2016 (7) TMI 12 - AT - Income Tax

Revision u/s 263 - non inclusion of income from shareholders account - Held that - Not only was the AO aware about the method of aggregation followed by the assessee, he had also taken a lawful and possible view. In the circumstances we do not find any error in the order of the AO which can be vested by a Section 263 jurisdiction. The twin conditions viz., there should be an error and such error should be prejudicial to the interests of Revenue are not satisfied. We have no hesitation in setting aside the order of CIT - Decided in favour of assessee

Summary

Issues Involved:
1. Whether the assessment order was erroneous and prejudicial to the interests of Revenue.
2. Whether the income from shareholders' account and policy holders' account should be treated separately or consolidated for tax purposes.
3. Applicability of Section 44 and Rule 2 of the First Schedule of the Income-tax Act, 1961 to the computation of income for a life-insurance business.
4. Validity of the CIT's invocation of Section 263 of the Income-tax Act, 1961.

Issue-wise Detailed Analysis:

1. Erroneous and Prejudicial to Revenue:
The CIT considered the assessment order erroneous and prejudicial to the interests of Revenue because the income from the shareholders' account amounting to ?24,31,68,000/- was not taxed. The CIT argued that the profits from the life-insurance business should be taxed at the concessional rate of 12.5%, while the balance income related to the shareholders' account should be taxed at normal rates. The CIT believed there was an omission by the AO to bring to tax the income appearing in the shareholders' account.

2. Treatment of Income from Shareholders' and Policy Holders' Accounts:
The assessee contended that its business was covered by the Insurance Act, 1938, and the IRDA Act, 1999, and it had been filing returns by aggregating the results of the shareholders' profit and loss account and the policy holders' revenue account. This computation was in accordance with Section 44 read with Rule 2 of the First Schedule to the Income-tax Act. The assessee argued that the segregation of accounts was mandated by IRDA regulations for reporting purposes and did not imply separate businesses. The Mumbai Tribunal in the case of ICICI Prudential Ltd v. ACIT had held that income in the shareholders' account was to be taxed as part of the life-insurance business only.

3. Applicability of Section 44 and Rule 2:
The assessee's method of computing income by aggregating the shareholders' and policy holders' accounts was based on Section 44 read with Rule 2 of the First Schedule of the Income-tax Act. The AO had sought and obtained explanations from the assessee on this method during the assessment proceedings. The Tribunal noted that the AO was aware of the issue of aggregation and had taken a lawful and possible view in accepting the assessee's method.

4. Validity of CIT's Invocation of Section 263:
The Tribunal found that the AO had considered the method of aggregation followed by the assessee and had taken a valid view. The Tribunal referred to the Mumbai bench's decision in ICICI Prudential Ltd, which supported the consolidation of policy holders' and shareholders' accounts for computing income under Section 44. The Tribunal concluded that there was no error in the AO's order that could be rectified under Section 263, as the twin conditions of error and prejudice to the interests of Revenue were not satisfied. Consequently, the Tribunal set aside the CIT's order.

Conclusion:
The Tribunal allowed the appeal of the assessee, holding that the AO's order was not erroneous or prejudicial to the interests of Revenue. The method of aggregating the shareholders' and policy holders' accounts for computing income was upheld as lawful and consistent with the provisions of the Income-tax Act and relevant case law. The CIT's invocation of Section 263 was deemed invalid, and the original assessment order was restored.