Income Tax Appellate Tribunal - Delhi
Dcit (Ltu), New Delhi vs Max New York Life Insurance Company ... on 5 January, 2018
THE INCOME TAX APPELLATE TRIBUNAL
DELHI BENCHES 'E', DELHI
Before Shri P K Bansal, Vice President &
Smt Beena A Pillai, Judicial Member
ITA No.142/Del/2017
Assessment Year : 2010-11
Max New York Life Insurance DCIT Large Taxpayer Unit
Company Limited (Now known as (LTU)
Max Life Insurance Company Vs. New Delhi.
Limited) Max House, 3rd Floor,
1 Dr. Jha Marg,
Okhla, New Delhi - 110 020
PAN AACCM3201E
(Appellant) (Respondent)
CO No. 123/Del/2017
(Arising out of ITA No.142/Del/2017 for Assessment Year : 2010-11)
DCIT Large Taxpayer Unit (LTU) Max New York Life Insurance
New Delhi. Company Limited (Now known
Vs. as Max Life Insurance Company
Limited) New Delhi - 110 020
PAN AACCM3201E
(Cross-Objector) (Respondent)
Appellant By : Shri Ajay Vohra & Shri Himanshu Sinha
& Ms. Vrinda Tulsian
Cross-Objector By: Shri Vijay Varma
Date of Hearing :14.12.2017 Date of Pronouncement : 05.01.2018
ORDER
Per P K Bansal, Vice-President: This appeal by the assessee and cross-objections by the Revenue are directed against the very same order of the CIT(A) -22, Delhi, dated 07.11.2016 pertaining to A.Y. 2010-11. 2
Max New York Life Insurance Company Ltd.
(Now known as Max Life Insurance Company Limited).
2. The assessee has raised the following grounds of appeal:
"1.That on the facts and circumstances of the case and in law. the Ld. CIT(A) erred in making/upholding various additions to the returned income of the Appellant totalling to Rs. 1,889,623,500 and by not accepting 'Nil' income returned by the Appellant.
Enhancement of income made by Ld. CIT(A)
2. That on the facts and circumstances of the case and in law, the Ld. C1T(A) erred in holding that the profit disclosed by the Appellant in the Shareholder's Profit and Loss Account (Form A-PL) was not the profit of the life insurance business of the Appellant and consequently, erred in holding that the provisions of Section 44 of the Act read with the First Schedule thereto do not apply to the said profit.
3.That on the facts and circumstances of the case and in law, the Ld. CIT(A) erred in not appreciating the Appellant's contention that its income was to be computed taking into account the surplus of the actuarial valuation done in accordance with the Insurance Act. 1938 as represented in Form I ('Old Form I").
4. That on the facts and circumstances of the case and in law. the Ld. C1T(A) erred in making an enhancement of Rs. 42,18,54,000 to the taxable income of the Appellant by considering the amount appropriated as Funds for Future Appropriation ("FFA") as part of the actuarial surplus being liable to tax under Section 44 read with Rule 2 of the First Schedule of the Act.
5. That on the facts and circumstances of the case and in law. the Ld. CIT(A) erred in making an enhancement of Rs. 141,85,84,000 to the taxable income of the Appellant by treating the amount declared and allocated as bonus for policyholders as part of the actuarial surplus being liable to tax under Section 44 read with Rule 2 of the First Schedule of the Act.
6. That on the facts and circumstances of the case and in law. the Ld. CIT.(A) erred in enhancing the assessment by making addition of provision of doubtful debts in the Shareholders' Profit and Loss Account amounting to Rs. 2,41,83,000 by erroneously concluding that Section 44 of the Act read with the First Schedule thereto does not apply to the profits in the Shareholders' Account.3
Max New York Life Insurance Company Ltd.
(Now known as Max Life Insurance Company Limited).
Additions of Ld. AO confirmed by Ld. CIT(A)
7. That on the facts and circumstances of the case and in law. the Ld. CIT(A) erred in upholding disallowance of Rs. 2,50,00,000 made by the Ld. AO on account of donation/ made by the Appellant.
8. That on the facts and circumstances of the case and in law. the Ld. CIT(A) erred in upholding the addition of Rs. 2,500 made by the Ld. AO on account of disallowance of share issue expense incurred by the Appellant by erroneously concluding that section 44 of the Act read with the First Schedule thereto does not apply to the profits in the Shareholders' Account.
9. That on the facts and circumstances of the case and in law the CIT(A) exceeded jurisdiction in directing the Ld. AO to re-compute the losses assessed in earlier assessment years for purposes of allowing set off thereof under section 72 of the Act.
Each of the above grounds are independent and without prejudice to the other grounds of appeal preferred by the appellant."
3. The assessee, vide letter dated 13.12.2017 has taken the following additional ground of appeal:
"That on the facts and circumstances of the case and in law, the CIT(A)/AO erred in not allowing exemption under Section 10(34) of the Act in respect of dividend income earned by the Appellant during the previous year relevant to subject AY."
4. In this regard, it was submitted that during the previous year relevant to the impugned assessment year, the assessee earned dividend income from investments made by the assessee in the course of carrying on its life insurance business. It is submitted that the assessee is entitled to avail of exemption under Section 10(34) of the Act with respect to aforesaid dividend 4 Max New York Life Insurance Company Ltd.
(Now known as Max Life Insurance Company Limited).
income. However, the assessee had inadvertently not claimed the said exemption in the Income-tax and, therefore, raised this ground. It was contended that since the said ground is legal ground and no facts are to be investigated, therefore, the said ground can be admitted in view of the decision of Hon'ble Supreme Court in the case of National Thermal Power Co. Ltd Vs CIT 229ITR 383 (SC) and Jute Corporation of India Ltd. 187 ITR 688.. Further, reliance was also placed in the case of Ashok Vardhan Birla vs. CWT 208 ITR 958, wherein the Hon'ble Bombay High Court in the context of Wealth tax Act, has observed that the powers of the appellate authorities are the same as the powers of the assessing authority. Additional grounds can be entertained so long as they relate to the subject-matter of the proceedings which were before the Assessing Officer or before the appellate authority. The learned DR, on the other hand, relied on the decision of Hon'ble Bombay High Court in the case of Ultratech Cement Ltd. vs. Additional CIT in ITA 1060 of 2014, dated 18th April 2017, and on that basis contended that the ground taken by the assessee is not a pure question of law and, therefore, it should not be admitted.
5. We have heard the rival submissions and carefully considered the same. It is a fact on record that the assessee has earned dividend income. Therefore, whether the assessee is entitled for deduction u/s. 10(34), in our view is a legal ground. Hon'ble Supreme Court in the case of National Thermal Power Co. Ltd Vs CIT(supra), has held that legal ground can be 5 Max New York Life Insurance Company Ltd.
(Now known as Max Life Insurance Company Limited).
taken for the first time before this Tribunal. No doubt the decision of National Thermal Power Co. Ltd has been discussed by the Hon'ble Bombay High Court in the case of Ultratech Cement Ltd. (supra), which has been relied on by the learned DR. We have gone through that decision and find that the Hon'ble High Court did not admit the additional ground as they found additional ground taken by the assessee is not a pure question of law but would depend upon the satisfaction of the authority as to the facts existing in the subject assessment year for allowing the benefit of section 80IA of the Act. The Hon'ble High Court gave a clear finding this ground has been raised for the first time before the Tribunal without relevant evidence being on record. In view of this fact the High Court took the view that the additional ground could not be admitted. From para 27 of the said order of the Bombay High Court, it is apparent that the High Court has clearly laid down "where only a pure question of law arises from facts which are already on record, then there is no reason why the appellate authority should not consider the question of law so as to determine the correct tax liability of an assessee in accordance with law." In the impugned case, the fact that the assessee has earned dividend income is apparent from the material available on record of the authorities below. In view of this fact the only question before us in the additional ground relate as to whether the provisions of section 10(34) are applicable in the case of the assessee or not. Therefore, in our view, the recent decision of Hon'ble Bombay High Court in the case of Ultratech 6 Max New York Life Insurance Company Ltd.
(Now known as Max Life Insurance Company Limited).
Cement Ltd. (supra), as relied upon by the learned DR will not assist the Revenue. We, therefore, admit the additional ground.
6. Now coming to the appeal of the assessee and the cross objection of the Revenue, the brief facts of the case are that the assessee company was a joint venture between Max India Limited and New York Life International Holdings Ltd. Max Life is an Indian insurance company and has been allowed a life insurance business license by the Insurance Regulatory and Development Authority (IRDA) as it fulfills the criterion laid down in section 2(7A) of the Insurance Act 1938. For the impugned assessment year the assessee filed its income tax return on 08.10.2010 declaring 'nil' income. Subsequently, the assessment was made u/s. 143(3) at an income of ` 167,934,800/- by making the following additions:
S. No. Particulars Amount (in ` )
1. Profit from sale of investment 71,043,000
2. Provision for bad debts 2,160,000
3. Penalty/ Fines paid 164,000
4. Short deduction and payment of 69,565,300
taxes deducted at source
5. Donation paid 25,000,000
6. Share issue expenses 2,500
Total additions 167,934,800
7. The assessee went in appeal before the CIT(A). The CIT(A) deleted the addition in respect of the sum of 71,043,000/-, ` 69,565,300/- and ` 1,64,000/- but enhanced the addition of ` 21,60,000/- to ` 24,18,300/- i.e. by ` 1,86,24,61,000/- consisting of ` 42,18,54,000/- on account of 7 Max New York Life Insurance Company Ltd.
(Now known as Max Life Insurance Company Limited).
incremental FFA, ` 1418584000 in respect of bonus declared to the policy holder and ` 22023000 for the provision for doubtful debts. He also confirmed the balance addition of ` 2,50,00,000/-, `1,64,000/- and ` 2,500/-. Against the enhancement and the additions sustained by the CIT(A), the assessee has come in appeal by taking the grounds enumerated above. While the Revenue has filed the cross-objections taking the following two grounds:
"1. That the Id. CIT(A) erred in deleting the addition of Rs.7,10,43,000/- made by the AO on account of 'profit from sale of investment' on the ground of double addition whilst the interest of Revenue demanded that the same should have been sustained separately. Without prejudice, the addition should have been sustained separately on protective basis.
1.1 That in appeals filed by the assessee for AY 2007-08, 2008- 09 and 2009-10, the addition on profit from sale of investment has been decided by the First Appellate Authority in favour of the Department. Therefore, this establishes that addition made by the Assessing Officer is in conformity with the provisions of the Act."
8. The learned AR before us contended that the assessee company was incorporated on 11.07.2000 as public limited company registered under the Companies Act, 1956. The assessee obtained licence from the Insurance Regulatory and Development Authority ('IRDA') for carrying on life insurance business on 15.11.2000. The assessee offers a wide range of participating plans (i.e., where the policyholders participate in the distribution of income and the profits/surplus will be distributed in the form of bonus or dividends to the participating policyholder), non-participating plans (i.e., where the 8 Max New York Life Insurance Company Ltd.
(Now known as Max Life Insurance Company Limited).
policyholder does not have any right to receive a portion of the surplus of the insurance company) and linked products covering life insurance, pension and health benefits including riders for individual and group segments distributed by individual agents, corporate agents, banks, brokers and other channels. It was submitted that prior to amendment of the Insurance Act, 1938, in 1999, life insurance business was monopoly of the State. With the enactment of Insurance Regulatory Development Authority, 1999 private insurers were also allowed to carry on insurance business, including life insurance business. It is pointed out that under the erstwhile Insurance Act, 1938, life insurance companies were preparing/submitting to the Controller of Insurance, the following key account statements
(a) Consolidated Revenue Account [Form G],
(b) Summary and Valuation of Policies [Form H]
(c) Valuation Balance Sheet [Form-I] notified under the relevant schedules of the said Act.
The consolidated Revenue Account was prepared without segregating income/ expenses for policyholders as well as shareholders. It was further stated that IRDA, the insurance regulator, has made specific 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 insurance company is divided into a technical account (Policy holders account in Form A-RA) also 9 Max New York Life Insurance Company Ltd.
(Now known as Max Life Insurance Company Limited).
called as revenue account and non-technical account (shareholder's account represented as Form A-PL) also called Profit and loss account. 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.
9. The insurance companies are presently mandated to prepare their accounts as per the format prescribed under IRDA Act, 1999 for presentation of insurance accounts. According to the new Regulations formulated by the IRDA, the surplus of a company in the business of life insurance is required to be determined on an annual basis. Such surplus is to be determined, inter- alia, by taking into consideration the actuarial liability towards unexpired policies. The audited copies of such accounts are required to be filed with the IRDA on an annual basis. The change in the reporting format for companies carrying on life insurance business pursuant to change in the regulatory framework and pursuant to enactment by IRDA of Regulations, 2000 and Regulations, 2002 was duly noted by Hon'ble Bombay High Court in ICICI Prudential Life Insurance Co. Ltd. vs. ACIT 325 ITR 471. In this regard our attention was invited to page 474 -476 of the said decision.
10. It was further argued that the taxable profits of an insurance company are required to be computed under the provisions of Section 44 of the Act read with the First Schedule which is a self-contained code for computation of such taxable profits. Rule 2 of the First Schedule to the Act states that the 10 Max New York Life Insurance Company Ltd.
(Now known as Max Life Insurance Company Limited).
actuarial surplus or deficit shall be deemed to be the profit or gains of the life insurance business. Referring to Section 44 it was contended that this section is charged with a non-obstante clause and overriding other provisions of the Act, provides for profits from life insurance business to be computed in accordance with the rules contained in the First Schedule to the Act. As per rule 2 of the First Schedule to the Act, profits and gains of life insurance business shall be taken to be the annual average of the surplus arrived at by adjusting the surplus or deficit disclosed by the actuarial valuation made in accordance with the Insurance Act, 1938, in respect of the last inter valuation period ending before the commencement of the assessment year, so as to exclude any surplus or deficit included therein which was made in any earlier inter valuation period. Thus, the surplus or deficit between two inter valuation periods can only be taken as income or loss of the period. Our attention was also drawn towards the decision of Hon'ble Supreme Court in the case of LIC of India v. CIT 51 ITR 773.
11. With regard to the scope of section 44, reliance was placed on the decision of Hon'ble Bombay High Court in Life Insurance Corporation of India vs. CIT 119 ITR 900. Our attention was also invited to the decision of Hon'ble Supreme Court in the case of General Insurance Corporation of India vs. CIT 240 ITR 139. Thus, it was contended that on a combined reading of the provisions of the First Schedule of the Act and the filing requirement laid out under Section 11 of the Insurance Act, the taxable surplus /deficit of a 11 Max New York Life Insurance Company Ltd.
(Now known as Max Life Insurance Company Limited).
company in the business of life insurance is represented by the annual surplus/ loss disclosed under the audited accounts filed with the IRDA. It is further submitted that the AO have completed the tax assessments of the assessee upto FY 2012-13 and CIT(A) has passed orders upto FY 2008-09 basis adopted approach by the assessee. It is submitted that if the taxable surplus had been determined in accordance with old Form H (Consolidated Revenue Account), Form I (Valuation Balance sheet) along with the other attendant statements, the results would have been same as per the approach currently followed by the assessee.
12. The learned AR submitted before us that the approach followed by the assessee in respect of
(i) aggregation of policyholders' and shareholders' accounts,
(ii) bonus declared for policyholders; and
(iii) amounts appropriated as Funds for Future Appropriation is correct and in accordance with law. In respect of aggregation of policyholders' and shareholders' accounts, it was submitted that as per section 2 (7A) of the Insurance Act 1938, an Indian insurance company has been defined as company whose sole purpose is to carry on life insurance or general insurance or reinsurance business. Reference was drawn in this regard on sections 2(11), 3(4)(h), 11, 13, 27, 27A, 56 & 57 of the Insurance Act 1938 to demonstrate that Indian insurance companies are not allowed to carry any business other than life insurance business and shareholders' funds 12 Max New York Life Insurance Company Ltd.
(Now known as Max Life Insurance Company Limited).
are part of such business only. Shareholders funds are maintained in business as per IRDAI directive to maintain specific level of solvency and risk capital. IRDAI has also specified manner in which such shareholders funds have to be invested. Shareholders account includes income from investment of shareholders funds and certain expenses associated therewith, such as board meeting expenses, etc., and is part of Life Insurance Business.
13. In respect of Ground No. 2 & 3 the learned AR contended that the amendment made vide IRDA Regulations of 2002 requiring every insurer to prepare (i) policyholders' account which is in the nature of revenue account, and (ii) shareholders' account, which is in the nature of profit and loss account, apart from the balance sheet, is only a change in the reporting format, so as to ensure transparency. There is no amendment in Rule 2 of the First Schedule to the Act with respect to the computation mechanism for determining the profit of a insurance company, which continues to be governed by the actuarial valuation made in accordance with the Insurance Act, 1938, notwithstanding the change in the reporting requirement vide IRDA Regulations, 2002. The said amendment does not have effect of overriding the provisions of section 44 read with the First Schedule to the Act. In this regard reliance was placed on the decision of the Mumbai bench of the Tribunal in the case of IC1CI Prudential Insurance Co. Ltd. vs. ACIT 140 ITD
41. 13 Max New York Life Insurance Company Ltd.
(Now known as Max Life Insurance Company Limited).
14. It was pointed out that the said order of the Tribunal was challenged by the Revenue before the Bombay High Court raising amongst several questions, the following question of law:
"8) Whether on the facts and in the circumstances of the case and in law, the Tribunal is correct in allowing relief to the assessee by holding that surplus available in Share Holders Account is not to be taxed separately as "income from other sources"
and at the normal corporate rate and holding that surplus from Share Holders Account was only part of income from insurance business arrived at after "combining" surplus available in Share Holders Account with the surplus available in Policy Holders Account and then and taxing this 'net surplus' arrived at, at the rate specified u/s. 115B of the Act?"
15. Although Hon'ble Bombay High Court admitted the appeal of the Revenue on other substantial questions of law, but with respect to the aforesaid question, the Bombay High Court in the case reported as CIT vs. ICICI Prudential Insurance Co. Ltd. : 242 Taxman 159 did not admit the Revenue's appeal. When a query was raised whether any SLP has been filed, the learned AR was fair enough to concede that the SLP of the Revenue has been admitted by Hon'ble Supreme Court against the said decision of the Bombay High Court in the case of CIT vs. ICICI Prudential Life Insurance Co. Ltd. 242 Taxman 97.
16. It was further submitted that the matter can be looked at from another angle, too. The CIT(A) in his order dated 7.11.2016, for assessment year 2010-11, has noted that players in the life insurance business follow different 14 Max New York Life Insurance Company Ltd.
(Now known as Max Life Insurance Company Limited).
approaches as enumerated on pages 25-26 of that order. We noted that the CIT(A) has observed as under:
"i) Approach based on financial statements and A-RA in which A-PL are considered part of one single business of life insurance. Aggregation of results of both A-RA and A-PL (after nullifying effect of transfer between accounts) and offering for tax the combined profit for tax as profit of company from life insurance business taxable at special rate is done under this approach.
ii) Approach based on financial statements but A-RA and A-PL are considered separate business and profits of each account are calculated independent of other. Then only A-RA represents profits of life insurance business taxable at special rate while A-PL income (after nullifying effect of transfer between accounts) is to be taxed as Income from other business at normal rates.
iii) Mixed approach with aggregation, i.e., partially Form I based approach based on actuarial valuation report and partially an approach based on financial statements. In this approach surplus reflected in Form I is considered as policyholders' surplus and Profit/loss hi A-PL is aggregated (after nullifying effect of transfer between accounts) with Form I surplus to arrive at taxable profits. This combined profit is offered for tax as profit of company from life insurance business taxable at special rate.
iv) Mixed approach without aggregation i.e. partially Form I based approach based on actuarial valuation report and partially an approach based on financial statements. In this approach surplus reflected in Form I Is considered as policyholders' surplus taxable at special rate and profit/loss in A-PL (after nullifying effect of transfer between accounts) is treated as Income from other business taxable at normal rates."15
Max New York Life Insurance Company Ltd.
(Now known as Max Life Insurance Company Limited).
On this basis the learned AR did not dispute that there may be different approaches followed by the insurance companies, but he emphasized that in the context of determination of income under the head "profits and gains of business or profession", section 145 of the Act provides that the income of the assessee has to be determined in accordance with the method of accounting consistently and regularly followed. The assessee is regularly and consistently following aggregating / consolidating, both, the policyholders' and shareholders' account for purposes of arriving at the deficit / surplus from the life insurance business is not only in accordance with law as held by the Mumbai bench of the Tribunal in the case of ICICI Prudential Insurance (supra) but has consistently and regularly been followed and accepted by the Revenue over the years. Therefore, it was contended that on the principle of consistency the Revenue cannot discard the aforesaid method of determination of taxable income, which has been accepted by the Revenue consistently, without there being any change in facts or in law. In this regard reliance was placed on the decision of Hon'ble Supreme Court in the case of Radhasoami Satsang Saomi Bagh vs. CIT 193ITR 321 which at page 328 following the passage from Hoystead v. Commissioner of Taxation 1926 AC 155 (PC) is mentioned:
"Parties are not permitted to begin fresh litigation because of new views they may entertain of the law of the case, or new versions which they present as to what should be a proper apprehension by the court of the legal result either of the construction of the documents or the weight of certain 16 Max New York Life Insurance Company Ltd.
(Now known as Max Life Insurance Company Limited).
circumstances. If this were permitted, litigation would have no end, except when legal ingenuity is exhausted. It is a principle of law that this cannot be permitted and there is abundant authority reiterating that principle. Thirdly, the same principle, namely, that of setting to rest rights of litigants, applies to the case where a point, fundamental to the decision, taken or assumed by the Plaintiff and traversable by the Defendant, has not been traversed. In that case also a Defendant is bound by the judgment, although it may be true enough that subsequent light or ingenuity might suggest some traverse which had not been taken."
17. Further, it was also pointed out that the principle of consistency was reiterated by the Supreme Court in Shasun Chemicals & Drugs Ltd. vs. CIT 388 ITR 1 and CIT vs. Excel Industries Ltd. 358 ITR 295. In Excel Industries (supra), the Supreme Court observed as under:
"It appears from the record that in several assessment years, the Revenue accepted the order of the Tribunal in favour of the Assessee and did not pursue the matter any further but in respect of some assessment years the matter was taken up in appeal before the Bombay High Court but without any success. That being so, the Revenue cannot be allowed to flip-flop on the issue and it ought let the matter rest rather than spend the tax payers' money in pursuing litigation for the sake of it."
Thus, it was contended that the assessee is consistently determining the taxable income by adopting the approach of aggregation of both, the policyholders' and shareholders' account. The Revenue has accepted such position in the earlier years therefore, it cannot deviate in the impugned assessment year. Thus, it was stressed that income has to be determined 17 Max New York Life Insurance Company Ltd.
(Now known as Max Life Insurance Company Limited).
after aggregation of both the policyholders' and shareholders' account as has been regularly accepted by the Revenue.
18. In respect of ground no.5 the learned Sr. Advocate submitted that bonus paid in cash is expressly allowable under the erstwhile "Consolidated Revenue Account". Further, liability for the present value of future bonuses is an actuarially determined liability which is also considered at the time of determining "Net Liability under business" as per earlier Form H; separately, the provision for future bonus liability is expressly included in the incremental valuation liability, i.e., change in valuation of liability against life policies in force. It was submitted that even when there was a deficit in the policyholders' account in the initial years, the funds have to be transferred from the shareholders' account in order to declare bonus on the participating policies, which is being done based on the advice of the Appointed Actuary. Reference is made to a sample insurance policy and the terms and conditions attached thereto. The relevant conditions are reproduced under:
"Benefits 7.1 Subject to the provisions of section 8 (Suicide Exclusion), on the occurrence of the Insured Event, the Company will pay the following benefits (the "Benefits"):
(a) the Sum Insured; and
(b) the accrued bonus.
12. Policy Holder Bonus and Bonus Options No bonus is payable for the first two Policy years.
Thereafter, a bonus as declared by the Company, 18 Max New York Life Insurance Company Ltd.
(Now known as Max Life Insurance Company Limited).
will be paid, from the surplus arising from the actuarial valuation of the participating life insurance fund. The amount of bonus to be paid will be as determined by the Company's Appointed Actuary from time to time."
19 Further, attention was also drawn towards the IRDA (Distribution Of Surplus) Regulations, 2002 in respect of the procedure for distribution of surplus in the following terms:
"4 Procedure for distribution of surplus. - A life insurer may, on the advice of his appointed actuary, reserve a part of the actuarial surplus (also referred to as valuation surplus) arising out of a valuation of assets and liabilities made for a financial year in accordance with Insurance Regulatory and Development Authority (Actuarial Report and Abstract) Regulations, 2000, to its shareholders, which shall be:-
(a) one hundred per cent in case of a life fund maintained for non-participating policyholders;
(b) one-ninth of the surplus allocated to policyholders in case of a life fund maintained for participating policyholders:
Provided that an insurer shall, however, be required to obtain prior approval of the authority in cases where the said allocation is not the one-ninth of the surplus.
Provided further that an insurer shall not allocate or reserve exceeding ten per cent of the said actuarial surplus to its shareholders."
He also invited our attention to schedule 16 II Notes on accounts clause (b),(r) and
(s) in this regard.Thus it was contended that bonus is declared pursuant to 19 Max New York Life Insurance Company Ltd.
(Now known as Max Life Insurance Company Limited).
inherent right of the participating policyholder, in terms of the contract of insurance, enforceable at law, to participate in the distribution of surplus arising in the fund. In other words, the premiums received are embedded with the obligation to declare bonus to participating policyholders. In that view of the matter, on the matching principle, the amount declared as bonus is necessarily to be set off against the premium received. The amount of bonus declared, it was pointed out, is unconditionally made available to the policyholder and is paid at the time of maturity / death. It is further pointed out that in some cases, bonus is paid in cash after declaration, while in case of some policies, bonus amounts are adjusted with next due premium, as per product features. The amount of bonus declared, which the assessee is mandatorily bound to declare in terms of the contract of insurance in respect of participating policies, cannot be held back by the assessee and has to be transferred to the account of the policy holder. Therefore, such bonus is ascertained liability accrued to the assessee while determining the acturial surplus and such bonus has to be taken into account while determining the actuarial surplus, subject of taxation under section 44 of the Act read with the First Schedule thereto. It was submitted that "actuarial surplus" has not been defined in the Insurance Act/IRDA Act. Its meaning therefore has to be gathered from the ordinary commercial principles governing life insurance business and relevant rules, guidelines and norms governing actuarial valuation of life insurance contracts. In this regard attention was drawn 20 Max New York Life Insurance Company Ltd.
(Now known as Max Life Insurance Company Limited).
towards the observation of the Mumbai bench of the Tribunal in the case of ICICI Prudential Insurance Co. Ltd. (supra) as under:
" ... An actuary is responsible for analysing possible outcomes of the types of events that would potentially cost policy holders to make claims against their insurance policies. Insurance companies need to make sure that the money they are charging and collecting from policy holders is adequate to cover the costs of certain claims that might beneficially be made by policy holders as well as their other expenses, hi fact, the work that actuaries perform is crucial to an insurance company's ability to remain in business. Actuaries are involved at all stages in product development and in the pricing risk assessment and marketing of the products. Their job involves making estimates of ultimate out-come of insurable events. In the business of insurance the product cost is an abstraction, depending on the timing issues, variability issues and risk parameters. One big function actuaries provide is making reserves to insure that insurance companies keep enough money on their balance sheets to make good of all the claims they will have to pay. This involves arriving at actuarial surplus or deficit depending on various factors. .... .... The surplus or deficit arrived at by the actuary in his valuation for the inter valuation period has to be taken into consideration under the regulations in financial accounts as well"
20. It was further submitted that the policyholders are not shareholders of the business; the policyholders are customers paying premium to the insurance company to manage risks associated with loss of human life. A liability or amount set aside for future distribution to the policyholders which is not, in law, available to the shareholders cannot form part of the actuarial surplus. The basis of taxation for a life insurance company is the actuarial 21 Max New York Life Insurance Company Ltd.
(Now known as Max Life Insurance Company Limited).
surplus, i.e., the amount available to shareholders like dividend, after reducing amounts, contractually and statutorily payable to the policyholders. The amounts set aside for policyholders like bonus or an amount that is statutorily mandated to be kept aside for the benefit of policyholders are in the nature of ascertained liability / charge and cannot form part of actuarial surplus. The formats of the various prescribed forms under the IRDA Act or for that matter Insurance Act, 1938 cannot conclusively determine the quantum of actuarial surplus. These formats have been prescribed by IRDA not for purposes of taxation but to ensure proper disclosure of figures to protect the interests of the policyholders and to ensure transparency and better regulation of the insurance sector in India. The deductibility of an item would not depend upon treatment / presentation in the accounts but with reference to the provisions of the Act. Since payment of bonus is a contractual obligation in terms of the clauses of the outstanding par policies, the amount of bonus declared is an accrued and ascertained liability deductible in computing profits from the life insurance business. It was further submitted that up to A.Y. 1976-77, while there were two methods for calculating profits and gains of life insurance business, a specific deduction was allowed of 80% of the amount paid to or reserved on behalf of the policyholder. The Finance Act, 1976 amended the First Schedule to the Indian Income-tax Act, deleting Rule 3.
22
Max New York Life Insurance Company Ltd.
(Now known as Max Life Insurance Company Limited).
21. Further, our attention was also drawn towards Explanatory Notes to the Finance Act, 1976(specially para 40.20) explained the purpose of the amendment and clarified that no further deduction would be permitted for amount paid or reserved on behalf of the policyholders. Further he contended that the amendment made by Finance Act 1976, cannot be read in a manner so as to take away the right of an assessee carrying on life insurance business to treat bonus declared as an actuarial liability. Furthermore, the scheme of taxation has undergone complete change with the current provisions providing for actuarial valuation of the surplus /deficit. It is to be noted that prior to the amendment in 1976 such a limitation was provided in the erstwhile Rule 3 which limited the allowability of deduction pertaining to amounts set aside for the benefit of policyholders to 80%. After the amendment, no such limitation exists. For this our attention was drawn towards Rule 3, which was omitted by Finance Act 1976. The limitation was in Rule 3 because the old Rule 2 provided for two alternate tax bases (Higher of the Net Income and Actuarial Surplus). Under the Net Income method, deduction could be claimed and a limitation for the same was provided. In the case of actuarial surplus, there was no such thing as "deduction" because any liability recognized by the actuary was to be reduced from the income to arrive at the surplus/deficit. As presently, there is nothing in the Act which states that while arriving at "actuarial surplus", liabilities ascertained by the actuary as bonus payable in future or amount set aside for future 23 Max New York Life Insurance Company Ltd.
(Now known as Max Life Insurance Company Limited).
appropriation for the benefit of policyholders would not be reduced, no such limitation can be implied / inferred. Thus, it was contended that the declaration of bonus payable to participating policy holders will necessarily have to be taken into account while determining profit from life insurance business.
22. Ground No. 4 relates to Funds for future appropriation (FFA) is an unallocated surplus in participating funds. It was submitted that these funds supports the ability of the insurer to meet its contracted obligations to its policy holders as presented at the time of the inception of the policy contract and is, therefore, akin to a policyholder liability which has been determined through due process of actuarial valuation. The assessee is contractually bound in terms of the insurance policies taken out to provide various benefits to its policyholders, including, inter alia, death benefit to surviving nominees, survival benefits, cash or reversionary bonuses and other payouts / benefits linked to the happening of future uncertain events. The premiums earned by the assessee, therefore, carry / have embedded the obligation to make available such benefits in future. The actuaries available seek to estimate the likely payouts on that account in respect of the contracts of life insurance already in force. At this juncture, the learned AR referred to the matching principle and on that basis he contended that the premiums earned have to be off-set by the estimated liability to make available future benefits, as actuarially declared. Such provision in the form of FFA represents in essence, 24 Max New York Life Insurance Company Ltd.
(Now known as Max Life Insurance Company Limited).
provision for future bonuses. The same is in the nature of an ascertained but unallocated liability, which has necessarily to be taken into account while computing actuarial surplus. The liability of the assessee to make available the stipulated benefits to a particular insured may be contingent, such liability is definite and certain towards all insured taken together. In addition to the actuarial reserves, the assessee keeps aside a part of excess in participating funds as FFA for declaring or smoothening bonuses in future. It represents policyholders' reasonable expectation of future bonus on account of performance participating funds over the years. Thus, it was contended that FFA, in this view represents provision for a definite and ascertained liability, which is a necessary charge on the profits of the life insurance business. Reliance was placed in this regard on the decision of the Hon'ble Apex Court in the case of Bharat Earth Movers vs. CIT 245 ITR 428 where the question whether provision for leave encashment to employees was allowable deduction while computing profits of the business, was allowable deduction or not. It was submitted that the facts involved in this case were:
"..,. ..... The company has floated beneficial schemes for its employees for encashment of leave. The officers are entitled to earned leave calculated at the rate of 2.5 days per month, i.e., 30 days per year. The staff (other than officers) is entitled to vacation leave calculated at the rate of 1.5 days per month, i.e., 18 days in a year. The earned leave can be accumulated upto 240 days maximum while the vacation leave can be accumulated upto 126 days maximum. The earned leave/vacation leave can be encashed subject to the ceiling on accumulation. The officers may at their option avail the accumulated leave or in lieu of availing the leave apply for encashment whereupon they would be paid salary for the period of leave earned but not availed. So does the scheme extend 25 Max New York Life Insurance Company Ltd.
(Now known as Max Life Insurance Company Limited).
facility of encashment to the staff in respect of vacation leave. Any leave earned beyond the said ceiling limit of 240/126 days cannot be accumulated and goes a waste. It can neither be availed nor encashed. The assessee company has created a fund by making a provision for meeting its liability arising on account of the accumulated earned/vacation leave. In the assessment year 1978- 1979 an amount of Rs. 62,25,483/- was set apart in a separate account as provision for encashment of accrued leave. It was claimed as a deduction. In the opinion of the Tribunal the assessee was entitled to such deduction. The High Court has formed a different opinion and held that the provision for accrued leave salary was a contingent liability and therefore was not a permissible deduction. The reasoning applied by the High Court is that the liability will arise only if an employee may not go on leave and instead apply for encashment. If the employee avails the leave as per his entitlement, then he would be paid salary for the period of leave and liability for encashment would not arise. The other event on the occurrence of which the employee may stake his claim is termination or retirement which again is an uncertainty. Accordingly the High Court has answered the question in the negative, that is, in favour of the Revenue and against the assessee. .... ...."
While answering the question in the affirmative, the Apex Court laid down the following dictum of law :
"The law is settled if a business liability has definitely arisen in the accounting year, the deduction should be allowed although the liability may have to be quantified and discharged at a future date. What should be certain is the incurring of the liability. It should also be capable of being estimated with reasonable certainty though the actual quantification may not be possible. If these requirements are satisfied the liability is not a contingent one. The liability is in present though it will be discharged at a future date. It does not make any difference if the future date on which the liability shall have to be discharged is not certain."
It was pointed out that while coming to the aforesaid conclusion, the Court took note of the principles laid down in the case of Metal Box Co. of India Ltd. Vs. Their Workmen 73 ITR 53 wherein the Apex Court allowed provision for 26 Max New York Life Insurance Company Ltd.
(Now known as Max Life Insurance Company Limited).
gratuity payable on termination of employees service due to retirement / death or termination, worked out on an actuarial basis and Calcutta Co. Ltd. Vs. CIT 37 ITR 1. Reference was also made to the judgment of Hon'ble Delhi High Court in the case of CIT vs. Triveni Engineering& Industries Ltd. 336 ITR 374 wherein it has held that where the contract receipts, including unbilled revenue for which invoices have been raised in the succeeding year, were brought into tax in entirety in the relevant previous year, deduction had to be allowed in respect of provision for foreseeable losses towards completion of the contract.
23. Reliance was also placed in this regard in the case Rotork Controls India (P) Ltd. vs. CIT : 314 ITR 62 wherein the issue for consideration was allowability of provision for warranty. Allowing the appeal of the assessee, the Hon'ble Apex Court made the following observations:
".....Under the matching concept, if revenue is recognized the cost incurred to earn that revenue including warranty costs has to be fully provided for. When Valve Actuators are sold and the warranty costs are an integral part of that sale price then the assessee has to provide for such warranty costs in its account for the relevant year, otherwise the matching concept fails. ....
The warranty provision for the products should be based on the estimate at year end of future warranty expenses. Such estimates need reassessment every year. As one reaches close to the end of the warranty period, the probability that the warranty expenses will be incurred is considerably reduced and that should be reflected in the estimation amount. ....
In our view, on the facts and circumstances of this case, provision for warranty is rightly made by the assessee -enterprise because it has incurred a present obligation as a result of past events. There is also an outflow of resources. A reliable estimate of the obligation 27 Max New York Life Insurance Company Ltd.
(Now known as Max Life Insurance Company Limited).
was also possible. Therefore, the assessee has incurred a liability, on the facts and circumstances of this case, during the relevant assessment year which was entitled to deduction under Section 37 of the 1961 Act. Therefore, all the three conditions for recognizing a liability for the purposes of provisioning stands satisfied in this case.... "
By referring to this decision, it was pointed out that the Hon'ble Apex Court has clearly laid down following four important aspects that need to be satisfied in order that the provision made is not regarded as a contingent liability, and hence not deductible in computing business profits:
(i) the provision relates to present obligation;
(ii) it arises out of obligating events;
(iii) it involves outflow of resources; and
(iv) it involves reliable estimation of obligation.
It was pointed out that the ratio laid down by the Apex Court in the case of Rotork Controls (supra), has been applied by Hon'ble the Delhi High Court in the case of CIT vs. Whirlpool Of India Ltd.
242 CTR 245 where deduction for incremental warranty provision made in the relevant previous year was allowed, based on actuarial valuation, after taking into consideration the existing warranty provisions vis-a-vis the expected claims that might be received with respect to products sold and covered under warranty.
24. Thus, it was contended that FFA being provision for expectation of future bonuses and its smoothening satisfies all the four parameters above, 28 Max New York Life Insurance Company Ltd.
(Now known as Max Life Insurance Company Limited).
inasmuch as the obligation to make available future benefits arises out of pre- existing contracts of insurance in respect of which premiums have been collected by the assessee; the benefits are payable in terms of binding and legally enforceable contacts of insurance; the payment of benefit would involve outflow of resources and lastly, the same is capable of actuarial valuation. Thus, it was contended that the participating surplus earned is embedded with the obligation to provide various benefits to the participating policy holders, inter alia, death benefit to surviving nominees, survival benefits, cash or reversionary bonuses and other payouts / benefits linked to the happening of a future uncertain events. The income earned by the assessee is thus impressed with the obligation to make available such benefits in future, in terms of the legally binding covenants under the contract of insurance. Further, as per the Insurance Regulatory and Development Authority (Distribution of Surplus) Regulations, 2002, the shareholders are not entitled to any amount in excess of 10% of the actuarial surplus. Therefore, 90% of the actuarial surplus which is represented by, inter alia, FFA is diverted by overriding title in favour of the policyholders and cannot constitute income of the assessee.
25. Our attention was also drawn towards the decision of Hon'ble Supreme Court in the case of CIT vs. Shri Sitaldas Tirathdas 41 ITR 367 for the provision of law whether income could be said to have been diverted by overriding title. Applying the principles laid down in the aforesaid judgment, it 29 Max New York Life Insurance Company Ltd.
(Now known as Max Life Insurance Company Limited).
was contended that there is an overriding charge in terms of contract of insurance due to the Regulations to pay 90% of the participating surplus to the policyholders. Thus, the FFA represents income which never reaches the assessee in its own individual right but is held for and on behalf of the policyholders to whom it is payable in future.
26. Reliance was also placed on the decision of Hon'ble Supreme Court in the case of CIT vs. Bijli Cotton Mills (P.) Ltd. 116 1TR 60. Referring to the facts, it was stated that in that case, the assessee was collecting as part of the sales invoice, amount towards dharmada as per the custom prevailing in the area where the assessee was carrying on business. The amount collected towards dharmada was claimed by the assessee to be not liable to tax on the ground that the same was imposed with the legal obligation to spend the same towards charity and, therefore, such amount was diverted by overriding title. Dismissing the appeal of the Revenue, the Supreme Court held that realizations made by the assessee from its customers towards dharmada was being validly earmarked for charity or charitable purposes, could not be regarded as assessee's income chargeable to tax. Reliance was also placed on the decision of Hon'ble Allahabad High Court in the case of U.P. Bhumi Sudhar Nigam vs. CIT 280 ITR 197 (All ) for the proposition of the law of diversion of income by overriding title. It was pointed out that recently, Mumbai Bench of the Tribunal in the case of Addl. CIT vs. Mumbai International Airport P. Ltd. 184 TTJ 229 (Mum) held that passenger service 30 Max New York Life Insurance Company Ltd.
(Now known as Max Life Insurance Company Limited).
fee collected by the assessee airport operator from passengers was not in the nature of income and alternatively diverted by overriding title, on the ground that the amount was collected with the clear understanding and stipulation that the same was meant for the security agencies.
27. Reliance was also placed on the recent judgment of the Hon'ble Supreme Court decision in the case of CIT vs. Modipon 87 taxmann.com 275 (SC) wherein it was clarified that amounts deposited in the Personal Ledger Account ("PLA") towards likely excise duty liability, to be discharged in future represented expenditure accrued and actually paid considering that the assessee had no control over the amount once deposited and the assessee was not entitled to withdraw any amount therefrom. It was further submitted that the issue whether funds for future appropriation are allowed in one year or the other, is revenue neutral, considering that the same are held by the assessee company in fiduciary capacity, for and on behalf of the participating policyholders and the said amount cannot be diverted in favour of the shareholders (except to the extent of 10% of the surplus as and when declared, in view of the binding IRDA Regulations). Reliance in this regard is placed upon the judgment of the Bombay High Court in CIT vs. Nagri Mills 33 ITR 681 (Bom), especially to the observations at pg 684 of the judgment, which reads as under:
"We have often wondered why the Income-tax authorities, in a matter such as this where the deduction is obviously a permissible deduction under the Income-tax Act, raise disputes as to the year in which the deduction should be allowed. The question as to the year 31 Max New York Life Insurance Company Ltd.
(Now known as Max Life Insurance Company Limited).
in which a deduction is allowable may be material when the rate of tax chargeable on the assessee in two different years is different; but in the case of income of a company, tax is attracted at a uniform rate, and whether the deduction in respect of bonus was granted in the assessment year 1952-53 or in the assessment year corresponding to the accounting year 1952, that is in the assessment year 1953-54, should be a matter of no consequence to the Department; and one should have thought that the Department would not fritter away its energies in fighting matters of this kind. But, obviously, judging from the references that come up to us every now and then, the Department appears to delight in raising points of the character which do not affect the taxability of the assessee or the tax that the Department is likely to collect from him whether in one year or the other."
28. It was further pointed out that same proposition was accepted by the Delhi High Court in the case of CIT vs. Shriram Pistons & Rings 220 CTR 404 (Delhi) wherein it was held as under:
"..no doubt that the assessee had incurred an expenditure. The only dispute is regarding the date on which the liability had crystallized. It appears that there was no change in the rate of tax for the assessment year 1983-84 with which we are concerned. The question, therefore, is only with regard to the year of deduction and it is a pity that all of us have to expend so much time and energy only to determine the year of taxability of the amount.
19. Be that as it may, we answer the question in the negative, in favour of the assessee and against the Revenue"
It was further pointed out that on the ground of consistency, the Revenue is not entitled to disturb the consistent and accepted history of the case wherein the amount standing to the credit of FFA in the earlier years has not been treated as part of the actuarial surplus liable to tax, in terms of section 44 of the Act read with Rule 2 of the First Schedule thereto. 32
Max New York Life Insurance Company Ltd.
(Now known as Max Life Insurance Company Limited).
29. Thus, it was contended that on the basis of the above referred decisions that if the assessee has discretion in the manner and timing of declaration of (future) bonuses, would not result in the FFA representing provision for future payouts to policyholders being treated as part of income of the assessee, when there is a legal antecedent obligation to spend such amounts for payment to policyholders, both, in terms of the contract of insurance and the extant Regulations. In other words, an amount that is statutorily mandated to be kept aside for the benefit of policyholders (FFA) for future distribution, cannot form part of actuarial surplus. Accordingly, FFA would thus have to be taken into account in determining actuarial surplus.
30. Ground No. 9: relates to the claim of the assessee in respect of the direction given by the CIT(A) for re-computing the assessed carried forward losses of AY 2002-03 and other earlier years for the purpose of allowing set off u/s. 72 of the Income tax Act. The learned AR in this regard submitted that the CIT(A) directed the Assessing Officer to recompute carry forward losses of the A.Y. 2002-03 and other earlier years. This direction amounts to order of remand and reopening of assessments of the prior years. Such an action is ex facie illegal and manifestly in violation of the Act and settled principles of law. Reliance was placed in this regard on the decisions of Hon'ble Supreme Court in the case of ITO v. Murlidhar Bhagwan Das 52 ITR 335 and CIT v. Manick Sons 74 ITR 1, wherein, it has been held that powers of an appellate authority are restricted to the assessment year in question 33 Max New York Life Insurance Company Ltd.
(Now known as Max Life Insurance Company Limited).
and cannot extend to assessment of a year which is not the subject matter of appeal. It was pointed out that said position of law has also been followed by the Jurisdictional High Court in the case of Marubeni India P. Ltd. v. CIT (2010) 328 ITR 306 in the context of the powers of the ITAT to issue directions relating to an assessment year which is not the subject matter of the appeal wherein the Hon'ble High Court has held that the ITAT can only pass those orders which are necessary for disposal of the appeal in question. Further, reliance is also placed on the judgment of Kala Niketan vs. UOI 293 CTR 178 (Bom).
31. In respect of ground nos.6, 7 & 8, it was contended that since the income of the assessee has to be computed in accordance with Rule 2 of the First Schedule provided in Section 44 of the Income tax Act. Section 44 of the Act start with non-obstante clause and overriding provisions of the Act and state that the profits and gains of life insurance business is completely governed by the rules contained in the Rule 2 of the First Schedule. The Assessing Officer was not correct in making certain disallowances as stipulated in ground nos. 6,7 & 8. Therefore, the additions in respect of these disallowances must be deleted.
32. The learned DR also went on to explain the brief history of taxation of the Insurance companies by referring various provisions of Income tax Act, Insurance Act and IRDA as pointed out by learned AR also and stated that in the case of Insurance companies carrying on life insurance business, there 34 Max New York Life Insurance Company Ltd.
(Now known as Max Life Insurance Company Limited).
are two separate funds, the shareholder's fund and the policyholder's fund. Unlike in other industries shareholder's fund does not play an active role in running the business and remains invested. It was contended that Total Income of life Insurance companies is equal to (Investment Income - Expenses) of Shareholder's funds + Profits and Gains of life insurance business.
33. Further it was submitted that globally the Profits and Gains of life insurance business (Policy Holder's funds) are computed by two methods
a) Investment Income - Allowable Expenses = Net Income
b) Investment Income + Premium Income + Miscellaneous Income - Allowable Management Expenses - Payments to Policy Holders - Increase in liability = Valuation Surplus Thus, it was contended that a life insurance company incurs a liability whenever a policy is issued and an additional liability when renewal premium is received. This liability is estimated by actuarial techniques using appropriate discounts and probability factors. In case of a new company, Net Income will be negative for a long period. However, valuation surplus may be positive after few years as the company matures and the Net Income start exceeding the Valuation Surplus. Before 1918, the life insurance companies in India, were being assessed on profits like other trading companies. The procedure had evolved departmentally. 1918 and 1922 Acts gave statutory recognition of these procedures. Later, till 1939, taxation of life insurance 35 Max New York Life Insurance Company Ltd.
(Now known as Max Life Insurance Company Limited).
companies was governed by the Income Tax Act 1932 and Rules 25 and 35, and the Average Annual Gross Valuation Surplus (Valuation Surplus with certain adjustments) was taxed as Profits and Gains of life insurance business without reducing the surplus allocated back to policy holders. After that, higher of the following two was taken as Profits and Gains of life insurance business:-
(i) Investment Income - Allowable Management Expenses (ceiling - 85 % of first year premium and 8.5 % of renewal premium)
(ii) Valuation Surplus - 50 % of Surplus allocated to policy holders By 1944 Act 85 % limit was increased to 90 % and 8.5 % limit was increased to 12 % (this was subsequently increased to 15 % by 1953 Act). The 50 % limit of Surplus allocated to policy holders was increased to 80 % by 1953 Act. As per Rule 2 which was in existence prior to amendment made by Finance Act, 1976, higher of the Net Income and Valuation Surplus was to be taken as Profits and Gains of life insurance business. Section 30 to 43A has to be applied for determination of Valuation Surplus. There was cap on allowable management expenses. Only 80 % of Surplus allocated to policy holders was allowed as deduction. Assessing Officer was empowered to make adjustments in Valuation Surplus after having consultation with Controller of Insurance. There were rules prevailing for tax free interest. Under the head Income from House Property income was also be computed as per Income 36 Max New York Life Insurance Company Ltd.
(Now known as Max Life Insurance Company Limited).
tax Act. There were also rules regarding realization of profits/loss from investments.
34. The provisions of computation of income from life Insurance business was simplified with the insertion of section 115B to the Finance Act 1976, which provided that the Profits and Gains of life insurance business shall be taxed at 12.5 % of Gross Valuation Surplus, rather than at 52.5 % (excluding surcharge) earlier and remaining income shall be taxed at normal rate of tax. Rule 2 of the First Schedule was amended and it provided that only the Gross Valuation Surplus would be taxed. Adjustment u/s 30 to 43 A, Computation under the Income from House Property, rules of profits/loss from realization of investment and Rule 3 were omitted.
35. Prior to amendment i.e. in A.Y. 1976-77, the Profits and Gains of life insurance business were taxed at 52.5 % (excluding surcharge). As per Life Insurance Corporation Act, 95% of its valuation surplus has to be allocated to policyholders. This means that {100 - 80% of 95} % i.e. 24% of Valuation Surplus was to be taxed at 52.5 %. If this is applied to whole surplus, it will give that valuation surplus was to be taxed @ 12.6%. Therefore, in other words Net Valuation Surplus was to be taxed at 52.5 % OR the Gross Valuation Surplus was to be taxed at 12.6 %. This was the rationale of withdrawing deduction of allocation of surplus to policy holders, while reducing tax rate to 12.5 %. The CBDT circular No. 202 dated 5.7.1976, para 40.2 removed any ambiguity in this regard. It was a fair deal as even after 37 Max New York Life Insurance Company Ltd.
(Now known as Max Life Insurance Company Limited).
reduction of corporate tax rates, if the original condition that X% of Valuation Surplus should not be less than the tax at corporate rate on higher of Net Income or Net Surplus is applied, the value of 'X' would be higher than 12.5% even today as when a company grows, rate of growth of Net Income is higher than rate of growth of Net Surplus. Though, the First Schedule talks of average surplus, that is no longer relevant as actuarial valuation is now done every year as against once in three to five years earlier.
36. As regards Ground No. 3, reliance was placed on CIT(A) order and contended that it has been demonstrated in the order of CIT(A), that this issue is Infructuous as the issue is not of old and new forms but of deduction of surplus allocated to policy holders or retained as fund for future appropriation(FFA).
37. With respect to the issue of enhancement, it was stated that the assessee had raised seven specific grounds relating to section 44 of the IT Act before the CIT(A). The CIT(A) has only assessed the income of the assessee as per section 44 of the I.T. Act, thereby deleting the additions which were not as per section 44 and enhancing the assessment by making addition which were required to be made as per the said section. He did not even travel outside the subject matter of appeal, though the Revenue submits that he had statutory powers to do so. In this regard, it was submitted that Hon'ble Delhi High Court in the case of Gurinder Mohan Singh Nindrajog Vs Commissioner of Income Tax reported in 348 ITR 170 has held 38 Max New York Life Insurance Company Ltd.
(Now known as Max Life Insurance Company Limited).
that merely because the ultimate order passed by the Assessing Officer was silent about the item on which enhancement was made by CIT (A) and there was no discussion thereupon would not mean that Assessing Officer had not considered the same. Reliance is also placed on the decision of Hon'ble Kerala High Court in the case of Popular Automobiles reported in 187 ITR 86 holding that it is the statutory duty of CIT (A) to see that true and proper assessment is made. It also needs to be emphasized that section 251 (1)(a) gave CIT (A) a power to set aside an assessment which was withdrawn with effect from 1st June, 2001. Therefore, the scope of enhancement in the decisions pertaining to the period after 01.06.2001 is much wider. Prior to 01.06.2001 the CIT (A) could set aside an assessment order for de-novo assessment in which everything was open before the Assessing Officer. It was in this background that there were certain decisions holding that in case of new sources of income (which is not the case in present appeal) the CIT (A) should remand [set aside] the matter to the ITO to deal with the same rather than enhancing (Reference 161 ITR 82)]. After 01.06.2001, the word "set aside"
has been removed, so that the assessments attain finality at the first appellate level. Therefore, the scope of enhancement gets further increased after 01.06.2001. Any contrary interpretation will create a situation, wherein the CIT (A) can neither set aside not enhance, but the Revenue can move before ITAT for setting aside the matter and Hon'ble ITAT may set aside to the Assessing Officer for de-novo assessment. The powers to set aside an 39 Max New York Life Insurance Company Ltd.
(Now known as Max Life Insurance Company Limited).
issue to the Assessing Officer for de-novo assessment by the Tribunal is well settled. However, if CIT (A) cannot enhance, it would restrict the powers of Hon'ble ITAT to set aside the matter to Assessing Officer for de-novo assessment which may lead to enhancement. That cannot be the correct interpretation.
38. With regard to ground 9 relating to section 72 i.e. setting aside the brought forward losses, it was pointed out that an order u/s 154 was also been passed by CIT(A) on 07.02.17(the copy of which was placed before us during the course of hearing), rejecting the assessee's application on this issue and further clarifying the issue. As per First Schedule, Profits and Gains of life insurance business are to be taken at Gross Valuation Surplus after excluding the Surplus/Deficit of earlier years and this Profits and Gains is to be taxed u/s 115B(1)(i) at 12.5 %. So question of Set Off of loss of earlier years does not arise as far as Income Taxable u/s 115 B(1)(i) and corresponding tax liability is concerned. Otherwise section 115B(1)(i) will become redundant. It was further submitted any interpretation which makes a provision redundant cannot be the correct interpretation as held by the Hon'ble Apex Court in the case of Surat Art Silk Cloth Manufacturers Association 121 ITR 1. Section 72 is a part of computation of Total income. Section 4 is a charge on total income. But section 115B(1)(i) levies tax on Valuation Surplus of the year and 115B(1)(ii) talks of Total Income less income u/s. 115B(1)(i). It was submitted that the question of set off of 40 Max New York Life Insurance Company Ltd.
(Now known as Max Life Insurance Company Limited).
losses arises only for Income Taxable u/s 115 B(l)(ii) at normal rates. But this year there is loss u/s 115 B(l)(ii). Without prejudice to the same as per assessee, there is no income taxable u/s 115 B(l)(ii). Though this contention of the assessee has not been accepted by CIT(A), the assessee's contention is self-contradictory. However, any valuation deficit will reduce income in shareholder's account or increase loss in shareholder's account as section 115(1)(i) would be applicable only in case of surplus. The corresponding loss can be carried forward and set off against income u/s 115 B(l)(ii) in future years. Thus, it was vehemently contended that ground 9 needs to be dismissed.
39. For ground nos. 2, 6, 7 and 8 and issue of income in share holders account, it was contended that shareholder's account A-PL does not include capital receipt of equity capital. It is a Profit & Loss Account. The income in this account is investment income. The assessee has itself added Royalty paid and debited in this account in the computation of Income, there by accepting that normal provisions of the act apply to this account. Even old form 'G' debits profit transferred to P & L Account and Credits the loss transferred to P & L Account, thereby establishing that P & L Account was independent of forms 'G', 'H' and 'I'.
40. As regards the decisions relied upon by the assessee, the factual and legal aspects of the present appeal as discussed in the order of CIT(A), the learned DR submitted that none of the decisions relied upon are applicable. 41
Max New York Life Insurance Company Ltd.
(Now known as Max Life Insurance Company Limited).
They have not discussed or considered all the factual cum legal aspects of this appeal. Therefore, those decisions do not apply in present case. Reliance is also placed on the decisions in the case of Vinay Extraction (P) Ltd (271 ITR 450), Iskraemeco Regent Ltd (331 ITR 312), Blue Star Ltd ( 217 ITR 514) and ITA No 3451/Ahd/2014 dated 13.11.1017(ITAT 'A' Bench ITAT) which deal with the issue of binding nature of decisions. All the decisions relied upon by the assessee are Sub-Silentio as far as the issues involved in this appeal are concerned. Some decisions are in fact PerIncuriam.
41. It was further submitted that IRDA Act 1999 forms part of Insurance Act 1938 (4 of 1938) only. In fact, section 30, read with First Schedule of IRDA Act 1999 deals with the amendments in Insurance Act 1938 (4 of 1938) only. It substitutes Controller of Insurance with Chairperson of Authority at various places in the Insurance Act 1938 (4 of 1938) and makes IRDA Act/Regulations integral part of Insurance Act 1938 (4 of 1938). A copy of corresponding amendments was filed and referred to. Therefore, it was contended that Rule 2 to First Schedule to Income Tax Act does not include Actuary Report as per IRDA Act/Regulations is against the express the provisions of the Act and it makes the First Schedule of Income Tax redundant. Even otherwise with no Controller of Insurance as per old Act and corresponding amendments incorporating IRDA Act/Regulations in Insurance Act 1938 (4 of 1938), it is not understood, how the parallel accounts as per 42 Max New York Life Insurance Company Ltd.
(Now known as Max Life Insurance Company Limited).
old regulations could be maintained , and which authority would certify them to be correct.
42. Without prejudice to the above, it was further contended that for the decision in the case of ICICI Prudential Insurance Company Ltd, reported in 141 ITD 41, and all other decisions following the said decision or confirming the said decision, is in respect of AY 2005-06 to 2008-09. For holding that IRDA Regulations do not apply to Rule 2 of First Schedule, it has heavily relied (In para 28 of the its order) on the fact that the words 'IRDA Act/Regulations' were added in Rule 5 of First Schedule by Finance Act 2009 w.e.f. 01.04.2011 and the omission to add the same in Rule 2 means legislative intent that un amended provisions of Insurance Act 1938 (4 of L938) would apply to Rule 2. By implication it means that repealed Insurance Regulation of 1938 also apply. There cannot be a judicial cognizance of such a proposition of law. Repealed provisions cannot apply to the assessee for determining its taxable income.
43. Moreover, the Rule 5 deals with General Insurance. If we refer to the circular 5/2010 of CBDT explaining the amendments by Finance Act 1999, the purpose of mentioning IRDA Act/Regulations in Rule 5 becomes clear and any further interpretation of legislative intent is imaginative.
44. Thus, it was vehemently contended that there has always been a fundamental difference in the taxation of life insurance companies and general insurance companies. General insurance is short term insurance and 43 Max New York Life Insurance Company Ltd.
(Now known as Max Life Insurance Company Limited).
often year to year basis. So, the concept of actuary valuation of present value of long term liabilities does not have any role to play in general insurance. Sub-section 7 of section 64VA (as amended by IRDA Act 1999) also talks of Actuary for Life Insurance Business and Auditor for General Insurance Business. Thus, it was submitted that the accounts of General Insurance Business are maintained as per normal accountancy principles subject to certain restrictions in corresponding insurance regulations. This is similar to the provisions of section 115JB which talks of accounts to be maintained as per Company Law. As per Rule 5, profits and gains of non-life insurance business is taken to be profits disclosed in the annual account, copies of which were required to be furnished to the Controller of Insurance under the Insurance Act, 1938 (4 of 1938), subject to adjustments for unexpired risk and disallowances under section 30 to Section 43B. The Insurance Act, 1938 was amended in 1999 and the Insurance Regulatory Development Authority (IRDA) was created. In the financial year 2001-02, IRDA introduced "IRDA (Preparation of Financial Statements and Auditor's Report of Insurance Companies) Regulations, 2002". According to these changed norms, a non- life insurance company had to include profit or loss on realization/sale of investment in the profit and loss account. Due to this, the Act had been amended to provide that any increase in respect of any amount taken credit for in the accounts on account of appreciation of or gains on realization of investments in accordance with the regulations prescribed by IRDA, should be 44 Max New York Life Insurance Company Ltd.
(Now known as Max Life Insurance Company Limited).
treated as income and included in the computation of the total income. Similarly, deduction should be allowed in respect of any amount either written off or provided in the accounts to meet diminution in or loss on realization of investments in accordance with the regulations prescribed by IRDA. Thus, it was contended that the amendment was in totally different context. Moreover, even the Old Insurance Rules have not been specifically mentioned in Rule 2 of the First Schedule of Income Tax Act though the same are mentioned in Rule 5.
45. Without prejudice it was contended that Hon'ble ITAT in the case of ICICI Prudential was considering assessment years AY 2005-06 to 2008-09 while present appeal is for AY 2010-11. IRDA Act came into force in 1999 and Insurance Act, 1938 (4 of 1938) was accordingly amended. IRDA Regulations came after all these assessment years. Therefore, a provision which has been introduced w.e.f. AY 11-12, that too in different context, cannot be used to interpret provisions as it existed before that in different context.
46. Ultimately, he summarized the findings of the decision of Hon'ble ITAT Mumbai in the case of ICICI Prudential Co., Ltd., 140 ITD 41 in the following manner:-
(a) The Actuarial surplus in policy holders account is to be considered after excluding the funds transferred from shareholders account as it amounts to taxing the equity/reserves of shareholders A/c 45 Max New York Life Insurance Company Ltd.
(Now known as Max Life Insurance Company Limited).
[New form A-PL]. (There is no such Ground in present appeal as CIT(A) has followed this]
(b) Section 14A will not apply to life Insurance business. (No such Ground is there in present appeal)
(c) Benefit of section 10(23AAB) and 10(34) is available to the life Insurance business. (No such Ground is there in present appeal)
(d) Income in share holders' account is to be considered to be arising from life insurance business and not assessable under the head income from other sources. [Not relevant in this appeal as far as rate of taxation is concerned, as there is loss in Share Holder's A/c for other issues], He relied on the order of CIT(A) and submissions made in this appeal.
(e) Adjustment of total surplus as per form I on account of negative reserves is not permissible as AO has no power to modify the amount of actuarial valuation in view of the decision of Apex Court reported in 51 ITR 773 in the case of LIC. (No such Ground is taken there in present appeal)
(f) Adjustment on account of depreciation cannot be made by AO. (No such Ground is taken there in present appeal)
(g) Old form I is to be considered for actuarial surplus and not new form-1.(This is not relevant as far as enhancement on account of FFA and surplus allocated to policy holders is concerned). 46
Max New York Life Insurance Company Ltd.
(Now known as Max Life Insurance Company Limited).
Thus, it was contended that except issue in above para (d) which is relevant only for ground no. 2(legal), ground no.6 (Rs. 2,41,83,000), ground no 7. (Rs. 2,50,00, 000) and ground no 8 (Rs. 2,500), no other issue is relevant.
47. Without prejudice to the above, learned DR referred to the decision of ITAT in the case of assessee wherein it has held that Transfer Pricing Provisions are applicable in the case of assessee, as only section 28 to 43B are excluded, as far as Profits and Gains of life insurance business are concerned. Section 14A also falls outside section 28 to 43B. The same view will apply to section 80G also.
48. With regard to the issue of applicability of section 44 to Share Holder's Account, it was submitted that IRDA Act came into force in 1999 and Insurance Act, 1938 (4 of 1938) was also amended. IRDA regulations came subsequently. Earlier there were Insurance Rules 1939. As per assessee accounts are to be maintained, presented and business is to be regulated as per a non-existent regulations, regulated by a nonexistent regulator and prepared by non-existent appointed actuary, for the purpose under non- existent provisions of the Act. This is to be appreciated that the concept of Revenue Account, Consolidated Revenue Account, Profit & Loss Account, Profit & Loss Appropriation Account, Balance Sheet, Life Insurance Fund, Shareholder's Fund existed even before IRDA Act/Regulations. For this attention is drawn to old Insurance Act, 1938. The schedules of the same would establish this point. IRDA Act/Regulations only changed the manner of 47 Max New York Life Insurance Company Ltd.
(Now known as Max Life Insurance Company Limited).
presentation and made it more detailed for regulation purpose. The assessee is making plea that while it maintains accounts as per IRDA regulations, for Income Tax purpose, the abstract of the same as uncertified summary in old forms should be accepted. The CIT(A) has demonstrated that there is correspondence between two types of forms and the issue is not of old forms or new forms. Regulation 8 of IRDA (Actuarial Report and Abstract) Regulations 2000 deals with the presentation of report. But the fundamental concept remains the same. The only use of shareholder's funds in life insurance business is for maintaining Solvency Margins and Solvency Ratios (Reference is invited Table III, Form K, Regulation 4)
49. Attention was also drawn to the amended sub section 1-A of section 11 of Insurance Act, 1938 (4 of 1938), which has used the words " life insurance business" and " Shareholder's funds" to the exclusion of each other, meaning there by that the reference to 'life insurance business' in Insurance Act, 1938 (4 of 1938), has a different meaning than what is normally understood and the same interpretation has to continue for the purpose of section 44 and first schedule of Income Tax for harmonious construction. All these submissions are based on written submissions dated 11.12.2017, which were also brought to our knowledge.
50. It was clarified that submissions filed on 24.10.2017 and submissions made here only contain synopsis of the order of CIT(A) and written submissions of the Revenue. The annexures thereto mainly consist of 48 Max New York Life Insurance Company Ltd.
(Now known as Max Life Insurance Company Limited).
relevant pages of Income Tax Act, Insurance Act, CBDT circulars, case laws and annual accounts of the assessee, which have been reproduced in the order of CIT(A) also, for ready reference, though the same could have been filed during the course of hearing also. So, it does not contain any factual evidence in the form of any statement, document or any other paper and does not fall under the definition of Paper Book under ITAT Rules.
51. Subsequently, the learned DR made following written submissions dated 12.12.2017:
"1. At the outset, the Revenue wishes to submit that assessee raised following specific grounds related to section 44 of the IT Act before the CIT(A) " The learned AO failed to appreciate:
2.3 That Section 44 of the Act read with the First Schedule is a self-contained code in the Act for computing income of assessee engaged in Life Insurance business and overrides other provisions of the Act which are contrary to the provisions of Section 44 of the Act.
3. The learned AO has erred in law and in facts, in making addition of Rs. 2,160,000/- on account of disallowance of provision for bad debts and disregarding the provisions of Section 44 of the Act which prohibit any adjustment under Sections 28 to 43B of the Act.
3.1 That the learned AO has erred in not following the decision of Hon 'ble Supreme Court in the case of Oriental Fire and General Insurance Co. Ltd.[2007] 291 ITR 370 which explicitly specifies section 44 of the Act overrides section 36(1 )(iii) of the Act.
4. The learned AO has erred in law and in facts in making addition of Rs. 25,000,000/- on account of disallowances of donation made by the appellant and disregarding the provisions of Section 44 of the Act which prohibit any adjustment under Section 28 to 43B of the Act.49
Max New York Life Insurance Company Ltd.
(Now known as Max Life Insurance Company Limited).
5. The learned AO has erred in law and in facts in making addition of Rs. 164,000/- on account of disallowance of penalty /fines paid by the appellant under Section 37 of the Act and disregarding the provisions of Section 44 of the Act which prohibit any adjustment under Section 28 to 43B of the Act.
6.3 The learned AO has erred in law and in facts in making addition under Section 40(a)(ia) of the Act disregarding provisions of Section 44 of the Act which prohibits any adjustment under Section 28 to 43B of the Act.
7. The learned AO has erred in law and in facts in making addition of Rs. 2,500/- on account of disallowance of share issue expenses disregarding provisions of Section 44 of the Act which prohibits any adjustment under Section 28 to 436 of the Act."
1.1 The CIT(A) has only assessed the income of the assessee as per section 44 of the I.T. Act, thereby deleting the additions which were not as per section 44 and enhancing the assessment by making addition which were required to be made as per the said section. He did not even travel outside the subject matter of appeal, though the Revenue submits that he had statutory powers to do so. The Assessee was asked to show cause u/s 251(2) vide notices/order sheet dated 23.9.2016, 24.10.2016 and 4.11.2016. The order was passed on 7.11.2016 after several hearings since the first hearing. The records of proceedings and notices issued have been reproduced in the order of CIT(A). So the principles of natural justice were also complied with.
3. As discussed from para 8 onwards of the order of CIT(A) , the taxation of life insurance companies needs to be explained first. The taxation of life insurance companies in India has gone through several changes over the last hundred years. Globally, there are two methods of assessing taxable income of life insurance business. In life Insurance companies, these are two funds, the shareholder's fund and the policyholder's fund. Unlike in other industries share holder's fund does not play an active role in running the business and remains invested. The profits and gains from life insurance business can be computed by two methods.
50
Max New York Life Insurance Company Ltd.
(Now known as Max Life Insurance Company Limited).
3.1 In the first method, the profits and gains of life Insurance business is defined as income minus expenses or net income. The income here means, the investment income only. Not all the expenses are allowed as deduction.
3.2 In the second method, the taxable income of life insurance business is defined as income minus outgo minus increase in liability. In this method, the income is the sum of premium income, investment income and any other miscellaneous income in policyholder's account. The outgo is the sum of payments to policyholders and allowable management expenses related to insurance business. The increase in liability is the difference in the total liability towards policyholders at the end of the year and at the beginning of the year. A life insurance company incurs a liability whenever a policy is issued and an additional liability when renewal premium is received. This liability is estimated by actuarial techniques using appropriate discounts and probability factors. The profits and gains of life insurance business as per the second method is technically known as the 'Valuation Surplus'. 3.3 In case of a new company with reasonable growth rate, net income as per the first method will be negative for a long period. However, valuation surplus may become positive after few years. The position gets reversed as the company matures and the net income as per first method may start exceeding the valuation surplus as per the second method. Therefore, while the net income method may suit the new companies, the valuation surplus method may suit the companies once they matured.
3.4 A life insurance company may also have income from investment activity out of shareholders fund and corresponding investment income, net of allowable expenses becomes investment income of shareholder's fund. The sum total of the investment income in the shareholder's account (net of allowable expenses) and the profit and gains of the life insurance business as per the first method or the second method discussed above becomes the total taxable income.
3.5 Before 1918, the life insurance companies in India, were being assessed on profits like other trading companies and the procedure for determining the profit had evolved departmentally. The Income Tax Act, 1918 and 1922 gave statutory recognition of these procedures. Later, till 1939, taxation of life insurance companies was governed by the Income Tax Act 1932 and Rules 25 51 Max New York Life Insurance Company Ltd.
(Now known as Max Life Insurance Company Limited).
and 35, and the average annual valuation surplus with certain adjustments was taxed without reducing the surplus allocated back to policy holders. Since then, representations were made by respective associations and the manner of assessments of life insurance companies underwent several changes. After nationalization of life insurance business, we only had Life Insurance Corporation of India.
3.6 Prior to A.Y. 1977-78 the profits and gains of life insurance business were taxed at 52.5 % (excluding surcharge). The profits and gains of life insurance business were taken a greater of the Net Income (First Method) and Valuation Surplus (Second Method). While computing valuation surplus a deduction of 80 % of valuation surplus allocated to policy holders was also allowed Regarding other expenses also ceiling was prescribed. The allowable deduction of valuation surplus allocated to policy holders was 50 % earlier. Income Tax Investigation Commission appointed in 1948 had rejected the demand of industry for raising the limit of deduction of valuation surplus allocated to policy holders from 50 % to 100 %. However, Income Tax Act 1961 [Rule 2(1) of first schedule] raised it to 80 %.
3.7 The rate of 52.5 % was lower than corporate rate of taxation of 55 % at that time and LIC of India was the only company in this business. As per LIC Act, 95% of its valuation surplus was allocated to policyholders. This meant that {100 - 80% of 95} % of valuation surplus was taxed which came to {100- 76} % or 24 % of the valuation surplus. So 24 % of Gross Valuation Surplus was taxed at 52.5 %. But 52.5 % of 24 % comes to 12.6 % . Therefore, in other words Net Valuation Surplus was taxed at 52.5 % OR the Gross Valuation Surplus was taxed at 12.6 %. In the meeting of Consultative Committee of Ministry of Finance in 1974, a simple method for taxing the Gross Valuation Surplus (i.e. without deduction of allocation of surplus to policy holders) was proposed instead of complicated methods of determining higher of the Net income or the Net Valuation Surplus. Consequently a significant change came from Finance Act 1976, when section 115B was introduced, which provided that the profits of life insurance business (Policy Holder's Account) shall be taxed at 12.5 % of Gross Valuation Surplus. Essentially it was only a simplification of computation, while the tax rate (12.6 % of Gross Valuation Surplus) remained almost the same. It was a fair deal as even after reduction of corporate tax rates, if the original condition that X % of Valuation Surplus should not be less than the tax at corporate 52 Max New York Life Insurance Company Ltd.
(Now known as Max Life Insurance Company Limited).
rate on higher of Net Income or Net Surplus is applied, the value of 'X' would be higher than 12.5 % more so as when a company grows, rate of growth of Net Income is higher than rate of growth of Net Surplus.
3.8 Therefore, assessee's claim of deduction of allocation of surplus to policy holders goes against the very premise of section 44, First Schedule and section 115B. Explanatory notes/memorandum/commentary to Finance Act 1976 would also establish this. For reference , page 4150 to 4154 of Fifth Edition of the Commentary by Chaturvedi & Pithisaria is enclosed. Para 40.2 on page 4153 clarifies the issue involved i.e. w.e.f. AY 1977-78, no deduction for surplus allocated to policy holders is to be allowed as a deduction. The tax rate had been reduced only to compensate for the same. After opening up of the sector for private sector and amendment to section 49 of Insurance act, only 10 % of surplus can be allocated to shareholders as far as participating policies are concerned. For non participating policies 100 % of surplus goes to shareholders. It contains CBDT circular No. 202 dated 5-7-1976 as well which clarities that after introduction of section 115B, Bonus to policy holders is not an allowable deduction.
3.9 A paper by R. Ramakrishnan, Consultant Actuary published in "The Actuary India October 2008" also explains the history of taxation of Life Insurance Business in India. Relevant pages of that are also enclosed for reference.
4. For the year under appeal, the taxation of insurance companies is governed by section 44, read with First Schedule of the Income Tax Act. As per the same, the profits and gains shall be the valuation surplus at the end of the year after excluding from it any surplus or deficit included therein of earlier assessment years. Thought, the First Schedule talks of average surplus, that is no longer relevant as actuarial valuation is now done every year as against once in three to five years earlier.
4.1 The Apex Court in the case of Life Insurance Corporation of India, reported in 51 ITR 773 held that ITO has no power to make any adjustment in actuarial valuation, except u/r 3(b) with the permission of Controller of Insurance. This decision has been relied on by the Apex Court in the case of General Insurance Corporation of India reported in 240 ITR 139 as well. In the said decision in respect of Insurance business other than life insurance, the Apex 53 Max New York Life Insurance Company Ltd.
(Now known as Max Life Insurance Company Limited).
Court again reiterated that the AO is bound to follow the scheme of computation given in the First Schedule for Insurance business. 4.2 Indian life insurance sector was opened up in year 2000 for private players IRDA, a regulatory t body was constituted under IRDA Act, 1999 in place of Controller of Insurance to provide for governing rules and regulations. Significant changes were brought out/ new regulations were introduced under IRDA Act. New accounting formats were also introduced. Two separate accounts were prescribed as under: -
a. Policyholders' Account (A-RA) known as Revenue account (Technical account) b. Shareholders' Account (A-PL) known as Profit & Loss account (Non- Technical account) New format of Valuation Balance Sheet (i.e. Form I) was introduced. However, as explained with illustrations by CIT(A), the taxable income of an assessee before IRDA regulations and after IRDA regulations does not change.
4.3 Assessee also sought to create confusion of old forms G,H,I of Actuary Reports prior to IRDA Regulations. However para 12.1 of the order of CIT(A) reproduces relevant portion of section 13(1) of the insurance Act 1938 (4 of 1938) as unde:-
"13 (1) Every insurer carrying on life insurance business shall, in respect of life insurance transacted by him in India, and also in the case of an insurer specified in sub-clause (a)(ii) or sub-clause (b) of clause (9) of section 2 in respect of all life insurance business transacted by him, every year cause an investigation to be made by an actuary into the financial condition of the life insurance business carried on by him, including a valuation of his liabilities in respect thereto and shall cause an abstract of the report of such actuary to be made in accordance with the regulations contained in Part - I of the Fourth Schedule and in conformity with the requirement of Part
-II of that Schedule :...................................................,.......
Provided also that every insurer on or after the commencement of the Insurance Regulatory and Development Authority Act, 1999, shall cause an abstract of the report of the actuary fo be made in the manner specified by the regulations made by the Authority".54
Max New York Life Insurance Company Ltd.
(Now known as Max Life Insurance Company Limited).
4.4 So the actuary report as per new regulations has to form basis of taxation. However, as explained from para 7.1 onwards of the order of CIT(A), and more particularly para 9.2.1 onwards, there is no fundamental difference in old and new reports in the sense that both lead to same results.
4.5 Without prejudice to the same Para 11 of the order of CIT(A) is also reproduced herein under;
"For reference para I.I of appellants reply dated 05.10.2016 is reproduced here is under:-
1.1 it is respectfully submitted that the taxable income of a life insurance company since 1976 is to be determined on the basis of the earlier Revenue Account and Valuation Balance Sheet (erstwhile Insurance Act, 1938) which account for all incomes and outgoings of the life insurance company including premiums, dividends income, interest and the associated outgo. It is further respectfully submitted that the current reporting requirement (in Form A-RA and A-PL) is pari materia to the old reporting requirement i.e. earlier Revenue Account and Valuation Balance sheet ('Form I'). Therefore, the assessee has determined his taxable income in a consistent manner."
4.5.1 The CIT(A) has determined the taxable income from forms A-RA and A-PL only. The dispute was not related to old or new formats of Actuary Reports. For reference para 13.1 to 13.6 of the order of CIT(A), reproduced herein under "13.1 The dispute actually involves the following issues only:
1. Whether incremental FFA(Rs.62,29,38,000 -
Rs.16,94,60,000) of Rs.45,34,78,000/- should be taxed? (Opening FFA is to be reduced as it is a surplus pertaining to earlier years.)
2. Whether allocation of surplus to policy holders 143,28,62,000/- should be taxed.
55
Max New York Life Insurance Company Ltd.
(Now known as Max Life Insurance Company Limited).
3. Whether the amount transferred from share holders account to policy holders account of Rs. 58,62,00,0007-, which is a part of actuarial surplus as perform I, should be taxed?
4. Whether income of share holder's account is to be taxed at normal rates. [Not very relevant in this appeal as Share Holder's A/c has net loss as mentioned later in para 16.]"
13.2 As per appellant, the answer to all the three questions above is 'NO'. There may not be any dispute regarding question no. 3, in view of the decision of Hon'ble ITAT, Mumbai in the case of ICICI Prudential Co., Ltd. (supra) and therefore, the stand of the appellant is accepted. However, if answer to question no. 1 and 2 is YES, then the taxable profits from life insurance business would be as under:-
Rs.
44,72,60,000 - Shown by appellant 45,34,78,000 - [Sr. No. 1 supra] 143,28,62,000 - [ Sr. No. 2 supra] 233,36,00,000 Then the, taxable income before set off of brought forwarded losses would be computed as under:
Profits of Life Insurance 2333600(000)
business
Investment income 398160(000)
Misc. Income in share holder A/C 299(000)
Total 2732059(000)
Less
Expenses in share holder A/c 1078063(000)
Balance 1653996(000)
Less: Provisions (-)23204(000)
Balance 1677200(000)
Less:- 10(23AAB)Profit 8211(000)
56
Max New York Life Insurance Company Ltd.
(Now known as Max Life Insurance Company Limited).
Add: Royalty for use of Broad 617857(000)
License
Balance 2286846(000)
13.3 Now, we may examine the reconciliation of above figures with that shown by the appellant.
(Rs) Income worked-out in the above table 2286846(000) Less : Surplus Allocated to policy holders 1432862(000) 853984(000) Less: Incremental FFA 457438(000) Income as per computation of income as per appellant 400506(000) 13.4 From the above reconciliation it is apparent that the dispute is not related to old form G, H, I or new form I, H, A-PL and A- RA. The dispute is only about following two items Incremental FFA (Rs.62,29,38,000- Rs.16,94,60,000) of Rs 45,34,78,000/- Allocation of surplus as bonus to policy holders of Rs.143,28,62,000/- This is so as once we aggregate Share Holder's Account (A-PL) and Policy Holder's Account (A-RA), the transfer from A-PL to ARA of Rs. 58,62,00,000/- cancels out and the issue of its reduction become irrelevant. Since A-RA shows the surplus after allocation of bonus to policy holder's account, the dispute of Rs. 143,28,62,000/- remains. Moreover, since, FFA has not been considered as a part of taxable income the issue of Rs. 45,34,78,000/-also remains. If we take profits of life insurance business as per new form I, then also the dispute is of these two amounts only.
57
Max New York Life Insurance Company Ltd.
(Now known as Max Life Insurance Company Limited).
13.6 The detailed analyses in preceding paragraphs has been made only to explain the computational complications created by appellant. In simple terms, the taxable income of the appellant, as per First Schedule, can be computed as under:-
Closing Balance of surplus as per new form 'I' 3089260(000) Less Amount transferred to policy holder's A/c from share holder's A/C 586200(000) Less opening FFA 16,94,60(000) Balance Surplus being income from life insurance business 23,36,00(000) Which is the same figure as in para 13.2 (supra) "
4.5.2 It needs to be clarified that in the above portion, the CIT(A) was dealing with the issue of taxable Income pertaining to Life Insurance Business only and not with the allowance of expenses claimed in Shareholders Account, which have been discussed from para 17 onwards of the order of CIT(A).
5. As per para 4.2 of the order of CIT(A), the assessee has worked out its taxable income as under A.Y. 10-11 Share Holder's account (Non Technical Account) In Rs. (000) Transfer from Policyholder's account 1033460 Income from investments 398160 Misc Income 299 Total- A 1431919 Less 58 Max New York Life Insurance Company Ltd.
(Now known as Max Life Insurance Company Limited).
Expenses other than directly related to insurance 1078063 business Contribution to policyholder's account 586200 Provisions (-) 23204 Total -B 1641059 Profit (A-B) in Share Holder's Account A-PL (-)209140 Less -Adjustments in computation of income U/s 10(23AABj for surplus of Linked and Non 8211 linked pension policies Add- Royalty for use of brand licence disallowed 617857 suo moto Taxable Income 400506 5.1 As mentioned in para 4.3 of the order of CIT(A), If we
exclude, the net amount transferred from Policy Holder's Account to Share Holder's Account in above table of Rs. (103346 - 586200) thousands i.e. Rs. 447260 thousands, the appellant has shown a net loss of Rs.46754 thousands in Share Holder's Account (after adjustments made in computation of income). A surplus of Rs. 447260 thousands has been transferred from Policy Holder's Account, resulted in net taxable income (before set off of carried forward losses) of Rs. 400506 thousands.
5.2 As per para 5.2 of the order of CIT(A, the actuarial surplus and its distribution/allocation is as under (all figures in thousands) Form 1 - IRDA regulations- Actuary Report & Abstract Balance of life Insurance 93367246 funds shown in balance sheet Mathematical Reserves 90277986 excluding cost of bonuses allocated (Present actuarial liability of policies) 59 Max New York Life Insurance Company Ltd.
(Now known as Max Life Insurance Company Limited).
Surplus 3089260
Participating Linked Total
Policies Policies
Surplus(break up) 2194332 894928 3089260
Allocation of surplus as
perform A-RA i.e. Policy
Holder's Account
To Policy holders 1432862 0 1432862
To Share holders 138532 894928 1033460
Carried Forward 622938 0 622938
Unappropriated-FFA
2194332 3089260
5.2.1The above surplus includes un-appropriated surplus of earlier years of Rs. 169460 thousands. The remaining surplus of earlier years had already been appropriated/allocated and not included in above REVENUE ACCOUNT (POLICY HOLDER'S All figures are ACCOUNT) in thousand rupees PREMIUMS RECEIVED (NET) 48605388 RE INSURANCE CEDED (-)596797 INCOME FROM INVESTMENTS 19896451 60 Max New York Life Insurance Company Ltd.
(Now known as Max Life Insurance Company Limited).
CONTRIBNITION FROM SHAREHOLDERS 586200 ACCOUNT MISC INCOME 4629 TOTAL RECEIPTS 19890483 EXPENSES COMMISSION 4212087 OPERATING EXPENSES OF INSURANCE 15048109 BUSINESS BENEFITS PAID 5891741 CHANGE IN VALUTAION OF LIABILITY OF 41962018 POLICIES Amount ceded in reinsurance (-)105022 SURPLUS 1486938
5.2.2 This surplus (It excludes allocation of surplus to policy holders) + opening FFA of 16,94,60,000/- has been allocated [reference para 5.3 of the order of CIT(A)]as under:-
a) To Share Holders A/c 103,34,60,000
b) Closing FFA 62,29,38,000
Total 165,63,98,000
6. On the issue of set off past losses, it is submitted that the issue of determination of loss which can be set off u/s 72 pertains to the year in which the set off is claimed. The Hon'ble I.T.A.T Delhi in the case of Lodhi Properties Co. Ltd, reported in 36 SOT 128 has also held so.
6.1 The CIT(A) in para 16 has held as under;61
Max New York Life Insurance Company Ltd.
(Now known as Max Life Insurance Company Limited).
"The set off has to be of the amount of loss from shareholder's account (after adjustments made in statement of income and additions made/sustained in the assessment order) after excluding transfers to and from policyholder's account and actuarial deficit arrived at by reducing from surplus as per new annexure I, the amount transferred from shareholder's account to policy holder's account in that year."
The above finding is in accordance with the decision of Hon'ble ITAT, Mumbai in the case of in the case of ICICI Prudential Insurance Company Ltd, reported in 140 ITD 41. However, the loss whose set off has been claimed is not the deficit as per section 44 of the I.T. Act and the assessee did not furnish the actuary report, A-RA and A- PL and computation of Income of the year, whose loss was claimed for set off before the CIT(A), though asked 6.2 Without prejudice to the above the deemed profits and gains of life insurance business are taxed at a concessional rate of tax and set off of loss of regular business against the same may not be permissible. Moreover, as per the First Schedule, at the time of "Computation of profits of life insurance business", "profit and gains of the life insurance business" is taken as "the surplus or deficit disclosed by the actuarial valuation" excluding "from it any surplus or deficit included therein which was made in any earlier inter- valuation period". This essentially precludes carry forward of losses. The set off of carried forward losses under section 72 is a part of computation of income under the head business or profession The provision of Section 72, are of general nature and since the special provisions in the legislation always override the general provisions, the provisions of the First Schedule would override the provisions of section 72 so far as life insurance business is concerned. 6.3 An illustration of impact of deficit in actuarial valuation is given as under:
YEAR 1 Year 1 , A Year 1 ,B Year 2, C Year 2, D CLOSING Increase in Increase in POSITION Funds liabilities Funds 80 40 30 20 Liabilities 40 50 25 30 Surplus 40 (-)10 5 (-)10 62 Max New York Life Insurance Company Ltd.
(Now known as Max Life Insurance Company Limited).
YEAR 2 A+C A+D B+C B+D
CLOSING
POSITION
Funds 110 100 70 60
Liabilities 65 70 75 80
Surplus 45 30 (-)5 (-)20
Break up of 40 + 5 40-10 -10 + 5 -10 - 10
surplus
6.3.1 However, if surplus of year 1 is distributed/allocated, the above calculations fail and the surplus in new annexure 'I' would have only the difference of 'Increase in Funds' and 'Increase in liabilities' during the year in addition to opening FFA (which is the remaining surplus of earlier years) besides, the amount transferred from Shareholders account during the year. Para 14 of the order of CIT(A) {record of order sheet proceedings} also confirm this fact.
52. Again on 12.12.2017, the learned DR made the following submissions:
"In continuation of earlier submission in addition to oral arguments which may be made at the time of hearing, the Revenue wishes to further submit as under:-
1. The compilation of case laws filed by assessee are old case laws, some of which pertain to the period prior to Income Tax 1961.
In fact some are of foreign courts and some are of 1930s. The remaining are in different context. As submitted earlier a judgment is to be seen only in the context of facts and law as it existed at that time. In the present appeal not only the law is different but also the facts. Moreover, once legal fiction has been created for computation of income, case laws dealing with the concepts of accrual of income and expenditure in general have no applicability in the present case.
2. Moreover, obiter dicta or general discussions in decisions given in different context while dealing with other sections like 148, 63 Max New York Life Insurance Company Ltd.
(Now known as Max Life Insurance Company Limited).
263 etc. cannot override legal fiction created by statute which is to be construed strictly
3. As regards Rule 5 of First Schedule of Income Tax, it earlier provided for filing of Annual Report before Controller of Insurance. It never mentioned that accounts were to be maintained as per Insurance Act. However it provided for certain adjustments to the said profit. In view of the same and certain adverse court decisions, it had to be amended
4. As regards Rule 2, it talks of Insurance Act, which has substantive provisions and separation of Share Holder's Account and Policy Holders Account is a part of substantive provisions and not any regulations. Earlier only LIC existed and it provided 95 % of surplus to be paid to policyholders. After privatization, shareholders can use the surplus (which becomes part of their funds) for various purposes. Like the assessee has paid royalty and donation. Shareholders funds are now required mainly for maintaining solvency margin.
5. The concept of Life Insurance Fund and Total Funds of business is different. The returns from investments of Life Insurance funds forms part of actuary surplus whose distribution to policy holders and shareholders is regulated. The return on shareholder's funds does not go as allocation of profit (or surplus) to policy holders. So it is not a part of actuarial surplus. The situation before privatization and after privatization is not the same.
6. The concept of profit of life insurance business u/s 44 read with first schedule is a legal fiction and general concepts of profit cannot be imported into it. A legal fiction is to construed strictly. Concept of surplus is a premium linked issue as liability is incurred in respect of premium and not shareholder's funds, which are required only for maintaining solvency margin. The income on that is business income, which may, in common parlance, even be called income from life insurance business but it is not the same as artificially(legally) defined " profits of life insurance business" u/s 44 read with first schedule which alone is taxable u/s. 115B(1)(i). The income of shareholders account is taxable u/s 115B(1)(ii). Even in the case of ICICI Prudential Insurance Company Ltd, reported in 140 ITD 41, the issue was taxability of income in shareholder's account under the head 'other sources'.
64
Max New York Life Insurance Company Ltd.
(Now known as Max Life Insurance Company Limited).
7. Moreover, and without prejudice to the above, section 44 read with First schedule are provisions for computation of income. Section 115B provides rate of tax. Any interpretation by courts of section 115B cannot be imported into section 44 read with First schedule. The Court decisions holding that income in shareholder's account is taxable at concessional rate u/s 115B only decide about rate of taxation and not computation income.
8. Without prejudice to the above and all earlier submissions, the Revenue submits that even the transfer of funds from shareholder's account to policyholder's account should not be excluded from taxable actuarial surplus. However, it is to be treated as allowable expenditure in shareholder's account. This is so as actuarial surplus is computed with reference to life insurance fund and such amount transferred becomes part of life insurance fund and remains so. This explains the dilemma expressed by Hon'ble ITAT Mumbai in the case of of ICICI Prudential Insurance Company Ltd, reported in 140 ITD 41. The order of Hon'ble ITAT is sub-silentio on this issue. Though the CIT(A) has followed the above decision to a limited extent (The appeal against the same has been admitted by Hon'ble High Court), the Revenue submits under rule 27 of ITAT Rules, that even that was not in accordance with express provisions of law. The Hon'ble ITAT has plenary powers u/s 254(1), as held by the Apex court in the case of M/s NTPC Ltd to consider any additional ground which goes onto the root of the matter and courts have held that such a plea can even be raised orally at the time of hearing. A compilation of such case laws is enclosed (262 ITR 325, 223 ITR 173, 29 ITR 799, 124 ITD 181).
Subsequently, on the last date of hearing, the DR filed another set of written submissions in respect of additional ground raised by the assessee, which reads as under:
"2. In view of the same the Revenue submits as under:
a)The Revenue in para- 6 on page 12 of the submission filed on 24.10.2017 has relied on the decision reported in 36 SOT 128 65 Max New York Life Insurance Company Ltd.
(Now known as Max Life Insurance Company Limited).
holding that the issue of set off of carried forward losses is to be examined in the year in which the set off is claimed.
b) In the order u/s 154 of CIT(A) dated 7.2.2017, which merges with the order under appeal, the CIT(A) has given an illustration in para 5.1 of the order on the issue of set off of losses. Revenue relies on the same.
c) On the issue of admissibility of additional ground of appeal filed by assessee, the Revenue relies on the decisions reported in 111 ITR OOl(SC), 301 ITR 17 (Alld) and the decision in the case of Ultra Tech Cement Ltd, dated 18.4.2017 of Hon'ble Bombay High Court in ITA No. 1040 of 2014 and submits that the additional ground should not be admitted as no such claim was made in the return. The Revenue also relies on the decision of the Apex Court in the case of Goetze India Ltd.
d) On merits of additional ground of the assessee, the Revenue submits that section 10(23AAB), being exemption of income of pension funds has been specifically given to assessee. For section 10(34), the section 44 read with First Schedule would apply, and exemption would not be available as far as policyholders funds are concerned. For shareholder's funds, if it held that section 10(34) applies then section 14A also applies. Since the only activity in shareholder's account is of investment, it cannot be said that no expenditure was incurred for earning dividend income. Since this issue was not there before AO or even CIT(A), it has not been examined by them. Without prejudice to the same, the transfer of such exempted income (if so held) from shareholder's account to policy holders account amounts to double deduction, if such transfer is excluded from the actuarial surplus as held by the CIT(A).
e) In respect of copy of LIC Act filed sections 5,26, 28, 28A, 30, 37 and 43 may kindly be referred to in support of Revenue's arguments made in the hearing.
f) As regards the Query of the Honb'le Bench regarding interpretation of words "On behalf of the policy holder" in the circular No 202 dated 5.7.1976, being explanatory notes on Finance Act 1976, it is submitted that the said words are to be read context of Rule 3{a) of First Schedule of Income Tax Act, which was deleted as the Circular only explains the corresponding amendment and can not be interpreted in isolation, if we read un-amended Rule 66 Max New York Life Insurance Company Ltd.
(Now known as Max Life Insurance Company Limited).
3(a), we notice that the same words have been used there in as under "Four-fifth of the amounts paid to, OR reserved for OR expended on behalf of policy holders...."
As per Standard English and rule of its Grammer it means Paid to (policy-holders) OR Reserved for (policy-holders) OR Expended on behalf of (policy-holders) The circular 202 dated 5.7.1976 explains the reason for omitting Rule 3(a). So no other interpretation can be given to it."
g) In respect of copies of old Insurance act of 1938 (before IRDA Act 1999), placed from page 48 to 72 of Annexure to written submissions filed on 11-12-2017, kind attention is invited to page 59 to 61, which refer to P & L Account, P & L Appropriation Account and Revenue Account not as synonyms. However, the Revenue submits that after amendment of Insurance Act 1938 by IRDA Act 1999, any reference to or reliance on the said old Act is not required as it does not exist."
53. The learned DR during the course of hearing drew our attention towards Circular 202 dated 05.07.1976 in which under para 40.2, the reason for bringing amendment by Finance Act, 1976 for allowing the tax @ 12.5% on the profits and gains of Life Insurance business was explained as under:
"40.2 Under the amendment made by the Finance Act, 1976, the method of determining the profits on the basis of gross external incomings, as stated at (a) in the preceding paragraph has been dropped and the profits and gains of a life insurance business will, 67 Max New York Life Insurance Company Ltd.
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in all cases be taken to be the annual average of the surplus arrived at by adjusting the surplus or deficit disclosed by the actuarial valuation made in accordance with the Insurance Act in respect of the last inter-valuation period ending before the commencement of the assessment year, so as to exclude therefrom any surplus or deficit which was made in any earlier inter-valuation period. No further adjustment to the annual average of the surplus so arrived at will be made. In other words, no further deduction will be allowed in respect of any portion of the amount paid or reserved or expended on behalf of the policy-holders nor will the expenditure and allowances which are not deductible under the provisions of section 30 to 43A be added back. The profits and gains of life insurance business so arrived at will be charged to tax at the rate of 12 ½ per cent as explained in paragraph 37""
54. In the rejoinder, the learned AR submitted that Section 44 read with Rule 2 of the First Schedule provides for taxation of income from Life Insurance business. As per Rule 2 surplus or deficit is determined by way of actuarial valuation is treated to be income of the life insurance business. The term "actuarial valuation" has not been defined in the Act. Therefore, in the absence of any specific definition, its ordinary meaning as understood in the common parlance has to be taken. Thus, it will mean a value that is determined by an actuary as per the rules and norms of actuarial valuation. In life insurance business, the actuary is required to value the liability that arises on account of writing life insurance policies, the likely future liabilities that the insurer may have to bear on account of maturity/death/surrender of policies. All these are valued based on principles of actuarial probability and statistical tools. The future value thus worked out has to be discounted to ascertain present value which represents the present liability (i.e. on the date 68 Max New York Life Insurance Company Ltd.
(Now known as Max Life Insurance Company Limited).
of valuation) on the life insurance business. When such estimated liabilities along with other expenses that are incurred during the valuation period are reduced from the income generated from the life insurance business during the valuation period, the surplus/deficit is arrived at and it is deemed to be the income from life insurance business. The actuarial valuation of future liabilities includes: (a) bonus amounts that the policyholders have become entitled to receive but have not received (the same would be distributed in future); and (b) amount set aside for future distribution of bonus for the exclusive benefit of the policyholders (known as Fund for Future Appropriation). Though Income-tax Act does not provide any definition or guidance regarding the term "actuarial valuation", IRDA Regulations stipulated that actuarial valuation would take into account amount set aside for bonus payments to policyholders in future.
55. Our attention was invited towards the Preparation of Financial Statements and Auditor's Report of Insurance Companies Regulations, 2000 especially to Clause 6 thereof, which has been reproduced herein above, pointing out Liability for life insurance policies in force includes all future claims (including bonus entitlements of policy holders). Attention was also invited to Clause 12 (b) and Clause 43 of IRDA Regulations 2013. As per Clause 12B, it is mandatory to declare bonus annually while Clause 43 provides that all insurance products shall provide the prospective policyholder a customized benefit illustration, illustrating the guaranteed and non- 69
Max New York Life Insurance Company Ltd.
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guaranteed benefits at gross investment returns of 4% and 8% respectively and as specified by IRDA or Life Insurance Council from time to time. It is also required that the benefit illustration shall be signed by both the prospective policyholder & the intermediary and shall form part of the policy document. He also invited our attention towards the definition of )"non-par policies" or "policies without participation in profits" as defined by IRDA (Actuarial Report and Abstract of Life Insurance Business) Regulations 2016 and on that basis contended that participating policy holders are entitled to participate in the surplus/profits. Before us reliance was also placed on sample benefit illustration. The relevant extract thereof is reproduced hereunder:
"(4) Accrued Reversionary Bonus: Reversionary Bonus will be declared each year post completion of second policy year depending on the experience of the company. Once declared reversionary bonus is guaranteed to be paid out on the earlier of Surrender (only cash value) or Maturity. Reversionary bonus is primarily driven by investment in fixed interest securities such as government and corporate bonds and is expected to be relatively less volatile as compared to Terminal Bonus.
(5) Terminal Bonus is an additional bonus paid only ONCE on the earlier of surrender or maturity, provided the policy has been in force for at least 5 complete policy years. Unlike Reversionary Bonus which once declared becomes guaranteed, Terminal Bonus is NOT GUARANTEED and is expected to move in line with the value of the overall assets, more specifically with the value of the growth assets like equity/property. Under the economic scenario of lower investment returns, the Terminal Bonus is likely to reduce. Please note that on surrender, only surrender value of Terminal Bonus, if any, is payable."70
Max New York Life Insurance Company Ltd.
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On this basis it was contended that the policy holders have a reasonable expectation of receiving bonuses in future and the company is legally obliged to ascertain the same and provide for its future discharge. This liability is determined by the actuary based on scientific principles.
56. Attention was also drawn towards the written submissions of the learned DR, wherein it has been stated that unlike in other industries, in life insurance business, shareholders' fund does not play an active role in running of business and remains invested. On this it was submitted that this is factually incorrect as shareholders' funds are regularly used to meet the regular expenses of life insurance business and to meet the deficit in policyholders' account, if any. The shareholders funds are basically required to maintain solvency margins stipulated by IRDA.
57. With regard to the old Rule 2 of Schedule 1, brought in by Finance Act 1976, it was contended, that profits and gains of life insurance business were taken greater of Net Income (First Method) and Valuation Surplus (Second Method) and Rule 3 restricted the deduction to 80% of bonus paid to or reserved for or expended on behalf of policyholders. From 01.04.1976, the first method was deleted from Rule 2 and, thus, profits and gains of life insurance business was to be taken as the Valuation Surplus / Actuarial Surplus and under this method there is no such restriction for allowing deduction to 80% of bonus. With reference to the reliance placed on the CBDT Circular No. 202 dated 05.07.1976, it was submitted that the words in 71 Max New York Life Insurance Company Ltd.
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the explanatory memorandum were only meant for Rule 2 as it existed prior to the amendment allowing use of greater of the two methods. It was not meant to limit the scope of the meaning of actuarial surplus, which has not gone through any amendment. If the legislature intends to change the meaning of actuarial surplus by disallowing deductions for bonus and FFA in calculating the actuarial surplus, the statute should and would have expressly provided for the same. Deduction of bonus/FFA arises not because the statute provides for these amounts as deductions but because the actuary recognizes the same as accrued liabilities. The CBDT Circular can be used as an aid of construction only when there is lack of clarity regarding a statutory provision. In this regard, reliance is placed on the judgments of Nawab Sir Mir Osman Ali Khan vs. Commissioner of Wealth-tax 162 ITR 888 (SC); Principle Chief Conservator of Forest & Anr. vs. JK Johnson 10 SCC 794 and State of Maharashtra vs. Marwanjee P. Desai &Ors 2 SCC 318. In these decision it was held that when the language of the statutory provision is plain and clear, no external aid is required and the legislative intention has to be gathered from the language employed. Our attention was also drawn towards the decision of the Hon'ble Supreme Court in the case of Tarulata Syam & Ors vs. CIT 108 ITR 345 (SC).
58. It was further submitted that Rule 2 of First Schedule does not refer to any deduction but merely refers to actuarial surplus or deficit determined in accordance with Insurance Act, 1938. Actuarial surplus/deficit is an amount 72 Max New York Life Insurance Company Ltd.
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that is computed after providing for liabilities on account of future bonus payments set aside for the benefit of the policyholders - both by way of bonus allocation as well as Funds For Future Appropriation. The old forms G, H and I prescribed under the Insurance Act 1938, clearly provided for the same. Attention was drawn at the cost of repetition towards the decision of Hon'ble Supreme Court in the case of LIC of India v. CIT (supra), and the decision of the Tribunal in the case of ICICI Prudential Insurance Co. Ltd. vs. ACIT140 ITD 41 (supra), wherein it was held that actuarial surplus or deficit has to be determined in the manner provided in Old Forms G,H and I. Therefore, any amount which is recognized as an actuarial liability has to be necessarily reduced while arriving at the surplus. Under the new method of presentation, IRDA has stipulated that Shareholders Accounts and Policy Holders Accounts are to be shown separately though a consolidated balance sheet would be required to be drawn up. New Forms require the detailed disclosure but the norms regarding actuarial valuation have not been altered to negate the recognition of actuarial liabilities by way of bonus allocations to the policyholders. Attention was drawn towards the order of the CIT(A) where he also agreed that in material terms and in substance there is no difference between the old and new forms - they differ only in the manner of presentation. The question therefore relate only to whether there has been any change in the treatment of actuarial liability recognized for future payments of bonus to policyholders. The learned CIT(A) himself contradict 73 Max New York Life Insurance Company Ltd.
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the findings in this order, when on one hand he states that the new Form A- PL, A-RA and I govern the computation of income from life insurance business and on the other states that there is no difference between the new and old forms. A deduction which is otherwise allowable as accrued liability cannot be taken away by way of CBDT Circular.
59. Under the rule of literal interpretation, the term actuarial surplus is to be interpreted in its ordinary meaning. And such surplus is the amounts available after providing for all determined by the actuary. It is not correct to say that CBDT Circular controls the interpretation of Rule 2. Its application is to be necessarily limited to amounts paid or reserved or expended on behalf of the policyholders. It does not use the same expression as used in erstwhile Rule 3 (a) - "amounts paid to or reserved for or expended on behalf of policy holders". The CBDT circular has limited application to situation where the insurance benefits are assigned to third parties and where benefits are to be paid/reserved/expended on behalf of the policyholders for the assignees. Under these circumstances, the company acts as an agent for the benefit of the policyholder. The term "on behalf of", as per the definition contained in the Law Dictionary by D.P Mittal and Law Lexicon Encyclopedia Law Dictionary, implies an agency relationship. Even otherwise, it was submitted that if it is presumed without conceding that the CBDT Circular was meant to curtail the meaning of the term "actuarial surplus", the same cannot be a permissible way of interpretation of statute as no such legislative intent is 74 Max New York Life Insurance Company Ltd.
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evident from the Rule itself. In this regard, our attention was invited to the decision of Hon'ble Supreme Court in the case of CIT vs. Hero Cycles 228 ITR 463 and State Bank of Travancore vs. CIT 158 ITR 102. If CBDT circular is given full effect to even the amounts paid during the year as bonus to policyholders would be taxable, but this is not the case of the Revenue. The Revenue tried to tax the bonus declared and the incremental FFA.
60. So far as the calculation of the tax @ 12.5% on the basis of 52.5% rate applicable to Insurance companies is conjectural in nature and this cannot be used to interpret a provision where there is no ambiguity. The reason for reducing the tax rate to 12.5% is not relevant for interpreting Rule 2.
61. Coming to the submission of the learned DR regarding Section 115B that second limb of it will become redundant, it was submitted, life insurance companies cannot carry on any other business. However, they may have income which is not arising from life insurance business such as interest on income tax refund, which is meant to be taxed under Section 115B(ii).
62. With regard to the contention of the DR for the set off of losses for which it placed reliance on the judgment of the Hon'ble ITAT in the case of Lodhi Property Co. Ltd. vs. CIT 1 ITR (IT) 1040, it was submitted that the said case has no application since in that case an order was passed by CIT under Section 263 of the Act where the CIT observed that the assessment was completed after the due date. Further, it was held that the computation of loss has to be done in the relevant year itself and only the Assessing 75 Max New York Life Insurance Company Ltd.
(Now known as Max Life Insurance Company Limited).
Officer dealing with the assessment of the subsequent year in which any claim of set off of loss is made can decide the issue. Thus, it was submitted that the Assessing Officer in the subsequent year cannot re-compute the losses of prior years.
63. With regard to the additional ground pertaining to claim of exemption under Section 10(34) of the Act, the learned AR referring to the contention of the learned DR in the written submissions, contented that the submission made by the DR is contrary to the decision of the Tribunal in the case of ICICI Prudential Life Insurance Co. Ltd (supra), wherein it has been held that a Life Insurance company is entitled to claim exemption of dividend income under section 10(34) of the Act, which was also confirmed by the Hon'ble Bombay High Cour57.
64 We have heard the rival submissions and carefully considered the same along with the order of the tax authorities below. We have also gone through the case laws, relevant provisions of the Income Tax Act, Insurance Act as well as IRDA regulations notified from time to time and referred to before us during the course of the hearing from both the sides along with the material and the documents brought and referred to during the course of hearing.
65. Ground no.1 is general and therefore does not require any adjudication. Ground no.2 and 3 deals with finding of the CIT(A) that the profit disclosed by the assessee in the shareholder's Profit and loss account 76 Max New York Life Insurance Company Ltd.
(Now known as Max Life Insurance Company Limited).
(Form A-PL) is not the profit derived from Life Insurance business and therefore the provisions of section 44 read with Schedule First of the Income Tax Act are not applicable. Before deciding this issue, it is necessary to look into the relevant provisions of Income Tax Act which are reproduced as under:-
Section 44:
"Notwithstanding anything to the contrary contained in the provisions of this Act relating to the computation of income chargeable under the head "interest on Securities", "Income from House Property", "capital gains" or "Income from other sources", or in section 199 or in section 28 to 43B, profits and gains of any business of insurance, including any such business carried on by a mutual insurance company or by a co- operative society, shall be computed in accordance with the rules contained in the First Schedule."
The First schedule to the Income tax Act contains three parts, viz A,B & C. Part A which pertains to life insurance business is extracted here under for ready reference as is in existence during the impugned assessment year:
"THE FIRST SCHEDULE INSURANCE BUSINESS A.- Life insurance business Profits of life insurance business to be computed separately.
1. In the case of a person who carries on or at any time in the previous year carried on life insurance business, the profits and gains of such person from that business shall be computed separately from his profits and gains from any other business.
Computation of profits of life insurance business.77
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2. The profits and gains of life insurance business shall be taken to be the annual average of the surplus arrived at by adjusting the surplus or deficit disclosed by the actuarial valuation made in accordance with the Insurance Act, 1938 (4 of 1938), in respect of the last inter-valuation period ending before the commencement of the assessment year, so as to exclude from it any surplus or deficit included therein which was made in any earlier inter-valuation period].
Deductions.
3. .... ...
Adjustment of tax paid by deduction at source.
4. Where for any year an assessment of the profits of life insurance business is made in accordance with the annual average of a surplus disclosed by a valuation for an inter-valuation period exceeding twelve months, then, in, computing the income-tax payable for that year, credit shall not be given in accordance with section 199 for the income
-tax paid in the previous year, but credit shall be given for the annual average of the income-tax paid by deduction at source from interest on securities or otherwise during such period."
Section 115B of the Act provides the rate of tax leviable on profits and gains of life insurance business. The said section reads as under:-
"Section 115B - Tax on profits and gains of life insurance business.
(1) Where the total income of an assessee includes any profits and gains from life insurance business, the income-tax payable shall be the aggregate of -
(i) the amount of income-tax calculated on the amount of profits and gains of the life insurance business included in the total income, at the rate of twelve and one-half percent; and
(ii) the amount of income-tax with which the assessee would have been chargeable had the total income of the assessee been reduced by the amounts of profits and gains of the life insurance business.78
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(2) Notwithstanding anything contained in sub-section (1) or in any other law for the time being in force or any instrument having the force of law, the assessee shall, in addition to the payment of income-tax computed under sub-section (1), deposit, during [the previous years relevant to the assessment years commencing on the 1st day of April, 1989 and the 1st day of April, 1990], an amount equal to thirty-three and one-third per cent of the amount of income-tax computed under clause (i) of sub-section (1), in such social security fund (hereafter in this sub-section referred to as the security fund), as the Central Government may, by notification in the Official Gazette, specify in this behalf:
Provided that where the assessee makes during the said previous [years] any deposit of an amount of not less than two and one-half per cent of the profits and gains o the life insurance business in the security fund, the amount of income-tax payable by the assessee under the said clause (i) shall be reduced by an amount equal to two and one-half per cent of such profits and gains and, accordingly, the deposit of thirty-three and one third per cent required to be made under this sub-section shall be calculated on the income-tax as so reduced."
66. Section 115B was inserted by the Finance Act, 1976 but with effect from 1 June, 1976. It is, therefore, applicable for assessment year 1977-78 and thereafter. At the time of insertion, the section contained only the provisions that were later renumbered as sub-section (1). The scope and effect of the insertion was explained by the Board in a circular as under:
"Rate of tax on profits and gains of life insurance business - New section 115B. -
37.1 As explained in paragraph 40 of this circular, the Finance Act has substantially modified the basis for determining profits and gains of life insurance business. The rate of income-tax to be charged on the profits and gains of the life insurance business determined on the modified basis has been laid down in new section 115B of the Income-tax Act. Under the new provision, in case of a taxpayer having 79 Max New York Life Insurance Company Ltd.
(Now known as Max Life Insurance Company Limited).
income from life insurance business, the income-tax payable on the profits and gains of the life insurance business will be calculated at the rate of 12 ½ per cent of such profits and gains and the remaining income, if any, will be charged to tax at the rates specified in the annual Finance Act.
37.2 This amendment has come into force with effect from the 1st June, 1976, and will apply in relation to the assessment year 1977-78 and subsequent years."
Rule 2 had been amended and Rule 3 stand omitted by the Finance Act, 1976 w.e.f. 1.4.1977. These Rules when in existence read as under:-
"Old Rule 2 read as follows:
"2. Computation of profits of life insurance business. - (1) The profits and gains of life insurance business shall be taken to be the greater of the following:-
(a) the gross external incomings of the previous year from that business, less the management expenses of that year;
(b) the annual average of the surplus arrived at by adjusting the surplus or deficit disclosed by the actuarial valuation made in accordance with the Insurance Act, 1938 (IV of 1938), in respect of the last inter-valuation period ending before the commencement of the assessment year, so as to exclude from it any surplus or deficit included therein which was made in any earlier inter-valuation period and any expenditure or allowance which is not deductible under the provisions of section 30 to 43 in computing income chargeable under the head "Profits and gains of business or profession".
(2) The amount to be allowed as management expenses under sub-rule (1) shall not exceed the aggregate of the following:-
(a) 71/2 per cent of the premiums received during the previous year in respect of single premium life insurance policies;
(b) in respect of the first year's premiums received in respect of other life insurance policies for which the number of annual premiums payable is less than twelve, or for which the number of years during which 80 Max New York Life Insurance Company Ltd.
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premiums are payable is less than twelve, for each such premium or each such year 71/2 per cent of such first year's premiums received during the previous year;
(c) 90 per cent of the first year's premiums received during the previous year in respect of all other life insurance policies;
(d) in respect of all renewal premiums received during the previous year, an amount calculated at such percentage thereof as is permissible under sub-section (2) of section 40B of the Insurance Act, 1938 (IV of 1938), as reduced by any expenditure or allowance which is not deductible under sections 30 to 43 in computing income chargeable under the head "Profits and gains of business or profession".
(ii) Rule 3 was in the following terms:
(a) four-fifths of the amounts paid to or reserved for or expended on behalf of policy-holders shall be allowed as a deduction:
Provided that if any amount so reserved for policy-holders ceases to be so reserved, and is not paid to or expended on behalf of policy- holders, that proportion of such amount (one-half or four-fifths, as the case may be) if it has been previous allowed as a deduction under this Act or under the Indian Income-tax Act, 1922 (XI of 1922), shall be treated as part of the surplus for the period in which the said amount ceased to be so reserved;
(b) any amount either written off or reserved in the accounts or through the actuarial valuation balance sheet to meet depreciation of or loss on the realisation of investments shall be allowed as a deduction, any sums taken credit for in the accounts or actuarial valuation balance sheet on account of appreciation of or gains on the realisation of investments shall be included in the surplus:
Provided that if upon investigation it appears to the Income-tax Officer after consultation with the Controller of Insurance that having due regard to the necessity for making reasonable provision for bonuses to participating policy-holders and for contingencies, the rate of interest or other factor employed in determining the liability in respect of outstanding policies is materially inconsistent with the valuation of investments so as artificially to reduce the surplus, such adjustment shall be made to the allowance for depreciation or to the amount to be included in the surplus in respect of appreciation of such investments as shall increase the surplus for the purposes of these provisions to a figure which is fair and just;81
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(c) interest received during the inter-valuation period in respect of any securities of the Central Government which have been issued or declared to be income-tax free, shall not be excluded, but no income-
tax shall be payable on the annual average of the amount of such interest".
67. CBDT issued Circular No. 202 dated 5th July, 1976 [105 ITR (St pg 22, 43 and 45)] being the explanatory memorandum, with respect to, the Amendment made by Finance Act, 1976, which read as under and has been vehemently referred to by the learned CIT(DR) again and again for the purpose of interpreting why the income-tax rate under section 115B has been reduced from 52.5 per cent to 12.5 per cent for the assessee carrying on life insurance business:-
"9.2 No separate rate schedule has been specified in the case of Life Insurance Corporation of India. This is in view of the position that the basis of taxation of profits from life insurance business has been modified and the rate of income-tax to be charged on the profits and gains of the life insurance business determined on the modified basis has been laid down in new section 115B of the Income-tax Act. These changes have been explained in paragraphs 37 and 40 of this circular."
Rate of tax on profits and gains of life insurance business - New section 115B.
"37.1 As explained in paragraph 40 of this circular, the Finance Act has substantially modified the basis for determining profits and gains of life insurance business. The rate of income-tax to be charged on the profits and gains of the life insurance business determined on the modified basis has been laid down in new section 115B of the Income-tax Act. Under the new provision, in the case of a taxpayer having income from life insurance business, the income-tax payable on the profits and gains of the life insurance business will be calculated at the rate of 12 ½ per 82 Max New York Life Insurance Company Ltd.
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cent. of such profits and gains and the remaining income, if any, will be charged to tax at the rates specified in the annual Finance Act. 37.2 This amendment has come into force with effect from the 1st June, 1976, and will apply in relation to the assessment year 1977-78 and subsequent years. [Section 20 (part) of the Financial Act]. Revised basis for computation of profits of life insurance business - First Schedule.
40.1 The Finance Act has amended the First Schedule to the Income- tax Act with a view to simplifying the determination of profits from life insurance business. Broadly, the profits and gains of a life insurance business are computed at the higher of the two following figures -
(a) the gross external incomings of the nature of rent, interest, etc., of the previous year (but exclusive of premiums received from the policy-holders and interest and dividends on any annuity fund) less the management expenses of that year;
(b) the annual average of the valuation surplus disclosed by the last valuation made under the Insurance Act, 1938, after excluding from it any surplus or deficit relating to any earlier inter-valuation period and deducting 80 per cent. of the amount paid to or reserved for or expended on behalf of the policy-holders. The figure so arrived at is increased by the amount of expenditure and allowances which are not deductible under the provisions of sections 30 to 43A in computing income chargeable under the head "Profits and gains of business or profession.
40.2 Under the amendment made by the Finance Act, the method of determining the profits on the basis of gross external incomings, as stated at (i) in the preceding paragraph has been dropped and the profits and gains of a life insurance business will, in all cases, be taken to be the annual average of the surplus arrived at by adjusting the surplus or deficit disclosed by the actuarial valuation made in accordance with the Insurance Act in respect of the last inter-valuation period ending before the commencement of the assessment year, so as to exclude there from any surplus or deficit which was made in any earlier inter-valuation period. No further adjustment to the annual average of the surplus so arrived at will be made. In other words, no further deduction will be allowed in respect of any portion of the amount paid or reserved or expended on behalf of the policy-holders nor will the expenditure and allowances which are not deductible under the provisions of sections 30 to 43A be added back. The profits and 83 Max New York Life Insurance Company Ltd.
(Now known as Max Life Insurance Company Limited).
gains of life insurance business so arrived at will be charged to tax at the rate of 12 ½ per cent. as explained in paragraph 37. 40.3 This amendment will come into force with effect from the 1st April, 1977, and will accordingly apply in relation to the assessment year 1977-78 and subsequent years. [Section 23 of the Finance Act]."
68. We noted that Section 44 of the Act start with a non-obstante clause and overriding other provisions of the Act, provides for profits and gains from life insurance business to be computed in accordance with the rules contained in the First Schedule to the Act. As per rule 2 of the First Schedule to the Act, profits and gains of life insurance business has to be taken to be the annual average of the surplus arrived at by adjusting the surplus or deficit disclosed by the actuarial valuation made in accordance with the Insurance Act, 1938, in respect of the last inter valuation period ending before the commencement of the assessment year, so as to exclude any surplus or deficit included therein, which was made in any earlier inter valuation period. According this rule as is applicable from A.Y.1977-78, the surplus or deficit between two inter valuation periods disclosed by the actuarial valuation made in accordance with Insurance Act,1938, can only be taken as income or loss of the period. The old Rule 2 which was in existence prior to amendment made by Finance Act, 1976 contains two methods of determining profits and gains of the insurance business and greater of these two method was regarded to be the profit and gains of life insurance business. The first method prescribes calculation of net income = Gross external incomings of the previous year 84 Max New York Life Insurance Company Ltd.
(Now known as Max Life Insurance Company Limited).
from that business less the management expenses of that year. Clause (2) of old rule 2 restricts the deduction of management expenses under old Rule (1). Old Rule 2 (2) refers to average surplus arrived at by adjusting the surplus disclosed in the actuarial valuation made with regard to the Insurance Act,1938 in respect of inter valuation period. We noted by amendment made by Finance Act 1976 Sub Rule (1) of Rule 2 was omitted but sub rule (2) has been substituted by new Rule 2 in amended form, which does not require computation of profit and gains of the life insurance business on the basis of gross external income and deducting therefrom the management expenses. New Rule 2 prescribes the profits and gains of the life insurance business to be taken annual average of the surplus arrived at by adjusting the surplus or deficit disclosed by the actuarial valuation made in accordance with the Insurance Act,1938 in respect of the last inter valuation period ending before the commencement of the assessment year, so as to exclude from it any surplus or deficit included therein which was made in any earlier intern valuation period.
69. We noted that Supreme Court in LIC of India v. CIT : (1964) 51 ITR 773 at Page 778 made the following pertinent observations while interpreting the provisions relating to the computation of taxable income of the life insurance company:
"It is clear that the Income Tax Act contemplates that the assessment of insurance companies should be carried out not according to the 85 Max New York Life Insurance Company Ltd.
(Now known as Max Life Insurance Company Limited).
ordinary principles applicable to business concerns as laid down in section 10, but in quite a different manner. Insurance companies do not compute their profits in the ordinary way because premiums cover risks which run into future eyars and loss includes losses for previous years. The method prescribed ensures that by taking the average of several years a fair and reasonable conclusion is reached. Actuarial estimation plays an important part and surplus only results when there is an excess of the fund over the liability after all other charges are met. The rules which have been quoted lay down two different methods of ascertaining profits. So the annual average of the surplus found by the actuary had to be taken and from it the surplus of the last inter-valuation period had to be deducted as also expenditure allowable under section 10 of the Income Tax Act. This is the basic calculation and they were followed."
The Bombay High Court in Life Insurance Corporation of India vs. CIT :
[1979] 119 ITR 900 summarised the scope of section 44 of the Act in the following terms:-
"... ... It is now well known that so far as the life insurance business is concerned, the computation of the profits has to be made not in the matter in which it is normally done in the case of an ordinary assessee but 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 be 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 with Sch. IV of the Insurance Act. ... ... ..."86
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(Now known as Max Life Insurance Company Limited).
The same view was echoed by the Supreme Court in the later decision reported as General Insurance Corporation of India vs. CIT : [1999] 240 ITR
139. The pertinent observations at pg 144 of the said judgement are reproduced hereunder:
"Section 44 of the Income-tax Act is a special provision governing computation of taxable income earned from business of insurance. It opens with a non-obstante clause and thus has an overriding effect over other provisions contained in the Act. It mandates the assessing authorities to compute the taxable income for business of insurance in accordance with the provisions of the First Schedule."
There is change in the reporting format for companies carrying on insurance business pursuant to enactment by IRDA Regulations. Such change in the reporting format for companies carrying on life insurance business pursuant to change in the regulatory framework and pursuant to enactment by IRDA of Regulations, 2000 and Regulations, 2002 was noticed by the Bombay High Court in ICICI Prudential Life Insurance Co. Ltd. Vs. ACIT : 325 ITR 471 in the following words : (pages 474-476] "Before 1999, companies engaged in the business of life insurance were required to prepare one consolidated account. Section 11 of the Insurance Act, 1938 was amended so as to include sub-sections (1A) and (1B). Subsection (1A) to section 11 provides that every insurer, on or after the commencement of the IRDA Act, 1999, in respect of insurance business transacted by him and in respect of shareholder's funds, shall, at the expiration of each financial year, prepare with reference to that year, a balance sheet, a profit and loss account, a separate account of receipts and payments, and revenue account in accordance with the Regulations made by the Authority. Section 13(1) provides that every insurer carrying on life insurance business shall, inter alia, in respect of the life insurance business transacted in India, cause an investigation to be made each year by an actuary into the financial condition of the life 87 Max New York Life Insurance Company Ltd.
(Now known as Max Life Insurance Company Limited).
insurance business carried on by him, including a valuation of his liabilities and shall cause an abstract of the report of such actuary to be made in accordance with the Regulations laid down in Part I of the Fourth Schedule and in conformity with the requirements of Part II of that Schedule. The fifth proviso to section 13 stipulates that on or after the commencement of the IRDA Act, 1999 every insurer shall cause an abstract of the report of the actuary to be made in the manner specified by the Regulations made by the Authority.
In exercise of the powers conferred by section 114A of the Insurance Act, 1938, the IRDA notified the Insurance Regulatory and Development Authority (Actuarial Report and Abstract) Regulations, 2000. Regulations 3 and 4 stipulate the procedure for preparation of actuarial reports and abstracts and the requirements applicable. Under Regulation 3(4)*v), each abstract and statement is to be accompanied by a certificate signed by the appointed actuary, inter alia, stating that in his opinion, the mathematical reserves are adequate to meet the insurer's future commitments under contracts and the reasonable expectation of policyholder's. Each insurer is required to prepare statements which are to be annexed to the abstract and a list of those statements is set out in Regulation 4(2). Regulation 8 provides that a statement showing the total amount of surplus arising during the inter-valuation period and allocation of such surplus, shall be furnished separately for participating business and for non-participating business, together with the particulars as mentioned in the Regulation. The composition of surplus, inter alia, includes the surplus shown by Form I, interim bonuses, loyalty additions and sums transferred from shareholder's funds during the inter-valuation period. The Authority has also notified the Insurance Regulation and Development Authority (Preparation of Financial Statements and Auditor's Report of Insurance Companies) Regulations, 2002. Part V deals with the provision of financial statements. Every insurer is required to prepare (i) a revenue account which is also described as a policyholder's account; and (ii) a profit and loss account, which is also described as a shareholder's account, apart from a balance- sheet. The statutory forms are prescribed by the Regulations. Form A-RA is prescribed for the preparation of the revenue account or the policyholder's account. Form A-RA reflects the surplus or, as the case may be, the deficit generated in the revenue account for the year ending 31st March.
88
Max New York Life Insurance Company Ltd.
(Now known as Max Life Insurance Company Limited).
As a result of the Regulations, the petitioner which is engaged in the business of life insurance is required to prepare and maintain two accounts namely, (i) a revenue account of policyholders, and
(ii) a profit and loss account of shareholders. ... ..."
70. On this basis, we can summarize the impact of the amendment of the Regulations as below:
(i) The erstwhile format for the presentation of surplus/deficit required each insurance company to aggregate the results relating to shareholder's operations. The impact of the consolidated revenue account was transferred to the actuary's valuation balance-sheet in Form I which disclosed the surplus/deficit for the year.
(ii) The format for presentation of the insurance accounts was amended by the Regulations of 2000 and by the revised format, the impact of the actuarial valuation was transferred to the revenue account relating to the policyholders for the year and the surplus/deficit was disclosed therein;
(iii) The profit and loss for shareholders and the surplus/deficit for policyholders are since segregated after the amended Regulations of 2002 Mumbai Bench of the Tribunal in the case of ICICI Prudential Insurance Co. Ltd. Vs. ACIT : 140 ITD 41 (page 72) as relied by learned Senior Advocate discussed these provisions as under:-
"27. Respectfully following the above principles and examining the provisions of IT Act, we are of the opinion that the actuarial valuation made in accordance with the Insurance Act6, 1938 do mean that the actuarial valuation done in accordance with the Insurance Act, 1938. In arriving at the above decision we have also taken into consideration that Rule-5 in Part-B of the First Schedule with reference to other insurance business' did incorporate the IRDA and its Regulations as amended by the Finance Act 2009 w.e.f. 1.4.2011 which is as under: B-Other Insurance Business:
Computation of profits and gains of other insurance business.89
Max New York Life Insurance Company Ltd.
(Now known as Max Life Insurance Company Limited).
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 & Loss A/c 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, l 1999 (4 of 1999) or the Regulations made thereunder subject to the following adjustments:-
(a) Subject to 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 section 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 & Loss A/c;
(c) such amount carried over to a reserve for unexpired risks as may be prescribed in this behalf shall be allowed as a deduction.
This indicates that the legislature consciously omitted incorporating the provisions of IRDA or the Regulations made there under in Rule 2, which still refers to the Insurance Act 1938 only.
28. Further, we also notice that the Insurance Act itself was amended along with the introduction of IRDA Act 1999. Along with the said IRDA Act there are various amendments proposed in the Insurance Act in tune with I(RDA Act by amending the relevant provisions of Insurance Act, 1938. However, since the Rule 5 was amended in the First Schedule by specifically referring to the IRDA Act 1999 or the Regulations made there under, we are of the opinion that the legislature intended not to modify or amend the Rule-2. This indicates the intention of legislature that the actuarial valuation has to be made in accordance with the unamended Insurance Act, 1938. We are of the firm opinion that the unamended provisions of Insurance Act, 1938 were only incorporated into the Income Tax Act as far as life insurance business is concerned. Therefore, AO's action in following the format prescribed under the Regulations of IRDA Act is not in accordance with the spirit of Rule-2 and provisions as made applicable under the Income Tax Act.
29. We also notice that the actuarial report and abstracts under the Insurance Act, 1938 has to be prepared vide section 13 of that Act in accordance with the Regulations contained in Part-I of the Fourth Schedule and in conformity with the requirement of Part-II of that 90 Max New York Life Insurance Company Ltd.
(Now known as Max Life Insurance Company Limited).
schedule. Section 13 of Insurance Act 1938 (as amended now) is as under:
"13. Actuarial report and abstract.
(i) Every insurer carrying on life insurance business shall, in respect of the life insurance business transacted by him in India, and also in the case of an insurer specified in sub-clause (a)(ii) or sub-clause (b) of clause (9) of section 2 in respect of all life instance business transacted by him, (every year) cause an investigation to be made by an actuary in to the financial condition of the life insurance business carried on by him, including a valuation of his liabilities in respect thereto and shall cause an abstract of the report of such actuary to be made in accordance with the Regulations contained in Part I of the Fourth Schedule and in conformity with the requirements of Part II of that Schedule:
Provided that the Authority may, having regard to the circumstances of any particular insurer, allow him to have the investigation made as at a date not later than two years from the date as at which the previous investigation was made:
Provided:
Provided:
Provided:
Provided also that every insurer on or after the commencement of the Insurance Regulatory and Development Authority Act, 1999 shall cause an abstract of the report of the actuary to be made in the manner specified by the Regulations made by the Authority."
30. The First to Fourth Schedule of the Insurance Act 1938 was omitted by the Insurance Amendment Act 2002 after incorporation of the relevant schedules in the IRDA Act. Even though the said schedules were omitted from the Insurance Act, 1938, we are of the opinion that as far as Rule-2 is concerned by the principle of 'Legislation by incorporation' unamended Insurance Act, 1938 is applicable and the actuarial valuation has to be made in accordance with the then existing Part-I of the Fourth Schedule and in conformity with the requirements of Part-II of that schedule. Therefore, assessee's contention that the IRDA Regulations even though are applicable to assessee since it has commenced business after the commencement of the IRDA Act, 1999, for the purpose of Rule-2, the actuarial valuation has to be done in 91 Max New York Life Insurance Company Ltd.
(Now known as Max Life Insurance Company Limited).
accordance with the Regulations contained in erstwhile Fourth Schedule Part-I and Part-II. This is what assessee is contending and merging the accounts of policyholder's and shareholders account and arriving at the actuarial deficit, without taking into consideration the transfer of funds from the shareholder's account to policyholder's account.
31. After introduction of IRDA Act, the entire Regulation of insurance business has gone to the authority and in order to protect the interests of holders of insurance policies, to regulate, to promote and ensure orderly growth of insurance industry number of regulations have been prescribed by the IRDA. One such is, Insurance Regulatory and Development Authority (IRDA) (Actuarial Report and Abstract) Regulations 2000 by which method of preparation of actuaries report and abstracts were prescribed. An actuary is responsible for analysing possible outcomes of the types of events that would potentially cost policy holders to made claims against their insurance policies. Insurance companies need to make sure that the money they are charging and collecting from policy holders is adequate to cover the cost of certain claims that might beneficially be made by policy holders as well as their other expenses. In fact, the work that actuaries perform is crucial to an insurance company's ability to remain in business. Actuaries are involved at all stages in product development and in the pricing risk assessment and marketing of the products. Their job involves making estimates of ultimate out-come of insurable events. In the business of insurance the product cost is an abstraction, depending on the timing issues, variability issues and risk parameters. One big function actuaries provide is making reserves to insure that insurance companies keep enough money on their balance sheets to make good of all the claims they will have to pay. This involves arriving at actuarial surplus or deficit depending on various factors. In order to ensure a fair play in the business, the IRDA prescribed regulations according to which various norms were prescribed in order to ensure that Life Insurance of business (even other insurance business) are done according to healthy business practices. As per the above regulations, Regulation 4 prescribes number of abstracts and statements in respect of (a) linked business; (b) non-linked business and (c) health insurance business. As part of this Regulation 4(2)(d) item No. iv, Form -'I' was prescribed for the purpose of valuation results and to indicate the surplus or deficit in the life insurance business of a company. Apart from the above regulations, IRDA also prescribed Insurance Regulatory and Development Authority (Preparation of Financial Statements and Auditor's Report of Insurance Companies) Regulations 2002. The surplus or deficit arrived at by the actuary in his valuation for the inter valuation period has to be taken in to consideration under the regulations in financial accounts as well. 92
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(Now known as Max Life Insurance Company Limited).
32. IRDA Regulations specifically require to maintain the policyholder's account and the shareholder's account separately and permits transfer of funds from shareholder's account to policyholder's account as and when there is a deficit in policyholder's account. As rightly noted by the Hon'ble Bombay High Court, as a policy company is transferring funds/assets from shareholder's account to policyholders account even during the year periodically as and when the actuarial valuation was arrived at in policyholder's account. Most of the companies are required to submit quarterly accounts under the Company Law, there is requirement of actuarial valuation report periodically and accordingly assessee was transferring funds from the shareholder's account to policyholder's account. Since the insurance business will not yield the required profits in the initial 7 to 10 years, lot of capital has to be infused so as to balance the deficit in the policyholder's account. During the year as already stated assessee has issued fresh capital to the extent of Rs.250 crores and transferred funds to the extent of Rs.233 crores from the shareholders' account to policyholder's account. Since assessee is having only one business of life insurance, the entire transactions both under the policyholder's and shareholder's account do pertain to the life insurance business only as it was not permitted to do any other business. Once assessee is in the life insurance business, the computation has to be made in accordance with the Rule-2 as per provisions of section 44. Therefore, there is a valid argument raised by assessee that both the policyholder's and shareholder's account has to be consolidated into one and transfer from one account to another is tax neutral. What AO has done is to tax the surplus after the funds have been transferred from shareholder's account to the policyholder's account at the gross level while ignoring such transfer in shareholder's account, while bringing to tax only the incomes declared in the shareholder's account that too under the head 'other sources of income'. In fact, while giving the finding that assessee is in the life insurance business only and incomes are to be treated as income from life insurance business only and incomes are to be treated as income from life insurance business, the CIT(A) surprisingly in subsequent assessment years appeals accepted AO's contention that surplus in shareholder's account is to be taxed as other sources of income. But once the provisions of section 44 of I T Act are invoked to arrive at the profit. Therefore, in our opinion both the policyholder's and shareholder's account has to be consolidated for the purpose of arriving at the deficit or surplus."
93
Max New York Life Insurance Company Ltd.
(Now known as Max Life Insurance Company Limited).
71. We noted that the Revenue challenged the order passed by the Tribunal in appeal under section 260A of the Act before the Bombay High Court raising amongst several questions, the following question of law:
"8) Whether on the facts and in the circumstances of the case and in law, the Tribunal is correct in allowing relief to the assessee by holding that surplus available in Share Holders Account is not to be taxed separately as "income from other sources" and at the normal corporate rate and holding that surplus from Share Holders Account was only part of income from insurance business arrived at after "combining" surplus available in Share Holders Account with the surplus available in Policy Holders Account and then add taxing this 'net surplus' arrived at, the rate specified u/s.115B of the Act?"
Although the appeal filed by the Revenue was admitted on other substantial questions of law, with respect to the aforesaid question, the Bombay High Court in the case reported as CIT vs. ICICI Prudential Insurance Co. Ltd. : 242 Taxman 159 did not admit the Revenue's appeal and held as under:
"5) So far as Question No. 8 is concerned, the grievance of the revenue is that the income on shareholders' account has to be taxed as income from other sources. This on the ground that the income earned on shareholders' account is not an income which represents income on account of Life Insurance Business.
Therefore, it is the revenue's contention that it has to be taxed as income from other sources. The impugned order while allowing the assessee's appeal holds that income earned on shareholders' amount has to be considered as arising out of Life Insurance Business. Moreover, in terms of Section 44 of the Act, such income has to be taxed in accordance with First Schedule as provided therein. None of the authorities under the Act or even before us is it urged that the assessee is carrying on separate business other than life insurance business. Accordingly, the impugned order holding that the income from shareholder's account is also to be taxed as a part of life insurance business cannot be found fault with in view of the clear mandate of Section 44 of the Act. Accordingly, Question 94 Max New York Life Insurance Company Ltd.
(Now known as Max Life Insurance Company Limited).
No. 8 also does not raise any substantial question of law. Thus not entertained."
72. The Supreme Court has admitted the special leave petition filed by the Revenue against the judgment of the Bombay High Court, vide decision reported as CIT vs. ICICI Prudential Life Insurance Co. Ltd. 242 Taxman 97 but has not stayed operation of the order of High Court. The learned DR even though tried his best to convince us that we should not follow the decision of Income Tax Appellate Tribunal as approved by Mumbai High Court in the case of ICICI Prudential, but that decision is the only decision of coordinate bench of this tribunal as confirmed by Mumbai High Court has been referred to before us . Although Supreme court admitted SLP, that will not loose the value of binding precedent until the decision is reversed or operation of the order is stayed. But, we noted in respect of the issue whether the income in shareholder account has to be taxed as part of the income of the insurance business, the learned DR in this regard contended that if shareholder income is also taxed as part of life insurance business, the provisions of section 115(1)(ii) will become redundant and we cannot interpret the law in this manner to make part of the section to be redundant. In this regard, he vehemently relied on the decision of the Supreme Court in the case of Surat Art silk cloth Manufacturer Association 121 ITR 01 (SC) in which it was held "The construction contended for the revenue would have the effect of rendering section 11(4) totally redundant after the enactment of section 13(1)(bb). A construction which renders a provision of the Act 95 Max New York Life Insurance Company Ltd.
(Now known as Max Life Insurance Company Limited).
superfluous and reduces it to silence cannot be accepted". He also referred to the decision of Ahmadabad Bench of this tribunal in the case of Mayurbhai Mangaldas Patel Vs. ITO ITA No. 3451/Ahmd/2014 dt 30.11.2017 particularly the observations made my Hon'ble Supreme Court in the case of Mumbai Kamgar Sabha Vs. Abdulbahi Faizulbhai AIR 1976 SC 1455 referred to in that decision "It is trite, going by Anglophonic principles that a ruling of a superior court is binding law. It is not of scriptural sanctity but of ratio-wise luminousity within the edifice of facts where the judicial lamp plays the legal flame. Beyond those walls and dehors the milieu we cannot impart eternal vernal value to the decision, exalting the precedents into a prison house of bigotry, regardless of the varying circumstances and myriad developments. Realism dictates that a judgement has to be read, subjec6 to the fact directly presented for consideration and not affecting the matters which may lurk in the dark." We noted in the decision of Ahmadabad Bench the bench noted the facts that the approval u/s 151(2) was first duly given by the joint commissioner which was apparent from the facts therein and therefore the bench decided against the assessee while upholding the validity of the approval u/s 151. The learned DR Also relied on the decision of Blue star Ltd. Vs. CIT 217 ITR 514 (Mum) for the proposition of law that a case is only an authority for what is actually decides. In this decision it was held "Every judgment must be read as applicable to the particular facts proved or assumed to be proved, since the generally of the expressions which may be 96 Max New York Life Insurance Company Ltd.
(Now known as Max Life Insurance Company Limited).
found there are not intended to be expositions of the whole law, but governed and qualified by the particular facts of the case in which such expressions are found and a case is only an authority for what it actually decides." In view of these decisions, the learned DR was of the view that the decision of Mumbai bench of this Tribunal should not be followed by this tribunal in the case of ICICI Prudential (supra). We do agree with learned DR that each decision has to be interpreted with the facts and the contents involved there in. We noted that Section 115B(1) (ii) was inserted by Finance Act, 1976 when the condition that life insurance company are not permitted to carry on any other business was reinforced by the provisions of the Section 3(4)(F) of the Insurance Act enabling IRDA to cancel the registration of an insurer if the insurer carried on any business other than life insurance business or any prescribed business. There may be a case that in future government may amend the Act and permit life insurer to carry on other business or there may be a case where insurer, although allowed license for life insurance business but in violation of license, may have carried out any other business but IRDA have not exercise the power of cancelling registration ,under these circumstances income so derived has to be assessed at the rate prescribed u/s 115B(1)(ii). There may be a case that the assessee may have interest income on refund of income tax, the income so received be taxed u/s 115(1)(ii). Therefore, we do not agree with the plea of learned DR that the provisions of section 115(1)(ii) will become redundant in case the 97 Max New York Life Insurance Company Ltd.
(Now known as Max Life Insurance Company Limited).
income in shareholders account is taken to be the income derived from life insurance business. We may also mention that we cannot take a different view what has been taken by the coordinate Bench approved by High Court. The learned DR was fair enough to state that there is no other decision either of the Tribunal or superior court on this issue taking a contrary view as has been taken in the case of ICICI Prudential (supra).
73. The observations of the Tribunal in the case of ICICI Prudential insurance (supra) that "the entire transactions both under the policyholder's and shareholder's account do pertain to the life insurance business only as it was not permitted to do any other business" are reinforced by provisions of section 3(4F) of the Insurance Act which enables IRDA to cancel the registration of an insurer if the insurer carries on any business other than the life insurance business or any prescribed business. In other words, a life insurer, such as the assessee, is not permitted to carry on any other business other than that of life insurance; the manner of investment is strictly regulated by IRDA, implying thereby that investments made out of shareholder funds is an integral and inextricable part of the life insurance business and not an independent business. Respectfully following the decision of coordinate bench on this issue, we allow ground no.2. Even we noted that the assessee is consistently following the same method for determining the income under the head profits and gains of business or profession by aggregating/consolidating, both the policyholders and 98 Max New York Life Insurance Company Ltd.
(Now known as Max Life Insurance Company Limited).
shareholders account for the purposes of arriving at the deficit/surplus from the life insurance business and this has duly been accepted by the revenue upto financial year 2008-09. On the principle of consistency this method in our view until and unless is held to be illegal cannot be discarded. We have gone through the decisions as relied before us. We noted that Hon'ble Supreme court in the case of Radhasoami Satsang Saaomi Bagh vs. CIT 193 ITR 321(SC) 193 ITR 321 referred to the following passage from Hoystead v Commissioner of Taxation 1926 AC 155 (PC) wherein it was observed (page
328) "Parties are not permitted to begin fresh litigation because of new view they may entertain of the law of the case, or new versions which they present as to what should be a proper apprehension by the court of the legal result either of the construction of the documents or the weight of certain circumstances. If this were permitted, litigation would have no end, except when legal ingenuity is exhausted. It is a principle of law that this cannot be permitted and there is abundant authority reiterating that principle. Thirdly, the same principle, namely, that of setting to rest rights of litigants, applies to the case where a point, fundamental to the decision, taken or assumed by the Plaintiff and traversable by the Defendant, has not been traversed. In that case also a Defendant is bound by the judgement, although it may be true enough that subsequent light or ingenuity might suggest some traverse which had not been taken."
At pg 329 of the judgement, Their Lordships observed as under:
"We are aware of the fact that strictly speaking res judicata does not apply to income-tax proceedings. Again, each assessment year being a unit, what is decided in one year may not apply in the following year but where a fundamental aspect permeating though the different assessment years has been found as a fact one way or the other and parties have allowed that position to be sustained by not challenging the order, it would not be at all appropriate to allow the position to be changed in a subsequent year.99
Max New York Life Insurance Company Ltd.
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19. On these reasonings in the absence of any material change justifying the Revenue to take a different view of the matter and if there was not change it was in support of the assesses - we do not think the question should have been reopened and contrary to what had been decided by the Commission of Income-Tax in the earlier proceedings, a different and contradictory stand should have been taken. We are, therefore, of the view that these appeals should be allowed and the question should be answered in the affirmative namely, that the Tribunal was justified in holding that the income derived by the Radhasoami Satsang was entitled to exemption under Sections 11 and 12 of the Income Tax Act of 1961."
74. The aforesaid dictum of law was reiterated recently by the Supreme Court in CIT vs. Excel Industries Ltd. : 358 ITR 295.
"It appears from the record that in several assessment years, the Revenue accepted the order of the Tribunal in favour of the Assessee and did not pursue the mater any further but in respect of some assessment years the matter was taken up in appeal before the Bombay High Court but without any success. That being so, the Revenue cannot be allowed to flip-flop on the issue and it ought let the matter rest rather spend the tax payers money in pursuing litigation for the sake of it."
75. We therefore respectfully following the decision of this Tribunal in the case of ICICI Prudential Insurance Co. Ltd (supra), set aside the order of CIT(A) on this issue and direct the assessing officer to take profit shown in shareholders' profit and loss account i.e. Form A-PL to be part of the income derived from life insurance business. Thus these grounds are allowed.
76. Since the learned AR has argued ground 5 first, which relates to the enhancement of income by the CIT(A) by a sum of ` 141,85,54,000/- in respect of the amount declared and allocated as bonus for the policy holders, we decided to dispose of this issue first instead of ground no.4. Before 100 Max New York Life Insurance Company Ltd.
(Now known as Max Life Insurance Company Limited).
deciding this ground, in our opinion, it is necessary to reproduce pages 177, 178 and 179 of the paper-book being the profit & loss account in Form A-PL and Revenue account in form A-RA for the year ended March 31, 2010, which were referred to during the course of hearing again and again and also forms part of the audited balance-sheet of the company:
MAX NEW YORK LIFE INSURANCE COMPANY LIMITED REGISTRATION No.104; DATE OF REGISTRATION WITH IRDA : NOVEMBER 15, 2000 Profit and Loss Account for the year ended March 31, 2010 FORM A-PL SHAREHOLDERS' ACCOUNT (NON-TECHNICAL ACCOUNT) (All amounts in Thousands of Indian Rupees, unless otherwise stated) Schedule Year Ended Year Ended March 31,2010 March 31,2009 TRANSFER FROM THE POLICYHOLDER'S ACCOUNT
- Participating Individual Life Policies (Technical Account) 137,080 108,726
- Participating Pension Policies (Technical Account) 1,452 1,393
- Non-participating Individual Life Policies (Technical Account) - -
- Non-participating Health Insurance Policies (Technical Account) - -
- Non-participating Group Policies - - - Non-participating Individual Linked Policies 883,226 - - Non-participating Linked Pension Policies 6,759 - - Non-participating Linked Group Policies 4,943 - INCOME FROM INVESTMENTS (a) Interest, Dividends & Rent - Gross 324,119 262,367
[Gross of tax deducted at source Rs. Nil (2009 : Rs.Nil)]
(b) Profit on sale/redemption of investments 71,043 65,354
(c) (Loss) on sale/redemption of investments (9,884) (55,014)
(d) Amortisation of discount/(premium) 12,882 65,541 Other Income - Miscellaneous income 299 301 Total (A) 1,431,919 448,668 EXPENSES OTHER THAN THOSE DIRECTLY RELATED TO THE INSURANCE BUSINESS Employees remuneration and welfare benefits 84,023 47,129 Filing fees, rates and taxes 53,673 19,605 Donations 25,000 24,151 Others
- Interest and bank charges 28,128 20,345
- Advertisement and publicity 640,370 508,469
- Travel, conveyance and vehicle running expenses 14,713 -
- Training expenses 29,211 - - Consultancy charges 53,877 - - Other miscellaneous expenses 44,269 861 - Depreciation 104,799 163 Bad debts written off - -
Contribution to the Policyholders Account (Technical Account)
- Participating Individual Life Policies - -101
Max New York Life Insurance Company Ltd.
(Now known as Max Life Insurance Company Limited).
- Participating Pension Policies - -
- Non-participating Individual Life Policies 296,880 643,362
- Non-participating Health Insurance Policies 128,443 310,115
- Non-participating Group Policies 160,877 5,709
- Non-participating Individual Linked Policies - 2,470,055
- Non-participating Linked Pension Policies - 195,992
- Non-participating Linked Group Policies - 90,569
MAX NEW YORK LIFE INSURANCE COMPANY LIMITED
REGISTRATION No.104; DATE OF REGISTRATION WITH IRDA : NOVEMBER 15, 2000 Profit and Loss Account for the year ended March 31, 2010 FORM A-PL SHAREHOLDERS' ACCOUNT (NON-TECHNICAL ACCOUNT) (All amounts in Thousands of Indian Rupees, unless otherwise stated) Schedule Year Ended Year Ended March 31,2010 March 31,2009 PROVISIONS (OTHER THAN TAXATION)
(a) For diminution in the value of investments (Net) (47,387) 42,249
(b) Provision for doubtful debts 24,183 -
(c) Others - -
Total (B) 1,641,059 4,378,824
Profit/(Loss) before Tax (C) = (A) - (B) (209,140) (3,930,156)
Provision for Taxation - -
Profit/(loss) after tax (209,140) (3,930,156)
Appropriations
(a) Balance at the beginning of the year (10,027,545) (6,097,389)
(b) Interim dividends paid during the year - -
(c) Proposed final dividend - -
(d) Dividend distribution on tax - -
(e) Transfer to reserves/other accounts - -
Profit/(Loss) carried forward to the Balance Sheet (10,236,685 (10,027,545)
Earning per Share (Basic and Diluted) (0.12) (2.76)
102
Max New York Life Insurance Company Ltd.
(Now known as Max Life Insurance Company Limited).
MAX NEW YORK LIFE INSURANCE COMPANY LIMITED REGISTRATION No.104; DATE OF REGISTRATION WITH IRDA : NOVEMBER 15, 2000 REVENUE ACCOUNT for the year ended March 31, 2010 FORM A-RA POLICYHOLDERS' ACCOUNT (TECHNICAL ACCOUNT) (All amounts in Thousands of Indian Rupees, unless otherwise stated) Particulars Schedule YEAR ENDED MARCH 31, 2010 Participating Policies Non-Participating Policies Linked Policies Total (Non-Linked) (Non-Linked) Individual Pension Individual Health Group Linked Linked Linked Life Life Insurance Individual Pension Group Premiums earned - net 1 Premiums 12,964,409 81,357 828,669 172,563 582,756 31,415,325 2,179,947 380,362 48,605,388 Less: Reinsurance Ceded 109,407 - 37,018 59,498 285,285 105,589 - - 596,797 Add: Reinsurance Accepted - - - - - - - - -
12,855,002 81,357 791,651 113,065 297,471 31,309,736 2,179,947 380,362 48,008,591 Income from Investments
(a) Interest, Dividends & Rent-Gross 1,635,218 38,107 101,213 1,714 29,907 1,338,097 70,823 23,303 3,238,382
(b) Profit on sale/redemption of investments 13,142 - 81 - - 6,943,309 259,960 6,796 7,23,288
(c) (Loss) on sale/redemption of investments (22) - - - (1) (844,202) (131,294) (5,098) (980,617)
(d) Transfer/Gain on revaluation/change in fair - - - - - 9,637,935 633,294 20,096 10,291,325 value
(e) Amortisation of discount/(premium) 9,202 (328) 775 (10) (298) (513) 15 - 8,843
(f) Appropriation /Expropriation Adjustment - - - - - 108,618 6,689 (77) 115,230 Account Other Income Contribution from the Shareholders' Account - - 296,880 128,443 160,877 - - - 586,200 Miscellaneous Income 1,136 1 73 1,718 35 1,552 110 4 44,629 Total (A) 14,513,678 119,137 1,190,673 244,930 487,991 48,494,532 3,019,544 425,386 68,495,871 Commission 2 1,314,531 864 131,003 27,610 3,863 2,660,168 73,959 89 4,212,087 Operating Expenses related to Insurance 5,159,766 8,550 638,476 193,327 142,845 8,405,672 491,112 4,191 15,04,399 Business 3 Provision for doubtful debts 830 1 54 32 26 1,139 77 1 2,160 Bad debts written off 773 1 50 30 24 1,059 72 1 2,010 Provision for Tax - Fringe Benefit Tax - - - - - - - - -
Provision (other than taxation) - - - - - - - - -
(a) For diminution in the value of investments - - - - - - - - -
(Net)
(b) Others - - - - - - - - -
Total (B) 6,475,900 9,416 769,583 220,999 146,758 11,068,038 565,220 4,282 19,260,196
Benefits paid (Net) 4 2,448,932 27,540 111,535 32,124 173,596 2,915,882 137,373 44,759 5,891,741
Interim Bonuses Paid - - - - - - - - -
Change in valuation of liability against life
policies in force:
(a) Gross 5,038,500 49,105 306,390 (8,243) 267,286 33,627,396 2,310,192 371,402 41,962,018
(b) Amount ceded in Reinsurance (8,588) - 3,165 50 (99,649) - - - (105,022)
(c) Amount accepted in Reinsurance - - - - - - - - -
Total (C) 7,478,844 76,645 421,090 23,931 341,233 36,543,268 2,447,565 416,161 47,748,737
SURPLUS/(DEFICIT) (D) = (A) - (B) - (C) 558,934 33,076 - - - 883,226 6,759 4,943 1,486,938
Opening balance of funds available for Future 55,269 114,191 - - - - - - 169,460
Appropriation
SURPLUS/(DEFICIT) AVAILABLE FOR 614,203 147,267 - - - 883,226 6,759 4,943 1,656,398
APPROPRIATION
APPROPRIATIONS
Transfer to Shareholders' Account 137,080 1,452 - - - 883,226 6,759 4,943 1,033,460
Transfer to Other Reserves - - - - - - - - -
Funds available for Future Appropriations 477,123 145,815 - - - - - - 622,938
Insurance reserve carried to the Balance - - - - - - - - -
Sheet
Details of Surplus
(a) Interim Bonus Paid - - - - - - - - -
(b) Allocation of Bonus to Policyholders 1,418,584 14,278 - - - - - - 1,432,862
(c) Surplus shown in the Revenue Audit 614,203 147,267 - - - 883,226 6,759 4,943 1,656,398
(d) Total Surplus : [(a) + (b) + (c)] 2,032,787 161,545 - - - 883,226 6,759 4,943 3,089,260
103
Max New York Life Insurance Company Ltd.
(Now known as Max Life Insurance Company Limited).
77. Revenue Account Form A-RA as reproduced hereinabove shows that the assessee had allocated bonus to the policy holders to the extent of ` 141,85,84,000/-. According to the assessee the said amount represent bonus declared for the impugned assessment year on the participating policies. It is not disputed that the taxation of the insurance companies is governed by section 44 read with First Schedule of the Income Tax Act. As per Rule 2 of the First Schedule, profits and gains of life insurance business shall be taken to be the annual average of the surplus arrived at by adjusting the surplus or deficit disclosed by the actuarial valuation made in accordance with the Insurance Act, 1938, in respect of the last inter valuation period ending before the commencement of the assessment year, so as to exclude any surplus or deficit included therein which was made in any earlier inter valuation period. This Rule talks of annual average surplus on the basis of actuarial valuation. These words, in our opinion, have been taken from the old Rule 2(b) when the actuarial valuation is to be done once in three or five years. Now these words are not relevant as actuarial valuation is done every year. We noted that Hon'ble Supreme Court in the case of Life Insurance Corporation of India 51 ITR 773 took the view that ITO has no power to modify the amount of actuarial valuation except under Rule 2(b) with the permission of the Controller of Insurance. Rule 2 now stands amended by the Finance Act, 1976. This decision of Life Insurance Corporation of India was referred on by the Hon'ble Supreme Court in the case of General 104 Max New York Life Insurance Company Ltd.
(Now known as Max Life Insurance Company Limited).
Insurance Corporation 240 ITR 139 (SC). In this decision, Hon'ble Supreme Court reiterated that the Assessing Officer is bound to follow the scheme of computation given in the First Schedule for the assessee carrying on the insurance business. Life insurance business earlier was being carried out only by Life Insurance Corporation of India. In the year 2000, Life Insurance Sector was opened to private players and Insurance Regulatory Development Authority (IRDA) was constituted under the Insurance Regulation Development Act 1999. IRDA, the insurance regulator, has made specific 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 insurance company is divided into a technical account (in Form A-RA also called as revenue account and non-technical account (shareholder's account represented as Form A-PL) also called Profit and loss account. The technical account (Form A-RA) deals with all the transactions relating to and includes income from premium and expenditure in relation to the Policyholders account and related investment income while non-technical account i.e. share holders account, income transferred from the policy holders account as well as income from the investment has to be shown in addition to the expenditure as well as any contribution towards Life Insurance Policies. It is a fact that in life insurance business in the initial years, there is bound to be deficit and funds are usually transferred from the share holders account for 105 Max New York Life Insurance Company Ltd.
(Now known as Max Life Insurance Company Limited).
declaring bonus on participating policies, which is done based on the advice of the Appointed Actuary. The assessee during the impugned assessment year declared bonus for participating policy holders to the extent of ` 141,85,84,000/-. The contention of the Revenue is that the assessee is not entitled for the deduction of the said bonus and it will form part of the actuarial surplus. While the contention of the assessee is that it is part of the actuarial liability and as per Rule 2 of First Schedule to the Income tax Act it represents the liability accrued towards the participating policy holders. We noted that the change in the reporting format has duly been acknowledged by the Hon'ble Bombay High Court in the case of ICICI Prudential Life Insurance Co. Ltd. vs. ACIT 325 ITR 471, in the following manner:
"Before 1999, companies engaged in the business of life insurance were required to prepare one consolidated account. Section 11 of the Insurance Act, 1938 was amended so as to include sub-sections (1A) and (1B). Subsection (1A) to section 11 provides that every insurer, on or after the commencement of the IRDA Act, 1999, in respect of insurance business transacted by him and in respect of shareholder's funds, shall, at the expiration of each financial year, prepare with reference to that year, a balance sheet, a profit and loss account, a separate account of receipts and payments, and revenue account in accordance with the Regulations made by the Authority. Section 13(1) provides that every insurer carrying on life insurance business shall, inter alia, in respect of the life insurance business transacted in India, cause an investigation to be made each year by an actuary into the financial condition of the life insurance business carried on by him, including a valuation of his liabilities and shall cause an abstract of the report of such actuary to be made in accordance with the Regulations laid down in Part I of the Fourth Schedule and in conformity with the requirements of Part II of that Schedule. The fifth proviso to section 13 stipulates that on or after the commencement of the IRDA Act, 1999 every insurer shall cause an abstract of the report of the actuary to be 106 Max New York Life Insurance Company Ltd.
(Now known as Max Life Insurance Company Limited).
made in the manner specified by the Regulations made by the Authority.
In exercise of the powers conferred by section 114A of the Insurance Act, 1938, the IRDA notified the Insurance Regulatory and Development Authority (Actuarial Report and Abstract) Regulations, 2000. Regulations 3 and 4 stipulate the procedure for preparation of actuarial reports and abstracts and the requirements applicable. Under Regulation 3(4)*v), each abstract and statement is to be accompanied by a certificate signed by the appointed actuary, inter alia, stating that in his opinion, the mathematical reserves are adequate to meet the insurer's future commitments under contracts and the reasonable expectation of policyholder's. Each insurer is required to prepare statements which are to be annexed to the abstract and a list of those statements is set out in Regulation 4(2). Regulation 8 provides that a statement showing the total amount of surplus arising during the inter-valuation period and allocation of such surplus, shall be furnished separately for participating business and for non-participating business, together with the particulars as mentioned in the Regulation. The composition of surplus, inter alia, includes the surplus shown by Form I, interim bonuses, loyalty additions and sums transferred from shareholder's funds during the inter-valuation period. The Authority has also notified the Insurance Regulation and Development Authority (Preparation of Financial Statements and Auditor's Report of Insurance Companies) Regulations, 2002. Part V deals with the provision of financial statements. Every insurer is required to prepare (i) a revenue account which is also described as a policyholder's account; and (ii) a profit and loss account, which is also described as a shareholder's account, apart from a balance- sheet. The statutory forms are prescribed by the Regulations. Form A-RA is prescribed for the preparation of the revenue account or the policyholder's account. Form A-RA reflects the surplus or, as the case may be, the deficit generated in the revenue account for the year ending 31st March.
As a result of the Regulations, the petitioner which is engaged in the business of life insurance is required to prepare and maintain two accounts namely, (i) a revenue account of policyholders, and
(ii) a profit and loss account of shareholders. ... ..."
78. The determinative issue for arriving at the taxable income u/s. 44 read with Rule 2 of the First Schedule, in our opinion, is "what constitutes actuarial 107 Max New York Life Insurance Company Ltd.
(Now known as Max Life Insurance Company Limited).
surplus". The term "actuarial" is neither defined in the Income tax Act nor in the Insurance Act/IRDA Act, therefore, its meaning has to be gathered from the ordinary commercial principles governing life insurance business and relevant rules, guidelines and norms governing actuarial valuation of life insurance contracts. We noted, Mumbai Bench of this Tribunal in the case of ICICI Prudential Insurance Co. Ltd. (supra), in this regard observed as under:
"... ... An actuary is responsible for analysing possible outcomes of the types of events that would potentially cost policy holders to make claims against their insurance policies. Insurance companies need to make sure that the money they are charging and collecting from policy holders is adequate to cover the costs of certain claims that might beneficially be made by policy holders as well as their other expenses. In fact, the work that actuaries perform is crucial to an insurance company's ability to remain in business. Actuaries are involved at all stages in product development and in the pricing risk assessment and marketing of the products. Their job involves making estimates of ultimate out-come of insurable events. In the business of insurance the product cost is an abstraction, depending on the timing issues, variability issues and risk parameters. One big function actuaries provide is making reserves to insure that insurance companies keep enough money on their balance sheets to make good of all the claims they will have to pay. This involves arriving at actuarial surplus or deficit depending on various factors. ....
The surplus or deficit arrived at by the actuary in his valuation for the inter valuation period has to be taken into consideration under the regulations in financial accounts as well"
79. Actuarial surplus, in our view, represent the amount available for the shareholders after providing for all the expenses and ascertained liabilities of the life insurance business. The policyholders are not the share holders but the customers paying premium to the insurance company to manage risks 108 Max New York Life Insurance Company Ltd.
(Now known as Max Life Insurance Company Limited).
associated with loss of human life. A liability or amount set aside for future distribution to the policyholders which is not, in law, available to the shareholders cannot form part of the actuarial surplus. The liabilities ascertained by an actuary or mandated under the insurance laws are not available for the shareholders. The basis of taxation for a life insurance company is the actuarial surplus, which in our view will mean the amount repayable to the policy holders under the contract or under the statute. The amounts set aside for policy holders are in the nature of liability/charge on the income. No doubt under the IRDA Rules in Form A-RA the terms "surplus" and "appropriation" cannot be used interchangeable with "actuarial surplus" and "appropriation of income" respectively.
80. We have gone through the copy of insurance policy terms especially terms 7.1 and 12, which relates to the benefit to the insured persons detailed as under:
"Benefits 7.1 Subject to the provisions of section 8 (Suicide Exclusion), on the occurrence of the Insured Event, the Company will pay the following benefits (the "Benefits"):
(a) the Sum Insured; and
(b) the accrued bonus.
12. Policy Holder Bonus and Bonus Options No bonus is payable for the first two Policy years.
Thereafter, a bonus as declared by the Company, will be paid, from the surplus arising from the actuarial valuation of the participating life insurance 109 Max New York Life Insurance Company Ltd.
(Now known as Max Life Insurance Company Limited).
fund. The amount of bonus to be paid will be as determined by the Company's Appointed Actuary from time to time."
81. From these terms it is apparent that the assessee is liable to pay to the insured person the sum insured as well as accrued bonus on the occurrence of the event. As per term 12, the company is liable after the expiry of two years to pay bonus from the surplus as may be determined by the actuary. We have also gone through the Insurance Regulatory and Development Authority (Distribution Of Surplus) Regulations, 2002. The said regulation, inter alia, provides the procedure for distribution of surplus in the following terms:
"4 Procedure for distribution of surplus. - A life insurer may, on the advice of his appointed actuary, reserve apart of the actuarial surplus (also referred to as valuation surplus) arising out of a valuation of assets and liabilities made for a financial year in accordance with Insurance Regulatory and Development Authority (Actuarial Report and Abstract) Regulations, 2000, to its shareholders, which shall be:-
(a) one hundred per cent in case of a life fund maintained for non- participating policyholders;
(b) one-ninth of the surplus allocated to policyholders in case of a life fund maintained for participating policyholders:
Provided that an insurer shall, however, be required to obtain prior approval of the authority in cases where the said allocation is not the one-ninth of the surplus.
Provided further that an insurer shall not allocate or reserve exceeding ten per cent of the said actuarial surplus to its shareholders 110 Max New York Life Insurance Company Ltd.
(Now known as Max Life Insurance Company Limited).
82. From the said regulation it is apparent that an insurer cannot allocate or reserve 10% of the accrual surplus to its share holders therefore, 90% of the accrual surplus in policy holder's account belong to the policy holder. Similarly as per clause 43 of the IRDA Notification, which reads as under:
"43. Benefit Disclosure:
a. All insurance products shall provide the prospective policyholder a customized benefit illustration, illustrating the guaranteed and non-guaranteed benefits at gross investment returns of 4% and 8% respectively and as specified by IRDA or Life Insurance Council from time to time.
b. Such benefit illustration shall be signed by both the prospective policyholder and the intermediary and shall form part of the policy document.
c. The benefit illustration as approved under the File and Use Procedure shall be part of the sales literature and shall be furnished to the prospective policyholder along with the sales literature before concluding the sale."
We, also noted that as per clause 43 of the Insurance Regulatory and Development Clause the benefits which are granted to the policy holders should form part of the sales literature and must be furnished to the prospective policy holder along with the sales literature before concluding the sale. We noted that as per clause 6 of Schedule A of the Preparation of Financial Statements and Auditor's Report of Insurance Companies Regulations, 2000, Notification dated 14.08.2000, the Appointed Actuary has to estimate the liability against the life policies in force on the basis of annual 111 Max New York Life Insurance Company Ltd.
(Now known as Max Life Insurance Company Limited).
investigation of the life insurance business. All these prove that bonus is to be declared in terms of the contract of the insurance and is an inherent right of participating policyholder, enforceable in law to participate in distribution of the surplus arising in the life policy holders fund. This is view is also supported by the notes given under Schedule 16 of the audited financial account of the impugned year which were referred to during the course of hearing and reproduced as under:-
" II NOTES TO ACCOUNTS
(b) Actuarial assumptions The Company's Appointed Actuary has determined valuation assumptions that conform with regulations issued by the IRDA and professional guidance notes issued by the Institute of Actuaries of India. Details of assumptions are given below:
...........................
Future bonuses:
Provision is made for future bonuses based on estimated expected bonus payouts consistent with the valuation assumptions and policyholders' reasonable expectations.
..........................
(r) Policyholders' Bonus The Bonus to participating policyholders, for current year as recommended by Appointed Actuary has been included in change in valuation against policies in force.
(s) Policy Liabilities The movement of policy liabilities (forming part of Policyholders funds) is as follows:112
Max New York Life Insurance Company Ltd.
(Now known as Max Life Insurance Company Limited).
Particulars Participating Policies Non-participating Policies Linked Policies Total
Individual Pension Individual Health Group Individual Linked Linked
Life Life linked Pension Group
At start of 17,673,319 320,457 917,116 18,128 203,052 29,085,845 1,440,237 195,697 49,853,851
Year
Add: change 3,611,327 34,826 309,556 (8,192) 167,637 33,627,386 2,310,193 371,403 40,424,136
in valuation of
liability
against life
policies in
force, Net
Add: Policy 1,418,584 14,278 - - - - - - 1,432,862
holder Bonus
provided
At end of year 22,703,230 369,561 1,226,672 9,936 370,689 62,713,231 3,750,430 567,100 91,710,849
83. In our view, the premium received by the assessee are embedded with the obligation to declare bonus to participating policy holders, therefore, it has to be set off against the premium received. Once the bonus is declared, which the assessee is bound to declare as per the terms of the contract of insurance for the participating policies, the assessee in our view cannot reverse the same and once bonus is declared it becomes ascertained liability.
Since the bonus is being paid to the insured persons who are not the share holder but customers of the assessee, therefore, when it is declared it becomes ascertained liability towards the customers. No doubt in form A-RA (Actuarial Report and Abstract) Regulations 2000, this forms part of the distribution of the surplus. Section 8 of the said Regulation on Statement of composition of surplus and distribution of surplus in respect of policyholders fund states as under:
113
Max New York Life Insurance Company Ltd.
(Now known as Max Life Insurance Company Limited).
"Composition of surplus as:
1. Surplus shown under Form I
2. Interim bonuses paid...
3. Terminal bonuses paid...
4. Loyalty additions....
5. Sum transferred from shareholder's funds...
6. Amount of surplus, from policyholders' funds brought forward from preceding valuation...
7. Total surplus [total of the items (1) to (6)] Distribution of surplus as: Policyholder's fund:
1. To interim bonuses paid
2. To Terminal bonuses paid
3. To Loyalty Additions...
4. ......
5. ......
6....
7. As carried forward un-appropriated." ;
IRDAI (Preparation of Financial Statements and Auditor's Report of Insurance Companies) Regulations, 2002 state the key components/headings of the Policyholder's Account (Technical account) as under:
" 1. Premiums earned (+)
2. Income from investments (+)
3. Commission (-)
4. Expenses (-)
5. Benefits paid (-)
6. Interim bonuses Paid (-)
7. Change in valuation liability (-) Surplus (Sum of 1 to 7).
Appropriations
1. Transfer to Shareholder's account
2. Transfer for Other reserves
3. Balance being Funds for Future Appropriation Notes:
The total surplus shall be disclosed separately with the following details:114
Max New York Life Insurance Company Ltd.
(Now known as Max Life Insurance Company Limited).
1. Interim bonuses paid
2. Allocation of Bonus to policyholders
3. Surplus shown in the Revenue account
4. Total surplus [(l)+(2)+(3)]"
84. If we analyze the above, it is apparent that after determining the surplus the interim bonus paid is deductible while computing the surplus but the amount allocated as bonus to policy holders has to be added. Once the bonus is declared, it cannot take character of surplus especially when the bonus paid is not taxable while working out the surplus. The amounts set aside for policy holder are in the nature of liability/charge and not dividend, which is a return on share holders capital. The terms "surplus" and "appropriation" used in the IRDA Rules cannot be used interchangeable with "actuarial surplus" and "appropriation of income" respectively. Such an interpretation of terms de hors the context is not permissible under law. The appropriation of income under income tax law has a definite import of application of income, i.e., after income has been earned / accrued, "appropriation" of surplus under insurance laws means the act of declaring a particular amount as being kept aside for the benefit of the policyholder/ shareholder. Amount that is kept aside or transferred to the shareholders' account is the taxable income whereas the amount that is kept aside or distributed to the policyholders is a liability / charge on the life insurance business, to be discharged in present or in future and is ascertained liability. Any liability which is ascertained by the actuary as a charge/bonus or an 115 Max New York Life Insurance Company Ltd.
(Now known as Max Life Insurance Company Limited).
amount that is statutorily mandated to be kept aside for the benefit of policyholders (FFA), for future distribution cannot form part of actuarial surplus. The format prescribed under the IRDA Act or for that matter Insurance Act, 1938 cannot determine the quantum of actuarial surplus. These formats have been prescribed by IRDA to protect the interests of the policyholders and to ensure better regulation of the insurance sector. The deductibility of an item while computing taxable income would not be dependent upon treatment / presentation in the accounts - the same would have to be determined with reference to the provisions of the Act. From the sample contract and the notified regulations under the IRDA, it is apparent that payment of bonus is contractual obligation on the outstanding participating policies. Therefore bonus declared is not only ascertained liability but has also accrued to the policy holders in computing the profit from the life insurance business. No doubt there is change in Rule 2 of First Schedule by the Finance Act 1976 and explanatory notes to Finance Act 1976, as notified under Circular 202 in para 40.2 while clarifying the purpose of amendment states that no further deduction would be permitted in respect of any portion of the amount paid or reserved or expended on behalf of the policy-holders. But such explanatory note cannot control the language of Rule 2. It is a golden rule of the interpretation that if there is ambiguity and the language is not plain or clear the aid to explanatory notes are required 116 Max New York Life Insurance Company Ltd.
(Now known as Max Life Insurance Company Limited).
not otherwise. We noted similar view has been taken by the Hon'ble Supreme Court in the following cases:
i) Nawab Sir Mir Osman Ali Khan vs. Commissioner of Wealth-tax 162 ITR 888 (SC)
ii) Principle Chief Conservator of Forest & Anr. vs. JK Johnson 10 SCC 794
iii) State of Maharashtra vs. Marwanjee P. Desai &Ors 2 SCC 318.
85. We have also gone through the decision of the Apex Court in this regard in the case of Tarulata Syam & Ors vs. CIT 108 ITR 345 (SC), wherein it was held as under:
"To us, there appears no justification to depart from the normal rule of construction according to which the intention of the legislature is primarily to be gathered from the words used in the statute. It will be well to recall the words of Rowlatt J. in Cape Brandy Syndicase v. I.R.C.(1) at p. 71, that "in a taxing Act one has to look merely at what is clearly said. There is no room for any intendment. There is no equity about a tax. There is no. presumption as to a tax nothing is to be read in, nothing is to be implied. One can only look fairly at the language used".
86. We do not find any ambiguity in Rule 2 of the First Schedule. Rule 2 of the First Schedule does not refer to any deduction but merely refers to actuarial surplus or deficit determined in accordance with Insurance Act, 1938. Prior to amendment of law in 1976 there was limitation in the erstwhile Rule 3, which limited the allowability of the deduction pertaining to the amount set aside for the benefit of policy holders to 80%. Post amendment no such limitation exists. We do not find any provision under the Income tax which states that while arriving at actuarial surplus liability ascertained by the actuary as bonus payable in future or amount set aside for 117 Max New York Life Insurance Company Ltd.
(Now known as Max Life Insurance Company Limited).
further appropriation for the benefit of the policy holders would not be deductible. Actuarial surplus/deficit is the amount that is computed after providing for liabilities, which includes amount of future bonus payments set aside for the benefit of the policy holders both by way of bonus allocation as well as Funds for Future Appropriation. We noted that the old Form G, H and I prescribed under the Insurance Act 1938 clearly provide for the same. ITAT Bench in the case of ICICI Prudential Insurance Co. Ltd. (supra) has already held that accrual surplus or deficit has to be determined in the manner provided in old Form G, H & I. This decision of the co-ordinate Bench is binding on us. Therefore, any amount which is recognized as accrual liability has to be necessarily reduced while arriving at the actuarial surplus. Although IRDA has prescribed a new method of presentation i.e. share holders account and policy holders account to be shown separately though a consolidated balance sheet to be drawn up. But the norms regarding the actuarial valuation have not been altered so that recognition of the accrual liabilities by way of bonus allocation to the policy holders be excluded. We do agree that the term accrual surplus is not defined under the act. The CBDT Circular cannot control the interpretation of Rule 2. We find force in the submissions of the learned Sr. Advocate that CBDT Circular has limited application to a situation where the insurance benefits are assigned to third parties, where the benefits are to be paid/reserved/expended on behalf of the policy holder or the assignee. As the term "on behalf of" implies agency 118 Max New York Life Insurance Company Ltd.
(Now known as Max Life Insurance Company Limited).
relationship and when the benefits are assigned to third parties, insurance company acts as agent of the policy holder. Even otherwise, if we go to the explanatory note as given under para 40.2 of the Circular 202, according to this bonus paid to the policy holder will also be taxed but that is not the case of the Revenue. The Revenue has only contested the bonus declared and the incremental FFA. 89. We also noted that no such disallowance has been made by the Revenue in the earlier assessment years i.e. up to A.Y.2009-10 and it is for the first time that the CIT(A) has enhanced the assessment . We are of the view, even on the ground of consistency, the Revenue cannot discard the consistent and regular method followed for determining the taxable income without there being any change or otherwise, the bonus declared and the incremental FFA has been allowed as deduction by the Revenue. Our aforesaid view is supported by the following decisions. The relevant paragraphs of which are reproduced hereinabove while deciding ground no 2:
• Radhasoami Satsang Saomi Bagh vs. CIT 193 ITR 321 • CIT vs. Excel Industries Ltd 358 ITR 295 (SC).
87. Ground no. 4 relates to enhancement of Rs. 42,18,54,000/- the CIT(A) considering Funds for Future Appropriation ("FFA") as part of the actuarial surplus. We noted from the Funds for Future Appropriation aforesaid technical Form A-RA( as reproduced hereinabove) that a sum of ` 453478000/- has come after reducing from the closing balance the funds 119 Max New York Life Insurance Company Ltd.
(Now known as Max Life Insurance Company Limited).
available for future appropriation amounting to Rs 622938000/- a sum of ` 169460000/- which represented opening balance of Funds for Future Appropriation. The facts are that in the participating policies there was surplus amounting to Rs 558934000/- and after bringing the opening balance of the funds available for Future Appropriation Rs 55269000/- total surplus available was ` 614203000/- out of which sum of Rs 137080000 was transferred to the share holders account and the balance funds available were ` 477123000/- out of which ` 1432862000/- were allocated as bonus to the policy holders including a sum of ` 14278000/- participating policies- pensions. The CIT(A) while making enhancement treated the said FFA which were added during the year as part of the taxable income pertaining to the life insurance business as it is part of the actuarial surplus, while learned AR contended that it is not a part of actuarial surplus. As we noted from the Form A-RA this is an unallocated surplus relating to the participating policy holder. In fact, this fund has to be used by assessee in future to meet its contracted obligation towards policy holders. The contention of the learned AR is that this is akin to the policy holders liability which has been determined through due process of the actuarial valuation. If it is part of the liability while working out the actuarial valuation this fund will not form part of the accrual surplus. From provisions of section 44 read with Rule 2 of Schedule A, it is apparent that the profits and gains of a life insurance company has to be computed on the basis of the actuarial surplus. The assessee company is 120 Max New York Life Insurance Company Ltd.
(Now known as Max Life Insurance Company Limited).
contractually bound in terms of the insurance policies taken out to provide various benefit to its policy holders including, inter alia, survival benefits, cash or reversionary bonuses and other payouts / benefits linked to the happening of future uncertain events. The premiums earned by the assessee, therefore, in our opinion, have embedded obligation to make available such benefits in future. The premiums earned have to be set off by estimated liability to make available future benefit as actuary declared such provision in form of the FFA. In our view this present the provision of future bonus which it is bound to pay even though this liability has not been allocated but it is a ascertained liability and, therefore, while working out the actuarial surplus this has to be taken into account. While disposing of ground no.5 in the preceding para, we held that in the absence of any definition being given for actuarial surplus, we have to give a meaning to it, what actuarial surplus mean in common parlance. Actuarial surplus in our view represent the surplus i.e. the amount available for the shareholders after providing for all the expenses and ascertained liabilities of life insurance business. policyholders are not the shareholders but are the customers. The insurance policies are written by the company on the life of several insured persons while the liability of the assessee to make available the stipulated benefits to a particular insured may be contingent, such liability is definite and certain. Even otherwise also in view of the contract for the life insurance as well as the regulation given by the IRDA, the share holders are entitled only for 10% 121 Max New York Life Insurance Company Ltd.
(Now known as Max Life Insurance Company Limited).
of the surplus or deficit out of participating policy holders account; rest of the amount belong to the policy holders and company cannot allocate the funds to the share holders. Therefore, participating policyholders has a charge over this amount. These funds are generally kept as participating for FFA for declaring or smoothening bonuses in future. In fact, it represents the reasonable expectation of the future bonus on account of the performance of participating funds over the years. But FFA, in our view, represents the provision of definite and ascertained liability and, therefore, it is a charge on the profit while determining the profit and gains from the life insurance business. The learned AR in this regard relied on the decision of Hon'ble Supreme Court in the case of Bharat Earth Movers vs. CIT 245 ITR 428, which relate to the deductibility if provision for leave encashment to employees where the Supreme Court has noted the facts of the case as under ".... .... The company has floated beneficial schemes for its employees for encashment of leave. The officers are entitled to earned leave calculated at the rate of 2.5 days per month, i.e., 30 days per year. The staff (other than officers) is entitled to vacation leave calculated at the rate of 1.5 days per month, i.e., 18 days in a year. The earned leave can be accumulated upto 240 days maximum while the vacation leave can be accumulated upto 126 days maximum. The earned leave/vacation leave can be encashed subject to the ceiling on accumulation. The officers may at their option avail the accumulated leave or in lieu of availing the leave apply for encashment whereupon they would be paid salary for the period of leave earned but not availed. So does the scheme extend facility of encashment to the staff in respect of vacation leave. Any leave earned beyond the said ceiling limit of 240/126 days cannot be accumulated and goes a waste. It can neither be availed nor 122 Max New York Life Insurance Company Ltd.
(Now known as Max Life Insurance Company Limited).
encashed. The appellant company has created a fund by making a provision for meeting its liability arising on account of the accumulated earned/vacation leave. In the assessment year 1978- 1979 an amount of Rs.62,25,483/- was set apart in a separate account as provision for encashment of accrued leave. It was claimed as a deduction. In the opinion of the Tribunal the assessee was entitled to such deduction. The High Court has formed a different opinion and held that the provision for accrued leave salary was a contingent liability and therefore was not a permissible deduction. The reasoning applied by the High Court is that the liability will arise only if an employee may not go on leave and instead apply for encashment. If the employee avails the leave as per his entitlement, then he would be paid salary for the period of leave and liability for encashment would not arise. The other event on the occurrence of which the employee may stake his claim is termination or retirement which again is an uncertainty. Accordingly the High Court has answered the question in the negative, that is, in favour of the Revenue and against the assessee... .... "
Ultimately, the Hon'ble Supreme Court laid down the following proposition of law:
"The law is settled if a business liability has definitely arisen in the accounting year, the deduction should be allowed although the liability may have to be quantified and discharged at a future date. What should be certain is the incurring of the liability. It should also be capable of being estimated with reasonable certainty though the actual quantification may not be possible. If these requirements are satisfied the liability is not a contingent one. The liability is in present though it will be discharged at a future date. It does not make any difference if the future date on which the liability shall have to b e discharged is not certain."
88. We also noted that while holding so the Supreme Court took note of the principles laid down in the earlier judgment in the case of Metal Box Co. of India Ltd. Vs. Their Workmen 73 ITR 53 wherein the Apex Court allowed 123 Max New York Life Insurance Company Ltd.
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provision for gratuity payable on termination of employees' service due to retirement/death or termination, worked out on an actuarial basis.
89. No doubt in our view, this decision is not strictly applicable to the facts of the case because in this decision, the question was relating to the deductibility of the expenditure towards the provision for leave encashment i.e. for the purpose of computation of profit and gains from business but this decision may assist to the assessee for ascertaining whether the funds earmarked to be distributed to the customers from whom the assessee is getting income by way of premium i.e. whether the amount in FFA a/c is a liability which is deductible while working out acturial surplus. This is an undisputed fact that the assessee cannot utilise these funds for shareholders or distributing them as dividends to the shareholders. On the basis of this decision of Hon'ble SC, one can say that the amount allotted to the FFA a/c is a provision for a definite liability although it may arise when the bonus is distributed out of this. Therefore, since the amount is earmarked for policyholders, it cannot form part of the acturial surplus rather it has to be reduced while working out the actuarial surplus under Rule 2 Schedule A of the Income Tax Act for determining profit and gains of assessee from life insurance business. We have also gone through the decision of Delhi HC in case of CIT v Triveni Engineering 336 ITR 374 as relied by Senior Advocate. This decision in our view will not apply to the facts of the case. In that case, the contract receipts taken as income includes the unbilled revenue for which 124 Max New York Life Insurance Company Ltd.
(Now known as Max Life Insurance Company Limited).
bills to be raised in succeeding year. Therefore, the provision for forseeable losses towards completion of contract was allowed as deduction. It is not a case where all future premiums to be received in th case of present assessee are treated as part of the income. We have also gone through the decision of Rotor Controls Pvt Ltd v CIT 314 ITR 62(SC). This decision relate to the claim of the deduction u/s 37 for provision of warranty. This decision may assist only for ascertaining whether while calculating acturial surplus, there exists any liability which has to be reduced while calculating acturial surplus. In this decision, Hon'ble SC laid down following four aspects to be satisfied so that the provision made is not to be regarded as a contingent liability : -
(i) The provision relates to present obligation;
(ii) It arises out of obligating events;
(iii) It involves outflow of resources; and
(iv) It involves reliable estimation of obligtion.
If these principles are applied to the FFA, in our view the FFA since being earmarked for participating policyholders and represents provision for expectation of further bonuses based on terms & conditions laid down in the insurance policies and will also involve outflow of the resources, will represent ascertained liabilities towards the policyholders as it cannot be used by the insurance company for allocating it to the shareholders although it has not due to the policyholders.125
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90. We have also gone through the decision of Bijli cotton Mills as relied by learned AR. This decision of SC in CIT v Bijlee Cotton Mills 116 ITR 60 is on different facts. In that case, dharmada was collected for spending towards charity but in the impugned case, assessee is collecting premiums which are not earmarked to be spent on policyholder, rather, out of the surplus arrived at after meeting the expenses, shareholders are entitled upto 10% of surplus. In the case of ACIT v Mumbai International Airport P Ltd 184 TTJ 229, passenger service fee was being collected to be spent on security agencies, while it is not the case of assessee that all the premiums received have to be earmarked or spent on policyholders. Therefore, these decisions cannot apply to the facts of the assessee's case. Similar is the case in UP Bhoomi Sudhar Nigam 280 ITR 197 (Alld). We have also gone through the decision of CIT v Modipon (SC) 87 Taxmann.com 275. This decision also in our view is not applicable as in that case the assessee has departed the amount towards the excise duty liability which is to be discharged in future but in the case of the assessee amount remains with the assessee. We have also gone through decision of Mumbai HC in CIT v Nagri Mills 33 ITR 681 as well as Delhi HC in CIT v Shriram Pistons & Rings 220 CTR 404. These decisions cannot be applied in the impugned case as these decisions relate to the issue of allowing deduction but does not relate to the issue of computation of actuarial surplus. Whether while computing acturial surplus, amount appropriated towards FFA will form part of acturial liabilities or not. learned 126 Max New York Life Insurance Company Ltd.
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DR basically reiled Rule 3 & old Rule 2 which were in existence prior to the amendment made by the Finance Act 1976 and also given the logic as has been mentioned by us earlier why the rate of tax on the company carrying on life insurance business has been reduced from 52.5% to 12.5% as well as para 40.2 of Circular No. 202 dt 05/09/1976 which deals with the Explanatory Notes in respect of the amendment made by Finance Act,1976 as well as the decisions as discussed by us while disposing off ground no. 5. We have already taken a view while disposing off ground no. 5 that the golden rule of interpretation is that external aid to the interpretation is not required when there is no ambiguity in the relevant provision and the language of the relevant provision is plain and clear. The language of Rule 2 is plain and clear and there is no ambiguity. Therefore, as held by us earlier, explanatory note given in the circular 202 will not help the Revenue while interpretating Rule 2 of Schedule A. We noted that Hon'ble SC in the case of State of Maharashtra v Marwanji P Desai & Others 2 SCC 318 has observed as under::-
"True intent at the legislature shall have to be gatherd and dciphered in its proper spirit having due gard t he language used therein. Statemnts of objects nd reasons is undoubtedly an aid to construction but that by itself cannt be terme to be and by itelf cannot be interreted. It is an useful guide but the interpretations and the intent shall have to be gathered from the entirety of the statute and when the language of the sections providing an appeal to a forum is clear and catgorical no external aid is permissible in interpretations of the same." .127
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Similarly, we noted SC vide order dt 17/10/2011 in the case of Principal Chief Conservator of Forests & Other v J K Johnson & Others 2011 10SCC 794 held as under:-
"When the language of the statutory provisions is plain and clear no exernal aid is required and the legislative intention has to be gathered from the languag employed."
Not only this, we noted Hon'ble SC in the case of NawabSir Mir Usman AliKhan v CWT 162 ITR 888 while interpreting the word 'belonging to' in the Wealth Tax Act observed in respect of injustice being caused to the assessee as under-
The position is that though all statutes including the statute in question should be equitably interpreted, there is no place for equity as such in taxation laws. The concept of reality in implementing a fiscal provision is relevant and the Legislature in this case has not significantly used the expression " owner " but used the expression " belonging to ". The property in question legally, however, cannot be said to belong to the vendee. The vendee is in rightful possession only against the vendor. Speaking for myself, I have deliberated long on the question whether in interpreting the expression "belonging to" in the Act, we should not import the maxim that " equity looks upon a thing as done which ought to have been done " and though the conveyance had not been executed in favour of the vendee, and the legal title vested with the vendor, the property should be treated as belonging to the vendee and not to the assessee. I had occasion to discuss thoroughly this aspect of the matter with my learned brother and since in view of the position that legal title still vests with the assessee and the authorities, we have noted, are preponderantly in favour of the view that the property should be treated as belonging to the assessee in such circumstances, I shall not permit my doubts to prevail upon me to take the view that the property belongs to the vendee and not to the assessee. I am conscious that it will work some amount of injustice in such a situation because the assessees would be made liable to bear the tax burden in such situations 128 Max New York Life Insurance Company Ltd.
(Now known as Max Life Insurance Company Limited).
without having the enjoyment of the property in question. But times perhaps are yet not ripe to transmute equity on this aspect in the interpretation of law-much as I would have personally liked to do that. As Benjamin Cardozo has said, " The judge, even when he be free, is not wholly free ". The judge cannot innovate at pleasure. It may be said that the Legislature having designedly used the expression " belonging to " and not the expression " owned by "
had perhaps expected judicial statesmanship in the interpretation of this expression as leading to an interpretation that in a situation like this, it should not be treated as belonging to the assessee but, as said before, times are not yet ripe and in spite of some hesitation, I have persuaded myself to come to the conclusion that for all legal purposes, the property must be treated as belonging to the assessee and perhaps the Legislature would remedy the hardship of the assessee in such cases if it wants. Even though the assessee had a mere husk of title and as against the vendee no reality of title, as against the world he was still the legal owner and the real owner.
91. We therefore, are of the view that in case the Revenue is of the opinion that due to the language of Rule 2, the companies carrying on life insurance business will be paying unjustifiably tax at a lower rate, the Revenue can approach the Parliament for making the necessary amendment in the Income Tax Act.
92. We even noted upto Assessment Year 2009-10, the Revenue has consistently excluded amount appropriated for FFA out of the available surplus for the purpose of ascertaining acturial surplus while computing profit and gains of life insurance business of the assessee. Therefore, following principle of consistency as has been held by Hon'ble SC in the case of Radhasaomi Satsang Baug v CIT 193 ITR 321 & that of CIT v Excel Industries 129 Max New York Life Insurance Company Ltd.
(Now known as Max Life Insurance Company Limited).
Ltd 358 ITR 295, we set aside the order of CIT(A) and delete the enhancement made by CIT(A) in this regard.
93. Ground no. 6 relates to enhancing the assessment by making additions for the provision for doubtful debts amounting to ` 2,41,83,000/- in shareholders' P & L a/c. We heard rival submissions and carefully considered the same while disposing of ground no. 2 in the preceding paragraph. We have already held that income in the shareholders a/c also forms part of profit & gains from life insurance business of the assessee. Income has to be computed as per Rule 2 of Schedule I r.w.s. 44 of the Income Tax Act. S. 44 debars Revenue to apply the provisions of Sections 28 to 43B of the Income Tax Act while computing profit & gains from an insurance company and income has to be computed with the Rules contained in the First Schedule. In view of this specific provision, in our view the Revenue cannot apply the normal provisions of the Income Tax Act for computing the income under the Income Tax Act. From form A - P & L a/c i.e. shareholders a/c pg 178 of the audited balance sheet and P & L a/c, it is apparent that the assessee has made provision for doubtful debts amounting to ` 2,41,83,000/-. We noted that Revenue on the one side disallowed provision for doubtful debts but on the other side has taken the provision to the extent there is increase in value of investment other than temporary decline, as part of the income. This implies that CIT(A) has just taken the contrary view. We have also examined the contention of the learned DR that the assessee himself added back the 130 Max New York Life Insurance Company Ltd.
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royalty while computing the shareholders income. This implies that the assessee has accepted the view of the Revenue that the income in the shareholders a/c has to be computed under the normal provisions of the computation of income in Income Tax Act. Royalty paid by the assessee in our view cannot be regarded to be an expense relating to the life insurance business. Therefore there is nothing wrong caused to the Revenue as Royalty cannot be regarded to be liability incurred for life insurance business. We therefore set aside order of CIT(A) on this issue and delete the enhancement made by CIT(A) by ` 2,41,83,000/-.. Thus this ground stands allowed.
94. Ground no. 7 & 8 relates to the sustenance of disallowance of ` 2,50,00,000/-. made by the Assessing Officer on account of donation paid by the assessee. Ground no. 8 relates to the sustaining disallowance of ` 2500/- in respect of share issue expenses. While disposing of ground no. 6 in preceding paragraph, we held that the income of the assessee has to be computed in accordance with Rule 2 of First Schedule provided in S. 44 of the Income Tax Act and the normal provisions of the Income Tax Act relating to the profit and gains of the business will not apply. Section 44 specifically excludes the provisions of computaiton of the income chargeable under the head "Interest on Securities", "Income from house properties", "capital gain"
or "Income from other sources" or in section 199 or in section 28 to 43B and requires that the profit and gains of any business of insurance has to be computed in accordance with the rules contained in the First Schedule.131
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Section 28 to 43B are applied when the income is computed under the head "Income from business" but in view of section 44 these provisions are not to be applied while computing the profit and gains of business of insurance.
The learned DR even though vehemently contended that since the donations paid are covered under section 80G, therefore, they have to be disallowed.
The provision of section 80G falls under Chapter VI-A and the deduciton u/s 80G has to be allowed out of the gross total income of the assessee. The gross total income arise at after computing income under each head of income and after giving effect to the inclusion of the other persons income as stipulated under Chapter V, under section 60 to 65, whichever is applicable, and after aggregating the income under various heads of income giving effect to the set off or carried forward of the losses. This means applicability of the provisions of Chapter VI-A have not been denied under section 44 while comptuing the income in accordance with Rule 2 contained in the First Schedule. We find force in this regard and agree with the contention of the learned DR as it is not a case that the deduciton of the donations while comptuing the income from insurance business has to be allowed as per the provision of section 28 to 43B. The learned Senior Advocate did not advance any argument that the claim of the donation made by the assessee would have been eligible for deduciton under section 37 of the Income tax Act while computing the income under the head "Income from buisness or profession"
had it not been the question of determining the profit and gains of business 132 Max New York Life Insurance Company Ltd.
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of life insurance. We, therefore, dismiss ground no.7 taken by the assessee and confirm the disallowance of ` 2,50,00,000/- as there is no submission or argument made on behalf of the assesee that the assessee is eligible for deduction under section 80G of the Income tax Act and the assessee had complied with the conditions as stipulated under section 80G. It is also not the case of the assessee that the assessee has incurred these expenses eligible for deduction under section 35CCA, 35CCB, 35CCC or 35CCD so that we have taken a view that while computing the income from insurance business, in view of specific provisions of section 44 no disallowance could have been made.
95. On the basis of this finding given in preceding para, while deleting the enhancement made by CIT(A) in respect of provision for doubtful debts we also delete the disallowance of 2,500/- taken in ground no. 8 as the assessee derived income from life insurance business only and the computation of the income from life insurance business, in view of S. 44 of the Income Tax Act, has to be made in accordance with Rule 2 of First Schedule of the Income Tax Act which debars Revenue to apply provision of S. 28 to 43B of the Income Tax Act. Thus ground no. 8 stand allowed.
96. Ground no. 9 relates to directions given by CIT(A) to AO to re-compute the losses assessed in earlier AYs for the purpose of allowing setoff thereof u/s 72 of the Income Tax Act. learned AR in this regard has drawn our 133 Max New York Life Insurance Company Ltd.
(Now known as Max Life Insurance Company Limited).
attention towards para 16 of order of CIT(A) in which CIT(A) stated that assessee has claimed setoff of c/f loss of AY 2002-03 but has not established that the same was determined in accordance with S. 44 read with First Schedule of the Income Tax Act. CIT(A) we noted asked assessee to file computation of income, acturial report & annual report of AY 2002-03 for claiming setoff which according to him assessee has not filed. As per CIT(A), the setoff has to be of amount of loss from shareholders a/c (after adjustment made in statemnet of income and additions made/sustained in assessment order) after excluding transfer to & from policyholders a/c & accrual deficit arrived at by reducing from surplus as per new Annexure I, amount transferred from shareholders a/c to policyholders a/c in that year and accordingly CIT(A) recomputed the acturial deficit of policyholders a/c for AY 2007-08, 2008-09 & 2009-10 by holding that opening FFA is to be reduced from these figures to arrive at correct deficit of life insurance business for these years. CIT(A) took the view that similar calculation is to be made for AY 2002-03 & also mention that adjustment made in computation of income including adjustment for profit/loss u/s 10 (23AAB) and addition made in assessment order pertaining to the expenses in A-PL have to be made to arrive at correct profit/deficit and accordingly directed AO that AO will therefrom grant setoff u/s 72 on the basis of the acturial report, annual report, statement of income & additions pertaining to the shareholders a/c made sustained in assessment order/ Appellate Order of AY 2002-03 other 134 Max New York Life Insurance Company Ltd.
(Now known as Max Life Insurance Company Limited).
earlier years which in our view implied that CIT(A) directed AO to recompute c/f losses of AY 2002-03 & other earlier years. This direction in fact amounts to order of remand and the opening of assessment of prior years. Learned Sr. Advocate contended that these directions are illegal as the Appellate Authority does not have any power beyond the assessment year in question. We noted that SC in the case of ITO v Murlidhar Bhagwandas 52 ITR 335 has clearly laid down that the jurisdiction of Appellate Authority are restricted to the assessment year in question. It cannot extend to assessment of the year which is not subject matter of the appeal. Similar view has been taken in the case of CIT v Manekshaw Sons 74 ITR 1. In this regard at the outset the learned DR contended that as per First Schedule profit and gains of life insurance business are to be taken at gross valuation surplus after excluding the earlier years surplus over deficit. Therefore, question of setoff of loss of earlier years does not arise. S. 72 is a part of computation of total income. He also referred to the order passed by CIT(A) u/s 154 dt 07/02/2017 contending that whether income has correctly been computed in the year for which the losses are b/f & setoff is claimed has to be looked into by the AO in the year he is allowing setoff of the losses or the assessee has claimed setoff of b/f losses. For this he gave the example that if the assessee is having salary income say Rs 1 lakh but while filing return deducted household expenses at Rs. 2 lakhs and thereby returned loss at Rs 1 lakh and the return has been processed u/s 143(1) of the earlier year and the assessee claims in 135 Max New York Life Insurance Company Ltd.
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subsequent year setoff of b/f lossess of Rs. 1 lakh. AO who is allowing setoff is bound to recompute the income of the earlier year, otherwise the illegality will remain perpetuated. We do not agree with the contention of the learned DR as in our opinion each AY is an independent assessment, income has to be computed and assessed for each of the assessment year. First income has to be computed under the different heads of income after allowing the deductions specified under each head of income namely salary, house property, profits and gains of business & profession, capital gains & income from other sources as per Chapter IV of the Income Tax Act. After computing the income under each head of income as per Chapter V, income of other persons, if applicable, has to be included in assessee's Total Income under the respective head of income. Subsequent to that as per Chapter VI, the income has to be aggregated & setoff or carry forward and setoff of the loss as per provisions of S. 70 to 80 has to be allowed and thus income so arrived at after allowing the setoff of b/f losses and after aggregating it under various heads is regarded to be Gross Total Income. Total Taxable income is arrived at after allowing deductions as stipulated under Chapter VIA. This itself proves that setoff of b/f losses u/s 72 has to be allowed prior to the computation of the Gross Total Income. S. 72 allows the c/f of business losses upto 8 assessment years immediately succeeding the assessment year for which the loss was first computed. This itself proves that the year in which loss has been computed and is being carry forward are different from 136 Max New York Life Insurance Company Ltd.
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AY in which loss is being setoff. Thus both AYs are different and therefore assessment has to be made separately. If the assessment has been made of earlier year in which loss has been computed and c/f is allowed, the loss cannot be computed of that AY in the AY where setoff of past losses are allowed. Coming to the example given by learned DR, we are of the view that in case, Assessing Officer feels that mistake has been committed or there is underassessment by computing the loss in the earlier AY, the action should be taken in that AY in accordance with provisions of the Income Tax Act u/s 154, 147 or 263 whichever is applicable but the Assessing Officer of the AY in which the setoff of b/f losses is claimed cannot re-compute taxable income of the AY re-determining the losses to be c/f & setoff in the subsequent AY. We have gone through the decision of Lodhi properties Co Ltd of Delhi Bench of Tribunal reported in 36 SOT 128 on which learned DR has heavily relied upon. In our opinion, this decision will not apply to the facts of the impugned case. The issue in that case was whether assessee shall be entitled to c/f & setoff loss in any subsequent year. Tribunal decided this issue shall be decided by Assessing Officer of subsequent AY in which such claim is made. Tribunal nowhere in that decision held that the loss determined in the AY for which setoff has been claimed has to be re-determined or re-computed by Assessing Officer of the AY in which assessee has claimed setoff. This decision in fact relates to the order passed u/s 263 and in this decision it was held:
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Max New York Life Insurance Company Ltd.
(Now known as Max Life Insurance Company Limited).
"The question arises whether the present AO, who completed the assessment for the asst. yr. 2004-05 and determined the quantum of loss at Rs. 2,66,97,383 is justified in using the expression "loss o be carried forward". It is nt in dispute that themandate under section 80 is that the loss under sections 72(1),73(2),74(1), 74(3) and 74A(3) if not determined in pursuance of a reurn filed in accordance with the provisions of sub-s.(3) of section 139 shall not be carried forward and set off. S. 139(3) enacts that if the assessee who has sustained a loss in any previous year under the head "Profits and gains of business or profession" or under the head "Capital gains" and claims that the loss or any part thereof should be carried forward u/s 72(1), 73(2), 74(1), 74(3), 74A(3), a return of loss can be filed in the prescribed manner and containing such other particulars as may be prescribed, and that all the provisions of the Act shall apply as if it were a return u/s 139(1). S. 80 starts with the expression "notwithstanding anything contained in this chapter" meaning thereby that s. 80 shall apply notwithstanding anything contained in chapter VI, i.e., aggregation of income and set off or carry forward of loss. S. 72 deals with carry forward and set off of business loss, not being a loss sustained in a speculation business, and it provides that where net result of the computation under the head "Profits and gains of business or profession" is a loss and such loss cannot be or is not wholly set-off against income under any head of income in accordance with the provisions of s. 71, so much of the loss as has not been so set off shall be carried forward to the following AY and shall be set off against profits and gains, if any, of any business or profession for that AY subject to the provision of Chapter VI. S. 24(3) of the Act, 1922, is analogous to s. 157 under which the ITO has to notify to the assessee the amount of loss as computed by him. Therefore, the present AO determining the loss shall only determine the quantum of the loss incurred in the present AY and shall notify the same to the assessee and whether this loss shall be eligible to be set off against the profit of the subsequent AY cannot be decided by him, and it is only the ITO dealing with the assessment of the subsequent AY in which any claim of set off of loss is made by the assessee to decide whether the assessee shall be entitled to setoff of the loss of the present AY against the profits and gains of business of the subsequent AY. It is, therefore, held that the AO's order is erroneous and prejudicial to the interests of the Revenue to the extent the AO has made an observation that loss to be carried forward. The expression "to be carried forward" mentioned by the AO in his assessment order is undoubtedly rendering the assessment order erroneous and prejudicial to the interests of the Revenue. The issue whether the 138 Max New York Life Insurance Company Ltd.
(Now known as Max Life Insurance Company Limited).
assessee shall be entitled to carry forward and set off of this loss in any subsequent year shall be decided by the AO of the subsequent AY, in which such claim is made by the assessee. In this respect, therefore, the CIT was very much justified in holding that the assessment order is erroneous and prejudicial to the interests of the Revenue in so far as the observation to the effect "loss to be carried forward" made by the AO is concerned and he, accordingly, was justified in setting aside the assessment on the above issue to be made afresh after giving opportunity of being heard to the assessee. In the result, the present appeal filed by the assessee is partly allowed for a statistical purpose in the manner as indicated above. - CIT v Manmohan Das (1966) 59 ITR 699 (SC) applied. In this decision, we noted that the Tribunal nowhere has taken a view that Assessing Officer of the present AY shall re-compute or re-determine the loss of AY for which assessee claimed as setoff in the present AY. Tribunal only took the view that it is only Assessing Officer of that AY in which claim of setoff of loss is made shall decide whether assessee is entitled to setoff the loss and therefore Assessing Officer of AY in which assessee has incurred loss cannot observe 'loss to be c/f'. If we look into directions given by CIT(A) in case of assessee, we find that CIT(A) although allowed assessee to setoff of losses u/s 72 of AY 2002-03 & other earlier years but directed Assessing Officer to grant setoff on the basis of actuarial report, annual report, statement of income and additions pertaining to shareholders a/c made/ sustained in assessment order/ appellate order of 2002-03 other earlier year.
Such direction in our view means the Assessing Officer been directed to re-
compute the income/ loss of the earlier year. This will tantamount giving the direction of re-assessing income of AY for which no appeal is pending before CIT(A) which is apparently illegal in view of settled position of law on the 139 Max New York Life Insurance Company Ltd.
(Now known as Max Life Insurance Company Limited).
basis of decision of SC in case of ITO v Murlidhar Bhagwandas 52 ITR 335 (SC). This position of law has also been followed by Delhi HC in case of Maubeni India P Ltd v CIT 328 ITR 306. We, therefore, amend the direction given by CIT(A) under para 16 of its order and accordingly direct AO to grant setoff u/s 72 on basis of income finally assessed in the A.Y. 2002-2003 or earlier year in accordance with provisions of S. 72 of the Income Tax Act.
Thus this ground stands allowed.
97. Now coming to the additional ground taken by the assessee which relates to the claim of deduction by the assessee u/ 10 (34) in respect of dividend income, we noted that this issue is duly covered by decision of Mumbai Bench of this Tribunal in case of ICICI Prudential Insurance Company Ltd v ACIT 140 ITD 41 in which under para 47 while dealing with similar issue following decision of General Insurance Corp of India v CIT 204 Taxman.com 587 by Bombay HC gave clearcut finding that assessee is entitled to exemption u/s 10(34) for the dividend income. We also noted while disposing of ground relating to applicability of S. 14A for disallowance of expenditure in respect of income not forming part of Total Income. This Tribunal Mumbai Bench in the aforesaid case under para 45-46 took the view that since S. 44 creates a specific exception to the applicability of S. 28-43B, therefore purpose object & purview of S. 14A has no apllicability to profits and gains of an insurance business. This decision of co-ordinate Bench is binding on us. The learned DR in this regard although referred to decision of 140 Max New York Life Insurance Company Ltd.
(Now known as Max Life Insurance Company Limited).
Delhi Tribunal in the case of assessee reported in 86 Taxman.com 239 for AY 2002-03 dt 17/10/2017, we noted Tribunal took the view when the question of application of provision of S. 92 came before it, it took the view that S. 92 applied to an assessee carrying on insurance business. In case of computation of determination of ALP of International transaction, we are concerned with S. 92 in the case of an assesse carrying on life insurance business, there has to be two staged computation of income. First income has to be computed as per S. 44 read with First Schedule & while computing income all the other provisions relating to the computation of income chargeable under the head 'Interest on Securities', 'income from house property', 'income from capital gains' or 'income from other sources' or in S. 199 or in S. 28-43B has to be disregarded. Second stage comes after computation of income u/s 44, computation as per provision of S. 92 by making addition on a/c of transfer pricing adjustment.
98. This decision in our view will not apply w.r.t. the applicability of S. 14A as the applicability or inapplicability of S 14A has to be considered at the stage of making computation of income u/s 44. We also do not agree with submissionof learned DR since the only activity in shareholders a/c is of investment, it cannot be said that no expenditure was incurred for earning dividend. In this regard, we may state question before us is not whether any expenditure has been incurred or not for earning of dividend but the question relates to the applicability of S. 14A, which issue has already been decided by 141 Max New York Life Insurance Company Ltd.
(Now known as Max Life Insurance Company Limited).
co-ordinate Bench against Revenue in view of discussion under para 46 of the order of this Tribunal Mumbai Bench in case of ICICI Prudential (Supra), in which they have followed the decision of Delhi Bench in case of Oriental Insurance Co Ltd v ACIT 130 TTJ (Delhi) 338. No contrary decision for applicability of S. 10(34) & S. 14A was brought to our knowledge. We accordingly allow the additional ground and dismiss the plea of learned DR that directions be given in case exemption is granted u/s 10(34) to disallow be expenditure u/s 14A of the Income Tax Act.
Cross objection filed by Revenue:
99. The only issue involved in ground of appeal in cross objection relates to the deletion of the addition of ` 7,10,43,000/- made by AO on a/c of 'profit from sale of investment' on a/c of double addition. After hearing rival submissions and going through orders of tax authorities below, we noted Assessing Officer found from audited a/cs furnished by assessee that assessee earned income of ` 7,10,43,000/- on sale of investment. Assessing Officer was of the view that this income could not be considered as income from insurance business of assessee. He therefore treated said income to be business income falling within S. 28 of the Income Tax Act & added the same in assessable income of the assessee. When matter went before CIT(A), CIT(A) noted that as per shareholders P & L A/c, there is a net loss of ` 20,91,40,000/- which has been arrived at after considering the said income of ` 7,10,43,000/- and a loss of ` 98,84,000/- from sale/redemption of 142 Max New York Life Insurance Company Ltd.
(Now known as Max Life Insurance Company Limited).
investment. CIT(A) took the view irrespective of whether this profit/loss pertains to life insurance business or not, the addition of the same cannot be made as it will lead to inclusion of this amount twice in Total Income. He therefore deleted said addition as in his opinion disputes remain only whether income in shareholders a/c is an income from insurance business. we noted from form A-PL i.e. P & L a/c appearing at page 177 & 178 of audited final a/cs that income amounting to ` 7,10,43,000/- has duly been shown by assessee under the head 'income from investment' and is duly included in the gross receipt of ` 1,43,19,19,000/- and loss of ` 20,91,40,000/- has been arrived at after considering said income. Therefore we find that CIT(A) has correctly observed that this is a double addition in income of assessee and he has rightly deleted the said addition. We do not find any illegality or infirmity in the order of CIT(A) while deleting the said addition. Thus the cross objection filed by Revenue stands dismissed.
100. During the course of the hearing, learned DR raised a plea under Rule 27 in respect of sum of `58,62,00,000/- which represents amount transferred from shareholders a/c to policyholders a/c. He pointed out that CIT(A) in this regard held that there may not be any dispute about taxability of this amount in view of decision of ITAT Mumbai Bench in case of ICICI Prudential Co Ltd (supra). We have gone through Rule 27 of the Income Tax (Appellate Tribunal Rules 1963). This Rule states that 'the respondent, though he may, 143 Max New York Life Insurance Company Ltd.
(Now known as Max Life Insurance Company Limited).
not have appealed, may support the order appealed against on any of the grounds decided against him.' Before applying the Rule 27, in our opinion, the following conditions must be satisfied by the Respondent:
a) Respondent has taken a ground of appeal before appellate authority against whose order appeal has been filed before Tribunal and
b) This ground must be decided against the Respondent.
c) The respondent must support the order of CIT(A) on the ground decided against the assessee
101. We noted from the order of CIT(A) that Revenue has not come in appeal before CIT(A). Even no such ground has been taken by the Revenue before CIT(A) about the taxability of ` 58,62,00,000/-. On this basis itself, in our view, the plea taken by learned DR cannot be admitted under Rule 27 and is bound to be dismissed. We noted that it is a case where CIT(A) exercised its powers as entrusted on him u/s 251(1)(a) and enhanced the assessment. CIT(A), if taken a decision that in respect of sum of ` 58,62,00,000/-, income of assessee cannot be enhanced. This cannot tantamount that CIT(A) has decided ground taken by Revenue before CIT(A) against the Revenue. It is a case where CIT(A) decides to enhance income of assessee in respect of 2 issues relating to allocation of the funds to policyholders and incremental FFA. If CIT(A) has not invoked the enhancement power in respect of sum of ` 58,62,00,000/-, it cannot tantamount that CIT(A) had decided the ground against the Revenue i.e. the 144 Max New York Life Insurance Company Ltd.
(Now known as Max Life Insurance Company Limited).
Respondent in assessee's appeal and no quesiton of supporting the order of CIT(A) on the ground decided against the Respondent arise. In view of this fact, plea of the learned DR cannot be accepted under rule 27 as it is not a case where rule 27 is applicable in respect of this issue. Even otherwise, it is not a case where the Revenue has taken a ground in the cross objection filed against the order of CIT(A) on this issue. Even otherwise, Revenue cannot file an appeal without getting a direction u/s 253(2) from the Principal Commissioner or Commissioner. Before us, copy of any such direction raising this issue has not been filed. Thus, we dismiss the plea of learned CIT DR raised under rule 27 of ITAT Rules.
102. Before concluding, we appreciate the submissions made and sincere effort put by the learned DR for making us aware of various provisions of Income Tax Act, Insurance Act, 1938 as well as IRDA Act, 1999 which are applicable for computing the income of an assessee carrying on the life insurance business. The manner he presented the case as well as the arguments before us is laudable. In our view, for preparing the submission and the arguments before us he would have burnt the candle at the midnight for various days. Although the hearing went on continuously for four days, for about three to four hours, we did not find any tiredness on the face of the learned CIT-DR. We always found him fresh and cheerful. During our working in the ITAT, we seldom find such labourious and hardworking CIT- DR , who have command over the subject.
145
Max New York Life Insurance Company Ltd.
(Now known as Max Life Insurance Company Limited).
103. In the result, the appeal filed by the assesee is partly allowed and the corss objection of the revenue stands dismissed.
Order pronounced in the open court on 5th day of January, 2018.
Sd/- Sd/-
(Beena A Pillai) (P K Bansal)
JUDICIAL MEMBER VICE-PRESIDENT
Mumbai; Dated: 5th January, 2018
SA
Copy of the Order forwarded to :
1. The Appellant.
2. The Respondent.
3. The CIT(A),Delhi
4. The CIT
5. DR -"E", ITAT, Delhi
BY ORDER,
#True Copy #
Assistant Registrar
Income Tax Appellate Tribunal, Mumbai