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2012 (11) TMI 587 - AT - Income TaxMAT - Deduction for gains on sale of investment - disallowance as profits from insurance business are to be taken to be balance of the profits as disclosed by annual accounts subject to the adjustments provided in clause 5(a) to (c) - Held that - The assessee, being an Insurance Company is not required to prepare its accounts as per Part II & III of Schedule VI of the Companies Act 1956. The proviso to sub. Sec (2) of sec. 211 of the Companies Act creates an exemption of applicability of sub. Sec. (2) of sec 211 which requires that every P&L accounts of the Companies shall be prepared as per the requirement of Part II of Schedule VI inter-alia in respect of Insurance companies or banking companies or any other companies engaged in generation and supply of electricity for which a form of profit and loss account has been specified in or under the Act governing such class of company. Even if an Insurance Company does not disclose any matter in the Balance Sheet and P&L account because the same is not required to be disclosed by the Insurance Act shall not be treated non-disclosure of a true and fair view of the state of affairs of the company as the said condition has been relaxed by sub sec 5 of sec 211 of the Companies Act. Thus when the insurance companies, banking companies and electricity generation and distributions companies are treated in the same class as per the provisions of sec. 211 of the Companies Act in preparing their final accounts, then these companies cannot be treated differently for the purpose of sec. 115JB and accordingly, the provisions of sec. 115JB are not applicable in the case of the assessee - in favour of assessee.
Issues Involved:
1. Disallowance of deduction for gains on the sale of investment. 2. Applicability of section 115JB of the Income Tax Act to insurance companies. Issue-wise Detailed Analysis: 1. Disallowance of Deduction for Gains on Sale of Investment: The assessee, engaged in general insurance business, reduced the gain on the sale of investment amounting to Rs. 3.49 crores while calculating the profit or loss of business or profession. The assessee contended that these gains are exempt from tax based on Circular No. 528 dated 16.12.1988 issued by CBDT and the provisions of section 44 of the Income Tax Act, which stipulates that profits and gains for insurance business should be computed according to the rules in the first schedule of the Act. Particularly, the deletion of Clause 5(b) by the Finance Act, 1988 was argued to exempt profits on the realization of investments. The Assessing Officer (AO) rejected this contention, stating that section 44 and Rule 5 of the First Schedule do not allow for the reduction of profit/gain on the sale of investment while computing profits. The Commissioner of Income Tax (Appeals) upheld the AO's decision. Before the Tribunal, the assessee argued that the Tribunal had consistently held in various cases that profits on the sale of investments prior to the Assessment Year 2011 were not taxable for general insurance companies. The Tribunal noted that the deletion of Sub. Rule (b) of Rule 5 of the First Schedule was intended to grant exemption on profits from the sale of investments, effective prospectively from AY 2011-12. The Tribunal referred to several precedents, including decisions in Bajaj Allianz General Insurance v. ACIT, GIC v. ACIT, and Tata AIG General Insurance Co. Ltd v. ACIT, which supported the assessee's position. The Tribunal concluded that the consistent view in these decisions was that the deletion of Rule 5(b) intended to exempt such profits, and thus, the Tribunal ruled in favor of the assessee, allowing the appeal on this ground. 2. Applicability of Section 115JB of the Income Tax Act: The assessee raised an additional ground challenging the applicability of section 115JB, which deals with the computation of book profit for the purpose of Minimum Alternate Tax (MAT). The assessee argued that section 115JB does not apply to insurance companies as their accounts are prepared according to the Insurance Regulatory and Development Authority (IRDA) regulations, not as per Part II and III of Schedule VI of the Companies Act, 1956. The Tribunal admitted this additional ground, citing the Supreme Court decision in NTPC, which allows for the admission of purely legal issues. The AO had computed the assessee's income under section 115JB, which was higher than the regular computation under the Income Tax Act. The Tribunal noted that insurance companies are exempt from preparing accounts as per Part II of Schedule VI of the Companies Act, as per section 211 of the Companies Act. The Tribunal referred to decisions in the cases of State Bank of Hyderabad v. DCIT and Reliance Energy Ltd v. ACIT, which held that section 115JB does not apply to companies not required to prepare accounts as per Schedule VI of the Companies Act. The Tribunal also observed that an amendment to section 115JB by the Finance Act, 2012, effective from 1.4.2013, aligned the provisions of the Income Tax Act with the Companies Act, indicating that prior to this amendment, section 115JB did not apply to insurance companies. Consequently, the Tribunal ruled that section 115JB was not applicable to the assessee, allowing the appeal on this ground as well. Conclusion: The Tribunal allowed the appeal filed by the assessee on both grounds, ruling that the profits on the sale of investments were exempt from tax and that section 115JB did not apply to the assessee, an insurance company.
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