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TMI Blog2018 (10) TMI 603X X X X Extracts X X X X X X X X Extracts X X X X ..... urance 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. - ITA Nos.1622, 1623, 1624, 1625, 1626, 1627, 1628, 1629 & 1630/Chny/2011, ITA No.1356/Chny/2013 And ITA No.2310/Chny/2014ITA Nos.1662, 1663, 1664, 1665, 1666, 1667, 1668, 1669 & 1670/Chny/2011ITA No.1367/Chny/2013 And ITA No.2371/Chny/2014 - - - Dated:- 6-8-2018 - SHRI N.R.S. GANESAN, JUDICIAL MEMBER AND SHRI ABRAHAM P. GEORGE, ACCOUNTANT MEMBER For The Revenue : Shri M. Swaminathan, Sr.Standing Counsel Ms. V. Pushpa, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... unsel, is an insurance for insurer. The Ld. Sr. counsel further submitted that the re-insurer and the assessee-company being an insurance company, deal with the each other on principal-to-principal basis. Re-insurance, in fact, does not affect the relationship between the insured person and the assessee-company. The insured person is not a party to the re-insurance treaty or contract. In the event of loss, according to the Ld. Sr. counsel, the assessee being an insurance company, has to compensate the insured person independently. Subsequently, a claim would be made by the assessee in respect of the re-insurance contract / treaty before the re-insurer. The re-insurer, as per the re-insurance treaty, would compensate the assessee being the insurance company. 4. Shri Percy J. Pardiwala, the Ld. Sr. counsel for the assessee, further submitted that in order to distribute the risk, normally, re-insurance would be made with number of re-insurance companies. Referring to Section 101A of the Insurance Act, 1938, the Ld. Sr. counsel submitted that the assessee being an insurance company, mandatorily reinsure with Indian re-insurer such percentage of sum assured with each policy as specif ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Insurance Regulatory And Development Authority of India, how can they have re-insurance contrary to the provisions of Section 2(9) of the Insurance Act, 1938? The Ld. Sr. counsel clarified that Section 2(9) of the Insurance Act, 1938 is not applicable to the assessee-insurance company. Referring to Section 114A(zd) of the Insurance Act, 1938, the Ld. Sr. counsel submitted that the Insurance Regulatory And Development Authority of India framed regulations for having re-insurance treaty with non-resident re-insurance company. Since the Insurance Regulatory And Development Authority of India framed a regulation in exercise of its statutory power conferred under Section 114A(zd) of the Insurance Act, 1938, according to the Ld. Sr. counsel, the provisions of Section 2(9) of the Insurance Act, 1938 is not applicable to the assessee. 6. Shri Percy J. Pardiwala, the Ld. Sr. counsel for the assessee, further submitted that Section 2C of Insurance Act, 1938 in categorical terms says that only an Indian re-insurance company holding a valid license for dealing in insurance business can operate in India. In other words, the foreign re-insurance company cannot do any business in India. The Ld ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee-company is expected to identify the re-insurance company to whom re-insurance contract could be entered into over and above the obligatory cession to the General Insurance Corporation of India. On a query from the Bench how the assessee-company identifies the re-insurance company, either by calling for tender or by inviting non-resident company for negotiation? The Ld. Sr. counsel submitted that the assessee contacts the non-resident re-insurance company by sending e-mail. In some cases, the non-resident re-insurance company was also contacted by mails through brokers. The contract was settled by way of communication exchange via e-mail. 8. Shri Percy J. Pardiwala, the Ld. Sr. counsel for the assessee, further submitted that normally the assessee-company deals with re-insurance company outside the country directly. However, in order to distribute the risk to various companies and the assessee may not have the entire list of re-insurance companies across the globe, the assessee has to naturally contact the brokers who have entire information of the international brokers and re-insurance companies. The knowledge of brokers help the assessee-company in selecting the non-re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mes, even though the broker may sign the re-insurance slip specifying the share of each re-insurer in respect of particular line of business, each re-insurer signs the re-insurance slip agreeing their respective share of risk. According to the Ld. Sr. counsel, the broker cannot bind the re-insurer by signing the re-insurance slip in case the treaty terms have not been accepted by the re-insurer by signing the treaty or re-insurance slip. 11. The Ld. Sr. counsel for the assessee further submitted that the quarterly statement of accounts is normally sent to the non-resident re-insurer or the broker as the case may be, specifying the re-insurance premium, re-insurance claim, commission and net payable or receivable from the re-insurer. According to the Ld. Sr. counsel, in case the assessee has to pay money to the re-insurer or broker, the same would be paid. In case the re-insurer has to pay money, the same would be paid by the re-insurer either directly or through the broker. In case of claim, according to the Ld. Sr. counsel, it is obligation of the assessee-company to settle the claim irrespective of the fact whether the re-insurer accepts the claim or not. The assessee would no ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he disallowance made by the Assessing Officer under Section 40(a)(i) of the Income-tax Act, 1961 (in short the Act ) is not justified. 13. On the contrary, Shri M. Swaminathan, the Ld. Sr. Standing Counsel for the Revenue, submitted that Section 101A of the Insurance Act, 1938 clearly says that every insurer shall re-insure with Indian re-insurer such percentage of sum assured on each policy as may be specified by the authority. In this case, according to the Ld. Sr. Standing Counsel, the authority referred in Section 101A is Insurance Regulatory And Development Authority of India. In fact, Insurance Regulatory And Development Authority of India by way of notification specified the percentage of sum assured on each policy to be re-insured with Indian re-insurer. In fact, according to the Ld. Sr. Standing Counsel, there is no dispute with regard to re-insurance premium paid by the assessee to the Indian re-insurer. The Ld. Sr. Standing Counsel further submitted that the Indian re-insurer is General Insurance Corporation of India. Therefore, the assessee being an insurer has obligation to re-insure the percentage of sum assured as specified by the Insurance Regulatory And Develop ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sub-section (7) of Section 101A of the Insurance Act, 1938 is an insurer as defined in Section 2(9). It does not include non-resident re-insurance company or other insurance company which is not referred in Section 2(9). 16. Referring to Section 2(7A) of Insurance Act, 1938, the Ld. Sr. Standing Counsel for the Revenue submitted that Indian insurance company was also defined in Section 2(7A). Therefore, the non-resident re-insurance company which has no place of business in India or business connection in India would not fall within the term other insurer as provided in sub-section (7) of Section 101A. According to the Ld. Sr. Standing Counsel, if the assessee claims that non-resident re-insurance company has no business connection or permanent establishment, the payment of reinsurance premium would be in violation of Insurance Act, 1938, therefore, the entire premium paid by the assessee has to be disallowed under proviso to Section 37 of the Act. The Ld. Sr. Standing Counsel further submitted that if the assessee claims that there is a business connection for non-resident re-insurance company in India or non-resident company has permanent establishment in India, then natur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Bench whether the assessee can have re-insurance as such with other Indian insurance companies apart from General Insurance Corporation of India? The Ld. Sr. counsel clarified that the assessee can also have re-insurance programme with other Indian insurers like United India Insurance, New India Assurance, etc. apart from General Insurance Corporation of India. In fact, according to the Ld. Sr. counsel, the assessee has taken up re-insurance programme with Indian companies for its own risk and also received re-insurance premiums from other Indian insurer by taking part of their risk. 18. We have considered the rival submissions on either side and perused the relevant material available on record. The assessee is an Indian insurance company registered with Insurance Regulatory And Development Authority of India as provided in Section 3(2A) of the Insurance Act, 1938. Till 2014, the re-insurance programmes are not regularized in India. The Parliament for the first time amended the Insurance Act, 1938 by introducing Part IVA by Insurance (Amendment) Act, 1961. For the purpose of convenience, Part IVA is reproduced as under:- PART IV-A RE-INSURANCE Re-insurance w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ified under sub-section (2). (8) In this section, (i) policy means a policy issued or renewed on or after the 1st day of April, 1961, in Respect of general insurance business transacted in India and does not include a re-insurance policy; and (ii) Indian re-insurer means an insurer specified in sub-clause (b) of Clause (9) of Section 2 who carries on exclusively re-insurance business and is approved in this behalf by the Central Government. Advisory Committee 101B (1) The Authority with the previous approval of the Central Government shall, for the purposes of Section 101A, constitute an Advisory Committee consisting of not more than five persons having special Knowledge and experience of the business of insurance. (2) The term of office of, and the allowance payable to, members of the Advisory Committee, the procedure to be followed by, and the quorum necessary for the transaction of business of, the Committee and the manner of filling casual vacancies therein shall be such as may be determined by the regulations made by the Authority. Examination of re-insurance treaties 101C. The Authority may, at any time (a) call upon an insur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dividual or unincorporated body of individuals or body corporate incorporated under the law of any country other than India, carrying on insurance business [not being a person specified in sub-clause (c) of this clause] which- (i) carries on that business in India, or (ii) has his or its principal place of business or is domiciled in India or (iii) with the object of obtaining insurance business, employs a representative, or maintains a place of business, in India; (b) any body corporate [not being a person specified in sub-clause (c) of this clause] carrying on the business of insurance, which is a body corporate incorporated under any law for the time being in force in India; or stands to any such body corporate in the relation of a subsidiary company within the meaning of the Indian Companies Act, 1913 (7 of 1913), as defined by sub-section (2) of section 2 of that Act, and (c) any person who inIndia has a standing contract with underwriters who are members of the Society of Lloyd s whereby such person is authorised within the terms of such contract to issue protection notes, cover notes, or other documents granting insurance cover to others on behalf of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... led, in such manner as may be prescribed. Explanation - For the purposes of this sub-clause, the expression control shall include the right to appoint a majority of the directors or to control the management or policy decisions including by virtue of their shareholding or management rights or shareholders agreements or voting agreements; (c) whose sole purpose is to carry on life insurance business or general insurance business or re-insurance business or health insurance business;] 23. The term insurance company is also defined in Section 2(8) of Insurance Act, 1938 which was omitted with retrospect effect from 26.12.2014, reads as follows:- (8 ) insurance company means any insurer being a company, association or partnership which may be wound up under [the Companies Act, 1956 (1 of 1956)], or to which the Indian Partnership Act, 1932 (9 of 1932), applies; 24. The term Indian re-insurer is also defined in Section 101A(8)(ii) of Insurance Act, 1938 which reads as follows:- Indian re-insurer means an insurer specified in sub-clause (b) of clause (9) of section 2 who carries on exclusively re-insurance business and is approved in this behalf by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ct, 1938 and rules made thereunder. Therefore, insurance or re-insurance business in India cannot be carried on contrary to the provisions of Insurance Act, 1938 and rules made thereunder. 26. In the case before us, the assessee has paid re-insurance premium to non-resident re-insurance company and claimed the same as deduction while computing the taxable income. The Assessing Officer disallowed the claim of the assessee on the ground that tax was not deducted as required. The contention of the Ld. Sr. counsel for the assessee before this Tribunal is that the provisions of Section 2(9) of the Insurance Act, 1938 is not applicable to the assessee-insurance company. The Ld. Sr. counsel has also referred to provisions of Section 114A(zd) of the Insurance Act, 1938 and submitted that Insurance Regulatory And Development Authority of India framed regulations for having re-insurance treaty with non-resident re-insurance companies. The non-resident re-insurance company, according to the Ld. Sr. counsel, was not granted any license to do insurance business in India. Therefore, according to the Ld. Sr. counsel, the entire transaction of the non-resident re-insurance company was outside t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... co-operative society or a body corporate referred to in clause (c) of this sub-section carrying on the business of insurance, may carry on any business of insurance in any Special Economic Zone as defined in clause (za) of section 2 of the Special Economic Zones Act, 2005. (2) Every notification issued under sub-section (1) shall be laid before Parliament as soon as may be after it is issued. (3) Notwithstanding anything contained in sub-section (1), an insurance co-operative society may carry on any class of insurance business in India under this Act on or after the commencement of the Insurance (Amendment) Act, 2002. 28. Section 2C of the Insurance Act, 1938 prohibits from carrying on insurance business otherwise they are permitted under the Insurance Act, 1938. Third proviso to Section 2C clearly says that no insurer other than Indian insurance company shall begin to carry on any class of insurance business in India. We have also carefully gone through the provisions of Section 2(9) of the Insurance Act, 1938. The Ld. Sr. counsel for the assessee very fairly submitted before this Tribunal that after 2014, the assessee started deducting tax on the re-insurance pre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... insurance company has to deduct tax under Section 40(a)(i) of the Act. 31. Before amendment, the term insurer clearly says that any person who in India has a standing contract with underwriters who are members of the Society of Lloyd s, whereby such person is authorized within the terms of such contract, to issue protection notes, cover notes or other documents granting insurance cover to other on behalf of the underwriters. Therefore, it is obvious that the first condition is that the person, namely, the insurer or re-insurer shall be in India. The second condition is that such person shall have standing contract with underwriters who are members of the Society of Lloyd s, whereby such person in India was authorized to issue protection note or cover note or other documents granting insurance cover. The question now may arise what is meant by Lloyds ? Lloyds is nothing but an insurance market located in the city of London. Lloyds is a body corporate established by Lloyds Act, 1871 to operate as a partially- mutualised market place within which multiple financial brokers, grouped in syndicates, come together to pool and spread risk. These underwriters or members are a collec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on 37 of the Act also. 32. In view of the above, this Tribunal is of the considered opinion that the Assessing Officer has rightly disallowed the re-insurance premium under Section 40(a)(i) of the Act. Therefore, the CIT (Appeals) is not justified in restricting the claim of the assessee to 15% without any reason. 33. We have carefully gone through the judgment of Apex Court in the case of Vodafone International Holdings (supra). The provisions of Insurance Act, 1938, more particularly Section 2(9) was not considered by the Apex Court and that is not the subject matter of adjudication before the Apex Court. Therefore, this Tribunal is of the considered opinion that the judgment of Apex Court in Vodafone International Holdings (supra) is not applicable at all. 34. We have carefully gone through the decision of Mumbai Bench of this Tribunal in Swiss Re-Insurance Co. Limited v. Dy. DIT (IT) [2015] SOT 121 (URO) and other decisions cited by the Ld. Sr. counsel for the assessee on identical issue. In all these cases, the provisions of Section 2(9) of Insurance Act, 1938 was not brought to the notice of the Benches of the Tribunal which decided the above cases. Therefore, the Mu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 3) of the Act. Subsequently, notice was issued under Section 148 of the Act within four years for assessment years 2004-05 and 2005-06. For the assessment year 2002-03, the assessment was reopened beyond four years. For the assessment year 2003-04, the Assessing Officer reopened the assessment for second time after four years. The Madras High Court in the case of TANMAC India v. DCIT in Tax Case (Appeal) No.1426 of 2007 dated 19.12.2016 found that provisions of Sections 147 148 of the Act are not giving extended time for completing assessment. The Madras High Court found that unless there is a tangible material found after completion of assessment, the completed assessment cannot be reopened on the basis of the material already available on record. Since there is no tangible material found by the Assessing Officer after completing the original assessment, the reopening of assessment is invalid. Therefore, the consequential orders passed by the Assessing Officer for the assessment years 2002-03, 2003-04, 2004-05 and 2005-06, after reopening of assessments cannot stand in the eye of law. Accordingly, the same are set aside and all the appeals filed by the assessee challenging th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ary, Shri M. Swaminathan, Sr. Standing Counsel for the Revenue, submitted that the assessee created provision in anticipation of settlement of claims that were not ascertained. What was reported to the assessee is damage / loss caused to the insured persons. According to the Ld. Sr. Standing Counsel, the assessee is yet to assess the loss and determine the amount to be compensated, therefore, it is unascertainable liability. What is to be allowed under the Income-tax Act is ascertainable liability and not the unascertainable liability. In this case, according to the Ld. Sr. Standing Counsel, at the best, the assessee may claim that there is a liability for compensation. But, the amount of compensation is not quantified on the last day of the financial year. Therefore, according to the Ld. Sr. Standing Counsel, it has to be allowed in the year in which the liability was quantified. Referring to the order of the CIT (Appeals), the Ld. Sr. Standing Counsel submitted that the assessee made the provision of ₹ 1,24,97,27,939/- for the assessment year 2010-11. It is not known how much amount was actually paid by the assessee towards compensation. No details were available even after ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the considered opinion that the same cannot be allowed for assessment year 2010-11. Hence, the CIT (Appeals) is not correct in allowing the claim of the assessee. Accordingly, the order of the CIT (Appeals) is set aside and that of the Assessing Officer is restored. 44. The Revenue has taken one more ground for assessment years 2006-07, 2007-08, 2008-09, 2009-10 2010-11 with regard to disallowance made by the Assessing Officer under Section 14A of the Act. 45. Shri M. Swaminathan, Sr. Standing Counsel for the Revenue, submitted that the CIT (Appeals) has deleted the disallowance on the ground that provisions of Section 14A of the Act are not applicable to the insurance company. According to the Sr. Standing Counsel, expenditure relating to exempted income is not allowable under Section 37 of the Act. Therefore, according to the Sr. Standing Counsel, it ought to have been quantified under Section 14A of the Act. 46. On the contrary, Shri Percy J. Pardiwalla, the Ld. Sr. counsel for the assessee, submitted that Section 44 of the Act specifically says that the provisions of Sections 28 to 43B are not applicable to the insurance companies. According to the Ld. Sr. counse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e value of investment debited to the profit and loss account, shall be added back; (c) such amount carried over to a reserve for unexpired risks as may be prescribed in this behalf shall be allowed as a deduction. In view of Rule 5(a), the expenditures which are not for insurance business cannot be allowed and it has to be added back. 48. In view of the above, this Tribunal is unable to uphold the order of the CIT (Appeals). Accordingly, the orders of the CIT (Appeals) are set aside and that of the Assessing Officer are restored. 49. The next issue arises for consideration is taxability of profit on sale of investments. This issue arises for consideration in the Revenue s appeals for the assessment years 2006-07, 2007-08, 2008-09, 2009-10 and 2010-11 50. Shri M. Swaminathan, Sr. Standing Counsel for the Revenue, submitted that as per Rule 5 of the First Schedule of the Income-tax Act, 1961, the assessee has to offer to tax the profit as disclosed in the annual accounts prepared in accordance with the provisions of Insurance Act and subjected to adjustments made in accordance with Rule 5(a) and Rule 5(c) of the First Schedule to the Income-tax Act, 1961. According ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ter system, therefore, eligible for depreciation at the rate of 60%. In view of the above, we are unable to uphold the orders of the lower authorities. Accordingly, the orders of both the authorities below in respect of depreciation on UPS are set aside and the Assessing Officer is directed to allow the claim of the assessee. A similar view was taken by this Tribunal in Sundaram Asset Management Co. Ltd. v. Dy. CIT [2013] 145 ITD 17 (Chennai - Trib.). 55. The next issue arises for consideration is depreciation on EPABX. This issue arises for consideration in the assessee s appeals for assessment years 2006-07, 2007-08 and 2008-09. 56. Shri Percy J. Pardiwalla, the Ld. Sr. counsel for the assessee, submitted that EPABX is part and parcel of computer, therefore, eligible for depreciation at the rate of 60%. 57. We heard Shri M. Swaminathan, the Ld. Sr. Standing Counsel for the Revenue also. According to the Ld. Sr. Standing Counsel, EPABX is not a computer. It is a telecommunication system for transmitting voice signal from one end to another end. The computer is known as a machine which is used for processing the data. In this case, EPABX is used for transmitting voice sign ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gross premium from motor vehicle insurance is not liable for taxation. Therefore, the CIT (Appeals) has right allowed the claim of the assessee, hence the same is confirmed. 62. The next issue arises for consideration is disallowance of commission paid for receipt of re-insurance premium. This issue arises for consideration in the Revenue s appeals for assessment years 2005-06, 2006-07, 2007-08, 2008-09, 2009-10 and 2010-11. 63. Shri M. Swaminathan, the Ld. Sr. Standing Counsel for the Revenue, submitted that the assessee has paid commission for receipt of re-insurance premium. However, the assessee has not deducted tax at source. Therefore, according to the Ld. Sr. Standing Counsel, the Assessing Officer disallowed the payment of commission under Section 40(a)(ia) of the Act, hence, the CIT (Appeals) is not justified in allowing the claim of the assessee. 64. On the contrary, Shri Percy J. Pardiwalla, the Ld. Sr. counsel for the assessee, submitted that the assessee received re-insurance premium from M/s Cholamandalam MS General Insurance Company on discount basis, therefore, there is no question of deduction of tax. On identical circumstances, according to the Ld. Sr. co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... icer has rightly disallowed the claim of ₹ 21,71,733/-. 68. On the contrary, Shri Percy J. Pardiwalla, the Ld. Sr. counsel for the assessee, submitted that the assessee has paid ₹ 3,22,275/-to Mr. R.W. Clarke and ₹ 18,49,458/- to M/s Royal Sun Alliance Plc. According to the Ld. Sr. counsel, the assessee hired the service of settling agents / surveyors to assess the loss or damage in transit of goods to foreign country. The expenses incurred by the surveyors for assessing the damage to the goods in transit were reimbursed by the assessee. According to the Ld. Sr. counsel, it is not a technical service made known to the assessee. They are all independent surveyors who assess the damages and report to the assessee the extent of damage suffered in transit. Therefore, according to the Ld. Sr. counsel, no disallowance is called for. 69. We have considered the rival submissions on either side and perused the relevant material available on record. Mr. R.W. Clarke and M/s. Royal Sun Alliances Plc are non-residents. It is not in dispute that they have assessed the damage of goods outside the country. The surveyors assessed the damages as per their experience and k ..... X X X X Extracts X X X X X X X X Extracts X X X X
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