2017 (3) TMI 1054 - HC - Income Tax

Addition on account profit on sale/redemption of investment - ITAT deleted addition - Revenue s stand is that there is no specific provision in the statute which allows a general insurance company s profits from sale of investments to be exempted from total income for the purpose of taxation under the 1961 Act - Held that - We do not find any reason to accept the argument of the Revenue which goes contrary to the consistent stand taken by them on similar point in earlier assessment years on the same point of law. The Circular of 16th December, 1988 clearly stipulated the object behind deletion of aforesaid sub-clause (b). The manner in which profits from investments of a general insurance company is to be treated for income tax purpose also can be construed from the Notes on Clauses extracted from the Finance Bill, 1988. We have reproduced the relevant portion thereof earlier in this judgment. Having regard to the provisions of Section 44 of the Act read with First Schedule thereto, in our opinion the Assessing Officer for the applicable assessment year did not have power to add back the profit of ₹ 245.09 crores arising out of sale of investments to the total income of the assessee. Mr. Nizamuddin also could not explain to us why deviation was made on treatment of profits on sale of investments for the two assessment years. On binding nature of the aforesaid Circular of 1988, no negative argument has been advanced on behalf of the Revenue. We find that on no occasion earlier to or later than these two assessment years, the Revenue had preferred any appeal before the Tribunal or otherwise questioned such reduction by the assessee. In the cases of Sarita Agarwal (2002 (7) TMI 103 - SUPREME Court ) and Shivsagar Estate (2000 (12) TMI 909 - SUPREME COURT), special leave petitions of the Revenue were dismissed by the Supreme Court having regard to the fact that no appeal had been carried against the orders of identical assessments for the previous years. The same principle ought to apply in respect of the assessment year 2005-2006, with which this appeal is concerned. As regards assessment year 2006-2007, we are dealing with the same in another appeal filed by the Revenue before us. - Decided against revenue

Issues Involved:
1. Exemption of profit on sale/redemption of investments for a general insurance company.
2. Binding nature of circulars issued by the Revenue authorities.
3. Consistency in the application of tax laws by the Revenue authorities.

Issue-wise Detailed Analysis:

1. Exemption of Profit on Sale/Redemption of Investments for a General Insurance Company:
The primary issue in this case revolves around the exemption of ?245,09,18,028/- earned by the assessee, a general insurance company, from the sale/redemption of investments for the assessment year 2005-06. According to Section 44 of the Income Tax Act, 1961, read with Rule 5 of Part B to Schedule 1, the profits and gains of any business of insurance other than life insurance are to be taken as the balance of the profits disclosed by the annual accounts, subject to certain adjustments.

The rule initially included a sub-clause (b) that allowed for the deduction of losses and the inclusion of gains from the realization of investments. However, this sub-clause was deleted by the Finance Act, 1988, which aimed to exempt profits and gains on investments made by the General Insurance Corporation of India and its subsidiaries. This deletion was effective from April 1, 1989, and applied to subsequent assessment years.

The assessee's claim for exemption was based on Circular No. 528 dated December 16, 1988, which stipulated that profits on the sale of investments were not taxable. The Assessing Officer rejected this claim, adding back the profit to the total income. However, the CIT (Appeals) deleted this addition, and the ITAT upheld the CIT's decision.

2. Binding Nature of Circulars Issued by the Revenue Authorities:
The assessee argued that circulars, including Circular No. 528 of 1988, are binding on the Revenue authorities. This argument was supported by several Supreme Court judgments, which held that circulars issued by the Revenue authorities are binding on them and cannot be contested by the Department. The cited cases include:
- Navnit Lal C. Javeri v. K. K. Sen
- Varghese (K.P.) v. ITO
- Paper Products Ltd. v. Commissioner of Central Excise
- CCE v. Dhiren Chemical Industries
- State of Kerala v. Kurian Abraham Pvt. Ltd.
- Steel Authority of India v. Collector of Customs

These judgments emphasize that consistency and discipline in the application of circulars are crucial, and the Revenue cannot take a stand contrary to the instructions issued by the Board.

3. Consistency in the Application of Tax Laws by the Revenue Authorities:
The assessee also argued that the consistent practice of not adding back profits from the sale of investments for the assessment years between 1991-92 and 2010-11, except for 2005-06 and 2006-07, should not be deviated from. The CIT (Appeals) had previously held that profits from the sale of investments could not be included in the total income, and this decision was not challenged by the Revenue in any appellate forum.

The Revenue's stand that there is no specific provision in the statute allowing exemption for general insurance companies' profits from the sale of investments was countered by the assessee. The assessee argued that the omission of clause (b) from Rule 5 denuded the Assessing Officer of the power to make such adjustments. The consistent practice of the Revenue and the binding nature of the circulars further supported the assessee's claim.

Conclusion:
The court found no reason to accept the Revenue's argument, which contradicted the consistent stand taken by them in earlier assessment years. The Circular of 1988 and the Notes on Clauses from the Finance Bill, 1988, clearly indicated the intention to exempt profits from investments for general insurance companies. The court held that the Assessing Officer did not have the power to add back the profit to the total income for the assessment year 2005-06.

The court dismissed the Revenue's appeal, stating that no substantial question of law was involved and that the law was settled contrary to the Revenue's interpretation. The appeal and the connected application were accordingly dismissed.

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