2025 (1) TMI 1229 - AT - Income Tax

Admission of additional ground - Exemption u/s 10(15)(iv)(h) - interest income from investments in redeemable non-convertible bonds/debentures issued by public sector companies - HELD THAT - The Supreme Court in in NTPC 1996 (12) TMI 7 - SUPREME COURT permits the ITAT to entertain additional grounds u/s 254 of the IT Act for the first time with the only caveat that the relevant facts are on record in respect of that item. In the instant case the relevant facts of investment in PSU Bonds/debentures etc are available in the audited balance sheet and was before the assessing officer. We find from the recent decision in the case of Siva Equipment (P.) Ltd. 2020 (2) TMI 371 - BOMBAY HIGH COURT which held that a taxpayer is entitled to raise not merely additional legal submissions before the appellate authorities but is also entitled to raise additional claims before the appellate authorities. In view of the above we admit the additional ground raised. As investments in PSU Bonds and debentures are available in the audited accounts the assessing officer needs to examine the same with regard to the eligibility of assessee s claim considering the eligibility criteria laid down in section 10(15)(iv)(h). For this purpose we find it fit to set aside this issue to the file of the assessing officer for examining the claim of the assessee. Where the claim made is as per the law the same should be allowed. The additional ground is allowed for statistical purpose Non-allowance of deduction u/s 80G - HELD THAT - CIT(A) has not adjudicated the issue of allowance/disallowance u/s 80G although the assessee had taken this ground before the CIT(A). The assessee has claimed that the issue of 80G was set aside to the file of AO for verification in the assessee s own case by the ITAT in AY 2006-07 Following the earlier ITAT decision we are of the considered view that the issue of 80G be set aside to the file of Assessing officer to decide on the issue. Computation of income as per Rule-2 of First Schedule of Section 44 - Determination of income for a life insurance company - HELD THAT - As per rule 2 of the First Schedule to the Act profits and gains of life insurance business has to be taken to be the annual average of the surplus arrived at by adjusting the surplus or deficit disclosed by the actuarial valuation made in accordance with the Insurance Act 1938 in respect of the last inter valuation period ending before the commencement of the assessment year so as to exclude any surplus or deficit included therein which was made in any earlier inter valuation period. According this rule as is applicable from A.Y.1977-78 the surplus or deficit between two inter valuation periods disclosed by the actuarial valuation made in accordance with Insurance Act 1938 can only be taken as income or loss of the period. The old Rule 2 which was in existence prior to amendment made by Finance Act 1976 contains two methods of determining profits and gains of the 10 which has been allowed by the ITAT As no distinguishing decision has been brought to our notice we therefore respectfully following the decision of the co-ordinate bench dismiss all the grounds raised by the Revenue.

Summary

1. ISSUES PRESENTED and CONSIDERED

The legal judgment primarily revolves around the following core legal questions:

• Whether the disallowance of Corporate Social Responsibility (CSR) expenditure under Section 37 of the Income Tax Act is applicable to life insurance companies.
• Whether the assessee is entitled to deductions under Section 80G of the Income Tax Act for donations made.
• Whether the assessee can claim an exemption under Section 10(15)(iv)(h) for interest income from investments in redeemable non-convertible bonds/debentures issued by public sector companies.
• Whether the computation of income for a life insurance company should be governed solely by Section 44 of the Income Tax Act, overriding other provisions from Section 28 to Section 43B.
• Whether profits from the sale of investments should be considered as income derived from life insurance business.
• Whether the bonus allocated to policyholders and amounts appropriated to funds for future appropriation (FFA) should be deducted from taxable actuarial surplus.
• Whether provisions for bad debts should be treated as expenses related to life insurance business and thus governed by Section 44.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1: Disallowance of CSR Expenditure

• Legal Framework and Precedents: The key legal provision is Section 37 of the Income Tax Act, which generally disallows CSR expenses as deductions.
• Court's Interpretation and Reasoning: The court upheld the disallowance of CSR expenses, citing a precedent in the assessee's own case for AY 2010-11.
• Conclusion: The ground was dismissed as not pressed by the assessee.

Issue 2: Deduction under Section 80G

• Legal Framework and Precedents: Section 80G allows deductions for donations to certain funds and charitable institutions.
• Court's Interpretation and Reasoning: The court noted that the CIT(A) had not adjudicated the issue, and the ITAT in AY 2006-07 had set aside the matter for examination.
• Conclusion: The issue was set aside to the Assessing Officer for verification, allowing the ground for statistical purposes.

Issue 3: Exemption under Section 10(15)(iv)(h)

• Legal Framework and Precedents: This section provides exemptions for interest income from specified bonds.
• Court's Interpretation and Reasoning: The court admitted the additional ground for examination, citing the Supreme Court's decision in National Thermal Power Co. Ltd. v. CIT.
• Conclusion: The issue was set aside to the Assessing Officer for examination, allowing the ground for statistical purposes.

Issue 4: Computation of Income under Section 44

• Legal Framework and Precedents: Section 44 governs the computation of income for insurance businesses.
• Court's Interpretation and Reasoning: The court followed the ITAT's previous decisions, affirming that Section 44 overrides other provisions.
• Conclusion: The ground was dismissed, upholding the computation under Section 44.

Issue 5: Profits from Sale of Investments

• Legal Framework and Precedents: The treatment of profits from investments in insurance businesses.
• Court's Interpretation and Reasoning: The court followed previous ITAT decisions, treating such profits as income from insurance business.
• Conclusion: The ground was dismissed.

Issue 6: Bonus and FFA Deductions

• Legal Framework and Precedents: The deductibility of bonuses and FFA from actuarial surplus.
• Court's Interpretation and Reasoning: The court followed ITAT precedents, allowing such deductions.
• Conclusion: The grounds were dismissed.

Issue 7: Provision for Bad Debts

• Legal Framework and Precedents: Treatment of bad debts in insurance business under Section 44.
• Court's Interpretation and Reasoning: The court upheld the treatment of bad debts as insurance business expenses.
• Conclusion: The ground was dismissed.

3. SIGNIFICANT HOLDINGS

• Core Principles Established: The judgment reinforces the principle that specific provisions for insurance businesses under Section 44 take precedence over general provisions of the Income Tax Act.
• Final Determinations:
  • The appeal of the assessee was partly allowed, with certain issues remanded for further examination.
  • The appeals of the Revenue were dismissed, upholding the CIT(A)'s decisions in favor of the assessee.

Verbatim Quotes of Crucial Legal Reasoning:

"The power of the Tribunal in dealing with appeals is, thus, expressed in the widest possible terms. The purpose of the assessment proceedings before the taxing authorities is to assess correctly the tax liability of an assessee in accordance with law." - Supreme Court in NTPC case.

"Section 44 of the Act start with a non-obstante clause and overriding other provisions of the Act, provides for profits and gains from life insurance business to be computed in accordance with the rules contained in the First Schedule to the Act." - ITAT's previous decision.