DCIT, CIRCLE -6 KOLKATA, KOLKATA vs. M/S NATIONAL INSURANCE CO. LTD., KOLKATA

There is a delay of 14 days in filing ITA NO.606/Kol/2012 and delay of 11 days in filing ITA No.675/Kol/.2012. The delay has been explained due to intervening holidays and administrative difficulties. In our opinion the reasons are adduced are sufficient cause for the delay in filing these appeals. Hence the delay in filing these appeals are condoned.

As can be seen from the grounds, the revenue has objected to the decision of the CIT(Appeals) in deleting the addition of Profit on Sale of Investments (Rs.245,09, 18,028).

The Assessee is a company engaged in business of insurance other than life insurance. In view of the fact that the assessee is in the Business of Insurance other than Life Insurance, it’s income had to be in accordance with section 44 of the Income Tax Act, 1961 (Act) read with Rule 5 of the First Schedule to the Act. The AO therefore has limited power as regards making additions or disallowances. In the above-referred Rule 5 of the First Schedule, for and up to the Assessment Year 1998- 99 there had been a specific requirement of treating the gains on the realisation of the investments as part of Business Profit of the concerned Insurance Company. However, by the Finance Act, 1988 with effect from the Assessment Year 1989-90 the aforesaid requirement of treating the gains on realisation of investments as taxable income, was omitted. The CBDT vide its Circular No.528 dated 16-12-1988 clarified the reason as to why the omission had been made "to enable the General Insurance Corporation and its subsidiaries to play a more active role in capital markets for the benefit of policy- holders, the Finance Act has amended sub-rule (b) of rule 5 of the First Schedule to provide for exemption of the profits earned by them on the sale of investment". The same reads thus:

Before it’s omission with effect from 1.4.1989. clause (b) of Rule 5 stood as under:-

On the basis of the amendment as clarified by the CBDT, the Assessee in its Return had claimed exemption of the Net Profit on Sale of Investments of Rs.245,09,18,028.

The AO however held that if the provisions of clause (b) of rule 5 of Part B of Schedule I to the Act puts taxation of income of an insurance company within the

According to the AO, the profit as per annual accounts of the Assessee has to be deemed to be income of the Assessee and therefore the income from sale of investments has to be brought to tax.

The CIT(Appeals) following the Appellate Orders for the earlier years and also the decision of the Hon'ble ITAT, Mumbai 'B' Bench, in the case of New India Assurance Co. Ltd. v. Addl, CIT .[(2011) 142 TTJ (Mum) 312 in its Order dated 29- 07-2011] deleted the addition made by the AO of the Profit on Sale of Investments.

Aggrieved by the order of the CIT(A), the revenue has preferred the present appeal before the Tribunal.

We have heard the rival submissions. The learned DR relied on the order of the AO. The learned counsel for the Assessee relied on the order of the CIT(A). He also brought to our notice that for three of the earlier Assessment Years, viz., 1991-92, 1992-93 and 1993-94 the additions made by the AO of the Profit on Sale of Investments had been confirmed by the ClT(Appeals) in the respective Appeals and ITA Nos.606&675/Kol/2012-National Insurance Co.Ltd. –A.Y.2005-06 & 2006-07

We have considered the rival submissions. In view of the fact that the assessee is in the Business of Insurance other than Life Insurance, it’s income had to be in accordance with section 44 of the Income Tax Act, 1961 (Act) read with Rule 5 of the First Schedule to the Act. The AO therefore has limited power as regards making additions or disallowances. The amount of profit, as disclosed by the P&L a/c drawn as per the Insurance Act, shall be taken as an initial point. Such amount of profit shall be increased by the amounts which are not admissible under the provisions of ss. 30 to 43B in computing the profits and gains of business as per r. 5(a). The resultant figure of profit shall be reduced by the amount of reserves for unexpired risks as per cl. (c) of r. 5. No adjustment other than those specifically permitted as per r. 5 can be carried out to the amount of profit as per the P&L a/c. As per cl. (b) of r. 5 of Sch. I in the pre-omission era, the amount of profit determined as per the annual accounts of the insurance company was required to be adjusted by way of deduction towards the depreciation reserve or loss on realization of investments and increment towards appreciation in or gains on the realization of investments. Clause (b) was omitted by the Finance Act, 1988 leading to the situation that now neither the loss written off or reserved in the accounts to meet depreciation is required to be reduced from the profits nor appreciation in or gain on the realization of investments is to be added. This ITA Nos.606&675/Kol/2012-National Insurance Co.Ltd. –A.Y.2005-06 & 2006-07

The AO’s viewpoint cannot be accepted for the reason that with the omission of cl. (b) of r. 5 it has been made clear that neither the loss on account of diminution in the value of investment shall be allowed as deduction nor any income on investment shall be subjected to tax. Both the items of loss and income from the investments are to be considered as neither deductible nor includible in the total income of the assessee. Therefore the CIT(A) was justified in deleting the addition made by the AO. We do not find any grounds to interfere with the order of the CIT(A). Accordingly the appeal of the revenue is dismissed.

In the result the appeal filed by the revenue is dismissed for reasons given above.

Ground No.1 raised by the revenue reads as follows :- “1. That on the facts and circumstances of the case, Ld. CIT(A) erred in law in holding that a sum of Rs.534.08 crores being the profit on sale of investments is not taxable. Reasons given by the CIT(A) are not tenable on the facts of the case and in law.” 17. This ground is identical to the ground raised by the revenue in ITA No.606/Kol/2012 for the reasons given while deciding under similar ground of the revenue for A;.Y.2005-06. We dismiss ground no.1 raised by the revenue.

Ground No.2 raised by the revenue reads as follows :- ITA Nos.606&675/Kol/2012-National Insurance Co.Ltd. –A.Y.2005-06 & 2006-07

The Assessee in its Return claimed Exemption of two sums of Rs.1,66,04.042 and Rs.107,65,70,000 being Interest on Tax Free Bonds and Dividend from Domestic Companies respectively and the Assessee’s claim was accepted by the Assessing Officer. In the Return the Assessee itself computed a sum of Rs.1,00,69,998 as expenses incurred in relation to the exempt income and offered the said sum of Rs.l,00,69,998 as disallowable u/s 14A. The Assessing Officer observed that according to him the aforesaid sum of Rs..1,00,69,998 was allegedly "too low a sum for the disallowance" and was of the view that the Assessee had allegedly not considered huge expenses debited as Bank Charges and other indirect expenses in Insurance Revenue Account for the calculation of disallowance u/s.14A of the Act. The Assessing Officer made a reference to the decision of the Special Bench ITAT, Mumbai in the case of Daga Capital Market Management (P) Ltd. in ITA No.85071M/03 dated 28-10-08 for considering the applicability of Rule 8D with retrospective effect. The Assessing Officer by applying the above-referred Rule 8D, computed a sum of Rs..30,28,25,750 as allegedly disallowable u/s 14A and made disallowance of the said sum of Rs.30,28,25,750 instead of the sum of Rs.1,00,69,998 as offered by the Assessee in its Return.

Before CIT(A), the Assessee submitted that the Assessee had taken into account the expenses of management as shown in the Profit & Loss Account and then calculated the disallowable portion there from by considering the proportion of exempt income of the total receipt as reflected in the Profit & Loss Account. It was submitted that the mandate of Sec.14A of the Act was that the Assessing Officer, having regard to the Accounts of the Assessee, come to a conclusion that the amount claimed by the Assessee as expenditure incurred for earning exempt income, was not correct. It was submitted that such satisfaction did not emanate from the order of the ITA Nos.606&675/Kol/2012-National Insurance Co.Ltd. –A.Y.2005-06 & 2006-07

Without prejudice to the above, the Assessee submitted that while computing the disallowable sum u/s 14A the Assessing Officer took into account all the investments from which the income that may be received, would be exempt from tax, irrespective of the fact as to whether any such income has actually been received or not. It was submitted that as per the language of section 14A, the expense which has been incurred in relation to income which does not form part of the total income for the year, is disallowable. Hence, there is no scope of considering any income which has not actually been earned during the year, for the purposes of section 14A. It was ITA Nos.606&675/Kol/2012-National Insurance Co.Ltd. –A.Y.2005-06 & 2006-07

The CIT(A) agreed with the submissions so made and held that only 1% of the exempt income can be disallowed u/s.14A of the Act. The following were the relevant observations of the CIT(A): “ 19. I have gone through the Assessment Order as well as the submissions made by the Authorised Representative. ·It is noted that the Assessing Officer applied Rule 80 on the basis of the decision of the Special Bench of the ITAT, Mumbai in the case of Daga Capital Market Management (P) Ltd. In fact, the ITAT , Special Bench had decided that Rule 80 would be considered as retrospective in nature and thus the said Rule could be applied even for any assessment year prior to the Assessment Year 2008-09. As pointed out by the Authorised Representative as per the subsequent decision of the Bombay High Court in the case of Godrej & Boyce Mfg. Co. Ltd. v. Dy. CIT [2010] 328 ITR 87(Bom), Rule 80 could not be considered as retrospective and the said rule could be applied only with effect from the Assessment Year 2008- 09. He submitted further that it was observed by the Bombay High Court that Assessing Officer would first be required to check the concerned assessee's offer of disallowance and only after recording his dissatisfaction, if any, the Assessing Officer could compute the amount to be disallowed in accordance with section 14A(2). The Assessing Officer noted that the appellant had not considered the huge expenses debited as Bank Charges and other indirect expenses in Insurance Revenue Account for the calculation whereas the Dividend and exempt Interest income were disclosed in Insurance Revenue Account also. On the basis of his above observations the Assessing Officer applied Rule 80. 20. The appellant is a general insurance company and does not take money on interest as in the case of Banks; NBFCs and other corporate assessees. The appellant has invested its surplus funds into the investments which have grown in value over the period of time. The appellant has submitted the calculation of disallowance offered by it amounting to RS.1 ,00,69,998/- which is given as below:- "The details of Expenses incurred during the F. Y. 2005-06 (A. Y. 2006-07) related to Investment activities:

After considering the rival submissions, we are of the view that the order of the CIT(A) does not call for any interference. The Hon’ble Bombay High Court in the case of Godrej & Boyce Mfg. Co. Ltd. v. Dy. CIT [2010J 328 ITR 87(Bom) has held that Rule 8D could not be considered as retrospective and the said Rule could be applied only with effect from the Assessment Year 2008-09. Further, the Bombay High Court also observed in the above-referred case that the Assessing Officer would first be required to check the concerned assessee's offer of disallowance and only after recording his dissatisfaction, if any, the Assessing Officer could commute the amount to be disallowed in accordance with sub-section (2) of section 14A. The above- referred sub-section (2) of section 14A was inserted by the Finance Act, 2006, with effect from the Assessment Year 2007-08. The Assessee’s case being for the Assessment Year 2006-07, there cannot be any applicability of the above-referred sub- section (2) of section 14A or Rule 8D in the Assessee's case for the Assessment Year 2006-07. In the given circumstances, the quantum of disallowance had to be decided in the light of the decisions rendered by the ITAT Kolkata Benches in the cases referred to by the CIT(A) in the impugned order. In those decisions, the ITAT, Kolkata Benches have consistently taken a view that 1% of the exempted income/dividend shall be considered as expenses/expenditure relating to the earning of exempted income u/s 14A in the assessment years where the rule 8D was not applicable. Following those rulings, we uphold the order of the CIT(A) and dismiss Gr.No.2 raised by the Revenue. ITA Nos.606&675/Kol/2012-National Insurance Co.Ltd. –A.Y.2005-06 & 2006-07

In the result, the appeal being ITA No.675/Kol/12 is dismissed.

In the result both the appeals of the revenue are dismissed.