By TIOL News Service

MUMBAI, JAN 29, 2016: THE issue is - Whether when the income of the assessee as well as the expenditure incurred by the assessee are governed by specific provision which have an overriding effect, in that case it is still open for the AO to invoke the other provisions of the Act for carrying out the disallowance or adjustment in the income. NO is the answer.

Facts of the case

The assessee is a public sector undertaking fully owned by Government of India. It was mainly engaged in the business of Insurance of Export Credit Risk of exporters in India and extending difference types of insurance / guarantee covers to the banks and financial institution in India for facilitating the credit facilities to the exporters. Being in the business of insurance, the income of assessee was liable to be computed u/s 44 read with First Schedule and Rule 6E of I.T. Rules. Assessee issues insurance policies to the exporters against payment of premiums to cover the risk of nonrealization of export proceeds from abroad. When the exporter was unable to realize export proceeds, assessee lodged a claim on the assessee company. The assessee then settles the claim upto 90% of the gross invoice value and steps into the shoes of the exporter and makes efforts to realize the export proceeds. In the case of countries such as Uganda, Nigeria, Zambia and other African countries, the amounts remitted by the importers towards export dues of the Indian Exporters was blocked by the Central Bank of such countries in view of inadequate foreign exchange, then the assessee company negotiated with these Central Banks of such countries through the good offices of Government of India and Indian Embassies located in such countries to recover the dues. The amounts when received by the assessee from these foreign banks, do not carry sufficient details as to the exports and the exporters to whom the amounts pertained as well as share of each exporter. Consequently, such amount which were received in lump sum from these foreign banks were held in trust by the company in a fiduciary capacity pending identification of the exporters and ascertainment of their respective shares. The assessee company reflects such amount in the Balance sheet under the head "current liabilities" as "unapportioned claim recovery". During the previous year, the assessee has received sum of Rs. 504.24 lakhs representing amounts received from foreign countries as recovery against the claims paid. The said amount was not included in the income on the ground that amount received could not be apportioned to income and liability due to non-ascertainment of dues of other parties to whom the claims were paid in the past. The AO after noting down the entire facts and the information given by the assessee treated the amount of shows as liability as "income" of the assessee during the year, because, as per the mercantile system of accounting, when a debit is made on the basis of nature of certain items of payment, then the corresponding receipt of the same nature has to be credited to the income side of the profit & loss account. In this case, the receipt of the payment by the assessee is not disputed and the corresponding expenditure has already been debited to the profit & loss account. Thus, receipt of the sum by the assessee belongs to it and hence it is liable for taxation in the year of receipt, as it is a revenue receipt. Accordingly, he held that the entire receipt of Rs. 504.24 lakhs is taxable in this year. On appeal, CIT(A) had partly allowed the issue on the ground that, an amount of Rs. 2,99,84,955/- was paid to the exporters / banks in the financial year 2008-09, relevant to the assessment year 2009-10 and the balance amount of Rs. 2,04,39,082/- was treated as an "income" in that year. Such a practice has been followed by the assessee corporation and all along it has been accepted by the Department. Thus, CIT(A) deleted the addition subject to the verification by the AO regarding the amount paid to the exporters and the income offered by the assessee in AY 2009-10.

Deduction on account of estimated expenses to be reimbursed

The assessee had made a provision for fees payable to General Body of Insurance Council (GBIC). In response to the show cause notice as to why the same should not be disallowed, the assessee submitted that it represents fees payable to GBIC and is not an estimated expense. The GBIC has been formed under the provisions of "Insurance Act", 1938 and all General Insurance Companies are the members of GBIC. This amount is to be paid by the assessee towards subscription fee and charges levied as per the provisions of the GBIC requirement. However, the AO disallowed the same on the ground that it is mainly a provision. The CIT(A) after considering the relevant submissions of the assessee, held that since the assessee has been following mercantile systems of accounting and such an expense accrued to the assessee during the year, hence it is allowable in the year in which it relates, even if it has paid in the subsequent year.

Taxability of Interest & Dividend income

The AO noted that the assessee has received a dividend income of Rs. 2,87,73,576/- and interest on UTI bonds of Rs. 3,15,33,503/- which were credited to the profit and loss account but claimed as exempt. The AO show caused the assessee as to why disallowance u/s 14A r.w. Rule 8D should not be made. In response the assessee submitted that, the assessee being an Insurance Company, its income has to be computed as per the provisions of 44 r.w. First Schedule and only the amounts which are not admissible under sections 30 to 43B will qualify for being added back to the income of the assessee. Thus, the provisions of section 14A will not apply to insurance company which are specifically governed by section 44. Without prejudice, it was submitted that the entire investment of Rs. 46.72 crores and Rs.4.67 crores in shares of UTI u/s 64 were made out of assessee's own funds. Thus, no disallowance u/s 14A should be made. However, the AO computed the disallowance u/s 14A r.w. Rule 8D(2)(iii) and made a disallowance of Rs. 23,35,815/-. On appeal, CIT(A) held that Rule 8D is not applicable in the assessment year 2007-08. However, he held that 0.5% of the average investment for the purpose of disallowance cannot be said to be unreasonable. He also refer to the decision of CIT(A) in assessee's own case for the year 2004-05.

Having heard the matter, the Tribunal held that,

++ the assessee being a General Insurance Company, its income is liable to be computed strictly u/s 44 r.w. read with First Schedule, which provides for a special provision governing computation of taxable income earned from business of insurance and has an overriding effect over other provisions contained in the Income-tax Act. Section 44 mandates that the assessing authority has to compute the taxable income from the business of insurance strictly in accordance with the provisions of First Schedule. Rule 5 of the First Schedule mandates that the profits and gains of any business of insurance shall be taken to be the profits disclosed in the annual accounts. Such profits are only subject to any expenditure that are disallowable under sections 32 to 43B. Thus, the AO is bound to accept the profits as shown in the audited accounts and such profit can only be adjusted in respect of expenditure allowances that qualifies for disallowance under sections 32 to 43B. Here in this case, the amount of Rs.5.04 crores was received by the assessee from the foreign Central Banks and was classified in the Balance sheet as a "liability" which was as in accordance with the accepted accounting practice followed by the assessee right from the earlier years. The assessee has held the amount as a "trust" that is in fiduciary capacity on behalf of the exporters. Consequently, such amount had not been routed through profit and loss account by the assessee, as per the accounting system followed by the assessee. Hence, in accordance with the provisions contained in section 44 read with first schedule, such an adjustment by the AO for taxing the income in this year is wholly untenable. Apart from that, CIT(A) has categorically noted the fact that during the previous year relevant to the assessment year 2009-10, the assessee after identifying the exporters has paid back the substantial amount which were collected on their behalf and whatever amount could not be identified, the same has been offered as an income in that year. Thus, the whole of the amount has now been accounted for and income has also been offered by the assessee in the assessment year 2009-10. On these facts, we do not find any reasons to deviate from the finding and the direction given by the CIT(A). Accordingly, the ground raised by the Department on this score stands dismissed;

Deduction on account of estimated expenses to be reimbursed

++ we find that the assessee being Member of GBIC was required to make a payment towards fees / subscription. Such a levy of fees and subscription by the GBIC has been authorized by the Insurance Act itself and regulations thereof. Thus, such a payment definitely falls within the realm of revenue expenditure incurred by the assessee. Since this expenditure is an ascertained liability which is required to be paid every year, therefore, the same is allowable as a 'deduction' while computing the income of the assessee in this year, even if the said payment has been made in the subsequent year, because the said expenditure has definitely accrued to the assessee in the year under consideration. Thus, the finding given by the CIT(A) on this score is upheld;

Taxability of Interest & Dividend income

++ as stated earlier, the assessee company is engaged in the business of General Insurance and under the specific provisions given in the Income-tax Act, its income has to be computed strongly in accordance with section 44 r.w. First Schedule. It is a non obstante clause having overriding effect over the other provisions contained in the Act. For making a disallowance of any expenditure or allowance, which falls under the provisions of sections 30 to 43B. It should be firstly, be an expenditure or allowance and secondly, it should not be admissible under sections 30 to 43B. Otherwise no other disallowance can be made. For the purpose of the Income-tax, first of all the figures of the income of the assessee is to be drawn-up in accordance with the provisions of First Schedule to the Income-tax Act and satisfying the requirement of Insurance Act and such a determination of income is binding on the AO and there is no power to tinker with such an account. This proposition has been upheld by the SC in the case of General Insurance Corp. of India vs CIT, reported in [1990] 240 ITR 139. Thus, when the income of the assessee as well as the expenditure are governed by specific provision which have an overriding effect, then it is not open for the AO to invoke the other provisions of the Act for carrying out the disallowance or adjustment in the income. Thus, we hold that, no disallowance u/s 14A can be made in the case of the assessee and hence grounds raised in the Cross Objections are allowed. In the result, revenue's appeal is partly allowed for statistical purposes whereas the CO of the assessee stands allowed.

(See 2016-TIOL-181-ITAT-MUM)