Vildirect: IncomeTax-caselaws-2012-VIL-955-ITAT-MUM

2012-VIL-955-ITAT-MUM

Income Tax Appellate Tribunal MUMBAI

ITA No. 4286/Mum/2009, ITA No. 4273/Mum/2009

Date: 10.10.2012

ICICI LOMBARD GENERAL INSURANCE CO. LTD.

THE ASSTT. COMMR. OF INCOME TAX

For the Petitioner : Ms. Arati Vissanji
For the Respondent : Sh. Pritam Singh

BENCH

Shri Rajendra Singh, AM And Shri Vijay Pal Rao, JM,JJ.

JUDGMENT

Per Vijay Pal Rao,JM.

These Cross appeals are directed against the order dated 14.5.2009 of the Commissioner of Income Tax(Appeals) for the Assessment Year 2002-03.

2 The assessee has raised the following grounds in its appeal:

1. On the facts and circumstances of the case and the law, the CIT(A) erred in confirming the disallowance in respect of the reduction/exemption for gains on sale of investment amounting to Rs.6,94,628 on the ground that profits from insurance business are to be taken to be balance of the profits as disclosed by annual accounts, subject to the adjustments provided in clause 5 (a) to (c) and it is not open to the Appellant to reduce these profits from its computation of income in view of the non-obstinate clause b of Rule 5 of the First Schedule to the Act.

2. On the facts and circumstances of the case and the law, the CIT(A) erred in confirming the addition on account of premium deficiency of Rs 5,15,00,000/- for computing book profit u/s 115JB on the ground that the same is an unascertained provision not allowable under clause (c), to Explanation 1, to section 11 5JB(2).

3. On the facts and circumstances of the case and the law, the CIT(A) erred in directing the A.O. to compute the book profits of the Appellant for the purposes of MAT under section 1 15JB, by allowing the URR to the extent allowable under Rule 6E of the l.T. Rules even after giving a clear finding that the URR is not hit by the provisions of clause (b), to Explanation 1, to section 115JB(2) for computing book profit thereunder as this is not in the nature of a reserve but rather an allowable deduction for computing real income of an insurance company. 3 Ground no.1 is regarding exemption of gain on sale of investment.

4. We have heard the ld AR of the assessee as well as the ld DR and considered the relevant material on record. An identical issue has been considered and decided by us in assessee’s own case for the AY 2003-04 vide even dated 10th Oct 2012 order in ITA No. 2398/Mum/2009 as under:

5. We have considered the rival submissions as well as the relevant material on record. There is a special provision for computation of income chargeable under the head “profits and gain” inter-alia in the business of Insurance under section 44 of the I T Act and the same shall be computed in accordance with the Rule containing in first schedule of the Act. The profits and gains of business of insurance other than the life insurance shall be computed as per Rule 5 of First Schedule as under:

5. The profits and gains of any business of insurance other than life insurance shall be taken to be the profit before tax and appropriations as disclosed in the profit and loss account prepared in accordance with the provisions of the Insurance Act, 1938 (4 of 1938) or the rules made thereunder or the provisions of the Insurance Regulatory and Development Authority Act, 1999 (4 of 1999) or the regulations made thereunder, subject to the following adjustments; 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 business shall be added back;

b. (i) any gain or loss on realisation of investments shall be added or deducted, as the case may be, if such gain or loss is not credited or debited to the profit and loss account;

(ii) any provision for diminution in the 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.”

5.1 The bare reading of the amended provisions of Rule 5 of First Schedule makes it clear that the profits and gains shall be taken to be the profit before the tax and appropriately disclosed in the P&L Account prepared in accordance with the Insurance Act, 1938 or the Rule made thereunder or the provisions of IRDA Act. There is no dispute that the assessee before us has included the profit on sale of investments in the profit and gain as declared in the accounts prepared in accordance with the provisions of Insurance Act 1938. It is also not the case of the assessee that the profits/gains on sale of investments is not required to be included in the P&L Account prepared in accordance with the provisions of Insurance Act. Therefore, once the profit on sale of investment is required to be included in the P& L account in accordance with the provisions of Insurance Act, then as per the Rule 5 of First Schedule of the I T Act, no adjustment is required to be made on account of the amount of profits on sale of investment already included in the P&L Account. Thus, we find force and substance in the contention of the ld DR that once the assessee has included the gain on sale of investments in the P&L account prepared as per the provisions of the Insurance Act, 1938, then the said amount cannot be reduced while computing the income as per provisions of sec. 44 r.w First Schedule of the I T Act.

5.2 However, in the series of decisions of the Tribunal a view has been taken that the amendment vide Finance Act 1988 w.e.f 1.4.89, the sub rule (b) of Rule 5 of First Schedule was omitted with the purpose to grand exemption to the insurance companies with regard to the profit on sale of investments. The Tribunal has taken note of the fact that in the corollary, it has been provided in the circular no.528 dated 16.12.1988 that the loss incurred by the general insurance companies on realization of investment shall not be allowed as deduction in computing the profit chargeable to tax.

5.3 In the latest decision dated 22.10.2010, this Tribunal in the case of Tata AIG General Insurance Co Ltd vs ACIT in ITA No.2597/Mum/2009 after considering the earlier decisions of the Tribunal has held in paras 18 to 20 as under:

“18. We have carefully considered the rival contentions. There is no dispute that under the guidelines issued by the IRDA (Auditors Report) Regulations of 2002, for preparation of financial statements, the profit on sale of investments is to be credited to the Profit and Loss Account of the insurance company. There is also no dispute that the assessee has credited the Profit and Loss Account with such profit the question is whether such profit can be excluded and exemption can be claimed. Rule 5(b), as it stood before being omitted from 01 .04.1989, was as follows: -

‘any amount either written off or reserved in the accounts to meet depredation of or loss on the realization of investments shall be allowed as a deduction, and any sums taken credit for in the accounts on account of appreciation of or gains on the realization of investments shall be treated as part of the profits and gains;

Provided that the Assessing Officer is satisfied about the reasonableness of the amount written off or reserved in the accounts, as the case may be, to meet depredation of or loss on the realization of investment.

The argument on behalf of the assessee primarily is that when the rules for preparation of the final accounts provide that the profit on sale of investments, should be shown in the credit side of the Profit and Loss Account, then there was no question of rule 5(b) being applicable and that was the reason why the said rule was omitted with effect from 01.04.1989 and the effect of the omission is that where the Profit and Loss Account already includes the profit on sale of investments, the same shall stand excluded. The effect of the omission of the rule was considered by the Puns Bench of the Tribunal in its order dated 31 August 2009, in the case of Bajaj Allianz General Insurance Company, in ITA No: 1447/PN12007 and CO No:521PN12007 (assessment year 2003-04). A copy of the said order has been filed before us. The Tribunal has also considered the Circular No.528 dated 16.12.1988. After analyzing the impact of the omission of rule 5(b) and the Circular, the Tribunal held as under. -

‘8. A conclusion can be drawn on the basis of the above elaborate discussion that the deletion of sub rule (b) from Rule 5of the First Schedule was with a specific purpose. This Schedule not only prescribes the method of computation of income of Insurance Business in part (A) but also prescribe the method of computation of other Insurance Business in Part (B). Rule 5 is within Part (B) and earlier it has prescribed the method of taxation of profit on sale of investments which was later on scraped. Even by applying a reverse logic we must arrive at the same conclusion that had the impugned income’ was earlier taxable under one specific clause but even on its deletion no clause 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 V f the revenue”’.

19: The aforesaid order of the Pune Bench, which was in the case of a company carrying on general insurance business, was followed by the Mumbai Bench Of the Tribunal in its order dated 17.09.2010, in the case :of HDFC ERGO General Insurance Company Ltd., in ITA No: 338/Mum12009 (assessment year 2004- 05) as also in its Order dated 30.04.2010, in the case of Reliance General Insurance Co. Ltd., in :ITA No. 781/Mum12007 (and other appeals). Copies of these orders have also been filed before us. In these orders it has been held that the profit on sale of investment in the case of an assessee carrying on general insurance business cannot be brought to tax after the omission of rule 5(b) and as per the Circular cited above. Since the controversy before us is identical, respectfully following the orders Of the Puns and Mumbal Benches of the Tribunal cited above, we direct the Assessing Officer to exclude the profit of Z47,45,699/- on the sale of investments from the assessment • V

20. The learned CIT DR, however, argued that the effect of the omission of rule 5(b) is just the opposite of what the assessee has contended. According to him, after 01.04.1989 the exemption was taken away. He submitted further that the profit on sale of the investment has already been included in the Profit and Loss Account and there is no authority to take it out even under rule 5(b) as it existed before 01.04.1989. According to him, there was no scope for applying the rules of interpretation when the statutory provisions are clear. Since the matter is concluded by the orders of the Tribunal cited supra, where all these aspects have been considered, we are unable to take a different view of the matter. Thus Ground No.4 is allowed.”

5.4 Since the Tribunal has been taking a consistent view on this issue in a series of decisions as relied upon by the ld AR of the assessee; therefore, to maintain the rule of consistency and uniformity on this aspect, we deicide this issue in favour of the assessee and against the revenue. Accordingly, this issue is decided in favour of the assessee and against the revenue.

5 The assessee has also raised an additional ground vide letter dated 25.09.2012 as under:

“[1] On the facts and circumstances of the case and in law, the Assessing Officer has erred in computing income of the Appellant under section 115JB of the Act.

[2] The Assessing Officer ought to have appreciated that provisions of section 115JB of the Act are not applicable to the Appellant as the Appellant prepares its accounts as per the Insurance Regulatory And Development Authority (IRDA) (Preparation of Financial Statements and Auditor’s Report of Insurance Companies) Regulation, 2002 and not as per provisions of Part II and Ill of Schedule VI of the Companies Act, 1956.”

6 We have heard the ld AR of the assessee as well as the ld DR and considered the relevant material on record. An identical issue has been considered and decided by us in assessee’s own case for the AY 2003-04 in ITA No. 2398/Mum/2009 as under:

“9 We have considered the rival submissions as well as the relevant material on record. There is no quarrel on the point that the assessee, being an Insurance Company is not required to prepare its accounts as per Part II & III of Schedule VI of the Companies Act 1956. Sub. Section (2) of sec 211 are required every P&L accounts of the Companies shall be prepared as per the requirement of Part II of Schedule VI. However, the proviso to sub. Sec (2) of sec. 211 of the Companies Act creates an exemption of applicability of sub. Sec. (2) inter-alia in respect of Insurance companies or banking companies or any other companies engaged in generation and supply of electricity for which a form of profit and loss account has been specified in or under the Act governing such class of company. Even if an Insurance Company does not disclose any matter in the Balance Sheet and P&L account because the same is not required to be disclosed by the Insurance Act shall not be treated un-discloser of a true and fair view of the state of affairs of the company as the said condition has been relaxed by sub.,sec 5 of sec 211 of the Companies Act.

9.1 It is to be noted that in order to align the provisions of the I T Act with the Companies Act , an amendment has been brought into the statute by the Finance Act 2012 whereby sec 115JB has been amended w.e.f 2013 and therefore, prior to 1.4.2013, the provisions of sec. 115JB cannot be applied in case of Insurance, banking, electricity, generation and distribution companies and other class of companies, which are not required to prepare their accounts and particularly Balance Sheet and P&L account as per part II & III of Schedule VI of the Companies Act.

9.2 The Hyderabad Bench of the Tribunal in the cased of State Bank of Hyderabad (supra) has considered and decided a similar issue; though in the case of bank in paras 13 & 14 as under:

“13. The provisions of Sec.1153B will be applicable to all companies. However, it is contended that Sec.115JB will be applicable only where the assessee is required to show profit & loss account in accordance with schedule VI of companies act. As the banks are required to prepare balance sheet and profit & loss account in accordance with the Banking Regulation Act, provision of 115JB cannot be applied to the banks. In the case of Maharashtra State Electricity Board vs. )CIT (82 lTD 422) it was held that provisions of book profit cannot be applied to Electricity Companies. Banking Companies and companies engaged in generation and supply of electricity do not have to prepare their accounts in accordance with parts II and III of Sch. VI of the Companies Act by the virtue of proviso to sec 211(2) of the Companies Act. We find that by the Finance Act 2012, with effect from 1.4.2013, even companies to which Proviso to sec 211(2) applies (the banking Companies and companies engaged in generating and distribution of electricity), should prepare their P&L and balance Sheet in accordance with the provisions of the Act Governing such companies. This would mean that prior to AY 2013-14, provisions of sec 115)B will not apply to companies to which proviso to sec 211(2) of the companies Act, 1956 applies. Th Assessee being a company to which proviso to sec 211(2) of the Companies Act 1956 applies, will not be liable to be taxed under sec 115JB.

14. The Mumbai Tribunal in the case of Krung Thai Bank Vs. JCIT (133 TTJ 435), to which one of us is a party has held that provisions of sec 115JB cannot be applied to the banking company.”

9.3 Similarly, in the case of Reliance Energy (supra), the coordinate Bench of this Tribunal has held in paras 28 & 29 as under:

“28 As discussed above when it is not possible to prepare the accounts under the Companies Act for the purpose of computation u/s 115JB, therefore, the assessee cannot be forced to prepare the accounts when it is not possible. Therefore, we are in agreement with the contentions of the assessee in as much as the accounting policies followed in the electricity accounts if followed for the preparation of Companies Act account will not disclose true and fair view and will not be in accordance with part II and III of Schedule VI of the Companies Act. The ratio of the decisions of the Hon’ble Supreme Court and the ratio of the decision of the Tribunal discussed above are in support of the contentions of the assessee. We further found that the issue of applicability of sec. 115J came before the Tribunal for AY 88-89. Taking into consideration the preparation of accounts under the Electricity Act and other contentions the assessee including the decisions of the Supreme Court in the case of B.C.Srinivasa Setty (supra), the Tribunal has held that the provisions of sec. 115J are not attracted on the facts of the present case.

29 As discussed above, the assessee is following the accounting policies under the Electricity Supply act and prepared its accounts in view of those very policies. Following those very policies, the accounts in accordance with part II & III of Schedule VI of the Companies Act are not applicable at all. Once there is no possibility for preparing the accounts in accordance with the part II & II of Schedule VI of Companies Act then the provisions of sec. 115JB cannot be forced. Therefore, in view of the above facts and circumstances and respectfully following the above decisions of the Hon’ble Supreme Court and the decision of the Tribunal for AY 88-89, we hold that provisions of sec. 115JB are not applicable on the facts of the present case.”

10 Following the decisions of the coordinate Benches of this Tribunal, we hold that when the insurance companies, banking companies and electricity generation and distributions companies are treated in the same class as per the provisions of sec. 211 of the Companies Act in preparing their final accounts, then these companies cannot be treated differently for the purpose of sec. 115JB and accordingly, the provisions of sec. 115JB are not applicable in the case of the assessee.”

Accordingly, this issue is decided in favour of the assessee and against the revenue.

7 The revenue has raised the only ground in its appeal as under:

“On the facts and in the circumstances of the case as well as in law, the ld CIT(A) has erred in directing to compute the book profits of the company, for the purpose of MAT u/s 115JB by allowing the URR reserve to the extent allowable u/r 6E of the I T Rules, without appreciating that clause (b) of Explanation to section 115JB provides to increase the book profit by the amount carried to any reserves, by whatever name called, other than a reserve specified u/s 33AC and no such allowance of reserve u.r 6E is allowable therein.”

8 The other grounds raised by the assessee as well as the only ground raised by the revenue is with regard to adjustments made while computation of book profit for the purpose of MAT u/s115jB.

9 Since we have decided the issue of applicability of provisions of sec. 115JB while deciding the additional ground raised by the assessee in favour of the assessee; therefore, the other ground raised in assesse’s appeal as well as revenue’s appeal have become infructuous and accordingly, the same are dismissed.

10 In the result, the appeal filed by the assessee is allowed; whereas the appeal of the revenue is dismissed.

Order pronounced in the open court on the 10th, day of Oct 2012.

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