IN INCOME TAX APPELLATE TRIBUNAL, BENCH- A, BANGALORE BEFORE SMT. ASHA VIJAYARAGHAVAN, JUDICIAL MEMBER SHRI S JAYARAMAN, ACCOUNTANT MEMBER ITA No.1508/Bang/2015 (Asst. Year 2011-2012) PNB Metlife India Insurance Co. Ltd.., No.5, Brigade Seshmahal, Vani Vilas Road, Basavangudi, Bangalore. . Appellant Vs. Commissioner of Income-tax (Appeals)-5, Bangalore. . Respondent Appellant by : Shri KP Kumar, Sr. Counsel Respondent by : Shri GR Reddy, CIT Date of Hearing : 3-8-2016 Date of Pronouncement : 22-9-2016 ORDER PER SHA VIJAYARAGHAVAN, JUDICIAL MEMBER : This appeal by assessee is directed against order of Commissioner of Income-tax (Appeals) -5, Bangalore dated 4.11.2015 and it pertains to assessment year 2011-12. ITA No.1508/B/15 2 2. assessee has filed its return of income , declaring total loss of Rs.34,45,94,000/-, which was computed by aggregating its reporting under shareholders account & policy holders account, as prescribed under IRDA. AO completed assessment u/s 143(3), increasing loss from life insurance business from Rs.34,45,94,000/- to Rs.58,61,84,000/- and considered Rs.24,15,90,000/- reported under shareholders account as income from not-life insurance business. 3. CIT(A) held that as under:- 8.5 I have gone through tile guidelines of IRDA (Investment regulations), minimum capital requirement for carrying on life insurance business as per Insurance Act 1938 which has been brought to my knowledge during course of Appellate proceedings by appellant through it's authorized representative. Further, A.R has highlighted in its written submission unity of business (single indivisible business by stating that in case of PNB Met Life entire activity including reporting in share holder's account and policy holder's account IS controlled and supervised by common Board of Directors and same team which invests funds in policy holder's account also invests ITA No.1508/B/15 3 funds in share holder's account and both are subject to same regulatory norms. above arguments of assessee even though factually correct but will not come to its rescue in escaping share holder's profits to be taxed at normal rates. Because, in statute provisions relating to rates of taxes to respective incomes under various sources are clearly defined so as provisions relating to concessional rates of taxes. Therefore, tax authorities are mandated to apply tax rates as per statute and subsequent interpretations by Judicial Authorities are to be viewed objectively so as to maintain intention of legislature intact. Therefore, facts of appellant case are distinguishable from aforesaid case law i.e. ICICI Prudential Insurance Co. Ltd., upon which appellant was relying strongly. Further, higher Judicial Authorities, Hon'ble Bombay High Court and Apex Court in very same case have not adjudicated and addressed issue on hand rather appeals were dismissed on technical aspect and not on merits. Therefore, I am of opinion that decision of Hon'ble Tribunal Mumbai Bench in case of ICICI Prudential Insurance Co. and is not squarely applicable as they are different and distinguished on substantial question of fact. Be that as it may, one is bound by decisions of jurisdictional ITA No.1508/B/15 4 Tribunal, Hon'ble High Courts. However, decision of Hon'ble Mumbai Tribunal rendered in aforesaid case in favour of assessee and against revenue is not followed bymeas facts are different and distinguishable. Further Apex Court and Hon'ble Bombay High Court have not given any clear cut finding on issue on hand. In this view of matters, after considering carefully facts of case, and also written submissions filed by appellant, I am of opinion that there is no substantial merit in argument of appellant. computation of profit/loss from business of life insurance is, since governed by special provisions of section 44 of Income Tax Act 1961 and is distinct from income earned from share holder's account. Therefore, these grounds of appeal are dismissed. 4. Further CIT(A) held as under:- 9.2 . I am of opinion that income under different sources have to be separately taxed and if any losses arise of any segments of business has to be necessarily carried forward and set off against profits ITA No.1508/B/15 5 derived under same head as per provisions u/s 71, 72 & 73 of Income Tax Act. Therefore, since losses reported are only under policy holders account, Assessing Officer s action by not allowing set off losses of insurance business against profits of shareholder stating that computation of profit or loss from business of life insurance is governed by special provisions of section 44 of Act 1961 at concessional rate of taxes is distinct from income earned from shareholders account which is to be taxed at normal rates of taxes and loss relating to life insurance business cannot be set off against income from shareholders account is upheld. However, Assessing Officer is directed to examine brought forward losses whether any losses pertaining to/arising out of share holders business. 5. Aggrieved, assessee preferred appeal before ITAT and raised following grounds:- 1. impugned order of ld CIT(A) u/s 250 of Act is based on incorrect interpretation of law and facts and therefore bad in law; ITA No.1508/B/15 6 Manner of computation of income under Section 44 of Act 2. learned CIT(A) has erred in law and in facts in disregarding computation of taxable income of Appellant as provided under Section 44 of Act; 3. learned CIT(A) has erred, in law, and in facts, in upholding order of Assessing Officer of not aggregating income from shareholders' account and policyholders' account while computing taxable income from life insurance business under Section 44 of Act; 4. learned CIT(A) has erred, in law, and in facts, in upholding order of Assessing Officer that income from shareholders' account is to be taxed at normal rates under provisions of Act and not at concessional rate as prescribed under Section 115B of Act; 5. learned CIT(A) while agreeing that Appellant is carrying on sole and only business i.e. life insurance business, has erred in law in stating that statute prescribes different rate of tax for income from shareholders' account and for income from policyholders' account; ITA No.1508/B/15 7 6.The ld CIT(A) has erred in not considering judicial precedents laid down by Hon'ble Mumbai Tribunal's in case of ICICI Prudential Insurance Company Limited (ITA No 6855, 6855, 6856 and 6059 of 2010), HDFC Standard Life Insurance Company Limited (ITA No.2203, 3000, 3002, 2206, 3003, 4959, 5494, 2207, 5493, 4960, 5591, 5506 of 2012), S81 Life Insurance Company Limited (3800, 3801 of 2008 and 1501, 5670 of 2009) and DCIT vs Mls Kotak Mahindra Old Mutual Life Insurance Ltd (ITA No. 41791 Muml 2010), relied upon by Appellant; 7. learned CIT(A) has erred in observing and stating that case of ICICI Prudential Insurance Company Limited (ITA No 6855,6855,6856 and 6059 of 2010) of Hon'ble Mumbai Tribunal is distinguishable on facts and therefore ratio of decision cannot be applied to Appellant's case; 8. learned CIT(A) has failed to appreciate that principles laid down by Hon'ble Mumbai Tribunal in above case squarely applies to present case; Set-off of losses under Section 70 of Act and 72 of ITA No.1508/B/15 8 Act 9. Without prejudice to ground 2, 3, 4, 5, 6, 7 and 8, since income from shareholders' account was held to be taxable at normal rate, not at concessional rate under Section 44 of Act, learned CIT(A) has erred in not allowing set-off of losses under policyholders' account in accordance with provisions of Section 70 of Act, while computing total income of Appellant; 10. learned CIT(A) has grossly erred in law in drawing parallel and applying analogy of provisions of set-off of losses of short term losses and long term capital losses which is not applicable even remotely to facts and circumstances of instant case; 11. learned CIT(A) has failed to appreciate fact that there is no express or implied prohibition under provisions of Act denying benefit of set-off of loss from life insurance business and income from other business inter se under Section 70 of Act; 12. learned CIT(A) has erred in law and on facts, in denying benefit of set-off of ITA No.1508/B/15 9 assessed brought forward business losses against alleged business income determined by learned AO inasmuch as provisions of Section 72 of Act explicitly provides for set-off of brought forward losses while determining taxable income; 13. learned CIT(A) has failed to appreciate that unabsorbed brought forward business loss of earlier years amounting to Rs 1745,61,22,586 is already assessed and vested in hands of Appellant and therefore learned CIT(A) has erred in directing AO to allow part of loss which is digression from law laid down under Act and amounts to arbitrary interpretation of law. appellant submits that each of above grounds is independent and without prejudice to one another. 6. As regards ground No.1 to 8, learned counsel for assessee relied on decision of ITAT in assessee s own case in ITA No.756/Bang/2016, wherein it has held as under:- ITA No.1508/B/15 10 9. Now coming to view taken by CIT that these two accounts had to be considered separately, and benefit of section 115B of Act, could be given only to profits from life-insurance business, there is no dispute that assessee was doing only life-insurance business as regulated by IRDA. CIT himself has mentioned that assessee was engaged in life- insurance business. Question whether policy holders account and shareholders account, in case of assessee carrying on only business of life-insurance business was to be separated or consolidated had come before Tribunal in ICII Prudential Ltd, (supra). Para 32 of this order dt.14.09.2012 is reproduced below: 32. IRDA Regulations specifically require to maintain policyholder s account and shareholder s account separately and permits transfer of funds from shareholder s account to policyholder s account as and when there is deficit in policyholder s account. As rightly noted by Hon'ble Bombay High Court, as policy, company is transferring funds/assets from shareholder s account to policyholder s account even during year periodically as and when actuarial valuation was arrived at n policyholder s account. Most of companies are required to submit quarterly accounts under Company Law, there is ITA No.1508/B/15 11 requirement of actuarial valuation report periodically and accordingly assessee was transferring funds-from shareholder account to policyholder s account. Since insurance business will not yield required profits in initial 7 to 10 years, lot- of capital has to be infused so as to balance deficit in policyholder s account. During year as already stated assessee has issued fresh capital to extent of 250 crores and transferred funds to extent of 233 crores from shareholder s account to policyholders account. Since assessee is having only one business of life insurance, entire transactions both under policy holders account do pertain to life insurance business only as it was not permitted to do any other business. Once assessee is in life insurance business computation has to be made in accordance with Rule-Z as per provisions of section 44. Therefore, there is valid argument raised by assessee that both policyholder s & shareholder account has to be consolidated into one and transfer from one account to another is tax neutral. What AO has done is to tax surplus after funds have been transferred from shareholder s account to policyholder s account at gross level while ignoring such transfer in shareholder s account, while bringing to tax only incomes declared in shareholder s account that too ITA No.1508/B/15 12 under head 'other sources of income '. In fact while giving finding that assessee is in life insurance business only and incomes are to be treated as income from life insurance business, ClT(A) surprisingly in subsequent assessment years appeals accepted AO s contention that surplus in shareholder s account is to be taxed as other sources of income. But once provisions of section 44 of IT Act are invoked anything contained in 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 profit. Therefore, in our opinion both policyholder s and shareholder s account has to be consolidated for purpose of arriving at deficit or surplus. There is clear opinion expressed by Mumbai bench that when section 44 of Act is applied, distinction between various heads of income paled into insignificance. Assessee had in, its return, separately shown revenue in its shareholders account and revenue derived from its policy holders account. Revenue account for policy holders account clearly reflected change in valuation of liability in respect of life-policies which were accounted. ITA No.1508/B/15 13 10. Thus in our opinion not only was 1\0 aware about method of aggregation followed by assessee, he had also taken lawful and possible view. In circumstances we do not find any error in order of AO which can be vested by Section 263 jurisdiction. twin conditions viz., there should be error and such error should be prejudicial to interests of Revenue are not satisfied. We have no hesitation in setting aside order of CIT. 11. In result, appeal of assessee is allowed 7. Respectfully following decision of ITAT in assessee s own case, we allow grounds from 1 to 8. 8. As regards grounds 9 to 13, we find that they are alternate grounds. If deficits in policy holders account is to be set off against surplus as per shareholders account in computing taxable income of assessee u/s 44 of IT Act, assessee contends (i) deficit in policy holders account should be set off against surplus as per shareholders account u/s 70 of IT Act as both constitutes single business and sec. 70 permits inter unit set off and (ii) loss of ITA No.1508/B/15 14 business of assessee as determined at Rs.1745.61 croes for earlier years of current year. As we have held that surplus/deficit as per shareholders account should be aggregated with surplus/deficit in policy holders account for determining profile/loss in policy holders account for determining profile/loss of assessee u/s 44, and such aggregation would results in loss of Rs.34,45,94,000/- as per impugned order, view of setting off of losses against income u/s 70,72 would be academic and hence not decided. In result, appeal of assessee is allowed. Order pronounced in open court on 22nd September, 2016. Sd/- Sd/- (S JAYARAMAN) (ASHA VIJAYARAGHAVAN) ACCOUNTANT MEMBER JUDICIAL MEMBER Bangalore Dated : 22/09/2016 Vms Copy to :1. Assessee 2. Revenue 3.The CIT concerned. 4.The CIT(A) concerned. 5.DR 6.GF By order Asst. Registrar, ITAT, Bangalore. PNB Metlife India Insurance Co. Ltd. v. Commissioner of Income-tax (Appeals)-5, Bangalore