Income Tax Appellate Tribunal - Mumbai
General Assurance Corporation Of ... vs Assessee
IN THE INCOME TAX APPELLATE TRIBUNAL,
MUMBAI "B" BENCH: MUMBAI
Before Shri Pramod Kumar and Smt Asha Viajayaraghvan
ITA No 6500 to 6502/Mum/2005
(Assessment Years: 2002-03 to 2004-05)
M/s General Insurance Vs ACIT -1(3),
Corporation of India, Aayakar Bhavan,
"Suraksha" 170 J Tata Road Churchgate,
Churchgate, Mumbai -400 020
Mumbai -400 020
PAN: AAACG 0615 N
Appellant Respondent
Appellant by: Shri Farrokh V Irani
Respondent by: Shri S S Rana
O R D E R
Per Pramod Kumar:
1. These three appeals were originally disposed of vide order dated 27th June, 2008 but the said order had to be recalled, vide order dated 30th September, 2008, as grounds of appeal nos 1.1 to 1.6 of the appeal remained to be disposed off. It is in these circumstances that we have come to be in seisin of these appeals for the limited purposes of adjudicating on the following common grievances:-
"1.1 The Commissioner of Income-tax (Appeals) ("the CIT (A)") erred in upholding the action of the Assessing Officer ("the AO") of disallowing the exemption claimed by the assessee on account of "profit on sale of investment".
1.2 The CIT (A) failed to appreciate the fact that the Central Board of Direct Tax's ("the CBDT") circular is binding on the AO.
2 General Insurance Corporation of India 1.3 The CIT (A) ought to have allowed the Appellant's claim for an exemption of profit on sale of investment.
1.4 The CIT (A) erred in not allowing the Appellant's claim for a deduction in respect of investments written off.
1.5 The CIT (A) erred in holding that the Appellant's claim for a deduction in respect of investments written off would not be entertained by him.
1.6 The CIT (A) failed to appreciate that the disallowance of the Appellant's claim for a deduction in respect of investments written off was contrary to the provisions of Section 44 of the Income Tax Act 1961 read with Rule 5 of the First Schedule thereto."
2. The short issue we are thus required to adjudicate is whether or not the CIT (A) was justified in holding that the profit on sale of investments, is taxable in the hands of the assessee. The assessment years involved are 2002-03, 2003-04 and 2004-05 and the impugned order dated 17th March 2005 is common order passed by the CIT (A) for these three years.
3. Learned representatives agree that the issue is covered, in favour of the assessee, by Pune Bench decision dated 31.8.2009 in the case of Bajaj Allianz General Insurance Company Limited vs Addl CIT (ITA 1447/PN/07; CO 57/PN/07). Learned Departmental Representative, however, vehemently relies upon the orders of the authorities below and submits that, in the absence of a specific provision, exemptions cannot be inferred. Learned Departmental Representative has also filed a written submission which is reproduced below for ready reference:
During the course of appellate proceedings before your Honours the learned Counsel of the appellant produced an appellate order in the case of M/s. Bajaj Allianz General Insurance Co. Ltd. ITA No. 1447/PN/07 for A.Y. 2003-04. The issue involved in this case is similar to the issue involved in the present case. Before departing with this observation, may your Honours be pleased to consider the written arguments and submission as follows:-
3 General Insurance Corporation of India In both the cases the issue involved is to tax the profit on sale of investment in view of the omitted Sub Rule 5(b) of Rule 5 of the 1 st Schedule read with section 44 of the I.T. Act, 1961. The Hon'ble Member of the Pune Bench after going through the relevant provisions of the I.T. Act and also the Circular No. 528 dated 16.12.1988 had concluded that the deletion of sub rule(b) from Rule 5 of the First Schedule was with a specific purpose. This schedule not only prescribe 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 investment 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 represcribe 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 scribe 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 the I.T. Act.
02. The observations of the Hon'ble Members of the Pune Bench at para 7 of the order is also relevant and for the sake of convenience the same is extracted below:-
" In addition to the above contentions there was no dispute that the independent code is enacted by the introduction of sec. 44 in I.T. Act which independently prescribed the mode and manner for assessment of Insurance Business. This section since contains non-obstante clause therefore notwithstanding anything contained in any of the sections of the Act, the profits and gains of Insurance Business including any such business carried on by a Mutual Insurance Company or by an Co-operative Society shall be computed in accordance with the rules contained in First Schedule. Accordingly, there could not be any other income taxable other than Insurance Business because sec. 44 over-rules all other provisions of the I.T. Act."
03. The provisions of Rule 5 of First Schedule of the I.T. Act, 1961 clearly specified that profits and gains of any business of insurance other than life insurance shall be taken to be the balance of the profit disclosed by annual account copies of which are required under the Insurance Act, 1938 (4 of 1938) to be furnished to the Controller of Insurance. The Rules therein further provides for the adjustment specifically given in the Rule 5. Nowhere in the Rule 5 of the First Schedule it is mentioned that the profit on sale of investment is to be reduced from the balance of profit disclosed by annual accounts. It is 4 General Insurance Corporation of India relevant to note that Clause b which was earlier referring to adjustment in respect of right of reserve or any appreciation or any gain on realisation have been omitted by the Finance Act, 1988 w.e.f. 1.4.1989. It is also equally clear after going through the amended accounting principles of financial statements prescribed in Part V wherein it is seen that the profits and gains of any business of insurance shall be the balance of profits disclosed in the P & L A/c. Income from investment includes profit on sale of investments less loss on sale of investment which should form part of the P & L A/c. Therefore, it is abundantly clear that the assessee cannot reduce the profit of sale of investment from the balance of profit disclosed by annual accounts, copies of which are required under the Insurance Act, 1938 to be furnished to the Controller of Insurance.
04. It is a settled Income tax matter, the law to be applied is the law enforced in the assessment order unless or otherwise stated or implied (CIT vs. Isthmian Steamship Lines 20 ITR 572 (SC)
05. The profit on sale of investments is income and due to the non-obstante clause in section 44 of the Income tax Act is to be assessed as profits and gains of the business of insurance computed in accordance with rules contained in the First Schedule. By making such an assessment, there is no manifestly absurd and unjust result which could never have been intended by the Legislature. It is to be added here that in Bombay Mutual Life Assurance Society Ltd. vs. CIT 20 ITR 189(Bom), it was held that the appreciation in the value of securities which is not taken credit for in the revenue account or in the actuarial valuation balance sheet but is only shown in the balance sheet should be included in the "surplus" for computing the profits of an insurance company having regard to Rule 3(b) of the Schedule to the Indian Income tax Act (the provision is similar to the deleted Rule 5(b) of First Schedule of Income tax Act, 1961. Therefore, the deleted Rule 5(b) can be read as providing for assessment as part of the profits and gains of appreciation of or gains on the realization of investments even when such appreciation or gains is not credited in the P & L A/c. copy of which is required under the Insurance Act, 1938 to be furnished to the Controller of Insurance.
06. It has been held in Oriental Fire & General Insurance Co. Ltd. vs. CIT 143 ITR 378(Bom) that the character of the entries in the annual accounts furnished by an assessee-insurer to the Controller of Insurance cannot be gone into and accounts as accepted by the Controller must form the basis of assessment in the case of insurers who fall within the ambit of the rules of the First Schedule and the Income tax Officer has no power to do anything not contained in rule 5 of the First Schedule in computing the income from the business of insurance other than life insurance. The appellant's contention that at least the appreciation of assets in Burma and Ceylon should be excluded from the computation of profits was not accepted inter-alia because once certain amounts had been shown as profits in the annual accounts furnished to 5 General Insurance Corporation of India the Controller of Insurance it was not open to the ITO to go behind those figures. A similar view was taken in CIT vs. United India Fire & General Insurance Co. Ltd. 140 ITR 994 (Mad). The Hon'ble Supreme Court in General Insunrace Corpn. Of India vs. CIT 240 ITR 139(SC) (relevant para 8 & 12) has also held that for the purpose of income-tax, the figures in the accounts of the assessee drawn up in accordance with the provisions of the First Schedule to the Income tax Act and satisfying the requirements of the Insurance Act are binding on the Assessing Officer under the Income tax Act and he has no general power to correct the errors in the accounts of an insurance business and undo the entries made therein. The same ratio has been given by Supreme Court in the case of Apollo Tyres wherein with reference to analogous provision in section 115J they have held that the AO has power to do anything except what has been specifically provided in the section. The interpretation by the Courts of the provisions of Section 44 and Rule 5 of the First Schedule support the conclusion that the inclusion of the profit on sale of investments in he total income mandatory and deviations can be made if specific rules so required.
07. The appellant has sought to plead that it is not open to the AO to take a stand contrary to Circular No. 528 dt. 16.12.88 issued by the CBDT even assuming that the same deviates from the correct legal position. The circular seeks to explain the provisions of the Finance Act, 1988 and states that to enable the GIC and its subsidiaries to play a more active role in capital markets for the benefit of policy holders, the Finance Act has amended sub-rule (b) of Rule 5 of the First Schedule for exemption of the profits earned by them on sale of investment. The deleted Rule 5(b) can be read as providing for assessment as part of the profits and gains of appreciation of or gains on the realization of investments even when such appreciation or gains is not credited in the P & L A/c. copy of which is required under the Insurance Act, 1938 to be furnished to the Controller of Insurance. The circular does not seek to override the provisions of section 44 and Rule 5 of the First Schedule (after deletion of sub- rule (b) thereof) and to provide for exemption of profits earned on sale of investments even though such profits are assessable to tax by virtue of the provision contained in the Income tax Act, 1961.
08 It has been held in Union of India & Anr. Vs. Deoki Nandan Aggarwal 1992 Supp(1) SCC 323, that it is not the duty of the Court either to enlarge the scope of legislation or the intention of the legislature, when the language of the provision is plain. The Court cannot rewrite the legislation for the reason that it had no power to legislate. The power to legislate has not been conferred on the Courts. The Court cannot add words to a statute or read words into it which are not there. In State of Kerala vs. Mathai Vergehse & Ors (1986) 4 SEC 746, the Court has reiterated the well settled position that the Court can merely interpret the section: it cannot re-write, recast or redesign the section. In interpreting the provision the exercise undertaken by the Court is to make explicit the intention of the legislature which enacted the legislation. It is not for the Court to reframe the legislation for the very good reason that the 6 General Insurance Corporation of India powers to 'legislate' have not been conferred on the Court. In Gwalior Rayons Silk Mfg. (Wvg) Co. Ltd. Custodian of Vested Forests Palghat & Anr. 1990 (Supp) SCC 785, the Court rightly observed that in seeking legislative intention Judges not only lisen to the voice of the legislature but also listen attentively to what the legislature does not say. It has also been held in House of Lords in Pinner vs. Evertt (1969) 3 All ER 257 (HL) aptly observed that we have been warned again and again that it is wrong and dangerous to proceed by substituting some other words for the words of the statute. Therefore the legal position seems to be clear and consistent that it is the bounden duty and obligation of the Court to interpret the statute as it is. It is contrary to all rules of construction to read words into a statute which the legislature in its wisdom has deliberately not incorporated.
In the case of S.R.Bommai v. Union of India (1994) 3 SCC1 the it has been held that where the language of a statute is clear and unambiguous, there is no room for the application either of the doctrine of casus omissus or of pressing into service external aid, for in such a case the words used by the Constitution or the statute speak for themselves and it is not the function of the court to add words or expressions merely to suit what the courts think is the supposed intention of the legislature. If a particular case is omitted from the terms of a statute, even though such a case is within the obvious purpose of the statute and the omission appears to have been due to accident or inadvertence, the court cannot include the omitted case by supplying the omission. This is equally true where the omission was due to the failure of the legislature to foresee the missing case. To permit the court to supply the omissions in statutes, would generally constitute an encroachment upon the field of the legislature. In construing the Constitution we cannot look beyond the letter of the Constitution to adopt something which would commend itself to our minds as being implied from the context. The court when caught in paralysis of deliemma should adopt self-restraint, it must use the judicial review with greatest caution. In clash of political forces in political statement the interpretation should only be in rare and auspicious occasions to nullify ultra vires orders in highly arbitrary or wholly irrelevant proclamation which does not bear any nexus to the predominant purpose for which the proclamation was issued, do declare it to be unconstitutional and no more.
10. In the case of Grasim Industries Ltd. vs. Collector of Customs (2002) 4 SCC 297 it has been held that the elementary principle of interpreting any word while considering a statute is to gather the mens or sentential legis of the legislature. Wherever the language is clear the intention of he legislature is to be gathered from the language used. While doing so, what has been said in the statute as also what has not been said has to be noted. The construction which requires for is support addition or substitution of words or which results in rejection of words has to be avoided.
7 General Insurance Corporation of India
11. In the case of Jagjit Singh v. State of Haryana (2006) 11 SCC1 it has been held that no words can be read into the Constitution which do not exist. It is, ordinarily, not the function of the Court to read words into a statute. The court must proceed on the assumption that the legislature did not make a mistake and it intended to say what it said.
12. It has been held in M.H. Daryani vs. CIT 202 202 ITR 731, 735 (Bom) that the principle of beneficial interpretation has no application in a case where the words of statute are plain, precise and unambiguous. In such a case, the well- settled principle of interpretation is that the statutory provision should be construed according to the plain natural meaning of its language. When the language of a particular provision is clear and according to the plain natural meaning thereof the assessee is not entitled to any rebate, relief or allowance, it is not for the court to strain and stretch the language of the statutory provision to enable the assessee to get such relief. Such an approach will be against all accepted principles of interpretation. With regard to Section 80HHC of the Act, the Hon'ble Supreme Court in Ipca Laboratory Ltd. 266 ITR 521 has stated that even though a liberal interpretation has to be given to such a provision, the interpretation has to be as per the wording of Section 80HHC. It was further observed that if the wording of the Section is clear, then benefits which are not available under the section cannot be conferred by ignoring or misinterpreting the words in the Section. With reference to Section 80J of the Act, it was held by the Hon'ble Supreme Court in CIT vs. Cellulose Products of India Ltd. 192 ITR 155(SC) that it is only when there is any genuine doubt about the interpretation of a fiscal statute or where two options are capable of being formed that the rule of interpretation that a provision granting relief should be construed liberally so as to effectuate the object thereof may be taken recourse to. Similarly, with reference to Section 80HH of the Act, the Hon'be Supreme Court in Pandian Chemicals Ltd. vs. CIT 262 ITR 278 (SC) that rules of interpretation would come into play only if there is any doubt with regard to express language used. It was further observed that where the words are unequivocal there is no scope for importing the rule of liberal interpretation. In any case, it has been held in CIT vs. Vegetable Products Ltd. 88 ITR 192 (SC) that if the language is plain, the fact that the consequence of giving effect to it may lead to some absurd result is not a factory to be taken into account in interpreting a provision.
Therefore, the income from the sale of investment is taxable and the legislative intent cannot be inferred in the facts of this case, as the provisions exempting the impugned income from its ambit are missing and no casus omissus can be supplied by the Hon'ble Tribunal.
8 General Insurance Corporation of India
4. Having given our careful consideration to the submissions of the parties, however, we are inclined to follow the stand taken by the co ordinate bench in the case of the Bajaj Allianz General Insurance Co. Ltd (supra).
5. In our considered view, the computation of taxable profits of an insurance company is governed by a specific legal provision, i.e. Section 44 read with First Schedule to the Income Tax Act. Under the said scheme of things envisaged by these provisions, only such adjustments can be made to the profits disclosed by the annual accounts drawn up under the Insurance Act, 1938, as are specifically provides for under clause 5 of the First Schedule. It is an admitted position that there are no specific provisions for making an adjustment on account of profits on sale of investment after removal of clause 5(b) with effect from 1 st April 1989 and till clause 5(b)(ii) was inserted with effect from 1 st April 2011. Accordingly, there is no occasion to make an adjustment of profit on sale of investments in the profit disclosed by the annual accounts drawn up as per the Insurance Act, 1938. It is important to bear in mind the legal position that the taxability of income in the case of the insurance companies is not on commercial profits but on such profits as are computed in accordance with the provisions of the Insurance Act, subject to, of course, permissible adjustments under the Income Tax Act. It is, therefore, futile to suggest, as has been suggested by the learned Departmental Representative, that the profits on sale of investments are taxable in the hands of the assessee unless there is a specific provision for exemption of such profits. The question of exemption only arises when something is taxable, but, as we have noted above, the taxability of profits in the hands of the insurance companies is confined to profits as per annual accounts of such insurance companies drawn up in accordance with the Insurance Act.
6. What is taxable in the case of the insurance companies is, as we have noted above, is not commercial profit as per the normal rules of computation of business 9 General Insurance Corporation of India income but the profit reflected by accounts drawn up as per the provisions of the Insurance Act. Any adjustment to such profits can only be made as per specific provisions in Clause 5 of First Schedule to the Income Tax Act. It is not the case of the revenue that, in accordance with the provisions of the Insurance Act, these profits were required to be reflected in the annual accounts of the assessee, or that there is a specific adjustment, duly sanctioned by law, which was required to be made to such book profits in respect of these book profits. On a plain reading of the provisions of the law, such profits cannot be brought to tax in the first place. When these profits cannot be taxed in the first place, there is no need of any specific exemption provision. The principle of casus ommisus is not, therefore, relevant in the present context.
7. In the case of Bajaj Allianz (supra), the coordinate bench has, inter alia, observed as follows:-
"6. The ld CIT (A) has called for a remand report from the AO. When the same was handed over to this assessee the point-wise contention were as follows:-
(a) The appellant is not a public financial institution as prescribed u/s 4(A) of the Companies Act hence, it was wrong on the part of the AO to allege that in addition to the insurance Business the assessee company has also acted as a Public Financial Institution u/s 4(A) of Companies Act. It was pleaded that as per the definition of a Insurance company under the Insurance Act the whole and sole purpose of a General Insurance Company is to carry on General Insurance Business.
(b) The allegation of the AO that transaction in share and securities was one of the normal business activity of the assessee hence, liable for taxation. The contention was that though it was one of the activity to earn profit on sale on investment but the respected Parliament in his wisdom has decided not to tax the same. In support it was cited that the Insurance Company are 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 55 ITR 716.
10 General Insurance Corporation of India
(c) The allegation of the AO was that any part of the profits and gains not attributable to the Insurance Business cold 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 of 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 AO 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(D) and section 36(1)(viia) have also been denied. The contention of the assessee was that these provisions are applicable to Public Financial Institutions (PFI) and the assessee company do not fall under that category.
7. In addition to the above contentions there was no dispute that the independent code is enacted by the introduction of sec 44 in IT Act which independently prescribed the mode and manner for assessment of Insurance Business. This section since contains non-obstante clause therefore notwithstanding anything contained in any of the sections of the Act, the profits and gains of Insurance Business including any such business carried on by a Mutual Insurance Company or by an Co-operative Society shall be computed in accordance with the rules contained in First Schedule. Accordingly, there could not be any other Income taxable other hand Insurance Business because section 44 over-rules all other provisions of the IT Act.
8. A conclusion can be drawn on the basis of the above elaborate discussion that the deletion of sub-rule (b) from Rule 5 of the first Schedule was with a specific purpose. This schedule not only prescribe 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 was 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."
11 General Insurance Corporation of India
8. We have also noted that the legislature has now brought in a prospective amendment, with effect from assessment year 2011-12, in Rule 5(b)(i) of first Schedule to the Income Tax Act. By the virtue of this amendment, profits on sale of investments, in the case of insurance companies will be taxable w e f 2011-12. Since the amendment so made in the statute, which can not be inferred to be a superfluous amendment, is with effect from 2011-12, the conclusion arrived at by the Pune bench stands further fortified. This further fortifies the stand taken by the co ordinate bench in the case of Bajaj Allianz General Insurance Co Ltd (supra).
9. In view of these discussions, as also following the coordinate bench decision in the case of Bajaj Allianz General Insurance Company Limited (supra), we uphold the grievance of the assessee. The profits on sale of investment in the years before us, which are year prior to the years with effect from which prospective amendment is made, are not taxable in the hands of the assessee. The taxability of income of insurance companies under the head 'income from business and profession' as governed by provisions of section 44 read with first schedule to the Income Tax Act, does not extend to taxability of profits on sale of investments - So far as the assessment years before us are concerned.
10. For the reasons set out above, we direct the Assessing Officer to exclude profits on sale of investments from income of the assessee liable to be taxed. The assessee gets the relief accordingly.
11. In the result, the appeals are allowed in the terms indicated above.
Pronounced in the Open Court today on the 22 day of October 2009.
Sd/- Sd/-
(ASHA VIJAYARAGHAVAN) (PRAMOD KUMAR)
JUDICIAL MEMBER ACCOUNTANT MEMBER
Mumbai, Date: 22 October 2009
12 General Insurance Corporation of India
Copy to:-
1) The Appellant.
2) The Respondent.
3) The CIT (A)-XXI, Mumbai.
4) The CIT, City-I, Mumbai.
5) The D.R. "B" Bench, ITAT, Mumbai.
By order
/ / True Copy / /
Asstt. Registrar
Chavan* I.T.A.T., Mumbai
13 General Insurance Corporation of India
Sr.N. Episode of an order Date Initials Concerned
1 Draft dictated on 20.10.09 Sr.PS
2 Draft placed before author 20.10.09 Sr.PS
3 Draft proposed & placed before the JM/AM
second Member
4 Draft discussed/approved by Second JM/AM
Member
5 Approved Draft comes to the Sr.PS Sr.PS
6 Kept for pronouncement on Sr.PS
7 File sent to the Bench Clerk Sr.PS
8 Date on which file goes to the Head Clerk
9 Date of dispatch of Order