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TMI Blog2022 (4) TMI 1018X X X X Extracts X X X X X X X X Extracts X X X X ..... its own order and that the view stipulated in the judgment of the Hon ble Calcutta High court is also in support of the assessee. Respectfully following the aforesaid judicial pronouncements Ground No. 1 of the assessee s appeal is allowed while ground No. 2 of the Department s appeal is dismissed. Disallowance of contribution to environment relief fund u/s 43B - HELD THAT:- The assessee is covered in favour of the assessee in view of the decision by the Coordinate Bench Pune in assessee s own case, the lead year being A.Y. 2006-07 [ 2019 (1) TMI 1332 - ITAT PUNE ] The said appeal was filed by the assessee in the second round of proceedings before the Tribunal, wherein in earlier round the matter was set aside to the file of the A.O. In the second round of assessment proceedings, the ld. A.O continued with disallowance u/s 43B of the Act. The CIT(A) upheld the order of the A.O. However, the Tribunal decided this issue in favour of the assessee vide its order dated 21-1-2019 [ 2019 (1) TMI 1332 - ITAT PUNE ] Disallowance of Risk Inspection Charges - Sr. Counsel submitted that on a conjoint reading of the orders of the Tribunal for A.Y. 2008-09, 2009-10, 2010-11 and 2011-12 there wer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ub-clause (ii) of clause (a) of the said section to clarify that for purposes of sub-clause (ii) the term tax shall include and shall be deemed to have always included any surcharge or cess, by whatever name called, on such tax. This amendment shall take effect retrospectively from 1st April 2005 and will, accordingly apply in relation to the assessment years 2005- 06 and subsequent assessment years. In view thereof, we hold education cess is not allowed as deduction and it has to be charged to income-tax. The additional ground raised by the assessee is dismissed. X X X X Extracts X X X X X X X X Extracts X X X X ..... emption of investments of ₹ 1,93,96,515 as taxable. 1.2 Erred in not following the binding decision of the Hon'ble Pune Tribunal in appellant's own case for AY 2002-03 to AY 2006-07. Ground No 2: Disallowance of Contribution to Environmental Relief Fund 2.1 Erred in upholding the action of the AO in disallowing the provision of contribution towards Environmental Relief Fund of ₹ 94,07,003 under provisions of section 43B of the Act. Ground No 3: Disallowance of Risk Inspection Charges 3.1 Erred in upholding the action of the AO in disallowing Risk Inspection Charges of ₹ 3,35,80,OOO. The Appellant craves leave to add, alter, vary; omit, substitute, amend or delete one or more of the above grounds of appeal on or before or at the time of hearing of the appeal, so as to enable the Honorable Income Tax Appellate Tribunal to dispose off the appeal according to law." 3. In Cross Objection No. 112/PUN/2017 arising out of Revenue"s appeal No. 1645/PUN/2015 for A.Y. 2007-08 the assessee has raised on the following grounds of appeal: "On the facts and in the circumstances of the case, the Respondent wishes to raise the following grounds of cross objec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... essee has been consistently claiming profits on sale/redemption of investments (including amortization of profit/loss) as non-taxable in view of deletion of clause (b) to Rule 5 of the First Schedule to the Income-tax Act, 1961 (hereinafter referred to as "the Act") (with effect from 1989-90) with a specific legislative intent of not treating such profits as taxable as clarified by the Central Board of Direct Taxes (CBDT) vide its Circular No. 528 dated 16-12- 1988. Accordingly, while computing the taxable income for A.Y. 2007-08, net profits of ₹ 1,93,96,515/- (profits on sale/redemption of investments of ₹ 11,87,92,059/- - loss on amortization of securities of ₹ 93,93,95,544/-) was claimed as non-taxable. 7. The ld. A.O did not accept the aforesaid claim of the assessee and held the profits on sale/redemption of investments ₹ 11,10,98,149/- as taxable. Further, the ld. A.O did not allow the loss on amortization of securities of ₹ 9,93,95,544/- as deductible expenditure. The ld. A.O has dealt with this issue from para 4.4 to 4.7 of his order. The contentions of the ld. A.O are summarized as follows: i) The assessee is Public Financial Institution ( ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... so stands squarely covered in favour of the assessee in the light of the Hon"ble Calcutta High Court decision for A.Y. 2005-06 in the case of National Insurance Co. Ltd. (2017) 393 ITR 52 (Cal) wherein it has been held that in view of the deletion of Rule 5(b) and having regard to the legislative intent specified in the CBDT circular No. 528/1988 (being binding on the Tax Department), the profits on sale of investments should not be taxed. The Pune Bench of the Tribunal has taken cognizance of the said decision while passing order for A.Y. 2009-10 and 2010-11. 12. We find that for the lead year i.e. 2003-04 in ITA No. 1447/PN/2007, the Tribunal has very exhaustively observed and dealt with this issue and has given a categorical finding. The relevant part of the decision is extracted as follows: 5. On this issue we have heard both the sides at length, As is evident from the above discussion that there was no dispute as far as the facts in respect of claim was concerned. Also there was no contradiction about the applicability of the aforecited provisions of the Act. On the basis of the aforementioned discussion and on due appreciation of factual aspect it is undisputed that there ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Applying the principle as enunciated by the Hon'ble Courts we can draw conclusion that the said amendment was sought to remedify the taxation of gain ,on sale of certain investments. Up to this extent revenue should also not have any. objection that the intent of the legislature was' not to tax the gain on sale of investments and primarily because of this reason sub rule (b) from Rule 5 was omitted. The grievance of the revenue and the strong Objection of the A.O was that ~cause of the omission of sub rule it cannot be presumed automatically that the taxation laws have granted exemption to profit on sale of investment. Now the question is that, it the amendment has not taxed a particular income then whether a logical conclusion can be drawn that it was exempted from taxation or even after the amendment still could be taxed in the hands of the Insurance Company, while computing the taxable income based upon the profit and loss accounts of the assessee. Even to answer this question we have to take the shelter and the support from the view expressed by Hon'ble Court and that is the only guidance available to solve such nature of dispute. 5.3 The Hon'ble Courts have& ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... governed by Rule 5 of a schedule. Reliance was placed on the decision of [Supreme Court in the case of General Company of India 240 ITR 139 and Pandyne [insurance Company 551TR 716. c) The allegation of the A.O was that any part of the profits and gains not attributable to the Insurance Business could qualify for exemption and liable to be taxed. The contention of the assessee was that firstly the financial statements of an Insurance Company has to be finalized in accordance with the insurance regulatory and development authority. As per the said regulation profits earned by a General Insurance Company on sale of redemption 4f investment has to be credited to the profit and loss account and not to be shifted to the balance sheet directly, It was wrong on the part .of the A.O through a suggestion that had the assessee ever intended to claim the exemption then he could have reflected the profit on sale of investment in the balance sheet directly instead of crediting in P & l account. The contention of the assessee was that such a method has not been prescribed by the designated regulatory authority, d) The applicability of provisions of sec 43(0) and section 36(1)(vii a) have als ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 6, the Tribunal has held as follows: "17. We have heard the rival contentions and perused the record. The first issue raised vide ground of appeal No.1 before us is in relation to the taxability of profits arising on sale and redemption of investments claimed as exempt by the assessee totalling ₹ 50,00,81,160/- and amortization of securities charges totalling ₹ 3,10,26,441/-. The assessee before us is a joint venture between Bajaj Auto Ltd., and Allianz SE, Germany. The assessee was granted approval to carry on general insurance business as per IRDA authority. The assessee was engaged in the business of general insurance for the year under consideration. In addition to its income from insurance, the assessee had shown profit on sale / redemption of securities at ₹ 50,00,81,160/- and also amortization of securities of ₹ 3,10,26,441/-. The said claim of the assessee was rejected by the Assessing Officer observing that the functions of the assessee company were distinct i.e. it was engaged in the activity of insurance business and the second activity was public finance institution. The Assessing Officer was also of the view that the income from non-banking ac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... se was introduced or replaced to prescribe the method of taxation of such income; therefore the Revenue Department has no right to tax such an income in the absence of any enabling provision. Naturally, such a deletion cannot be treated a superfluous action but this change had to give a definite judicial meaning. We have to ascribe a logical conclusion to the said deletion of sub rule (b) from Rule 5 and the natural meaning is that after the deletion the income described therein is out of the purview of computation of Insurance Business from the First Schedule therefore consequently cannot be taxed u/s 44 of I.T. Act. After expressing this view we hereby dismiss the cross objection of the revenue." 18. Following the same parity of reasoning, we hold that while computing the income from insurance business under section 44 and First Schedule of the Act, there is no merit in holding the profit / loss on sale / redemption of securities / investments amounting to about ₹ 50 crores as taxable and the loss on amortization of securities of ₹ 3.10 crores is to be reduced from the taxable income of the assessee. The order of Tribunal in assessment year 2003-04 has been subseque ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ctice of not making adjustment by way of adding back in similar fashion and this practice ought not to be deviated for the relevant assessment year. He has also pointed out that such adjustment is permissible from the assessment years 2011-12 onwards by reason of reinsertion of clause (b) in Rule 5 to the said schedule. 15. Main stand of the assessee is on binding nature of the circular, so far as income tax authorities are concerned. Even if a circular appears to go against statutory provisions, Mr. Poddar has submitted, referring to the judgment of the Supreme Court in the case of Paper Products Ltd. v. Commissioner of Central Excise (supra), the circular would prevail. In this judgment it has been held that:- "The question for our consideration in these appeals is : What is the true nature and effect of the circulars issued by the Board in exercise of its power under section 37B of the Central Excise Act, 1944 ? This question is no more res integra in view of the various judgments of this court. This court in a catena of decisions has held that the circulars issued under section 37B of the said Act are binding on the Department and the Department cannot be permitted to take ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... his issue has been consistently held in favour of the assessee by its own order and that the view stipulated in the judgment of the Hon"ble Calcutta High court is also in support of the assessee. Respectfully following the aforesaid judicial pronouncements Ground No. 1 of the assessee's appeal is allowed while ground No. 2 of the Department's appeal is dismissed. 17. Ground No. 2 of assessee's appeal is with regard to the disallowance of contribution to environment relief fund. The assessee is aggrieved by the decision of the ld. CIT(A) in upholding the action of the ld. A.O in disallowing the provisions of contribution towards Environmental Relief Fund of ₹ 94,07,003/- u/s 43B of the Act. The relevant facts are that the assessee is mandated by the Public Liability Fund Act, 1999 to collect contribution equivalent to the amount of premium on public liability policies issued for being credited to the Environmental Relief Fund. In the return of income for A.Y. 2007-08, the assessee had erroneously considered a sum of ₹ 94,07,003/- relating to contribution to the Environmental Fund Liability collected under the Public Liability Fund Act, 1999 as disallowable u/s 43B of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iability Insurance Act 1991. As per see. 23 of the PLI Act, Central Govt. was required to formulate Rules for the manner in which and the period within which the amount received was required to be remitted by the insurer u/s 4(2D) of the PLI Act. The manner in which the contribution so collected is required to be remitted was prescribed in December, 2008 and the appellant made the payment of accumulated balance on 2/01/2009. Till then the amount in question was shown as current liability. Considering the above provision it can well be seen that there was impossibility of paying the amount as no mechanism for the same was put in place. However, there is no provision in the Act to exclude such cases from ambit of the provisions see. 438 of the I TAct, 1961. The appellant can claim the same in the year of payment. The appellant also admitted that such claim was rejected by DRP in the A.Y. 2008-09. Accordingly, I do not find any merit in the ground and the same is dismissed." 20. At the time of hearing, the ld. Sr. Counsel submitted that the ground raised by the assessee is covered in favour of the assessee in view of the decision by the Coordinate Bench Pune in assessee"s own case, t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iling of the return of income and, hence, not being contributed, whether can be added as income of the assessee under section 43B of the Act? 11. The relevant provisions of the Public Liability Fund Act, 1991 are as under:- "4(1) Every owner shall take out, before he starts handling any hazardous substance, one or more insurance policies providing for contracts of insurance thereby he is insured against liability to give relief under subsection (1) of section 3; xxxxxx 4(2C) Every owner shall also, together with the amount of premium, pay to the insurer, for being credited to the Relief Fund established under section 7A, such further amount, not exceeding the amount of premium, as may be prescribed.;" 12. The case of the assessee before us is that the amounts collected towards ERF were specifically identified in the policy schedule issued by it. The assessee collects the said amount from the owner (insured) of the insurance policy but it was acting only as a channel between proposed insured and the Government. The liability to contribute to the said fund arises when the owner (insured) pays the additional remuneration to the insurer. As per clause 4(2D) of PLI Act, the li ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (insured), but in the absence of the fund being created, the assessee was handicapped in transferring the amount so collected to the fund. The manner of remittance was prescribed in December 2008 and the assessee has paid the accumulated balance on 2.9.2009. In the absence of the creation of fund, the assessee had no means of depositing the said amount and the assessee in such circumstances cannot be held responsible for non-depositing the contribution to ERF. In any case, we have already held in the above paras that the assessee was only the collector of funds of the amount which was to be deposited on behalf of the owner (insured), when the mechanism was provided for such deposit. 14. Before parting, we may also point out that there is no merit in the order of CIT(A) in holding the said payment to be in the nature of cess. The Hon"ble Supreme Court in the case of M/s Guruswamy & Co. Etc. (supra) has decided the said issue at para 21 of its judgment and has held that the word "cess" means tax and generally used when the levy is for such specifically administrative expenses which the name indicates i.e. health cess, education cess, road cess, etc. The said levy (i.e. cess) is an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d in favour of the assessee. Respectfully following the aforestated decisions on the same facts and circumstances and on the same parity of reasoning, ground No. 2 of assessee's appeal is allowed. 23. Ground No. 3 of the assessee's appeal and Ground No. 6 of the Department's appeal is with regard to the issue of disallowance of Risk Inspection Charges. So far as ground No. 3 in the assessee"s appeal is concerned, the assessee is aggrieved that the ld. CIT(A) has upheld the action of the ld. A.O in disallowing Risk Inspection Charges of ₹ 3,35,80,000. In Ground No. 6 of the Departmental appeal, the Revenue is aggrieved that the ld. CIT(A) had restricted the disallowance at ₹ 1,63,70,017/- in place of ₹ 5 crores as made by the ld. A.O on account of Risk Inspection Charges. The relevant facts are that during the A.Y. 2007-08 the assessee has incurred expenses towards risk inspection charges paid for obtaining risk inspection report. The risk inspection report is obtained before entering into an insurance contract with the insured to analyse the risk involved and form a preliminary opinion as to whether it makes commercial sense to bear the risk. The risk inspection ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ers/insured which were inspected by the surveyors; vi) confirmation from the specified parties regarding receipt of the payment without any remittance back to the assessee; and vii) details regarding appropriate taxes being withheld for payments made to surveyors. 25. The assessee further submitted that even on filing the aforesaid details, which were sufficient to prove the genuineness of the payments made to specified surveyors, the DDIT insisted to produce the surveyors for the purpose of cross-examination. The assessee took efforts to produce these surveyors but because of discontinuance of business with these parties, the whereabouts of the surveyors could not be traced. Moreover, appropriate details like latest available address, contact details, PAN, service tax registration number, etc. of such surveyors were provided to the DDIT to independently trace these parties by issuing summons. The DDIT still insisted that the assessee should produce the surveyors for cross-examination. The assessee, in the absence of any authority, was not able to enforce physical attendance of the surveyors. Without prejudice to the bonafide deductibility of these expenses, having regard to m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... That on appeal before the ld. CIT(A), the assessee rebutted all the observations of the ld. A.O on facts and on law and sought complete relief from the ld. CIT(A). Copy of submissions made before the CIT(A) have been placed at pages 202 to 222 of the paper book. However, the ld. CIT(A) upheld the disallowance in relation to the specified parties but restricted the overall disallowance to 10% of the total risk inspection charges. Thus, against the total disallowance of ₹ 6,72,09,983/- the assessee got relief of ₹ 3,36,29,983/- at the first appellate level. The ld. CIT(A) has discussed this issue at paras 23 to 25 of his order. Now, the assessee is in appeal before us challenging the disallowance of ₹ 3,35,80,000/- sustained by the ld. CIT(A) and the department is in appeal before us on the relief of ₹ 3,36,29,983/- granted by the ld. CIT(A) in relation to the aforesaid issue. 27. Before us, the ld. Senior Counsel for the assessee submitted in a tabular form, the findings of the Tribunal while adjudicating on the issue in other assessment years which is as follows: Sr.No. A.Y. ITA No. Held by Tribunal 1. 2006-07 119/PUN/2011 The ITAT held that t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... from the same. Subsequently, the department and assessee (by way of cross objection) preferred Special Leave Petitions (SLP) before the Hon'ble Supreme Court and the same are pending at admission stage. The assessee"s decision of accepting the disallowance which pertains to specified parties despite submitting substantive documents to demonstrate that the expenses are for the purpose of receipt of the above mentioned services should not be considered as otherwise while adjudicating the penalty proceedings. Thus, the assessee submitted that this issue may be adjudicated in line with the findings at para 7.3 of the Tribunal order passed for A.Y. 2006- 07 so that the assessee is protected to substantiate its claim in the penalty proceedings, if any, that may be levied. Hence, the assessee submits that the A.Y. 2007-08 being the last pending year on the impugned issue wishes to put an end to this litigation and hence requests the Tribunal to consider the conjoint reading of the orders passed for A.Y. 2008-09 and 2009-10 to A.Y. 2011-12 and sustain the disallowance of ₹ 1,72,09,983/- which pertains to specified parties and delete the disallowance of ₹ 5.00 crores made on adh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ctions orchestrated by one Mr. S.K. Gupta. Therefore, the risk inspection survey expenses of ₹ 63,78,812/- was disallowed. Therefore, total of ₹ 1,08,31,171/- + ₹ 63,78,812/- = ₹ 1.72,09,983/- was disallowed by the A.O. having direct evidences of transaction with specified parties. The assessee has also conceded to this disallowance. The assessee further submitted that the decision of accepting the said disallowance which pertains to specified parties despite submitting substantive documents to demonstrate that the expenses were for the purposes of receipt of the above mentioned services should not be considered as otherwise while adjudicating the penalty proceedings. 31. After hearing both the sides and in view of the submissions of the ld. Sr. Counsel for the assessee conceding to the disallowance of ₹ 1,72,09,983/- which pertains to the specified parties, the same is hereby confirmed. However, this will not preclude the assessee to agitate the issue in the penalty proceedings. We also find that the A.O had made a disallowance of ₹ 5.00 crores on adhoc basis which was restricted to ₹ 1.63 crores by the ld. CIT(A). In this regard, the ld. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... le of the Act and that the ld. CIT(A) erred on the facts and circumstances of the case and in law in not considering that sec. 44 of the Act nowhere restricts the applicability of sec. 14A of the Act. Similarly, the assessee vide ground No. 1 in its Cross Objection has stated that the action of the ld. CIT(A) in concluding that the provisions of sec. 14A of the Act is not applicable in respect of non-taxable profits on sale/redemption of investments and exempt divided income is justifiable under the law and in accordance with the Tribunal"s ruling for earlier years in assessee"s own case. In Ground No. 2 of the assessee"s Cross Objection, the assessee submits that without prejudice to above, in case if sec. 14A of the Act is held to be applicable, the disallowance in relation to non-taxable profits on sale/redemption of investments and exempt dividend income should be restricted to ₹ 11,56,172/- as determined by the assessee based on "Net Income Method". 33. The relevant facts on the issue are that the taxability of the assessee is governed by the special and non-obstante provisions of sec.44 of the Act read with Rule 5 of the Frist Schedule which provides for specified adju ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... round raised by the Department and the cross objection raised by the assessee are covered in favour of the assessee in view of the decision of Pune Bench of the Tribunal in assessee"s own case for the following assessment years: i) I.T.A. No. 1447/PN/2007 and C.O No. 52/PN/2007 for the A.Y. 2003-04 (being the lead year) order dated 31-8-2009; ii) I.T.A. No. 2560/PN/2012 for A.Y. 2008-09 order dt. 3-2-2016 iii) I.T.A No. 1071 & 1072/PN/2015 for A.Y. 2009-10 & 2010-11 and ITA No. 1269 & 1270/PUN/2015 for A.Y. 2009-10 & 2010-11, order dt. 29-9-2017. iv) I.T.A no. 2907/PUN/2016 for A.Y. 2011-12, order dt. 19-9-2018 v) I.T.A No. 286/PUN/2017 for A.Y. 2012-13 order dt. 18-9-2019 vi) I.T.A No. 1111/PUN/2017 for A.Y. 2013-14 order dt. 25-7-2019 vii) ITA No. 1112/PUN/2017 for A.Y. 2014-15 order dt. 25-7-2019. The ld. Sr. Counsel also submitted that the issue stands squarely covered in favour of the assessee in the light of the decision by the Hon"ble Delhi High Court in the case of Pr. CIT New Delhi Vs. Oriental Insurance Co. Ltd. (2020) 118 Taxmann.com. 248) (Del). In this case, there was a categorical finding that sec. 44A of the Act over-rides sec. 14A of the Act and hence ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sideration. The Tribunal has interpreted Section 44 read with the first schedule and concluded that applicability of Section 14A is excluded in relation to computation of income of an insurance company. We have examined the relevant provisions. Section 44 begins with a non-obstante clause and overrides the other provisions of the Act as mentioned therein including Section 14A. We are not convinced with the submission of Mr. Ajit Sharma that Section 14A would be applicable in respect of the Respondent. Section 14A does not have independent legs to stand on. Section 14A inter alia begins with the words "for the purposes of computing the total income under this chapter, no deduction shall be allowed in respect of expenditure incurred................". The chapter in question is chapter IV. This chapter also contains the provisions relating to computation of profits and gains of business or profession. Section 44 specifically excludes the provisions of the Act relating to computation of income, inter alia, those contained in "Section 28 to 43B". Thus, the exclusion would take within its sweep Section 14A which is an exemption for deductions as allowable under the Ac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Bill 2022 has now turned as the Finance Act, 2022. As per Finance Act 2022, Education Cess is included as a tax component and is chargeable to income-tax. Health and Education Cess is to be levied at the rate of four percent on the amount of income tax so computed, inclusive of surcharge wherever applicable, in all cases. Thus, the previous position of claiming deduction on education cess now no longer holds good. In fact, as per clause 13 of the Finance Bill 2022, an amendment to sec. 40 of the Act has taken place, as effected now, by inserting new Explanation (3) to sub-clause (ii) of clause (a) of the said section to clarify that for purposes of sub-clause (ii) the term "tax" shall include and shall be deemed to have always included any surcharge or cess, by whatever name called, on such tax. This amendment shall take effect retrospectively from 1st April 2005 and will, accordingly apply in relation to the assessment years 2005- 06 and subsequent assessment years. In view thereof, we hold education cess is not allowed as deduction and it has to be charged to income-tax. The additional ground raised by the assessee is dismissed. 39. In the combined result, the grounds raised by ..... X X X X Extracts X X X X X X X X Extracts X X X X
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