THE issues before the Bench are - Whether at the time of computing the taxable income of the company engaged in the business of general insurance, once the profit on sale of investment is included in the P&L account prepared as per the Insurance Act, then no adjustment is required to be made as per the provisions of sec. 44 r.w. First Schedule of Income Tax Act and Whether when insurance, banking and electricity generation and distribution companies are treated as a special class as per Sec 211 of Companies Act, they can be treated like any other assessees for the purpose of Sec 115JB. And the verdict goes in favour of the assessee.
A) Assessee is engaged in the general insurance business. It reduced the gain on sale of investment while calculating the profit or loss of business or profession. Assessee contended that the gains on sale of investment amounting was exempt from tax in view of circular No.528 dated 16.12.1988 issued by CBDT. Further as per section 44, the profits and gains for insurance business would be computed in accordance with the rules contained in the first schedule to the Act and the profit from the insurance business would be taken to be the balance of the profits as disclosed by annual account, which were required under the Insurance Act, 1938 to be furnished to the Insurance Authorities, subject to the adjustments provided in clause 5(a) to (c). Clause 5(b) provided for adjustment, for profit or loss on the realization of investments, has been deleted by the Finance Act, 1988 and as per explanatory notes, the amendment was made to enable the general insurance companies to play a more active role in capital markets for the benefit of the policy holders. AO held that provisions of sec 44 A did not provide for any profit/gain on sale of investment to be reduced while computing the profits and gain of any business of insurance and held that circular 525 did not seek to override the provisions of section 44 and Rule 5 of First Schedule.
CIT (A) confirmed the disallowance made by AO. Assessee contended that that the Tribunal has repeatedly taken note that the deletion of Sub. Rule (b) of Rule 5 of first schedule was with specific purpose of granting exemption on the profit on sale of investments and that is why the legislature has now bought in a prospective amendment from Assessment Year 2011-12, whereby inserted Rule 5(b)(i) of first schedule of the I-T Act. By virtue of this amendment, the profit on sale of investments in the case of the insurance companies will be taxable w.e.f AY 2011-12.
Revenue contended that the assessment of the insurance companies has to be framed as per the provisions of sec. 44 and in accordance with the First Schedule of the Insurance Act. Even after the amendment whereby the sub Rule (b) of Rule 5 of First Schedule was removed the total income of the assessee has to be computed as per the existing provisions. According to Rule 5 of First Schedule, the income of non-life insurance business is taken as profit before tax and appropriations as per the profit and loss account of the company, prepared in accordance with the regulations made by the Insurance Regulatory Development Authority (IRDA), subject to certain adjustments. When the assessee itself has included the profit on sale of investments in the profits & loss account, which were prepared in accordance with the regulations made by IRDA, then no adjustment can be made in the said profits as shown by the assessee in the P&L account. The amendment by the Finance Act 1988 was made whereby sub. rule (b) of Rule 5 of First Schedule has been deleted due to the reasons because corresponding amendment was also made in the Insurance Act whereby the Insurance Companies has to decide to include the income on sale of investments in the P&L account prepared in compliance with the Insurance Act and therefore, once the profit on sale of investment is included in the P&L account prepared as per the Insurance Act, then no adjustment is required to be made as per the provisions of sec. 44 r.w. First Schedule of Income Tax Act. Once the assessee has included the profit on sale of investments in the annual account prepared as per the regulations made by IRDA and copies of which are to be furnished to the Controller of Insurance, then for computation of income u/s 44 of the I T Act by applying Rule 5 of First Schedule, the amount of profit on sale of investment will be included in the total income of the assessee.
B) AO held that the total income as per provisions of I-T Act was loss which was less than 7.5% of book profit computed by AO u/s 115JB and taxed u/s 115JB. Assessee contended that the provisions of sec. 115JB are not applicable in the case of the Insurance Companies because the profit and loss account of the Insurance Companies are not required to be prepared as per the part II of Schedule VI of Companies Act, which is a basic requirement for computation of book profit u/s 115JB. As per the proviso to sub-section 2 of section 211 of the Companies Act, 1956, the provisions of section 2 which requires the company to prepare the profit & loss account as per Part II of Schedule VI are not applicable to the Insurance or Banking or any companies engaged in the generation or supply of electricity or to any other class of company for which a form of profit and loss account has been specified in or under the Act governing such class of company. Amendment had been brought in statute by the Finance Act 2012 whereby sub.sec. 2 has been substituted w.e.f 1.4.2013; therefore, prior to 1.4.2013, the provisions of sec. 115JB cannot be applied in the case of Companies which are not required to prepare accounts as per the provisions of part II of Schedule VI of the Companies Act, 1956.
After hearing both the parties, the ITAT held that,
A) ++ the bare reading of the amended provisions of Rule 5 of First Schedule makes it clear that the profits and gains shall be taken to be the profit before the tax and appropriately disclosed in the P&L Account prepared in accordance with the Insurance Act, 1938 or the Rule made thereunder or the provisions of IRDA Act. There is no dispute that the assessee before us has included the profit on sale of investments in the profit and gain as declared in the accounts prepared in accordance with the provisions of Insurance Act 1938. It is also not the case of the assessee that the profits/gains on sale of investments is not required to be included in the P&L Account prepared in accordance with the provisions of Insurance Act. Therefore, once the profit on sale of investment is required to be included in the P& L account in accordance with the provisions of Insurance Act, then as per the Rule 5 of First Schedule of the I-T Act, no adjustment is required to be made on account of the amount of profits on sale of investment already included in the P&L Account. Thus, once the assessee has included the gain on sale of investments in the P&L account prepared as per the provisions of the Insurance Act, 1938, then the said amount cannot be reduced while computing the income as per provisions of sec. 44 r.w First Schedule of the IT Act. However, in various cases, the ITAT has taken a view that the amendment vide Finance Act 1988 w.e.f 1.4.89, the sub rule (b) of Rule 5 of First Schedule was omitted with the purpose to grant exemption to the insurance companies with regard to the profit on sale of investments. It has been provided in the circular no.528 dated 16.12.1988 that the loss incurred by the general insurance companies on realization of investment shall not be allowed as deduction in computing the profit chargeable to tax. Since the Tribunal has been taking a consistent view on this issue in a series of decisions, therefore, to maintain the rule of consistency and uniformity on this aspect, the issue is decided in favour of assessee;
B) ++ the proviso to sub. Sec (2) of sec. 211 of the Companies Act creates an exemption of applicability of sub. Sec (2) inter-alia in respect of Insurance companies or banking companies or any other companies engaged in generation and supply of electricity for which a form of profit and loss account has been specified in or under the Act governing such class of company. Even if an Insurance Company does not disclose any matter in the Balance Sheet and P&L account because the same is not required to be disclosed by the Insurance Act shall not be treated as non-disclosure of a true and fair view of the state of affairs of the company as the said condition has been relaxed by sub. sec 5 of sec 211 of the Companies Act. In order to align the provisions of the I-T Act with the Companies Act, an amendment has been brought in to the statute by the Finance Act 2012 whereby sec 115JB has been amended w.e.f 2013 and therefore, prior to 1.4.2013, the amended provisions of sec. 115JB cannot be applied in case of Insurance, banking, electricity, generation and distribution companies and other class of companies, which are not required to prepare their accounts and particularly Balance Sheet and P&L account as per part II & III of Schedule VI of the Companies Act. Thus, when the insurance companies, banking companies and electricity generation and distributions companies are treated in the same class as per the provisions of sec 211 of the Companies Act in preparing their final accounts, then these companies cannot be treated differently for the purpose of sec. 115JB and accordingly, the provisions of sec. 115JB are not applicable in the case of the assessee.
Facts of the case
A) Assessee is engaged in the general insurance business. It reduced the gain on sale of investment while calculating the profit or loss of business or profession. Assessee contended that the gains on sale of investment amounting was exempt from tax in view of circular No.528 dated 16.12.1988 issued by CBDT. Further as per section 44, the profits and gains for insurance business would be computed in accordance with the rules contained in the first schedule to the Act and the profit from the insurance business would be taken to be the balance of the profits as disclosed by annual account, which were required under the Insurance Act, 1938 to be furnished to the Insurance Authorities, subject to the adjustments provided in clause 5(a) to (c). Clause 5(b) provided for adjustment, for profit or loss on the realization of investments, has been deleted by the Finance Act, 1988 and as per explanatory notes, the amendment was made to enable the general insurance companies to play a more active role in capital markets for the benefit of the policy holders. AO held that provisions of sec 44 A did not provide for any profit/gain on sale of investment to be reduced while computing the profits and gain of any business of insurance and held that circular 525 did not seek to override the provisions of section 44 and Rule 5 of First Schedule.
CIT (A) confirmed the disallowance made by AO. Assessee contended that that the Tribunal has repeatedly taken note that the deletion of Sub. Rule (b) of Rule 5 of first schedule was with specific purpose of granting exemption on the profit on sale of investments and that is why the legislature has now bought in a prospective amendment from Assessment Year 2011-12, whereby inserted Rule 5(b)(i) of first schedule of the I-T Act. By virtue of this amendment, the profit on sale of investments in the case of the insurance companies will be taxable w.e.f AY 2011-12.
Revenue contended that the assessment of the insurance companies has to be framed as per the provisions of sec. 44 and in accordance with the First Schedule of the Insurance Act. Even after the amendment whereby the sub Rule (b) of Rule 5 of First Schedule was removed the total income of the assessee has to be computed as per the existing provisions. According to Rule 5 of First Schedule, the income of non-life insurance business is taken as profit before tax and appropriations as per the profit and loss account of the company, prepared in accordance with the regulations made by the Insurance Regulatory Development Authority (IRDA), subject to certain adjustments. When the assessee itself has included the profit on sale of investments in the profits & loss account, which were prepared in accordance with the regulations made by IRDA, then no adjustment can be made in the said profits as shown by the assessee in the P&L account. The amendment by the Finance Act 1988 was made whereby sub. rule (b) of Rule 5 of First Schedule has been deleted due to the reasons because corresponding amendment was also made in the Insurance Act whereby the Insurance Companies has to decide to include the income on sale of investments in the P&L account prepared in compliance with the Insurance Act and therefore, once the profit on sale of investment is included in the P&L account prepared as per the Insurance Act, then no adjustment is required to be made as per the provisions of sec. 44 r.w. First Schedule of Income Tax Act. Once the assessee has included the profit on sale of investments in the annual account prepared as per the regulations made by IRDA and copies of which are to be furnished to the Controller of Insurance, then for computation of income u/s 44 of the I T Act by applying Rule 5 of First Schedule, the amount of profit on sale of investment will be included in the total income of the assessee.
B) AO held that the total income as per provisions of I-T Act was loss which was less than 7.5% of book profit computed by AO u/s 115JB and taxed u/s 115JB. Assessee contended that the provisions of sec. 115JB are not applicable in the case of the Insurance Companies because the profit and loss account of the Insurance Companies are not required to be prepared as per the part II of Schedule VI of Companies Act, which is a basic requirement for computation of book profit u/s 115JB. As per the proviso to sub-section 2 of section 211 of the Companies Act, 1956, the provisions of section 2 which requires the company to prepare the profit & loss account as per Part II of Schedule VI are not applicable to the Insurance or Banking or any companies engaged in the generation or supply of electricity or to any other class of company for which a form of profit and loss account has been specified in or under the Act governing such class of company. Amendment had been brought in statute by the Finance Act 2012 whereby sub.sec. 2 has been substituted w.e.f 1.4.2013; therefore, prior to 1.4.2013, the provisions of sec. 115JB cannot be applied in the case of Companies which are not required to prepare accounts as per the provisions of part II of Schedule VI of the Companies Act, 1956.
After hearing both the parties, the ITAT held that,
A) ++ the bare reading of the amended provisions of Rule 5 of First Schedule makes it clear that the profits and gains shall be taken to be the profit before the tax and appropriately disclosed in the P&L Account prepared in accordance with the Insurance Act, 1938 or the Rule made thereunder or the provisions of IRDA Act. There is no dispute that the assessee before us has included the profit on sale of investments in the profit and gain as declared in the accounts prepared in accordance with the provisions of Insurance Act 1938. It is also not the case of the assessee that the profits/gains on sale of investments is not required to be included in the P&L Account prepared in accordance with the provisions of Insurance Act. Therefore, once the profit on sale of investment is required to be included in the P& L account in accordance with the provisions of Insurance Act, then as per the Rule 5 of First Schedule of the I-T Act, no adjustment is required to be made on account of the amount of profits on sale of investment already included in the P&L Account. Thus, once the assessee has included the gain on sale of investments in the P&L account prepared as per the provisions of the Insurance Act, 1938, then the said amount cannot be reduced while computing the income as per provisions of sec. 44 r.w First Schedule of the IT Act. However, in various cases, the ITAT has taken a view that the amendment vide Finance Act 1988 w.e.f 1.4.89, the sub rule (b) of Rule 5 of First Schedule was omitted with the purpose to grant exemption to the insurance companies with regard to the profit on sale of investments. It has been provided in the circular no.528 dated 16.12.1988 that the loss incurred by the general insurance companies on realization of investment shall not be allowed as deduction in computing the profit chargeable to tax. Since the Tribunal has been taking a consistent view on this issue in a series of decisions, therefore, to maintain the rule of consistency and uniformity on this aspect, the issue is decided in favour of assessee;
B) ++ the proviso to sub. Sec (2) of sec. 211 of the Companies Act creates an exemption of applicability of sub. Sec (2) inter-alia in respect of Insurance companies or banking companies or any other companies engaged in generation and supply of electricity for which a form of profit and loss account has been specified in or under the Act governing such class of company. Even if an Insurance Company does not disclose any matter in the Balance Sheet and P&L account because the same is not required to be disclosed by the Insurance Act shall not be treated as non-disclosure of a true and fair view of the state of affairs of the company as the said condition has been relaxed by sub. sec 5 of sec 211 of the Companies Act. In order to align the provisions of the I-T Act with the Companies Act, an amendment has been brought in to the statute by the Finance Act 2012 whereby sec 115JB has been amended w.e.f 2013 and therefore, prior to 1.4.2013, the amended provisions of sec. 115JB cannot be applied in case of Insurance, banking, electricity, generation and distribution companies and other class of companies, which are not required to prepare their accounts and particularly Balance Sheet and P&L account as per part II & III of Schedule VI of the Companies Act. Thus, when the insurance companies, banking companies and electricity generation and distributions companies are treated in the same class as per the provisions of sec 211 of the Companies Act in preparing their final accounts, then these companies cannot be treated differently for the purpose of sec. 115JB and accordingly, the provisions of sec. 115JB are not applicable in the case of the assessee.
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