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2022 (4) TMI 1271 - AT - Income TaxAllowable deduction u/s 37(1) - disallowance of reinsurance premium payment made to non-resident reinsurers who do not have a place of business / branch in India - alternative disallowance that was made by the ld. AO in this regard was u/s.40(a)(i) of the Act for payments made without deduction of tax at source - HELD THAT - Reinsurance premium sought to be paid to foreign reinsurers outside India was taken due cognizance by the IRDA, being the regulatory authority for insurance companies, and had not found anything adverse or in any violation of provisions of Insurance Act and insurance regulations thereon - we find that IRDA vide letter dated 12/02/2020 had given clarification in respect of assessment proceedings of the assessee company for A.Y.2016-17 and 2017-18 directly addressed to the ld. AO, wherein, it was specifically clarified that the reinsurance premium paid by the assessee to foreign reinsurers outside India who do not have any business presence in India, was permitted in law and was permitted activity under the insurance Act 1938 and IRDA (General Insurance-Reinsurance) Regulations issued by the authority. It was also mentioned in the said letter that the regulations issued by the authority i.e. IRDA are subordinate legislation which are also placed before both the Houses of Parliament. Hence, in view of the above, it could be safely concluded that the payment of reinsurance premium by the assessee to foreign reinsurers could not be construed as payment made in violation of provisions of Insurance Act and IRDA regulations. CIT(A) observed that since the foreign reinsurer in the instant case does not have a branch or place of business in India, the amended definition of Section 2(9) of the Act w.e.f. 26/12/2014 would go against the assessee. Accordingly, the ld. CIT(A) had granted relief to the assessee in respect of payments made prior to 26/12/2014. But we find that the Hon ble Madras High Court had already held that the definition of Section 2(9) of the Insurance Act has no role to play in the instant case. Hence, there was no need to get into the amendment in Section 2(9) thereon. We find that the Hon ble Madras High Court 2019 (2) TMI 335 - MADRAS HIGH COURT had held that definition in Section 2(9) of the Insurance Act is irrelevant for the purpose of Section 101A read with IRDA regulations. Hence, the observation made by the ld. CIT(A) in para 4.2.5, in our considered opinion, is wrong. Applicability of provisions of Section 40(a)(i) in respect of reinsurance premium paid to foreign reinsurers - It is a fact that in the impugned case of the assessee before us, i.e. Tata AIG Insurance, it is not in dispute that foreign reinsurer does not have any place of business or branch or any business connection or permanent establishment in India. Hence, the payments made by the assessee company to the said foreign insurer is not chargeable to tax in India in the hands of the foreign reinsurer in terms of Section 195(1) of the Income Tax Act. Hence, there is no obligation on the part of the assessee payer to deduct tax at source thereon. Reliance in this regard is placed on the decision of the Hon ble Supreme Court in the case of GE India Technology Centre Pvt. Ltd., vs CIT 2010 (9) TMI 7 - SUPREME COURT Accordingly, the provisions of Section 40(a)(i) of the Act would not come into operation at all. Moreover, these decisions were duly quoted by the assessee before the ld. CIT(A) vide its submission dated 25/02/2020 which was completely ignored by the ld. CIT(A) while adjudicating the issue. Hence, the entire observations of the lower authorities had been duly addressed in the aforesaid findings by us. At the cost of repetition, we would like to reiterate the fact that there is absolutely no dispute that the foreign reinsurers does not have any place of business in India / permanent establishment in India / branch established in India / Liaison office in India. Hence, any payment made by the assessee company to such foreign insurers would not be chargeable to tax in the hands of the foreign reinsurers in India in terms of Section 195(1) of the Act. Accordingly, as stated earlier, there would be no obligation on the part of the assessee, being a payer, to deduct tax at source and consequently there cannot be any disallowance u/s.40(a)(i) of the Act. Accordingly, assessee succeeds on this ground also. Claim of depreciation as per the provisions of Section 32 - HELD THAT - Legislature never wanted to deny any deduction or allowance that was otherwise allowable to the assessee under the very same provisions of Sections 30 to 43B of the Income Tax Act. It also impliedly mentioned that by this process, the double disallowance that would occur shall be avoided. There would be cases where assessee while making certain provision for certain expenses or provision for certain reserves would add it back voluntarily in the return of income even though the same is an item of legitimate expenditure in the P L account. When the very same expenditure is actually paid by the assessee in different assessment year, the same should be logically and legally liable for deduction / allowance to the assessee in the year in which such payments are made. This alone would address the clear intention of the legislature. Moreover these benefits are otherwise available to all other types of the assessee and there is no logical reason that an Insurance company alone should be deprived of the same. This would be more relevant from the point of discrimination of assessee. Considering the totality of these observations, it could be safely concluded that the amendment brought in Finance Act 2020 addressing this anomaly is merely curative in nature and hence has to be construed as clarificatory having retrospective effect as it was brought in to avoid unintended consequences and to avoid discrimination with other assessees. We find that the reliance has been rightly placed by the ld. AR on the decision of the Hon ble Supreme Court in the case of Allied Motors (P) Ltd. 1997 (3) TMI 9 - SUPREME COURT wherein it was held that when a proviso is inserted to remedy unintended consequences and to make the section workable, a proviso which supplies an obvious omission in the section and which proviso is required to be read into the section to give it a reasonable interpretation, it could be read to be retrospective in operation, particularly to give effect to the section as a whole. This direction, in our considered opinion, would make computation provisions mentioned in Rule 5 of the first schedule of the Income Tax Act workable. In view of the above observations, we direct the ld. AO to grant allowance of depreciation u/s.32 of the Act for the year under consideration. Needless to mention that the ld. AO should rework the depreciation of subsequent years accordingly due to change in the written down value of the block of assets. Accordingly, the ground No.10 raised by the assessee is allowed. Seeking credit for tax deducted at source - HELD THAT - We find that the ld. AO had not granted the credit of additional tax deduced at source claimed by the assessee during the assessment proceedings. Since this matter requires factual verification, we direct the ld. AO to verify the claim of the assessee and grant TDS credit in accordance with law. Accordingly, the ground No.11 raised by the assessee is allowed for statistical purposes.
Issues Involved:
1. Disallowance of re-insurance premium paid to non-resident reinsurers under Section 37(1) and Section 40(a)(i) of the Income Tax Act. 2. Claim of depreciation under Section 32 of the Income Tax Act. 3. Deduction of certain expenses and reversals disallowed in previous years. 4. Credit for tax deducted at source (TDS). Issue-wise Detailed Analysis: 1. Disallowance of Re-insurance Premium: The assessee, a general insurance company, paid reinsurance premiums to non-resident reinsurers without withholding tax, leading to disallowance under Section 37(1) and alternatively under Section 40(a)(i) of the Income Tax Act. The Tribunal found that the assessee’s payments were not in violation of the Insurance Act, 1938, as clarified by the Madras High Court in the case of Cholamandalam MS General Insurance Co. Ltd. The court ruled that reinsurance with foreign companies is permissible and not prohibited by law. Consequently, the Tribunal held that the disallowance under Section 37(1) was not applicable. Regarding Section 40(a)(i), the Tribunal noted that since the foreign reinsurers did not have a permanent establishment in India, the payments were not chargeable to tax in India, and thus, no TDS was required. Therefore, the disallowance under Section 40(a)(i) was also not applicable. 2. Claim of Depreciation: The assessee claimed depreciation as per Section 32 of the Income Tax Act, which was disallowed by the AO based on Rule 5 of the First Schedule to the Income Tax Act. The Tribunal observed that disallowing both book and income tax depreciation would result in no depreciation being allowed, which was unjust. The Tribunal emphasized that depreciation under Section 32 is mandatory and should be allowed to avoid unjust results. The Tribunal directed the AO to grant depreciation as per Section 32 and rework the depreciation for subsequent years accordingly. 3. Deduction of Certain Expenses and Reversals: The assessee sought deductions for various expenses and reversals disallowed in previous years, including profit on sale of fixed assets, reversal of expenses, disallowed expenses under Section 40(a)(ia), bonus and leave encashment paid, and reversal of provision for doubtful debts. The Tribunal held that these deductions should be allowed to avoid double disallowance, aligning with the amendments brought by the Finance Act, 2020, which aimed to prevent unintended consequences and ensure fairness. The Tribunal allowed these deductions, emphasizing that the legislative intent was not to deny legitimate deductions. 4. Credit for Tax Deducted at Source (TDS): The assessee claimed additional TDS credit during the assessment proceedings, which was not granted by the AO. The Tribunal directed the AO to verify the claim and grant the TDS credit in accordance with the law, ensuring that the assessee receives the due credit. Conclusion: The Tribunal ruled in favor of the assessee on all major grounds, allowing the reinsurance premium payments, granting depreciation under Section 32, allowing deductions for previously disallowed expenses, and directing the AO to verify and grant the TDS credit. The judgment emphasized the importance of fair and just application of tax laws, aligning with legislative intent and avoiding double disallowance.
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