2014 (5) TMI 1067 - AT - Income Tax

Taxable income of Insurance Company u/s 44 - nature of the funds transferred from shareholders Accounts to the Policyholders Account to meet out the deficiencies - Held that - under the provisions of IRDA Act, the assessee is under obligation to maintain separate accounts namely policy holders account and the shareholders account . In case, there is income deficiency in policy holders account, the funds are transferred from the shareholders account otherwise, both these accounts are part of the business of the assessee and it is case of transfer of funds from one hand to the other of the same person. Such transfer of funds to policy holders accounts should not be treated as income as it is a case of transfer of funds from one hand to the other. It is a tax neutral transaction. This issue is now settled by the decisions of the Tribunal in the case of ICICI Prudential Insurance vs. ACIT 2012 (11) TMI 13 - ITAT MUMBAI - Decided in favor of Assessee. Applicability of provisions of Section 14A on insurance Companies - dis-allowance of expenditure related to exempted income - Held that - in view of the special provisions applicable to the insurance companies, we are of the opinion that the provisions of section 14A r.w.r. 8D were held not applicable to the insurance companies i.e., ICICI Prudential Insurance, HDFC Standard Life Insurance Company. Therefore, the SBI Life Insurance Company Limited (assessee in the present case should not be any exception. Considering the settled nature of the issue vide the decisions of the Tribunal s orders - Decided in favor of assessee.

Issues Involved:
1. Income nature of the funds transferred from shareholders' accounts to the policyholders' account to meet deficiencies.
2. Allowability of the transfer of funds to the revenue account as a deduction.
3. Set off of losses arising from profits other than insurance against surplus from the revenue account.
4. Allowance of club expenses and provision of gratuity.
5. Applicability of provisions of section 14A of the Income Tax Act.
6. Disallowance of Fringe Benefit Tax.
7. Addition of negative reserve to the actuarial surplus for determining the profit from the business of life insurance.

Issue-wise Detailed Analysis:

1. Income Nature of the Funds Transferred from Shareholders' Accounts to the Policyholders' Account to Meet Deficiencies:
The core issue common across the assessment years (AYs) under consideration was whether the transfer of funds from shareholders' accounts to policyholders' accounts should be treated as income. The Tribunal referred to the provisions of section 44 of the Income Tax Act and the IRDA Act, which mandate maintaining separate accounts. It was argued that such transfers are tax-neutral transactions as they are merely transfers within the same entity. This issue was settled by the Tribunal in the case of ICICI Prudential Insurance vs. ACIT, where it was held that such transfers do not constitute taxable income. The Tribunal allowed the grounds raised by the assessee for AYs 2003-04 to 2006-07, treating such transfers as non-taxable.

2. Allowability of the Transfer of Funds to the Revenue Account as a Deduction:
In the revenue's appeal for AY 2004-05, it was argued that the transfer of funds to the revenue account should not be allowed as a deduction. The Tribunal dismissed this ground, considering it connected to the core issue already adjudicated in favor of the assessee.

3. Set Off of Losses Arising from Profits Other than Insurance Against Surplus from the Revenue Account:
For AYs 2004-05 and 2005-06, the revenue contended that losses arising from profits other than insurance should not be set off against the surplus from the revenue account. The Tribunal directed the AO to re-examine this issue in light of the decisions in ICICI Prudential Insurance and LIC cases.

4. Allowance of Club Expenses and Provision of Gratuity:
The revenue's appeal for AY 2004-05 included the issue of allowance of club expenses and provision of gratuity. The Tribunal remanded this issue to the AO for examination in light of the decisions in LIC cases, directing the AO to grant the assessee an opportunity to be heard.

5. Applicability of Provisions of Section 14A of the Income Tax Act:
The assessee argued that section 14A, which deals with the disallowance of expenditure incurred in relation to income not includible in total income, does not apply to insurance companies governed by section 44. The Tribunal agreed, citing the decisions in ICICI Prudential Insurance and HDFC Standard Life Insurance, which held that section 14A does not apply to insurance companies. This ground was allowed in favor of the assessee for AY 2006-07.

6. Disallowance of Fringe Benefit Tax:
The assessee contended that Fringe Benefit Tax (FBT) provisions are not applicable, as the profits are determinable under section 44. The Tribunal directed the AO to examine this issue in light of the decisions in HDFC Standard Life Insurance and LIC cases, allowing the ground for statistical purposes.

7. Addition of Negative Reserve to the Actuarial Surplus for Determining the Profit from the Business of Life Insurance:
For AY 2006-07, the revenue raised the issue of adding negative reserves to the actuarial surplus. The Tribunal directed the AO to re-adjudicate this issue considering the decisions in ICICI Prudential Insurance and LIC cases, allowing the ground for statistical purposes.

Conclusion:
The Tribunal consistently found in favor of the assessee on the core issue of the taxability of funds transferred within the same entity and other connected issues. The revenue's appeals were partly allowed for statistical purposes, with directions to the AO to re-examine specific issues in light of relevant case law and provide the assessee with an opportunity to be heard. The decisions emphasized the special provisions applicable to insurance companies under section 44 of the Income Tax Act.

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