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Facts
The revenue's appeal is against the CIT(A)'s order concerning AY 2020-21. The assessee, Kotak Mahindra Life Insurance Co. Ltd., is in the life insurance business. The revenue raised multiple grounds of appeal concerning the interpretation of Section 44, taxation of surplus, negative reserve, disallowance under Section 14A, and exemption under Section 10(23AAB).
Held
The Tribunal dismissed all grounds of appeal. Grounds 1 and 2 were dismissed based on a previous decision in the assessee's own case regarding the taxation of surplus in the shareholder's account. Ground 3 was dismissed, reiterating that negative reserves do not give rise to distributable surplus. Ground 4 was dismissed, holding that Section 14A is not applicable to insurance business governed by specific provisions. Ground 5 was dismissed as the issue was not raised during assessment proceedings.
Key Issues
The core issue is the correct computation of taxable income for a life insurance company, including the treatment of surplus, negative reserves, and applicability of Section 14A, in light of specific provisions governing insurance business.
Sections Cited
Section 44, Section 14A, Rule 8D, Section 10(34), Section 10(23AAB), Section 115B
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Income Tax Appellate Tribunal, MUMBAI BENCH “E”, MUMBAI
Before: SHRI AMIT SHUKLA & SHRI GAGAN GOYAL
PER GAGAN GOYAL, A.M: This appeal by revenue is directed against the order of Ld. CIT (A)-54, Mumbai dated 05.02.2024 passed u/s. 250 of the Income Tax Act, 1961 (in short ‘the Act’) for A.Y. 2020-21. The revenue has raised the following grounds of appeal:-
1. 1. "Whether on the facts & circumstances of the case and in law, the Ld. CIT (A) erred in interpreting the provisions of Section 44 of the Income Tax Act, 1961 [the Act read with Rule 2 of the First Schedule along with provisions of Insurance Act, 1938, insurance Regulatory and Development Authority Act, 1999 and regulations made there under and accordingly allowing adjustment from the 'surplus' worked out as per actuarial valuation? 2. "Whether on the facts and in the circumstance 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 with the surplus available in Policy Holders Account and then and taxing this 'net surplus arrived at the rates specified u/s. 115B of the Act?" 3. "Whether on the facts and in the circumstance of the case and in law, the Ld. CIT(A) is correct in falling to appreciate that negative reserve has an impact of reducing the 'taxable surplus' as per Form-l and therefore corresponding adjustment for "negative reserve" need to be made to arrive at "taxable surplus?" 4. "Whether on the facts und in the circumstance of the case and in law, the Ld.CIT (A) erred in ignoring the facts that since exemption for dividend income u/s. 10(34) of the Act is being allowed by the Assessing Officer, then separate disallowance under section 14A of the Act read with rule 8D of the Rules needs to be made"? 5. "Whether on the facts & circumstances of the case and in law, the Ld.CIT(A) erred in not appreciating the facts that the valuation of the insurance companies is done under the Insurance Act, therefore, what can be reduced is only what is specifically provided in schedule 1 Rule 2 and nothing else. Therefore, exemption under section 10(23AAB) of the Act cannot be granted to an assessee in the business of life insurance where income is computed u/s. 44 of the IT Act"? 2. The brief facts of the case are that the assessee that the assessee company is involved in the business of life insurance and being governed by the Insurance Act, 1938 and duly registered with Insurance Regulatory and Development Authority (IRDA). In this case the original return of income for the A.Y. 2020-21 was e-filed on 30.12.2020 declaring total income to the tune of Rs. 443,52,05,940/-. The return was processed U/s. 143(1) of the I.T. Act, 1961 by CPC Bengaluru on 30.03.2021 assessed total income at Rs. 443,52,05,940/-. The case was selected for scrutiny under CASS and notice U/s 143(2) was issued on 29.06.2021 and served on the assessee through e-mail. In response to notice u/s. 143(2) of the Act, assessee submitted its reply through e-proceedings portal on 17.08.2021. Further, the case has been transferred to the JAO on 22.09.2022. Accordingly, notices u/s. 142(1) of the Act was issued on 22.09.2022 and 26.09.2022 which were duly served on the assessee through E-mail. The assessee filed its reply on 26.09.2022 and 27.09.2022 through e-proceeding portal.
3. Kotak Mahindra Life Insurance Co. Ltd. (Formerly known as Kotak Mahindra Old Mutual Life Insurance Ltd.) (KLife) is a company engaged in the business of life insurance including annuity plans. The group Business Portfolio comprises of traditional and unit linked products catering to the gratuity, leave encashment and superannuation needs of employer-employee groups. In addition, KLife also offers term and credit insurance products to its customers.
4. The case was selected for scrutiny under CASS with reason of selection including the reason "High Risk International transactions". The case was referred to TPΟ through FAO-technical unit on 09.11.2021 for determination of Arm's Length Price. Subsequently, the case was transferred to the office of the Jurisdictional Assessing Officer of Circle 14(1) (1) on 22.09.2022. The Deputy Commissioner of Income Tax Transfer Pricing Office -2(3) (1), Mumbai vide letter dated 24.09.2022 has communicated to pass the final order as deemed fit.”
The case of the assessee was finally assessed at a figure of Rs. 460, 27, 00,078/- as normal business income and Rs. 169, 69, 02,000/- as income from other sources. The assessee being aggrieved with this order of AO preferred an appeal before the Ld. CIT (A), who in turn allowed the appeal of the assessee on all the grounds. Aggrieved by this order of the Ld. CIT (A), the revenue preferred the present appeal before us.
We have gone through the order of the AO passed under section 143(3) of the Act, order of the Ld. CIT (A) passed under section 250 of the Act and submissions of the Assessee along-with grounds taken by revenue before us. The issue involved in this appeal is frequent in nature in assessee’s own case. Hence, ground wise observation and adjudication is as under.
Ground nos. 1 & 2 pertain to interpretation /applicability of section 44 of the Act r. w. Rule 2 of the first Schedule alongwith the provisions of the Insurance Act, 1938 and IRDA Act, 1999 alongwith treatment of surplus available in shareholder’s account for rate purposes. These grounds are squarely covered by the decision of ITAT in for A.Y. 2007-08 in assessee’s own case which are as under:-
At the very outset, the Ld. Counsel for the assessee pointed out that the issue involved in the present appeal is squarely covered by the decision of the Tribunal in favour of the assessee in the case of ICICI Prudential Insurance Co. Ltd. Vs. ACIT in to 6856 & 6059/Mum/2010. The Ld. Counsel for the assessee submitted the copy of the order of the Tribunal.
Per contra, the Ld. Departmental Representative submitted the copy of the Tribunal in assessee's own case in and 397/M/07 and submitted that the issue has been decided against the assessee.
We have carefully considered the rival submissions and perused the orders of the lower authorities and the orders of the Tribunal relied upon by the rival parties. We find that the reliance of the DR on the decision of the Tribunal in assessee's own case is misplaced inasmuch as during that period, the assessee has not started its insurance business. Therefore, provisions of Sec. 44 and in the first schedule would not be applicable in that year. However, for the year under consideration, we find that the assessee is in the insurance business therefore, the issue is squarely covered by the decision of the Tribunal in the case of ICICI Prudential Insurance Co. Ltd (supra). We find that the Tribunal has decided this issue at para-55 of its order which is as under: "We have heard the rival contentions. As briefly discussed while deciding the issue of taxing surplus, assessee is in life Insurance business and it not permitted to do any other business. All activities carried out by assessee are for furtherance of Life Insurance business. Maintaining adequate capital is necessary to comply with IRDA (Assets, Liabilities and Solvency margin of insurers) Regulations, 2000. Income earned on capital infused in business is integral part of Life Insurance business. The Ld. CIT (A) gives a finding that assessee is exclusively in Life Insurance business. However, since he gave primacy to Form-I pro-forma he concluded that other incomes are not of Life Insurance business. We have already considered and decided that assessee was mandated to maintain separate accounts by IRDA Regulations. Just because separate accounts are maintained the incomes in Shareholder's account does not become separate from Life insurance business. As per Insurance Act 1938 all incomes are part of one business only and these incomes are considered as part of same business. Therefore, incomes in Shareholder's account are to be considered as arising out of Life insurance business only. Moreover Sec. 44 mandates that only First Schedule will apply for computing incomes and excludes other heads of income like, Interest on Securities, income from house property, Capital gains or Income from other sources. Being non-obstante clause, sec. 44 mandates that the profits and gains of insurance business shall be computed in accordance with the rules contained in First Schedule. Therefore, the incomes in Shareholder's account are to be taxed as part of life insurance business only, as they are part of same business and investments are made as part of solvency ratio of same business. The grounds are allowed. AO is directed to treat them as part of Life Insurance Business and tax them /s. 115B." As facts and issues are identical to the facts and issues in the case of ICICI Prudential Insurance Co. Ltd., (supra), respectfully following the decision of the Tribunal, appeal filed by the Revenue is dismissed.
Respectfully following the above decision by the Coordinate Bench in assessee’s own case, we dismiss the ground no. 1 and 2 raised by the revenue as while following this there was no objection raised by the Ld. Departmental Representative and also failed to differentiate the earlier position as laid down by the Coordinate Bench vis-à-vis the year under appeal.
Ground no. 3 pertains to negative reserve and its impact on reducing the taxable surplus as per Form I of the Insurance Act, 1938. This ground is squarely covered by the decision of ITAT in & 271/Mum/2014 for A.Y. 2009-10 & 2010-11 in assessee’s own case which are as under:-
The issue raised by the Revenue in ground No.5 is against the order of Ld. CIT(A) not appreciating that negative reserve has an impact of reducing the taxable surplus as per Form-I and therefore, corresponding adjustment for negative reserve needs to be made to arrive at taxable surplus.
The Ld. A.R. submitted that the identical issue has been decided by the co-ordinate bench of the Tribunal in assessee's own case in A.Y. 2011-12 in ITA No.6223/M/2014. The Ld. A.R. prayed that the ground raised
by the Revenue deserved to be dismissed on the basis of the decision of co-ordinate bench of the Tribunal in the case as cited above.
25. The Ld. D.R., on the other hand, relied on the order of AO and ground raised by the Revenue.
26. After hearing both the parties and perusing the material on record including the decision of the co-ordinate bench of the Tribunal, we find that the identical issue has been decided in favour of the assessee by the co-ordinate bench of the Tribunal in for A.Y. 2011-12 vide order dated 20.12.16. The relevant para is extracted below: 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 AO added the same in taxable surplus on the premises that negative reserve means the insurance contract under consideration does not warrant any provision and in fact, is an asset. Relying upon Tribunal judgment, CIT (A) deleted the same. The Ld. AR has supported the stand of CIT (A) and drawn our attention to various Tribunal decision in the case of companies carrying on insurance business, which we have perused. We find that Tribunal in & others / Mum/2010 order dated 14/09/2012 titled as ICICI Prudential Insurance Co. Ltd. Vs. ACIT has concluded that such negative reserves do not give rise to distributable surplus. Similar view has been expressed in bunch of appeals ITA No. 2203 & others titled as HDFC Standard LIC Ltd. vs. DCIT order dated 20/09/2013, copy of which has been placed before us. Respectfully following the settled position, we are inclined to dismiss this ground of revenue's appeal."
The facts in the present case being identical to one as decided by the Tribunal, therefore, we respectfully following the decision of the Tribunal, dismiss the ground raised
by the Revenue.
10. Respectfully following the above decision by the Coordinate Bench in assessee’s own case, we dismiss the ground no. 3 raised by the revenue as while following this there was no objection raised by the Ld. Departmental Representative and also failed to differentiate the earlier position as laid down by the Coordinate Bench vis-à-vis the year under appeal.
Ground no. 4 pertains to disallowance u/s. 14A of the Act and this ground is squarely covered by the decision of ITAT in for A.Y. 2007-08 in assessee’s own case which are as under:-
11. Ground no.2 is with regard to disallowance of sum of Rs. 2, 77, 69,215/- in accordance with Rule 8D 2 Sec. 14A is expenditure incurred for earning dividend income. The CIT (A) held as follows: "At the outset it is clarified that the activity of annuity business is permitted business activity which can be undertaken separately and independently of insurance business and the disallowance being considered is only in respect of exempt income of this annuity business. The only objection taken against the disallowance made by Assessing Officer is that Rule 8D goes beyond the authority given to CBDT by Section 14 A of the Income-tax Act. It is contended that the rule only determines the notional cost of holding investments which may or may not yield any exempt income and such notional cost for holding investment has no relationship with the actual expenditure incurred by appellant. It has been accordingly contended that the disallowance made by Assessing Officer needs to be deleted. I have perused the facts of the case. I find that the issue of disallowance u/s.14 A has been considered by Honorable Mumbai ITAT in several cases and it has been held that Rule 8D is perfectly justified and Is required to be invoked in all cases of disallowance u/s.14A. It is accordingly held that Assessing Officer has rightly invoked Rule 8D for making the disallowance. The disallowance made by Assessing Officer is consequently confirmed and the ground of appeal
is rejected."
12. Aggrieved the assessee is on appeal before us. In the case of Bajaj Alliance General Insurance Company Ltd vs. Additional Commissioner of Income Tax 38 DTR 282 Pune, It has been held that Sec.14A is not applicable in the case of Insurance business, which is governed by specific provisions of 44 and Schedule 1. In the case of Reliance General Insurance Co Ltd vs. Deputy Commissioner of Income Tax, Mumbai Bench, similar view has been taken. Similarly In the case of Birla Sun life Insurance Co Ltd vs. Additional Commissioner of Income Tax ITA 2253/M/2006 has held as follows: "We have carefully considered the submissions of the rival parties and perused the material available on record. We find merit in the plea of the Ld. Counsel for the assessee that the Assessing Officer after examining the relevant details as discussed in para 5.16 and 5.17 of the assessment order has disallowed the expenses of Rs.30, 18,496/- for earning dividend income, therefore, the plea taken by the Ld. DR that the issue may be set aside to the file of the Assessing Officer is devoid of any merit. This being so, and keeping in view that the Tribunal in Oriental Insurance Co Ltd vs. ACIT (2009) TIOL - 172 ITAT - DEL after discussing the Identical issue at length has held that Sec.44 provides for application of special provisions for computation of profits and gains of insurance business in accordance with Rule 5 of Schedule 1 and, therefore, it is not permissible to the Assessing Officer to travel beyond Sec.44 and Schedule-I and make disallowance by applying Sec. 14A of the Act. The above order has consistently been followed by the Tribunal in the above three cases relied on by the Ld. Counsel for the assessee. In the absence of any distinguishing feature brought on record by the Ld. DR we respectfully, following the consistent view of the Tribunal hold that it is not permissible to the Assessing Officer to travel beyond Sec.44 and Schedule-I and make disallowance by applying Sec. 14A of the Act and accordingly the disallowance of Rs.30, 18,496 made by the Assessing Officer and sustained by the Ld. CIT (A) is deleted. The ground taken by the assessee is therefore, allowed." Respectfully following the above decisions of the co-ordinate Benches, we delete the entire disallowance made under section 14A amounting to Rs. 2, 77, 69,215/- is no expenditure is incurred for earning exemption dividend Income.
12. Respectfully following the above decision by the Coordinate Bench in assessee’s own case, we dismiss the ground no. 4 raised by the revenue as while following this there was no objection raised by the Ld. Departmental Representative and also failed to differentiate the earlier position as laid down by the Coordinate Bench vis-à-vis the year under appeal.
Ground no. 5 pertains to exemption u/s. 10(23AAB) of the Act. It is pointed out by the Ld. Authorized Representative of the assessee that this issue was never emanated during the assessment proceedings, hence before the Ld. CIT (A) also. We have verified this statement of the Ld. AR with the order of AO and Ld. CIT (A) and the same is found to be correct. In view of this, this ground of appeal is raised by the revenue is found to be infructuous, hence dismissed.
In the result, the appeal of the revenue is dismissed.