2014 (10) TMI 968 - AT - Income Tax

Profit on sale of investments not liable to be taxed in the hands of the assessee - Rule-5 applicability - assessee carries on insurance business - Held that - A co-joint reading of Secton-44 to the First Schedule it is clear that the profit and gains of the present assessee are to be computed in accordance with Rule-5 as applicable to the relevant year. A plain reading of this rule signifies that the profit as disclosed in the annual accounts prepared in accordance with relevant Schedule of insurance Act is to be taken as total income subject to the adjustment specifically provided in clauses (a) and (c). Clause (b) was omitted by the Finance Act 1988 w.e.f. 1.4.1989. The only effect of section 44 is that the operation of provisions referred to therein are excluded in the case of an assessee who carries on insurance business and in whose case the provisions of Rule-2 of the First Schedule are attracted. Section 44 is a special provision enshrined in the Act for ascertaining the profit and gains of an assessee carrying on the business of insurance. Thus it can be said that special provision overrides the general provision. In view of this legal position the amount of profit as disclosed by the P&L Account are to be drawn as per the insurance Act. The Hon ble Apex Court in Britannia industries Ltd.(2005 (10) TMI 30 - SUPREME Court) reiterated the same principle holding that expenditure towards rent repairs maintenance of guest house used in connection with the business is to be disallowed u/s. 37(4) of the Act because this is a specific provision overriding the general provision. This rule has been expressly incorporated in section 44 of the Act by specifically providing interalia that nothing contained in the provisions of section 28 to 43B shall apply to the profits and gains of business of insurance which shall be computed in accordance with rules contained in the First Schedule. We find no infirmity on the issue in the conclusion drawn by the ld. CIT(A). - Decided against revenue

Summary

Issues:
1. Taxability of profit on sale of investments in the hands of the assessee.
2. Claim of exemption of dividend income and interest on tax-free bonds.
3. Interpretation of Section 44 and Rule-5 for computation of profits in insurance business.

Issue 1:
The Revenue challenged the decision of the ld. CIT(A) regarding the taxability of profit on the sale of investments in the hands of the assessee. The Revenue argued that profit on sale of investments should be taxed, citing the omission of clause (b) to Rule 5 of the First Schedule by the Finance Act. The assessee, a general insurance business, declared a loss in its return, but the AO determined income and made additions during assessment and reassessment. The ld. CIT(A) ruled in favor of the assessee, referencing the decision of the Hon'ble Jurisdictional High Court in a similar case. The Tribunal analyzed Rule-5, emphasizing that the profit and gains of the assessee should be computed in accordance with relevant rules, and noted that the omission of clause (b) is significant. The Tribunal upheld the decision of the ld. CIT(A) based on legal provisions and precedents, dismissing the Revenue's appeal.

Issue 2:
The AO reopened the assessment to address the claim of exemption of dividend income and interest on tax-free bonds. The ld. CIT(A) decided in favor of the assessee, leading to the Revenue's appeal. The Tribunal examined Section 44, which provides a special provision for computing income of insurance companies as per the rules in the First Schedule. It highlighted that this special provision overrides general provisions, emphasizing that profit and gains of insurance business must be computed according to the rules. Citing legal precedents, including decisions from the Hon'ble Jurisdictional High Court, the Tribunal concluded that the amount of profit disclosed in the P&L account should be drawn as per the Insurance Act. The Tribunal upheld the ld. CIT(A)'s decision, dismissing the Revenue's appeal.

Issue 3:
The interpretation of Section 44 and Rule-5 for the computation of profits in insurance business was a key aspect of the case. The Tribunal analyzed the legal framework, emphasizing that the special provision under Section 44 takes precedence over general provisions. It referenced decisions from the Hon'ble Jurisdictional High Court and the Hon'ble Apex Court to support the conclusion that profit and gains of insurance business should be computed in accordance with the rules in the First Schedule. The Tribunal found no merit in the Revenue's appeal, ultimately dismissing it based on the legal provisions and precedents cited during the proceedings.

In conclusion, the Tribunal upheld the decisions of the ld. CIT(A) in favor of the assessee, emphasizing the specific legal provisions governing the computation of profits in insurance business and dismissing the Revenue's appeal on all grounds.