2018 (10) TMI 603 - AT - Income Tax

Non-deduction of TDS - Additions u/s 40(a)(i) - Disallowance of re-insurance premium paid by the assessee to the non-resident re-insurance companies - The question now arises for consideration is when the provisions of Section 2(9) of the Insurance Act, 1938 is applicable with effect from 26.12.2014, why it is not applicable for earlier assessment years? - Held that - the provisions of Section 2(9)(c) of Insurance Act, 1938 is very much applicable to the re-insurance business, therefore, the profit of non-resident re-insurance company or the person in India who has standing contract with underwriters, who are members of the Lloyds, is taxable in India. Hence, the assessee has to necessarily deduct tax on the premium paid to non-resident re-insurance company for re-insurance. Even otherwise, if the assessee claims that there was no person in India, who has standing contract with underwriters who are members of the Lloyds and premium was paid directly to non-resident re-insurance company, then the transaction of the assessee is clearly in violation of provisions of Section 2(9)(c) of Insurance Act, 1938. In other words, the entire re-insurance arrangement of the assessee- company is in violation and contrary to the provisions of Section 2(9) of Insurance Act, 1938. - Order of AO restored - Decided against the assessee. Applicability of MAT u/s 115JB - Held that - It is not in dispute that the applicability of provisions of Schedule VI of the Companies Act was excluded in respect of insurance companies. Therefore, the provisions of 115JB of the Act, which enables the companies to compute the book profit, may not be applicable to the insurance companies. Appeals filed by both the Revenue and the assessee are partly allowed.

Issues Involved:
1. Disallowance of re-insurance premium paid by the assessee to non-resident re-insurance companies.
2. Validity of reopening of assessments for certain assessment years.
3. Disallowance of provision created towards claims incurred but not reported and claims incurred but not enough reported.
4. Disallowance under Section 14A of the Income-tax Act.
5. Taxability of profit on the sale of investments.
6. Depreciation on UPS and EPABX.
7. Disallowance of provision made towards contribution to the solatium fund.
8. Disallowance of commission paid for receipt of re-insurance premium.
9. Disallowance of payments made towards survey fees.
10. Disallowance of brokerage and other acquisition charges pertaining to investments.
11. Addition made on account of unexplained expenditure under Section 69 of the Act.
12. Applicability of Minimum Alternate Tax (MAT) under Section 115JB of the Act.

Detailed Analysis:

1. Disallowance of Re-insurance Premium:
The primary issue was whether the re-insurance premium paid to non-resident re-insurance companies was allowable as a deduction. The assessee argued that re-insurance was necessary to distribute risk and was done in compliance with the Insurance Regulatory and Development Authority of India (IRDAI) guidelines. The Revenue contended that such payments violated the Insurance Act, 1938, specifically Section 2(9), which requires re-insurance with Indian re-insurers. The Tribunal concluded that the assessee violated the provisions of the Insurance Act by re-insuring with non-resident companies without deducting tax at source, thus upholding the disallowance under Section 40(a)(i) and Section 37 of the Income-tax Act.

2. Validity of Reopening of Assessments:
The assessee challenged the reopening of assessments for the years 2002-03, 2003-04, 2004-05, and 2005-06, arguing that all relevant details were disclosed during the original assessments. The Tribunal found that the reopening was not based on any new tangible material but on a change of opinion, rendering the reassessment proceedings invalid. Consequently, the reassessment orders were set aside.

3. Disallowance of Provision for Claims:
The assessee made provisions for claims incurred but not reported and claims incurred but not enough reported. The Tribunal held that liability to pay arises only when the actual loss or damage is assessed and quantified, which had not occurred during the relevant assessment year. Therefore, the provision could not be allowed for the assessment year 2010-11, and the CIT (Appeals)'s order allowing the claim was set aside.

4. Disallowance under Section 14A:
The Revenue argued that the CIT (Appeals) erred in deleting the disallowance under Section 14A, which pertains to expenditure related to exempt income. The Tribunal noted that Section 44 of the Income-tax Act specifically excludes the applicability of Sections 28 to 43B for insurance companies, and profits must be computed as per the First Schedule. Hence, the disallowance under Section 14A was not applicable to the insurance company, and the CIT (Appeals)'s order was upheld.

5. Taxability of Profit on Sale of Investments:
The Tribunal found that Rule 5(b) of the First Schedule, which allowed adjustments for gains or losses on the realization of investments, was deleted for the relevant assessment years. Therefore, the profit on the sale of investments was taxable, and the CIT (Appeals)'s order allowing the claim was set aside.

6. Depreciation on UPS and EPABX:
The Tribunal concluded that UPS, when attached to a computer, forms part of the computer system and is eligible for depreciation at 60%. However, EPABX, being a telecommunication system, does not qualify as a computer and is not eligible for the higher depreciation rate. The orders of the lower authorities were set aside for UPS but upheld for EPABX.

7. Disallowance of Provision for Solatium Fund:
The provision for the solatium fund, which is a mandatory contribution of 0.1% of gross motor vehicle insurance premium, was allowed as it was not under the control of the assessee once paid. The CIT (Appeals)'s order allowing the claim was upheld.

8. Disallowance of Commission for Re-insurance Premium:
The Tribunal found that the commission retained by the assessee on re-insurance premium was in the nature of a discount and not a payment of commission, thus not requiring TDS. The CIT (Appeals)'s order was upheld.

9. Disallowance of Survey Fees:
Payments made to non-resident surveyors for assessing damage outside India were not liable for taxation in India, and no TDS was required. The CIT (Appeals)'s order allowing the claim was upheld.

10. Disallowance of Brokerage and Acquisition Charges:
The assessee did not press this issue, and it was dismissed as not pressed.

11. Addition for Unexplained Expenditure:
The assessee did not press this issue, and it was dismissed as not pressed.

12. Applicability of MAT under Section 115JB:
The Tribunal held that Section 115JB, which pertains to the computation of book profits, is not applicable to insurance companies as they prepare their accounts as per IRDAI guidelines and not as per Schedule VI of the Companies Act. The orders of the lower authorities were set aside.

Conclusion:
The appeals filed by both the Revenue and the assessee were partly allowed, with detailed findings on each issue based on the specific provisions of the Insurance Act, 1938, and the Income-tax Act, 1961.

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