2018 (1) TMI 845 - AT - Income Tax

Profit disclosed by the assessee in the shareholder s Profit and loss account (Form A-PL) - not the profit derived from Life Insurance business and therefore the provisions of section 44 read with Schedule First of the Income Tax Act are not applicable - Held that - Set aside the order of CIT(A) on this issue and direct the assessing officer to take profit shown in shareholders profit and loss account i.e. Form A-PL to be part of the income derived from life insurance business. Thus these grounds are allowed. Addition in respect of the amount declared and allocated as bonus for the policy holders - Held that - We do agree that the term accrual surplus is not defined under the act. The CBDT Circular cannot control the interpretation of Rule 2. We find force in the submissions of the learned Sr. Advocate that CBDT Circular has limited application to a situation where the insurance benefits are assigned to third parties, where the benefits are to be paid/reserved/expended on behalf of the policy holder or the assignee. As the term on behalf of implies agency relationship and when the benefits are assigned to third parties, insurance company acts as agent of the policy holder. Even otherwise, if we go to the explanatory note as given under para 40.2 of the Circular 202, according to this bonus paid to the policy holder will also be taxed but that is not the case of the Revenue. The Revenue has only contested the bonus declared and the incremental FFA. 89. We also noted that no such disallowance has been made by the Revenue in the earlier assessment years i.e. up to A.Y.2009-10 and it is for the first time that the CIT(A) has enhanced the assessment. Even on the ground of consistency, the Revenue cannot discard the consistent and regular method followed for determining the taxable income without there being any change or otherwise, the bonus declared and the incremental FFA has been allowed as deduction by the Revenue. Addition considering Funds for Future Appropriation ( FFA ) as part of the actuarial surplus - Held that - We even noted upto Assessment Year 2009-10, the Revenue has consistently excluded amount appropriated for FFA out of the available surplus for the purpose of ascertaining acturial surplus while computing profit and gains of life insurance business of the assessee. Therefore, following principle of consistency as has been held by Hon ble SC in the case of Radhasaomi Satsang Baug v CIT 1991 (11) TMI 2 - SUPREME Court & that of CIT v Excel Industries Ltd 2013 (10) TMI 324 - SUPREME COURT we set aside the order of CIT(A) and delete the enhancement made by CIT(A) in this regard. Enhancing the assessment by making additions for the provision for doubtful debts - Held that - We noted that Revenue on the one side disallowed provision for doubtful debts but on the other side has taken the provision to the extent there is increase in value of investment other than temporary decline, as part of the income. This implies that CIT(A) has just taken the contrary view. We have also examined the contention of the learned DR that the assessee himself added back the royalty while computing the shareholders income. This implies that the assessee has accepted the view of the Revenue that the income in the shareholders a/c has to be computed under the normal provisions of the computation of income in Income Tax Act. Royalty paid by the assessee in our view cannot be regarded to be an expense relating to the life insurance business. Therefore there is nothing wrong caused to the Revenue as Royalty cannot be regarded to be liability incurred for life insurance business. We therefore set aside order of CIT(A) on this issue and delete the enhancement made by CIT(A) Addition on account of donation paid by the assessee - disallowance in respect of share issue expenses - Held that - Senior Advocate did not advance any argument that the claim of the donation made by the assessee would have been eligible for deduciton under section 37 of the Income tax Act while computing the income under the head Income from buisness or profession had it not been the question of determining the profit and gains of business of life insurance. We, therefore, dismiss ground no.7 taken by the assessee and confirm the disallowance of ₹ 2,50,00,000/- as there is no submission or argument made on behalf of the assessee that the assessee is eligible for deduction under section 80G of the Income tax Act and the assessee had complied with the conditions as stipulated under section 80G. It is also not the case of the assessee that the assessee has incurred these expenses eligible for deduction under section 35CCA, 35CCB, 35CCC or 35CCD so that we have taken a view that while computing the income from insurance business, in view of specific provisions of section 44 no disallowance could have been made. Thus while deleting the enhancement made by CIT(A) in respect of provision for doubtful debts we also delete the disallowance of 2,500/- taken in ground no. 8 as the assessee derived income from life insurance business only and the computation of the income from life insurance business, in view of S. 44 of the Income Tax Act, has to be made in accordance with Rule 2 of First Schedule of the Income Tax Act which debars Revenue to apply provision of S. 28 to 43B of the Income Tax Act. Thus ground no. 8 stand allowed. Re-compute the losses assessed in earlier AYs for the purpose of allowing setoff thereof u/s 72 - Held that - CIT(A) although allowed assessee to setoff of losses u/s 72 of AY 2002-03 & other earlier years but directed Assessing Officer to grant setoff on the basis of actuarial report, annual report, statement of income and additions pertaining to shareholders a/c made/ sustained in assessment order/ appellate order of 2002-03 other earlier year. Such direction in our view means the Assessing Officer been directed to recompute the income/ loss of the earlier year. This will tantamount giving the direction of re-assessing income of AY for which no appeal is pending before CIT(A) which is apparently illegal in view of settled position of law on the basis of decision of SC in case of ITO v Murlidhar Bhagwandas (1964 (1) TMI 5 - SUPREME Court). This position of law has also been followed by Delhi HC in case of Maubeni India P Ltd v CIT 2010 (9) TMI 85 - Delhi High Court . We, therefore, amend the direction given by CIT(A) under para 16 of its order and accordingly direct AO to grant setoff u/s 72 on basis of income finally assessed in the A.Y. 2002-2003 or earlier year in accordance with provisions of S. 72 of the Income Tax Act. Thus this ground stands allowed. Claim of deduction by the assessee u/ 10 (34) in respect of dividend income - applicability of S. 14A - Held that - Question before us is not whether any expenditure has been incurred or not for earning of dividend but the question relates to the applicability of S. 14A, which issue has already been decided by co-ordinate Bench against Revenue in view of discussion under para 46 of the order of this Tribunal Mumbai Bench in case of ICICI Prudential (2010 (3) TMI 709 - Bombay High Court), in which they have followed the decision of Delhi Bench in case of Oriental Insurance Co Ltd v ACIT (2009 (2) TMI 240 - ITAT DELHI-B). No contrary decision for applicability of S. 10(34) & S. 14A was brought to our knowledge. We accordingly allow the additional ground and dismiss the plea of learned DR that directions be given in case exemption is granted u/s 10(34) to disallow be expenditure u/s 14A of the Income Tax Act. Addition on a/c of profit from sale of investment on a/c of double addition - Held that - CIT(A) took the view irrespective of whether this profit/loss pertains to life insurance business or not, the addition of the same cannot be made as it will lead to inclusion of this amount twice in Total Income. He therefore deleted said addition as in his opinion disputes remain only whether income in shareholders a/c is an income from insurance business. we noted from form A-PL i.e. P & L a/c appearing at page 177 & 178 of audited final a/cs that income amounting to ₹ 7,10,43,000/- has duly been shown by assessee under the head income from investment and is duly included in the gross receipt of ₹ 1,43,19,19,000/- and loss of ₹ 20,91,40,000/- has been arrived at after considering said income. Therefore we find that CIT(A) has correctly observed that this is a double addition in income of assessee and he has rightly deleted the said addition. We do not find any illegality or infirmity in the order of CIT(A) while deleting the said addition. Thus the cross objection filed by Revenue stands dismissed.

Summary

Issues Involved:
1. Enhancement of income made by CIT(A)
2. Additions confirmed by CIT(A)
3. Additional ground of appeal regarding exemption under Section 10(34)
4. Cross-objections by the Revenue

Detailed Analysis:

1. Enhancement of Income Made by CIT(A):
The CIT(A) enhanced the taxable income of the assessee by Rs. 42,18,54,000 on account of Funds for Future Appropriation (FFA) and Rs. 141,85,84,000 by treating the amount declared and allocated as bonus for policyholders as part of the actuarial surplus liable to tax under Section 44 read with Rule 2 of the First Schedule of the Act.

Analysis:
- The Tribunal found that the bonus declared for participating policyholders is an ascertained liability and should be deducted while computing the actuarial surplus. The bonus is a contractual obligation enforceable in law and represents a liability towards the policyholders, not the shareholders.
- The Funds for Future Appropriation (FFA) were also considered as a provision for a definite and ascertained liability, which is a necessary charge on the profits of the life insurance business. The Tribunal held that FFA represents the provision for future bonuses and should be taken into account while determining the actuarial surplus.
- The Tribunal emphasized that the actuarial surplus should be computed after providing for all expenses and ascertained liabilities of the life insurance business, including bonuses and FFA.

2. Additions Confirmed by CIT(A):
The CIT(A) confirmed the additions made by the Assessing Officer on account of donations paid (Rs. 2,50,00,000) and share issue expenses (Rs. 2,500).

Analysis:
- The Tribunal held that the income of the assessee has to be computed in accordance with Rule 2 of the First Schedule provided in Section 44 of the Income Tax Act, which overrides the normal provisions of the Act relating to the computation of income chargeable under the head "Profits and gains of business or profession."
- Donations and share issue expenses are not to be disallowed under the normal provisions of the Act while computing the income from life insurance business. However, the Tribunal upheld the disallowance of donations as the assessee did not establish eligibility for deduction under Section 80G.

3. Additional Ground of Appeal Regarding Exemption Under Section 10(34):
The assessee raised an additional ground of appeal for exemption under Section 10(34) in respect of dividend income earned during the previous year.

Analysis:
- The Tribunal admitted the additional ground as it was a legal ground and no new facts were required to be investigated.
- The Tribunal allowed the exemption under Section 10(34) for dividend income, following the decision of the Mumbai Bench of the Tribunal in the case of ICICI Prudential Insurance Co. Ltd. vs. ACIT, which was also confirmed by the Bombay High Court.

4. Cross-Objections by the Revenue:
The Revenue filed cross-objections against the deletion of the addition of Rs. 7,10,43,000 made by the Assessing Officer on account of profit from the sale of investment.

Analysis:
- The Tribunal upheld the deletion of the addition by the CIT(A), noting that the said income was already included in the shareholders' profit and loss account, and adding it again would lead to double taxation.
- The Tribunal dismissed the cross-objections filed by the Revenue, finding no error in the CIT(A)'s order.

Conclusion:
- The Tribunal allowed the appeal of the assessee in part, setting aside the enhancements made by the CIT(A) and deleting the disallowances of provision for doubtful debts and share issue expenses.
- The Tribunal dismissed the cross-objections filed by the Revenue, upholding the deletion of the addition on account of profit from the sale of investment.
- The Tribunal admitted and allowed the additional ground of appeal for exemption under Section 10(34) for dividend income.