Oriental Insurance Co Ltd vs. DCIT (Delhi High Court)

DATE: August 30, 2017 (Date of pronouncement)
DATE: September 2, 2017 (Date of publication)
AY: 2005-06
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S. 115JB: As Insurance companies are required to prepare accounts as per the Insurance Act and not as per Schedule VI to the Companies Act, s. 115JB does not apply. Insurance companies are not taxed on commercial profits but on profits as computed under the Insurance Act. Accordingly, income earned on sale/redemption of investments is not chargeable to tax

(i) The question concerns the applicability of Section 115JB of the Act to insurance companies. The ITAT has permitted the Assessee to raise this question since, in a large number of judgments of the ITAT, the question has been answered in favour of the Assessee.

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

(iii) Consequently, the question framed in ITA No. 447/2015 is answered in the affirmative, i.e. in favour of the Assessee and against the Revenue by holding that Section 115JB of the Act does not apply to insurance companies.

Profits on sale/redemption of investments

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

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

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

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

Further, the Assessee has itself clarified that it is not claiming the loss suffered on the writing off of the investments in compliance with the CBDT Circular No. 528.

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

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

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

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