2018 (7) TMI 2092 - HC - Income Tax

Applicability of section 14A to Insurance business - Tribunal justification on interpreting that on account legislation by incorporation , 'only' the unamended Insurance Act 1938 and the Regulations thereunder became part of Section 44 r.w Rule 2 of the First Schedule of the I.T. Rules? - relief to the assessee by holding that surplus available both in Policy Holders Account and Share Holder's Account is to be consolidated and only net surplus is to be taxed as income from Insurance Business? - addition made on account of claim of 100% depreciation - HELD THAT - Appeal is admitted on substantial questions of law at question nos. (i), (v), (vi) (viii) and (x).

Summary

Issues:
1. Interpretation of Section 14A of the Income Tax Act regarding exemption for Insurance business.
2. Treatment of dividend income in Life Insurance Business under Section 10(34) of the Income Tax Act.
3. Application of Section 44 of the Income Tax Act in relation to Insurance Act 1938 and Insurance Regulatory and Development Authority Act 1999.
4. Taxability of transfer from Share Holders Account to Policy Holder's Account under Section 44 of the Income Tax Act.
5. Incorporation of Insurance Act 1938 and Insurance Regulatory and Development Authority Act 1999 in Section 44 of the Income Tax Act.
6. Interpretation of Section 44 and Rule 2 of the First Schedule in relation to Insurance Regulatory and Development Authority Act 1999.
7. Consideration of provisions of Section 28 of Insurance Regulatory and Development Authority Act 1999 in relation to Section 44 of the Income Tax Act.
8. Tax treatment of "surplus" in Policy Holders Account and Share Holder's Account in Insurance Business.
9. Adjustment for negative reserve impact on taxable surplus in Insurance Business.
10. Addition made on account of claim of 100% depreciation in Actuarial surplus calculation.
11. Taxation of surplus in Share Holder's Account separately as income from other sources.
12. Treatment of expenses not directly related to insurance business in Share Holder's Account.

Analysis:
1. The appeal challenges the Tribunal's order on the application of Section 14A of the Income Tax Act to Insurance business. The issue revolves around the Tribunal's interpretation of whether the provisions of Section 14A apply to exempted income under Section 10 and disallowance under Section 14A made by the assessee.

2. The question arises regarding the treatment of dividend income in Life Insurance Business under Section 10(34) of the Income Tax Act. The Tribunal's decision to allow dividend income as exempt under Section 10(34) is disputed based on the consideration that dividend income forms part of the income of Life Insurance Business.

3. The Tribunal's interpretation of Section 44 of the Income Tax Act, read with Rule 2 of the First Schedule, along with provisions of the Insurance Act 1938 and Insurance Regulatory and Development Authority Act 1999 is under scrutiny. The issue pertains to the adjustment made from the 'surplus' as per actuarial valuation and its compliance with the precedent set by the Apex Court in LIC vs. CIT.

4. The Tribunal's conclusion regarding the taxability of the transfer from Share Holders Account to Policy Holder's Account as part of 'surplus' in actuarial valuation is challenged. The question is whether such transfers constitute taxable events under Section 44 of the Income Tax Act.

5. The interpretation of 'legislation by incorporation' in relation to the Insurance Act 1938 and Insurance Regulatory and Development Authority Act 1999 becoming part of Section 44 of the Income Tax Act is disputed. The Tribunal's decision to consider only the unamended Insurance Act 1938 and its regulations is questioned.

6. The Tribunal's interpretation of the omission of provisions of the Insurance Regulatory and Development Authority Act 1999 in Rule 2 of the First Schedule is challenged. The issue revolves around whether the Tribunal correctly excluded the incorporation of the provisions of the IRDA Act in Section 44.

7. The Tribunal's failure to appreciate the provisions of Section 28 of the Insurance Regulatory and Development Authority Act 1999 is questioned. The issue pertains to the relationship between the IRDA Act and the Insurance Act 1938 in the context of Section 44 of the Income Tax Act.

8. The Tribunal's decision to consolidate the 'surplus' in Policy Holders Account and Share Holder's Account for tax treatment is under scrutiny. The question is whether the net surplus should be taxed as income from Insurance Business.

9. The impact of negative reserve on the taxable surplus in Form I and the corresponding adjustment required is disputed. The Tribunal's failure to consider the impact of negative reserve on the taxable surplus is challenged.

10. The addition made on account of the claim of 100% depreciation in the calculation of Actuarial surplus is contested. The issue revolves around the understatement of assets in the books and its impact on the surplus or deficit calculation.

11. The Tribunal's decision to tax the surplus in Share Holder's Account as part of income from insurance business is disputed. The question is whether the surplus from Share Holder's Account should be taxed separately as income from other sources.

12. The treatment of expenses not directly related to insurance business in Share Holder's Account is questioned. The issue pertains to whether such expenses should be considered part of the income from insurance business or treated separately.