Bombay High Court
India vs Income Tax on 1 December, 2011
Bench: Dr. D.Y. Chandrachud, A.A. Sayed
Dmt 1 wpl2560-11
IN THE HIGH COURT OF JUDICATURE AT BOMBAY
ORDINARY ORIGNAL CIVIL JURISDICTION
WRIT PETITION (L) NO. 2560 OF 2011
General Insurance Corporation of
India, Mumbai. .. Petitioner.
versus
The Deputy Commissioner of
Income Tax, - 1(3) Mumbai & Anr. .. Respondents.
.....
Mr. F.B. Irani with Mr. Atul K. Jasani for the Petitioner.
Mr. Charanjeet Chanderpaul for Respondent No. 1.
......
CORAM : DR.D.Y.CHANDRACHUD &
A. A. SAYED, JJ.
01 DECEMBER 2011.
ORAL JUDGMENT : (PER DR.D.Y.CHANDRACHUD, J.)
1. Rule. Learned Counsel for the Respondents waives
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service. By consent taken up for final hearing on the request
of learned Counsel for the parties.
2. By a notice of the First Respondent dated 17
March 2011 issued under Section 148 of the Income Tax Act,
1961 an assessment for Assessment Year 2006-07 has been
sought to be reopened.
3. The Petitioner is engaged in the business of general
insurance. For Assessment Year 2006-07 the Petitioner filed a
return of income on 30 November 2006 declaring a loss of Rs.
504.68 crores after excluding exempt incomes under clauses (15),
(23G), (33) and (38) of Section 10. On 12 October 2007, the
Assessing Officer issued a notice under Section 142 (1) seeking
details of income exempted and of expenditure under Section
14A. The Petitioner, during the course of the assessment
proceedings, made a submission before the Assessing Officer in
a letter dated 25 October 2007 inter alia in regard to the claim
of exemption under Section 10 (38). Reliance was placed on a
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communication dated 21 February 2006 of the Central Board of
Direct Taxes to the Chairman of the Insurance Regulatory &
Development Authority (IRDA) to the effect that exemptions
available to any other assessee under any clause of Section 10
are also available to a person carrying on non-life insurance
business subject to fulfillment of the conditions under the
particular clause under which an exemption is sought. By a
further communication dated 22 November 2007 the assessee
once again relied upon the aforesaid circular.
4. In the computation of income for the assessment
year, the assessee had claimed inter alia an exemption under
Section 10 (15) of the interest on tax free bonds; under Section
10 (23G) on interest on investment with infrastructure
companies and under Section 10 (33) on dividend income. In
the notes forming part of the computation of income, the
assessee also stated that it was reserving its right to claim an
exemption under Section 10 (38). The Assessing Officer while
passing an order of assessment on 31 March 2008 denied to the
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assessee the benefit of an exemption under Section 10 (38) on
the ground that during the assessment year, the assessee had
carried on a regular business of trading in equity shares; the
intention of the assessee being to earn profit and not to act as
an investor. The exemptions claimed under Section 10(15),
10(23G) and 10(33) were however, allowed.
5.
The Assessing Officer issued a notice under Section
148 on 17 March 2011 purporting to reopen the assessment for
Assessment Year 2006-07. The reasons which have been
disclosed to the assessee for reopening the assessment are as
follows :
"The assessee company is involved in general
insurance business, hence the income is to be
assessed as per special provisions for assessment
given in section 44. Section 44 provides that the
total income of the assessee company has to be
assessed as per the First Schedule of the Act. The
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insurance company in the business other than life
insurance are to be assessed as per Rule 5 of the
First Schedule and the company involved in life
insurance business as per Rule 1 to 4 of the first
Schedule. On combined reading of section 44 and
First Schedule it can be ascertained that no other
sections of the Act applies to these companies
except for the provisions provided in the First
Schedule Rule 5. In view of this, the claim of the
assessee for exemption of dividend income [u/s.
10(34)], interest on tax-free bonds [u/s. 10(15)] is
not according to law and deserves to be
disallowed. However, for this assessment year, in
the assessment u/s. 143(3) of the Act, the above
claims have been wrongly allowed."
The assessee submitted objections to the reopening of the
assessment on 25 April 2011 which have been disposed of by
an order dated 14 November 2011.
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6. Learned Counsel appearing on behalf of the
assessee submitted that :
(i) During the course of assessment proceedings, the
assessee had claimed an exemption under four
clauses of Section 10 and had specifically placed
reliance on a circular of the Central Board of
Direct Taxes dated 21 February 2006. The Assessing
Officer brought his mind to bear on whether the
assessee has fulfilled the conditions for the grant
of exemption under Section 10 and specifically
disallowed the claim for an exemption under
Section 10 (38). The exemptions under the other
three clauses were allowed;
(ii) The Assessing Officer had no new material and
certainly no tangible material on the basis of
which the assessment could be reopened even
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within the period of four years. As a matter of
fact, the reasons which have been disclosed to the
assessee state that in the assessment under Section
143 (3) exemptions have been wrongly allowed and
this is reiterated in the order disposing of the
objections which states that the Assessing Officer
failed to correctly apply the statutory provisions.
There is in the present case, it is urged, only a
change of opinion and the Assessing Officer has
purported to review his earlier decision, which is
not permissible in view of the law laid down by
the Supreme Court.
7. On the other hand, learned Counsel appearing on
behalf of the Revenue urged that :
(i) No case has been made out for exercise of the
writ jurisdiction under Article 226 of the
Constitution since it would be open to the assessee
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following the reopening of the assessment to urge
all appropriate contentions before the Assessing
Officer in regard to the entitlement of the assessee
to claim an exemption under Section 10;
(ii) The exercise of the writ jurisdiction is not
warranted having regard to the factual issues
which arise; and
(iii) Since the reopening has taken place within a
period of four years, there was no bar on the
Assessing Officer reopening the assessment, once he
comes to the conclusion that income had escaped
assessment.
8. The record before the Court discloses the fact that
during the course of the assessment proceedings the Assessing
Officer had brought his mind to bear on the issue as to
whether the assessee which carries on the business of general
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insurance is entitled to an exemption under Section 10. Both
in the letter dated 25 October 2007 and in the subsequent
communication dated 22 November 2011 the assessee had
relied upon a communication issued by the CBDT, in response
to a query, to the Chairperson of the Insurance Regulatory and
Development Authority (IRDA). The communication is to the
following effect :
" The undersigned is directed to refer to the
write-up on the captioned subject submitted by
you during the month to the Hon'ble Finance
Minister and Secretary (Revenue).
2. It is clarified that the exemption available to
any other assessee under any clause of section 10
of the Income-tax Act 1961 (including clause (38) of
section 10 regarding long-term capital gains) is also
available to a person carrying on non-life
insurance business subject to fulfillment of the
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conditions, if any, under a particular clause of
section 10 under which exemption is sought.
General Insurance Companies are therefore, on par
with other assesses who are entitled to or are
eligible for exemption under section 10 of the
Income-tax Act of long-term capital gains."
The Assessing Officer declined to grant the benefit of an
exemption under Section 10(38) to the assessee on the ground
that during the assessment year the assessee had carried on a
regular business activity of trading in shares and was not an
investor. The exemptions under clauses (15), (23G) and (33) of
Section 10 were however allowed. The Assessing Officer, in
the reasons which have been declared to the assessee for
reopening assessment has now taken the view that on a
combined reading of Section 44 of the Income Tax Act, 1961
and the First Schedule the position that emerges is that no
other Section of the Act applies to a company which carries
on general insurance business except the provisions contained
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in Rule 5 of the First Schedule. On this basis, it has been
contended that the claims have been "wrongly allowed". We
find merit in the contention of the Petitioner that the reasons
which have been set out by the Assessing Officer constitute a
mere change of opinion and there was no tangible material on
the basis of which the assessment could be reopened. Our
reasons for this are now set out.
9. Under Section 147 the Assessing Officer is
empowered to reopen an assessment where he has reason to
believe that any income chargeable to tax has escaped
assessment for any assessment year. Under clause (3) of
Explanation 2 the Legislature has set out cases where income
chargeable to tax is deemed to have escaped assessment.
Such cases include a case where an assessment is made but (i)
income chargeable to tax has been underassessed; or (ii) such
income has been assessed at too low a rate; or (iii) such
income has been made the subject of excessive relief under
the Act; or (iv) excessive loss or depreciation allowance or any
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other allowance under the Act has been computed. The power
of the Assessing Officer to reopen an assessment even within a
period of four years is structured. Following the amendment
of Section 147 by the Direct Tax Laws (Amendment) Act, 1987
with effect from 1 April 1989 Parliament has provided for only
one condition for exercise of the power to reopen an
assessment within four years which is that the Assessing
Officer has reason to believe that income has escaped
assessment. While recognizing that after 1 April 1989 the
power to reopen assessment is wider than before, the Supreme
Court has held in Commissioner of Income-Tax v. Kelvinator of
India Ltd, 1 that a "schematic interpretation" should be given
to the words "reason to believe" failing which Section 147
would confer arbitrary power upon the Assessing Officer to
reopen an assessment on the basis of a mere change of
opinion. In that context, Hon'ble Mr. Justice S.H. Kapadia (as
the learned Chief Justice of India then was) speaking for the
Supreme Court held as follows :
1 [2010] 320 ITR 561 (SC)
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"....Therefore, post- 1st April, 1989, power to reopen
is much wider. However, one needs to give a
schematic interpretation to the words "reason to
believe" failing which, we are afraid, section 147
would give arbitrary powers to the Assessing
Officer to reopen assessments on the basis of
"mere change of opinion", which cannot be per se
reason to reopen. We must also keep in mind the
conceptual difference between power to review and
power to reassess. The Assessing Officer has no
power to review; he has the power to reassess.
But reassessment has to be based on fulfilment of
certain pre-conditions and if the concept of
"change of opinion" is removed, as contended on
behalf of the Department, then, in the garb of
reopening the assessment, review would take place.
One must treat the concept of "change of
opinion" as an in-built test to check abuse of
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power by the Assessing Officer. Hence, after 1st
April, 1989, the Assessing Officer has power to
reopen, provided there is "tangible material" to
come to the conclusion that there is escapement of
income from assessment. Reasons must have a live
link with the formation of the belief. Our view
gets support from the changes made to section 147
of the Act, as quoted hereinabove. Under the
Direct Tax Laws (Amendment) Act,1987, Parliament
not only deleted the words "reason to believe" but
also inserted the word "opinion" in section 147 of
the Act. However, on receipt of representations
from the companies against omission of the words
"reason to believe", Parliament reintroduced the
said expression and deleted the word "opinion" on
the ground that it would vest arbitrary powers in
the Assessing Officer."
10. In the present case, it is apparent that the
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Assessing Officer had applied his mind to the claim of the
assessee to exemption under clauses (15), (23G), (33) and (38) of
Section 10. The exemption under clause (38) was specifically
denied. The reasons for reopening the assessment merely
postulate that the exemption under Section 10 was wrongly
allowed. This is clearly a situation where there is a change
in opinion by the Assessing Officer. There is no tangible
material for the Assessing Officer to reopen the assessment.
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 from other
sources", or in section 199 or in sections 28 to
[43B], the profits and gains of any business of
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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."
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
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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 sections
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
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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 2 a Division
Bench of this Court construed the provisions of Section 44 and
of the First Schedule. The assessee in that case which carried
on life insurance business had made a claim to exemption
under Section 10 (15) and Section 10 (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 :
2 115 ITR 45
Dmt 19 wpl2560-11
"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",
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"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 sections 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 carries 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
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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."
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
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earlier decision of a Division Bench of this Court in
Commissioner of Income-Tax v. New India Assurance Co. Ltd.,. 3
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
10(7) of the Income Tax Act, 1922. The questions referred to
this Court included whether the assessee was 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
3 [1969] 71 ITR 761 (Bom)
Dmt 23 wpl2560-11
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 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
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Assurance Co. Ltd. Accordingly, the decision in 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 4 the Supreme Court considered
in an appeal arising out of a judgment of the High Court the
issue as to whether a sum of Rs. 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 Assessment Year
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
4 [1999] 240 ITR 139
Dmt 25 wpl2560-11
Supreme Court held that the sum of Rs. 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 Act 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 an
insurance business and undo the entries made
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therein."
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
Dmt 27 wpl2560-11
under any clauses of Section 10 is also available to a person
carrying on non-life insurance business subject to the
fulfilment of the conditions, if any, under a particular clause of
Section 10 under which exemption is sought. It needs to be
emphasised that it is not the case of the Assessing Officer that
the assessee had failed to fulfil 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 and 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
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material. Consequently, we hold that the reopening of the
assessment is contrary to law. The Petition would have,
therefore, to be allowed.
13. Rule is, therefore, made absolute by quashing and
setting aside the notice dated 17 March 2011 reopening the
assessment under Section 148 of the Income Tax Act, 1961. In
the circumstances of the case, there shall be no order as to
costs.
(Dr. D.Y. Chandrachud, J.)
(A. A. Sayed, J.)
