Disallowance under Section 14A unsustainable because income under Section 44 does not need head-wise splitting
Fact and issue of the case
The appeal is preferred by the Assessee & Revenue against the order dated 26.12.2017 of CIT(A)-22, New Delhi (hereinafter referred as Ld. First Appellate Authority or in short Ld. ‘FAA’) in appeal No. 202/17-18/CIT(A)- 22, New Delhi arising out of an appeal before it against the assessment order dated 15.03.2016 passed u/s 143(3) of the Income Tax Act, 1961 (hereinafter referred as ‘the Act’) by the DCIT, LTU, New Delhi (hereinafter referred as the Ld. AO).
The facts in brief are that return of income declaring total income under normal provisions of the Act at Nil and book profit u/s 115JB at Rs. 6,60,63,49,113/- was filed which was taken up for scrutiny. The assessee is a public sector undertaking of Government of India and is in the business of Non Life Insurance. The assessee offers insurance covers for large projects like power plants, petrochemical, steel and chemical plants. It also offers various insurance products like Motor Policies, Health-Mediclaim/Overseas Mediclaim/ Personal Accident: Motor Vehicle, Agriculture/ Sericulture/ Poultry, Aviation, Marine and other miscellaneous policies. During the assessment proceedings as in earlier year the following issues cropped up for determination and the same were examined by the Ld. AO.
> Profit on sale of investment.
> Interest income not provided as income.
> Disallowance of depreciation u/s 32.
> Disallowance u./s. 14A.
> Guest House Expenses.
> Provision for standard assets.
Ld. AO made additions while following the earlier years and Ld. CIT(A) had given relief to the assessee in regard to the deletion of addition u/s 14A and deletion of 50 % disallowance on account of expenses incurred on guest house. Accordingly, Revenue is in appeal raising following grounds :
On the facts and circumstances of the case and in law, the ld. CIT(A) has erred in deleting the addition of Rs. 49,51,26,420/- made u/s 14A of the I. T.A ct by the AO.
On the facts and circumstances of the case and in law, Ld. CIT(A) has erred in deleting 50% disallowance of Rs. 57,69,416/- on account of expenses incurred on Guest House made by the AO.
The appellant craves leave to, add to, alter, amend or vary from the above grounds of appeal at or before the time of hearing.
Assessee is in appeal raising following grounds
That on facts and in law the commissioner of income tax (appeals) [hereinafter referred to as “CIT(A)”] has erred in upholding an addition to total income of Rs. 8,00,23,29,329/- on account of Profit on Sale/ Redemption of Investment.
That on facts and in law the CIT(A) erred in upholding the action of Assessing Officer [hereinafter referred to as “AO”] in denying benefit of exemption u/s 10(38) of the Income Tax Act, 1961 [hereinafter referred to as “Act”].
Without prejudice, on facts and in law the CIT(A) erred in upholding the action of AO in denying benefit of concessional rate of tax as per section 111A and / or 112 of the Act.
That on facts and in law the CIT(A) erred in upholding disallowance of Rs. 52,88,173/- out of total depreciation allowance of 1,82,35,078/- claimed by the appellant under section 32 of the Act.
That on facts and in law the AO/ CIT(A) erred in making/ upholding the above disallowance without considering the fact that unlike earlier years assessments / appeals all the necessary details relevant to depreciation allowance claim for 2013-1 4 were on record.
On the facts and in law the CIT(A) erred in upholding disallowance of Rs. 3,16,82,836/- being provision made for standard
That on facts and in law the order of Assessment u/s 143(3) passed by the AO is bad in law and void ab initio.
Heard and perused the record.
IN REGARD TO GROUNDS OF APPEAL OF THE ASSESSEE :
As regards Ground No 1 and 2 Ld. AR submitted that vide the decision of Hon’ble Delhi High Court in assessee’s own case reported in 407 ITR 658(Del) it has been held by Hon’ble High Court that in years prior to AY 2011-12 owing to CBDT Circular No. 528 of 1988 income from Profit on Sale/Redemption of Investments is not liable to tax. This decision has thereafter been followed by Tribunal in the case for assessee for years upto AY 2010-11. Last appellate order for AY 2010-11 in ITA no. 4535/Del/2016 dated 04.06.2021 was accordingly refered. It was submitted that for AYs 2011-12 onwards an alternative claim for exemption u/s 10(3 8) of the Act has been made and Tribunal has allowed this claim in case of assessee for AY 2011-12 in ITA No. 200/Del/2016 vide order dated 22-11-2022, though the AO is directed to verify about status of STT payment.
It can be observed that in regard to ground no. 1 and 2 of assesse’ s apeal this bench while dealing with the case of assessee for A.Y. 2011-12 in ITA no. 200/Del/2016 vide order dated 22.11.2022 had made following relevant observations while holding that assessee is entitled to claim benefit of exemption u/s 10(3 8) and Ld. AO was however directed to verify about status of STT payments :-
In regard to Ground No. 1, 1.1, 2, 2.1, 2.2 it was submitted that the primary question involved is whether assessee is entitled for making a claim u/s 10(38) of the Act. In this context it can be observed that the ld AO has classified the gains from transfer of long term capital asset being as part of the business activities of the assessee and accordingly denied exemption u/s 10(38) of the Act.
Ld. AR relied on the judgment of the Hon’ble Bombay High Court in the case of General Insurance Corporation of India for Assessment Year 2006-07 (342 ITR 27) to contend that Hon’ble High Court has held that exemption available to any other assessee under any clauses of section 10 is also available to General insurance business company subject to fulfillment of the conditions attached to the relevant provisions and it was submitted that assessee fulfilled both the conditions. Ld counsel relied on the judgment of the Hon ’ble Bombay High Court in case of Life Insurance Corporation of India Vs. CIT (1978) 115 ITR 45 (Bombay) to contend that the Hon’ble High Court has held that there is no bar by virtue of section 44 of the Insurance Act and the insurance business corporation are entitled to claim deduction it was otherwise admissible in the case when the assessee computation of income is governed by the other provisions of the Act. It was submitted that Bombay High Court in CIT Vs. New India Assurance Company Ltd 71 ITR 761 allowed benefit of exemption to assessee engaged in the business of general insurance and also allowed the benefit of exemption claimed by LIC. Reliance was placed on the Mumbai ITAT decision in the case of New India Assurance Company Ltd for Assessment Year 2002 -03 and 2003 -04 in ITA No. 6498 and 6499/Mumbai/2005 to contend that the Tribunal has sustained the claim of general insurance business in exemption under provision u/s 10(38) of the Act. It was submitted that the assessee being into business of Insurance has to abide by the IRDA guidelines and instructions with regard to its investment activity. It was contended that its holdings are in the nature of investment and not stock in trade. It was submitted that CBDT Circular No. 528 dated 16.12.1988 had considered the holdings in shares by the insurance company as investments. It was submitted that section 44 of the Act provides that irrespective of anything contrary contained in the provisions of section 45 of the Act the profit and gains of insurance business is to be computed in accordance to Rule 5 of the First Schedule of the Act and the Rule 5 also consider shall holding to be investments. It was submitted that on behalf of the assessee that in fact the Rule 5 was deleted by Finance Act, 1988 w.e.f. 01.04.1989 and substituted by Finance Act, 2010 w.e.f. 01.04.2011. The ld counsel submitted that in fact when this Rule 5 stood omitted, the Circular No. 528 dated 16.08.1 988 was considered to give relief to the insurance company.
The ld DR relied on the order of the ld tax authorities below and submitted that the case of assessee has to be distinguished from the life insurance company business in which the judgment has been relied by the ld AR.
Observation of the court
In view of amendment to Rule 5 including rule 5(a) w.e.f., 01-04- 2011, the decisions of the Apex Court relied upon by the appellant, no longer apply and the word ‘expenditure or allowed’ referred to in section 5(a) now includes provision, which is not admissible under the provisions of section 30 to section 438. without prejudice to the same, as per IRDA Circular dated 24-01-07 reported on page 15 of the assessment order, the standard asset is one which does not disclose any problem and which does not carry more than normal risk attached to the business and such assets is not on NPA. Therefore, the provision for Standard Asset is not even a provision for anticipated losses, referred to in the decision of the Apex Court reported in 291 ITR 370, as the provision in that case, was for bad and doubtful claims, I.e., an anticipated loss. In view of the same, even without considering the amendment to rule 5 and 5(a) w.e.f., 01.04.2011, the facts in the case of the appellant are distinguishable from the two decisions of the Apex Court, relied upon by the appellant. Moreover, since the Act has been amended w. e.f., 01.04.11, the provision for Standard Asset is to be added back even otherwise, in view of amended provision. Consequently, ground no. 7 of the appeal is dismissed.
Before us it was submitted by the Ld AR that the lower authorities have erred in making/sustaining the disallowance. In this regard it was submitted by the Ld. AR that the total income of the assessee is to be computed as per provisions of section 44 read Rule 5 of Schedule 1. It was submitted that as per the scheme of taxing provisions, the audited annual accounts of the assessee are to be treated as sacrosanct and only the adjustments provided for in Rule 5 of the First Schedule are permissible. It was submitted that under Rule 5 there is no enabling provision which directs for disallowance of provision made for Standard Assets.
The Ld. CIT (DR), on the other hand, vehemently supported the disallowance made by the lower authorities. It was submitted that the Ld. CIT (A), in AY 2011-12, has justifiably sustained the disallowance. The Ld. CIT. (DR) also relied upon the decision of the coordinate bench of this Tribunal in case of Chaitanya Godavari Grameen Bank reported in 170 ITD 668(Vishaka).
”In ITA no. 4535/Del/2016 vide order dated 30/06/2021 Co-ordinate Bench observed and concluded as follows :
As a result, we find that there is no enabling mechanism in Rule 5(a) mandating an adjustment to disclosed profits by making an addition on account of provision made for Standard Assets. The Ld. CIT (DR) has relied upon decision of the coordinate bench of this Tribunal in case of Chaitanya Godavari Grameena Bank (supra). However, in that case the assesee was a bank and had claimed deduction on account of Provision for Standard Assets u/s 36(l)(viia). This was not a case of an Insurance Company to which provisions of Rule 5 was applicable. As already held above, under Rule 5 the Statute makes profit disclosed in Profit and Loss account sacrosanct, subject only do adjustments prescribed in Rules 5(a) to 5(c). The case law relied is, therefore, ‘distinguishable. The Ld. CIT (A), in AY 2011-12, has also not properly addressed the issue. Relevant statutory provisions have been inadvertently misread and hence not properly understood. We therefore delete the disallowance and for reasons given by us above Ground No 4 is allowed. Accordingly, the issue no. 4 is decided in favour of the assessee.
IN REGARD TO GROUNDS OF APPEAL OF THE REVENUE :
ITA 1750/Del/2018 :
GROUND NO. 1 7.
Ld. DR submitted that at one end assessee is taking benefit of Section 10(3 8) of the Act on other hand pleading for benefits under Section 44 qua Section 14A. The Bench is of considered opinion that it is a settled proposition of law now that as Section 44 of the Act provides a complete code for computation of profit and gain of the business of the assessee insurance company. The assessing officer cannot make any adjustments in the profit of the assessee’ s business when they are calculated in accordance with the rules contained in first schedule. Reliance can be placed on the judgment of Delhi High Court in the case of assessee reported in (2002) 125 taxman 1094 (Delhi). In assessee’s own case for A.Y. 2000-01, 2001-02 co-ordinate Bench in ITA No. 5462, 5463/Del/2003 have held that in the light of aforesaid provisions of Section 44 of the Act there is no requirement of head wise bifurcation while computing the income u/s 44 in the case of insurance company. Thus, provisions of Section 14A are not relevant to make a disallowance. The findings of Ld. CIT(A) require no interference. The ground is decided against the Revenue. Ground no. 2 8. The issue is squarely covered in assessee’s own case for A.Y. 1999-2000, 2001-02, 2005-06, 2007-08, 2010-11 and 2011-12. No distinguishing fact is argued on behalf of the Ld. AO. The ground is decided against the Revenue.
In the light of aforesaid, the appeal of Revenue is dismissed and of assessee is allowed partly.
Order pronounced in the open court on 29th May, 2023.
In the result, appeal of the assessee is allowed and ruled in favour of the assessee
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