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TMI Blog2021 (3) TMI 1334X X X X Extracts X X X X X X X X Extracts X X X X ..... approval in terms of section 151 of the Act. In the said full text of reasons, omission on the part of the assessee was mentioned as a general and vague statement without specifically pointing out as to what was the clear omission or failure on the part of the assessee in not furnishing the requisite information that was necessary for the assessment. The entire information was very much available with the ld AO in the records which alone enabled him on bare perusal, to come to a conclusion that income of the assessee had escaped assessment. Hence in this scenario, how failure or omission could be attributed on the part of the assessee. Once there is no failure on the part of the assessee in providing requisite information, then the basic premise on which the entire reassessment was framed by recording reasons, vanishes in thin air. This makes the entire reassessment proceedings void abinitio. Moreover, we also find that the ld AO had triggered the reopening only based on verification of records. This goes to prove beyond doubt that there was absolutely no tangible material available with the ld AO to form a belief that income of the assessee had escaped assessment. On this count a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rules for presentation of insurance accounts as prescribed in IRDA (Preparation of Financial statements and Auditor s Report of Insurance Companies) Regulations. 2002. Under these norms, profit loss of life insurance company is divided into a technical account (policy holder s account represented in Form A-RA) also called as revenue account and non-technical account (shareholder s account represented as Form A-PL) also called Profit Loss A/c. The technical account deals with all the transactions relating to and includes income from premium and expenditure in relation to the Policyholders account and related investment income. For negative reserves are nothing but discounted value of estimated future net income of the Company which cannot be brought to tax in the year under consideration. Reliance is placed on Mumbai Tribunal Judgment in the case of ICICI Prudential Insurance Co. Ltd. vs. ACIT [ 2012 (11) TMI 13 - ITAT MUMBAI] wherein it was held that negative reserve disclosed in Form-1 does not give rise to distributable surplus. As per IRDA (Actuarial Report and Abstract for Life Insurance Business) Regulations. 2016, the disclosure of negative reserves in the Form-1 is not requi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd in law in not testing/ examining the validity of the reopening strictly on the basis of the reasons recorded, and instead, referring to/ relying upon finding not mentioned therein. 1.4 That the CIT(A) erred on facts and in law in not appreciating that reassessment is barred by limitation in terms of section 149 of the Act, since reasons recorded (that too, without copy of sanction obtained under section 151) were communicated much after the expiry of limitation of 6 years as prescribed in that section. 1.5 That the CIT(A) erred on facts and in law in not appreciating that the reassessment order was without jurisdiction, illegal and bad in law, since sanction obtained under section 151 was not provided to the appellant, much less within limitation prescribed in section 149 of the Act." 3.1. The revenue has raised the following grounds of appeal in its appeal:- ― "1. "Whether on the facts and circumstances of the case, the Ld. CIT(A) was right in deleting the disallowance of the claim of loss of ₹ 8,42,56,839/- which was merely due to accounting changes made by transfer of funds from shareholders Account to Policy holders account and did not result in actua ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hedule to the Act. The formats for presentation of insurance accounts have been amended by the IRDA (Actuarial Report and Abstract) Regulations, 2000 without a corresponding amendment to the First Schedule requiring the preparation of Policyholder's and Shareholder's Profit and Loss accounts distinctly. The earlier formats for presentation of accounts, aggregated the results relating to shareholders and policyholders and thus the surplus / deficit as computed included the impact of both. To give effect to the change in the presentation of the accounts of an insurance company as per IRDA Regulation, the results of the shareholders' accounts and the policyholders' accounts have been aggregated. The net deficit in the Revenue Account was ₹ 80,42,56,839/-. In view of the above, assessee's profits and gains under section 44 of the Act read with Rule 2 of the First Schedule to the Act has been computed at a loss of ₹ 80,42,56,839/- for the valuation year ended 31.3.2007. 2. Bharti Axa had incurred certain expenses prior to obtaining license to carry on life insurance business from the IRDA. These expenses are not disallowed while computing its taxable profit or loss under t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Limited in 51 ITR 773 , it was interalia held that software expenses claimed by the assessee cannot be disallowed in the light of the special provisions having non obstante clause governing the insurance sector. 4.2. The original assessment was completed u/s 143(3) read with section 144C(3) of the Act on 30.12.2010 determining total loss at ₹ 73,28,08,306/- after making addition u/s 92CA(3) in respect of transfer pricing adjustment of ₹ 7,14,48,533/-. In the said assessment order, there is a specific observation made by the ld AO that the income of the assessee life insurance company was determined in accordance with section 44 read with First Schedule to the Act. 4.3. Later this assessment was sought to be reopened by the ld AO vide issuance of notice u/s 148 of the Act on 29.3.2014 which was duly served on the assessee on 1.4.2014. This notice was admittedly issued beyond 4 years but within 6 years from the end of the relevant assessment year. The assessee filed a letter dated 22.4.2014 requesting the ld AO to consider the same as a return filed in response to notice u/s 148 of the Act and sought for copy of reasons recorded together with the approval from the compe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Further, you have requested to give reasons for reopening assessment u/s 148 vide your letter dated 22.04.2014. The reasons recorded for issuance of notice u/s 148 provided as under: a. "The assessee M/s Bharti AXA Life Insurance Co, Ltd having PAN AACC87227P is assessed to tax in this charge. In this case return of income was e-filed on 31.10.2007 declaring total loss at ₹ 80,42,56,839/-. The assessment u/s 143(3) /144C (3) was passed on 30.12.2010 at loss of ₹ 73,28,08,306/-. b. On verification of records, it is noticed that the assessee has declared loss of ₹ 80,42,56,839 in the return of income and carried it forward to set It off against profits for subsequent years. The assessee, being a life Insurance company has claimed that its income has been computed as per section 44 read with First schedule to the I.T.Act. 1961. In the assessment order, the profits and gains from insurance business as declared by the assessee have been accepted subject to an addition of ₹ 7,14,48,533/- made in accordance with the order of the TPO. c. In this connection, it is necessary to reproduce provisions of sections 44 and Rule 2 of the First Schedule as follows ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 3(3) /144C (3) was passed on 30.12,2010 at loss of ₹ 73,28,08,306/-. 2. On verification of records it is noticed that the assessee has declared loss of ₹ 80,42,56,839 in the return of income and carried it forward to set it off against profits for subsequent years. The assessee, being a life insurance company has claimed that its income has been computed as per section 44 read with First schedule to the I.T.Act, 1961. In the assessment order, the profits and gains from insurance business as declared by the assessee have been accepted subject to an addition of ₹ 7,14,48,533/- made in accordance with the order of the TPO. 3. In this connection, it is necessary to reproduce provisions of sections 44 and Rule 2 of the First Schedule as follows: Not withstanding anything to the contrary contained in the provisions of this Act.......shall be computed in accordance with the rules contained in the First Schedule. Thus, the profits and gains of the insurance have to be determined in accordance with the surplus disclosed by the actuarial valuation made in accordance with the Insurance Act, 1938 in respect of the last inter-valuation period ending before the commence ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... internal audit team. Reliance in this regard was placed on the decisions of Hon'ble Jurisdictional High Court in the case of DCIT vs DRM Enterprises reported in 230 Taxman 61 (Bom) and CIT vs Shankardas B Pahajani reported in 93 taxmann.com 248 (Bom). f) Only extract of reasons were provided to the assessee by the ld AO vide letter dated 13.2.2015 which was incomplete. This itself makes the entire reassessment proceedings as bad in law. Reliance in this regard was placed on the following decisions :- (i) Decision of Hon'ble Jurisdictional High Court in the case of PCIT vs Shodiman Investments (P) Ltd reported in 93 taxmann.com 153 (Bom), wherein it was held that partial furnishing of reasons will render the reopening invalid and bad. (ii) Decision of Hon'ble Delhi High Court in the case of Sabh Infrastructure Ltd vs ACIT reported in 398 ITR 198 (Del) wherein the Court at Para 19 of the order, laid down the following guidelines that ought to be followed by the Department in case of reopening of assessments:- (i) while communicating the reasons for reopening the assessment, the copy of the standard form used by the Assessing Officer for obtaining the approval of the Superior ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e original assessment proceedings. Reliance in this regard was placed on the decision of the Hon'ble Jurisdictional High Court in the case of Life Insurance Corporation of India vs CIT reported in 119 ITR 900 (Bom). The main reason adduced in the reasons recorded by the ld AO is that the assessee had failed to furnish the actuarial valuation certificate which was also vehemently argued by the ld DR as a failure on the part of the assessee. To this, the ld AR assailed the argument that the assessee failing to produce the valuation certificate is of no consequence, since it has no bearing on the computation of taxable income of the assessee under the provisions of the Act. The ld AR further stated that in terms of IRDA Regulations, 2000, which provides for specific rules for presentation of insurance accounts as prescribed in IRDA (Preparation of Financial Statements and Auditor‟s Report of Insurance Companies - Rule 3 read with Rule 5 of Schedule A) Regulations, 2002, every insurance company is mandated to prepare its financial statements after taking into consideration the actuarial valuation. The ld AR submitted that the entire audited financial accounts had been prepared af ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t in 269 Taxman 195 (SC). (ii) Decision of Hon'ble Delhi High Court in the case of Yum Restaurants Asia Pte Ltd vs DDIT reported in 397 ITR 665 (Del). h) Approval u/s 151 of the Act by the ld PCIT and ld Additional CIT had been granted in the instant case without due application of mind as in the prescribed proforma, they had just stated that "Yes I am satisfied". This tantamounts to improper sanction obtained and does not amount to judicial satisfaction after proper application of mind. It was argued by the ld AR that the ld PCIT had cryptically recorded his approval, without any application of mind. The ld PCIT had failed to even question the nature of information that was purportedly in the possession of the ld AO, on the basis of which he formed such reason to believe. Reliance in this regard was placed on the following decisions :- (i) Decision of Hon'ble Supreme Court in the case of Chhugamal Rajpal vs S.P.Chaliha reported in 79 ITR 603 (SC) ; (ii) Decision of Hon'ble Delhi High Court in the case of United Electrical Co. Pvt Ltd vs CIT reported in 258 ITR 317 (Del); (iii) Decision of Hon'ble Madhya Pradesh High Court in the case of CIT vs M/s S Goyanka Lime and Chemic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e assessment deserves to be declared as bad in law. 4.9.1. We find that the assessee upto the completion of reassessment and first appellate proceedings thereon was supplied only with the extract of reasons recorded which was admittedly incomplete as narrated above. Even the said extract of reasons recorded were supplied to the assessee without furnishing the sanction obtained in terms of section 151 of the Act, though it was specifically sought for in writing by the assessee. In this regard, we find that the ld AR rightly placed reliance on the decision of Hon'ble Jurisdictional High Court in the case of PCIT vs Shodiman Investments (P) Ltd reported in 93 taxmann.com 153 (Bom), wherein it was held as under:- 9. We find that at the time of re-opening of the Assessment, the Assessing Officer did not provide the reasons recorded in support of the re-opening notice in its entirety, to the Respondent-Assessee. This was contrary to and in defiance of the decision of the Apex Court in GKN Driveshafts v. ITO [2002] 125 Taxman 963/[2003] 259 ITR 19. The entire objects of reasons for re- opening notice as recorded being made available to an Assessee, is to enable the Assessing Officer to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fficer could have jurisdiction to issue notice under Section 148 read with section 147(a). But under the substituted section 147 existence of only the first condition suffices." Therefore, the sentence being relied upon was made in the context of the change in law that under the amended provision 'reason to believe' that in case of escaped assessment, is sufficient to re-open the assessment. This unlike the earlier provision of Section 147(a) of the Act which required two conditions i.e. failure to disclose fully and truly all facts necessary for assessment and reason to believe that income has escaped assessment. Thus, the observations being relied upon must be read in the context in which it was rendered. On so reading the submission, will not survive. 11. Further, a reading of the entire decision, it is clear that the reasonable belief on the basis of tangible material could be, prima facie, formed to conclude that income chargeable to tax has escaped assessment. Mr. Mohanty, learned Counsel is ignoring the fact that the words 'whatever reasons' is qualified by the words 'having reasons to believe that income has escaped assessment'. The words wh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on the formation of belief i.e. there must be a live link between material coming the notice of the Assessing Officer and the formation of belief regarding escapement of income. If the aforesaid requirement are not met, the Assessee is entitled to challenge the very act of re-opening of Assessment and assuming jurisdiction on the part of the Assessing Officer. 13. In this case, the reasons as made available to the Respondent- Assessee as produced before the Tribunal merely indicates information received from the DIT (Investigation) about a particular entity, entering into suspicious transactions. However, that material is not further linked by any reason to come to the conclusion that the Respondent-Assessee has indulged in any activity which could give rise to reason to believe on the part of the Assessing Officer that income chargeable to tax has escaped Assessment. It is for this reason that the recorded reasons even does not indicate the amount which according to the Assessing Officer, has escaped Assessment. This is an evidence of a fishing enquiry and not a reasonable belief that income chargeable to tax has escaped assessment. 14. Further, the reasons clearly shows that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... atisfaction of ld Additional CIT is also obtained in addition to the approval of ld PCIT, the said approval becomes invalid in terms of section 151 of the Act. It is trite law that if the law requires an act to be done in a particular manner, more particularly acts conferring jurisdiction like the present one, then, such act has to be done in that manner alone and the same cannot be compromised in any manner whatsoever. On perusal of the standard proforma for seeking approval in terms of section 151 of the Act, the legislature in its wisdom had prescribed such proforma, clearly demarcating and defining the circumstances under which the approval had to be granted by ld Additional CIT and circumstances under which the approval had to be granted by the ld PCIT. The said defined circumstances cannot be rendered otiose by obtaining approval from both Additional CIT as well as ld PCIT by the ld AO, as was done in the present case before us. 4.9.2.1. Reliance in this regard was rightly placed by the ld AR on the decision of Hon'ble Jurisdictional High Court in the case of Ghanshyam K Khabrani vs ACIT reported in 346 ITR 443 (Bom) wherein it was held that :- 6. The second ground upon wh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ovision hereunder which a power to be exercised by an officer can be exercised by a superior officer. When the statute mandates the satisfaction of a particular functionary for the exercise of a power, the satisfaction must be of that authority. Where a statute requires something to be done in a particular manner, it has to be done in that manner. In a similar situation the Delhi High Court in CIT v. SPL'S Siddhartha Ltd. [2012] 204 Taxman 115/17 taxmann.com 138 (Delhi) held that powers which are conferred upon a particular authority have to be exercised by that authority and the satisfaction which the statute mandates of a distinct authority cannot be substituted by the satisfaction of another. We are in respectful agreement with the judgment of the Delhi High Court. 7. In view of the findings which we have recorded on submissions (i), (ii) and (iv), it is not necessary for the Court to consider submission (iii) which has been urged on behalf of the Assessee. Once the Court has come to the conclusion that there was no compliance of the mandatory requirements of Section 147 and 151(2), the notice reopening the assessment cannot be sustained in law. 4.9.2.2. Reliance in this ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d and marked A, B & C for identification. 8. Mr. Tejveer Singh, learned Counsel appearing for the Revenue submits that the Additional Commissioner of Income Tax is the jurisdictional Officer to grant sanction under Section 151 (2) of the Act. This, Officer he, submits has recorded his satisfaction with the reasons recorded by the Assessing Officer to issue the re-opening notice. Thus, the requirement of Section 151 (2) of the Act is satisfied inasmuch as the Additional Commissioner of Income Tax has found it to be a fit case for issuing of notice. It is further submitted that even though, the approval was obtained from the Commissioner of Income Tax for issuance of the notice, it does not take away the fact that the Additional Commissioner of Income Tax was satisfied with reasons recorded by the Assessing Officer. Therefore, it is submitted that the notice dated 25th March, 2011, cannot be said to be without jurisdiction. 9. It is undisputed position before us that in terms of Section 151(2) of the Act, the sanctioning/ permission to issue notice under Section 148 of the Act has to be issued by the Additional Commissioner of Income Tax. We find that the Assessing Officer had no ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Appeal dismissed. No order as to costs. The Special Leave Petition preferred by the revenue before the Hon'ble Apex Court against this judgement was dismissed in 269 Taxman 195 (SC). 4.9.3. Moreover, in the instant case, on perusal of the sanction obtained in terms of section 151 of the Act, we find that the ld PCIT had merely recorded - "Yes, I am satisfied". The same, in our considered opinion, could not be regarded as a valid satisfaction as it does not reflect due application of mind of the sanctioning authority before granting satisfaction. This cryptic noting only leads to the inescapable conclusion that there was, in reality, no independent application of mind by the sanctioning authority while according approval in terms of section 151 of the Act. This clearly vitiates the purpose behind the inbuilt safeguards and checks provided by the statute on exercise of powers by the ld AO u/s 147/148 of the Act. It is trite law that the sanctioning authority is expected to judiciously review and then record objective satisfaction which is conspicuously absent in the present case. Hence it could be safely concluded that the sanction in terms of section 151 of the Act had been accor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... #39;s Inv. No. A/P/Misc. (5) D.I./63-64/ 5623 dated August 13, 1965, forwarded to this office under C.I.T., Bihar and Orissa, Patna's letter No. Inv. (Inv.) 15/65-66/1953-2017 dated Patna September 24, 1965, it appears that these persons are name-lenders and the transactions are bogus. Hence, proper investigation regarding these loans is necessary. The names of some of the persons from whom money is alleged to have been taken on loan on hundis are: 1.Seth Bhagwan Singh Sricharan. 2 Lakha Singh Lai Singh. 3. Radhakissen Shyam Sunder. The amount of escapement involved amounts to ₹ 1,00,000. Sd. S.P. Chaliha, 30-4-66. Income-tax Officer, A-Ward, Muzaffarpur." In his report the Income-tax Officer does not set out any reason for coming to the conclusion that this is a fit case to issue notice under section 148. The material that he had before him for issuing notice under section 148 is not mentioned in the report. In his report he vaguely refers to certain communications received by him from the Commissioner of Income-tax, Bihar and Orissa. He does not mention the facts contained in those communications. All that he says is that from those communications &qu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uirements of either clause (a) or clause (b) of section 147. Therefore, he could not have issued a notice under section 148. Further, the report submitted by him under section 151(2) does not mention any reason for coming to the conclusion that it is a fit case for the issue of a notice under section 148. We are also of the opinion that the Commissioner has mechanically accorded permission. He did not himself record that he was satisfied that this was a fit case for the issue of a notice under section 148. To question No. 8 in the report which reads "Whether the Commissioner is satisfied that it is a fit case for the issue of notice under section 148", he just noted the word "Yes" and affixed his signature thereunder. We are of the opinion that if only he had read the report carefully, he could never have come to the conclusion on the material before him that this is a fit case to issue notice under section 148. The important safeguards provided in sections 147 and 151 were lightly treated by the Income-tax Officer as well as by the Commissioner. Both of them appear to have taken the duty imposed on them under these provisions as of little importance. They have ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nts prescribed by IRDA, life insurance companies are required to present their accounts separately in the form of Policyholders‟ sub-account and Shareholders‟ sub-account being the Revenue Account and Profit and Loss Account, respectively. Thus, while IRDA regulations oblige, two separate sub-accounts, so far as the business of the company is concerned, it is only one ingle, indivisible business only viz life insurance business. We find that the ld AR vehemently argued that separate sub-accounts namely Revenue Account and Profit and Loss Account are prepared purely to adhere to the monitoring requirements of IRDA , in order to ensure the interest of the persons insured are protected in the life insurance companies so that, when the policy matures, either by efflux of time or by demise of the insured person, the beneficiaries are assured of the payments due to them. We find that these two separate sub-accounts does not have any bearing to the income tax law more particularly u/s 44 read with First Schedule to the Act. 5.1. As stated above, prior to amendment of the Insurance Act, 1938, life insurance business was monopoly of the State till 1999. With the enactment of In ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ly done in the case of an ordinary assessee hut according to the special and artificial mode prescribed in the First Schedule, having regard to the provisions of s. 44 of the I. T. Act. 1961. The effect of s. 44 of the I. T. Act, 1961, is that the provisions relating to interest on securities, income from house property, capital gains and income from other sources are not made applicable in the case of an insurance company and the profits are to be computed in accordance with rr. 2, 3 and 4 in the First Schedule so far as life insurance business is concerned. Thus, so far as the proceedings regarding assessment to tax under the I. T. Act are concerned, they will be controlled solely by the provisions of s. 44 and the First Schedule which, as already pointed out, is an artificial mode of computation of income. The basic figure which is required to he taken for the purposes of computation of income from insurance business is the annual average of the surplus. Rule 2(b). which is the only material rule so far as the present case is concerned. provides for the annual average of the surplus. The surplus contemplated is the surplus as determined actuarially in accordance with s. 13 read ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tation of taxable profits in the case of insurance company. The aforesaid decision was followed by Mumbai Bench of the Tribunal in the following cases: - HDFC Standard Life Insurance Company Ltd vs. DCIT (OSD)-l(l) (ITA No.2203 of 2012) (HDFC) - ICICI Prudential Insurance Company Limited vs. ACIT. Circle 6(1) (I.T.A. No.5251/Mum/2013 and 5252/Mum/2013) (ICICI-2015) 6.1.5. Further, even the DRP, while giving directions for AY 2011-12 relying on ICICI-2012 decision, appreciated the assessee's submissions and held that taxable income under section 44 of Act is the surplus as per Form-I prepared as per IRDA Regulations. 2000 and surplus in the Shareholders' A/c (prior to internal transfer) needs to be considered. 6.1.6. It is pertinent to note here that, based on the DRP's direction for AY 2011-12, even the AO in all the subsequent assessment orders passed by him (i.e.. AY 2012-13 to AY 2016-17), on a consistent basis, accepted the above contention of the assessee and accordingly, determined the surplus or deficit after merging both the Policyholders account and the Shareholders' account and ignoring the transfer of funds from 'Shareholders' account to 'Policyhold ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... stimated future net income of the Company which cannot be brought to tax in the year under consideration. Reliance is placed on Mumbai Tribunal Judgment in the case of ICICI Prudential Insurance Co. Ltd. vs. ACIT [2012 140 ITD 41] wherein it was held that negative reserve disclosed in Form-1 does not give rise to distributable surplus. 7.1.3. The aforesaid decision was followed by Mumbai Bench of the Tribunal in the following cases: - AEGON Religare Life Insurance Company Limited vs. ACIT ([2016] ITA No. 4110/Mum/2014, ITA No. 4130/Mum/2014, (2018)ITA No. 6336/Mum/2016, (2018)ITA No.3726/Mum/2017. (2018)ITA No. 4528/Mum/2017 and [2019J ITA No. 4200/Mum.2018) - HDFC Standard Life Insurance Company Ltd vs. DCIT (OSD)-l(l) [2013] (ITA No.2203 of 2012) - IC1CI Prudential Life Insurance Company Limited vs. Asst. CIT. Circle 6(1) [2015] (ITA No. 5251, 5252 of 2013) - DCIT vs. SBI Life Insurance Co. Ltd: ITA No. 3385/Mum/2017 (Mum)- 7.1.4. It is also pertinent to note that Bombay High Court in ease of ICICI Prudential Life Insurance Company Limited [2015] (ITA 711 of 2013 and ITA 688 of 2013) and HDFC Standard Life Insurance Company Limited [2016] (ITA No. 548 of 2014) did not a ..... X X X X Extracts X X X X X X X X Extracts X X X X
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