2019 (11) TMI 1463 - AT - Income Tax

Assessment of Life insurance business - Income from annuity - computation of total income for the purpose of determination of income u/s 44 - Whether similar to Pension Business and loss from Pension Scheme as not adjustable against taxable business? - CIT(A) directed the AO to compute exemption u/s 10 (23AAB) after considering the loss under annuity schemes and also to take remedial action for earlier year assessments - HELD THAT - CIT(A) misunderstood the provisions of section 80CCC and 10(23)AAB of the Act and try to merge the insurance business of annuity plan and pension plan and also presumed that assessee s line of business of annuity and pension are different and also assessee can claim benefit u/s 80CCC of the Act which is not correct. The deduction u/s 80CCC also available only to the individual assessee not to the insurance company. Since assessee s line of business are only with life cover and other benefits are extended benefits allowed to the policy holders alongwith life cover therefore presumption drawn by Ld. CIT(A) is not proper and accordingly direction given by the Ld. CIT(A) to enhance assessment is accordingly dismissed. Rule 5 applicability to income from Health Schemes Group schemes and others treated as non-life insurance schemes - HELD THAT - All the basic policy are offered by the assessee in term basis insurance plan or life based insurance plan and these plans are offered alongwith additional benefits of saving health etc. Most of these plans are approved by IRDA and are term basis alongwith tax benefits includes deduction u/s 80C not u/s 80D. The schemes referred by Ld. CIT(A) are all those schemes which are not term based and it does not have life cover whereas these schemes are purely on health based and covering a short tenure of one year or two year alongwith having a tax benefit u/s 80D. These are the distinguishing features for the insurance plans which one can distinguish from the type of schemes offered by the insurance companies. Plans offered by the assessee are of term basis and life cover with the extended benefit of health and savings etc. Therefore these schemes can only be classified as life insurance and which can be considered as part of the main activities of the assessee company. Taxability of incomes in Shareholder s account - Bringing to tax only the incomes declared in the shareholder s account that too under the head other sources of income - HELD THAT - As decided in own case 2012 (11) TMI 13 - ITAT MUMBAI there is a valid argument raised by assessee that both the policyholder s shareholder s account has to be consolidated into one and transfer from one account to another is tax neutral. What AO has done is to tax the surplus after the funds have been transferred from shareholder s account to the policyholder s account at the gross level while ignoring such transfer in shareholder s account while bringing to tax only the incomes declared in the shareholder s account that too under the head other sources of income . While giving the finding that assessee is in the life insurance business only and incomes are to be treated as income from life insurance business the CIT (A) surprisingly in subsequent assessment years appeals accepted AO s contention that surplus in shareholder s account is to be taxed as other sources of income. But once the provisions of section 44 of IT Act are invoked anything contained in the heads of income like income from other sources capital gains house property or even interest on securities does not come into play and only first schedule has to be invoked to arrive at the profit. Therefore in our opinion both the policyholder s and shareholder s account has to be consolidated for the purpose of arriving at the deficit or surplus. Actuarial surplus determined for the purpose of the Insurance Act must be the same as the First Schedule - HELD THAT - As decided in own case 2012 (11) TMI 13 - ITAT MUMBAI computation made by assessee is in accordance with Rule-2 of the Insurance Act 1938 according to which only AO can base his computation. This also corresponds to the way incomes were assessed in earlier years ie. the correct method as per Rule 2 and Sec 44 of IT ACT. In view of the discussion above and after analyzing the Forms Regulations and Provisions we have no hesitation to hold that the assessee working of actuarial surplus/ deficit is in accordance with Rule 2 of First Schedule. Therefore assessee grounds on this issue are allowed Subjecting negative reserve to tax - HELD THAT - As decided in own case 2012 (11) TMI 13 - ITAT MUMBAI examining the method of accounting and the mandate given by regulations to appoint Actuarial on the concept of mathematical reserves we do not see any reason to interfere with the order of the CIT(A). The mathematical reserve is part of Actuarial valuation and the surplus as discussed in Form-I under Regulation 4 takes into consideration this mathematical reserve also. Therefore the order of the CIT(A) is approve. Moreover the 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. Disallowance u/s 14A - HELD THAT - As decided in own case 2012 (11) TMI 13 - ITAT MUMBAI we hereby accept the argument of learned Authorized Representative to the extent that 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. Once we have taken this view therefore the enhancement as proposed by learned CIT(A) is reversed and the directions in this regard are set aside. Applying the normal corporate rate of tax instead of rate specified in section 115B of the Act to income treated as other than from the business of insurance - HELD THAT - As per Insurance Act 1938 all incomes are part of one business only and these incomes are considered as part of same business. Therefore the incomes in Shareholder s account are to be considered as arising out of Life insurance business only. More over Sec 44 mandates that only First Schedule will apply for computing incomes and excludes other heads of income like Interest on Securities income from house property Capital gains or Income from other sources. Being non-obstante clause sec. 44 mandates that the profits and gains of insurance business shall be computed in accordance with the rules contained in First Schedule. Therefore the incomes in Shareholder s account are to be taxed as part of life insurance business only as they are part of same business and investments are made as part of solvency ratio of same business. The grounds are allowed. AO is directed to treat them as part of Life Insurance Business and tax them u/s 115B. See own case 2012 (11) TMI 13 - ITAT MUMBAI . Claim of 100% depreciation on fixed assets - HELD THAT - Taxation of Life Insurance is presumptive taxation with only the surplus as disclosed by Form I being subjected to tax - as per the provisions of law only those adjustments which are expressly not prohibited under section 44 of the Act could be made. Consequently depreciation which has been debited in the audited accounts as per the consistently followed and accepted accounting policy need not be disallowed. Action of the CIT(A) in deleting the amount is consistent with the accounting principles followed and the provisions of section 44 read with Rule 2 of the 1st Schedule. Therefore we uphold the order of the CIT(A) and dismiss the ground raised by the Revenue

Summary

Issues Involved:
1. Basis of computation adopted by the assessee.
2. Non-following of ITAT order in assessee's own case for previous years.
3. Treatment of income from annuity and pension business.
4. Applicability of Rule 5 to non-life insurance schemes.
5. Assessee's investment activities and their tax treatment.
6. Actuarial surplus determination.
7. Tax neutrality of transfers between shareholder and policyholder funds.
8. Double taxation of amounts transferred between accounts.
9. Taxation of negative reserve.
10. Applicability of Section 14A and Rule 8D.
11. Tax rate applicable to non-insurance income.

Detailed Analysis:

1. Basis of Computation Adopted by the Assessee:
The Tribunal found that the issues raised in the present appeal were already decided by the Coordinate Bench of ITAT in the assessee's own case for AY 2005-06 to 2011-12. The Tribunal allowed the grounds raised by the assessee, following the precedent set in previous years.

2. Non-Following of ITAT Order in Previous Years:
The Tribunal noted that the identical issue was already decided by the Coordinate Bench for previous assessment years. Therefore, it followed the precedent and allowed the grounds raised by the assessee.

3. Treatment of Income from Annuity and Pension Business:
The Tribunal observed that the CIT(A) misunderstood the provisions of Sections 80CCC and 10(23AAB) of the Act. It clarified that the deduction under Section 80CCC is available only to individual assessees, not to insurance companies. The Tribunal dismissed the CIT(A)’s direction to enhance the assessment and allowed the ground raised by the assessee.

4. Applicability of Rule 5 to Non-Life Insurance Schemes:
The Tribunal found that the schemes offered by the assessee were term-based and life cover with extended benefits. It concluded that these schemes could only be classified as life insurance and dismissed the directions given by CIT(A). The ground raised by the assessee was allowed.

5. Assessee's Investment Activities and Their Tax Treatment:
The Tribunal noted that the identical issue was already decided by the Coordinate Bench in the assessee’s own case for previous years. It followed the precedent and allowed the grounds raised by the assessee.

6. Actuarial Surplus Determination:
The Tribunal observed that the computation made by the assessee was in accordance with Rule 2 of the Insurance Act, 1938. It found no basis for the AO to take Form-I 'total surplus' as surplus of the life insurance business ignoring the transfer from shareholder’s account. The Tribunal allowed the ground raised by the assessee.

7. Tax Neutrality of Transfers Between Shareholder and Policyholder Funds:
The Tribunal noted that the identical issue was already decided by the Coordinate Bench in the assessee’s own case for previous years. It followed the precedent and allowed the grounds raised by the assessee.

8. Double Taxation of Amounts Transferred Between Accounts:
The Tribunal found that the identical issue was already decided by the Coordinate Bench in the assessee’s own case for previous years. It followed the precedent and allowed the ground raised by the assessee.

9. Taxation of Negative Reserve:
The Tribunal observed that the mathematical reserve is part of actuarial valuation and the surplus as discussed in Form-I under Regulation 4 takes into consideration this mathematical reserve. It upheld the order of the CIT(A) and allowed the ground raised by the assessee.

10. Applicability of Section 14A and Rule 8D:
The Tribunal noted that the identical issue was already decided by the Coordinate Bench in the assessee’s own case for previous years. It followed the precedent and allowed the grounds raised by the assessee.

11. Tax Rate Applicable to Non-Insurance Income:
The Tribunal found that the identical issue was already decided by the Coordinate Bench in the assessee’s own case for previous years. It followed the precedent and allowed the ground raised by the assessee.

Revenue’s Appeal:
The Tribunal noted that all the grounds raised by the revenue were inter-connected and related to the interpretation of Section 44 of the IT Act read with Rule 2 of the First Schedule. It found that the identical issue was already decided by the Coordinate Bench in the assessee’s own case for previous years. Therefore, it dismissed the grounds raised by the revenue and upheld the order of the CIT(A).

Conclusion:
The appeal filed by the assessee was allowed, and the appeal filed by the revenue was dismissed. The Tribunal followed the precedents set in the assessee’s own case for previous assessment years, ensuring consistency in the application of legal principles.