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TMI Blog2021 (7) TMI 92X X X X Extracts X X X X X X X X Extracts X X X X ..... nsideration. We are, therefore, inclined to set aside this issue to the records of the AO for a de novo verification of the relevant facts. In the result, Grounds 3 and 3.1 are partly allowed for statistical purposes. Disallowance on account of Provision made for Standard Assets - whether Rule 5 prescribes for an adjustment by adding back the provision made for standard assets? - HELD THAT:- There is no enabling mechanism in Rule 5(a) mandating an adjustment to disclosed profits by making an addition on account of provision made for Standard Assets. CIT (DR) has relied upon decision of the coordinate bench of this Tribunal in case of Chaitanya Godavari Grameena Bank [ 2018 (5) TMI 511 - ITAT VISAKHAPATNAM] . However, in that case the assessee was a bank and had claimed deduction on account of Provision for Standard Assets u/s 36(1)(viia). This was not a case of an Insurance Company to which provisions of Rule 5 was applicable. As already held above, under Rule 5 the Statute makes profit disclosed in Profit and Loss account sacrosanct subject only to adjustments prescribed in Rules 5(a) to 5(c). The case law relied is, therefore, distinguishable. CIT (A), in AY 2011-12, has a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tandard Asset Disallowed ₹ 56,59,609/- 2.1 Being aggrieved by the assessment order passed, the assessee preferred appeal before Ld. CIT (A). The Ld. CIT (A), vide the impugned order, gave partial relief to the assessee by confirming certain additions made by the AO. 2.2 Aggrieved by the order of the Ld. CIT (A), the assessee is in appeal before us now. To the extent disallowances/ additions were deleted by the Ld CIT (A), revenue preferred an appeal before this Tribunal (ITAT) which stands dismissed vide order dated 22nd October 2019 in ITA No. 4818/Del/2016. 2.3 The assessee has raised the following grounds of appeal: 1. That on the facts and in law the CIT (A) erred in upholding an addition to total income of ₹ 561,92,07,000(i.e., ₹ 535,25,23,496/- and ₹ 26,66,83,544/-) on account of Profit on Sale/Redemption of Investments. 1.1 That on the facts and in law the CIT (A)/AO erred in not appreciating that by virtue of CBDT Circular No.528 dated 16th December, 1988 income earned by the appellant from Profit on Sale/Redemption of investments is not liable to tax. 2. Without prejudice, on facts and in law the CIT (A)/AO erred in not app ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at ₹ 561,92,07,000/-. Briefly stated, the relevant facts that in the return of income, the assessee had claimed profit derived from sale/ redemption of investments to the tune of ₹ 535.25 crores as exempt by relying upon CBDT Circular No. 528 dated 16th December 1988. Thereafter, during the course of assessment, revised computation of income was filed by the assessee making a further claim of exemption of ₹ 26.66 crores. Therefore, the subject matter of dispute before the Ld CIT (A) was whether the entire amount of ₹ 561.92 crores (i.e. ₹ 535.25 crores + ₹ 26.66 crores) was exempt from tax while computing the total income of the assessee. 4.1 Before us, the Ld. AR, at the outset submitted that the issue as to whether profit derived by the assessee from sale/ redemption of investments is exempt from tax is a legacy issue. In earlier years too similar additions were made by the lower authorities and the matter now stands settled by the decision of the Hon ble Jurisdictional High Court in case of assessee for AY 2005-06 reported in 407 ITR 658 (Del). 4.2 The Ld. CIT (DR), on the other hand, has not been able to controvert this and has relied ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Ltd. [2006] 280 ITR 331/152 Taxman 50 (Delhi). 44. The ITAT itself has taken a consistent stand that the taxability of income in the case of insurance companies is not on commercial profits but on such profits as are computed in accordance with the provisions of the IA, subject to the permissible adjustments under the Act. In other words, the taxability of profits in the hands of the insurance companies is confined to profits in terms of annual accounts of such insurance companies drawn up in accordance with the IA. 45. Indeed, the legislative policy appears to be clear. Where it is intended to bring the profit on sale of investments to tax, the legislature has chosen to re-introduce the earlier provision by virtue of the amendment effective from AY 2011-12. The intention behind omitting Rule 5(b) was clearly expressed in the Circular. If the Circular was not intended to fill the gap brought about by the omission of Rule 5(b), viz., to exempt the profits on sale of investments made by the insurance companies from tax, there was no need to re-introduce Rule 5(b) with effect from AY 2011-12. The resultant position is that for the period during which there was no Rule 5(b) t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g exempt as the same is not covered by section 44 of the Income Tax Act. The Hon ble High Court has also observed that legislative intention is clear. Where the Legislature intended to bring the profit on sale of investments to tax, it has chosen to reintroduce the earlier provision by virtue of the amendment effective from Assessment Year (AY) 2011-12. Since there is no difference in the facts for the year under consideration vis-a-vis assessment year 2005-06 and considering that the present case before us pertains to AY 2010-11, respectfully following the ratio laid down by the Hon ble High Court we allow this ground raised by assessee. Accordingly the Ground Nos. 1 and 1.1 are allowed. 6.0 Ground Nos. 2, 2.1 are in respect of denial of exemption under section 10(38) of the Act, whereas Ground No. 2.2 seeks benefit of concessional rate of tax u/s 111A / 112 of the Income Tax Act. These are alternative claims raised by the assessee. In our considered opinion, these grounds now become in fructuous in view of our adjudication in Ground Nos. 1 and 1.1 above which has been decided in favour of the assessee. Grounds 2, 2.1 and 2.2 are accordingly dismissed. 7.0 Ground Nos ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... so submitted that the learned Assessing Officer has followed the appellant orders for the earlier years wherein estimated 29% of the depreciation allowance was disallowed on the ground that details of addition to assets was not furnished. However, during the year requisite details were filed and the particulars of same are disclosed in Annexure of the Tax Audit report for the captioned year. Thus, the dissonance in the captioned year is without any basis and material on record. The addition if any is to be based on facts of each year as every assessment year is distinct and separate for purpose of assessment. 7.3 The Ld. AR submitted that both the lower authorities had decided the issue by blindly following the precedents decided in the past and ignoring the factual details submitted during assessment. It was, therefore, prayed by the Ld. AR that in interest of justice the issue may be set aside to the AO for verification of the details filed, along with the audit report which is a part of record. 8.0 The Ld. DR supported the order passed by the Ld. CIT (A). 9.0 We have carefully perused the orders of the lower authorities and the material available on record. It is seen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... per cent of the value of the asset. The change in provision from last year is taken to P L A/c. 10.2 The reply of the assessee has been perused and carefully considered. As per the assessee s own submission standard asset does not disclose any problem and does not carry more than normal risk and is not an NPA. The provision for standard assets of ₹ 56,59,609/- is therefore disallowed. Penalty u/s 271(1)(c) is initiated for furnishing of inaccurate particulars of income and concealment of the particulars of income. 10.1 The Ld. first appellate authority has upheld the disallowance by relying on the appellate order passed by him in the case of the assessee for AY 2011-12. The Ld AR has filed a copy of the appellate order dated 16th November 2015 passed by the Ld CIT (A) in its case in appeal No. 40/13-14. The Ld. CIT (A) has upheld the disallowance by observing as under: The AO has followed the order for AY10-11 on this issue. However, it needs to be mentioned here, there has been an amendment under rule 5 (supra), w.e.f., 01-04-2011, Under rule 5(a), the legislature has provided w.e.f., 01-04-2011, that any expenditure or allowance, which is not admissible ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ently, ground no. 7 of the appeal is dismissed. 10.2 Before us it was submitted by the Ld AR that the lower authorities have erred in making/sustaining the disallowance. In this regard it was submitted by the Ld. AR that the total income of the assessee is to be computed as per provisions of section 44 read Rule 5 of Schedule 1. It was submitted that as per the scheme of taxing provisions, the audited annual accounts of the assessee are to be treated as sacrosanct and only the adjustments provided for in Rule 5 of the First Schedule are permissible. It was submitted that under Rule 5 there is no enabling provision which directs for disallowance of provision made for Standard Assets. 10.3 The Ld. CIT (DR), on the other hand, vehemently supported the disallowance made by the lower authorities. It was submitted that the Ld. CIT (A), in AY 2011-12, has justifiably sustained the disallowance. The Ld. CIT.(DR) also relied upon the decision of the coordinate bench of this Tribunal in case of Chaitanya Godavari Grameen Bank reported in 170 ITD 668(Vishaka). 11.0 We have carefully considered the facts of the case and the material available on record. The assessee is engaged in th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he total income of the assessee requires firstly, picking up the figure of profit disclosed by the Profit and Loss Account and then making adjustments as per clauses ( a ) and ( c ) of Rule 5. Section 44 read with Rule 5 of the First Schedule makes the figure of profit disclosed by the Profit and Loss account drawn as per the Insurance Act as absolute and binding. Only the adjustments specified in clauses ( a ) and ( c ) can be given effect to while computing the total income. The above legal position is now well settled, in case of assessee itself by the Hon ble Apex Court in its judgment reported in 291 ITR 370(SC) as under: 13. Insurance companies in view of the provisions of the said Act, however, are dealt with also under the 1961 Act differently. Section 44 thereof, as noticed hereinbefore, begins with a non obstante clause. The jurisdiction of the Income-tax Officer in passing the orders of assessment is limited. Keeping in view the fact that the business carried out by the assesse is not governed by the ordinary principles applicable to business computation as laid down in section 10 of the 1961 Act, the insurance companies do not compute their profits annually ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... essee has not denied the fact that Standard Assets do not disclose any problem and are not NPA. However, the prudential norms adopt a conservative view and mandate recognition of general provision in the books of accounts. Provision made for Standard Asset is therefore a reserve created for Contingent Loss and is not expenditure . 11.5 The moot issue now to be deliberated upon is whether Rule 5 prescribes for an adjustment by adding back the provision made for standard assets? 11.6 Clearly, clauses (b) and (c) of Rule 5 are not relevant. Rule 5(b) is applicable w.e.f. from AY 2011-12. Even otherwise, Rule 5(b) prescribes for an adjustment on account of profit or loss vis a vis investments. Rule 5(c) again is not relevant as it deals with reserve for unexpired risk. Rule 5(a) being relevant mandates an adjustment as under: (a) subject to the other provisions of this rule, any expenditure or allowance including any amount debited to the profit and loss account either by way of a provision for any tax, dividend, reserve or any other provision as may be prescribed which is not admissible under the provisions of sections 30 to 43B in computing the profits and gains of a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... wance u/s 32 and Investment Allowance u/s 32A. 11.9 Now let s deliberate upon the second part of Rule 5(a) which prescribes for an adjustment on account of provision for any tax, dividend, reserve or any other provision as may be prescribed which is not admissible under the provisions of sections 30 to 43B . Although in the instant case the amount debited to profit and loss account is termed as Provision for Doubtful Assets , however in substance it is a Reserve and not a Provision . The difference between the two is now well settled. In case of State Bank of Patiala v. CIT reported in 219 ITR 706(SC) it was held by the Hon ble Apex Court that: A fair reading of the above decisions would go to show that if the transfer of amount is made ad hoc, when there is no known or anticipated liability, such fund will only be treated as reserve. In this case, substantial amounts were set apart as reserves. No amount of bad debts was actually written off or adjusted against the amount claimed as reserves. No claim for any deduction by way of bad debts were made during the relevant assessment years. The assessee never appropriated any amount against any bad and doubtful debts ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The Ld. CIT (A), in AY 2011-12, has also not properly addressed the issue. Relevant statutory provisions have been inadvertently misread and hence not properly understood. We therefore delete the disallowance and for reasons given by us above Ground No 4 is allowed. 12.0 In Ground No. 5 of the appeal, the assessee is aggrieved by the fact that the Ld. CIT (A) has erred in not adjudicating on ground numbers 7 and 8 raised by the assessee in the appeal memo filed before him. From records it is apparent that in Form 35 the assessee had challenged the assessment order on following grounds 7 and 8: 7. On the facts and in the circumstances of the case and in law the Ld Assessing Officer ought to have allowed carry forward of ₹ 4,41,53,11,765/- under section 72(1) being business loss the captioned assessment year and ₹ 29,14,60,122/- being unabsorbed depreciation allowance of the captioned assessment year under section 32(2), and not doing so is wrong and contrary to the facts and circumstances of the case, provisions of the Income Tax Act, 1961, and Rules made thereunder. 8. On the facts and in the circumstances of the case and in law, the Ld Assessing Officer o ..... X X X X Extracts X X X X X X X X Extracts X X X X
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