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2015 (2) TMI 1323 - AT - Income TaxProfit on sale of Investments - business income OR capital gains - assessee is an insurance company- HELD THAT - The computation of taxable profit of an insurance company is governed by specific provision as given in section 44, read First schedule to the Income-Tax Act. Under the said scheme, only such adjustment can be made to the profits as disclosed in the annual accounts drawn under the Insurance Act, 1938, which are specifically provided under Rule 5. As clarified by Finance Act that the amendment will be effective from A.Y. 2011-12 onwards. Thus, it is amply clear from the legislative intent that, prior to 01.04.2011, adjustment of such a gain on realization of investment cannot be added. This aspect of the matter have been dealt extensively and upheld by the Co-ordinate Benches of the Tribunal which have been referred to the learned counsel. Accordingly we hold that profit on sale of investment cannot be taxed. Thus, ground no. 2 as raised by the assessee is allowed. Disallowance u/s 14A on estimated basis - HELD THAT - On the perusal of various decisions of the Tribunal including that of the assessee, we find that it has been consistently held that, provision of section 14A is not applicable in the cases of Insurance company which are governed by section 44, because it is non obstante provision wherein the income is to be computed as per P L account prepared under the Insurance Act 1938. Section 14A contemplates exception for deduction allowable under the act, whereas section 44 creates special application of provision of computation of profit as per the Insurance Act. Thus, no disallowance u/s 14A can be made and accordingly, ground no. 3 is allowed in favour of the assessee. Disallowance of amortization of premium - allowable revenue expenses - HELD THAT - According to the terms of issue of the securities, the assessee was to get only the face value at the time of redemption or maturity. IRDA regulation prescribes, the accounting principle for preparation of financial statement, whereby the assessee is required to prepare the financial statements in the manner provided in the said regulation. The said regulation read with relevant rules given in the schedules therein, provides that debts securities including, Government securities shall be considered as held to maturity and shall be measured at historical cost subject to amortization. This IRDA regulation are binding on the insurance companies. we hold that such an amortization claimed by the assessee as revenue expenditure is allowable . As relying on TATA AIG GENERAL INSURANCE CO. LTD. VERSUS ITO 2010 (10) TMI 764 - ITAT, MUMBAI we hold that such an amortization claimed by the assessee as revenue expenditure is allowable. Applicability of MAT u/s 115JB to the General Insurance Company - HELD THAT - Since the assessee s P L account is prepared in accordance with Insurance Act 1938, as specifically provided in Section 44 read with First schedule, therefore, the provision of section 115JB will not apply in case of assessee. This has been held in the case of General Insurance Corporation Cited Cases GENERAL INSURANCE CORPORATION OF INDIA VERSUS ADDL. CIT RANGE (13) 2012 (2) TMI 522 - ITAT MUMBAI Applicability of section 69B - HELD THAT - The assessee has sold the shares and buyers have failed to take the delivery, then in such a case how the provision of 69B gets attracted because here it is not a case that the investment exceeds the amount recorded in the books of account. On these facts alone, the addition cannot be sustained. Accordingly, the same is deleted. Addition on account of taxes paid on foreign dividend - HELD THAT - We find merit in the reasoning given by the AO as well as Ld. CIT(A) because taxed paid do not qualify as expenditure for the purpose of business and entire gross dividend should have accounted for in the P L account. Thus Ground no. 5 is treated as dismissed.
Issues Involved:
1. Taxing profit on sale of investments as 'Business Income'. 2. Disallowance under Section 14A of the Income Tax Act, 1961. 3. Deduction of amortization of premium paid on purchase of securities. 4. Addition on account of profit on sale of securities using different cost methods. 5. Applicability of Section 115JB (Minimum Alternate Tax). 6. Addition under Section 69B. 7. Addition on account of taxes paid on foreign dividend. Detailed Analysis: 1. Taxing Profit on Sale of Investments as 'Business Income': The primary issue was whether the profit on the sale of investments amounting to Rs. 406,81,17,320/- should be treated as 'Business Income' or exempt from tax. The assessee argued that the profit should be exempt based on CBDT Circular No. 528 dated 16.12.1988, or alternatively, treated as long-term capital gains. The Assessing Officer (AO) and Commissioner of Income Tax (Appeals) [CIT(A)] disagreed, citing Section 44 read with Rule 5 of the First Schedule of the Income-tax Act, which does not provide for such exemptions. The Tribunal, however, noted that from 01.04.1989 to 01.04.2011, there was no provision in the statute to make adjustments for profits on the sale of investments. Thus, the Tribunal ruled in favor of the assessee, allowing the profit on the sale of investments to be exempt from tax. 2. Disallowance under Section 14A: The AO disallowed Rs. 60,00,000/- under Section 14A, which the CIT(A) upheld. The Tribunal, however, noted that Section 14A does not apply to insurance companies governed by Section 44 of the Income-tax Act. This section creates a special provision for computing the income of insurance companies as per their Profit and Loss (P&L) account prepared under the Insurance Act, 1938. Consequently, the Tribunal allowed the assessee's claim, deleting the disallowance under Section 14A. 3. Deduction of Amortization of Premium Paid on Purchase of Securities: The assessee claimed a deduction of Rs. 9,26,36,131/- for amortization of the premium paid on securities, as per IRDA guidelines. The AO and CIT(A) disallowed this, arguing that such expenses are capital in nature and only deductible at the time of sale/redemption/maturity. The Tribunal, referencing the case of Tata AIG General Insurance Company Ltd., held that such amortization is allowable as there is no specific prohibition under Sections 30 to 43B. Thus, the Tribunal allowed the deduction for amortization of the premium. 4. Addition on Account of Profit on Sale of Securities Using Different Cost Methods: The AO added Rs. 79,32,000/- by substituting the cost of securities sold using the weighted average method instead of the FIFO method consistently followed by the assessee. Since the Tribunal allowed the profit on the sale of investments to be exempt from tax (Issue 1), this ground became infructuous and was dismissed. 5. Applicability of Section 115JB (Minimum Alternate Tax): The assessee argued that Section 115JB, which pertains to Minimum Alternate Tax (MAT), does not apply to insurance companies. The Tribunal agreed, noting that MAT provisions apply only when the P&L account is prepared per Schedule VI of the Companies Act. Since the assessee's P&L account is prepared under the Insurance Act, 1938, Section 115JB does not apply. This was supported by various decisions, including those involving General Insurance Corporation. 6. Addition under Section 69B: The AO added Rs. 5.48 lakhs under Section 69B, noting that shares in possession exceeded the book value. The Tribunal found that the shares were sold but not transferred to the buyer's name, thus remaining with the assessee. Since it was not a case of investment exceeding the recorded amount, the Tribunal deleted the addition, ruling in favor of the assessee. 7. Addition on Account of Taxes Paid on Foreign Dividend: The AO added the difference between gross and net foreign dividends to the total income, disallowing the credit for taxes paid on foreign dividends. The CIT(A) upheld this, stating that taxes paid do not constitute business expenditure. The Tribunal agreed with the AO and CIT(A), dismissing the assessee's ground on this issue. Conclusion: The Tribunal allowed the appeals partly, ruling in favor of the assessee on most grounds, including the exemption of profit on the sale of investments, disallowance under Section 14A, and deduction for amortization of premium. The Tribunal also ruled that Section 115JB does not apply to insurance companies. However, the Tribunal upheld the addition on account of taxes paid on foreign dividends.
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