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2009 (8) TMI 810 - AT - Income TaxComputation of income of insurance business - Exemption - section 44 - 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. - s. 44 creates 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. - the provisions of s. 14A need not to apply while granting exemption 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.
Issues Involved:
1. Disallowance of exemption on profit from sale/redemption of investments. 2. Applicability of Section 14A of IT Act in relation to non-taxable income. Detailed Analysis: Issue 1: Disallowance of Exemption on Profit from Sale/Redemption of Investments The assessee, a general insurance company, claimed an exemption for profit on the sale of investments amounting to Rs. 17,44,603, which the AO disallowed. The AO's interpretation was based on the omission of sub-rule (b) of Rule 5 from the First Schedule effective from 1st April 1989. This sub-rule previously allowed for the taxation of gains on the realization of investments. The AO argued that the omission did not automatically grant an exemption, as the statute did not specifically provide for it. The CIT(A), however, deleted the addition made by the AO, relying on a CBDT Circular No. 528, which clarified that the deletion of Rule 5(b) was intended to exempt profits earned by insurance companies on the sale of investments. The Tribunal upheld the CIT(A)'s decision, emphasizing that the deletion of Rule 5(b) from the First Schedule was with the specific purpose of exempting such profits from taxation. The Tribunal concluded that since no new clause was introduced to tax such income after the deletion, the profits from the sale of investments were not taxable. Issue 2: Applicability of Section 14A of IT Act in Relation to Non-Taxable Income The CIT(A) invoked Section 14A of the IT Act, which disallows expenditure incurred in relation to income not includible in total income. The CIT(A) allocated certain expenditures, including interest on loans, against the exempted income from the sale of investments, resulting in a disallowance of Rs. 15.36 crores. The assessee challenged this, arguing that Section 14A should not apply to profits from the sale of investments, especially in the context of insurance business governed by Section 44 of the IT Act. The Tribunal referred to the Supreme Court's decision in General Insurance Corporation of India vs. CIT, which held that Section 44, being a special provision with a non obstante clause, overrides other provisions of the IT Act. The Tribunal also cited the Delhi Tribunal's decision in Oriental Insurance Co. Ltd., which confirmed that Section 44 and the First Schedule govern the computation of income for insurance companies, and Section 14A does not apply to such computations. The Tribunal concluded that the provisions of Section 14A were not applicable to the income from the sale of investments for insurance companies due to the specific and overriding nature of Section 44. Consequently, the enhancement proposed by the CIT(A) was reversed. Conclusion The Tribunal allowed the assessee's appeal and dismissed the Revenue's cross-objection. The profits from the sale of investments were held to be exempt from taxation due to the deletion of Rule 5(b) from the First Schedule, and the provisions of Section 14A were deemed inapplicable to such income for insurance companies governed by Section 44 of the IT Act.
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