2017 (8) TMI 1566 - AT - Income Tax

Assessment of insurance business - adjustment of earlier years surplus worked out as per actuarial valuation - HELD THAT - Identical issue arose in assessee s own case in assessment year 2008 09 2013 (10) TMI 1072 - ITAT MUMBAI the Tribunal following its own case in ICICI Prudential Insurance Co. Ltd. v/s ACIT I 2012 (11) TMI 13 - ITAT MUMBAI the profits and gains of life insurance business shall be taken to be the annual average of the surplus arrived at by adjusting the surplus or deficit disclosed by the actuarial valuation made in accordance with the Insurance Act, 1938,in respect of the last inter-valuation period ending before the commencement of the assessment year,so as to exclude from it any surplus or deficit included therein which was made in any earlier inter-valuation period - Decided in favour of assessee. Taxability of income arising in share holder s account - HELD THAT - Notably, identical issue arose in assessee s own case as referred to above and while deciding the issue the Tribunal followed the decision of ICICI Prudential Insurance Co. Ltd. 2012 (11) TMI 13 - ITAT MUMBAI and held that income arising in share holders account cannot be taxed as income from other sources but has to be assessed as income from business or profession considering the fact that the business carried out by the assessee is governed by the provisions of section 44. Since the learned Commissioner (Appeals) has decided the issue following the decision of the Tribunal cited supra, we do not find any infirmity in the order of the learned Commissioner (Appeals). This ground is dismissed. Transfer of money from share holders account to the policy holder s account - transfer of capital asset, hence and not taxable under section 44 - HELD THAT - Notably, the aforesaid issue arose in assessee s own case for the preceding assessment years. While deciding the issue the Tribunal following its own order in the case of ICICI Prudential Insurance Co. Ltd 2012 (11) TMI 13 - ITAT MUMBAI what assessee has done in reconciling the IRDA format with that of old Insurance Form is correct and accordingly the loss disclosed in the computation of income is according to the actuarial surplus/deficit under the Insurance Act, 1938 prescribed under Rule 2 of the first schedule part-A. In view of this, we are of the opinion that insistence by AO to bring to tax the entire amount shown under the new Regulations including transfer from Share-holders‟ account is not correct. Instead of AO in taking the surplus at Regulation 8(1)(a) which is the actuarial surplus / deficit for the year took the amount as disclosed at Regulation 8 (1) (f) (total surplus after transfer from Share-holders‟ account) which is not at all correct. Assessment of insurance business - whether surplus available both in policy holder s account and shareholders account is to be consolidated and the net surplus is to be taxed as income from insurance business? - HELD THAT - Surplus available both in policy holder s account and shareholders account is to be consolidated and the net surplus is to be taxed as income from insurance business. It is noted by us that identical issue arose in assessee s own case in the preceding assessment year 2013 (10) TMI 1072 - ITAT MUMBAI and while deciding the issue, the Tribunal following its own decision in the case of ICICI Prudential Insurance Co. Ltd. 2012 (11) TMI 13 - ITAT MUMBAI once assessee was in the life insurance business the computation had to be made in accordance with the Rule-2 as per provisions of section 44,that both the Policy-holders‟ and Share holder's account had to be consolidated into one and transfer from one account to another was tax neutral,that the AO had taxed the surplus after the funds had been transferred from Share -holder's account to the Policy-holders‟ account at the gross level while ignoring such transfer in share holder's account,that as per the provisions of section 44 of Act heads of income like income from other sources,capital gains, house property or even interest on securities did not come into play and only first schedule had to be invoked to arrive at the profit,that both accounts-the Policyholders‟ and Share-holders‟ account- had to be consolidated for the purpose of arriving at the deficit or surplus. Addition u/s 14A - special provisions of section 44 applicable - HELD THAT - Commissioner (Appeals) while deciding the issue held that in view of special provisions of section 44 provisions of section 14A, is not attracted. It is worth mentioning, similar issue arose in assessee s own case in the preceding assessment years and the Tribunal while deciding the issue followed its own decision in ICICI Prudential Insurance Co. Ltd. 2012 (11) TMI 13 - ITAT MUMBAI and held that since assessee s income is to be computed under section 44, no disallowance under section 14A can be made. Respectfully following the decision of Co ordinate Bench cited supra, we uphold the decision of the learned Commissioner (Appeals) on this issue. This ground is dismissed. Interest u/s 234B - HELD THAT - While deciding the issue of chargeability of interest under section 234B, the learned Commissioner (Appeals) held that the levy of interest under section 234B is mandatory, hence, directed the Assessing Officer to revise the computation of interest leviable while giving effect to the appeal order. We fail to understand, how the Department can have any grievance against the aforesaid direction of Commissioner (Appeals). In any case of the matter, while deciding identical issue in assessee s own case for preceding assessment years, the Tribunal considered the fact that assessee used to calculate advanced tax on the basis of its return of income filed for the past years and the income likely to be earned in the impugned assessment year, had a bonafide belief that it was not liable to pay advance tax. Tribunal held that interest is not leviable u/s 234B . Facts in the impugned assessment year are more or less identical. That being the case no interest under section 234B is leviable. Negative reserve assessment - whether no surplus or taxable income at the hands of the assessee - HELD THAT - As could be seen in assessee s own case for preceding assessment years treatment given to negative reserves by actuary cannot be disturbed by the AO. Here,it would be useful to understand meaning of negative reserve in simple terms. While making actuarial valuation,requirement of reserve to service insurance policies issued is ascertained. Such reserve (called mathematical reserve or value of liability)is equal to present value of future benefits payable and future expenses to be incurred less present value of future premium receivable. When the present value of future premium is more than the present value of future benefits payable and future expenses to be incurred, this amount becomes negative, known as negative reserve . Assessing Officer 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.

Summary

Issues Involved:
1. Interpretation of Section 44 of the I.T. Act and related rules and regulations.
2. Adjustment of earlier years' surplus as per actuarial valuation.
3. Taxability of income arising in the shareholder's account.
4. Transfer of funds from the shareholder's account to the policyholder's account.
5. Consolidation of surplus from policyholder's and shareholder's accounts.
6. Applicability of Section 14A to insurance business.
7. Levy of interest under Section 234B.
8. Treatment of negative reserves.

Detailed Analysis:

1. Interpretation of Section 44 of the I.T. Act:
The Revenue contested the interpretation of Section 44 of the I.T. Act, read with Rule 2 of the First Schedule, along with provisions of the Insurance Act, 1938, and the Insurance Regulatory and Development Authority Act, 1999. The Tribunal upheld the CIT(A)'s interpretation, aligning with the Tribunal's decision in the assessee's own case for previous years, emphasizing the legislative intent and the specific incorporation of the un-amended Insurance Act, 1938.

2. Adjustment of Earlier Years' Surplus:
The Tribunal addressed whether the adjustment of earlier years' surplus, worked out as per actuarial valuation, was correct. The Tribunal followed its previous decision, which stated that only the difference between the surplus of two valuation periods should be considered as income, thus supporting the CIT(A)'s decision in favor of the assessee.

3. Taxability of Income in Shareholder's Account:
The Tribunal examined the taxability of income arising in the shareholder's account. Consistent with its earlier rulings, the Tribunal held that such income should be assessed as income from business or profession under Section 44, rather than as income from other sources, thereby dismissing the Revenue's appeal.

4. Transfer of Funds from Shareholder's to Policyholder's Account:
The Tribunal considered whether the transfer of funds from the shareholder's account to the policyholder's account constituted a taxable event. It reiterated its stance from previous rulings that such transfers are tax-neutral, as they are essentially internal adjustments within the insurance business, and thus not taxable under Section 44.

5. Consolidation of Surplus:
The Tribunal upheld the CIT(A)'s decision that the surplus available in both the policyholder's and shareholder's accounts should be consolidated, and the net surplus should be taxed as income from the insurance business. This decision was in line with the Tribunal's earlier judgments, which emphasized the unified nature of the insurance business for tax purposes.

6. Applicability of Section 14A:
The Tribunal addressed the applicability of Section 14A, which deals with disallowance of expenditure related to exempt income. It upheld the CIT(A)'s view that Section 14A does not apply to insurance businesses governed by Section 44, following its consistent interpretation in previous cases involving the assessee.

7. Levy of Interest under Section 234B:
The Tribunal examined the issue of interest levy under Section 234B. It noted that the assessee calculated advance tax based on past returns and anticipated income, leading to a bona fide belief of non-liability. Thus, the Tribunal upheld the CIT(A)'s decision that interest under Section 234B was not leviable in this case.

8. Treatment of Negative Reserves:
The Tribunal evaluated whether negative reserves should be treated as taxable income. It reaffirmed its previous rulings that negative reserves, which represent future probable income, should not be included in the taxable surplus until they actually materialize. Consequently, the Tribunal upheld the CIT(A)'s decision to exclude negative reserves from taxable income.

Conclusion:
The Tribunal dismissed the Revenue's appeals and partly allowed the assessee's cross objections, maintaining consistency with its prior decisions and emphasizing the specific provisions governing the taxation of insurance businesses. The Tribunal's detailed analysis and adherence to established legal interpretations provided a comprehensive resolution of the issues involved.