.

18.2. Ld. Counsel referred to the information summary supplied by the ld. Assessing Officer along with notice u/s. 142(1) dated 16.12.2022 to demonstrate that this “information summary” itself contained details of each of the party including their names, PANs, their status, nature of services/products and the amounts. According to him, this list included several parties with which assessee had undertaken transaction for its services or products like Mahanagar Telephone Nigam Ltd., The Indian and 3044/MUM/2024 Aditya Birla Sunlife Insurance Co. Ltd., AY 2021-22 Hotels Co. Ltd., Indian Bank, United India Insurance Co. Ltd., American Express Banking Corporation, Lemon Tree Hotels Ltd., Make my Trip India Ltd., Vodafone Idea Ltd., Spice Jet Ltd., etc., to name a few. By pointing to such names in the list provided by the ld. Assessing Officer, it was submitted that one fails to understand as to how ld. Assessing Officer has figured these parties as non-filers of returns or having very less income as compared to their turnover to doubt the genuineness of the transactions.