Icici Prudential Life Insurance ... Vs Department of Income Tax On 20 June, 2012

Icici Prudential Life Insurance ...
vs Department Of Income Tax on 20 June, 2012
Income Tax Appellate Tribunal - Mumbai

Icici Prudential Life Insurance ... vs Department Of Income Tax on 20 June, 2012
ITA Nos.6854 to 6856 6509 7765 to 7767 and 7213 ICICI PRULIFE Mumbai F Ben
IN THE INCOME TAX APPELLATE TRIBUNAL

"F" Bench, Mumbai
Before Shri B. Ramakotaiah, Accountant Member
And Shri Vivek Varma, Judicial Member
ITA
ITA
ITA
ITA
No.6854/Mum/2010
No.6855/Mum/2010
No.6856/Mum/2010
No.6059/Mum/2011
:
:
:
:
ICICI Prudential Insurance

Co. Ltd, 1089 Appasaheb
Marathe Marg, Prabhadevi,
Mumbai 400025
PAN: AAACI 7351 P
(Appellant)
ITA
ITA
ITA
ITA
Vs.
year:
year:
year:
year:
2005-06)
2006-07)
2007-08)
2008-09)
Asstt. CIT, Cir-6(1)

Mumbai
(Respondent)
No.7765/Mum/2010
No.7766/Mum/2010
No.7767/Mum/2010
No.7213/Mum/2011
Asstt. CIT, Cir-6(1)

Mumbai
(Assessment
(Assessment
(Assessment
(Assessment
:
:
:
:
Vs.
(Appellant)
(Assessment
(Assessment
(Assessment
(Assessment
year:
year:
year:
year:
2005-06)
2006-07)
2007-08)
2008-09)
ICICI Prudential Insurance

Co. Ltd, 1089 Appasaheb
Marathe Marg, Prabhadevi,
Mumbai 400025
PAN: AAACI 7351 P
(Respondent)
Assessee by:
Shri S.E. Dastur and

Ms. Arati Vissanji
Department by: Shri Subachan Ram
Date of Hearing:
20/06/2012
Date of Pronouncement: 14/09/2012
ORDER
Per Bench:
These appeals are by assessee for the assessment years 2005- 06 to 2008-09 and cross appeals by
revenue for the respective assessment years. These appeals are on common issues, even though
amounts vary from year to year. Therefore, all the appeals were heard together and common order is
Indian Kanoon - http://indiankanoon.org/doc/37648666/
passed.
Page 1 of 77
ITA Nos.6854 to 6856 6509 7765 to 7767 and 7213 ICICI PRULIFE Mumbai F Bench
2. We have heard the learned Counsel Shri S.E. Dastur and the learned CIT (DR) Shri Subachan
Ram in detail and also perused the submissions made by the respective parties and reliance on
various case law and paper books placed on record in respective years. Their arguments were
incorporated wherever necessary. For the sake of convenience, the issues in assessment year
2005-06 are discussed elaborately.
ITA No.6854/Mum/2010 - AY 2005-06:
3. This is an assessee's appeal in which assessee has raised the following grounds:
"1. The CIT (Appeals) has erred in not accepting the loss of `.150.45 crores returned
by the appellant.
2. The CIT (Appeals) erred in holding that the surplus as reflected in
Form-I is the taxable income of the appellant.
3. The CIT(Appeals) erred in upholding the taxable income for the
year at `.98.96 crores by holding that the amount transferred from the
shareholder's account to account is not to be reduced from the surplus
disclosed in Form-I. It is prayed that the surplus considered for
computing taxable income should be after removing the effect of
transfer from Shareholder's account to account.
4. The CIT (Appeals) has erred in not accepting disallowance under
section 14A offered in revised return of income is on reasonable basis
but directed AO to decide the issue afresh".
4. The facts in brief are that assessee is a Public Limited Company registered under
the Companies Act, 1956. The Company was incorporated on July 20, 2000 with the
object of carrying on Life Insurance Business. The activities of the insurance are
governed by the Insurance Act, 1938, Insurance Regulatory and Development
Authority (IRDA) Act, 1999 as amended from time to time, IRDA rules and
Regulations from time to time made there under. The return of income for AY
2005-06 was filed on 27.10.2005 declaring a loss of `.150,46,83,807/-. The case was
selected for scrutiny and AO while accepting that assessee is in the business of life
insurance considered that income of assessee from Page 2 of 77 ITA Nos.6854 to
6856 6509 7765 to 7767 and 7213 ICICI PRULIFE Mumbai F Bench insurance
business is assessable as per section 44 of the Income Tax Act. He has considered the
Actuarial Valuation Report submitted in Form-I extracted in the assessment order

which is as under:
Form-I of the Actuarial Report:
Item
Description
No.
Balance of
Mathematical
fund shown
in Balance
reserves
(excluding
`.)
Sheet (`
(1)
01
02
(2)
Business
within India
Par policies
Non
Par
05
Policies
Totals
Total
business
par policies
Non
par
06
policies
Total
03
04
(3)
6702408920
`.)
Surplus (`
Negative
Reserves
`.)
(`
cost of bonus
`)
allocated)(`)
(4)
(5)
(6)
6411682550
290726370
12539400
28131258270
28064221830
67969900
59423230
34833667190
34475904380
358696280
71962640
6411682550
290726370
12539400
28131258270
28064221830
67969900
59423230
34833667190
34475904380
358696280
71962640
6702408920
Since there is a surplus declared at `.35,86,92,280/- in the form I AO asked assessee

to explain why the computation is not made according to the 'actuarial valuation' It
was the contention of assessee that the actuarial valuation has resulted in deficit
which were shown as loss whereas the Form-I represents the total surplus after
transfer of assets from shareholder's account to the account as per the IRDA rules.
The surplus has to be shown in order to declare dividend, bonus etc. under the rules
and the amount was transferred by way of infusion of fresh capital into the company
and transferred to the Policyholder's account. It was submitted that the transfer of
shareholder's funds does not give rise to any income and the actuarial surplus arrived
at was a deficit on which the return was filed and in case AO has to consider the
surplus in Form-I, then transfer of funds from shareholder's account should be
reduced from the above amount as it is only transfer of capital assets and not income.
AO, however, relying on the principles laid Page 3 of 77 ITA Nos.6854 to 6856 6509
7765 to 7767 and 7213 ICICI PRULIFE Mumbai F Bench down by the Hon'ble
Supreme Court in the case of LIC vs. CIT, 51 ITR 773 wherein it was held that the
assessment of the profits of an insurance business is completely governed by the rules
under the schedules and there is no power to do anything not contained in it. Further
he also relied on the judgment of the Hon'ble Bombay High Court in the case of LIC
vs. CIT, 115 ITR 45 to come to a conclusion that AO has no power to make adjustment
once provisions of section 44 were invoked. Accordingly he took the surplus as
declared in Form-I as the basis for computation of income and accordingly arrived at
the surplus at `.35,86,96,280/-. He also made an addition of deficit from Pension
Scheme at `.63,09,19,492/- before setting of the brought forward losses. He also
made disallowance under section 14A to an extent of `.4,42,584/- even though no
adjustment was made in the computation of income.
5. The matter was contested before the CIT (A) and assessee made elaborate
submissions. The main contention was that Form-I is a report prepared as a part of
actuarial report and abstracts under the IRDA Regulations to ascertain segment-wise
cumulative allowability of actuarial valuation shown as mathematical errors. It was
submitted that Form - I does not provide the Profit & Loss A/c of entire business but
shows the asset- liability position of only . It was further explained that IRDA has
made specific rules to segregate the account and shareholder's account and revised
the form for presentation of insurance accounts as prescribed in IRDA(Preparation of
Financial statements and Auditor's Report of Insurance companies) Regulations
2002. According to the Regulations, Profit & Loss A/c of life insurance company is
divided into a technical account (policy holder's account) also called as revenue
account and non-technical account (shareholder's account) also called Profit & Loss
A/c. It was further submitted that technical accounts deals with all the transactions
relating to the Page 4 of 77 ITA Nos.6854 to 6856 6509 7765 to 7767 and 7213 ICICI
PRULIFE Mumbai F Bench including income from premium and expenditure and
actuarial provision shown segment-wise. All the transactions relating to
shareholder's like funding the deficit of the account, income earned on investment of
share capital and reserves are dealt with the non technical account called
shareholder's account. As per the Regulations the format for presentation of account,
the impact of actuarial valuation is shown in the Revenue Account relating to for the
year and the surplus/deficit is arrived at. It was submitted that in order to compute
the effect for the Income Tax computation result of account and shareholder's
account needs to be combined and accordingly assessee filed surplus/deficit
calculated after combining the and shareholder's accounts.
6. The learned CIT (A) however, did not agree with the above contentions and stated
that section 44 r.w. part-A of first schedule to the Income Tax (Rule 2) provides for
mechanism of arriving at the surplus of the insurance business and the actuarial
surplus as disclosed in Form-I which is part of the actuarial report duly certified by
the appointed Actuary of the Company should be considered as income from life
insurance business as per the Act. Therefore, he agreed with AO's action and rejected
assessee's contention. Assessee is aggrieved on this issue and raised grounds no 1 to
3.
7. The learned Counsel drawing our attention to the special scheme of assessment as
provided in section 44 of the Income tax Act and First schedule of Income tax act and
more particularly Rule-2 submitted that insurance business was governed by the
actuarial valuation and not by the general Profit & Loss A/c prepared in other
company. Insurance business is regulated by the Insurance Act 1938 and further by
the IRDA Act 1999. As per the Regulations issued by the IRDA which assessee has to
follow, as it was incorporated after the legislation of the IRDA Act, it has to maintain
the accounts as per the new Regulations and accordingly Page 5 of 77 ITA Nos.6854
to 6856 6509 7765 to 7767 and 7213 ICICI PRULIFE Mumbai F Bench shown policy
holder's account and shareholder's account. There was a negative balance in
policyholder's account to an extent of `.201.60 crores. The law requires the deficit in
policyholder's account should be made good before declaring any bonus or dividend
and this deficit should be fulfilled by transferring corresponding amount from
shareholder's account. Accordingly during the year, assessee has transferred an
amount to the extent of `.233.35 crores from shareholder's account to policyholder's
account. As the transfer should be supported by assets, assessee has issued shares
afresh to the extent of `.250 crores and increased the capital to that extent. Since the
amount transferred from shareholder's account is nothing but transfer of capital
from shareholder's account to policyholder's account, it was the submission that the
surplus arrived at after the transfer of the capital cannot be considered as income of
assessee. It was like taxing the capital receipt/ sum which can not be regarded as
income. Without prejudice to the claim, it was also submitted that assessee has filed
the returns consolidating the policyholder's account and shareholder's account and
the credit in the policyholder's account is matched by the debit in the shareholder's
account. This is tax neutral. Therefore, AO was not correct in considering the surplus
which arose due to transfer of share capital as per the IRDA Regulations.
8. The learned Counsel also explained the history of the case. It was the submission
that this issue of examining the actuarial surplus was first time taken up under
section 263 in assessment years 2003-04 and 2004-05, for the first time by the CIT
and this matter has been contested before the ITAT. ITAT vide ITA No.3270 and
4685/Mum/2008 dated 22.01.2009 has set aside the orders of the CIT as there was
no prejudice caused to the Revenue in the order under section 143(3). This order was
contested before the Hon'ble High Court which dismissed the Revenue appeal and
Page 6 of 77 ITA Nos.6854 to 6856 6509 7765 to 7767 and 7213 ICICI PRULIFE
Mumbai F Bench further contested before the Hon'ble Supreme Court which also did
not admit and dismissed Revenue appeals. However, the Revenue took proceedings
under section 147 and reopened assessment from assessment years 2002-03 to
2004-05 on the very same issue which was contested by way of writ petition filed
before the Hon'ble High Court. The Hon'ble High Court vide orders dated
19/03/2010 reported in 325 ITR 471 quashed the notices under section 148 issued in
this regard. The Hon'ble High Court also considered on merits all the issues and
rejected the Revenue contentions. So, it was submitted that upto the assessment year
2004-05 assessee's computation of actuarial deficit i.e. loss arrived at in the life
insurance business was accepted.

9. Referring to the notes to the computation, the learned Counsel drew our attention
to various notes (page-5 of the paper book) to submit that consequent to the IRDA
recommendations, the insurance companies are maintaining the account as per the
format prescribed under Insurance Act 1938 for presentation of insurance accounts
and as per the revised format for the presentation of accounts in the new Regulations
under IRDA, the impact of the actuarial valuation is transferred to the revenue
account relating to policy holders for the year and the surplus/deficit is disclosed
therein. It was further submitted that the earlier formats for presentation of accounts
aggregated the results relating to shareholder's and policyholder's and thus the
surplus/deficit was including the impact of both. There is a scheme of presentation of
accounts currently in force for life insurance companies and the new formats were
prescribed for complying with the IRDA Regulations. It was the submission that even
though amendment was brought in Rule 5 in First Schedule for General Insurance
business to incorporate changes brought by I R D Act no such amendment was
brought in Rule-2. Therefore, the manner of taxing the life insurance companies has
not been realigned with the Page 7 of 77 ITA Nos.6854 to 6856 6509 7765 to 7767
and 7213 ICICI PRULIFE Mumbai F Bench changes as prescribed by the IRDA. It
was further submitted that there is a deficit of `.233,34,76,828/- in the policyholder's
account format-A-RA which has been made good by transfer of funds from the
shareholder's account. Therefore, the figures that appeared in Form-I are subsequent
to this transfer from shareholder's account. It was further submitted that the earlier
format did not provide for segregating insurance business into and shareholder's and
therefore, the requirement to transfer funds from one account to other and the need
thereof for aggregating two accounts to reflect the outcome of surplus or deficit did
not arise at that time. In order to arrive at the actuarial surplus/ deficit as per the
Insurance Act, 1938 it was submitted that the accounts are aggregated and
accordingly assessee has filed the return of income. As per the account before
transfer of the amounts, there was a deficit to an extent of `.161,40,61,362/- and
surplus in shareholder's account of `.10,93,77,555/-. In view of this assessee arrived
at a loss of `.150,46,83,807/- for the valuation year ended 31.03.2005 by combing
both accounts. The learned Counsel referred to the actuarial valuation report placed
in the paper book and also reconciliation statement as per Rule-2 and submitted that
the reconciliation statement is as per the rules under Insurance Act 1938.
10. It was further submitted that even if one were to accept the flipside of the
accounting, AO cannot take only one side of the account to tax the surplus arrived
after transfer of capital funds from the shareholder's account. If one were to accept
the transfer from one account to another, the surplus in policyholder's account will
get nullified by deficit in shareholder's account consequent to transfer from one to
another. If the method is to be followed as per the Insurance Act, 1938, then the
combined account which assessee has followed is correct method and AO has no
option than to accept the accounts as prepared under the Insurance Act, 1938.
Page 8 of 77
11. The learned Counsel referring to Rule-2 submitted that the actuarial valuation
made in accordance with the Insurance Act, 1938 (Act No.4 of 1938) should be read
to mean that it is an incorporation into the Income Tax Act and not a mere reference.
Therefore, it was his submission that the actuarial valuation has to be computed in
accordance with the Insurance Act, 1938 then existing and not with reference to the
subsequent amendments made in the formats under the IRDA Act. He then referred
to the principle of 'legislation by incorporation' and 'legislation by reference' and
referred to the decisions of the Hon'ble Supreme Court of India in the case of
Mahindra & Mahindra Ltd vs. Union of India & Others (1979) 2 Supreme Court cases
529 given in the context of MRTP Act, 1969 and Bharat Cooperative Bank Mumbai
Ltd vs. Cooperative Bank Employees Union AIR 2007 (SC) 2320
12. The learned Counsel also submitted that in case the language of the statutory
provision is ambiguous and capable of two constructions, that construction must be
adopted which will give meaning and effect to the other provisions of the enactment
rather than that which will give none. He referred to the decision of the Hon'ble
Supreme Court in the case of Addl. CIT vs. Surat Art Silk Cloth Manufacturers
Association 121 ITR 1(SC) to submit that the construction which is in tune with the
provisions of the Act can only be adopted and referred to the following from the
above said order.
"It is true that the consequences of a suggested construction cannot
alter the meaning of a statutory provision where such meaning is plain
and unambiguous, but they can certainly help to fix its meaning in
case of doubt or ambiguity. Let us examine what would be the
consequences of the construction contended for on behalf of the
revenue. If the construction put forward on behalf of the revenue were
accepted, then as already pointed out above, no trust or institution
whose purpose is promotion of an object of general public utility,
would be able to carry on any business, even though such business is
held under trust or legal obligation to apply its income wholly to the
charitable purpose or is carried on by the trust or institution for the
purpose of earning profit to be Page 9 of 77 ITA Nos.6854 to 6856
6509 7765 to 7767 and 7213 ICICI PRULIFE Mumbai F Bench utilized
exclusively for feeding the charitable purpose. If any such business is
carried on, the purpose of the trust or institution would cease to be
charitable and not only the income from such business but the entire
income of the trust or institution from whatever source derived, would
lose the tax exemption. The result would be that no trust or institution
established for promotion of an object of general public utility would
be able to engage in business for fear that it might lose the tax
exemption altogether and a major source of income for promoting
objects of general public utility would be dried up. It is difficult to
belief that the legislature could have intended to bring about a result
so drastic in its consequence. If the intention of the legislature were to
prohibit a trust or institution established for the promotion of an
object of general public utility from carrying on any activity for profit,
it would have provided in the clearest terms that no such trust or
institution shall carry on any activity for profit, instead of using
involved and obscure language giving rise to linguistic problems and
promoting interpretative litigation. The legislature would have used
language leaving no doubt as to what was intended and not left its
intention to be gathered by doubtful implication from an amendment
made in the definition clause and that too in language far from clear".
13. The learned Counsel further relied on principle laid down by Hon'ble Himachal
Pradesh High Court decision in Yogendra Chandra Vs CWT 187 ITR 58 to submit that
if a literal interpretation as suggested by Revenue is accepted, it would lead to a
manifestly absurd result which is not the intention of legislature. In this case the
capital transfer was considered as income in the pretext of relying on Form I. He
referred to AO's order to submit that the Hon'ble Supreme Court in the case of LIC
vs. CIT 51 ITR 773 had approved that AO has to arrive at the profits of the insurance
business as per first schedule and he was not empowered to make any variation. To
that extent, the accounts that were prepared under the Insurance Act, 1938 are to be
accepted. However, it was submitted that reliance on the Hon'ble Bombay High Court
judgment in LIC vs. CIT 115 ITR 45 is not correct as that judgment was reversed by
the Hon'ble Supreme Court in 219 ITR 410. Therefore, it was submitted that AO
relied on the over-ruled Page 10 of 77 ITA Nos.6854 to 6856 6509 7765 to 7767 and
7213 ICICI PRULIFE Mumbai F Bench judgment to deny assessee the benefit of
combining the accounts. It was submitted that the rules and provisions has to be
implemented by making a harmonious reading of the provisions and internal transfer
should be permitted which was made as per IRDA Regulations for which the Income
Tax Act was not amended to incorporate the changes.
14. Ld. Counsel also referred to the annual accounts, various forms and Regulations
and filed reconciliation statements placed before authorities to explain the rationale
of arriving at surplus/deficit as was done by assessee company.
15. In reply the learned DR submitted that there is no relevance of the proceedings
initiated under section 263 and 147 to the issue in present as their actions are under
different provisions and are different matter altogether. It was his submission that
the ITAT order against appeal on order under section 263 had no impact as ITAT
considered the issue in the context of erroneous and prejudice to the interest of
Revenue. Likewise dismissal of SLP does not establish any law and the factual
position was not affected by the orders of the High Court or Supreme Court. He then
referred to the provisions of law under section 44 of the Income Tax Act, Rule-2 of
first schedule and the actuarial report placed on record to submit that assessee has
prepared the actuarial surplus under the IRDA Regulations which AO has accepted as
per the provisions of law. There may be credit or transfer from shareholder's funds
but AO has no option than to arrive at the surplus as disclosed in Form-I as per the
rules. He also referred to Form-I and the surplus as per the actuarial valuation
extracted by AO in the assessment order itself. He relied on the principles laid down
by the Hon'ble Supreme Court in the case of Vegetable Products, 88 ITR 192 with
reference to the provisions for interpretation of law and further in the case of
Hindustan Construction Co. Ltd. v. CIT 208 ITR 291.
Page 11 of 77
16. Ld CIT DR further submitted that in case there are any transfers from one
account to another account, that issue is not for AO to examine as the actuary arrived
at the surplus and reported in Form-I which is the basis for assessment under Rule-2
of first schedule to the Income Tax Act. Whether there is a surplus or not in the
actuarial report can only be verified by AO under Rule-2 and he is duty bound to act
on the basis of form as prescribed under the Regulations which indicate surplus
during the year which AO has accepted as mandated by the statutory provisions and
the legal interpretations. It was further submitted that as far as life insurance
business is concerned, the old provisions will apply and as there is no amendment to
the Act as such the IRDA can only modify the format of reporting. He also submitted
that there is no contradiction in the old and new format prescribed under the IRDA
and relied on the decision of the Hon'ble Supreme Court in the case of Surana Steels
Pvt. Ltd vs. Dy. CIT, 104 Taxman 188 (SC) to submit that reference to the other
provisions are not required when the Act is very clear. It was further submitted that
the regulatory provisions for other insurance businesses have taken profit as Profit &
Loss A/c as basis for the computation but for the life insurance business, they have
taken a different method of calculation based on determination of actuarial
surplus/deficit. It was submitted that as far as life insurance business is concerned,
the intention of the legislature is not to consider capital or revenue but only to arrive
at surplus or deficit. It was further submitted that even though amendment was made
to Rule-5, no such amendment was made in Rule-2 of Part-A of first schedule and
virtually there was no change from the situation from Insurance Act 1938 to IRDA
Act1999. It is very clear that actuarial report is nothing to do with shareholder's but
only.
17. Ld.CIT DR further submitted that meaning of actuarial surplus used in Rule-2 is
not defined. As per Rule 4 of the IRDA Page 12 of 77 ITA Nos.6854 to 6856 6509
7765 to 7767 and 7213 ICICI PRULIFE Mumbai F Bench Regulations, actuarial report
was abstracted in a statement to be prepared by the actuary as per procedure. In view

of this the actuarial report provided in Form-I is the base for the assessment for AO.
The Regulations 8 of the IRDA starts as a statement showing total amount of surplus
arisen during the inter valuation period. Further it depends on the composition of
surplus which consist of A to F items and item J talks about the total surplus (a to
i). Since Form I indicate surplus for the total business, the total surplus has to be
considered as actuarial surplus for the purpose of Rule-2 for the inter valuation
period. He also further referred to the guidelines issued in IRDA circular 2004 to
state that transfer of funds shall not be reversible in nature. He also referred to AO's
order passed in assessment year 2008-09 which is little more elaborate than the
order in assessment year 2005-06 to support the stand of the Revenue that the
surplus arrived at in Form I is the actuarial surplus to be brought to tax under the
rules. The learned DR in his submission also referred to the Hon'ble Supreme Court
judgment in the case of LIC vs. CIT 51 ITR 773 (SC) for the primacy of section 44 and
Rule-2 in arriving at the actuarial valuation. He supported the order of AO and the
CIT (A).
18. We have considered the submissions and perused the record and relevant
provisions and the case laws relied upon. There is no dispute with the taxability of
insurance business as governed by the provisions of section 44 of the Act r.w. First
schedule of Income Tax Act 1961. Section 44 provides as under:
"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 sections 28 to[43B], the 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.
Page 13 of 77
The First schedule contains three parts A, B & C. Part-A pertains to life insurance
business, Part-B for other business and Part-C other provisions. The relevant rules in
Part A for life insurance business are as under:
"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
10
person from hat business shall be computed separately from his

profits and gains from any other business.
Computation of profits of life insurance business
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. Omitted 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".
Rule-7 defines 'life insurance business' means life insurance business as defined in
clause-2 of section 2 of Insurance Act 1938. Assessee incorporated after the
enactment of the IRDA 1999, is in the life insurance business and there is no dispute
with that. As per section 44 for a business involved in insurance business
notwithstanding contained in any other head of income like interest Page 14 of 77 ITA
Nos.6854 to 6856 6509 7765 to 7767 and 7213 ICICI PRULIFE Mumbai F Bench on
securities, house property, capital gains and other sources, the income from profits
and business are to be computed according to the first schedule. Primacy of Sec.44
and power of AO to compute as per Rule 2 of First Schedule was also decided by
Hon'ble Supreme Court in number cases relied on by both parties. As the dispute is
not with the above, there is no need to reiterate those principles or discuss cases in
this order.
19. Rule-2 is the main computation provision which is applicable to the life insurance
business. As per Rule-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, in
respect of the last inter valuation period so as to exclude any surplus or deficit
included therein which was made in any inter valuation period. According to the rule
11
the surplus or deficit between two valuation periods can only be taken as income or
loss of the period. Thus if there is a surplus in earlier valuation of 'Y' amount and
surplus in the later valuation at 'X' amount, the difference between X & Y will be the
income of the inter valuation period for the purpose of Rule 2. Therefore, actuarial
evaluation done in respective periods has importance. Before the IRDA Act, only Life
Insurance Corporation was permitted to involve itself in life insurance business. The
actuarial valuation was not undertaken every year but once in three years. Therefore,
the rule provides for only average of the surplus to arrive between two inter valuation
periods. However, with the enactment of IRDA Act 1999 and Regulations therein not
only the private participants were permitted to do business but presentation of
accounts and reports were modified.
Past history of the assessee company:
20. Assessee company was governed by the IRDA Act and its Regulations from its
inception. In earlier years attempts were made Page 15 of 77 ITA Nos.6854 to 6856
6509 7765 to 7767 and 7213 ICICI PRULIFE Mumbai F Bench by Revenue to disturb
the Incomes or losses assessed both under Sec. 263 and Sec. 147, as briefly stated in
Ld. Counsel's arguments. The incomes and Losses shown by assessee in various
assessment years are as under:
A.Y.
2001-02
2001-03
2003-04
2004-05
2005-06
2006-07
2007-08
2008-09
Returned
Income/(loss)
(204,359,146)
(854,736,440)
(987,036,885)
(1,742,378,630)
(1,505,539,430)
(2,005,534,043)
(4,128,758,204)
8,233,771,502)
Surplus/(deficit)
as per A-RA
(206,619,000)
177,434,000
22,000
(22,000)
(317,487,000)
1100,641,000)
(1,360,152,000)
(3,251,153,000)
Amount
transferred
from SHA
1,241,806,000
1,583,784,000
2,367,746,000
2,333,474,000
2,306,655,000
7,579,972,000
16,063,495,000
Surplu
per Fo
358,69
775,73
1,426,03
3,029,12
21. The dispute in this case is in adopting the amount of surplus or deficit as per
actuarial valuation. There is no dispute with method of actuarial valuation. The
dispute is centered around the amounts represented in Form-I as per the IRDA
Regulations. Consequent to changes brought by IRDA Act, and its Regulations the
revised format in Form I deviates from the Form-I prescribed under Insurance Act
1938. Assessee reconciles the form with old Regulations and filed return of income/
loss. The AO adopts the 'Total Surplus' stated in Form-I under new Regulations
ignoring the assessee submissions about changes in accounting procedures and need
for reconciliation. This aspect was examined by the Hon'ble Bombay High Court in
the assessee own case of ICICI Prudential Life Insurance Co. Ltd. vs. ACIT 325 ITR
471 (Bom.). The facts examined by the Hon'ble Bombay High Court pertain to the
assessment year 2003-04 wherein consequent to the reopening of the assessment
12
under section 148, the matter was challenged before the Hon'ble Bombay High Court.
The entire scheme, various Regulations applicable, change in formats and method of
accounts were elaborately discussed by the Hon'ble Bombay High Court as under:
"During the course of the assessment year 2003-04, the petitioner filed a return of
income on November 27, 2003, Page 16 of 77 ITA Nos.6854 to 6856 6509 7765 to
7767 and 7213 ICICI PRULIFE Mumbai F Bench reporting a net loss of Rs. 98.70
crores. The statement of the computation of profits and gains from business shows an
actuarial deficit of Rs. 158.37 crores. After excluding a deficit of Rs. 48.47 crores,
arising out of pension schemes exempt under section 10(23AAB), the deficit in the
account stood at Rs. 109.90 crores. The petitioner had an income surplus in the
shareholder's' account of Rs. 11.20 crores. As a result, the deficit from the insurance
business was Rs. 98.70 crores. Section 44 of the Income-tax Act, 1961, provides that
notwithstanding anything contained to the contrary in the provisions of the 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 sections 28 to 43B the profits and gains of any
business of insurance shall be computed in accordance with the rules contained in
the First Schedule to the Act. Rule 2 of the First Schedule provides as follows:
"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, 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."
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 Page 17 of 77 ITA
Nos.6854 to 6856 6509 7765 to 7767 and 7213 ICICI PRULIFE Mumbai F Bench and
in conformity with the requirements of Part II of that Schedule. The fifth proviso to
13
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. 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 Page 18 of 77 ITA Nos.6854 to 6856
6509 7765 to 7767 and 7213 ICICI PRULIFE Mumbai F Bench account of
policyholder's, and (ii) a profit and loss account of shareholder's. For the previous
year which ended on March 31, 2003, the policyholder's' account reflected a deficit of
Rs. 158.37 crores. This deficit was made good by the transfer of an amount of Rs.
158.37 crores from the shareholder's' account to the policyholder's account. This was
essentially an internal transfer of funds. Form I which has been prepared by the
petitioner in pursuance of the IRDA Regulations of 2000 reflected a nil deficit
consequent upon the transfer of an amount of Rs. 158.37 crores from the
shareholder's' account to the policyholder's account. The source for making a transfer
of Rs. 158.37 crores from the shareholder's' account originated in the infusion of
14
capital from shareholder's during the course of the previous year relevant to the
assessment year in question.
During the course of the assessment proceedings for the assessment year 2003-04,
the petitioner furnished a note to the computation of income. The salient aspects
which were highlighted in the note were as follows:
(i) The erstwhile format for the presentation of surplus/deficit required each
insurance company to aggregate the results relating to shareholder's' operations and
policyholder'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 policyholder's for the year and
the surplus/deficit was disclosed therein ;
(iii) The profit and loss for shareholder's and the surplus/deficit for policyholder's are
since segregated into two separate accounts after the amended Regulations;
(iv) For the financial year ending March 31, 2003, the actuarial valuation as disclosed
in Form I shows a nil surplus/deficit as regards the business of policyholder's. The
actual deficit of Rs. 158.37 crores in the policyholder's' account (Form A-RA) was
made good by a transfer of an equivalent sum from the shareholder's' account.
Hence, the figures showing a nil deficit in Form I were subsequent to the transfer;
(v) The total deficit in the policyholder's' account for tax purposes was Rs. 109.90
crores (Rs.158.37 crores less an Page 19 of 77 ITA Nos.6854 to 6856 6509 7765 to
7767 and 7213 ICICI PRULIFE Mumbai F Bench amount of Rs. 48.47 crores on
account of exempt pension schemes);
(vi) In the shareholder's' account, there was a net surplus of Rs. 11.19 crores;
(vii) Consequently, while there was a net surplus in the shareholder's' account of Rs.
11.19 crores, there was a net deficit in the policyholder's' account of Rs. 109.90 crores;
(viii) Consequently, in determining the profits and gains under section 44 read with
rule 2, the loss was computed at Rs. 98.70 crores by aggregating the surplus in the
shareholder's' account with the deficit in the policyholder's' account for the purposes
of taxation.
During the course of the assessment proceedings, letters were addressed to the
Assessing Officer specifically in order to clarify the position of the deficit in the
15
policyholder's' account. By its letter dated December 27, 2005, the petitioner clarified
that the deficit in the policyholder's' account as reflected by Form A-RA had been met
by a transfer from the shareholder's' account. The figures relating to surplus/deficit
in Form I were subsequent to the internal transfer of funds. The assessee contended
that the transfer from the shareholder's' to the policyholder's' account was an internal
adjustment and was tax neutral. Before the assessment proceedings came to be
concluded for the assessment year 2003-04, an audit query was raised with reference
to the assessment year 2002-03. The audit report dated May 4, 2005 specifically
raised a question as to whether the petitioner should have been allowed to claim a
deficit in the policyholder's' account since the deficit disclosed by the actuarial
valuation in Form I was shown to be nil. In response to the audit query, the petitioner
addressed a letter dated December 29, 2005, contending that the First Schedule to
the Income-tax Act did not refer to any particular form for calculating the taxable
surplus and instead mentions that the actuarial surplus calculated under the
provision of the Insurance Act, 1938, has to be considered. The petitioner reiterated
its position that Form I showed a zero surplus because, it has already considered,
inter alia, the transfers made from the shareholder's' account to the policyholder's'
account to nullify the deficit as per the IRDA Regulations. The same position has
been reiterated by a letter dated December 30, 2005 to the Assessing Officer".
It was further observed vide Para 18 (Page No.480) as under:
The record before the court shows that the assessee had in its
computation of income disclosed that the policyholder's' account
showed that (i) there was a deficit of Rs. 109.90 Page 20 of 77 ITA
Nos.6854 to 6856 6509 7765 to 7767 and 7213 ICICI PRULIFE
Mumbai F Bench crores (comprising Rs. 158.37 crores minus Rs.
48.47 crores arising out of exempt pension funds) ; (ii) there was a
transfer of funds to the extent of Rs. 158.37 crores from the
shareholder's' account to the policyholder's' account ; and (iii) that the
deficit in the policyholder's' account was adjusted only by an internal
transfer of funds from the shareholder's' account to the policyholder's'
account. By its letters dated December 27, 2005 and December 30,
2005, which were filed in response to queries raised by the Assessing
Officer, the assessee disclosed (a) the manner in which the profits and
gains under section 44 read with the First Schedule were arrived at, so
as to reflect a loss of Rs. 98.70 crores ; (b)the fact that the nil surplus
shown in the report of the actuarial valuation in Form I was
subsequent to the transfer of funds from the shareholder's' account to
the policyholder's' account. When the assessment proceedings
pertaining to the assessment year 2003-04 were pending, an audit
query came to be raised in regard to a similar claim for loss during the
assessment year 2002-03. The petitioner responded to the audit query
by its letter dated December 29, 2005. The letters addressed by the
16
petitioner, including the note appended to the computation of income

clearly set out the fact that there was a surplus in the shareholder's'
account and that the deficit in the policyholder's' account was met by a
transfer from the share holders' account to the policyholder's' account.
The petitioner disclosed that in Form I, the surplus/deficit was shown
to be nil and submitted that the position reflected in Form I was
subsequent to the internal transfer of funds which took place from the
shareholder's' to the policyholder's' account. It is after the petitioner
had filed its explanation by several letters that the Assessing Officer
passed an order of assessment under section 143(3)".
22. Further vide Para 21 (Page 482), the method of accounting and Regulations were
further analysed as under:
While dealing with the reopening of the assessment for the assessment
year 2004-05, the principal question before the court is as to whether
there was any tangible material before the Assessing Officer to form a
reason to believe that income chargeable to tax had escaped
assessment. In the prefatory part of this judgment, a reference has
been made to the relevant provisions of the Insurance Act, 1938 and to
the Regulations of 2000 and 2002, which have a bearing on the
formulation of the accounts, of an assessee like the petitioner who
engages in the business of life insurance. Section 13(1) of the
Insurance Act, 1938 which was inserted by the Insurance Regulatory
Authority Act, 1999 requires every insurer upon Page 21 of 77 ITA
Nos.6854 to 6856 6509 7765 to 7767 and 7213 ICICI PRULIFE
Mumbai F Bench the commencement of the Act to maintain separate
accounts in respect of the insurance business transacted by the insurer
and in respect of the shareholder's funds. Regulations 3 and 4 of the
Regulations of 2000 provide the procedure and requirements in the
preparation of the actuarial report and abstract. Form I, it may be
noted, is one of the summary statements that is required to be
prepared by the insurer under Regulation 4(2). Part V of the 2000
Regulations deals with the preparation of the financial statement and
requires the insurer to prepare; (i) a revenue account, also called a
policyholder's' account ; and (ii) a profit and loss account, also called
the shareholder's' account. Form A-RA is the form in which the
policyholder's' account is to be filed. Form A-RA requires a disclosure
of (a) premiums earned, income from investments and other income ;
(b) commission, operating expenses, provision for doubtful debts,
debts written off, provision for tax and other than taxation ; (c)
benefits, interim bonuses and change in valuation of liability in
respect of life policies. The surplus/deficit is computed at the foot of
the account by deducting the amounts computed under (b) and (c)
17
above from the figures of income in (a).

During the course of the assessment, the assessee had set out the computation in the
policyholder's' account and in the shareholder's' account.
According to the assessee, the net result of the operations is reflected in the
policyholder's' account which has been made good by transfer from the shareholder's'
account. A circular has been issued on March 23, 2004 by the Insurance Regulatory
Development Authority, to specify the conditions which are required to be fulfilled
where an insurer intends to declare a bonus when there is a deficit in the life fund.
The condition which is prescribed in the circular is that the accumulated deficit in the
policyholder's' account must be made good by a transfer of funds from the
shareholder's' account to the policyholder's' account. The circular clarifies that the
transfer from the shareholder's' account can be out of the profit and loss account,
balance or reserves in the shareholder's' account or by drawing upon the paid up
capital of the insurer. The transfer of funds made from the shareholder's' account to
the policyholder's' account is to be irreversible. What the circular emphasizes is that
an insurer who intends to declare a bonus has to ensure, in the event that there is a
deficit in the policyholder's' account, that the deficit is effaced Page 22 of 77 ITA
Nos.6854 to 6856 6509 7765 to 7767 and 7213 ICICI PRULIFE Mumbai F Bench by a
transfer of funds from the shareholder's' account".
The Assessing Officer, while reopening the assessment has not put forth any tangible
material on the basis of which he could have formed a reasonable belief that income
chargeable to tax has escaped assessment. He has merely altered or changed the
opinion which was formed during the assessment proceedings". (emphasis supplied)
The Hon'ble Bombay High Court on the facts of the case held that reopening is bad in
law. In arriving at that decision, the Hon'ble High Court examined the entire scheme
of presentation of accounts and arriving at surplus. Therefore not only the
Regulations which are binding on the assessee were discussed but computation made
there under was also considered in the above decision.
23. The dispute in these years is also similar. Eventhough Ld.CIT DR submitted that
those years has no effect on deciding this issue, we are aware about consequential
effects in later years and the need to follow uniform methodology. Therefore an
attempt was made to examine and reconcile the various contentions in this order. It
was the assessee contention that the surplus or deficit amount should be arrived at
after adjusting both Accounts there by neutralising the transfer of capital funds from
Shareholder's account to policyholder's account as per Regulations and prudent
business practice and international practices being followed by assessee company.
AO's contention is based on amounts referred in Form I.
Import of Insurance Act 1938:
18
24. Before analyzing the issue, it is necessary to discuss the principles of

'incorporation' of Insurance Act 1938 into the Income Tax Act 1961. As rightly
pointed out by the learned Counsel, the reference to the Insurance Act 1938 in the
Income Tax Act as such can only be considered as 'legislation by incorporation'. The
principles of 'legislation by incorporation' and 'legislation by Page 23 of 77 ITA
Nos.6854 to 6856 6509 7765 to 7767 and 7213 ICICI PRULIFE Mumbai F Bench
reference' are discussed by the Hon'ble Supreme Court in a number of cases, more so
in the following cases.
25. In the case of Mahindra & Mahindra Ltd vs. Union of India & Others, the Hon'ble
Supreme Court on the principles of interpretation of statutes on section 8(1) of
general Clauses Act 1897 held as under:
Interpretation of Statutes - Legislation by reference and by
incorporation-Difference - In former case Section 8(1) of General
Clauses Act applicable - But in latter case subsequent repeal or
amendment of the provision incorporated does not affect the
incorporating statute General Clauses Act, 1897,Section 8(1) (paras 8 and 9) "8. The first question that
arises for consideration on the preliminary objection of the respondents is as to what
is the true scope and ambit of an appeal under Section 55., That section provides
inter alia that any person aggrieved by an order made by the Commission under
Section 13 may prefer an appeal to this Court on "one or more of 'the grounds
specified in Section 100 of the Code of Civil Procedure, 1908". Now at the pate when
Section 55 was enacted, namely, December 27, 1969, being the date of coming into
force of the Act, Section 100 of the Code of Civil Procedure specified three grounds on
which a second appeal could be, brought to the High Court and one of these grounds
was that the decision appealed against was contrary It was sufficient under Section
100 as it stood then that there should be a question of law in order to attract the
jurisdiction of the High Court in second appeal and, therefore, if the reference in
Section 55 were to the grounds set out in the then existing Section 100, there can be
no doubt that an appeal would lie to this Court under Section 55 on a question of law.
But subsequent to the enactment of Section 55, Section 100 of the Code of Civil
Procedure was substituted by a new section by Section 37 of the Code of Civil
Procedure (Amendment) Act, J 976 with effect from February 1, 19'77 and the new
Section 100 provided that a second appeal shall lie to the High Court only if the High
Court is satisfied that the case involves a substantial question of law. The three
grounds on which a second appeal could lie under the former Section 100 were
abrogated and in their place only one ground was substituted which was a highly
stringent ground, namely, that there' should be a substantial question of law. This
was the new Section 100 which was in force on the date when the present appeal was
'preferred by the appellant and the argument of the respondents was that the
maintainability of Page 24 of 77 ITA Nos.6854 to 6856 6509 7765 to 7767 and 7213
19
ICICI PRULIFE Mumbai F Bench the appeal was, therefore, required to be judged by
reference to the ground specified in the new Section 100 and the appeal could be
entertained only if there was a substantial question of law. The respondents leaned
heavily on Section 8(1) of the General Clauses Act, 1897 which provides:
Where this Act or any Central Act or Regulation made after the commencement of
this Act, repeals and re-enacts, with or without modification, any provision of a
former enactment, then references in any other enactment or in any instrument to
the provision so repealed shall, unless a different intention appears, be construed as
references to .the provision so re- enacted and contended that the substitution of the
new Section 100 amounted to repeal and re-enactment, of the former Section 100
and, therefore, on an application of the rule of interpretation enacted in Section 8(1),
the reference in Section 55 to Section 100 must be construed as reference to the new
Section 100 and the- appeal could be maintained only on ground" specified in the
new Section 100, that IS, on a substantial question of law. We do not think this
contention is well founded. It ignores the 'distinction between a mere reference to or
citation' of one statute in another and an incorporation which in effect means bodily
lifting a provision of one enactment and making it a part of another. Where there is
mere reference to or citation of one enactment in another without incorporation;
Section 8(1) applies and the repeal and re-enactment of the provision referred to or
cited, has the effect set out in that section and the reference to the provision repealed
is required to be construed, as reference to the provision as' 're-enacted. Such was the
case in the Collector of Customs v. Nathella Sampathu Chetty" and New Central Jute
Mills Co. Ltd. v. Assistant Collector of Central Excise. But where a provision of one
statute is Incorporated in another, 'the repeal or amendment of the former does not
affect the latter. The effect of incorporation is as if 'the provision incorporated were
written' out in the incorporating statute and were a part of it. Legislation by
incorporation is a common legislative device employed by the legislature, where the
legislature for convenience of drafting incorporates provisions from an existing
statute by reference to: that statute instead of setting out for itself at length the
provisions which it desires to adopt. Once the incorporation is made, the provision
incorporated becomes an integral part of the statute in which it is transposed and
thereafter there is no need to refer to the statute from which the incorporation is
made and any' subsequent amendment made in it has no effect on the incorporation
statute. Lord Esher, M. R." while dealing with legislation in incorporation in In re
Wood's Estate" pointed out at page 615 :
If a subsequent Act brings into itself by reference some of the Page 25 of 77 ITA
clauses of a former Act, the legal effect of that, as has often been held, is to write
those sections into the new Act, just as if they' had been actually written in it with the
pen, or printed in it, and, the .moment you pave those clauses in the later Act, you
have no occasion to refer to .the former Act at all. ' Lord Justice Brett, also observed
to' the same effect in 'Clarke v. Bradlaugh": ..... there is a' rule of construction that,
20
where statute is incorporated by reference into a second . statute, the repeal of the
first statute by a third statute does not affect the second. This was the rule applied by
the Judicial Committee of the Privy Council in Secretary of State' for India in Council
v; Hindustan Co-operative Insurance Society Ltd.". The Judicial Committee pointed
out in this case that the provisions of the Land Acquisition Act, 1894 having been
incorporated in the Calcutta Improvement Act, 1911 and become an integral part of it,
the subsequent amendment of the Land Acquisition Act, 1894 by the addition of
sub-section (2) in Section 26 had no effect on the Calcutta Improvement Act, 1911
and could not be read into it. 'Sir George Lowndes delivering the opinion of the
Judicial Committee observed at page 267 :
In this country it is accepted that where a statue is incorporated by reference into a
second statute, the repeal of the first statute does not affect the second: see the cases
collected in Craies on Statue Law 3rd ed. pp. 349, 350 ... The independent existence
of the two Acts is, therefore, recognized; despite the death of the parent Act, its
.offspring survives in, the incorporating Act. It seems to be no less .logical: to hold
that where certain provisions from an existing Act, have been incorporated into a
subsequent Act, .no addition to the former Act, which is not expressly made
applicable to the subsequent Act, :can be deemed to be incorporated in it, at all
events if it is possible for the subsequent Act to function effectually without the
addition. So also in Ram Sarup v. M Munshi, it was held by this Court that since the
definition of 'agricultural land' in the Punjab Alienation, of Land' Act, 1900 as bodily
incorporated, in the Punjab Pre-emption Act, 1913, the' repeal of the former Act .had
no effect on the continued operation of, the latter. Rajagopala Ayyangar, J., "speaking
for the Court observed at pages 868-869 of the Report : Where the provisions of an
Act are' incorporated' by reference in a later Act the' 'repeal 'of 'the' earlier Act has, in
general, no effect upon the construction or effect of the Act' in which its provisions
have been incorporated.
In the circumstances, therefore, the repeal of the Punjab Alienation Page 26 of 77 ITA
Nos.6854 to 6856 6509 7765 to 7767 and 7213 ICICI PRULIFE Mumbai F Bench of
Land Act of 1900 has no effect on the continued operation of the Pre-emption Act
and the expression~, 'agricultural land' in the later Act has to be read as if the
definition in the Alienation of Land Act 1900, had been bodily transposed into it. :
The decision of this Court in Bolani Ores Ltd. v. State 'of Orissa" also proceeded on
the same principle. There the question arose in regard to the interpretation of Section
2(c) of the Bihar and Orissa Motor Vehicles Taxation' Act, 1930 (hereinafter referred
to as the Taxation Act). This section when enacted adopted the definition of 'motor
vehicle' contained in Section 2(18) of the Motor Vehicles Act, 1939. Subsequently,
Section 2(18) was amended by Act 100 of 1956 but no corresponding amendment was
made in the definition contained in Section 2(c) of the Taxation Act. The argument
advanced before the Court was that the definition in Section 2(c) of the Taxation Act
was not a definition by incorporation but only a definition by reference and the
21
meaning of 'motor vehicle' in Section 2(c) must, therefore, be taken to be the same as
defined from time. to time in Section 2(18) of the' Motor Vehicles Act, 1939. This
argument was negatived by the Court and it was held that this was a case of
incorporation and not reference and the definition' in Section 2(18) of the Motor
Vehicles Act, 1939 as then existing was incorporated in Section 2(c) of the 'Taxation
Act and neither repeal of the Motor Vehicles Act, 1939 nor any .amendment in, it
would affect the definition of 'motor vehicle' in Section 2 (c) of the.-Taxation Act. It
is, therefore, clear that if there is mere reference to a provision. of one statute in
another without incorporation, then, unless a different intention clearly appears,
Section 8(1) would apply and the reference- would ; be construed as a reference to the
provision as may be in force from time to time in the former statute. But if a
provision of one statute is incorporated in another, any subsequent. amendment in
the former statute or even its total repeal would not affect the provision as
incorporated in the latter statute. The question is to which category the present case
belongs.
9. We have no doubt that Section 55 is an instance of legislation by incorporation and
not legislation by reference. Section 55 provides for an appeal to this Court on' "one
or more of the grounds specified in Section 100". It is obvious that the legislature did
not want to confer an unlimited right of appeal, but wanted to restrict it and turning
to Section 100, it found that the grounds there set out were appropriate for restricting
the right of appeal and hence it incorporated them in Section 55. The right of appeal
was clearly intended to be limited to the grounds set out in the then existing
Section 100. Those were the grounds which were before the Legislature and to which
the Legislature could have applied its mind and it is reasonable to assume that it was
with reference to those specific and known grounds that the Legislature intended to
Mumbai F Bench restrict the right of appeal. The Legislature could never have been
intended to limit the right of appeal to any ground or grounds which might from time
to time find place in Section 100 without knowing what those grounds were. The
grounds specified in Section 100 might be changed from' time to time having regard
to the legislative policy relating to second appeals and it is difficult to see' any valid
reason why the Legislature should have thought it necessary that these changes
should also be reflected in Section 55 which deals with the right of appeal in a totally
different context. We fail to appreciate what relevance the legislative policy in 'regard
to second appeals has to the right of appeal under Section 55 so that Section 55
should be inseparably linked or yoked to .Section 100 and whatever changes take
place in Section 100 must be automatically read into Section 55. It must be
remembered that the Act is a self-contained Code dealing with monopolies and
restrictive trade practices and it is not possible to believe that the Legislature could
have made the right of 'appeal under such a code. dependent on the vicissitudes
through which a section in another statute might pass from time to time. The scope
and ambit of the appeal could not have been intended to fluctuate or vary with every
change in the grounds set out in Section 100. Apart from the absence of any rational
22
justification for doing so, such an indissoluble linking of Section 55 with Section 100
could conceivably lead to a rather absurd and startling result. Take for example a
situation where Section 100 might be repealed altogether by the Legislature - a
situation which cannot be regarded as wholly unthinkable. If the construction
contended for on behalf of the respondents were accepted, Section 55 would in such a
case be reduced to futility and the right of appeal would be wholly gone, because then
there would be no grounds on which an appeal could lie. Could such a consequence
ever have been contemplated by the Legislature? - The Legislature clearly
'intended that the e should be a right of appeal, though on limited grounds, and it
would be absurd to place on the language of Section 55 an interpretation which
might, in a given situation, result in denial of the right of appeal altogether and thus
defeat the plain object and purpose of the section. We must, therefore, hold that on a
proper interpretation the grounds specified in the then existing Section 100 were
incorporated in Section 55 and the substitution of the new Section 100 did not affect
or restrict the grounds as incorporated and since the present appeal admittedly raises
questions of law, it is clearly maintainable under Section 55. We may point out that
even if the right of appeal under Section 55 were restricted to the ground specified in
the new Section 100, the present appeal would still be maintainable, since it involves
a substantial question of law relating to the interpretation of section 13(2). What
should be the test for determining whether a question of law raised in an appeal is
substantial has been laid. down by this Court in Sir Chunilal V. .Mehta and Sons Ltd.
N. The Century Page 28 of 77 ITA Nos.6854 to 6856 6509 7765 to 7767 and 7213
ICICI PRULIFE Mumbai F Bench Spinning and Manufacturing Co. Ltd." and it has
been held that the proper test would be whether the question of' law - is of general
public importance or whether it directly and substantially affects, the rights of the'
parties, and if so, whether it is 'either an open question in the sense that it is not
finally settled by this Court or 'by the 'Privy Councilor by the Federal Court or is not
free from difficulty or calls for discussion of alternative' views. The question of
interpretation of Section 13(2) which arises in the present appeal directly and
substantially affects the rights of the parties and it is an open question in the sense
that it is not finally settled by this Court and it is, therefore, clearly a substantial
question of Jaw within the meaning of. this test. We must, therefore, reject the
preliminary objection raised on behalf of the respondents against the maintainability
of the present appeal:
26. Further in the case of Bharat Co-operative Bank (Mumbai) Ltd vs. Co-operative
Bank Employees Union,( supra) this issue was considered by the Hon'ble Supreme
Court vide Paras 12 to 29 and held as under:
"12. The main question raised for determination is whether the afore-noted
amendments to the BR Act, particularly insertion of Section 56 in the new format
w.e.f. 1st March, 1966, after the insertion of the definition of "Banking Company" in
the ID Act by Act 54 of 1949 will apply mutatis mutandis to the matters governed by
the ID Act?
23
13. As there is no indication in the ID Act as to the applicability or otherwise of the

subsequent amendments in the BR Act, the question posed has to be answered in the
light of the two concepts of statutory interpretation, namely, incorporation by
reference and mere reference or citation of one statute into another. Thus, answer to
a rather intricate question hinges on the test whether at the time of insertion of the
definition of the term "Banking Company" in the form of sub-section (bb) of Section
2 of the ID Act by the 1949 Act it was a mere reference to the Banking Companies Act,
1949 (later re-christened as the Banking Regulation Act) or the intendment of the
legislature was to incorporate the said definition as it is in the ID Act?
14. Before adverting to the said core issue, we may briefly notice the distinction
between the two afore-mentioned concepts of statutory interpretation, viz., a mere
reference or citation of one statute in another and incorporation by reference.
Legislation by incorporation is a common legislative device where the legislature, for
the sake of convenience of drafting incorporates provisions from an existing statute
by reference to that statute instead of verbatim reproducing the provisions, which it
desires Page 29 of 77 ITA Nos.6854 to 6856 6509 7765 to 7767 and 7213 ICICI
PRULIFE Mumbai F Bench to adopt in another stature. Once incorporation is made,
the provision incorporated becomes an integral part of the statute in which it is
transposed and thereafter there is no need to refer to the statute from which the
incorporation is made and any subsequent amendment made in it has no effect on
the incorporating statute. On the contrary, in the case of a mere reference or citation,
a modification, repeal or re-enactment of the statute, that is referred will also have
effect on the stature in which it is referred. The effect of "incorporation by reference"
was aptly stated by Lord Esher, M.R. In re: Wood's Estate, Ex parte Her Majesty's
Commissioners of Works and Buildings in the following words at page 615:
"If a subsequent Act brings into itself by reference some of the clauses of a former
Act, the legal effect of that, as has often been held, is to write those sections into the
new Act just as if they had been actually written in it with the pen, or printed in it,
and, the moment you have those clauses in the later Act, you have no occasion to
refer to the former Act at all."
15. The Privy Council in Secretary of State for India in Council vs. Hindustan
Co-operative Insurance Society Ltd. while amplifying the doctrine of incorporation,
observed as follows: "Their Lordships regard the local Act asdoing nothing more than
incorporating certain provisions from an existing Act, and for convenience of draft
doing so by reference to that Act, instead of setting out for itself at length the
provisions which it was desired to adopt The independent existence of the two Acts is
therefore recognized; despite the death of the parent Act, its offspring survives in the
incorporating Act. Though no such saving clause appears in the General Clauses Act,
their Lordships think that the principle involved is as applicable in India as it is in
this country."
24
16. The doctrine of legislation by incorporation and its effect has been dealt with by
this Court in a catena of decisions. In Ram Sarup vs. Munshi & Ors. a Constitution
Bench held that repeal of Punjab Alienation of Land Act, 1900 had no effect on the
continued operation of the Punjab Pre-emption Act, 1913 and that the expression
"agricultural land" in the later Act had to be read as if the definition of the Alienation
of Land Act had been bodily transposed into it. After referring to what Brett, L.J. said
on the effect of incorporation in Clarke vs. Bradlaugh , namely, "where a statute is
incorporated, by reference, into a second statute the repeal of the first statute by a
third does not affect the second", it was observed as follows:- "Where the provisions
of an Act are incorporated by reference in a later Act the repeal of the earlier Act has,
in general, no effect upon the construction or effect of the Act in which its provisions
have been Page 30 of 77 ITA Nos.6854 to 6856 6509 7765 to 7767 and 7213 ICICI
PRULIFE Mumbai F Bench incorporated. In the circumstances, therefore, the repeal
of the Punjab Alienation of Land Act of 1900 has no effect on the continued operation
of the Pre- emption Act and the expression 'agricultural land' in the later Act has to
be read as if the definition in the Alienation of Land Act had been bodily transposed
into it."
17. The same principle was applied in Bolani Ores Ltd. vs. State of Orissa . In that
case this Court was considering the question regarding the interpretation of Section
2(c) of the Bihar and Orissa Motor Vehicles Taxation Act, 1930 (for short "the
Taxation Act"). This Section when enacted adopted the definition of "motor vehicle"
contained in Section 2(18) of the Motor Vehicles Act, 1939. Subsequently, Section
2(18) was amended by Act 100 of 1956 but no corresponding amendment was made
in the definition contained in Section 2(c) of the Taxation Act. The argument
advanced was that the definition in Section 2(c) of the Taxation Act was not a
definition by incorporation but only a definition by reference and the meaning of
"motor vehicle" in Section 2(c) must, therefore, be taken to be the same as defined
from time to time in Section 2(18) of the Motor Vehicles Act, 1939. The argument was
rejected by this Court and it was held that this was a case of incorporation and not
reference and the definition in Section 2(18) of the Motor Vehicles Act, 1939, as then
existing, was incorporated in Section 2(c) of the Taxation Act and neither repeal of
the Motor Vehicles Act, 1939 nor any amendment in it would affect the definition of
"motor vehicle" in Section 2(c) of the Taxation Act.
18. The decision of this Court in Mahindra & Mahindra Ltd. Vs. Union of India & Anr.
also proceeded on the same principle. There the question was in regard to the effect
of subsequent amendment in Section 100 of the Code of Civil Procedure, 1908 on
Section 55 of the Monopolies and Restrictive Trade Practices Act, 1969 (for short
"The MRTP Act"). Section 55 of the MRTP Act provides for an appeal to this Court
against the orders of the Monopolies and Restrictive Trade Practices Commission on
"one or more of the grounds specified in Section 100 of the Code of Civil Procedure,
1908". Section 100 of the Code of Civil Procedure was substituted by a new Section in
1976, which narrowed the grounds of appeal under that Section. In construing
25
Section 55 of the MRTP Act this Court held that Section 100 of the Code as it existed
in 1969 was incorporated in Section 55 and the substitution of new Section in the
code, abridging the grounds of appeal, had no affect on the appeal under Section 55
of the MRTP Act.
19. The principle laid down in these decisions was reiterated in U.P. Avas Evam Vikas
Parishad vs. Jainul Islam & Anr. and lately in P.C. Agarwala vs. Payment of Wages
Inspector, Page 31 of 77 ITA Nos.6854 to 6856 6509 7765 to 7767 and 7213 ICICI
PRULIFE Mumbai F Bench M.P. & Ors. It is, therefore, clear from the afore-noted
decisions that if there is a mere reference to a provision of one statute in another
without incorporation, then, unless a different intention clearly appears, the
reference would be construed as a reference to the provision as may be in force from
time to time in the former statute. But if a provision of one statute is incorporated in
another, any subsequent amendment in the former statute or even its total repeal
would not affect the provision as incorporated in the latter statute.
20. However, the distinction between incorporation by reference and adoption of
provisions by mere reference or citation is not too easy to highlight. The distinction is
one of difference in degree and is often blurred. The fact that no clear-cut guidelines
or distinguishing features have been spelt out to ascertain whether it belongs to one
or the other category makes the task of identification difficult. The semantics
associated with interpretation play their role to a limited extent. Ultimately, it is a
matter of probe into legislative intention and/or taking an insight into the working of
the enactment if one or the other view is adopted. Therefore, the kind of language
used in the provision, the scheme and purpose of the Act assume significance in
finding answer to the question. (See:Collector of Customs vs. Sampathu Chetty &
Anr. ). The doctrinaire approach to ascertain whether the legislation is by
incorporation or reference is, on ultimate analysis, directed towards that end. (See:
Maharashtra State Road Transport Corporation vs. State of Maharashtra & Ors. )
Thus, the question for determination is to which category the present case belongs.
21. The plain language of Section 2(bb) of the ID Act makes the intention of the
legislature very clear and we have no hesitation in holding that reference to Section 5
of the Banking Companies Act, 1949 in the said provision is an instance of legislation
by incorporation and not legislation by reference.
22. Section 2(bb) of the ID Act as initially introduced by Act 54 of 1949 used the word
"means.. and includes" and was confined to a "Banking Company" as defined in
Section 5 of the Banking Companies Act, 1949, having branches or other
establishments in more than one province and includes Imperial Bank of India.
Similarly, Section 2(kk), which was also introduced by Act 54 of 1949, defines
Insurance Company as "an Insurance Company defined in Section 2 of the Insurance
Act, 1938 (IV of 1938), having branches or other establishments in more than one
province". It is trite to say that when in the definition clause given in any statute the
26
word "means" is used, what follows is intended to speak exhaustively. When the
phrase "means" is used in the definition, to borrow the words of Lord Esher M.R. in
Gough vs. Gough , it is a "hard and fast" definition and no Page 32 of 77 ITA
meaning other than that which is put in the definition can be assigned to the same.
(Also see: P. Kasilingam and Ors. vs. P.S.G. College of Technology and others ). On
the other hand, when the word "includes" is used in the definition, the legislature
does not intend to restrict the definition; makes the definition enumerative but not
exhaustive. That is to say, the term defined will retain its ordinary meaning but its
scope would be extended to bring within it matters, which in its ordinary meaning
may or may not comprise. Therefore, the use of the word "means" followed by the
word "includes" in Section 2(bb) of the ID Act is clearly indicative of the legislative
intent to make the definition exhaustive and would cover only those banking
companies which fall within the purview of the definition and no other.
23. Moreover, Section 2(bb) has subsequently been amended from time to time by
various amendments to include certain specified banks and institutions, which would
otherwise not fall within the exhaustive definition of the "Banking Company" in
Section 2(bb) read with Section 5(c), 5(b) and 5(d) of the BR Act. It is plain that if the
Parliament had intended an expansive interpretation of the original words, then
there would have been no reason whatsoever to keep amending the definition from
time to time. In our view, therefore, the language of Section 2(bb) clearly
demonstrates the legislative intent not to bring within its ambit all the banks
transacting the business of banking in India.
24. We are, therefore, of the opinion that introduction of the Banking Companies Act,
1949 in clause (bb) of Section 2 of the ID Act is a case of incorporation by reference; it
has become its integral part and therefore, subsequent amendments in the BR Act
would not have any effect on the expression "Banking Company" as defined in the
said Section.
25. At this juncture, we may also consider an alternative submission made on behalf
of the Bank that even if it is assumed that the provisions of Section 5 of the BR Act
were introduced into Section 2(bb) of the ID Act by way of legislative incorporation,
two of the exceptions, namely, exceptions (c) and
(d), carved out by this Court in State of Madhya Pradesh vs. M.V. Narasimhan and
reiterated in P.C. Agarwala's case (supra), would apply in the instant case. The
exceptions so enumerated are:
(a) Where the subsequent Act and the previous Act are supplemental to each other;
(b) Where the two Acts are in pari materia;
27
(c) Where the amendment in the previous Act, if not imported into the subsequent
Act also, would render the subsequent Act wholly unworkable and ineffectual; and
Mumbai F Bench
(d) Where the amendment of the previous Act, either expressly or by necessary
intendment, applies the said provisions to the subsequent Act.
26. In our view, there is no substance in the contention. The ID Act is a complete and
self contained Code in itself and its working is not dependant on the BR Act. It could
not also be said that the amendments in the BR Act either expressly or by necessary
intendment applied to the ID Act. We, therefore, reject the contention advanced by
learned counsel for the appellant on this aspect as well.
27. Further, as noticed above, the definition of the "Banking Company" in clause (bb)
of Section 2 of the ID Act being exhaustive, it is only with respect to the "Banking
Company" falling within the ambit of the said definition in the ID Act, that the
Central Government would be the appropriate government, which admittedly is not
the case here.
28. In the light of the analysis we have made of the provision contained in Section
2(bb) of the ID Act, we deem it unnecessary to dilate on the impact of the IDBIC Act
on the ID Act.
29. For all these reasons, we have no hesitation in upholding the view taken by the
High Court that for the purpose of deciding as to which is the "appropriate
government", within the meaning of Section 2(a) of the ID Act, the definition of the
"Banking Company" will have to be read as it existed on the date of insertion of
Section 2(bb) and so read, the "appropriate government" in relation to a multi-state
co-operative bank, carrying on business in more than one state, would be the State
Government".
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 Act, 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.
28
Page 34 of 77
ITA Nos.6854 to 6856 6509 7765 to 7767 and 7213 ICICI PRULIFE
Mumbai F Bench
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, 1999 (4 of 1999) or the Regulations made
thereunder subject to the following adjustments:(a) subject to the 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 realization 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". ( emphasis supplied) 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 IRDA 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 Page 35 of 77 ITA
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
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 schedule. Section 13 of Insurance Act 1938( as
amended now) is as under:
"13. Actuarial report and abstract.
(1) 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 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 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".
Page 36 of 77
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
30
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 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 shareholder's 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 out comes 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 Page 37
of 77 ITA Nos.6854 to 6856 6509 7765 to 7767 and 7213 ICICI PRULIFE Mumbai F
Bench 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 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 into consideration under the regulations in financial
accounts as well.
31
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 Page 38 of 77 ITA
High Court, as a policy, company is transferring funds/assets from shareholder's
account to policyholder's 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 `.250 crores and transferred funds to the extent of `.233 crores from the
shareholder's 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 & 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, the CIT (A) surprisingly in subsequent
assessment years appeals accepted AO's contention that surplus in shareholder's
account is to be taxed as Page 39 of 77 ITA Nos.6854 to 6856 6509 7765 to 7767 and
7213 ICICI PRULIFE Mumbai F Bench other sources of income. But once the
provisions of section 44 of IT Act are invoked anything contained in the heads of
income like income from other sources, capital gains, house property or even interest
on securities does not come into play and only first schedule has to be 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.
Comparison of Forms-I under the Insurance Act and the IRDA Regulations.
33. Let us examine whether AO's action in adopting Form-I prescribed under the
IRDA Regulations same as that of actuarial valuation made in accordance with the
Insurance Act 1938. Even though Insurance Act 1938 also refers to Form-I, there is
32
substantial difference in the formats. Both AO and the CIT (A) has given credence to
Form I without understanding that the old form-I prescribed under the Insurance Act
1938 is entirely different from new Form-I prescribed under the IRDA Regulations.
In fact the old form -I has this format:
The Insurance Act, 1938 Form I Valuation of Balance Sheet of as at 19 Net liability
under `. Balance of Life Insurance `.
business as shown in
the summary and
valuation of policies
Surplus, if any......
Fund as shown in the

Balance sheet
Deficiency, if any.....
NOTE
If the proportion of surplus allocated to the insurer, or in the case of an insurance

company to shareholder's, is not uniform in respect of all classes of insurances, the
surplus must be shown separately for the classes to which the different proportions
relate.
New Form-I under the IRDA Actuarial Report and Abstracts 2000 is as under which
was prescribed under the Regulations 4.
Page 40 of 77
(Form-I) (See Regulation 4) Insurance Regulatory and Development Authority
(Actuarial Report and Abstract) Regulations, 2000 Valuation Results as at 31st
March, 20__ Form Code___________ Name of Insurer: Regn.No. Date of Regn.
Item
No.
Description
(1)
01
(2)
Business
within India
Par policies
Non-Par
Policies
Total
Total
Business Par
Policies
Non Par
Policies
Totals
02
03
04
05
06
Balance
of Fund
shown
in
Balance
Sheet
(3)
Mathematical
reserves
(excluding
cost of bonus
allocated)
Surplus
Negative
Reserve
(4)
(5)
(6)
33
34. Not only that another format of the Form-I is prescribed in the IRDA
recommendations under Regulation 8 in the following format:
Statement of composition and distribution of surplus in respect of policyholder's'
fund as prescribed in Regulation 8: (1) A statement showing total amount
Composition of Surplus;
a) Surplus shown under Form I;
b) Interim Bonus paid during the inter-valuation period;
c) Terminal Bonuses paid during the inter-valuation period;
d) Loyalty additions or other forms of bonuses, if any, paid during the inter-valuation
period;
Page 41 of 77
e) Sum transferred from shareholder's funds during the inter valuation period;
f) Amount of surplus from policyholder's' funds, brought forward from preceding
valuation;
g) Total Surplus (total of the items (a) to (f)
35. We have specifically asked the CIT DR to explain what is the surplus shown under
Form I ie. at column (a) above. Regulation 8 as shown above has Column (a) 'surplus
shown under Form I'. In Col.(e) one has to represent sum transferred from
shareholder's fund during the inter valuation period. Item (g) refers to the 'total
surplus' after taking into account items (a) to (f). Under Col.(a) surplus shown in
Form I is a deficit as per Form AR-A in the policyholder's deficit account in this year.
This corresponds the 'actuarial valuation surplus or deficit' referred to under the
Insurance Act, 1938. This amount also tallies with Form I prescribed under
Regulation 4. IRDA Regulations however, after arriving at the surplus or deficit in the
Form I also prescribes a separate statement again as Form I with details of (a) to (f)
under Regulation 8. As can be seen from these two forms, there is variation in the
amounts are presented, as these forms serve different purposes. The Form I which
was prescribed under Regulations 8 is after arriving at the distribution surplus under
Regulations 6. The Regulations 6, 7 and 8 are as under:
34
"Distribution of Surplus:
6. The basis adopted in the distribution of surplus as between the
shareholder's and the policyholder's, and whether such distribution
was determined by the instruments constituting the company or by its
Regulations or by-laws or how otherwise shall be mentioned.
Principles adopted in distribution of profits:
7. The general principles adopted in distribution of profits among
policyholder's, including statements on following points, shall be
furnished:
Page 42 of 77
ITA Nos.6854 to 6856 6509 7765 to 7767 and 7213 ICICI PRULIFE
Mumbai F Bench
(i) Whether the principles were determined by instruments
constituting the insurer, or by its Regulations or by-laws or how
otherwise:
(ii) The number of years premium to be paid, period to elapse and other conditions to
be fulfilled before a bonus is allotted;
(iii) Whether the bonus is allocated in respect of each year's premium paid or in
respect of each calendar year or year of assurance or how otherwise and
(iv) Whether the bonus vests immediately on allocation or if not conditions of
vesting.
Statements of composition of surplus and distribution of surplus in respect of
policyholder's' funds:
(8) A statement, showing total amount of surplus arising during the inter valuation
period and the allocation of such surplus, shall be furnished separately for
participating business and for non participating business, with the particulars as
mentioned below:
Composition of Surplus:
(a)
(b)
(c)
Surplus shown under Form I

Interim Bonuses paid during the inter-valuation
period;
Terminal Bonuses paid during the inter-valuation
35
(d)
(e)
(f)
period;
Loyalty Additions or other forms of bonuses, if any,
paid during the inter valuation period.
Sum transferred from shareholder's funds during
the inter valuation period;
Amount of surplus, from policyholder's' funds,
brought forward from preceding valuation;

(g) Total surplus (total of the items (a) to (f). Distribution of Surplus:
Policyholder's' Fund:
(a)
(b)
(c)
To
To
To
if
Terminal Bonuses paid;

Terminal Bonuses;
loyalty Additions or any other forms of bonuses,
any;
Page 43 of 77
(d) Among policyholder's with immediate participation giving the number of policies
which participated and the sums assured thereunder (excluding bonuses);
(e) Among policyholder's with deferred participation, giving the number of policies
(f) Among policyholder's in the discounted bonus class giving the number of policies
(g) To every reserve fund or other fund or account (any such sums passed through the
accounts during the inter valuation period to be separately stated);
(h) As carried forward un-appropriated.
Shareholder's' Fund:
(i) To the shareholder's funds (any such sums passed through the accounts during the
inter-valuation period to be separately stated);
Totals:
36
(j) Total surplus allocated: (total of the items (a) to (j) (2) Specimen of Bonuses
allotted to policies for one thousand rupees together with the amounts apportioned
under the various manners in which the bonus is receivable for each type of
participating produce, shall be furnished.
Thus as can be seen from above Regulations, the Form I under Regulation 8
represent the total surplus for the purpose of distribution of bonuses/ dividends to
policy holders and does not represent surplus or deficit of actuarial valuation for the
purposes of balance sheet. This amount is represented in Form I prepared under
Regulation 4 for the purpose of financial accounts.
Reconciliation of amounts:
36. As seen from the orders of the authorities, the 'Total surplus' prepared under
Regulation 8 was taken as basis ignoring the Form- I of Regulation 4. While
accepting the Ld.CIT DR argument that for the purposes of Life insurance business
the act provides for surplus of valuation to be taxed at lesser rate, we can not accept
the argument that surplus is Total surplus including Transfers from share holder's
account. Basically transfers are tax neutral as a Page 44 of 77 ITA Nos.6854 to 6856
6509 7765 to 7767 and 7213 ICICI PRULIFE Mumbai F Bench credit in one account
gets cancelled by debit in other account when accounts are consolidated. What the
Rule.2 prescribed was only 'average surplus' arrived by adjusting the surplus
disclosed in the actuarial valuation made with regard to the Insurance Act, 1938 in
respect of inter valuation period. Assessee in the course of the assessment
proceedings has furnished general balance sheet in Form-A which is as under:
Form-A General Balance Sheet General Balance Sheet of ICICI Prudential Life
Insurance Company Limited as at March 31, 2006 (Amount in Rupees '000)
Particulars Mar-05 Mar-04 Particulars Mar-05 Mar-04 Share Capital 92,50,000
67,50,000 Loans 25,225 21,619 Share Application - - Investments 3,75,88,023
1,64,46,429 Money Employee stock option - - Agents Balances outstanding Reserve
for Outstanding 84,426 61,287 contingency premiums General Reserve - - Interest,
Dividend 1,47,531 77,589 and Rents outstanding Share Premium - - Int. Dividend and
1,86,899 1,48,778 Rents accrued but not due Property Revaluation - - Amount due
from Reserve other persons or bodies carrying on Insurance Business Investment
Reserve Sundry Debtors, 2,95,504 1,78,792 Advances and Deposits Property
Insurance Fixed Assets 6,30,124 5,48,131 Reserve Profit & Loss Cash: At Bankers
3,00,000 44,900 Appropriate A/c on Deposit Account Balance of funds 2,78,28,554
95,97,898 At Bankers on - -
Debenture stock
Notice
Deposit
Account
At
Bankers
on
current
account
and in hand
37
Estimated liability in
respect of outstanding
claims, whether due or
intimated
Annuities
due
and
Page 45 of 77
unpaid Amount due to other - persons
or bodies
carrying on Insurance
Business
Current Liabilities &
Provisions
Total `.
38,75,046
16,37,931
4,09,53,600
1,79,85,829
Total `.
Likewise it also given Form-G consolidating Revenue Account as under:

Form-G Consolidated Revenue Account Revenue Account of ICICI Prudential Live
Insurance Company Limited as at March 31, 2006 (Amount in Rupees '000)
Particulars Mar-05 Mar-04 Particulars Mar-05 Mar-04 Claims under policies,
Balance of fund at 95,97,898 26,58,698 less re-insurance: the beginning year By
Death 1,11,348 59,627 Premiums:
By Maturity
Annuities,
less
reinsurance
Surrenders (incl. sur
bonus)
less
reinsurance
2,539
9,286
4,076
1st year premiums

Renewal premiums
Single premiums
Less: Reinsurance
Bonuses in cash, less

re-insurance
Bonuses in reduction
of premiums
Other benefit
Expenses
of
Management:
Commission
Other
operating
Expenses
Bad Debts
56,434
17,79,564
46,20,211
17,904
8,65,104
29,79,714
Consideration
for
Annuities granted,
less reinsurance
Interest, Dividends
and Rents
Fees and Charges
Linked Income
Other income
Registration fees
Loss transferred to
Profit & Loss A/c
38
UK, Indian, Dominion

and foreign taxes
Provision for tax
Fringe Benefit Tax
Profit transferred
Profit & Loss A/c
Total `.
Transferred
from
Appropriation A/c
to
2,78,28,554
95,97,898
3,44,07,936
1,35,24,323
Total `.
Page 46 of 77
Form-I - Valuation Balance Sheet has been furnished as under:
Form-I Valuation Balance Sheet Valuation Balance Sheet of ICICI Prudential Life
Insurance Company Limited as at March 31, 2005 Particulars Mar-05 Mar-04
Particulars Mar-05 Mar-04 Actuarial 3,44,75,905 1,43,38,641 Balance of 2,78,28,554
95,97,898 Valuation fund as Liability shown in General Balance Sheet Surplus Deficit
66,47,351 47,40,743 Total `. 3,44,75,905 1,43,38,641 Total `, 3,44,75,905 1,43,38,641
Particulars `.'000) Amount (` Deficit as at March 31,2005 (664,73,51) Less: Deficit as
at March 31,2004 (474,07,43) Deficit for the year ended on March 31,2005
(190,66,08) Income offered in return of income before (190,66,08) claiming
exemption under section 10 of the Income Tax Act, 1961
37. Thus as can be seen, the deficit for the year ended March, 2005 was arrived at
`.190,66,08/- ('000) which was also tallying with assessee's computation of income.
Further assessee also furnished the reconciliation of Form-I 'total surplus' with
return of income:
ICICI Prudential Life Insurance Company Limited FY 2004-05/ AY 2005-06:
Reconciliation of Form-I Surplus with Return of Income Particulars `.) Amount (` `.)
Amount (` Form-I Surplus as on 31.3.2005 (Page-14B 35,86,96,280 Less Form I
Surplus as at 31.3.2004 Surplus for FY 2004-05/AY 2005-06 35,86,96,280 Less: Shareholder's funding
Deficit funding transfers from shareholder's fund 2,33,34,74,000 (Page 8PB) Page 47
of 77 ITA Nos.6854 to 6856 6509 7765 to 7767 and 7213 ICICI PRULIFE Mumbai F
Bench Advance funding based on estimates (Note 1) 4,12,09,280 (2,37,46,82,280)
Less: Round off (12,808) Deficit in account (2,01,59,99,808) Surplus for
participating business 10,41,05,196 Deficit for non-participating business
(36,30,236) Surplus for participating annuities (Pension 21,33,71,824 Business)
Deficit for linked business (1,66,59,51,826) Deficit for linked pension business
(63,09,19,492) Deficit for linked group business (3,29,75,274) Deficit in
39
policyholder's account (2,01,59,99,808) Add: surplus in shareholder's' account

10,93,77,555 Income as per Rule 2 of Schedule 1 of the Act (1,90,66,22,253)
Exemption under section 10(23AAB) Less: Surplus for participating pension business
(21,33,71,824) Add: Deficit for linked pension business 63,09,19,492 41,75,47,668
Exemption under section 10(34) Dividend Income 2,21,29,204 Less: In pension
scheme (65,19,982) Less: Disallowance under section 14A 1,44,377) (1,54,64,845)
Total Surplus/(Deficit) from Life Insurance Business (1,50,45,39,430)
38. The above statement furnished is in accordance with the Insurance Act, 1938,
therefore, it cannot be stated that assessee returned income is not in accordance with
the Insurance Act, 1938. There is no basis for AO to take Form-I 'total surplus' as
surplus of the Life insurance business ignoring transfer from shareholder's account.
39. It is also on record that assessee followed the IRDA recommendations and
accordingly prepared the actuarial valuation report including the surplus or deficit.
However, Rule-2 prescribes only actuarial valuation in accordance with the Insurance
Act, 1938. Therefore, AO is duty bound to insist on actuarial valuation in accordance
with the Insurance Act, 1938, so as to bring to tax the surplus or deficit. What we
notice is that AO, ignoring Rule-2, Page 48 of 77 ITA Nos.6854 to 6856 6509 7765 to
7767 and 7213 ICICI PRULIFE Mumbai F Bench has relied on the actuarial valuation
report prescribed under the IRDA recommendations under Regulation 8 that too at
'Total surplus', which is at variance with the Insurance Act, 1938. Since no
amendment was brought to Rule-2 to incorporate IRDA recommendations, we are of
the opinion that the action of AO in relying on the IRDA Regulations is not according
to the law. Assessee had submitted its accounts as stated above, which are in
accordance with the Insurance Act, 1938. Instead of examining these statements, just
because assessee has shown total surplus in the accounts in similarly named Form-I(
under Regulation 8), AO wants to tax the amount which is after taking into account
the transfer of assets by way of fresh capital from shareholder's account. This in a way
is taxing fresh capital infused into business indirectly which cannot be done as this is
not business surplus but infusion of capital directly.
40. In our opinion what assessee has done in reconciling the IRDA format with that
of old Insurance Form is correct and accordingly the loss disclosed in the
computation of income is according to the actuarial surplus/deficit under the
Insurance Act, 1938 prescribed under Rule 2 of the first schedule part-A. In view of
this, we are of the opinion that insistence by AO to bring to tax the entire amount
shown under the new Regulations including transfer from shareholder's account is
not correct. Instead of AO in taking the surplus at Regulation 8(1)(a) which is the
actuarial surplus / deficit for the year took the amount as disclosed at Regulation 8
(1) (f) (total surplus after transfer from Shareholder's account) which is not at all
correct.
40
41. Learned Counsel in the course of the argument also placed reconciliation of the
various figures as under:
Page 49 of 77
Table: Statement of deficit in policyholder's account (PHA), Shareholder account
(SHA) funding and Net deficit:
S.No
Particulars
Amount
Amount
`. In crs.)
(`
Deficit in PHA a/c
Met by transfer from

SHA a/c amounting to:
a.Transfer to meet the
deficit
`
(`
In crs.)
233.34
Paper book
reference
Page 70 - Part o
Actuarial
Repo
and also Page 8
Revenue A/c
237.46
233.34
Page 70 Part of
Actuarial
Repo
and also at Page
b.Additional Transfer
4.12
I
SCENARIO
1:
If
transfer
disregarded
as income:
The
amount
transferred cannot be
237.46
Revenue Account
Page 8
account
233.33)
-201.59
Page 9 Profit &
of income nature, if
A/c (11.34-0.41)
disregarded, there will
be a net deficit in the
PHA of Add: Surplus in
10.93
-190.66
II
SHA
SCENARIO
2:
If
transfer
disregarded
as income:
If amount transferred
is regarded as income
nature, the surplus in
PHA account will be
31.74
Page 8 Revenue
account
(Surplus/Deficit
Page - 9 Profit
Loss
A
(Profit/Loss bef
Tax)
-222.40
Deficit in SHA
190.66
Net Deficit
Net Deficit as per the

return
on
income
Page 8 - Revenu
account
41
(before
exemptions
claiming
under
(surplus/deficit
Page 9 Profit &
section 10)
-201.59
Deficit in PHA
A/c
(Profit/
before tax.
10.93
SHA Income
-190.66
Details as per return
before
claiming
exemptions
Conclusion:
Both scenarios give the
same result and reflect
the actual deficit as
Page 50 of 77
disclosed in the return of income filed (before claiming exemptions under section 10).
NOTE
Due to excess funding

done, the surplus as
disclosed
by
the
actuarial valuation is
Page 8 Revenue
account
(surplus/deficit)
Page 70 Part of
more than the surplus

Actuarial
disclosed
in
excess
financials:
The surplus
financials
Add Excess
Repo
the
fundi
31.74
as
disclosed by way
a note (Amount no
mentioned)
Page 14 - Actuari
per
funding
4.12
done
Surplus
as
per
actuarial valuation
Valuation in Form
35.86
42. In view of the above, looking at the issue in any way what we notice is that the
computation made by assessee is in accordance with Rule-2 of the Insurance Act
1938 according to which only AO can base his computation. This also corresponds to
the way incomes were assessed in earlier years ie. the correct method as per Rule 2
42
and Sec 44 of IT ACT. In view of the discussion above and after analyzing the Forms,
Regulations and Provisions we have no hesitation to hold that the assessee working
of actuarial surplus/ deficit is in accordance with Rule 2 of First Schedule. Therefore,
assessee grounds on this issue are allowed and AO is directed to modify the order
accordingly. Ground Nos.1 to 3 are considered allowed.
43. Ground No.4 pertains to disallowance under section 14A offered in revised return
on reasonable basis. Assessee offered an amount of `.1,44,377/- as against the
dividend income mostly claimed at `.1,56,09,222/- arrived at in participating life
insurance business. Assessee gave methodology in contributing the expenses.
However, AO did not accept and took the estimation 0.5% of the average investment
thereby making the addition. The CIT (A) following the judgment of the Hon'ble
Bombay High Court in the case of Godrej & Page 51 of 77 ITA Nos.6854 to 6856 6509
7765 to 7767 and 7213 ICICI PRULIFE Mumbai F Bench Boyce vs. DCIT dated on
12/08/2010 directed AO to workout on a reasonable basis. Assessee has raised the
additional ground of appeal as under:
Ground:
"AO and the CIT (A) erred in invoking the provisions of section 14A of
the Income Tax Act 1961 and disallowing expenses attributable to
earning exempted income, without appreciating the fact that the
provisions of section 14A are not applicable to Insurance Companies".
44. The learned Counsel submitted that in view of the provisions of section 44, the
provisions of section 14A are not applicable. He relied on the orders of Bajaj Alliance
General Insurance Co. vs. Addl.CIT in ITA No.1447/Mum/2007 dated 31/08/2009,
JCIT vs. Reliance General Insurance Company in ITA No.3085/Mum/2008 and
other cases wherein the Coordinate Bench have already decided the provisions of
section 14A are not applicable. He also placed on reliance in the case of General
Insurance Corporation of India vs. Addl. CIT in ITA No.3554/Mum/2011 dated
15/02/2012 to submit that the provisions of section 14A does not apply to the
Insurance business.
45. The learned DR however, relied on the orders of AO and the CIT (A) and the fact
that assessee itself has offered income disallowing under section 14A.
46. This issue is already decided by the Coordinate Benches in various cases. For the
sake of record, the order in the case of General Insurance Corporation of India in ITA
No.3554/Mum/2011 vide Para 9 is as under:
9. "Issue No.6 Non applicability of provisions of section 14A.
(Modified Ground of Appeal No.3.1 to 3.4 -
43
Original Ground of Appeal No.3.1 to 3.5). The issue is with reference to the
applicability of section 14A and disallowance of expenditure in respect of sale of
investment which are not taxed. We have heard the rival contentions. We also note
that this issue is also considered Page 52 of 77 ITA Nos.6854 to 6856 6509 7765 to
7767 and 7213 ICICI PRULIFE Mumbai F Bench by the Coordinate Bench in
assessee's own case for 2006- 07 vide Para 7 to 9:
7. Grounds of appeal no.4 regarding the expenditure under section 14A.
8. We have heard the rival contentions and perused the relevant record. We note that
this issue has been considered and decided by the Pune Bench of this Tribunal in the
case of Bajaj Allianz General Insurance Company limited V/s Add. CIT in ITA
No.1447/PN/2007 for the assessment year 2003-04 order dated 31.08.2009. This
Tribunal in the case of JCITV/s M/s Reliance General Insurance co. in ITA
No.3085/Mum/2008 for the assessment year 2005-06 vide order dated 26.2.2010
has considered this issue and decided in favour of the assessee. This order was
followed by this Tribunal while deciding the issue in ITA No.781/Mum/2007 vide
order dated 30.4.2010. Thus, this issue has been consistently decided in favour of the
assessee and against the revenue by this Tribunal. The Pune Bench of this Tribunal in
the case of Bajaj Allianz General Insurance Company limited V/s Add. CIT (supra)
has decided this issue in paragraphs 17 to 20 as under:
"17. Finally the quest ion to be answered is about the applicability of s.
14A in respect of sale of investment which is not taxed under the
special circumstances of deletion of a sub-rule from the statute. It is
not questioned that the impugned profit was non-taxable per se rather
the accepted legal position is that the impugned profit was very much
taxable in the past .Now it has been informed that this controversy in
respect of insurance company set at rest by a decision of Tribunal ,
Delhi Bench verdict in the case of Oriental Insurance Co. Ltd. (ITA
Nos. 5462 & 5463/Del /2003) asst. yrs. 2000-01 and 2001-02 order
dt. 27th Feb. 2009 [reported as Oriental Insurance Co. Ltd. v. Asst t .
CIT [2010] 130 TTJ (Delhi)388 : [2010] 38 DTR (Delhi ) 225--Ed. ] .
Therefore considering the vehement reliance of learned Authorized
Representative it is worth to mention at the outset itself that the issue
now stood resolved by this latest decision of Delhi, Tribunal in the
case of Oriental Insurance Co. Ltd. (supra), the relevant portion
reproduced below:
"17. We have heard rival submissions of the parties and have gone
through the material available on record. Identical issue arose in
assessee's own case for asst. yr. 1985-86.
44
The Tribunal accepted the plea of the assessee and in fact the issue went up to Page
53 of 77 ITA Nos.6854 to 6856 6509 7765 to 7767 and 7213 ICICI PRULIFE Mumbai
F Bench the Hon'ble Delhi High Court in asst . yrs. 1986-87 to 1988-89, which is
reported as CIT v. Oriental Insurance Co. Ltd. [2003] 179 CTR (Delhi ) 85 : [2002]
125 Taxman 1094 (Delhi ), decided the issue in favour of the assessee by holding that
s. 44 of the Act is a special provision dealing with the computation of profits and gifts
of business of insurance. It being a non obstinate provision, has to prevail over other
provisions in the Act. It clearly provides that income from insurance business has to
be computed in accordance with the rule contained in the First Schedule. It is not the
case of the Revenue that the assessee has not computed the profits and gains of its
insurance business in accordance with the said rules. Reliance was placed on the
scope of s. 144, as held in the case of General Insurance Corporation of India v. CIT
[1999] 156 CTR (SC) 425 : [1999] 240 ITR 139 (SC), wherein their Lordships of the
apex Court have categorically held that the provisions of s. 44 being a special
provision govern computation of taxable income earned from business of insurance. I
t mandates the tax authorities to compute the taxable income in respect of insurance
business in accordance with the provisions of the First Schedule to the Act. In the
light of these, their Lordships of Delhi High Court have held that no quest ion of law,
much less a substantial quest ion of law survives for their consideration. In other
words, order of the Tribunal has been affirmed. Following the same reasoning,
addition made by the AO is deleted.
22. We have considered the rival contentions and gone through the records. The provisions of s. 44
read as under:
"44. Insurance business.--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 s. 199 or in ss. 28 to 43B, the profits and gains of
any business Page 54 of 77 ITA Nos.6854 to 6856 6509 7765 to 7767 and 7213 ICICI
PRULIFE Mumbai F Bench 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"'.
23. The above provision makes it very clear that s. 44 applies notwithstanding anything to the
contrary contained within the provisions of the IT Act relating to computation of income chargeable
under different heads. We agree with the learned counsel that there is no requirement of head-wise
bifurcation called for while computing the income under s. 44 of the Act in the case of an insurance
company. The income of the business of insurance is essentially to be at the amount of the balance
of profits disclosed by the annual accounts as furnished in the Controller of Insurance. The actual
computation of profits and gains of insurance business will have to be computed in accordance with
r. 5 of the First Schedule. In the light of these special provisions coupled with non obstante clause
the AO is not permitted to t ravel beyond these provisions.
45
24. Sec. 14A contemplates an exception for deductions as allowable under the Act are those
contained under ss. 28 to 43B of the Act. Sec. 44 creates special application of these provisions in
the cases of insurance companies. We therefore, agree with the assessee and delete the act as
according to us, it is not permissible to the AO to travel beyond s. 44 and First Schedule of the IT Act
."
18. I t may not be out of place to mention that the respected Co-ordinate Bench has
duly taken the note of an earlier decision of that very Bench decided in the case of
that very assessee vide order dt . 29th Sept. 2004 bearing ITA Nos. 7815/Del/1989,
3607 to 3609/Del /1990; 5035/Del / 1998 and 3910/Del /2000 named as Dy. CIT v.
Oriental General Insurance Co. Ltd. [2005] 92 TTJ (Delhi ) 300. As seen from the Paras reproduced
above on due consideration of the relevant provisions as applicable to resolve this issue a conclusion
was drawn that since the Courts have held, s. 44 creates a special provision in the cases of
assessment of insurance companies therefore it was not permissible to the AO to Page 55 of 77 ITA
Nos.6854 to 6856 6509 7765 to 7767 and 7213 ICICI PRULIFE Mumbai F Bench travel beyond s. 44
of First Schedule of IT Act .
18. The next common dispute relates to the order of the CIT (A) in sustaining the act ion of AO in al
lowing only 50 per cent of the management expenses by invoking the provisions of s. 14A of the Act .
The addition is made by the AO on the plea that the provisions of s.14A was inserted by Finance Act,
2001 w.e.f. 1st April, 1962. It is stated that the investments made by the assessee are both taxable as
well as tax free. An estimated disallowance of 50 per cent out of the management expenses incurred
and as claimed in the P&L a/c is treated as expenses incur red in connect ion with the looking after
tax-free investment.
19. The learned counsel for the assessee vehemently argued that the income of the assessee is to be
computed under s. 44 r/w r. 5 of Sch. 1 of the IT Act. Sec. 44 is a non obstinate clause and applies
notwithstanding anything to the contrary contained within the provisions of the IT Act relating to
computation of income chargeable under different heads, other than the income to be computed
under the head 'Profit and gains of business or profession' . For computation of profits and gains of
business or profession the mandate to the AO is to compute the said income in accordance with the
provisions of ss. 28 to 43B of the Act . In the case of the computation of profits and gains of any
business of insurance, the same shall be done in accordance with the rules prescribed in First
Schedule of the Act, meaning thereby ss. 28 to 43B shall not apply. No other provision pertaining to
computation of income will become relevant. According to the learned counsel, two presumptions
that follow on a combined reading of ss. 14, 14A, 44 and r. 5 of the First Schedule are:
(a)That no head-wise bifurcation is cal led for. The income, inter alia, of the business of insurance is
essentially to be at the amount of the balance of profits disclosed by the annual accounts as
furnished to the Page 56 of 77 ITA Nos.6854 to 6856 6509 7765 to 7767 and 7213 ICICI PRULIFE
Mumbai F Bench Controller of Insurance under the Insurance Act, 1938. The said balance of profits
is subject only to adjustments there under. The adjustments do not refer to disallowance under s.
14A of the Act.
46
(b) Profits and gains of business as refer red to in (a) above have only to be computed in accordance
with r. 5 of the First Schedule.
22. Sec. 44 creates a specific except ion to the applicability of ss. 28 to 43B. Therefore, the purpose,
object and purview of s. 14A has no applicability to the profits and gains of an insurance business.
21. The learned Departmental Representative strongly justified the act ion of the AO and that of the
CIT(A) in the light of the clear provisions of s. 14A of the Act .
Since the view has al ready been expressed by respected Co-ordinate Bench therefore, we have no
reason to take any other view except to follow the same. With the result we hereby accept the
argument of learned Authorized Representative to the extent that in the present situation the
provisions of s. 14A need not to apply while granting exempt ion to an income earned on sale of
investment primarily because of the reason of the withdrawal or deletion of sub- r. 5(b) to First
Schedule of s. 44 of IT Act. Once we have taken this view therefore the enhancement as proposed by
learned CIT(A) is reversed and the directions in this regard are set aside.
Resultantly ground No. 1 is allowed consequent thereupon ground No. 2 automatically goes in
favour of the assessee".
Accordingly, by following the orders of this Tribunal, we decide this issue in favour of the assessee.
Therefore, the ground is allowed".
Respectfully following the same, we modify the order of the CIT (A) and delete the addition made by
AO. The ground and additional grounds are considered as allowed.
Page 57 of 77
ITA Nos.6854 to 6856 6509 7765 to 7767 and 7213 ICICI PRULIFE Mumbai F Bench Revenue
Appeal in ITA No.7765/Mum/2010, AY 2005-06
47. The Revenue in its appeal has raised the following grounds:
"1. On the facts and in the circumstances of the case and in law, the learned CIT (A)
erred in deleting the deficit from pension schemes of `.63,09,19,492/- ignoring the
facts that the surplus of pension schemes do not form part of total income as per
section 10(23AAB), so the deficit would also not form part of total income.
2. On the facts and in the circumstances of the case and in law, the learned CIT (A)
erred in holding that the income from surplus of participating annuities business
represent surplus from "Participating Pension Business" and accordingly allowing the
relief to assessee of `.21.34 crores".
47
erred in allowing the dividend income of assessee of `.1,56,09,222/- as exempted
under section 10(34) of the Income Tax Act, 1961 ignoring the facts that dividend
income is considered as part of Income of Life Insurance Business and is included as
an income by the actuary".
48. All the above three grounds are on the issue whether exemption under Sec 10 can be allowed
when incomes are computed under Sec.44 of the IT Act. In arriving at the deficit from the insurance
business, assessee claimed certain exempt incomes under section 10(23AAB) with reference to
Pension Business and dividend under section 10(34). AO did not allow the amounts on the reason
that these incomes are part of income of life insurance business and it is included as income by the
actuary, therefore, they cannot be exempted. This issue is covered in favour of assessee and against
the Revenue by the orders of the General Insurance Company of India in ITA No.3554/Mum/2011
wherein the issue of deduction under section 10 have been considered and allowed following the
Hon'ble Bombay High Court judgment in writ petition No.2560 of 2011 dated 1.12.2011. The order
in the case of GIC of India in ITA No.3554/Mum 2011 vide Para 7 to 8 is as under:
Page 58 of 77
7."Issue No.5: Availability of Section 10 Exemption (Modified Ground of Appeal No.2 - Original
Ground of Appeal No.2.1 & 2.2) -. The issue arises in a peculiar manner in this assessment year.
While dealing with the issue of profit on sale of investments, the Assessing Officer proposed to differ
from assessee stand and bring to tax the profit on sale of investment. The assessee alternately
submitted that the deduction under section 10(38) in respect of long term capital gain was available.
When this issue came up before the CIT (A), the CIT (A) not only rejected the claim under section
10(38) but also considered and elaborately discussed how and why the assessee was not eligible for
deductions already allowed by the Assessing Officer in respect of 'interest on tax free bonds'
amounting to `3,45,19,352/- under section 10(15) and dividend income amounting to
`270,66,46,489/- under section 10(34). He has elaborately discussed this issue from Para 6 onwards
and ultimately made an enhancement of income to an extent of `274,11,65,844/- the amount which
was allowed by the Assessing Officer as exempt under section 10. The contention of the CIT (A) was
that the assessee was not eligible for deduction under section 10, once the incomes are brought to
tax under section 44 r.w. Rule 5 of First Schedule to the Income Tax Act, 1961.
8. There is no need to consider the arguments of the CIT (A) and how he has arrived at that
conclusion in this order as this issue was decided by the Hon'ble Bombay High Court in favour of the
assessee in writ petition No.2560 of 2011 in the assessee's own case dated 1.12.2011. Consequent to
the findings of the CIT(A) in AY 2007-08 (impugned AY ) the Assessing Officer seems to have issued
notice under section 148 for reopening the assessment for the AY 2006-07 on the reason that the
assessee was not eligible for claiming income as exempt under sub-sections 15, 23G, 34 and 38 of
Section 10 and assessee challenged the issue by way of writ petition. The Hon'ble Bombay High
Court not only disapproved the reopening of the assessment but gave the findings on merit also
48
which are as under:"11. Section 44 of the Income Tax Act, 1961 stipulates as follows:
"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 Page 59 of 77
from other sources", or in section 199 or in sections 28 to (43B), the profits and gains
of any business of insurance, including any such business carried on by a mutual
insurance company or by a cooperative society, shall be computed in accordance with
the rules contained in the First Schedule".
Section 44 provides that the profits and gains of any business of insurance of a mutual insurance
company shall be computed in accordance with the rules in the First Schedule. Part 'A' of the First
Schedule containing Rules 1 to 4 deals with profits of life insurance business while Part B consisting
of Rule 5 deals with computation of profits and gains of other insurance business. Rule 5 provides as
follows:
"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
(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) (.........)
(c) Such amount carried over to a reserve for unexpired risks as may be prescribed in
this behalf shall be allowed as a deduction".
The Assessing Officer has in the reasons for reopening the assessment proceeded on the premise
that in computing the profits and gains of business for an assessee who carries on general insurance
business no other section of the Act would apply and that the computation could be carried out only
in accordance with section 44 read with Rule 5 of the First Schedule. In Life Insurance Corporation
of India, Bombay v.
Commissioner of Income Tax Bombay City-III, a Division Bench of this Court construed the
provisions of section 44 and of the First Schedule. The assessee in Page 60 of 77 ITA Nos.6854 to
6856 6509 7765 to 7767 and 7213 ICICI PRULIFE Mumbai F Bench that case which carried on life
49
insurance business had made a claim to exemption under section 10(15) and section 19(1). In a
reference before the Court, the questions referred included whether in computing the profits and
gains of the business of insurance under section 44 read with the First Schedule certain items which
were ordinarily not includible in the total income were rightly included in the taxable surplus. The
Division Bench of this Court held as follows:
"The question which essentially falls to be determined in this reference is whether, in view of the
provisions in section 44 or rule 2 of the first Schedule, the Life Insurance Corporation will not be
entitled to claim the deductions which are otherwise admissible in the case of an assessee,
computation of whose income is governed by the other provisions of the Act. The argument of Mr.
Kolah for the Life Insurance Corporation is that unless there are express provisions which disable
the Corporation from claiming the deductions referred to above, the Corporation cannot be deprived
of the benefit of the provisions referred to in the questions Nos. 1 to 6. Section 44, which deals with
computation of profits and gains of business of insurance, begins with a non- obstante clause, the
effect of which is that the provisions of the 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", do not apply in the case of computation of income from insurance business.
The effect of the non-obstante clause so far as the earlier part of section 44 is concerned, therefore,
is that the provisions of section 44 will prevail notwithstanding the fact that there are contrary
provisions in the Act relating to computation of income chargeable under the four heads mentioned
in section 44. The only other overriding effect of section 44 is that its provisions operate
notwithstanding the provisions of section 191 and of section 28 to 43A. Thus, the only effect of
section 44 is that the operation of the provisions referred to therein is excluded in the case of an
assessee who carried on insurance business and in whose case the provisions of rule 2 of the First
Schedule are attracted. If the deductions which are claimed by the assessee do not fall within the
provisions which are referred to in section 44, it will have to be held that the applicability of those
provisions in the case of an assessee whose assessment is governed by section 44 read with rule 2 in
the First Schedule is not excluded".
Page 61 of 77
ITA Nos.6854 to 6856 6509 7765 to 7767 and 7213 ICICI PRULIFE Mumbai F Bench This judgment
is sought to be distinguished by the Assessing Officer while disposing of the objections on the
ground that the decision was rendered in the context of an assessee which carried on life insurance
business to whom Rules 1 to 4 of the First Schedule applied whereas in the case of the assessee in
this case which carries on general insurance business Rule 5 could apply. According to the Assessing
Officer, Rule 5 would not permit any adjustment to the balance of profit as per annual accounts
prepared under the Insurance Act, and hence the judgment would not be applicable. The Assessing
Officer has clearly not noticed that the decision in Life Insurance Corporation (supra) though
rendered in the context of an assessee which carries on life insurance business, followed an earlier
decision of a Division Bench of this Court in Commissioner of Income-Tax v. New India Assurance
Co Ltd. That was a case of an assessee which carried on non life insurance business. In New India
Assurance Co. Ltd. the Division Bench dealt inter alia with the provisions of section 19(7) of the
Income Tax Act, 1922. The questions referred to this Court included whether the assessee was
50
entitled to claim an exemption from tax under section 15B and 15C (4) and in respect of interest on a
government loan under a notification issued under section 60. Section 10(7) of the Income Tax Act,
1922 provided that notwithstanding anything to the contrary contained in section 8,9,10,12 or 18,
the profits and gains of any business of insurance and the tax payable thereon shall be computed in
accordance with the rules contained in the Schedule to the Act. The Division Bench held that upon
the language of sub-section (7) of section 10 read along with rule 6 it was impossible to hold that the
provisions relating to exemptions stood excluded from operation. In that context the Division Bench
held as follows:
"It is only after the profits and gains of a business are computed that any question of
granting exemptions arises and if the latter stage were intended to be excluded by the
law we should have thought that a clearer provision than is made in sub-section (7) of
section 10 and in rule 6 would have been made".
In the subsequent judgment of the Division Bench in Life Insurance Corporation (supra), the
Division Bench noted that there was a difference in the language of Page 62 of 77 ITA Nos.6854 to
6856 6509 7765 to 7767 and 7213 ICICI PRULIFE Mumbai F Bench section 10(7) of the Act of 1922
when compared with section 44 of the Act of 1961 since section 44 does not refer to the computation
of tax but merely to the computation of profits and gains in the business of insurance. The Division
Bench held that this would however not make any difference to the principle laid down by the Court
in the earlier decision in the case of New India Assurance Co. Ltd. Accordingly, the decision of Life
Insurance Corporation (Supra) could not have been ignored by the Assessing Officer on the
supposition that the decision was rendered in the context of an assessee who carried on life
insurance business and was, therefore, not available to an assessee which carries on general
insurance business.
12. In General Insurance Corporation of India v. Commissioner of Income-Tax, the Supreme Court
considered in an appeal arising out of a judgment of the High Court the issue as to whether a sum of
`3 crores, being a provision for redemption of preference shares, was not liable to be added back in
the total income of the assessee for AY 1977-78?. The Supreme Court held that a plain reading of
rule 5(a) of the First Schedule made it clear that in order to attract the applicability of the provision
the amount should firstly be an expenditure or allowance and secondly it should be one not
admissible under the provisions of section 30 to 43A. The Supreme Court held that the sum of `3
crores in that case which was set apart as a provision for redemption of preference shares could not
have been treated as an expenditure and hence could not have been added back under rule 5(a). In
that context the Supreme Court held as follows:
"There is another approach to the same issue. Section 44 of the Income-tax At read
with the rules contained in the First Schedule to the Act lays down an artificial mode
of computing the profits and gains of insurance business. For the purpose of
income-tax, the figures in the accounts of the assessee drawn up in accordance with
the provisions of the First Schedule to the Income-tax Act and satisfying the
requirements of the Insurance Act are binding on the Assessing Officer under the
Income-tax Act and he has no general power to correct the errors in the accounts of
51
an insurance business and undo the entries made therein".

Page 63 of 77
ITA Nos.6854 to 6856 6509 7765 to 7767 and 7213 ICICI PRULIFE Mumbai F Bench The question
whether an assessee who carries on general insurance business would be entitled to avail of an
exemption under section 10 did not arise. The issue as to whether the assessee which carries on the
business of general insurance would be entitled to the benefit of an exemption under clauses (15),
(23G) and (33) of section 10 is directly governed by the decision rendered by the Division Bench in
Life Insurance Corporation vs. Commissioner of Income-tax (Supra) following the earlier decision in
Commissioner of Income-tax vs. New India Assurance Co. Ltd (supra). The Assessing Officer could
not have ignored the binding precedent contained in the two Division Bench decisions of this Court.
Moreover, the Assessing Officer in allowing the benefit of the exemption in the order of assessment
under section 143(3) specifically relied upon the view taken by the CBDT in its communication
dated 21 February 2006 to the Chairman of IRDA. The communication clarifies that the exemption
available to any other assessee under any clauses of section 10 is also available to a person carrying
on non-life insurance business subject to the fulfillment of the conditions, if any, under a particular
clause of section 10 under which exemption is sought. It needs to be emphasized that it is not the
case of the Assessing Officer that the assessee had failed to fulfill the condition which attached to the
provisions of the relevant clauses of section 10 in respect of which the exemption was allowed. This
of course is apart from clause (38) of section 10 where the Assessing Officer had rejected the claim
for exemption in the original order of assessment under section 143(3). The Assessing Officer above
all was bound by the communication of the CBDT. Having followed that in the order under section
143(3) he could not have taken a different view while purporting to reopen the assessment. Having
applied his mind specifically to the issue an having taken a view on the basis of the communication
noted earlier, the act of reopening the assessment would have to be regarded as a mere change of
opinion which has also not been based on any tangible material. Consequently, we hold that the
reopening of the assessment is contrary to law. The Petition would have, therefore, to be allowed".
Respectfully following the above, we hold that the assessee is entitled for exemption under section
10. The enhancement made by the CIT (A) is therefore, cancelled. Ground is accordingly allowed".
Page 64 of 77
49. In view of the above and respectfully following the same, we hold that assessee is entitled to
exemption under section 10. Therefore, we do not see any reason to differ from the order of the CIT
(A) where he has allowed assessee's claim of exemption under section 10(23AAB) of surplus of
Participating Pension Business and also dividend under section 10(34). Accordingly Revenue
ground on this issue is rejected.
50. In the result, assessee appeal in ITA No.6854/Mum/2010 for the assessment year 2005-06 is
allowed and Revenue appeal in ITA No.7765/Mum/2010 for the assessment year 2005-06 is
dismissed.
52
ITA No.6855/Mum/2010- AY 2006-07

51. This is an assessee appeal wherein assessee has raised the following grounds:
"1. The CIT (A) has erred in not accepting the loss of `.200.55 crores returned by the
Appellant.
2. The CIT (A) erred in holding that the insurance income of the appellant which is
taxable is the amount of surplus disclosed in Form I.
3. The CIT (A) has erred in upholding the computation of taxable income for the year
at `.27.34 crores by holding that the amount transferred from the shareholder's
account to account is not to be reduced from the surplus disclosed in Form I.
4. The CIT (A) has erred in holding that the income of `.27.34 crores in shareholder's
account is separately taxable under the head "income from other sources".
5. The CIT (A) has erred in rejecting the alternate plea that in an event the income in
policyholder account is computed after considering transfers from shareholder's
account to account, then income in shareholder's account should be computed by
allowing a corresponding deduction of transfers to account.
6. The CIT (A) has erred in not accepting the disallowance under section 14A offered
in revised return of income is on reasonable basis but directed AO to decide the issue
afresh.
7. The CIT (A) has erred in confirming that the income in the shareholder's account is
taxable at the normal Page 65 of 77 ITA Nos.6854 to 6856 6509 7765 to 7767 and
7213 ICICI PRULIFE Mumbai F Bench corporate rate of tax instead of rate specified
in section 115B of the Act."
52. In assessee appeal ground nos.1, 2, 3, 5 is on taxing the transfer from share holders fund, while
considering the total surplus as surplus for purposes of Rule 2. This issue was discussed elaborately
in AY 2005-06 vide grounds 1 to 3 in ITA no 6854/M/2010 above and for the detailed reasons
stated there in the grounds are allowed. AO is directed to modify the order accordingly.
53. Ground no 6 and Additional Ground raised are similar to the grounds raised in AY 2005-06 on
the issue of disallowance u/s 14A. This issue was also elaborately considered in appeal no ITA no
6854/M/2010 above in ground no.4. For the reasons stated there in following coordinate bench
decisions, these grounds are allowed.
54. Ground no 4 and 7 is on the issue of treating incomes in shareholders account as income from
other sources. This issue arises for the first time in this year. The assessing officer was of the view
that policy holders account represent life insurance business to be taxed u/s 44 where as
53
shareholders account is separate investment account of assessee and incomes are to be taxed under
the head 'income from other sources'. An amount of Rs.27,33,67,000, adjusted by assessee in deficit
in policy holders account, was brought to tax separately, while considering the Total surplus in Life
insurance business. The CIT(A) upheld the same stating that income of Life insurance activity is to
be computed as per Form I and since there is income from other activities not included in Form I,
same should be subjected to tax as income from other sources.
55. We have heard the rival contentions. As briefly discussed while deciding the issue of taxing
surplus, assessee is in life Insurance business and it is not permitted to do any other business. All
activities carried out by assessee are for furtherance of Life Insurance business. Maintaining
adequate capital is necessary to Page 66 of 77 ITA Nos.6854 to 6856 6509 7765 to 7767 and 7213
ICICI PRULIFE Mumbai F Bench comply with IRDA( Assets, Liabilities and Solvency margin of
insurers)Regulations,2000. Income earned on capital infused in business is integral part of Life
Insurance business. The LD. CIT(A) gives a finding that assessee is exclusively in Life Insurance
business. However, since he gave primacy to Form I proforma he concluded that other incomes are
not of Life Insurance business. We have already considered and decided that assessee was mandated
to maintain separate accounts by IRDA Regulations. Just because separate accounts are maintained
the incomes in Shareholder's account does not become separate from Life insurance business. As
per Insurance Act 1938 all incomes are part of one business only and these incomes are considered
as part of same business. Therefore, the incomes in Shareholder's account are to be considered as
arising out of Life insurance business only. More over Sec 44 mandates that only First Schedule will
apply for computing incomes and excludes other heads of income like, Interest on Securities,
income from house property, Capital gains or Income from other sources. Being non-obstante
clause, sec. 44 mandates that the profits and gains of insurance business shall be computed in
accordance with the rules contained in First Schedule. Therefore, the incomes in Shareholder's
account are to be taxed as part of life insurance business only, as they are part of same business and
investments are made as part of solvency ratio of same business. The grounds are allowed. AO is
directed to treat them as part of Life Insurance Business and tax them u/s 115B.
ITA No.7766/Mum/2010 A.Y 2006-07
56. In this appeal, the Revenue has raised the following three grounds:
"1. On the facts and circumstances of the case and in law, the learned CIT (A) erred in
not subjecting the negative reserve amounting to `.27.27 crores ignoring the facts
that negative reserve has an impact of reducing the taxable surplus as per Form-I.
Page 67 of 77
2. On the facts and circumstances of the case and in law, the learned CIT (A) erred in
deleting the addition made on account of claim of 100% depreciation of `.15,79,707/ignoring the facts that Actuarial surplus is determined on the basis of the total assets
54
of the company and therefore by not capitalizing the above assets, the assets of the
assessee company are under stated in the books and thereby it has an impact of
reducing the surplus of or increase in the books and thereby it has an impact of
reducing the surplus of or increase in the deficit and therefore, the assets so written
off are also considered as part of the surplus and taxable under section 44 of the I.T.
Act.
allowing the dividend income of assessee of `.2,24,05,934/- as exempted under
section 10(34) of the Income Tax Act, 1961 ignoring the facts that dividend income is
considered as part of income of Life Insurance Business and is included as an income
by the actuary".
57. Ground No. 1 is on the issue of treating negative reserve and disallowing the amount. While
completing the assessment of life insurance business the AO, after taking the total surplus from
Form-I, reduced the negative reserve amounting to `27.27 crores. Assessee submitted before the
CIT(A) as under: "Method of Determination of Mathematical Reserves - (1) Mathematical Reserves
shall be determined separately for each contract by a prospective method of valuation
in accordance with sub-paras (2) to (4).
(2) The valuation method shall take into account all prospective contingencies under
which any premiums (by the policyholder) or benefits (to the
policyholder/beneficiary) may be payable under the policy, as determined by the
policy conditions. The level of benefits shall take into account the reasonable
expectations of policyholders (with regard to bonuses, including terminal bonuses, if
any) and any established practices of an insurer for payment of benefits. (3) The
valuation method shall take into account the cost of any options that may be available
to the policyholder under the terms of the contract.
(4) The determination of the amount of liability under each policy shall be based on prudent
assumptions of all relevant parameters. The value of each such parameter shall be based on the
insurer's expected Page 68 of 77 ITA Nos.6854 to 6856 6509 7765 to 7767 and 7213 ICICI PRULIFE
Mumbai F Bench experience and shall include an appropriate margin for adverse deviations
(hereinafter referred to as MAD) that may result in an increase in the amount of mathematical
reserves.
(5) (1) The amount of mathematical reserve in respect of a policy, determined in accordance with
sub-para (4), may be negative (called "negative reserves") or less than the guaranteed surrender
value available (called "guaranteed surrender value deficiency reserves") at the valuation date.
The appointed actuary shall, for the purpose of section 35 of the Act, use the amount of such
mathematical reserves without any modification.
55
The appointed actuary shall, for the purpose of sections 13, 49, 64V and 64VA of the Act, set the
amount of such mathematical reserve to zero, in case of such negative reserve, or to the guaranteed
surrender value, in case of such guaranteed surrender value deficiency reserves, as the case may be.
(6) The valuation method shall be called "Gross Premium Method".
(7) If in the opinion of the appointed actuary, a method of valuation other than the Gross Premium
Method of valuation is to be adopted, then, other approximations (e.g. retrospective method) may
be used.
Provided that the amount of calculated reserve is expected to be atleast equal to the amount that
shall be produced by the application of Gross Premium Method.
(8) The method of calculation of the amount of liabilities and the assumptions for the valuation
parameters shall not be subject to arbitrary discontinuities for one year to the next. (9) The
determination of the amount of mathematical reserves shall take into account the nature and term
of the assets representing those liabilities and the value placed upon them and shall include prudent
provision against the effects of possible future changes in the value of assets on the ability to the
insurer to meet its obligations arising under policies as they arise.
Mandate to Appointed Actuary under regulations Sub-Rule 4 mandates Appointed Actuary to have
prudent assumption of all relevant parameters and to include an appropriate margin for adverse
deviations that may result in an increase in the amount of mathematical reserves.
Page 69 of 77
ITA Nos.6854 to 6856 6509 7765 to 7767 and 7213 ICICI PRULIFE Mumbai F Bench Sub-Rule 5
defines such margin as "Negative Reserve", which is being disclosed in column 6 of the Form 1.
Further, clause (iii) to sub-Rule 5 mandates appointed actuary to provide for negative reserve in
mathematical reserve, accordingly not to include in distributable surplus as per Section 49 of the
Insurance Act, 1938.
Clause (ii) to sub-Rule 5 mandates appointed actuary to include negative reserve in mathematics
reserve only at the time of Amalgamation and transfer of insurance business and otherwise.
Taxable surplus Since taxation of Life Insurance Business is on surplus disclosed as per Section 49
which is covered by Rule 2(5)(iii), where in appointed actuary is mandated to arrive at surplus after
excluding negative reserve.
In view of the above we humbly submit before your goodself to kindly not treat negative reserve as
taxable. Sub-Rule 4 mandates Appointed Actuary to have prudent assumption of all relevant
parameters and to include an appropriate margin for adverse deviations that may result in an
increase in the amount of mathematical reserves."
56
58. The CIT(A), in his brief order vide para 17, considered the detailed explanation above and
accepted that the negative reserve disclosed in Form-I does not give rise to distributable surplus.
Accordingly he disallowed the same.
59. After considering the rival submissions and examining the method of accounting and the
mandate given by regulations to appoint Actuarial on the concept of mathematical reserves, we do
not see any reason to interfere with the order of the CIT(A). The mathematical reserve is part of
Actuarial valuation and the surplus as discussed in Form-I under Regulation 4 takes into
consideration this mathematical reserve also. Therefore the order of the CIT(A) is approve.
Moreover the Assessing Officer has no power to modify the amount after actuarial valuation was
done, which was the basis for assessment under Rule 2 of 1st Schedule r.w.s. 44 of the I.T. Act. The
principles laid down by the Hon'ble Supreme Court in LIC vs. CIT 512 ITR 773 about the powers of
Assessing Officer also restricts Page 70 of 77 ITA Nos.6854 to 6856 6509 7765 to 7767 and 7213
ICICI PRULIFE Mumbai F Bench the scope and adjustments by the AO. In view of this we uphold
the order of the CIT(A) and dismiss the Revenue ground.
60. Ground No. 2 is about deletion of addition made on account of claim of 100% depreciation of
`15,79,707/-. It was the contention of the Revenue that the CIT(A) ignored the actuarial surplus
determined on the basis of the total assets if the company and therefore not capitalized in the above
assets. The assets of assessee to that extent are not stated, therefore, it has an impact of reducing the
total surplus.
61. Before the CIT(A) it was submitted that the assessee prepared its accounts as per the format
prescribed by the IRDA in tune with the Insurance Act 1938. The assets were originally capitalized
in the books and being eligible for 100% depreciation they are written off. The CIT(A), after
considering the submissions, accepted the contention as under: "19. The appellant has to prepare its accounts as per the formats prescribed by the
IRDA under the Insurance Act, 1938. These accounts have accordingly been prepared
by the appellant and have been subject to statutory audit. Further, the accounting
policy of claiming 100% depreciation in its financial statements has been consistently
followed by the appellant and has also been duly accepted by the IRDA. The appellant
has stated that the assets on which depreciation has been claimed have been initially
capitalized in the books and then 100% depreciation has been claimed on these
assets. Taxation of Life Insurance is presumptive taxation with only the surplus as
disclosed by Form I being subjected to tax. In my view, as per the provisions of law
only those adjustments which are expressly not prohibited under section 44 of the
Act could be made. Consequently depreciation which has been debited in the audited
accounts as per the consistently followed and accepted accounting policy need not be
disallowed."
62. After considering the rival submissions, we are of the opinion that the action of the CIT(A) in
deleting the amount is consistent with the accounting principles followed and the provisions of
section Page 71 of 77 ITA Nos.6854 to 6856 6509 7765 to 7767 and 7213 ICICI PRULIFE Mumbai F
57
Bench 44 read with Rule 2 of the 1st Schedule. Therefore we uphold the order of the CIT(A) and
dismiss the ground raised by the Revenue.
63. Ground No. 3 is on the issue of claim of exemption under section 10(34) on the dividend income
earned by the assessee, which was allowed by the CIT(A). This ground is already considered vide
paras 48 & 49 of the above in ITA No. 7765/Mum/2010 for A.Y. 2005-06. Therefore, ground No. 3
raised by the Revenue is accordingly dismissed.
ITA No.6856/Mum/2010 - A.Y. 2007-08.
64. Assessee in this appeal has raised seven grounds which is extracted below:
Appellant.
2. The CIT (A) erred in holding that the Appellant's taxable income from insurance is
the amount of surplus disclosed in Form I.
account to policyholder's account is not to be reduced from the surplus disclosed in
Form I.
4. The CIT (A) has erred in holding that income of `.31.72 crores in shareholder's
allowing a corresponding deduction of transfers to policyholder's account.
6. The CIT (A) has erred in not holding disallowance under section 14A offered in
revised return of income is on reasonable basis but directed AO to decide the issue
afresh.
taxable at the normal corporate rate of tax instead of rate specified in section 115B of
the Act".
Page 72 of 77
58
65. Grounds No. 1,2,3 & 5 are on the issue of actuarial surplus. This issue was discussed elaborately
in AY 2005-06 vide grounds 1 to 3 in ITA No 6854/Mum/2010 above and for the detailed reasons
66. Grounds No. 4 & 7 on the issue of treating the income in shareholders account as income from
other sources. This issue is already decided in grounds No. 4 & 7 in ITA No. 6855/Mum/2010 for
A.Y. 2006-07. For the reasons stated therein vide paras 54 & 55 we direct the AO to treat the income
in shareholders account as part of life insurance business only. Grounds are allowed.
67. Ground No. 6 pertains to the issue of disallowance under section 14A and assessee also raised
additional ground on the reason that section 14A is not applicable once incomes are assessed under
section 44. This issue is also considered in A.Y. 2005-06 in ITA No. 6854/Mum/2010 in ground No.
4. For the reasons stated therein, following the above, this ground and the additional ground are
allowed. AO is directed to do accordingly.
ITA No.7767/Mum/2010 - A.Y. 2007-08
68. The Revenue in this appeal has raised the following two grounds:
deleting the addition made on account of claim of 100% depreciation of
`.76,60,380/- ignoring the facts that Actuarial surplus is determined on the basis of
the total assets of the company and therefore by not capitalizing the above assets, the
assets of the assessee company are under stated in the books and thereby it has an
impact of reducing the surplus of or increase in the deficit and therefore, the assets so
written off are also considered as part of the surplus and taxable under section 44 of
the I.T. Act.
allowing the dividend income of assessee as exempted under section 10(34) of the
Income Tax Act, 1961 ignoring the facts that dividend income is Page 73 of 77 ITA
considered as part of Income of Life Insurance Business and is included as an income
by the actuary".
69. Ground No. 1 is about deletion of addition made on account of claim of 100% depreciation of
`76,60,380/-. This ground is already considered vide ground No.2 in ITA No. 7766/Mum/2010 for
A.Y. 2005-06. Therefore, for the reasons mentioned therein ground No. 2 raised by the Revenue is
accordingly dismissed.
earned by the assessee, which was allowed by the CIT(A). This ground is already considered vide
paras 48 & 49 of the above in ITA No. 7765/Mum/2010 for A.Y. 2005-06. Therefore, ground No. 3
59
ITA No.6059/Mum/2010 - A.Y. 2008-09

71. Assessee in this appeal raised the following grounds:
Appellant,
2. The CIT (A) erred in holding that the Appellant's taxable income from insurance is
the amount of surplus disclosed in Form I.
account to policyholder's account is not to be reduced from the surplus disclosed in
Form I.
4. The CIT (A) has erred in holding that income of `.61.09 crores in shareholder's
allowing a corresponding deduction of transfers to policyholder's account.
6. Section 14A is not applicable to insurance companies as this section contemplates
to restrict the deductions as allowable under the Act which are contained under
section 28 to 43B of the Act. Section 44 creates a special exception Page 74 of 77 ITA
Nos.6854 to 6856 6509 7765 to 7767 and 7213 ICICI PRULIFE Mumbai F Bench to
the applicability of these provisions in the cases of insurance companies and
therefore, section 14A is not applicable to insurance companies.
7. The CIT (A) has erred upholding that the amount of disallowance as computed by
AO under section 14A of the Act is appropriate ignoring the amount offered by the
Appellant under section 14A in return of income.
taxable at the normal corporate rate of tax instead of rate specified in section 115B of
the Act."
72. Grounds No. 1,2,3 & 5 are on the issue of actuarial surplus. This issue was discussed elaborately
in AY 2005-06 vide grounds 1 to 3 in ITA No 6854/Mum/2010 above and for the detailed reasons
73. Grounds No. 4 & 8 are on the issue of treating the income in shareholders account as income
from other sources. This issue is already decided in grounds No. 4 & 7 in ITA No. 6855/Mum/2010
60
for A.Y. 2006-07. For the reasons stated therein vide paras 54 & 55 we direct the AO to treat the
income in shareholders account as part of life insurance business only. Grounds are allowed.
74. Grounds No. 6 & 7 pertain to the issue of disallowance under section 14A and assessee also
raised additional ground on the reason that section 14A is not applicable once incomes are assessed
under section 44. This issue is also considered in A.Y. 2005-06 in ITA No. 6854/Mum/2010 in
ground No. 4. For the reasons stated therein, following the above, this ground and the additional
ground are allowed. AO is directed to do accordingly.
ITA No.7213/Mum/2010 - A.Y 2008-09
75. The Revenue in this appeal has raised the following four grounds:
not upholding the Page 75 of 77 ITA Nos.6854 to 6856 6509 7765 to 7767 and 7213
ICICI PRULIFE Mumbai F Bench findings of AO that assessee is earning income
from activities other than Life Insurance Business ignoring the facts that assessee is
getting dividend income and income from other sources also.
not subjecting the negative reserve amounting to `.87.94 crores ignoring the facts
that negative reserve has an impact of reducing the taxable surplus as per Form-I.
deleting the addition of `.61,88,017/- ignoring the fact that Actuarial surplus is
determined on the basis of the total assets of the company and therefore by not
capitalizing the above assets, the assets of the assessee company are understated in
the books and thereby it has an impact of reducing the surplus of or increase in the
deficit and therefore, the assets so written off are also considered as part of the
surplus and taxable under section 44 of the IT Act.
erred in allowing the dividend income of assessee of `.78,27,74,249/- as exempted
under section 10(34) of the Income Tax Act, 1961 ignoring the facts that dividend
income is considered as part of income of Life Insurance Business and is included as
an income by the actuary".
76. Grounds No. 1 & 2 are on the issue of actuarial surplus. This issue was discussed elaborately in
AY 2005-06 vide grounds 1 to 3 in ITA No 6854/Mum/2010 above and for the detailed reasons
77. Ground No. 3 pertains to deletion of addition on deprecation claimed at 100%. This issue was
discussed above in ITA No. 7766/Mum/2010 vide ground No. 2. For the reasons stated therein the
ground raised by the Revenue is rejected.
61
earned by the assessee, which was allowed by the CIT(A). This ground is already considered Page 76
of 77 ITA Nos.6854 to 6856 6509 7765 to 7767 and 7213 ICICI PRULIFE Mumbai F Bench vide para
47, 48 & 49 of the above in ITA No. 7765/Mum/2010 for A.Y. 2005-06. Therefore, ground No. 3
79. In the result appeals filed by assessee in ITA Nos. 6854 to 6856/Mum/2010, & 6059/Mum/2011
are allowed and the Revenue appeals in ITA Nos. 7765 to 7767/Mum/2010 & 7213/Mum/2011 are
dismissed.
Order pronounced in the open court on 14th September, 2012.
Sd/(Vivek Varma)
Judicial Member
Sd/(B. Ramakotaiah)
Accountant Member
Mumbai, dated" 14th September, 2012.

Vnodan/sps
Copy to:
1.
2.
3.
4.
5.
The
The
The
The
The
Appellant
Respondent
concerned CIT(A)
concerned CIT
DR, "F" Bench, ITAT, Mumbai
By Order
Assistant Registrar
Income Tax Appellate Tribunal,
Mumbai Benches, MUMBAI
Page 77 of 77
62

Icici Prudential Life Insurance ... Vs Department of Income Tax On 20 June, 2012

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Icici Prudential Life Insurance ... Vs Department of Income Tax On 20 June, 2012

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Icici Prudential Life Insurance ...

vs Department Of Income Tax on 20 June, 2012

Income Tax Appellate Tribunal - Mumbai

IN THE INCOME TAX APPELLATE TRIBUNAL

ICICI Prudential Insurance

Asstt. CIT, Cir-6(1)

Asstt. CIT, Cir-6(1)

ICICI Prudential Insurance

Shri S.E. Dastur and

Actuarial Valuation Report submitted in Form-I extracted in the assessment order

Since there is a surplus declared at `.35,86,92,280/- in the form I AO asked assessee

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insurance business was accepted.

was abstracted in a statement to be prepared by the actuary as per procedure. In view

person from hat business shall be computed separately from his

petitioner, including the note appended to the computation of income

above from the figures of income in (a).

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24. Before analyzing the issue, it is necessary to discuss the principles of

13. As there is no indication in the ID Act as to the applicability or otherwise of the

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Indian Kanoon - http://indiankanoon.org/doc/37648666/

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Fund as shown in the

If the proportion of surplus allocated to the insurer, or in the case of an insurance

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Surplus shown under Form I

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brought forward from preceding valuation;

Terminal Bonuses paid;

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Likewise it also given Form-G consolidating Revenue Account as under:

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1st year premiums

Bonuses in cash, less

UK, Indian, Dominion

policyholder's account (2,01,59,99,808) Add: surplus in shareholder's' account

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Met by transfer from

Net Deficit as per the

Due to excess funding

more than the surplus

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an insurance business and undo the entries made therein".

ITA No.6855/Mum/2010- AY 2006-07

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ITA No.6059/Mum/2010 - A.Y. 2008-09

Mumbai, dated" 14th September, 2012.

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