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TMI Blog2013 (6) TMI 377X X X X Extracts X X X X X X X X Extracts X X X X ..... ve Reserve. (iv)The CIT (Appeals) erred in confirming the action of the AO of adding the income from shareholder's funds credited directly to the shareholder's Account. (v)The CIT (Appeals) erred in his interpretation of the Act, the Insurance Act 1938, the IRDA Act and the IRDA (preparation of Financial Statements and Auditor's Report of Insurance Companies)/Regulations 2002, the IRDA (Assets, Liabilities and Solvency Margin of Insurers) Regulations 2000. (vi)The CIT (Appeals) erred in not deleting the interest charged by the Assessing Officer u/s. 234D of the Act. The Appellant craves leave to add to, amend and/or alter all or any of the above Grounds of Appeal. 2. The assessee, Life Insurance Corporation of India (LIC), engaged in the business of Life Insurance filed its return of income on 26.09.2009 declaring total income of Rs.1,64,92,76,34,890/-. Later on a revised return of income was filed on 12.02.2011 declaring total income of Rs.1,56,37,79,83,629/-. Assessment was finalised by the Assessing Officer (AO) u/s.143(3) of the Income-tax Act,1961 (Act) on 30.12. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... debited/credited to the PandL A/c with a view to determine its deductibility/its inclusion in the total income of the Insurance Company, that once the PandL A/c had been prepared as per the Insurance Act and submitted to the Controller of Insurance figure of profit could not he altered, that only adjustments permitted in that figure were as per [Clause(a) and Clause(c)] of Rule 5 for computing the total income, that in that profit-figure addition could be made as per Clause (a) or deduction could be made as per Clause (c) only, that there was no provision under Rule 5 to exclude any tax exempt income u/s. 10(15) or dividend income u/s. 10(34) of the Act, that in absence of any specific provision in Rule 5, AO could not make any changes in profit figure worked out under the Insurance Act. Finally, he held that tax free income falling u/s. 10 could not be excluded in view of no express provision for the same in Rule 5. Upholding the order of the AO, he dismissed the appeal filed by the assessee. 3.2. Before us, AR submitted that Rule 5 to Schedule I was for General Insurance, that assessee was engaged in the business of Life Insurance, that rule 2 of Schedule was applicable to the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... writ petition No. 2560 of 2011 dt. 01-12-2011. After referring to the order of the GIC of India, which in turn had relied upon the cases of LIC vs. CIT-III Bombay, CIT vs. New India Assurance Co. Ltd., GIC of India vs. CIT(Supreme Court) Tribunal further held that assessee was entitled to exemption u/s. 10 including the dividend income i.e., exemption available u/s. 10(34) of the Act. We find that facts of the case under consideration are similar to the facts of ICICI Prudential Insurance (supra), decided by the coordinating Bench. Here, we would also like to mention that Hon'ble Jurisdictional High Court in case of GIC of India has discussed and decided the issue as under: ""11. Section 44 of the Income Tax Act, 1961 stipulates as follows: "44: Notwithstanding anything to the contrary contained in the provisions of this Act relating to the computation of income chargeable under the head "interest on securities", "Income from house property", "Capital gains" or "Income from other sources", or in section 199 or in sections 28 to (43B), the profits and gains of any business of insurance, including any such business curried on by a m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o exemption under section 10(15) and section 19(1). In a reference before the Court, the questions referred included whether in computing the profits and gains of the business of insurance under section 44 read with the First Schedule certain items-which were ordinarily not includible in the total income were rightly included in- the taxable surplus. The Division Bench of this Court held as follows:- "The question which essentially falls to be - determined in this reference is whether, in view of the provisions in section 44 or rule 2 of the first Schedule, - the Life Insurance Corporation will not be entitled to claim the deductions which a-i-c otherwise admissible in- the- case of an assessee, computation of whose income is go vented by the other provisions of the Act. The argument of Mr. Kolah for the Life Insurance Corporation is that unless there are express provisions which disable the Corporation from claiming the deductions referred to above; the Corporation cannot be deprived of the benefit -of the provisions referred to in the questions Nos. 1 to 6. Section 44, which deals with computation of profits and gains of business of insurance ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ision Bench dealt inter alia with the provisions - of section 1 9(7) of the Income Tax Act, 1922. The questions referred to this Court included whether the assessee was entitled to claim an exemption from tax under section 15B and 15C (4) and in respect of interest on a government loan under a notification issued under section 60. Section 10(7) of the Income Tax Act, 1922 provided that notwithstanding anything to the contrary contained in section 8,9,10,12 or 18, the profits and gains of any business of insurance and the tax payable thereon shall be computed in accordance with the rules contained in the Schedule to the Act. The Division Bench held that upon the language of sub-section (7) of section 10 read along with rule 6 it was impossible to hold that the provisions relating to exemptions stood excluded from operation. In that context the Division Bench held as follows: "It is only after the profits and gains of a business are computed that any question of granting exemptions arises and if the latter stage were intended to be excluded by the law we should have thought that a clearer provision than is made in sub-section (7) of section 10 and in rule 6 would have b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tax Act and he has no general power to correct the errors in the accounts of an insurance business and under the entries made. The question whether an assessee who carries on general insurance business would be entitled to avail of an exemption under section 10 did not arise. The issue as to whether the assessee which carries on the business of general insurance would be entitled to the benefit of an. exemption under clauses (10), (23G,) and (33) of section 10 is directly governed by the decision rendered by the Division Bench in. Life Insurance Corporation vs. Commissioner of Income-tax (Supra) following the earlier decision in Commissioner of Income-tax vs. New India Assurance Co. Ltd (supra). The Assessing Officer could not have ignored the binding precedent contained in the two Division Bench decisions of this Court. Moreover, the Assessing Officer in allowing the benefit of the exemption in the order of assessment under section 143(3) specifically relied upon the view taken by the CBDT in its communication dated 21 February 2006 to the Chairman of IRDA. The communication clarifies that the exemption available to any other assessee under an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , that Rule 5(ii) mandated that mathematical reserves should be taken without any modification for the purpose of Section 35 of the Insurance Act, that provisions of Insurance Act clearly indicated that actuary was not mandated to take negative reserves at '0'in all situations, that by taking Negative Reserves at '0' surplus had been made less than the real actuarial valuation, that in Income Tax assessments real income of an assessee had to be debited, that ignoring negative reserve was in accordance with IRDA Regulations was also not material, that the IRDA guidelines were applicable in specific situations only, that IRDA guidelines provided that the liabilities shall be calculated together with the future premium payments, that in the surplus computation the Negative Reserves were nothing but future premium payments in respect of policies where liabilities were less than the future premium receivable, that liability valuation must not take the figure of Negative Reserve at '0' for the purpose of determining of surplus of a particular Financial Year. After comparing the Actuarial Valuation Reports of 31-03-2008 and 31-03- 2009, he observed that figure of Negative Reserve was cal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t Schedule of the Act, that the AO had negated the provisions legislated by Parliament, that IRDA Regulations were the guidelines in this regard, that these regulations had the force of law having been notified by the Insurance Regulatory and Development Authority in exercise of the powers conferred on the Authority by section 114A of the Insurance Act and was binding on the insurer as also the appointed Actuary, that para 5(iii) of IRDA (Assets, Liabilities and Solvency Margin)Regualtions,2000 mandated that for the purpose of section 13 the Appointed Actuary should set the amount of mathematical reserves to zero in the case of negative reserve, that the Appointed Actuary had done the same in arriving at the net valuation surplus, that IRDA to whom the various statements(including From- I)were submitted had accepted the valuation surplus of the life insurance business determined by the Appointed Actuary in accordance with the requirements of Insurance Act and IRDA Regulation was sacrosanct and same could not be tempered with, that the actuarial valuation of liabilities was done in accordance with the provisions of sections 13,15,49 and 64V of the Insurance Act,1938 and in complianc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of future premium receivable. When the present value of future premium is more than the present value of future benefits payable and future expenses to be incurred, this amount becomes negative, known as 'negative reserve'. In simple words, it means that the insurance contracts under consideration do not warrant any provision and is, in fact, an asset. However, in certain circumstances, such as for following IRDA guidelines, insurers may not treat policies as assets and they set any negative reserves to zero.' For example, if an insurer had two policies, one with a reserve of 100 and the other with a reserve of - '10, it might think of its liabilities at 100 rather than 90 to take into account the eventuality in case the second policy lapsed. This process is called eliminating negative reserves. As mentioned earlier, a policy which has a negative reserve is in nature of an asset. 4.3.2. We find that in the case of ICICI Prudential Insurance Co.(supra) AO had disallowed negative reserve related to Life Insurance business of the assessee. In appellate proceedings FAA allowed the appeal of the assessee.AO challenged the order of the FAA before the Tribunal, as stated earlier. Dispos ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ring the submissions of the assessee he held that assessee was the Corporation owned by Government of India, that it did not mean that Government of India and assessee were one and the same thing, that the relation-ship between the Government of India and assessee was that of shareholder (albeit sole-share holder) and Company, that the Company was owned by share holders, that it was a separate legal entity in itself, that assessee-company was distinct from its share holders, that income of LIC could not be said to be income of Government of India, that the argument; that income in shareholders account was income of Government of India not subjected to tax; was not correct, that any income arising from assessee's activity belonged to it as a statutory entity and not to the Government of India as such, that income to Government of India would arise-only when the assessee paid dividend to the Government of India, that out of total receipts in the shareholders account the assessee retained amount of Rs.28.23 Crores which was transferred to general reserve and the balance was paid to Government of India as final dividend, that there was distinction between income of assessee corporation ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... me on dividend and interest had not been earned by the LIC strictly from the insurance business, that dividend and interest income earned on the amount contributed by the Government of India as capital was taxable under the head Income from other sources, that the AO had already exempted the dividend income earned on the investment of capital contributed by the Government of India, that AO had rightly taxed other income falling under the head Income from other sources which was different from the Insurance business. As stated earlier, following the order for AY 2007-08 he dismissed the appeal filed by the assessee-corporation. 5.3. Before us AR submitted that income assessed by the AO in the hands of the assessee belonged to Government of India, that assessee had computed its income as per actuarial report, that income and expenditure account and the actuarial report were same, that out of the share-holders' account 95 % went to policy holders' account and balance would to government's account, that AO could not determine surplus for assessing income, that interest or rent were not part of the income in question, that income assessed by AO in the hands of the assessee was directly ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sessee-corporation on dividend and interest, in a strict sense, cannot be held to be earned from the insurance business. As per the provisions of the Act income from insurance business is exempt from taxation and not every type of income. We agree that initial capital contribution was made by the Government of India in 1955 for carrying out insurance business, but income earned by the assessee as dividend and interest in the year under consideration cannot be termed as income of the Sovereign. It is not part of any tax, duty, cess or any other similar levy by the State, which could be termed as income of Government of India. LIC cannot claim that it represents Government of India it is one of many a corporations established by Government of India for specific purposes. Income earned by it for carrying of business of Life Insurance is exempt as per the provisions of section 44 of the Act and not because that income of LIC is income of Government of India. 5.4.3. We have perused the order of the Tribunal dtd. 18.12.2006 (ITA2025/Mum/2000-AY. 1998-99. The basic question to be decided in that appeal was whether the assessee could be said to be in default u/s.115-Q of the Act on accoun ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nsurers) Regulations 2000. (v)The CIT (Appeals) erred in confirming the levy of interest under Section 234B of the Act. The Appellant denies its liabilities for such interest. The Appellant craves leave to add to, amend and/or alter all or any of the above Grounds of Appeal. AY.2008-09 The under mentioned Grounds of Appeal are without prejudice to one another: (i)The CIT (Appeals) erred in holding that the Appellant was not entitled to the exemption under Section 10(34) of Income Tax Act, 1961 ("the Act"). (ii)The CIT (Appeals) erred in confirming the action of the Assessing Officer ("the AO") of adding Negative Reserve shown in Form -I. (iii)The CIT (Appeals) erred in rejecting the Appellant's alternative, without prejudice, plea for reduction of the amount of the Negative Reserve disallowed in A.Y. 2007-08 and for making an addition in A.Y. 2008-09 for only the incremental Negative Reserve. (iv)The CIT (Appeals) erred in confirming the action of the AO of adding the income from shareholder's funds credited directly to the shareholder's Account. (v)The CIT (Appeals) erred in his interpretation o ..... X X X X Extracts X X X X X X X X Extracts X X X X
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