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Income Tax Appellate Tribunal, BENGALURU BENCH C, BENGALURU
Before: SHRI. VIJAY PAL RAO & SHRI. S. JAYARAMAN
PER S. JAYARAMAN, ACCOUNTANT MEMBER :
This is an appeal filed by the assessee against the order of the CIT, LTU, Bengaluru, dt.08.02.2016, for the assessment year 2009-10.
The assessee is in the business of Life Insurance. For the assessment year 2009-10, it filed its return on 29-9-2009 by declaring loss of Rs 183,52,00,500/-. The assessment was concluded u/s 143(3) read with sec 144C on 10-5-2013 determining the total loss at Rs.181,03,33,672/-. On perusal of the assessment records, the CIT, LTU, ITA.792/Bang/2016 Page - 2 Bengaluru , observed that the loss in the Policyholders account is set off against the surplus of Shareholders a/c amounting to Rs.10,52,02,173/- which is against the provisions of the Act and hence the same needs to be withdrawn. Thus, the assessment order is erroneous and prejudicial to the interest of the revenue and hence initiated proceedings u/s 263. After considering the assessee explanation, the CIT held that the assessee is engaged in the life insurance business has maintained the financials as per the IRDA regulations. The surplus/deficits in the shareholders account and the policyholders account are shown -separately. During f y 2000-09, the assesses has arrived at deficit in policyholders account at Rs 194,04,02,725/- and surplus in shareholders account for Rs 10,52,02,173/-. The net loss is shown at Rs 183,52,00,552/- which is the total income returned. In the assessment order, adjustments are made on transfer pricing and the loss is determined at Rs 181 ,03,3322.-. As per section 115B , the profits and gains of life insurance business is taxed at two different rates on the profits earned by the Life insurance business and on the profits excluding the income from life insurance business. While the profits of life insurance business is taxed at 12.5%, the profits from other than life insurance business is taxed at normal rate of tax. In view of these provisions, it is evident that the two incomes, i.e. the deficit/surplus of the policyholders account and the deficit/surplus of the shareholders account are distinct ITA.792/Bang/2016 Page - 3 and taxed separately. The set off of loss from policyholders account which is from the life insurance business cannot be set off against the income from shareholders account. By setting off of the deficit from the policyholders account to the surplus of the Shareholders account, the assessee has not offered the income amounting to Rs 10,52,02,173/- which is taxable at normal rate. By allowing the set off of the losses against the surplus, the Assessing Officer has erred in passing an erroneous order which is prejudicial to revenue as there is non-taxation of income. Hence, the CIT held that the set off of deficit in policyholders account to the surplus in the Shareholders account is wrongly done against the provisions of sec 44 read with section 115B. The CIT held that by not applying the provisions of the Act correctly, the AO has erred in passing an erroneous order causing loss of revenue in this case and hence set aside this issue is to the Assessing Officer to reconsider it afresh. Aggrieved, the assessee filed this appeal with following grounds :
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The AR submitted that the AO has passed the impugned order after; making relevant enquiries, considering relevant appellate orders and after considering that there are no adverse rulings available on this issue . The CIT has not satisfied the twin conditions viz., there should be an error and such error should be prejudicial to the interests of Revenue and hence the order passed u/s 263 should be quashed. In this regard, he invited our attention to the copy of the assessee’s submission filed before the CIT dt 21.01.2016 and its annexure, a letter dt 29.01.2015 addressed to the AO. He relied on this Tribunal decisions in The PNB Metlife India Insurance Co Ltd dt 19.04.2016 & 22.09.2016 in & 1508 / Bang/2015 apart from those decisions relied on before the AO & the CIT .
Per contra, the DR relied on the CIT order.
We heard the rival submissions and gone through relevant material.
The relevant portion of the assessee’s submission, made before the AO dt 29.01.2015, a copy of which was submitted to the CIT during the proceedings u/s 263, is extracted as under :
“1. Write up as to why surplus from shareholders account should not be taxed as business income under sec/ion 28 of the Act The taxation of the income from life insurance business is governed by section 44 of the Act. Section 44 of the Act which reads as follows:
"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 section 199 or in sections 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 ITA.792/Bang/2016 Page - 6 with the rules contained in the First Schedule." Further, according to section 44 of the Act, provisions regarding computation of income chargeable under the head 'Interest on securities',"Income from house property', 'Capital gains', Income from other source' and provisions of section 28 to43B would not apply to assessee in insurance business. Reliance is placed on the following decisions on applicability of section 44 of the Act:
General Insurance Corpn. of India v. CIT [1999] 106 TAXMAN 389 (SC)
'Section 44 is a special provision governing computation of taxable income earned from business of insurance’. It opens with a non obstante clause and, thus, has an overriding effect over other provisions contained in the Act. It mandates the assessing authorities to compute the taxable income from business of insurance in accordance with the provisions of the First Schedule.'
• Life Insurance Corpn. of India v. CIT [1964] 51 ITR 773 (SC) There is no other provision in the Schedule which authorises an ITO to make adjustments in the actuarial valuation made by the assessee. When one comes to rule 3(b) one can find that the first part of it lays down that it shall be obligatory on the ITO to allow certain amounts written off or reserved by the assessee as a deduction and to include in the surplus any sums for which credit has been taken on account of appreciation or gains on the realization of the securities or other assets. This part of the rule only compels the ITO to allow certain amounts as deductions and to include certain amounts for which credit had been taken in the accounts of the assessee. It therefore, did not warrant what the ITO did, namely, to adjust the accounts on the basis of a revaluation made by him.
We submit that the company is into the business of life insurance and does not carry on any other business. Further, the company is governed by the IRDA regulations which restrict the company to carry on any other business except the life insurance business.
Accordingly, income of the company has to be computed in accordance with the provisions of section 44 of the Act read with First Schedule to the Act.
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It is further submitted that merely because separate accounts are maintained, the income in Shareholder account does not become separate from life insurance business. As per the Insurance Act, 1938 all income are part of one business only and these income are considered as part of the same business. Therefore, the income in Shareholders' account shall be considered as arising out of life insurance business only.
The assessee, in support of the above contention, wishes to place reliance on the following decisions wherein it was held that income from the shareholders' account cannot be considered as separate from life insurance business for the purpose of taxation under the Act and hence it shall be considered as arising from the life insurance business only.
( a ) D C I T v . I C I C I P r u d e n t i a l L i f e I n s u r a n c e C o m p a n y L i m i t e d . (ITA/1563/Mum/2013)
( b ) HDFC Standard Life Insurance Company Ltd. v. DIT (ITA/3004/Mum/2012)
A brief summary of the above mentioned precedents is reproduced below for your goodselfs ready reference:
'IRDA Regulations specifically require to maintain the Policy-holders' account and the Share-holders' account separately and permits transfer of funds from Shareholders' account to Policy-holders' account as and when there is a deficit in Policyholders' account. Since the insurance business will not yield the required profits in the initial 7 to 10 years, lot of capital has to be infused so as to balance the deficit in the policy - holder's account. Since assessee is having only one business of life insurance, the entire transactions both under the Policy-holders' and Share-holders' account do pertain to the life insurance business only as it was not permitted to do any other business. Once assessee is in the lift insurance business, the computation has to be made in accordance with the Rule-2as per provisions of section 44. Therefore, there is a valid argument raised by assessee that both the Policy- holders' & Share-holders' account has to be consolidated into one and transfer from one account to another is tax neutral. Just because separate accounts are maintained the incomes in Share- holders' 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, the incomes in Share- holders' account are to be considered as arising out of Life insurance business only. More over 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 ITA.792/Bang/2016 Page - 8 gains of insurance business shall be computed in accordance with the rules contained in First Schedule. Therefore, the incomes in Share-holders' 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. AG is directed to treat them as part of Life Insurance Business and tax them u/s 115B.' In view of the above, we submit that both the income from both Policyholders' and Shareholders' accounts has to be taxed as part of life insurance business in accordance with the provisions of the First Schedule to the Act. Treatment given by the assessee in return of income for A Y 2011-12.
We submit that in line with the above submissions, the assessee for AY 2011- 12, has aggregated the surplus/deficit arising from both the Policyholders' account and Shareholders' account and computed the net deficit of Rs. 1,23,42,44,958/- in the return of income.”
Thus, in the above reply the assessee had clearly brought out its understanding on the rules of aggregation. According to it, Rule 2 of first schedule of Income-tax Act, provided for aggregation of profits as per policy holders account and shareholders account. No doubt, assessment order passed by the AO which has been subjected to 263 proceedings before us is cryptic without any reference to the above mentioned letter submitted by the assessee. However, it is clear from the reply given by the assessee, as extracted supra, that the AO had required the assessee to explain its stand regarding aggregation of profits / loss as it appeared in policy holders account and as it appeared in shareholders account and the assessee had given an explanation. We cannot say that the AO was not aware of the issue of aggregation.
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Now , coming to the view taken by the CIT that these two accounts had to be considered separately, and benefit of section 115B of the Act, could be given only to the profits from life-insurance business, there is no dispute that assessee was doing only life-insurance business as regulated by the IRDA. The CIT himself has mentioned that the assessee was engaged in life-insurance business. Question whether policy holders account and shareholders account, in the case of an assessee carrying on only the business of life-insurance business was to be separated or consolidated, had come before the Tribunal in ICICI Prudential Ltd, (supra).
Para 32 of this order dt.14.09.2012 is reproduced below :
“32. IRDA Regulations specifically require to maintain the policyholder’s account and the shareholder’s account separately and permits transfer of funds from shareholder’s account to policyholder’s account as and when there is a deficit in policyholder’s account. As rightly noted by the Hon'ble Bombay High Court, as a policy, company is transferring funds/assets from shareholder’s account to policyholder’s account even during the year periodically as and when the actuarial valuation was arrived at in policyholder’s account. Most of the companies are required to submit quarterly accounts under the Company Law, there is requirement of actuarial valuation report periodically and accordingly assessee was transferring funds from the shareholder’s account to policyholder’s account. Since the insurance business will not yield the required profits in the initial 7 to 10 years, lot of capital has to be infused so as to balance the deficit in the policyholder’s account. During the year as already stated assessee has issued fresh capital to the extent of `.250 crores and transferred funds to the extent of `.233 crores from the shareholder’s account to policyholder’s account. Since assessee is having only one business of life insurance, the entire transactions both under the policyholder’s and shareholder’s account ITA.792/Bang/2016 Page - 10 do pertain to the life insurance business only as it was not permitted to do any other business. Once assessee is in the life insurance business, the computation has to be made in accordance with the Rule-2 as per provisions of section 44. Therefore, there is a valid argument raised by assessee that both the policyholder’s & shareholder’s account has to be consolidated into one and transfer from one account to another is tax neutral. What AO has done is to tax the surplus after the funds have been transferred from shareholder’s account to the policyholder’s account at the gross level while ignoring such transfer in shareholder’s account, while bringing to tax only the incomes declared in the shareholder’s account that too under the head ‘other sources of income’. In fact while giving the finding that assessee is in the life insurance business only and incomes are to be treated as income from life insurance business, the CIT (A) surprisingly in subsequent assessment years appeals accepted AO’s contention that surplus in shareholder’s account is to be taxed as other sources of income. But once the provisions of section 44 of IT Act are invoked anything contained in the heads of income like income from other sources, capital gains, house property or even interest on securities does not come into play and only first schedule has to be invoked to arrive at the profit. Therefore, in our opinion both the policyholder’s and shareholder’s account has to be consolidated for the purpose of arriving at the deficit or surplus.”
There is a clear opinion expressed by the Mumbai bench that when section 44 of the Act is applied, distinction between various heads of income paled into insignificance. The assessee had in its return, separately shown the revenue in its shareholders account and revenue derived from its policy holders account. Revenue account for policy holders account clearly reflected the change in valuation of liability in respect of life-policies which were accounted.
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Thus, in our opinion not only was the AO aware about the method of aggregation followed by the assessee, he had also taken a lawful and possible view. In the circumstances, we do not find any error in the order of the AO which can be vested by a Section 263 jurisdiction. The twin conditions viz., there should be an error and such error should be prejudicial to the interests of Revenue are not satisfied. We have no hesitation in setting aside the order of CIT.
In the result, the appeal filed by the assessee is allowed.
Order pronounced in the open court on the 3rd day of May, 2017.