2023 (11) TMI 391 - AT - Income Tax

Assessment of insurance business - Computing taxable income as per section 44 read with rule No.2 of Schedule I -Adjustment of earlier year surplus - HELD THAT - We notice that the assessing officer while recomputing the income of the assessee has made the adjustment stating that the revenue in earlier assessment years has done a similar adjustment. CIT(A) has given relief to the assessee by relying on the decision of the coordinate bench in assessee's own case for earlier assessment years. Therefore there is merit in the contention that the facts for the year under consideration are identical to that of the earlier years and that the decision of the coordinate bench for earlier years are mutatis mutandis applicable to the year under consideration also. We notice that in the above case, the co-ordinate bench has considered the various adjustments made to the income of the assessee and has held that in assessee s case the income should be computed as per the provisions of section 44 and accordingly, to be taxed under section 115B. Therefore respectfully following the above, we see no reason to interfere with the decision of the CIT(A). Disallowance u/s 14A - We hold that the provisions of section 14A are not applicable in assessee s case while granting exemption to an income earned on sale of investment primarily because of the reason of the withdrawal or deletion of sub-r.5(b) to First Schedule of s. 44 of IT Act, thus allow the ground raised in this regard in favour of the assessee. Exemption towards dividend income, interest income from tax free bonds and income from pension line of business - We notice in this regard that the coordinate bench in the case of ICICI Prudential Insurance Co. Ltd 2012 (11) TMI 13 - ITAT MUMBAI has considered the issue of claiming exemption towards income from pension line of business and dividend income and held that the only effect of section 44 is that the operation of the provisions referred to therein is excluded in the case of an assessee who carried on insurance business and in whose case the provisions of rule 2 of the First Schedule are attracted. If the deductions which are claimed by the assessee do not fall within the provisions which are referred to in section 44, it will have to be held that the applicability of those provisions in the case of an assessee whose assessment is governed by section 44 read with rule 2 in the First Schedule is not excluded. Therefore respectfully following the above decision of the coordinate bench we hold that the assessee is entitle to claim exemption under section 10(15) towards interest income from tax free bonds, under section 10(34) towards dividend income and under section 10(23AAB) towards surplus of Participating Pension Business.

Issues Involved:

1. Adjustment of actuarial surplus of previous years.
2. Basis of computation as per section 44 read with rule No.2 of Schedule I.
3. Consolidation of policyholder and shareholder accounts.
4. Transfer to revenue account from P&L account.
5. Adding negative reserves to the actuarial surplus.
6. Disallowance under section 14A r.w.r.8D.
7. Denial of exemption under section 10 for various incomes.

Summary:

1. Adjustment of Actuarial Surplus of Previous Years:
The Tribunal upheld the CIT(A)'s decision that the actuarial valuation should be done in accordance with the unamended Insurance Act, 1938, and not as per the IRDA regulations. The adjustment of earlier years' surplus was affirmed, stating that only the difference between the closing and opening surplus should be considered as income for the year.

2. Basis of Computation as per Section 44 Read with Rule No.2 of Schedule I:
The Tribunal agreed with the CIT(A) that the actuarial valuation should be done as per the erstwhile Fourth Schedule of the Insurance Act, 1938. The AO's method of following IRDA regulations was not in accordance with Rule-2 and the provisions of the Income Tax Act.

3. Consolidation of Policyholder and Shareholder Accounts:
The Tribunal supported the CIT(A)'s view that both accounts should be consolidated for the purpose of arriving at the deficit or surplus. The transfer of funds between these accounts is tax-neutral and should be considered as part of the life insurance business income.

4. Transfer to Revenue Account from P&L Account:
The Tribunal held that the transfer of funds from the shareholder's account to the policyholder's account does not result in taxable income. The AO's insistence on taxing the total surplus, including transfers, was incorrect.

5. Adding Negative Reserves to the Actuarial Surplus:
The Tribunal found that the treatment given to negative reserves by the actuary cannot be disturbed by the AO. Negative reserves, being in the nature of an asset, should not be added back to the actuarial surplus.

6. Disallowance under Section 14A r.w.r.8D:
The Tribunal ruled that the provisions of section 14A are not applicable to insurance companies. The AO's disallowance of expenses attributable to earning exempt income was overturned, following the precedent set in earlier cases.

7. Denial of Exemption under Section 10:
The Tribunal held that the assessee is entitled to claim exemptions under section 10(15) for interest income from tax-free bonds, section 10(34) for dividend income, and section 10(23AAB) for income from the pension line of business. The AO's denial of these exemptions was not justified.

Conclusion:
The appeals by the Revenue for AY 2017-18 and 2018-19 were dismissed, and the cross objections filed by the Assessee were also dismissed. The Tribunal upheld the CIT(A)'s decision to give relief to the assessee, affirming that the income should be computed as per the provisions of section 44 and taxed under section 115B.

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