ADDL CIT 2(3), MUMBAI vs. TATA AIG GENERAL INSURANCE CO. LTD, MUMBAI

आयकर अपीऱीय अधिकरण, म ुंबई न्यायपीठ ‘ई’, म ुंबई । IN THE INCOME TAX APPELLATE TRIBUNAL “E”, BENCH MUMBAI BEFORE SHRI R.C.SHARMA, AM & SHRI SANDEEP GOSAIN, JM आमकय अऩीर सं./ITA No.3535&1702/Mum/2011 & ITA No.4167/Mum/2012 (नििाारण वषा / Assessment Years :2006-07 to 2008-09) Tata AIG General Insurance Vs. ADCIT, Rg.2(3), Mumbai- Company Limited, A-501, 5th 400020 Floor, Building No.4, Infinity Park, Dindoshi, Malad (East), Mumbai- 400097 स्थामी रेखा सं./ जीआइआय सं./ PAN/GIR No. : AABCT 3518 Q (अऩीराथी /Appellant) (प्रत्मथी / Respondent) .. AND आमकय अऩीर सं./ITA No.1584&3596/Mum/2011 & ITA No.4071/Mum/2012 (नििाारण वषा / Assessment Years :2006-07 to 2008-09) ADCIT, Rg.2(3), Mumbai- Vs. Tata AIG General Insurance Company Limited, A-501, 5th 400020 Floor, Building No.4, Infinity Park, Dindoshi, Malad (East), Mumbai-400097 स्थामी रेखा सं./ जीआइआय सं./ PAN/GIR No. : AABCT 3518 Q (अऩीराथी /Appellant) (प्रत्मथी / Respondent) .. ननधाारयती की ओर से /Assessee by : Shri F.V.Irani याजस्व की ओर से /Revenue by : Manjunatha R. Swamy सुनवाई की तायीख / Date of Hearing : 21/10/2015 घोषणा की तायीख/Date of Pronouncement 20/11/2015 आदेश / O R D E R PER R.C.SHARMA (A.M): These are the cross appeals filed by the assessee and revenue against the order of CIT(A), Mumbai, for the assessment years 2006-07 to 2008-09, in the matter of order passed u/s.143(3) of the I.T Act.

2 ITA Nos.3535&1702/11 &4167/12 And ITA Nos.1584&3596/11&4071/12 2. Rival contentions have been heard and record perused. Facts in brief are that the assessee is engaged in the business of General Insurance. During the course of scrutiny assessment the AO disallowed assessee’s claim for amortization of premium paid on investment/securities, amortization of pre-operative expenses, profit on sale of investment, exemption u/s.10(34) in respect of dividend income, disallowance u/s.14A, 40(a)(ia), expenditure on purchase of harddisk, ram, software, renewal of software licence etc. By the impugned order the CIT(A) deleted the addition/disallowance made under the head – amortization of premium paid on purchase of investments, amortization of pre-operative expenses, profit on sale of investment, dividend income. 3. It was contended by ld. AR that all these grounds are covered by the order of Tribunal in assessee’s own case. 4. We have gone through the orders of the Tribunal in assessee’s own case for the assessment year 2003-04 dated 22-10-2010, wherein the issue with regard to amortization of premium paid on purchases of investments was allowed in favour of assessee. The precise observation of the Tribunal at page 7 are as under :- “7. On a careful consideration of the facts and the rival contentions, we are of the view that the amortization claim cannot be considered as an expenditure or allowance within the meaning of rule 5(a) of the First Schedule. As held by the Supreme Court in the case of Indian Molasses Co. (Private) Ltd. vs. CIT, West Bengal (1959) 37 ITR 66 (SC), spending in the sense paying out or away of money is the primary meaning of expenditure. Expenditure is what is paid out or away and is something which is gone irretrievably. Expenditure , which is deductible for income tax purposes, is one which is towards a liability actually existing at the time, but the putting aside of money which may become expenditure on the happening of an event is not expenditure. If this meaning is to be

3 ITA Nos.3535&1702/11 &4167/12 And ITA Nos.1584&3596/11&4071/12 given to the word "expenditure" occurring in rule 5(a), the amortization claim cannot be considered as expenditure and, therefore, cannot be added back to the balance of the profits. In General Insurance Corporation of India vs. CIT (1999) 240 ITR 139 (se), the Supreme Court held that even if an item of debit is considered as an expenditure, it should further be such an expenditure contemplated in sections 30 to 43A and, therefore, unless there was a specific prohibition for such an allowance, the departmental authorities would not be justified in adding back the amount under rule 5(a). Therefore, even if the debit for amortization is considered as an expenditure, there is no specific prohibition against allowing such an expenditure under the provisions of sections 30 to 438. The words "expenditure or allowance, Which is not admissible under the provisions of sections 30 to 43Bn appearing in the sub-rule has been explained by the Supreme Court to mean that there should be a specific prohibition against the expenditure or allowance in which case alone the Assessing Officer can add back the same to the balance of profits. It is common ground that there is no such specific prohibition against the allowance of the expenditure in the above sections of the Act. It may be noted that though rule 5(a) of the First Schedule considered by the Supreme Court in the above judgment was slightly different, but the words "any expenditure or allowance which is not admissible under the provisions of sections 30 to 43A" were present and the same words being present in the amended sub-rule, they have to be given the same meaning as was given by the Supreme Court. Therefore, even if the debit for amortization is considered as an expenditure or allowance, there being no specific prohibition against the expenditure or allowance in sections 30 to 43A, the departmental authorities were not justified in adding back the amount to the balance of the profits. The judgment of the Supreme Court in the case of General Insurance Corporation of India (supra) takes care of all the arguments advanced on behalf of the Revenue. We, therefore, delete the addition of Rs.1,91,33,945/- and allow the first ground.” As the facts and circumstances during all the three years under consideration are same, respectfully following the order of the Tribunal, we confirm the action of the CIT(A) for allowing assessee’s claim of amortization of premium paid on purchases of investment. 6. The second ground of revenue’s appeal pertains to amortization of pre-operative expenses for the assessment year 2006-07. This issue is

4 ITA Nos.3535&1702/11 &4167/12 And ITA Nos.1584&3596/11&4071/12 also covered by the order of the Tribunal for assessment year 2003-04. The precise observations of the Tribunal in this regard are as under :-

“11. We have carefully considered the facts and the rival contentions. There is no dispute that the expenditure was incurred between the date of incorporation and the date on which the license to carry on the business was obtained from the Regulatory Authority. Thus it is clear that the expenses were incurred before the actual carrying on of the business. We are concerned with the assessment year 2003-04 for which the relevant previous year was 01.04.2002 to 31.03.2003. The entire pre-operative expenses of Rs.7,03,38,000/- was incurred earlier, i.e. between 24.08.2000 and 22.01.2001. The question for consideration is whether the expenditure which did not relate to the year under consideration can be allowed as a deduction. The facts of the case before the Delhi High Court in Shriram Refrigeration Industries Ltd. (supra) shows that the assessee was to pay a sum in three installments to its collaborator. These installments were paid in May 1962, June 1963 and May 1964. The commercial production started thereafter, i.e. in October 1964 and the business itself was set up only in the accounting period ending 30th September 1965 relevant to the assessment year 1966-67. The question was whether the amount was allowable as revenue expenditure for the assessment year 1966-67. The Tribunal decided against the assessee by holding that the expenditure was capital in nature and that even assuming that it could be of the nature of revenue, it can be considered for allowance only in the assessment year 1966-67. On these facts the following two questions were referred to the Delhi High Court for opinion: - "(1) Whether, on the facts and in the circumstances of the case, the amount of Rs.39,084/- paid by the assessee to Westinghouse represented expenditure of a capital nature? (2) If the answer to question No.1 is in the affirmative, whether, on the facts and in the circumstances of the case, any portion of the amount is allowable as a deduction in each or either of the two assessment years 1966-67 and 1967 - 68?" On the first question, the High Court held in favour of the assessee, i.e. that the expenditure was revenue in nature. As regards the second question, the High Court held at pages 762 and 763 as follows: - "The second question referred to us proceeds on the footing that the answer to question No.1 is in the affirmative. Since· we have answered the first question in the negative, no

5 ITA Nos.3535&1702/11 &4167/12 And ITA Nos.1584&3596/11&4071/12 answer need be given to the second question. However, since we have held that the entire amount is allowable as revenue expenditure it is obvious that the entire amount should be allowed in the assessment year 1966-67 and no question of apportioning it over a series of years can at all arise. There can, therefore, be no question of allowing any deduction in respect of the whole or any part of this amount in the assessment year 1967-68". This judgment of the Delhi High Court fully supports the assessee's claim. The facts of that case show that the entire amount paid to the collaborator was claimed as a deduction in the return filed for the assessment year 1966-67 though the payments were made before the business was set up. The facts further show that initially the assessee had claimed only 1/14th of the payment as a deduction but later revised its claim and claimed the entire payment as deduction in the assessment year 1966-67, though no part of the payment either related to the said assessment 'year or was paid in the said assessment year. The Delhi High Court, speaking through Hon'ble Justice S Ranganathan (His Lordship then was) held that entire payment allowable in the assessment year 1966-67 as revenue expenditure without being apportioned between the assessment years 1966-67 and 1967-68. It cannot be argued that the High Court was not aware of the fact that the payment did not relate to the assessment year 1966-67 or that it was not paid in the previous year relevant to the assessment year 1966-67. The payment was nevertheless allowed as revenue expenditure in its entirety in the assessment year 1966-67. 12. A perusal of the details of the total expenses shows that none of the items of expenditure can be stated to be capital in nature. Only capital expenditure can be amortized under section 350 and ,that is a special allowance for capital expenditure, which is not otherwise allowed as a deduction. However, as rightly pointed out on behalf of the assessee, that provision cannot be pressed into service to contend that the revenue expenditure incurred during the period prior to the commencement of the business cannot be allowed. The decision of the Delhi High Court in Shriram Refrigeration Industries Ltd. (supra) is authority for the proposition canvassed on behalf of the assessee. 13. The judgment of the Madras High Court in CIT vs. Ennar Steel & Alloy (P) Ltd. (supra) cited on behalf of the Department shows that certain items of expenses which did not fall to be included under section 350 were sought to be included in that section and deduction was allowed accordingly by the Tribunal. The High Court held that this would amount to re-writing the section, which cannot be permitted. The precise controversy that has arisen in the present case was not before the Madras High Court.

6 ITA Nos.3535&1702/11 &4167/12 And ITA Nos.1584&3596/11&4071/12 14. As regards the argument of the Department that the claim was not made in the original return but was made only in the revised return; there is no prohibition in making the claim in the revised return. An assessee can correct any mistake or omission in the original return by filing a revised return, the validity of which has not been challenged. Therefore, this cannot be held against the assessee. 15. For the above reasons and respectfully following the judgment of 'the Delhi High Court in the case of Shriram Refrigeration Industries Ltd. vs. CIT (supra), we uphold the assessee's claim and allow Ground No.2” As the facts and circumstances during the year 2006-07 are pari materia, respectfully following the order of the Tribunal in assessee’s own case, we confirm the action of the CIT(A) for allowing assessee’s claim for amortization of pre-operative expenses. 7. In ground No.4, the revenue is aggrieved in all the years under consideration for deleting the addition made on account of profit on sale of investment being chargeable to tax. This issue is also covered by the order of Tribunal for assessment year 2003-04 and the precise observation of the Tribunal in this regard is as under :- “18. We have carefully considered the rival contentions. There is no dispute that under the guidelines issued by the IRDA (Auditor's Report) Regulations of 2002, for preparation of financial statements, the profit on sale of investments is to be credited to the Profit and Loss Account of the insurance company. There is also no dispute that the assessee has credited the Profit and Loss Account with such profit. The question is whether such profit can be excluded and exemption can be claimed .... Rule 5(b), as it stood before being omitted from 01.04.1989, was as follows: - "any amount either written off or reserved in the account's to meet depreciation of or loss on the realization of investments shall be allowed as a deduction, and any sums taken credit for in the accounts on account of appreciation of or gains on the realization of investments shall be treated as part of the profits and gains;

7 ITA Nos.3535&1702/11 &4167/12 And ITA Nos.1584&3596/11&4071/12 Provided that the Assessing Officer is satisfied about the reasonableness of the amount written off or reserved in the accounts, as the case may be, to meet depreciation of or loss on the realization of investment. The argument on behalf of the assessee primarily is that when the rules for preparation of the final accounts provide that the profit on sale of investments should be shown in the credit side of the Profit and Loss Account, then there was no question of rule 5(b) being applicable and that was the reason why the said rule was omitted with effect from 01.04.1 9a9 and the effect of the omission is that where the Profit and Loss Account already includes the profit on sale of investments, the same shall stand excluded. The effect of the omission of the rule was considered by-the Pune Bench of the Tribunal in its order dated 31st August 200'9, in the case of Bajaj Allianz General Insurance Company, in ITA1No: 1447/PN/2007 and Co No:52/PN/2007 (assessment year 2003-04). A copy of the said order has been filed before us. The Tribunal has also considered the Circular NO.528 dated 16.12.1988. After analyzing the impact of the omission of rule S(b) and the Circular, the Tribunal held as under: - "8. A conclusion can be drawn on' the basis of the above elaborate discussion that the deletion of sub rule (b) from Rule 5 of the First Schedule was with a specific purpose.; This Schedule not only prescribe the method of computation of income of Insurance Business in part (A) but also prescribe the method of computation of other Insurance Business in Part (B). Rule 5 is within Part (8) and earlier it has prescribed the method of taxation of profit on sale of investments which was later on scraped. Even by applying a reverse logic we must arrive at the same conclusion that had the impugned income was earlier taxable under one specific clause but even on its deletion no clause was introduced or replaced to prescribe the method of taxation of such income; therefore the Revenue Department has no right to tax such an income in the absence - of any enabling provision. Naturally, such a deletion cannot be treated a superfluous action but this change had to give a definite judicial meaning. We have to ascribe a logical conclusion to the said deletion of sub rule (b) from Rule 5 and the natural meaning - is that after the deletion the income described therein is out of the purview of computation of insurance Business from the First schedule therefore consequently cannot -be-taxed--u/s44 of I. T.- Act - -After expressing this view we hereby dismiss the cross Objection of the revenue", 19: The aforesaid-order of the Pune Bench, which was in the case of a company carrying on general insurance business, was followed by the Mumbai Bench of the Tribunal in its order dated 17.09.2010, in the case - of HDFC ERGO General Insurance Company Ltd., in

8 ITA Nos.3535&1702/11 &4167/12 And ITA Nos.1584&3596/11&4071/12 ITA No: 338IMum/2009 (assessment year 2004-- 05) as also in its order dated 30.04.2010, in the case of Reliance General Insurance Co. Ltd., in ITA No. 781/Muni/2007 (and 'other appeals). Copies of these orders have also been filed before us. In these orders it has been held that the profit on sale of investment in the case of an assessee carrying on general insurance business cannot be brought to tax after the omission of rule 5(b) and as per the Circular cited above. Since the controversy before us is identical, respectfully following the orders of the Pune and Mumbai Benches of the Tribunal cited above, we direct the Assessing Officer to exclude the profit of Rs.47,45,699/- on the sale of investments from the assessment.” As the facts and circumstances during the year under consideration are same, respectfully following the order of the Tribunal in assessee’s own case, we confirm the action of the CIT(A). 8. In ground No.5, the revenue is aggrieved for CIT(A)’s action for exempting dividend income. 9. This issue is also covered by the order of the Hon’ble Bombay High Court in the case of General Insurance Corporation of India, 342 ITR 27. The precise observation of the Hon’ble High Court are as under :- “12. In General Insurance Corp. of India v. CIT [1999] 240 ITR 1391 106 Taxman 389 (SC) the Supreme Court considered in an appeal arising out of a judgment of the High Court the issue as to whether a sum of Rs. 3 crores, being a provision for redemption of preference shares, was not liable to be added back in the total income of the assessee for Assessment Year 1977-78? The Supreme Court held that a plain reading of rule 5(a) of the First Schedule made it clear that in order to attract the applicability of the provision the amount should firstly be an expenditure or allowance and secondly it should be one not admissible under the provisions of section 30 to 43A. The Supreme Court held that the sum of Rs. 3 crores in that case which was set apart as a provision for redemption of preference shares could not have been treated as an expenditure and hence could not have been added back under rule 5(a). In that context, the Supreme Court held as follows: "There is another approach to the same issue. Section 44 of the Income-tax Act read with the rules contained in the First Schedule to the Act lays down an artificial mode of computing the profits and gains of insurance business. For

9 ITA Nos.3535&1702/11 &4167/12 And ITA Nos.1584&3596/11&4071/12 the purpose of income-tax, the figures in the accounts of the assessee drawn up in accordance with the provisions of the First Schedule to the Income-tax Act and satisfying the requirements of the Insurance Act are binding on the Assessing Officer under the Income-tax Act and he has no general power to correct the, errors in the accounts of an insurance business and undo the entries made therein." The question whether an assessee who carries on general insurance business would be entitled to avail of an exemption under Section 10 did not arise. The issue as to whether the assessee which carries on the business of general insurance would be entitled to the benefit of an exemption under clauses (15), (23G) and (33) of Section 10 is directly governed by the decision rendered by the Division Bench in Life Insurance Corporation v. Commissioner of Income-tax (supra) following the earlier decision in Commissioner of Income-tax v. New India Assurance Co. Ltd. (supra). The Assessing Officer could not have ignored the binding precedent contained in the two Division Bench decisions of this Court. Moreover, the Assessing Officer in allowing the benefit of the exemption in the order of assessment under Section 143(3) specifically relied upon the, view taken by the CBDT in its communication dated 21 February 2006 to the Chairman of IRDA. The communication clarifies that the exemption available to any other assessee under any clauses of Section 10 is also available to a person carrying on non-life insurance business subject to the fulfillment of the conditions, if any, under a particular clause of Section 10 under which exemption is sought. It needs to be emphasised that it is not the case of the Assessing Officer that the assessee had failed to fulfill the condition which attached to the provisions of the relevant clauses of Section 10 in respect of which the exemption was allowed. This of course is apart from clause (38) of Section 10 where the Assessing Officer had rejected the claim for exemption in the original order of assessment under Section 143(3). The Assessing Officer above all was bound by the communication of the CBDT. Having followed that in the order under Section 143(3) he could not have taken a different view while purporting to reopen the assessment. Having applied his mind specifically to the issue and having taken a view on the basis of the communication noted earlier, the act of reopening the assessment would have to be regarded as a mere change of opinion which has also not been based on any tangible material. Consequently, we hold that the reopening of the assessment is contrary to law. The Petition would have, therefore, to be allowed. 13. Rule is, therefore, made absolute by quashing and setting aside the notice dated 17 March, 2011 reopening the assessment under Section 148 of the Income Tax Act, 1961. In the circumstances of the case, there shall be no order as to costs.”

10 ITA Nos.3535&1702/11 &4167/12 And ITA Nos.1584&3596/11&4071/12 10. Common grounds have been taken by the revenue in all the years under consideration. Grounds taken by the revenue for the assessment year is 2006-07 reads as under :- On the facts and in the circumstances of the case and in law, the learned CIT(A) has erred in allowing relief to the assessee to the extent impugned in the grounds enumerated below: 1. The order of CIT(A) is opposed to law and facts of the case. 2. On the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in allowing the amortized amount of the premium on investments without appreciating that the amortized amount of the premium on investments which is not admissible under the provisions of sec. 30 to 43B of the IT Act is required to be added back while computing income of general insurance business as provided under clause 5 of the First Schedule read with section 44 of the IT Act. 2(a) On the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in holding that pre-operative expenses can be amortized and claimed over a period of several years when there is no provision in the IT Act to admit such allowance. 2(b) On the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in allowing the pre-operative amortized expenses without appreciating that same cannot be claimed as deduction in a previous year in which it had not been incurred. 3. On the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in holding that profit of Rs. 6,37,88,000/- on sale of investment is exempt in view of CBDT Circular No. 528 dt. 16-12- 1988 without appreciating that the said Circular was specifically for General Insurance Corpn. Of India and its subsidiaries only which are wholly owned enterprises of Govt. of India and the assessee is not entitled to such benefit. 4. On the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in directing the AO to reduce the dividend from the surplus as per 'Form I' as dividend is exempt u/s.10(34) without appreciating that income of the assessee was computed u/s.44 read with First Schedule of the IT Act on the basis of Actuarial Valuation in which dividend was not included hence there is no question of its exclusion. 5. For these and other grounds that may be urged at the time of hearing the decision of the CIT(A) may be set aside and that of the AO be restored.” Respectfully following the above decision of Hon’ble Bombay High Court, we do not find any infirmity in the order of CIT(A) exempting the dividend income.

11 ITA Nos.3535&1702/11 &4167/12 And ITA Nos.1584&3596/11&4071/12 11. In the result, all appeals of the revenue are dismissed. 12. In the appeals filed by the assessee common grounds have been taken in all the years under consideration. The grounds taken in assessment year 2006-07 read as under :- “The following grounds of appeal are without prejudice to and independent of the other(s). On the facts and circumstances of the case and in law, TATA AIG General Insurance Company Limited [hereinafter referred to as the Appellant] craves to prefer an appeal against the order passed by the Commissioner of Income-tax (Appeals) - 6, Mumbai [hereinafter referred to as the learned CIT(A)], under section 250 of the Income- tax Act, 1961 (Act) in respect of the order passed by the Additional Commissioner of Income-tax - Range 2(3), Mumbai (the AO) under section 143(3) of the Act, on the following grounds: 1. The learned CIT(A) has erred in confirming the action of the AO in making a disallowance under the provisions of section 14A of the Act and directing the AO to recompute the disallowance under section 14A of the Act on a reasonable basis. 2. The learned CIT(A) erred in confirming the action of the AO in disallowing Rs 4,280,853 under the provisions of section 40(a) (ia) of the Act on account of non-deduction of tax at source on payment of co-insurance fees. 3. The learned CIT(A) erred in confirming the action of the AO in disallowing Rs 175,268 under the provisions of section 40(a) (ia) of the Act on account of non-deduction of tax at source on rent payments made to AB's Executive Apartments of Rs 113,198 and Hotel Tunga International Pvt Ltd of Rs 62,070. 4. The learned CIT(A) erred in confirming the action of the AO in disallowing the expenditure incurred towards purchase of hard disks, head sets, RAM etc amounting to Rs 1,127,768 on the basis that same is capital in nature. The Appellant craves leave to add, alter, vary, omit, substitute or amend the grounds of appeal, at any time before or at, the time of hearing of the appeal, so as to enable the honourable Income-Tax Appellate Tribunal to decide this appeal according to law.” 13. In the assessment year 2006-07 & 2008-09, disallowance made by the AO u/s.14A was confirmed by the CIT(A). The contention of ld. AR

12 ITA Nos.3535&1702/11 &4167/12 And ITA Nos.1584&3596/11&4071/12 was that the provisions of Section 14A is not applicable in the case of Insurance Company. For this purpose reliance was placed in the decision of coordinate bench in the case of ICICI Lombard General Insurance Co. Ltd. Vs. ACIT, ITA No.4287/&4374/M/2009, dated 18-9-2013. 14. We have gone through the order of the Tribunal in the case of ICICI Lombard General Insurance Co. Ltd (supra), wherein the Tribunal observed as under :- 5. Ground No. 2 regarding disallowance u/s 14A. We have heard the Ld. AR as well as Ld. DR and considered the relevant material on record. The Ld. AR of the assessee has submitted that Rule 14A is not applicable in the case of Insurance Company. She has relied upon the decision of this Tribunal in case of ICICI Prudential Insurance Co. Ltd. Vs ACIT 140 ITD 41. On the other hand, the Ld. DR has submitted that when the income is non-assessable to tax being exempt then the provisions of section 14A shall be applied. This issue has been considered and decided by the Tribunal in case of ICICI Prudential Insurance Co. Ltd. Vs ACIT (supra) in para 46 as under: "46. This issue is already decided by the Coordinate Benches in various cases. For the sake of record, the order in the case of General Insurance Corporation of India (supra) vide Para 9 is as under: 9. "Issue No.6 Non applicability of provisions of section 14A. (Modified Ground of Appeal No.3.1 to 3.4 - Original Ground of Appeal No.3.1 to 3.5). The issue is with reference to the applicability of section 1 4A and disallowance of expenditure in respect of sale of investment which are not taxed. We have heard the rival contentions. We also note that this issue is also considered by the Coordinate Bench in assessee's own case for 2006-07 vide Para 7 to 9: 7. Grounds of appeal no.4 regarding the expenditure under section 14A. 8. We have heard the rival contentions and perused the relevant record. We note that this issue has been considered and decided by the Pune Bench of this Tribunal in the case of Bajaj Allianz General Insurance Company limited v. Addl. CIT ITA No.1447/PN/2007 for the assessment year 2003-04 order dated 31.08.2009. This Tribunal in the case of JCIT v. M/s Reliance General Insurance Co. in ITA No.3085/Mum/2008 for the assessment year 2005-06 vide order dated 26.2.2010 has considered this issue and decided in favour of the assessee. This

13 ITA Nos.3535&1702/11 &4167/12 And ITA Nos.1584&3596/11&4071/12 order was followed by this Tribunal while deciding the issue in ITA No.781/Mum/2007 vide order dated 30.4.20 10. Thus, this issue has been consistently decided in favour of the assessee and against the revenue by this Tribunal. The Pune Bench of this Tribunal in the case of Bajaj Allianz General Insurance Company limited v. Addl. CIT(supra) has decided this issue in paragraphs 17 to 20 as under: "17. Finally the question to be answered is about the applicability of s. 14A in respect of sale of investment which is not taxed under the special circumstances of deletion of a sub-rule from the statute. It is not questioned that the impugned profit was non- taxable per se rather the accepted legal position is that the impugned profit was very much taxable in the past. Now it has been informed that this controversy in respect of insurance company set at rest by a decision of Tribunal, Delhi Bench verdict in the case of Oriental Insurance Co. Ltd. (ITA Nos. 5462 & 5463/Del/2003) asst. yrs. 2000-01 and 2001-02 order dt. 27th Feb.2009 [reported as Oriental Insurance Co. Ltd. v. Asstt. CIT[2010] 130 TTJ (Delhi)388 : [2010] 38 DTR (Delhi ) 225- Ed.]. Therefore considering the vehement reliance of learned Authorized Representative it is worth to mention at the outset itself that the issue now stood resolved by this latest decision of Delhi, Tribunal in the case of Oriental Insurance Co. Ltd. (supra), the relevant portion reproduced below: "17. We have heard rival submissions of the parties and have gone through the material available on record. Identical issue arose in assessee's own case for asst. yr. 1985-86. The Tribunal accepted the plea of the assessee and in fact the issue went up to the Hon'ble Delhi High Court in asst . yrs. 1986-87 to 1988-89, which is reported as CIT v. Oriental Insurance Co. Ltd. [2003] 179 CTR (Delhi) 85 : [2002] 125 Taxman 1094 (Delhi), decided the issue in favour of the assessee by holding that s. 44 of the Act is a special provision dealing with the computation of profits and gifts of business of insurance. It being a non obstante provision has to prevail over other provisions in the Act. It clearly provides that income from insurance business has to be computed in accordance with the rule contained in the First Schedule. It is not the case of the Revenue that the assessee has not computed the profits and gains of its insurance business in accordance with the said rules. Reliance was placed on the scope of s. 144, as held in the case of General Insurance Corporation of India v. CIT [1999] 156 CTR (SC) 425: [1999] 240 ITR 139 (SC), wherein their Lordships of the Apex Court have categorically held that the provisions of s. 44 being a special provision govern computation of taxable income earned from business of insurance. It mandates the tax authorities to compute the taxable income in respect of insurance business in accordance with the provisions of the First Schedule to the Act. In the light of these, their Lordships of Delhi High Court have held that no question of law, much less a substantial question of law survives for their consideration. In other words, order of the Tribunal has been affirmed. Following the same reasoning, addition made by the AO is deleted.

14 ITA Nos.3535&1702/11 &4167/12 And ITA Nos.1584&3596/11&4071/12 22. We have considered the rival contentions and gone through the records. The provisions of s. 44 read as under: "44. Insurance business.-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 s. 199 or in ss. 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 cooperative society, shall be computed in accordance with the rules contained in the First Schedule". 23. The above provision makes it very clear that s. 44 applies notwithstanding anything to the contrary contained within the provisions of the IT Act relating to computation of income chargeable under different heads. We agree with the learned counsel that there is no requirement of head- wise bifurcation called for while computing the income under s. 44 of the Act in the case of an insurance company. The income of the business of insurance is essentially to be at the amount of the balance of profits disclosed by the annual accounts as furnished in the Controller of Insurance. The actual computation of profits and gains of insurance business will have to be computed in accordance with r. 5 of the First Schedule. In the light of these special provisions coupled with non obstante clause the AO is not permitted to travel beyond these provisions, 24. Sec. 14A contemplates an exception for deductions as allowable under the Act are those contained under ss. 28 to 43B of the Act, Sec. 44 creates special application of these provisions in the cases of insurance companies. We therefore, agree with the assessee and delete the Act as according to us, it is not permissible to the AO to travel beyond s. 44 and First Schedule of the IT Act." 18. It may not be out of place to mention that the respected Co- ordinate Bench has duly taken the note of an earlier decision of that very Bench decided in the case of that very assessee vide order dt. 29th Sept. 2004 bearing ITA Nos.7815/Del/1989, 3607to3609/Del/1990; 5035/Del/1998 and 3910/Del/2000namedas Dy. CIT v. Oriental General Insurance Co. Ltd. [2005)92 TTJ (Delhi) 300. As seen from the Paras reproduced above on due consideration of the relevant provisions as applicable to resolve this issue a conclusion was drawn that since the Courts have held, s. 44creates a special provision in the cases of assessment of insurance companies therefore it was not permissible to the AO to travel beyond s. 44 of First Schedule of IT Act. 18.1 The next common dispute relates to the order of the CIT (A) in sustaining the action of AO in allowing only 50 per cent of the management expenses by invoking the provisions of s. 14A of the Act. The addition is made by the AO on the plea that the provisions of s. 14A was inserted by Finance Act, 2001 w.e.f. 1st April, 1962. It is stated that the investments made by the assessee

15 ITA Nos.3535&1702/11 &4167/12 And ITA Nos.1584&3596/11&4071/12 are both taxable as well as tax free. An estimated disallowance of 50 per cent out of the management expenses incurred and as claimed in the P&L a/c is treated as expenses incur red in connect ion with the looking after tax-free investment. 19. The learned counsel for the assessee vehemently argued that the income of the assessee is to be computed under s. 44 r w r. 5 of Sch. I of the IT Act, Sec. 44 is a non obstante clause and applies notwithstanding anything to the contrary contained within the provisions of the IT Actrelating to computation of income chargeable under different heads, other than the income to be computed under the head Profit and gains of business or profession'. For computation of profits and gains of business or profession the mandate to the AO is to compute the said income in accordance with the provisions of ss. 28 to 43B of the Act. In the case of the computation of profits and gains of any business of insurance, the same shall be done in accordance with the rules prescribed in First Schedule of the Act, meaning thereby ss. 28 to 43B shall not apply. No other provision pertaining to computation of income will become relevant. According to the learned counsel, two presumptions that follow on a combined reading of ss. 14, 14A, 44 and r. 5 of the First Schedule are: (a) That no head-wise bifurcation is called for. The income, inter alia, of the business of insurance is essentially to be at the amount of the balance of profits disclosed by the annual accounts as furnished to the Controller of Insurance under the Insurance Act, 1938. The said balance of profits is subject only to adjustments thereunder. The adjustments do not refer to disallowance under s. 14A of the Act. (b) Profits and gains of business as refer red to in (a) above have only to be computed in accordance with r. 5 of the First Schedule. 22. Sec. 44 creates a specific except ion to the applicability of ss. 28 to 43B. Therefore, the purpose, object and purview of s. 14A has no applicability to the profits and gains of an insurance business. 23. The learned Departmental Representative strongly justified the act ion of the AO and that of the CIT(A) in the light of the clear provisions of s. 14A of the Act. Since the view has already been expressed by respected Co-ordinate Bench therefore, we have no reason to take any other view except to follow the same. With the result we hereby accept the argument of learned Authorized Representative to the extent that in the present situation the provisions of s. 14A need not to apply while granting exempt ion to an income earned on sale of investment primarily because of the reason of the withdrawal or deletion of sub-r. 5(b) to First Schedule of s. 44 of IT Act. Once we have taken this view therefore the enhancement as proposed by learned CIT(A) is reversed and the directions in this regard are set aside. Resultantly ground No. 1 is allowed consequent thereupon ground No. 2 automatically goes in favour of the assessee". Accordingly, by following the orders of this Tribunal, we decide this issue in favour of the assessee. Therefore, the ground is allowed".

16 ITA Nos.3535&1702/11 &4167/12 And ITA Nos.1584&3596/11&4071/12

Respectfully following the same, we modify the order of the CIT (A) and delete the addition made by AO. The ground and additional grounds are considered as allowed." Following the earlier order of this Tribunal we decide this issue in favour of the assessee.” 15. Ld. AR also placed on record order of the Pune Bench in the case of Reliance General Insurance Co. Ltd. Vs. DCIT, 130 TTJ 398, wherein at para 17 & 18, the Tribunal held as under :- “17. Finally the question to be answered is about the applicability of s.14A in respect of sale of investment which is not taxed under the special circumstances of deletion of a sub-rule from the statute. It is not questioned that the impugned profit was non-taxable per se rather the accepted legal position is that the impugned profit was very much taxable in the past. Now it has been informed that this controversy in respect of insurance company set at rest by a decision of Tribunal. Delhi Bench verdict in the case of Oriental Insurance Co. l.td. (ITA Nos. 5462 & 5463/Del/2003) asst. yrs. 2000-01 and 2001-02 order dt. 27th Feb. 2009 [reported as Oriental Insurance Co. Ltd. v. Asstt. CIT [2010] 30 TTJ (Delhi) 388 : [2010] 38 DTR (Delhi) 225-Ed.]. Therefore considering the vehement reliance of learned Authorised Representative it is worth to mention at the outset itself that the issue now stood resolved by this latest decision of Delhi. Tribunal in the case of Oriental Insurance Co. Ltd. (supra). the relevant portion reproduced below: "17. We have heard rival submissions of the parties and have gone through the material available on record. Identical issue arose in assessee's own case for asst. yr. 1985-86. The Tribunal accepted the plea of the assessee and in fact the issue went up to the Hon'ble Delhi High Court in asst. yrs. 1986-87 to 1988-89, which is reported as CITv. Oriental Insurance Co. Ltd. [2003] 179 eTR (Delhi) 85: [2002] 125 Taxman 1094 (Delhi), decided the issue in favour of the assessee by holding that s. 44 of the Act is a special provision dealing with the computation of profits and gifts of business of insurance. It being a non obstnate provision, has to prevail over other provisions in the Act. It clearly provides that income from insurance business has to be computed in accordance with the rule contained in the First Schedule. It is not the case of the Revenue that the assessee has not computed the profits and gains of its insurance business in accordance with the said rules. Reliance was placed on the scope of s. 144, as held in the case of General Insurance Corporation of India v . CIT [1999] 156 eTR (Se) 425 : [1999] 240 ITR 139 (SC), wherein their Lordships of the apex Court have categorically held that the provisions of s. 44 being a special provision govern computation of taxable income earned

17 ITA Nos.3535&1702/11 &4167/12 And ITA Nos.1584&3596/11&4071/12 from business of insurance. It mandates the tax authorities to compute the taxable income in respect of insurance business in accordance with the provisions of the First Schedule to the Act In the light of these, their Lordships of Delhi High Court have held that no question of law, much less a substantial question of law survives for their consideration. In other words, order of the Tribunal has been affirmed. Following the same reasoning, addition made by the AO is deleted. 18. The next common dispute relates to the order of the CIT(A) in sustaining the action of AO in allowing only 50 per cent of the management expenses by invoking the provisions of s. 14A of the Act. The addition is made by the AO on the plea that the provisions of s. 14A was inserted by Finance Act, 2001 w.e.f. 1 st April, 1962. It is stated that the investments made by the assessee are both taxable as well as tax free. An estimated disallowance of 50 per cent out of the management expenses incurred and as claimed in the P&L a/c is treated as expenses incurred in connection with the looking after tax-free investment.” 16. Reliance was also placed on the decision of Mumbai Tribunal in the case of M/s Birla Sun Life Insurance Co. Ltd., ITA No.602/Mum/2009, dated 9-9-2010, wherein at para 4 to 9, the Tribunal observed as under :- “4. Ground No.1 is against sustenance of disallowance of expenses Rs. 30,18,496/- u/s. 14A, incurred for dividend income.

18 ITA Nos.3535&1702/11 &4167/12 And ITA Nos.1584&3596/11&4071/12 crores. The Assessing Officer following the assessment orders for the Assessment Years 2001-02 and 2002-03 worked out the disallowance u/s. 14A on the basis of total receipts shown by the assessee. Since the assessee has incurred total expense of Rs.145.12 crores and the total receipt shown by the assessee is Rs.537.50 crores and the dividend income shown by the assessee is Rs.1,12,87,020/-, therefore, the Assessing Officer worked out the ratio of dividend income at 0.208% of total income and at this rate, he worked out the expenses incurred by the assessee for earning dividend income at Rs.30,18,496/- which he added to the total income of the assessee . On appeal, the ld. CIT(A) while relying on the decision of the Special Bench of the Tribunal in ITO vs. Daga Capital Management(P) Ltd. in ITA No.8057/Mum/2003 dated 20.10.2008 upheld the addition made by the Assessing Officer.

1) M/s. Oriental Insurance Co. Ltd. vs. ACIT 2009-TIOL-172-ITAT- Del (ITA No.5462 & 5463/del/03 for Assessment Year 2000-01 and 2001-02) order dated 27.2.2009.

2) Bajaj Allianz General Insurance Company Limited vs. Addl.CIT and vice versa in ITA No.1447/PN/07 and CO. No.52/PN/2007 order dated 31.8.2009 for the Assessment Year 2003-04.

3) JCIT vs. M/s. Reliance General Insurance Co. and vice versa in ITA Nos.3083, 2950,2951, 3084, 3085 & 3126/M/08 order dated 26.2.2010 for the Assessment Years 2001-02, 2002-03 and 2005- 06.

4) M/s. Reliance General Insurance Co. vs. DCIT and vice versa in ITA No.781/M/07 for Assessment Year 2003-04 and ITA Nos.1520 & 6262 and 2144 & 6554/M/2008 order dated 30.4.2010 for Assessment Years 2004-05 and 2006-07.

He also placed on record copy of the said orders of the Tribunal. He therefore, submits that in view of the consistent view of the Tribunal, the disallowance of expenses made by the Assessing Officer and sustained by the ld. CIT(A) be deleted.

19 ITA Nos.3535&1702/11 &4167/12 And ITA Nos.1584&3596/11&4071/12 claiming expenses related to the said exempted income which is not allowable under the Act. He further submits that since the assessee has not filed the details of such expenses, therefore, in the interest of justice the issue may be set aside to the file of the Assessing Officer.

20 ITA Nos.3535&1702/11 &4167/12 And ITA Nos.1584&3596/11&4071/12 17. Similar view was also taken by the coordinate bench in the case of Reliance General Insurance Co.Ltd. Vs. DCIT, 2010-TIOL-ITAT-MUM. 18. Respectfully following the above judicial pronouncements, we do not find any merit in the action of lower authorities for disallowance made u/s.14A, which is not applicable to the Insurance Company. 19. In the assessment years 2006-07 & 2007-08, the AO made disallowance in respect of payment made to Hotel on the plea that tax was liable to be deducted u/s.194C, whereas the assessee has deducted tax u/s.149-I. 20. We have considered rival contentions and found that the payment to Hotel is covered by the provision of Section 194I. Circular No.5 dated 30-7-2002 also supports the contention that while making payment to the Hotel tax is liable to be deducted u/s.194-I. 21. Hon’ble Bombay High Court in the case of East India Hotels Ltd. & Anr., 320 ITR 526, held that in case of payment to Hotels tax is to be deducted at source as per provisions of Section 194-I and not as per the provisions of Section 194C. Respectfully following the decision of the Hon’ble jurisdictional High Court vis-à-vis the CBDT Circular, as discussed above, we do not find any merit for disallowance of expenses on the plea that payment to Hotel is subject to deduction of tax u/s.194C of the IT Act. Accordingly, the AO is directed to delete the disallowance so made.

21 ITA Nos.3535&1702/11 &4167/12 And ITA Nos.1584&3596/11&4071/12 22. In all the years under consideration the AO had disallowed the expenditure on purchase of hard disk, head sets, RAM etc. considering the same to be capital in nature. 23. The issue is directly covered by the decision in the case of Southern Roadways Ltd., 288 ITR 15 (Mad), wherein it was held that expenditure on replacement of machinery and expenditure on upgradation of computer are revenue in nature. In the instant case also the expenditure was incurred for upgradation of the computers by placing its hard disk, RAM etc. Respectfully following the decision of Hon’ble Madras High Court, we do not find any merit in the AO’s action for disallowing the expenditure on purchase of hard disk, head sets, RAM etc. on the plea that the same being capital in nature. 24. The next ground of the assessee for the assessment year 2008-09 relates to disallowance of expenditure pertaining to purchase of software/renewal of software licence, considering the same to be capital in nature. 25. We have considered the rival contentions and found that this issue is covered by the order of the Tribunal in assessee’s own case for the assessment year 2003-04, wherein at para 22 to 23 the Tribunal held as under :- “22. The appeal of the Department in ITA No: 2543/Mum/2009 raises only one issue, namely, the allowing of the software expenses of Rs.49,30,679/-. We have considered the facts and the rival contentions. The details of the expenditure set out in paragraph 11 of the impugned order shows that the breakup of the expenditure is as below: -

22 ITA Nos.3535&1702/11 &4167/12 And ITA Nos.1584&3596/11&4071/12

Description Amount (Rs.) Purchase of Software (MS Office, WIN for 38,45,379 office application Etrust Innoculate (Anti Virus Software) 8,07,433 Others 2,77,887 Total 49,30,699 In paragraph 12 the CIT(A) has noted that the assessee itself has capitalized software expenditure of the tune of Rs.71,98,000/-. He has also noted that some of the software expenditure are with regard to virus prevention, MS office, etc. which are not long lasting and do not result in any benefit of enduring nature. According to him the expenses are allowable as revenue expenditure. The findings of the CIT(A) are not disputed. No enduring benefit obtained by the assessee has been shown. In these circumstances we do not see any reason to interfere with the decision of the CIT(A). We also find that so far as the MS Office software is concerned, for which the assessee has spent Rs.38,45,379/-, the Delhi High Court in the case of CIT vs. G E Capital Services Ltd. (2008) 300 ITR 420 (Del) has held that it is revenue expenditure. For these reasons and respectfully following the ratio of the Delhi High Court, we confirm the decision of the CIT(A) and dismiss the appeal filed by the Revenue.” 26. As the facts and circumstances during the assessment year 2008- 09 under consideration are same, respectfully following the order of the Tribunal in assessee’s own case, we direct the AO to delete the disallowance made on account of expenditure pertaining to purchase of software, renewal of software licece. 27. The next grievance of the assessee relates to disallowance of co- insurance fees u/s.40(a)(ia) of the Act for non-deduction of TDS. By the impugned order the CIT(A) confirmed the disallowance by observing as under :- “9.3 I have considered the facts of the issue and the submissions made by the AR of the appellant but do not find merit in them. The provisions of sec.194H are clearly applicable since the appellant has made payment s to the other co-insurer which could be termed as payment for services rendered by them on behalf of the

23 ITA Nos.3535&1702/11 &4167/12 And ITA Nos.1584&3596/11&4071/12 appellant. The appellant would obviously not make any payment to the co-insurer unless services were rendered by the co-insurer in the course of the insurance business. Section 194H clearly talks about 'commission or brokerage' to include any payment received or receivable, directly or indirectly, by a person acting on behalf of another person for services rendered or for any services in the course of buying or selling of goods or in relation to any transaction relating to any asset, valuable article or thing, not being securities. I find merit in the AO's finding that the appellant has availed of the service of sharing of risk and in order to avail of this service, it has paid commission/ service charge on which it has deducted tax under chapter XVIIB of the Act and that the appellant has failed to explain as to why tax was not deductible on the impugned amount. Hence, it is held that the AO was justified in disallowing the co- insurance fee of Rs.42,80,853/- u/s.40(a)(ia) for non deduction of TDS. This ground is dismissed.” 28. Against the above order of CIT(A), assessee is in appeal before us. 29. Similar disallowance has also been made by the AO in the assessment year 2007-08 & 2008-09 and the same has been confirmed by the CIT(A) after having similar observation as given in the assessment year 2006-07, reproduced hereinabove. 30. It was contended by the ld. AR that assessee had entered into an arrangement with the co-insurers for sharing the risk premium as per the agreed ratio. It was pleaded that the co-insurers were not the agents of the assessee and that the transactions between the assessee and the co- insurers were on principal to principal basis. The said fact was stated to be evidenced by the arrangement between the two parties and therefore no withholding was required. It was further submitted that the essential characteristic of commission was payment to an agent. In the present case, the co-insurers were stated to be neither acting as an agent nor acting as broker for and on behalf of the assessee and therefore the payments of co-insurance fees could not be construed as commission as

24 ITA Nos.3535&1702/11 &4167/12 And ITA Nos.1584&3596/11&4071/12 per the Act or in commercial parlance. The AR made detailed submissions to bring out how the provisions of Sec.194H were not applicable in their case. The AR also placed reliance on a number of judicial pronouncements, the ratio of which is not applicable to the facts of this case. 31. Considering totality of facts and circumstances of the case, we are in agreement with the contention of ld. AR that no disallowance is warranted u/s.40(a)(ia) in respect of coinsurance fees paid by assessee. 32. Thus, appeals of the assessee are allowed in terms indicated hereinabove. 33. In the result, appeals of the revenue are dismissed, whereas appeals of the assessee are allowed, in terms indicated hereinabove. Order pronounced in the open court on this 20/11/2015.

Sd/- Sd/- (SANDEEP GOSAIN) (R.C.SHARMA) न्यानयक सदस्य / JUDICIAL MEMBER ऱेखा सदस्य / ACCOUNTANT MEMBER भुंफई Mumbai; ददनांक Dated 20/11/2015 प्र.कु.मभ/pkm, नन.स/ PS आदेश की प्रनिलऱपप अग्रेपषि/Copy of the Order forwarded to : अऩीराथी / The Appellant 1. प्रत्मथी / The Respondent. 2. आमकय आमुक्त(अऩीर) / The CIT(A), Mumbai. 3. आमकय आमुक्त / CIT 4. ववबागीम प्रनतननधध, आमकय अऩीरीम अधधकयण, भुंफई / DR, ITAT, Mumbai 5. गार्ा पाईर / Guard file. 6. आदेशाि सार/ BY ORDER, सत्मावऩत प्रनत //True Copy//

उप/सहायक पुंजीकार (Asstt. Registrar) आयकर अपीऱीय अधिकरण, भुंफई / ITAT, Mumbai