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Income Tax Appellate Tribunal, BENCH- A, BANGALORE
Before: SMT. ASHA VIJAYARAGHAVANSHRI S JAYARAMAN
PER A SHA VIJAYARAGHAVAN, JUDICIAL MEMBER :
This appeal by the assessee is directed against the order of Commissioner of Income-tax (Appeals) -5, Bangalore dated 4.11.2015 and it pertains to the assessment year 2011-12.
2 2. The assessee has filed its return of income , declaring a total loss of Rs.34,45,94,000/-, which was computed by aggregating its reporting under the shareholders’ account & policy holders’ account, as prescribed under IRDA. The AO completed the assessment u/s 143(3), increasing the loss from life insurance business from Rs.34,45,94,000/- to Rs.58,61,84,000/- and considered Rs.24,15,90,000/- reported under shareholders’ account as income from not-life insurance business.
The CIT(A) held that as under:-
“8.5 I have gone through tile guidelines of IRDA (Investment regulations), the minimum capital requirement for carrying on the life insurance business as per the Insurance Act 1938 which has been brought to my knowledge during the course of Appellate proceedings by the appellant through it's authorized representative. Further, the A.R has highlighted in its written submission the unity of business (single indivisible business by stating that in the case of PNB Met Life the entire activity including the reporting in the share holder's account and policy holder's account IS controlled and supervised by a common Board of Directors and the same team which invests funds in policy holder's account also invests the 3 funds in the share holder's account and both are subject to the same regulatory norms. The above arguments of the assessee even though factually correct but will not come to its rescue in escaping the share holder's profits to be taxed at the normal rates. Because, in the statute the provisions relating to the rates of taxes to the respective incomes under various sources are clearly defined so as the provisions relating to the concessional rates of the taxes. Therefore, the tax authorities are mandated to apply the tax rates as per the statute and the subsequent interpretations by the Judicial Authorities are to be viewed objectively so as to maintain the intention of the legislature intact. Therefore, the facts of the appellant case are distinguishable from the aforesaid case law i.e. ICICI Prudential Insurance Co. Ltd., upon which the appellant was relying strongly. Further, the higher Judicial Authorities, Hon'ble Bombay High Court and Apex Court in the very same case have not adjudicated and addressed the issue on hand rather the appeals were dismissed on the technical aspect and not on the merits. Therefore, I am of the opinion that the decision of the Hon'ble Tribunal Mumbai Bench in the case of ICICI Prudential Insurance Co. and is not squarely applicable as they are different and distinguished on substantial question of fact. Be that as it may, one is bound by the decisions of jurisdictional
4 Tribunal, Hon'ble High Courts. However, the decision of Hon'ble Mumbai Tribunal rendered in the aforesaid case in favour of the assessee and against the revenue is not followed bymeas the facts are different and distinguishable. Further the Apex Court and the Hon'ble Bombay High Court have not given any clear cut finding on the issue on hand. In this view of the matters, after considering carefully the facts of the case, and also the written submissions filed by the appellant, I am of the opinion that there is no substantial merit in the argument of the appellant. The computation of profit/loss from the business of life insurance is, since governed by special provisions of section 44 of the Income Tax Act 1961 and is distinct from the income earned from the share holder's account. Therefore, these grounds of appeal are dismissed.
4. Further the CIT(A) held as under:-
“9.2 …………………………………………………….
…………………”I am of the opinion that the income under different sources have to be separately taxed and if any losses arise of any segments of the business has to be necessarily carried forward and set off against the profits
5 derived under the same head as per provisions u/s 71, 72 & 73 of the Income Tax Act. Therefore, since the losses reported are only under the policy holders account, the Assessing Officer’s action by not allowing the set off the losses of the insurance business against the profits of the shareholder stating that the computation of profit or loss from the business of life insurance is governed by special provisions of section 44 of the Act 1961 at concessional rate of taxes is distinct from income earned from the shareholders account which is to be taxed at normal rates of taxes and the loss relating to life insurance business cannot be set off against the income from the shareholders account is upheld. However, the Assessing Officer is directed to examine the brought forward losses whether any losses pertaining to/arising out of share holders business.”
Aggrieved, the assessee preferred an appeal before ITAT and raised the following grounds:-
1. The impugned order of the ld CIT(A) u/s 250 of the Act is based on incorrect interpretation of law and facts and therefore bad in law;
6 Manner of computation of income under Section 44 of the Act 2. The learned CIT(A) has erred in law and in facts in disregarding the computation of taxable income of the Appellant as provided under Section 44 of the Act;
3. The learned CIT(A) has erred, in law, and in facts, in upholding the order of the Assessing Officer of not aggregating income from shareholders' account and policyholders' account while computing taxable income from life insurance business under Section 44 of the Act;
The learned CIT(A) has erred, in law, and in facts, in upholding the order of the Assessing Officer that income from shareholders' account is to be taxed at normal rates under the provisions of the Act and not at concessional rate as prescribed under Section 115B of the Act;
5. The learned CIT(A) while agreeing that Appellant is carrying on sole and only business i.e. life insurance business, has erred in law in stating that statute prescribes a different rate of tax for income from shareholders' account and for income from policyholders' account;
7 6.The ld CIT(A) has erred in not considering the judicial precedents laid down by Hon'ble Mumbai Tribunal's in the case of ICICI Prudential Insurance Company Limited (ITA No 6855, 6855, 6856 and 6059 of 2010), HDFC Standard Life Insurance Company Limited (ITA No.2203, 3000, 3002, 2206, 3003, 4959, 5494, 2207, 5493, 4960, 5591, 5506 of 2012), S81 Life Insurance Company Limited (3800, 3801 of 2008 and 1501, 5670 of 2009) and DCIT vs Mls Kotak Mahindra Old Mutual Life Insurance Ltd (ITA No. 41791 Muml 2010), relied upon by the Appellant;
7. The learned CIT(A) has erred in observing and stating that the case of ICICI Prudential Insurance Company Limited (ITA No 6855,6855,6856 and 6059 of 2010) of Hon'ble Mumbai Tribunal is distinguishable on facts and therefore the ratio of the decision cannot be applied to the Appellant's case;
8. The learned CIT(A) has failed to appreciate that the principles laid down by the Hon'ble Mumbai Tribunal in the above case squarely applies to the present case;
Set-off of losses under Section 70 of the Act and 72 of 8 the Act
Without prejudice to ground 2, 3, 4, 5, 6, 7 and 8, since income from shareholders' account was held to be taxable at normal rate, not at concessional rate under Section 44 of the Act, the learned CIT(A) has erred in not allowing set-off of losses under policyholders' account in accordance with the provisions of Section 70 of the Act, while computing the total income of the Appellant;
The learned CIT(A) has grossly erred in law in drawing parallel and applying analogy of provisions of set-off of losses of short term losses and long term capital losses which is not applicable even remotely to the facts and circumstances of the instant case;
11. The learned CIT(A) has failed to appreciate the fact that there is no express or implied prohibition under the provisions of the Act denying benefit of set-off of loss from life insurance business and income from other business inter se under Section 70 of the Act;
The learned CIT(A) has erred in law and on facts, in denying the benefit of set-off of 9 assessed brought forward business losses against alleged business income determined by the learned AO inasmuch as the provisions of Section 72 of the Act explicitly provides for set-off of brought forward losses while determining taxable income;
The learned CIT(A) has failed to appreciate that the unabsorbed brought forward business loss of earlier years amounting to Rs 1745,61,22,586 is already assessed and vested in the hands of the Appellant and therefore the learned CIT(A) has erred in directing the AO to allow part of the loss which is a digression from the law laid down under the Act and amounts to arbitrary interpretation of law. The appellant submits that each of the above grounds is independent and without prejudice to one another.
As regards ground No.1 to 8, the learned counsel for the assessee relied on the decision of the ITAT in the assessee’s own case in wherein it has held as under:-
“9. 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. CIT himself has mentioned that 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 ICII Prudential Ltd, (supra). Para 32 of this order dt.14.09.2012 is reproduced below:
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 n policyholder s account. Most of the companies are required to submit quarterly accounts under the Company Law, there is 11 requirement of actuarial valuation report periodically and accordingly assessee was transferring funds-from the shareholder 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 policyholders account. Since assessee is having only one business of life insurance, the entire transactions both under the policy 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 life insurance business the computation has to be made in accordance with the Rule-Z as per provisions of section 44. Therefore, there is a valid argument raised by assessee that both the policyholder’s & shareholder 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
12 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 ClT(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. 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.
13 10. Thus in our opinion not only was the 1\0 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, appeal of the assessee is allowed”
Respectfully following the decision of the ITAT in the assessee’s own case, we allow the grounds from 1 to 8.
As regards the grounds 9 to 13, we find that they are alternate grounds. If the deficits in the policy holders account is to be set off against the surplus as per shareholders account in computing the taxable income of the assessee u/s 44 of the IT Act, the assessee contends (i) deficit in the policy holders account should be set off against the surplus as per shareholders account u/s 70 of the IT Act as both constitutes a single business and sec. 70 permits inter unit set off and (ii) the loss of the 14 business of assessee as determined at Rs.1745.61 croes for earlier years of the current year. As we have held that surplus/deficit as
per shareholders account should be aggregated with surplus/deficit in the policy holders account for determining the profile/loss in the policy holders account for determining the profile/loss of the assessee u/s 44, and such aggregation would results in a loss of Rs.34,45,94,000/- as per the impugned order, the view of setting off of losses against income u/s 70,72 would be academic and hence not decided.
In the result, the appeal of the assessee is allowed.