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IN THE HIGH COURT OF KARNATAKA AT BENGALURU
DATED THIS THE 31ST DAY OF AUGUST, 2021
PRESENT
THE HON’BLE MRS.JUSTICE S.SUJATHA
AND
THE HON’BLE MR. JUSTICE RAVI V. HOSMANI
I.T.A.No.112/2020 c/w I.T.A.No.118/2020
IN I.T.A.No.112/2020:
BETWEEN :
1 . THE PR. COMMISSIONER OF INCOME TAX 5TH FLOOR, BMTC BUILDING 80 FEET ROAD, KORAMANGALA BENGALURU-560 095
2 . THE DEPUTY COMMISSIONER OF INCOME TAX, CIRCLE-2 (1) (2) 2ND FLOOR, BMTC BUILDING 80 FEET ROAD, KORAMANGALA BENGALURU-560 095
...APPELLANTS
(BY SRI K.V.ARAVIND, ADV.)
AND :
M/s EXIDE LIFE INSURANCE COMPANY LTD., (FORMERLY KNOWN AS ING VYSYA LIFE INSURANCE COMPANY LTD., NO.3/1, 3RD FLOOR, J.P.TECHNO PARK, MILLERS ROAD, BENGALURU-560 001 PAN-AACI 7940L
…RESPONDENT
(BY SRI T.SURYANARAYANA, ADV.)
THIS INCOME TAX APPEAL IS FILED UNDER SECTION 260-A OF INCOME TAX ACT 1961, ARISING OUT OF ORDER DATED 23.10.2019 PASSED IN ITA NO.1961/BANG/2018, FOR THE ASSESSMENT YEAR 2012-2013 PRAYING THIS HONBLE COURT TO 1. FORMULATE THE SUBSTANTIAL QUESTIONS OF LAW STATED ABOVE. 2. ALLOW THE APPEAL AND SET ASIDE THE ORDERS PASSED BY THE INCOME TAX APPELLATE TRIBUNAL, BENGALURU IN ITA NO.1961/BANG/2018 DATED 23.10.2019 FOR ASSESSMENT YEAR 2012-2013 ANNEXURE-C CONFIRMING THE ORDER OF THE APPELLATE COMMISSIONER AND CONFIRM THE ORDER PASSED BY THE DEPUTY COMMISSIONER OF INCOME TAX, CIRCLE-2(1)(2), BENGALURU.
IN I.T.A.No.118/2020:
BETWEEN :
1 . THE PR. COMMISSIONER OF INCOME TAX 5TH FLOOR, BMTC BUILDING 6TH BLOCK, 80 FEET ROAD, KORAMANGALA, BENGALURU-560 095
2 . THE DEPUTY COMMISSIONER OF INCOME TAX, CIRCLE-2 (1) (2) 2ND FLOOR, BMTC BUILDING 6TH BLOCK, 80 FEET ROAD, KORAMANGALA, BENGALURU-560 095
...APPELLANTS (BY SRI K.V.ARAVIND, ADV.)
AND :
M/s EXIDE LIFE INSURANCE CO. LTD., 3RD FLOOR, J.P.TECHNO PARK, No.3/1, MILLERS ROAD, BENGALURU-560 001 PAN-AACI 7940L
…RESPONDENT
(BY SRI T.SURYANARAYANA, ADV.)
THIS INCOME TAX APPEAL IS FILED UNDER SECTION 260-A OF INCOME TAX ACT 1961, ARISING OUT OF ORDER DATED 13.12.2019 PASSED IN ITA NO.1005/BANG/2019, FOR THE ASSESSMENT YEAR 2014-2015 PRAYING THIS HONBLE
COURT TO 1. FORMULATE THE SUBSTANTIAL QUESTIONS OF LAW STATED ABOVE. 2. ALLOW THE APPEAL AND SET ASIDE THE ORDERS PASSED BY THE INCOME TAX APPELLATE TRIBUNAL, BENGALURU IN ITA NO.1005/BANG/2019 DATED 13.12.2019 FOR ASSESSMENT YEAR 2014-2015 ANNEXURE-C CONFIRMING THE ORDER OF THE APPELLATE COMMISSIONER AND CONFIRM THE ORDER PASSED BY THE DEPUTY COMMISSIONER OF INCOME TAX, CIRCLE-2(1)(2), BENGALURU.
THESE APPEALS COMING ON FOR HEARING, THIS DAY, S. SUJATHA, J., DELIVERED THE FOLLOWING:
J U D G M E N T
Since common and akin issues are involved in these appeals, they are heard together and disposed of by this common judgment.
ITA No.112/2020 is filed by the revenue under Section 260A of the Income Tax Act, 1961 (‘Act’ for short) challenging the order dated 23.10.2019 of the Income Tax Appellate Tribunal, “C” Bench, Bangalore (‘Tribunal’ for short) in ITA No.1961/Bang/2018 relating to the assessment year 2012-13.
ITA No.118/2020 is filed by the revenue under Section 260A of the Income Tax Act, 1961 challenging the order dated 13.12.2019 of the Income
Tax Appellate Tribunal, “A” Bench, Bangalore (‘Tribunal’ for short) in ITA No.1005/Bang/2019 relating to the assessment year 2014-15.
These appeals were admitted to consider the following substantial questions of law:- (IN ITA No.112/2020) 1. Whether on the facts and in the circumstances of the case and in law, the Tribunal is in law in allowing claim of assessee made on account of surplus from shareholders account being treated as income from other business at Rs.32,11,86,149/- by holding that “surplus” available both in Policy Holders Account and Share Holders’ Account is to be consolidated and only “net surplus” is to be taxed as income from insurance business without observing that income from life insurance business is liable to be treated differently when compared to income from other business (share holder’s account) since section 44 read with First Schedule do not cover income from other business?
Whether on the facts and in the circumstances of the case, the Tribunal is right in law setting aside disallowance made in respect of claim of losses from pension fund not allowed to be carried forward at Rs.93,39,11,564/- by holding that losses incurred from pension fund is exempt under section 10(23AAB) of the Act and taxability of income from life insurance business is governed by section 44 of the Act with the first schedule of the Act even though when section 10 of the Act is applicable and income is exempt from tax, it follows that losses are also not allowed to be set off nor can be carried forward?
(IN ITA No.118/2020) 1. Whether on the facts and in the circumstances of the case, the Tribunal is right in law in confirming the order of the Commissioner of Income Tax (Appeals) setting aside disallowance of surplus from shareholders account treated as income from other sources by assessee by holding that surplus available both in Policy Holder’s
Account and share Holder’s account is to be consolidated and net surplus only to be taxed as income from business without appreciating that income from life insurance business is treated differently when compared to income from other sources (Shareholder’s account) and section 44 read with First Schedule applies to only Income from Insurance? 2. Whether, on the facts and in the circumstances of the case, the Tribunal is right in law in holding that assessee is entitled for carry forward of losses arising out of pension fund account by holding that loss from pension fund which is exempt under section 10(23AAB) be excluded while determining surplus under section 44 of the Act when same is not provider specifically in section 10(23AAB) nor in section 44 read with section 70 to 80 of the Act?
The assessee is a company engaged in the business of life insurance and has filed its return of income for the Assessment Years in question. The case was selected for scrutiny and the notices under Sections
143(2) and 142(1) were issued. As the international transaction exceeded Rs.15 crores, the case was referred to Transfer Pricing Officer (TPO) to determine the Arm’s Length Price and the said officer did not suggest TP adjustment. Assessing Authority made non TP addition pertaining to surplus from shareholders account, treating the same as income from other business and losses from pension fund not allowed to be carried forward. Aggrieved by the said order, the assessee preferred appeals before First Appellate Authority (CIT(A)). The First Appellate Authority allowed the ground of appeals holding that the losses from pension fund be eligible for set-off and carry forward, from the income from the life insurance business. Being aggrieved, the revenue preferred appeals before the Tribunal. The Tribunal dismissed the appeals. Being aggrieved, the revenue has preferred the above appeals.
Learned counsel Sri. K.V. Aravind appearing for the appellants – revenue argued that the Tribunal erred in holding that surplus available both in policy holder’s account and shareholder’s account is to be aggregated and only “net surplus” is to be taxed as income from insurance business. Income from other business is not covered by Section 44 of the Act and therefore to be taxed as per normal provisions which deal with exempt income namely, Section 10 of the Act. The provisions of Section 10 were brought into force to specifically exclude some income from purview of taxation. The income of the fund, set up by the Life Insurance Company of India or any other insurer under the pension scheme to which contribution is made by any person for the purpose of receiving pension for such fund is not included in computing the total income. As such, losses from pension fund cannot be allowed to be carried forward. Thus, it was argued that losses are not allowed to be set-off nor can be carried forward when
Section 10(23AAB) of the Act is applicable albeit income from life insurance business is covered by Section 44 of the Act.
Learned counsel placing reliance on the Co- ordinate Bench decision of this Court in the case of Commissioner of Income-tax vs. Yokogawa India Ltd., reported in (2012) 21 taxmann.com 154 (Karnataka), which has been confirmed by the Hon’ble Apex Court reported in (2017) 77 taxmann.com 41 (SC), submitted that though Section 10A, as amended, is held to be deduction by the Hon’ble Apex Court has a bearing to the facts of the case. Thus, it was argued that the stage of deduction under Section 10A would be while computing the gross total income of the eligible undertaking under Chapter IV of the Act and not at the stage of computation of the total income under Chapter VI. Reliance is also placed on the judgments of the Hon’ble Apex Court in Commissioner of Income-tax
vs. Harprasad and Company (P) Ltd., reported in (1975) 99 ITR 118 and Commissioner of Income-tax, Ahmedabad vs. Gold Coin Health Food (P) Ltd., reported in (2008) 172 Taxman 386.
Learned counsel Sri T. Suryanarayana appearing for the assessee submitted that the first substantial question of law has been considered and answered by this Court in ITA Nos.128/2018, 181/2017 and 436/2018 (D.D.30.08.2021) holding that Rule 2 to First Schedule of Section 44 of the Act is applicable to the business of life insurance and not Rule 5 of Part – B with the First Schedule of the Act, thereby answering the substantial question of law in favour of the assessee and against the revenue. As regards, second substantial question of law raised by the revenue, it was submitted that the business of life insurance being covered under Section 44 of the Act read with First Schedule, the same being a self-contained code, profit and loss shall be
computed in accordance with the rules contained in the First Schedule i.e., on actuarial valuation basis not under Sections 28 to 43 of the Act. The Tribunal observed that CIT (Appeals) granted reliefs relating to the assessment year 2013-14, which has not been disputed by the revenue. The judgment of the Hon’ble High Court of Bombay in the case of Commissioner of Income-tax – 1, Mumbai vs. Life Insurance Corporation of India Ltd., reported in (2011) 12 taxmann.com 388 (Bombay) has been rightly followed by the Tribunal. It was further argued that the judgment of Yokogawa India Ltd., supra, would come to the aid of the assessee, wherein it has been held that phrase “total income” used in Section 10A need not necessarily mean the total income as computed in accordance with the provisions of the Act. The computation of the relief as provided in Section 10A(4) is also with reference to the undertaking. The phrase “total income” used in Section 10A cannot be
understood in the same sense as in Section 2(45). The phrase “total income” in Section 10A is not the total income of the assessee, the said total income means “profits and gains” of the STP undertaking as understood in its commercial sense. Thus, Section 10A and the interpretation given by this Court and the Hon’ble Apex Court in Yokogawa India Ltd., supra would not come to the assistance of the revenue in support of the second question of law raised.
Heard the learned counsel for the parties and perused the material on record.
Re. Substantial Question of Law No.1:- 10. This Court has dealt with this substantial question of law in extenso in ITA Nos.128/2018, 181/2017 and 436/2018 (D.D.30.08.2021) (Pr. Commissioner of Income Tax-5 and another vs. M/S. PNB Metlife India) and the same is applicable to the facts of the present case. Accordingly, substantial
question of law No.1 is answered in favour of the assessee and against the revenue.
Re. Substantial Question of Law No.2:- 11. Section 44 of the Act reads thus:- “44. 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 with the rules contained in the First Schedule.”
First Schedule to the Act reads thus:- “R.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. R.2. Computation of profits of life insurance business.- The profits and gains of life insurance business shall be taken to be the annual average of the surplus arrived at by adjusting the surplus or deficit disclosed by the actuarial valuation made in accordance with the Insurance Act, 1938 (4 of 1938), in respect of the last inter-valuation period ending before the commencement of the assessment year, so as to exclude from it any surplus or deficit included therein which was made in any earlier inter- valuation period.
Section 10 (23AAB) reads thus: “10. In computing the total income of a previous year of any person, any income falling within any of the following clauses shall not be included: (23AAB). any income of a fund, by whatever name called, set up by the Life Insurance Corporation of India on or after the 1st
day of August, 1996, [or any other insurer under a pension scheme],- (i) to which contribution is made by any person for the purpose of receiving pension from such fund; (ii) which is approved by the Controller of Insurance [or the Insurance Regulatory and Development Authority established under sub- section (1) of section 3 of the Insurance Regulatory and Development Authority Act, 1999 (41 of 1999), as the case may be]. Explanation.- For the purposes of this clause, the expression “Controller of Insurance” shall have the meaning assigned to it in clause (5B) of section 2 of the Insurance Act, 1938 (4 of 1938);]
In the case of Harprasad, supra, the Hon’ble Apex Court has held thus.. “It may be remembered that the concept of carry forward of loss does not stand in vacuo. It involves the notion of set-off. Its sole purpose is to set off the loss against the profits
of a subsequent year. It pre-supposes the permissibility and possibility of the carried- forward loss being absorbed or set off against the profits and gains, if any, of the subsequent year. Set off implies that the tax is exigible and the assessee wants to adjust the loss against profit to reduce the tax demand. If follows that if such set-off is not permissible or possible owing to the income or profits of the subsequent year being from a non-taxable source, there would be no point in allowing the loss to be “carried forward”. Conversely, if the loss arising in the previous year was under a head not chargeable to tax, it could not be allowed to be carried forward and absorbed against income in a subsequent year from a taxable source.”
In Life Insurance Corporation of India Ltd., supra, the Hon’ble High Court of Bombay has held thus: “16. The argument of the revenue is that with the insertion of section 10(23AAB) by Finance (No.2) Act, 1996 with effect from
1-4-1997, the profits as well as loss arising from Jeevan Suraksha Fund would not be includible in the total income of the assessee and, therefore, while determining the distributable profits of the assessee, the loss of from Jeevan Suraksha Fund ought not to be allowed to be adjusted against the taxable income. 17. It is not in dispute that the Jeevan Suraksha Fund is a pension fund approved by the Controller of Insurance appointed by the Central Government to perform the duties of the Controller of Insurance under the Insurance Act, 1938. The loss incurred in the Jeevan Suraksha Fund has been considered by the actuary as a business loss, as per the valuation report as on the last day of the financial year, allowable under section 44 read with the First Schedule to the Income-tax Act, 1961. The fact that the income from such fund has been exempted under section 10(23AAB) with effect from 1st April, 1997, does not mean that the pension fund ceases to be insurance business, so as to fall outside the purview of the insurance business
covered under section 44 of the Income-tax Act, 1961. In other words, the pension fund like Jeevan Suraksha Fund would continue to be governed by the provisions of section 44 of the Income-tax Act, 1961 irrespective of the fact that the income from such fund are exempted, or not.
Therefore, while determining the surplus from the insurance business, the actuary was justified in taking into consideration the loss incurred under Jeevan Suraksha Fund. 18. The object of inserting section 10(23AAB) as per the Board Circular No.762, dated 18-2-1998 was to enable the assessee to offer attractive terms to the contributors. Thus, the object of inserting section 10(23AAB) was not with a view to treat the pension fund like Jeevan Suraksha Fund outside the purview of insurance business but to promote insurance business by exempting the income from such fund. Therefore, in the facts of the present case, the decision of the Income-tax Appellate Tribunal in holding that even after insertion of section 10(23AAB), the loss incurred from the pension fund like
Jeevan Suraksha Fund had to be excluded while determining the actuarial valuation surplus from the insurance business under section 44 of the Income-tax Act, 1961 cannot be faulted. Accordingly, questions (c) and (d) are answered in the affirmative, that is, in favour of the assessee and against the revenue.”
Learned counsel for the revenue argued that the aforesaid judgment was rendered on August 2, 2011, prior to the judgment rendered in Yokogawa, supra. Hence, the said judgment would not have any bearing on the facts of the present case. We are not inclined to accede to the submissions of the learned counsel for the revenue for two reasons; firstly, Section 10A of the Act deals with the special provisions in respect of newly established undertakings in free trade zone etc., whereas Section 44 of the Act deals with the profits and gains of any business of insurance, including any such business carried on by a mutual
insurance company (relevant herein). It is true that while considering Section 10A of the Act, it has been held by the Co-ordinate Bench of this Court that the income of Section 10A unit has to be excluded before arriving at the gross total income of the assessee. In other words, the income of Section 10A unit has to be deducted at source and not after computing the gross total income. The insurance business has to be considered by the actuary valuation as per the valuation report allowable under Section 44 read with First Schedule to the Act. Merely for the reason that the income from pension fund is exempted under Section 10(23AAB) with effect from 01.04.1997, it cannot be held that the loss incurred under the fund cannot be carried forward or given a set-off.
The Clause 13.1 of the C.B.D.T. Circular No.762, dated 18.02.1998, provides that the Life Insurance Corporation of India (LIC) has started a new
personal-cum-family pension scheme. The scheme offers attractive terms to its contributors and has a provision for payment of a life-time widow’s pension in the event of the death of the contributor during the contribution period. Clause 13.3 provides that in order to enable the LIC to offer attractive terms to the contributors, exemption from income-tax has been provided to the income of such funds which the LIC has set up on or after the August 1, 1996, under the scheme to which contributions are made by the contributors. Clause 13.5 contemplates that the amendment will take effect from April 1, 1997, and will, accordingly, apply in relation to the assessment year 1997-98 and subsequent years.
The object of inserting Section 10(23AAB) being made clear as per the said Circular, the same cannot be equated with the provisions of Section 10A of the Act.
Secondly, Section 44 of the Act begins with a non-obstante clause and overrides the other provisions of the Act relating to computation of income under the various heads of income including income under the head profit and gains of business of insurance. Thus, the provisions under Sections 28 to 43 of the Act would not be applicable to the assessee coming within the ambit of Section 44, Judgment in Harprasad is distinguishable. These aspects were considered by the Hon’ble High Court of Bombay in Life Insurance Corporation of India Ltd., supra and following the said decision, the Tribunal has dismissed the appeals filed by the revenue, which indeed was applied for the earlier assessment year. We do not find any perversity or irregularity in the finding of the Tribunal in answering these issues. Hence, we answer the second substantial question of law also in favour of the assesee and against the revenue.
In the result, both the appeals stand dismissed.
SD/- JUDGE
SD/- JUDGE
PMR