2022 (9) TMI 1178 - AT - Income Tax

TDS u/s 195 - disallowance of reinsurance premium ceded to non-resident re-insurance companies u/s.40(a)(i) - According to AO income of NRRI are accrued or arose in India and or deemed to have accrued or arose in India, because they have business connection in India in respect of reinsurance business thus held that wherever there is no DTAA between India and other contracting States, to whom the assessee has ceded reinsurance premium, question of examining case with reference to DTAA and more particularly, concept of PE does not arise - HELD THAT - The sum paid by the assessee to NRR is not taxable in India under the Act as well as DTAA between India and respective countries and thus, case laws relied upon by the Assessing Officer on the issue is incorrect. We are of the considered view that reinsurance premium ceded to non-resident reinsurer is not taxable in India under the Income Tax Act, 1961 or under DTAA between India and respective countries where NRRs are tax residents and thus, on impugned payments the assessee is not liable to deduct TDS u/s.195 of the Income Tax Act, 1961. Consequently, payments made to NRR cannot be disallowed u/s.40(a)(i) of the Act, 1961. Hence, we direct the Assessing Officer to delete additions made towards disallowance of reinsurance premium ceded to NRRs. Excess depreciation on UPS - HELD THAT - UPS is part of computer and eligible for depreciation @ 60% and directed the Assessing Officer to allow 60% on UPS also. Therefore, consistent with the view taken by the coordinate Bench 2018 (11) TMI 1539 - ITAT CHENNAI we are inclined to uphold findings of the learned CIT(A) and direct the Assessing Officer to allow depreciation on UPS @ 60% as claimed by the assessee. MAT computation u/s 115JB - Excess claim of deduction on unexpired premium reserve - AO has added back provision made for UPR to book profit computed u/s.115JB of the Act on the ground that when the assessee has received entire premium income for the relevant assessment year, in the books of account, then any reserve created other than those reserves mentioned in Explanation (1) (b) u/s.115JB of the Act cannot be allowed as deduction - HELD THAT - As we find that this issue is squarely covered in favour of the assessee by the decision of the ITAT, Kolkata Bench in the case of DCIT Vs. National Insurance Co.Ltd. 2016 (8) TMI 326 - ITAT KOLKATA where the Tribunal, after considering relevant facts and also Rule 6E of Income Tax Rules, 1962, held that if provision for unexpired premium reserve is within allowable limit as prescribed under Rule 6E, then same does not fall in the category of those reserves which have been specified in Rule 1(b) of section 115JB(2) of the Act, and thus, deleted additions made by the Assessing Officer towards excess provision on UPR to book profit computed u/s.115JB(2) In this case, it was contention of the Assessing Officer that the assessee has not furnished necessary break up of premium received during the year to prove that such provision is within permissible limit of Rule 6E of Income Tax Rules, 1962. Therefore, we are of the considered view that issue needs further verification from the Assessing Officer. Hence, we set aside the issue to file of the Assessing Officer and direct the Assessing Officer to examine claim of the assessee and if provision made for UPR is in accordance with Rule 6E of Income Tax Rules, 1962, then, the Assessing Officer is directed to delete additions made towards excess claim of deduction towards UPR to book profit computed u/s.115JB(2) of the Income Tax Act, 1961. Disallowance u/s.14A read with Rule 8D - Assessment of insurance companies - HELD THAT -We find that the Hon'ble High Court of Madras in the case of the assessee had considered an identical issue and held that section 14A of the Income Tax Act, 1961, stands excluded while computing income tax of an insurance company, in view of non-obstante clause contained in section 44 of the Income Tax Act, 1961. Thus we direct the Assessing Officer to delete additions made towards disallowance u/s.14A read with Rule 8D of Income Tax Rules, 1962. Disallowance of provision for IBNR and IBNER - assessee has made provision for claims incurred, but were not reported (IBNR) and claims incurred, which were not enough reported (IBENR) and such provision has been made for all unsettled claims on the basis of claim lodged by insured persons - HELD THAT - As decided in own case 2018 (11) TMI 1539 - ITAT CHENNAI provision for IBNR IBNER is not deductible u/s.37(1) of the Income Tax Act, 1961, because such provision is only on unascertained liability, which is not accrued to the assessee for the relevant assessment year. Thus assessee is not entitled for deduction towards provision created for IBNR IBNER and thus, we reverse findings of the learned CIT(A) on this issue for the assessment years 2010-11 2013-14 and uphold findings of the learned CIT(A) for the assessment year 2014-15 and reject ground taken by the assessee. Contention of the assessee that actual utilization of IBNR IBNER should be allowed - We find that what was disallowed by the Assessing Officer is only provision created for the relevant assessment year, but there was no discussion on the spending in respect of IBNR IBNER. In case, the assessee has made actual utilization towards IBNR IBNER, then same needs to be allowed as deduction on payment basis. In other words, the compensation payable by the assessee has to be allowed in the year in which amount of compensation was determined. Therefore, we direct the Assessing Officer to verify claim of the assessee and in case, the assessee is able to prove actual utilization towards IBNR IBNER, then the Assessing Officer is directed to allow claim of the assessee. Excess depreciation claimed on motor vehicles - AO has allowed depreciation @ 15% as per Item 3 of Part A of Appendix - entry 2, which is applicable to general category of motor cars acquired or put to use on or after 01.04.1990 - HELD THAT - We find that this issue is squarely covered in favour of the assessee by the decision of the Hon'ble High Court of Bombay in the case of CIT vs. M/s. Birla Global Asset Finance Co. Ltd. 2012 (8) TMI 773 - BOMBAY HIGH COURT where the Hon ble High Court has defined the term commercial vehicles' in light of Motor Vehicles Act, and held that commercial vehicle includes light motor vehicles. The Hon'ble Bombay High Court in the case of CIT Vs Shah Rukh Khan 2011 (8) TMI 1368 - BOMBAY HIGH COURT had considered very similar issue and held that commercial vehicle includes light motor vehicle also. In this case, there is no dispute with regard to fact that higher depreciation claimed on the vehicles is light motor vehicles which were acquired on or after specified date. Therefore, we are of the considered view that the assessee is entitled for higher depreciation @ 50% on motor vehicles and thus, we direct the Assessing Officer to delete additions made towards excess depreciation on motor vehicles. Disallowance of payment made to motor vehicle dealers - HELD THAT - This issue is covered in favour of the assessee by the decision of ITAT, Chennai in the case of United India Insurance Co. Ltd. 2018 (10) TMI 1096 - ITAT CHENNAI where an identical issue has been considered by the Tribunal and held that payment made to motor vehicle dealers is allowable deduction - assessee is eligible for deduction towards payment made to motor vehicle dealers, because there is sufficient proof for rendering services by said dealers. However, fact remains that the order passed by the CESTAT is not available to the AO, we are of the considered view that the issue needs to be set aside to the file of the Assessing Officer for limited purpose of verifying the issue with reference to the CESTAT order and allow the claim of the assessee. Hence, we set aside the issue to the file of the Assessing Officer and direct that Assessing Officer to verify facts with reference to order passed by the CESTAT in the assessee s own case with reference to investigation carried out by the Service Tax Directorate. AO finds that there is finding on rendering of services, then the Assessing Officer is directed to delete additions made towards disallowances of payment made to motor vehicle dealers. Addition towards profit on sale of investments - AO has considered profit on sale of investments as taxable income - HELD THAT - We find that the Hon'ble High Court of Madras had considered an identical issue in the case of United India Insurance Co. 2019 (7) TMI 387 - MADRAS HIGH COURT and held that profit on sale of investments is not taxable in the hands of insurance companies - In the case of M/s.Bajaj Allianz General Insurance Co. Ltd. 2009 (8) TMI 810 - ITAT PUNE-A had considered identical issue and held that income from profit on sale of investments by insurance companies is not taxable, after deletion of sub-rule (b) of Rule 5 of First Schedule. Therefore, from the above, it is very clear that profit on sale of investments is not taxable in the case of insurance companies. The learned CIT(A), after considering relevant facts has rightly deleted additions made by the Assessing Officer towards profit on sale of investments and thus, we are inclined to uphold findings of the learned CIT(A) and reject ground taken by the Revenue. TDS u/s 194J - Disallowance of payment made to Third Party Administrators - AO disallowed payment made to Third Party Administrators u/s.40(a)(ia) of the Act on the ground that the assessee ought to have deducted TDS on such payments - HELD THAT - When the CBDT itself clarified that payments made by the assessee to hospital through TPAs are subjected to TDS from the TPAs, question of deducting TDS on such payments by the assessee does not arise. It is practically impossible to deduct TDS on payment made to beneficiaries / hospitals, when the assessee is not directly making payment to hospitals. The learned CIT(A), after considering relevant facts has rightly deleted additions made by the Assessing Officer and thus, we are inclined to uphold findings of the learned CIT(A) and reject grounds taken by the Revenue for the assessment years 2010-11 2013-14. Non-applicability of section 115JB of IT act for insurance companies - HELD THAT - As decided in own case 2018 (11) TMI 1539 - ITAT CHENNAI held that upto the assessment year 2013-14, provisions of section 115JB of the Act, does not apply to the insurance companies, because insurance companies are preparing their financial statements in accordance with guidelines issued by IRDAI and not as per part II III of Schedule VI of the Companies Act. Thus we are of the considered view that provisions of section 115JB of the Act, has no application to insurance companies and thus, adjustments made by the Assessing Officer towards book profit cannot be sustained and thus, we direct the Assessing Officer to delete additions made to book profit u/s.115JB of the Income Tax Act, 1961. Addition made towards UPR to book profit u/s.115JB - HELD THAT - As in National Insurance Co.Ltd. 2016 (8) TMI 326 - ITAT KOLKATA held that provision for UPR is not an item contemplated to be added in Explanation 1 to section 115JB(2) - we direct the Assessing Officer to delete additions made towards UPR to book profit u/s.115JB of the Income Tax Act, 1961, for both the assessment years. Addition of IBNR IBNER to book profit u/s.115JB - HELD THAT - We find that provisions of section 115JB of the Income Tax Act, 1961, has no application to insurance companies upto assessment year 2013-14 and thus, no addition can be made to book profit computed u/s.115JB of the Act, including addition towards IBNR IBNER upto assessment year 2013-14 and thus, we direct the Assessing Officer to delete additions made towards IBNR IBNER to book profit u/s.115JB of the Act for the assessment year 2013-14.

Summary

Issues Involved:
1. Disallowance of reinsurance premium ceded to non-resident reinsurance companies.
2. Excess depreciation on UPS.
3. Excess claim of deduction on unexpired premium reserve (UPR).
4. Disallowance under Section 14A read with Rule 8D.
5. Disallowance of provision for IBNR and IBNER.
6. Excess depreciation claimed on motor vehicles.
7. Disallowance of payment made to motor vehicle dealers.
8. Addition towards profit on sale of investments.
9. Disallowance of payment made to Third Party Administrators.
10. Non-applicability of Section 115JB for insurance companies.
11. Validity of reopening of assessment.
12. Jurisdiction and principles of natural justice.
13. Deduction for cess under Section 37(1).

Detailed Analysis:

1. Disallowance of Reinsurance Premium Ceded to Non-Resident Reinsurance Companies:
The primary issue was the disallowance of reinsurance premiums paid to non-resident reinsurance companies due to non-deduction of TDS under Section 195. The Tribunal found that reinsurance contracts are separate from insurance contracts and are governed by IRDAI regulations. The Tribunal held that reinsurance premiums paid to non-residents are not taxable in India under the Income Tax Act or DTAA, as the non-residents do not have a PE in India. Consequently, the assessee was not liable to deduct TDS under Section 195, and the disallowance under Section 40(a)(i) was unwarranted.

2. Excess Depreciation on UPS:
The Tribunal upheld the claim for 60% depreciation on UPS, consistent with its earlier decision in the assessee's own case, recognizing UPS as part of the computer system eligible for higher depreciation.

3. Excess Claim of Deduction on Unexpired Premium Reserve (UPR):
The Tribunal noted that the provision for UPR is a deferral of income received in advance and should be allowed if compliant with Rule 6E of the Income Tax Rules. The issue was remanded to the Assessing Officer for verification.

4. Disallowance under Section 14A read with Rule 8D:
The Tribunal, following the Madras High Court's decision, held that Section 14A does not apply to insurance companies due to the non-obstante clause in Section 44, which governs the computation of insurance companies' income.

5. Disallowance of Provision for IBNR and IBNER:
The Tribunal upheld the disallowance of provisions for IBNR and IBNER, considering them unascertained liabilities not deductible under Section 37(1). However, actual utilization of these provisions should be allowed on a payment basis.

6. Excess Depreciation Claimed on Motor Vehicles:
The Tribunal allowed the claim for 50% depreciation on new motor vehicles, interpreting "commercial vehicles" to include light motor vehicles as per the Motor Vehicles Act.

7. Disallowance of Payment Made to Motor Vehicle Dealers:
The Tribunal found that the payments were supported by agreements and invoices, and the CESTAT had ruled that services were rendered. The issue was remanded to the Assessing Officer to verify the CESTAT's findings.

8. Addition Towards Profit on Sale of Investments:
The Tribunal upheld the CIT(A)'s decision that profit on sale of investments is not taxable in the hands of insurance companies, following the Madras High Court and ITAT precedents.

9. Disallowance of Payment Made to Third Party Administrators:
The Tribunal held that the responsibility to deduct TDS on payments to hospitals lies with the TPAs, not the assessee, based on CBDT Circular No. 8/2009.

10. Non-Applicability of Section 115JB for Insurance Companies:
The Tribunal reiterated that Section 115JB does not apply to insurance companies, as their financial statements are prepared under IRDAI guidelines, not as per Schedule VI of the Companies Act.

11. Validity of Reopening of Assessment:
The assessee did not press this ground, and it was dismissed as not pressed.

12. Jurisdiction and Principles of Natural Justice:
The assessee did not press these grounds, and they were dismissed as not pressed.

13. Deduction for Cess under Section 37(1):
The assessee withdrew this ground, and it was dismissed as withdrawn.

Conclusion:
The appeals were disposed of with the Tribunal allowing certain claims, remanding some issues for verification, and dismissing others based on existing legal precedents and factual assessments.