2019 (2) TMI 335 - HC - Income Tax

Allowable deduction u/s 37 - ITAT observed that reinsurance payments to non-residents are prohibited by law and therefore hit by Explanation 1 to section 37 of the Act? - TDS liability on reinsurance premium paid to non-resident - Held that - The words other insurer occurring in sub-Section 7 of Section 101A of the Insurance Act cannot be treated as a pronoun or a noun and should be read as a verb . This is more so because, there is no separate definition provided for other insurer and considering the scheme of Section 101A of the Insurance Act, other insurer should mean the insurer, who is outside India and not a person in terms of the definition under Section 2(9) of the Act. We are of the clear view that the Tribunal erred in coming to a conclusion that it is not the intention of the Parliament to authorize an Indian insurer to have re-insurance outside the country ignoring the provisions of Insurance Act referred above. The Tribunal had no jurisdiction to declare any provisions of the regulations to be inconsistent with the provisions of the Insurance Act. This was wholly outside the purview of the Tribunal. Tribunal clearly exceeded its jurisdiction in stating that the assessee have engaged in a transaction, which is prohibited by law and therefore, not entitled for deduction under Section 37. This has never been the case of the Revenue either before the Assessing Officer or before the CIT(A) or before the Tribunal, when they filed appeals challenging that portion of the order passed by the CIT(A), which was against the Revenue. Tribunal while upholding the order of the AO did not assign any independent reasons. The discussion in the impugned order relates to the validity of re-insurance business outside India done by an Indian insurer. Tribunal did not consider the correctness of the order passed by the AO or that of the CIT(A). Tribunal could not have held that the Assessing Officer rightly disallowed the re-insurance premium under Section 40(a)(i). This finding is not supported with any reasons. Therefore, the Tribunal misdirected itself, exceeded the scope of remand as ordered by the Division Bench and ventured into a jurisdiction, which is wholly prohibited in the light of the plain language of Section 254(1) of the Act. We are of the clear view that the order passed by the Tribunal calls for interference. Accordingly, the appeals, filed by the assessee are allowed and the substantial questions of law framed are answered in favour of the assessee. The matter stands remanded to the Tribunal to take a decision on the following points - (i) Whether the Assessing Officer was right in disallowing the re-insurance premium under Section 40(a)(i) of the Act; (ii) Whether the CIT(A) was right in rejecting partially the appeal filed by the assessee; and (iii) Whether the CIT(A) was justified in restricting the claim of the assessee to 15% instead of confirming the order passed by the Assessing Officer.

Issues Involved:
1. Validity of reinsurance ceded to non-resident reinsurers.
2. Jurisdiction of ITAT in deciding the validity of the reinsurance.
3. Interpretation of IRDA Regulations vis-à-vis Section 101A of the Insurance Act, 1938.
4. Applicability of Explanation 1 to Section 37 of the Income-tax Act, 1961.
5. Adherence to precedents and remand directions by ITAT.

Issue-wise Detailed Analysis:

1. Validity of Reinsurance Ceded to Non-resident Reinsurers:
The core issue in these appeals is the disallowance of reinsurance premiums ceded to non-resident reinsurers. The Tribunal held that the reinsurance arrangement of the assessee-company is in violation of Section 2(9) of the Insurance Act, 1938, and thus disallowed the reinsurance premium under Section 37 of the Income-tax Act, 1961. However, the Tribunal's interpretation was found to be erroneous as it failed to consider the statutory regulations and the legislative intent behind the Insurance Act amendments and IRDA Regulations.

2. Jurisdiction of ITAT in Deciding the Validity of the Reinsurance:
The Tribunal exceeded its jurisdiction by addressing issues not raised by either the Revenue or the assessee. The Tribunal's suo motu decision to declare reinsurance with foreign entities prohibited by law was beyond its scope, especially considering the pointed remand directions from the Division Bench which required the Tribunal to focus on the issues raised by the parties in their appeals.

3. Interpretation of IRDA Regulations vis-à-vis Section 101A of the Insurance Act, 1938:
The Tribunal incorrectly interpreted the term "other insurer" in Section 101A(7) of the Insurance Act to mean only an Indian insurer as defined under Section 2(9). The correct interpretation, supported by IRDA Regulations, allows reinsurance with foreign reinsurers, provided certain conditions are met. The IRDA (General Insurance – Reinsurance) Regulations, 2000, do not prohibit reinsurance with foreign entities but regulate it to ensure maximum retention within the country and adherence to specified standards.

4. Applicability of Explanation 1 to Section 37 of the Income-tax Act, 1961:
The Tribunal's application of Explanation 1 to Section 37 was misplaced as neither the Revenue nor the assessee claimed deductions under this section. The Tribunal's assertion that the reinsurance premiums were prohibited by law was unfounded, as the IRDA Regulations and the Insurance Act do not prohibit such transactions but regulate them. The Tribunal's decision lacked jurisdiction and was not supported by the legislative framework governing insurance and reinsurance.

5. Adherence to Precedents and Remand Directions by ITAT:
The Tribunal failed to adhere to the remand directions issued by the Division Bench, which required it to focus on the issues raised by the Revenue and the assessee. The Tribunal's decision to address an independent issue, not raised by the parties, was a clear overreach. The Tribunal also disregarded established precedents and did not refer the matter to a larger bench despite disagreeing with coordinate bench decisions.

Conclusion:
The appeals filed by the assessees are allowed, and the substantial questions of law are answered in their favor. The matter is remanded to the Tribunal to decide on specific points regarding the disallowance of reinsurance premiums under Section 40(a)(i) and the partial rejection by the CIT(A). The Tribunal is directed to decide based on the available material without entertaining fresh submissions from the parties.

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