Appeal details
Counselvise Citation
[2018] 123 COUNSELVISE.COM (IT) 3474 (ITAT-DELHI)
Assessee PAN
Bench
Appeal Number
Duration Of Justice
7 month(s) 18 day(s)
Appellant
Respondent
Appeal Type
Cross Objection
Pronouncement Date
05-01-2018
Appeal Filed By
Department
Order Result
Dismissed
Bench Allotted
E
Assessment Year
2010-2011
Appeal Filed On
18-05-2017
Judgement Text
THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCHES E, DELHI BEFORE SHRI P K BANSAL, VICE PRESIDENT & SMT BEENA A PILLAI, JUDICIAL MEMBER ITA NO.142/DEL/2017 ASSESSMENT YEAR : 2010-11 MAX NEW YORK LIFE INSURANCE COMPANY LIMITED (NOW KNOWN AS MAX LIFE INSURANCE COMPANY LIMITED) MAX HOUSE, 3 RD FLOOR, 1 DR. JHA MARG, OKHLA, NEW DELHI 110 020 PAN AACCM3201E VS. DCIT LARGE TAXPAYER UNIT (LTU) NEW DELHI. (APPELLANT) (RESPONDENT) CO NO. 123/DEL/2017 (ARISING OUT OF ITA NO.142/DEL/2017 FOR ASSESSMENT YEAR : 2010-11) DCIT LARGE TAXPAYER UNIT (LTU) NEW DELHI. VS. MAX NEW YORK LIFE INSURANCE COMPANY LIMITED (NOW KNOWN AS MAX LIFE INSURANCE COMPANY LIMITED) NEW DELHI 110 020 PAN AACCM3201E (CROSS-OBJECTOR) (RESPONDENT) APPELLANT BY : SHRI AJAY VOHRA & SHRI HIMANSHU SINH A & MS. VRINDA TULSIAN CROSS-OBJECTOR BY: SHRI VIJAY VARMA DATE OF HEARING : 14 . 1 2 .2017 DATE OF PRONOUNCEMENT : 05 . 0 1 .201 8 O R D E R PER P K BANSAL, VICE-PRESIDENT: THIS APPEAL BY THE ASSESSEE AND CROSS-OBJECTIONS BY THE REVENUE ARE DIRECTED AGAINS T THE VERY SAME ORDER OF THE CIT(A) -22, DELHI, DATED 07.11.2016 PERTAINING TO A.Y. 2010-11. MAX NEW YORK LIFE INSURANCE COMPANY LTD. (NOW KNOWN AS MAX LIFE INSURANCE COMPANY LIMITED). 2 2. THE ASSESSEE HAS RAISED THE FOLLOWING GROUNDS OF APPEAL: 1.THAT ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW. THE LD. CIT(A) ERRED IN MAKING/UPHOLDING VARIOUS ADDITI ONS TO THE RETURNED INCOME OF THE APPELLANT TOTALLING TO RS. 1 ,889,623,500 AND BY NOT ACCEPTING 'NIL' INCOME RETURNED BY THE APPEL LANT. ENHANCEMENT OF INCOME MADE BY LD. CIT(A) 2. THAT ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE LD. C1T(A) ERRED IN HOLDING THAT THE PROFIT DISCLOS ED BY THE APPELLANT IN THE SHAREHOLDER'S PROFIT AND LOSS ACCO UNT (FORM A-PL) WAS NOT THE PROFIT OF THE LIFE INSURANCE BUSINESS O F THE APPELLANT AND CONSEQUENTLY, ERRED IN HOLDING THAT THE PROVISI ONS OF SECTION 44 OF THE ACT READ WITH THE FIRST SCHEDULE THERETO DO NOT APPLY TO THE SAID PROFIT. 3.THAT ON THE FACTS AND CIRCUMSTANCES OF THE CASE A ND IN LAW, THE LD. CIT(A) ERRED IN NOT APPRECIATING THE APPELLANT' S CONTENTION THAT ITS INCOME WAS TO BE COMPUTED TAKING INTO ACCOUNT T HE SURPLUS OF THE ACTUARIAL VALUATION DONE IN ACCORDANCE WITH THE INSURANCE ACT. 1938 AS REPRESENTED IN FORM I ('OLD FORM I'). 4. THAT ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN L AW. THE LD. C1T(A) ERRED IN MAKING AN ENHANCEMENT OF RS. 42 ,18,54,000 TO THE TAXABLE INCOME OF THE APPELLANT BY CONSIDERING THE AMOUNT APPROPRIATED AS FUNDS FOR FUTURE APPROPRIATION ('FF A') AS PART OF THE ACTUARIAL SURPLUS BEING LIABLE TO TAX UNDER SEC TION 44 READ WITH RULE 2 OF THE FIRST SCHEDULE OF THE ACT. 5. THAT ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW. THE LD. CIT(A) ERRED IN MAKING AN ENHANCEMENT OF RS. 14 1,85,84,000 TO THE TAXABLE INCOME OF THE APPELLANT BY TREATING THE AMOUNT DECLARED AND ALLOCATED AS BONUS FOR POLICYHOLDERS A S PART OF THE ACTUARIAL SURPLUS BEING LIABLE TO TAX UNDER SECTION 44 READ WITH RULE 2 OF THE FIRST SCHEDULE OF THE ACT. 6. THAT ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW. THE LD. CIT.(A) ERRED IN ENHANCING THE ASSESSMENT BY MA KING ADDITION OF PROVISION OF DOUBTFUL DEBTS IN THE SHAREHOLDERS' PROFIT AND LOSS ACCOUNT AMOUNTING TO RS. 2,41,83,000 BY ERRONEOUSLY CONCLUDING THAT SECTION 44 OF THE ACT READ WITH THE FIRST SCHE DULE THERETO DOES NOT APPLY TO THE PROFITS IN THE SHAREHOLDERS' ACCOU NT. MAX NEW YORK LIFE INSURANCE COMPANY LTD. (NOW KNOWN AS MAX LIFE INSURANCE COMPANY LIMITED). 3 ADDITIONS OF LD. AO CONFIRMED BY LD. CIT(A) 7. THAT ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW. THE LD. CIT(A) ERRED IN UPHOLDING DISALLOWANCE OF R S. 2,50,00,000 MADE BY THE LD. AO ON ACCOUNT OF DONATION/ MADE BY THE APPELLANT. 8. THAT ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW. THE LD. CIT(A) ERRED IN UPHOLDING THE ADDITION OF RS. 2 ,500 MADE BY THE LD. AO ON ACCOUNT OF DISALLOWANCE OF SHARE ISSUE EX PENSE INCURRED BY THE APPELLANT BY ERRONEOUSLY CONCLUDING THAT SEC TION 44 OF THE ACT READ WITH THE FIRST SCHEDULE THERETO DOES NOT A PPLY TO THE PROFITS IN THE SHAREHOLDERS' ACCOUNT. 9. THAT ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW THE CIT(A) EXCEEDED JURISDICTION IN DIRECTING THE LD. A O TO RE-COMPUTE THE LOSSES ASSESSED IN EARLIER ASSESSMENT YEARS FOR PURPOSES OF ALLOWING SET OFF THEREOF UNDER SECTION 72 OF THE AC T. EACH OF THE ABOVE GROUNDS ARE INDEPENDENT AND WITHO UT PREJUDICE TO THE OTHER GROUNDS OF APPEAL PREFERRED BY THE APP ELLANT. 3. THE ASSESSEE, VIDE LETTER DATED 13.12.2017 HAS T AKEN THE FOLLOWING ADDITIONAL GROUND OF APPEAL: THAT ON THE FACTS AND CIRCUMSTANCES OF THE CASE AN D IN LAW, THE CIT(A)/AO ERRED IN NOT ALLOWING EXEMPTION UNDER SEC TION 10(34) OF THE ACT IN RESPECT OF DIVIDEND INCOME EARNED BY THE APPELLANT DURING THE PREVIOUS YEAR RELEVANT TO SUBJECT AY. 4. IN THIS REGARD, IT WAS SUBMITTED THAT DURING THE PREVIOUS YEAR RELEVANT TO THE IMPUGNED ASSESSMENT YEAR, THE ASSESSEE EARNE D DIVIDEND INCOME FROM INVESTMENTS MADE BY THE ASSESSEE IN THE COURSE OF C ARRYING ON ITS LIFE INSURANCE BUSINESS. IT IS SUBMITTED THAT THE ASSESS EE IS ENTITLED TO AVAIL OF EXEMPTION UNDER SECTION 10(34) OF THE ACT WITH RESP ECT TO AFORESAID DIVIDEND MAX NEW YORK LIFE INSURANCE COMPANY LTD. (NOW KNOWN AS MAX LIFE INSURANCE COMPANY LIMITED). 4 INCOME. HOWEVER, THE ASSESSEE HAD INADVERTENTLY NOT CLAIMED THE SAID EXEMPTION IN THE INCOME-TAX AND, THEREFORE, RAISED THIS GROUND. IT WAS CONTENDED THAT SINCE THE SAID GROUND IS LEGAL GROUN D AND NO FACTS ARE TO BE INVESTIGATED, THEREFORE, THE SAID GROUND CAN BE ADM ITTED IN VIEW OF THE DECISION OF HONBLE SUPREME COURT IN THE CASE OF NA TIONAL THERMAL POWER CO. LTD VS CIT 229ITR 383 (SC) AND JUTE CORPORATION OF INDIA LTD. 187 ITR 688.. FURTHER, RELIANCE WAS ALSO PLACED IN THE CASE OF AS HOK VARDHAN BIRLA VS. CWT 208 ITR 958, WHEREIN THE HONBLE BOMBAY HIGH COURT IN THE CONTEXT OF WEALTH TAX ACT, HAS OBSERVED THAT THE POWERS OF THE APPELLATE AUTHORITIES ARE THE SAME AS THE POWERS OF THE ASSESSING AUTHORITY. ADDITIONAL GROUNDS CAN BE ENTERTAINED SO LONG AS THEY RELATE TO THE SUBJECT-M ATTER OF THE PROCEEDINGS WHICH WERE BEFORE THE ASSESSING OFFICER OR BEFORE T HE APPELLATE AUTHORITY. THE LEARNED DR, ON THE OTHER HAND, RELIED ON THE DE CISION OF HONBLE BOMBAY HIGH COURT IN THE CASE OF ULTRATECH CEMENT LTD. VS. ADDITIONAL CIT IN ITA 1060 OF 2014, DATED 18 TH APRIL 2017, AND ON THAT BASIS CONTENDED THAT THE GROUND TAKEN BY THE ASSESSEE IS NOT A PURE QUESTION OF LAW AND, THEREFORE, IT SHOULD NOT BE ADMITTED. 5. WE HAVE HEARD THE RIVAL SUBMISSIONS AND CAREFULL Y CONSIDERED THE SAME. IT IS A FACT ON RECORD THAT THE ASSESSEE HAS EARNED DIVIDEND INCOME. THEREFORE, WHETHER THE ASSESSEE IS ENTITLED FOR DED UCTION U/S. 10(34), IN OUR VIEW IS A LEGAL GROUND. HONBLE SUPREME COURT IN T HE CASE OF NATIONAL THERMAL POWER CO. LTD VS CIT(SUPRA), HAS HELD THAT LEGAL GROUND CAN BE MAX NEW YORK LIFE INSURANCE COMPANY LTD. (NOW KNOWN AS MAX LIFE INSURANCE COMPANY LIMITED). 5 TAKEN FOR THE FIRST TIME BEFORE THIS TRIBUNAL. NO DOUBT THE DECISION OF NATIONAL THERMAL POWER CO. LTD HAS BEEN DISCUSSED B Y THE HONBLE BOMBAY HIGH COURT IN THE CASE OF ULTRATECH CEMENT LTD. (SU PRA), WHICH HAS BEEN RELIED ON BY THE LEARNED DR. WE HAVE GONE THROUGH THAT DECISION AND FIND THAT THE HONBLE HIGH COURT DID NOT ADMIT THE ADDIT IONAL GROUND AS THEY FOUND ADDITIONAL GROUND TAKEN BY THE ASSESSEE IS NOT A PU RE QUESTION OF LAW BUT WOULD DEPEND UPON THE SATISFACTION OF THE AUTHORITY AS TO THE FACTS EXISTING IN THE SUBJECT ASSESSMENT YEAR FOR ALLOWING THE BENEFI T OF SECTION 80IA OF THE ACT. THE HONBLE HIGH COURT GAVE A CLEAR FINDING T HIS GROUND HAS BEEN RAISED FOR THE FIRST TIME BEFORE THE TRIBUNAL WITHOUT RELE VANT EVIDENCE BEING ON RECORD. IN VIEW OF THIS FACT THE HIGH COURT TOOK T HE VIEW THAT THE ADDITIONAL GROUND COULD NOT BE ADMITTED. FROM PARA 27 OF THE SAID ORDER OF THE BOMBAY HIGH COURT, IT IS APPARENT THAT THE HIGH COURT HAS CLEARLY LAID DOWN WHERE ONLY A PURE QUESTION OF LAW ARISES FROM FACTS WHICH ARE ALREADY ON RECORD, THEN THERE IS NO REASON WHY THE APPELLATE AUTHORITY SHOULD NOT CONSIDER THE QUESTION OF LAW SO AS TO DETERMINE THE CORRECT TAX LIABILITY OF AN ASSESSEE IN ACCORDANCE WITH LAW. IN THE IMPUGNED CASE, THE FACT THAT THE ASSESSEE HA S EARNED DIVIDEND INCOME IS APPARENT FROM THE MATERIA L AVAILABLE ON RECORD OF THE AUTHORITIES BELOW. IN VIEW OF THIS FACT THE ON LY QUESTION BEFORE US IN THE ADDITIONAL GROUND RELATE AS TO WHETHER THE PROVISIO NS OF SECTION 10(34) ARE APPLICABLE IN THE CASE OF THE ASSESSEE OR NOT. THE REFORE, IN OUR VIEW, THE RECENT DECISION OF HONBLE BOMBAY HIGH COURT IN THE CASE OF ULTRATECH MAX NEW YORK LIFE INSURANCE COMPANY LTD. (NOW KNOWN AS MAX LIFE INSURANCE COMPANY LIMITED). 6 CEMENT LTD. (SUPRA), AS RELIED UPON BY THE LEARNED DR WILL NOT ASSIST THE REVENUE. WE, THEREFORE, ADMIT THE ADDITIONAL GROUN D. 6. NOW COMING TO THE APPEAL OF THE ASSESSEE AND THE CROSS OBJECTION OF THE REVENUE, THE BRIEF FACTS OF THE CASE ARE THAT T HE ASSESSEE COMPANY WAS A JOINT VENTURE BETWEEN MAX INDIA LIMITED AND NEW YOR K LIFE INTERNATIONAL HOLDINGS LTD. MAX LIFE IS AN INDIAN INSURANCE COMP ANY AND HAS BEEN ALLOWED A LIFE INSURANCE BUSINESS LICENSE BY THE INSURANCE REGULATORY AND DEVELOPMENT AUTHORITY (IRDA) AS IT FULFILLS THE CRI TERION LAID DOWN IN SECTION 2(7A) OF THE INSURANCE ACT 1938. FOR THE IMPUGNED ASSESSMENT YEAR THE ASSESSEE FILED ITS INCOME TAX RETURN ON 08.10.2010 DECLARING NIL INCOME. SUBSEQUENTLY, THE ASSESSMENT WAS MADE U/S. 143(3) A T AN INCOME OF ` 167,934,800/- BY MAKING THE FOLLOWING ADDITIONS: S. NO. PARTICULARS AMOUNT (IN ` ) 1. PROFIT FROM SALE OF INVESTMENT 71,043,000 2. PROVISION FOR BAD DEBTS 2,160,000 3. PENALTY/ FINES PAID 164,000 4. SHORT DEDUCTION AND PAYMENT OF TAXES DEDUCTED AT SOURCE 69,565,300 5. DONATION PAID 25,000,000 6. SHARE ISSUE EXPENSES 2,500 TOTAL ADDITIONS 167,934,800 7. THE ASSESSEE WENT IN APPEAL BEFORE THE CIT(A). THE CIT(A) DELETED THE ADDITION IN RESPECT OF THE SUM OF 71,043,000/-, ` 69,565,300/- AND ` 1,64,000/- BUT ENHANCED THE ADDITION OF ` 2 1,60,000/- TO ` 24,18,300/- I.E. BY ` 1,86,24,61,000/- CONSISTING OF ` 42,18,54,000/- ON ACCOUNT OF MAX NEW YORK LIFE INSURANCE COMPANY LTD. (NOW KNOWN AS MAX LIFE INSURANCE COMPANY LIMITED). 7 INCREMENTAL FFA, ` 1418584000 IN RESPECT OF BONUS DECLARED TO THE POL ICY HOLDER AND ` 22023000 FOR THE PROVISION FOR DOUBTFUL DEBTS. HE ALSO CONFIRMED THE BALANCE ADDITION OF ` 2,50,00,000/-, ` 1,64,000/- AND ` 2,500/-. AGAINST THE ENHANCEMENT AND THE ADDITIONS SUSTAINED BY THE CIT(A), THE ASSESSEE HAS COME IN APPEAL BY TAKING THE GROUNDS E NUMERATED ABOVE. WHILE THE REVENUE HAS FILED THE CROSS-OBJECTIONS TA KING THE FOLLOWING TWO GROUNDS: 1. THAT THE ID. CIT(A) ERRED IN DELETING TH E ADDITION OF RS.7,10,43,000/- MADE BY THE AO ON ACCOUNT OF 'PROF IT FROM SALE OF INVESTMENT' ON THE GROUND OF DOUBLE ADDITION WHILST THE INTEREST OF REVENUE DEMANDED THAT THE SAME SHOULD HAVE BEEN SUS TAINED SEPARATELY. WITHOUT PREJUDICE, THE ADDITION SHOULD HAVE BEEN SUSTAINED SEPARATELY ON PROTECTIVE BASIS. 1.1 THAT IN APPEALS FILED BY THE ASSESSEE FOR AY 2007-08, 2008- 09 AND 2009-10, THE ADDITION ON PROFIT FROM SALE OF INVESTMENT HAS BEEN DECIDED BY THE FIRST APPELLATE AUTHORITY IN FA VOUR OF THE DEPARTMENT. THEREFORE, THIS ESTABLISHES THAT ADDITI ON MADE BY THE ASSESSING OFFICER IS IN CONFORMITY WITH THE PROVISI ONS OF THE ACT. 8. THE LEARNED AR BEFORE US CONTENDED THAT THE ASSE SSEE COMPANY WAS INCORPORATED ON 11.07.2000 AS PUBLIC LIMITED COMPAN Y REGISTERED UNDER THE COMPANIES ACT, 1956. THE ASSESSEE OBTAINED LICENCE FROM THE INSURANCE REGULATORY AND DEVELOPMENT AUTHORITY ('IRDA') FOR CARRYING ON LIFE INSURANCE BUSINESS ON 15.11.2000. THE ASSESSEE OFFERS A WID E RANGE OF PARTICIPATING PLANS (I.E., WHERE THE POLICYHOLDERS PARTICIPATE IN THE DISTRIBUTION OF INCOME AND THE PROFITS/SURPLUS WILL BE DISTRIBUTED IN THE FORM OF BONUS OR DIVIDENDS TO THE PARTICIPATING POLICYHOLDER), NON-PARTICIPATING PLANS (I.E., WHERE THE MAX NEW YORK LIFE INSURANCE COMPANY LTD. (NOW KNOWN AS MAX LIFE INSURANCE COMPANY LIMITED). 8 POLICYHOLDER DOES NOT HAVE ANY RIGHT TO RECEIVE A P ORTION OF THE SURPLUS OF THE INSURANCE COMPANY) AND LINKED PRODUCTS COVERING LIF E INSURANCE, PENSION AND HEALTH BENEFITS INCLUDING RIDERS FOR INDIVIDUAL AND GROUP SEGMENTS DISTRIBUTED BY INDIVIDUAL AGENTS, CORPORATE AGENTS, BANKS, BROK ERS AND OTHER CHANNELS. IT WAS SUBMITTED THAT PRIOR TO AMENDMENT OF THE INSURA NCE ACT, 1938, IN 1999, LIFE INSURANCE BUSINESS WAS MONOPOLY OF THE STATE. WITH THE ENACTMENT OF INSURANCE REGULATORY DEVELOPMENT AUTHORITY, 1999 PR IVATE INSURERS WERE ALSO ALLOWED TO CARRY ON INSURANCE BUSINESS, INCLUDING L IFE INSURANCE BUSINESS. IT IS POINTED OUT THAT UNDER THE ERSTWHILE INSURANCE ACT, 1938, LIFE INSURANCE COMPANIES WERE PREPARING/SUBMITTING TO THE CONTROLL ER OF INSURANCE, THE FOLLOWING KEY ACCOUNT STATEMENTS (A) CONSOLIDATED REVENUE ACCOUNT [FORM G], (B) SUMMARY AND VALUATION OF POLICIES [FORM H] (C) VALUATION BALANCE SHEET [FORM-I] NOTIFIED UNDER THE RELEVANT SCHEDULES OF THE SAID ACT. THE CONSOLIDATED REVENUE ACCOUNT WAS PREPARED WITHO UT SEGREGATING INCOME/ EXPENSES FOR POLICYHOLDERS AS WELL AS SHARE HOLDERS. IT WAS FURTHER STATED THAT IRDA, THE INSURANCE REGULATOR, HAS MADE SPECIFIC RULES FOR PRESENTATION OF INSURANCE ACCOUNTS AS PRESCRIBED IN IRDA (PREPARATION OF FINANCIAL STATEMENTS AND AUDITORS REPORT OF INSURA NCE COMPANIES) REGULATIONS 2002. UNDER THESE NORMS, PROFIT & LOSS OF INSURANCE COMPANY IS DIVIDED INTO A TECHNICAL ACCOUNT (POLICY HOLDERS AC COUNT IN FORM A-RA) ALSO MAX NEW YORK LIFE INSURANCE COMPANY LTD. (NOW KNOWN AS MAX LIFE INSURANCE COMPANY LIMITED). 9 CALLED AS REVENUE ACCOUNT AND NON-TECHNICAL ACCOUNT (SHAREHOLDER'S ACCOUNT REPRESENTED AS FORM A-PL) ALSO CALLED PROFIT AND LOSS ACCOUNT. THE TECHNICAL ACCOUNT DEALS WITH ALL THE TRANSACTIONS RELATING TO AND INCLUDES INCOME FROM PREMIUM AND EXPENDITURE IN RELATION TO THE POLICYHO LDERS ACCOUNT AND RELATED INVESTMENT INCOME. 9. THE INSURANCE COMPANIES ARE PRESENTLY MANDATED T O PREPARE THEIR ACCOUNTS AS PER THE FORMAT PRESCRIBED UNDER IRDA AC T, 1999 FOR PRESENTATION OF INSURANCE ACCOUNTS. ACCORDING TO THE NEW REGULA TIONS FORMULATED BY THE IRDA, THE SURPLUS OF A COMPANY IN THE BUSINESS OF L IFE INSURANCE IS REQUIRED TO BE DETERMINED ON AN ANNUAL BASIS. SUCH SURPLUS IS T O BE DETERMINED, INTER- ALIA, BY TAKING INTO CONSIDERATION THE ACTUARIAL LI ABILITY TOWARDS UNEXPIRED POLICIES. THE AUDITED COPIES OF SUCH ACCOUNTS ARE R EQUIRED TO BE FILED WITH THE IRDA ON AN ANNUAL BASIS. THE CHANGE IN THE REPORT ING FORMAT FOR COMPANIES CARRYING ON LIFE INSURANCE BUSINESS PURSUANT TO CHA NGE IN THE REGULATORY FRAMEWORK AND PURSUANT TO ENACTMENT BY IRDA OF REGU LATIONS, 2000 AND REGULATIONS, 2002 WAS DULY NOTED BY HONBLE BOMBAY HIGH COURT IN ICICI PRUDENTIAL LIFE INSURANCE CO. LTD. VS. ACIT 325 ITR 471. IN THIS REGARD OUR ATTENTION WAS INVITED TO PAGE 474 -476 OF THE SAID DECISION. 10. IT WAS FURTHER ARGUED THAT THE TAXABLE PROFITS OF AN INSURANCE COMPANY ARE REQUIRED TO BE COMPUTED UNDER THE PROVISIONS OF SECTION 44 OF THE ACT READ WITH THE FIRST SCHEDULE WHICH IS A SELF-CONTAI NED CODE FOR COMPUTATION OF SUCH TAXABLE PROFITS. RULE 2 OF THE FIRST SCHEDULE TO THE ACT STATES THAT THE MAX NEW YORK LIFE INSURANCE COMPANY LTD. (NOW KNOWN AS MAX LIFE INSURANCE COMPANY LIMITED). 10 ACTUARIAL SURPLUS OR DEFICIT SHALL BE DEEMED TO BE THE PROFIT OR GAINS OF THE LIFE INSURANCE BUSINESS. REFERRING TO SECTION 44 IT WAS CONTENDED THAT THIS SECTION IS CHARGED WITH A NON-OBSTANTE CLAUSE AND O VERRIDING OTHER PROVISIONS OF THE ACT, PROVIDES FOR PROFITS FROM LIFE INSURANC E BUSINESS TO BE COMPUTED IN ACCORDANCE WITH THE RULES CONTAINED IN THE FIRST SC HEDULE TO THE ACT. AS PER RULE 2 OF THE FIRST SCHEDULE TO THE ACT, PROFITS AN D GAINS OF LIFE INSURANCE BUSINESS SHALL BE TAKEN TO BE THE ANNUAL AVERAGE OF THE SURPLUS ARRIVED AT BY ADJUSTING THE SURPLUS OR DEFICIT DISCLOSED BY THE A CTUARIAL VALUATION MADE IN ACCORDANCE WITH THE INSURANCE ACT, 1938, IN RESPECT OF THE LAST INTER VALUATION PERIOD ENDING BEFORE THE COMMENCEMENT OF THE ASSESS MENT YEAR, SO AS TO EXCLUDE ANY SURPLUS OR DEFICIT INCLUDED THEREIN WHI CH WAS MADE IN ANY EARLIER INTER VALUATION PERIOD. THUS, THE SURPLUS OR DEFICI T BETWEEN TWO INTER VALUATION PERIODS CAN ONLY BE TAKEN AS INCOME OR LOSS OF THE PERIOD. OUR ATTENTION WAS ALSO DRAWN TOWARDS THE DECISION OF HONBLE SUPREME COURT IN THE CASE OF LIC OF INDIA V. CIT 51 ITR 773. 11. WITH REGARD TO THE SCOPE OF SECTION 44, RELIANC E WAS PLACED ON THE DECISION OF HONBLE BOMBAY HIGH COURT IN LIFE INSUR ANCE CORPORATION OF INDIA VS. CIT 119 ITR 900. OUR ATTENTION WAS ALSO INVITE D TO THE DECISION OF HONBLE SUPREME COURT IN THE CASE OF GENERAL INSURA NCE CORPORATION OF INDIA VS. CIT 240 ITR 139. THUS, IT WAS CONTENDED THAT ON A COMBINED READING OF THE PROVISIONS OF THE FIRST SCHEDULE OF THE ACT AND THE FILING REQUIREMENT LAID OUT UNDER SECTION 11 OF THE INSURANCE ACT, THE TAXA BLE SURPLUS /DEFICIT OF A MAX NEW YORK LIFE INSURANCE COMPANY LTD. (NOW KNOWN AS MAX LIFE INSURANCE COMPANY LIMITED). 11 COMPANY IN THE BUSINESS OF LIFE INSURANCE IS REPRES ENTED BY THE ANNUAL SURPLUS/ LOSS DISCLOSED UNDER THE AUDITED ACCOUNTS FILED WITH THE IRDA. IT IS FURTHER SUBMITTED THAT THE AO HAVE COMPLETED THE TA X ASSESSMENTS OF THE ASSESSEE UPTO FY 2012-13 AND CIT(A) HAS PASSED ORDE RS UPTO FY 2008-09 BASIS ADOPTED APPROACH BY THE ASSESSEE. IT IS SUBMI TTED THAT IF THE TAXABLE SURPLUS HAD BEEN DETERMINED IN ACCORDANCE WITH OLD FORM H (CONSOLIDATED REVENUE ACCOUNT), FORM I (VALUATION BALANCE SHEET) ALONG WITH THE OTHER ATTENDANT STATEMENTS, THE RESULTS WOULD HAVE BEEN S AME AS PER THE APPROACH CURRENTLY FOLLOWED BY THE ASSESSEE. 12. THE LEARNED AR SUBMITTED BEFORE US THAT THE APP ROACH FOLLOWED BY THE ASSESSEE IN RESPECT OF (I) AGGREGATION OF POLICYHOLDERS' AND SHAREHOLDERS' ACCOUNTS, (II) BONUS DECLARED FOR POLICYHOLDERS; AND (III) AMOUNTS APPROPRIATED AS FUNDS FOR FUTURE APPR OPRIATION IS CORRECT AND IN ACCORDANCE WITH LAW. IN RESPECT O F AGGREGATION OF POLICYHOLDERS' AND SHAREHOLDERS' ACCOUNTS, IT WAS S UBMITTED THAT AS PER SECTION 2 (7A) OF THE INSURANCE ACT 1938, AN INDIAN INSURANCE COMPANY HAS BEEN DEFINED AS COMPANY WHOSE SOLE PURPOSE IS TO CA RRY ON LIFE INSURANCE OR GENERAL INSURANCE OR REINSURANCE BUSINESS. REFERENC E WAS DRAWN IN THIS REGARD ON SECTIONS 2(11), 3(4)(H), 11, 13, 27, 27A, 56 & 57 OF THE INSURANCE ACT 1938 TO DEMONSTRATE THAT INDIAN INSURANCE COMPA NIES ARE NOT ALLOWED TO CARRY ANY BUSINESS OTHER THAN LIFE INSURANCE BUSINE SS AND SHAREHOLDERS' FUNDS MAX NEW YORK LIFE INSURANCE COMPANY LTD. (NOW KNOWN AS MAX LIFE INSURANCE COMPANY LIMITED). 12 ARE PART OF SUCH BUSINESS ONLY. SHAREHOLDERS FUNDS ARE MAINTAINED IN BUSINESS AS PER IRDAI DIRECTIVE TO MAINTAIN SPECIFIC LEVEL O F SOLVENCY AND RISK CAPITAL. IRDAI HAS ALSO SPECIFIED MANNER IN WHICH SUCH SHARE HOLDERS FUNDS HAVE TO BE INVESTED. SHAREHOLDERS ACCOUNT INCLUDES INCOME FRO M INVESTMENT OF SHAREHOLDERS FUNDS AND CERTAIN EXPENSES ASSOCIATED THEREWITH, SUCH AS BOARD MEETING EXPENSES, ETC., AND IS PART OF LIFE INSURAN CE BUSINESS. 13. IN RESPECT OF GROUND NO. 2 & 3 THE LEARNED AR CONTENDED THAT THE AMENDMENT MADE VIDE IRDA REGULATIONS OF 2002 REQUIR ING EVERY INSURER TO PREPARE (I) POLICYHOLDERS' ACCOUNT WHICH IS IN THE NATURE OF REVENUE ACCOUNT, AND (II) SHAREHOLDERS' ACCOUNT, WHICH IS IN THE NAT URE OF PROFIT AND LOSS ACCOUNT, APART FROM THE BALANCE SHEET, IS ONLY A CH ANGE IN THE REPORTING FORMAT, SO AS TO ENSURE TRANSPARENCY. THERE IS NO A MENDMENT IN RULE 2 OF THE FIRST SCHEDULE TO THE ACT WITH RESPECT TO THE C OMPUTATION MECHANISM FOR DETERMINING THE PROFIT OF A INSURANCE COMPANY, WHIC H CONTINUES TO BE GOVERNED BY THE ACTUARIAL VALUATION MADE IN ACCORDA NCE WITH THE INSURANCE ACT, 1938, NOTWITHSTANDING THE CHANGE IN THE REPORT ING REQUIREMENT VIDE IRDA REGULATIONS, 2002. THE SAID AMENDMENT DOES NOT HAVE EFFECT OF OVERRIDING THE PROVISIONS OF SECTION 44 READ WITH T HE FIRST SCHEDULE TO THE ACT. IN THIS REGARD RELIANCE WAS PLACED ON THE DECISION OF THE MUMBAI BENCH OF THE TRIBUNAL IN THE CASE OF IC1CI PRUDENTIAL INSURANCE CO. LTD. VS. ACIT 140 ITD 41. MAX NEW YORK LIFE INSURANCE COMPANY LTD. (NOW KNOWN AS MAX LIFE INSURANCE COMPANY LIMITED). 13 14. IT WAS POINTED OUT THAT THE SAID ORDER OF THE T RIBUNAL WAS CHALLENGED BY THE REVENUE BEFORE THE BOMBAY HIGH COURT RAISING AMONGST SEVERAL QUESTIONS, THE FOLLOWING QUESTION OF LAW: '8) WHETHER ON THE FACTS AND IN THE CIRCUMSTANCES O F THE CASE AND IN LAW, THE TRIBUNAL IS CORRECT IN ALLOWING RELIEF TO THE ASSESSEE BY HOLDING THAT SURPLUS AVAILABLE IN SHARE HOLDERS ACCOUNT IS NOT T O BE TAXED SEPARATELY AS 'INCOME FROM OTHER SOURCES' AND AT THE NORMAL CORPORATE RATE AND HOLDING THAT SURPLUS FROM SHARE HOLDERS ACCOUNT WAS ONLY PART OF INCOME FROM INSURANCE BUSINESS ARRIVED AT AFTER 'COMBINING' SURPLUS AVAILABLE IN SHARE HOLDERS ACCOUNT WITH THE SURPLUS AVAILABLE IN POLICY HOLDER S ACCOUNT AND THEN AND TAXING THIS 'NET SURPLUS' ARRIVED AT, AT THE RATE SPECIFIED U/S. 115B OF THE ACT?' 15. ALTHOUGH HONBLE BOMBAY HIGH COURT ADMITT ED THE APPEAL OF THE REVENUE ON OTHER SUBSTANTIAL QUESTIONS OF LAW, BUT WITH RESPECT TO THE AFORESAID QUESTION, THE BOMBAY HIGH COURT IN THE CA SE REPORTED AS CIT VS. ICICI PRUDENTIAL INSURANCE CO. LTD. : 242 TAXMAN 15 9 DID NOT ADMIT THE REVENUE'S APPEAL. WHEN A QUERY WAS RAISED WHETHER A NY SLP HAS BEEN FILED, THE LEARNED AR WAS FAIR ENOUGH TO CONCEDE THAT THE SLP OF THE REVENUE HAS BEEN ADMITTED BY HONBLE SUPREME COURT AGAINST THE SAID DECISION OF THE BOMBAY HIGH COURT IN THE CASE OF CIT VS. ICICI PRUD ENTIAL LIFE INSURANCE CO. LTD. 242 TAXMAN 97. 16. IT WAS FURTHER SUBMITTED THAT THE MATTER CAN BE LOOKED AT FROM ANOTHER ANGLE, TOO. THE CIT(A) IN HIS ORDER DATED 7.11.2016 , FOR ASSESSMENT YEAR 2010-11, HAS NOTED THAT PLAYERS IN THE LIFE INSURAN CE BUSINESS FOLLOW DIFFERENT MAX NEW YORK LIFE INSURANCE COMPANY LTD. (NOW KNOWN AS MAX LIFE INSURANCE COMPANY LIMITED). 14 APPROACHES AS ENUMERATED ON PAGES 25-26 OF THAT ORD ER. WE NOTED THAT THE CIT(A) HAS OBSERVED AS UNDER: 'I) APPROACH BASED ON FINANCIAL STATEMENTS AND A-RA IN WHICH A-PL ARE CONSIDERED PART OF ONE SINGLE BUSINESS OF LIFE INSURANCE. AGGREGATION OF RESULTS OF BOTH A-RA AND A-PL (AFTER NULLIFYING EFFECT OF TRANSFER BETWEEN ACCOUNTS) AND OFFERING FOR TAX THE COMBINED PROFIT FOR TAX AS PROFIT OF COMPANY FROM LIFE INSURANCE BUSINESS TAXABLE AT SPECIAL RATE IS DONE UNDER THIS APPROACH. II) APPROACH BASED ON FINANCIAL STATEMENTS BUT A-RA AND A-PL ARE CONSIDERED SEPARATE BUSINESS AND PROFITS OF EACH ACCOUNT ARE CALCULATED INDEPENDENT OF OTHER. THEN ONLY A-RA REPRESENTS PROFITS OF LIFE INSURANCE BUSINESS TAXABLE AT SPECIAL RATE WHILE A- PL INCOME (AFTER NULLIFYING EFFECT OF TRANSFER BETWEEN ACCOUNTS) IS TO BE TAXED AS INCOME FROM OTHER BUSINESS AT NORMAL RATES. III) MIXED APPROACH WITH AGGREGATION, I.E., PARTIAL LY FORM I BASED APPROACH BASED ON ACTUARIAL VALUATION REPORT AND PARTIALLY AN APPROACH BASED ON FINANCIAL STATEMENTS. IN THIS APPROACH SURPLUS REFLECTED IN FORM I IS CONSIDERED AS POLICYHOLDERS' SURPLUS AND PROFIT/LOSS HI A-PL IS AGGREGATED (AFTER NULLIFYING EFFECT OF TRANSFER BETWEEN ACCOUNTS) WITH FORM I SURPLUS TO ARRIVE AT TAXABLE PROFITS. THIS COMBINED PROFIT IS OFFERED FOR TAX AS PROFIT OF COMPANY FROM LIFE INSURANCE BUSINESS TAXABLE AT SPECIAL RATE. IV) MIXED APPROACH WITHOUT AGGREGATION I.E. PARTIAL LY FORM I BASED APPROACH BASED ON ACTUARIAL VALUATION REPORT AND PARTIALLY AN APPROACH BASED ON FINANCIAL STATEMENTS. IN THIS APPROACH SURPLUS REFLECTED IN FORM I IS CONSIDERED AS POLICYHOLDERS' SURPLUS TAXABLE AT SPECIAL RATE AND PROFIT/LOSS IN A-PL (AF TER NULLIFYING EFFECT OF TRANSFER BETWEEN ACCOUNTS) IS TREATED AS INCOME FROM OTHER BUSINESS TAXABLE AT NORMAL RATES.' MAX NEW YORK LIFE INSURANCE COMPANY LTD. (NOW KNOWN AS MAX LIFE INSURANCE COMPANY LIMITED). 15 ON THIS BASIS THE LEARNED AR DID NOT DISPUTE THAT T HERE MAY BE DIFFERENT APPROACHES FOLLOWED BY THE INSURANCE COMPANIES, BUT HE EMPHASIZED THAT IN THE CONTEXT OF DETERMINATION OF INCOME UNDER THE HE AD 'PROFITS AND GAINS OF BUSINESS OR PROFESSION', SECTION 145 OF THE ACT PRO VIDES THAT THE INCOME OF THE ASSESSEE HAS TO BE DETERMINED IN ACCORDANCE WIT H THE METHOD OF ACCOUNTING CONSISTENTLY AND REGULARLY FOLLOWED. TH E ASSESSEE IS REGULARLY AND CONSISTENTLY FOLLOWING AGGREGATING / CONSOLIDATING, BOTH, THE POLICYHOLDERS' AND SHAREHOLDERS' ACCOUNT FOR PURPOSES OF ARRIVING AT THE DEFICIT / SURPLUS FROM THE LIFE INSURANCE BUSINESS IS NOT ONLY IN ACC ORDANCE WITH LAW AS HELD BY THE MUMBAI BENCH OF THE TRIBUNAL IN THE CASE OF ICI CI PRUDENTIAL INSURANCE (SUPRA) BUT HAS CONSISTENTLY AND REGULARLY BEEN FOL LOWED AND ACCEPTED BY THE REVENUE OVER THE YEARS. THEREFORE, IT WAS CONTENDE D THAT ON THE PRINCIPLE OF CONSISTENCY THE REVENUE CANNOT DISCARD THE AFORESAI D METHOD OF DETERMINATION OF TAXABLE INCOME, WHICH HAS BEEN ACC EPTED BY THE REVENUE CONSISTENTLY, WITHOUT THERE BEING ANY CHANGE IN FAC TS OR IN LAW. IN THIS REGARD RELIANCE WAS PLACED ON THE DECISION OF HONBLE SUPR EME COURT IN THE CASE OF RADHASOAMI SATSANG SAOMI BAGH VS. CIT 193ITR 321 W HICH AT PAGE 328 FOLLOWING THE PASSAGE FROM HOYSTEAD V. COMMISSIONER OF TAXATION 1926 AC 155 (PC) IS MENTIONED: 'PARTIES ARE NOT PERMITTED TO BEGIN FRESH LITIGATIO N BECAUSE OF NEW VIEWS THEY MAY ENTERTAIN OF THE LAW OF THE CASE, OR NEW VERSIONS WHICH THEY PRESENT AS TO WHAT SHOULD BE A PROPER APPREHENSION BY THE COURT OF THE LEGAL RESULT EITHER OF THE CONSTRUCTIO N OF THE DOCUMENTS OR THE WEIGHT OF CERTAIN MAX NEW YORK LIFE INSURANCE COMPANY LTD. (NOW KNOWN AS MAX LIFE INSURANCE COMPANY LIMITED). 16 CIRCUMSTANCES. IF THIS WERE PERMITTED, LITIGATION WOULD HAVE NO END, EXCEPT WHEN LEGAL INGENUITY IS EXHAUSTED. IT IS A PRINCIPLE OF LAW THAT THIS CANNO T BE PERMITTED AND THERE IS ABUNDANT AUTHORITY REITERATI NG THAT PRINCIPLE. THIRDLY, THE SAME PRINCIPLE, NAMELY , THAT OF SETTING TO REST RIGHTS OF LITIGANTS, APPLIE S TO THE CASE WHERE A POINT, FUNDAMENTAL TO THE DECISION , TAKEN OR ASSUMED BY THE PLAINTIFF AND TRAVERSABLE B Y THE DEFENDANT, HAS NOT BEEN TRAVERSED. IN THAT CASE ALSO A DEFENDANT IS BOUND BY THE JUDGMENT, ALTHOUGH IT MAY BE TRUE ENOUGH THAT SUBSEQUENT LIGHT OR INGENUITY MIGHT SUGGEST SOME TRAVERSE WHICH HAD NOT BEEN TAKEN.' 17. FURTHER, IT WAS ALSO POINTED OUT THAT THE PRINC IPLE OF CONSISTENCY WAS REITERATED BY THE SUPREME COURT IN SHASUN CHEMICALS & DRUGS LTD. VS. CIT 388 ITR 1 AND CIT VS. EXCEL INDUSTRIES LTD. 358 ITR 295. IN EXCEL INDUSTRIES (SUPRA), THE SUPREME COURT OBSERVED AS UNDER: 'IT APPEARS FROM THE RECORD THAT IN SEVERAL ASSESSMENT YEARS, THE REVENUE ACCEPTED THE ORDER OF THE TRIBUNAL IN FAVOUR OF THE ASSESSEE AND DID N OT PURSUE THE MATTER ANY FURTHER BUT IN RESPECT OF SOM E ASSESSMENT YEARS THE MATTER WAS TAKEN UP IN APPEAL BEFORE THE BOMBAY HIGH COURT BUT WITHOUT ANY SUCCESS. THAT BEING SO, THE REVENUE CANNOT BE ALLOWED TO FLIP-FLOP ON THE ISSUE AND IT OUGHT LET THE MATTER REST RATHER THAN SPEND THE TAX PAYERS' MONEY IN PURSUING LITIGATION FOR THE SAKE OF IT.' THUS, IT WAS CONTENDED THAT THE ASSESSEE IS CONSIST ENTLY DETERMINING THE TAXABLE INCOME BY ADOPTING THE APPROACH OF AGGREGAT ION OF BOTH, THE POLICYHOLDERS' AND SHAREHOLDERS' ACCOUNT. THE REVE NUE HAS ACCEPTED SUCH POSITION IN THE EARLIER YEARS THEREFORE, IT CANNOT DEVIATE IN THE IMPUGNED ASSESSMENT YEAR. THUS, IT WAS STRESSED THAT INCOM E HAS TO BE DETERMINED MAX NEW YORK LIFE INSURANCE COMPANY LTD. (NOW KNOWN AS MAX LIFE INSURANCE COMPANY LIMITED). 17 AFTER AGGREGATION OF BOTH THE POLICYHOLDERS' AND SH AREHOLDERS' ACCOUNT AS HAS BEEN REGULARLY ACCEPTED BY THE REVENUE. 18. IN RESPECT OF GROUND NO.5 THE LEARNED SR. ADVOCATE SUBMITTED THAT BONUS PAID IN CASH IS EXPRESSLY ALLOWABLE UNDER THE ERSTWHILE 'CONSOLIDATED REVENUE ACCOUNT'. FURTHER, LIABILITY FOR THE PRESEN T VALUE OF FUTURE BONUSES IS AN ACTUARIALLY DETERMINED LIABILITY WHICH IS ALSO C ONSIDERED AT THE TIME OF DETERMINING 'NET LIABILITY UNDER BUSINESS' AS PER E ARLIER FORM H; SEPARATELY, THE PROVISION FOR FUTURE BONUS LIABILITY IS EXPRESS LY INCLUDED IN THE INCREMENTAL VALUATION LIABILITY, I.E., CHANGE IN VALUATION OF L IABILITY AGAINST LIFE POLICIES IN FORCE. IT WAS SUBMITTED THAT EVEN WHEN THERE WAS A DEFICIT IN THE POLICYHOLDERS' ACCOUNT IN THE INITIAL YEARS, THE FU NDS HAVE TO BE TRANSFERRED FROM THE SHAREHOLDERS' ACCOUNT IN ORDER TO DECLARE BONUS ON THE PARTICIPATING POLICIES, WHICH IS BEING DONE BASED ON THE ADVICE O F THE APPOINTED ACTUARY. REFERENCE IS MADE TO A SAMPLE INSURANCE POLICY AND THE TERMS AND CONDITIONS ATTACHED THERETO. THE RELEVANT CONDITIONS ARE REPR ODUCED UNDER: 'BENEFITS 7.1 SUBJECT TO THE PROVISIONS OF SECTION 8 (SUICIDE EXCLUSION), ON THE OCCURRENCE OF THE INSURED EVENT, THE COMPANY WILL PAY THE FOLLOWING BENEFITS (THE 'BENEFITS'): (A) THE SUM INSURED; AND (B) THE ACCRUED BONUS. 12. POLICY HOLDER BONUS AND BONUS OPTIONS NO BONUS IS PAYABLE FOR THE FIRST TWO POLICY YEARS. THEREAFTER, A BONUS AS DECLARED BY THE COMPANY, MAX NEW YORK LIFE INSURANCE COMPANY LTD. (NOW KNOWN AS MAX LIFE INSURANCE COMPANY LIMITED). 18 WILL BE PAID, FROM THE SURPLUS ARISING FROM THE ACTUARIAL VALUATION OF THE PARTICIPATING LIFE INSUR ANCE FUND. THE AMOUNT OF BONUS TO BE PAID WILL BE AS DETERMINED BY THE COMPANY'S APPOINTED ACTUARY FROM TIME TO TIME.' 19 FURTHER, ATTENTION WAS ALSO DRAWN TOWARDS THE IRDA (DISTRIBUTION OF SURPLUS) REGULATIONS, 2002 IN RESPECT OF THE PROCED URE FOR DISTRIBUTION OF SURPLUS IN THE FOLLOWING TERMS: '4 PROCEDURE FOR DISTRIBUTION OF SURPLUS. - A LIFE INSURER MAY, ON THE ADVICE OF HIS APPOINTED ACTUARY , RESERVE A PART OF THE ACTUARIAL SURPLUS (ALSO REFER RED TO AS VALUATION SURPLUS) ARISING OUT OF A VALUATION OF ASSETS AND LIABILITIES MADE FOR A FINANCIAL YEAR IN ACCORDANCE WITH INSURANCE REGULATORY AND DEVELOPMENT AUTHORITY (ACTUARIAL REPORT AND ABSTRACT) REGULATIONS, 2000, TO ITS SHAREHOLDERS, WHICH SHALL BE:- (A) ONE HUNDRED PER CENT IN CASE OF A LIFE FUND MAINTAINED FOR NON-PARTICIPATING POLICYHOLDERS; (B) ONE-NINTH OF THE SURPLUS ALLOCATED TO POLICYHOLDERS IN CASE OF A LIFE FUND MAINTAINED FOR PARTICIPATING POLICYHOLDERS: PROVIDED THAT AN INSURER SHALL, HOWEVER, BE REQUIRE D TO OBTAIN PRIOR APPROVAL OF THE AUTHORITY IN CASES WHERE THE SAID ALLOCATION IS NOT THE ONE-NINTH OF T HE SURPLUS. PROVIDED FURTHER THAT AN INSURER SHALL NOT ALLOCATE OR RESERVE EXCEEDING TEN PER CENT OF THE SAID ACTUARIA L SURPLUS TO ITS SHAREHOLDERS.' HE ALSO INVITED OUR ATTENTION TO SCHEDULE 16 II NOT ES ON ACCOUNTS CLAUSE (B),(R) AND (S) IN THIS REGARD. THUS IT WAS CONTENDED THAT BONUS IS DECLARED PURSUA NT TO MAX NEW YORK LIFE INSURANCE COMPANY LTD. (NOW KNOWN AS MAX LIFE INSURANCE COMPANY LIMITED). 19 INHERENT RIGHT OF THE PARTICIPATING POLICYHOLDER, I N TERMS OF THE CONTRACT OF INSURANCE, ENFORCEABLE AT LAW, TO PARTICIPATE IN TH E DISTRIBUTION OF SURPLUS ARISING IN THE FUND. IN OTHER WORDS, THE PREMIUMS R ECEIVED ARE EMBEDDED WITH THE OBLIGATION TO DECLARE BONUS TO PARTICIPATI NG POLICYHOLDERS. IN THAT VIEW OF THE MATTER, ON THE MATCHING PRINCIPLE, THE AMOUNT DECLARED AS BONUS IS NECESSARILY TO BE SET OFF AGAINST THE PREMIUM RE CEIVED. THE AMOUNT OF BONUS DECLARED, IT WAS POINTED OUT, IS UNCONDITIONA LLY MADE AVAILABLE TO THE POLICYHOLDER AND IS PAID AT THE TIME OF MATURITY / DEATH. IT IS FURTHER POINTED OUT THAT IN SOME CASES, BONUS IS PAID IN CASH AFTER DECLARATION, WHILE IN CASE OF SOME POLICIES, BONUS AMOUNTS ARE ADJUSTED WITH N EXT DUE PREMIUM, AS PER PRODUCT FEATURES. THE AMOUNT OF BONUS DECLARED, WHI CH THE ASSESSEE IS MANDATORILY BOUND TO DECLARE IN TERMS OF THE CONTRA CT OF INSURANCE IN RESPECT OF PARTICIPATING POLICIES, CANNOT BE HELD BACK BY T HE ASSESSEE AND HAS TO BE TRANSFERRED TO THE ACCOUNT OF THE POLICY HOLDER. T HEREFORE, SUCH BONUS IS ASCERTAINED LIABILITY ACCRUED TO THE ASSESSEE WHILE DETERMINING THE ACTURIAL SURPLUS AND SUCH BONUS HAS TO BE TAKEN INTO ACCOUNT WHILE DETERMINING THE ACTUARIAL SURPLUS, SUBJECT OF TAXATION UNDER SECTIO N 44 OF THE ACT READ WITH THE FIRST SCHEDULE THERETO. IT WAS SUBMITTED THAT 'ACTUARIAL SURPLUS' HAS NOT BEEN DEFINED IN THE INSURANCE ACT/IRDA ACT. ITS MEA NING THEREFORE HAS TO BE GATHERED FROM THE ORDINARY COMMERCIAL PRINCIPLES GO VERNING LIFE INSURANCE BUSINESS AND RELEVANT RULES, GUIDELINES AND NORMS G OVERNING ACTUARIAL VALUATION OF LIFE INSURANCE CONTRACTS. IN THIS REG ARD ATTENTION WAS DRAWN MAX NEW YORK LIFE INSURANCE COMPANY LTD. (NOW KNOWN AS MAX LIFE INSURANCE COMPANY LIMITED). 20 TOWARDS THE OBSERVATION OF THE MUMBAI BENCH OF THE TRIBUNAL IN THE CASE OF ICICI PRUDENTIAL INSURANCE CO. LTD. (SUPRA) AS UNDE R: ' ... AN ACTUARY IS RESPONSIBLE FOR ANALYSING POSSIBLE OUTCOMES OF THE TYPES OF EVENTS THAT WOULD POTENTIALLY COST POLICY HOLDERS TO MAKE CLAIMS AGAI NST THEIR INSURANCE POLICIES. INSURANCE COMPANIES NEED TO MAKE SURE THAT THE MONEY THEY ARE CHARGING AND COLLECTING FROM POLICY HOLDERS IS ADEQUATE TO COVER THE COSTS OF CERTAIN CLAIMS THAT MIGHT BENEFICIALLY BE MADE BY POLICY HOLDERS AS WELL AS THEIR OTHER EXPENSES, HI FACT, THE WORK THAT ACTUARIES PERFORM IS CRUCIAL TO AN INSURANCE COMPANY'S ABILITY TO REMAIN IN BUSINESS. ACTUARIES ARE INVOLVED AT ALL STAGES I N PRODUCT DEVELOPMENT AND IN THE PRICING RISK ASSESSMENT AND MARKETING OF THE PRODUCTS. THEIR JOB INVOLVES MAKING ESTIMATES OF ULTIMATE OUT-COME OF INSURABLE EVENTS. IN THE BUSINESS OF INSURANCE THE PRODUCT COST IS AN ABSTRACTION, DEPENDING ON THE TIMING ISSUES, VARIABILITY ISSUES AND RISK PARAMETE RS. ONE BIG FUNCTION ACTUARIES PROVIDE IS MAKING RESERVES TO INSURE THAT INSURANCE COMPANIES KEEP ENOUGH MONEY ON THEIR BALANCE SHEETS TO MAKE GOOD OF ALL THE CLAIMS THEY WILL HAVE TO PAY. THIS INVOLVES ARRIVING AT ACTUARIAL SURPLUS OR DEFICIT DEPENDING ON VARIOUS FACTORS. .... .... THE SUR PLUS OR DEFICIT ARRIVED AT BY THE ACTUARY IN HIS VALUATI ON FOR THE INTER VALUATION PERIOD HAS TO BE TAKEN INTO CONSIDERATION UNDER THE REGULATIONS IN FINANCIAL ACCOUNTS AS WELL' 20. IT WAS FURTHER SUBMITTED THAT THE POLICYHOLDERS ARE NOT SHAREHOLDERS OF THE BUSINESS; THE POLICYHOLDERS ARE CUSTOMERS PAYIN G PREMIUM TO THE INSURANCE COMPANY TO MANAGE RISKS ASSOCIATED WITH L OSS OF HUMAN LIFE. A LIABILITY OR AMOUNT SET ASIDE FOR FUTURE DISTRIBUTI ON TO THE POLICYHOLDERS WHICH IS NOT, IN LAW, AVAILABLE TO THE SHAREHOLDERS CANNO T FORM PART OF THE ACTUARIAL SURPLUS. THE BASIS OF TAXATION FOR A LIFE INSURANCE COMPANY IS THE ACTUARIAL MAX NEW YORK LIFE INSURANCE COMPANY LTD. (NOW KNOWN AS MAX LIFE INSURANCE COMPANY LIMITED). 21 SURPLUS, I.E., THE AMOUNT AVAILABLE TO SHAREHOLDERS LIKE DIVIDEND, AFTER REDUCING AMOUNTS, CONTRACTUALLY AND STATUTORILY PAY ABLE TO THE POLICYHOLDERS. THE AMOUNTS SET ASIDE FOR POLICYHOLDERS LIKE BONUS OR AN AMOUNT THAT IS STATUTORILY MANDATED TO BE KEPT ASIDE FOR THE BENEF IT OF POLICYHOLDERS ARE IN THE NATURE OF ASCERTAINED LIABILITY / CHARGE AND CA NNOT FORM PART OF ACTUARIAL SURPLUS. THE FORMATS OF THE VARIOUS PRESCRIBE D FORMS UNDER THE IRDA ACT OR FOR THAT MATTER INSURANCE ACT, 1938 CANNOT CONCL USIVELY DETERMINE THE QUANTUM OF ACTUARIAL SURPLUS. THESE FORMATS HAVE BE EN PRESCRIBED BY IRDA NOT FOR PURPOSES OF TAXATION BUT TO ENSURE PROPER D ISCLOSURE OF FIGURES TO PROTECT THE INTERESTS OF THE POLICYHOLDERS AND TO E NSURE TRANSPARENCY AND BETTER REGULATION OF THE INSURANCE SECTOR IN INDIA. THE DEDUCTIBILITY OF AN ITEM WOULD NOT DEPEND UPON TREATMENT / PRESENTATION IN T HE ACCOUNTS BUT WITH REFERENCE TO THE PROVISIONS OF THE ACT. SINCE PAYME NT OF BONUS IS A CONTRACTUAL OBLIGATION IN TERMS OF THE CLAUSES OF T HE OUTSTANDING PAR POLICIES, THE AMOUNT OF BONUS DECLARED IS AN ACCRUED AND ASCE RTAINED LIABILITY DEDUCTIBLE IN COMPUTING PROFITS FROM THE LIFE INSUR ANCE BUSINESS. IT WAS FURTHER SUBMITTED THAT UP TO A.Y. 1976-77, WHILE TH ERE WERE TWO METHODS FOR CALCULATING PROFITS AND GAINS OF LIFE INSURANCE BUS INESS, A SPECIFIC DEDUCTION WAS ALLOWED OF 80% OF THE AMOUNT PAID TO OR RESERVE D ON BEHALF OF THE POLICYHOLDER. THE FINANCE ACT, 1976 AMENDED THE FI RST SCHEDULE TO THE INDIAN INCOME-TAX ACT, DELETING RULE 3. MAX NEW YORK LIFE INSURANCE COMPANY LTD. (NOW KNOWN AS MAX LIFE INSURANCE COMPANY LIMITED). 22 21. FURTHER, OUR ATTENTION WAS ALSO DRAWN TOWARDS E XPLANATORY NOTES TO THE FINANCE ACT, 1976(SPECIALLY PARA 40.20) EXPLAIN ED THE PURPOSE OF THE AMENDMENT AND CLARIFIED THAT NO FURTHER DEDUCTION W OULD BE PERMITTED FOR AMOUNT PAID OR RESERVED ON BEHALF OF THE POLICYHOLD ERS. FURTHER HE CONTENDED THAT THE AMENDMENT MADE BY FINANCE ACT 19 76, CANNOT BE READ IN A MANNER SO AS TO TAKE AWAY THE RIGHT OF AN ASSESSE E CARRYING ON LIFE INSURANCE BUSINESS TO TREAT BONUS DECLARED AS AN AC TUARIAL LIABILITY. FURTHERMORE, THE SCHEME OF TAXATION HAS UNDERGONE C OMPLETE CHANGE WITH THE CURRENT PROVISIONS PROVIDING FOR ACTUARIAL VALU ATION OF THE SURPLUS /DEFICIT. IT IS TO BE NOTED THAT PRIOR TO THE AMENDMENT IN 19 76 SUCH A LIMITATION WAS PROVIDED IN THE ERSTWHILE RULE 3 WHICH LIMITED THE ALLOWABILITY OF DEDUCTION PERTAINING TO AMOUNTS SET ASIDE FOR THE BENEFIT OF POLICYHOLDERS TO 80%. AFTER THE AMENDMENT, NO SUCH LIMITATION EXISTS. FOR THIS OUR ATTENTION WAS DRAWN TOWARDS RULE 3, WHICH WAS OMITTED BY FINANCE ACT 19 76. THE LIMITATION WAS IN RULE 3 BECAUSE THE OLD RULE 2 PROVIDED FOR TWO A LTERNATE TAX BASES (HIGHER OF THE NET INCOME AND ACTUARIAL SURPLUS). UNDER THE NET INCOME METHOD, DEDUCTION COULD BE CLAIMED AND A LIMITATION FOR THE SAME WAS PROVIDED. IN THE CASE OF ACTUARIAL SURPLUS, THERE WAS NO SUCH TH ING AS 'DEDUCTION' BECAUSE ANY LIABILITY RECOGNIZED BY THE ACTUARY WAS TO BE R EDUCED FROM THE INCOME TO ARRIVE AT THE SURPLUS/DEFICIT. AS PRESENTLY, THERE IS NOTHING IN THE ACT WHICH STATES THAT WHILE ARRIVING AT 'ACTUARIAL SURPLUS', LIABILITIES ASCERTAINED BY THE ACTUARY AS BONUS PAYABLE IN FUTURE OR AMOUNT SET AS IDE FOR FUTURE MAX NEW YORK LIFE INSURANCE COMPANY LTD. (NOW KNOWN AS MAX LIFE INSURANCE COMPANY LIMITED). 23 APPROPRIATION FOR THE BENEFIT OF POLICYHOLDERS WOUL D NOT BE REDUCED, NO SUCH LIMITATION CAN BE IMPLIED / INFERRED. THUS, IT WAS CONTENDED THAT THE DECLARATION OF BONUS PAYABLE TO PARTICIPATING POLIC Y HOLDERS WILL NECESSARILY HAVE TO BE TAKEN INTO ACCOUNT WHILE DETERMINING PRO FIT FROM LIFE INSURANCE BUSINESS. 22. GROUND NO. 4 RELATES TO FUNDS FOR FUTURE APPROPRIATION (FFA) IS AN UNALLOCATED SURPLUS IN PARTICIPATING FUNDS. IT WAS SUBMITTED THAT THESE FUNDS SUPPORTS THE ABILITY OF THE INSURER TO MEET ITS CON TRACTED OBLIGATIONS TO ITS POLICY HOLDERS AS PRESENTED AT THE TIME OF THE INCE PTION OF THE POLICY CONTRACT AND IS, THEREFORE, AKIN TO A POLICYHOLDER LIABILITY WHICH HAS BEEN DETERMINED THROUGH DUE PROCESS OF ACTUARIAL VALUATION. THE ASSESSEE IS CONTRACTUALLY BOUND IN TERMS OF THE INSURANCE POLICIES TAKEN OUT TO PROVIDE VARIOUS BENEFITS TO ITS POLICYHOLDERS, INCLUDING, INTER ALIA, DEATH BENEFIT TO SURVIVING NOMINEES, SURVIVAL BENEFITS, CASH OR REVERSIONARY BONUSES AND OTHER PAYOUTS / BENEFITS LINKED TO THE HAPPENING OF FUTURE UNCERTAIN EVENTS. THE PREMIUMS EARNED BY THE ASSESSEE, THEREFORE, CARRY / HAVE EMBEDDED THE OBLIGATION TO MAKE AVAILABLE SUCH BENEFITS IN FUTURE. THE ACTUARIES AV AILABLE SEEK TO ESTIMATE THE LIKELY PAYOUTS ON THAT ACCOUNT IN RESPECT OF THE CO NTRACTS OF LIFE INSURANCE ALREADY IN FORCE. AT THIS JUNCTURE, THE LEARNED AR REFERRED TO THE MATCHING PRINCIPLE AND ON THAT BASIS HE CONTENDED THAT THE P REMIUMS EARNED HAVE TO BE OFF-SET BY THE ESTIMATED LIABILITY TO MAKE AVAIL ABLE FUTURE BENEFITS, AS ACTUARIALLY DECLARED. SUCH PROVISION IN THE FORM OF FFA REPRESENTS IN ESSENCE, MAX NEW YORK LIFE INSURANCE COMPANY LTD. (NOW KNOWN AS MAX LIFE INSURANCE COMPANY LIMITED). 24 PROVISION FOR FUTURE BONUSES. THE SAME IS IN THE NA TURE OF AN ASCERTAINED BUT UNALLOCATED LIABILITY, WHICH HAS NECESSARILY TO BE TAKEN INTO ACCOUNT WHILE COMPUTING ACTUARIAL SURPLUS. THE LIABILITY OF THE ASSESSEE TO MAKE AVAILABLE THE STIPULATED BENEFITS TO A PARTICULAR INSURED MAY BE CONTINGENT, SUCH LIABILITY IS DEFINITE AND CERTAIN TOWARDS ALL INSURED TAKEN T OGETHER. IN ADDITION TO THE ACTUARIAL RESERVES, THE ASSESSEE KEEPS ASIDE A PART OF EXCESS IN PARTICIPATING FUNDS AS FFA FOR DECLARING OR SMOOTHENING BONUSES I N FUTURE. IT REPRESENTS POLICYHOLDERS' REASONABLE EXPECTATION OF FUTURE BON US ON ACCOUNT OF PERFORMANCE PARTICIPATING FUNDS OVER THE YEARS. THU S, IT WAS CONTENDED THAT FFA, IN THIS VIEW REPRESENTS PROVISION FOR A DEFINI TE AND ASCERTAINED LIABILITY, WHICH IS A NECESSARY CHARGE ON THE PROFITS OF THE L IFE INSURANCE BUSINESS. RELIANCE WAS PLACED IN THIS REGARD ON THE DECISION OF THE HONBLE APEX COURT IN THE CASE OF BHARAT EARTH MOVERS VS. CIT 245 ITR 428 WHERE THE QUESTION WHETHER PROVISION FOR LEAVE ENCASHMENT TO EMPLOYEES WAS ALLOWABLE DEDUCTION WHILE COMPUTING PROFITS OF THE BUSINESS, WAS ALLOWABLE DEDUCTION OR NOT. IT WAS SUBMITTED THAT THE FACTS INVOLVED I N THIS CASE WERE: '..,. ..... THE COMPANY HAS FLOATED BENEFICIAL SCHEMES FOR ITS EMPLOYEES FOR ENCASHMENT OF LEAVE. THE OFFICERS ARE ENTITLED TO EARNED LEAVE CALCULATED AT THE RATE OF 2.5 DAYS PER MONTH, I.E., 30 DAYS PER YEAR. THE STAFF (OTHER THAN OFFICERS) IS E NTITLED TO VACATION LEAVE CALCULATED AT THE RATE OF 1.5 DAYS PER MONTH, I.E., 18 DAYS IN A YEAR. THE EARNED LEAVE CAN BE ACCUMULATED UPTO 240 DAYS MAXIMUM WHILE THE VACATION LEAVE CAN BE ACCUMULATED UPTO 126 DAYS MAXIMUM. THE EARNED LEAVE/VACATION LEAVE CAN B E ENCASHED SUBJECT TO THE CEILING ON ACCUMULATION. THE OFFICER S MAY AT THEIR OPTION AVAIL THE ACCUMULATED LEAVE OR IN LIEU OF AV AILING THE LEAVE APPLY FOR ENCASHMENT WHEREUPON THEY WOULD BE PAID S ALARY FOR THE PERIOD OF LEAVE EARNED BUT NOT AVAILED. SO DOES THE SCHEME EXTEND MAX NEW YORK LIFE INSURANCE COMPANY LTD. (NOW KNOWN AS MAX LIFE INSURANCE COMPANY LIMITED). 25 FACILITY OF ENCASHMENT TO THE STAFF IN RESPECT OF V ACATION LEAVE. ANY LEAVE EARNED BEYOND THE SAID CEILING LIMIT OF 240/1 26 DAYS CANNOT BE ACCUMULATED AND GOES A WASTE. IT CAN NEITHER BE AVAILED NOR ENCASHED. THE ASSESSEE COMPANY HAS CREATED A FUND B Y MAKING A PROVISION FOR MEETING ITS LIABILITY ARISING ON ACCO UNT OF THE ACCUMULATED EARNED/VACATION LEAVE. IN THE ASSESSMEN T YEAR 1978- 1979 AN AMOUNT OF RS. 62,25,483/- WAS SET APART IN A SEPARATE ACCOUNT AS PROVISION FOR ENCASHMENT OF ACCRUED LEAV E. IT WAS CLAIMED AS A DEDUCTION. IN THE OPINION OF THE TRIBU NAL THE ASSESSEE WAS ENTITLED TO SUCH DEDUCTION. THE HIGH COURT HAS FORMED A DIFFERENT OPINION AND HELD THAT THE PROVISION FOR A CCRUED LEAVE SALARY WAS A CONTINGENT LIABILITY AND THEREFORE WAS NOT A PERMISSIBLE DEDUCTION. THE REASONING APPLIED BY THE HIGH COURT IS THAT THE LIABILITY WILL ARISE ONLY IF AN EMPLOYEE MAY NOT GO ON LEAVE AND INSTEAD APPLY FOR ENCASHMENT. IF THE EMPLOYEE AVAIL S THE LEAVE AS PER HIS ENTITLEMENT, THEN HE WOULD BE PAID SALARY F OR THE PERIOD OF LEAVE AND LIABILITY FOR ENCASHMENT WOULD NOT ARISE. THE OTHER EVENT ON THE OCCURRENCE OF WHICH THE EMPLOYEE MAY STAKE H IS CLAIM IS TERMINATION OR RETIREMENT WHICH AGAIN IS AN UNCERTA INTY. ACCORDINGLY THE HIGH COURT HAS ANSWERED THE QUESTION IN THE NEG ATIVE, THAT IS, IN FAVOUR OF THE REVENUE AND AGAINST THE ASSESSEE. .... ....' WHILE ANSWERING THE QUESTION IN THE AFFIRMATIVE, TH E APEX COURT LAID DOWN THE FOLLOWING DICTUM OF LAW : 'THE LAW IS SETTLED IF A BUSINESS LIABILITY HAS DEF INITELY ARISEN IN THE ACCOUNTING YEAR, THE DEDUCTION SHOULD BE ALLOWED AL THOUGH THE LIABILITY MAY HAVE TO BE QUANTIFIED AND DISCHARGED AT A FUTURE DATE. WHAT SHOULD BE CERTAIN IS THE INCURRING OF THE LIAB ILITY. IT SHOULD ALSO BE CAPABLE OF BEING ESTIMATED WITH REASONABLE CERTA INTY THOUGH THE ACTUAL QUANTIFICATION MAY NOT BE POSSIBLE. IF THESE REQUIREMENTS ARE SATISFIED THE LIABILITY IS NOT A CONTINGENT ONE. TH E LIABILITY IS IN PRESENT THOUGH IT WILL BE DISCHARGED AT A FUTURE DA TE. IT DOES NOT MAKE ANY DIFFERENCE IF THE FUTURE DATE ON WHICH THE LIABILITY SHALL HAVE TO BE DISCHARGED IS NOT CERTAIN.' IT WAS POINTED OUT THAT WHILE COMING TO THE AFORESA ID CONCLUSION, THE COURT TOOK NOTE OF THE PRINCIPLES LAID DOWN IN THE CASE O F METAL BOX CO. OF INDIA LTD. VS. THEIR WORKMEN 73 ITR 53 WHEREIN THE APEX COURT ALLOWED PROVISION FOR MAX NEW YORK LIFE INSURANCE COMPANY LTD. (NOW KNOWN AS MAX LIFE INSURANCE COMPANY LIMITED). 26 GRATUITY PAYABLE ON TERMINATION OF EMPLOYEES SERVIC E DUE TO RETIREMENT / DEATH OR TERMINATION, WORKED OUT ON AN ACTUARIAL BA SIS AND CALCUTTA CO. LTD. VS. CIT 37 ITR 1. REFERENCE WAS ALSO MADE TO THE JUDGMENT OF HONBLE DELHI HIGH COURT IN THE CASE OF CIT VS. TRIVENI ENG INEERING& INDUSTRIES LTD. 336 ITR 374 WHEREIN IT HAS HELD THAT WHERE THE CONT RACT RECEIPTS, INCLUDING UNBILLED REVENUE FOR WHICH INVOICES HAVE BEEN RAISE D IN THE SUCCEEDING YEAR, WERE BROUGHT INTO TAX IN ENTIRETY IN THE RELEVANT P REVIOUS YEAR, DEDUCTION HAD TO BE ALLOWED IN RESPECT OF PROVISION FOR FORESEEAB LE LOSSES TOWARDS COMPLETION OF THE CONTRACT. 23. RELIANCE WAS ALSO PLACED IN THIS REGARD IN THE CASE ROTORK CONTROLS INDIA (P) LTD. VS. CIT : 314 ITR 62 WHEREIN THE ISS UE FOR CONSIDERATION WAS ALLOWABILITY OF PROVISION FOR WARRANTY. ALLOWING TH E APPEAL OF THE ASSESSEE, THE HONBLE APEX COURT MADE THE FOLLOWING OBSERVATIONS: '.....UNDER THE MATCHING CONCEPT, IF REVENUE IS REC OGNIZED THE COST INCURRED TO EARN THAT REVENUE INCLUDING WARRANTY CO STS HAS TO BE FULLY PROVIDED FOR. WHEN VALVE ACTUATORS ARE SOLD A ND THE WARRANTY COSTS ARE AN INTEGRAL PART OF THAT SALE PRICE THEN THE ASSESSEE HAS TO PROVIDE FOR SUCH WARRANTY COSTS IN ITS ACCOUNT FOR THE RELEVANT YEAR, OTHERWISE THE MATCHING CONCEPT FAILS. .... THE WARRANTY PROVISION FOR THE PRODUCTS SHOULD BE B ASED ON THE ESTIMATE AT YEAR END OF FUTURE WARRANTY EXPENSES. S UCH ESTIMATES NEED REASSESSMENT EVERY YEAR. AS ONE REACHES CLOSE TO THE END OF THE WARRANTY PERIOD, THE PROBABILITY THAT THE WARRA NTY EXPENSES WILL BE INCURRED IS CONSIDERABLY REDUCED AND THAT SHOULD BE REFLECTED IN THE ESTIMATION AMOUNT. .... IN OUR VIEW, ON THE FACTS AND CIRCUMSTANCES OF THIS CASE, PROVISION FOR WARRANTY IS RIGHTLY MADE BY THE ASSESSEE -ENTER PRISE BECAUSE IT HAS INCURRED A PRESENT OBLIGATION AS A RESULT OF PA ST EVENTS. THERE IS ALSO AN OUTFLOW OF RESOURCES. A RELIABLE ESTIMATE O F THE OBLIGATION MAX NEW YORK LIFE INSURANCE COMPANY LTD. (NOW KNOWN AS MAX LIFE INSURANCE COMPANY LIMITED). 27 WAS ALSO POSSIBLE. THEREFORE, THE ASSESSEE HAS INCU RRED A LIABILITY, ON THE FACTS AND CIRCUMSTANCES OF THIS CASE, DURING THE RELEVANT ASSESSMENT YEAR WHICH WAS ENTITLED TO DEDUCTION UND ER SECTION 37 OF THE 1961 ACT. THEREFORE, ALL THE THREE CONDITION S FOR RECOGNIZING A LIABILITY FOR THE PURPOSES OF PROVISIONING STANDS S ATISFIED IN THIS CASE.... ' BY REFERRING TO THIS DECISION, IT WAS POINTED OUT T HAT THE HONBLE APEX COURT HAS CLEARLY LAID DOWN FOLLOWING FOUR IMPORTANT ASPE CTS THAT NEED TO BE SATISFIED IN ORDER THAT THE PROVISION MADE IS NOT R EGARDED AS A CONTINGENT LIABILITY, AND HENCE NOT DEDUCTIBLE IN COMPUTING BU SINESS PROFITS: (I) THE PROVISION RELATES TO PRESENT OBLIGATION; (II) IT ARISES OUT OF OBLIGATING EVENTS; (III) IT INVOLVES OUTFLOW OF RESOURCES; AND (IV) IT INVOLVES RELIABLE ESTIMATION OF OBLIGATION. IT WAS POINTED OUT THAT THE RATIO LAID DOWN BY THE APEX COURT IN THE CASE OF ROTORK CONTROLS (SUPRA), HAS BEEN APPLIED BY HONBLE THE DELHI HIGH COURT IN THE CASE OF CIT VS. WHIRLPOOL OF INDIA LTD. 242 CTR 245 WHERE DEDUCTION FOR INCREMENTAL WARRANT Y PROVISION MADE IN THE RELEVANT PREVIOUS YEAR WAS ALLOWED, BASED ON ACTUAR IAL VALUATION, AFTER TAKING INTO CONSIDERATION THE EXISTING WARRANTY PROVISIONS VIS-A-VIS THE EXPECTED CLAIMS THAT MIGHT BE RECEIVED WITH RESPECT TO PRODU CTS SOLD AND COVERED UNDER WARRANTY. 24. THUS, IT WAS CONTENDED THAT FFA BEING PROVISION FOR EXPECTATION OF FUTURE BONUSES AND ITS SMOOTHENING SATISFIES ALL TH E FOUR PARAMETERS ABOVE, MAX NEW YORK LIFE INSURANCE COMPANY LTD. (NOW KNOWN AS MAX LIFE INSURANCE COMPANY LIMITED). 28 INASMUCH AS THE OBLIGATION TO MAKE AVAILABLE FUTURE BENEFITS ARISES OUT OF PRE- EXISTING CONTRACTS OF INSURANCE IN RESPECT OF WHICH PREMIUMS HAVE BEEN COLLECTED BY THE ASSESSEE; THE BENEFITS ARE PAYABLE IN TERMS OF BINDING AND LEGALLY ENFORCEABLE CONTACTS OF INSURANCE; THE PAYM ENT OF BENEFIT WOULD INVOLVE OUTFLOW OF RESOURCES AND LASTLY, THE SAME I S CAPABLE OF ACTUARIAL VALUATION. THUS, IT WAS CONTENDED THAT THE PARTICI PATING SURPLUS EARNED IS EMBEDDED WITH THE OBLIGATION TO PROVIDE VARIOUS BEN EFITS TO THE PARTICIPATING POLICY HOLDERS, INTER ALIA, DEATH BENEFIT TO SURVIV ING NOMINEES, SURVIVAL BENEFITS, CASH OR REVERSIONARY BONUSES AND OTHER PA YOUTS / BENEFITS LINKED TO THE HAPPENING OF A FUTURE UNCERTAIN EVENTS. THE INC OME EARNED BY THE ASSESSEE IS THUS IMPRESSED WITH THE OBLIGATION TO M AKE AVAILABLE SUCH BENEFITS IN FUTURE, IN TERMS OF THE LEGALLY BINDING COVENANTS UNDER THE CONTRACT OF INSURANCE. FURTHER, AS PER THE INSURANC E REGULATORY AND DEVELOPMENT AUTHORITY (DISTRIBUTION OF SURPLUS) REG ULATIONS, 2002, THE SHAREHOLDERS ARE NOT ENTITLED TO ANY AMOUNT IN EXCE SS OF 10% OF THE ACTUARIAL SURPLUS. THEREFORE, 90% OF THE ACTUARIAL SURPLUS WH ICH IS REPRESENTED BY, INTER ALIA, FFA IS DIVERTED BY OVERRIDING TITLE IN FAVOUR OF THE POLICYHOLDERS AND CANNOT CONSTITUTE INCOME OF THE ASSESSEE. 25. OUR ATTENTION WAS ALSO DRAWN TOWARDS THE DECISI ON OF HONBLE SUPREME COURT IN THE CASE OF CIT VS. SHRI SITALDAS TIRATHDA S 41 ITR 367 FOR THE PROVISION OF LAW WHETHER INCOME COULD BE SAID TO HA VE BEEN DIVERTED BY OVERRIDING TITLE. APPLYING THE PRINCIPLES LAID DOWN IN THE AFORESAID JUDGMENT, IT MAX NEW YORK LIFE INSURANCE COMPANY LTD. (NOW KNOWN AS MAX LIFE INSURANCE COMPANY LIMITED). 29 WAS CONTENDED THAT THERE IS AN OVERRIDING CHARGE IN TERMS OF CONTRACT OF INSURANCE DUE TO THE REGULATIONS TO PAY 90% OF THE PARTICIPATING SURPLUS TO THE POLICYHOLDERS. THUS, THE FFA REPRESENTS INCOME WHICH NEVER REACHES THE ASSESSEE IN ITS OWN INDIVIDUAL RIGHT BUT IS HELD FO R AND ON BEHALF OF THE POLICYHOLDERS TO WHOM IT IS PAYABLE IN FUTURE. 26. RELIANCE WAS ALSO PLACED ON THE DECISION OF HON BLE SUPREME COURT IN THE CASE OF CIT VS. BIJLI COTTON MILLS (P.) LTD. 11 6 1TR 60. REFERRING TO THE FACTS, IT WAS STATED THAT IN THAT CASE, THE ASSESSE E WAS COLLECTING AS PART OF THE SALES INVOICE, AMOUNT TOWARDS DHARMADA AS PER T HE CUSTOM PREVAILING IN THE AREA WHERE THE ASSESSEE WAS CARRYING ON BUSINES S. THE AMOUNT COLLECTED TOWARDS DHARMADA WAS CLAIMED BY THE ASSESSEE TO BE NOT LIABLE TO TAX ON THE GROUND THAT THE SAME WAS IMPOSED WITH THE LEGAL OBL IGATION TO SPEND THE SAME TOWARDS CHARITY AND, THEREFORE, SUCH AMOUNT WA S DIVERTED BY OVERRIDING TITLE. DISMISSING THE APPEAL OF THE REVENUE, THE SU PREME COURT HELD THAT REALIZATIONS MADE BY THE ASSESSEE FROM ITS CUSTOMER S TOWARDS DHARMADA WAS BEING VALIDLY EARMARKED FOR CHARITY OR CHARITABLE P URPOSES, COULD NOT BE REGARDED AS ASSESSEE'S INCOME CHARGEABLE TO TAX. R ELIANCE WAS ALSO PLACED ON THE DECISION OF HONBLE ALLAHABAD HIGH COURT IN THE CASE OF U.P. BHUMI SUDHAR NIGAM VS. CIT 280 ITR 197 (ALL ) FOR THE PRO POSITION OF THE LAW OF DIVERSION OF INCOME BY OVERRIDING TITLE. IT WAS PO INTED OUT THAT RECENTLY, MUMBAI BENCH OF THE TRIBUNAL IN THE CASE OF ADDL. C IT VS. MUMBAI INTERNATIONAL AIRPORT P. LTD. 184 TTJ 229 (MUM) HEL D THAT PASSENGER SERVICE MAX NEW YORK LIFE INSURANCE COMPANY LTD. (NOW KNOWN AS MAX LIFE INSURANCE COMPANY LIMITED). 30 FEE COLLECTED BY THE ASSESSEE AIRPORT OPERATOR FROM PASSENGERS WAS NOT IN THE NATURE OF INCOME AND ALTERNATIVELY DIVERTED BY OVER RIDING TITLE, ON THE GROUND THAT THE AMOUNT WAS COLLECTED WITH THE CLEAR UNDERS TANDING AND STIPULATION THAT THE SAME WAS MEANT FOR THE SECURITY AGENCIES. 27. RELIANCE WAS ALSO PLACED ON THE RECENT JUDGMENT OF THE HON'BLE SUPREME COURT DECISION IN THE CASE OF CIT VS. MODIP ON 87 TAXMANN.COM 275 (SC) WHEREIN IT WAS CLARIFIED THAT AMOUNTS DEPOSITE D IN THE PERSONAL LEDGER ACCOUNT ('PLA') TOWARDS LIKELY EXCISE DUTY LIABILIT Y, TO BE DISCHARGED IN FUTURE REPRESENTED EXPENDITURE ACCRUED AND ACTUALLY PAID C ONSIDERING THAT THE ASSESSEE HAD NO CONTROL OVER THE AMOUNT ONCE DEPOSI TED AND THE ASSESSEE WAS NOT ENTITLED TO WITHDRAW ANY AMOUNT THEREFROM. IT WAS FURTHER SUBMITTED THAT THE ISSUE WHETHER FUNDS FOR FUTURE A PPROPRIATION ARE ALLOWED IN ONE YEAR OR THE OTHER, IS REVENUE NEUTRAL, CONSI DERING THAT THE SAME ARE HELD BY THE ASSESSEE COMPANY IN FIDUCIARY CAPACITY, FOR AND ON BEHALF OF THE PARTICIPATING POLICYHOLDERS AND THE SAID AMOUNT CAN NOT BE DIVERTED IN FAVOUR OF THE SHAREHOLDERS (EXCEPT TO THE EXTENT OF 10% OF THE SURPLUS AS AND WHEN DECLARED, IN VIEW OF THE BINDING IRDA REGULATIONS). RELIANCE IN THIS REGARD IS PLACED UPON THE JUDGMENT OF THE BOMBAY HIGH COURT I N CIT VS. NAGRI MILLS 33 ITR 681 (BOM), ESPECIALLY TO THE OBSERVATIONS AT PG 684 OF THE JUDGMENT, WHICH READS AS UNDER: 'WE HAVE OFTEN WONDERED WHY THE INCOME-TAX AUTHORIT IES, IN A MATTER SUCH AS THIS WHERE THE DEDUCTION IS OBVIOUSL Y A PERMISSIBLE DEDUCTION UNDER THE INCOME-TAX ACT, RAISE DISPUTES AS TO THE YEAR IN WHICH THE DEDUCTION SHOULD BE ALLOWED. THE QUESTION AS TO THE YEAR MAX NEW YORK LIFE INSURANCE COMPANY LTD. (NOW KNOWN AS MAX LIFE INSURANCE COMPANY LIMITED). 31 IN WHICH A DEDUCTION IS ALLOWABLE MAY BE MATERIAL W HEN THE RATE OF TAX CHARGEABLE ON THE ASSESSEE IN TWO DIFFERENT YEA RS IS DIFFERENT; BUT IN THE CASE OF INCOME OF A COMPANY, TAX IS ATTR ACTED AT A UNIFORM RATE, AND WHETHER THE DEDUCTION IN RESPECT OF BONUS WAS GRANTED IN THE ASSESSMENT YEAR 1952-53 OR IN THE AS SESSMENT YEAR CORRESPONDING TO THE ACCOUNTING YEAR 1952, THAT IS IN THE ASSESSMENT YEAR 1953-54, SHOULD BE A MATTER OF NO C ONSEQUENCE TO THE DEPARTMENT; AND ONE SHOULD HAVE THOUGHT THAT TH E DEPARTMENT WOULD NOT FRITTER AWAY ITS ENERGIES IN FIGHTING MAT TERS OF THIS KIND. BUT, OBVIOUSLY, JUDGING FROM THE REFERENCES THAT CO ME UP TO US EVERY NOW AND THEN, THE DEPARTMENT APPEARS TO DELIG HT IN RAISING POINTS OF THE CHARACTER WHICH DO NOT AFFECT THE TAX ABILITY OF THE ASSESSEE OR THE TAX THAT THE DEPARTMENT IS LIKELY T O COLLECT FROM HIM WHETHER IN ONE YEAR OR THE OTHER.' 28. IT WAS FURTHER POINTED OUT THAT SAME PROPOSITIO N WAS ACCEPTED BY THE DELHI HIGH COURT IN THE CASE OF CIT VS. SHRIRAM PIS TONS & RINGS 220 CTR 404 (DELHI) WHEREIN IT WAS HELD AS UNDER: '..NO DOUBT THAT THE ASSESSEE HAD INCURRED AN EXPEN DITURE. THE ONLY DISPUTE IS REGARDING THE DATE ON WHICH THE LIA BILITY HAD CRYSTALLIZED. IT APPEARS THAT THERE WAS NO CHANGE I N THE RATE OF TAX FOR THE ASSESSMENT YEAR 1983-84 WITH WHICH WE ARE C ONCERNED. THE QUESTION, THEREFORE, IS ONLY WITH REGARD TO THE YEA R OF DEDUCTION AND IT IS A PITY THAT ALL OF US HAVE TO EXPEND SO MUCH TIME AND ENERGY ONLY TO DETERMINE THE YEAR OF TAXABILITY OF THE AMO UNT. 19. BE THAT AS IT MAY, WE ANSWER THE QUESTION IN TH E NEGATIVE, IN FAVOUR OF THE ASSESSEE AND AGAINST THE REVENUE' IT WAS FURTHER POINTED OUT THAT ON THE GROUND OF CO NSISTENCY, THE REVENUE IS NOT ENTITLED TO DISTURB THE CONSISTENT AND ACCEPTED HISTORY OF THE CASE WHEREIN THE AMOUNT STANDING TO THE CREDIT OF FFA IN THE EARLIER YEARS HAS NOT BEEN TREATED AS PART OF THE ACTUARIAL SURPLUS LIABL E TO TAX, IN TERMS OF SECTION 44 OF THE ACT READ WITH RULE 2 OF THE FIRST SCHEDUL E THERETO. MAX NEW YORK LIFE INSURANCE COMPANY LTD. (NOW KNOWN AS MAX LIFE INSURANCE COMPANY LIMITED). 32 29. THUS, IT WAS CONTENDED THAT ON THE BASIS OF THE ABOVE REFERRED DECISIONS THAT IF THE ASSESSEE HAS DISCRETION IN TH E MANNER AND TIMING OF DECLARATION OF (FUTURE) BONUSES, WOULD NOT RESULT I N THE FFA REPRESENTING PROVISION FOR FUTURE PAYOUTS TO POLICYHOLDERS BEING TREATED AS PART OF INCOME OF THE ASSESSEE, WHEN THERE IS A LEGAL ANTECEDENT O BLIGATION TO SPEND SUCH AMOUNTS FOR PAYMENT TO POLICYHOLDERS, BOTH, IN TERM S OF THE CONTRACT OF INSURANCE AND THE EXTANT REGULATIONS. IN OTHER WORD S, AN AMOUNT THAT IS STATUTORILY MANDATED TO BE KEPT ASIDE FOR THE BENEF IT OF POLICYHOLDERS (FFA) FOR FUTURE DISTRIBUTION, CANNOT FORM PART OF ACTUAR IAL SURPLUS. ACCORDINGLY, FFA WOULD THUS HAVE TO BE TAKEN INTO ACCOUNT IN DETERMI NING ACTUARIAL SURPLUS. 30. GROUND NO. 9: RELATES TO THE CLAIM OF THE ASSESSEE IN RESPECT OF THE DIRECTION GIVEN BY THE CIT(A) FOR RE-COMPUTING THE ASSESSED CARRIED FORWARD LOSSES OF AY 2002-03 AND OTHER EARLIER YEARS FOR TH E PURPOSE OF ALLOWING SET OFF U/S. 72 OF THE INCOME TAX ACT. THE LEARNED AR IN THIS REGARD SUBMITTED THAT THE CIT(A) DIRECTED THE ASSESSING OFFICER TO R ECOMPUTE CARRY FORWARD LOSSES OF THE A.Y. 2002-03 AND OTHER EARLIER YEARS. THIS DIRECTION AMOUNTS TO ORDER OF REMAND AND REOPENING OF ASSESSMENTS OF THE PRIOR YEARS. SUCH AN ACTION IS EX FACIE ILLEGAL AND MANIFESTLY IN VIOLAT ION OF THE ACT AND SETTLED PRINCIPLES OF LAW. RELIANCE WAS PLACED IN THIS REG ARD ON THE DECISIONS OF HON'BLE SUPREME COURT IN THE CASE OF ITO V. MURLIDH AR BHAGWAN DAS 52 ITR 335 AND CIT V. MANICK SONS 74 ITR 1, WHEREIN, IT HAS BEEN HELD THAT POWERS OF AN APPELLATE AUTHORITY ARE RESTRICTED TO THE ASS ESSMENT YEAR IN QUESTION MAX NEW YORK LIFE INSURANCE COMPANY LTD. (NOW KNOWN AS MAX LIFE INSURANCE COMPANY LIMITED). 33 AND CANNOT EXTEND TO ASSESSMENT OF A YEAR WHICH IS NOT THE SUBJECT MATTER OF APPEAL. IT WAS POINTED OUT THAT SAID POSITION OF LA W HAS ALSO BEEN FOLLOWED BY THE JURISDICTIONAL HIGH COURT IN THE CASE OF MARUBE NI INDIA P. LTD. V. CIT (2010) 328 ITR 306 IN THE CONTEXT OF THE POWERS OF THE ITAT TO ISSUE DIRECTIONS RELATING TO AN ASSESSMENT YEAR WHICH IS NOT THE SUBJECT MATTER OF THE APPEAL WHEREIN THE HON'BLE HIGH COURT HAS HELD THAT THE ITAT CAN ONLY PASS THOSE ORDERS WHICH ARE NECESSARY FOR DISPOSAL OF THE APPEAL IN QUESTION. FURTHER, RELIANCE IS ALSO PLACED ON THE JUDGMENT OF KALA NIKETAN VS. UOI 293 CTR 178 (BOM). 31. IN RESPECT OF GROUND NOS.6, 7 & 8, IT WAS CONTENDED THAT SINCE THE INCOME OF THE ASSESSEE HAS TO BE COMPUTED IN ACCORD ANCE WITH RULE 2 OF THE FIRST SCHEDULE PROVIDED IN SECTION 44 OF THE INCOME TAX ACT. SECTION 44 OF THE ACT START WITH NON-OBSTANTE CLAUSE AND OVERRIDI NG PROVISIONS OF THE ACT AND STATE THAT THE PROFITS AND GAINS OF LIFE INSURA NCE BUSINESS IS COMPLETELY GOVERNED BY THE RULES CONTAINED IN THE RULE 2 OF TH E FIRST SCHEDULE. THE ASSESSING OFFICER WAS NOT CORRECT IN MAKING CERTAIN DISALLOWANCES AS STIPULATED IN GROUND NOS. 6,7 & 8. THEREFORE, THE ADDITIONS IN RESPECT OF THESE DISALLOWANCES MUST BE DELETED. 32. THE LEARNED DR ALSO WENT ON TO EXPLAIN THE BRIE F HISTORY OF TAXATION OF THE INSURANCE COMPANIES BY REFERRING VARIOUS PROVIS IONS OF INCOME TAX ACT, INSURANCE ACT AND IRDA AS POINTED OUT BY LEARNED AR ALSO AND STATED THAT IN THE CASE OF INSURANCE COMPANIES CARRYING ON LIFE IN SURANCE BUSINESS, THERE MAX NEW YORK LIFE INSURANCE COMPANY LTD. (NOW KNOWN AS MAX LIFE INSURANCE COMPANY LIMITED). 34 ARE TWO SEPARATE FUNDS, THE SHAREHOLDER'S FUND AND THE POLICYHOLDER'S FUND. UNLIKE IN OTHER INDUSTRIES SHAREHOLDER'S FUND DOES NOT PLAY AN ACTIVE ROLE IN RUNNING THE BUSINESS AND REMAINS INVESTED. IT WAS CONTENDED THAT TOTAL INCOME OF LIFE INSURANCE COMPANIES IS EQUAL TO (INV ESTMENT INCOME - EXPENSES) OF SHAREHOLDER'S FUNDS + PROFITS AND GAIN S OF LIFE INSURANCE BUSINESS. 33. FURTHER IT WAS SUBMITTED THAT GLOBALLY THE PROF ITS AND GAINS OF LIFE INSURANCE BUSINESS (POLICY HOLDER'S FUNDS) ARE COMP UTED BY TWO METHODS A) INVESTMENT INCOME - ALLOWABLE EXPENSES = NET INCOME B) INVESTMENT INCOME + PREMIUM INCOME + MISC ELLANEOUS INCOME - ALLOWABLE MANAGEMENT EXPENSES - PAYMENTS TO POLICY HOLDERS - INCREASE IN LIABILITY = VALUATION SURPLUS THUS, IT WAS CONTENDED THAT A LIFE INSURANCE COMPAN Y INCURS A LIABILITY WHENEVER A POLICY IS ISSUED AND AN ADDITIONAL LIABI LITY WHEN RENEWAL PREMIUM IS RECEIVED. THIS LIABILITY IS ESTIMATED BY ACTUARI AL TECHNIQUES USING APPROPRIATE DISCOUNTS AND PROBABILITY FACTORS. IN CASE OF A NEW COMPANY, NET INCOME WILL BE NEGATIVE FOR A LONG PERIOD. HOWEVER, VALUATION SURPLUS MAY BE POSITIVE AFTER FEW YEARS AS THE COMPANY MATURES AND THE NET INCOME START EXCEEDING THE VALUATION SURPLUS. BEFORE 1918, THE LIFE INSURANCE COMPANIES IN INDIA, WERE BEING ASSESSED ON PROFITS LIKE OTHER TRADING COMPANIES. THE PROCEDURE HAD EVOLVED DEPARTMENTALLY. 1918 AND 1922 ACTS GAVE STATUTORY RECOGNITION OF THESE PROCEDURES. LATER, TILL 1939, TAXATION OF LIFE INSURANCE MAX NEW YORK LIFE INSURANCE COMPANY LTD. (NOW KNOWN AS MAX LIFE INSURANCE COMPANY LIMITED). 35 COMPANIES WAS GOVERNED BY THE INCOME TAX ACT 1932 A ND RULES 25 AND 35, AND THE AVERAGE ANNUAL GROSS VALUATION SURPLUS (VALUATION SURPLUS WITH CERTAIN ADJUSTMENTS) WAS TAXED AS PROFITS AND GAINS OF LIFE INSURANCE BU SINESS WITHOUT REDUCING THE SURPLUS ALLOCATED BACK TO POLI CY HOLDERS. AFTER THAT, HIGHER OF THE FOLLOWING TWO WAS TAKEN AS PROFITS AN D GAINS OF LIFE INSURANCE BUSINESS:- (I) INVESTMENT INCOME - ALLOWABLE MANAGEMEN T EXPENSES (CEILING - 85 % OF FIRST YEAR PREMIUM AND 8.5 % OF RENEWAL PREMIUM) (II) VALUATION SURPLUS - 50 % OF SURPLUS ALL OCATED TO POLICY HOLDERS BY 1944 ACT 85 % LIMIT WAS INCREASED TO 90 % AND 8.5 % LIMIT WAS INC REASED TO 12 % (THIS WAS SUBSEQUENTLY INCREASED TO 15 % BY 1953 ACT). THE 50 % LIMIT OF SURPLUS ALLOCATED TO POLICY HOLDERS WAS IN CREASED TO 80 % BY 1953 ACT. AS PER RULE 2 WHICH WAS IN EXISTENCE PRIOR TO AMENDMENT MADE BY FINANCE ACT, 1976, HIGHER OF THE NET INCOME AND VAL UATION SURPLUS WAS TO BE TAKEN AS PROFITS AND GAINS OF LIFE INSURANCE BUSINE SS. SECTION 30 TO 43A HAS TO BE APPLIED FOR DETERMINATION OF VALUATION SURPLUS. THERE WAS CAP ON ALLOWABLE MANAGEMENT EXPENSES. ONLY 80 % OF SURPLUS ALLOCATED TO POLICY HOLDERS WAS ALLOWED AS DEDUCTION. ASSESSING OFFICER WAS EMPOWERED TO MAKE ADJUSTMENTS IN VALUATION SURPLUS AFTER HAVING CONSU LTATION WITH CONTROLLER OF INSURANCE. THERE WERE RULES PREVAILING FOR TAX FREE INTEREST. UNDER THE HEAD INCOME FROM HOUSE PROPERTY INCOME WAS ALSO BE COMPU TED AS PER INCOME MAX NEW YORK LIFE INSURANCE COMPANY LTD. (NOW KNOWN AS MAX LIFE INSURANCE COMPANY LIMITED). 36 TAX ACT. THERE WERE ALSO RULES REGARDING REALIZATIO N OF PROFITS/LOSS FROM INVESTMENTS. 34. THE PROVISIONS OF COMPUTATION OF INCOME FROM LI FE INSURANCE BUSINESS WAS SIMPLIFIED WITH THE INSERTION OF SECTION 115B T O THE FINANCE ACT 1976, WHICH PROVIDED THAT THE PROFITS AND GAINS OF LIFE I NSURANCE BUSINESS SHALL BE TAXED AT 12.5 % OF GROSS VALUATION SURPLUS, RATHER THAN AT 52.5 % (EXCLUDING SURCHARGE) EARLIER AND REMAINING INCOME SHALL BE TA XED AT NORMAL RATE OF TAX. RULE 2 OF THE FIRST SCHEDULE WAS AMENDED AND IT PRO VIDED THAT ONLY THE GROSS VALUATION SURPLUS WOULD BE TAXED. ADJUSTMENT U/S 30 TO 43 A, COMPUTATION UNDER THE INCOME FROM HOUSE PROPERTY, RULES OF PROF ITS/LOSS FROM REALIZATION OF INVESTMENT AND RULE 3 WERE OMITTED. 35. PRIOR TO AMENDMENT I.E. IN A.Y. 1976-77, THE PR OFITS AND GAINS OF LIFE INSURANCE BUSINESS WERE TAXED AT 52.5 % (EXCLUDING SURCHARGE). AS PER LIFE INSURANCE CORPORATION ACT, 95% OF ITS VALUATION SUR PLUS HAS TO BE ALLOCATED TO POLICYHOLDERS. THIS MEANS THAT {100 - 80% OF 95} % I.E. 24% OF VALUATION SURPLUS WAS TO BE TAXED AT 52.5 %. IF THIS IS APPLI ED TO WHOLE SURPLUS, IT WILL GIVE THAT VALUATION SURPLUS WAS TO BE TAXED @ 12.6% . THEREFORE, IN OTHER WORDS NET VALUATION SURPLUS WAS TO BE TAXED AT 52.5 % OR THE GROSS VALUATION SURPLUS WAS TO BE TAXED AT 12.6 %. THIS W AS THE RATIONALE OF WITHDRAWING DEDUCTION OF ALLOCATION OF SURPLUS TO P OLICY HOLDERS, WHILE REDUCING TAX RATE TO 12.5 %. THE CBDT CIRCULAR NO. 202 DATED 5.7.1976, PARA 40.2 REMOVED ANY AMBIGUITY IN THIS REGARD. IT WAS A FAIR DEAL AS EVEN AFTER MAX NEW YORK LIFE INSURANCE COMPANY LTD. (NOW KNOWN AS MAX LIFE INSURANCE COMPANY LIMITED). 37 REDUCTION OF CORPORATE TAX RATES, IF THE ORIGINAL C ONDITION THAT X % OF VALUATION SURPLUS SHOULD NOT BE LESS THAN THE TAX AT CORPORAT E RATE ON HIGHER OF NET INCOME OR NET SURPLUS IS APPLIED, THE VALUE OF 'X' WOULD BE HIGHER THAN 12.5% EVEN TODAY AS WHEN A COMPANY GROWS, RATE OF G ROWTH OF NET INCOME IS HIGHER THAN RATE OF GROWTH OF NET SURPLUS. THOUG H, THE FIRST SCHEDULE TALKS OF AVERAGE SURPLUS, THAT IS NO LONGER RELEVANT AS A CTUARIAL VALUATION IS NOW DONE EVERY YEAR AS AGAINST ONCE IN THREE TO FIVE YE ARS EARLIER. 36. AS REGARDS GROUND NO. 3, RELIANCE WAS PLACED ON CIT(A) ORDER AND CONTENDED THAT IT HAS BEEN DEMONSTRATED IN THE ORDE R OF CIT(A), THAT THIS ISSUE IS INFRUCTUOUS AS THE ISSUE IS NOT OF OLD AND NEW FORMS BUT OF DEDUCTION OF SURPLUS ALLOCATED TO POLICY HOLDERS OR RETAINED AS FUND FOR FUTURE APPROPRIATION(FFA). 37. WITH RESPECT TO THE ISSUE OF ENHANCEMENT, IT WA S STATED THAT THE ASSESSEE HAD RAISED SEVEN SPECIFIC GROUNDS RELATING TO SECTION 44 OF THE IT ACT BEFORE THE CIT(A). THE CIT(A) HAS ONLY ASSESSED THE INCOME OF THE ASSESSEE AS PER SECTION 44 OF THE I.T. ACT, THEREBY DELETING THE ADDITIONS WHICH WERE NOT AS PER SECTION 44 AND ENHANCING THE ASSESSMENT BY MAKING ADDITION WHICH WERE REQUIRED TO BE MADE AS PER THE SAID SECTION. HE DID NOT EVEN TRAVEL OUTSIDE THE SUBJECT MATTER OF APPEAL, T HOUGH THE REVENUE SUBMITS THAT HE HAD STATUTORY POWERS TO DO SO. IN THIS REGARD, IT WAS SUBMITTED THAT HON'BLE DELHI HIGH COURT IN THE CASE OF GURINDER MOHAN SINGH NINDRAJOG VS COMMISSIONER OF INCOME TAX REPORTED IN 348 ITR 170 HAS HELD MAX NEW YORK LIFE INSURANCE COMPANY LTD. (NOW KNOWN AS MAX LIFE INSURANCE COMPANY LIMITED). 38 THAT MERELY BECAUSE THE ULTIMATE ORDER PASSED BY TH E ASSESSING OFFICER WAS SILENT ABOUT THE ITEM ON WHICH ENHANCEMENT WAS MADE BY CIT (A) AND THERE WAS NO DISCUSSION THEREUPON WOULD NOT MEAN THAT ASS ESSING OFFICER HAD NOT CONSIDERED THE SAME. RELIANCE IS ALSO PLACED ON THE DECISION OF HON'BLE KERALA HIGH COURT IN THE CASE OF POPULAR AUTOMOBILES REPOR TED IN 187 ITR 86 HOLDING THAT IT IS THE STATUTORY DUTY OF CIT (A) TO SEE THA T TRUE AND PROPER ASSESSMENT IS MADE. IT ALSO NEEDS TO BE EMPHASIZED THAT SECTIO N 251 (1)(A) GAVE CIT (A) A POWER TO SET ASIDE AN ASSESSMENT WHICH WAS WITHDR AWN WITH EFFECT FROM 1 ST JUNE, 2001. THEREFORE, THE SCOPE OF ENHANCEMENT IN THE DECISIONS PERTAINING TO THE PERIOD AFTER 01.06.2001 IS MUCH WIDER. PRIOR TO 01.06.2001 THE CIT (A) COULD SET ASIDE AN ASSESSMENT ORDER FOR DE-NOVO ASS ESSMENT IN WHICH EVERYTHING WAS OPEN BEFORE THE ASSESSING OFFICER. I T WAS IN THIS BACKGROUND THAT THERE WERE CERTAIN DECISIONS HOLDING THAT IN C ASE OF NEW SOURCES OF INCOME (WHICH IS NOT THE CASE IN PRESENT APPEAL) TH E CIT (A) SHOULD REMAND [SET ASIDE] THE MATTER TO THE ITO TO DEAL WITH THE SAME RATHER THAN ENHANCING (REFERENCE 161 ITR 82)]. AFTER 01.06.2001 , THE WORD 'SET ASIDE' HAS BEEN REMOVED, SO THAT THE ASSESSMENTS ATTAIN FI NALITY AT THE FIRST APPELLATE LEVEL. THEREFORE, THE SCOPE OF ENHANCEMEN T GETS FURTHER INCREASED AFTER 01.06.2001. ANY CONTRARY INTERPRETATION WILL CREATE A SITUATION, WHEREIN THE CIT (A) CAN NEITHER SET ASIDE NOT ENHANCE, BUT THE REVENUE CAN MOVE BEFORE ITAT FOR SETTING ASIDE THE MATTER AND HON'BL E ITAT MAY SET ASIDE TO THE ASSESSING OFFICER FOR DE-NOVO ASSESSMENT. THE P OWERS TO SET ASIDE AN MAX NEW YORK LIFE INSURANCE COMPANY LTD. (NOW KNOWN AS MAX LIFE INSURANCE COMPANY LIMITED). 39 ISSUE TO THE ASSESSING OFFICER FOR DE-NOVO ASSESSME NT BY THE TRIBUNAL IS WELL SETTLED. HOWEVER, IF CIT (A) CANNOT ENHANCE, IT WOU LD RESTRICT THE POWERS OF HON'BLE ITAT TO SET ASIDE THE MATTER TO ASSESSING O FFICER FOR DE-NOVO ASSESSMENT WHICH MAY LEAD TO ENHANCEMENT. THAT CANN OT BE THE CORRECT INTERPRETATION. 38. WITH REGARD TO GROUND 9 RELATING TO SECTION 72 I.E. SETTING ASIDE THE BROUGHT FORWARD LOSSES, IT WAS POINTED OUT THAT AN ORDER U/S 154 WAS ALSO BEEN PASSED BY CIT(A) ON 07.02.17(THE COPY OF WHICH WAS PLACED BEFORE US DURING THE COURSE OF HEARING), REJECTING THE ASSESS EE'S APPLICATION ON THIS ISSUE AND FURTHER CLARIFYING THE ISSUE. AS PER FIRS T SCHEDULE, PROFITS AND GAINS OF LIFE INSURANCE BUSINESS ARE TO BE TAKEN AT GROSS VALUATION SURPLUS AFTER EXCLUDING THE SURPLUS/DEFICIT OF EARLIER YEARS AND THIS PROFITS AND GAINS IS TO BE TAXED U/S 115B(1)(I) AT 12.5 %. SO QUESTION OF S ET OFF OF LOSS OF EARLIER YEARS DOES NOT ARISE AS FAR AS INCOME TAXABLE U/S 1 15 B(1)(I) AND CORRESPONDING TAX LIABILITY IS CONCERNED. OTHERWISE SECTION 115B(1)(I) WILL BECOME REDUNDANT. IT WAS FURTHER SUBMITTED ANY INTE RPRETATION WHICH MAKES A PROVISION REDUNDANT CANNOT BE THE CORRECT INTERPR ETATION AS HELD BY THE HON'BLE APEX COURT IN THE CASE OF SURAT ART SILK CL OTH MANUFACTURERS ASSOCIATION 121 ITR 1. SECTION 72 IS A PART OF COMP UTATION OF TOTAL INCOME. SECTION 4 IS A CHARGE ON TOTAL INCOME. BUT SECTION 115B(1)(I) LEVIES TAX ON VALUATION SURPLUS OF THE YEAR AND 115B(1)(II) TALKS OF TOTAL INCOME LESS INCOME U/S. 115B(1)(I). IT WAS SUBMITTED THAT THE QUESTION OF SET OFF OF MAX NEW YORK LIFE INSURANCE COMPANY LTD. (NOW KNOWN AS MAX LIFE INSURANCE COMPANY LIMITED). 40 LOSSES ARISES ONLY FOR INCOME TAXABLE U/S 115 B(L)( II) AT NORMAL RATES. BUT THIS YEAR THERE IS LOSS U/S 115 B(L)(II). WITHOUT PREJUD ICE TO THE SAME AS PER ASSESSEE, THERE IS NO INCOME TAXABLE U/S 115 B(L)(I I). THOUGH THIS CONTENTION OF THE ASSESSEE HAS NOT BEEN ACCEPTED BY CIT(A), TH E ASSESSEE'S CONTENTION IS SELF-CONTRADICTORY. HOWEVER, ANY VALUATION DEFIC IT WILL REDUCE INCOME IN SHAREHOLDER'S ACCOUNT OR INCREASE LOSS IN SHAREHOLD ER'S ACCOUNT AS SECTION 115(1)(I) WOULD BE APPLICABLE ONLY IN CASE OF SURPL US. THE CORRESPONDING LOSS CAN BE CARRIED FORWARD AND SET OFF AGAINST INCOME U /S 115 B(L)(II) IN FUTURE YEARS. THUS, IT WAS VEHEMENTLY CONTENDED THAT GROUN D 9 NEEDS TO BE DISMISSED. 39. FOR GROUND NOS. 2, 6, 7 AND 8 AND ISSUE OF INCOME IN SHARE HOLDERS ACCOUNT, IT WAS CONTENDED THAT SHAREHOLDER'S ACCOUN T A-PL DOES NOT INCLUDE CAPITAL RECEIPT OF EQUITY CAPITAL. IT IS A PROFIT & LOSS ACCOUNT. THE INCOME IN THIS ACCOUNT IS INVESTMENT INCOME. THE ASSESSEE HAS ITSELF ADDED ROYALTY PAID AND DEBITED IN THIS ACCOUNT IN THE COMPUTATION OF I NCOME, THERE BY ACCEPTING THAT NORMAL PROVISIONS OF THE ACT APPLY TO THIS ACC OUNT. EVEN OLD FORM 'G' DEBITS PROFIT TRANSFERRED TO P & L ACCOUNT AND CRED ITS THE LOSS TRANSFERRED TO P & L ACCOUNT, THEREBY ESTABLISHING THAT P & L ACCOUN T WAS INDEPENDENT OF FORMS 'G' , 'H' AND 'I'. 40. AS REGARDS THE DECISIONS RELIED UPON BY THE ASS ESSEE, THE FACTUAL AND LEGAL ASPECTS OF THE PRESENT APPEAL AS DISCUSSED IN THE ORDER OF CIT(A), THE LEARNED DR SUBMITTED THAT NONE OF THE DECISIONS REL IED UPON ARE APPLICABLE. MAX NEW YORK LIFE INSURANCE COMPANY LTD. (NOW KNOWN AS MAX LIFE INSURANCE COMPANY LIMITED). 41 THEY HAVE NOT DISCUSSED OR CONSIDERED ALL THE FACTU AL CUM LEGAL ASPECTS OF THIS APPEAL. THEREFORE, THOSE DECISIONS DO NOT APPL Y IN PRESENT CASE. RELIANCE IS ALSO PLACED ON THE DECISIONS IN THE CASE OF VINA Y EXTRACTION (P) LTD (271 ITR 450), ISKRAEMECO REGENT LTD (331 ITR 312), BLUE STAR LTD ( 217 ITR 514) AND ITA NO 3451/AHD/2014 DATED 13.11.1017(ITAT 'A' BENCH ITAT) WHICH DEAL WITH THE ISSUE OF BINDING NATURE OF DECISIONS. ALL THE DECISIONS RELIED UPON BY THE ASSESSEE ARE SUB-SILENTIO AS FAR AS THE ISSUES INVOLVED IN THIS APPEAL ARE CONCERNED. SOME DECISIONS ARE IN FACT PE RINCURIAM. 41. IT WAS FURTHER SUBMITTED THAT IRDA ACT 1999 FOR MS PART OF INSURANCE ACT 1938 (4 OF 1938) ONLY. IN FACT, SECTION 30, REA D WITH FIRST SCHEDULE OF IRDA ACT 1999 DEALS WITH THE AMENDMENTS IN INSURANC E ACT 1938 (4 OF 1938) ONLY. IT SUBSTITUTES CONTROLLER OF INSURANCE WITH C HAIRPERSON OF AUTHORITY AT VARIOUS PLACES IN THE INSURANCE ACT 1938 (4 OF 1938 ) AND MAKES IRDA ACT/REGULATIONS INTEGRAL PART OF INSURANCE ACT 1938 (4 OF 1938). A COPY OF CORRESPONDING AMENDMENTS WAS FILED AND REFERRED TO. THEREFORE, IT WAS CONTENDED THAT RULE 2 TO FIRST SCHEDULE TO INCOME T AX ACT DOES NOT INCLUDE ACTUARY REPORT AS PER IRDA ACT/REGULATIONS IS AGAIN ST THE EXPRESS THE PROVISIONS OF THE ACT AND IT MAKES THE FIRST SCHEDU LE OF INCOME TAX REDUNDANT. EVEN OTHERWISE WITH NO CONTROLLER OF INS URANCE AS PER OLD ACT AND CORRESPONDING AMENDMENTS INCORPORATING IRDA ACT/REG ULATIONS IN INSURANCE ACT 1938 (4 OF 1938), IT IS NOT UNDERSTOOD, HOW THE PARALLEL ACCOUNTS AS PER MAX NEW YORK LIFE INSURANCE COMPANY LTD. (NOW KNOWN AS MAX LIFE INSURANCE COMPANY LIMITED). 42 OLD REGULATIONS COULD BE MAINTAINED , AND WHICH AUT HORITY WOULD CERTIFY THEM TO BE CORRECT. 42. WITHOUT PREJUDICE TO THE ABOVE, IT WAS FURTHER CONTENDED THAT FOR THE DECISION IN THE CASE OF ICICI PRUDENTIAL INSURANCE COMPANY LTD, REPORTED IN 141 ITD 41, AND ALL OTHER DECISIONS FOLLOWING THE S AID DECISION OR CONFIRMING THE SAID DECISION, IS IN RESPECT OF AY 2005-06 TO 2 008-09. FOR HOLDING THAT IRDA REGULATIONS DO NOT APPLY TO RULE 2 OF FIRST SC HEDULE, IT HAS HEAVILY RELIED (IN PARA 28 OF THE ITS ORDER) ON THE FACT THAT THE WORDS IRDA ACT/REGULATIONS WERE ADDED IN RULE 5 OF FIRST SCHE DULE BY FINANCE ACT 2009 W.E.F. 01.04.2011 AND THE OMISSION TO ADD THE SAME IN RULE 2 MEANS LEGISLATIVE INTENT THAT UN AMENDED PROVISIONS OF IN SURANCE ACT 1938 (4 OF L938) WOULD APPLY TO RULE 2. BY IMPLICATION IT MEAN S THAT REPEALED INSURANCE REGULATION OF 1938 ALSO APPLY. THERE CANNOT BE A JU DICIAL COGNIZANCE OF SUCH A PROPOSITION OF LAW. REPEALED PROVISIONS CANNOT A PPLY TO THE ASSESSEE FOR DETERMINING ITS TAXABLE INCOME. 43. MOREOVER, THE RULE 5 DEALS WITH GENERAL INSURAN CE. IF WE REFER TO THE CIRCULAR 5/2010 OF CBDT EXPLAINING THE AMENDMENTS B Y FINANCE ACT 1999, THE PURPOSE OF MENTIONING IRDA ACT/REGULATIONS IN RULE 5 BECOMES CLEAR AND ANY FURTHER INTERPRETATION OF LEGISLATIVE INTENT IS IMA GINATIVE. 44. THUS, IT WAS VEHEMENTLY CONTENDED THAT THERE HA S ALWAYS BEEN A FUNDAMENTAL DIFFERENCE IN THE TAXATION OF LIFE INSU RANCE COMPANIES AND GENERAL INSURANCE COMPANIES. GENERAL INSURANCE IS S HORT TERM INSURANCE AND MAX NEW YORK LIFE INSURANCE COMPANY LTD. (NOW KNOWN AS MAX LIFE INSURANCE COMPANY LIMITED). 43 OFTEN YEAR TO YEAR BASIS. SO, THE CONCEPT OF ACTUAR Y VALUATION OF PRESENT VALUE OF LONG TERM LIABILITIES DOES NOT HAVE ANY ROLE TO PLAY IN GENERAL INSURANCE. SUB-SECTION 7 OF SECTION 64VA (AS AMENDED BY IRDA ACT 1999) ALSO TALKS OF ACTUARY FOR LIFE INSURANCE BUSINESS AND AUDITOR FOR GENERAL INSURANCE BUSINESS. THUS, IT WAS SUBMITTED THAT THE ACCOUNTS OF GENERAL INSURANCE BUSINESS ARE MAINTAINED AS PER NORMAL ACCOUNTANCY P RINCIPLES SUBJECT TO CERTAIN RESTRICTIONS IN CORRESPONDING INSURANCE REG ULATIONS. THIS IS SIMILAR TO THE PROVISIONS OF SECTION 115JB WHICH TALKS OF ACCO UNTS TO BE MAINTAINED AS PER COMPANY LAW. AS PER RULE 5, PROFITS AND GAINS OF NON-LIFE INSURANCE BUSINESS IS TAKEN TO BE PROFITS DISCLOSED IN THE AN NUAL ACCOUNT, COPIES OF WHICH WERE REQUIRED TO BE FURNISHED TO THE CONTROLL ER OF INSURANCE UNDER THE INSURANCE ACT, 1938 (4 OF 1938), SUBJECT TO ADJUSTM ENTS FOR UNEXPIRED RISK AND DISALLOWANCES UNDER SECTION 30 TO SECTION 43B. THE INSURANCE ACT, 1938 WAS AMENDED IN 1999 AND THE INSURANCE REGULATORY DE VELOPMENT AUTHORITY (IRDA) WAS CREATED. IN THE FINANCIAL YEAR 2001-02, IRDA INTRODUCED 'IRDA (PREPARATION OF FINANCIAL STATEMENTS AND AUDITOR'S REPORT OF INSURANCE COMPANIES) REGULATIONS, 2002'. ACCORDING TO THESE C HANGED NORMS, A NON- LIFE INSURANCE COMPANY HAD TO INCLUDE PROFIT OR LOS S ON REALIZATION/SALE OF INVESTMENT IN THE PROFIT AND LOSS ACCOUNT. DUE TO T HIS, THE ACT HAD BEEN AMENDED TO PROVIDE THAT ANY INCREASE IN RESPECT OF ANY AMOUNT TAKEN CREDIT FOR IN THE ACCOUNTS ON ACCOUNT OF APPRECIATION OF O R GAINS ON REALIZATION OF INVESTMENTS IN ACCORDANCE WITH THE REGULATIONS PRES CRIBED BY IRDA, SHOULD BE MAX NEW YORK LIFE INSURANCE COMPANY LTD. (NOW KNOWN AS MAX LIFE INSURANCE COMPANY LIMITED). 44 TREATED AS INCOME AND INCLUDED IN THE COMPUTATION O F THE TOTAL INCOME. SIMILARLY, DEDUCTION SHOULD BE ALLOWED IN RESPECT O F ANY AMOUNT EITHER WRITTEN OFF OR PROVIDED IN THE ACCOUNTS TO MEET DIMINUTION IN OR LOSS ON REALIZATION OF INVESTMENTS IN ACCORDANCE WITH THE REGULATIONS PRES CRIBED BY IRDA. THUS, IT WAS CONTENDED THAT THE AMENDMENT WAS IN TOTALLY DIF FERENT CONTEXT. MOREOVER, EVEN THE OLD INSURANCE RULES HAVE NOT BEE N SPECIFICALLY MENTIONED IN RULE 2 OF THE FIRST SCHEDULE OF INCOME TAX ACT T HOUGH THE SAME ARE MENTIONED IN RULE 5. 45. WITHOUT PREJUDICE IT WAS CONTENDED THAT HON'BLE ITAT IN THE CASE OF ICICI PRUDENTIAL WAS CONSIDERING ASSESSMENT YEARS A Y 2005-06 TO 2008-09 WHILE PRESENT APPEAL IS FOR AY 2010-11. IRDA ACT CA ME INTO FORCE IN 1999 AND INSURANCE ACT, 1938 (4 OF 1938) WAS ACCORDINGLY AME NDED. IRDA REGULATIONS CAME AFTER ALL THESE ASSESSMENT YEARS. THEREFORE, A PROVISION WHICH HAS BEEN INTRODUCED W.E.F. AY 11-12, THAT TOO IN DIFFERENT C ONTEXT, CANNOT BE USED TO INTERPRET PROVISIONS AS IT EXISTED BEFORE THAT IN D IFFERENT CONTEXT. 46. ULTIMATELY, HE SUMMARIZED THE FINDINGS OF THE D ECISION OF HON'BLE ITAT MUMBAI IN THE CASE OF ICICI PRUDENTIAL CO., LTD., 1 40 ITD 41 IN THE FOLLOWING MANNER:- (A) THE ACTUARIAL SURPLUS IN POLICY HOLDERS ACCOUNT IS TO BE CONSIDERED AFTER EXCLUDING THE FUNDS TRANSFERRED FROM SH AREHOLDERS ACCOUNT AS IT AMOUNTS TO TAXING THE EQUITY/RESER VES OF SHAREHOLDERS A/C MAX NEW YORK LIFE INSURANCE COMPANY LTD. (NOW KNOWN AS MAX LIFE INSURANCE COMPANY LIMITED). 45 [NEW FORM A-PL]. (THERE IS NO SUCH GROUND IN PRESEN T APPEAL AS CIT(A) HAS FOLLOWED THIS] (B) SECTION 14A WILL NOT APPLY TO LIFE INSURANCE BU SINESS. (NO SUCH GROUND IS THERE IN PRESENT APPEAL) (C) BENEFIT OF SECTION 10(23AAB) AND 10(34) IS AVAI LABLE TO THE LIFE INSURANCE BUSINESS. (NO SUCH GROUND IS THERE IN PRE SENT APPEAL) (D) INCOME IN SHARE HOLDERS' ACCOUNT IS TO BE CONSI DERED TO BE ARISING FROM LIFE INSURANCE BUSINESS AND NOT ASSESSABLE UND ER THE HEAD INCOME FROM OTHER SOURCES. [NOT RELEVANT IN THIS APPEAL AS FAR AS RATE OF TAXATION IS CONCERNED, AS THERE IS LOSS IN SHARE HO LDER'S A/C FOR OTHER ISSUES], HE RELIED ON THE ORDER OF CIT(A) AND SUBMI SSIONS MADE IN THIS APPEAL. (E) ADJUSTMENT OF TOTAL SURPLUS AS PER FORM I ON ACCOUNT OF NEGATIVE RESERVES IS NOT PERMISSIBLE AS AO HAS NO POWER TO M ODIFY THE AMOUNT OF ACTUARIAL VALUATION IN VIEW OF THE DECISION OF A PEX COURT REPORTED IN 51 ITR 773 IN THE CASE OF LIC. (NO SUCH GROUND IS T AKEN THERE IN PRESENT APPEAL) (F) ADJUSTMENT ON ACCOUNT OF DEPRECIATION CANNOT BE MADE BY AO. (NO SUCH GROUND IS TAKEN THERE IN PRESENT APPEAL) (G) OLD FORM I IS TO BE CONSIDERED FOR ACTUARIAL SU RPLUS AND NOT NEW FORM-1.(THIS IS NOT RELEVANT AS FAR AS ENHANCEMENT ON ACCOUNT OF FFA AND SURPLUS ALLOCATED TO POLICY HOLDERS IS CONCERNE D). MAX NEW YORK LIFE INSURANCE COMPANY LTD. (NOW KNOWN AS MAX LIFE INSURANCE COMPANY LIMITED). 46 THUS, IT WAS CONTENDED THAT EXCEPT ISSUE IN ABOVE P ARA (D) WHICH IS RELEVANT ONLY FOR GROUND NO. 2(LEGAL), GROUND NO.6 (RS. 2,41 ,83,000), GROUND NO 7. (RS. 2,50,00, 000) AND GROUND NO 8 (RS. 2,500), NO OTHER ISSUE IS RELEVANT. 47. WITHOUT PREJUDICE TO THE ABOVE, LEARNED DR REFE RRED TO THE DECISION OF ITAT IN THE CASE OF ASSESSEE WHEREIN IT HAS HELD TH AT TRANSFER PRICING PROVISIONS ARE APPLICABLE IN THE CASE OF ASSESSEE, AS ONLY SECTION 28 TO 43B ARE EXCLUDED, AS FAR AS PROFITS AND GAINS OF LIFE I NSURANCE BUSINESS ARE CONCERNED. SECTION 14A ALSO FALLS OUTSIDE SECTION 2 8 TO 43B. THE SAME VIEW WILL APPLY TO SECTION 80G ALSO. 48. WITH REGARD TO THE ISSUE OF APPLICABILITY OF SE CTION 44 TO SHARE HOLDER'S ACCOUNT, IT WAS SUBMITTED THAT IRDA ACT CAME INTO F ORCE IN 1999 AND INSURANCE ACT, 1938 (4 OF 1938) WAS ALSO AMENDED. I RDA REGULATIONS CAME SUBSEQUENTLY. EARLIER THERE WERE INSURANCE RULES 19 39. AS PER ASSESSEE ACCOUNTS ARE TO BE MAINTAINED, PRESENTED AND BUSINE SS IS TO BE REGULATED AS PER A NON-EXISTENT REGULATIONS, REGULATED BY A NONE XISTENT REGULATOR AND PREPARED BY NON-EXISTENT APPOINTED ACTUARY, FOR THE PURPOSE UNDER NON- EXISTENT PROVISIONS OF THE ACT. THIS IS TO BE APPRE CIATED THAT THE CONCEPT OF REVENUE ACCOUNT, CONSOLIDATED REVENUE ACCOUNT, PROF IT & LOSS ACCOUNT, PROFIT & LOSS APPROPRIATION ACCOUNT, BALANCE SHEET, LIFE INSURANCE FUND, SHAREHOLDER'S FUND EXISTED EVEN BEFORE IRDA ACT/REG ULATIONS. FOR THIS ATTENTION IS DRAWN TO OLD INSURANCE ACT, 1938. THE SCHEDULES OF THE SAME WOULD ESTABLISH THIS POINT. IRDA ACT/REGULATIONS ON LY CHANGED THE MANNER OF MAX NEW YORK LIFE INSURANCE COMPANY LTD. (NOW KNOWN AS MAX LIFE INSURANCE COMPANY LIMITED). 47 PRESENTATION AND MADE IT MORE DETAILED FOR REGULATI ON PURPOSE. THE ASSESSEE IS MAKING PLEA THAT WHILE IT MAINTAINS ACCOUNTS AS PER IRDA REGULATIONS, FOR INCOME TAX PURPOSE, THE ABSTRACT OF THE SAME AS UNC ERTIFIED SUMMARY IN OLD FORMS SHOULD BE ACCEPTED. THE CIT(A) HAS DEMONSTRAT ED THAT THERE IS CORRESPONDENCE BETWEEN TWO TYPES OF FORMS AND THE I SSUE IS NOT OF OLD FORMS OR NEW FORMS. REGULATION 8 OF IRDA (ACTUARIAL REPORT AND ABSTRACT) REGULATIONS 2000 DEALS WITH THE PRESENTATION OF REP ORT. BUT THE FUNDAMENTAL CONCEPT REMAINS THE SAME. THE ONLY USE OF SHAREHOLD ER'S FUNDS IN LIFE INSURANCE BUSINESS IS FOR MAINTAINING SOLVENCY MARG INS AND SOLVENCY RATIOS (REFERENCE IS INVITED TABLE III, FORM K, REGULATION 4) 49. ATTENTION WAS ALSO DRAWN TO THE AMENDED SUB SEC TION 1-A OF SECTION 11 OF INSURANCE ACT, 1938 (4 OF 1938), WHICH HAS USED THE WORDS ' LIFE INSURANCE BUSINESS' AND ' SHAREHOLDER'S FUNDS' TO THE EXCLUSI ON OF EACH OTHER, MEANING THERE BY THAT THE REFERENCE TO 'LIFE INSURANCE BUSI NESS' IN INSURANCE ACT, 1938 (4 OF 1938), HAS A DIFFERENT MEANING THAN WHAT IS N ORMALLY UNDERSTOOD AND THE SAME INTERPRETATION HAS TO CONTINUE FOR THE PUR POSE OF SECTION 44 AND FIRST SCHEDULE OF INCOME TAX FOR HARMONIOUS CONSTRU CTION. ALL THESE SUBMISSIONS ARE BASED ON WRITTEN SUBMISSIONS DATED 11.12.2017, WHICH WERE ALSO BROUGHT TO OUR KNOWLEDGE. 50. IT WAS CLARIFIED THAT SUBMISSIONS FILED ON 24.1 0.2017 AND SUBMISSIONS MADE HERE ONLY CONTAIN SYNOPSIS OF THE ORDER OF CIT (A) AND WRITTEN SUBMISSIONS OF THE REVENUE. THE ANNEXURES THERETO M AINLY CONSIST OF MAX NEW YORK LIFE INSURANCE COMPANY LTD. (NOW KNOWN AS MAX LIFE INSURANCE COMPANY LIMITED). 48 RELEVANT PAGES OF INCOME TAX ACT, INSURANCE ACT, CB DT CIRCULARS, CASE LAWS AND ANNUAL ACCOUNTS OF THE ASSESSEE, WHICH HAVE BEE N REPRODUCED IN THE ORDER OF CIT(A) ALSO, FOR READY REFERENCE, THOUGH T HE SAME COULD HAVE BEEN FILED DURING THE COURSE OF HEARING ALSO. SO, IT DOE S NOT CONTAIN ANY FACTUAL EVIDENCE IN THE FORM OF ANY STATEMENT, DOCUMENT OR ANY OTHER PAPER AND DOES NOT FALL UNDER THE DEFINITION OF PAPER BOOK UN DER ITAT RULES. 51. SUBSEQUENTLY, THE LEARNED DR MADE FOLLOWING WRI TTEN SUBMISSIONS DATED 12.12.2017: 1. AT THE OUTSET, THE REVENUE WISHES TO SUB MIT THAT ASSESSEE RAISED FOLLOWING SPECIFIC GROUNDS RELATED TO SECTIO N 44 OF THE IT ACT BEFORE THE CIT(A) ' THE LEARNED AO FAILED TO APPRECIATE: 2.3 THAT SECTION 44 OF THE ACT READ WITH THE FIRST SCHEDULE IS A SELF-CONTAINED CODE IN THE ACT FOR CO MPUTING INCOME OF ASSESSEE ENGAGED IN LIFE INSURANCE BUSINE SS AND OVERRIDES OTHER PROVISIONS OF THE ACT WHICH ARE CON TRARY TO THE PROVISIONS OF SECTION 44 OF THE ACT. 3. THE LEARNED AO HAS ERRED IN LAW AND IN FACTS, IN MAKING ADDITION OF RS. 2,160,000/- ON ACCOUNT OF DISALLOWA NCE OF PROVISION FOR BAD DEBTS AND DISREGARDING THE PROVIS IONS OF SECTION 44 OF THE ACT WHICH PROHIBIT ANY ADJUSTMENT UNDER SECTIONS 28 TO 43B OF THE ACT. 3.1 THAT THE LEARNED AO HAS ERRED IN NOT FOLLOWING THE DECISION OF HON 'BLE SUPREME COURT IN THE CASE OF O RIENTAL FIRE AND GENERAL INSURANCE CO. LTD.[2007] 291 ITR 3 70 WHICH EXPLICITLY SPECIFIES SECTION 44 OF THE ACT OV ERRIDES SECTION 36(1 )(III) OF THE ACT. 4. THE LEARNED AO HAS ERRED IN LAW AND IN FACTS IN MAKING ADDITION OF RS. 25,000,000/- ON ACCOUNT OF DISALLOW ANCES OF DONATION MADE BY THE APPELLANT AND DISREGARDING THE PROVISIONS OF SECTION 44 OF THE ACT WHICH PROHIBIT ANY ADJUSTMENT UNDER SECTION 28 TO 43B OF THE ACT. MAX NEW YORK LIFE INSURANCE COMPANY LTD. (NOW KNOWN AS MAX LIFE INSURANCE COMPANY LIMITED). 49 5. THE LEARNED AO HAS ERRED IN LAW AND IN FACTS IN MAKING ADDITION OF RS. 164,000/- ON ACCOUNT OF DISALLOWANC E OF PENALTY /FINES PAID BY THE APPELLANT UNDER SECTION 37 OF THE ACT AND DISREGARDING THE PROVISIONS OF SECTION 44 O F THE ACT WHICH PROHIBIT ANY ADJUSTMENT UNDER SECTION 28 TO 4 3B OF THE ACT. 6.3 THE LEARNED AO HAS ERRED IN LAW AND IN FACTS IN MAKING ADDITION UNDER SECTION 40(A)(IA) OF THE ACT DISREG ARDING PROVISIONS OF SECTION 44 OF THE ACT WHICH PROH IBITS ANY ADJUSTMENT UNDER SECTION 28 TO 43B OF THE ACT. 7. THE LEARNED AO HAS ERRED IN LAW AND IN FACTS IN MAKING ADDITION OF RS. 2,500/- ON ACCOUNT OF DISALLOWANCE OF SHARE ISSUE EXPENSES DISREGARDING PROVISIONS OF SECTION 4 4 OF THE ACT WHICH PROHIBITS ANY ADJUSTMENT UNDER SECTION 28 TO 436 OF THE ACT.' 1.1 THE CIT(A) HAS ONLY ASSESSED THE INCOME OF THE ASSESSEE AS PER SECTION 44 OF THE I.T. ACT, THEREBY DELETING TH E ADDITIONS WHICH WERE NOT AS PER SECTION 44 AND ENHANCING THE ASSESS MENT BY MAKING ADDITION WHICH WERE REQUIRED TO BE MADE AS P ER THE SAID SECTION. HE DID NOT EVEN TRAVEL OUTSIDE THE SUBJECT MATTER OF APPEAL, THOUGH THE REVENUE SUBMITS THAT HE HAD STAT UTORY POWERS TO DO SO. THE ASSESSEE WAS ASKED TO SHOW CAUSE U/S 251(2) VIDE NOTICES/ORDER SHEET DATED 23.9.2016, 24.10.2016 AND 4.11.2016. THE ORDER WAS PASSED ON 7.11.2016 AFTER SEVERAL HEA RINGS SINCE THE FIRST HEARING. THE RECORDS OF PROCEEDINGS AND NOTIC ES ISSUED HAVE BEEN REPRODUCED IN THE ORDER OF CIT(A). SO THE PRIN CIPLES OF NATURAL JUSTICE WERE ALSO COMPLIED WITH. 3. AS DISCUSSED FROM PARA 8 ONWARDS OF THE ORDER OF CIT(A) , THE TAXATION OF LIFE INSURANCE COMPANIES NEEDS TO B E EXPLAINED FIRST. THE TAXATION OF LIFE INSURANCE COMPANIES IN INDIA H AS GONE THROUGH SEVERAL CHANGES OVER THE LAST HUNDRED YEARS. GLOBAL LY, THERE ARE TWO METHODS OF ASSESSING TAXABLE INCOME OF LIFE INS URANCE BUSINESS. IN LIFE INSURANCE COMPANIES, THESE ARE TWO FUNDS, T HE SHAREHOLDER'S FUND AND THE POLICYHOLDER'S FUND. UNLIKE IN OTHER I NDUSTRIES SHARE HOLDER'S FUND DOES NOT PLAY AN ACTIVE ROLE IN RUNNI NG THE BUSINESS AND REMAINS INVESTED. THE PROFITS AND GAINS FROM LI FE INSURANCE BUSINESS CAN BE COMPUTED BY TWO METHODS. MAX NEW YORK LIFE INSURANCE COMPANY LTD. (NOW KNOWN AS MAX LIFE INSURANCE COMPANY LIMITED). 50 3.1 IN THE FIRST METHOD, THE PROFITS AND GAINS OF LIFE INSURANCE BUSINESS IS DEFINED AS INCOME MINUS EXPENSES OR NET INCOME. THE INCOME HERE MEANS, THE INVESTMENT INCOME ONLY. NOT ALL THE EXPENSES ARE ALLOWED AS DEDUCTION. 3.2 IN THE SECOND METHOD, THE TAXABLE INCOME OF LIF E INSURANCE BUSINESS IS DEFINED AS INCOME MINUS OUTGO MINUS INC REASE IN LIABILITY. IN THIS METHOD, THE INCOME IS THE SUM OF PREMIUM INCOME, INVESTMENT INCOME AND ANY OTHER MISCELLANEOUS INCOM E IN POLICYHOLDER'S ACCOUNT. THE OUTGO IS THE SUM OF PAY MENTS TO POLICYHOLDERS AND ALLOWABLE MANAGEMENT EXPENSES REL ATED TO INSURANCE BUSINESS. THE INCREASE IN LIABILITY IS TH E DIFFERENCE IN THE TOTAL LIABILITY TOWARDS POLICYHOLDERS AT THE END OF THE YEAR AND AT THE BEGINNING OF THE YEAR. A LIFE INSURANCE COMPANY INC URS A LIABILITY WHENEVER A POLICY IS ISSUED AND AN ADDITIONAL LIABI LITY WHEN RENEWAL PREMIUM IS RECEIVED. THIS LIABILITY IS ESTIMATED BY ACTUARIAL TECHNIQUES USING APPROPRIATE DISCOUNTS AND PROBABIL ITY FACTORS. THE PROFITS AND GAINS OF LIFE INSURANCE BUSINESS AS PER THE SECOND METHOD IS TECHNICALLY KNOWN AS THE 'VALUATION SURPL US'. 3.3 IN CASE OF A NEW COMPANY WITH REASONABLE GROWTH RATE, NET INCOME AS PER THE FIRST METHOD WILL BE NEGATIVE FOR A LONG PERIOD. HOWEVER, VALUATION SURPLUS MAY BECOME POSITIVE AFTE R FEW YEARS. THE POSITION GETS REVERSED AS THE COMPANY MATURES A ND THE NET INCOME AS PER FIRST METHOD MAY START EXCEEDING THE VALUATION SURPLUS AS PER THE SECOND METHOD. THEREFORE, WHILE THE NET INCOME METHOD MAY SUIT THE NEW COMPANIES, THE VALUATION SU RPLUS METHOD MAY SUIT THE COMPANIES ONCE THEY MATURED. 3.4 A LIFE INSURANCE COMPANY MAY ALSO HAVE INCOME F ROM INVESTMENT ACTIVITY OUT OF SHAREHOLDERS FUND AND CO RRESPONDING INVESTMENT INCOME, NET OF ALLOWABLE EXPENSES BECOME S INVESTMENT INCOME OF SHAREHOLDER'S FUND. THE SUM TOTAL OF THE INVESTMENT INCOME IN THE SHAREHOLDER'S ACCOUNT (NET OF ALLOWAB LE EXPENSES) AND THE PROFIT AND GAINS OF THE LIFE INSURANCE BUSI NESS AS PER THE FIRST METHOD OR THE SECOND METHOD DISCUSSED ABOVE B ECOMES THE TOTAL TAXABLE INCOME. 3.5 BEFORE 1918, THE LIFE INSURANCE COMPANIES IN INDIA, WERE BEING ASSESSED ON PROFITS LIKE OTHER TRADING COMPAN IES AND THE PROCEDURE FOR DETERMINING THE PROFIT HAD EVOLVED DE PARTMENTALLY. THE INCOME TAX ACT, 1918 AND 1922 GAVE STATUTORY RE COGNITION OF THESE PROCEDURES. LATER, TILL 1939, TAXATION OF LIFE INSURANCE COMPANIES WAS GOVERNED BY THE INCOME TAX ACT 1932 A ND RULES 25 MAX NEW YORK LIFE INSURANCE COMPANY LTD. (NOW KNOWN AS MAX LIFE INSURANCE COMPANY LIMITED). 51 AND 35, AND THE AVERAGE ANNUAL VALUATION SURPLUS WI TH CERTAIN ADJUSTMENTS WAS TAXED WITHOUT REDUCING THE SURPLUS ALLOCATED BACK TO POLICY HOLDERS. SINCE THEN, REPRESENTATIONS WERE MADE BY RESPECTIVE ASSOCIATIONS AND THE MANNER OF ASSESSMEN TS OF LIFE INSURANCE COMPANIES UNDERWENT SEVERAL CHANGES. AFTE R NATIONALIZATION OF LIFE INSURANCE BUSINESS, WE ONLY HAD LIFE INSURANCE CORPORATION OF INDIA. 3.6 PRIOR TO A.Y. 1977-78 THE PROFITS AND GAINS OF LIFE INSURANCE BUSINESS WERE TAXED AT 52.5 % (EXCLUDING SURCHARGE) . THE PROFITS AND GAINS OF LIFE INSURANCE BUSINESS WERE TAKEN A G REATER OF THE NET INCOME (FIRST METHOD) AND VALUATION SURPLUS (SECOND METHOD). WHILE COMPUTING VALUATION SURPLUS A DEDUCTION OF 80 % OF VALUATION SURPLUS ALLOCATED TO POLICY HOLDERS WAS ALSO ALLOWE D REGARDING OTHER EXPENSES ALSO CEILING WAS PRESCRIBED . THE ALLOWABLE DEDUCTION OF VALUATION SURPLUS ALLOCATED TO POLICY HOLDERS WAS 5 0 % EARLIER. INCOME TAX INVESTIGATION COMMISSION APPOINTED IN 19 48 HAD REJECTED THE DEMAND OF INDUSTRY FOR RAISING THE LIM IT OF DEDUCTION OF VALUATION SURPLUS ALLOCATED TO POLICY HOLDERS FROM 50 % TO 100 %. HOWEVER, INCOME TAX ACT 1961 [RULE 2(1) OF FIRST SC HEDULE] RAISED IT TO 80 %. 3.7 THE RATE OF 52.5 % WAS LOWER THAN CORPORATE RAT E OF TAXATION OF 55 % AT THAT TIME AND LIC OF INDIA WAS THE ONLY COMPANY IN THIS BUSINESS. AS PER LIC ACT, 95% OF IT S VALUATION SURPLUS WAS ALLOCATED TO POLICYHOLDERS. THIS MEANT THAT {100 - 80% OF 95} % OF VALUATION SURPLUS WAS TAXED WHICH CAME TO {100- 76} % OR 24 % OF THE VALUATION SURPLUS. SO 24 % OF GROS S VALUATION SURPLUS WAS TAXED AT 52.5 %. BUT 52.5 % OF 24 % COM ES TO 12.6 % . THEREFORE, IN OTHER WORDS NET VALUATION SURPLUS W AS TAXED AT 52.5 % OR THE GROSS VALUATION SURPLUS WAS TAXED AT 12.6 %. IN THE MEETING OF CONSULTATIVE COMMITTEE OF MINISTRY OF FI NANCE IN 1974, A SIMPLE METHOD FOR TAXING THE GROSS VALUATION SURPLU S (I.E. WITHOUT DEDUCTION OF ALLOCATION OF SURPLUS TO POLICY HOLDER S) WAS PROPOSED INSTEAD OF COMPLICATED METHODS OF DETERMINING HIGHE R OF THE NET INCOME OR THE NET VALUATION SURPLUS. CONSEQUENTLY A SIGNIFICANT CHANGE CAME FROM FINANCE ACT 1976, WHEN SECTION 115 B WAS INTRODUCED, WHICH PROVIDED THAT THE PROFITS OF LIFE INSURANCE BUSINESS (POLICY HOLDER'S ACCOUNT) SHALL BE TAXED A T 12.5 % OF GROSS VALUATION SURPLUS. ESSENTIALLY IT WAS ONLY A SIMPLI FICATION OF COMPUTATION, WHILE THE TAX RATE (12.6 % OF GROSS VA LUATION SURPLUS) REMAINED ALMOST THE SAME. IT WAS A FAIR DEAL AS EVE N AFTER REDUCTION OF CORPORATE TAX RATES, IF THE ORIGINAL C ONDITION THAT X % OF VALUATION SURPLUS SHOULD NOT BE LESS THAN THE TA X AT CORPORATE MAX NEW YORK LIFE INSURANCE COMPANY LTD. (NOW KNOWN AS MAX LIFE INSURANCE COMPANY LIMITED). 52 RATE ON HIGHER OF NET INCOME OR NET SURPLUS IS APPL IED, THE VALUE OF 'X' WOULD BE HIGHER THAN 12.5 % MORE SO AS WHEN A C OMPANY GROWS, RATE OF GROWTH OF NET INCOME IS HIGHER THAN RATE OF GROWTH OF NET SURPLUS. 3.8 THEREFORE, ASSESSEE'S CLAIM OF DEDUCTION OF ALL OCATION OF SURPLUS TO POLICY HOLDERS GOES AGAINST THE VERY PRE MISE OF SECTION 44, FIRST SCHEDULE AND SECTION 115B. EXPLANATORY NOTES/MEMORANDUM/COMMENTARY TO FINANCE ACT 1976 WOU LD ALSO ESTABLISH THIS. FOR REFERENCE , PAGE 4150 TO 4154 O F FIFTH EDITION OF THE COMMENTARY BY CHATURVEDI & PITHISARIA IS ENCLOS ED. PARA 40.2 ON PAGE 4153 CLARIFIES THE ISSUE INVOLVED I.E. W.E. F. AY 1977-78, NO DEDUCTION FOR SURPLUS ALLOCATED TO POLICY HOLDERS I S TO BE ALLOWED AS A DEDUCTION. THE TAX RATE HAD BEEN REDUCED ONLY TO COMPENSATE FOR THE SAME. AFTER OPENING UP OF THE SECTOR FOR PRIVAT E SECTOR AND AMENDMENT TO SECTION 49 OF INSURANCE ACT, ONLY 10 % OF SURPLUS CAN BE ALLOCATED TO SHAREHOLDERS AS FAR AS PARTICIP ATING POLICIES ARE CONCERNED. FOR NON PARTICIPATING POLICIES 100 % OF SURPLUS GOES TO SHAREHOLDERS. IT CONTAINS CBDT CIRCULAR NO. 202 DAT ED 5-7-1976 AS WELL WHICH CLARITIES THAT AFTER INTRODUCTION OF SEC TION 115B, BONUS TO POLICY HOLDERS IS NOT AN ALLOWABLE DEDUCTION. 3.9 A PAPER BY R. RAMAKRISHNAN, CONSULTANT ACTUARY PUBLISHED IN 'THE ACTUARY INDIA OCTOBER 2008' ALSO EXPLAINS T HE HISTORY OF TAXATION OF LIFE INSURANCE BUSINESS IN INDIA. RELEV ANT PAGES OF THAT ARE ALSO ENCLOSED FOR REFERENCE. 4 . FOR THE YEAR UNDER APPEAL, THE TAXATION OF INSU RANCE COMPANIES IS GOVERNED BY SECTION 44, READ WITH FIRS T SCHEDULE OF THE INCOME TAX ACT. AS PER THE SAME, THE PROFITS AN D GAINS SHALL BE THE VALUATION SURPLUS AT THE END OF THE YEAR AFTER EXCLUDING FROM IT ANY SURPLUS OR DEFICIT INCLUDED THEREIN OF EARLIER ASSESSMENT YEARS. THOUGHT, THE FIRST SCHEDULE TALKS OF AVERAGE SURPLU S, THAT IS NO LONGER RELEVANT AS ACTUARIAL VALUATION IS NOW DONE EVERY YEAR AS AGAINST ONCE IN THREE TO FIVE YEARS EARLIER. 4.1 THE APEX COURT IN THE CASE OF LIFE INSURANCE CO RPORATION OF INDIA, REPORTED IN 51 ITR 773 HELD THAT ITO HAS NO POWER TO MAKE ANY ADJUSTMENT IN ACTUARIAL VALUATION, EXCEPT U/R 3 (B) WITH THE PERMISSION OF CONTROLLER OF INSURANCE. THIS DECISIO N HAS BEEN RELIED ON BY THE APEX COURT IN THE CASE OF GENERAL INSURAN CE CORPORATION OF INDIA REPORTED IN 240 ITR 139 AS WELL. IN THE SA ID DECISION IN RESPECT OF INSURANCE BUSINESS OTHER THAN LIFE INSUR ANCE, THE APEX MAX NEW YORK LIFE INSURANCE COMPANY LTD. (NOW KNOWN AS MAX LIFE INSURANCE COMPANY LIMITED). 53 COURT AGAIN REITERATED THAT THE AO IS BOUND TO FOLL OW THE SCHEME OF COMPUTATION GIVEN IN THE FIRST SCHEDULE FOR INSURAN CE BUSINESS. 4.2 INDIAN LIFE INSURANCE SECTOR WAS OPENED UP IN Y EAR 2000 FOR PRIVATE PLAYERS IRDA, A REGULATORY T BODY WAS CONST ITUTED UNDER IRDA ACT, 1999 IN PLACE OF CONTROLLER OF INSURANCE TO PROVIDE FOR GOVERNING RULES AND REGULATIONS. SIGNIFICANT CHANGE S WERE BROUGHT OUT/ NEW REGULATIONS WERE INTRODUCED UNDER IRDA ACT . NEW ACCOUNTING FORMATS WERE ALSO INTRODUCED. TWO SEPARA TE ACCOUNTS WERE PRESCRIBED AS UNDER: - A. POLICYHOLDERS' ACCOUNT (A-RA) KNOWN AS REVENUE ACCO UNT (TECHNICAL ACCOUNT) B. SHAREHOLDERS' ACCOUNT (A-PL) KNOWN AS PROFIT & LOSS ACCOUNT (NON- TECHNICAL ACCOUNT) NEW FORMAT OF VALUATION BALANCE SHEET (I.E. FORM I) WAS INTRODUCED. HOWEVER, AS EXPLAINED WITH ILLUSTRATION S BY CIT(A), THE TAXABLE INCOME OF AN ASSESSEE BEFORE IRDA REGULATIO NS AND AFTER IRDA REGULATIONS DOES NOT CHANGE. 4.3 ASSESSEE ALSO SOUGHT TO CREATE CONFUSION OF OLD FORMS G,H,I OF ACTUARY REPORTS PRIOR TO IRDA REGULATIONS. HOWEV ER PARA 12.1 OF THE ORDER OF CIT(A) REPRODUCES RELEVANT PORTION OF SECTION 13(1) OF THE INSURANCE ACT 1938 (4 OF 1938) AS UNDE:- '13 (1) EVERY INSURER CARRYING ON LIFE INSURANCE BU SINESS SHALL, IN RESPECT OF LIFE INSURANCE TRANSACTED BY HIM IN INDI A, AND ALSO IN THE CASE OF AN INSURER SPECIFIED IN SUB-CLAUSE (A)(II) OR SUB-CLAUSE (B) OF CLAUSE (9) OF SECTION 2 IN RESPECT OF ALL LIFE INSU RANCE BUSINESS TRANSACTED BY HIM, EVERY YEAR CAUSE AN INVESTIGATIO N TO BE MADE BY AN ACTUARY INTO THE FINANCIAL CONDITION OF THE LIFE INSURANCE BUSINESS CARRIED ON BY HIM, INCLUDING A VALUATION OF HIS LIA BILITIES IN RESPECT THERETO AND SHALL CAUSE AN ABSTRACT OF THE REPORT O F SUCH ACTUARY TO BE MADE IN ACCORDANCE WITH THE REGULATIONS CONTAINE D IN PART - I OF THE FOURTH SCHEDULE AND IN CONFORMITY WITH THE REQU IREMENT OF PART II OF THAT SCHEDULE :............................ .......................,....... PROVIDED ALSO THAT EVERY INSURER ON OR AFTER THE CO MMENCEMENT OF THE INSURANCE REGULATORY AND DEVELOPMENT AUTHORITY ACT, 1999, SHALL CAUSE AN ABSTRACT OF THE REPORT OF THE ACTUAR Y FO BE MADE IN THE MANNER SPECIFIED BY THE REGULATIONS MADE BY THE AUTHORITY'. MAX NEW YORK LIFE INSURANCE COMPANY LTD. (NOW KNOWN AS MAX LIFE INSURANCE COMPANY LIMITED). 54 4.4 SO THE ACTUARY REPORT AS PER NEW REGULATIONS HA S TO FORM BASIS OF TAXATION. HOWEVER, AS EXPLAINED FROM PARA 7.1 ONWARDS OF THE ORDER OF CIT(A), AND MORE PARTICULARLY PARA 9.2 .1 ONWARDS, THERE IS NO FUNDAMENTAL DIFFERENCE IN OLD AND NEW R EPORTS IN THE SENSE THAT BOTH LEAD TO SAME RESULTS. 4.5 WITHOUT PREJUDICE TO THE SAME PARA 11 OF THE OR DER OF CIT(A) IS ALSO REPRODUCED HEREIN UNDER; 'FOR REFERENCE PARA I.I OF APPELLANTS REPLY DATED 0 5.10.2016 IS REPRODUCED HERE IS UNDER:- 1.1 IT IS RESPECTFULLY SUBMITTED THAT THE TAXABLE I NCOME OF A LIFE INSURANCE COMPANY SINCE 1976 IS TO BE DETERMIN ED ON THE BASIS OF THE EARLIER REVENUE ACCOUNT AND VALUAT ION BALANCE SHEET (ERSTWHILE INSURANCE ACT, 1938) WHICH ACCOUNT FOR ALL INCOMES AND OUTGOINGS OF THE LIFE I NSURANCE COMPANY INCLUDING PREMIUMS, DIVIDENDS INCOME, INTER EST AND THE ASSOCIATED OUTGO. IT IS FURTHER RESPECTFULL Y SUBMITTED THAT THE CURRENT REPORTING REQUIREMENT (I N FORM A-RA AND A-PL) IS PARI MATERIA TO THE OLD REPORTING REQUIREMENT I.E. EARLIER REVENUE ACCOUNT AND VALUAT ION BALANCE SHEET ('FORM I'). THEREFORE, THE ASSESSEE H AS DETERMINED HIS TAXABLE INCOME IN A CONSISTENT MANNE R.' 4.5.1 THE CIT(A) HAS DETERMINED THE TAXABLE INCOME FROM FORMS A-RA AND A-PL ONLY. THE DISPUTE WAS NOT RELATED TO OLD OR NEW FORMATS OF ACTUARY REPORTS. FOR REFERENCE PARA 13.1 TO 13.6 OF THE ORDER OF CIT(A), REPRODUCED HEREIN UNDER ' 13.1 THE DISPUTE ACTUALLY INVOLVES THE FOLLOWING ISSUES ONLY: 1. WHETHER INCREMENTAL FFA(RS.62,29,38,000 - RS.16,94,60,000) OF RS.45,34,78,000/- SHOULD BE TAX ED? (OPENING FFA IS TO BE REDUCED AS IT IS A SURPLUS PE RTAINING TO EARLIER YEARS.) 2. WHETHER ALLOCATION OF SURPLUS TO POLICY HOLDER S 143,28,62,000/- SHOULD BE TAXED. MAX NEW YORK LIFE INSURANCE COMPANY LTD. (NOW KNOWN AS MAX LIFE INSURANCE COMPANY LIMITED). 55 3. WHETHER THE AMOUNT TRANSFERRED FROM SHARE HOLD ERS ACCOUNT TO POLICY HOLDERS ACCOUNT OF RS. 58,62,00,0007-, WHICH IS A PART OF ACTUARIAL SURPLUS AS PERFORM I, SHOULD BE TAXED? 4. WHETHER INCOME OF SHARE HOLDER'S ACCOUNT IS TO BE TAXED AT NORMAL RATES. [NOT VERY RELEVANT IN THIS APPEAL AS SHARE HOLDER'S A/C HAS NET LOSS AS MENTIONED LATER IN PAR A 16.]' 13.2 AS PER APPELLANT, THE ANSWER TO ALL THE THREE QUEST IONS ABOVE IS 'NO'. THERE MAY NOT BE ANY DISPUTE REGARDING QUE STION NO. 3, IN VIEW OF THE DECISION OF HON'BLE ITAT, MUMBAI IN THE CASE OF ICICI PRUDENTIAL CO., LTD. (SUPRA) AND THEREFORE, THE STA ND OF THE APPELLANT IS ACCEPTED. HOWEVER, IF ANSWER TO QUESTI ON NO. 1 AND 2 IS YES, THEN THE TAXABLE PROFITS FROM LIFE INSURANCE B USINESS WOULD BE AS UNDER:- RS. 44,72,60,000 - SHOWN BY APPELLANT 45,34,78,000 - [SR. NO. 1 SUPRA] 143,28,62,000 - [ SR. NO. 2 SUPRA] 233,36,00,000 THEN THE, TAXABLE INCOME BEFORE SET OFF OF BROUGHT FORWARDED LOSSES WOULD BE COMPUTED AS UNDER: PROFITS OF LIFE INSURANCE BUSINESS 2333600(000) INVESTMENT INCOME 398160(000) MISC. INCOME IN SHARE HOLDER A/C 299(000) TOTAL 2732059(000) LESS EXPENSES IN SHARE HOLDER A/C 1078063(000) BALANCE 1653996(000) LESS: PROVISIONS (-)23204(000) BALANCE 1677200(000) LESS:- 10(23AAB)PROFIT 8211(000) MAX NEW YORK LIFE INSURANCE COMPANY LTD. (NOW KNOWN AS MAX LIFE INSURANCE COMPANY LIMITED). 56 ADD: ROYALTY FOR USE OF BROAD LICENSE 617857(000) BALANCE 2286846(000) 13.3 NOW, WE MAY EXAMINE THE RECONCILIATION OF ABOVE FIG URES WITH THAT SHOWN BY THE APPELLANT. (RS) INCOME WORKED-OUT IN THE ABOVE TABLE 2286846(000) LESS : SURPLUS ALLOCATED TO POLICY HOLDERS 1432862(000) 853984(000) LESS: INCREMENTAL FFA 457438(000) INCOME AS PER COMPUTATION OF INCOME AS PER APPELLANT 400506(000) 13.4 FROM THE ABOVE RECONCILIATION IT IS APPARENT T HAT THE DISPUTE IS NOT RELATED TO OLD FORM G, H, I OR NEW FORM I, H, A-PL AND A- RA. THE DISPUTE IS ONLY ABOUT FOLLOWING TWO ITEMS INCREMENTAL FFA (RS.62,29,38,000- RS.16,94,60,000) OF RS 45,34,78,000/- ALLOCATION OF SURPLUS AS BONUS TO POLICY HOLDERS OF RS.143,28,62,000/- THIS IS SO AS ONCE WE AGGREGATE SHARE HOLDER'S ACCO UNT (A-PL) AND POLICY HOLDER'S ACCOUNT (A-RA), THE TRANSFER FROM A -PL TO ARA OF RS. 58,62,00,000/- CANCELS OUT AND THE ISSUE OF ITS RED UCTION BECOME IRRELEVANT. SINCE A-RA SHOWS THE SURPLUS AFTER ALLO CATION OF BONUS TO POLICY HOLDER'S ACCOUNT, THE DISPUTE OF RS. 143,28, 62,000/- REMAINS. MOREOVER, SINCE, FFA HAS NOT BEEN CONSIDERED AS A P ART OF TAXABLE INCOME THE ISSUE OF RS. 45,34,78,000/-ALSO REMAINS. IF WE TAKE PROFITS OF LIFE INSURANCE BUSINESS AS PER NEW FORM I, THEN ALSO THE DISPUTE IS OF THESE TWO AMOUNTS ONLY. MAX NEW YORK LIFE INSURANCE COMPANY LTD. (NOW KNOWN AS MAX LIFE INSURANCE COMPANY LIMITED). 57 13.6 THE DETAILED ANALYSES IN PRECEDING PARAGRAPHS HAS BEEN MADE ONLY TO EXPLAIN THE COMPUTATIONAL COMPLICATIONS CRE ATED BY APPELLANT. IN SIMPLE TERMS, THE TAXABLE INCOME OF THE APPELLAN T, AS PER FIRST SCHEDULE, CAN BE COMPUTED AS UNDER:- CLOSING BALANCE OF SURPLUS AS PER NEW FORM 'I' 3089 260(000) LESS AMOUNT TRANSFERRED TO POLICY HOLDER'S A/C FROM SHARE HOLDER'S A/C 586200(000) LESS OPENING FFA 16,94,60(000) BALANCE SURPLUS BEING INCOME FROM LIFE INSURANCE BUSINESS 23,36,00(000) WHICH IS THE SAME FIGURE AS IN PARA 13.2 (SUPRA) ' 4.5.2 IT NEEDS TO BE CLARIFIED THAT IN THE ABOVE P ORTION, THE CIT(A) WAS DEALING WITH THE ISSUE OF TAXABLE INCOME PERTAI NING TO LIFE INSURANCE BUSINESS ONLY AND NOT WITH THE ALLOWANCE OF EXPENSES CLAIMED IN SHAREHOLDERS ACCOUNT, WHICH HAVE BEEN DI SCUSSED FROM PARA 17 ONWARDS OF THE ORDER OF CIT(A). 5. AS PER PARA 4.2 OF THE ORDER OF CIT(A), THE ASSE SSEE HAS WORKED OUT ITS TAXABLE INCOME AS UNDER A.Y. 10-11 SHARE HOLDER'S ACCOUNT (NON TECHNICAL ACCOUNT) IN RS. (000) TRANSFER FROM POLICYHOLDER'S ACCOUNT 1033460 INCOME FROM INVESTMENTS 398160 MISC INCOME 299 TOTAL- A 1431919 LESS MAX NEW YORK LIFE INSURANCE COMPANY LTD. (NOW KNOWN AS MAX LIFE INSURANCE COMPANY LIMITED). 58 EXPENSES OTHER THAN DIRECTLY RELATED TO INSURANCE BUSINESS 1078063 CONTRIBUTION TO POLICYHOLDER'S ACCOUNT 586200 PROVISIONS (-) 23204 TOTAL B 1641059 PROFIT (A-B) IN SHARE HOLDER'S ACCOUNT A-PL (- )209140 LESS -ADJUSTMENTS IN COMPUTATION OF INCOME U/S 10(23AABJ FOR SURPLUS OF LINKED AND NON LINKED PENSION POLICIES 8211 ADD- ROYALTY FOR USE OF BRAND LICENCE DISALLOWED SUO MOTO 617857 TAXABLE INCOME 400506 5.1 AS MENTIONED IN PARA 4.3 OF THE ORDER OF CIT(A) , IF WE EXCLUDE, THE NET AMOUNT TRANSFERRED FROM POLICY HOL DER'S ACCOUNT TO SHARE HOLDER'S ACCOUNT IN ABOVE TABLE OF RS. (10334 6 - 586200) THOUSANDS I.E. RS. 447260 THOUSANDS, THE APPELLANT HAS SHOWN A NET LOSS OF RS.46754 THOUSANDS IN SHARE HOLDER'S AC COUNT (AFTER ADJUSTMENTS MADE IN COMPUTATION OF INCOME). A SURPL US OF RS. 447260 THOUSANDS HAS BEEN TRANSFERRED FROM POLICY H OLDER'S ACCOUNT, RESULTED IN NET TAXABLE INCOME (BEFORE SET OFF OF CARRIED FORWARD LOSSES) OF RS. 400506 THOUSANDS. 5.2 AS PER PARA 5.2 OF THE ORDER OF CIT(A, THE ACTU ARIAL SURPLUS AND ITS DISTRIBUTION/ALLOCATION IS AS UNDER (ALL FI GURES IN THOUSANDS) FORM 1 - IRDA REGULATIONS- ACTUARY REPORT & ABSTRAC T BALANCE OF LIFE INSURANCE FUNDS SHOWN IN BALANCE SHEET 93367246 MATHEMATICAL RESERVES EXCLUDING COST OF BONUSES ALLOCATED (PRESENT ACTUARIAL LIABILITY OF POLICIES) 90277986 MAX NEW YORK LIFE INSURANCE COMPANY LTD. (NOW KNOWN AS MAX LIFE INSURANCE COMPANY LIMITED). 59 SURPLUS 3089260 PARTICIPATING POLICIES LINKED POLICIES TOTAL SURPLUS(BREAK UP) 2194332 894928 3089260 ALLOCATION OF SURPLUS AS PERFORM A- RA I.E. POLICY HOLDER'S ACCOUNT TO POLICY HOLDERS 1432862 0 1432862 TO SHARE HOLDERS 138532 894928 1033460 CARRIED FORWARD UNAPPROPRIATED-FFA 622938 0 622938 2194332 3089260 5.2.1THE ABOVE SURPLUS INCLUDES UN-APPROPRIATED SUR PLUS OF EARLIER YEARS OF RS. 169460 THOUSANDS. THE REMAINING SURPLU S OF EARLIER YEARS HAD ALREADY BEEN APPROPRIATED/ALLOCATED AND N OT INCLUDED IN ABOVE REVENUE ACCOUNT (POLICY HOLDER'S ACCOUNT) ALL FIGURES ARE IN THOUSAND RUPEES PREMIUMS RECEIVED (NET) 48605388 RE INSURANCE CEDED (-)596797 INCOME FROM INVESTMENTS 19896451 MAX NEW YORK LIFE INSURANCE COMPANY LTD. (NOW KNOWN AS MAX LIFE INSURANCE COMPANY LIMITED). 60 CONTRIBNITION FROM SHAREHOLDERS ACCOUNT 586200 MISC INCOME 4629 TOTAL RECEIPTS 19890483 EXPENSES COMMISSION 4212087 OPERATING EXPENSES OF INSURANCE BUSINESS 15048109 BENEFITS PAID 5891741 CHANGE IN VALUTAION OF LIABILITY OF POLICIES 41962018 AMOUNT CEDED IN REINSURANCE (-)105022 SURPLUS 1486938 5.2.2 THIS SURPLUS (IT EXCLUDES ALLOCATION OF S URPLUS TO POLICY HOLDERS) + OPENING FFA OF 16,94,60,000/- HAS BEE N ALLOCATED [REFERENCE PARA 5.3 OF THE ORDER OF CIT(A)]AS UNDER :- A) TO SHARE HOLDERS A/C 103,34,60,000 B) CLOSING FFA 62,29,38,000 TOTAL 165,63,98,000 6. ON THE ISSUE OF SET OFF PAST LOSSES, IT IS SUBM ITTED THAT THE ISSUE OF DETERMINATION OF LOSS WHICH CAN BE SET OFF U/S 72 PERTAINS TO THE YEAR IN WHICH THE SET OFF IS CLAIMED. THE HO N'BLE I.T.A.T DELHI IN THE CASE OF LODHI PROPERTIES CO. LTD, REPORTED I N 36 SOT 128 HAS ALSO HELD SO. 6.1 THE CIT(A) IN PARA 16 HAS HELD AS UNDER; MAX NEW YORK LIFE INSURANCE COMPANY LTD. (NOW KNOWN AS MAX LIFE INSURANCE COMPANY LIMITED). 61 'THE SET OFF HAS TO BE OF THE AMOUNT OF LOSS FROM S HAREHOLDER'S ACCOUNT (AFTER ADJUSTMENTS MADE IN STATEMENT OF INC OME AND ADDITIONS MADE/SUSTAINED IN THE ASSESSMENT ORDER) A FTER EXCLUDING TRANSFERS TO AND FROM POLICYHOLDER'S ACCOUNT AND AC TUARIAL DEFICIT ARRIVED AT BY REDUCING FROM SURPLUS AS PER NEW ANNE XURE I, THE AMOUNT TRANSFERRED FROM SHAREHOLDER'S ACCOUNT TO PO LICY HOLDER'S ACCOUNT IN THAT YEAR.' THE ABOVE FINDING IS IN ACCORDANCE WITH THE DECISIO N OF HON'BLE ITAT, MUMBAI IN THE CASE OF IN THE CASE OF ICICI PR UDENTIAL INSURANCE COMPANY LTD, REPORTED IN 140 ITD 41. HOWE VER, THE LOSS WHOSE SET OFF HAS BEEN CLAIMED IS NOT THE DEFICIT A S PER SECTION 44 OF THE I.T. ACT AND THE ASSESSEE DID NOT FURNISH TH E ACTUARY REPORT, A-RA AND A- PL AND COMPUTATION OF INCOME OF THE YEA R, WHOSE LOSS WAS CLAIMED FOR SET OFF BEFORE THE CIT(A), THOUGH A SKED 6.2 WITHOUT PREJUDICE TO THE ABOVE THE DEEMED PROFI TS AND GAINS OF LIFE INSURANCE BUSINESS ARE TAXED AT A CON CESSIONAL RATE OF TAX AND SET OFF OF LOSS OF REGULAR BUSINESS AGAINST THE SAME MAY NOT BE PERMISSIBLE. MOREOVER, AS PER THE FIRST SCHEDULE , AT THE TIME OF 'COMPUTATION OF PROFITS OF LIFE INSURANCE BUSINESS' , 'PROFIT AND GAINS OF THE LIFE INSURANCE BUSINESS' IS TAKEN AS 'THE SU RPLUS OR DEFICIT DISCLOSED BY THE ACTUARIAL VALUATION' EXCLUDING 'FR OM IT ANY SURPLUS OR DEFICIT INCLUDED THEREIN WHICH WAS MADE IN ANY E ARLIER INTER- VALUATION PERIOD'. THIS ESSENTIALLY PRECLUDES CARRY FORWARD OF LOSSES. THE SET OFF OF CARRIED FORWARD LOSSES UNDER SECTION 72 IS A PART OF COMPUTATION OF INCOME UNDER THE HEAD BUSINESS OR PR OFESSION THE PROVISION OF SECTION 72, ARE OF GENERAL NATURE AND SINCE THE SPECIAL PROVISIONS IN THE LEGISLATION ALWAYS OVERRIDE THE G ENERAL PROVISIONS, THE PROVISIONS OF THE FIRST SCHEDULE WOULD OVERRIDE THE PROVISIONS OF SECTION 72 SO FAR AS LIFE INSURANCE BUSINESS IS CON CERNED. 6.3 AN ILLUSTRATION OF IMPACT OF DEFICIT IN ACTUARIAL V ALUATION IS GIVEN AS UNDER: YEAR 1 CLOSING POSITION YEAR 1 , A YEAR 1 ,B YEAR 2, C INCREASE IN FUNDS YEAR 2, D INCREASE IN LIABILITIES FUNDS 80 40 30 20 LIABILITIES 40 50 25 30 SURPLUS 40 (-)10 5 (-)10 MAX NEW YORK LIFE INSURANCE COMPANY LTD. (NOW KNOWN AS MAX LIFE INSURANCE COMPANY LIMITED). 62 YEAR 2 CLOSING POSITION A+C A+D B + C B + D FUNDS 110 100 70 60 LIABILITIES 65 70 75 80 SURPLUS 45 30 (-)5 (-)20 BREAK UP OF SURPLUS 40 + 5 40-10 -10 + 5 -10 - 10 6.3.1 HOWEVER, IF SURPLUS OF YEAR 1 IS DISTRIBUTED/ ALLOCATED, THE ABOVE CALCULATIONS FAIL AND THE SURPLUS IN NEW ANNE XURE 'I' WOULD HAVE ONLY THE DIFFERENCE OF 'INCREASE IN FUNDS' AND 'INCREASE IN LIABILITIES' DURING THE YEAR IN ADDITION TO OPENING FFA (WHICH IS THE REMAINING SURPLUS OF EARLIER YEARS) BESIDES, THE AM OUNT TRANSFERRED FROM SHAREHOLDERS ACCOUNT DURING THE YEAR. PARA 14 OF THE ORDER OF CIT(A) {RECORD OF ORDER SHEET PROCEEDINGS} ALSO CON FIRM THIS FACT. 52. AGAIN ON 12.12.2017, THE LEARNED DR MADE THE FO LLOWING SUBMISSIONS: IN CONTINUATION OF EARLIER SUBMISSION IN ADDITION TO ORAL ARGUMENTS WHICH MAY BE MADE AT THE TIME OF HEARING, THE REVEN UE WISHES TO FURTHER SUBMIT AS UNDER:- 1. THE COMPILATION OF CASE LAWS FILED BY ASSESSEE ARE OLD CASE LAWS, SOME OF WHICH PERTAIN TO THE PERIOD PRIOR TO INCOME TAX 1961. IN FACT SOME ARE OF FOREIGN COURTS AND SOME ARE OF 1930S. THE REMAINING ARE IN DIFFERENT CONTEXT. AS SUBMITTED EA RLIER A JUDGMENT IS TO BE SEEN ONLY IN THE CONTEXT OF FACTS AND LAW AS IT EXISTED AT THAT TIME. IN THE PRESENT APPEAL NOT ONL Y THE LAW IS DIFFERENT BUT ALSO THE FACTS. MOREOVER, ONCE LEGAL FICTION HAS BEEN CREATED FOR COMPUTATION OF INCOME, CASE LAWS D EALING WITH THE CONCEPTS OF ACCRUAL OF INCOME AND EXPENDITURE I N GENERAL HAVE NO APPLICABILITY IN THE PRESENT CASE. 2. MOREOVER, OBITER DICTA OR GENERAL DISCUSSIONS IN DE CISIONS GIVEN IN DIFFERENT CONTEXT WHILE DEALING WITH OTHER SECTI ONS LIKE 148, MAX NEW YORK LIFE INSURANCE COMPANY LTD. (NOW KNOWN AS MAX LIFE INSURANCE COMPANY LIMITED). 63 263 ETC. CANNOT OVERRIDE LEGAL FICTION CREATED BY S TATUTE WHICH IS TO BE CONSTRUED STRICTLY 3. AS REGARDS RULE 5 OF FIRST SCHEDULE OF INCOME TAX, IT EARLIER PROVIDED FOR FILING OF ANNUAL REPORT BEFORE CONTROL LER OF INSURANCE. IT NEVER MENTIONED THAT ACCOUNTS WERE TO BE MAINTAINED AS PER INSURANCE ACT. HOWEVER IT PROVIDE D FOR CERTAIN ADJUSTMENTS TO THE SAID PROFIT. IN VIEW OF THE SAME AND CERTAIN ADVERSE COURT DECISIONS, IT HAD TO BE AMENDED 4. AS REGARDS RULE 2, IT TALKS OF INSURANCE ACT, WHICH HAS SUBSTANTIVE PROVISIONS AND SEPARATION OF SHARE HOLD ER'S ACCOUNT AND POLICY HOLDERS ACCOUNT IS A PART OF SUBSTANTIVE PROVISIONS AND NOT ANY REGULATIONS. EARLIER ONLY LIC EXISTED A ND IT PROVIDED 95 % OF SURPLUS TO BE PAID TO POLICYHOLDERS. AFTER PRIVATIZATION, SHAREHOLDERS CAN USE THE SURPLUS (WHICH BECOMES PAR T OF THEIR FUNDS) FOR VARIOUS PURPOSES. LIKE THE ASSESSEE HAS PAID ROYALTY AND DONATION. SHAREHOLDERS FUNDS ARE NOW REQUIRED M AINLY FOR MAINTAINING SOLVENCY MARGIN. 5. THE CONCEPT OF LIFE INSURANCE FUND AND TOTAL FUNDS OF BUSINESS IS DIFFERENT. THE RETURNS FROM INVESTMENTS OF LIFE INSURANCE FUNDS FORMS PART OF ACTUARY SURPLUS WHOSE DISTRIBUT ION TO POLICY HOLDERS AND SHAREHOLDERS IS REGULATED. THE RETURN O N SHAREHOLDER'S FUNDS DOES NOT GO AS ALLOCATION OF PR OFIT (OR SURPLUS) TO POLICY HOLDERS. SO IT IS NOT A PART OF ACTUARIAL SURPLUS. THE SITUATION BEFORE PRIVATIZATION AND AFTER PRIVAT IZATION IS NOT THE SAME. 6. THE CONCEPT OF PROFIT OF LIFE INSURANCE BUSINESS U/ S 44 READ WITH FIRST SCHEDULE IS A LEGAL FICTION AND GENERAL CONCE PTS OF PROFIT CANNOT BE IMPORTED INTO IT. A LEGAL FICTION IS TO C ONSTRUED STRICTLY. CONCEPT OF SURPLUS IS A PREMIUM LINKED ISSUE AS LIA BILITY IS INCURRED IN RESPECT OF PREMIUM AND NOT SHAREHOLDER' S FUNDS, WHICH ARE REQUIRED ONLY FOR MAINTAINING SOLVENCY MA RGIN. THE INCOME ON THAT IS BUSINESS INCOME, WHICH MAY, IN CO MMON PARLANCE, EVEN BE CALLED INCOME FROM LIFE INSURANCE BUSINESS BUT IT IS NOT THE SAME AS ARTIFICIALLY(LEGALLY) DEFINED ' PROFITS OF LIFE INSURANCE BUSINESS' U/S 44 READ WITH FIRST SCHEDULE WHICH ALONE IS TAXABLE U/S. 115B(1)(I). THE INCOME OF SHAREHOLD ERS ACCOUNT IS TAXABLE U/S 115B(1)(II). EVEN IN THE CASE OF ICICI PRUDENTIAL INSURANCE COMPANY LTD, REPORTED IN 140 ITD 41, THE ISSUE WAS TAXABILITY OF INCOME IN SHAREHOLDER'S ACCOUNT UNDER THE HEAD 'OTHER SOURCES'. MAX NEW YORK LIFE INSURANCE COMPANY LTD. (NOW KNOWN AS MAX LIFE INSURANCE COMPANY LIMITED). 64 7. MOREOVER, AND WITHOUT PREJUDICE TO THE ABOVE, SECTI ON 44 READ WITH FIRST SCHEDULE ARE PROVISIONS FOR COMPUTATION OF INCOME. SECTION 115B PROVIDES RATE OF TAX. ANY INTERPRETATI ON BY COURTS OF SECTION 115B CANNOT BE IMPORTED INTO SECTION 44 READ WITH FIRST SCHEDULE. THE COURT DECISIONS HOLDING THAT IN COME IN SHAREHOLDER'S ACCOUNT IS TAXABLE AT CONCESSIONAL RA TE U/S 115B ONLY DECIDE ABOUT RATE OF TAXATION AND NOT COMPUTAT ION INCOME. 8. WITHOUT PREJUDICE TO THE ABOVE AND ALL EARLIER SUBM ISSIONS, THE REVENUE SUBMITS THAT EVEN THE TRANSFER OF FUNDS FRO M SHAREHOLDER'S ACCOUNT TO POLICYHOLDER'S ACCOUNT SHO ULD NOT BE EXCLUDED FROM TAXABLE ACTUARIAL SURPLUS. HOWEVER, I T IS TO BE TREATED AS ALLOWABLE EXPENDITURE IN SHAREHOLDER'S A CCOUNT. THIS IS SO AS ACTUARIAL SURPLUS IS COMPUTED WITH REFEREN CE TO LIFE INSURANCE FUND AND SUCH AMOUNT TRANSFERRED BECOMES PART OF LIFE INSURANCE FUND AND REMAINS SO. THIS EXPLAINS THE DI LEMMA EXPRESSED BY HON'BLE ITAT MUMBAI IN THE CASE OF OF ICICI PRUDENTIAL INSURANCE COMPANY LTD, REPORTED IN 140 I TD 41. THE ORDER OF HON'BLE ITAT IS SUB-SILENTIO ON THIS ISSUE . THOUGH THE CIT(A) HAS FOLLOWED THE ABOVE DECISION TO A LIMITED EXTENT (THE APPEAL AGAINST THE SAME HAS BEEN ADMITTED BY HON'BL E HIGH COURT), THE REVENUE SUBMITS UNDER RULE 27 OF ITAT R ULES, THAT EVEN THAT WAS NOT IN ACCORDANCE WITH EXPRESS PROVIS IONS OF LAW. THE HON'BLE ITAT HAS PLENARY POWERS U/S 254(1), AS HELD BY THE APEX COURT IN THE CASE OF M/S NTPC LTD TO CONSIDER ANY ADDITIONAL GROUND WHICH GOES ONTO THE ROOT OF THE M ATTER AND COURTS HAVE HELD THAT SUCH A PLEA CAN EVEN BE RAISE D ORALLY AT THE TIME OF HEARING. A COMPILATION OF SUCH CASE LAW S IS ENCLOSED (262 ITR 325, 223 ITR 173, 29 ITR 799, 124 ITD 181) . SUBSEQUENTLY, ON THE LAST DATE OF HEARING, THE DR F ILED ANOTHER SET OF WRITTEN SUBMISSIONS IN RESPECT OF ADDITIONAL GROUND RAISED BY THE ASSESSEE, WHICH READS AS UNDER: 2. IN VIEW OF THE SAME THE REVENUE SUBMITS AS UNDE R: A)THE REVENUE IN PARA- 6 ON PAGE 12 OF THE SUBMISSI ON FILED ON 24.10.2017 HAS RELIED ON THE DECISION REPORTED IN 3 6 SOT 128 MAX NEW YORK LIFE INSURANCE COMPANY LTD. (NOW KNOWN AS MAX LIFE INSURANCE COMPANY LIMITED). 65 HOLDING THAT THE ISSUE OF SET OFF OF CARRIED FORWAR D LOSSES IS TO BE EXAMINED IN THE YEAR IN WHICH THE SET OFF IS CLAIME D. B) IN THE ORDER U/S 154 OF CIT(A) DATED 7.2.2017, W HICH MERGES WITH THE ORDER UNDER APPEAL, THE CIT(A) HAS GIVEN A N ILLUSTRATION IN PARA 5.1 OF THE ORDER ON THE ISSUE OF SET OFF OF LO SSES. REVENUE RELIES ON THE SAME. C) ON THE ISSUE OF ADMISSIBILITY OF ADDITIONAL GROU ND OF APPEAL FILED BY ASSESSEE, THE REVENUE RELIES ON THE DECISIONS RE PORTED IN 111 ITR OOL(SC), 301 ITR 17 (ALLD) AND THE DECISION IN THE CASE OF ULTRA TECH CEMENT LTD, DATED 18.4.2017 OF HON'BLE BOMBAY HIGH COURT IN ITA NO. 1040 OF 2014 AND SUBMITS THAT THE ADDITI ONAL GROUND SHOULD NOT BE ADMITTED AS NO SUCH CLAIM WAS MADE IN THE RETURN. THE REVENUE ALSO RELIES ON THE DECISION OF THE APEX COURT IN THE CASE OF GOETZE INDIA LTD. D) ON MERITS OF ADDITIONAL GROUND OF THE ASSESSEE, THE REVENUE SUBMITS THAT SECTION 10(23AAB), BEING EXEMPTION OF INCOME OF PENSION FUNDS HAS BEEN SPECIFICALLY GIVEN TO ASSESS EE. FOR SECTION 10(34), THE SECTION 44 READ WITH FIRST SCHEDULE WOU LD APPLY, AND EXEMPTION WOULD NOT BE AVAILABLE AS FAR AS POLICYHO LDERS FUNDS ARE CONCERNED. FOR SHAREHOLDER'S FUNDS, IF IT HELD THAT SECTION 10(34) APPLIES THEN SECTION 14A ALSO APPLIES. SINCE THE ON LY ACTIVITY IN SHAREHOLDER'S ACCOUNT IS OF INVESTMENT, IT CANNOT B E SAID THAT NO EXPENDITURE WAS INCURRED FOR EARNING DIVIDEND INCOM E. SINCE THIS ISSUE WAS NOT THERE BEFORE AO OR EVEN CIT(A), IT H AS NOT BEEN EXAMINED BY THEM. WITHOUT PREJUDICE TO THE SAME, T HE TRANSFER OF SUCH EXEMPTED INCOME (IF SO HELD) FROM SHAREHOLDER S ACCOUNT TO POLICY HOLDERS ACCOUNT AMOUNTS TO DOUBLE DEDUCTION, IF SUCH TRANSFER IS EXCLUDED FROM THE ACTUARIAL SURPLUS AS HELD BY THE CIT(A). E) IN RESPECT OF COPY OF LIC ACT FILED SECTIONS 5,2 6, 28, 28A, 30, 37 AND 43 MAY KINDLY BE REFERRED TO IN SUPPORT OF REVE NUES ARGUMENTS MADE IN THE HEARING. F) AS REGARDS THE QUERY OF THE HONB'LE BENCH REGARD ING INTERPRETATION OF WORDS ON BEHALF OF THE POLICY HO LDER' IN THE CIRCULAR NO 202 DATED 5.7.1976, BEING EXPLANATORY N OTES ON FINANCE ACT 1976, IT IS SUBMITTED THAT THE SAID WORDS ARE T O BE READ CONTEXT OF RULE 3{A) OF FIRST SCHEDULE OF INCOME TAX ACT, W HICH WAS DELETED AS THE CIRCULAR ONLY EXPLAINS THE CORRESPON DING AMENDMENT AND CAN NOT BE INTERPRETED IN ISOLATION, IF WE READ UN-AMENDED RULE MAX NEW YORK LIFE INSURANCE COMPANY LTD. (NOW KNOWN AS MAX LIFE INSURANCE COMPANY LIMITED). 66 3(A), WE NOTICE THAT THE SAME WORDS HAVE BEEN USED THERE IN AS UNDER FOUR-FIFTH OF THE AMOUNTS PAID TO, OR RESERVED FOR OR EXPENDED ON BEHALF OF POLICY HOLDERS....' AS PER STANDARD ENGLISH AND RULE OF ITS GRAMMER IT MEANS PAID TO (POLICY-HOLDERS) OR RESERVED FOR (POLICY-HOLDERS) OR EXPENDED ON BEHALF OF (POLICY-HOLDERS ) THE CIRCULAR 202 DATED 5.7.1976 EXPLAINS THE REASON FOR OMITTING RULE 3(A). SO NO OTHER INTERPRETATION CAN BE GIVEN TO IT. G) IN RESPECT OF COPIES OF OLD INSURANCE ACT OF 193 8 (BEFORE IRDA ACT 1999), PLACED FROM PAGE 48 TO 72 OF ANNEXURE TO WRITTEN SUBMISSIONS FILED ON 11-12-2017, KIND ATTENTION IS INVITED TO PAGE 59 TO 61, WHICH REFER TO P & L ACCOUNT, P & L APPRO PRIATION ACCOUNT AND REVENUE ACCOUNT NOT AS SYNONYMS. HOWEVER, THE REVENUE SUBMITS THAT AFTER AMENDMENT OF INSURANCE ACT 1938 BY IRDA ACT 1999, ANY REFERENCE TO OR RELIANCE ON THE SAID OLD ACT IS NOT REQUIRED AS IT DOES NOT EXIST. 53. THE LEARNED DR DURING THE COURSE OF HEARING DRE W OUR ATTENTION TOWARDS CIRCULAR 202 DATED 05.07.1976 IN WHICH UNDE R PARA 40.2, THE REASON FOR BRINGING AMENDMENT BY FINANCE ACT, 1976 FOR ALL OWING THE TAX @ 12.5% ON THE PROFITS AND GAINS OF LIFE INSURANCE BUSINESS WAS EXPLAINED AS UNDER: 40.2 UNDER THE AMENDMENT MADE BY THE FINANCE ACT, 1976, THE METHOD OF DETERMINING THE PROFITS ON THE BASIS OF G ROSS EXTERNAL INCOMINGS, AS STATED AT (A) IN THE PRECEDING PARAGR APH HAS BEEN DROPPED AND THE PROFITS AND GAINS OF A LIFE INSURAN CE BUSINESS WILL, MAX NEW YORK LIFE INSURANCE COMPANY LTD. (NOW KNOWN AS MAX LIFE INSURANCE COMPANY LIMITED). 67 IN ALL CASES BE TAKEN TO BE THE ANNUAL AVERAGE OF T HE SURPLUS ARRIVED AT BY ADJUSTING THE SURPLUS OR DEFICIT DISCLOSED BY THE ACTUARIAL VALUATION MADE IN ACCORDANCE WITH THE INSURANCE ACT IN RESPECT OF THE LAST INTER-VALUATION PERIOD ENDING BEFORE THE C OMMENCEMENT OF THE ASSESSMENT YEAR, SO AS TO EXCLUDE THEREFROM ANY SURPLUS OR DEFICIT WHICH WAS MADE IN ANY EARLIER INTER-VALUATI ON PERIOD. NO FURTHER ADJUSTMENT TO THE ANNUAL AVERAGE OF THE SUR PLUS SO ARRIVED AT WILL BE MADE. IN OTHER WORDS, NO FURTHER DEDUCT ION WILL BE ALLOWED IN RESPECT OF ANY PORTION OF THE AMOUNT PAI D OR RESERVED OR EXPENDED ON BEHALF OF THE POLICY-HOLDERS NOR WILL T HE EXPENDITURE AND ALLOWANCES WHICH ARE NOT DEDUCTIBLE UNDER THE P ROVISIONS OF SECTION 30 TO 43A BE ADDED BACK. THE PROFITS AND G AINS OF LIFE INSURANCE BUSINESS SO ARRIVED AT WILL BE CHARGED TO TAX AT THE RATE OF 12 PER CENT AS EXPLAINED IN PARAGRAPH 37 54. IN THE REJOINDER, THE LEARNED AR SUBMITTED THAT SECTION 44 READ WITH RULE 2 OF THE FIRST SCHEDULE PROVIDES FOR TAXATION OF INCOME FROM LIFE INSURANCE BUSINESS. AS PER RULE 2 SURPLUS OR DEFI CIT IS DETERMINED BY WAY OF ACTUARIAL VALUATION IS TREATED TO BE INCOME OF THE LIFE INSURANCE BUSINESS. THE TERM 'ACTUARIAL VALUATION' HAS NOT BEEN DEFINED IN THE ACT. THEREFORE, IN THE ABSENCE OF ANY SPECIFIC DEFINITION, ITS ORDINARY ME ANING AS UNDERSTOOD IN THE COMMON PARLANCE HAS TO BE TAKEN. THUS, IT WILL MEAN A VALUE THAT IS DETERMINED BY AN ACTUARY AS PER THE RULES AND NORMS OF ACTUARIAL VALUATION. IN LIFE INSURANCE BUSINESS, THE ACTUARY IS REQUIRED TO VALUE THE LIABILITY THAT ARISES ON ACCOUNT OF WRITING LIFE INSURANCE POLICIE S, THE LIKELY FUTURE LIABILITIES THAT THE INSURER MAY HAVE TO BEAR ON ACCOUNT OF MAT URITY/DEATH/SURRENDER OF POLICIES. ALL THESE ARE VALUED BASED ON PRINCIPLES OF ACTUARIAL PROBABILITY AND STATISTICAL TOOLS. THE FUTURE VALUE THUS WORKED OUT HAS TO BE DISCOUNTED TO ASCERTAIN PRESENT VALUE WHICH REPRESENTS THE PRESEN T LIABILITY (I.E. ON THE DATE MAX NEW YORK LIFE INSURANCE COMPANY LTD. (NOW KNOWN AS MAX LIFE INSURANCE COMPANY LIMITED). 68 OF VALUATION) ON THE LIFE INSURANCE BUSINESS. WHEN SUCH ESTIMATED LIABILITIES ALONG WITH OTHER EXPENSES THAT ARE INCURRED DURING THE VALUATION PERIOD ARE REDUCED FROM THE INCOME GENERATED FROM THE LIFE INS URANCE BUSINESS DURING THE VALUATION PERIOD, THE SURPLUS/DEFICIT IS ARRIVE D AT AND IT IS DEEMED TO BE THE INCOME FROM LIFE INSURANCE BUSINESS. THE A CTUARIAL VALUATION OF FUTURE LIABILITIES INCLUDES: (A) BONUS AMOUNTS THAT THE PO LICYHOLDERS HAVE BECOME ENTITLED TO RECEIVE BUT HAVE NOT RECEIVED (THE SAME WOULD BE DISTRIBUTED IN FUTURE); AND (B) AMOUNT SET ASIDE FOR FUTURE DISTRI BUTION OF BONUS FOR THE EXCLUSIVE BENEFIT OF THE POLICYHOLDERS (KNOWN AS FU ND FOR FUTURE APPROPRIATION). THOUGH INCOME-TAX ACT DOES NOT PROV IDE ANY DEFINITION OR GUIDANCE REGARDING THE TERM 'ACTUARIAL VALUATION', IRDA REGULATIONS STIPULATED THAT ACTUARIAL VALUATION WOULD TAKE INTO ACCOUNT AMOUNT SET ASIDE FOR BONUS PAYMENTS TO POLICYHOLDERS IN FUTURE. 55. OUR ATTENTION WAS INVITED TOWARDS THE PREPARATI ON OF FINANCIAL STATEMENTS AND AUDITOR'S REPORT OF INSURANCE COMPAN IES REGULATIONS, 2000 ESPECIALLY TO CLAUSE 6 THEREOF, WHICH HAS BEEN REPR ODUCED HEREIN ABOVE, POINTING OUT LIABILITY FOR LIFE INSURANCE POLICIES IN FORCE INCLUDES ALL FUTURE CLAIMS (INCLUDING BONUS ENTITLEMENTS OF POLICY HOLD ERS). ATTENTION WAS ALSO INVITED TO CLAUSE 12 (B) AND CLAUSE 43 OF IRDA REGU LATIONS 2013. AS PER CLAUSE 12B, IT IS MANDATORY TO DECLARE BONUS ANNUAL LY WHILE CLAUSE 43 PROVIDES THAT ALL INSURANCE PRODUCTS SHALL PROVIDE THE PROSPECTIVE POLICYHOLDER A CUSTOMIZED BENEFIT ILLUSTRATION, ILLUSTRATING THE GUARANTEED AND NON- MAX NEW YORK LIFE INSURANCE COMPANY LTD. (NOW KNOWN AS MAX LIFE INSURANCE COMPANY LIMITED). 69 GUARANTEED BENEFITS AT GROSS INVESTMENT RETURNS OF 4% AND 8% RESPECTIVELY AND AS SPECIFIED BY IRDA OR LIFE INSURANCE COUNCIL FROM TIME TO TIME. IT IS ALSO REQUIRED THAT THE BENEFIT ILLUSTRATION SHALL B E SIGNED BY BOTH THE PROSPECTIVE POLICYHOLDER & THE INTERMEDIARY AND SHA LL FORM PART OF THE POLICY DOCUMENT. HE ALSO INVITED OUR ATTENTION TOWARDS TH E DEFINITION OF )'NON-PAR POLICIES' OR 'POLICIES WITHOUT PARTICIPATION IN PRO FITS' AS DEFINED BY IRDA (ACTUARIAL REPORT AND ABSTRACT OF LIFE INSURANCE BU SINESS) REGULATIONS 2016 AND ON THAT BASIS CONTENDED THAT PARTICIPATING POLI CY HOLDERS ARE ENTITLED TO PARTICIPATE IN THE SURPLUS/PROFITS. BEFORE US RELI ANCE WAS ALSO PLACED ON SAMPLE BENEFIT ILLUSTRATION. THE RELEVANT EXTRACT THEREOF IS REPRODUCED HEREUNDER: '(4) ACCRUED REVERSIONARY BONUS: REVERSIONARY BONUS WILL BE DECLARED EACH YEAR POST COMPLETION OF SECOND POLICY YEAR DEPENDING ON THE EXPERIENCE OF THE COMPANY. ONCE DE CLARED REVERSIONARY BONUS IS GUARANTEED TO BE PAID OUT ON THE EARLIER OF SURRENDER (ONLY CASH VALUE) OR MATURITY. REVERSIONA RY BONUS IS PRIMARILY DRIVEN BY INVESTMENT IN FIXED INTEREST SE CURITIES SUCH AS GOVERNMENT AND CORPORATE BONDS AND IS EXPECTED TO B E RELATIVELY LESS VOLATILE AS COMPARED TO TERMINAL BONUS. (5) TERMINAL BONUS IS AN ADDITIONAL BONUS PAID ONLY ONCE ON THE EARLIER OF SURRENDER OR MATURITY, PROVIDED THE POLI CY HAS BEEN IN FORCE FOR AT LEAST 5 COMPLETE POLICY YEARS. UNLIKE REVERSIONARY BONUS WHICH ONCE DECLARED BECOMES GUARANTEED, TERMI NAL BONUS IS NOT GUARANTEED AND IS EXPECTED TO MOVE IN LINE WITH THE VALUE OF THE OVERALL ASSETS, MORE SPECIFICALLY WITH THE V ALUE OF THE GROWTH ASSETS LIKE EQUITY/PROPERTY. UNDER THE ECONOMIC SCE NARIO OF LOWER INVESTMENT RETURNS, THE TERMINAL BONUS IS LIKELY TO REDUCE. PLEASE NOTE THAT ON SUR RENDER, ONLY SURRENDER VALUE OF TERMINAL BONUS, IF ANY, IS PAYABLE.' MAX NEW YORK LIFE INSURANCE COMPANY LTD. (NOW KNOWN AS MAX LIFE INSURANCE COMPANY LIMITED). 70 ON THIS BASIS IT WAS CONTENDED THAT THE POLICY HOLD ERS HAVE A REASONABLE EXPECTATION OF RECEIVING BONUSES IN FUTURE AND THE COMPANY IS LEGALLY OBLIGED TO ASCERTAIN THE SAME AND PROVIDE FOR ITS FUTURE DI SCHARGE. THIS LIABILITY IS DETERMINED BY THE ACTUARY BASED ON SCIENTIFIC PRINC IPLES. 56. ATTENTION WAS ALSO DRAWN TOWARDS THE WRITTEN SU BMISSIONS OF THE LEARNED DR, WHEREIN IT HAS BEEN STATED THAT UNLIKE IN OTHER INDUSTRIES, IN LIFE INSURANCE BUSINESS, SHAREHOLDERS' FUND DOES NOT PLA Y AN ACTIVE ROLE IN RUNNING OF BUSINESS AND REMAINS INVESTED. ON THIS IT WAS SU BMITTED THAT THIS IS FACTUALLY INCORRECT AS SHAREHOLDERS' FUNDS ARE REGU LARLY USED TO MEET THE REGULAR EXPENSES OF LIFE INSURANCE BUSINESS AND TO MEET THE DEFICIT IN POLICYHOLDERS' ACCOUNT, IF ANY. THE SHAREHOLDERS FU NDS ARE BASICALLY REQUIRED TO MAINTAIN SOLVENCY MARGINS STIPULATED BY IRDA. 57. WITH REGARD TO THE OLD RULE 2 OF SCHEDULE 1, BROUGHT IN BY FINANCE ACT 1976, IT WAS CONTENDED, THAT PROFITS AND GAINS OF LIFE INSURANCE BUSINESS WERE TAKEN GREATER OF NET INCOME (FIRST METHOD) AND VALUATION SURPLUS (SECOND METHOD) AND RULE 3 RESTRICTED THE DEDUCTION TO 80% OF BONUS PAID TO OR RESERVED FOR OR EXPENDED ON BEHALF OF POLICYHOLD ERS. FROM 01.04.1976, THE FIRST METHOD WAS DELETED FROM RULE 2 AND, THUS, PRO FITS AND GAINS OF LIFE INSURANCE BUSINESS WAS TO BE TAKEN AS THE VALUATION SURPLUS / ACTUARIAL SURPLUS AND UNDER THIS METHOD THERE IS NO SUCH REST RICTION FOR ALLOWING DEDUCTION TO 80% OF BONUS. WITH REFERENCE TO THE R ELIANCE PLACED ON THE CBDT CIRCULAR NO. 202 DATED 05.07.1976, IT WAS SUBM ITTED THAT THE WORDS IN MAX NEW YORK LIFE INSURANCE COMPANY LTD. (NOW KNOWN AS MAX LIFE INSURANCE COMPANY LIMITED). 71 THE EXPLANATORY MEMORANDUM WERE ONLY MEANT FOR RULE 2 AS IT EXISTED PRIOR TO THE AMENDMENT ALLOWING USE OF GREATER OF THE TWO METHODS. IT WAS NOT MEANT TO LIMIT THE SCOPE OF THE MEANING OF ACTUARIA L SURPLUS, WHICH HAS NOT GONE THROUGH ANY AMENDMENT. IF THE LEGISLATURE INTE NDS TO CHANGE THE MEANING OF ACTUARIAL SURPLUS BY DISALLOWING DEDUCTI ONS FOR BONUS AND FFA IN CALCULATING THE ACTUARIAL SURPLUS, THE STATUTE SHOU LD AND WOULD HAVE EXPRESSLY PROVIDED FOR THE SAME. DEDUCTION OF BONUS/FFA ARISE S NOT BECAUSE THE STATUTE PROVIDES FOR THESE AMOUNTS AS DEDUCTIONS BU T BECAUSE THE ACTUARY RECOGNIZES THE SAME AS ACCRUED LIABILITIES. THE CB DT CIRCULAR CAN BE USED AS AN AID OF CONSTRUCTION ONLY WHEN THERE IS LACK OF C LARITY REGARDING A STATUTORY PROVISION. IN THIS REGARD, RELIANCE IS PLACED ON TH E JUDGMENTS OF NAWAB SIR MIR OSMAN ALI KHAN VS. COMMISSIONER OF WEALTH-TAX 162 I TR 888 (SC); PRINCIPLE CHIEF CONSERVATOR OF FOREST & ANR. VS. JK JOHNSON 1 0 SCC 794 AND STATE OF MAHARASHTRA VS. MARWANJEE P. DESAI &ORS 2 SCC 318. IN THESE DECISION IT WAS HELD THAT WHEN THE LANGUAGE OF THE STATUTORY PR OVISION IS PLAIN AND CLEAR, NO EXTERNAL AID IS REQUIRED AND THE LEGISLATIVE INT ENTION HAS TO BE GATHERED FROM THE LANGUAGE EMPLOYED. OUR ATTENTION WAS ALSO DRAWN TOWARDS THE DECISION OF THE HON'BLE SUPREME COURT IN THE CASE O F TARULATA SYAM & ORS VS. CIT 108 ITR 345 (SC). 58. IT WAS FURTHER SUBMITTED THAT RULE 2 OF FIRST S CHEDULE DOES NOT REFER TO ANY DEDUCTION BUT MERELY REFERS TO ACTUARIAL SURPLU S OR DEFICIT DETERMINED IN ACCORDANCE WITH INSURANCE ACT, 1938. ACTUARIAL SURP LUS/DEFICIT IS AN AMOUNT MAX NEW YORK LIFE INSURANCE COMPANY LTD. (NOW KNOWN AS MAX LIFE INSURANCE COMPANY LIMITED). 72 THAT IS COMPUTED AFTER PROVIDING FOR LIABILITIES ON ACCOUNT OF FUTURE BONUS PAYMENTS SET ASIDE FOR THE BENEFIT OF THE POLICYHOL DERS - BOTH BY WAY OF BONUS ALLOCATION AS WELL AS FUNDS FOR FUTURE APPROP RIATION. THE OLD FORMS G, H AND I PRESCRIBED UNDER THE INSURANCE ACT 1938, CL EARLY PROVIDED FOR THE SAME. ATTENTION WAS DRAWN AT THE COST OF REPETITION TOWARDS THE DECISION OF HON'BLE SUPREME COURT IN THE CASE OF LIC OF INDIA V . CIT (SUPRA), AND THE DECISION OF THE TRIBUNAL IN THE CASE OF ICICI PRUDE NTIAL INSURANCE CO. LTD. VS. ACIT140 ITD 41 (SUPRA), WHEREIN IT WAS HELD THAT AC TUARIAL SURPLUS OR DEFICIT HAS TO BE DETERMINED IN THE MANNER PROVIDED IN OLD FORMS G,H AND I. THEREFORE, ANY AMOUNT WHICH IS RECOGNIZED AS AN ACT UARIAL LIABILITY HAS TO BE NECESSARILY REDUCED WHILE ARRIVING AT THE SURPLUS. UNDER THE NEW METHOD OF PRESENTATION, IRDA HAS STIPULATED THAT SHAREHOLDERS ACCOUNTS AND POLICY HOLDERS ACCOUNTS ARE TO BE SHOWN SEPARATELY THOUGH A CONSOLIDATED BALANCE SHEET WOULD BE REQUIRED TO BE DRAWN UP. NEW FORMS R EQUIRE THE DETAILED DISCLOSURE BUT THE NORMS REGARDING ACTUARIAL VALUAT ION HAVE NOT BEEN ALTERED TO NEGATE THE RECOGNITION OF ACTUARIAL LIABILITIES BY WAY OF BONUS ALLOCATIONS TO THE POLICYHOLDERS. ATTENTION WAS DRAWN TOWARDS THE ORDER OF THE CIT(A) WHERE HE ALSO AGREED THAT IN MATERIAL TERMS AND IN SUBSTANCE THERE IS NO DIFFERENCE BETWEEN THE OLD AND NEW FORMS - THEY DIF FER ONLY IN THE MANNER OF PRESENTATION. THE QUESTION THEREFORE RELATE ONLY TO WHETHER THERE HAS BEEN ANY CHANGE IN THE TREATMENT OF ACTUARIAL LIABILITY RECOGNIZED FOR FUTURE PAYMENTS OF BONUS TO POLICYHOLDERS. THE LEARNED CIT (A) HIMSELF CONTRADICT MAX NEW YORK LIFE INSURANCE COMPANY LTD. (NOW KNOWN AS MAX LIFE INSURANCE COMPANY LIMITED). 73 THE FINDINGS IN THIS ORDER, WHEN ON ONE HAND HE STA TES THAT THE NEW FORM A- PL, A-RA AND I GOVERN THE COMPUTATION OF INCOME FRO M LIFE INSURANCE BUSINESS AND ON THE OTHER STATES THAT THERE IS NO D IFFERENCE BETWEEN THE NEW AND OLD FORMS. A DEDUCTION WHICH IS OTHERWISE ALLO WABLE AS ACCRUED LIABILITY CANNOT BE TAKEN AWAY BY WAY OF CBDT CIRCULAR. 59. UNDER THE RULE OF LITERAL INTERPRETATION, THE TERM ACTUARIAL SURPLUS IS TO BE INTERPRETED IN ITS ORDINARY MEANING. AND SUCH SU RPLUS IS THE AMOUNTS AVAILABLE AFTER PROVIDING FOR ALL DETERMINED BY THE ACTUARY. IT IS NOT CORRECT TO SAY THAT CBDT CIRCULAR CONTROLS THE INTERPRETATION OF RULE 2. ITS APPLICATION IS TO BE NECESSARILY LIMITED TO AMOUNTS PAID OR RESERV ED OR EXPENDED ON BEHALF OF THE POLICYHOLDERS. IT DOES NOT USE THE SAME EXPR ESSION AS USED IN ERSTWHILE RULE 3 (A) - 'AMOUNTS PAID TO OR RESERVED FOR OR EX PENDED ON BEHALF OF POLICY HOLDERS'. THE CBDT CIRCULAR HAS LIMITED APPLICATION TO SITUATION WHERE THE INSURANCE BENEFITS ARE ASSIGNED TO THIRD PARTIES AN D WHERE BENEFITS ARE TO BE PAID/RESERVED/EXPENDED ON BEHALF OF THE POLICYHOLDE RS FOR THE ASSIGNEES. UNDER THESE CIRCUMSTANCES, THE COMPANY ACTS AS AN A GENT FOR THE BENEFIT OF THE POLICYHOLDER. THE TERM 'ON BEHALF OF, AS PER T HE DEFINITION CONTAINED IN THE LAW DICTIONARY BY D.P MITTAL AND LAW LEXICON EN CYCLOPEDIA LAW DICTIONARY, IMPLIES AN AGENCY RELATIONSHIP. EVEN O THERWISE, IT WAS SUBMITTED THAT IF IT IS PRESUMED WITHOUT CONCEDING THAT THE C BDT CIRCULAR WAS MEANT TO CURTAIL THE MEANING OF THE TERM 'ACTUARIAL SURPLUS' , THE SAME CANNOT BE A PERMISSIBLE WAY OF INTERPRETATION OF STATUTE AS NO SUCH LEGISLATIVE INTENT IS MAX NEW YORK LIFE INSURANCE COMPANY LTD. (NOW KNOWN AS MAX LIFE INSURANCE COMPANY LIMITED). 74 EVIDENT FROM THE RULE ITSELF. IN THIS REGARD, OUR A TTENTION WAS INVITED TO THE DECISION OF HONBLE SUPREME COURT IN THE CASE OF C IT VS. HERO CYCLES 228 ITR 463 AND STATE BANK OF TRAVANCORE VS. CIT 158 IT R 102. IF CBDT CIRCULAR IS GIVEN FULL EFFECT TO EVEN THE AMOUNTS PAID DURIN G THE YEAR AS BONUS TO POLICYHOLDERS WOULD BE TAXABLE, BUT THIS IS NOT THE CASE OF THE REVENUE. THE REVENUE TRIED TO TAX THE BONUS DECLARED AND THE INC REMENTAL FFA. 60. SO FAR AS THE CALCULATION OF THE TAX @ 12.5% ON THE BASIS OF 52.5% RATE APPLICABLE TO INSURANCE COMPANIES IS CONJECTURAL IN NATURE AND THIS CANNOT BE USED TO INTERPRET A PROVISION WHERE THERE IS NO AMB IGUITY. THE REASON FOR REDUCING THE TAX RATE TO 12.5% IS NOT RELEVANT FOR INTERPRETING RULE 2. 61. COMING TO THE SUBMISSION OF THE LEARNED DR REGA RDING SECTION 115B THAT SECOND LIMB OF IT WILL BECOME REDUNDANT, IT WA S SUBMITTED, LIFE INSURANCE COMPANIES CANNOT CARRY ON ANY OTHER BUSINESS. HOWEV ER, THEY MAY HAVE INCOME WHICH IS NOT ARISING FROM LIFE INSURANCE BUS INESS SUCH AS INTEREST ON INCOME TAX REFUND, WHICH IS MEANT TO BE TAXED UNDER SECTION 115B(II). 62. WITH REGARD TO THE CONTENTION OF THE DR FOR THE SET OFF OF LOSSES FOR WHICH IT PLACED RELIANCE ON THE JUDGMENT OF THE HON 'BLE ITAT IN THE CASE OF LODHI PROPERTY CO. LTD. VS. CIT 1 ITR (IT) 1040, IT WAS SUBMITTED THAT THE SAID CASE HAS NO APPLICATION SINCE IN THAT CASE AN ORDER WAS PASSED BY CIT UNDER SECTION 263 OF THE ACT WHERE THE CIT OBSERVED THAT THE ASSESSMENT WAS COMPLETED AFTER THE DUE DATE. FURTHER, IT WAS H ELD THAT THE COMPUTATION OF LOSS HAS TO BE DONE IN THE RELEVANT YEAR ITSELF AND ONLY THE ASSESSING MAX NEW YORK LIFE INSURANCE COMPANY LTD. (NOW KNOWN AS MAX LIFE INSURANCE COMPANY LIMITED). 75 OFFICER DEALING WITH THE ASSESSMENT OF THE SUBSEQUE NT YEAR IN WHICH ANY CLAIM OF SET OFF OF LOSS IS MADE CAN DECIDE THE ISS UE. THUS, IT WAS SUBMITTED THAT THE ASSESSING OFFICER IN THE SUBSEQUENT YEAR C ANNOT RE-COMPUTE THE LOSSES OF PRIOR YEARS. 63. WITH REGARD TO THE ADDITIONAL GROUND PERTAINING TO CLAIM OF EXEMPTION UNDER SECTION 10(34) OF THE ACT, THE LEARNED AR REF ERRING TO THE CONTENTION OF THE LEARNED DR IN THE WRITTEN SUBMISSIONS, CONTENTE D THAT THE SUBMISSION MADE BY THE DR IS CONTRARY TO THE DECISION OF THE T RIBUNAL IN THE CASE OF ICICI PRUDENTIAL LIFE INSURANCE CO. LTD (SUPRA), WH EREIN IT HAS BEEN HELD THAT A LIFE INSURANCE COMPANY IS ENTITLED TO CLAIM EXEMP TION OF DIVIDEND INCOME UNDER SECTION 10(34) OF THE ACT, WHICH WAS ALSO CON FIRMED BY THE HONBLE BOMBAY HIGH COUR57. 64 WE HAVE HEARD THE RIVAL SUBMISSIONS AND CAREFULL Y CONSIDERED THE SAME ALONG WITH THE ORDER OF THE TAX AUTHORITIES BELOW. WE HAVE ALSO GONE THROUGH THE CASE LAWS, RELEVANT PROVISIONS OF THE INCOME TA X ACT, INSURANCE ACT AS WELL AS IRDA REGULATIONS NOTIFIED FROM TIME TO TIME AND REFERRED TO BEFORE US DURING THE COURSE OF THE HEARING FROM BOTH THE SIDE S ALONG WITH THE MATERIAL AND THE DOCUMENTS BROUGHT AND REFERRED TO DURING TH E COURSE OF HEARING. 65. GROUND NO.1 IS GENERAL AND THEREFORE DOES NOT REQUIRE ANY ADJUDICATION. GROUND NO.2 AND 3 DEALS WITH FINDING OF THE CIT(A) THAT THE PROFIT DISCLOSED BY THE ASSESSEE IN THE SHAREHOLDER S PROFIT AND LOSS ACCOUNT MAX NEW YORK LIFE INSURANCE COMPANY LTD. (NOW KNOWN AS MAX LIFE INSURANCE COMPANY LIMITED). 76 (FORM A-PL) IS NOT THE PROFIT DERIVED FROM LIFE INS URANCE BUSINESS AND THEREFORE THE PROVISIONS OF SECTION 44 READ WITH SC HEDULE FIRST OF THE INCOME TAX ACT ARE NOT APPLICABLE. BEFORE DECIDING THIS I SSUE, IT IS NECESSARY TO LOOK INTO THE RELEVANT PROVISIONS OF INCOME TAX ACT WHIC H ARE REPRODUCED AS UNDER:- SECTION 44: NOTWITHSTANDING ANYTHING TO THE CONTRARY CONTAINED IN THE PROVISIONS OF THIS ACT RELATING TO THE COMPUTATION OF INCOME C HARGEABLE UNDER THE HEAD INTEREST ON SECURITIES, INCOME FROM HOUSE P ROPERTY, CAPITAL GAINS OR INCOME FROM OTHER SOURCES, OR IN SECTIO N 199 OR IN SECTION 28 TO 43B, PROFITS AND GAINS OF ANY BUSINESS OF INS URANCE, INCLUDING ANY SUCH BUSINESS CARRIED ON BY A MUTUAL INSURANCE COMP ANY OR BY A CO- OPERATIVE SOCIETY, SHALL BE COMPUTED IN ACCORDANCE WITH THE RULES CONTAINED IN THE FIRST SCHEDULE. THE FIRST SCHEDULE TO THE INCOME TAX ACT CONTAINS T HREE PARTS, VIZ A,B & C. PART A WHICH PERTAINS TO LIFE INSURANCE BUSINESS IS EXTRACTED HERE UNDER FOR READY REFERENCE AS IS IN EXISTENCE DURING THE IMPUG NED ASSESSMENT YEAR: THE FIRST SCHEDULE INSURANCE BUSINESS A.- LIFE INSURANCE BUSINESS PROFITS OF LIFE INSURANCE BUSINESS TO BE COMPUTED S EPARATELY. 1. IN THE CASE OF A PERSON WHO CARRIES ON OR AT ANY TI ME IN THE PREVIOUS YEAR CARRIED ON LIFE INSURANCE BUSINESS, THE PROFIT S AND GAINS OF SUCH PERSON FROM THAT BUSINESS SHALL BE COMPUTED SEPARAT ELY FROM HIS PROFITS AND GAINS FROM ANY OTHER BUSINESS. COMPUTATION OF PROFITS OF LIFE INSURANCE BUSINESS. MAX NEW YORK LIFE INSURANCE COMPANY LTD. (NOW KNOWN AS MAX LIFE INSURANCE COMPANY LIMITED). 77 2. THE PROFITS AND GAINS OF LIFE INSURANCE BUSINESS SH ALL BE TAKEN TO BE THE ANNUAL AVERAGE OF THE SURPLUS ARRIVED AT BY ADJUSTI NG THE SURPLUS OR DEFICIT DISCLOSED BY THE ACTUARIAL VALUATION MADE I N ACCORDANCE WITH THE INSURANCE ACT, 1938 (4 OF 1938), IN RESPECT OF THE LAST INTER-VALUATION PERIOD ENDING BEFORE THE COMMENCEMENT OF THE ASSESS MENT YEAR, SO AS TO EXCLUDE FROM IT ANY SURPLUS OR DEFICIT INCLUDED THEREIN WHICH WAS MADE IN ANY EARLIER INTER-VALUATION PERIOD]. DEDUCTIONS. 3. . ADJUSTMENT OF TAX PAID BY DEDUCTION AT SOURCE. 4. WHERE FOR ANY YEAR AN ASSESSMENT OF THE PROFITS OF LIFE INSURANCE BUSINESS IS MADE IN ACCORDANCE WITH THE ANNUAL AVER AGE OF A SURPLUS DISCLOSED BY A VALUATION FOR AN INTER-VALUATION PER IOD EXCEEDING TWELVE MONTHS, THEN, IN, COMPUTING THE INCOME-TAX PAYABLE FOR THAT YEAR, CREDIT SHALL NOT BE GIVEN IN ACCORDANCE WITH SECTIO N 199 FOR THE INCOME TAX PAID IN THE PREVIOUS YEAR, BUT CREDIT SHALL BE GIVEN FOR THE ANNUAL AVERAGE OF THE INCOME-TAX PAID BY DEDUCTION AT SOUR CE FROM INTEREST ON SECURITIES OR OTHERWISE DURING SUCH PERIOD. SECTION 115B OF THE ACT PROVIDES THE RATE OF TAX LEVIABLE ON PRO FITS AND GAINS OF LIFE INSURANCE BUSINESS. THE SAID SECTION READS AS UNDER:- SECTION 115B TAX ON PROFITS AND GAINS OF LIFE IN SURANCE BUSINESS. (1) WHERE THE TOTAL INCOME OF AN ASSESSEE INCLUDES ANY PROFITS AND GAINS FROM LIFE INSURANCE BUSINESS, THE INCOME-TAX PAYABLE SHALL BE THE AGGREGATE OF (I) THE AMOUNT OF INCOME-TAX CALCULATED ON THE AMOUNT OF PROFITS AND GAINS OF THE LIFE INSURANCE BUSINESS INCLUDED IN THE TOTAL INCOME, AT THE RATE OF TWELVE AND ONE-HALF PERCENT; AND (II) THE AMOUNT OF INCOME-TAX WITH WHICH THE ASSESSEE WOULD HAVE BEEN CHARGEABLE HAD THE TOTAL INCOME OF THE ASSESSEE BEEN REDUCED BY THE AMOUNTS OF PROFITS AND GAINS OF THE LIFE INSURANCE BUSINESS. MAX NEW YORK LIFE INSURANCE COMPANY LTD. (NOW KNOWN AS MAX LIFE INSURANCE COMPANY LIMITED). 78 (2) NOTWITHSTANDING ANYTHING CONTAINED IN SUB-SECTION ( 1) OR IN ANY OTHER LAW FOR THE TIME BEING IN FORCE OR ANY INSTRU MENT HAVING THE FORCE OF LAW, THE ASSESSEE SHALL, IN ADDITION TO TH E PAYMENT OF INCOME-TAX COMPUTED UNDER SUB-SECTION (1), DEPOSIT, DURING [THE PREVIOUS YEARS RELEVANT TO THE ASSESSMENT YEARS COM MENCING ON THE 1 ST DAY OF APRIL, 1989 AND THE 1 ST DAY OF APRIL, 1990], AN AMOUNT EQUAL TO THIRTY-THREE AND ONE-THIRD PER CENT OF THE AMOUNT OF INCOME-TAX COMPUTED UNDER CLAUSE (I) OF SUB-SECTION (1), IN SUCH SOCIAL SECURITY FUND (HEREAFTER IN THIS SUB-SECTION REFERRED TO AS THE SECURITY FUND), AS THE CENTRAL GOVERNMENT MAY, BY N OTIFICATION IN THE OFFICIAL GAZETTE, SPECIFY IN THIS BEHALF: PROVIDED THAT WHERE THE ASSESSEE MAKES DURING THE S AID PREVIOUS [YEARS] ANY DEPOSIT OF AN AMOUNT OF NOT LESS THAN T WO AND ONE-HALF PER CENT OF THE PROFITS AND GAINS O THE LIFE INSURA NCE BUSINESS IN THE SECURITY FUND, THE AMOUNT OF INCOME-TAX PAYABLE BY THE ASSESSEE UNDER THE SAID CLAUSE (I) SHALL BE REDUCED BY AN AM OUNT EQUAL TO TWO AND ONE-HALF PER CENT OF SUCH PROFITS AND GAINS AND, ACCORDINGLY, THE DEPOSIT OF THIRTY-THREE AND ONE TH IRD PER CENT REQUIRED TO BE MADE UNDER THIS SUB-SECTION SHALL BE CALCULATED ON THE INCOME-TAX AS SO REDUCED. 66. SECTION 115B WAS INSERTED BY THE FINANCE ACT, 1 976 BUT WITH EFFECT FROM 1 JUNE, 1976. IT IS, THEREFORE, APPLICABLE FOR ASSESSMENT YEAR 1977-78 AND THEREAFTER. AT THE TIME OF INSERTION, THE SECTI ON CONTAINED ONLY THE PROVISIONS THAT WERE LATER RENUMBERED AS SUB-SECTIO N (1). THE SCOPE AND EFFECT OF THE INSERTION WAS EXPLAINED BY THE BOARD IN A CIRCULAR AS UNDER: RATE OF TAX ON PROFITS AND GAINS OF LIFE INSURANCE BUSINESS NEW SECTION 115B. 37.1 AS EXPLAINED IN PARAGRAPH 40 OF THIS CIRCULAR, THE FINANCE ACT HAS SUBSTANTIALLY MODIFIED THE BASIS FOR DETERM INING PROFITS AND GAINS OF LIFE INSURANCE BUSINESS. THE RATE OF INCOM E-TAX TO BE CHARGED ON THE PROFITS AND GAINS OF THE LIFE INSURANCE BUSI NESS DETERMINED ON THE MODIFIED BASIS HAS BEEN LAID DOWN IN NEW SECTIO N 115B OF THE INCOME-TAX ACT. UNDER THE NEW PROVISION, IN CASE OF A TAXPAYER HAVING MAX NEW YORK LIFE INSURANCE COMPANY LTD. (NOW KNOWN AS MAX LIFE INSURANCE COMPANY LIMITED). 79 INCOME FROM LIFE INSURANCE BUSINESS, THE INCOME-TAX PAYABLE ON THE PROFITS AND GAINS OF THE LIFE INSURANCE BUSINESS WI LL BE CALCULATED AT THE RATE OF 12 PER CENT OF SUCH PROFITS AND GAINS AND THE REMAINING INCOME, IF ANY, WILL BE CHARGED TO TAX AT THE RATES SPECIFIED IN THE ANNUAL FINANCE ACT. 37.2 THIS AMENDMENT HAS COME INTO FORCE WITH EFFECT FROM THE 1 ST JUNE, 1976, AND WILL APPLY IN RELATION TO THE ASSES SMENT YEAR 1977-78 AND SUBSEQUENT YEARS. RULE 2 HAD BEEN AMENDED AND RULE 3 STAND OMITTED BY THE FINANCE ACT, 1976 W.E.F. 1.4.1977. THESE RULES WHEN IN EXISTENCE REA D AS UNDER:- OLD RULE 2 READ AS FOLLOWS : 2. COMPUTATION OF PROFITS OF LIFE INSURANCE BUSINE SS. (1) THE PROFITS AND GAINS OF LIFE INSURANCE BUSINESS SHALL BE TAKEN TO BE THE GREATER OF THE FOLLOWING:- (A) THE GROSS EXTERNAL INCOMINGS OF THE PREVIOUS YEAR F ROM THAT BUSINESS, LESS THE MANAGEMENT EXPENSES OF THAT YEAR ; (B) THE ANNUAL AVERAGE OF THE SURPLUS ARRIVED AT BY ADJ USTING THE SURPLUS OR DEFICIT DISCLOSED BY THE ACTUARIAL VALUATION MAD E IN ACCORDANCE WITH THE INSURANCE ACT, 1938 (IV OF 1938), IN RESPE CT OF THE LAST INTER-VALUATION PERIOD ENDING BEFORE THE COMMENCEME NT OF THE ASSESSMENT YEAR, SO AS TO EXCLUDE FROM IT ANY SURPL US OR DEFICIT INCLUDED THEREIN WHICH WAS MADE IN ANY EARLIER INTE R-VALUATION PERIOD AND ANY EXPENDITURE OR ALLOWANCE WHICH IS NO T DEDUCTIBLE UNDER THE PROVISIONS OF SECTION 30 TO 43 IN COMPUTI NG INCOME CHARGEABLE UNDER THE HEAD PROFITS AND GAINS OF BUS INESS OR PROFESSION. (2) THE AMOUNT TO BE ALLOWED AS MANAGEMENT EXPENSES UNDER SUB-RULE (1) SHALL NOT EXCEED THE AGGREGATE OF THE FOLLOWING :- (A) 7 1/2 PER CENT OF THE PREMIUMS RECEIVED DURING THE PREVI OUS YEAR IN RESPECT OF SINGLE PREMIUM LIFE INSURANCE POLICIES; (B) IN RESPECT OF THE FIRST YEARS PREMIUMS RECEIVE D IN RESPECT OF OTHER LIFE INSURANCE POLICIES FOR WHICH THE NUMBER OF ANNUAL P REMIUMS PAYABLE IS LESS THAN TWELVE, OR FOR WHICH THE NUMBER OF YEARS DURING WHICH MAX NEW YORK LIFE INSURANCE COMPANY LTD. (NOW KNOWN AS MAX LIFE INSURANCE COMPANY LIMITED). 80 PREMIUMS ARE PAYABLE IS LESS THAN TWELVE, FOR EACH SUCH PREMIUM OR EACH SUCH YEAR 7 1/2 PER CENT OF SUCH FIRST YEARS PREMIUMS RECEIVED DURING THE PREVIOUS YEAR; (C) 90 PER CENT OF THE FIRST YEARS PREMIUMS RECEIV ED DURING THE PREVIOUS YEAR IN RESPECT OF ALL OTHER LIFE INSURANCE POLICIE S; (D) IN RESPECT OF ALL RENEWAL PREMIUMS RECEIVED DUR ING THE PREVIOUS YEAR, AN AMOUNT CALCULATED AT SUCH PERCENTAGE THEREOF AS IS PERMISSIBLE UNDER SUB-SECTION (2) OF SECTION 40B OF THE INSURAN CE ACT, 1938 (IV OF 1938), AS REDUCED BY ANY EXPENDITURE OR ALLOWANCE W HICH IS NOT DEDUCTIBLE UNDER SECTIONS 30 TO 43 IN COMPUTING INC OME CHARGEABLE UNDER THE HEAD PROFITS AND GAINS OF BUSINESS OR PR OFESSION. (II) RULE 3 WAS IN THE FOLLOWING TERMS : (A) FOUR-FIFTHS OF THE AMOUNTS PAID TO OR RESERVED FOR OR EXPENDED ON BEHALF OF POLICY-HOLDERS SHALL BE ALLOWED AS A DEDU CTION: PROVIDED THAT IF ANY AMOUNT SO RESERVED FOR POLICY- HOLDERS CEASES TO BE SO RESERVED, AND IS NOT PAID TO OR EXPENDED O N BEHALF OF POLICY- HOLDERS, THAT PROPORTION OF SUCH AMOUNT (ONE-HALF O R FOUR-FIFTHS, AS THE CASE MAY BE) IF IT HAS BEEN PREVIOUS ALLOWED AS A D EDUCTION UNDER THIS ACT OR UNDER THE INDIAN INCOME-TAX ACT, 1922 (XI OF 1922), SHALL BE TREATED AS PART OF THE SURPLUS FOR THE PERIOD IN WH ICH THE SAID AMOUNT CEASED TO BE SO RESERVED; (B) ANY AMOUNT EITHER WRITTEN OFF OR RESERVED IN THE AC COUNTS OR THROUGH THE ACTUARIAL VALUATION BALANCE SHEET TO MEET DEPRE CIATION OF OR LOSS ON THE REALISATION OF INVESTMENTS SHALL BE ALLOWED AS A DEDUCTION, ANY SUMS TAKEN CREDIT FOR IN THE ACCOUNTS OR ACTUARIAL VALUATION BALANCE SHEET ON ACCOUNT OF APPRECIATION OF OR GAINS ON THE REALISATION OF INVESTMENTS SHALL BE INCLUDED IN THE SURPLUS: PROVIDED THAT IF UPON INVESTIGATION IT APPEARS TO T HE INCOME-TAX OFFICER AFTER CONSULTATION WITH THE CONTROLLER OF I NSURANCE THAT HAVING DUE REGARD TO THE NECESSITY FOR MAKING REASONABLE P ROVISION FOR BONUSES TO PARTICIPATING POLICY-HOLDERS AND FOR CON TINGENCIES, THE RATE OF INTEREST OR OTHER FACTOR EMPLOYED IN DETERMINING THE LIABILITY IN RESPECT OF OUTSTANDING POLICIES IS MATERIALLY INCON SISTENT WITH THE VALUATION OF INVESTMENTS SO AS ARTIFICIALLY TO REDU CE THE SURPLUS, SUCH ADJUSTMENT SHALL BE MADE TO THE ALLOWANCE FOR DEPRE CIATION OR TO THE AMOUNT TO BE INCLUDED IN THE SURPLUS IN RESPECT OF APPRECIATION OF SUCH INVESTMENTS AS SHALL INCREASE THE SURPLUS FOR THE P URPOSES OF THESE PROVISIONS TO A FIGURE WHICH IS FAIR AND JUST; MAX NEW YORK LIFE INSURANCE COMPANY LTD. (NOW KNOWN AS MAX LIFE INSURANCE COMPANY LIMITED). 81 (C) INTEREST RECEIVED DURING THE INTER-VALUATION PERIOD IN RESPECT OF ANY SECURITIES OF THE CENTRAL GOVERNMENT WHICH HAVE BEE N ISSUED OR DECLARED TO BE INCOME-TAX FREE, SHALL NOT BE EXCLUD ED, BUT NO INCOME- TAX SHALL BE PAYABLE ON THE ANNUAL AVERAGE OF THE A MOUNT OF SUCH INTEREST. 67. CBDT ISSUED CIRCULAR NO. 202 DATED 5 TH JULY, 1976 [105 ITR (ST PG 22, 43 AND 45)] BEING THE EXPLANATORY MEMORANDUM, WITH RESPECT TO, THE AMENDMENT MADE BY FINANCE ACT, 1976, WHICH READ AS UNDER AND HAS BEEN VEHEMENTLY REFERRED TO BY THE LEARNED CIT(DR) AGAIN AND AGAIN FOR THE PURPOSE OF INTERPRETING WHY THE INCOME-TAX RATE UND ER SECTION 115B HAS BEEN REDUCED FROM 52.5 PER CENT TO 12.5 PER CENT FOR THE ASSESSEE CARRYING ON LIFE INSURANCE BUSINESS:- 9.2 NO SEPARATE RATE SCHEDULE HAS BEEN SPECIFIED I N THE CASE OF LIFE INSURANCE CORPORATION OF INDIA. THIS IS IN VIEW OF THE POSITION THAT THE BASIS OF TAXATION OF PROFITS FROM LIFE INSURANCE BU SINESS HAS BEEN MODIFIED AND THE RATE OF INCOME-TAX TO BE CHARGED O N THE PROFITS AND GAINS OF THE LIFE INSURANCE BUSINESS DETERMINED ON THE MODIFIED BASIS HAS BEEN LAID DOWN IN NEW SECTION 115B OF THE INCOM E-TAX ACT. THESE CHANGES HAVE BEEN EXPLAINED IN PARAGRAPHS 37 AND 40 OF THIS CIRCULAR. RATE OF TAX ON PROFITS AND GAINS OF LIFE INSURANCE BUSINESS NEW SECTION 115B. 37.1 AS EXPLAINED IN PARAGRAPH 40 OF THIS CIRCULAR , THE FINANCE ACT HAS SUBSTANTIALLY MODIFIED THE BASIS FOR DETERMINING PR OFITS AND GAINS OF LIFE INSURANCE BUSINESS. THE RATE OF INCOME-TAX TO BE CH ARGED ON THE PROFITS AND GAINS OF THE LIFE INSURANCE BUSINESS DETERMINED ON THE MODIFIED BASIS HAS BEEN LAID DOWN IN NEW SECTION 115B OF THE INCOME-TAX ACT. UNDER THE NEW PROVISION, IN THE CASE OF A TAXPAYER HAVING INCOME FROM LIFE INSURANCE BUSINESS, THE INCOME-TAX PAYABLE ON THE PROFITS AND GAINS OF THE LIFE INSURANCE BUSINESS WILL BE CALCULATED A T THE RATE OF 12 PER MAX NEW YORK LIFE INSURANCE COMPANY LTD. (NOW KNOWN AS MAX LIFE INSURANCE COMPANY LIMITED). 82 CENT. OF SUCH PROFITS AND GAINS AND THE REMAINING I NCOME, IF ANY, WILL BE CHARGED TO TAX AT THE RATES SPECIFIED IN THE ANNUAL FINANCE ACT. 37.2 THIS AMENDMENT HAS COME INTO FORCE WITH EFFECT FROM THE 1 ST JUNE, 1976, AND WILL APPLY IN RELATION TO THE ASSES SMENT YEAR 1977-78 AND SUBSEQUENT YEARS. [SECTION 20 (PART) OF THE FIN ANCIAL ACT]. REVISED BASIS FOR COMPUTATION OF PROFITS OF LIFE IN SURANCE BUSINESS FIRST SCHEDULE. 40.1 THE FINANCE ACT HAS AMENDED THE FIRST SCHEDULE TO THE INCOME- TAX ACT WITH A VIEW TO SIMPLIFYING THE DETERMINATIO N OF PROFITS FROM LIFE INSURANCE BUSINESS. BROADLY, THE PROFITS AND GAINS OF A LIFE INSURANCE BUSINESS ARE COMPUTED AT THE HIGHER OF THE TWO FOLL OWING FIGURES (A) THE GROSS EXTERNAL INCOMINGS OF THE NATURE OF R ENT, INTEREST, ETC., OF THE PREVIOUS YEAR (BUT EXCLUSIVE OF PREMIUMS REC EIVED FROM THE POLICY-HOLDERS AND INTEREST AND DIVIDENDS ON ANY AN NUITY FUND) LESS THE MANAGEMENT EXPENSES OF THAT YEAR; (B) THE ANNUAL AVERAGE OF THE VALUATION SURPLUS DIS CLOSED BY THE LAST VALUATION MADE UNDER THE INSURANCE ACT, 1938, AFTER EXCLUDING FROM IT ANY SURPLUS OR DEFICIT RELATING TO ANY EARLIER INTE R-VALUATION PERIOD AND DEDUCTING 80 PER CENT. OF THE AMOUNT PAID TO OR RES ERVED FOR OR EXPENDED ON BEHALF OF THE POLICY-HOLDERS. THE FIGUR E SO ARRIVED AT IS INCREASED BY THE AMOUNT OF EXPENDITURE AND ALLOWANC ES WHICH ARE NOT DEDUCTIBLE UNDER THE PROVISIONS OF SECTIONS 30 TO 4 3A IN COMPUTING INCOME CHARGEABLE UNDER THE HEAD PROFITS AND GAINS OF BUSINESS OR PROFESSION. 40.2 UNDER THE AMENDMENT MADE BY THE FINANCE ACT, T HE METHOD OF DETERMINING THE PROFITS ON THE BASIS OF GROSS EXTER NAL INCOMINGS, AS STATED AT (I) IN THE PRECEDING PARAGRAPH HAS BEEN D ROPPED AND THE PROFITS AND GAINS OF A LIFE INSURANCE BUSINESS WILL , IN ALL CASES, BE TAKEN TO BE THE ANNUAL AVERAGE OF THE SURPLUS ARRIVED AT BY ADJUSTING THE SURPLUS OR DEFICIT DISCLOSED BY THE ACTUARIAL VALUA TION MADE IN ACCORDANCE WITH THE INSURANCE ACT IN RESPECT OF THE LAST INTER-VALUATION PERIOD ENDING BEFORE THE COMMENCEMENT OF THE ASSESS MENT YEAR, SO AS TO EXCLUDE THERE FROM ANY SURPLUS OR DEFICIT WHICH WAS MADE IN ANY EARLIER INTER-VALUATION PERIOD. NO FURTHER ADJUSTME NT TO THE ANNUAL AVERAGE OF THE SURPLUS SO ARRIVED AT WILL BE MADE. IN OTHER WORDS, NO FURTHER DEDUCTION WILL BE ALLOWED IN RESPECT OF ANY PORTION OF THE AMOUNT PAID OR RESERVED OR EXPENDED ON BEHALF OF TH E POLICY-HOLDERS NOR WILL THE EXPENDITURE AND ALLOWANCES WHICH ARE N OT DEDUCTIBLE UNDER THE PROVISIONS OF SECTIONS 30 TO 43A BE ADDED BACK. THE PROFITS AND MAX NEW YORK LIFE INSURANCE COMPANY LTD. (NOW KNOWN AS MAX LIFE INSURANCE COMPANY LIMITED). 83 GAINS OF LIFE INSURANCE BUSINESS SO ARRIVED AT WILL BE CHARGED TO TAX AT THE RATE OF 12 PER CENT. AS EXPLAINED IN PARAGRAP H 37. 40.3 THIS AMENDMENT WILL COME INTO FORCE WITH EFFEC T FROM THE 1 ST APRIL, 1977, AND WILL ACCORDINGLY APPLY IN RELATION TO THE ASSESSMENT YEAR 1977-78 AND SUBSEQUENT YEARS. [SECTION 23 OF T HE FINANCE ACT]. 68. WE NOTED THAT SECTION 44 OF THE ACT START WITH A NON-OBSTANTE CLAUSE AND OVERRIDING OTHER PROVISIONS OF THE ACT, PROVIDE S FOR PROFITS AND GAINS FROM LIFE INSURANCE BUSINESS TO BE COMPUTED IN ACCORDANC E WITH THE RULES CONTAINED IN THE FIRST SCHEDULE TO THE ACT. AS PER RULE 2 OF THE FIRST SCHEDULE TO THE ACT, PROFITS AND GAINS OF LIFE INSURANCE BUSINESS HAS TO BE TAKEN TO BE THE ANNUAL AVERAGE OF THE SURPLUS ARRIVED AT BY ADJUSTING THE SURPLUS OR DEFICIT DISCLOSED BY THE ACTUARIAL VALUATION MADE IN ACCORDANCE WITH THE INSURANCE ACT, 1938, IN RESPECT OF THE LAST INTER VALUATION PERIOD ENDIN G BEFORE THE COMMENCEMENT OF THE ASSESSMENT YEAR, SO AS TO EXCLUDE ANY SURPLU S OR DEFICIT INCLUDED THEREIN, WHICH WAS MADE IN ANY EARLIER INTER VALUAT ION PERIOD. ACCORDING THIS RULE AS IS APPLICABLE FROM A.Y.1977-78, THE SURPLUS OR DEFICIT BETWEEN TWO INTER VALUATION PERIODS DISCLOSED BY THE ACTUARIAL VALUATION MADE IN ACCORDANCE WITH INSURANCE ACT,1938, CAN ONLY BE TAK EN AS INCOME OR LOSS OF THE PERIOD. THE OLD RULE 2 WHICH WAS IN EXISTENCE PRIOR TO AMENDMENT MADE BY FINANCE ACT, 1976 CONTAINS TWO METHODS OF DETERM INING PROFITS AND GAINS OF THE INSURANCE BUSINESS AND GREATER OF THESE TWO METHOD WAS REGARDED TO BE THE PROFIT AND GAINS OF LIFE INSURANCE BUSINESS. THE FIRST METHOD PRESCRIBES CALCULATION OF NET INCOME = GROSS EXTERNAL INCOMING S OF THE PREVIOUS YEAR MAX NEW YORK LIFE INSURANCE COMPANY LTD. (NOW KNOWN AS MAX LIFE INSURANCE COMPANY LIMITED). 84 FROM THAT BUSINESS LESS THE MANAGEMENT EXPENSES OF THAT YEAR. CLAUSE (2) OF OLD RULE 2 RESTRICTS THE DEDUCTION OF MANAGEMENT EX PENSES UNDER OLD RULE (1). OLD RULE 2 (2) REFERS TO AVERAGE SURPLUS ARRIV ED AT BY ADJUSTING THE SURPLUS DISCLOSED IN THE ACTUARIAL VALUATION MADE W ITH REGARD TO THE INSURANCE ACT,1938 IN RESPECT OF INTER VALUATION PERIOD. WE N OTED BY AMENDMENT MADE BY FINANCE ACT 1976 SUB RULE (1) OF RULE 2 WAS OMIT TED BUT SUB RULE (2) HAS BEEN SUBSTITUTED BY NEW RULE 2 IN AMENDED FORM, WHI CH DOES NOT REQUIRE COMPUTATION OF PROFIT AND GAINS OF THE LIFE INSURAN CE BUSINESS ON THE BASIS OF GROSS EXTERNAL INCOME AND DEDUCTING THEREFROM THE M ANAGEMENT EXPENSES. NEW RULE 2 PRESCRIBES THE PROFITS AND GAINS OF THE LIFE INSURANCE BUSINESS TO BE TAKEN ANNUAL AVERAGE OF THE SURPLUS ARRIVED AT B Y ADJUSTING THE SURPLUS OR DEFICIT DISCLOSED BY THE ACTUARIAL VALUATION MADE I N ACCORDANCE WITH THE INSURANCE ACT,1938 IN RESPECT OF THE LAST INTER VAL UATION PERIOD ENDING BEFORE THE COMMENCEMENT OF THE ASSESSMENT YEAR, SO AS TO E XCLUDE FROM IT ANY SURPLUS OR DEFICIT INCLUDED THEREIN WHICH WAS MADE IN ANY EARLIER INTERN VALUATION PERIOD. 69. WE NOTED THAT SUPREME COURT IN LIC OF INDIA V. CIT : (1964) 51 ITR 773 AT PAGE 778 MADE THE FOLLOWING PERTINENT OBSERV ATIONS WHILE INTERPRETING THE PROVISIONS RELATING TO THE COMPUTATION OF TAXAB LE INCOME OF THE LIFE INSURANCE COMPANY: IT IS CLEAR THAT THE INCOME TAX ACT CONTEMPLATES T HAT THE ASSESSMENT OF INSURANCE COMPANIES SHOULD BE CARRIED OUT NOT AC CORDING TO THE MAX NEW YORK LIFE INSURANCE COMPANY LTD. (NOW KNOWN AS MAX LIFE INSURANCE COMPANY LIMITED). 85 ORDINARY PRINCIPLES APPLICABLE TO BUSINESS CONCERNS AS LAID DOWN IN SECTION 10, BUT IN QUITE A DIFFERENT MANNER. INSURA NCE COMPANIES DO NOT COMPUTE THEIR PROFITS IN THE ORDINARY WAY BECA USE PREMIUMS COVER RISKS WHICH RUN INTO FUTURE EYARS AND LOSS INCLUDES LOSSES FOR PREVIOUS YEARS. THE METHOD PRESCRIBED ENSURES THAT BY TAKING THE AVERAGE OF SEVERAL YEARS A FAIR AND REASONABLE CONCLUSION IS R EACHED. ACTUARIAL ESTIMATION PLAYS AN IMPORTANT PART AND SURPLUS ONLY RESULTS WHEN THERE IS AN EXCESS OF THE FUND OVER THE LIABILITY AFTER A LL OTHER CHARGES ARE MET. THE RULES WHICH HAVE BEEN QUOTED LAY DOWN TWO DIFFERENT METHODS OF ASCERTAINING PROFITS. SO THE ANNUAL AVER AGE OF THE SURPLUS FOUND BY THE ACTUARY HAD TO BE TAKEN AND FROM IT TH E SURPLUS OF THE LAST INTER-VALUATION PERIOD HAD TO BE DEDUCTED AS ALSO E XPENDITURE ALLOWABLE UNDER SECTION 10 OF THE INCOME TAX ACT. THIS IS THE BASIC CALCULATION AND THEY WERE FOLLOWED. THE BOMBAY HIGH COURT IN LIFE INSURANCE CORPORATION OF INDIA VS. CIT : [1979] 119 ITR 900 SUMMARISED THE SCOPE OF SECTION 44 OF THE ACT IN THE FOLLOWING TERMS:- IT IS NOW WELL KNOWN THAT SO FAR AS THE LIFE I NSURANCE BUSINESS IS CONCERNED, THE COMPUTATION OF THE PROFI TS HAS TO BE MADE NOT IN THE MATTER IN WHICH IT IS NORMALLY DONE IN T HE CASE OF AN ORDINARY ASSESSEE BUT ACCORDING TO THE SPECIAL AND ARTIFICIAL MODE PRESCRIBED IN THE FIRST SCHEDULE, HAVING REGARD TO THE PROVISIONS OF S.44 OF THE I. T. ACT, 1961. THE EFFECT OF S. 44 OF THE I. T. ACT, 1961, IS THAT THE PROVISIONS RELATING TO INTEREST ON SECURIT IES, INCOME FROM HOUSE PROPERTY, CAPITAL GAINS AND INCOME FROM OTHER SOURCES ARE NOT MADE APPLICABLE IN THE CASE OF AN INSURANCE COMPANY AND THE PROFITS ARE TO BE COMPUTED IN ACCORDANCE WITH RR. 2, 3 AND 4 IN THE FIRST SCHEDULE SO FAR AS LIFE INSURANCE BUSINESS IS CONCE RNED. THUS, SO FAR AS THE PROCEEDINGS REGARDING ASSESSMENT TO TAX UNDE R THE I. T. ACT ARE CONCERNED, THEY WILL BE CONTROLLED SOLELY BY TH E PROVISIONS OF S. 44 AND THE FIRST SCHEDULE WHICH, AS ALREADY POINTED OU T, IS AN ARTIFICIAL MODE OF COMPUTATION OF INCOME. THE BASIC FIGURE WHI CH IS REQUIRED TO BE TAKEN FOR THE PURPOSES OF COMPUTATION OF INCOME FROM INSURANCE BUSINESS IS THE ANNUAL AVERAGE OF THE SURPLUS. RULE 2(B), WHICH IS THE ONLY MATERIAL RULE SO FAR AS THE PRESENT CASE IS CO NCERNED, PROVIDES FOR THE ANNUAL AVERAGE OF THE SURPLUS. THE SURPLUS CONT EMPLATED IS THE SURPLUS AS DETERMINED ACTUARIALLY IN ACCORDANCE WIT H S. 13 READ WITH SCH. IV OF THE INSURANCE ACT. MAX NEW YORK LIFE INSURANCE COMPANY LTD. (NOW KNOWN AS MAX LIFE INSURANCE COMPANY LIMITED). 86 THE SAME VIEW WAS ECHOED BY THE SUPREME COURT IN TH E LATER DECISION REPORTED AS GENERAL INSURANCE CORPORATION OF INDIA VS. CIT : [1999] 240 ITR 139. THE PERTINENT OBSERVATIONS AT PG 144 OF THE SA ID JUDGEMENT ARE REPRODUCED HEREUNDER: SECTION 44 OF THE INCOME-TAX ACT IS A SPECIAL PROV ISION GOVERNING COMPUTATION OF TAXABLE INCOME EARNED FROM BUSINESS OF INSURANCE. IT OPENS WITH A NON-OBSTANTE CLAUSE AND THUS HAS AN OV ERRIDING EFFECT OVER OTHER PROVISIONS CONTAINED IN THE ACT. IT MAND ATES THE ASSESSING AUTHORITIES TO COMPUTE THE TAXABLE INCOME FOR BUSIN ESS OF INSURANCE IN ACCORDANCE WITH THE PROVISIONS OF THE FIRST SCHEDUL E. THERE IS CHANGE IN THE REPORTING FORMAT FOR COMPANI ES CARRYING ON INSURANCE BUSINESS PURSUANT TO ENACTMENT BY IRDA RE GULATIONS. SUCH CHANGE IN THE REPORTING FORMAT FOR COMPANIES CARRYING ON L IFE INSURANCE BUSINESS PURSUANT TO CHANGE IN THE REGULATORY FRAMEWORK AND PURSUANT TO ENACTMENT BY IRDA OF REGULATIONS, 2000 AND REGULATIONS, 2002 WAS NOTICED BY THE BOMBAY HIGH COURT IN ICICI PRUDENTIAL LIFE INSURANC E CO. LTD. VS. ACIT : 325 ITR 471 IN THE FOLLOWING WORDS : (PAGES 474-476] BEFORE 1999, COMPANIES ENGAGED IN THE BUSINESS OF L IFE INSURANCE WERE REQUIRED TO PREPARE ONE CONSOLIDATED ACCOUNT. SECTION 11 OF THE INSURANCE ACT, 1938 WAS AMENDED SO AS TO INCLUD E SUB-SECTIONS (1A) AND (1B). SUBSECTION (1A) TO SECTION 11 PROVID ES THAT EVERY INSURER, ON OR AFTER THE COMMENCEMENT OF THE IRDA A CT, 1999, IN RESPECT OF INSURANCE BUSINESS TRANSACTED BY HIM AND IN RESPECT OF SHAREHOLDERS FUNDS, SHALL, AT THE EXPIRATION OF EA CH FINANCIAL YEAR, PREPARE WITH REFERENCE TO THAT YEAR, A BALANCE SHEE T, A PROFIT AND LOSS ACCOUNT, A SEPARATE ACCOUNT OF RECEIPTS AND PA YMENTS, AND REVENUE ACCOUNT IN ACCORDANCE WITH THE REGULATIONS MADE BY THE AUTHORITY. SECTION 13(1) PROVIDES THAT EVERY INSURE R CARRYING ON LIFE INSURANCE BUSINESS SHALL, INTER ALIA, IN RESPECT OF THE LIFE INSURANCE BUSINESS TRANSACTED IN INDIA, CAUSE AN INVESTIGATIO N TO BE MADE EACH YEAR BY AN ACTUARY INTO THE FINANCIAL CONDITIO N OF THE LIFE MAX NEW YORK LIFE INSURANCE COMPANY LTD. (NOW KNOWN AS MAX LIFE INSURANCE COMPANY LIMITED). 87 INSURANCE BUSINESS CARRIED ON BY HIM, INCLUDING A V ALUATION OF HIS LIABILITIES AND SHALL CAUSE AN ABSTRACT OF THE REPO RT OF SUCH ACTUARY TO BE MADE IN ACCORDANCE WITH THE REGULATIONS LAID DOWN IN PART I OF THE FOURTH SCHEDULE AND IN CONFORMITY WITH THE R EQUIREMENTS OF PART II OF THAT SCHEDULE. THE FIFTH PROVISO TO SECT ION 13 STIPULATES THAT ON OR AFTER THE COMMENCEMENT OF THE IRDA ACT, 1999 EVERY INSURER SHALL CAUSE AN ABSTRACT OF THE REPORT OF TH E ACTUARY TO BE MADE IN THE MANNER SPECIFIED BY THE REGULATIONS MAD E BY THE AUTHORITY. IN EXERCISE OF THE POWERS CONFERRED BY SECTION 114A OF THE INSURANCE ACT, 1938, THE IRDA NOTIFIED THE INSURANC E REGULATORY AND DEVELOPMENT AUTHORITY (ACTUARIAL REPORT AND ABS TRACT) REGULATIONS, 2000. REGULATIONS 3 AND 4 STIPULATE TH E PROCEDURE FOR PREPARATION OF ACTUARIAL REPORTS AND ABSTRACTS AND THE REQUIREMENTS APPLICABLE. UNDER REGULATION 3(4)*V), EACH ABSTRACT AND STATEMENT IS TO BE ACCOMPANIED BY A CERTIFICATE SIGNED BY THE APPOINTED ACTUARY, INTER ALIA, STATING THAT IN HIS OPINION, T HE MATHEMATICAL RESERVES ARE ADEQUATE TO MEET THE INSURERS FUTURE COMMITMENTS UNDER CONTRACTS AND THE REASONABLE EXPECTATION OF P OLICYHOLDERS. EACH INSURER IS REQUIRED TO PREPARE STATEMENTS WHIC H ARE TO BE ANNEXED TO THE ABSTRACT AND A LIST OF THOSE STATEME NTS IS SET OUT IN REGULATION 4(2). REGULATION 8 PROVIDES THAT A STATE MENT SHOWING THE TOTAL AMOUNT OF SURPLUS ARISING DURING THE INTE R-VALUATION PERIOD AND ALLOCATION OF SUCH SURPLUS, SHALL BE FURNISHED SEPARATELY FOR PARTICIPATING BUSINESS AND FOR NON-PARTICIPATING BU SINESS, TOGETHER WITH THE PARTICULARS AS MENTIONED IN THE REGULATION . THE COMPOSITION OF SURPLUS, INTER ALIA, INCLUDES THE SU RPLUS SHOWN BY FORM I, INTERIM BONUSES, LOYALTY ADDITIONS AND SUMS TRANSFERRED FROM SHAREHOLDERS FUNDS DURING THE INTER-VALUATION PERIOD. THE AUTHORITY HAS ALSO NOTIFIED THE INSURANCE REGUL ATION AND DEVELOPMENT AUTHORITY (PREPARATION OF FINANCIAL STA TEMENTS AND AUDITORS REPORT OF INSURANCE COMPANIES) REGULATION S, 2002. PART V DEALS WITH THE PROVISION OF FINANCIAL STATEMENTS. E VERY INSURER IS REQUIRED TO PREPARE (I) A REVENUE ACCOUNT WHICH IS ALSO DESCRIBED AS A POLICYHOLDERS ACCOUNT; AND (II) A PROFIT AND LOS S ACCOUNT, WHICH IS ALSO DESCRIBED AS A SHAREHOLDERS ACCOUNT, APART FR OM A BALANCE- SHEET. THE STATUTORY FORMS ARE PRESCRIBED BY THE RE GULATIONS. FORM A-RA IS PRESCRIBED FOR THE PREPARATION OF THE REVEN UE ACCOUNT OR THE POLICYHOLDERS ACCOUNT. FORM A-RA REFLECTS THE SURPLUS OR, AS THE CASE MAY BE, THE DEFICIT GENERATED IN THE REVENUE A CCOUNT FOR THE YEAR ENDING 31 ST MARCH. MAX NEW YORK LIFE INSURANCE COMPANY LTD. (NOW KNOWN AS MAX LIFE INSURANCE COMPANY LIMITED). 88 AS A RESULT OF THE REGULATIONS, THE PETITIONER WHIC H IS ENGAGED IN THE BUSINESS OF LIFE INSURANCE IS REQUIRED TO PREPA RE AND MAINTAIN TWO ACCOUNTS NAMELY, (I) A REVENUE ACCOUNT OF POLIC YHOLDERS, AND (II) A PROFIT AND LOSS ACCOUNT OF SHAREHOLDERS. 70. ON THIS BASIS, WE CAN SUMMARIZE THE IMPACT OF T HE AMENDMENT OF THE REGULATIONS AS BELOW: (I) THE ERSTWHILE FORMAT FOR THE PRESENTATION OF SURPLU S/DEFICIT REQUIRED EACH INSURANCE COMPANY TO AGGREGATE THE RESULTS REL ATING TO SHAREHOLDERS OPERATIONS. THE IMPACT OF THE CONSOLI DATED REVENUE ACCOUNT WAS TRANSFERRED TO THE ACTUARYS VALUATION BALANCE-SHEET IN FORM I WHICH DISCLOSED THE SURPLUS/DEFICIT FOR THE YEAR. (II) THE FORMAT FOR PRESENTATION OF THE INSURANCE ACCOUN TS WAS AMENDED BY THE REGULATIONS OF 2000 AND BY THE REVIS ED FORMAT, THE IMPACT OF THE ACTUARIAL VALUATION WAS TRANSFERRED T O THE REVENUE ACCOUNT RELATING TO THE POLICYHOLDERS FOR THE YEAR AND THE SURPLUS/DEFICIT WAS DISCLOSED THEREIN; (III) THE PROFIT AND LOSS FOR SHAREHOLDERS AND THE SURPLU S/DEFICIT FOR POLICYHOLDERS ARE SINCE SEGREGATED AFTER THE AMENDE D REGULATIONS OF 2002 MUMBAI BENCH OF THE TRIBUNAL IN THE CASE OF ICICI PRUDENTIAL INSURANCE CO. LTD. VS. ACIT : 140 ITD 41 (PAGE 72) AS RELIED BY LEARNED SENIOR ADVOCATE DISCUSSED THESE PROVISIONS AS UNDER :- 27. RESPECTFULLY FOLLOWING THE ABOVE PRINCIPLES AN D EXAMINING THE PROVISIONS OF IT ACT, WE ARE OF THE OPINION THAT TH E ACTUARIAL VALUATION MADE IN ACCORDANCE WITH THE INSURANCE ACT6, 1938 DO MEAN THAT THE ACTUARIAL VALUATION DONE IN ACCORDANCE WITH THE INS URANCE ACT, 1938. IN ARRIVING AT THE ABOVE DECISION WE HAVE ALSO TAKEN I NTO CONSIDERATION THAT RULE-5 IN PART-B OF THE FIRST SCHEDULE WITH REFEREN CE TO OTHER INSURANCE BUSINESS DID INCORPORATE THE IRDA AND ITS REGULATI ONS AS AMENDED BY THE FINANCE ACT 2009 W.E.F. 1.4.2011 WHICH IS AS UN DER: B-OTHER INSURANCE BUSINESS: COMPUTATION OF PROFITS AND GAINS OF OTHER INSURANCE BUSINESS. MAX NEW YORK LIFE INSURANCE COMPANY LTD. (NOW KNOWN AS MAX LIFE INSURANCE COMPANY LIMITED). 89 5. THE PROFITS AND GAINS OF ANY BUSINESS OF INSURANCE OTHER THAN LIFE INSURANCE SHALL BE TAKEN TO BE THE PROFIT BEFORE TA X AND APPROPRIATIONS AS DISCLOSED IN THE PROFIT & LOSS A/C PREPARED IN ACCO RDANCE WITH THE PROVISIONS OF THE INSURANCE ACT, 1938 (4 OF 1938) O R THE RULES MADE THEREUNDER OR THE PROVISIONS OF THE INSURANCE REGUL ATORY AND DEVELOPMENT AUTHORITY ACT, L 1999 (4 OF 1999) OR TH E REGULATIONS MADE THEREUNDER SUBJECT TO THE FOLLOWING ADJUSTMENTS:- (A) SUBJECT TO OTHER PROVISIONS OF THIS RULE, ANY EXPEN DITURE OR ALLOWANCE INCLUDING ANY AMOUNT DEBITED TO THE PROFIT AND LOSS ACCOUNT EITHER BY WAY OF A PROVISION FOR ANY TAX, DIVIDEND, RESERVE O R ANY OTHER PROVISION AS MAY BE PRESCRIBED WHICH IS NOT ADMISSI BLE UNDER THE PROVISIONS OF SECTION 30 TO 43B IN COMPUTING THE PR OFITS 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 BE, IF SUCH GAIN OR LOSS IS NOT CREDITED OR DEBITED TO THE PROFIT & LOSS A/C; (C) SUCH AMOUNT CARRIED OVER TO A RESERVE FOR UNEXPIRED RISKS AS MAY BE PRESCRIBED IN THIS BEHALF SHALL BE ALLOWED AS A DED UCTION. THIS INDICATES THAT THE LEGISLATURE CONSCIOUSLY OMI TTED INCORPORATING THE PROVISIONS OF IRDA OR THE REGULAT IONS MADE THERE UNDER IN RULE 2, WHICH STILL REFERS TO THE INSURANC E ACT 1938 ONLY. 28. FURTHER, WE ALSO NOTICE THAT THE INSURANCE ACT ITSELF WAS AMENDED ALONG WITH THE INTRODUCTION OF IRDA ACT 199 9. ALONG WITH THE SAID IRDA ACT THERE ARE VARIOUS AMENDMENTS PROPOSED IN THE INSURANCE ACT IN TUNE WITH I(RDA ACT BY AMENDING THE RELEVANT PROVISIONS OF INSURANCE ACT, 1938. HOWEVER, SINCE THE RULE 5 WAS AMENDED IN THE FIRST SCHEDULE BY SPECIFICALLY REFERRING TO THE IRD A ACT 1999 OR THE REGULATIONS MADE THERE UNDER, WE ARE OF THE OPINION THAT THE LEGISLATURE INTENDED NOT TO MODIFY OR AMEND THE RULE-2. THIS IN DICATES THE INTENTION OF LEGISLATURE THAT THE ACTUARIAL VALUATION HAS TO BE MADE IN ACCORDANCE WITH THE UNAMENDED INSURANCE ACT, 1938. WE ARE OF T HE FIRM OPINION THAT THE UNAMENDED PROVISIONS OF INSURANCE ACT, 193 8 WERE ONLY INCORPORATED INTO THE INCOME TAX ACT AS FAR AS LIFE INSURANCE BUSINESS IS CONCERNED. THEREFORE, AOS ACTION IN FOLLOWING THE FORMAT PRESCRIBED UNDER THE REGULATIONS OF IRDA ACT IS NOT IN ACCORDA NCE WITH THE SPIRIT OF RULE-2 AND PROVISIONS AS MADE APPLICABLE UNDER THE INCOME TAX ACT. 29. WE ALSO NOTICE THAT THE ACTUARIAL REPORT AND AB STRACTS UNDER THE INSURANCE ACT, 1938 HAS TO BE PREPARED VIDE SECTION 13 OF THAT ACT IN ACCORDANCE WITH THE REGULATIONS CONTAINED IN PART-I OF THE FOURTH SCHEDULE AND IN CONFORMITY WITH THE REQUIREMENT OF PART-II OF THAT MAX NEW YORK LIFE INSURANCE COMPANY LTD. (NOW KNOWN AS MAX LIFE INSURANCE COMPANY LIMITED). 90 SCHEDULE. SECTION 13 OF INSURANCE ACT 1938 (AS AMEN DED NOW) IS AS UNDER: 13. ACTUARIAL REPORT AND ABSTRACT. (I) EVERY INSURER CARRYING ON LIFE INSURANCE BUSINE SS SHALL, IN RESPECT OF THE LIFE INSURANCE BUSINESS TRANSACTED BY HIM IN INDIA, AND ALSO IN THE CASE OF AN INSURER SPECIFIED IN SUB-CLAUSE (A)( II) OR SUB-CLAUSE (B) OF CLAUSE (9) OF SECTION 2 IN RESPECT OF ALL LIFE INST ANCE BUSINESS TRANSACTED BY HIM, (EVERY YEAR) CAUSE AN INVESTIGATION TO BE M ADE BY AN ACTUARY IN TO THE FINANCIAL CONDITION OF THE LIFE INSURANCE BUSINESS CARRIED ON BY HIM, INCLUDING A VALUATION OF HIS LIABILITIES IN RE SPECT THERETO AND SHALL CAUSE AN ABSTRACT OF THE REPORT OF SUCH ACTUARY TO BE MADE IN ACCORDANCE WITH THE REGULATIONS CONTAINED IN PART I OF THE FOURTH SCHEDULE AND IN CONFORMITY WITH THE REQUIREMENTS OF PART II OF THAT SCHEDULE: PROVIDED THAT THE AUTHORITY MAY, HAVING REGARD TO T HE CIRCUMSTANCES OF ANY PARTICULAR INSURER, ALLOW HIM TO HAVE THE INVESTIGATION MADE AS AT A DATE NOT LATER THAN TWO YEARS FROM THE DATE AS AT WHICH THE PREVIOUS INVESTIGATION WAS MADE: PROVIDED: PROVIDED: PROVIDED: PROVIDED ALSO THAT EVERY INSURER ON OR AFTER THE CO MMENCEMENT OF THE INSURANCE REGULATORY AND DEVELOPMENT AUTHORITY ACT, 1999 SHALL CAUSE AN ABSTRACT OF THE REPORT OF THE ACTUARY TO BE MADE IN THE MANNER SPECIFIED BY THE REGULATIONS MADE BY THE AUTHORITY. 30. THE FIRST TO FOURTH SCHEDULE OF THE INSURANCE A CT 1938 WAS OMITTED BY THE INSURANCE AMENDMENT ACT 2002 AFTER I NCORPORATION OF THE RELEVANT SCHEDULES IN THE IRDA ACT. EVEN THOUGH THE SAID SCHEDULES WERE OMITTED FROM THE INSURANCE ACT, 1938, WE ARE O F THE OPINION THAT AS FAR AS RULE-2 IS CONCERNED BY THE PRINCIPLE OF LEGISLATION BY INCORPORATION UNAMENDED INSURANCE ACT, 1938 IS APP LICABLE AND THE ACTUARIAL VALUATION HAS TO BE MADE IN ACCORDANCE WI TH THE THEN EXISTING PART-I OF THE FOURTH SCHEDULE AND IN CONFORMITY WIT H THE REQUIREMENTS OF PART-II OF THAT SCHEDULE. THEREFORE, ASSESSEES CON TENTION THAT THE IRDA REGULATIONS EVEN THOUGH ARE APPLICABLE TO ASSESSEE SINCE IT HAS COMMENCED BUSINESS AFTER THE COMMENCEMENT OF THE IR DA ACT, 1999, FOR THE PURPOSE OF RULE-2, THE ACTUARIAL VALUATION HAS TO BE DONE IN MAX NEW YORK LIFE INSURANCE COMPANY LTD. (NOW KNOWN AS MAX LIFE INSURANCE COMPANY LIMITED). 91 ACCORDANCE WITH THE REGULATIONS CONTAINED IN ERSTWH ILE FOURTH SCHEDULE PART-I AND PART-II. THIS IS WHAT ASSESSEE IS CONTEN DING AND MERGING THE ACCOUNTS OF POLICYHOLDERS AND SHAREHOLDERS ACCOUNT AND ARRIVING AT THE ACTUARIAL DEFICIT, WITHOUT TAKING INTO CONSIDERATIO N THE TRANSFER OF FUNDS FROM THE SHAREHOLDERS ACCOUNT TO POLICYHOLDERS AC COUNT. 31. AFTER INTRODUCTION OF IRDA ACT, THE ENTIRE REGU LATION OF INSURANCE BUSINESS HAS GONE TO THE AUTHORITY AND IN ORDER TO PROTECT THE INTERESTS OF HOLDERS OF INSURANCE POLICIES, TO REGULATE, TO P ROMOTE AND ENSURE ORDERLY GROWTH OF INSURANCE INDUSTRY NUMBER OF REGU LATIONS HAVE BEEN PRESCRIBED BY THE IRDA. ONE SUCH IS, INSURANCE REGU LATORY AND DEVELOPMENT AUTHORITY (IRDA) (ACTUARIAL REPORT AND ABSTRACT) REGULATIONS 2000 BY WHICH METHOD OF PREPARATION OF ACTUARIES REPORT AND ABSTRACTS WERE PRESCRIBED. AN ACTUARY IS RESPON SIBLE FOR ANALYSING POSSIBLE OUTCOMES OF THE TYPES OF EVENTS THAT WOULD POTENTIALLY COST POLICY HOLDERS TO MADE CLAIMS AGAINST THEIR INSURAN CE POLICIES. INSURANCE COMPANIES NEED TO MAKE SURE THAT THE MONEY THEY ARE CHARGING AND COLLECTING FROM POLICY HOLDERS IS ADEQUATE TO COVER THE COST OF CERTAIN CLAIMS THAT MIGHT BENEFICIALLY BE MADE BY POLICY HO LDERS AS WELL AS THEIR OTHER EXPENSES. IN FACT, THE WORK THAT ACTUARIES PE RFORM IS CRUCIAL TO AN INSURANCE COMPANYS ABILITY TO REMAIN IN BUSINESS. ACTUARIES ARE INVOLVED AT ALL STAGES IN PRODUCT DEVELOPMENT AND IN THE PRI CING RISK ASSESSMENT AND MARKETING OF THE PRODUCTS. THEIR JOB INVOLVES M AKING ESTIMATES OF ULTIMATE OUT-COME OF INSURABLE EVENTS. IN THE BUSIN ESS OF INSURANCE THE PRODUCT COST IS AN ABSTRACTION, DEPENDING ON THE TI MING ISSUES, VARIABILITY ISSUES AND RISK PARAMETERS. ONE BIG FUNCTION ACTUAR IES PROVIDE IS MAKING RESERVES TO INSURE THAT INSURANCE COMPANIES KEEP EN OUGH MONEY ON THEIR BALANCE SHEETS TO MAKE GOOD OF ALL THE CLAIMS THEY WILL HAVE TO PAY. THIS INVOLVES ARRIVING AT ACTUARIAL SURPLUS OR DEFI CIT DEPENDING ON VARIOUS FACTORS. IN ORDER TO ENSURE A FAIR PLAY IN THE BUSI NESS, THE IRDA PRESCRIBED REGULATIONS ACCORDING TO WHICH VARIOUS NORMS WERE PRESCRIBED IN ORDER TO ENSURE THAT LIFE INSURANCE O F BUSINESS (EVEN OTHER INSURANCE BUSINESS) ARE DONE ACCORDING TO HEALTHY B USINESS PRACTICES. AS PER THE ABOVE REGULATIONS, REGULATION 4 PRESCRIBES NUMBER OF ABSTRACTS AND STATEMENTS IN RESPECT OF (A) LINKED BUSINESS; ( B) NON-LINKED BUSINESS AND (C) HEALTH INSURANCE BUSINESS. AS PART OF THIS REGULATION 4(2)(D) ITEM NO. IV, FORM I WAS PRESCRIBED FOR THE PURPO SE OF VALUATION RESULTS AND TO INDICATE THE SURPLUS OR DEFICIT IN THE LIFE INSURANCE BUSINESS OF A COMPANY. APART FROM THE ABOVE REGULATIONS, IRDA ALS O PRESCRIBED INSURANCE REGULATORY AND DEVELOPMENT AUTHORITY (PRE PARATION OF FINANCIAL STATEMENTS AND AUDITORS REPORT OF INSURA NCE COMPANIES) REGULATIONS 2002. THE SURPLUS OR DEFICIT ARRIVED AT BY THE ACTUARY IN HIS VALUATION FOR THE INTER VALUATION PERIOD HAS TO BE TAKEN IN TO CONSIDERATION UNDER THE REGULATIONS IN FINANCIAL AC COUNTS AS WELL. MAX NEW YORK LIFE INSURANCE COMPANY LTD. (NOW KNOWN AS MAX LIFE INSURANCE COMPANY LIMITED). 92 32. IRDA REGULATIONS SPECIFICALLY REQUIRE TO MAINTA IN THE POLICYHOLDERS ACCOUNT AND THE SHAREHOLDERS ACCOUN T SEPARATELY AND PERMITS TRANSFER OF FUNDS FROM SHAREHOLDERS ACCOUN T TO POLICYHOLDERS ACCOUNT AS AND WHEN THERE IS A DEFICIT IN POLICYHOL DERS ACCOUNT. AS RIGHTLY NOTED BY THE HONBLE BOMBAY HIGH COURT, AS A POLICY COMPANY IS TRANSFERRING FUNDS/ASSETS FROM SHAREHOLDERS ACCOUN T TO POLICYHOLDERS ACCOUNT EVEN DURING THE YEAR PERIODICALLY AS AND WH EN THE ACTUARIAL VALUATION WAS ARRIVED AT IN POLICYHOLDERS ACCOUNT. MOST OF THE COMPANIES ARE REQUIRED TO SUBMIT QUARTERLY ACCOUNTS UNDER THE COMPANY LAW, THERE IS REQUIREMENT OF ACTUARIAL VALUATION REPORT PERIODICALLY AND ACCORDINGLY ASSESSEE WAS TRANSFERRING FUNDS FROM TH E SHAREHOLDERS ACCOUNT TO POLICYHOLDERS ACCOUNT. SINCE THE INSURA NCE BUSINESS WILL NOT YIELD THE REQUIRED PROFITS IN THE INITIAL 7 TO 10 Y EARS, LOT OF CAPITAL HAS TO BE INFUSED SO AS TO BALANCE THE DEFICIT IN THE POLI CYHOLDERS ACCOUNT. DURING THE YEAR AS ALREADY STATED ASSESSEE HAS ISSU ED FRESH CAPITAL TO THE EXTENT OF RS.250 CRORES AND TRANSFERRED FUNDS T O THE EXTENT OF RS.233 CRORES FROM THE SHAREHOLDERS ACCOUNT TO POL ICYHOLDERS ACCOUNT. SINCE ASSESSEE IS HAVING ONLY ONE BUSINESS OF LIFE INSURANCE, THE ENTIRE TRANSACTIONS BOTH UNDER THE POLICYHOLDERS AND SHAR EHOLDERS ACCOUNT DO PERTAIN TO THE LIFE INSURANCE BUSINESS ONLY AS IT W AS NOT PERMITTED TO DO ANY OTHER BUSINESS. ONCE ASSESSEE IS IN THE LIFE IN SURANCE BUSINESS, THE COMPUTATION HAS TO BE MADE IN ACCORDANCE WITH THE R ULE-2 AS PER PROVISIONS OF SECTION 44. THEREFORE, THERE IS A VAL ID ARGUMENT RAISED BY ASSESSEE THAT BOTH THE POLICYHOLDERS AND SHAREHOLD ERS ACCOUNT HAS TO BE CONSOLIDATED INTO ONE AND TRANSFER FROM ONE ACCO UNT TO ANOTHER IS TAX NEUTRAL. WHAT AO HAS DONE IS TO TAX THE SURPLUS AFTER THE F UNDS HAVE BEEN TRANSFERRED FROM SHAREHOLDERS ACCOUNT TO THE POLICYHOLDERS ACCOUNT AT THE GROSS LEVEL WHILE IGNORING SUCH TRAN SFER IN SHAREHOLDERS ACCOUNT, WHILE BRINGING TO TAX ONLY THE INCOMES DEC LARED IN THE SHAREHOLDERS ACCOUNT THAT TOO UNDER THE HEAD OTHE R SOURCES OF INCOME. IN FACT, WHILE GIVING THE FINDING THAT ASSESSEE IS IN THE LIFE INSURANCE BUSINESS ONLY AND INCOMES ARE TO BE TREATED AS INCO ME FROM LIFE INSURANCE BUSINESS ONLY AND INCOMES ARE TO BE TREAT ED AS INCOME FROM LIFE INSURANCE BUSINESS, THE CIT(A) SURPRISINGLY IN SUBSEQUENT ASSESSMENT YEARS APPEALS ACCEPTED AOS CONTENTION T HAT SURPLUS IN SHAREHOLDERS ACCOUNT IS TO BE TAXED AS OTHER SOURC ES OF INCOME. BUT ONCE THE PROVISIONS OF SECTION 44 OF I T ACT ARE I NVOKED TO ARRIVE AT THE PROFIT. THEREFORE, IN OUR OPINION BOTH THE POLICYHO LDERS AND SHAREHOLDERS ACCOUNT HAS TO BE CONSOLIDATED FOR TH E PURPOSE OF ARRIVING AT THE DEFICIT OR SURPLUS. MAX NEW YORK LIFE INSURANCE COMPANY LTD. (NOW KNOWN AS MAX LIFE INSURANCE COMPANY LIMITED). 93 71. WE NOTED THAT THE REVENUE CHALLENGED THE ORDER PASSED BY THE TRIBUNAL IN APPEAL UNDER SECTION 260A OF THE ACT BE FORE THE BOMBAY HIGH COURT RAISING AMONGST SEVERAL QUESTIONS, THE FOLLOW ING QUESTION OF LAW: 8) WHETHER ON THE FACTS AND IN THE CIRCUMSTANCES O F THE CASE AND IN LAW, THE TRIBUNAL IS CORRECT IN ALLOWING RELIEF TO THE ASSESSEE BY HOLDING THAT SURPLUS AVAILABLE IN SHARE HOLDERS ACC OUNT IS NOT TO BE TAXED SEPARATELY AS INCOME FROM OTHER SOURCES AND AT THE NORMAL CORPORATE RATE AND HOLDING THAT SURPLUS FROM SHARE HOLDERS ACCOUNT WAS ONLY PART OF INCOME FROM INSURANCE BUSINESS ARR IVED AT AFTER COMBINING SURPLUS AVAILABLE IN SHARE HOLDERS ACCO UNT WITH THE SURPLUS AVAILABLE IN POLICY HOLDERS ACCOUNT AND THE N ADD TAXING THIS NET SURPLUS ARRIVED AT, THE RATE SPECIFIED U/S.11 5B OF THE ACT? ALTHOUGH THE APPEAL FILED BY THE REVENUE WAS ADMIT TED ON OTHER SUBSTANTIAL QUESTIONS OF LAW, WITH RESPECT TO THE A FORESAID QUESTION, THE BOMBAY HIGH COURT IN THE CASE REPORTED AS CIT VS. I CICI PRUDENTIAL INSURANCE CO. LTD. : 242 TAXMAN 159 DID NOT ADMIT T HE REVENUES APPEAL AND HELD AS UNDER: 5) SO FAR AS QUESTION NO. 8 IS CONCERNED, THE GRIE VANCE OF THE REVENUE IS THAT THE INCOME ON SHAREHOLDERS ACCOUNT HAS TO BE TAXED AS INCOME FROM OTHER SOURCES. THIS ON THE GRO UND THAT THE INCOME EARNED ON SHAREHOLDERS ACCOUNT IS NOT AN IN COME WHICH REPRESENTS INCOME ON ACCOUNT OF LIFE INSURANCE BUSI NESS. THEREFORE, IT IS THE REVENUES CONTENTION THAT IT H AS TO BE TAXED AS INCOME FROM OTHER SOURCES. THE IMPUGNED ORDER WHILE ALLOWING THE ASSESSEES APPEAL HOLDS THAT INCOME EARNED ON SHARE HOLDERS AMOUNT HAS TO BE CONSIDERED AS ARISING OUT OF LIFE INSURANCE BUSINESS. MOREOVER, IN TERMS OF SECTION 44 OF THE A CT, SUCH INCOME HAS TO BE TAXED IN ACCORDANCE WITH FIRST SCHEDULE A S PROVIDED THEREIN. NONE OF THE AUTHORITIES UNDER THE ACT OR E VEN BEFORE US IS IT URGED THAT THE ASSESSEE IS CARRYING ON SEPARATE BUS INESS OTHER THAN LIFE INSURANCE BUSINESS. ACCORDINGLY, THE IMPUGNED ORDER HOLDING THAT THE INCOME FROM SHAREHOLDERS ACCOUNT IS ALSO TO BE TAXED AS A PART OF LIFE INSURANCE BUSINESS CANNOT BE FOUND FAU LT WITH IN VIEW OF THE CLEAR MANDATE OF SECTION 44 OF THE ACT. ACCORDI NGLY, QUESTION MAX NEW YORK LIFE INSURANCE COMPANY LTD. (NOW KNOWN AS MAX LIFE INSURANCE COMPANY LIMITED). 94 NO. 8 ALSO DOES NOT RAISE ANY SUBSTANTIAL QUESTION OF LAW. THUS NOT ENTERTAINED. 72. THE SUPREME COURT HAS ADMITTED THE SPECIAL LEAV E PETITION FILED BY THE REVENUE AGAINST THE JUDGMENT OF THE BOMBAY HIGH COU RT, VIDE DECISION REPORTED AS CIT VS. ICICI PRUDENTIAL LIFE INSURANCE CO. LTD. 242 TAXMAN 97 BUT HAS NOT STAYED OPERATION OF THE ORDER OF HIGH C OURT. THE LEARNED DR EVEN THOUGH TRIED HIS BEST TO CONVINCE US THAT WE S HOULD NOT FOLLOW THE DECISION OF INCOME TAX APPELLATE TRIBUNAL AS APPROV ED BY MUMBAI HIGH COURT IN THE CASE OF ICICI PRUDENTIAL, BUT THAT DECISION IS THE ONLY DECISION OF COORDINATE BENCH OF THIS TRIBUNAL AS CONFIRMED BY M UMBAI HIGH COURT HAS BEEN REFERRED TO BEFORE US . ALTHOUGH SUPREME COUR T ADMITTED SLP, THAT WILL NOT LOOSE THE VALUE OF BINDING PRECEDENT UNTIL THE DECISION IS REVERSED OR OPERATION OF THE ORDER IS STAYED. BUT, WE NOTED IN RESPECT OF THE ISSUE WHETHER THE INCOME IN SHAREHOLDER ACCOUNT HAS TO BE TAXED AS PART OF THE INCOME OF THE INSURANCE BUSINESS, THE LEARNED DR IN THIS REGARD CONTENDED THAT IF SHAREHOLDER INCOME IS ALSO TAXED AS PART OF LIFE INSURANCE BUSINESS, THE PROVISIONS OF SECTION 115(1)(II) WILL BECOME REDUND ANT AND WE CANNOT INTERPRET THE LAW IN THIS MANNER TO MAKE PART OF TH E SECTION TO BE REDUNDANT. IN THIS REGARD, HE VEHEMENTLY RELIED ON THE DECISIO N OF THE SUPREME COURT IN THE CASE OF SURAT ART SILK CLOTH MANUFACTURER ASSOC IATION 121 ITR 01 (SC) IN WHICH IT WAS HELD THE CONSTRUCTION CONTENDED FOR THE REVENUE WOULD HA VE THE EFFECT OF RENDERING SECTION 11(4) TOTALLY REDUN DANT AFTER THE ENACTMENT OF SECTION 13(1)(BB). A CONSTRUCTION WHICH RENDERS A P ROVISION OF THE ACT MAX NEW YORK LIFE INSURANCE COMPANY LTD. (NOW KNOWN AS MAX LIFE INSURANCE COMPANY LIMITED). 95 SUPERFLUOUS AND REDUCES IT TO SILENCE CANNOT BE ACC EPTED . HE ALSO REFERRED TO THE DECISION OF AHMADABAD BENCH OF THIS TRIBUNAL IN THE CASE OF MAYURBHAI MANGALDAS PATEL VS. ITO ITA NO. 3451/AHMD/2014 DT 3 0.11.2017 PARTICULARLY THE OBSERVATIONS MADE MY HONBLE SUPREME COURT IN T HE CASE OF MUMBAI KAMGAR SABHA VS. ABDULBAHI FAIZULBHAI AIR 1976 SC 1 455 REFERRED TO IN THAT DECISION IT IS TRITE, GOING BY ANGLOPHONIC PRINCIPLES THAT A RULING OF A SUPERIOR COURT IS BINDING LAW. IT IS NOT OF SCRIPTURAL SANC TITY BUT OF RATIO-WISE LUMINOUSITY WITHIN THE EDIFICE OF FACTS WHERE THE J UDICIAL LAMP PLAYS THE LEGAL FLAME. BEYOND THOSE WALLS AND DEHORS THE MILIEU WE CANNOT IMPART ETERNAL VERNAL VALUE TO THE DECISION, EXALTING THE PRECEDEN TS INTO A PRISON HOUSE OF BIGOTRY, REGARDLESS OF THE VARYING CIRCUMSTANCES AN D MYRIAD DEVELOPMENTS. REALISM DICTATES THAT A JUDGEMENT HAS TO BE READ, S UBJEC6 TO THE FACT DIRECTLY PRESENTED FOR CONSIDERATION AND NOT AFFECTING THE M ATTERS WHICH MAY LURK IN THE DARK . WE NOTED IN THE DECISION OF AHMADABAD BENCH THE BENCH NOTED THE FACTS THAT THE APPROVAL U/S 151(2) WAS FIRST DU LY GIVEN BY THE JOINT COMMISSIONER WHICH WAS APPARENT FROM THE FACTS THER EIN AND THEREFORE THE BENCH DECIDED AGAINST THE ASSESSEE WHILE UPHOLDING THE VALIDITY OF THE APPROVAL U/S 151. THE LEARNED DR ALSO RELIED ON THE DECISION OF BLUE STAR LTD. VS. CIT 217 ITR 514 (MUM) FOR THE PROPOSITION OF LA W THAT A CASE IS ONLY AN AUTHORITY FOR WHAT IS ACTUALLY DECIDES. IN THIS DE CISION IT WAS HELD EVERY JUDGMENT MUST BE READ AS APPLICABLE TO THE PARTICUL AR FACTS PROVED OR ASSUMED TO BE PROVED, SINCE THE GENERALLY OF THE EX PRESSIONS WHICH MAY BE MAX NEW YORK LIFE INSURANCE COMPANY LTD. (NOW KNOWN AS MAX LIFE INSURANCE COMPANY LIMITED). 96 FOUND THERE ARE NOT INTENDED TO BE EXPOSITIONS OF T HE WHOLE LAW, BUT GOVERNED AND QUALIFIED BY THE PARTICULAR FACTS OF T HE CASE IN WHICH SUCH EXPRESSIONS ARE FOUND AND A CASE IS ONLY AN AUTHORI TY FOR WHAT IT ACTUALLY DECIDES . IN VIEW OF THESE DECISIONS, THE LEARNED DR WAS OF THE VIEW THAT THE DECISION OF MUMBAI BENCH OF THIS TRIBUNAL SHOULD NO T BE FOLLOWED BY THIS TRIBUNAL IN THE CASE OF ICICI PRUDENTIAL (SUPRA). W E DO AGREE WITH LEARNED DR THAT EACH DECISION HAS TO BE INTERPRETED WITH THE F ACTS AND THE CONTENTS INVOLVED THERE IN. WE NOTED THAT SECTION 115B(1) ( II) WAS INSERTED BY FINANCE ACT, 1976 WHEN THE CONDITION THAT LIFE INSURANCE CO MPANY ARE NOT PERMITTED TO CARRY ON ANY OTHER BUSINESS WAS REINFORCED BY TH E PROVISIONS OF THE SECTION 3(4)(F) OF THE INSURANCE ACT ENABLING IRDA TO CANCE L THE REGISTRATION OF AN INSURER IF THE INSURER CARRIED ON ANY BUSINESS OTHE R THAN LIFE INSURANCE BUSINESS OR ANY PRESCRIBED BUSINESS. THERE MAY BE A CASE THAT IN FUTURE GOVERNMENT MAY AMEND THE ACT AND PERMIT LIFE INSURE R TO CARRY ON OTHER BUSINESS OR THERE MAY BE A CASE WHERE INSURER, ALTH OUGH ALLOWED LICENSE FOR LIFE INSURANCE BUSINESS BUT IN VIOLATION OF LICENSE , MAY HAVE CARRIED OUT ANY OTHER BUSINESS BUT IRDA HAVE NOT EXERCISE THE POWER OF CANCELLING REGISTRATION ,UNDER THESE CIRCUMSTANCES INCOME SO D ERIVED HAS TO BE ASSESSED AT THE RATE PRESCRIBED U/S 115B(1)(II). THERE MAY B E A CASE THAT THE ASSESSEE MAY HAVE INTEREST INCOME ON REFUND OF INCOME TAX, T HE INCOME SO RECEIVED BE TAXED U/S 115(1)(II). THEREFORE, WE DO NOT AGREE WI TH THE PLEA OF LEARNED DR THAT THE PROVISIONS OF SECTION 115(1)(II) WILL BECO ME REDUNDANT IN CASE THE MAX NEW YORK LIFE INSURANCE COMPANY LTD. (NOW KNOWN AS MAX LIFE INSURANCE COMPANY LIMITED). 97 INCOME IN SHAREHOLDERS ACCOUNT IS TAKEN TO BE THE I NCOME DERIVED FROM LIFE INSURANCE BUSINESS. WE MAY ALSO MENTION THAT WE CAN NOT TAKE A DIFFERENT VIEW WHAT HAS BEEN TAKEN BY THE COORDINATE BENCH AP PROVED BY HIGH COURT. THE LEARNED DR WAS FAIR ENOUGH TO STATE THAT THERE IS NO OTHER DECISION EITHER OF THE TRIBUNAL OR SUPERIOR COURT ON THIS ISSUE TAK ING A CONTRARY VIEW AS HAS BEEN TAKEN IN THE CASE OF ICICI PRUDENTIAL (SUPRA). 73. THE OBSERVATIONS OF THE TRIBUNAL IN THE CASE OF ICICI PRUDENTIAL INSURANCE (SUPRA) THAT THE ENTIRE TRANSACTIONS BOTH UNDER THE POLICYHOLDER S AND SHAREHOLDERS ACCOUNT DO PERTAIN TO THE LIFE IN SURANCE BUSINESS ONLY AS IT WAS NOT PERMITTED TO DO ANY OTHER BUSINE SS ARE REINFORCED BY PROVISIONS OF SECTION 3(4F) OF THE INSURANCE ACT WHICH ENABLES IR DA TO CANCEL THE REGISTRATION OF AN INSURER IF THE INSURER CARRIES O N ANY BUSINESS OTHER THAN THE LIFE INSURANCE BUSINESS OR ANY PRESCRIBED BUSINESS. IN OTHER WORDS, A LIFE INSURER, SUCH AS THE ASSESSEE, IS NOT PERMITTED TO CARRY ON ANY OTHER BUSINESS OTHER THAN THAT OF LIFE INSURANCE; THE MANNER OF IN VESTMENT IS STRICTLY REGULATED BY IRDA, IMPLYING THEREBY THAT INVESTMENT S MADE OUT OF SHAREHOLDER FUNDS IS AN INTEGRAL AND INEXTRICABLE P ART OF THE LIFE INSURANCE BUSINESS AND NOT AN INDEPENDENT BUSINESS. RESPECTF ULLY FOLLOWING THE DECISION OF COORDINATE BENCH ON THIS ISSUE, WE ALLO W GROUND NO.2. EVEN WE NOTED THAT THE ASSESSEE IS CONSISTENTLY FOLLOWING T HE SAME METHOD FOR DETERMINING THE INCOME UNDER THE HEAD PROFITS AND G AINS OF BUSINESS OR PROFESSION BY AGGREGATING/CONSOLIDATING, BOTH THE P OLICYHOLDERS AND MAX NEW YORK LIFE INSURANCE COMPANY LTD. (NOW KNOWN AS MAX LIFE INSURANCE COMPANY LIMITED). 98 SHAREHOLDERS ACCOUNT FOR THE PURPOSES OF ARRIVING A T THE DEFICIT/SURPLUS FROM THE LIFE INSURANCE BUSINESS AND THIS HAS DULY BEEN ACCEPTED BY THE REVENUE UPTO FINANCIAL YEAR 2008-09. ON THE PRINCIPLE OF C ONSISTENCY THIS METHOD IN OUR VIEW UNTIL AND UNLESS IS HELD TO BE ILLEGAL CAN NOT BE DISCARDED. WE HAVE GONE THROUGH THE DECISIONS AS RELIED BEFORE US. WE NOTED THAT HONBLE SUPREME COURT IN THE CASE OF RADHASOAMI SATSANG SAA OMI BAGH VS. CIT 193 ITR 321(SC) 193 ITR 321 REFERRED TO THE FOLLOWING P ASSAGE FROM HOYSTEAD V COMMISSIONER OF TAXATION 1926 AC 155 (PC) WHEREIN I T WAS OBSERVED (PAGE 328) PARTIES ARE NOT PERMITTED TO BEGIN FRESH LITIGATI ON BECAUSE OF NEW VIEW THEY MAY ENTERTAIN OF THE LAW OF THE CASE, OR NEW VERSIONS WHICH THEY PRESENT AS TO WHAT SHOULD BE A PROPER AP PREHENSION BY THE COURT OF THE LEGAL RESULT EITHER OF THE CONSTRU CTION OF THE DOCUMENTS OR THE WEIGHT OF CERTAIN CIRCUMSTANCES. I F THIS WERE PERMITTED, LITIGATION WOULD HAVE NO END, EXCEPT WHE N LEGAL INGENUITY IS EXHAUSTED. IT IS A PRINCIPLE OF LAW TH AT THIS CANNOT BE PERMITTED AND THERE IS ABUNDANT AUTHORITY REITERATI NG THAT PRINCIPLE. THIRDLY, THE SAME PRINCIPLE, NAMELY, THAT OF SETTIN G TO REST RIGHTS OF LITIGANTS, APPLIES TO THE CASE WHERE A POINT, FUNDA MENTAL TO THE DECISION, TAKEN OR ASSUMED BY THE PLAINTIFF AND TRA VERSABLE BY THE DEFENDANT, HAS NOT BEEN TRAVERSED. IN THAT CASE ALS O A DEFENDANT IS BOUND BY THE JUDGEMENT, ALTHOUGH IT MAY BE TRUE ENO UGH THAT SUBSEQUENT LIGHT OR INGENUITY MIGHT SUGGEST SOME TR AVERSE WHICH HAD NOT BEEN TAKEN. AT PG 329 OF THE JUDGEMENT, THEIR LORDSHIPS OBSERVE D AS UNDER: WE ARE AWARE OF THE FACT THAT STRICTLY SPEAKING RE S JUDICATA DOES NOT APPLY TO INCOME-TAX PROCEEDINGS. AGAIN, EACH AS SESSMENT YEAR BEING A UNIT, WHAT IS DECIDED IN ONE YEAR MAY NOT A PPLY IN THE FOLLOWING YEAR BUT WHERE A FUNDAMENTAL ASPECT PERME ATING THOUGH THE DIFFERENT ASSESSMENT YEARS HAS BEEN FOUND AS A FACT ONE WAY OR THE OTHER AND PARTIES HAVE ALLOWED THAT POSITION TO BE SUSTAINED BY NOT CHALLENGING THE ORDER, IT WOULD NOT BE AT ALL A PPROPRIATE TO ALLOW THE POSITION TO BE CHANGED IN A SUBSEQUENT YEAR. MAX NEW YORK LIFE INSURANCE COMPANY LTD. (NOW KNOWN AS MAX LIFE INSURANCE COMPANY LIMITED). 99 19. ON THESE REASONINGS IN THE ABSENCE OF ANY MATER IAL CHANGE JUSTIFYING THE REVENUE TO TAKE A DIFFERENT VIEW OF THE MATTER AND IF THERE WAS NOT CHANGE IT WAS IN SUPPORT OF THE ASSES SES WE DO NOT THINK THE QUESTION SHOULD HAVE BEEN REOPENED AND CO NTRARY TO WHAT HAD BEEN DECIDED BY THE COMMISSION OF INCOME-TAX IN THE EARLIER PROCEEDINGS, A DIFFERENT AND CONTRADICTORY STAND SH OULD HAVE BEEN TAKEN. WE ARE, THEREFORE, OF THE VIEW THAT THESE AP PEALS SHOULD BE ALLOWED AND THE QUESTION SHOULD BE ANSWERED IN THE AFFIRMATIVE NAMELY, THAT THE TRIBUNAL WAS JUSTIFIED IN HOLDING THAT THE INCOME DERIVED BY THE RADHASOAMI SATSANG WAS ENTITLED TO E XEMPTION UNDER SECTIONS 11 AND 12 OF THE INCOME TAX ACT OF 1 961. 74. THE AFORESAID DICTUM OF LAW WAS REITERATED RECE NTLY BY THE SUPREME COURT IN CIT VS. EXCEL INDUSTRIES LTD. : 358 ITR 29 5. IT APPEARS FROM THE RECORD THAT IN SEVERAL ASSESSM ENT YEARS, THE REVENUE ACCEPTED THE ORDER OF THE TRIBUNAL IN FAVOU R OF THE ASSESSEE AND DID NOT PURSUE THE MATER ANY FURTHER B UT IN RESPECT OF SOME ASSESSMENT YEARS THE MATTER WAS TAKEN UP IN AP PEAL BEFORE THE BOMBAY HIGH COURT BUT WITHOUT ANY SUCCESS. THAT BEING SO, THE REVENUE CANNOT BE ALLOWED TO FLIP-FLOP ON THE ISSUE AND IT OUGHT LET THE MATTER REST RATHER SPEND THE TAX PAYERS MONEY I N PURSUING LITIGATION FOR THE SAKE OF IT. 75. WE THEREFORE RESPECTFULLY FOLLOWING THE DECISIO N OF THIS TRIBUNAL IN THE CASE OF ICICI PRUDENTIAL INSURANCE CO. LTD (SUPRA), SET ASIDE THE ORDER OF CIT(A) ON THIS ISSUE AND DIRECT THE ASSESSING OFFIC ER TO TAKE PROFIT SHOWN IN SHAREHOLDERS PROFIT AND LOSS ACCOUNT I.E. FORM A-P L TO BE PART OF THE INCOME DERIVED FROM LIFE INSURANCE BUSINESS. THUS THESE G ROUNDS ARE ALLOWED. 76. SINCE THE LEARNED AR HAS ARGUED GROUND 5 FIRST, WHICH RELATES TO THE ENHANCEMENT OF INCOME BY THE CIT(A) BY A SUM OF ` 141,85,54,000/- IN RESPECT OF THE AMOUNT DECLARED AND ALLOCATED AS BON US FOR THE POLICY HOLDERS, WE DECIDED TO DISPOSE OF THIS ISSUE FIRST INSTEAD O F GROUND NO.4. BEFORE MAX NEW YORK LIFE INSURANCE COMPANY LTD. (NOW KNOWN AS MAX LIFE INSURANCE COMPANY LIMITED). 100 DECIDING THIS GROUND, IN OUR OPINION, IT IS NECESSA RY TO REPRODUCE PAGES 177, 178 AND 179 OF THE PAPER-BOOK BEING THE PROFIT & LO SS ACCOUNT IN FORM A-PL AND REVENUE ACCOUNT IN FORM A-RA FOR THE YEAR ENDED MARCH 31, 2010, WHICH WERE REFERRED TO DURING THE COURSE OF HEARING AGAIN AND AGAIN AND ALSO FORMS PART OF THE AUDITED BALANCE-SHEET OF THE COMPANY: MAX NEW YORK LIFE INSURANCE COMPANY LIMITED REGISTRATION NO.104; DATE OF REGISTRATION WITH IRDA : NOVEMBER 15, 2000 PROFIT AND LOSS ACCOUNT FOR THE YEAR ENDED MARCH 31, 2010 FORM A-PL SHAREHOLDERS ACCOUNT (NON-TECHNICAL ACCOUNT) (ALL AMOUNTS IN THOUSANDS OF INDIAN RUPEES, UNLESS OTHERWISE STATED) SCHEDULE YEAR ENDED MARCH 31,2010 YEAR ENDED MARCH 31,2009 TRANSFER FROM THE POLICYHOLDERS ACCOUNT - PARTICIPATING INDIVIDUAL LIFE POLICIES (TECHNICAL ACCOUNT) 137,080 108,726 - PARTICIPATING PENSION POLICIES (TECHNICAL ACCOUNT ) 1,452 1,393 - NON-PARTICIPATING INDIVIDUAL LIFE POLICIES (TECHN ICAL ACCOUNT) - - - NON-PARTICIPATING HEALTH INSURANCE POLICIES (TECH NICAL ACCOUNT) - - - NON-PARTICIPATING GROUP POLICIES - - - NON-PARTICIPATING INDIVIDUAL LINKED POLICIES 883, 226 - - NON-PARTICIPATING LINKED PENSION POLICIES 6,759 - - NON-PARTICIPATING LINKED GROUP POLICIES 4,943 - INCOME FROM INVESTMENTS (A) INTEREST, DIVIDENDS & RENT GROSS [GROSS OF TAX DEDUCTED AT SOURCE RS. NIL (2009 : RS.NIL)] 324,119 262,367 (B) PROFIT ON SALE/REDEMPTION OF INVESTMENTS 71,043 65,354 (C) (LOSS) ON SALE/REDEMPTION OF INVESTMENTS (9,884) (55,014) (D) AMORTISATION OF DISCOUNT/(PREMIUM) 12,882 65,541 OTHER INCOME - MISCELLANEOUS INCOME 299 301 TOTAL (A) 1,431,919 448,668 EXPENSES OTHER THAN THOSE DIRECTLY RELATED TO THE INSURANCE BUSINESS EMPLOYEES REMUNERATION AND WELFARE BENEFITS 84,023 47,129 FILING FEES, RATES AND TAXES 53,673 19,605 DONATIONS 25,000 24,151 OTHERS - INTEREST AND BANK CHARGES 28,128 20,345 - ADVERTISEMENT AND PUBLICITY 640,370 508,469 - TRAVEL, CONVEYANCE AND VEHICLE RUNNING EXPENSES 14,713 - - TRAINING EXPENSES 29,211 - - CONSULTANCY CHARGES 53,877 - - OTHER MISCELLANEOUS EXPENSES 44,269 861 - DEPRECIATION 104,799 163 BAD DEBTS WRITTEN OFF - - CONTRIBUTION TO THE POLICYHOLDERS ACCOUNT (TECHNICAL ACCOUNT) - PARTICIPATING INDIVIDUAL LIFE POLICIES - - MAX NEW YORK LIFE INSURANCE COMPANY LTD. (NOW KNOWN AS MAX LIFE INSURANCE COMPANY LIMITED). 101 - PARTICIPATING PENSION POLICIES - - - NON-PARTICIPATING INDIVIDUAL LIFE POLICIES 296,880 643,362 - NON-PARTICIPATING HEALTH INSURANCE POLICIES 128,443 310,115 - NON-PARTICIPATING GROUP POLICIES 160,877 5,709 - NON-PARTICIPATING INDIVIDUAL LINKED POLICIES - 2,470,055 - NON-PARTICIPATING LINKED PENSION POLICIES - 195,992 - NON-PARTICIPATING LINKED GROUP POLICIES - 90,569 MAX NEW YORK LIFE INSURANCE COMPANY LIMITED REGISTRATION NO.104; DATE OF REGISTRATION WITH IRDA : NOVEMBER 15, 2000 PROFIT AND LOSS ACCOUNT FOR THE YEAR ENDED MARCH 31, 2010 FORM A-PL SHAREHOLDERS ACCOUNT (NON-TECHNICAL ACCOUNT) (ALL AMOUNTS IN THOUSANDS OF INDIAN RUPEES, UNLESS OTHERWISE STATED) SCHEDULE YEAR ENDED MARCH 31,2010 YEAR ENDED MARCH 31,2009 PROVISIONS (OTHER THAN TAXATION) (A) FOR DIMINUTION IN THE VALUE OF INVESTMENTS (NET ) (47,387) 42,249 (B) PROVISION FOR DOUBTFUL DEBTS 24,183 - (C) OTHERS - - TOTAL (B) 1,641,059 4,378,824 PROFIT/(LOSS) BEFORE TAX (C) = (A) (B) (209,140) (3,930,156) PROVISION FOR TAXATION - - PROFIT/(LOSS) AFTER TAX (209,140) (3,930,156) APPROPRIATIONS (A) BALANCE AT THE BEGINNING OF THE YEAR (10,027,545) (6,097,389) (B) INTERIM DIVIDENDS PAID DURING THE YEAR - - (C) PROPOSED FINAL DIVIDEND - - (D) DIVIDEND DISTRIBUTION ON TAX - - (E) TRANSFER TO RESERVES/OTHER ACCOUNTS - - PROFIT/(LOSS) CARRIED FORWARD TO THE BALANCE SHEET (10,236,685 (10,027,545) EARNING PER SHARE (BASIC AND DILUTED) (0.12) (2.76) MAX NEW YORK LIFE INSURANCE COMPANY LTD. (NOW KNOWN AS MAX LIFE INSURANCE COMPANY LIMITED). 102 MAX NEW YORK LIFE INSURANCE COMPANY LIMITED REGISTRATION NO.104; DATE OF REGISTRATION WITH IRDA : NOVEMBER 15, 2000 REVENUE ACCOUNT FOR THE YEAR ENDED MARCH 31, 2010 FORM A-RA POLICYHOLDERS ACCOUNT (TECHNICAL ACCOUNT) (ALL AMOUNTS IN THOUSANDS OF INDIAN RUPEES, UNLESS OTHERWISE STATED) PARTICULARS SCHEDULE YEAR ENDED MARCH 31, 2010 PARTICIPATING POLICIES (NON-LINKED) NON-PARTICIPATING POLICIES (NON-LINKED) LINKED POLICIES TOTAL INDIVIDUAL LIFE PENSION INDIVIDUAL LIFE HEALTH INSURANCE GROUP LINKED INDIVIDUAL LINKED PENSION LINKED GROUP PREMIUMS EARNED - NET 1 PREMIUMS 12,964,409 81,357 828,669 172,563 582,756 31,415,32 5 2,179,947 380,362 48,605,388 LESS: REINSURANCE CEDED 109,407 - 37,018 59,498 285 ,285 105,589 - - 596,797 ADD: REINSURANCE ACCEPTED - - - - - - - - - 12,855,002 81,357 791,651 113,065 297,471 31,309,73 6 2,179,947 380,362 48,008,591 INCOME FROM INVESTMENTS (A) INTEREST, DIVIDENDS & RENT-GROSS 1,635,218 38,1 07 101,213 1,714 29,907 1,338,097 70,823 23,303 3,2 38,382 (B) PROFIT ON SALE/REDEMPTION OF INVESTMENTS 13,142 - 81 - - 6,943,309 259,960 6,796 7,23,288 (C) (LOSS) ON SALE/REDEMPTION OF INVESTMENTS (22) - - - (1) (844,202) (131,294) (5,098) (980,617) (D) TRANSFER/GAIN ON REVALUATION/CHANGE IN FAIR VALUE - - - - - 9,637,935 633,294 20,096 10,291,325 (E) AMORTISATION OF DISCOUNT/(PREMIUM) 9,202 (328) 775 (10) (298) (513) 15 - 8,843 (F) APPROPRIATION /EXPROPRIATION ADJUSTMENT ACCOUNT - - - - - 108,618 6,689 (77) 115,230 OTHER INCOME CONTRIBUTION FROM THE SHAREHOLDERS ACCOUNT - - 296 ,880 128,443 160,877 - - - 586,200 MISCELLANEOUS INCOME 1,136 1 73 1,718 35 1,552 110 4 44,629 TOTAL (A) 14,513,678 119,137 1,190,673 244,930 487,991 48,494 ,532 3,019,544 425,386 68,495,871 COMMISSION 2 1,314,531 864 131,003 27,610 3,863 2,660,168 73,959 89 4,212,087 OPERATING EXPENSES RELATED TO INSURANCE BUSINESS 3 5,159,766 8,550 638,476 193,327 142,845 8,405,672 4 91,112 4,191 15,04,399 PROVISION FOR DOUBTFUL DEBTS 830 1 54 32 26 1,139 7 7 1 2,160 BAD DEBTS WRITTEN OFF 773 1 50 30 24 1,059 72 1 2,010 PROVISION FOR TAX FRINGE BENEFIT TAX - - - - - - - - - PROVISION (OTHER THAN TAXATION) - - - - - - - - - (A) FOR DIMINUTION IN THE VALUE OF INVESTMENTS (NET) - - - - - - - - - (B) OTHERS - - - - - - - - - TOTAL (B) 6,475,900 9,416 769,583 220,999 146,758 11,068,038 565,220 4,282 19,260,196 BENEFITS PAID (NET) 4 2,448,932 27,540 111,535 32,124 173, 596 2,915,882 137,373 44,759 5,891,741 INTERIM BONUSES PAID - - - - - - - - - CHANGE IN VALUATION OF LIABILITY AGAINST LIFE POLICIES IN FORCE: (A) GROSS 5,038,500 49,105 306,390 (8,243) 267,286 33,627,396 2,310,192 371,402 41,962,018 (B) AMOUNT CEDED IN REINSURANCE (8,588) - 3,165 50 (99,649) - - - (105,022) (C) AMOUNT ACCEPTED IN REINSURANCE - - - - - - - - - TOTAL (C) 7,478,844 76,645 421,090 23,931 341,233 36,543,268 2,447,565 416,161 47,748,737 SURPLUS/(DEFICIT) (D) = (A) (B) (C) 558,934 33,076 - - - 883,226 6,759 4,943 1,486,938 OPENING BALANCE OF FUNDS AVAILABLE FOR FUTURE APPROPRIATION 55,269 114,191 - - - - - - 169,460 SURPLUS/(DEFICIT) AVAILABLE FOR APPROPRIATION 614,203 147,267 - - - 883,226 6,759 4,943 1,656,398 APPROPRIATIONS TRANSFER TO SHAREHOLDERS ACCOUNT 137,080 1,452 - - - 883,226 6,759 4,943 1,033,460 TRANSFER TO OTHER RESERVES - - - - - - - - - FUNDS AVAILABLE FOR FUTURE APPROPRIATIONS 477,123 1 45,815 - - - - - - 622,938 INSURANCE RESERVE CARRIED TO THE BALANCE SHEET - - - - - - - - - DETAILS OF SURPLUS (A) INTERIM BONUS PAID - - - - - - - - - (B) ALLOCATION OF BONUS TO POLICYHOLDERS 1,418,584 14,278 - - - - - - 1,432,862 (C) SURPLUS SHOWN IN THE REVENUE AUDIT 614,203 147, 267 - - - 883,226 6,759 4,943 1,656,398 (D) TOTAL SURPLUS : [(A) + (B) + (C)] 2,032,787 161 ,545 - - - 883,226 6,759 4,943 3,089,260 MAX NEW YORK LIFE INSURANCE COMPANY LTD. (NOW KNOWN AS MAX LIFE INSURANCE COMPANY LIMITED). 103 77. REVENUE ACCOUNT FORM A-RA AS REPRODUCED HEREINA BOVE SHOWS THAT THE ASSESSEE HAD ALLOCATED BONUS TO THE POLICY HOLD ERS TO THE EXTENT OF ` 141,85,84,000/-. ACCORDING TO THE ASSESSEE THE SAI D AMOUNT REPRESENT BONUS DECLARED FOR THE IMPUGNED ASSESSMENT YEAR ON THE PA RTICIPATING POLICIES. IT IS NOT DISPUTED THAT THE TAXATION OF THE INSURANCE COM PANIES IS GOVERNED BY SECTION 44 READ WITH FIRST SCHEDULE OF THE INCOME T AX ACT. AS PER RULE 2 OF THE FIRST SCHEDULE, PROFITS AND GAINS OF LIFE INSUR ANCE BUSINESS SHALL BE TAKEN TO BE THE ANNUAL AVERAGE OF THE SURPLUS ARRIVED AT BY ADJUSTING THE SURPLUS OR DEFICIT DISCLOSED BY THE ACTUARIAL VALUATION MADE I N ACCORDANCE WITH THE INSURANCE ACT, 1938, IN RESPECT OF THE LAST INTER V ALUATION PERIOD ENDING BEFORE THE COMMENCEMENT OF THE ASSESSMENT YEAR, SO AS TO EXCLUDE ANY SURPLUS OR DEFICIT INCLUDED THEREIN WHICH WAS MADE IN ANY EARLIER INTER VALUATION PERIOD. THIS RULE TALKS OF ANNUAL AVERAGE SURPLUS ON THE BASIS OF ACTUARIAL VALUATION. THESE WORDS, IN OUR OPINION, HAVE BEEN TAKEN FROM THE OLD RULE 2(B) WHEN THE ACTUARIAL VALUATION IS TO BE DONE ONCE IN THREE OR FIVE YEARS. NOW THESE WORDS ARE NOT RELEVANT AS ACTUARI AL VALUATION IS DONE EVERY YEAR. WE NOTED THAT HONBLE SUPREME COURT IN THE CA SE OF LIFE INSURANCE CORPORATION OF INDIA 51 ITR 773 TOOK THE VIEW THAT ITO HAS NO POWER TO MODIFY THE AMOUNT OF ACTUARIAL VALUATION EXCEPT UND ER RULE 2(B) WITH THE PERMISSION OF THE CONTROLLER OF INSURANCE. RULE 2 NOW STANDS AMENDED BY THE FINANCE ACT, 1976. THIS DECISION OF LIFE INSUR ANCE CORPORATION OF INDIA WAS REFERRED ON BY THE HONBLE SUPREME COURT IN THE CASE OF GENERAL MAX NEW YORK LIFE INSURANCE COMPANY LTD. (NOW KNOWN AS MAX LIFE INSURANCE COMPANY LIMITED). 104 INSURANCE CORPORATION 240 ITR 139 (SC). IN THIS DE CISION, HONBLE SUPREME COURT REITERATED THAT THE ASSESSING OFFICER IS BOUN D TO FOLLOW THE SCHEME OF COMPUTATION GIVEN IN THE FIRST SCHEDULE FOR THE ASS ESSEE CARRYING ON THE INSURANCE BUSINESS. LIFE INSURANCE BUSINESS EARLIE R WAS BEING CARRIED OUT ONLY BY LIFE INSURANCE CORPORATION OF INDIA. IN THE YEA R 2000, LIFE INSURANCE SECTOR WAS OPENED TO PRIVATE PLAYERS AND INSURANCE REGULATORY DEVELOPMENT AUTHORITY (IRDA) WAS CONSTITUTED UNDER THE INSURANC E REGULATION DEVELOPMENT ACT 1999. IRDA, THE INSURANCE REGULATO R, HAS MADE SPECIFIC RULES FOR PRESENTATION OF INSURANCE ACCOUNTS AS PRE SCRIBED IN IRDA (PREPARATION OF FINANCIAL STATEMENTS AND AUDITORS REPORT OF INSURANCE COMPANIES) REGULATIONS 2002. UNDER THESE NORMS, PRO FIT & LOSS INSURANCE COMPANY IS DIVIDED INTO A TECHNICAL ACCOUNT (IN FOR M A-RA ALSO CALLED AS REVENUE ACCOUNT AND NON-TECHNICAL ACCOUNT (SHAREHOL DER'S ACCOUNT REPRESENTED AS FORM A-PL) ALSO CALLED PROFIT AND LOSS ACCOUNT. THE TECHNICAL ACCOUNT (FORM A-RA) DEALS WITH ALL THE TRANSACTIONS RELATING TO AND INCLUDES INCOME FROM PREMIUM AND EXPENDITURE IN RELATION TO THE POLICYHOLDERS ACCOUNT AND RELATED INVESTMENT INCOME WHILE NON-TEC HNICAL ACCOUNT I.E. SHARE HOLDERS ACCOUNT, INCOME TRANSFERRED FROM THE POLICY HOLDERS ACCOUNT AS WELL AS INCOME FROM THE INVESTMENT HAS TO BE SHOWN IN AD DITION TO THE EXPENDITURE AS WELL AS ANY CONTRIBUTION TOWARDS LIF E INSURANCE POLICIES. IT IS A FACT THAT IN LIFE INSURANCE BUSINESS IN THE INITI AL YEARS, THERE IS BOUND TO BE DEFICIT AND FUNDS ARE USUALLY TRANSFERRED FROM THE SHARE HOLDERS ACCOUNT FOR MAX NEW YORK LIFE INSURANCE COMPANY LTD. (NOW KNOWN AS MAX LIFE INSURANCE COMPANY LIMITED). 105 DECLARING BONUS ON PARTICIPATING POLICIES, WHICH IS DONE BASED ON THE ADVICE OF THE APPOINTED ACTUARY. THE ASSESSEE DURING THE IMPUGNED ASSESSMENT YEAR DECLARED BONUS FOR PARTICIPATING POLICY HOLDER S TO THE EXTENT OF ` 141,85,84,000/-. THE CONTENTION OF THE REVENUE IS THAT THE ASSESSEE IS NOT ENTITLED FOR THE DEDUCTION OF THE SAID BONUS AND IT WILL FORM PART OF THE ACTUARIAL SURPLUS. WHILE THE CONTENTION OF THE ASS ESSEE IS THAT IT IS PART OF THE ACTUARIAL LIABILITY AND AS PER RULE 2 OF FIRST SCHE DULE TO THE INCOME TAX ACT IT REPRESENTS THE LIABILITY ACCRUED TOWARDS THE PARTIC IPATING POLICY HOLDERS. WE NOTED THAT THE CHANGE IN THE REPORTING FORMAT HAS D ULY BEEN ACKNOWLEDGED BY THE HONBLE BOMBAY HIGH COURT IN THE CASE OF ICI CI PRUDENTIAL LIFE INSURANCE CO. LTD. VS. ACIT 325 ITR 471, IN THE FOL LOWING MANNER: BEFORE 1999, COMPANIES ENGAGED IN THE BUSINESS OF L IFE INSURANCE WERE REQUIRED TO PREPARE ONE CONSOLIDATED ACCOUNT. SECTION 11 OF THE INSURANCE ACT, 1938 WAS AMENDED SO AS TO INCLUD E SUB-SECTIONS (1A) AND (1B). SUBSECTION (1A) TO SECTION 11 PROVID ES THAT EVERY INSURER, ON OR AFTER THE COMMENCEMENT OF THE IRDA A CT, 1999, IN RESPECT OF INSURANCE BUSINESS TRANSACTED BY HIM AND IN RESPECT OF SHAREHOLDERS FUNDS, SHALL, AT THE EXPIRATION OF EA CH FINANCIAL YEAR, PREPARE WITH REFERENCE TO THAT YEAR, A BALANCE SHEE T, A PROFIT AND LOSS ACCOUNT, A SEPARATE ACCOUNT OF RECEIPTS AND PA YMENTS, AND REVENUE ACCOUNT IN ACCORDANCE WITH THE REGULATIONS MADE BY THE AUTHORITY. SECTION 13(1) PROVIDES THAT EVERY INSURE R CARRYING ON LIFE INSURANCE BUSINESS SHALL, INTER ALIA, IN RESPECT OF THE LIFE INSURANCE BUSINESS TRANSACTED IN INDIA, CAUSE AN INVESTIGATIO N TO BE MADE EACH YEAR BY AN ACTUARY INTO THE FINANCIAL CONDITIO N OF THE LIFE INSURANCE BUSINESS CARRIED ON BY HIM, INCLUDING A V ALUATION OF HIS LIABILITIES AND SHALL CAUSE AN ABSTRACT OF THE REPO RT OF SUCH ACTUARY TO BE MADE IN ACCORDANCE WITH THE REGULATIONS LAID DOWN IN PART I OF THE FOURTH SCHEDULE AND IN CONFORMITY WITH THE R EQUIREMENTS OF PART II OF THAT SCHEDULE. THE FIFTH PROVISO TO SECT ION 13 STIPULATES THAT ON OR AFTER THE COMMENCEMENT OF THE IRDA ACT, 1999 EVERY INSURER SHALL CAUSE AN ABSTRACT OF THE REPORT OF TH E ACTUARY TO BE MAX NEW YORK LIFE INSURANCE COMPANY LTD. (NOW KNOWN AS MAX LIFE INSURANCE COMPANY LIMITED). 106 MADE IN THE MANNER SPECIFIED BY THE REGULATIONS MAD E BY THE AUTHORITY. IN EXERCISE OF THE POWERS CONFERRED BY SECTION 114A OF THE INSURANCE ACT, 1938, THE IRDA NOTIFIED THE INSURANC E REGULATORY AND DEVELOPMENT AUTHORITY (ACTUARIAL REPORT AND ABS TRACT) REGULATIONS, 2000. REGULATIONS 3 AND 4 STIPULATE TH E PROCEDURE FOR PREPARATION OF ACTUARIAL REPORTS AND ABSTRACTS AND THE REQUIREMENTS APPLICABLE. UNDER REGULATION 3(4)*V), EACH ABSTRACT AND STATEMENT IS TO BE ACCOMPANIED BY A CERTIFICATE SIGNED BY THE APPOINTED ACTUARY, INTER ALIA, STATING THAT IN HIS OPINION, T HE MATHEMATICAL RESERVES ARE ADEQUATE TO MEET THE INSURERS FUTURE COMMITMENTS UNDER CONTRACTS AND THE REASONABLE EXPECTATION OF P OLICYHOLDERS. EACH INSURER IS REQUIRED TO PREPARE STATEMENTS WHIC H ARE TO BE ANNEXED TO THE ABSTRACT AND A LIST OF THOSE STATEME NTS IS SET OUT IN REGULATION 4(2). REGULATION 8 PROVIDES THAT A STATE MENT SHOWING THE TOTAL AMOUNT OF SURPLUS ARISING DURING THE INTE R-VALUATION PERIOD AND ALLOCATION OF SUCH SURPLUS, SHALL BE FURNISHED SEPARATELY FOR PARTICIPATING BUSINESS AND FOR NON-PARTICIPATING BU SINESS, TOGETHER WITH THE PARTICULARS AS MENTIONED IN THE REGULATION . THE COMPOSITION OF SURPLUS, INTER ALIA, INCLUDES THE SU RPLUS SHOWN BY FORM I, INTERIM BONUSES, LOYALTY ADDITIONS AND SUMS TRANSFERRED FROM SHAREHOLDERS FUNDS DURING THE INTER-VALUATION PERIOD. THE AUTHORITY HAS ALSO NOTIFIED THE INSURANCE REGUL ATION AND DEVELOPMENT AUTHORITY (PREPARATION OF FINANCIAL STA TEMENTS AND AUDITORS REPORT OF INSURANCE COMPANIES) REGULATION S, 2002. PART V DEALS WITH THE PROVISION OF FINANCIAL STATEMENTS. E VERY INSURER IS REQUIRED TO PREPARE (I) A REVENUE ACCOUNT WHICH IS ALSO DESCRIBED AS A POLICYHOLDERS ACCOUNT; AND (II) A PROFIT AND LOS S ACCOUNT, WHICH IS ALSO DESCRIBED AS A SHAREHOLDERS ACCOUNT, APART FR OM A BALANCE- SHEET. THE STATUTORY FORMS ARE PRESCRIBED BY THE RE GULATIONS. FORM A-RA IS PRESCRIBED FOR THE PREPARATION OF THE REVEN UE ACCOUNT OR THE POLICYHOLDERS ACCOUNT. FORM A-RA REFLECTS THE SURPLUS OR, AS THE CASE MAY BE, THE DEFICIT GENERATED IN THE REVENUE A CCOUNT FOR THE YEAR ENDING 31 ST MARCH. AS A RESULT OF THE REGULATIONS, THE PETITIONER WHIC H IS ENGAGED IN THE BUSINESS OF LIFE INSURANCE IS REQUIRED TO PREPA RE AND MAINTAIN TWO ACCOUNTS NAMELY, (I) A REVENUE ACCOUNT OF POLIC YHOLDERS, AND (II) A PROFIT AND LOSS ACCOUNT OF SHAREHOLDERS. 78. THE DETERMINATIVE ISSUE FOR ARRIVING AT THE TAX ABLE INCOME U/S. 44 READ WITH RULE 2 OF THE FIRST SCHEDULE, IN OUR OPINION, IS WHAT CONSTITUTES ACTUARIAL MAX NEW YORK LIFE INSURANCE COMPANY LTD. (NOW KNOWN AS MAX LIFE INSURANCE COMPANY LIMITED). 107 SURPLUS. THE TERM ACTUARIAL IS NEITHER DEFINED IN THE INCOME TAX ACT NOR IN THE INSURANCE ACT/IRDA ACT, THEREFORE, ITS MEANING HAS TO BE GATHERED FROM THE ORDINARY COMMERCIAL PRINCIPLES GOVERNING LIFE I NSURANCE BUSINESS AND RELEVANT RULES, GUIDELINES AND NORMS GOVERNING ACTU ARIAL VALUATION OF LIFE INSURANCE CONTRACTS. WE NOTED, MUMBAI BENCH OF THI S TRIBUNAL IN THE CASE OF ICICI PRUDENTIAL INSURANCE CO. LTD. (SUPRA), IN THI S REGARD OBSERVED AS UNDER: '... ... AN ACTUARY IS RESPONSIBLE FOR ANALYSIN G POSSIBLE OUTCOMES OF THE TYPES OF EVENTS THAT WOULD POTENTIALLY COST POLICY HOLDERS TO MAKE CLAIMS AGAINST THEIR INSURANCE POLICIES. INSUR ANCE COMPANIES NEED TO MAKE SURE THAT THE MONEY THEY ARE CHARGING AND COLLECTING FROM POLICY HOLDERS IS ADEQUATE TO COVER THE COSTS OF CERTAIN CLAIMS THAT MIGHT BENEFICIALLY BE MADE BY POLICY HOLDERS A S WELL AS THEIR OTHER EXPENSES. IN FACT, THE WORK THAT ACTUARIES PE RFORM IS CRUCIAL TO AN INSURANCE COMPANY'S ABILITY TO REMAIN IN BUSI NESS. ACTUARIES ARE INVOLVED AT ALL STAGES IN PRODUCT DEVELOPMENT A ND IN THE PRICING RISK ASSESSMENT AND MARKETING OF THE PRODUCTS. THEI R JOB INVOLVES MAKING ESTIMATES OF ULTIMATE OUT-COME OF INSURABLE EVENTS. IN THE BUSINESS OF INSURANCE THE PRODUCT COST IS AN ABSTRA CTION, DEPENDING ON THE TIMING ISSUES, VARIABILITY ISSUES AND RISK P ARAMETERS. ONE BIG FUNCTION ACTUARIES PROVIDE IS MAKING RESERVES TO IN SURE THAT INSURANCE COMPANIES KEEP ENOUGH MONEY ON THEIR BALA NCE SHEETS TO MAKE GOOD OF ALL THE CLAIMS THEY WILL HAVE TO PA Y. THIS INVOLVES ARRIVING AT ACTUARIAL SURPLUS OR DEFICIT DEPENDING ON VARIOUS FACTORS. .... THE SURPLUS OR DEFICIT ARRIVED AT BY THE ACTUARY IN HIS VALUATION FOR THE INTER VALUATION PERIOD HAS TO BE TAKEN INTO CON SIDERATION UNDER THE REGULATIONS IN FINANCIAL ACCOUNTS AS WELL 79. ACTUARIAL SURPLUS, IN OUR VIEW, REPRESENT THE A MOUNT AVAILABLE FOR THE SHAREHOLDERS AFTER PROVIDING FOR ALL THE EXPENSES A ND ASCERTAINED LIABILITIES OF THE LIFE INSURANCE BUSINESS. THE POLICYHOLDERS ARE NOT THE SHARE HOLDERS BUT THE CUSTOMERS PAYING PREMIUM TO THE INSURANCE COMPA NY TO MANAGE RISKS MAX NEW YORK LIFE INSURANCE COMPANY LTD. (NOW KNOWN AS MAX LIFE INSURANCE COMPANY LIMITED). 108 ASSOCIATED WITH LOSS OF HUMAN LIFE. A LIABILITY OR AMOUNT SET ASIDE FOR FUTURE DISTRIBUTION TO THE POLICYHOLDERS WHICH IS NOT, IN LAW, AVAILABLE TO THE SHAREHOLDERS CANNOT FORM PART OF THE ACTUARIAL SURP LUS. THE LIABILITIES ASCERTAINED BY AN ACTUARY OR MANDATED UNDER THE INS URANCE LAWS ARE NOT AVAILABLE FOR THE SHAREHOLDERS. THE BASIS OF TAXATI ON FOR A LIFE INSURANCE COMPANY IS THE ACTUARIAL SURPLUS, WHICH IN OUR VIEW WILL MEAN THE AMOUNT REPAYABLE TO THE POLICY HOLDERS UNDER THE CONTRACT OR UNDER THE STATUTE. THE AMOUNTS SET ASIDE FOR POLICY HOLDERS ARE IN THE NAT URE OF LIABILITY/CHARGE ON THE INCOME. NO DOUBT UNDER THE IRDA RULES IN FORM A-RA THE TERMS SURPLUS AND APPROPRIATION CANNOT BE USED INTERC HANGEABLE WITH ACTUARIAL SURPLUS AND APPROPRIATION OF INCOME RESPECTIVEL Y. 80. WE HAVE GONE THROUGH THE COPY OF INSURANCE POLI CY TERMS ESPECIALLY TERMS 7.1 AND 12, WHICH RELATES TO THE BENEFIT TO T HE INSURED PERSONS DETAILED AS UNDER: 'BENEFITS 7.1 SUBJECT TO THE PROVISIONS OF SECTION 8 (SUICIDE EXCLUSION), ON THE OCCURRENCE OF THE INSURED EVENT, THE COMPANY WILL PAY THE FOLLOWING BENEFITS (THE 'BENEFITS'): (A) THE SUM INSURED; AND (B) THE ACCRUED BONUS. 12. POLICY HOLDER BONUS AND BONUS OPTIONS NO BONUS IS PAYABLE FOR THE FIRST TWO POLICY YEARS. THEREAFTER, A BONUS AS DECLARED BY THE COMPANY, WILL BE PAID, FROM THE SURPLUS ARISING FROM THE ACTUARIAL VALUATION OF THE PARTICIPATING LIFE INSUR ANCE MAX NEW YORK LIFE INSURANCE COMPANY LTD. (NOW KNOWN AS MAX LIFE INSURANCE COMPANY LIMITED). 109 FUND. THE AMOUNT OF BONUS TO BE PAID WILL BE AS DETERMINED BY THE COMPANY'S APPOINTED ACTUARY FROM TIME TO TIME.' 81. FROM THESE TERMS IT IS APPARENT THAT THE ASSESS EE IS LIABLE TO PAY TO THE INSURED PERSON THE SUM INSURED AS WELL AS ACCRUED B ONUS ON THE OCCURRENCE OF THE EVENT. AS PER TERM 12, THE COMPANY IS LIABL E AFTER THE EXPIRY OF TWO YEARS TO PAY BONUS FROM THE SURPLUS AS MAY BE DETER MINED BY THE ACTUARY. WE HAVE ALSO GONE THROUGH THE INSURANCE REGULATORY AND DEVELOPMENT AUTHORITY (DISTRIBUTION OF SURPLUS) REGULATIONS, 20 02. THE SAID REGULATION, INTER ALIA, PROVIDES THE PROCEDURE FOR DISTRIBUTION OF SURPLUS IN THE FOLLOWING TERMS: '4 PROCEDURE FOR DISTRIBUTION OF SURPLUS. - A LIFE INSURER MAY, ON THE ADVICE OF HIS APPOINTED ACTUARY, RESERVE APART OF T HE ACTUARIAL SURPLUS (ALSO REFERRED TO AS VALUATION SURPLUS) ARI SING OUT OF A VALUATION OF ASSETS AND LIABILITIES MADE FOR A FINA NCIAL YEAR IN ACCORDANCE WITH INSURANCE REGULATORY AND DEVELOPMEN T AUTHORITY (ACTUARIAL REPORT AND ABSTRACT) REGULATIONS, 2000, TO ITS SHAREHOLDERS, WHICH SHALL BE:- (A) ONE HUNDRED PER CENT IN CASE OF A LIFE FUND MAI NTAINED FOR NON- PARTICIPATING POLICYHOLDERS; (B) ONE-NINTH OF THE SURPLUS ALLOCATED TO POLICYHOL DERS IN CASE OF A LIFE FUND MAINTAINED FOR PARTICIPATING POLICYHOLDER S: PROVIDED THAT AN INSURER SHALL, HOWEVER, BE REQUIRE D TO OBTAIN PRIOR APPROVAL OF THE AUTHORITY IN CASES WHERE THE SAID A LLOCATION IS NOT THE ONE-NINTH OF THE SURPLUS. PROVIDED FURTHER THAT AN INSURER SHALL NOT ALLOCATE OR RESERVE EXCEEDING TEN PER CENT OF THE SAID ACTUARIAL SURPLU S TO ITS SHAREHOLDERS MAX NEW YORK LIFE INSURANCE COMPANY LTD. (NOW KNOWN AS MAX LIFE INSURANCE COMPANY LIMITED). 110 82. FROM THE SAID REGULATION IT IS APPARENT THAT AN INSURER CANNOT ALLOCATE OR RESERVE 10% OF THE ACCRUAL SURPLUS TO ITS SHARE HOLDERS THEREFORE, 90% OF THE ACCRUAL SURPLUS IN POLICY HOLDERS ACCOUNT BELO NG TO THE POLICY HOLDER. SIMILARLY AS PER CLAUSE 43 OF THE IRDA NOTIFICATION , WHICH READS AS UNDER: 43. BENEFIT DISCLOSURE: A. ALL INSURANCE PRODUCTS SHALL PROVIDE THE PROSPECTIV E POLICYHOLDER A CUSTOMIZED BENEFIT ILLUSTRATION, ILL USTRATING THE GUARANTEED AND NON-GUARANTEED BENEFITS AT GROSS INV ESTMENT RETURNS OF 4% AND 8% RESPECTIVELY AND AS SPECIFIED BY IRDA OR LIFE INSURANCE COUNCIL FROM TIME TO TIME. B. SUCH BENEFIT ILLUSTRATION SHALL BE SIGNED BY BOTH T HE PROSPECTIVE POLICYHOLDER AND THE INTERMEDIARY AND S HALL FORM PART OF THE POLICY DOCUMENT. C. THE BENEFIT ILLUSTRATION AS APPROVED UNDER THE FILE AND USE PROCEDURE SHALL BE PART OF THE SALES LITERATURE AND SHALL BE FURNISHED TO THE PROSPECTIVE POLICYHOLDER ALONG WITH THE SALES LITERATURE BEFORE CONCLUDING T HE SALE. WE, ALSO NOTED THAT AS PER CLAUSE 43 OF THE INSURAN CE REGULATORY AND DEVELOPMENT CLAUSE THE BENEFITS WHICH ARE GRANTED T O THE POLICY HOLDERS SHOULD FORM PART OF THE SALES LITERATURE AND MUST B E FURNISHED TO THE PROSPECTIVE POLICY HOLDER ALONG WITH THE SALES LITE RATURE BEFORE CONCLUDING THE SALE. WE NOTED THAT AS PER CLAUSE 6 OF SCHEDULE A O F THE PREPARATION OF FINANCIAL STATEMENTS AND AUDITOR'S REPORT OF INSURA NCE COMPANIES REGULATIONS, 2000, NOTIFICATION DATED 14.08.2000, T HE APPOINTED ACTUARY HAS TO ESTIMATE THE LIABILITY AGAINST THE LIFE POLICIES IN FORCE ON THE BASIS OF ANNUAL MAX NEW YORK LIFE INSURANCE COMPANY LTD. (NOW KNOWN AS MAX LIFE INSURANCE COMPANY LIMITED). 111 INVESTIGATION OF THE LIFE INSURANCE BUSINESS. ALL THESE PROVE THAT BONUS IS TO BE DECLARED IN TERMS OF THE CONTRACT OF THE INSURAN CE AND IS AN INHERENT RIGHT OF PARTICIPATING POLICYHOLDER, ENFORCEABLE IN LAW T O PARTICIPATE IN DISTRIBUTION OF THE SURPLUS ARISING IN THE LIFE POLICY HOLDERS FUND . THIS IS VIEW IS ALSO SUPPORTED BY THE NOTES GIVEN UNDER SCHEDULE 16 OF T HE AUDITED FINANCIAL ACCOUNT OF THE IMPUGNED YEAR WHICH WERE REFERRED TO DURING THE COURSE OF HEARING AND REPRODUCED AS UNDER:- II NOTES TO ACCOUNTS (B) ACTUARIAL ASSUMPTIONS THE COMPANYS APPOINTED ACTUARY HAS DETERMINED VALU ATION ASSUMPTIONS THAT CONFORM WITH REGULATIONS ISSUED BY THE IRDA AND PROFESSIONAL GUIDANCE NOTES ISSUED BY THE INSTITUTE OF ACTUARIES OF INDIA. DETAILS OF ASSUMPTIONS ARE GIVEN BELOW: FUTURE BONUSES: PROVISION IS MADE FOR FUTURE BONUSES BASED ON ESTIM ATED EXPECTED BONUS PAYOUTS CONSISTENT WITH THE VALUATION ASSUMPT IONS AND POLICYHOLDERS REASONABLE EXPECTATIONS. .. (R) POLICYHOLDERS BONUS THE BONUS TO PARTICIPATING POLICYHOLDERS, FOR CURRE NT YEAR AS RECOMMENDED BY APPOINTED ACTUARY HAS BEEN INCLUDED IN CHANGE IN VALUATION AGAINST POLICIES IN FORCE. (S) POLICY LIABILITIES THE MOVEMENT OF POLICY LIABILITIES (FORMING PART OF POLICYHOLDERS FUNDS) IS AS FOLLOWS : MAX NEW YORK LIFE INSURANCE COMPANY LTD. (NOW KNOWN AS MAX LIFE INSURANCE COMPANY LIMITED). 112 PARTICULARS PARTICIPATING POLICIES NON-PARTICIPAT ING POLICIES LINKED POLICIES TOTAL INDIVIDUAL LIFE PENSION INDIVIDUAL LIFE HEALTH GROUP INDIVIDUAL LINKED LINKED PENSION LINKED GROUP AT START OF YEAR 17,673,319 320,457 917,116 18,128 203,052 29,085,84 5 1,440,237 195,697 49,853,851 ADD: CHANGE IN VALUATION OF LIABILITY AGAINST LIFE POLICIES IN FORCE, NET 3,611,327 34,826 309,556 (8,192) 167,637 33,627,386 2,310,193 371,403 40,424,136 ADD: POLICY HOLDER BONUS PROVIDED 1,418,584 14,278 - - - - - - 1,432,862 AT END OF YEAR 22,703,230 369,561 1,226,672 9,936 3 70,689 62,713,231 3,750,430 567,100 91,710,849 83. IN OUR VIEW, THE PREMIUM RECEIVED BY THE ASSESS EE ARE EMBEDDED WITH THE OBLIGATION TO DECLARE BONUS TO PARTICIPATING PO LICY HOLDERS, THEREFORE, IT HAS TO BE SET OFF AGAINST THE PREMIUM RECEIVED. ON CE THE BONUS IS DECLARED, WHICH THE ASSESSEE IS BOUND TO DECLARE AS PER THE T ERMS OF THE CONTRACT OF INSURANCE FOR THE PARTICIPATING POLICIES, THE ASSES SEE IN OUR VIEW CANNOT REVERSE THE SAME AND ONCE BONUS IS DECLARED IT BECO MES ASCERTAINED LIABILITY. SINCE THE BONUS IS BEING PAID TO THE INSURED PERSON S WHO ARE NOT THE SHARE HOLDER BUT CUSTOMERS OF THE ASSESSEE, THEREFORE, WH EN IT IS DECLARED IT BECOMES ASCERTAINED LIABILITY TOWARDS THE CUSTOMERS . NO DOUBT IN FORM A-RA (ACTUARIAL REPORT AND ABSTRACT) REGULATIONS 2000, T HIS FORMS PART OF THE DISTRIBUTION OF THE SURPLUS. SECTION 8 OF THE SAID REGULATION ON STATEMENT OF COMPOSITION OF SURPLUS AND DISTRIBUTION OF SURPLUS IN RESPECT OF POLICYHOLDERS FUND STATES AS UNDER: MAX NEW YORK LIFE INSURANCE COMPANY LTD. (NOW KNOWN AS MAX LIFE INSURANCE COMPANY LIMITED). 113 'COMPOSITION OF SURPLUS AS: 1. SURPLUS SHOWN UNDER FORM I 2. INTERIM BONUSES PAID... 3. TERMINAL BONUSES PAID... 4. LOYALTY ADDITIONS.... 5. SUM TRANSFERRED FROM SHAREHOLDER'S FUNDS... 6. AMOUNT OF SURPLUS, FROM POLICYHOLDERS' FUNDS BRO UGHT FORWARD FROM PRECEDING VALUATION... 7. TOTAL SURPLUS [TOTAL OF THE ITEMS (1) TO (6)] DISTRIBUTION OF SURPLUS AS: POLICYHOLDER'S FUND: 1. TO INTERIM BONUSES PAID 2. TO TERMINAL BONUSES PAID 3. TO LOYALTY ADDITIONS... 4. ...... 5. ...... 6.... 7. AS CARRIED FORWARD UN-APPROPRIATED.' ; IRDAI (PREPARATION OF FINANCIAL STATEMENTS AND AUDI TOR'S REPORT OF INSURANCE COMPANIES) REGULATIONS, 2002 STATE THE KE Y COMPONENTS/HEADINGS OF THE POLICYHOLDER'S ACCOUNT ( TECHNICAL ACCOUNT) AS UNDER: ' 1. PREMIUMS EARNED (+) 2. INCOME FROM INVESTMENTS (+) 3. COMMISSION (-) 4. EXPENSES (-) 5. BENEFITS PAID (-) 6. INTERIM BONUSES PAID (-) 7. CHANGE IN VALUATION LIABILITY (-) SURPLUS (SUM OF 1 TO 7). APPROPRIATIONS 1. TRANSFER TO SHAREHOLDER'S ACCOUNT 2. TRANSFER FOR OTHER RESERVES 3. BALANCE BEING FUNDS FOR FUTURE APPROPRIATION NOTES: THE TOTAL SURPLUS SHALL BE DISCLOSED SEPARATELY WIT H THE FOLLOWING DETAILS: MAX NEW YORK LIFE INSURANCE COMPANY LTD. (NOW KNOWN AS MAX LIFE INSURANCE COMPANY LIMITED). 114 1. INTERIM BONUSES PAID 2. ALLOCATION OF BONUS TO POLICYHOLDERS 3. SURPLUS SHOWN IN THE REVENUE ACCOUNT 4. TOTAL SURPLUS [(L)+(2)+(3)]' 84. IF WE ANALYZE THE ABOVE, IT IS APPARENT THAT AF TER DETERMINING THE SURPLUS THE INTERIM BONUS PAID IS DEDUCTIBLE WHILE COMPUTING THE SURPLUS BUT THE AMOUNT ALLOCATED AS BONUS TO POLICY HOLDERS HAS TO BE ADDED. ONCE THE BONUS IS DECLARED, IT CANNOT TAKE CHARACTER OF SURP LUS ESPECIALLY WHEN THE BONUS PAID IS NOT TAXABLE WHILE WORKING OUT THE SUR PLUS. THE AMOUNTS SET ASIDE FOR POLICY HOLDER ARE IN THE NATURE OF LIABIL ITY/CHARGE AND NOT DIVIDEND, WHICH IS A RETURN ON SHARE HOLDERS CAPITAL. THE TE RMS SURPLUS AND APPROPRIATION USED IN THE IRDA RULES CANNOT BE US ED INTERCHANGEABLE WITH ACTUARIAL SURPLUS AND APPROPRIATION OF INCOME R ESPECTIVELY. SUCH AN INTERPRETATION OF TERMS DE HORS THE CONTEXT IS NOT PERMISSIBLE UNDER LAW. THE APPROPRIATION OF INCOME UNDER INCOME TAX LAW HAS A DEFINITE IMPORT OF APPLICATION OF INCOME, I.E., AFTER INCOME HAS BEEN EARNED / ACCRUED, 'APPROPRIATION' OF SURPLUS UNDER INSURANCE LAWS MEA NS THE ACT OF DECLARING A PARTICULAR AMOUNT AS BEING KEPT ASIDE FOR THE BENEF IT OF THE POLICYHOLDER/ SHAREHOLDER. AMOUNT THAT IS KEPT ASIDE OR TRANSFERR ED TO THE SHAREHOLDERS' ACCOUNT IS THE TAXABLE INCOME WHEREAS THE AMOUNT TH AT IS KEPT ASIDE OR DISTRIBUTED TO THE POLICYHOLDERS IS A LIABILITY / C HARGE ON THE LIFE INSURANCE BUSINESS, TO BE DISCHARGED IN PRESENT OR IN FUTURE AND IS ASCERTAINED LIABILITY. ANY LIABILITY WHICH IS ASCERTAINED BY THE ACTUARY A S A CHARGE/BONUS OR AN MAX NEW YORK LIFE INSURANCE COMPANY LTD. (NOW KNOWN AS MAX LIFE INSURANCE COMPANY LIMITED). 115 AMOUNT THAT IS STATUTORILY MANDATED TO BE KEPT ASID E FOR THE BENEFIT OF POLICYHOLDERS (FFA), FOR FUTURE DISTRIBUTION CANNOT FORM PART OF ACTUARIAL SURPLUS. THE FORMAT PRESCRIBED UNDER THE IRDA ACT OR FOR THAT MATTER INSURANCE ACT, 1938 CANNOT DETERMINE THE QUANTUM OF ACTUARIAL SURPLUS. THESE FORMATS HAVE BEEN PRESCRIBED BY IRDA TO PROTE CT THE INTERESTS OF THE POLICYHOLDERS AND TO ENSURE BETTER REGULATION OF TH E INSURANCE SECTOR. THE DEDUCTIBILITY OF AN ITEM WHILE COMPUTING TAXABLE IN COME WOULD NOT BE DEPENDENT UPON TREATMENT / PRESENTATION IN THE ACCO UNTS - THE SAME WOULD HAVE TO BE DETERMINED WITH REFERENCE TO THE PROVISI ONS OF THE ACT. FROM THE SAMPLE CONTRACT AND THE NOTIFIED REGULATIONS UNDER THE IRDA, IT IS APPARENT THAT PAYMENT OF BONUS IS CONTRACTUAL OBLIGATION ON THE OUTSTANDING PARTICIPATING POLICIES. THEREFORE BONUS DECLARED I S NOT ONLY ASCERTAINED LIABILITY BUT HAS ALSO ACCRUED TO THE POLICY HOLDER S IN COMPUTING THE PROFIT FROM THE LIFE INSURANCE BUSINESS. NO DOUBT THERE I S CHANGE IN RULE 2 OF FIRST SCHEDULE BY THE FINANCE ACT 1976 AND EXPLANATORY NO TES TO FINANCE ACT 1976, AS NOTIFIED UNDER CIRCULAR 202 IN PARA 40.2 WHILE C LARIFYING THE PURPOSE OF AMENDMENT STATES THAT NO FURTHER DEDUCTION WOULD BE PERMITTED IN RESPECT OF ANY PORTION OF THE AMOUNT PAID OR RESERVED OR EXPEN DED ON BEHALF OF THE POLICY-HOLDERS. BUT SUCH EXPLANATORY NOTE CANNOT C ONTROL THE LANGUAGE OF RULE 2. IT IS A GOLDEN RULE OF THE INTERPRETATION THAT IF THERE IS AMBIGUITY AND THE LANGUAGE IS NOT PLAIN OR CLEAR THE AID TO EXPLA NATORY NOTES ARE REQUIRED MAX NEW YORK LIFE INSURANCE COMPANY LTD. (NOW KNOWN AS MAX LIFE INSURANCE COMPANY LIMITED). 116 NOT OTHERWISE. WE NOTED SIMILAR VIEW HAS BEEN TA KEN BY THE HONBLE SUPREME COURT IN THE FOLLOWING CASES: I) NAWAB SIR MIR OSMAN ALI KHAN VS. COMMISSIONER OF WE ALTH-TAX 162 ITR 888 (SC) II) PRINCIPLE CHIEF CONSERVATOR OF FOREST & ANR. VS. JK JOHNSON 10 SCC 794 III) STATE OF MAHARASHTRA VS. MARWANJEE P. DESAI &ORS 2 SCC 318. 85. WE HAVE ALSO GONE THROUGH THE DECISION OF THE A PEX COURT IN THIS REGARD IN THE CASE OF TARULATA SYAM & ORS VS. CIT 1 08 ITR 345 (SC), WHEREIN IT WAS HELD AS UNDER: 'TO US, THERE APPEARS NO JUSTIFICATION TO DEPART FR OM THE NORMAL RULE OF CONSTRUCTION ACCORDING TO WHICH THE INTENTI ON OF THE LEGISLATURE IS PRIMARILY TO BE GATHERED FROM THE WO RDS USED IN THE STATUTE. IT WILL BE WELL TO RECALL THE WORDS OF ROW LATT J. IN CAPE BRANDY SYNDICASE V. I.R.C.(1) AT P. 71, THAT 'IN A TAXING ACT ONE HAS TO LOOK MERELY AT WHAT IS CLEARLY SAID. THERE IS NO ROOM FOR ANY INTENDMENT. THERE IS NO EQUITY ABOUT A TAX. THERE I S NO. PRESUMPTION AS TO A TAX NOTHING IS TO BE READ IN, N OTHING IS TO BE IMPLIED. ONE CAN ONLY LOOK FAIRLY AT THE LANGUAGE U SED'. 86. WE DO NOT FIND ANY AMBIGUITY IN RULE 2 OF THE F IRST SCHEDULE. RULE 2 OF THE FIRST SCHEDULE DOES NOT REFER TO ANY DEDUCTION BUT MERELY REFERS TO ACTUARIAL SURPLUS OR DEFICIT DETERMINED IN ACCORDAN CE WITH INSURANCE ACT, 1938. PRIOR TO AMENDMENT OF LAW IN 1976 THERE WAS LIMITATION IN THE ERSTWHILE RULE 3, WHICH LIMITED THE ALLOWABILITY OF THE DEDUCTION PERTAINING TO THE AMOUNT SET ASIDE FOR THE BENEFIT OF POLICY HOLD ERS TO 80%. POST AMENDMENT NO SUCH LIMITATION EXISTS. WE DO NOT FIN D ANY PROVISION UNDER THE INCOME TAX WHICH STATES THAT WHILE ARRIVING AT ACTU ARIAL SURPLUS LIABILITY ASCERTAINED BY THE ACTUARY AS BONUS PAYABLE IN FUTU RE OR AMOUNT SET ASIDE FOR MAX NEW YORK LIFE INSURANCE COMPANY LTD. (NOW KNOWN AS MAX LIFE INSURANCE COMPANY LIMITED). 117 FURTHER APPROPRIATION FOR THE BENEFIT OF THE POLICY HOLDERS WOULD NOT BE DEDUCTIBLE. ACTUARIAL SURPLUS/DEFICIT IS THE AMOUNT THAT IS COMPUTED AFTER PROVIDING FOR LIABILITIES, WHICH INCLUDES AMOUNT OF FUTURE BONUS PAYMENTS SET ASIDE FOR THE BENEFIT OF THE POLICY HOLDERS BOTH BY WAY OF BONUS ALLOCATION AS WELL AS FUNDS FOR FUTURE APPROPRIATION. WE NOTED TH AT THE OLD FORM G, H AND I PRESCRIBED UNDER THE INSURANCE ACT 1938 CLEARLY P ROVIDE FOR THE SAME. ITAT BENCH IN THE CASE OF ICICI PRUDENTIAL INSURANCE CO. LTD. (SUPRA) HAS ALREADY HELD THAT ACCRUAL SURPLUS OR DEFICIT HAS TO BE DETE RMINED IN THE MANNER PROVIDED IN OLD FORM G, H & I. THIS DECISION OF TH E CO-ORDINATE BENCH IS BINDING ON US. THEREFORE, ANY AMOUNT WHICH IS RECO GNIZED AS ACCRUAL LIABILITY HAS TO BE NECESSARILY REDUCED WHILE ARRIVING AT THE ACTUARIAL SURPLUS. ALTHOUGH IRDA HAS PRESCRIBED A NEW METHOD OF PRESEN TATION I.E. SHARE HOLDERS ACCOUNT AND POLICY HOLDERS ACCOUNT TO BE SH OWN SEPARATELY THOUGH A CONSOLIDATED BALANCE SHEET TO BE DRAWN UP. BUT THE NORMS REGARDING THE ACTUARIAL VALUATION HAVE NOT BEEN ALTERED SO THAT R ECOGNITION OF THE ACCRUAL LIABILITIES BY WAY OF BONUS ALLOCATION TO THE POLIC Y HOLDERS BE EXCLUDED. WE DO AGREE THAT THE TERM ACCRUAL SURPLUS IS NOT DEFINED UNDER THE ACT. THE CBDT CIRCULAR CANNOT CONTROL THE INTERPRETATION OF RULE 2. WE FIND FORCE IN THE SUBMISSIONS OF THE LEARNED SR. ADVOCATE THAT CBDT C IRCULAR HAS LIMITED APPLICATION TO A SITUATION WHERE THE INSURANCE BENE FITS ARE ASSIGNED TO THIRD PARTIES, WHERE THE BENEFITS ARE TO BE PAID/RESERVED /EXPENDED ON BEHALF OF THE POLICY HOLDER OR THE ASSIGNEE. AS THE TERM ON BEH ALF OF IMPLIES AGENCY MAX NEW YORK LIFE INSURANCE COMPANY LTD. (NOW KNOWN AS MAX LIFE INSURANCE COMPANY LIMITED). 118 RELATIONSHIP AND WHEN THE BENEFITS ARE ASSIGNED TO THIRD PARTIES, INSURANCE COMPANY ACTS AS AGENT OF THE POLICY HOLDER. EVEN O THERWISE, IF WE GO TO THE EXPLANATORY NOTE AS GIVEN UNDER PARA 40.2 OF THE CI RCULAR 202, ACCORDING TO THIS BONUS PAID TO THE POLICY HOLDER WILL ALSO BE T AXED BUT THAT IS NOT THE CASE OF THE REVENUE. THE REVENUE HAS ONLY CONTESTED THE BONUS DECLARED AND THE INCREMENTAL FFA. 89. WE ALSO NOTED THAT NO SUCH DI SALLOWANCE HAS BEEN MADE BY THE REVENUE IN THE EARLIER ASSESSMENT YEARS I.E. UP TO A.Y.2009-10 AND IT IS FOR THE FIRST TIME THAT THE CIT(A) HAS EN HANCED THE ASSESSMENT . WE ARE OF THE VIEW, EVEN ON THE GROUND OF CONSISTENCY, THE REVENUE CANNOT DISCARD THE CONSISTENT AND REGULAR METHOD FOLLOWED FOR DETERMINING THE TAXABLE INCOME WITHOUT THERE BEING ANY CHANGE OR OT HERWISE, THE BONUS DECLARED AND THE INCREMENTAL FFA HAS BEEN ALLOWED A S DEDUCTION BY THE REVENUE. OUR AFORESAID VIEW IS SUPPORTED BY THE FO LLOWING DECISIONS. THE RELEVANT PARAGRAPHS OF WHICH ARE REPRODUCED HEREINA BOVE WHILE DECIDING GROUND NO 2: RADHASOAMI SATSANG SAOMI BAGH VS. CIT 193 ITR 321 CIT VS. EXCEL INDUSTRIES LTD 358 ITR 295 (SC). 87. GROUND NO. 4 RELATES TO ENHANCEMENT OF RS. 42,1 8,54,000/- THE CIT(A) CONSIDERING FUNDS FOR FUTURE APPROPRIATION ('FFA') AS PART OF THE ACTUARIAL SURPLUS. WE NOTED FROM THE FUNDS FOR FUTURE APPROP RIATION AFORESAID TECHNICAL FORM A-RA( AS REPRODUCED HEREINABOVE) THA T A SUM OF ` 453478000/- HAS COME AFTER REDUCING FROM THE CLOSIN G BALANCE THE FUNDS MAX NEW YORK LIFE INSURANCE COMPANY LTD. (NOW KNOWN AS MAX LIFE INSURANCE COMPANY LIMITED). 119 AVAILABLE FOR FUTURE APPROPRIATION AMOUNTING TO RS 622938000/- A SUM OF ` 169460000/- WHICH REPRESENTED OPENING BALANCE OF FU NDS FOR FUTURE APPROPRIATION. THE FACTS ARE THAT IN THE PARTICIPAT ING POLICIES THERE WAS SURPLUS AMOUNTING TO RS 558934000/- AND AFTER BRING ING THE OPENING BALANCE OF THE FUNDS AVAILABLE FOR FUTURE APPROPRIATION RS 55269000/- TOTAL SURPLUS AVAILABLE WAS ` 614203000/- OUT OF WHICH SUM OF RS 137080000 WAS TRANSFERRED TO THE SHARE HOLDERS ACCOUNT AND THE BA LANCE FUNDS AVAILABLE WERE ` 477123000/- OUT OF WHICH ` 1432862000/- WERE ALLOCATED AS BONUS TO THE POLICY HOLDERS INCLUDING A SUM OF ` 14278000/- PARTICIPATING POLICIES- PENSIONS. THE CIT(A) WHILE MAKING ENHANCEMENT TREA TED THE SAID FFA WHICH WERE ADDED DURING THE YEAR AS PART OF THE TAXABLE I NCOME PERTAINING TO THE LIFE INSURANCE BUSINESS AS IT IS PART OF THE ACTUAR IAL SURPLUS, WHILE LEARNED AR CONTENDED THAT IT IS NOT A PART OF ACTUARIAL SURPLU S. AS WE NOTED FROM THE FORM A-RA THIS IS AN UNALLOCATED SURPLUS RELATING T O THE PARTICIPATING POLICY HOLDER. IN FACT, THIS FUND HAS TO BE USED BY ASSES SEE IN FUTURE TO MEET ITS CONTRACTED OBLIGATION TOWARDS POLICY HOLDERS. THE CONTENTION OF THE LEARNED AR IS THAT THIS IS AKIN TO THE POLICY HOLDERS LIABI LITY WHICH HAS BEEN DETERMINED THROUGH DUE PROCESS OF THE ACTUARIAL VALUATION. IF IT IS PART OF THE LIABILITY WHILE WORKING OUT THE ACTUARIAL VALUATION THIS FUND WILL NOT FORM PART OF THE ACCRUAL SURPLUS. FROM PROVISIONS OF SECTION 44 REA D WITH RULE 2 OF SCHEDULE A, IT IS APPARENT THAT THE PROFITS AND GAINS OF A L IFE INSURANCE COMPANY HAS TO BE COMPUTED ON THE BASIS OF THE ACTUARIAL SURPLUS. THE ASSESSEE COMPANY IS MAX NEW YORK LIFE INSURANCE COMPANY LTD. (NOW KNOWN AS MAX LIFE INSURANCE COMPANY LIMITED). 120 CONTRACTUALLY BOUND IN TERMS OF THE INSURANCE POLIC IES TAKEN OUT TO PROVIDE VARIOUS BENEFIT TO ITS POLICY HOLDERS INCLUDING, IN TER ALIA, SURVIVAL BENEFITS, CASH OR REVERSIONARY BONUSES AND OTHER PAYOUTS / BENEFIT S LINKED TO THE HAPPENING OF FUTURE UNCERTAIN EVENTS. THE PREMIUMS EARNED BY THE ASSESSEE, THEREFORE, IN OUR OPINION, HAVE EMBEDDED OBLIGATION TO MAKE AV AILABLE SUCH BENEFITS IN FUTURE. THE PREMIUMS EARNED HAVE TO BE SET OFF BY ESTIMATED LIABILITY TO MAKE AVAILABLE FUTURE BENEFIT AS ACTUARY DECLARED S UCH PROVISION IN FORM OF THE FFA. IN OUR VIEW THIS PRESENT THE PROVISION O F FUTURE BONUS WHICH IT IS BOUND TO PAY EVEN THOUGH THIS LIABILITY HAS NOT BEE N ALLOCATED BUT IT IS A ASCERTAINED LIABILITY AND, THEREFORE, WHILE WORKING OUT THE ACTUARIAL SURPLUS THIS HAS TO BE TAKEN INTO ACCOUNT. WHILE DISPOSING OF GROUND NO.5 IN THE PRECEDING PARA, WE HELD THAT IN THE ABSENCE OF ANY DEFINITION BEING GIVEN FOR ACTUARIAL SURPLUS, WE HAVE TO GIVE A MEANING TO IT, WHAT ACTUARIAL SURPLUS MEAN IN COMMON PARLANCE. ACTUARIAL SURPLUS IN OUR V IEW REPRESENT THE SURPLUS I.E. THE AMOUNT AVAILABLE FOR THE SHAREHOLDERS AFTE R PROVIDING FOR ALL THE EXPENSES AND ASCERTAINED LIABILITIES OF LIFE INSURA NCE BUSINESS. POLICYHOLDERS ARE NOT THE SHAREHOLDERS BUT ARE THE CUSTOMERS. TH E INSURANCE POLICIES ARE WRITTEN BY THE COMPANY ON THE LIFE OF SEVERAL INSUR ED PERSONS WHILE THE LIABILITY OF THE ASSESSEE TO MAKE AVAILABLE THE STI PULATED BENEFITS TO A PARTICULAR INSURED MAY BE CONTINGENT, SUCH LIABILIT Y IS DEFINITE AND CERTAIN. EVEN OTHERWISE ALSO IN VIEW OF THE CONTRACT FOR THE LIFE INSURANCE AS WELL AS THE REGULATION GIVEN BY THE IRDA, THE SHARE HOLDERS ARE ENTITLED ONLY FOR 10% MAX NEW YORK LIFE INSURANCE COMPANY LTD. (NOW KNOWN AS MAX LIFE INSURANCE COMPANY LIMITED). 121 OF THE SURPLUS OR DEFICIT OUT OF PARTICIPATING POL ICY HOLDERS ACCOUNT; REST OF THE AMOUNT BELONG TO THE POLICY HOLDERS AND COMPANY CANNOT ALLOCATE THE FUNDS TO THE SHARE HOLDERS. THEREFORE, PARTICIPATI NG POLICYHOLDERS HAS A CHARGE OVER THIS AMOUNT. THESE FUNDS ARE GENERALLY KEPT AS PARTICIPATING FOR FFA FOR DECLARING OR SMOOTHENING BONUSES IN FUTURE. IN FACT, IT REPRESENTS THE REASONABLE EXPECTATION OF THE FUTURE BONUS ON ACCOU NT OF THE PERFORMANCE OF PARTICIPATING FUNDS OVER THE YEARS. BUT FFA, IN OU R VIEW, REPRESENTS THE PROVISION OF DEFINITE AND ASCERTAINED LIABILITY AND , THEREFORE, IT IS A CHARGE ON THE PROFIT WHILE DETERMINING THE PROFIT AND GAINS F ROM THE LIFE INSURANCE BUSINESS. THE LEARNED AR IN THIS REGARD RELIED ON THE DECISION OF HONBLE SUPREME COURT IN THE CASE OF BHARAT EARTH MOVERS VS . CIT 245 ITR 428, WHICH RELATE TO THE DEDUCTIBILITY IF PROVISION FOR LEAVE ENCASHMENT TO EMPLOYEES WHERE THE SUPREME COURT HAS NOTED THE FAC TS OF THE CASE AS UNDER . . THE COMPANY HAS FLOATED BENEFICIAL SCHEMES F OR ITS EMPLOYEES FOR ENCASHMENT OF LEAVE. THE OFFICERS ARE ENTITLED TO EARNED LEAVE CALCULATED AT THE RATE OF 2.5 DAYS PER MONTH, I.E., 30 DAYS PER YEAR. THE STAFF (OTHER THAN OFFICERS) IS E NTITLED TO VACATION LEAVE CALCULATED AT THE RATE OF 1.5 DAYS PER MONTH, I.E., 18 DAYS IN A YEAR. THE EARNED LEAVE CAN BE ACCUMULATED UPTO 240 DAYS MAXIMUM WHILE THE VACATION LEAVE CAN BE ACCUMULATED UPTO 126 DAYS MAXIMUM. THE EARNED LEAVE/VACATION LEAVE CAN B E ENCASHED SUBJECT TO THE CEILING ON ACCUMULATION. THE OFFICER S MAY AT THEIR OPTION AVAIL THE ACCUMULATED LEAVE OR IN LIEU OF AV AILING THE LEAVE APPLY FOR ENCASHMENT WHEREUPON THEY WOULD BE PAID S ALARY FOR THE PERIOD OF LEAVE EARNED BUT NOT AVAILED. SO DOES THE SCHEME EXTEND FACILITY OF ENCASHMENT TO THE STAFF IN RESPECT OF V ACATION LEAVE. ANY LEAVE EARNED BEYOND THE SAID CEILING LIMIT OF 240/1 26 DAYS CANNOT BE ACCUMULATED AND GOES A WASTE. IT CAN NEITHER BE AVAILED NOR MAX NEW YORK LIFE INSURANCE COMPANY LTD. (NOW KNOWN AS MAX LIFE INSURANCE COMPANY LIMITED). 122 ENCASHED. THE APPELLANT COMPANY HAS CREATED A FUND BY MAKING A PROVISION FOR MEETING ITS LIABILITY ARISING ON ACCO UNT OF THE ACCUMULATED EARNED/VACATION LEAVE. IN THE ASSESSMEN T YEAR 1978- 1979 AN AMOUNT OF RS.62,25,483/- WAS SET APART IN A SEPARATE ACCOUNT AS PROVISION FOR ENCASHMENT OF ACCRUED LEAV E. IT WAS CLAIMED AS A DEDUCTION. IN THE OPINION OF THE TRIBU NAL THE ASSESSEE WAS ENTITLED TO SUCH DEDUCTION. THE HIGH COURT HAS FORMED A DIFFERENT OPINION AND HELD THAT THE PROVISION FOR A CCRUED LEAVE SALARY WAS A CONTINGENT LIABILITY AND THEREFORE WAS NOT A PERMISSIBLE DEDUCTION. THE REASONING APPLIED BY THE HIGH COURT IS THAT THE LIABILITY WILL ARISE ONLY IF AN EMPLOYEE MAY NOT GO ON LEAVE AND INSTEAD APPLY FOR ENCASHMENT. IF THE EMPLOYEE AVAIL S THE LEAVE AS PER HIS ENTITLEMENT, THEN HE WOULD BE PAID SALARY F OR THE PERIOD OF LEAVE AND LIABILITY FOR ENCASHMENT WOULD NOT ARISE. THE OTHER EVENT ON THE OCCURRENCE OF WHICH THE EMPLOYEE MAY STAKE H IS CLAIM IS TERMINATION OR RETIREMENT WHICH AGAIN IS AN UNCERTA INTY. ACCORDINGLY THE HIGH COURT HAS ANSWERED THE QUESTION IN THE NEG ATIVE, THAT IS, IN FAVOUR OF THE REVENUE AND AGAINST THE ASSESSEE . ULTIMATELY, THE HONBLE SUPREME COURT LAID DOWN THE FOLLOWING PROPOSITION OF LAW: THE LAW IS SETTLED IF A BUSINESS LIABILITY HAS DEF INITELY ARISEN IN THE ACCOUNTING YEAR, THE DEDUCTION SHOULD BE ALLOWED AL THOUGH THE LIABILITY MAY HAVE TO BE QUANTIFIED AND DISCHARGED AT A FUTURE DATE. WHAT SHOULD BE CERTAIN IS THE INCURRING OF THE LIAB ILITY. IT SHOULD ALSO BE CAPABLE OF BEING ESTIMATED WITH REASONABLE CERTA INTY THOUGH THE ACTUAL QUANTIFICATION MAY NOT BE POSSIBLE. IF THESE REQUIREMENTS ARE SATISFIED THE LIABILITY IS NOT A CONTINGENT ONE. TH E LIABILITY IS IN PRESENT THOUGH IT WILL BE DISCHARGED AT A FUTURE DA TE. IT DOES NOT MAKE ANY DIFFERENCE IF THE FUTURE DATE ON WHICH THE LIABILITY SHALL HAVE TO B E DISCHARGED IS NOT CERTAIN. 88. WE ALSO NOTED THAT WHILE HOLDING SO THE SUPREME COURT TOOK NOTE OF THE PRINCIPLES LAID DOWN IN THE EARLIER JUDGMENT IN THE CASE OF METAL BOX CO. OF INDIA LTD. VS. THEIR WORKMEN 73 ITR 53 WHEREIN T HE APEX COURT ALLOWED MAX NEW YORK LIFE INSURANCE COMPANY LTD. (NOW KNOWN AS MAX LIFE INSURANCE COMPANY LIMITED). 123 PROVISION FOR GRATUITY PAYABLE ON TERMINATION OF EM PLOYEES SERVICE DUE TO RETIREMENT/DEATH OR TERMINATION, WORKED OUT ON AN A CTUARIAL BASIS. 89. NO DOUBT IN OUR VIEW, THIS DECISION IS NOT STRI CTLY APPLICABLE TO THE FACTS OF THE CASE BECAUSE IN THIS DECISION, THE QUESTION WAS RELATING TO THE DEDUCTIBILITY OF THE EXPENDITURE TOWARDS THE PROVIS ION FOR LEAVE ENCASHMENT I.E. FOR THE PURPOSE OF COMPUTATION OF PROFIT AND G AINS FROM BUSINESS BUT THIS DECISION MAY ASSIST TO THE ASSESSEE FOR ASCERTAININ G WHETHER THE FUNDS EARMARKED TO BE DISTRIBUTED TO THE CUSTOMERS FROM W HOM THE ASSESSEE IS GETTING INCOME BY WAY OF PREMIUM I.E. WHETHER THE A MOUNT IN FFA A/C IS A LIABILITY WHICH IS DEDUCTIBLE WHILE WORKING OUT ACT URIAL SURPLUS. THIS IS AN UNDISPUTED FACT THAT THE ASSESSEE CANNOT UTILISE TH ESE FUNDS FOR SHAREHOLDERS OR DISTRIBUTING THEM AS DIVIDENDS TO THE SHAREHOLDE RS. ON THE BASIS OF THIS DECISION OF HONBLE SC, ONE CAN SAY THAT THE AMOUNT ALLOTTED TO THE FFA A/C IS A PROVISION FOR A DEFINITE LIABILITY ALTHOUGH IT MA Y ARISE WHEN THE BONUS IS DISTRIBUTED OUT OF THIS. THEREFORE, SINCE THE AMOUN T IS EARMARKED FOR POLICYHOLDERS, IT CANNOT FORM PART OF THE ACTURIAL SURPLUS RATHER IT HAS TO BE REDUCED WHILE WORKING OUT THE ACTUARIAL SURPLUS UND ER RULE 2 SCHEDULE A OF THE INCOME TAX ACT FOR DETERMINING PROFIT AND GAINS OF ASSESSEE FROM LIFE INSURANCE BUSINESS. WE HAVE ALSO GONE THROUGH THE D ECISION OF DELHI HC IN CASE OF CIT V TRIVENI ENGINEERING 336 ITR 374 AS RE LIED BY SENIOR ADVOCATE. THIS DECISION IN OUR VIEW WILL NOT APPLY TO THE FAC TS OF THE CASE. IN THAT CASE, THE CONTRACT RECEIPTS TAKEN AS INCOME INCLUDES THE UNBILLED REVENUE FOR WHICH MAX NEW YORK LIFE INSURANCE COMPANY LTD. (NOW KNOWN AS MAX LIFE INSURANCE COMPANY LIMITED). 124 BILLS TO BE RAISED IN SUCCEEDING YEAR. THEREFORE, T HE PROVISION FOR FORSEEABLE LOSSES TOWARDS COMPLETION OF CONTRACT WAS ALLOWED A S DEDUCTION. IT IS NOT A CASE WHERE ALL FUTURE PREMIUMS TO BE RECEIVED IN TH CASE OF PRESENT ASSESSEE ARE TREATED AS PART OF THE INCOME. WE HAVE ALSO GON E THROUGH THE DECISION OF ROTOR CONTROLS PVT LTD V CIT 314 ITR 62(SC). THIS D ECISION RELATE TO THE CLAIM OF THE DEDUCTION U/S 37 FOR PROVISION OF WARRANTY. THIS DECISION MAY ASSIST ONLY FOR ASCERTAINING WHETHER WHILE CALCULATING ACT URIAL SURPLUS, THERE EXISTS ANY LIABILITY WHICH HAS TO BE REDUCED WHILE CALCULA TING ACTURIAL SURPLUS. IN THIS DECISION, HONBLE SC LAID DOWN FOLLOWING FOUR ASPEC TS TO BE SATISFIED SO THAT THE PROVISION MADE IS NOT TO BE REGARDED AS A CONTI NGENT LIABILITY : - (I) THE PROVISION RELATES TO PRESENT OBLIGATION; (II) IT ARISES OUT OF OBLIGATING EVENTS; (III) IT INVOLVES OUTFLOW OF RESOURCES; AND (IV) IT INVOLVES RELIABLE ESTIMATION OF OBLIGTION. IF THESE PRINCIPLES ARE APPLIED TO THE FFA, IN OUR VIEW THE FFA SINCE BEING EARMARKED FOR PARTICIPATING POLICYHOLDERS AND REPRE SENTS PROVISION FOR EXPECTATION OF FURTHER BONUSES BASED ON TERMS & CON DITIONS LAID DOWN IN THE INSURANCE POLICIES AND WILL ALSO INVOLVE OUTFLOW OF THE RESOURCES, WILL REPRESENT ASCERTAINED LIABILITIES TOWARDS THE POLICYHOLDERS A S IT CANNOT BE USED BY THE INSURANCE COMPANY FOR ALLOCATING IT TO THE SHAREHOL DERS ALTHOUGH IT HAS NOT DUE TO THE POLICYHOLDERS. MAX NEW YORK LIFE INSURANCE COMPANY LTD. (NOW KNOWN AS MAX LIFE INSURANCE COMPANY LIMITED). 125 90. WE HAVE ALSO GONE THROUGH THE DECISION OF BIJLI COTTON MILLS AS RELIED BY LEARNED AR. THIS DECISION OF SC IN CIT V BIJLEE COT TON MILLS 116 ITR 60 IS ON DIFFERENT FACTS. IN THAT CASE, DHARMADA WAS COLLECT ED FOR SPENDING TOWARDS CHARITY BUT IN THE IMPUGNED CASE, ASSESSEE IS COLLE CTING PREMIUMS WHICH ARE NOT EARMARKED TO BE SPENT ON POLICYHOLDER, RATHER, OUT OF THE SURPLUS ARRIVED AT AFTER MEETING THE EXPENSES, SHAREHOLDERS ARE ENT ITLED UPTO 10% OF SURPLUS. IN THE CASE OF ACIT V MUMBAI INTERNATIONAL AIRPORT P LTD 184 TTJ 229, PASSENGER SERVICE FEE WAS BEING COLLECTED TO BE SPE NT ON SECURITY AGENCIES, WHILE IT IS NOT THE CASE OF ASSESSEE THAT ALL THE P REMIUMS RECEIVED HAVE TO BE EARMARKED OR SPENT ON POLICYHOLDERS. THEREFORE, THE SE DECISIONS CANNOT APPLY TO THE FACTS OF THE ASSESSEES CASE. SIMILAR IS THE CASE IN UP BHOOMI SUDHAR NIGAM 280 ITR 197 (ALLD). WE HAVE ALSO GONE THROUGH THE DECISION OF CIT V MODIPON (SC) 87 TAXMANN.COM 275. THIS DECISION ALSO IN OUR VIEW IS NOT APPLICABLE AS IN THAT CASE THE ASSESSEE HAS DEPARTE D THE AMOUNT TOWARDS THE EXCISE DUTY LIABILITY WHICH IS TO BE DISCHARGED IN FUTURE BUT IN THE CASE OF THE ASSESSEE AMOUNT REMAINS WITH THE ASSESSEE. WE HAVE ALSO GONE THROUGH DECISION OF MUMBAI HC IN CIT V NAGRI MILLS 33 ITR 6 81 AS WELL AS DELHI HC IN CIT V SHRIRAM PISTONS & RINGS 220 CTR 404. THESE DE CISIONS CANNOT BE APPLIED IN THE IMPUGNED CASE AS THESE DECISIONS REL ATE TO THE ISSUE OF ALLOWING DEDUCTION BUT DOES NOT RELATE TO THE ISSUE OF COMPUTATION OF ACTUARIAL SURPLUS. WHETHER WHILE COMPUTING ACTURIAL SURPLUS, AMOUNT APPROPRIATED TOWARDS FFA WILL FORM PART OF ACTURIAL LIABILITIES OR NOT. LEARNED MAX NEW YORK LIFE INSURANCE COMPANY LTD. (NOW KNOWN AS MAX LIFE INSURANCE COMPANY LIMITED). 126 DR BASICALLY REILED RULE 3 & OLD RULE 2 WHICH WERE IN EXISTENCE PRIOR TO THE AMENDMENT MADE BY THE FINANCE ACT 1976 AND ALSO GIV EN THE LOGIC AS HAS BEEN MENTIONED BY US EARLIER WHY THE RATE OF TAX ON THE COMPANY CARRYING ON LIFE INSURANCE BUSINESS HAS BEEN REDUCED FROM 52.5% TO 12.5% AS WELL AS PARA 40.2 OF CIRCULAR NO. 202 DT 05/09/1976 WHICH D EALS WITH THE EXPLANATORY NOTES IN RESPECT OF THE AMENDMENT MADE BY FINANCE A CT,1976 AS WELL AS THE DECISIONS AS DISCUSSED BY US WHILE DISPOSING OFF GR OUND NO. 5. WE HAVE ALREADY TAKEN A VIEW WHILE DISPOSING OFF GROUND NO. 5 THAT THE GOLDEN RULE OF INTERPRETATION IS THAT EXTERNAL AID TO THE INTERPRE TATION IS NOT REQUIRED WHEN THERE IS NO AMBIGUITY IN THE RELEVANT PROVISION AND THE LANGUAGE OF THE RELEVANT PROVISION IS PLAIN AND CLEAR. THE LANGUAGE OF RULE 2 IS PLAIN AND CLEAR AND THERE IS NO AMBIGUITY. THEREFORE, AS HELD BY US EARLIER, EXPLANATORY NOTE GIVEN IN THE CIRCULAR 202 WILL NOT HELP THE REVENUE WHILE INTERPRETATING RULE 2 OF SCHEDULE A. WE NOTED THAT HONBLE SC IN THE CASE OF STATE OF MAHARASHTRA V MARWANJI P DESAI & OTHERS 2 SCC 318 HAS OBSERVED AS UNDER::- TRUE INTENT AT THE LEGISLATURE SHALL HAVE TO BE GA THERD AND DCIPHERED IN ITS PROPER SPIRIT HAVING DUE GARD T HE LANGUAGE USED THEREIN. STATEMNTS OF OBJECTS ND REASONS IS UNDOUBT EDLY AN AID TO CONSTRUCTION BUT THAT BY ITSELF CANNT BE TERME TO B E AND BY ITELF CANNOT BE INTERRETED. IT IS AN USEFUL GUIDE BUT TH E INTERPRETATIONS AND THE INTENT SHALL HAVE TO BE GATHERED FROM THE E NTIRETY OF THE STATUTE AND WHEN THE LANGUAGE OF THE SECTIONS PROVI DING AN APPEAL TO A FORUM IS CLEAR AND CATGORICAL NO EXTERNAL AID IS PERMISSIBLE IN INTERPRETATIONS OF THE SAME. . MAX NEW YORK LIFE INSURANCE COMPANY LTD. (NOW KNOWN AS MAX LIFE INSURANCE COMPANY LIMITED). 127 SIMILARLY, WE NOTED SC VIDE ORDER DT 17/10/2011 IN THE CASE OF PRINCIPAL CHIEF CONSERVATOR OF FORESTS & OTHER V J K JOHNSON & OTHE RS 2011 10SCC 794 HELD AS UNDER:- WHEN THE LANGUAGE OF THE STATUTORY PROVISIONS IS P LAIN AND CLEAR NO EXERNAL AID IS REQUIRED AND THE LEGISLATIVE INTENTI ON HAS TO BE GATHERED FROM THE LANGUAG EMPLOYED. NOT ONLY THIS, WE NOTED HONBLE SC IN THE CASE OF N AWABSIR MIR USMAN ALIKHAN V CWT 162 ITR 888 WHILE INTERPRETING THE WO RD BELONGING TO IN THE WEALTH TAX ACT OBSERVED IN RESPECT OF INJUSTICE BEI NG CAUSED TO THE ASSESSEE AS UNDER- THE POSITION IS THAT THOUGH ALL STATUTES INCLUDING THE STATUTE IN QUESTION SHOULD BE EQUITABLY INTERPRETED, THERE IS NO PLACE FOR EQUITY AS SUCH IN TAXATION LAWS. THE CONCEPT OF REA LITY IN IMPLEMENTING A FISCAL PROVISION IS RELEVANT AND THE LEGISLATURE IN THIS CASE HAS NOT SIGNIFICANTLY USED THE EXPRESSION ' OWNER ' BUT USED THE EXPRESSION ' BELONGING TO '. THE PROPERTY IN QUESTION LEGALLY, HOWEVER, CANNOT BE SAID TO BELONG TO THE V ENDEE. THE VENDEE IS IN RIGHTFUL POSSESSION ONLY AGAINST THE V ENDOR. SPEAKING FOR MYSELF, I HAVE DELIBERATED LONG ON THE QUESTION WHETHER IN INTERPRETING THE EXPRESSION 'BELONGING TO' IN THE A CT, WE SHOULD NOT IMPORT THE MAXIM THAT ' EQUITY LOOKS UPON A THING A S DONE WHICH OUGHT TO HAVE BEEN DONE ' AND THOUGH THE CONVEYANCE HAD NOT BEEN EXECUTED IN FAVOUR OF THE VENDEE, AND THE LEGA L TITLE VESTED WITH THE VENDOR, THE PROPERTY SHOULD BE TREATED AS BELONGING TO THE VENDEE AND NOT TO THE ASSESSEE. I HAD OCCASION TO D ISCUSS THOROUGHLY THIS ASPECT OF THE MATTER WITH MY LEARNE D BROTHER AND SINCE IN VIEW OF THE POSITION THAT LEGAL TITLE STIL L VESTS WITH THE ASSESSEE AND THE AUTHORITIES, WE HAVE NOTED, ARE PR EPONDERANTLY IN FAVOUR OF THE VIEW THAT THE PROPERTY SHOULD BE TREA TED AS BELONGING TO THE ASSESSEE IN SUCH CIRCUMSTANCES, I SHALL NOT PERMIT MY DOUBTS TO PREVAIL UPON ME TO TAKE THE VIEW THAT THE PROPER TY BELONGS TO THE VENDEE AND NOT TO THE ASSESSEE. I AM CONSCIOUS THAT IT WILL WORK SOME AMOUNT OF INJUSTICE IN SUCH A SITUATION BECAUS E THE ASSESSEES WOULD BE MADE LIABLE TO BEAR THE TAX BURDEN IN SUCH SITUATIONS MAX NEW YORK LIFE INSURANCE COMPANY LTD. (NOW KNOWN AS MAX LIFE INSURANCE COMPANY LIMITED). 128 WITHOUT HAVING THE ENJOYMENT OF THE PROPERTY IN QUE STION. BUT TIMES PERHAPS ARE YET NOT RIPE TO TRANSMUTE EQUITY ON THI S ASPECT IN THE INTERPRETATION OF LAW-MUCH AS I WOULD HAVE PERSONAL LY LIKED TO DO THAT. AS BENJAMIN CARDOZO HAS SAID, ' THE JUDGE, EV EN WHEN HE BE FREE, IS NOT WHOLLY FREE '. THE JUDGE CANNOT INNOVA TE AT PLEASURE. IT MAY BE SAID THAT THE LEGISLATURE HAVING DESIGNED LY USED THE EXPRESSION ' BELONGING TO ' AND NOT THE EXPRESSION ' OWNED BY ' HAD PERHAPS EXPECTED JUDICIAL STATESMANSHIP IN THE INTERPRETATION OF THIS EXPRESSION AS LEADING TO AN INTERPRETATION THA T IN A SITUATION LIKE THIS, IT SHOULD NOT BE TREATED AS BELONGING TO THE ASSESSEE BUT, AS SAID BEFORE, TIMES ARE NOT YET RIPE AND IN SPITE OF SOME HESITATION, I HAVE PERSUADED MYSELF TO COME TO THE CONCLUSION THA T FOR ALL LEGAL PURPOSES, THE PROPERTY MUST BE TREATED AS BELONGING TO THE ASSESSEE AND PERHAPS THE LEGISLATURE WOULD REMEDY T HE HARDSHIP OF THE ASSESSEE IN SUCH CASES IF IT WANTS. EVEN THOUGH THE ASSESSEE HAD A MERE HUSK OF TITLE AND AS AGAINST THE VENDEE NO REALITY OF TITLE, AS AGAINST THE WORLD HE WAS STILL THE LEGAL OWNER AND THE REAL OWNER. 91. WE THEREFORE, ARE OF THE VIEW THAT IN CASE THE REVENUE IS OF THE OPINION THAT DUE TO THE LANGUAGE OF RULE 2, THE COM PANIES CARRYING ON LIFE INSURANCE BUSINESS WILL BE PAYING UNJUSTIFIABLY TAX AT A LOWER RATE, THE REVENUE CAN APPROACH THE PARLIAMENT FOR MAKING THE NECESSARY AMENDMENT IN THE INCOME TAX ACT. 92. WE EVEN NOTED UPTO ASSESSMENT YEAR 2009-10, THE REVENUE HAS CONSISTENTLY EXCLUDED AMOUNT APPROPRIATED FOR FFA O UT OF THE AVAILABLE SURPLUS FOR THE PURPOSE OF ASCERTAINING ACTURIAL SU RPLUS WHILE COMPUTING PROFIT AND GAINS OF LIFE INSURANCE BUSINESS OF THE ASSESSE E. THEREFORE, FOLLOWING PRINCIPLE OF CONSISTENCY AS HAS BEEN HELD BY HONBL E SC IN THE CASE OF RADHASAOMI SATSANG BAUG V CIT 193 ITR 321 & THAT OF CIT V EXCEL INDUSTRIES MAX NEW YORK LIFE INSURANCE COMPANY LTD. (NOW KNOWN AS MAX LIFE INSURANCE COMPANY LIMITED). 129 LTD 358 ITR 295, WE SET ASIDE THE ORDER OF CIT(A) A ND DELETE THE ENHANCEMENT MADE BY CIT(A) IN THIS REGARD. 93. GROUND NO. 6 RELATES TO ENHANCING THE ASSESSMEN T BY MAKING ADDITIONS FOR THE PROVISION FOR DOUBTFUL DEBTS AMOUNTING TO ` 2,41,83,000/- IN SHAREHOLDERS P & L A/C. WE HEARD RIVAL SUBMISSIONS AND CAREFULLY CONSIDERED THE SAME WHILE DISPOSING OF GROUND NO. 2 IN THE PRE CEDING PARAGRAPH. WE HAVE ALREADY HELD THAT INCOME IN THE SHAREHOLDERS A /C ALSO FORMS PART OF PROFIT & GAINS FROM LIFE INSURANCE BUSINESS OF THE ASSESSEE. INCOME HAS TO BE COMPUTED AS PER RULE 2 OF SCHEDULE I R.W.S. 44 OF T HE INCOME TAX ACT. S. 44 DEBARS REVENUE TO APPLY THE PROVISIONS OF SECTIONS 28 TO 43B OF THE INCOME TAX ACT WHILE COMPUTING PROFIT & GAINS FROM AN INSU RANCE COMPANY AND INCOME HAS TO BE COMPUTED WITH THE RULES CONTAINED IN THE FIRST SCHEDULE. IN VIEW OF THIS SPECIFIC PROVISION, IN OUR VIEW THE RE VENUE CANNOT APPLY THE NORMAL PROVISIONS OF THE INCOME TAX ACT FOR COMPUTI NG THE INCOME UNDER THE INCOME TAX ACT. FROM FORM A P & L A/C I.E. SHAREH OLDERS A/C PG 178 OF THE AUDITED BALANCE SHEET AND P & L A/C, IT IS APPARENT THAT THE ASSESSEE HAS MADE PROVISION FOR DOUBTFUL DEBTS AMOUNTING TO ` 2,41,83,000/-. WE NOTED THAT REVENUE ON THE ONE SIDE DISALLOWED PROVISION F OR DOUBTFUL DEBTS BUT ON THE OTHER SIDE HAS TAKEN THE PROVISION TO THE EXTEN T THERE IS INCREASE IN VALUE OF INVESTMENT OTHER THAN TEMPORARY DECLINE, AS PART OF THE INCOME. THIS IMPLIES THAT CIT(A) HAS JUST TAKEN THE CONTRARY VIE W. WE HAVE ALSO EXAMINED THE CONTENTION OF THE LEARNED DR THAT THE ASSESSEE HIMSELF ADDED BACK THE MAX NEW YORK LIFE INSURANCE COMPANY LTD. (NOW KNOWN AS MAX LIFE INSURANCE COMPANY LIMITED). 130 ROYALTY WHILE COMPUTING THE SHAREHOLDERS INCOME. TH IS IMPLIES THAT THE ASSESSEE HAS ACCEPTED THE VIEW OF THE REVENUE THAT THE INCOME IN THE SHAREHOLDERS A/C HAS TO BE COMPUTED UNDER THE NORMA L PROVISIONS OF THE COMPUTATION OF INCOME IN INCOME TAX ACT. ROYALTY PA ID BY THE ASSESSEE IN OUR VIEW CANNOT BE REGARDED TO BE AN EXPENSE RELATI NG TO THE LIFE INSURANCE BUSINESS. THEREFORE THERE IS NOTHING WRONG CAUSED T O THE REVENUE AS ROYALTY CANNOT BE REGARDED TO BE LIABILITY INCURRED FOR LIF E INSURANCE BUSINESS. WE THEREFORE SET ASIDE ORDER OF CIT(A) ON THIS ISSUE A ND DELETE THE ENHANCEMENT MADE BY CIT(A) BY ` 2,41,83,000/-.. THUS THIS GROUND STANDS ALLOWED. 94. GROUND NO. 7 & 8 RELATES TO THE SUSTENANCE OF D ISALLOWANCE OF ` 2,50,00,000/-. MADE BY THE ASSESSING OFFICER ON ACC OUNT OF DONATION PAID BY THE ASSESSEE. GROUND NO. 8 RELATES TO THE SUSTAININ G DISALLOWANCE OF ` 2500/- IN RESPECT OF SHARE ISSUE EXPENSES. WHILE DISPOSING OF GROUND NO. 6 IN PRECEDING PARAGRAPH, WE HELD THAT THE INCOME OF THE ASSESSEE HAS TO BE COMPUTED IN ACCORDANCE WITH RULE 2 OF FIRST SCHEDUL E PROVIDED IN S. 44 OF THE INCOME TAX ACT AND THE NORMAL PROVISIONS OF THE INC OME TAX ACT RELATING TO THE PROFIT AND GAINS OF THE BUSINESS WILL NOT APPLY . SECTION 44 SPECIFICALLY EXCLUDES THE PROVISIONS OF COMPUTAITON OF THE INCOM E CHARGEABLE UNDER THE HEAD INTEREST ON SECURITIES, INCOME FROM HOUSE P ROPERTIES, CAPITAL GAIN OR INCOME FROM OTHER SOURCES OR IN SECTION 199 OR IN SECTION 28 TO 43B AND REQUIRES THAT THE PROFIT AND GAINS OF ANY BUSINESS OF INSURANCE HAS TO BE COMPUTED IN ACCORDANCE WITH THE RULES CONTAINED IN THE FIRST SCHEDULE. MAX NEW YORK LIFE INSURANCE COMPANY LTD. (NOW KNOWN AS MAX LIFE INSURANCE COMPANY LIMITED). 131 SECTION 28 TO 43B ARE APPLIED WHEN THE INCOME IS CO MPUTED UNDER THE HEAD INCOME FROM BUSINESS BUT IN VIEW OF SECTION 44 TH ESE PROVISIONS ARE NOT TO BE APPLIED WHILE COMPUTING THE PROFIT AND GAINS OF BUSINESS OF INSURANCE. THE LEARNED DR EVEN THOUGH VEHEMENTLY CONTENDED THA T SINCE THE DONATIONS PAID ARE COVERED UNDER SECTION 80G, THEREFORE, THEY HAVE TO BE DISALLOWED. THE PROVISION OF SECTION 80G FALLS UNDER CHAPTER VI -A AND THE DEDUCITON U/S 80G HAS TO BE ALLOWED OUT OF THE GROSS TOTAL INCOME OF THE ASSESSEE. THE GROSS TOTAL INCOME ARISE AT AFTER COMPUTING INCOME UNDER EACH HEAD OF INCOME AND AFTER GIVING EFFECT TO THE INCLUSION OF THE OTHER PERSONS INCOME AS STIPULATED UNDER CHAPTER V, UNDER SECTION 60 TO 65, WHICHEVER IS APPLICABLE, AND AFTER AGGREGATING THE INCOME UNDER VARIOUS HEAD S OF INCOME GIVING EFFECT TO THE SET OFF OR CARRIED FORWARD OF THE LOSSES. T HIS MEANS APPLICABILITY OF THE PROVISIONS OF CHAPTER VI-A HAVE NOT BEEN DENIED UND ER SECTION 44 WHILE COMPTUING THE INCOME IN ACCORDANCE WITH RULE 2 CONT AINED IN THE FIRST SCHEDULE. WE FIND FORCE IN THIS REGARD AND AGREE WI TH THE CONTENTION OF THE LEARNED DR AS IT IS NOT A CASE THAT THE DEDUCITON O F THE DONATIONS WHILE COMPTUING THE INCOME FROM INSURANCE BUSINESS HAS TO BE ALLOWED AS PER THE PROVISION OF SECTION 28 TO 43B. THE LEARNED SENIOR ADVOCATE DID NOT ADVANCE ANY ARGUMENT THAT THE CLAIM OF THE DONATION MADE BY THE ASSESSEE WOULD HAVE BEEN ELIGIBLE FOR DEDUCITON UNDER SECTION 37 O F THE INCOME TAX ACT WHILE COMPUTING THE INCOME UNDER THE HEAD INCOME FROM BU ISNESS OR PROFESSION HAD IT NOT BEEN THE QUESTION OF DETERMINING THE PRO FIT AND GAINS OF BUSINESS MAX NEW YORK LIFE INSURANCE COMPANY LTD. (NOW KNOWN AS MAX LIFE INSURANCE COMPANY LIMITED). 132 OF LIFE INSURANCE. WE, THEREFORE, DISMISS GROUND N O.7 TAKEN BY THE ASSESSEE AND CONFIRM THE DISALLOWANCE OF ` 2,50,00,000/- AS THERE IS NO SUBMISSION OR ARGUMENT MADE ON BEHALF OF THE ASSESEE THAT THE ASS ESSEE IS ELIGIBLE FOR DEDUCTION UNDER SECTION 80G OF THE INCOME TAX ACT A ND THE ASSESSEE HAD COMPLIED WITH THE CONDITIONS AS STIPULATED UNDER SE CTION 80G. IT IS ALSO NOT THE CASE OF THE ASSESSEE THAT THE ASSESSEE HAS INCU RRED THESE EXPENSES ELIGIBLE FOR DEDUCTION UNDER SECTION 35CCA, 35CCB, 35CCC OR 35CCD SO THAT WE HAVE TAKEN A VIEW THAT WHILE COMPUTING THE INCOM E FROM INSURANCE BUSINESS, IN VIEW OF SPECIFIC PROVISIONS OF SECTION 44 NO DISALLOWANCE COULD HAVE BEEN MADE. 95. ON THE BASIS OF THIS FINDING GIVEN IN PRECEDING PARA, WHILE DELETING THE ENHANCEMENT MADE BY CIT(A) IN RESPECT OF PROVISION FOR DOUBTFUL DEBTS WE ALSO DELETE THE DISALLOWANCE OF 2,500/- TAKEN IN GR OUND NO. 8 AS THE ASSESSEE DERIVED INCOME FROM LIFE INSURANCE BUSINESS ONLY AN D THE COMPUTATION OF THE INCOME FROM LIFE INSURANCE BUSINESS, IN VIEW OF S. 44 OF THE INCOME TAX ACT, HAS TO BE MADE IN ACCORDANCE WITH RULE 2 OF FIRST S CHEDULE OF THE INCOME TAX ACT WHICH DEBARS REVENUE TO APPLY PROVISION OF S. 28 TO 43B OF THE INCOME TAX ACT. THUS GROUND NO. 8 STAND ALLOWED. 96. GROUND NO. 9 RELATES TO DIRECTIONS GIVEN BY CIT (A) TO AO TO RE-COMPUTE THE LOSSES ASSESSED IN EARLIER AYS FOR THE PURPOSE OF ALLOWING SETOFF THEREOF U/S 72 OF THE INCOME TAX ACT. LEARNED AR IN THIS RE GARD HAS DRAWN OUR MAX NEW YORK LIFE INSURANCE COMPANY LTD. (NOW KNOWN AS MAX LIFE INSURANCE COMPANY LIMITED). 133 ATTENTION TOWARDS PARA 16 OF ORDER OF CIT(A) IN WHI CH CIT(A) STATED THAT ASSESSEE HAS CLAIMED SETOFF OF C/F LOSS OF AY 2002- 03 BUT HAS NOT ESTABLISHED THAT THE SAME WAS DETERMINED IN ACCORDANCE WITH S. 44 READ WITH FIRST SCHEDULE OF THE INCOME TAX ACT. CIT(A) WE NOTED ASK ED ASSESSEE TO FILE COMPUTATION OF INCOME, ACTURIAL REPORT & ANNUAL REP ORT OF AY 2002-03 FOR CLAIMING SETOFF WHICH ACCORDING TO HIM ASSESSEE HAS NOT FILED. AS PER CIT(A), THE SETOFF HAS TO BE OF AMOUNT OF LOSS FROM SHAREHO LDERS A/C (AFTER ADJUSTMENT MADE IN STATEMNET OF INCOME AND ADDITION S MADE/SUSTAINED IN ASSESSMENT ORDER) AFTER EXCLUDING TRANSFER TO & FRO M POLICYHOLDERS A/C & ACCRUAL DEFICIT ARRIVED AT BY REDUCING FROM SURPLUS AS PER NEW ANNEXURE I, AMOUNT TRANSFERRED FROM SHAREHOLDERS A/C TO POLICYH OLDERS A/C IN THAT YEAR AND ACCORDINGLY CIT(A) RECOMPUTED THE ACTURIAL DEFI CIT OF POLICYHOLDERS A/C FOR AY 2007-08, 2008-09 & 2009-10 BY HOLDING THAT OPENI NG FFA IS TO BE REDUCED FROM THESE FIGURES TO ARRIVE AT CORRECT DEFICIT OF LIFE INSURANCE BUSINESS FOR THESE YEARS. CIT(A) TOOK THE VIEW THAT SIMILAR CALC ULATION IS TO BE MADE FOR AY 2002-03 & ALSO MENTION THAT ADJUSTMENT MADE IN COMP UTATION OF INCOME INCLUDING ADJUSTMENT FOR PROFIT/LOSS U/S 10 (23AAB) AND ADDITION MADE IN ASSESSMENT ORDER PERTAINING TO THE EXPENSES IN A-PL HAVE TO BE MADE TO ARRIVE AT CORRECT PROFIT/DEFICIT AND ACCORDINGLY DI RECTED AO THAT AO WILL THEREFROM GRANT SETOFF U/S 72 ON THE BASIS OF THE A CTURIAL REPORT, ANNUAL REPORT, STATEMENT OF INCOME & ADDITIONS PERTAINING TO THE SHAREHOLDERS A/C MADE SUSTAINED IN ASSESSMENT ORDER/ APPELLATE ORDER OF AY 2002-03 OTHER MAX NEW YORK LIFE INSURANCE COMPANY LTD. (NOW KNOWN AS MAX LIFE INSURANCE COMPANY LIMITED). 134 EARLIER YEARS WHICH IN OUR VIEW IMPLIED THAT CIT(A) DIRECTED AO TO RECOMPUTE C/F LOSSES OF AY 2002-03 & OTHER EARLIER YEARS. THI S DIRECTION IN FACT AMOUNTS TO ORDER OF REMAND AND THE OPENING OF ASSESSMENT OF PRIOR YEARS. LEARNED SR. ADVOCATE CONTENDED THAT THESE DIRECTIONS ARE ILLEGA L AS THE APPELLATE AUTHORITY DOES NOT HAVE ANY POWER BEYOND THE ASSESS MENT YEAR IN QUESTION. WE NOTED THAT SC IN THE CASE OF ITO V MURLIDHAR BHA GWANDAS 52 ITR 335 HAS CLEARLY LAID DOWN THAT THE JURISDICTION OF APPELLAT E AUTHORITY ARE RESTRICTED TO THE ASSESSMENT YEAR IN QUESTION. IT CANNOT EXTEND T O ASSESSMENT OF THE YEAR WHICH IS NOT SUBJECT MATTER OF THE APPEAL. SIMILAR VIEW HAS BEEN TAKEN IN THE CASE OF CIT V MANEKSHAW SONS 74 ITR 1. IN THIS REGA RD AT THE OUTSET THE LEARNED DR CONTENDED THAT AS PER FIRST SCHEDULE PRO FIT AND GAINS OF LIFE INSURANCE BUSINESS ARE TO BE TAKEN AT GROSS VALUATI ON SURPLUS AFTER EXCLUDING THE EARLIER YEARS SURPLUS OVER DEFICIT. THEREFORE, QUESTION OF SETOFF OF LOSS OF EARLIER YEARS DOES NOT ARISE. S. 72 IS A PART OF CO MPUTATION OF TOTAL INCOME. HE ALSO REFERRED TO THE ORDER PASSED BY CIT(A) U/S 154 DT 07/02/2017 CONTENDING THAT WHETHER INCOME HAS CORRECTLY BEEN C OMPUTED IN THE YEAR FOR WHICH THE LOSSES ARE B/F & SETOFF IS CLAIMED HAS TO BE LOOKED INTO BY THE AO IN THE YEAR HE IS ALLOWING SETOFF OF THE LOSSES OR THE ASSESSEE HAS CLAIMED SETOFF OF B/F LOSSES. FOR THIS HE GAVE THE EXAMPLE THAT IF THE ASSESSEE IS HAVING SALARY INCOME SAY RS 1 LAKH BUT WHILE FILING RETURN DEDUCTED HOUSEHOLD EXPENSES AT RS. 2 LAKHS AND THEREBY RETURNED LOSS A T RS 1 LAKH AND THE RETURN HAS BEEN PROCESSED U/S 143(1) OF THE EARLIER YEAR A ND THE ASSESSEE CLAIMS IN MAX NEW YORK LIFE INSURANCE COMPANY LTD. (NOW KNOWN AS MAX LIFE INSURANCE COMPANY LIMITED). 135 SUBSEQUENT YEAR SETOFF OF B/F LOSSESS OF RS. 1 LAKH . AO WHO IS ALLOWING SETOFF IS BOUND TO RECOMPUTE THE INCOME OF THE EARLIER YEA R, OTHERWISE THE ILLEGALITY WILL REMAIN PERPETUATED. WE DO NOT AGREE WITH THE C ONTENTION OF THE LEARNED DR AS IN OUR OPINION EACH AY IS AN INDEPENDENT ASSE SSMENT, INCOME HAS TO BE COMPUTED AND ASSESSED FOR EACH OF THE ASSESSMENT YEAR. FIRST INCOME HAS TO BE COMPUTED UNDER THE DIFFERENT HEADS OF INCOME AFTER ALLOWING THE DEDUCTIONS SPECIFIED UNDER EACH HEAD OF INCOME NAME LY SALARY, HOUSE PROPERTY, PROFITS AND GAINS OF BUSINESS & PROFESSIO N, CAPITAL GAINS & INCOME FROM OTHER SOURCES AS PER CHAPTER IV OF THE INCOME TAX ACT. AFTER COMPUTING THE INCOME UNDER EACH HEAD OF INCOME AS PER CHAPTER V, INCOME OF OTHER PERSONS, IF APPLICABLE, HAS TO BE INCLUDED IN ASSES SEES TOTAL INCOME UNDER THE RESPECTIVE HEAD OF INCOME. SUBSEQUENT TO THAT A S PER CHAPTER VI, THE INCOME HAS TO BE AGGREGATED & SETOFF OR CARRY FORWA RD AND SETOFF OF THE LOSS AS PER PROVISIONS OF S. 70 TO 80 HAS TO BE ALLOWED AND THUS INCOME SO ARRIVED AT AFTER ALLOWING THE SETOFF OF B/F LOSSES AND AFTE R AGGREGATING IT UNDER VARIOUS HEADS IS REGARDED TO BE GROSS TOTAL INCOME. TOTAL T AXABLE INCOME IS ARRIVED AT AFTER ALLOWING DEDUCTIONS AS STIPULATED UNDER CH APTER VIA. THIS ITSELF PROVES THAT SETOFF OF B/F LOSSES U/S 72 HAS TO BE A LLOWED PRIOR TO THE COMPUTATION OF THE GROSS TOTAL INCOME. S. 72 ALLOWS THE C/F OF BUSINESS LOSSES UPTO 8 ASSESSMENT YEARS IMMEDIATELY SUCCEEDI NG THE ASSESSMENT YEAR FOR WHICH THE LOSS WAS FIRST COMPUTED. THIS ITSELF PROVES THAT THE YEAR IN WHICH LOSS HAS BEEN COMPUTED AND IS BEING CARRY FOR WARD ARE DIFFERENT FROM MAX NEW YORK LIFE INSURANCE COMPANY LTD. (NOW KNOWN AS MAX LIFE INSURANCE COMPANY LIMITED). 136 AY IN WHICH LOSS IS BEING SETOFF. THUS BOTH AYS ARE DIFFERENT AND THEREFORE ASSESSMENT HAS TO BE MADE SEPARATELY. IF THE ASSESS MENT HAS BEEN MADE OF EARLIER YEAR IN WHICH LOSS HAS BEEN COMPUTED AND C/ F IS ALLOWED, THE LOSS CANNOT BE COMPUTED OF THAT AY IN THE AY WHERE SETOF F OF PAST LOSSES ARE ALLOWED. COMING TO THE EXAMPLE GIVEN BY LEARNED DR, WE ARE OF THE VIEW THAT IN CASE, ASSESSING OFFICER FEELS THAT MISTAKE HAS B EEN COMMITTED OR THERE IS UNDERASSESSMENT BY COMPUTING THE LOSS IN THE EARLIE R AY, THE ACTION SHOULD BE TAKEN IN THAT AY IN ACCORDANCE WITH PROVISIONS O F THE INCOME TAX ACT U/S 154, 147 OR 263 WHICHEVER IS APPLICABLE BUT THE ASS ESSING OFFICER OF THE AY IN WHICH THE SETOFF OF B/F LOSSES IS CLAIMED CANNOT RE -COMPUTE TAXABLE INCOME OF THE AY RE-DETERMINING THE LOSSES TO BE C/F & SETOFF IN THE SUBSEQUENT AY. WE HAVE GONE THROUGH THE DECISION OF LODHI PROPERTIES CO LTD OF DELHI BENCH OF TRIBUNAL REPORTED IN 36 SOT 128 ON WHICH LEARNED DR HAS HEAVILY RELIED UPON. IN OUR OPINION, THIS DECISION WILL NOT APPLY TO THE FACTS OF THE IMPUGNED CASE. THE ISSUE IN THAT CASE WAS WHETHER ASSESSEE S HALL BE ENTITLED TO C/F & SETOFF LOSS IN ANY SUBSEQUENT YEAR. TRIBUNAL DECIDE D THIS ISSUE SHALL BE DECIDED BY ASSESSING OFFICER OF SUBSEQUENT AY IN WH ICH SUCH CLAIM IS MADE. TRIBUNAL NOWHERE IN THAT DECISION HELD THAT THE LOS S DETERMINED IN THE AY FOR WHICH SETOFF HAS BEEN CLAIMED HAS TO BE RE-DETERMIN ED OR RE-COMPUTED BY ASSESSING OFFICER OF THE AY IN WHICH ASSESSEE HAS C LAIMED SETOFF. THIS DECISION IN FACT RELATES TO THE ORDER PASSED U/S 26 3 AND IN THIS DECISION IT WAS HELD: MAX NEW YORK LIFE INSURANCE COMPANY LTD. (NOW KNOWN AS MAX LIFE INSURANCE COMPANY LIMITED). 137 THE QUESTION ARISES WHETHER THE PRESENT AO, WHO CO MPLETED THE ASSESSMENT FOR THE ASST. YR. 2004-05 AND DETERMINED THE QUANTUM OF LOSS AT RS. 2,66,97,383 IS JUSTIFIED IN USING TH E EXPRESSION LOSS O BE CARRIED FORWARD. IT IS NT IN DISPUTE THAT THEM ANDATE UNDER SECTION 80 IS THAT THE LOSS UNDER SECTIONS 72(1),73 (2),74(1), 74(3) AND 74A(3) IF NOT DETERMINED IN PURSUANCE OF A REUR N FILED IN ACCORDANCE WITH THE PROVISIONS OF SUB-S.(3) OF SECT ION 139 SHALL NOT BE CARRIED FORWARD AND SET OFF. S. 139(3) ENACTS TH AT IF THE ASSESSEE WHO HAS SUSTAINED A LOSS IN ANY PREVIOUS YEAR UNDER THE HEAD PROFITS AND GAINS OF BUSINESS OR PROFESSION OR UN DER THE HEAD CAPITAL GAINS AND CLAIMS THAT THE LOSS OR ANY PAR T THEREOF SHOULD BE CARRIED FORWARD U/S 72(1), 73(2), 74(1), 74(3), 74A(3), A RETURN OF LOSS CAN BE FILED IN THE PRESCRIBED MANNER AND C ONTAINING SUCH OTHER PARTICULARS AS MAY BE PRESCRIBED, AND THAT AL L THE PROVISIONS OF THE ACT SHALL APPLY AS IF IT WERE A RETURN U/S 1 39(1). S. 80 STARTS WITH THE EXPRESSION NOTWITHSTANDING ANYTHING CONTA INED IN THIS CHAPTER MEANING THEREBY THAT S. 80 SHALL APPLY NOT WITHSTANDING ANYTHING CONTAINED IN CHAPTER VI, I.E., AGGREGATION OF INCOME AND SET OFF OR CARRY FORWARD OF LOSS. S. 72 DEALS WITH CARRY FORWARD AND SET OFF OF BUSINESS LOSS, NOT BEING A LOSS SUSTAINE D IN A SPECULATION BUSINESS, AND IT PROVIDES THAT WHERE NET RESULT OF THE COMPUTATION UNDER THE HEAD PROFITS AND GAINS OF BUSINESS OR PR OFESSION IS A LOSS AND SUCH LOSS CANNOT BE OR IS NOT WHOLLY SET-O FF AGAINST INCOME UNDER ANY HEAD OF INCOME IN ACCORDANCE WITH THE PRO VISIONS OF S. 71, SO MUCH OF THE LOSS AS HAS NOT BEEN SO SET OFF SHALL BE CARRIED FORWARD TO THE FOLLOWING AY AND SHALL BE SET OFF AG AINST PROFITS AND GAINS, IF ANY, OF ANY BUSINESS OR PROFESSION FOR TH AT AY SUBJECT TO THE PROVISION OF CHAPTER VI. S. 24(3) OF THE ACT, 1 922, IS ANALOGOUS TO S. 157 UNDER WHICH THE ITO HAS TO NOTIFY TO THE ASSESSEE THE AMOUNT OF LOSS AS COMPUTED BY HIM. THEREFORE, THE P RESENT AO DETERMINING THE LOSS SHALL ONLY DETERMINE THE QUANT UM OF THE LOSS INCURRED IN THE PRESENT AY AND SHALL NOTIFY THE SAM E TO THE ASSESSEE AND WHETHER THIS LOSS SHALL BE ELIGIBLE TO BE SET O FF AGAINST THE PROFIT OF THE SUBSEQUENT AY CANNOT BE DECIDED BY HIM, AND IT IS ONLY THE ITO DEALING WITH THE ASSESSMENT OF THE SUBSEQUENT A Y IN WHICH ANY CLAIM OF SET OFF OF LOSS IS MADE BY THE ASSESSEE TO DECIDE WHETHER THE ASSESSEE SHALL BE ENTITLED TO SETOFF OF THE LOS S OF THE PRESENT AY AGAINST THE PROFITS AND GAINS OF BUSINESS OF THE SU BSEQUENT AY. IT IS, THEREFORE, HELD THAT THE AOS ORDER IS ERRONEOU S AND PREJUDICIAL TO THE INTERESTS OF THE REVENUE TO THE EXTENT THE A O HAS MADE AN OBSERVATION THAT LOSS TO BE CARRIED FORWARD. THE EX PRESSION TO BE CARRIED FORWARD MENTIONED BY THE AO IN HIS ASSESSM ENT ORDER IS UNDOUBTEDLY RENDERING THE ASSESSMENT ORDER ERRONEOU S AND PREJUDICIAL TO THE INTERESTS OF THE REVENUE. THE IS SUE WHETHER THE MAX NEW YORK LIFE INSURANCE COMPANY LTD. (NOW KNOWN AS MAX LIFE INSURANCE COMPANY LIMITED). 138 ASSESSEE SHALL BE ENTITLED TO CARRY FORWARD AND SET OFF OF THIS LOSS IN ANY SUBSEQUENT YEAR SHALL BE DECIDED BY THE AO OF T HE SUBSEQUENT AY, IN WHICH SUCH CLAIM IS MADE BY THE ASSESSEE. IN THIS RESPECT, THEREFORE, THE CIT WAS VERY MUCH JUSTIFIED IN HOLDI NG THAT THE ASSESSMENT ORDER IS ERRONEOUS AND PREJUDICIAL TO TH E INTERESTS OF THE REVENUE IN SO FAR AS THE OBSERVATION TO THE EFFECT LOSS TO BE CARRIED FORWARD MADE BY THE AO IS CONCERNED AND HE , ACCORDINGLY, WAS JUSTIFIED IN SETTING ASIDE THE ASSESSMENT ON TH E ABOVE ISSUE TO BE MADE AFRESH AFTER GIVING OPPORTUNITY OF BEING HE ARD TO THE ASSESSEE. IN THE RESULT, THE PRESENT APPEAL FILED B Y THE ASSESSEE IS PARTLY ALLOWED FOR A STATISTICAL PURPOSE IN THE MAN NER AS INDICATED ABOVE. CIT V MANMOHAN DAS (1966) 59 ITR 699 (SC) APPLIED. IN THIS DECISION, WE NOTED THAT THE TRIBUNAL NOWHER E HAS TAKEN A VIEW THAT ASSESSING OFFICER OF THE PRESENT AY SHALL RE-COMPU TE OR RE-DETERMINE THE LOSS OF AY FOR WHICH ASSESSEE CLAIMED AS SETOFF IN THE PRESENT AY. TRIBUNAL ONLY TOOK THE VIEW THAT IT IS ONLY ASSESSING OFFICER OF THAT AY IN WHICH CLAIM OF SETOFF OF LOSS IS MADE SHALL DECIDE WHETHER ASSESSE E IS ENTITLED TO SETOFF THE LOSS AND THEREFORE ASSESSING OFFICER OF AY IN WHIC H ASSESSEE HAS INCURRED LOSS CANNOT OBSERVE LOSS TO BE C/F. IF WE LOOK IN TO DIRECTIONS GIVEN BY CIT(A) IN CASE OF ASSESSEE, WE FIND THAT CIT(A) ALTHOUGH A LLOWED ASSESSEE TO SETOFF OF LOSSES U/S 72 OF AY 2002-03 & OTHER EARLIER YEAR S BUT DIRECTED ASSESSING OFFICER TO GRANT SETOFF ON THE BASIS OF ACTUARIAL R EPORT, ANNUAL REPORT, STATEMENT OF INCOME AND ADDITIONS PERTAINING TO SHA REHOLDERS A/C MADE/ SUSTAINED IN ASSESSMENT ORDER/ APPELLATE ORDER OF 2 002-03 OTHER EARLIER YEAR. SUCH DIRECTION IN OUR VIEW MEANS THE ASSESSING OFFI CER BEEN DIRECTED TO RE- COMPUTE THE INCOME/ LOSS OF THE EARLIER YEAR. THIS WILL TANTAMOUNT GIVING THE DIRECTION OF RE-ASSESSING INCOME OF AY FOR WHICH NO APPEAL IS PENDING BEFORE CIT(A) WHICH IS APPARENTLY ILLEGAL IN VIEW OF SETTL ED POSITION OF LAW ON THE MAX NEW YORK LIFE INSURANCE COMPANY LTD. (NOW KNOWN AS MAX LIFE INSURANCE COMPANY LIMITED). 139 BASIS OF DECISION OF SC IN CASE OF ITO V MURLIDHAR BHAGWANDAS 52 ITR 335 (SC). THIS POSITION OF LAW HAS ALSO BEEN FOLLOWED B Y DELHI HC IN CASE OF MAUBENI INDIA P LTD V CIT 328 ITR 306. WE, THEREFOR E, AMEND THE DIRECTION GIVEN BY CIT(A) UNDER PARA 16 OF ITS ORDER AND ACCO RDINGLY DIRECT AO TO GRANT SETOFF U/S 72 ON BASIS OF INCOME FINALLY ASSESSED I N THE A.Y. 2002-2003 OR EARLIER YEAR IN ACCORDANCE WITH PROVISIONS OF S. 72 OF THE INCOME TAX ACT. THUS THIS GROUND STANDS ALLOWED. 97. NOW COMING TO THE ADDITIONAL GROUND TAKEN BY TH E ASSESSEE WHICH RELATES TO THE CLAIM OF DEDUCTION BY THE ASSESSEE U / 10 (34) IN RESPECT OF DIVIDEND INCOME, WE NOTED THAT THIS ISSUE IS DULY C OVERED BY DECISION OF MUMBAI BENCH OF THIS TRIBUNAL IN CASE OF ICICI PRUD ENTIAL INSURANCE COMPANY LTD V ACIT 140 ITD 41 IN WHICH UNDER PARA 47 WHILE DEALING WITH SIMILAR ISSUE FOLLOWING DECISION OF GENERAL INSURANCE CORP OF INDIA V CIT 204 TAXMAN.COM 587 BY BOMBAY HC GAVE CLEARCUT FINDING T HAT ASSESSEE IS ENTITLED TO EXEMPTION U/S 10(34) FOR THE DIVIDEND I NCOME. WE ALSO NOTED WHILE DISPOSING OF GROUND RELATING TO APPLICABILITY OF S. 14A FOR DISALLOWANCE OF EXPENDITURE IN RESPECT OF INCOME NOT FORMING PAR T OF TOTAL INCOME. THIS TRIBUNAL MUMBAI BENCH IN THE AFORESAID CASE UNDER P ARA 45-46 TOOK THE VIEW THAT SINCE S. 44 CREATES A SPECIFIC EXCEPTION TO TH E APPLICABILITY OF S. 28-43B, THEREFORE PURPOSE OBJECT & PURVIEW OF S. 14A HAS NO APLLICABILITY TO PROFITS AND GAINS OF AN INSURANCE BUSINESS. THIS DECISION O F CO-ORDINATE BENCH IS BINDING ON US. THE LEARNED DR IN THIS REGARD ALTHOU GH REFERRED TO DECISION OF MAX NEW YORK LIFE INSURANCE COMPANY LTD. (NOW KNOWN AS MAX LIFE INSURANCE COMPANY LIMITED). 140 DELHI TRIBUNAL IN THE CASE OF ASSESSEE REPORTED IN 86 TAXMAN.COM 239 FOR AY 2002-03 DT 17/10/2017, WE NOTED TRIBUNAL TOOK THE V IEW WHEN THE QUESTION OF APPLICATION OF PROVISION OF S. 92 CAME BEFORE IT , IT TOOK THE VIEW THAT S. 92 APPLIED TO AN ASSESSEE CARRYING ON INSURANCE BUSINE SS. IN CASE OF COMPUTATION OF DETERMINATION OF ALP OF INTERNATIONA L TRANSACTION, WE ARE CONCERNED WITH S. 92 IN THE CASE OF AN ASSESSE CARR YING ON LIFE INSURANCE BUSINESS, THERE HAS TO BE TWO STAGED COMPUTATION OF INCOME. FIRST INCOME HAS TO BE COMPUTED AS PER S. 44 READ WITH FIRST SCH EDULE & WHILE COMPUTING INCOME ALL THE OTHER PROVISIONS RELATING TO THE COM PUTATION OF INCOME CHARGEABLE UNDER THE HEAD INTEREST ON SECURITIES, INCOME FROM HOUSE PROPERTY, INCOME FROM CAPITAL GAINS OR INCOME F ROM OTHER SOURCES OR IN S. 199 OR IN S. 28-43B HAS TO BE DISREGARDED. SECOND S TAGE COMES AFTER COMPUTATION OF INCOME U/S 44, COMPUTATION AS PER PR OVISION OF S. 92 BY MAKING ADDITION ON A/C OF TRANSFER PRICING ADJUSTME NT. 98. THIS DECISION IN OUR VIEW WILL NOT APPLY W.R.T. THE APPLICABILITY OF S. 14A AS THE APPLICABILITY OR INAPPLICABILITY OF S 14A HA S TO BE CONSIDERED AT THE STAGE OF MAKING COMPUTATION OF INCOME U/S 44. WE AL SO DO NOT AGREE WITH SUBMISSIONOF LEARNED DR SINCE THE ONLY ACTIVITY IN SHAREHOLDERS A/C IS OF INVESTMENT, IT CANNOT BE SAID THAT NO EXPENDITURE W AS INCURRED FOR EARNING DIVIDEND. IN THIS REGARD, WE MAY STATE QUESTION BEF ORE US IS NOT WHETHER ANY EXPENDITURE HAS BEEN INCURRED OR NOT FOR EARNING OF DIVIDEND BUT THE QUESTION RELATES TO THE APPLICABILITY OF S. 14A, WHICH ISSUE HAS ALREADY BEEN DECIDED BY MAX NEW YORK LIFE INSURANCE COMPANY LTD. (NOW KNOWN AS MAX LIFE INSURANCE COMPANY LIMITED). 141 CO-ORDINATE BENCH AGAINST REVENUE IN VIEW OF DISCUS SION UNDER PARA 46 OF THE ORDER OF THIS TRIBUNAL MUMBAI BENCH IN CASE OF ICIC I PRUDENTIAL (SUPRA), IN WHICH THEY HAVE FOLLOWED THE DECISION OF DELHI BENC H IN CASE OF ORIENTAL INSURANCE CO LTD V ACIT 130 TTJ (DELHI) 338. NO CON TRARY DECISION FOR APPLICABILITY OF S. 10(34) & S. 14A WAS BROUGHT TO OUR KNOWLEDGE. WE ACCORDINGLY ALLOW THE ADDITIONAL GROUND AND DISMISS THE PLEA OF LEARNED DR THAT DIRECTIONS BE GIVEN IN CASE EXEMPTION IS GRANT ED U/S 10(34) TO DISALLOW BE EXPENDITURE U/S 14A OF THE INCOME TAX ACT. CROSS OBJECTION FILED BY REVENUE: 99. THE ONLY ISSUE INVOLVED IN GROUND OF APPEAL IN CROSS OBJECTION RELATES TO THE DELETION OF THE ADDITION OF ` 7,10,43,000/- MADE BY AO ON A/C OF PROFIT FROM SALE OF INVESTMENT ON A/C OF DOUBLE ADDITION. AFTER HEARING RIVAL SUBMISSIONS AND GOING THROUGH ORDERS OF TAX AUTHORI TIES BELOW, WE NOTED ASSESSING OFFICER FOUND FROM AUDITED A/CS FURNISHED BY ASSESSEE THAT ASSESSEE EARNED INCOME OF ` 7,10,43,000/- ON SALE OF INVESTMENT. ASSESSING OFFICER WAS OF THE VIEW THAT THIS INCOME COULD NOT BE CONSIDERED AS INCOME FROM INSURANCE BUSINESS OF ASSESSEE. HE THEREFORE T REATED SAID INCOME TO BE BUSINESS INCOME FALLING WITHIN S. 28 OF THE INCOME TAX ACT & ADDED THE SAME IN ASSESSABLE INCOME OF THE ASSESSEE. WHEN MATTER W ENT BEFORE CIT(A), CIT(A) NOTED THAT AS PER SHAREHOLDERS P & L A/C, TH ERE IS A NET LOSS OF ` 20,91,40,000/- WHICH HAS BEEN ARRIVED AT AFTER CONS IDERING THE SAID INCOME OF ` 7,10,43,000/- AND A LOSS OF ` 98,84,000/- FROM SALE/REDEMPTION OF MAX NEW YORK LIFE INSURANCE COMPANY LTD. (NOW KNOWN AS MAX LIFE INSURANCE COMPANY LIMITED). 142 INVESTMENT. CIT(A) TOOK THE VIEW IRRESPECTIVE OF WH ETHER THIS PROFIT/LOSS PERTAINS TO LIFE INSURANCE BUSINESS OR NOT, THE ADD ITION OF THE SAME CANNOT BE MADE AS IT WILL LEAD TO INCLUSION OF THIS AMOUNT TW ICE IN TOTAL INCOME. HE THEREFORE DELETED SAID ADDITION AS IN HIS OPINION D ISPUTES REMAIN ONLY WHETHER INCOME IN SHAREHOLDERS A/C IS AN INCOME FROM INSURA NCE BUSINESS. WE NOTED FROM FORM A-PL I.E. P & L A/C APPEARING AT PAGE 177 & 178 OF AUDITED FINAL A/CS THAT INCOME AMOUNTING TO ` 7,10,43,000/- HAS DULY BEEN SHOWN BY ASSESSEE UNDER THE HEAD INCOME FROM INVESTMENT AN D IS DULY INCLUDED IN THE GROSS RECEIPT OF ` 1,43,19,19,000/- AND LOSS OF ` 20,91,40,000/- HAS BEEN ARRIVED AT AFTER CONSIDERING SAID INCOME. THEREFORE WE FIND THAT CIT(A) HAS CORRECTLY OBSERVED THAT THIS IS A DOUBLE ADDITION I N INCOME OF ASSESSEE AND HE HAS RIGHTLY DELETED THE SAID ADDITION. WE DO NOT FI ND ANY ILLEGALITY OR INFIRMITY IN THE ORDER OF CIT(A) WHILE DELETING THE SAID ADDI TION. THUS THE CROSS OBJECTION FILED BY REVENUE STANDS DISMISSED. 100. DURING THE COURSE OF THE HEARING, LEARNED DR R AISED A PLEA UNDER RULE 27 IN RESPECT OF SUM OF ` 58,62,00,000/- WHICH REPRESENTS AMOUNT TRANSFERRED FROM SHAREHOLDERS A/C TO POLICYHOLDERS A/C. HE POIN TED OUT THAT CIT(A) IN THIS REGARD HELD THAT THERE MAY NOT BE ANY DISPUTE ABOUT TAXABILITY OF THIS AMOUNT IN VIEW OF DECISION OF ITAT MUMBAI BENCH IN CASE OF ICICI PRUDENTIAL CO LTD (SUPRA). WE HAVE GONE THROUGH RULE 27 OF THE INCOME TAX (APPELLATE TRIBUNAL RULES 1963). THIS RULE STATES THAT THE RESPONDENT, THOUGH HE MAY, MAX NEW YORK LIFE INSURANCE COMPANY LTD. (NOW KNOWN AS MAX LIFE INSURANCE COMPANY LIMITED). 143 NOT HAVE APPEALED, MAY SUPPORT THE ORDER APPEALED A GAINST ON ANY OF THE GROUNDS DECIDED AGAINST HIM . BEFORE APPLYING THE RULE 27, IN OUR OPINION, THE FOLLOWING CONDITIONS MUST BE SATISFIED BY THE R ESPONDENT: A) RESPONDENT HAS TAKEN A GROUND OF APPEAL BEFORE APPE LLATE AUTHORITY AGAINST WHOSE ORDER APPEAL HAS BEEN FILED BEFORE TR IBUNAL AND B) THIS GROUND MUST BE DECIDED AGAINST THE RESPONDENT. C) THE RESPONDENT MUST SUPPORT THE ORDER OF CIT(A) ON THE GROUND DECIDED AGAINST THE ASSESSEE 101. WE NOTED FROM THE ORDER OF CIT(A) THAT REVENUE HAS NOT COME IN APPEAL BEFORE CIT(A). EVEN NO SUCH GROUND HAS BEEN TAKEN BY THE REVENUE BEFORE CIT(A) ABOUT THE TAXABILITY OF ` 58,62,00,000/-. ON THIS BASIS ITSELF, IN OUR VIEW, THE PLEA TAKEN BY LEARNED DR CANNOT BE AD MITTED UNDER RULE 27 AND IS BOUND TO BE DISMISSED. WE NOTED THAT IT IS A CASE WHERE CIT(A) EXERCISED ITS POWERS AS ENTRUSTED ON HIM U/S 251(1) (A) AND ENHANCED THE ASSESSMENT. CIT(A), IF TAKEN A DECISION THAT IN RES PECT OF SUM OF ` 58,62,00,000/-, INCOME OF ASSESSEE CANNOT BE ENHANC ED. THIS CANNOT TANTAMOUNT THAT CIT(A) HAS DECIDED GROUND TAKEN BY REVENUE BEFORE CIT(A) AGAINST THE REVENUE. IT IS A CASE WHERE CIT(A) DECI DES TO ENHANCE INCOME OF ASSESSEE IN RESPECT OF 2 ISSUES RELATING TO ALLOCAT ION OF THE FUNDS TO POLICYHOLDERS AND INCREMENTAL FFA. IF CIT(A) HAS NO T INVOKED THE ENHANCEMENT POWER IN RESPECT OF SUM OF ` 58,62,00,000/-, IT CANNOT TANTAMOUNT THAT CIT(A) HAD DECIDED THE GROUND AGAIN ST THE REVENUE I.E. THE MAX NEW YORK LIFE INSURANCE COMPANY LTD. (NOW KNOWN AS MAX LIFE INSURANCE COMPANY LIMITED). 144 RESPONDENT IN ASSESSEES APPEAL AND NO QUESITON OF SUPPORTING THE ORDER OF CIT(A) ON THE GROUND DECIDED AGAINST THE RESPONDENT ARISE. IN VIEW OF THIS FACT, PLEA OF THE LEARNED DR CANNOT BE ACCEPTED UND ER RULE 27 AS IT IS NOT A CASE WHERE RULE 27 IS APPLICABLE IN RESPECT OF THIS ISSUE. EVEN OTHERWISE, IT IS NOT A CASE WHERE THE REVENUE HAS TAKEN A GROUND IN THE CROSS OBJECTION FILED AGAINST THE ORDER OF CIT(A) ON THIS ISSUE. EVEN OTH ERWISE, REVENUE CANNOT FILE AN APPEAL WITHOUT GETTING A DIRECTION U/S 253(2) FR OM THE PRINCIPAL COMMISSIONER OR COMMISSIONER. BEFORE US, COPY OF AN Y SUCH DIRECTION RAISING THIS ISSUE HAS NOT BEEN FILED. THUS, WE DISMISS THE PLEA OF LEARNED CIT DR RAISED UNDER RULE 27 OF ITAT RULES. 102. BEFORE CONCLUDING, WE APPRECIATE THE SUBMISSIO NS MADE AND SINCERE EFFORT PUT BY THE LEARNED DR FOR MAKING US AWARE OF VARIOUS PROVISIONS OF INCOME TAX ACT, INSURANCE ACT, 1938 AS WELL AS IRDA ACT, 1999 WHICH ARE APPLICABLE FOR COMPUTING THE INCOME OF AN ASSESSEE CARRYING ON THE LIFE INSURANCE BUSINESS. THE MANNER HE PRESENTED THE CAS E AS WELL AS THE ARGUMENTS BEFORE US IS LAUDABLE. IN OUR VIEW, FOR PREPARING THE SUBMISSION AND THE ARGUMENTS BEFORE US HE WOULD HAVE BURNT THE CANDLE AT THE MIDNIGHT FOR VARIOUS DAYS. ALTHOUGH THE HEARING WENT ON CON TINUOUSLY FOR FOUR DAYS, FOR ABOUT THREE TO FOUR HOURS, WE DID NOT FIND ANY TIREDNESS ON THE FACE OF THE LEARNED CIT-DR. WE ALWAYS FOUND HIM FRESH AND CHEE RFUL. DURING OUR WORKING IN THE ITAT, WE SELDOM FIND SUCH LABOURIOUS AND HARDWORKING CIT- DR , WHO HAVE COMMAND OVER THE SUBJECT. MAX NEW YORK LIFE INSURANCE COMPANY LTD. (NOW KNOWN AS MAX LIFE INSURANCE COMPANY LIMITED). 145 103. IN THE RESULT, THE APPEAL FILED BY THE ASSESEE IS PARTLY ALLOWED AND THE CORSS OBJECTION OF THE REVENUE STANDS DISMISSED. ORDER PRONOUNCED IN THE OPEN COURT ON 5 TH DAY OF JANUARY, 2018. SD/- SD/- (BEENA A PILLAI) (P K BANSAL) JUDICIAL MEMBER VICE-PRESIDENT MUMBAI; DATED: 5 TH JANUARY, 2018 SA COPY OF THE ORDER FORWARDED TO : 1. THE APP ELL ANT. 2. THE RESPONDENT. 3. T HE CIT(A), DELHI 4. THE CIT 5. DR E , ITAT, DELHI BY ORDER, #TRUE COPY # ASSISTANT REGISTRAR INCOME TAX APPELLATE TRIBUNAL, MUMBAI
