2021 (5) TMI 298 - AT - Income Tax

Exemption on dividend income u/s 10(34) - computing the income of insurance company - CIT-A allowed exemption considering the fetters prescribed in Section 44 - HELD THAT - As decided in own case 2020 (11) TMI 601 - ITAT MUMBAI CIT(A) has relied upon host of binding decisions to arrive at the conclusion that exemption u/s 10(34) with respect to dividend income would be available to the assessee and further, the provisions of Sec. 14A would not apply to insurance company. Thus Exemption u/s 10(34) could not be denied to the assessee - Decided against revenue. Addition on account of negative reserves - CIT(A) has allowed the claim of the assessee - HELD THAT - As decided in own case 2020 (11) TMI 601 - ITAT MUMBAI Assessee s income was to be computed as per Sec. 44 of the Act and the assessee would be required to take Actuarial valuation Report in accordance with insurance Act, 1938. The negative reserves would be nothing but premium receivable by the insurance company. However, there would always be a chance that policyholder might not continue with the insurance polity bought by him which would result in non-receipt of premium which was otherwise receivable by the insurance company. Therefore, the same could not be taxed. See LIFE INSURANCE CORPN. OF INDIA VERSUS ADDL. CIT 2013 (6) TMI 377 - ITAT MUMBAI - Decided against revenue.

Summary

Issues Involved:
1. Allowance of exemption under Section 10(34) of the Income Tax Act, 1961, for dividend income.
2. Deletion of addition on account of negative reserves.

Issue-wise Detailed Analysis:

Issue No. 1: Allowance of Exemption under Section 10(34) of the Income Tax Act, 1961, for Dividend Income

The revenue challenged the allowance of the assessee's claim for exemption on dividend income of ?83,96,134 under Section 10(34) of the Income Tax Act, 1961. The Commissioner of Income Tax (Appeals) [CIT(A)] had allowed this exemption based on the assessee's appeal for the assessment year (A.Y.) 2012-13 and supported by various judicial precedents. The CIT(A) noted that Section 44 of the Act, which is a self-contained code for computing the income of insurance companies, does not override the exemption provided under Section 10(34). The CIT(A) referenced decisions from the Hon’ble Jurisdictional ITAT and the Hon’ble High Court, which held that dividend income on which dividend distribution tax is paid does not form part of the total income and thus is not taxable under Section 44. The ITAT in the case of ICICI Prudential Insurance and other similar cases had consistently upheld this view.

The CIT(A) concluded that the dividend income, exempt under Section 10(34), could not be taxed under Section 44. This conclusion was based on the principle that income exempt under specific provisions cannot be brought to tax unless explicitly stated in the Act. The ITAT upheld this view, noting that the revenue's appeal for the A.Y. 2012-13 had been dismissed, affirming the exemption under Section 10(34) and the non-applicability of Section 14A to insurance companies.

Issue No. 2: Deletion of Addition on Account of Negative Reserves

The revenue also challenged the deletion of the addition of ?5,40,08,000 on account of negative reserves. The CIT(A) had deleted this addition based on the assessee's appeal for the A.Y. 2012-13, supported by judicial precedents. The CIT(A) explained that negative reserves represent net premium receivable by the insurance company and are disclosed as per IRDA regulations and the Insurance Act, 1938. The negative reserve is not actual income but a future receivable, which is uncertain and contingent on the policyholder continuing the policy.

The CIT(A) referenced the ITAT's decision in the case of Life Insurance Corporation of India, which held that the treatment of negative reserves by actuaries could not be disturbed by the Assessing Officer (AO). The ITAT had emphasized that the AO has no power to modify actuarial valuations, which form the basis for assessments under Rule 2 of the First Schedule read with Section 44 of the Act. The ITAT in the case of ICICI Prudential Insurance and other similar cases had upheld this view, confirming that negative reserves should not be taxed.

The CIT(A) concluded that taxing negative reserves was unjustified and contrary to the provisions of the Act. The ITAT upheld this view, noting that the revenue's appeal for the A.Y. 2012-13 had been dismissed, affirming the non-taxability of negative reserves.

Conclusion:

The ITAT dismissed the revenue's appeal, affirming the CIT(A)’s decisions on both issues. The exemption under Section 10(34) for dividend income was upheld, and the addition on account of negative reserves was deleted. These decisions were based on consistent judicial precedents and the specific provisions of the Income Tax Act, 1961, and the Insurance Act, 1938. The ITAT found no reason to interfere with the CIT(A)’s findings, which were deemed judicious and correct.