2013 (6) TMI 377 - AT - Income Tax

Entitlement to the exemption u/s 10(34) - LIC engaged in the business of Life Insurance - Held that - Rule 5 to Schedule I was for General Insurance, that assessee was engaged in the business of Life Insurance, that rule 2 of Schedule was applicable to the business of the assessee, that the assessee was entitled to exemption u/s. 10(34). See General Insurance Corporation of India (2011 (12) TMI 70 - BOMBAY HIGH COURT) & ICICI Prudential Insurance Co. Ltd. 2012 (11) TMI 13 - ITAT MUMBAI - In favour of assessee. Addition of Negative Reserve shown in Form - I - Held that - As decided in case of ICICI Prudentail Insurance Co. 2012 (11) TMI 13 - ITAT MUMBAI on examining the method of accounting and the mandate given by regulations to appoint Actuarial on the concept of mathematical reserves the mathematical reserve is a part of Actuarial valuation and the surplus as discussed in Form-I under Regualtion 4 takes in to consideration this mathematical reserve also. Therefore the order of the order of the CIT(A) is approved. Moreover AO has no power to modify the amount after actuarial valuation was done, which was the basis for assessment under Rule 2 of 1st Schedule r.w.s.44 of the I.T. Act. The principle laid down in LIC vs.CIT 1963 (12) TMI 5 - SUPREME Court about the power of the Assessing Officer also restricted the scope and adjustment by the AO. In view of this uphold the order of the CIT(A) and dismiss the Revenue s ground. In favour of assessee. Addition of income from shareholder s funds credited directly to the shareholder s Account - Held that - There is no doubt that income had accrued to the assessee and same was transferred to the share holders account. Once income is earned by the assessee and later on it is applied for some specific purpose it cannot be treated as charge on profit. It is application of income. Preparation of books of accounts as per the Insurance account is different from determining the tax liability under income tax. Income transferred to policy holders a/c. was not application of income-it was charge on income and therefore AO had rightly excluded it from taxation. Income earned by the assessee-corporation on dividend and interest, in a strict sense, cannot be held to be earned from the insurance business. Initial capital contribution was made by the Government of India in 1955 for carrying out insurance business, but income earned by the assessee as dividend and interest in the year under consideration cannot be termed as income of the Sovereign - Against assessee.

Issues Involved:
1. Entitlement to exemption under Section 10(34) of the Income Tax Act, 1961.
2. Addition of Negative Reserve shown in Form -I.
3. Addition of income from shareholder's funds credited directly to the shareholder's account.
4. Interpretation of the Income Tax Act, Insurance Act 1938, IRDA Act, and related regulations.
5. Levy of interest under Section 234D of the Income Tax Act.

Issue-wise Detailed Analysis:

1. Entitlement to Exemption under Section 10(34):
The assessee claimed exemption for dividend income under Section 10(34) of the Income Tax Act, 1961. The AO denied this, stating that the computation of income for insurance businesses should be done as per Section 44 of the Act, which does not allow for separate treatment of dividend income. The First Appellate Authority (FAA) upheld the AO's decision, stating that tax-free income under Section 10 could not be excluded due to the absence of a specific provision in Rule 5. However, the Tribunal found that Rule 5 applies to General Insurance, not Life Insurance, and that the assessee was entitled to the exemption under Section 10(34). The Tribunal cited previous cases, including LIC vs. CIT and General Insurance Corporation of India, supporting the assessee's position and reversed the FAA's order.

2. Addition of Negative Reserve:
The AO added the Negative Reserve amounting to Rs. 38,075.39 Crores to the assessee's income, arguing that it was not in accordance with the Insurance Act and IRDA Regulations. The FAA upheld this addition, stating that the Negative Reserve should be taken as zero only in specific situations. The Tribunal, however, found that the treatment of Negative Reserves by the actuary should not be disturbed by the AO. The Tribunal explained the concept of Negative Reserves and cited the case of ICICI Prudential Insurance Co., where a similar issue was resolved in favor of the assessee. The Tribunal held that the AO had no power to modify the actuarial valuation and decided the issue in favor of the assessee.

3. Addition of Income from Shareholder's Funds:
The AO taxed the income from investments made out of shareholders' funds, arguing that it was not derived from the life insurance business and should be taxed under 'income from other sources'. The FAA upheld this view, stating that the income from shareholders' funds was separate from the income derived from the life insurance business. The Tribunal agreed with the AO and FAA, noting that the income in question could not be considered as derived from the life insurance business and should be taxed separately. The Tribunal upheld the FAA's decision and ruled against the assessee on this issue.

4. Interpretation of the Act and Regulations:
The assessee argued that the FAA erred in interpreting the Income Tax Act, Insurance Act 1938, IRDA Act, and related regulations. The Tribunal found this ground to be of a general nature and dismissed it for statistical purposes.

5. Levy of Interest under Section 234D:
The assessee did not press this issue during the hearing, and the Tribunal treated it as dismissed.

Summary:
The Tribunal allowed the appeal in part for the assessment years 2007-08, 2008-09, and 2009-10. The Tribunal ruled in favor of the assessee on the issues of exemption under Section 10(34) and the addition of Negative Reserve. However, the Tribunal upheld the FAA's decision on the addition of income from shareholders' funds and dismissed the general interpretation issue and the levy of interest under Section 234D.

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