2014 (11) TMI 841 - AT - Income Tax

Addition on account profit on sale/redemption of investments Held that - Following the decision in assessee s own case as decided in Oriental Insurance Co. Ltd. Versus Assistant Commissioner of Income-tax, Circle 16(1), New Delhi 2011 (7) TMI 728 - ITAT DELHI - no adjustment is required to be made to the accounts furnished to the Controller of Insurance in respect of profit on sale of investments - Decided against assessee. Disallowance of provision made for orphan claims Held that - As decided in assessee s own case for the earlier assessment year, it has been held that the assessee explained that as per clause 5.1 of accounting policy of the assessee company in respect of motor third party claim where Court summons have been served on the company without adequate policy particulars to establish the liability of the company, provision is made to the extent of one third of the value of the total estimated liability of such unidentified claims determined on the basis of existing guide lines and practices - the claim of assessee is clearly contingent in nature and cannot be allowed as deduction thus, the order of the CIT(A) is upheld Decided against assessee. Diminution in value of investments Held that - As decided in assessee s own case for the earlier assessment year, CIT(A) rightly held that the claim of the assessee for an unascertained liability was rightly disallowed by the AO - the provision made by the assesee for notional losses on revaluation of investment is in fact a reserve irrespective of the nomenclature given by the, assesee - the substance of the Claim is to be considered and not the nomenclature. The assessee has not sold the investments in question during the relevant accounting period and notwithstanding the guidelines given by the IRDA to reflect the true position of assets and liabilities in the relevant balance sheet of the assessee, the notional losses claimed only on the basis of prevailing market price could not be allowed against the actual business profits of the relevant accounting period - the claim of loss pot actually incurred on the investments which have neither been sold nor transferred otherwise is only a provision for unascertained liability and cannot be allowed to be reduced from the income of the assessee - the deduction for the amount provided by the assessee in its relevant accounts to meet diminution in or loss on realization of investments cannot be allowed for the period prior to 01.04.2011 as per the existing provisions of the Act the order of the CIT(A) is upheld Decided against assessee. Admission of additional ground - Computation of book profits u/s 115JB Held that - All the facts are on record and the ground is a legal ground by following the decision in NTPC Ltd. Vs. CIT 1996 (12) TMI 7 - SUPREME Court - the provisions of S.115 JB of the Act are not applicable in case of Insurance Companies, as they are not required to prepare the accounts as per Part 2 and 3 of Schedule VI to the Companies Act - the computation made u/s 115 JB of the Act is deleted Decided in favour of assessee. Disallowance on investment written off deleted Held that - As decided in assessee s own case for the earlier assessment year, CIT(A) rightly held that the entries made in the assessee s books of account in this behalf are strictly in accordance with the guidelines issued by General Insurance Corporation - These guidelines permit the assessee to book a loss which has for all practical purposes, been suffered on account of depreciation in value of investments beyond any reasonable hope of recovery - the guide lines permitted the insurance company to book the loss in the accounts rather than waiting for actual realization of loss on sale of investment - Thus, the amounts claimed by the assessee are to be understood as a loss on investments suffered by the assessee - Such loss can neither be-considered an expenditure nor an allowance - the addition made by the AO in respect of amounts written off by the assessee on punt of depreciation in the value of investments is to be set aside Decided against revenue. Disallowance u/s 14A Held that - As decided in assessee s own case for the earlier assessment year, section 14A contemplates an exception for deductions as allowable under the Act are those contained u/s 28 to 438 - Section 44 creates special application of these provisions in the cases of insurance companies the order of the CIT(A) is upheld Decided against revenue. Guest house expenses Held that - As decided in assessee s own case for the earlier assessment year, expenditure incurred for maintenance of the company s own guest houses is covered u/s 30(a)(ii) - in respect of the guest houses owned by the assessee, repair expenses will have to be allowed as deduction under section 30(a)(ii) - once the expenditure is allowable under section 30(a)(ii ), if the expenditure of incurred on repair and maintenance of guest house taken on lease should also be allowed the order of the CIT(A) is upheld Decided against revenue.

Issues Involved:
1. Deletion of disallowance on account of investment written off.
2. Deletion of addition on account of notional interest income.
3. Deletion of disallowance under Section 14A of the Income Tax Act.
4. Deletion of disallowance on account of guest house expenses.
5. Addition to total income on account of profit on sale/redemption of investments.
6. Disallowance on account of provision made for orphan claims.
7. Disallowance on account of diminution in the value of investments.
8. Computation of book profits under Section 115JB.
9. Levy of interest under Sections 234B and 234D.
10. Validity of the assessment order under Section 143(3).

Detailed Analysis:

1. Deletion of Disallowance on Account of Investment Written Off:
The Tribunal upheld the deletion of disallowance made by the Assessing Officer (AO) on account of investment written off. It was determined that the write-off/write-down of investments is neither an 'expenditure' nor an 'allowance' but a 'loss'. This view was supported by the Supreme Court's judgment in General Insurance Corporation vs. CIT. The Tribunal consistently followed its earlier decisions and concluded that the AO erred in adding back the same in the computation of the assessee's income chargeable to tax.

2. Deletion of Addition on Account of Notional Interest Income:
The Tribunal dismissed the Revenue's appeal regarding the deletion of notional interest income. This issue was covered in the assessee's favor by the jurisdictional High Court's decision, which upheld the Tribunal's earlier order. The Tribunal followed this precedent and dismissed the ground of the Revenue.

3. Deletion of Disallowance under Section 14A:
The Tribunal dismissed the Revenue's appeal on the disallowance under Section 14A, holding that Section 44 of the Income Tax Act, which applies to insurance companies, overrides the provisions of Section 14A. The Tribunal noted that the income of insurance companies is computed as per Rule 5 of the First Schedule and does not require head-wise bifurcation. Therefore, the AO's disallowance under Section 14A was not permissible.

4. Deletion of Disallowance on Account of Guest House Expenses:
The Tribunal upheld the deletion of disallowance regarding guest house expenses. It followed its earlier decision that expenses incurred on the maintenance of guest houses owned or leased by the company are allowable under Section 30(a)(ii) of the Income Tax Act. The Tribunal dismissed the Revenue's ground based on this precedent.

5. Addition to Total Income on Account of Profit on Sale/Redemption of Investments:
The Tribunal dismissed the assessee's appeal regarding the addition on account of profit on sale/redemption of investments. It followed its earlier decision, which held that no adjustment is required to the accounts furnished to the Controller of Insurance in respect of profit on sale of investments. The Tribunal found that the decision in the assessee's own case is a binding precedent and must be followed.

6. Disallowance on Account of Provision Made for Orphan Claims:
The Tribunal dismissed the assessee's appeal on the disallowance of provision made for orphan claims. It followed its earlier decision, which held that the provision for orphan claims is contingent in nature and cannot be allowed as a deduction. The Tribunal confirmed the order of the CIT(A) on this issue.

7. Disallowance on Account of Diminution in the Value of Investments:
The Tribunal dismissed the assessee's appeal on the disallowance of diminution in the value of investments. It followed its earlier decision, which held that the provision for diminution in the value of investments is a reserve for meeting future losses and is not allowable as a deduction. The Tribunal upheld the AO's addition on this issue.

8. Computation of Book Profits under Section 115JB:
The Tribunal allowed the assessee's additional ground, holding that the provisions of Section 115JB are not applicable to insurance companies, as they prepare their accounts as per IRDA guidelines and not as per Part II and III of Schedule VI to the Companies Act. The Tribunal deleted the computation made under Section 115JB.

9. Levy of Interest under Sections 234B and 234D:
The Tribunal dismissed the assessee's appeal regarding the levy of interest under Sections 234B and 234D, stating that the levy of interest is consequential in nature.

10. Validity of the Assessment Order under Section 143(3):
The Tribunal did not adjudicate on the general grounds regarding the validity of the assessment order under Section 143(3), as they were deemed infructuous.

Conclusion:
The appeal of the assessee was allowed in part, and the appeal of the Revenue was dismissed. The Tribunal's decision was pronounced in the open court on 21st November 2014.

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