2015 (1) TMI 694 - AT - Income Tax

Computation adopted for filing return of income - non adjudication of the issue by the CIT(A) - Held that - The computation made by assessee is in accordance with Rule-2 of the Insurance Act 1938 according to which only AO can base his computation. This also corresponds to the way incomes were assessed in earlier years i.e. the correct method as per Rule 2 and Sec 44 of IT ACT. AO is directed to compute the income of the assessee in accordance with the Rule-2 of the Insurance Act 1938. Decided in favour of assessee. Disallowance under section 14A - Held that - Sec. 14A contemplates an exception for deductions as allowable under the Act are those contained under ss. 28 to 43B of the Act. Sec. 44 creates special application of these provisions in the cases of insurance companies. We therefore agree with the assessee and delete the act as according to us it is not permissible to the AO to travel beyond s. 44 and First Schedule of the IT Act. Decided in favour of assessee. Interpretation of the provision of section 44 of the Income tax Act r.w. Rule 2 of the 1st Schedule of the Income tax Act 1938 - Held that - The computation made by assessee is in accordance with Rule-2 of the Insurance Act 1938 according to which only AO can base his computation. This also corresponds to the way incomes were assessed in earlier years i.e. the correct method as per Rule 2 and Sec 44 of IT ACT. In view of the discussion above and after analyzing the Forms Regulations and Provisions we have no hesitation to hold that the assessee working of actuarial surplus/ deficit is in accordance with Rule 2 of First Schedule. - Decided in favour of assessee and AO is directed to modify the order accordingly. Taxability of surplus of both policy and share holders account - Held that - As per Insurance Act 1938 all incomes are part of one business only and these incomes are considered as part of same business. Therefore the incomes in Shareholder s account are to be considered as arising out of Life insurance business only. More over Sec 44 mandates that only First Schedule will apply for computing incomes and excludes other heads of income like Interest on Securities income from house property Capital gains or Income from other sources. Being non-obstante clause sec. 44 mandates that the profits and gains of insurance business shall be computed in accordance with the rules contained in First Schedule. Therefore the incomes in Shareholder s account are to be taxed as part of life insurance business only as they are part of same business and investments are made as part of solvency ratio of same business. The grounds are allowed. AO is directed to treat them as part of Life Insurance Business and tax them u/s 115B. - Decided in favour of assessee. Claim of 100% depreciation on fixed assets - Held that - As per the provisions of law only those adjustments which are expressly not prohibited under section 44 of the Act could be made. Consequently depreciation which has been debited in the audited accounts as per the consistently followed and accepted accounting policy need not be disallowed. - Decided in favour of assessee. Treating / excluding negative reserve for considering the taxable surplus - Held that - ssessee is entitled to exemption under section 10. Therefore we do not see any reason to differ from the order of the CIT (A) where he has allowed assessee s claim of exemption under section 10(23AAB) of surplus of Participating Pension Business and also dividend under section 10(34). -- Decided in favour of assessee.

Issues Involved:
1. Non-adjudication of computation method by CIT(A).
2. Double taxation of negative reserve.
3. Applicability of Section 14A to the appellant.
4. Disallowance computation under Rule 8D.
5. Interpretation of Section 44 of the Income Tax Act.
6. Taxability of surplus from policy and shareholders' accounts.
7. Claim of 100% depreciation on fixed assets.
8. Treatment of negative reserve for taxable surplus.

Detailed Analysis:

Issue 1: Non-adjudication of Computation Method by CIT(A)
The appellant contended that the CIT(A) did not adjudicate on the computation method adopted by the assessee in the return of income. The Tribunal noted that an identical issue was decided in the assessee's favor in earlier years, holding that the computation made by the assessee was in accordance with Rule-2 of the Insurance Act, 1938. Consequently, the AO was directed to compute the income in accordance with this rule, and this ground of the assessee's appeal was allowed.

Issue 2: Double Taxation of Negative Reserve
The Tribunal addressed the appellant's claim that the CIT(A) erred in taxing the negative reserve twice. The Tribunal followed its earlier decision, which had consistently held that the computation of actuarial surplus/deficit should be in accordance with Rule-2 of the Insurance Act, 1938. Therefore, the AO was directed to modify the order accordingly, allowing the assessee's grounds on this issue.

Issue 3: Applicability of Section 14A
The appellant argued that Section 14A should not apply to insurance companies. The Tribunal referenced its earlier decisions and those of other coordinate benches, which had consistently ruled in favor of the assessee. It was held that Section 44 of the IT Act, being a special provision, prevails over other provisions, including Section 14A. Therefore, the disallowance made under Section 14A was deleted, and this ground was allowed.

Issue 4: Disallowance Computation under Rule 8D
The appellant contended against the method used by CIT(A) for computing disallowance under Rule 8D. The Tribunal reiterated its stance from previous rulings that Section 44 and the First Schedule should be used for computation, not Rule 8D. Consequently, the Tribunal ruled in favor of the appellant, deleting the disallowance computed under Rule 8D.

Issue 5: Interpretation of Section 44 of the Income Tax Act
The revenue raised issues regarding the interpretation of Section 44 read with Rule 2 of the First Schedule. The Tribunal referenced its earlier decisions, which had clarified that actuarial valuation must be done in accordance with the Insurance Act, 1938, and not the IRDA regulations. The Tribunal upheld that the computation of income must follow Rule-2 of the First Schedule, dismissing the revenue's grounds on this issue.

Issue 6: Taxability of Surplus from Policy and Shareholders' Accounts
The revenue contended that the surplus from policy and shareholders' accounts should be taxed separately. The Tribunal, following its earlier decisions, held that both accounts should be consolidated for tax purposes as they pertain to the life insurance business. The Tribunal directed that the surplus be taxed under Section 115B as part of the life insurance business, dismissing the revenue's grounds.

Issue 7: Claim of 100% Depreciation on Fixed Assets
The revenue disputed the claim of 100% depreciation on fixed assets. The Tribunal upheld the CIT(A)'s decision, which accepted the assessee's consistent accounting policy of claiming 100% depreciation, as per the IRDA-prescribed format. The Tribunal found no error in the CIT(A)'s order and dismissed the revenue's ground on this issue.

Issue 8: Treatment of Negative Reserve for Taxable Surplus
The revenue challenged the treatment of the negative reserve in computing taxable surplus. The Tribunal referenced its earlier rulings, which had allowed the assessee's claim of exemption under Section 10 for surplus of Participating Pension Business and dividend under Section 10(34). The Tribunal found no reason to differ from the CIT(A)'s order and dismissed the revenue's grounds on this issue.

Conclusion:
The Tribunal allowed the assessee's appeal and dismissed the revenue's appeal, directing the AO to compute the income in accordance with the Insurance Act, 1938, and ruling in favor of the assessee on all disputed issues.

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