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Income Tax Appellate Tribunal, BANGALORE BENCH A, BANGALORE
Before: SHRI. ABRAHAM P. GEORGE
PER ABRAHAM P. GEORGE, ACCOUNTANT MEMBER :
In this appeal filed by assessee it assails an order dt.19.03.2015 passed by the Pr. CIT -5, Bengaluru, U/s.263 of the Income-tax Act, 1961 ('the Act' in short).
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Facts apropos are that assessee engaged in life-insurance business had filed its return declaring loss of Rs.2,75,96,87,000/- . Assessment was completed by the AO on 15.03.2013 u/s.143(3) of the Act, accepting the loss returned by the assessee, after seeking and obtaining explanations of the assessee on various aspects of the return filed. Thereafter on 22.04.2014, a show-cause notice was issued by the CIT requiring the assessee to explain why the assessment ought not be considered as preducial and erroneous to the interests of Revenue. As per the CIT, assessee had mixed up provisions of Section 44 of the Act applicable to insurance company with normal provisions of the Act and in the process availed ineligible benefits. CIT noted that as per Section 115B of the Act, income from insurance business was required to be taxed at 12.5%, whereas balance of the total income was to be taxed at normal rates. As per the CIT, profits and gains of life-insurance business had to be carved out of the total income of the assessee which was not done by the AO. As per the CIT profits and gains of life-insurance business could alone be taxed at the concessional rate of 12.5%, whereas the balance of income which related to shareholders' account was to be taxed at normal rates. Thus according to him there was omission to bring to tax income of Rs.24,31,68,000/- appearing in the shareholders account.
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Assessee in its reply mentioned that its business was covered by Insurance Act, 1938 and Insurance Regulatory and Development Authority (IRDA) Act, 1999. As per the assessee it was all along filing the return of income by aggregating the result of the shareholders profit and loss account and policy holders revenue account. This computation as per the assessee was in accordance with Section 44 r.w. Rule 2 of the First schedule to the Income-tax Act. Assessee also pointed out to the CIT that as per the reporting formats prescribed under IRDA (Preparation of Financial Statements and Auditors Report of Insurance Companies) Regulations, 2002, presentation of accounts of life-insurance companies had to be done in a segregated manner, one as shareholders profit and loss account and the other as policy holders surplus/deficit account. Assessee also pointed out that the issue regarding aggregation of results in the shareholders account and revenue account had come up before the Mumbai Tribunal in the case of ICICI Prudential Ltd v. ACIT ((2013) 140 ITD 41). As per the assessee, it was held by the Mumbai bench in the said decision that income in the shareholders account were to be taxed as a part of life-insurance business only. Further as per the assessee, while computing its profit and gains from life-insurance business, it had considered the actual valuation made in accordance with Insurance Act, 1938. Assessee also pointed out the IRDA ITA.756/Bang/2015 Page - 4 regulations which specifically required consideration of assets of both policy holders fund and shareholders fund for meeting solvency margin requirements. Again as per the assessee, Section 27A of the Insurance Act, 1938 required a life-insurance company to place investment out of a controlled fund, which meant all funds of an insurer without any distinction between shareholders fund and policy holders fund. Argument of the assessee was that the segregation done was only for working out the solvency margin. According to it, the balance sheet was only one. In any case as per the assessee, there was substantial loss in policy holders account and if this was set off against the surplus available in the shareholders account no prejudice would still result to the Revenue. Thus according to it there was no error in the order of the AO and no prejudice caused to the Revenue.
However, the CIT was not impressed by the above reply. According to him, eventhough assessee was a single entity, its income had to be divided into profits from the business of insurance and profits pertaining to shareholders account. He was of the opinion that the entire issue required fresh consideration by the AO. He set aside the order of the AO with a direction to the AO to redo the assessment afresh.
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Now before us, Ld. AR submitted that all the required particulars regarding computation of income was asked for by the AO during the course of assessment proceedings and furnished by the assessee.
According to him the division of profit and loss account into two viz., revenue account and shareholders account was to comply with IRDA regulations. Relying on the regulations issued by IRDA on 30.03.2002. placed at paper book pages 2 to 4, Ld. AR submitted that a person carrying on life-insurance business was required to comply with Schedule 'A' of the said regulations. According to him, Part-V of the said schedule stipulated preparation of Revenue account (policy holders account) Profit and Loss account (shareholders account), and Balance Sheet in form A -RA, A-PL and A-BS respectively. Thus assessee had to comply with the such regulations and was required to separately prepare its profit and loss account for the policy holders and for the shareholders account. This according to him did not mean that assessee was doing two types of business. Assessee as per the Ld. AR was doing one business which was of life-insurance. Ld. AR submitted that liability in respect of life-insurance policies based on actuarial valuation was considered in the revenue account of the policy holders. There was substantial deficit in the said account.
Shareholders were responsible to finance the deficit in the policy holders ITA.756/Bang/2015 Page - 6 account. As per the Ld. AR assessee by virtue of Section 2(7A)(c) of the Insurance Act 1938, a person who was carrying on only life-insurance business could do nothing else. Investments made by the assessee were in the course of such business for generating income for the insurance business. All these aspects, were examined by the AO during the course of assessment proceedings. Relying on the decision of Mumbai bench in the case of ICICI Prudential Co. Ltd (supra), Ld. AR submitted that similar issue had come up and it was held that the entire transactions both under policy holders and shareholders account had to be consolidated into one.
As per the Ld. AR, transfer from one account to another remained tax neutral. Thus according to him, the view taken by the AO was not only a possible one under law, but the only one that could have been taken. In any case as per the Ld. AR, CIT was unable to bring out any error in the order of AO much less any error prejudicial to the interests of Revenue.
Per contra, Ld. DR submitted that Section 11(1A) and 11(1B) of the Insurance Act, 1938 clearly differentiated the gains arising to an insurance company from shareholders account and policy holders account. Only relationship between these two, as per the Ld. AR was the requirement to replenish the deficit in policy holders account from the shareholders ITA.756/Bang/2015 Page - 7 account. IRDA regulations mandated separation of accounts so as to ensure safety of the policy holders money. Thus there was a clear demarcation between shareholders fund which were used for the purpose of insurance and shareholders funds which were used for other purposes. The profits from latter, as per the Ld. DR, was not eligible for any beneficial tax treatment. In any case, as per the Ld. DR, AO had not verified correctly the basis on which the assessee had prepared its revenue account nor verified the deficits. Vis-a-vis, contention of the Ld. AR that no prejudice would be caused since the loss in revenue account could be set off against the profits in shareholders account, Ld. DR submitted that this went against section 115B of the Act which required different treatment for both types of income.
We have perused the material on record and heard the rival contentions. CIT had considered the assessment order to be erroneous and prejudicial to the interests of Revenue for the following reasons : “The AO’s order is erroneous and prejudicial to the revenue due to the fact that, the income from shareholders account amounting to Rs.24,31,68,000/- has been failed to be taxed. Therefore, revisionary proceedings u/s.263 are initiated in this case.”
As per the CIT though assessee was a single entity, total income of the ITA.756/Bang/2015 Page - 8 entity having been divided into profits of shareholders and profits from investments done by shareholders, former alone would be eligible for concessional rate of 12.5%, whereas the latter sum had to be taxed under the normal provisions of the Act. First question to be answered by us is whether the issue regarding separation of accounts between shareholders account and policy holders account and method of dealing with the results was in the mind of the AO while doing the original assessment. In reply to a notice issued by the AO on 12.10.2012, assessee had stated as under :
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Assessee in the above reply 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 above mentioned reply given by the assessee, that 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 assessee had given an explanation.
We cannot say that AO was not aware of the issue of aggregation.
Now coming to the view taken by the CIT that these two accounts ITA.756/Bang/2015 Page - 10 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 ICICI 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 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 do pertain to the life ITA.756/Bang/2015 Page - 11
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. 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.