2021 (3) TMI 1334 - AT - Income Tax

Reopening of assessment u/s 147 - eligibility of reasons to believe - Approval u/s 151 - HELD THAT - From the perusal of the reasons recorded for reopening the assessment, as furnished to the assessee, it is a fact that the said reasons communicated to the assessee were incomplete and no where in the reasons recorded, the failure on the part of the assessee to furnish full and true information necessary for the purpose of assessment was mentioned. When this was put to ld DR, he argued that the full text of the reasons recorded would be available in the assessment folder and that whatever is relevant to be given to the assessee had been duly furnished by the ld AO. We find that the ld DR had duly furnished the full text of the reasons recorded for reopening the assessment which was also duly placed before the competent authority while seeking approval in terms of section 151 of the Act. In the said full text of reasons, omission on the part of the assessee was mentioned as a general and vague statement without specifically pointing out as to what was the clear omission or failure on the part of the assessee in not furnishing the requisite information that was necessary for the assessment. The entire information was very much available with the ld AO in the records which alone enabled him on bare perusal, to come to a conclusion that income of the assessee had escaped assessment. Hence in this scenario, how failure or omission could be attributed on the part of the assessee. Once there is no failure on the part of the assessee in providing requisite information, then the basic premise on which the entire reassessment was framed by recording reasons, vanishes in thin air. This makes the entire reassessment proceedings void abinitio. Moreover, we also find that the ld AO had triggered the reopening only based on verification of records. This goes to prove beyond doubt that there was absolutely no tangible material available with the ld AO to form a belief that income of the assessee had escaped assessment. On this count also, the reopening of the assessment deserves to be declared as bad in law. We further find that the sanction obtained in terms of section 151 of the Act was not provided to the assessee along with the reasons recorded despite assessee asking for the same in writing before the ld AO. This, in our considered opinion, is against the settled principles of natural justice as reopening of an assessment is an extraordinary power available to the ld AO and it should not be done in a cavalier manner. Since the reopening in the instant case had been done beyond 4 years from the end of the relevant assessment year, approval and sanction ought to have been granted only by ld PCIT alone. Hence this is a case where satisfaction of ld Additional CIT is also obtained in addition to the approval of ld PCIT, the said approval becomes invalid in terms of section 151 of the Act. It is trite law that if the law requires an act to be done in a particular manner, more particularly acts conferring jurisdiction like the present one, then, such act has to be done in that manner alone and the same cannot be compromised in any manner whatsoever. Since reopening of assessment is quashed for more than one reason as enumerated above, we do not deem it fit to address the other legal issues raised by the ld AR as they would be purely academic in nature. On merits also we find that the Act provides for a specific mechanism for computation of taxable profits of an insurance company and the taxable profits of an insurance company are required to be computed under the provisions of section 44 read with First Schedule to the Act which is a self contained code in itself. Rule 2 of First Schedule to the Act specifically provides that profits and gains of life insurance business is to be computed as per surplus / deficit disclosed by the actuarial valuation made in accordance with the Insurance Act, 1938. The consolidated Revenue Account was prepared without segregating income/ expenses for policyholders as well as shareholders. Therefore, the said Form-1 reflected the surplus/ deficit of the business as a whole (i.e.. considering shareholders as well as policyholders account) since in those days there was no bifurcation of the accounts of insurance companies into policyholders and shareholders accounts. Post introduction of IRDA Regulations, 2000. IRDA. the insurance regulator, has made specific rules for presentation of insurance accounts as prescribed in IRDA (Preparation of Financial statements and Auditor's Report of Insurance Companies) Regulations. 2002. Under these norms, profit loss of life insurance company is divided into a technical account (policy holder's account represented in Form A-RA) also called as revenue account and non-technical account (shareholder's account represented as Form A-PL) also called Profit Loss A/c. The technical account deals with all the transactions relating to and includes income from premium and expenditure in relation to the Policyholders account and related investment income. For negative reserves are nothing but discounted value of estimated future net income of the Company which cannot be brought to tax in the year under consideration. Reliance is placed on Mumbai Tribunal Judgment in the case of ICICI Prudential Insurance Co. Ltd. vs. ACIT 2012 (11) TMI 13 - ITAT MUMBAI wherein it was held that negative reserve disclosed in Form-1 does not give rise to distributable surplus. As per IRDA (Actuarial Report and Abstract for Life Insurance Business) Regulations. 2016, the disclosure of negative reserves in the Form-1 is not required. Hence, this further proves the assessee's contention that negative reserves in Form-I is just a disclosure requirement. For the aforesaid cumulative reasons, it is respectfully submitted that the AO be directed to delete the addition of negative reserves - Decided in favour of assessee.

Summary

Issues Involved:
1. Validity of reopening of assessment under Section 143(3) read with Section 147 of the Income Tax Act.
2. Deletion of disallowance of loss claimed due to accounting changes.
3. Reliance on the judgment of Hon'ble ITAT in similar cases.
4. Addition on account of negative reserves and its nature.
5. Application of actuarial valuation in computing taxable income for insurance companies.

Issue-wise Detailed Analysis:

1. Validity of Reopening of Assessment:
The assessee challenged the reopening of the assessment on several legal grounds, including:
- The reassessment order was barred by limitation under the proviso to Section 147.
- The reassessment was initiated based on a mere change of opinion without any new tangible material.
- The CIT(A) failed to test the validity of the reopening strictly based on the recorded reasons.
- The reassessment was barred by limitation under Section 149, and the sanction under Section 151 was not provided to the appellant.

The Tribunal found that the reasons communicated to the assessee for reopening were incomplete and did not mention any failure on the part of the assessee to furnish full and true information necessary for the assessment. The Tribunal held that the reopening was based on a mere verification of records and lacked tangible material, making the reassessment void ab initio. Moreover, the approval obtained under Section 151 was invalid as it involved both the Additional CIT and the PCIT, whereas only the PCIT's approval was required. The Tribunal cited several judicial precedents to support its decision, including the Hon'ble Bombay High Court's rulings in Ghanshyam K Khabrani vs ACIT and CIT vs Aquatic Remedies P Ltd.

2. Deletion of Disallowance of Loss Claimed Due to Accounting Changes:
The revenue contended that the CIT(A) erred in deleting the disallowance of the claim of loss which resulted from accounting changes, specifically the transfer of funds from the shareholders' account to the policyholders' account. The Tribunal upheld the CIT(A)'s decision, stating that the taxable income of an insurance company should be computed as per Section 44 read with the First Schedule of the Income Tax Act, which requires considering the actuarial valuation. The Tribunal emphasized that the IRDA regulations mandating separate sub-accounts for policyholders and shareholders do not affect the computation of taxable income under the Income Tax Act.

3. Reliance on the Judgment of Hon'ble ITAT in Similar Cases:
The revenue argued that the CIT(A) relied on the ITAT's judgment in the case of HDFC Standard Life Insurance Company, which was pending before the Hon'ble Bombay High Court. The Tribunal dismissed this ground, reiterating that the computation of taxable income for insurance companies should be based on actuarial valuation as per Section 44 read with the First Schedule, and not on the separate sub-accounts mandated by IRDA regulations.

4. Addition on Account of Negative Reserves:
The revenue challenged the CIT(A)'s decision to grant relief on the addition of negative reserves, arguing that it ignored the nature of these reserves. The Tribunal found that negative reserves are merely a disclosure requirement stipulated by IRDA and do not impact the financial statements or taxable income. The Tribunal cited several judicial precedents, including the Bombay High Court's rulings in the cases of ICICI Prudential Life Insurance Company Limited and HDFC Standard Life Insurance Company Limited, to support its decision.

5. Application of Actuarial Valuation in Computing Taxable Income for Insurance Companies:
The Tribunal reiterated that the taxable income for insurance companies should be computed based on the actuarial surplus or deficit as per the Insurance Act, 1938, and not based on the formats prescribed by IRDA. The Tribunal noted that the IRDA regulations' requirement for separate sub-accounts for policyholders and shareholders does not affect the computation of taxable income under the Income Tax Act.

Conclusion:
The Tribunal allowed the cross-objections raised by the assessee, quashing the reassessment proceedings on multiple grounds, including the lack of tangible material and improper sanction under Section 151. The Tribunal dismissed the revenue's appeal, upholding the CIT(A)'s decision to grant relief on the disallowance of loss and addition of negative reserves, and reaffirmed the application of actuarial valuation in computing taxable income for insurance companies.