Madras High Court
M/S. Cholamandalam Ms General ... vs The Deputy Commissioner Of Income Tax on 16 April, 2025
Author: Anita Sumanth
Bench: Anita Sumanth
2025:MHC:977
T.C.A.Nos. 755, 855 of 2018, 49, 51 & 52 of 2023
IN THE HIGH COURT OF JUDICATURE AT MADRAS
Reserved On : 19.12.2024
Pronounced On : 16.04.2025
CORAM :
THE HONOURABLE DR.JUSTICE ANITA SUMANTH
and
THE HONOURABLE MR.JUSTICE G. ARUL MURUGAN
T.C.A.Nos. 755, 855 of 2018, 49, 51 & 52 of 2023
and
C.M.P.Nos. 2153, 2155, 2177, 2203 & 2205 of 2023
T.C.(A).No. 755 of 2018
M/s. Cholamandalam MS General Insurance Co Ltd
Dare House,
No.2, NSC Bose Road,
Chennai – 600 001
PAN AABCC 6633 K .. Appellant
vs
1.The Deputy Commissioner of Income Tax
Large Tax Payer Unit,
Chennai – 600 101.
2.Ministry of Finance,
Department of Financial Services,
Rep. By its Secretary, Jeevan Deep Building,
Parliament Street, New Delhi – 110 001.
3.Insurance Regulatory and Development Authority of India,
Rep. By its Chairman,
Sy No.115/1, Financial District,
1/33
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T.C.A.Nos. 755, 855 of 2018, 49, 51 & 52 of 2023
Nanakramguad, Gachibowli,
Hyderabad – 500032.
4.The Central Board of Direct Taxes,
Rep. By its Chairman, 9th Floor, Lok Nayak Bhavan,
Khan Market, New Delhi – 3.
5.General Insurance Council,
Rep. By its Secretary General,
5th Floor, National Insurance Building,
14, Jamshedji Tata Road, Churchgate,
Mumbai – 20.
(R2 to R5 impleaded vide order dated 20.11.2018) .. Respondents
T.C.(A).No.855 of 2018
M/s. Royal Sundaram General Insurance Co Ltd
“Sundaram Towers”,
45 & 46, Whites Road,
Chennai – 600 002.
PAN AABCR7106G .. Appellant
Vs
The Deputy Commissioner of Income Tax,
Large Tax Payer Unit,
Chennai – 600 101. .. Respondent
T.C.(Appeal) No. 49 of 2023
M/s.Cholamanadlam MS General Insurance Co. Ltd
No.2, Dare House, NSC Bose Road,
Chennai – 600 001.
PAN AABCC 6633K .. Appellant
Vs
The Deputy / Assistant Commissioner of Income Tax
Large Taxpayer Unit – 2,
Chennai – 600 034. .. Respondent
2/33
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T.C.A.Nos. 755, 855 of 2018, 49, 51 & 52 of 2023
T.C.(Appeal) Nos. 51 & 52 of 2023
M/s.Cholamanadlam MS General Insurance Co. Ltd
No.2, Dare House, NSC Bose Road,
Chennai – 600 001.
PAN AABCC 6633K .. Appellant
Vs
The Assistant / Deputy Commissioner of Income Tax
Large Taxpayer Unit – 2,
Chennai – 600 034. .. Respondent
Prayer in T.C.(A).No. 755 of 2018: Appeal filed under Section 260A of
the Income-Tax Act, 1961 against the order of the Income-Tax Appellate
Tribunal, ‘A’ Bench, Chennai dated 31.07.2018 in ITA
No.2372/Chny/2014 for assessment year 2009 – 10.
Prayer in T.C.(A).No. 855 of 2018: Appeal filed under Section 260A of
the Income-Tax Act, 1961 against the order of the Income-Tax Appellate
Tribunal, ‘A’ Bench, Chennai dated 06.08.2018 in ITA
No.2371/Chny/2014 for assessment year 2010 – 11.
Prayer in T.C.(A).No. 49 of 2023: Appeal filed under Section 260A of
the Income-Tax Act, 1961 against the order of the Income-Tax Appellate
Tribunal, ‘C’ Bench, Chennai dated 26.08.2022 in ITA
No.771/Chny/2020 for assessment year 2014 – 15.
Prayer in T.C.(A).No. 51 of 2023: Appeal filed under Section 260A of
the Income-Tax Act, 1961 against the order of the Income-Tax Appellate
Tribunal, ‘C’ Bench, Chennai dated 26.08.2022 in ITA
No.950/Chny/2018 for assessment year 2010 – 11.
Prayer in T.C.(A).No. 52 of 2023: Appeal filed under Section 260A of
the Income-Tax Act, 1961 against the order of the Income-Tax Appellate
3/33
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T.C.A.Nos. 755, 855 of 2018, 49, 51 & 52 of 2023
Tribunal, ‘C’ Bench, Chennai dated 26.08.2022 in ITA
No.951/Chny/2018 for assessment year 2013 – 14.
For Appellants : Dr.S.Muralidhar, Senior Counsel
For Mr.R.Sandeep Bagmar
(in TCA Nos. 755/2018, 49, 51 & 52/2023)
Mr.Arvind P. Datar, Senior Counsel
For Mr.R.Sandeep Bagmar
(in TCA No. 855/2018)
For Respondents : Mrs.V.Pushpa
Senior Standing Counsel
(in all TCAs)
COMMON JUDGMENT
Dr. ANITA SUMANTH.,J
TC(A) Nos.755 of 2018 and 49, 51 and 52 of 2023 have been filed
by Cholamandalam MS General Insurance Co. Ltd and TC(A) No.855 of
2018 has been filed by Royal Sundaram General Insurance Co. Ltd under
Section 260A of the Income tax Act 1961 (Act). The appeals relate to
assessment years (AYs) 2009-10 (TC(A) 755 of 2018), 2010-11 (TC(A)
No.855 of 2018), 2010-11 (TC(A) No.51 of 2023), 2013-14 (TC(A)
No.52 of 2023) and 2014-15 (TC(A) No.49 of 2023).
2. The substantial questions of law admitted for consideration in
T.C.(A)Nos.755 and 855 of 2018 are as follows:
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T.C.A.Nos. 755, 855 of 2018, 49, 51 & 52 of 2023
'Reinsurance Premium:
1. Whether the Tribunal has the jurisdiction to
adjudicate upon validity and legality of payments of
reinsurance premium made by the appellant to non-resident
reinsurers under the Insurance Act, 1938 ?
2. Whether the Tribunal has the jurisdiction to
adjudicate upon the grounds, which were never raised by the
appellant and the respondent in its grounds of appeal ?
3. When this issue did not arise out of appeal before the
Tribunal, whether the Tribunal was correct in holding that the
payments of reinsurance premium made by the appellant to
non-resident reinsurers are in violation of the provisions of
the Insurance Act, 1938 ?
4. Whether the Tribunal has the jurisdiction to
adjudicate upon validity and legality of the IRDA (General
Insurance- Reinsurance) Regulations, 2000, which permit
general insurance companies in India to place reinsurance
premium outside India and to hold that these Regulations are
not inconsistent with the provisions of the Insurance Act,
1938?
5. Whether the Tribunal was correct in questioning the
intention of the Parliament by holding that it cannot be the
intention of the Parliament to authorize Indian insurer to have
insurance outside the country ignoring the provisions of the
Insurance Act, when, on other hand, the Regulations being the
IRDA (General Insurance-Reinsurance) Regulations, 2000,
which were tabled before the Parliament, permit Indian
insurer to place reinsurance outside India ?
6. When the Tribunal was correct in holding that the
other insurer in Section 101A(7) of the Insurance Act would
only mean the insurer as defined under Section 2(9) of the
Insurance Act ?
7. When the finding of the Tribunal that the learned
Senior Counsel for the assessee very fairly submitted before
the Tribunal that after 2014, the assessee started deducting
tax on the reinsurance premium paid to the non-resident
reinsurance company is erroneous and perverse ?
8. Whether the Tribunal was correct in holding that the
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T.C.A.Nos. 755, 855 of 2018, 49, 51 & 52 of 2023
payments of reinsurance premium made by the appellant to
non-resident reinsurers is to be disallowed under Section 37
read with Explanation 1 of the Act on the ground that the
same is prohibited under the Insurance Act, 1938?
9. Whether the Tribunal was correct in not adjudicating
on any of the grounds raised by the appellant and the
respondent in respect of non applicability of provisions of
Section 195 being withholding of taxes on reinsurance
premium paid to foreign insurers?
10. Whether the Tribunal was correct in holding that
the payments of reinsurance premium made by the appellant
to non-resident reinsurers is to be disallowed under Section
40(a)(i) of the Act, when the Tribunal has not decided the
taxability of these payments under the Act as per Section 195
of the Act ?
11. Whether the Tribunal was correct in distinguishing
the judgments of the Supreme Court in the case of Vodafone
and the decision of the Mumbai Tribunal in Swiss
Reinsurance Company Ltd., and the Pune Tribunal in Bajaj
Alliance, which has decided the grounds in appeal before the
Tribunal in favour of the assessee?
12. Whether the Tribunal was correct in distinguishing
the decisions of the Mumbai and the Pune Benches of the
Tribunal without referring the appeal to a Larger Bench ?
Disallowance of IBNR and IBNER :
13. Whether the Tribunal was correct in holding that
the provisions on account of IBNR and IBNER was not
determined during the subject assessment year and
consequently, not to be allowed in the subject assessment
year?
14. Whether the order of the Tribunal is erroneous and
perverse as it did not consider the IRDA (Preparation of
Financial Statements and Auditor’s Report of Insurance
Companies) Regulations, 2002 basis, which the appellant has
worked out the liability for IBNR and IBNER certified by
actuary on basis of actuarial valuation ?
15. Whether the order of the Tribunal is erroneous and
perverse as it did not consider the decision of the Kolkata
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T.C.A.Nos. 755, 855 of 2018, 49, 51 & 52 of 2023
Tribunal in National Insurance Company Limited and the
Mumbai Tribunal in Export Credit Guarantee Corporation,
which has decided the grounds in appeal before the Tribunal
in favour of the assessee?
16. Whether the Tribunal was correct in distinguishing
the decisions of the Kolkata and the Mumbai Tribunals
without referring the matter to a Larger Bench ?
Disallowance under Section 14A :
17. Whether the Tribunal was correct in holding that
Section 14A is applicable to insurance companies when it is
undisputed that income of Insurance companies is to be
computed as per Section 44 read with First Schedule of the
Act?
18. Whether the order of the Tribunal is erroneous and
perverse as it did not adjudicate on the issue of non
applicability of Section 14A to insurance companies, when a
specific ground was raised before it ?
19. Whether the order of the Tribunal is erroneous and
perverse as it did not consider the decisions of the Bombay
High Court in Kotak Mahindra Old Mutual Life Insurance
Limited, Delhi Tribunal in Oriental Insurance Company Ltd.,
the Mumbai Tribunal in ICICI Prudential Life Insurance and
the Mumbai Tribunal in Reliance General Insurance, which
has decided the grounds in appeal before the Tribunal in
favour of the assessee ?
20. Whether the Tribunal was correct in distinguishing
the decisions of the other Tribunals without referring the
matter to a Larger Bench ?
Profit on sale of investment:
21. Whether the Tribunal was correct in holding that
the profit on sale of investment is taxable in view of deletion of
Rule 5(b) to the First Schedule of the Act ?
22. Whether the order of the Tribunal is holding that
the profit on sale of investment is erroneous and perverse as
the Explanatory Notes to the Finance Act, 1988 described by
the CBDT circular No. 528 dated 16.12.1988 that the intent of
deletion of Rule 5(b) to the First Schedule is not to tax gain on
sale of investments ?
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T.C.A.Nos. 755, 855 of 2018, 49, 51 & 52 of 2023
23. Whether the order of the Tribunal is erroneous and
perverse as it did not consider the decision of the Pune
Tribunal in Bajaj Alliance General Insurance Company
Limited and the Mumbai Tribunal in General Insurance
Corporation of India, which have considered the effect of the
deletion of Rule 5(b) and decided the grounds in appeal
before the Tribunal in favour of the assessee ? and
24. Whether the Tribunal was correct in distinguishing
the decisions of the other Tribunals without referring the
matter to a Larger Bench ?
3. The substantial questions of law that arise for consideration in
T.C.(A)Nos.49, 51 and 52 of 2023 are as follows:
Disallowance of IBNR and IBNER:
1. Whether the Tribunal was correct in holding that the
provisions on account of IBNR and IBNER was not
determined during the subject assessment year and
consequently, not to be allowed in the subject assessment
year?
2. Whether the Tribunal erred in not allowing the claim
of IBNR and IBNER which was determined by an independent
actuary based on IRDA (Preparation of Financial Statements
and Auditor’s Report of Insurance Companies) Regulation,
2002 and the methodology of the same was not in dispute?
3. Whether the Tribunal was correct in following the
decision in appellant’s own case in ITA NO.2372
dt.31/07/2018 for AY 2009-10, when the view taken by the
Chennai Bench of the Tribunal was found to be per-incuriam
by the Bombay High Court in General Insurance Corporation
of India V. ACIT 422 ITR 248 (Bom)?
4. Whether the Tribunal erred in failing to follow the
co-ordinate bench decisions on the very question of
disallowance of IBNR and IBNER?
5. Whether the order of the Tribunal is perverse as it
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T.C.A.Nos. 755, 855 of 2018, 49, 51 & 52 of 2023
failed to take note of binding judicial precedents which were
placed on record and referred to for its consideration?
4. An additional question of law that has been raised for
consideration in TC(A)No. 49 of 2023 is as follows:
Disallowance of payments made to Motor vehicle dealers.
Whether the Tribunal was correct in remitting the issue
of disallowance of payments made to motor vehicle dealers to
the file of the AO when all facts relating to the said issue have
been adjudicated in favour of the assessee?
5. Learned counsel for the appellant in TC(A)Nos.755 and 855 of
2018 has made an endorsement to the effect that the appellant companies
do not press questions 1 to 12 under the caption ‘reinsurance premium’
raised in TC(A)Nos.755 and 855 of 2018. Hence, these questions are
returned as unanswered.
6. As against questions 21 to 24 under the caption Profit on sale of
investment, raised in TC(A)Nos.755 and 855 of 2018, all learned counsel
would concur on the position that the issues are to be answered in favour
of the assessee by virtue of judgement of the Supreme Court in
Commissioner of Income-Tax v United India Insurance Co1 affirming the
decision of this Court in Commissioner of Income-Tax v United India
1 (2020) 117 taxmann.com 849(SC)
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T.C.A.Nos. 755, 855 of 2018, 49, 51 & 52 of 2023
Insurance Co2.
7. The operative portion of the judgement in the case of
Commissioner of Income-Tax v United India Insurance Co3 qua the issue
Profit on sale of investment is extracted below:
6.So far as the first substantial question of law is concerned,
viz., profit on sale of investments whether it is exempt or not,
the issue came up for consideration before the High Court of
Delhi in the case of Oriental Insurance Co. Ltd., vs. Deputy
Commissioner of Income-tax reported in [2017] 84 taxmann.-
com 312 (Delhi). The Court analysed Rule 5(b) of the First
Schedule to the Act, which stood omitted by Finance Act, 1988
and was re-introduced by Finance Act, 2009 with effect from
1st April, 2011. It was pointed out that the rationale for omit-
ting Rule 5(b) was to exempt profits and gains in investments
by the General Insurance Corporation of India and the four
companies formed under Section 16 of the General Insurance
Business (Nationalisation) Act, 1972. After referring to the
relevant provisions, the explanation offered in the memoran-
dum to the Finance Bill, 1988, and the circular of the CBDT
in Circular No.528, dated 16.12.1988, the Court held as fol-
lows:-
“38.Thus, the major change, therefore, sought to be
brought about by the 2009 amendment was to align
it with the IRDA Regulations regarding preparation
of accounts of general insurance companies. The
changed norms, in terms of said Regulations, re-
quired a non-life insurance company to include in
its Profit and Loss ('P & L') Account or Revenue Ac-
count “profit or loss on realisation/sale of invest-
ment”. This was said to be consistent with the inter-
national standards.
2 (2019) 111 taxmann.com 217 (Madras)
3 (2019) 111 taxmann.com 217 (Madras)
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T.C.A.Nos. 755, 855 of 2018, 49, 51 & 52 of 2023
39.With the Assessee carrying on a general insur-
ance business, it was bound by the provisions of the
IA as well as the IRDA Regulations referred to
hereinbefore. Even the CBDT, in its Circular
No.5/2010 dated 3rd June, 2010, acknowledged
that, after the introduction of the IRDA Regulations
in 2002, non-life insurance companies are required
to credit income from the sale of investments direct-
ly to the P&L Account. This requirement, which
would make the income so earned amenable to tax,
was made applicable only from AY 2011-12. Prior
to 1st April, 2011, there was no provision which re-
quired the Revenue to disallow the deduction of loss
on sale of investments.”
7.In terms of the above decision, prior to 1st April, 2011,
there was no provision which required the Revenue to disal-
low the deduction of loss on sale of investments.
8.In the respondent/assessee's case, identical view was taken
by the Commissioner of Income-tax (Appeals), Large Taxpay-
er Unit, Chennai (for brevity, “the CIT(A)”), and the order
was confirmed by the Tribunal. The finding in favour of the
assessee was on the ground that prior to 1st April, 2011, there
was no provision which required the Revenue to disallow the
deduction of loss on sale of investments.
9.We respectfully agree with the view taken by the High Court
of Delhi in Oriental Insurance Co. Ltd. (supra). Accordingly,
the first substantial question of law is answered against the
Revenue.
8. We have had an occasion to deal with the same issue ‘profit on
sale of investments’ in Commissioner of Income Tax –LTU V. Royal
Sundaram Alliance Insurance Company Ltd.4, wherein we have held as
follows:
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T.C.A.Nos. 755, 855 of 2018, 49, 51 & 52 of 2023
14. The admitted facts in this matter are that the
assessee is an Insurance Company, which is bound to follow
the method of computation as set out under Section 44 read
with Rule 5(b) of the First Schedule to the Act. Rule 5,
specifically clause (b) thereof, has been subject matter of
amendment over the years in that the aforesaid clause stood
deleted with effect from 1988 and restored with effect from
01.04.2011 (A.Y.2011-12). We are concerned with the
applicability of the said clause for the interregnum period.
15. The purport behind clause (b) to Rule 5 was clear,
to either include or exclude profits/losses from sale of
investments, specific to insurance businesses. With the
deletion of that clause for the periods 1988 to 2011, there is
no justification whatsoever to continue to tax profits/losses
from sale of investments. Such an interpretation would result
in reading clause (b) as continuing on the stature book, even
for a period when it had stood deleted.
16. This very issue had come up for consideration
before this Court in Commissioner of Income Tax V. United
India Insurance Company5. The co-ordinate Bench of this
Court noted the decision of the Delhi High Court in the case
of Oriental Insurance Co. Ltd V. Deputy Commissioner of
Income-Tax6, wherein the purpose of omitting Rule 5(b) was
specifically noticed.
17. That apart, the operative portion of CBDT
Circular dated 16.12.1988 touching upon this aspect is also
relevant and is extracted below:
CBDT Circular No .528 dated 16.12.1988
....
Liberalisation of provisions in respect of taxation of
profits and deduction of tax at source applicable to
5 2019-111 Taxman.com 217 (Mad)
6 (2018) 407 ITR 658
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T.C.A.Nos. 755, 855 of 2018, 49, 51 & 52 of 2023
the General Insurance Corporation and its
subsidiaries
45.1 Under the existing provisions of s. 44 of the IT
Act, the profits and gains of any Insurance business is
computed in accordance with the rules contained in
the First Schedule to the Act. Under r. 5 of this
Schedule, profits and gains of any business of
insurance other than life insurance are taken to be
balance of profits disclosed in the annual accounts
furnished to the Controller of Insurance subject to
certain adjustments. One of the adjustments provided
therein is in respect of any amount either written off or
reserved in the accounts to meet depreciation or loss
on the realisation of investment which is to be allowed
as deduction. Similarly, any sum credited to the
account, due to appreciation of or gain on the
realisation of investment, is taken as part of the profits
and gains of the business. To enable the General
Insurance Corporation and its subsidiaries to play a
more active role in capital markets for the benefit of
policy holders, the Finance Act has amended sub-r.(b)
of R. 5 of the First Schedule to provide for exemption
of the profits earned by them on the sale of investment.
As a corollary, it has also been provided that the
losses Incurred by the General Insurance Corporation
on the realisation of the investment shall not be
allowed as a deduction in computing the profits
chargeable to tax.
45.2 This amendment will take effect from the 1st
April, 1989, and will accordingly, apply in relation to
the asst. yr. 1989-90 and subsequent years.
9. Coming to the substantial questions of law in relation to
disallowance under Section 14A, the Tribunal has concluded the issue
adverse to the assessee holding that Rule 5(a) militates against the grant
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T.C.A.Nos. 755, 855 of 2018, 49, 51 & 52 of 2023
of expenses, which are not for the purposes of insurance business and,
directing that the same are to be added back.
10. The Assessing Authority, in the course of assessment, had
disallowed the expenditure on the ground that it relates to income which
is exempt and applying the computational methodology in Rule 8D.
However, there was no impact, since the profit on sale of investments
had been taxed as income from regular business activity.
11. By virtue of the present order, we have allowed the issue in
relation to profit on sale of investments in favour of the assessee, and
hence there would be a revenue impact by virtue of the disallowance
under Section 14A.
12. The assessees’ arguments are that the computational
methodology governing them are set out under Section 44 read with Rule
5 of the First Schedule to the Act and hence there would be no
application of Section 14A to their case. We have extracted Section 44
as well as Rule 5 of the First Schedule in the latter portion of this order.
(see paragraphs 35 and 36).
13. Section 14 A states that no deduction shall be allowed in
respect of the expenditure incurred by the assessee in relation to income
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T.C.A.Nos. 755, 855 of 2018, 49, 51 & 52 of 2023
which does not form part of the total income under the Act. However, in
framing of assessments in the case of insurance companies, it is purely
Section 44 read with Rule 5 of the First Schedule that would apply.
14. This position is made clear by Section 44 itself which says that
the methodology for computation shall be as per Rule 5 of the First
Schedule that excludes specifically the application of Sections 28 to 43B
and Section 199 of the Act. We are thus of the considered view that in a
specialised assessment of this nature, where the methodology for
computation is not as stipulated under Section 28 to 43B, there is no role
for Section 14A at all.
15. The fact that such an assessment would stand outside the ambit
of application of Section 14A is made clear by the non-obstante clause
contained in Section 44 which states that notwithstanding anything to the
contrary contained in this Act relating to the computation of income
chargeable under the heads of interest on securities, house property,
Capital gains or other sources, or Section 199 or Sections 28 to 43B
dealing with the computation of business income, the assessment of
insurance business would be in accordance with the Rules contained in
the First Schedule alone.
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T.C.A.Nos. 755, 855 of 2018, 49, 51 & 52 of 2023
16. Rule 5 of the First Schedule provides for a self-contained
methodology for computation of profits and gains of other insurance
businesses. It sets out the manner by which the profits and gains of other
insurance business would be computed and stipulates specifically what
the adjustments are, that are to be made to the profit before tax and
appropriations as per the profit and loss account prepared in accordance
with the Insurance and IRDA Acts and the Rules and Regulations.
17. Clause (a) of Rule 5 is specific in that, it states that expenditure
or allowances inadmissible under the provisions of Sections 30 to 43B in
computing profits and gains of the business are to be added back. Clause
(b) states that gain or loss on realisation of investments, if not credited or
debited to profit and loss account, shall be added back, and similarly,
provision for diminution in the value of investments debited to profit and
loss account are to be added back. Clause (c) states that any amounts
carried over to a reserve for unexpired risks as may be prescribed are to
be allowed as a deduction.
18. Barring the aforesaid adjustments, there can be no other
adjustments contemplated to the scheme of computation of profits and
gains of other insurance businesses. Reference to Section 14A thus does
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T.C.A.Nos. 755, 855 of 2018, 49, 51 & 52 of 2023
not arise in the context of such computation. In the scheme as we have
set out above, the legislative intent is clear, to put in place a distinct and
different scheme for computation of profits from other insurance
businesses. The substantial question of law in relation to this issue is
thus answered in favour of the assessee and against the revenue.
19. What remains are questions 13 to 16 raised in TC(A)Nos.755
and 855 of 2018 and questions 1 to 5 raised in T.C.(A)Nos.49, 51 and 52
of 2023 dealing with disallowance of the provisions made on account of
the expenditure ‘incurred but not reported (IBNR)’ and ‘incurred but not
enough reported (IBNER)’ and additional question raised in
TC(A)No.49 of 2023 dealing with disallowance of payments made to
motor vehicle dealers.
20. Detailed submissions have been advanced by Dr.S.Muralidhar,
learned Senior Counsel appearing for Mr.R.Sandeep Bagmar, learned
counsel on record for the appellant in TCA Nos. 755 of 2018, 49, 51& 52
of 2023 and Mr.Arvind P. Datar, learned Senior Counsel, appearing for
Mr.R.Sandeep Bagmar, learned counsel on record for the appellant in
TCA No. 855 of 2018 as follows.
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T.C.A.Nos. 755, 855 of 2018, 49, 51 & 52 of 2023
21. Returns of income have been filed within time for the
assessment years in question. Both companies are engaged in the
business of General Insurance including marine and motor vehicle
insurance. In the course of assessments and on verification of the
financials, the Assessing Authority had noted the deduction claimed from
the profits on account of IBNR and IBNER. Being provisions, and being
of the view that they were contingent and unascertained, the Assessing
Authority sought a justification for the claim.
22. Explanations were tendered to the effect that both IBNR and
IBNER claims were made on scientific basis. The determination of
liability was on actuarial principles made by the appointed actuary, and
in line with the guidelines and norms issued by the Institute of Actuaries
of India as well as the Insurance Regulatory and Development Authority
(IRDA).
23. Thus, the appellant companies had reiterated their claims as
being appropriate and in line with the mandate of Section 37 of the Act.
Reliance was placed on the judgments of the Supreme Court in Bharath
Earth Movers v Commissioner of Income-Tax7, Metal Box Company of
7 245 ITR 428 (SC)
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India Ltd v Their Workmen8 and Rotork Controls India (P) Ltd v
Commissioner of Income-Tax9.
24. Overriding the submissions made, the Assessing Authority
disallowed the provisions on the ground that they were unascertained.
While noting that the provisions had been created as per the extant
Regulations and guidelines, the assessing authority sill proceeds to
disallow the same on the ground that the liabilities had not crystallized
under either regular provisions or Minimum Alternate Tax (MAT) under
Section 115JB of the Act.
25. The first appeal filed by the appellant companies came to be
allowed, the Commissioner of Income Tax (Appeals) (CIT(A))
disagreeing with the Assessing Officer that the liability was
unascertained. The CIT(A) holds that the liability of the appellant
companies stands crystallized as soon as the incident covered by the
policy accrues. What remained thereafter was only the quantification of
the amount, which constituted a mere computation. According to him,
the creation of a provision would protect the company from erratic
display of profits over the years.
8 73 ITR 53 (SC)
9 314 ITR 62 (SC)
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26. Aggrieved by the order of the CIT(A), the Revenue approached
the Income Tax Appellate Tribunal (in short, ITAT/Tribunal), which
reversed the order in first appeal restoring the disallowance made by the
Assessing Officer.
27. Learned Senior Counsel argue that the order of the Tribunal is
cryptic, non-speaking and has not considered the detailed and
voluminous submissions made. Specific reference is drawn to the
observations of the Tribunal that the liability to make payment accrues to
the assessee only in the year in which the loss or damage was ascertained
and compensation payable to insured person is determined.
28. It thus follows that since the appellant is a company following
mercantile method of accounting, liability accrues in the year in which
the event has occurred and hence the creation of a provision in that year,
according to the appellant, is perfectly appropriate. As far as the
quantification is concerned, the appellant draws attention to voluminous
material filed by it to demonstrate the process by which the amount has
been crystallized, which process has been completely ignored by the
Tribunal in its conclusion.
29. Dr.Muralidhar takes us through the scheme of taxation
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governing insurance companies commencing from Section 44 of the Act
and the First Schedule to the Act, as well as the prescription under the
Insurance Regulatory and Development (Preparation of Financial
Statements and Auditors Report of Insurance Companies) Regulations,
2002 (in short, IRDA 2002 Regulations) which the Appellant is bound to
follow.
30. He also takes us through a sample actuarial certificate which
reflects the summary of IBNR and IBNER proceedings issued by an
appointed actuary who is a fellow of Institute of Actuaries of India. It is
that figure which has been adopted by the appellant companies as their
claim towards provisions made.
31. Apart from the decisions already cited before the authorities,
Appellants rely on the decisions of the Delhi High Court in Principal
Commissioner of Income-Tax v Care Health Insurance Ltd10,
Commissioner of Income-Tax v Whirlpool of India Ltd11, Calcutta High
Court in Principal Commissioner of Income-Tax v National Insurance
Co. Ltd12, Bombay High Court in General Insurance Corporation of
10 (2024) 164 Taxmann.com 53 (Delhi)
11 242 CTR 245 (Del)
12 (Calcutta HC) ITA No. 76 of 2019 dated 16.07.2019
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India v Assistant-Commissioner of Income-Tax and others13 and Kerala
High Court in Commissioner of Income-Tax v Kerala Transport
Company14 praying that the appeals be allowed.
32. Per contra, Ms.V.Pushpa, learned Senior Standing Counsel for
the Department contests the matter pointing out that the settlement of the
insurance claim is based on a contract between the parties. There is no
record, according to her, to show how that the claim has evolved from
the time of entering into a contract of insurance, occurrence of an event,
processing of the claim and thereafter settlement of the claim.
33. There is no material produced by the appellant companies that
would support their stand that the claims have crystallized, on the mere
occurrence of an event. As far as the creation of a provision is concerned,
such provision would have to be tested on a case on case basis only and
cannot be generalized.
34. In the present case, apart from producing the actuarial
certificate, which is only a self-serving document, no other material has
been produced in support of the claim. According to her, the decisions
relied on do not support the appellants’ case and for her part, she relies
13 422 ITR 248 (Bom)
14 239 ITR 183 (Ker)
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on the following decisions:
1. Rotork Controls India (Private) Limited v Commissioner of Income-
Tax15
2.Renowned Auto Products Mfrs Limited v Income Tax Officer16
3. Commissioner of Income-Tax v Tamil Nadu Small Industries
Development Corporation Limited17
4. EID Parry (India) Limited v Assistant Commissioner of Income Tax18
5.Principal Commissioner of Income-Tax LTU, New Delhi v Oriental
Insurance Co., Ltd19
6. Commissioner of Income Tax v Birla Global Asset Finance Co., Ltd20
7. The Commissioner of Income Tax v M/s. Johnson Lifts Pvt Ltd21
35. We have heard the rival contentions and perused the material
records and our decision is as follows. The scheme of taxation that
governs Insurance Companies has its genesis in Section 44 of the Act, a
special provision touching upon the taxation of the Insurance business
reading as follows:
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 section 199 or in sections 28 to
43-B, the profits and gains of any business of insurance,
including any such business carried on by a mutual
15 314 ITR 62 (SC)
16 354 ITR 127 (Madras)
17 370 ITR 449 (Madras)
18 425 ITR 508 (Madras)
19 (2020) 118 taxmann.com 248 (Delhi)
20 (2012) 76 DTR 342 (Bom)
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T.C.A.Nos. 755, 855 of 2018, 49, 51 & 52 of 2023
insurance company or by a co-operative society, shall be
computed in accordance with the rules contained in the
First Schedule.
36. The computational methodology as stipulated under the First
Schedule to the Act and under Part B, extracted below, sets out the
detailed manner by which the computation of profits and gains of other
Insurance business is to be carried out. To be noted, Part A deals with
the Life Insurance business with which we are not concerned in these
appeals.
B.—Other insurance business
Computation of profits and gains of other insurance
business.
5. The profits and gains of any business of
insurance other than life insurance shall be taken to be
the profit before tax and appropriations as disclosed in
the profit and loss account 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 sections 30 to 43B in computing the profits
and gains of a business shall be added back;
(b) (i) any gain or loss on realisation of
investments shall be added or deducted, as the case may
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be, if such gain or loss is not credited or debited to the
profit and loss account;
(ii) any provision for diminution in the value of
investment debited to the profit and loss account, shall be
added back;
(c) such amount carried over to a reserve for
unexpired risks as may be prescribed in this behalf shall
be allowed as a deduction.
Provided that any sum payable by the assessee under
section 43B, which is added back in accordance with
clause (a) of this rule, shall be allowed as deduction in
computing the income under the said rule in the previous
year in which such sum is actually paid.
37. The Appellants are thus bound to comply with the prescription
under the IRDA 2002 Regulations and subsequent editions of those
Regulations as and when issued. Those Regulations provide for the
detailed methodology to be adopted for various aspects of the insurance
business including methods of presentation of claims, preparation of
financial statements, the break-up of the claims and the presentation
thereof in the financials and all other details which an Insurance
company is mandated to prepare and present as part of the financial
statements itself.
38. Incidentally, the IRDA had issued Insurance Regulatory and
Development Authority of India (Assets, Liabilities and Solvency
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Margin of General Insurance Business) Regulations, 2016 (in short
‘IRDA 2016 Regulations), effective from 01.04.2016 where there are
procedural differences in the reporting of claims and creation of claim
reserves.
39. However, there is no effective difference, as far as the
appellant companies are concerned, in that, the mandate to have a
transparent disclosure of the claims and the manner in which such claims
are to be crystallized continues to be the same even in the 2016
Regulations. Thus, for all practical purposes, the appellants would be
equally entitled to the grant of provision both under the 2002 as well as
2016 Regulations.
40. That apart, the Actuarial Certificate issued by a registered
Actuary sets out the summary of IBNR and IBNER proceedings which is
the basis of the claim made by the appellants towards provision. A copy
of the sample summary as on 31.03.2009 has been placed before us in the
paper book to indicate the basis on which the claims have been made.
41. Section 37 encompasses claims which are general in nature,
not covered under Sections 30 to 36 that are specific in nature. A
combined reading of Section 44 with the First Schedule indicates to us
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T.C.A.Nos. 755, 855 of 2018, 49, 51 & 52 of 2023
that the IRDA guidelines stand incorporated into the very scheme of
taxation of an insurance business, by reference therein, to those
guidelines. Thus, it follows that once an insurance company applies those
guidelines and parametres in the maintenance of its accounts and
computation of claims, there remains nothing further to be verified qua
the veracity of the claims made.
42. Various High Courts, the Delhi High Court in Care Health
Insurance Ltd and Whirlpool of India Ltd, Calcutta High Court in
National Insurance Co. Ltd, Bombay High Court in General Insurance
Corporation of India and Kerala High Court in Kerala Transport
Company have considered the identical issue, allowing them in favour of
the Insurance companies.
43. The objection of the Department is that the claim is based
merely on a contract between the parties. In our view, this is an over
simplification of the matter, as it has been demonstrated that the claim is
based on a scientific assessment of the risk as well as other parametres.
The materials placed before us now are on record from the stage of
assessment and point to the unambiguous position that the Appellant has
been adhering to the mandate of the stipulations under the Second
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Schedule to the Income Tax Act and the IRDA Regulations.
44. Ultimately, the assessment and valuation of risk has been made
by a Registered Actuary, and in our view this would amount to a sound
and scientific basis for the claim of expenditure. Hence, we find that
there is a scientific basis for the claim of the provisions based on the
stipulations under the applicable statutory and other prescriptions.
45. The Chairman of the IRDA appears, in fact, to have sought a
clarification from the Chairperson of the Central Board of Direct Taxes
(CBDT) about the subject claim, setting out the history of the working of
Insurance Companies, the relevant statutory provisions and Guidelines
which govern their functioning, and the manner of preparation and
presentation of the financial statements. That communication, dated
13.02.2013, has not found favour of response.
46. In light of the aforesaid discussion, we answer the substantial
questions of law in regard to claim in regard to IBNR and IBNER in
favour of the assessee and against the Revenue.
47. In regard to the substantial question of law regarding
Disallowance of payments made to Motor vehicle dealers, we find that
during the course of assessment, the Assessing Authority examined the
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claim of expenditure to motor vehicle dealers. Prior thereto, information
had been received from the Director of Income Tax (Investigation,
Chennai) in regard to that expenditure and verifications undertaken by
them.
48. The claim related to input credit available on service tax paid
to automobile companies, such as Toyota Kirloskar Motor India Pvt.
Limited, Ashok Leyland and Nissan among others. It appears that
statements had been recorded from the employees of those companies to
the effect that no service had been rendered by them, based on which the
expenditure claim was disallowed.
49. That very issue, being the claim of input tax, had been the
subject matter of adjudication by the service tax authorities that had
travelled before the Customs, Excise and Service Tax Appellate Tribunal
(in short, CESTAT), which had held that the motor vehicle dealers had,
indeed, rendered services. That order of the CESTAT had been produced
before the Tribunal relying on the factual findings therein that services
had been rendered by the automobile manufacturers.
50. The Tribunal has thus remitted the matter to the file of the
Assessing Officer, since the order of the CESTAT is dated 24.02.2021,
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which order was not available before the Assessing Officer when the
orders of assessment had been passed. In fact, the Tribunal has, in
remanding the matter, stated that the remand was for the limited purpose
of enabling the Assessing Authority to verify the issue with reference to
the CESTAT order.
51. We find nothing untoward in the order of remand and hence
the conclusion of the Tribunal in this regard is affirmed. This substantial
question of law is answered against the assessee.
52. In fine, the substantial questions are answered as follows:
(i) Reinsurance Premium – not pressed and hence unanswered.
(ii)Profit on sale of investment – answered in favour of the
assessee.
(iii) Disallowance of IBNR and IBNER – answered in favour of
the assessee.
(iv) Disallowance under Section 14A – answered in favour of the
assessee.
(v) Disallowance of payments made to Motor vehicle dealers –
answered in favour of the revenue.
53. These Tax Case (Appeals) are disposed as above. No costs.
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Connected Miscellaneous Petitions are closed.
[A.S.M., J] [G.A.M., J]
16.04.2025
Index:Yes
Speaking Order
Neutral Citation:Yes
sl
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To
1.The Deputy Commissioner of Income Tax
Large Tax Payer Unit,
Chennai – 600 101.
2. The Secretary, Ministry of Finance,
Department of Financial Services,
Jeevan Deep Building,
Parliament Street, New Delhi – 110 001.
3. The Chairman,
Insurance Regulatory and Development Authority of India,
Sy No.115/1, Financial District,
Nanakramguad, Gachibowli,
Hyderabad – 500032.
4. The Chairman,
Central Board of Direct Taxes,
9th Floor, Lok Nayak Bhavan,
Khan Market, New Delhi – 3.
5. The Secretary General,
General Insurance Council,
5th Floor, National Insurance Building,
14, Jamshedji Tata Road, Churchgate,
Mumbai – 20.
6.The Deputy Commissioner of Income Tax,
Large Tax Payer Unit,
Chennai – 600 101
7.The Deputy / Assistant Commissioner of Income Tax
Large Taxpayer Unit – 2,
Chennai – 600 034.
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