2025 (3) TMI 26 - AT - Income Tax

Disallowance of provision towards IBNR/IBNER claims - HELD THAT - Right of an enterprise to make provisions for a liability which could be measured by and as the Supreme Court in Rotork Controls India Private Limited 2009 (5) TMI 16 - SUPREME COURT described a substantial degree of estimation . It was thus held that as long as a liability is properly ascertainable on the basis of empirical data or a known methodology the same cannot possibly be held to be a contingent liability. A lucid explanation of the concept of contingent liabilities is then found in Whirpool of India Ltd. 2011 (1) TMI 657 - DELHI HIGH COURT wherin 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. As relying on M/s Royal Sundaram General Insurance Company Limited 2025 (1) TMI 640 - ITAT CHENNAI we also decide this ground in favour of the assessee. Accordingly this ground of assessee is allowed. Amortization of premium paid on securities - As respectfully following the Co-ordinate bench order in assessee s own case up to AY 2019-20 we decide this ground in the favour of the revenue as decided the issue of amortization of premium paid on purchase of securities against the assessee. Disallowance u/s 40(a)(i) on reinsurance premium paid to foreign insurers - As following the Co-ordinate bench order in assessee s own case up to AY 2019-20 we decide this ground in the favour of the assessee as set aside order of the CIT(A) in restricting the claim of the assessee to 15% of payment made to NRRs of other countries and direct the Assessing Officer to delete the additions made towards disallowance of reinsurance premium ceded to NRRs u/s. 40(a)(i). Disallowance u/s 40(a)(i) in respect of commission paid to non-resident agents - This ground has been decided in favour of assessee by the co-ordinate bench of the Tribunal in assessee s own case 2024 (7) TMI 1556 - ITAT CHENNAI wherein held assessee is not paying any commission to insurance companies and such commission was deducted by respective insurance companies themselves from reinsurance premium. Therefore when the assessee is not making payment the assessee is not liable to deduct tax. Disallowance of expenditure incurred for the purpose of survey fees paid to non-residents. u/s. 40(a)(ia) - This ground has been decided in favour of assessee in 2024 (7) TMI 1556 - ITAT CHENNAI wherein held whenever there was damage or claim surveyors examined the insured property and estimated damages and entire services were outside India and the non-residents have no business connection in India. Further the income of the surveyors is not liable for taxation in India thus the assessee is not liable to deduct tax which is nothing but reimbursement of expenditure incurred by surveyors. Decided against revenue.

2025 (1) TMI 640 - AT

1. ISSUES PRESENTED and CONSIDERED

The core legal questions considered in this judgment include:

Whether the disallowance of provisions made towards Claims Incurred But Not Reported (IBNR) and Claims Incurred But Not Enough Reported (IBNER) is justified under Section 37(1) of the Income Tax Act, 1961.
Whether the amortization of premium paid on the purchase of securities is allowable under the provisions of the Income Tax Act.
Whether the disallowance of reinsurance premiums paid to non-resident reinsurers (NRRs) under Section 40(a)(i) of the Act, due to failure to deduct Tax Deducted at Source (TDS) under Section 195, is justified.
Whether the disallowance of commission paid to non-residents under Section 40(a)(i) of the Act is appropriate.
Whether the disallowance of survey fees paid to non-residents under Section 40(a)(ia) of the Act is appropriate.

2. ISSUE-WISE DETAILED ANALYSIS

Disallowance of Provision towards IBNR/IBNER Claims:

Legal Framework and Precedents: The provision for IBNR and IBNER claims is evaluated under Section 37(1) of the Income Tax Act, which allows deductions for business expenses that are not contingent liabilities. The Tribunal had previously disallowed these provisions as they were considered contingent liabilities.
Court's Interpretation and Reasoning: The Tribunal initially held that these provisions were contingent liabilities, as they were not ascertained at the time of reporting. However, recent judgments from higher courts and other Tribunal benches have recognized these provisions as ascertained liabilities based on actuarial valuation and regulatory guidelines, thus allowing them under Section 37(1).
Application of Law to Facts: The Tribunal revisited its earlier stance in light of new precedents, acknowledging that the provisions are based on scientific calculations and regulatory compliance, thus qualifying as ascertained liabilities.
Conclusion: The Tribunal allowed the deduction for IBNR and IBNER provisions, aligning with recent judicial trends.

Amortization of Premium Paid on Securities:

Legal Framework and Precedents: The issue revolves around whether the amortization of premium paid on securities is deductible. Previous Tribunal decisions have consistently disallowed this deduction, considering it a capital expense.
Court's Interpretation and Reasoning: The Tribunal maintained its earlier position, citing past decisions where the amortization was treated as a non-deductible capital expenditure.
Conclusion: The Tribunal disallowed the amortization of premium on securities, consistent with prior rulings.

Disallowance of Reinsurance Premiums Paid to NRRs:

Legal Framework and Precedents: Section 40(a)(i) requires TDS on payments to non-residents. However, reinsurance premiums are often covered by Double Taxation Avoidance Agreements (DTAA), which may exempt them from Indian tax.
Court's Interpretation and Reasoning: The Tribunal referred to its earlier decisions and those of higher courts, which found that reinsurance premiums paid to NRRs are not taxable in India under DTAAs, thus not requiring TDS.
Conclusion: The Tribunal allowed the deduction of reinsurance premiums, siding with the assessee.

Disallowance of Commission Paid to Non-Resident Agents:

Legal Framework and Precedents: Similar to reinsurance premiums, commissions paid to non-residents are subject to Section 40(a)(i) unless exempt under DTAAs.
Court's Interpretation and Reasoning: The Tribunal observed that the commissions were not subject to Indian tax due to the lack of a business connection in India, as confirmed by previous Tribunal and High Court decisions.
Conclusion: The Tribunal allowed the deduction for commissions paid to non-residents.

Disallowance of Survey Fees Paid to Non-Residents:

Legal Framework and Precedents: Section 40(a)(ia) requires TDS on payments to non-residents unless exempt under specific conditions.
Court's Interpretation and Reasoning: The Tribunal noted that the survey fees were for services rendered outside India with no business connection in India, thus not attracting TDS as per previous rulings.
Conclusion: The Tribunal allowed the deduction for survey fees paid to non-residents.

3. SIGNIFICANT HOLDINGS

IBNR/IBNER Provisions: The Tribunal recognized these as ascertained liabilities, allowing deductions under Section 37(1) based on actuarial valuation and regulatory guidelines.
Amortization of Securities Premium: Consistent with past decisions, the Tribunal disallowed this deduction, treating it as a capital expense.
Reinsurance Premiums to NRRs: The Tribunal upheld that these are not taxable in India under DTAAs, thus not requiring TDS.
Commissions to Non-Residents: The Tribunal confirmed that these payments are not subject to Indian tax, aligning with previous judicial findings.
Survey Fees to Non-Residents: The Tribunal allowed the deduction, noting the absence of a business connection in India.