Latest Expert Exchange Queries

GST Demo Service software link: https://ims.go2customer.com
Username: demouser Password: demopass
Get your inventory and invoicing software GST Ready from Binarysoft info@binarysoft.com
sitemapHome | Registration | Job Portal for CA's | Expert Exchange | Currency Converter | Post Matrimonial Ads | Post Property Ads
 
 
News shortcuts: From the Courts | News Headlines | VAT (Value Added Tax) | Placements & Empanelment | Various Acts & Rules | Latest Circulars | New Forms | Forex | Auditing | Direct Tax | Customs and Excise | ICAI | Corporate Law | Markets | Students | General | Mergers and Acquisitions | Continuing Prof. Edu. | Budget Extravaganza | Transfer Pricing | GST - Goods and Services Tax
 
 
 
 
Popular Search: ACCOUNTING STANDARDS :: ARTICLES ON INPUT TAX CREDIT IN VAT :: cpt :: Central Excise rule to resale the machines to a new company :: due date for vat payment :: ACCOUNTING STANDARD :: form 3cd :: list of goods taxed at 4% :: VAT Audit :: articles on VAT and GST in India :: empanelment :: VAT RATES :: TAX RATES - GOODS TAXABLE @ 4% :: TDS :: ICAI offer Get Windows 7,Office 2010 in Rs.799 Taxes
 
 
From the Courts »
 Radico Nv Distilleries Maharashtra Ltd. Vs. Commissioner Of Income Tax (Central)-Iii, New Delhi & ORS.
  Vijay Vishin Meghani vs. DCIT (Bombay High Court)
  Dayawanti vs. CIT (Supreme Court)
  Claris Life Sciences Limited vs. DCIT (ITAT Ahmedabad) (Special Bench)
 Vijay Vishin Meghani vs. DCIT (Bombay High Court)
 CIT vs. Balbir Singh Maini (Supreme Court)
 Dayawanti vs. CIT (Supreme Court)
 Claris Life Sciences Limited vs. DCIT (ITAT Ahmedabad) (Special Bench)
 Pr CIT vs. Reliance Capital Asset Management Ltd (Bombay High Court)
 H. Naginchand Kincha vs. Superintendent of Police (Karnataka High Court)
 Commissioner Of Income Tax Delhi-Ix, New Delhi Vs. M/s Arya Exports & Industries

Commissioner Of Income Tax (Ltu), New Delhi Vs. Oriental Insurance Company Ltd.
September, 21st 2017
$~
*      IN THE HIGH COURT OF DELHI AT NEW DELHI

                                            Reserved on: 2nd August, 2017
                                            Date of decision: 30th August, 2017

+                                 ITA No. 372 of 2015

ORIENTAL INSURANCE CO. LTD.                         .....Appellant
             Through: Mr. M. S. Syali, Senior Advocate with Mr.
             Mayank Nagi and Mr. Tarun Singh, Advocates.

                                       versus

DEPUTY COMMISSIONER OF INCOME TAX                 .....Respondent
            Through: Mr. Ashok K. Manchanda, Senior Standing
            Counsel and Mr. Anand K. Chaudhuri, Advocates

+                                 ITA No. 447 of 2015
+                                 ITA No. 448 of 2015

COMMISSIONER OF INCOME TAX (LTU), NEW DELHI .....Appellant
            Through: Mr. Ashok K. Manchanda, Senior Standing
            Counsel and Mr. Anand K. Chaudhuri, Advocates.

                                       versus

ORIENTAL INSURANCE COMPANY LTD.                  .....Respondent
             Through: Mr. M. S. Syali, Senior Advocate with Mr.
                      Mayank Nagi and Mr. Tarun Singh,
                      Advocates.

                                  JUDGMENT


CORAM:
JUSTICE S. MURALIDHAR
JUSTICE PRATHIBA M. SINGH

ITAs 372/2015, 447/2015 and 448/2015                                  Page 1 of 22
Dr. S. Muralidhar, J.:

1. These are three appeals under Section 260A of the Income Tax Act, 1961
(`Act') directed against the same impugned order dated 21 st November 2014
passed by the Income Tax Appellate Tribunal (`ITAT') in ITA Nos. 4493
and 4786/Del/2012. ITA No. 372/2015 has been preferred by the Assessee
against the order of the ITAT in ITA No. 4493/Del/2012, which was the
Assessee's own appeal for the Assessment Year (`AY') 2005 -06. The other
two appeals, ITA Nos. 447 and 448 of 2015 are by the Revenue against ITA
Nos. 4493 and 4786/Del/2012, respectively for the same AY.

Questions of Law
2. The questions of law in each of the appeals differ. In the Assessee's
appeal, i.e. ITA No. 372/2015, by an order dated 7th July 2015, the following
question of law was framed for determination:-
       "Whether the ITAT was correct in law in holding that the income
       earned on sale/redemption of investment is chargeable to tax?"

3. In ITA No. 447/2015, the question framed by the order dated
17th May 2016 reads:
       "Whether the Tribunal was correct in holding that the provisions of
       Section 115JB of the Income Tax Act are not applicable to insurance
       companies?"

4. As far as ITA No. 448/2015 is concerned, notice was issued by the order
dated 18th September 2015 on only one of the four questions projected by
the Revenue, viz.:
       "Whether the ITAT was correct in upholding the decision of the CI T
       (A) in deleting the addition of Rs. 3,39,60,000/- made by the
       Assessing Officer (`AO') on account of the investment written off?"

ITAs 372/2015, 447/2015 and 448/2015                             Page 2 of 22
5. At one stage, the above appeals were directed to be listed with ITA
No. 174 of 2013 which was the Assessee's appeal for AY 2006-07. One of
the questions framed in the said appeal by the order dated 10 th July 2013
was:
       "Whether the ITAT was correct in law in holding that the income
       earned on sale/redemption of investment is chargeable to tax?"

6. However, when that appeal came to be decided by the decision in
Oriental Insurance Company v. CIT [2015] 378 ITR 421 (Del) , the above
question was left open since the other two questions in that appeal regarding
reopening of the assessment under Section 148 of the Act were answered in
favour of the Assessee.

Background facts
7. The background facts are that the assessee is the subsidiary of General
Insurance Corporation of India (`GIC') and is engaged in the business of
General Insurance comprising of Fire, Marine and Miscellaneous Insurance
Business. The Assessee was originally incorporated on 12th September 1947
as the Oriental Fire Insurance Company Ltd. Its name was changed to
Oriental Insurance Ltd. on 1st May 1984.

8. For the AY in question, the Assessee filed a tax return declaring a loss of
Rs. 76,71,41,581/- and a book profit of Rs. 3,62,45,18,770/- under the
special provisions of Section 115JB of the Act.

Proceedings before the Assessing Officer
9. The return was picked up for scrutiny. The Assessing Officer (`AO')
passed the assessment order on 3rd December 2007 assessing the total

ITAs 372/2015, 447/2015 and 448/2015                              Page 3 of 22
income of the Assessee at Rs. 4,65,97,73,716/- under the normal provisions
of the Act and at book profits of Rs. 9,05,14,34,065/- as per the Minimum
Alternate Tax (MAT) provision i.e. Section 115 JB of the Act. The AO, by
the said assessment order, inter alia made the following additions to the
returned income of the Assessee:

(i) Profits/Gains derived by the Assessee from sale/redemption of
investments - Rs. 457,60,43,000/-.

(ii) Provision for Diminution in the Value of Investments - Rs. 7,47,40,000/-

10. As regards (i) above the AO disbelieved the Assessee's plea that it was
consistently following the policy of claiming exemption in respect of the
profit on sale of investments. The AO found that in some years where there
was nil income the Assessee did not claim exemption but only when there
were profits. According to the AO the said profit "represented the actual
income of the Assessee" and was "not any notional income keeping in view
the fact that Assessee is following the mercantile method of accounting."

11. As regards (ii) above, the AO held that Circular No. 528 of the Central
Board of Direct Taxes (`CBDT') dated 16th December 1988 reported in 176
ITR 154 (St) was not applicable. It was held that once Rule 5 (b) stood
omitted the "benefit/adjustments arising from that Rule also is destroyed and
cannot be enjoyed."

Order of the CIT (A)
12. Aggrieved by the above order, the Assessee went before the
Commissioner of Income Tax (Appeals) [`CIT (A)']. By the order dated

ITAs 372/2015, 447/2015 and 448/2015                             Page 4 of 22
2nd July 2012, the CIT (A) confirmed the additions made by the AO. On the
question of profits/gains from the sale/redemption of investments, the
ITAT's order for AY 2004-05 was followed. As for the provision of
diminution of the value of investment, the disallowance was upheld in view
of the order of the ITAT for AY 2003-04.

Order of the ITAT

13. Both the Assessee and the Revenue filed appeals before the ITAT. Both
appeals were disposed of by the impugned common order dated
21st November 2014 upholding the additions made by the AO.

14. On the issue of addition on account of profit on the sale of investments,
the ITAT followed its own order in the Assessee's case for AY 2004-05 and
accordingly rejected the Assessee's appeal on this ground. On the issue of
addition on account of diminution in the value of investments, the ITAT
followed its own order in the Assessee's case for AY 2003-04 and
accordingly rejected the Assessee's appeal on this ground. On the issue of
investments written off the ITAT followed its own order in the Assessee's
case for AYs 2000-01 and 2001-02. The Revenue's appeal was accordingly
rejected on this issue.

Contentions on behalf of the Assessee
15. Mr. M. S. Syali, learned Senior Counsel appearing on behalf of the
Assessee, points out that the basis of the claim for exemption in respect of
profit on the sale of investments is not omission of Rule 5(b) but the
Circular No. 528 dated 16th December 1988. He contends that, in the context
of Section 119 of the Act, a circular that is in favour of the Assessee can




ITAs 372/2015, 447/2015 and 448/2015                             Page 5 of 22
supplant the law. He referred to the decisions of the Supreme Court in
Navnitlal C. Javeri v. K. K. Sen, [1965] 56 ITR 198 (SC) and Ellerman
Lines Ltd. v. CIT, [1971] 82 ITR 913 (SC) in this regard. He also referred to
the decision of the Kerala High Court in CIT v. Punalur Paper Mills Ltd.,
[1988] 170 ITR 37 (Ker) and the judgments of the Supreme Court in UCO
Bank v. CIT, [1999] 237 ITR 889 (SC) and UOI v. Arviva Industries India
Ltd., (2014) 3 SCC 159. According to him, both the CIT (A) and the ITAT
erred in simply following the ITAT's earlier order in the Assessee's own
case for AY 2004-05 and failed to appreciate that, in the said order, the
Revenue had actually given up the point.

16. Mr. Syali places considerable reliance on the decision of the Supreme
Court in CIT v. Karnataka State Co-operative Apex Bank [2001] 251 ITR
194 (SC) where it was held that if, by the mandate of statute, investment is
to be made as a pre-condition to carrying on banking business then the
profits on sale thereof would constitute profits in the same business. He
pointed out that investments to be made by insurance companies were
stipulated under Sections 27 and 28 of the Insurance Act 1938 (IA). Section
3 of the IA prohibits the Assessee from carrying on any other business. In
particular, Section 3 (4) (h) of the IA states that the Insurance Regulatory
Development Authority (IRDA) can cancel the registration of an insurer if it
carries on any business other than the insurance business or any prescribed
business.

17. Mr. Syali referred to the decisions of the other benches of the ITAT that
had taken the consistent view that profits or losses from the sale of


ITAs 372/2015, 447/2015 and 448/2015                             Page 6 of 22
investment are not to be taxed. The mere fact that, in some earlier year, the
Assessee may have taken a stand to the contrary cannot act as an estoppel. In
support of this proposition, reliance was placed on the decisions in CIT v.
Mr. P. Firm, [1965] 56 ITR 67 (SC) and Chryscapital Investment Advisors
v. DCIT [2015] 376 ITR 183 (Del).

Contentions on behalf of the Revenue
18. In reply Mr. Ashok Manchanda, learned Senior Standing counsel
appearing on behalf of the Revenue, first traced the background to the
changes brought about by the IA and the Insurance Regulatory Development
Authority Act, 1999 (`IRDA Act'). Mr. Manchanda maintained that the
investments made by the Assessee have to be treated as its stock-in-trade.
He submitted that this was the Assessee's own case in its grounds of appeal
in ITA No. 372 of 2015. He pointed out that the long term capital gains
(LTCG) on the investments in equity shares alone qualified for exemption
under Section 10 (38) of the Act and not investments in debentures, bonds,
preference shares and other securities.

19. According to Mr. Manchanda, such long term capital assets constitute
only a very small portion of the Assessee's portfolio of so-called
investments. A substantial part of the securities, having not been held by the
Assessee for more than one year, could not be treated as long term capital
assets. The very fact that the Assessee has included the surplus on account
of the appreciation of the value of the stock-in-trade and also the profits
realised on the transfer of stock-in-trade in its books of accounts, there was
no scope for the Assessee to now claim that the same should be exempted as
LTCG.

ITAs 372/2015, 447/2015 and 448/2015                              Page 7 of 22
20. Mr. Manchanda submitted that that much of the profits of Rs. 457 crores
were not as a result of transfer/sale of shares, but notional i.e. on account of
upward revision/appreciation in the value of so called investments which
form part of the stock-in-trade of the business of the assessee. The profits
attributable to the increase in the value of stock-in-trade are always taxable
as business profits. Most of the so-called investments being not capital
assets and having been held for short periods, the profits resulting therefrom
on account of appreciation/sale etc. are in no way exempt under any
provision of the Act.

21. Mr. Manchanda contended that the Assessee had changed its stand
before this Court by relying on the Circular No. 528 of the CBDT instead of
relying on Section 44 of the Act read with Rule 5 of the First Schedule
thereto. According to Mr. Manchanda, Circular No. 528 had no application
in the facts and circumstances of the case. He contended that Circular No.
528 did not contain any binding instructions and could not have been
deemed to be issued under Section 119 of the Act. It was ultra vires Section
119 of the Act and was not of a binding nature. Moreover, it was issued with
reference to the GIC and its subsidiaries. In the AY in question, the Assessee
was not a subsidiary of GIC and was, therefore, not covered by said circular.
The circular could neither impose a new tax nor grant exemption from
payment of tax and was, therefore, not applicable.

22. Mr. Manchanda further contended that in earlier AYs, i.e. prior to
2002-03, the Assessee credited the profits on the sale of shares to the general
reserve instead of to the P&L account. The Revenue also did not seek to


ITAs 372/2015, 447/2015 and 448/2015                               Page 8 of 22
bring it to tax, consistent with Section 44 read with the First Schedule to the
Act and the IRDA Regulations. However, for the AY in question, where the
Assessee itself has brought the profits into the P&L Account, it cannot be
claimed that, for the purposes of taxation, they should not be treated as
taxable. Reliance in this regard is placed on J.K. Synthetics Ltd. v. CBDT
[1972] 83 ITR 335 (SC).

23. According to Mr. Manchanda, there was no occasion for Rule 5 not to
apply during the AY since the investment in question was not exempt for the
purpose of clauses (a) and (c) thereof. There was no question of excluding
the profit from the sale of such investment for the purposes of computation
of taxable income. He also noted that, for AY 1990-91, the Assessee had
argued before the ITAT that Circular No. 528 is not applicable and this was
accepted by the ITAT. The ITAT had held that Section 44 of the Act read
with Rule 5 of the First Schedule gives only method of computation of the
income of a company carrying on the business of insurance. It does not
provide for taxing or not taxing of any particular income. Rule 5(b) also
impacted the writing off of investments. Once Rule 5(b) stood omitted, any
loss suffered by the Assessee could not be allowed.

24. Mr. Manchanda supplemented his oral submissions with a 16 page
written note of submissions.

Whether investments could be considered as stock-in-trade?
25. Section 27B (1) of the IA mandates that no insurer carrying on general
insurance business shall "invest or keep invested any part of his assets
otherwise than in any of the following approved investments." These

ITAs 372/2015, 447/2015 and 448/2015                               Page 9 of 22
`approved investments are set out in clauses (a) to (j) thereunder. Section
27B (4) states that an insurer "shall not invest or keep invested any part of
his assets in the shares of any one banking company or investment company
to the extent of more than (a) 10% of his assets, or (b) 2% of the subscribed
share capital and debentures of the banking company or investment
company concerned, whichever is less."

26. Section 27B(16)(b) of the IA clarifies that "assets" means all assets
required to be shown in the balance-sheet as per Form A, in Part II of the
First Schedule but excludes any items against the head "Other Accounts (to
be specified)". Section 27D of the IA also specifies the manner and
conditions of investment. Section 28 of the IA pertains to statement and
return of investment of assets.

27. A conspectus of the above provisions of the IA makes it clear that there
is no option with a company carrying on general insurance business, like the
Assessee, to treat any part of its investment as "stock-in-trade" as is sought
to be contended by the Revenue before the Court. These investments are, at
best, "floating assets". The argument that these constitute "stock-in-trade" is
ingenious but does not find resonance in the provisions of the IA.

28. It is also pertinent to note that the reason the AO proceeded to reject the
plea of the Assessee that the profit from the sale of investments should not
be brought to tax is not because it was stock-in-trade but because, according
to him, the entire income of the Assessee is assessable as business income in
accordance with Rule 5 of the First Schedule to the Act. Indeed, if one
carefully peruses the assessment order dated 3 rd December 2007, nowhere

ITAs 372/2015, 447/2015 and 448/2015                                 Page 10 of 22
does it treat investment as the Assessee's stock-in-trade. This argument
appears to be taken for the first time before this Court to counter the
submission of the Assessee based on Circular No.                   528 dated
16th December 1998 which the AO had rejected on the basis that it was not
supported by any statute.

29. In the view of this Court, the argument of the Revenue in this regard
requires to be rejected as not being consistent with either the factual position
or the legal position.

Profits on sale/redemption of investments
30. Since the Assessee's case with respect to the addition of profits earned
on sale/redemption of investments essentially rests on Circular No. 528, this
circular requires to be examined in some detail. Before reference is made to
the said Circular, the background requires to be traced.

31. As already noticed, Section 44 of the Act is specific to `Insurance
Business'. It states that, notwithstanding anything to the contrary contained
in the Act relating to the computation of income chargeable under different
heads `interest on securities', `income from house property', `capital gains'
or `income from other sources', the profits and gains of any business of
insurance shall be computed in accordance with rules contained in the First
Schedule of the Act. Therefore, in the case of the Assessee which is carrying
on general insurance business, the profits and gains of its business have to
be computed only in terms of the First Schedule.

Analysis of Rule 5 (b)
32. The First Schedule sets out the Rules under Part `B'. We are concerned

ITAs 372/2015, 447/2015 and 448/2015                                Page 11 of 22
with Rule 5(b) which stood omitted by the Finance Act, 1988 and was re-
introduced by the Finance Act, 2009 with effect from 1st April 2011. The
rationale for omitting Rule 5(b) was to exempt profits and gains in
investments by the General Insurance Corporation of India and the four
companies formed under Section 16 of the General Insurance Business
(Nationalisation) Act, 1972.

33. Rule 5 in First Schedule to the Act, i.e. the provisions relating to
"Computation of profits and gains for other Insurance business" reads as
under:

         "Computation of profits and gains of other insurance business.-
         5. The profits and gains of any business of insurance other than
         life insurance shall be taken to be the balance of the profits
         disclosed by the annual accounts, copies of which are required
         under the Insurance Act, 1938 (4 of 1938) to be furnished to the
         Controller of Insurance, subject to the following adjustments:-
         (a) subject to the other provisions of this rule, any expenditure
         or allowance which is not admissible under the provisions of
         sections 30 to 43B in computing the profits and gains of a
         business shall be added back;
         (b) (i) any gain or loss on realisation of investments shall be
         added or deducted, as the case may be, if such gain or loss is
         not credited or debited to the profit and loss account;
            (ii) any provision for diminution in the value of investment
         debited to the profit and loss account, shall be added back;
         (c) such amount carried over to a reserve for unexpired risks as
         may be prescribed in this behalf shall be allowed as a
         deduction."

34. The current clause (b) of Rule 5 was substituted by the Finance Act,

ITAs 372/2015, 447/2015 and 448/2015                                Page 12 of 22
2010 with effect from 1st April 2011 for the previous clause (b) which stood
re-inserted by the Finance (No. 2) Act, 2009 with effect from 1 st April 2011
after its omission by the Finance Act, 1988 with effect from 1st April 1989.
The clause, prior to substitution, read as under:-
       "Computation of profits and gains of other insurance business.-

       5. [...]

       (a) [...]

       (b) (i) deduction in respect of any amount either written off or
       provided in the account to meet diminution in or loss on
       realisation of investments in accordance with the regulations
       made by the Insurance Regulatory and Development Authority;

          (ii) increase in respect of any amount taken credit for in the
       account on account of appreciation of or gains on realisation of
       investments in accordance with the regulations made by the
       Insurance Regulatory and Development Authority;

       (c) [...]"

35. Prior to this, while proposing deletion of Clause (b) of Rule 5 of the First
Schedule with effect from 1st April 1989, the explanation offered in the
Memorandum to the Finance Bill, 1988 was as under:
                  "Liberalization of provisions in respect of taxation
                  of profits and deduction of tax at source applicable
                     to the General Insurance Corporation and its
                                      subsidiaries

       17. Under the existing provisions of Section 44 of the Income
       Tax Act, the profits and gains of any insurance business is
       computed in accordance with the rules contained in the First
       Schedule to the Act. In rule 5 of this Schedule, profits and gains

ITAs 372/2015, 447/2015 and 448/2015                                     Page 13 of 22
       of any business of insurance, other than life insurance, are taken
       to be balance of profits disclosed in the annual accounts
       furnished to the Controller of Insurance subject to certain
       adjustments. One of the adjustments provided therein is in
       respect of any amount either written off or reserved in the
       accounts to meet depreciation or loss on the realisation of
       investment which is allowed as deduction. Similarly, any sum
       taken credit for in the account on account of appreciation of or
       gain on the realisation of investments is taken as part of the
       profits and gains of the business.

       With a view to enable the General Insurance Corporation and
       its subsidiaries to play a more active role in the capital markets
       for the benefit of policy holders, it is proposed to provide for
       exemption of the profits earned by them on the sale of
       investments. As a corollary, it is proposed to provide that the
       losses incurred by the General Insurance Corporation on the
       realisation of investment shall not be allowed as deduction in
       computing the profits chargeable to tax. To achieve this
       objective, clause (b) of rule 5 of the First Schedule to the
       Income tax Act is proposed to be deleted.

       This amendment will take effect from 1st April, 1989, and will,
       accordingly, apply in relation to the assessment year 1989-90
       and subsequent years."

36. Simultaneous with the omission of Rule 5 (b) in 1988, Circular No. 528
dated 16th December 1988 was issued by the Central Board of Direct Taxes
(`CBDT') which purported to introduce through the Rules a policy of
`Liberalisation of provisions in respect of taxation of profits and deduction
of tax at source applicable to the holding company' of the Assessee, that is,
the GIC and its subsidiaries (including the Assessee). Thus what an
insurance company was deprived of by omission of Rule 5 (b) was provided
to it by the above Circular. Whether this was permissible in law is the


ITAs 372/2015, 447/2015 and 448/2015                               Page 14 of 22
central question in the present case.

37. To complete the chronological sequence, when again a change was
brought about in 2009 to Rule 5, the Memorandum appended to the Finance
(No. 2) Bill, 2009, explained the rationale thus:
       "Taxation of Investment Income/loss of Non-life Insurance
       business.

       The profits and gains of non-life insurance business is
       computed under section 44 read with rule 5 of the First
       Schedule. 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 are required under the Insurance act, 1938 (4 of
       1938), to be furnished to the Controller of Insurance, 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". The
       regulations mandated new guidelines and formats for
       preparation of accounts by General Insurers. According to
       these changed norms, a non-life insurance company has to
       include profit or loss on realization/sale of investment in the
       profit and loss account or revenue account. This is also
       consistent with international best practice on taxation of
       investment income of non-life insurance companies."

38. Thus, the major change, therefore, sought to be brought about by the
2009 amendment was to align it with the IRDA Regulations regarding
preparation of accounts of general insurance companies. The changed
norms, in terms of said Regulations, required a non-life insurance company


ITAs 372/2015, 447/2015 and 448/2015                              Page 15 of 22
to include in its Profit and Loss (`P&L') Account or Revenue Account
"profit or loss on realisation/sale of investment". This was said to be
consistent with the international standards.

39. With the Assessee carrying on a general insurance business, it was
bound by the provisions of the IA as well as the IRDA Regulations referred
to hereinbefore. Even the CBDT, in its Circular No. 5/2010 dated
3rd June 2010, acknowledged that, after the introduction of the IRDA
Regulations in 2002, non-life insurance companies are required to credit
income from the sale of investments directly to the P&L Account. This
requirement, which would make the income so earned amenable to tax, was
made applicable only from AY 2011-12. Prior to 1st April 2011, there was
no provision which required the Revenue to disallow the deduction of loss
on sale of investments.




40. As explained by the Supreme Court in CIT v. Karnataka State Co-
operative Apex Bank (supra) in the context of Section 80 P (2) (a) (i) of the
Act, where an entity is obliged to place a part of its funds with the State
Bank or the Reserve Bank of India to enable it to carry on its banking
business, then "any income derived from funds so placed arises from the
business carried on by it and the assessee has not, by reason of section
80P(2)(a)(i), to pay income-tax thereon. The placement of such funds being
imperative for the purposes of carrying on the banking business, the income
derived therefrom would be income from the assessee's business."

41. In the AY in question, the AO did not accept the case of the Assessee
that the income earned on the sale/redemption is not chargeable to tax

ITAs 372/2015, 447/2015 and 448/2015                             Page 16 of 22
because, in the past, the profit on sale of investment was sometimes shown
in the balance sheet and sometimes in the P&L account. According to the
AO, the entire income of the Assessee was assessable as `business income'.
According to the AO, Circular No. 528 dated 16th December 1988 of the
CBDT did not create a dent insofar as it stated that both profit and loss on
sale of investments will not be taken into account in calculation of insurance
profits.

Binding nature of the Circular
42. The above approach of the AO in relation to Circular No. 528 and its
binding nature as far as the Revenue is concerned, appears to be flawed. In
Principal Commissioner of Income Tax v. National Insurance Company
Ltd. [2017] 393 ITR 52 (Cal), it was held that Circular No. 528 of 1988 did
not permit the AO to add back the profits arising from the sale of
investments made by the Assessee in that case which was also carrying on a
general insurance business. The Calcutta High Court in the above decision
referred to the decision in Paper Products Ltd. v. Commissioner of Central
Excise [2001] 247 ITR 128 (SC) where it was held that the circulars issued
under Section 37B of the Central Excise Act, 1944 would be binding on the
Department and that, "it does not lie in the mouth of the Revenue to
repudiate a circular issued by the Board on the basis that it is inconsistent
with the statutory provisions. Consistency and discipline are, according to
this Court, of far greater importance than the winning or losing of Court
proceedings." It is, therefore, too late in the day for the Revenue to disown
its own Circular No. 528 and contend that it does not apply to the facts of
the present case.


ITAs 372/2015, 447/2015 and 448/2015                              Page 17 of 22
43. In CIT v. Ashok Mittal [2013] 357 ITR 245 (Del), the Court reiterated
the well settled position that, where the CBDT circular has not been
withdrawn and is beneficial to the Assessee, it would be binding on the AO
and other Revenue authorities. The Court was merely reiterating what has
been held in a large number of cases including Navnitlal C. Zaveri v. K.K.
Sen (supra) and CIT v. Milk Food Ltd. [2006] 280 ITR 331 (Del).

44. The ITAT itself has taken a consistent stand that the taxability of income
in the case of insurance companies is not on commercial profits but on such
profits as are computed in accordance with the provisions of the IA, subject
to the permissible adjustments under the Act. In other words, the taxability
of profits in the hands of the insurance companies is confined to profits in
terms of annual accounts of such insurance companies drawn up in
accordance with the IA.

45. Indeed, the legislative policy appears to be clear. Where it is intended to
bring the profit on sale of investments to tax, the legislature has chosen to
re-introduce the earlier provision by virtue of the amendment effective from
AY 2011-12. The intention behind omitting Rule 5(b) was clearly expressed
in the Circular. If the Circular was not intended to fill the gap brought about
by the omission of Rule 5(b), viz., to exempt the profits on sale of
investments made by the insurance companies from tax, there was no need
to re-introduce Rule 5(b) with effect from AY 2011-12. The resultant
position is that for the period during which there was no Rule 5(b) the
profits on sale of investments were not taxable in the hands of the Assessee.
Further, the Assessee has itself clarified that it is not claiming the loss


ITAs 372/2015, 447/2015 and 448/2015                               Page 18 of 22
suffered on the writing off of the investments in compliance with the CBDT
Circular No. 528.

46. The different benches of the ITAT have, in other cases, consistently held
that during the period when Rule 5(b) was not operational the profit on sale
of investments made by general insurance companies cannot be brought to
tax. In Bajaj Allianz General Insurance Co. Ltd. v. Additional
Commissioner of Income Tax (2010) 130 TTJ (Pune) 398 , the ITAT
addressed the specific question of whether a logical conclusion could be
drawn that an income that is not taxed in terms of Rule 5(b) could, even
after such amendment was deleted, be taxed in the hands of the insurance
company. It was held that income which was earlier taxable under one
specific clause could not be brought to tax after the deletion of such clause.

47. It is futile, therefore, for the Revenue to seek to bring to tax profits on
sale of investment because in some earlier year the Assessee may have taken
what appears to be a contradictory stand. In any event, the Assessee appears
to have explained that the issue that arose in the earlier case was regarding
investments written off and not profit on sale/redemption of investments.
The observations of the ITAT in its order for AY 1990-91 with regard to the
profit on sale/redemption of investment could, at best, be treated as obiter
since that was not in issue in the case before it.

48. The Court is, therefore, unable to subscribe to the submission of Mr.
Manchanda that the Circular No. 528 has no application to the present case.
The decision in J.K. Synthetics v. CBDT (supra) relied upon by him has no
application to the facts of the case. Furthermore, it is not even the case of the

ITAs 372/2015, 447/2015 and 448/2015                                Page 19 of 22
Revenue that the said Circular is ultra vires of the Act.

49. The question framed in ITA No. 372 of 2015 is accordingly answered in
the negative, in favour of the Assessee and against the Revenue, by holding
that the ITAT erred in holding that the income earned on sale/redemption of
investment was chargeable to tax.

On the disallowance of investments written off
50. The disallowance of the investments written off is the subject matter of
the Revenue's ITA No. 448/2015. The ITAT has in the impugned order
while setting aside the disallowance, followed its decision for AYs 2000-01
and 2001-02. The ITAT held that the guidelines issued by the GIC permitted
insurance companies to book the loss in their accounts rather than waiting
for the actual loss on the sale of investment. Since it represented a loss and
not an expenditure or allowance, the AO was held to have erred in adding
back the said loss in the computation of the Assessee's income. Reliance
was placed on the decision in General Insurance Corporation of India v.
CIT [1999] 240 ITR 139 (SC).

51. The contention of the Revenue is that contradictory pleas have been
taken by the Assessee before the ITAT in the appeal for the AY 1990-91
where, on the issue of write off of investments, it was contended that since
Rule 5(b) had been omitted, no exemption has been provided in respect of
the profits earned and that since they were chargeable to tax, the losses, if
any, were required to be allowed as a deduction.

52. In the written note of submissions filed on behalf of the Assessee, it is


ITAs 372/2015, 447/2015 and 448/2015                              Page 20 of 22
stated that: "When the petitioner is availing the non-taxation of its
profits from sale of investments it is also not claiming the loss suffered
on these investments. The AO has not only taxed the profits on sale of
investment but has also disallowed the losses." (emphasis supplied)
Therefore, even the Assessee acknowledges that if it succeeds, as it has, in
its plea that the profit from sale/redemption of investments must be exempt
from tax, then it cannot seek deduction as a result of losses on the write off
of such investments.

53. Consequently the question framed in the Revenue's ITA No. 448/2015 is
answered in the negative, i.e. in favour of the Revenue and against the
Assessee. It is held that CIT (A) erred in deleting the addition of
Rs. 3,39,60,000/- by the AO on account of the investment written off.

Applicability of Section 115JB to insurance companies
54. Turning now to ITA No. 447/2015, the question concerns the
applicability of Section 115JB of the Act to insurance companies. The ITAT
has permitted the Assessee to raise this question since, in a large number of
judgments of the ITAT, the question has been answered in favour of the
Assessee.

55. It is plain, from a reading of Section 44 read with the First Schedule of
the Act, that insurance companies are required to prepare accounts as per the
IA and the regulations of the IRDA and not as per Parts II and III of
Schedule VI of the Companies Act. The Assessee prepares its accounts as
per the IRDA principles. The IRDA Regulations govern the preparation of
the auditor's report.

ITAs 372/2015, 447/2015 and 448/2015                              Page 21 of 22
56. Consequently, the question framed in ITA No. 447/2015 is answered in
the affirmative, i.e. in favour of the Assessee and against the Revenue by
holding that Section 115JB of the Act does not apply to insurance
companies.

Conclusion
57. ITA No.372 and 448 of 2015 are allowed and ITA No. 447 of 2015 is
dismissed.



                                                   S. MURALIDHAR, J.



                                              PRATHIBA M. SINGH, J.
AUGUST 30, 2017
`anb'/b'nesh




ITAs 372/2015, 447/2015 and 448/2015                          Page 22 of 22

 
 
Home | About Us | Terms and Conditions | Contact Us
Copyright 2017 CAinINDIA All Right Reserved.
Designed and Developed by Binarysoft Technologies Pvt. Ltd.
Binarysoft Technologies - We Bring IT. Offshore software outsourcing company. We use Global Delivery Model (GDM) and believe in Follow The Sun principle

Transfer Pricing | International Taxation | Business Consulting | Corporate Compliance and Consulting | Assurance and Risk Advisory | Indirect Taxes | Direct Taxes | Transaction Advisory | Regular Compliance and Reporting | Tax Assessments | International Taxation Advisory | Capital Structuring | Withholding tax advisory | Expatriate Tax Reporting | Litigation | Badges | Club Badges | Seals | Military Insignias | Emblems | Family Crest | Software Development India | Software Development Company | SEO Company | Web Application Development | MLM Software | MLM Solutions