2025 (2) TMI 710 - HC - Income Tax

Treating liabilities as unascertained or contingent - ITAT justification in deleting the addition made by the AO on account of provision for uncertain liability of an insurance company other than Life Insurance Company - HELD THAT - Liability is a present obligation arising from past events the settlement of which is expected to result in an outflow of resources and in respect of which a reliable estimate of the amount of obligation is possible. The fact that Rotork Controls 2009 (5) TMI 16 - SUPREME COURT concerned an army of items of sophisticated goods manufactured and sold by the assessee or Metal Box Company 1968 (8) TMI 53 - SUPREME COURT pertained to an army of employees due to retire in future or Bharat Earth Movers 2000 (8) TMI 4 - SUPREME COURT was concerned with the provision made by the Assessee for meeting the liability incurred under Leave Encashment Scheme are no grounds not to follow the principle laid down in such binding presidents. Provisions based upon actuarial valuation are well accepted in several decisions. Hon ble Supreme Court has explained the difference between accrued and contingent liabilities in the above decisions. Merely because these decisions may have dealt with the issue of leave encashment for employees or payment of bonus to the employees or warranties provided by the assessee we cannot agree with Mr Chhotaray s contention that these decisions are entirely irrelevant or do not apply to the facts of this case. The ratio decidendi of the above precedents is not much coloured by the factual aspects of how those decisions were delivered. However the principle involved is important and this principle has been followed to reject the Revenue s contention that the provisions or expenditures were toward some unascertained liability or contingent liability. Besides in the present case since the assessee is obliged to maintain its accounts in terms of the IRDA directives or to adopt the actuarial method of valuation there was no error in the first appellate authority and the ITAT holding that no additions could have been made in respect of the provisions made by the assessee entirely consistent with the IRDA directives and the methods of valuation prescribed by IRDA. The approach of the AO in this case was contrary to the law laid down in General Insurance Corporation 1999 (9) TMI 3 - SUPREME COURT As far as in the precise factual context which obtains in the present case the Division Bench of the Delhi High Court concluded that it would be wholly incorrect to treat the IBNR (incurred but not reported) provisioning to be a contingent liability. The Court noted that the IRDA regulations which provided for adopting the actuarial method of valuation was a scientific method that the assessee involved in the insurance business was mandated to apply. We are satisfied that this Appeal is not required to be admitted on question (A) as same cannot be regarded as any substantial question of law. This is a mixed question of law and fact. The first appellate authority and the ITAT have both on facts and law correctly decided the matter. No case of perversity is made out. The ITAT has also referred to circumstances such as how consistently the revenue has assessed identical provisioning made by the assessee for the past assessment years. ITAT has also noted that though principles of res-judicata may not apply to the tax proceedings in the absence of any change circumstances the AO was not justified in treating liabilities as unascertained or contingent. Accordingly this Appeal is admitted only on substantial question of law at (B) above - ITAT justification in allowing u/s 14A r.w. Rule 8D (2) (ii)

Summary

The High Court of Bombay considered an appeal regarding the deletion of certain additions made by the Assessing Officer (AO) to the income of an insurance company. The core legal questions addressed in the judgment were as follows:1. Whether the addition made by the AO on account of provision for uncertain liability of an insurance company other than a Life Insurance Company was justified under the Income Tax Act?2. Whether the allowance of a specific amount under a particular section without proper evidence was justified?The Court analyzed these issues in detail:Issue A: Provision for Uncertain Liability- The Court examined Rule 5(a) of the First Schedule to the Income Tax Act, which outlines the treatment of expenditures or allowances not admissible under specific sections.- The Appellant argued that the provisions made by the Assessee were akin to contingent or unascertained liabilities and should be disallowed.- However, the Court found that the Assessee, an insurance company, was bound by the Insurance Regulatory and Development Authority Act and its directives, including the actuarial valuation method.- Precedents were cited to support the acceptance of provisions based on actuarial valuation and the distinction between accrued and contingent liabilities.- The Court concluded that the AO's addition of provisions made by the Assessee was unjustified, as they were consistent with IRDA directives and actuarial valuation methods.Issue B: Allowance without Proper Evidence- The Appellant contested the allowance of a specific amount under a particular section without evidence that the expenses were not attributable to earning exempted income.- The Court noted that the AO's decision was not supported by sufficient reasoning and evidence.- The Court upheld the decision of the Commissioner (Appeals) and the ITAT to delete the addition, citing consistency in past assessments and the application of correct legal principles.Significant Holdings:- The Court admitted the appeal only on the substantial question of law related to the allowance without proper evidence and rejected the appeal on the issue of uncertain liability provisions.- The judgment emphasized the importance of following IRDA directives and actuarial valuation methods in assessing insurance companies' liabilities.In conclusion, the High Court of Bombay upheld the decisions of the lower authorities in deleting the additions made by the AO, emphasizing the adherence to legal frameworks and precedents in determining tax liabilities for insurance companies.