2023 (10) TMI 689 - AT - Income Tax

Revision u/s 263 on Insurance business - validity of reassessment proceedings - AO assessed the income based on the surplus declared as per actuary report and also made addition towards deficit from Pension Schemes - CIT directed the AO to adjust the amount of capital contribution transferred from shareholders account to policy holders account against the surplus as per the actuary report - HELD THAT - We see merit in the contention of the ld AR that the AO during the re-assessment the AO has merged the entire proceedings by assessing the total income of the assessee afresh. It is also noticed that the AO has analysed the provisions of section 44 along with relevant rules, has taken into consideration the various submissions of the assessee and also has relied on a plethora of judgements while completing the re- assessment. Therefore the revenue's contention that the assessing officer has not applied his mind while completing the re-assessment is not tenable. Computation of income of the assessee engaged in the business of life insurance business shall be taken to be the annual average of the surplus arrived at by adjusting the surplus or deficit disclosed by the actuarial valuation not with standing sections 28 to 43B and also the provisions relating to the computation of income chargeable under the head Interest on securities , Income from house property , Capital gains or Income from other sources . On perusal of the original order of assessment u/s. 143(3) we notice that the AO in the original assessment has made the disallowance considering the Shareholders Account separately from the Policy Holders Account and the plea of the assessee before the AO was that only for presentation purposes, the assessee prepares 'policyholders account' and 'shareholders account' and that shareholders account cannot be treated as other regular business carried out by the assessee. This issue is no longer res integra in view of the decision of ICICI Prudential Insurance Co. Ltd. 2015 (7) TMI 1259 - BOMBAY HIGH COURT in terms of section 44 of the Act, such income has to be taxed in accordance with First Schedule as provided therein. None of the authorities under the Act nor even before us is it urged that the assessee is carrying on separate business other than life insurance business. Accordingly, the impugned order holding that the income from shareholders' account is also to be taxed as a part of life insurance business cannot be found fault with in view of the clear mandate of section 44. From the facts of the assessee's case it is clear that in the original assessment the Assessing Officer has clearly segregated the Shareholders Account and Policyholders Account and made the disallowances treating income from Shareholders Account as not part of income from life insurance business of the assessee. CIT holding the order of re-assessment as erroneous for the reason that the disallowances made by the Assessing Officer has not been considered is not well-founded and is debatable. Also AO has made a fresh assessment of the income of the assessee considering the provisions of the Act along with the various judicial proceeding and therefore excise of the revisionary powers u/s. 263 for this reason is not justifiable . Appeals of the assessee are allowed.

Summary

Issues Involved:

1. Validity of the reassessment proceedings under Section 147 of the Income-tax Act.
2. Applicability of Section 44 and the First Schedule of the Income-tax Act for computation of income for life insurance business.
3. Legitimacy of the revision order under Section 263 of the Income-tax Act by the Commissioner of Income-tax.

Detailed Analysis:

1. Validity of the Reassessment Proceedings under Section 147:

The reassessment proceedings were initiated because the actuarial valuation report, which showed a surplus rather than a loss, was not available during the original assessment. The Assessing Officer (AO) believed that income had escaped assessment due to this oversight. The AO, during the reassessment, computed the income based on the actuarial report and did not adjust the capital contribution transferred from the shareholders' account to the policyholders' account against the surplus. The tribunal found that the AO had conducted a fresh assessment of the total income during the reassessment, considering the provisions of the Act and relevant judicial precedents. Therefore, the reassessment was deemed valid as the AO had applied his mind and the reassessment order effaced the original assessment order.

2. Applicability of Section 44 and the First Schedule for Life Insurance Business:

Section 44, along with the First Schedule, governs the computation of income for life insurance companies, mandating that the income be computed based on the surplus or deficit disclosed by the actuarial valuation. The tribunal emphasized that the computation of income for life insurance business should not consider disallowances applicable to other businesses. The tribunal referred to the jurisdictional High Court's decision in the case of ICICI Prudential Insurance Co. Ltd., which held that income from the shareholders' account is part of the life insurance business income. The tribunal concluded that the AO correctly computed the income based on the actuarial surplus, aligning with Section 44 and the First Schedule, and the CIT's contention that the AO did not consider disallowances from the original assessment was unfounded.

3. Legitimacy of the Revision Order under Section 263:

The CIT invoked Section 263, arguing that the AO's reassessment order was erroneous and prejudicial to the revenue's interest as it did not incorporate the disallowances from the original assessment. The tribunal examined the provisions of Section 263, which requires the order to be erroneous and prejudicial to the revenue. It was noted that the AO had applied his mind, conducted inquiries, and relied on judicial precedents during the reassessment. The tribunal found no material evidence from the CIT to demonstrate that the original disallowances were legally sustainable or that the reassessment order was erroneous. Consequently, the tribunal held that the CIT's exercise of revisionary powers under Section 263 was unjustified, as the reassessment was neither erroneous nor prejudicial to the revenue's interest.

Conclusion:

The tribunal quashed the CIT's order under Section 263, holding that the reassessment orders for AY 2003-04 and 2004-05 were valid and not erroneous. The appeals of the assessee were allowed, and the reassessment orders were upheld.