2013 (10) TMI 1130 - AT - Income Tax

Determination of Income u/s 44 from Insurance Business - Disallowance u/s 14A Held that - Sec. 14A contemplates an exception for deductions as allowable under the Act are those contained under ss. 28 to 43B of the Act, Sec. 44 creates special application of these provisions in the cases of insurance companies - It is not permissible to the AO to travel beyond s. 44 and First Schedule of the IT Act Reliance has been placed on the Dy. CIT v. Oriental General Insurance Co. Ltd. 2004 (9) TMI 323 - ITAT DELHI-C , wherein it was held that section 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. In the present situation the provisions of s. 14A need not to apply while granting exempt ion 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 Decided in favor of Assessee. Allowance of amount transferred to Unexpired Risk Reserve (URR) on terrorism Held that - As per Rule 5, of Schedule I, read with Rule 6E, the appellant is entitled to claim deduction for any reserve for unexpired risks at the rate of 100% on account of terrorism. This is also in keeping with IRDA Regulations 2002 - A.O s discretion is limited to the adjustments provided in Rule 5, to schedule 1; other than which he is liable to accept the figures of profit as computed under the insurance Act. In the circumstances, this ground of appeal is allowed and the A.O is directed to allow URR on terrorism @ of 100% - Unexpired Risk Reserve on terrorism created at 100% of the net premium income of such business is allowable in view of the Rule 5 of Schedule 1 r.w.r. 6E of the Income Tax Rules Decided in favor of Assessee.

Summary

Issues Involved:
1. Disallowance of reduction/exemption for gains on the sale of investment.
2. Disallowance under Section 14A of the Income Tax Act.
3. Deduction for Unexpired Risk Reserve (URR) on terrorism.

Detailed Analysis:

1. Disallowance of Reduction/Exemption for Gains on Sale of Investment:
The assessee contested the CIT(A)'s decision to confirm the disallowance of Rs. 7,08,51,044/- related to gains on the sale of investment, arguing that profits from insurance business should be computed as disclosed in the annual accounts per Rule 5 of the First Schedule of the Income Tax Act, without adjustments. The Tribunal noted that the identical issue was previously decided for the assessment year 2003-04, where it was established that profits and gains of insurance business must be computed as per Rule 5 of the First Schedule. The Tribunal observed that the profits from the sale of investments were included in the profit and loss account as per the Insurance Act, 1938, and no further adjustments were required. The Tribunal cited consistent decisions in favor of the assessee, including the case of Tata AIG General Insurance Co Ltd vs ACIT, where it was held that post-omission of Rule 5(b) in 1989, gains on the realization of investments should not be taxed. Following these precedents, the Tribunal decided this issue in favor of the assessee.

2. Disallowance under Section 14A:
The assessee challenged the disallowance of Rs. 39,99,020/- under Section 14A, arguing that Section 14A is not applicable to insurance companies. The Tribunal referred to its decision in the case of ICICI Prudential Insurance Co. Ltd. vs ACIT, where it was held that Section 14A does not apply to insurance companies due to the special provisions of Section 44, which governs the computation of insurance business income. The Tribunal noted that Section 44, being a non-obstante clause, overrides other provisions of the Act, and income from insurance business should be computed as per the First Schedule. Citing consistent decisions, including the case of Bajaj Allianz General Insurance Company, the Tribunal concluded that the provisions of Section 14A do not apply to insurance companies and decided this issue in favor of the assessee.

3. Deduction for Unexpired Risk Reserve (URR) on Terrorism:
The Revenue challenged the CIT(A)'s decision to allow the deduction for URR on terrorism at 100%, arguing that it exceeded the permissible limit under Section 64(V)(1)(ii)(b) of the Insurance Act. The Tribunal noted that the CIT(A) had considered the Insurance Regulatory and Development Authority Regulations 2002 and Rule 6E(a) of the Income Tax Rules, which allow a 100% deduction for URR on terrorism. The Tribunal found that the reserve created by the assessee was in compliance with these provisions and upheld the CIT(A)'s decision. The Tribunal concluded that the URR on terrorism created at 100% of the net premium income was allowable and dismissed the Revenue's appeal.

Conclusion:
The Tribunal allowed the assessee's appeal regarding the disallowance of gains on the sale of investment and the disallowance under Section 14A, and dismissed the Revenue's appeal concerning the deduction for URR on terrorism. The decisions were based on consistent precedents and the specific provisions governing the computation of income for insurance companies.