2021 (10) TMI 928 - HC - Income Tax

Computation of profit of Life Insurance business - interpreting the special provision under Section 44 of the IT Act while granting benefits to assessee- company - AO treating the surplus under shareholders account as income from business and taxed at normal rates. - HELD THAT - In the assessee s own case relating to the assessment year 2010-11, considering the challenge made to the order of the CIT that policyholder s account and Shareholders account has to be considered separately and the benefit of Section 115B of the Act could be given only to the profits from life insurance business, Tribunal in the Assessee s own case relating the earlier year has held that there is no dispute that assessee was doing only life insurance business as regulated by the IRDA. It has been categorically observed that CIT himself has mentioned that assessee was engaged in life insurance business. The question whether policyholders 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, being considered by the Tribunal of Mumbai Bench in ICICI Prudential Insurance Co. Ltd., 2012 (11) TMI 13 - ITAT MUMBAI , applied the same to the assesse s case thereby allowing the appeal of the assessee and the same has reached finality. For the subsequent assessment years, the Tribunal has followed the decision of the Tribunal in assesse s own case and has held that the surplus with deficit as per shareholders account should be aggregated with surplus with deficit in the policyholders account for determining the profit or loss of the assessee under Section 44 of the Act. In the case of ICICI Prudential Insurance Company Ltd., 2015 (7) TMI 1346 - BOMBAY HIGH COURT , identical question having considered, the High Court of Bombay has held that shareholders amount has to be considered as arising out of Life Insurance Business. We find no fault with the Tribunal in following this ruling which is squarely applicable to the case on hand. It is not the case of the revenue that the assessee is carrying on any other business other than life insurance business. Thus, Section 44 read with Rule 2 to Part-A of First Schedule to the Act is applicable to the facts of the present case, not Rule 5 of Part B as canvassed by the Revenue. As brought to the notice of this Court Civil appeal filed by the Revenue against the judgment of the High Court of Bombay in ICICI Prudential Insurance Company Ltd., supra, is pending before the Hon'ble Apex Court. We answer the substantial questions of law in favour of the assessee

Summary

Issues Involved:
1. Computation of profits for life insurance business under Section 44 read with the First Schedule and Section 115B of the Income Tax Act.
2. Interpretation of special provisions under Section 44 of the Income Tax Act in granting benefits to the assessee company.

Issue-wise Detailed Analysis:

1. Computation of Profits for Life Insurance Business:
The primary issue revolves around whether the assessee company correctly computed the profits of its life insurance business in compliance with Section 44 read with the First Schedule and Section 115B of the Income Tax Act. The assessee, engaged in life insurance, filed returns declaring a loss by aggregating its shareholders' and policyholders' accounts as prescribed by the IRDA. The Assessing Officer, however, treated the surplus under the shareholders' account as business income, taxing it at normal rates. The Tribunal, relying on precedent from the Mumbai Tribunal in the case of ICICI Prudential Insurance Co. Ltd., allowed the assessee's appeal, holding that the surplus/deficit from both accounts should be aggregated for determining profit/loss under Section 44. This was affirmed by the Bombay High Court and is pending before the Supreme Court.

2. Interpretation of Special Provisions under Section 44:
Section 44, with its non-obstante clause, overrides other provisions of the Income Tax Act, mandating that profits and gains from insurance business be computed according to the First Schedule. The Tribunal's interpretation, supported by the Bombay High Court's ruling in ICICI Prudential, held that income from shareholders' accounts should also be taxed as part of the life insurance business. The Revenue argued that shareholders' profits should be taxed separately at normal rates, citing the Insurance Act, 1938, and relevant sections of the Income Tax Act. However, the Tribunal and the High Court found that Section 44 and Rule 2 of Part A of the First Schedule apply to life insurance business, not Rule 5 of Part B, which pertains to other insurance businesses.

Legal Precedents and Regulatory Framework:
The judgment extensively references legal precedents, including the Supreme Court rulings in Life Insurance Corp. of India v. CIT and General Insurance Corp. of India v. CIT, which emphasize that Section 44 governs the computation of taxable income for insurance businesses. The IRDA regulations mandate the preparation of financial statements, including separate accounts for policyholders and shareholders, which the assessee complied with. The Tribunal's reliance on the ICICI Prudential case, where the Bombay High Court ruled that shareholders' income is part of the life insurance business, was deemed appropriate.

Conclusion:
The Karnataka High Court upheld the Tribunal's decision, affirming that the assessee correctly computed its profits under Section 44 read with Rule 2 of Part A of the First Schedule. The substantial questions of law were answered in favor of the assessee, subject to the outcome of the pending Supreme Court appeal in the ICICI Prudential case. The judgment underscores the importance of adhering to the specific provisions governing the computation of income for life insurance businesses under the Income Tax Act.