2016 (11) TMI 598 - AT - Income Tax

Applicability of section 14A on insurance business - Held that - In view of non obstante clause of Section 44 of the Act read with Rule 5 of Schedule 1 of the Act, provisions of Section 14A of the Act, as no application to the profit and gains of insurance business. See Bajaj Allianz General Insurance Company Limited. Versus Additional Commissioner Of Income-Tax. 2009 (8) TMI 810 - ITAT PUNE-A Claim of exemption under section 10(23AAB) of surplus of Participating Pension Business and also dividend under section 10(34) allowed Addition on account of negative reserve at zero, the surplus of the assessee has been made less than the real actuarial valuation - Held that - We find that the assessee followed the IRDA Recommendations and accordingly prepared the actuarial valuation report including the surplus or deficit. The Rule 2 prescribes only actual valuation in accordance with Insurance Act 1938. Looking at the issue, we noticed that the computation made by the assessee is in accordance with Rule 2 of the Insurance Act 1938, according to which only AO can base his computation. The Revenue has not contested that the working of actuarial surplus / deficit is not in accordance with Rule 2 of 1st Schedule. Accordingly we are of the view that the CIT(A) has rightly deleted the addition and we confirmed the same. This issue of Revenue‟s appeal is dismissed. Disallowance towards claim of assessee in non-participating linked pension business segment - claim for deficit from Pension business - Held that - The object of inserting section 10(23AAB) as per the Board Circular No. 762, dated 18/02/1998 was to enable the assessee to offer attractive terms to the contributors. Thus, the object of inserting section 10(23AAB) was not with a view to treat the pension fund like jeevan Suraksha Fund outside the purview of insurance business but to promote insurance business by exempting the income from such fund. Therefore, even after insertion of section 10(23AAB), the loss incurred from the insurance business under section 44 of the Income-tax Act, 1961 cannot be faulted. See CIT Vs. LIC Of India 2011 (8) TMI 47 - BOMBAY HIGH COURT

Issues Involved:
1. Disallowance of expenses under Section 14A of the Income Tax Act read with Rule 8D.
2. Deduction of dividend income under Section 10(34) of the Income Tax Act.
3. Addition on account of negative reserves.
4. Rejection of deficit claim in Non-participating Linked Pension business segment.

Detailed Analysis:

1. Disallowance of Expenses under Section 14A read with Rule 8D:
The first issue pertains to the disallowance of expenses incurred to earn exempt income under Section 14A of the Income Tax Act, read with Rule 8D of the Income Tax Rules, 1962. The assessee argued that Section 14A does not apply to insurance companies, as their income computation is governed by Section 44 read with the First Schedule of the Act, which overrides other provisions. The Tribunal cited various precedents, including the cases of ICICI Prudential Insurance Co. Ltd. and Bajaj Allianz General Insurance Co. Ltd., where it was held that Section 14A does not apply to the profits and gains of insurance businesses due to the non-obstante clause in Section 44. The Tribunal concluded that the issue is consistently decided in favor of the assessee, thus allowing the ground.

2. Deduction of Dividend Income under Section 10(34):
The second issue involves the deletion of the disallowance of dividend income claimed as exempt under Section 10(34) of the Act. The Revenue contended that dividend income forms part of the actuarial valuation and should be considered business income. The Tribunal referenced the Bombay High Court's decision in the case of ICICI Prudential Insurance Co. Ltd., which confirmed that dividend income is exempt under Section 10(34) and does not form part of the taxable surplus. The Tribunal upheld the CIT(A)'s decision to allow the deduction, dismissing the Revenue's appeal on this issue.

3. Addition on Account of Negative Reserves:
The third issue concerns the addition made by the AO on account of negative reserves, which the CIT(A) deleted. The Revenue argued that taking negative reserves at zero reduces the surplus below the real actuarial valuation. The Tribunal referred to the Bombay High Court's decision in the case of ICICI Prudential Insurance Co. Ltd., which stated that the actuarial valuation, including mathematical reserves, is binding and cannot be modified by the AO. The Tribunal found that the assessee's computation was in accordance with Rule 2 of the Insurance Act, 1938, and upheld the CIT(A)'s deletion of the addition.

4. Rejection of Deficit Claim in Non-participating Linked Pension Business Segment:
The fourth issue involves the rejection of the assessee's claim for a deficit in the Non-participating Linked Pension business segment. The Tribunal noted that this issue was covered in favor of the assessee by the Bombay High Court's decision in the case of LIC of India Ltd., which held that losses from pension funds should be considered in the actuarial valuation of insurance businesses, even if the income from such funds is exempt under Section 10(23AAB). The Tribunal followed this precedent and allowed the assessee's claim, dismissing the Revenue's appeal on this ground.

Conclusion:
The Tribunal allowed the assessee's appeal regarding the disallowance under Section 14A and the deficit claim in the Non-participating Linked Pension business segment. It dismissed the Revenue's appeal concerning the deduction of dividend income under Section 10(34) and the addition on account of negative reserves. The Tribunal's decisions were based on consistent precedents and the binding nature of actuarial valuations under the Insurance Act.

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