Commissioner of Income Tax-V vs. Sri Anand Krishna Conjeevaram

1 IN THE HIGH COURT OF KARNATAKA AT BENGALURU DATED THIS THE 21ST DAY OF OCTOBER 2020 PRESENT THE HON’BLE MR. JUSTICE ALOK ARADHE AND THE HON’BLE MR. JUSTICE H.T.NARENDRA PRASAD I.T.A. NO.593 OF 2013 BETWEEN: 1. COMMISSIONER OF INCOME TAX

CENTRAL REVENUE BUILDINGS

QUEENS ROAD, BANGALORE-560001. 2. THE ASSISTANT COMMISSIONER OF INCOME TAX

CIRCLE 12(1), BANGALORE. ... APPELLANTS (BY Mr. E.I. SANMATHI, ADV.,) AND: M/S. MEDI ASSIST (INDIA) TPA PVT. LTD 'SRI KRISHNA ARCADE' NO.47/1, 9TH CROSS, 1ST MAIN ROAD SARAKKI INDL LAYOUT BANGALORE-560078 PAN: AACCM8044R. ALSO 'SHILPA VIDYA, 49, 1ST MAIN ROAD SARAKKI INDL. LAYOUT 3RD PHASE, J.P. NAGAR BANGALORE. ... RESPONDENT (BY Mrs. VANI H, ADV.) - - -

2 THIS ITA IS FILED UNDER SECTION 260-A OF I.T. ACT, 1961 ARISING OUT OF ORDER DATED 12.06.2013 PASSED IN ITA NO.1200/BANG/2012 FOR THE ASSESSMENT YEAR 2009-10, PRAYING THAT THIS HON’BLE COURT MAY BE PLEASED TO: (I) DECIDE THE FOREGOING QUESTION OF LAW AND/OR SUCH OTHER QUESTIONS OF LAW AS MAY BE FORMULATED BY THE HON'BLE COURT AS DEEMED FIT. (II) SET ASIDE THE APPELLATE ORDER DATED 12-06-2013 PASSED BY THE INCOME TAX APPELLATE TRIBUNAL, 'A' BENCH, BANGALORE, IN APPEAL PROCEEDINGS NO.I.T.A. NO.1200/BANG/2012 FOR ASSESSMENT YEAR 2009-10, AS SOUGHT FOR IN THIS APPEAL. THIS ITA COMING ON FOR HEARING, THIS DAY, ALOK ARADHE J., DELIVERED THE FOLLOWING: JUDGMENT This appeal under Section 260A of the Income Tax Act, 1961 (hereinafter referred to as the Act for short) has been preferred by the revenue. The subject matter of the appeal pertains to the Assessment year 2009-10. The appeal was admitted by a bench of this Court vide order dated 17.03.2014 on the following substantial question of law: (i) Whether on the facts and in the circumstances of the case, the Tribunal is correct in holding that the assessee is entitled to disclose revenue from certain activities spread over the period of

3 insurance policies for Income Tax purpose rather than recognizing the entire amount in the year in which the invoices in respect of fee was raised on insurance companies? (ii) Whether on the facts and in the circumstances of the case, the Tribunal is correct in holding that the assessee is allowed to change the method of accounting in the assessment year under reference in respect of TPA fee without appreciating the fact that as per AS-11 notified by the Central Government under section 145(2) of I.T. Act, change in accounting policy is allowed only if such change is required by the statute or if it is considered that the change would result in more appropriate preparation of financial statements and such conditions are absent in the instant case? (iii) Whether on the facts and in the circumstances of the case, the Tribunal is correct in holding that the activities of the assessee company are not of an insurance company/business without appreciating the

4 fact that Hon'ble High Court in the case of same assessee has held that the assessee's business activities fall under the activities of insurance company? (iv) Whether on the facts and in the circumstances of the case, the Tribunal is correct in coming to conclusion that the assessee is entitled to follow accounting standard 9 for revenue recognition in respect of TPA fee received from insurance companies? 2. The factual background, in which the aforesaid questions of law framed by a bench of this court, which arise for consideration in this appeal, need mention which are stated hereinafter. The assessee is a private limited company which is engaged in the business as third party administrator of insurance companies. The assessee derived income as third party agent fees from the insurance companies as percentage of premium paid by the policy holders to the insurance company. The assessee filed its return of income on

5 30.09.2009 declaring total income of Rs.9,20,45,514/- and revised return on 30.09.2009 declaring an income of Rs.2,82,19,530/-. The return of income was processed under Section 143(1) of the Act and the case was selected for scrutiny under Computer Aided Scrutiny Selection (CASS). Thereupon notices under Section143(2) and 142(1) of the Act were issued. The Assessing Officer by an order dated 30.12.2011 inter alia held that an amount of Rs.16,48,34,975/- was mentioned under the head of 'unearned income'. It was further held that business of a third party agent is insurance business as third party agent makes payments to the hospital / individuals policy holders. Therefore, Accounting Standard - 9 is not applicable in the fact situation of the case. It was further held that invoices raised in the financial year but not recognized as revenue have to be included in the income of the assessee. The Assessing Officer therefore, added a sum of Rs.6,09,84,904/- to the income of the assessee and

6 subjected the same to tax and directed initiation of proceeding under Section 271(1)(c) of the Act separately. 3. The assessee thereupon filed an appeal before the Commissioner of Income Tax (Appeals) who by an order dated 19.07.2012 inter alia held that in the assessee's own case for the Assessment Year 2008-09, it was held by the Commissioner of Income Tax (Appeals) that the Assessing Officer was not justified in treating the unearned income as revenue by considering the assessee to be an insurance company by treating it as outside the purview of Accounting Standard - 9. It was further held that the facts of the instant appeal are the same and accordingly the Assessing Officer was directed to delete the addition of Rs.6,09,84,904/-. The Assessing Officer was further directed to examine the return filed by the assessee and to determine the correct figure in respect of the figure of Rs.2,44,29,771/- declared by the assessee. Thus, the appeal was partly

7 allowed. Being aggrieved, the revenue filed an appeal before the Income Tax Appellate Tribunal (hereinafter referred to as 'the tribunal' for short). The tribunal vide order dated 12.06.2013 by placing reliance on the order dated 11.01.2013 passed by it in respect of Assessment Year 2007-08 in case of assessee that assessee has rightly followed Accounting Standard -9 on revenue recognition on a pro rata basis / term of policy. It was further held that the activity of the assessee is not in the nature of insurance business. In the result, the appeal preferred by the revenue was dismissed. In the aforesaid factual background, the revenue has approached this court. 4. Learned counsel for the revenue submitted that the assessee is following mercantile system of accounting and under the aforesaid system the income accrues once invoices are raised and the assessee cannot postpone the recognition of income under the aforesaid system of accounting. It is also submitted that

8 the income accrues / arises when the assessee acquires a right to receive the same. In support of aforesaid submissions, reliance has been placed in decision of the Supreme Court in 'MORVI INDUSTRIES LTD. VS. COMMISSIONER OF INCOME-TAX', 82 ITR 835 and 'COMMISSIONER OF INCOME-TAX VS. GAJAPATHY NAIDU', 53 ITR 114. It is also urged that Accounting Standard -9 excludes insurance company and therefore, the Assessing Officer has rightly rejected the contentions of the assessee and has followed the decision of this court wherein this court has held that 'business of third party agent is business of insurance'. It is also argued that the tribunal as well as the Commissioner of Income Tax (Appeals) grossly erred in placing reliance on the decision in the case of 'CIT VS. BILHARI INVESTMENTS (P.) LTD.', 299 ITR 1 (SC) and the aforesaid decision is distinguishable and is not applicable to the facts of the case. It is also pointed out that in the aforesaid decision the issue which arose for

9 consideration was whether the assessee is entitled to recognize the revenue in respect of chit discount amount only in the year of termination of chit period following completed contract method or pro rata basis in various Assessment Years falling under chit period by following 'deferred revenue expenditure method'. In the aforesaid context, the Supreme Court held that the assessee is entitled to follow completed contract method. It is also argued that the principle of taxation that right person has to be taxed at right time and on right event, in other words, on occurrence when taxable activity which occurs by virtue of transaction taking place and in relation to profit pertaining to transaction is generated, the taxable event occurs, which cannot be postponed. It is also argued that the assessee has not given any reasons for change of accounting system. 5. On the other hand, learned counsel for the assessee submitted that the first substantial question of law framed by this court in fact, is a question of fact and

10 concurrent findings of fact have been recorded by the Commissioner of Income Tax (Appeals) as well as by the Income Tax Appellate Tribunal and the aforesaid findings have not been challenged on the ground of perversity. It is further submitted that the assessee is entitled to change its method of accounting and every assessee is entitled to arrange its affairs and follow the method of accounting. It is further submitted that for the Assessment Years 2010-11, 2011-12 and 2012-13, the department has accepted the method of accounting adopted by the assessee. It is further submitted that change in the accounting policy has been made as per Accounting Standard -5 and the assessee does not carry on the insurance business. Reference in this connection has also been made to the Insurance Regulatory and Development Authority of India (Third Party Administrators - Health Services) Regulations, 2016. In support of aforesaid submissions, reliance has been placed on decisions of Supreme Court in

11 'COMMISSIONER OF INCOME-TAX VS, BILAHARI INVESTMENT P. LTD.', (2008) 289 ITR 1 (SC), 'COMMISSIONER OF INCOME-TAX-III, BANGALORE VS. NCR CORPORATION (P.) LTD.', (2020) 274 TAXMAN 139 (KARNATAKA) and 'COMMISSIONER OF INCOME-TAX AND ANOTHER VS. BANJARA DEVELOPERS AND CONSTRUCTIONS PVT. LTD.', (2020) 425 ITR 673 (KAR). 6. We have considered the submissions made by learned counsel for the parties and have perused the record. Section 145 of the Act deals with method of accounting. Section 145(1) provides that income chargeable under the head 'profits and gains of business or profession' or 'income from other sources' shall be subject to provisions of sub-Section (2), be computed in accordance with either cash or mercantile system of accounting regularly employed by the assessee. The Supreme Court in the case of Bilahari Investments P. Ltd., supra has held as under:

12 Every assessee is entitled to arrange its affairs and follow the method of accounting which the Department has earlier accepted. It is only in those cases where the Department records a finding that the method adopted by the assessee results in distortion or profits that the Department can insist on substitution of the existing method. 7. The assessee in the instant case has changed invoice method to proportionate completion method. Till 31.03.2007, the assessee used to recognize revenue immediately on raising of invoice, even though, the service under the contract is not completed or substantially completed. The assessee is involved in execution of more than one act i.e., rendering service in the entire year, therefore, it adopted the proportionate completion method. The revenue from service transactions usually recognized as the service is performed either by proportionate completion method or completed service contract method. The assessee is therefore, rightly adopted proportionate completion

13 method as it is engaged in rendering service in the entire year. The assessee in the instant case is covered by Accounting Standard - 9 as it does not deal with revenue of insurance companies arising from insurance contracts. The Accounting Standard - 9 applies as financial service rendered by the assessee, which results in revenue, which in turn has to be taken into account having regard to incidence of costs relating to service. It is also pertinent to mention here that it is open for the assessee to change the method of accounting and the burden is on the department to prove that the method invoked is not correct and that such a method distorts the profits of a particular year. The aforesaid burden has not been discharged by the revenue in the instant case. Besides that, the revenue has accepted the change in the method of accounting in subsequent Assessment Years viz., 2010-11, 2011-12 and 2012-13, therefore, there is no justification on the part of the Assessing Officer to change the method adopted by the assessee

14 and to determine the income on estimate basis. For the aforementioned reasons, the substantial questions of law No.1, 2 and 4 are answered against the revenue and in favour of the assessee. 8. Now we may advert to the third substantial question of law. The assessee is a third party agent and is governed by the provisions of the Insurance Regulatory and Development Authority of India (Third Party Administrators - Health Services) Regulations, 2016. Regulation 2(1)(m) defines the expression 'third party administrator to mean a company registered with the authority and engaged by an insurer, for a fee or remuneration, by whatever name called and as may be mentioned in the agreement, for providing health services mentioned under these Regulations. Regulation 3 prescribes the health services, which may be provided by a third party agent to an insurer under the agreement in connection with health insurance business. Section 2(9) of the Insurance Act defines the expression

15 'insurer' which includes insurance company. Thus, it is evident that the third party agent and the insurance company are different entities. Therefore, the finding recorded by the tribunal that the assessee's business activities do not fall under the business of insurance company is correct. So far as reliance placed by the assessee on the decision of learned Single Judge of this court in the case of assessee is concerned, suffice it to say that the aforesaid decision has been set aside by a division bench of this court. In the result, the third substantial question of law is also answered against the revenue and in favour of the assessee. In the result, we do not find any merit in this appeal, the same fails and is hereby dismissed. Sd/- JUDGE Sd/- JUDGE ss