2017 (5) TMI 1769 - AT - Income Tax

Revision u/s 263 - Assessment of income from life insurance business - surplus arising from shareholder account as separate income and not as income arising from life insurance business - as per CIT set off of deficit in policyholders account to the surplus in the Shareholders account is wrongly done against the provisions of sec 44 read with section 115B - set off of loss from policyholders account which is from the life insurance business cannot be set off against the income from shareholders account and by setting off of the deficit from the policyholders account to the surplus of the Shareholders account, the assessee has not offered the income which is taxable at normal rate - HELD THAT - As reply the assessee had clearly brought out its understanding on the rules of aggregation. According to it, Rule 2 of first schedule of Income-tax Act, provided for aggregation of profits as per policy holders account and shareholders account. No doubt, assessment order passed by the AO which has been subjected to 263 proceedings before us is cryptic without any reference to the above mentioned letter submitted by the assessee. However, it is clear from the reply given by the assessee, as extracted supra, that the AO had required the assessee to explain its stand regarding aggregation of profits / loss as it appeared in policy holders account and as it appeared in shareholders account and the assessee had given an explanation. We cannot say that the AO was not aware of the issue of aggregation. CIT himself has mentioned that the assessee was engaged in life-insurance business. Question whether policy holders account and shareholders account, in the case of an assessee carrying on only the business of life-insurance business was to be separated or consolidated, had come before the Tribunal in ICICI Prudential Ltd 2015 (1) TMI 9 - ITAT MUMBAI There is a clear opinion expressed by the Mumbai bench that when section 44 of the Act is applied, distinction between various heads of income paled into insignificance. The assessee had in its return, separately shown the revenue in its shareholders account and revenue derived from its policy holders account. Revenue account for policy holders account clearly reflected the change in valuation of liability in respect of life-policies which were accounted There is a clear opinion expressed by the Mumbai bench that when section 44 of the Act is applied, distinction between various heads of income paled into insignificance. The assessee had in its return, separately shown the revenue in its shareholders account and revenue derived from its policy holders account. Revenue account for policy holders account clearly reflected the change in valuation of liability in respect of life-policies which were accounted. Appeal filed by the assessee is allowed.

Summary

Issues Involved:

1. Aggregation of losses and surpluses between Policyholders' and Shareholders' accounts.
2. Applicability of Section 44 and Section 115B of the Income Tax Act.
3. Jurisdiction under Section 263 of the Income Tax Act.

Issue-wise Detailed Analysis:

1. Aggregation of Losses and Surpluses Between Policyholders' and Shareholders' Accounts:

The primary issue revolves around whether the deficit in the Policyholders' account can be set off against the surplus in the Shareholders' account. The assessee, engaged in the life insurance business, maintained separate accounts for policyholders and shareholders as per IRDA regulations. The CIT observed that the assessee set off a loss of ?194,04,02,725 in the Policyholders' account against a surplus of ?10,52,02,173 in the Shareholders' account, leading to a net loss of ?183,52,00,552. The CIT contended that this set-off was against the provisions of the Act, specifically Section 44 read with Section 115B, which mandates separate taxation for the profits of life insurance business and other business income. The CIT held that the set-off resulted in non-taxation of the income from the Shareholders' account, which should be taxed at the normal rate, thus causing a loss of revenue.

2. Applicability of Section 44 and Section 115B of the Income Tax Act:

The assessee argued that Section 44, which governs the computation of income from life insurance business, overrides other provisions of the Act, including Sections 28 to 43B. The assessee cited judicial precedents, including the Supreme Court's decisions in General Insurance Corpn. of India v. CIT and Life Insurance Corpn. of India v. CIT, which emphasized that the profits and gains of insurance business should be computed in accordance with the rules in the First Schedule. The assessee contended that both Policyholders' and Shareholders' accounts pertain to the life insurance business and should be aggregated for tax computation. The Tribunal in ICICI Prudential Ltd. also supported this view, stating that the entire transactions of both accounts pertain to the life insurance business and should be consolidated for arriving at the deficit or surplus.

3. Jurisdiction Under Section 263 of the Income Tax Act:

The assessee challenged the CIT's invocation of Section 263, arguing that the AO had made relevant inquiries and considered the assessee's explanations before passing the assessment order. The assessee submitted that the AO was aware of the aggregation method and had taken a lawful view. The Tribunal agreed with the assessee, stating that the AO had required the assessee to explain its stand on aggregation and had considered the explanation. The Tribunal noted that the AO's order was not erroneous as it was based on a lawful and possible view. Since the twin conditions of an error and prejudice to the interests of Revenue were not satisfied, the Tribunal set aside the CIT's order under Section 263.

Conclusion:

The Tribunal concluded that the AO's assessment order was not erroneous and did not cause any prejudice to the interests of Revenue. The AO had taken a lawful view by allowing the aggregation of losses and surpluses between the Policyholders' and Shareholders' accounts. The Tribunal set aside the CIT's order under Section 263, allowing the assessee's appeal. The appeal was pronounced in favor of the assessee on May 3, 2017.