2025 (4) TMI 905 - AT - Income Tax

Addition towards Foreign dividend income - assessee offered to tax the net dividend i.e. the amount received after deducting TDS while filing the return of income - AO held that the dividend income has to be offered on gross basis and accordingly made the addition - HELD THAT - The impugned issue is already considered by the coordinate bench in assessee s own case 2015 (2) TMI 1323 - ITAT MUMBAI for AY 2006-07 where it is decided against the assessee because taxed paid do not qualify as expenditure for the purpose of business and entire gross dividend should have accounted for in the P L account. Decided against assessee. Disallowance of payment made to auto dealers - AO has received information from Addl. DG of Central Excise Intelligence that the General Insurance companies are selling insurance policies through auto dealers and that the commission towards soliciting the insurance is paid in the guise of payment towards infrastructure placement of banners advertisement etc which are not genuine - HELD THAT - We see merit in the submission of the ld AR that disallowance cannot be made on the ground that the impugned payments are against the IRDA regulation. Further we notice that findings of the Central Excise authority alleging that the insurance companies are paying commission in the guise of reimbursement of expenses is reversed by different benches of CESSTAT and Hon ble Madras High Court in the case of other insurance companies and therefore the disallowance by placing reliance on the findings of the Central Excise is no longer applicable. Section 44 r.w. Schedule I of the Act provides that the insurance companies are required to prepare the profit and loss account in accordance with the provisions of the Insurance Act 1938 (4 of 1938) or the rules made there under or the provisions of the Insurance Regulatory and Development Authority Act 1999 (4 of 1999) or the regulations made there under. In assessee s case we notice that the accounts are prepared as per the provisions as mentioned herein above and the same is approved by the Controller and Auditor General of India. The contention of the revenue that the payments made to auto dealers are not genuine and that the same is actually commission paid in the guise of reimbursement is solely based on findings of Central Excise which is subsequently reversed by the higher judicial forums. Accordingly the disallowance cannot be sustained on that ground. Further the submissions of the assessee that the payments are towards outsourced activities as per the IRDA guidelines which gets periodically reported is well substantiated. Therefore expenses claimed towards reimbursement of expenses for the outsourced activities as per the IRDA guidelines cannot be disallowed. Accordingly we direct the AO to delete the disallowance made in this regard. The ground raised by the assessee is allowed. Profit on Sale of Investment exempt u/s 10(38) - AO denied exemption u/s 10(38) on the ground that the assessee s income is computed u/s 44 of the Act read with First Schedule which is special regime applicable to the insurance companies for computation of total income and that entire income earned by insurance companies including income taxable under House property capital gains and income from other sources are taxed as business income - AO further held that the exemption under section 10(38) is available only to income which chargeable under the head capital gains - HELD THAT - Impugned issue stands decided in favour of the assessee by the decision of Bombay High Court in assessee s own case for AY 2006-07 2018 (3) TMI 589 - BOMBAY HIGH COURT wherein the Bombay High Court while deciding the issue had relied on clarificatory letter bearing F No. 153/24/2006-TPL dated 21 February 2006 issued by the CBDT to IRDAI regarding exemption under section 10(38) available to all General Insurance Companies. Exemption available to any other assessee under clause 10(38) relating to long term capital would also be available to a person carrying on non-life Insurance business. Disallowance u/s 14A - AR contended that section 14A is not applicable in the case of insurance companies which are governed by section 44 - HELD THAT - Identical issue for AY 2012-13 2020 (12) TMI 434 - ITAT MUMBAI held that it has been consistently held that provision of section 14A is not applicable in the cases of Insurance company which are governed by section 44 because it is non obstante provision wherein the income is to be computed as per P L account prepared under the Insurance Act 1938 Section 14A contemplates exception for deduction allowable under the act whereas section 44 creates special application of provision of computation of profit as per the Insurance Act. Thus no disallowance u/s 14A can be made and accordingly ground allowed in favour of the assessee. Amortization of Premium on Securities - AO disallowed the same stating that the same is in the nature of capital expenditure - HELD THAT - We notice that the coordinate bench while considering identical issue in the case of AIG General Insurance Co. Ltd. 2010 (10) TMI 764 - ITAT MUMBAI wherein the issue of Amortization of Premium on Securities has been explained by way of example. Even if the debit for amortization is considered as an expenditure or allowance there being so specific prohibition against the expenditure or allowance in section 30 to 43B the departmental authorities were not justified in adding back the amount of the balance of the profits. The judgment of the Supreme Court in the case of General Insurance Corporation of India 1999 (9) TMI 3 - SUPREME COURT takes care of all the arguments advanced on behalf of the Revenue. We therefore delete the addition. Applicability of provisions of Section 115JB on disallowance u/s 14A - We notice that the ground of the revenue is not factually correct. We further notice that the AO has added the disallowance made u/s 14A to the book profits while completing the assessment and that the CIT(A) has held the issue in favour of the assessee by holding that the AO is not correct in adding the disallowance to the book profits. It is a settled legal position that the disallowance under section 14A cannot be added to the book profit under section 115JB of the Act. Therefore we see no infirmity in the order of CIT(A). Accordingly the ground of the revenue is dismissed.

Summary

ISSUES PRESENTED and CONSIDERED

The core legal questions considered in this judgment are:

1. Whether foreign dividend income should be assessed net of foreign taxes.

2. The validity of disallowance of payments made to auto dealers by the assessee.

3. Whether profit on the sale of investments should be taxed as income from capital gains or business income.

4. Exemption eligibility of income under section 10(38) of the I.T. Act, 1961.

5. The applicability of section 14A disallowance in the context of insurance companies.

6. Whether amortization of premium on securities is allowable as revenue expenditure.

7. Applicability of section 115JB of the I.T. Act, 1961 to the assessee.

ISSUE-WISE DETAILED ANALYSIS

Foreign Dividend Income

The relevant legal framework involves the taxation of foreign dividend income, which the assessee argued should be assessed net of foreign taxes. The Tribunal referred to a precedent from the assessee's own case for AY 2006-07, where it was determined that taxes paid do not qualify as business expenditure, and thus the gross dividend should be accounted for. The Tribunal found no change in facts for the current year and upheld the CIT(A)'s decision, dismissing the assessee's ground.

Disallowance of Payment to Auto Dealers

The legal framework involves the IRDA regulations concerning insurance companies and the nature of payments to auto dealers. The AO disallowed the payments, classifying them as commissions disguised as reimbursements, contrary to IRDA regulations. The Tribunal examined the IRDA guidelines, which allow outsourcing of non-core activities, and found that the services rendered by auto dealers fit within these guidelines. Citing precedents and the reversal of similar findings by higher judicial forums, the Tribunal directed the AO to delete the disallowance, allowing the assessee's ground.

Profit on Sale of Investments

The issue revolves around whether profits from the sale of investments should be taxed as capital gains or business income. The Tribunal referred to the Bombay High Court's decision in the assessee's own case, which clarified that exemptions under section 10(38) are available to insurance companies. The Tribunal upheld the CIT(A)'s decision, dismissing the revenue's ground.

Section 14A Disallowance

The Tribunal considered whether section 14A applies to insurance companies governed by section 44. The Tribunal cited multiple precedents in the assessee's favor, establishing that section 14A does not apply to insurance companies. Consequently, the Tribunal upheld the CIT(A)'s decision, dismissing the revenue's ground.

Amortization of Premium on Securities

The issue concerns whether the amortization of premium on securities is allowable as revenue expenditure. The Tribunal referenced the IRDA regulations and precedents, concluding that the amortization is permissible. The Tribunal upheld the CIT(A)'s decision, dismissing the revenue's ground.

Applicability of Section 115JB

The Tribunal clarified that the revenue's ground was factually incorrect, as the CIT(A) had not erred in holding that section 115JB applies to the assessee. The Tribunal upheld the CIT(A)'s decision, dismissing the revenue's ground.

SIGNIFICANT HOLDINGS

The Tribunal preserved crucial legal reasoning, including:

"Exemption available to any other assessee under any clause of section 10 of the Income Tax Act, 1961 (including clause (38) of section 10 regarding long term capital gain) is also available to a person carrying on non-life insurance business subject to fulfillment of the conditions, if any, under a particular clause of section 10 under which exemption is sought."

Core principles established include:

- Taxes paid do not qualify as business expenditure, and gross dividend should be accounted for.

- Services rendered by auto dealers are within IRDA guidelines for outsourcing non-core activities.

- Exemptions under section 10(38) apply to insurance companies.

- Section 14A disallowance does not apply to insurance companies governed by section 44.

- Amortization of premium on securities is allowable as revenue expenditure.

Final determinations on each issue include:

- Dismissal of the assessee's appeal regarding foreign dividend income.

- Allowance of the assessee's appeal regarding payments to auto dealers.

- Dismissal of the revenue's appeal regarding profit on sale of investments, section 14A disallowance, amortization of premium on securities, and applicability of section 115JB.