2024 (6) TMI 153 - HC - Income Tax

Disallowance of provision for unsettled claims as on March 31st - Outstanding claims to the extent lodged by policy holders - Determination of Outstanding Claims Reserve - amount is shown as a provision in books of account of the assessee and can be allowed in the year when it is materialised and not in the year under consideration - ITAT deleted addition - HELD THAT - Tribunal was clearly justified in taking into consideration the indubitable fact of the distinction that must be borne in mind between the incurrence of a liability and its ultimate quantification. Before us it was not disputed by the appellant that the provision was made by the respondent-assessee on the basis of customer wise details of claims lodged. Merely because those claims ultimately came to be adjudicated subsequently would have no bearing on a provision being validly made. Determination of Incurred But Not Reported (IBNR) Claims Reserve - The computation of profits of general insurance business is undisputedly regulated by the provisions made in the First Schedule of the Act and which requires an entity engaged in the business of insurance to compute its profits and gains from business as per its profit and loss account prepared in accordance with the Insurance Act, 1938, the rules framed under the said enactment or the Insurance Regulatory and Development Authority Act, 1999 and the rules and regulations framed by the IRDA. We find that the provisioning for IBNR is based upon the Insurance Regulatory and Development Authority of India (Assets, Liabilities and Solvency Margin of General Insurance Business) Regulations, 2016 Regulations . The determination of amount of liabilities of a general insurer is regulated by Regulation 5 and which requires a general insurer to prepare a statement of liabilities in accordance with Schedule II of those Regulations. A lucid explanation of the concept of contingent liabilities is then found in Whirpool of India Ltd. 2011 (1) TMI 657 - DELHI HIGH COURT In the facts of that case, this Court found that the assessee there had been consistently making provisions on the basis of actuarial valuation in respect of machines sold and warranty claims lodged. Both the AO as well as the CIT(A) in that case had taken the view that claims pertaining to unexpired periods of warranty could be considered only when actual claims may arise and that the assessee would not be justified in estimating a warranty liability. Thus we come to the firm conclusion that it would be wholly incorrect to understand IBNR provisioning to be a contingent liability. We, in this regard, bear in consideration the precepts of reasonable estimation, the capability of a liability being quantified based upon historical trends and the known actuarial methods for estimation which are liable to be adopted in accordance with the IRDA Regulations. We consequently find no error in the view ultimately taken by the Tribunal. Decided against revenue.

Summary

Issues Involved:
1. Delay in filing and refiling the appeals.
2. Deletion of disallowance of provision for unsettled claims.
3. Deletion of disallowance on account of the provision for unlogged claims (IBNR).

Summary of Judgment:

1. Delay in Filing and Refiling Appeals:

The court condoned the delay in filing and refiling the appeals based on the disclosures made. The applications concerning the delay were disposed of accordingly.

2. Deletion of Disallowance of Provision for Unsettled Claims:

The Principal Commissioner of Income Tax challenged the ITAT's order deleting the disallowance of provision for unsettled claims. The ITAT had upheld the view that the provision for unsettled claims was not ad hoc but based on actual claims lodged by policyholders. The Tribunal referred to the Kerala High Court's judgment in Commissioner of Income Tax vs. Kerala Transport Company, asserting that unsettled claims, once lodged, are not contingent liabilities but ascertained liabilities. The Tribunal upheld the CIT(A)'s order, which found no merit in the AO's addition, stating that the liability was duly ascertained and not contingent.

3. Deletion of Disallowance on Account of Provision for Unlogged Claims (IBNR):

The ITAT followed its Kolkata Bench's view in Deputy Commissioner of Income Tax vs. National Insurance Co. Ltd., which held that the provision for IBNR claims, made in accordance with IRDA regulations, is an ascertained liability. The Tribunal noted that the computation of profits for general insurance businesses is regulated by the First Schedule of the Income Tax Act, 1961, and IRDA regulations. The IRDA regulations provide detailed methods for estimating IBNR claims, which are based on actuarial principles and historical data. The Tribunal found that the provision for IBNR claims was not a contingent liability but an ascertained liability, duly supported by empirical data and actuarial methods.

The court referred to the Supreme Court's decision in Rotork Controls India Private Limited vs. Commissioner of Income Tax, Chennai, which explained that a provision is a liability measurable by substantial estimation, arising from past events, and resulting in probable outflow of resources. The court also cited The Commissioner of Income Tax vs. Whirlpool of India Ltd., which supported the view that provisions based on historical trends and actuarial valuation are not contingent liabilities.

In conclusion, the court found no error in the Tribunal's view that IBNR provisioning is not a contingent liability but an ascertained liability. The appeals were dismissed accordingly.