2017 (10) TMI 1516 - AT - Income Tax

Allowance of prior period expenditure - assessee has not claimed any deduction on such expenditure - HELD THAT - As decided in 2015 (12) TMI 1826 - ITAT MUMBAI assessee has voluntarily added back part of the expenditure to the total income following the consistent accounting method adopted by it. It is also evident that assessee is following similar method of accounting from earlier assessment years and offered similar income on account of adjustment of prior period income and expenditure and the AO in assessments completed u/s. 143(3) has accepted non only such accounting treatment given by the assessee but also the income offered. Therefore, when the assessee has not claimed any deduction on account of prior period expenditure by debiting it to the profit loss account, the disallowance made by the AO is totally unjustified. Therefore, we direct deletion of the amount from the income of the assessee. The ground raised by the assessee is allowed. Addition being provisions for insurance claim debited in the P L a/c. - HELD THAT - Provisions made on the basis of an actuarial valuation cannot be considered a contingent liability. The basic thing to be remembered is that unlike other businesses life insurance business is being regulated by IRDA. Regulatory body issues instructions time to time. One of the instructions was about follow actuarial valuation while preparing the accounts. The actuarial method of valuation has been recoginsed an approved method for valuing liabilities by various courts. So, we hold that method followed by the assessee for valuing its liabilities cannot be rejected. Besides Rule 5(a)of the First Schedule deals with provisions pertaining to expenditure or allowance or other prescribed liabilities and not in respect of income. ln short the AO is not authorised to disturb any income reflected in the P L account. The assessee was following the method of creating provisions based on actuarial valuation and the AO had accepted it while passing orders u/s.143(3)of the Act. Without bringing changed circumstances the AO should not have held that liabilities were contingent. AO had not raised any objection about non filing of bifurcation of data which was made available to the actuary therefore in our opinion the DR cannot make a totally fresh ease before us at this stage about non filing of bifurcation. Neither the AO nor the FAA had dealt With the issue. The DR has a definite role in helping the bench to decide the Matters. But there are limitation of representation. ln any case the assessee had followed Rule 5 in respect of IBNR and IBNER as mentioned earlier. Therefore we do not find any force in the argument advanced by the DR in that regard. - Decided against revenue. Disallowance made by the AO u/s. 14A - HELD THAT - As decided in own case 2017 (5) TMI 1717 - ITAT MUMBAI ITAT has deleted the addition. The AR also referred to the case of ICICI Prudential Insurance Company Ltd. 2012 (11) TMI 13 - ITAT MUMBAI held when the income of the assessee as well as the expenditure are governed by specific provision which have an overriding effect then it is not open for the AO to invoke the other provisions of the Act for carrying out the disallowance of adjustment in the income. Thus, we hold that no disallowance u/s 14A can be made in the case of the assessee and hence grounds raised by assessee allowed.

Summary

Issues Involved:
1. Allowing prior period expenditure.
2. Deleting the addition of ?418.63 crores being provisions for insurance claim.
3. Disallowance made by the AO u/s. 14A of the Act.

Detailed Analysis:

1. Allowing Prior Period Expenditure:
The first ground of appeal concerns the disallowance of prior period expenditure amounting to ?24.63 lakhs. The Assessing Officer (AO) found that the assessee had added back ?18.69 crores due to prior period adjustments and incurred total prior period expenses of ?24.63 lakhs. The AO disallowed this amount, stating that the expenses did not pertain to the year under appeal and were not in accordance with section 145 of the Act.

The First Appellate Authority (FAA) held that the addition of ?24,63,854 was inadmissible under sections 30-43B of the Act and directed the AO to delete the addition if prior period income had been offered to tax in earlier years.

During the hearing, the Departmental Representative (DR) argued that the FAA had not properly appreciated the facts and passed a cryptic order. The Authorized Representative (AR) for the assessee argued that the assessee consistently followed the practice of passing entries about prior period expenses and claimed the net expenditure for the year under appeal.

The Tribunal, after considering the rival submissions, found that the assessee had not claimed any deduction of prior period expenditure in the profit and loss account and had followed a consistent accounting method. Therefore, the Tribunal directed the deletion of the amount from the income of the assessee, deciding the first ground of appeal against the AO.

2. Deleting the Addition of ?418.63 Crores Being Provisions for Insurance Claim:
The second ground of appeal concerns the deletion of an addition of ?418.63 crores for provisions for insurance claims debited in the profit and loss account. The AO held that the outstanding claims were unascertained liabilities and not admissible deductions under the specific provisions of the Act.

The FAA, after considering the submissions, held that the assessee followed guidelines issued by IRDA and that the accounts, including the provisions, were accepted by IRDA and C&AG auditors. The FAA relied on the ratio of LIC of India (338 ITR 212) and General Insurance Corporation of India (240 ITR 139) to hold that the claim could not be disallowed under sections 30 to 43B of the Act.

The DR argued that the provisions for claims were contingent in nature and not allowable under section 37(1) of the Act. The AR contended that the AO had never raised objections regarding the details of IBNR and IBNER and that the assessee followed IRDA guidelines and actuarial valuation, which were binding and consistently applied in earlier years.

The Tribunal found that the assessee, a government-owned entity, followed IRDA rules and guidelines, and its accounts were audited without objections. The Tribunal held that provisions made on the basis of actuarial valuation could not be considered contingent liabilities and that the AO had accepted this method in earlier assessments. The Tribunal upheld the FAA's order, deciding the second ground of appeal against the AO.

3. Disallowance Made by the AO u/s. 14A of the Act:
The second ground of the Cross Objection (CO) concerns the disallowance made by the AO under section 14A of the Act, which was confirmed by the FAA. The AR stated that similar disallowances were deleted by the Tribunal in earlier years and referred to the case of ICICI Prudential Insurance Company Ltd.

The Tribunal, relying on its earlier decision, held that no disallowance under section 14A could be made in the case of the assessee, as its income and expenditure were governed by specific provisions with overriding effect. The Tribunal allowed the second ground of the CO in favor of the assessee.

Conclusion:
The appeal filed by the AO is dismissed, and the CO of the assessee is allowed in part. The Tribunal upheld the FAA's orders concerning prior period expenditure and provisions for insurance claims, and ruled in favor of the assessee on the disallowance under section 14A.