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Income Tax Appellate Tribunal, MUMBAI BENCHES “E”, MUMBAI
Before: Shri Mahavir Singh, & Shri Ashwani Taneja
आदेश / O R D E R
Per Ashwani Taneja (Accountant Member): These appeals have been filed by the Revenue in the case of same assessee involving identical issues therefore these were heard together and being disposed by this common order. First we shall take up appeal in A.Y. 2009-10 filed by the Revenue on the following grounds: “On the facts and in the circumstances of the case and 2 Star union Dia ichi life in law the Ld. CIT(A) erred in deleting addition of Rs. 78,38,270/- on account of Negative Reserve appearing in actuarial Valuation Report in accordance with Insurance Act, 1938 without appreciating the facts and logical conclusion of the AO in the order of assessment" "On the facts and in the circumstances of the case and in law the Ld. CIT(A) erred in relying on the judicial pronouncements which are distinguishable on the facts of the case." The appellant craves leave to add, amend, vary, omit or substitute any of the aforesaid grounds of appeal at any time before or at the time of hearing of appeal.”
During the course of hearing, arguments were made by Shri Shailesh Shah, Authorised Representatives (AR) on behalf of the Assessee and by Shri B.S. Bist, Departmental Representative (DR) on behalf of the Revenue.
The solitary issue raised in this appeal is that Revenue is aggrieved with the action of Ld. CIT(A) in deleting the addition made by the AO for Rs.78,38,270/- on account of Negative Reserve appearing in actuarial valuation Report in accordance with Insurance Act, 1938. 3.1. During the course of hearing it was stated at the outset by the Ld. Counsel that this issue is covered in favour of the assessee, in view of the judgment of Tribunal in the case of ICICI Prudential Insurance Co. Ltd. v. ACIT (ITA No.7765/Mum/2010) which has been followed by the Ld. CIT(A) in deleting the addition made by the AO. It was further submitted that this report now stands covered in favour of the assessee on the basis of following judgments: (a) ICICI Prudential Insurance Co. Ltd v. ACIT 2012 - 3 Star union Dia ichi life 28 taxmann.com 257 (Mum.) (b) Life Insurance Corporation of India vs ClT 51 ITR 773 [SC] (c) ACIT vs HDFC Standard Life Insurance Co. Ltd - 3004/M/2012 AY 2008-09 (d) Life Insurance Corporation of India V. Addl. CIT Mumbai - 6221/Mum/2012 3.2. It was thus requested that the order of Ld. CIT(A) deserves to be upheld in view of the aforesaid judgments. 3.3. Per contra Ld. DR relied upon the orders of the AO. However, in response to our query, he was not able to draw any distinction in facts or legal position between aforesaid judgments and the case of the assessee before us. 3.4. We have gone through the orders passed by the lower authorities as well as copies of judgments placed before us for our consideration. The brief background of the case is that the assessee company is a joint venture between Bank of India, Union Bank of India and the Dia Ichi Insurance Company Ltd, Japan. The assessee company was incorporated as company under the Companies Act, 1956 and was granted license by the Insurance Regulatory and Development Authority on 26.12.2008 for carrying on life insurance business in India. 3.5. The financial statements are prepared by the assessee company in accordance with the regulation and guidelines issued by the IRDA and the Institute of Actuarial Society of India. During the course of assessment proceedings, it was observed by the AO that assessee had a Negative Reserve in its accounts and the surplus computed by the Actuarial Valuation Report was arrived at by ignoring Negative Reserve, and therefore AO asked the assessee to justify as to why the 4 Star union Dia ichi life surplus in the Actuarial Valuation Report should not be increased by the figure of Negative Reserve. The assessee gave detailed explanation by inter-alia contending that financial statements of Insurance Companies including valuation of liabilities are governed by the Regulations and guidelines by IRDA and the Institute of Actuarial Society of India. It was further submitted that the section 44 of the Income Tax Act, 1961 which prescribe the manner of assessment of Life Insurers over-rides all the general provisions for computation of income from business contained in Section 28 to 43B of the Income Tax Act, 1961. The relevant Rule 2 of the First Schedule to the Income Tax Act, 1961, which lays down the basis of determination of Business Income, leads to the conclusion that the Surplus or Deficit disclosed by the actuarial valuation made in accordance with the Insurance Act, 1938 is the sole basis for computation of Income from the business of Life Insurance. The provisions do not permit any other adjustment to be made therein. The Actuarial surplus/deficiency as per Insurance Act, 1938 is explained in Section 13(1) of the Insurance Act, 1938 which states that an investigation to be made by an actuary into the financial condition of the life insurance business which is basically determination of present value of future liabilities in respect of policies issued by the insurer. Therefore Actuarial surplus/deficiency represents the difference between the present value of future premiums and other income expected to be generated throughout the policy period and the present value of all future liabilities expected to arise throughout the 5 Star union Dia ichi life policy period. 3.6. In addition to the above, the assessee made exhaustive submissions in support of its claim that Negative Reserve was not to be considered for making addition to the assessable income of the assessee. The AO was not satisfied with the submissions of the assessee therefore, he made the addition equivalent to the amount of Negative Reserves as reported in the Actuarial Valuation Report of the life Insurance and added a sum of Rs.78,38,270/- to its income. 3.7. In the appeal before Ld. CIT(A), exhaustive submissions were made and reliance was placed on various judgments which were in favour of the assessee on this issue. Ld. CIT(A) considered the facts of the case to the assessee, and relying upon the aforesaid judgment of Mumbai Bench of Tribunal in the case of ICICI Prudential Life Insurance Corporation of India (supra), he deleted the addition with following observations: “4.2 I have considered the facts and circumstances of the case, submissions of the appellant and case laws relied upon by the appellant. AO during the assessment proceedings had treated the Negative Reserve as reported in the Actuarial valuation report of the life insurance and added Rs.78,38,270/-. AC treated this negative reserve a surplus reserve from the appellant's life insurance business and added the amount in the assessment order passed under sec. 143(3) of the Act. For insurance business, assessment has to be passed under sec. 44 of the Act and Rule 2 of the First Schedule which over-rides all the general provisions for computation of income from business contained in the provisions from Sec. 28 to 43B, There is no provision in the Act to add any further addition except as per the rule 2 of the First Schedule under sec. 44 of the IT Act.
6 Star union Dia ichi life Computation of income for this business should be only covered by the above sec. 44 as per rule 2 of the First Schedule. In this case, AC treated Negative Reserve as surplus from the actuarial valuation in insurance business and added the amount. On the same issue and on the same facts, this issue has come into consideration of ICICI Prudential Life Insurance Corporation of India Vs ACIT 7767/Bombay/210 wherein if is held as under "The mathematical reserve is part of Actuarial valuation and the surplus as discussed in Form-1 under Regulation 4 takes into consideration this mathematical reserve also. Therefore, the order of the CIT(A) is approved. Moreover, the Assessing Officer has no power to modify the amount after actuarial valuation was done, which was the basis for assessment under Rule 2 of 1st Schedule r.w.s. 44 of the IT Act. The principles laid down by the Hon'ble Supreme Court in LIC CIT 512 ITR 773 about the powers of Assessing Officer also restricts the scope and adjustments by the AO. In view of this, we uphold the order of the CIT(A) and dismiss the Revenue ground."
4.3 In the above ITAT’s case, in the ICICI Prudential Life Insurance Corporation of India, it is clearly held that Negative Reserve need not be added in the computation of income in the case of insurance business following the Supreme Court decision in the case of Life Insurance Corporation of India Vs CIT Delhi and Rajasthan 51 ITR 773. Respectfully following the decision, addition is deleted and ground of appeal No. 1 is allowed. Relief granted to the appellant is of Rs.78,38,270/.
3.8. During the course of hearing before us, it has been stated by the Ld. Counsel that now the view taken by the Ld. CIT(A) has been accepted in many judgments which have been mentioned above. It is noted that in the case of Life Insurance 7 Star union Dia ichi life Corporation of India V. Addl. CIT Mumbai – (ITA NO.6221/Mum/2012 order dated 03.04.2013), the Tribunal deleted the addition made by the AO on account of Negative Reserve after making detailed analysis with the following observations: “Next Ground of Appeal is about confirmation of addition made by the AO in respect of negative reserves shown in Form-I. During the assessment proceedings, on perusal of the actuarial reports in Form-I,AO found that there was an item called ‘Negative Reserve’ amounting to Rs. 38075.39 Crores. He directed the assessee to file explanation in this regard. After considering the submissions of the assessee, especially Insurance Regulatory and Development Authorities (IRDA) (Assets, Liabilities and Solvency margin of Insurers) Regulations, 2000 he discussed the principles governing the negative reserves. He held that the issue in negative reserves to be taken as ‘0’ was specific to situations mentioned in the regulation, that Rule 5(ii) mandated that mathematical reserves should be taken without any modification for the purpose of Section 35 of the Insurance Act, that provisions of Insurance Act clearly indicated that actuary was not mandated to take negative reserves at ‘0’in all situations, that by taking Negative Reserves at ‘0’surplus had been made less than the real actuarial valuation, that in Income Tax assessments real income of an assessee had to be debited, that ignoring negative reserve was in accordance with IRDA Regulations was also not material, that the IRDA guidelines were applicable in specific situations only, that IRDA guidelines provided that the liabilities shall be calculated together with the future premium payments, that in the surplus computation the Negative Reserves were nothing but future premium payments in respect of policies where liabilities were less than the future premium receivable, that liability valuation must not take the figure of Negative Reserve at ‘0’ for the purpose of determining of surplus of a particular Financial Year. After comparing the Actuarial Valuation Reports of 31-03-2008 and 31-03-2009, he observed that figure of Negative Reserve was calculated every year was taken at ‘0’ while reducing the liability from the total fund 8 Star union Dia ichi life of the year, that the liability reduced for AY. 2008-09 was not carried in LIC fund on 31-03-2009, that the LIC fund of 31-03-2009 did not include any adjustment by way of Negative Reserves made in the AY. 2008-09, that there was no question of giving any credit for adjustment Negative Reserve done in earlier AY. Finally, he held that assessee’s contention in respect of taking Negative Reserve at‘0’ was not tenable as the same were not in accordance with the Insurance Act and IRDA Regulations. Accordingly, the Negative Reserve reported by actuary amounting to Rs. 38,075.39 Crores was added back to the income of the assessee as surplus of Actuarial Valuation of Life Insurance business of the assessee-company. 4.1. Assessee preferred an appeal before the First Appellate Authority (FAA). After considering the submissions of the assessee and the assessment order, FAA held that under IRDA, Negative Reserves were to be taken under specific situations and not as a general rule, that the appellant corporation wanted to take un-due advantage by reducing its taxable surplus by the amount of Negative Reserves, that the value of Negative Reserves was taken as ‘0’, that same had been reduced from the taxable surplus and total income of the assessee, that the total income of the assessee had been under stated, that actuarial had erred in applying Insurance Act correctly and properly in the case under consideration. Referring to Provisions of IRDA he held that negative reserve was to be taken at Zero in specific situations only -under Rule 5(ii) of Schedule IIA, that said mandate was not applicable in all situation as argued by the assessee. Upholding the order of the AO he further held that negative reserves already disallowed in earlier years could not be allowed in the AY under consideration, that negative reserves were calculated by the actuary on year to year basis, that composition of the various types of policies could undergo a change from year to year basis, that there was no provision for incremental addition/set off of negative reserves under the Insurance Act or IRDA Regulations. 4.2. Before us, AR submitted that reasons advanced by the AO and confirmed by the FAA for disallowing the claim were far-fetched and were contrary to the provisions of Sec.44 of the Act r.w. the First Schedule of the Act, that the 9 Star union Dia ichi life AO had negated the provisions legislated by Parliament, that IRDA Regulations were the guidelines in this regard, that these regulations had the force of law having been notified by the Insurance Regulatory and Development Authority in exercise of the powers conferred on the Authority by section 114A of the Insurance Act and was binding on the insurer as also the appointed Actuary, that para 5(iii) of IRDA (Assets, Liabilities and Solvency Margin)Regualtions,2000 mandated that for the purpose of section 13 the Appointed Actuary should set the amount of mathematical reserves to zero in the case of negative reserve, that the Appointed Actuary had done the same in arriving at the net valuation surplus, that IRDA to whom the various statements(including From-I)were submitted had accepted the valuation surplus of the life insurance business determined by the Appointed Actuary in accordance with the requirements of Insurance Act and IRDA Regulation was sacrosanct and same could not be tempered with, that the actuarial valuation of liabilities was done in accordance with the provisions of sections 13,15,49 and 64V of the Insurance Act,1938 and in compliance with IRDA regulations. He referred to various regulations of IRDA. He further submitted that method of valuation of surplus after zeroing the negative reserves as required by the IRDA regulations was adopted by the Appointed Actuary since the commencement of IRDA Act and IRDA Regulations, that said method was accepted by the Controller of Insurance(IRDA) and the AO in the earlier AYs., that while completing the assessment for the AY under consideration AO had added the negative reserves to the total income of the assessee, that the AO had tampered with the net valuation surplus as determined by the Appointed Actuary, that action of the AO was contrary to the provisions of section 44 of the Act r.w. First Schedule to the Act. He relied upon the cases of CIT vs. LIC (51ITR773) and GIC vs. CIT (240 ITR 139). He also relied upon the order of the ICICI Prudential Insurance Co.(supra) delivered by the Mumbai Tribunal. He referred to Circular No.202dtd.05.07.1976 issued by the CBDT explaining and scope of effect of the changes made by the Finance Act, 1976 in the First Schedule to the Act. Alternatively, he submitted that treatment to negative reserve should not 10 Star union Dia ichi life result in double taxation, that figures of negative reserves should be considered for one AY only, that appropriate deduction should for earlier year’s reserves should be given in subsequent year. DR strongly supported the orders of the AO and the FAA. 4.3. We have considered the rival submissions. We find that similar issue was raised by the AO of the ICICI Prudential Insurance Co.(supra) in the appeal filed by him for AY 2006-07. Ground filed by him read as under: ““On the facts and in the circumstances of the case and in law, the learned CIT(A)erred in not subjecting the negative reserve amounting to Rs.27.27 Crores ignoring the facts that negative reserves has impact of reducing the taxable surplus as per From I.” 4.3.1. We are of the opinion that treatment given to negative reserves by actuary cannot be disturbed by the AO. Here, it would be useful to understand meaning of negative reserve in simple terms. While making actuarial valuation, requirement of reserve to service insurance policies issued is ascertained. Such reserve (called mathematical reserve or value of liability) is equal to present value of future benefits payable and future expenses to be incurred less present value of future premium receivable. When the present value of future premium is more than the present value of future benefits payable and future expenses to be incurred, this amount becomes negative, known as ‘negative reserve’. In simple words, it means that the insurance contracts under consideration do not warrant any provision and is, in fact, an asset. However, in certain circumstances, such as for following IRDA guidelines, insurers may not treat policies as assets and they set any negative reserves to zero.’ For example, if an insurer had two policies, one with areserve of 100 and the other with a reserve of - ‘10, it might think of its liabilities at 100 rather than 90 to take into account the eventuality in case the second policy lapsed. This process is called eliminating negative reserves. As mentioned earlier, a policy which has a negative reserve is in nature of an asset. 4.3.2. We find that in the case of ICICI Prudential Insurance Co.(supra) AO had disallowed negative reserve related to Life Insurance business of the assessee. In 11 Star union Dia ichi life appellate proceedings FAA allowed the appeal of theassessee.AO challenged the order of the FAA before the Tribunal, as stated earlier. Disposing his appeal, Tribunal held as under: “After considering the rival submissions and examining the method of accounting and the mandate given by regulations to appoint Actuarial on the concept of mathematical reserves we do not see any reason to interfere with the order of the CIT(A).The mathematical reserve is a part of Actuarial valuation and the surplus as discussed in Form-I under Regualtion 4 takes in to consideration this mathematical reserve also. Therefore the order of the order of the CIT(A) is approved. Moreover the Assessing Officer has no power to modify the amount after actuarial valuation was done, which was the basis for assessment under Rule 2 of 1stSchedule r.w.s.44 of the I.T. Act. The principle laid down by the Hon’ble Supreme Court in LIC vs.CIT 51ITR773 about the power of the Assessing Officer also restricted the scope and adjustment by the AO. In view of this uphold the order of the CIT(A) and dismiss the Revenue’s ground.” Respectfully following the above order of the Coordinating Bench we decide Ground No.2 in favour of the assessee.
3.9. It is further noted that similar view has been taken in other judgments relied upon by the Ld. Counsel. No contrary view was brought to our notice by Ld. DR. Therefore, respectfully following these judgments we decided this issue in favour of the assessee. It is noted that the findings recorded by the Ld. CIT(A) while deleting the impugned addition is based upon proper reasoning and correct appreciation of law. Nothing wrong could be pointed therein by the Ld. DR. Therefore, no interference is called for therein. Thus, order passed by the Ld. CIT(A) is upheld. Grounds raised by the Revenue are dismissed.
4. As a result, the appeal of the Revenue is dismissed.
12 Star union Dia ichi life 5. It is noted that in A.Y. 2010-11, the Revenue has raised identical issue of deletion of addition of Rs.9,11,32,400/- made by the AO on account of Negative Reserve. Ld. CIT(A) had deleted the addition by following his own order for A.Y. 2009-10. No distinction has been pointed out by the Ld. DR in the facts of A.Ys. 2009-10 and 2010-11, therefore, following our order for A.Y. 2009-10, grounds raised by the Revenue are dismissed.
In the result, both appeals of the Revenue are dismissed.
Order pronounced in the open court on 11th January, 2017.