2016 (2) TMI 1054 - AT - Income Tax

Addition being the profit on sale of investments - Held that - 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 position has been clarified by the Memorandum Explaining the Provision in the Finance Bill, 1988. As seen from the legislative intent made explicit through Memorandum Explaining the Provision, Notes and Clauses and also circular issued by the CBDT exemption is to be provided in respect of the profits earned by the insurance company on sale of investment and consequently no deduction is to be allowed towards losses incurred on the realization of investments. In simple words the prescription of the hitherto cl. (b) of r. 5 has been taken back, which granted deduction towards the depreciation reserve or loss on realization of investments and increment towards appreciation in or gains on the realization of investments. 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. Addition u/s 14A - Held that - The Assessee s case being for the Assessment Year 2006-07, there cannot be any applicability of the above-referred subsection (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.

Summary

Issues Involved:
1. Deletion of addition of profit on sale of investments.
2. Disallowance under Section 14A of the Income Tax Act read with Rule 8D of the Income Tax Rules.

Issue-wise Detailed Analysis:

1. Deletion of Addition of Profit on Sale of Investments:
The Revenue appealed against the CIT(A)'s orders which deleted the additions made by the Assessing Officer (AO) regarding the profit on sale of investments for the assessment years (A.Y.) 2005-06 and 2006-07. The core issue was whether the profit on the sale of investments should be included in the taxable income of a company engaged in the business of insurance other than life insurance.

For A.Y. 2005-06, the AO added Rs. 245,09,18,028 to the income of the assessee, arguing that the profit from the sale of investments should be taxed. However, the CIT(A) deleted this addition based on the Finance Act, 1988, which omitted the requirement to include gains on the realization of investments in the taxable income for insurance companies. This amendment was clarified by CBDT Circular No. 528, stating that the profits earned by General Insurance Corporation and its subsidiaries on the sale of investments were exempt from tax to enable them to play a more active role in capital markets.

The Tribunal upheld the CIT(A)'s order, noting that post the amendment, neither losses on the realization of investments should be deducted nor gains should be added to the taxable income. The Tribunal concluded that the AO's viewpoint was incorrect and dismissed the Revenue's appeal for A.Y. 2005-06.

For A.Y. 2006-07, the Tribunal found the issue identical to that of A.Y. 2005-06 and dismissed the Revenue's appeal, affirming that the profit on the sale of investments was not taxable.

2. Disallowance under Section 14A read with Rule 8D:
For A.Y. 2006-07, the AO disallowed Rs. 30,28,25,750 under Section 14A read with Rule 8D, arguing that the assessee's self-disallowance of Rs. 1,00,69,998 was too low. The AO applied Rule 8D retrospectively, which was later contested by the assessee.

The CIT(A) held that Rule 8D could not be applied retrospectively as per the Bombay High Court's decision in Godrej & Boyce Mfg. Co. Ltd. v. Dy. CIT, which stated that Rule 8D is applicable only from A.Y. 2008-09. The CIT(A) further noted that the AO did not record his dissatisfaction with the assessee's computation as required under Section 14A(2). Consequently, the CIT(A) restricted the disallowance to 1% of the exempt income, amounting to Rs. 6,43,39,744.

The Tribunal upheld the CIT(A)'s order, emphasizing that Rule 8D could not be applied for A.Y. 2006-07 and that the AO failed to record the necessary dissatisfaction with the assessee's claim. The Tribunal agreed with the CIT(A)'s application of the 1% disallowance rule as consistent with ITAT Kolkata's precedents.

Conclusion:
Both appeals by the Revenue were dismissed. The Tribunal confirmed that the profit on the sale of investments was not taxable for the insurance company for A.Y. 2005-06 and 2006-07 and upheld the reduced disallowance under Section 14A for A.Y. 2006-07. The Tribunal's decision was pronounced on 03.02.2016.