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2022 (3) TMI 528 - AT - Income TaxAllowable expense u/s 37(1) - provisions for claim Incurred but Not Reported (IBNR) and claim Incurred But Not Enough Reported (IBNER) - whether such provisions are in the nature of contingent liability? - HELD THAT - CIT(A) while deciding the issue has relied upon the decision National Insurance Company Limited 2016 (8) TMI 326 - ITAT KOLKATA has held that the provisions made available the above claim are based on scientific calculation with a proper and rational and therefore it could only be termed as ascertain liability. Though the above decision was rendered with respect to the computation of book profit under section 115JB of the Act however the learned CIT (A) applied it and allowed the claim of assessee for deduction under section 37(1) for the reason that the claim of the assessee is ascertained claim supported by Actuarial valuation and also made on a scientific basis. To reach at this calculation the learned CIT (A) obtained information for 6 different assessment years and found that the actual claim settled is always higher than the provisions made by the assessee. This it shows that the provisions made are not excessive - this claim is allowed to the assessee from year to year. In view of this we find that assessee has incurred an expenditure which is incurred during the year with respect to the provisions made for the IBNER and IBNR claims on scientific basis and also certified by the valuer with respect to the methodology adopted in making such provisions. Thus it satisfies the entire ingredient for its allowance u/s 37 (1) of the act. Thus there is no infirmity in the order of the learned CIT (A) in allowing the claim under section 37(1) - Decided against revenue. TDS u/s 194H - TDS on co-insurance fee u/s 40(a)(ia) - whether the assessee is not required to deduct tax at source on such payments? - HELD THAT - In the decision of the coordinate bench 2009 (2) TMI 234 - ITAT BOMBAY-G we find that there is no discussion with respect to any of the agreements between the insurance company and the reinsurance Co no such agreements were also available before us. Therefore it is very difficult for us to say without looking at the evidence that the provisions of Section 194H do not apply The honourable High Court 2019 (8) TMI 1803 - BOMBAY HIGH COURT has already held that the provisions of Section 194D do not apply to such commission. Therefore it is pertinent to examine whether the provisions of Section 194H applies to it or not. Before us the assessee has relied merely on the decisions. There are neither the copies of agreement of Reinsurance/coinsurance between the parties - we did not find any guidance that how the above payments were held to be on principal to principal basis and are not covered u/s 194 H of the Act because para no 31 of the order merely says that it agrees with arguments of the assessee. Thus these facts are not coming from the order of the lower authorities also. Therefore in absence of any evidence placed before us we are not in position to decide whether the above payments are covered u/s 194 H or not. We set-aside the whole issue back to the file of the learned assessing officer with a direction to assessee to produce the relevant agreements and arrangements before the assessing officer to show that the above payment does not fall within the purview of Section 194H of the act. The learned assessing officer may examine the same and then decide whether on such payment the provisions of Section 194H applies or not based on the various arguments raised before him by the assessee - ground no. 2 of the appeal of the Assessing Officer is allowed subject to above direction. Nature of expenditure - expenditure incurred towards the purchase of pen drives laptop adaptors etc. - whether such expenditure incurred by the assessee creates enduring benefit and was a capital asset eligible for depreciation u/s 32 - HELD THAT - We find that identical issue arose in case of the assessee for Assessment Year 2006-07 to 2008-09 2015 (11) TMI 1858 - ITAT MUMBAI relying on the decision of Southern Roadways Ltd. 2006 (10) TMI 82 - MADRAS HIGH COURT held that purchase of hard disk battery etc. is revenue expenditure and not capital. Further identical issue in case of the assessee honourable Bombay High Court 2019 (8) TMI 1800 - BOMBAY HIGH COURT as already decided this issue in favour of the assessee. Therefore this issue is squarely covered in favour of the assessee. Hence we confirm the order of the learned CIT (A) in deleting the above disallowance. In the result ground No. 3 of the appeal is dismissed.
Issues Involved:
1. Allowability of provisions for claims Incurred but Not Reported (IBNR) and claims Incurred But Not Enough Reported (IBNER) under Section 37(1) of the Income Tax Act. 2. Non-deduction of tax at source on co-insurance fees under Section 40(a)(ia) of the Income Tax Act. 3. Classification of expenditure on pen drives, laptop adapters, etc., as capital or revenue expenditure. Detailed Analysis: 1. Allowability of Provisions for Claims IBNR and IBNER under Section 37(1): The first issue concerns the allowability of provisions for claims Incurred but Not Reported (IBNR) and claims Incurred But Not Enough Reported (IBNER) amounting to ?148,43,01,915/- under Section 37(1) of the Income Tax Act. The assessee, a general insurance company, created these provisions based on guidelines from the Insurance Regulatory and Development Authority of India (IRDAI) and certified by an actuary. The Assessing Officer (AO) disallowed this amount, considering it a contingent liability. However, the CIT(A) allowed the claim, referencing the Supreme Court's decision in Rotork Controls India Pvt. Ltd. vs. Commissioner of Income Tax, which permits provisions for present obligations arising from past events if they can be reliably estimated. The ITAT upheld the CIT(A)'s decision, noting that the provisions were scientifically calculated, certified by an actuary, and consistently less than the actual claims settled in subsequent years, thus qualifying as an ascertained liability under Section 37(1). 2. Non-Deduction of Tax at Source on Co-Insurance Fees: The second issue involves the disallowance of ?41,49,000/- under Section 40(a)(ia) of the Act due to non-deduction of tax at source on co-insurance fees. The assessee argued that these payments were not subject to TDS under Section 194H, as there was no principal-agent relationship between the assessee and the co-insurer. The AO disallowed the amount, but the CIT(A) deleted the disallowance, referencing the ITAT's earlier decisions in the assessee's favor. The ITAT noted that while the earlier decisions supported the assessee, the exact nature of the agreements and whether the payments fell under Section 194H needed further examination. Therefore, the ITAT remanded the matter back to the AO to review the agreements and determine the applicability of Section 194H. 3. Classification of Expenditure on Pen Drives, Laptop Adapters, etc.: The third issue pertains to the classification of an expenditure of ?29,46,886/- on pen drives, laptop adapters, and similar items as capital or revenue expenditure. The AO treated these as capital expenditure, allowing depreciation at 60% and disallowing the balance. The CIT(A) reversed this decision, citing the ITAT's earlier rulings that such expenses are revenue in nature. The ITAT confirmed the CIT(A)'s decision, referencing the Madras High Court's ruling in Southern Roadways Ltd. and the Bombay High Court's decision in the assessee's own case, which classified similar expenditures as revenue expenses. Conclusion: The ITAT upheld the CIT(A)'s decisions on the first and third issues, allowing the provisions for IBNR and IBNER claims under Section 37(1) and classifying the expenditure on pen drives and laptop adapters as revenue expenditure. On the second issue, the ITAT remanded the matter back to the AO for a detailed examination of the agreements to determine the applicability of Section 194H. The appeal by the AO was thus partly allowed.
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