DCIT 1(1)(2), MUMBAI V. HDFC STANDARD LIFE INSURANCE COMPANY LTD, MUMBAI

ITA 4078/MUM/2015

• Counselvise Citation: [2017] 126 COUNSELVISE.COM (IT) 9847 (ITAT-MUMBAI)
• Duration Of Justice: 2 year(s) 1 month(s) 23 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 23-08-2017
• Appeal Filed By: Department
• Order Result: Allowed
• Bench Allotted: C
• Assessment Year: 2010-2011
• Appeal Filed On: 30-06-2015
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Department Lawyers: H N SINGH
• Keywords: Capital asset; Bonafide belief; Valuation report
• Section: 234B; 14A; 28

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL C BENCH, MUMBAI BEFORE SHRI SAKTIJIT DEY , JUDICIAL MEMBER AND SHRI RA M IT KOCHAR , ACCOUNTANT MEMBER ITA NO. 4078/MUM./2015 ( ASSESSMENT YEAR : 20 10 11 ) DY. COMMISSIONER OF INCOME TAX CIRCLE 1(1)(2), MUMBAI . APPELLANT V/S HDFC STANDARD LIFE INSURANCE CO. LTD. RAMON HOUSE, H.T. PAREKH MARG 165, BACKBAY RECLAMATION MUMBAI 400 020 PAN AAACH8755L . RESPONDENT C.O. NO.34/MUM./2017 ( ARISING OUT OF ITA NO. 4078/MUM./2015 ) ( ASSESSMENT YEAR : 2010 11 ) HDFC STANDARD LIFE INSURANCE CO. LTD. RAMON HOUSE, H.T. PAREKH MARG 165, BACKBAY RECLAMATION MUMBAI 400 020 PAN AAACH8755L . CROSS OBJECTOR (ORIGINAL RESPONDENT) V/S DY. COMMISSIONER OF INCOME TAX CIRCLE 1(1)(2), MUMBAI . RESPONDENT (ORIGINAL APPELLANT) ITA NO. 4079/MUM./2015 ( ASSESSMENT YEAR : 2011 12 ) DY. COMMISSIONER OF INCOME TAX CIRCLE 1(1)(2), MUMBAI . APPELLANT V/S HDFC STANDARD LIFE INSURANCE CO. LTD. RAMON HOUSE, H.T. PAREKH MARG 165, BACKBAY RECLAMATION MUMBAI 400 020 PAN AAACH8755L . RESPONDENT 2 HDFC STANDARD LIFE INSURANCE CO. LTD. C.O. NO.35/MUM./2017 ( ARISING OUT OF ITA NO. 4079/MUM./2015 ) ( ASSESSMENT YEAR : 2011 12 ) HDFC STANDARD LIFE INSURANCE CO. LTD. RAMON HOUSE, H.T. PAREKH MARG 165, BACKBAY RECLAMATION MUMBAI 400 020 PAN AAACH8755L . CROSS OBJECTOR (ORIGINAL RESPONDENT) V/S DY. COMMISSIONER OF INCOME TAX CIRCLE 1(1)(2), MUMBAI . RESPONDENT (ORIGINAL APPELLANT) REVENUE BY : SHR I H.N. SINGH , CIT.DR ASSESSEE BY : MS. AARTI VISSANJI DATE OF HEARING 01 .0 8 .2017 DATE OF ORDER 23.08.2017 O R D E R PER BENCH AFORESAID APPEALS AND CROSS OBJECTIONS ARE DIRECTED AGAINST TWO SEPARATE ORDERS PASSED BY THE LEARNED COMMISSIONER (APPEALS) 2, MUMBAI, FOR THE ASSESSMENT YEARS 2010 11 AND 2011 12. ITA NO.4078/MUM./2015 ITA NO.4079/MUM./2015 REVENUES APPEALS 2 . THE GROUNDS RAISED WHICH ARE COMMON IN BOTH THE APPEALS ARE AS UNDER: 1. WHETHER ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE LD.CIT(A) WAS CORRECT IN INTERPRETING THE PROVISIONS OF SECTION 44 OF THE I.T. ACT READ WITH RULE 2 OF THE FIRST SCHEDULE ALONG WITH PROVISIONS OF INSURANCE ACT, 1938, INSURANCE REGULATORY AND DEVELOPMENT AUTHORITY ACT 1999 AND 3 HDFC STANDARD LIFE INSURANCE CO. LTD. REGULATION THERE UNDER AND ACCORDINGLY ALLOWING ADJUSTMENT FROM THE 'SURPLUS' WORKED AS PER 'ACTUARIAL VALUATION' (AND AS SHOWN BY THE ASSESSEE IN FORM - 11 IN VIOLATION OF THE RATIO OF THE APEX COURT IN THE CASE OF LIC VS. CIT 51 ITR 778?' 2. WHETHER ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE LCICIT(A) WAS CORRECT IN INTERPRETING THAT ON ACCOUNT OF 'LEGISLATION BY INCORPORATION', 'ONLY' THE 'UN - AMENDED' INSURANCE ACT 1938 AND THE REGULATIONS THERE UNDER BECAME PART OF SECTIN 44 R.W. RULE 2 OF THE FIRST SCHEDULE OF THE LT. RULES.' 3. WHETHER ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE LD.CIT(A) WAS CORRECT IN INTERPRETING SECTION 44 OF THE I.T. ACT READ WITH RULE 2 OF THE FIRST SCHEDULE THAT THE LEGISLATURE CONSCIOUSLY OMITTED INCORPORATION OF THE PROVISION OF INSURANCE REGULATORY AND DEVELOPMENT AUTHORITY ACT 1999 AND REGULATION MADE THERE UNDER IN RULE 2 OF THE FIRST SCHEDULE WHICH 'REFERS' ONLY TO UN - AMENDED INSURANC E ACT 1938 AND REGULATIONS MADE THERE UNDER?' 4. WHETHER ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE LD.CIT(A) FAILED TO APPRECIATE THE PROVISIONS OF SECTION 28 OF INSURANCE REGULATORY AND DEVELOPMENT AUTHORITY ACT 1999 WHICH CLARIFIES THAT PROVISIONS OF IRDA ACT AND ITS REGULATION AS 'LEGISLATION BY REFERENCE' IN SECTION 44 OF THE LT. ACT READ WITH RULE 2 OF THE FIRST SCHEDULE OF THE I.T. RULES? 5. WHETHER ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE LD.CIT(A) WAS CORRECT IN ALLOWING RELIEF TO THE ASSESSEE BY HOLDING THAT SURPLUS AVAILABLE IN SHARE HOLDER ACCOUNT IS NOT TO BE TAXED SEPARATELY AS INCOME FROM OTHER SOURCES AND AT THE NORMAL CORPORATE RATE AND HOLDING THAT SURPL US 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 HOLDERS ACCOUNT AND THEN TAXING THIS NET SURPLUS ARRIVED AT THE RATE SPECIFIED U/S 115B OF THE ACT? 6. WHETHER ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE LD.CIT(A) WAS JUSTIFIED IN IGNORING THE FACT THAT EVEN THE ASSESSEE INSURANCE COMPANY USES THE NOMENCLATURE EXPENSES OTHER THAN THOS E DIRECTLY RELATED TO INSURANCE BUSINESS' WHILE COMPUTING THE SURPLUS IN THE SHARE HOLDER ACCOUNT AND TREATING IT AS PART OF INSURANCE BUSINESS? 7. WHETHER ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE LD.CIT(A) WAS CORRECT IN CONCLUDING THAT TRANSFER FROM 4 HDFC STANDARD LIFE INSURANCE CO. LTD. SHARE HOLDER ACCOUNT TO POLICY HOLDER'S ACCOUNT AND SHOWN AS PART OF 'SURPLUS' IN THE 'ACTUARIAL VALUATION' WAS ONLY TRANSFER OF CAPITAL ASSET AND NOT TAXABLE U/ S.44 OF THE ACT R.W. RULE 2 OF THE FIRST SCHEDULE?' 8 . WHETHER ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE LD.CIT(A) WAS CORRECT IN ALLOWING RELIEF TO THE ASSESSEE BY HOLDING THAT 'SURPLUS' AVAILABLE BOTH IN POLICY HOLDER'S ACCOUNT AND SHARE HOLDERS ACCOUNT IS TO BE CONSOLIDATED AND ONLY 'NET SURPLUS' IS TO BE TAXED AS INCOME FROM INSURANCE BUSINESS' 9. 'WHETHER ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE LD.CIT(A) WAS JUSTIFIED IN HOLDING THAT PROVISIONS OF SECION 14A OF THE ACT DID NOT APPLY TO INSURANCE BUSINESS, EVEN WHEN THE ASSESSEE HAS CLAIMED EXE MPTED INCOME U/S. 10 OF THE I.T. ACT. 10. WHETHER ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE LD.CIT(A) WAS JUSTIFIED IN GIVING RELIEF TO THE ASSESSEE ON CHARGE OF INTEREST U/S.234B OF THE ACT ON ITS PERCEPTION OF PECULIAR CIRCUMSTANCES OF THE CASE? 11. WHETHER ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE LD.CIT(A) WAS CORRECT IN FAILING TO APPRECIATE THAT NEGATIVE RESERVE HAS AN IMPACT OF REDUCING THE 'TAXABLE SURPLUS' AS PER FORM - 1 AND THEREFORE CORRESPONDING ADJUSTMENT FOR 'NEGATIVE RESERVE' NEED TO BE MADE TO ARRIVE AT 'TAXABLE SURPLUS?' 10 . WE HAVE HEARD SHRI H.N. SINGH, LEARNED DEPARTMENTAL REPRESENTATIVE APPEARING FOR THE REVENUE AND MS. AARTI VISSANJI, LEARNED COUNSEL APPEARING FOR THE ASSESSEE. 11 . LEARNED DEPARTMENTAL REPR ESENTATIVE FAIRLY SUBMITTED BEFORE US , ALL THE ISSUES RAISED IN THE APPEALS OF THE REVENUE ARE COVERED BY THE DECISION OF THE TRIBUNAL IN ASSESSEES OWN CASE FOR THE ASSESSMENT 5 HDFC STANDARD LIFE INSURANCE CO. LTD. YEAR 2002 03 AND 2009 10, IN ITA NO.2203/MUM./2012 AND OTHERS DATED 20 TH SEPTEMBER 2013. 12 . LEARNED AUTHORISED REPRESENTATIVE SUBMITTED, NOT ONLY THE ISSUES RAISED BY THE DEPARTMENT IN GROUNDS OF APPEAL ARE COVERED BY THE DECISION OF THE TRIBUNAL IN ASSESSEES OWN CASE , BUT , THE TRIBUNAL HAS CONSISTENTLY TAKEN SIMILAR VIEW IN RE SPECT OF OTHER INSURANCE COMPANIES AS WELL. IN THIS REGARD, THE LEARNED COUNSEL FOR THE ASSESSEE RELIED UPON THE DECISION S OF THE TRIBUNAL IN ASSESSEES OWN CASE AS WELL AS REFERRED TO THE FOLLOWING CASE S : 1 . ICICI PRUDENTIAL CO. LTD. 14 ITD 41; AND 2 . SBI LI FE INSURANCE CO. LTD. V/S ACIT, ITA NO.4066/MUM./2011 AND OTHERS, DATED 23 RD DECEMBER 2016. 6 . WE HAVE HEARD THE RIVAL CONTENTIONS AND PERUSED THE MATERIAL AVAILABLE ON RECORD. UNDISPUTEDLY, THE ASSESSEE COMPANY IS ENGAGED IN THE BUSINESS OF LIFE INSURANCE AND COMPUTATION OF ITS INCOME IS GOVERNED BY SECTION 44 R/W RULE CONTAINED UNDER FIRST SCHEDULE. IT IS ALSO A FACT THAT THE ASSESSEE IS COVERED UNDER IRDA REGULATIONS. THE ISSUE RAISED IN GROUNDS NO.1 AND 4, BY THE REVENUE IS IN RESPECT OF ADJUSTMENT OF EA RLIER YEARS SURPLUS WORK ED OUT AS PER ACTUARIAL VALUATION. AS COULD BE SEEN, IDENTICAL ISSUE AROSE IN ASSESSEES OWN CASE IN ASSESSMENT YEAR 2008 09, THE TRIBUNAL FOLLOWING ITS OWN CASE 6 HDFC STANDARD LIFE INSURANCE CO. LTD. IN ICICI PRUDENTIAL INSURANCE CO. LTD. V/S ACIT, [2013] 140 ITD 41 (MU M.) (TRIB.) , HELD AS UNDER: 2.5.5. SIXTH GROUND OF APPEAL IS ABOUT ADJUSTMENT OF EARLIER YEARSSURPLUS.WHILE COMPLETING THE ASSESSMENT FOR THE YEAR UNDER CONSIDERATION,THE AO ASSESSED ENTIRE SURPLUS APPEARING IN THE BOOKS OF ACCOUNTS AS ON 31.03.2008 WITHOUT EXCLUDING THE SURPLUS DETERMINED AS ON THE LAST DAY OF THE PREVIOUS FINANCIAL YEAR I.E. ON 31.03.2007.ADJUSTMENT OF EARLIER YEAR S SURPLUS,WHILE COMPUT ING INCOME OF A PARTICULAR YEAR WAS DEALT BY THE TRIBUNAL IN THE CASE OF IPLCI AS UNDER: RULE - 2 IS THE MAIN COMPUTATION PROVISION WHICH IS APPLICABLE TO THE LIFE INSURANCE BUSINESS. AS PER RULE - 2 THE PROFITS AND GAINS OF LIFE INSURANCE BUSINESS SHALL BE TAKEN TO BE THE ANNUAL AVERAGE OF THE SURPLUS ARRIVED AT BY ADJUSTING THE SURPLUS OR DEFICIT DIS CLOSED BY THE ACTUARIAL VALUATION MADE IN ACCORDANCE WITH THE INSURANCE ACT,IN RESPECT OF THE LAST INTER VALUATION PERIOD SO AS TO EXCLUDE ANY SURPLUS OR DEFICIT INCLUDED THEREIN WHICH WAS MADE IN ANY INTER VALUATION PERIOD.ACCORDING TO THE RULE THE SURPLU S OR DEFICIT BETWEEN TWO VALUATION PERIODS CAN ONLY BE TAKEN AS INCOME OR LOSS OF THE PERIOD. THUS IF THERE IS A SURPLUS IN EARLIER VALUATION OF 'Y' AMOUNT AND SURPLUS IN THE LATER VALUATION AT 'X' AMOUNT, THE DIFFERENCE BETWEEN X & Y WILL BE THE INCOME OF THE INTER VALUATION PERIOD FOR THE PURPOSE OF RULE 2. THEREFORE, ACTUARIAL EVALUATION DONE IN RESPECTIVE PERIODS HAS IMPORTANCE. BEFORE THE IRDA ACT, ONLY LIFE INSURANCE CORPORATION WAS PERMITTED TO INVOLVE ITSELF IN LIFE INSURANCE BUSINESS.THE ACTUARIAL VALUATION WAS NOT UNDERTAKEN EVERY YEAR BUT ONCE IN THREE YEARS.THEREFORE, THE RULE PROVIDES FOR ONLY AVERAGE OF THE SURPLUS TO ARRIVE BETWEEN TWO INTER VALUATION PERIODS. HOWEVER, WITH THE ENACTMENT OF IRDA ACT 1999 AND REGULATIONS THEREIN NOT ONLY THE PR IVATE PARTICIPANTS WERE PERMITTED TO DO BUSINESS BUT PRESENTATION OF ACCOUNTS AND REPORTS WERE MODIFIED.. .THE PROFITS AND GAINS OF LIFE INSURANCE BUSINESS SHALL BE TAKEN TO BE THE ANNUAL AVERAGE OF THE SURPLUS ARRIVED AT BY ADJUSTING THE SURPLUS OR DE FICIT DISCLOSED BY THE ACTUARIAL VALUATION MADE IN ACCORDANCE WITH THE INSURANCE ACT, 1938,IN RESPECT OF THE LAST INTER - VALUATION PERIOD ENDING BEFORE THE COMMENCEMENT OF THE ASSESSMENT YEAR,SO AS TO EXCLUDE FROM IT ANY SURPLUS OR DEFICIT INCLUDED THEREIN WHICH WAS MADE IN ANY EARLIER INTER - VALUATION PERIOD. 7 HDFC STANDARD LIFE INSURANCE CO. LTD. RESPECTFULLY FOLLOWING THE ABOVE GROUND NO.6 IS DECIDED IN FAVOUR OF THE ASSESSEE. 7 . THE LEARNED COMMISSIONER (APPEALS) WHILE DECIDING THE ISSUE IN FAVOUR OF ASSESSEE HAS FOLLOWED THE AFORESAID DECISI ON OF THE CO ORDINATE BENCH IN ASSESSEES OWN CASE. SINCE , THE ISSUE HAS ALREADY BEEN DECIDED IN ASSESSEES OWN CASE BY THE TRIBUNAL AND NO CONTRARY FACTS AND MATERIAL HAVE BEEN BROUGHT TO OUR NOTICE BY THE LEARNED DEPARTMENTAL REPRESENTATIVE , WE ARE INCLINED TO FOLLOW THE DECISION OF THE CO ORDINATE BENCH AS REFERRED TO ABOVE AND UPHOLD THE ORDER OF THE LEARNED COMMISSIONER (APPEALS). 8 . IN GROUND NO.5, THE REVENUE HAS CHALLENGE D THE DECISION OF THE LEARNED COMMISSIONER (APPEALS) WITH REGARD TO TAXABILITY OF INCOME ARISING IN SHARE HOLDERS ACCOUNT. NOTABLY, IDENTICAL ISSUE AROSE IN ASSESSEES OWN CASE AS REFERRED TO ABOVE AND WHILE DECIDING THE ISSUE THE TRIBUNAL FOLLOWED THE DECISION OF ICICI PRUDENTIAL INSURANCE CO. LTD. (SUPRA) AND HELD THAT INCOME ARISING IN SHARE HOLDERS ACCOUNT CANNOT BE TAXED AS INCOME FROM OTHER SOURCES BUT HAS TO BE ASSESSED AS INCOME FROM BUSINESS OR PROFESSION CONSIDERING THE FACT THAT THE BUSINESS CARRIED OUT BY THE ASSESSEE IS GOVERNED BY THE PROVISIONS OF SECTION 44 . SINCE THE LEARNED COMMISSIONER (APPEALS) HAS DECIDED THE ISSUE FOLLOWING THE DECISION OF THE TRIBUNAL CITED SUPRA, WE DO NOT FIND 8 HDFC STANDARD LIFE INSURANCE CO. LTD. ANY INFIRMITY IN THE ORDER OF THE LEARNED COMMISSIONER (APPEALS). THIS GROUND IS DISMISSED. 9 . IN GROUND NO.7, THE REVENUE HAS CHALLENGED THE DECISION OF THE LEARNED COMMISSIONER (APPEALS) IN HOLDING THAT TRANSFER OF MONEY FROM SHARE HOLDERS ACCOUNT TO THE POLICY HOLDERS ACCOUNT IS IN THE NATURE OF TRANSFER OF CAPITAL ASSET, HENCE, NOT TAXABLE UNDER SECTION 44. NOTABLY, THE AFOR ESAID ISSUE AROSE IN ASSESSEES OWN CASE FOR THE PRECEDING ASSESSMENT YEARS . W HILE DECIDING THE ISSUE THE TRIBUNAL FOLLOWING ITS OWN ORDER IN THE CASE OF ICICI PRUDENTIAL INSURANCE CO. LTD. (SUPRA), HELD AS UNDER: 2.5.3. GROUND OF APPEAL NO.4 IS ABOUT TRANSFER OF RS.324.82 CRORES FROM SHARE - HOLDERSACCOUNT TO THE POLICY - HOLDERSACCOUNT.WE FIND THAT SIMILAR ISSUE HAS BEEN ADJUDICATED BY ITAT MUMBAI IN THE CASE OF IPLIC(SUPRA).HOLDING THAT TRANSFER OF FUNDS FROM SHARE - HOLDERS ACCOUNT TO THE POLICY - HOLDERSACCOUNT DID NOT RESULT IN INCOME CHARGEABLE TO TAX,TRIBNAL,IN THE MATTER OF IPLIC, (SUPRA), HELD AS UNDER: .AS SEEN FROM THE ORDERS OF THE AUTHORITIES, THE 'TOTAL SURPLUS' PREPARED UNDER REGULATION 8 WAS TAKEN AS BASIS IGNORING THE FORM - I OF RE GULATION 4. WHILE ACCEPTING THE LD.CIT DR ARGUMENT THAT FOR THE PURPOSES OF LIFE INSURANCE BUSINESS THE ACT PROVIDES FOR SURPLUS OF VALUATION TO BE TAXED AT LESSER RATE, WE CANNOT ACCEPT THE ARGUMENT THAT SURPLUS IS TOTAL SURPLUS INCLUDING TRANSFERS FROM S HARE HOLDER'S ACCOUNT. BASICALLY TRANSFERS ARE TAX NEUTRAL AS A CREDIT IN ONE ACCOUNT GETS CANCELLED BY DEBIT IN OTHER ACCOUNT WHEN ACCOUNTS ARE CONSOLIDATED. WHAT THE RULE.2 PRESCRIBED WAS ONLY 'AVERAGE SURPLUS' ARRIVED BY ADJUSTING THE SURPLUS DISCLOSED IN THE ACTUARIAL VALUATION MADE WITH REGARD TO THE INSURANCE ACT, 1938 IN RESPECT OF INTER VALUATION PERIOD. ASSESSEE IN THE COURSE OF THE ASSESSMENT PROCEEDINGS HAS FURNISHED GENERAL BALANCE SHEET IN FORM - A. 9 HDFC STANDARD LIFE INSURANCE CO. LTD. ..IN OUR OPINION WHAT ASSESSEE HAS DONE IN R ECONCILING THE IRDA FORMAT WITH THAT OF OLD INSURANCE FORM IS CORRECT AND ACCORDINGLY THE LOSS DISCLOSED IN THE COMPUTATION OF INCOME IS ACCORDING TO THE ACTUARIAL SURPLUS/DEFICIT UNDER THE INSURANCE ACT, 1938 PRESCRIBED UNDER RULE 2 OF THE FIRST SCHEDULE PART - A. IN VIEW OF THIS, WE ARE OF THE OPINION THAT INSISTENCE BY AO TO BRING TO TAX THE ENTIRE AMOUNT SHOWN UNDER THE NEW REGULATIONS INCLUDING TRANSFER FROM SHARE - HOLDERS ACCOUNT IS NOT CORRECT. INSTEAD OF AO IN TAKING THE SURPLUS AT REGULATION 8(1)(A) WHICH IS THE ACTUARIAL SURPLUS / DEFICIT FOR THE YEAR TOOK THE AMOUNT AS DISCLOSED AT REGULATION 8 (1) (F) (TOTAL SURPLUS AFTER TRANSFER FROM SHARE - HOLDERS ACCOUNT) WHICH IS NOT AT ALL CORRECT. RESPECTFULLY FOLLOWING THE ORDER OF THE IPLCI(SUPRA)WE DECIDE GROUND NO.4 IN FAVOUR OF THE ASSESSEE. 10 . SINCE , THE LEARNED COMMISSIONER (APPEALS) HAS FOLLOWED THE AFORESAID DECISION OF THE T RIBUNAL IN ASSESSEES OWN CASE AND NO CONTRARY FACTS HAVE BEEN BROUGHT TO OUR NOTICE , WE DO NOT FIND ANY REASON TO INTERF ERE WITH THE DECISION OF THE LEARNED COMMISSIONER (APPEALS) . T HIS GROUND IS DISMISSED. 11 . GROUND NO.8 IS IN RELATION TO THE DECISION OF THE LEARNED COMMISSIONER (APPEALS) IN HOLDING THAT SURPLUS AVAILABLE BOTH IN POLICY HOLDERS ACCOUNT AND SHAREHOLDERS ACCO UNT IS TO BE CONSOLIDATED AND THE NET SURPLUS IS TO BE TAXED AS INCOME FROM INSURANCE BUSINESS. IT IS NOTED BY US THAT IDENTICAL ISSUE AROSE IN ASSESSEES OWN CASE IN THE PRECEDING ASSESSMENT YEAR AND WHILE DECIDING THE ISSUE, THE TRIBUNAL FOLLOW ING ITS OW N DECISION IN THE CASE OF ICICI PRUDENTIAL INSURANCE CO. LTD. (SUPRA), HELD AS UNDER: 10 HDFC STANDARD LIFE INSURANCE CO. LTD. 2.5.4. FIFTH GROUND IS ABOUT SETOFF OF DEFICIT IN SHARE - HOLDERS ACCOUNT.WE FIND THAT IDENTICAL ISSUE HAD ARISEN IN THE CASE OF IPLCI(SUPRA).DECIDING THE ISSUE IN FAVOUR OF THE ASSESSEE,TRIBUNAL HELD THAT IRDA REGULATIONS SPECIFICALLY REQUIRED TO MAINTAIN THE POLICY - HOLDERS ACCOUNT AND THE SHARE - HOLDERSACCOUNT SEPARATELY AND PERMITTED TRANSFER OF FUNDS FROM SHARE - HOLDERS ACCOUNT TO POLICY - HOLDERS ACCOUNT AS AND WHEN THERE WAS A DEFICIT IN POLICY - HOLDERS ACCOUNT,THAT HON'BLE BOMBAY HIGH COURT HAD HELD THAT AS A POLICY, COMPANY WAS TRANSFERRING FUNDS/ASSETS FROM SHAREHOLDERS ACCOUNT TO POLICY - HOLDERS ACCOUNT EVEN DURING THE YEAR PERIODICALLY AS AND WHEN THE ACT UARIAL VALUATION WAS ARRIVED AT IN POLICY - HOLDERS ACCOUNT,THAT MOST OF THE COMPANIES WERE REQUIRED TO SUBMIT QUARTERLY ACCOUNTS UNDER THE COMPANY LAW,THAT THERE WAS REQUIREMENT OF ACTUARIAL VALUATION REPORT PERIODICALLY AND ACCORDINGLY ASSESSEE WAS TRANSF ERRING FUNDS FROM THE SHARE - HOLDERS ACCOUNT TO POLICY - HOLDERS ACCOUNT,THAT THE INSURANCE BUSINESS WOULD NOT YIELD THE REQUIRED PROFITS IN THE INITIAL 7 TO 10 YEARS,THAT LOT OF CAPITAL HAD TO BE INFUSED SO AS TO BALANCE THE DEFICIT IN THE POLICY HOLDER'S ACCOUNT,THAT THE ASSESSEE HAD ISSUED FRESH CAPITAL TO THE EXTENT OF RS.250 CRORES AND TRANSFERRED FUNDS TO THE EXTENT OF RS.233 CRORES FROM THE SHARE - HOLDERS ACCOUNT TO POLICY - HOLDERS ACCOUNT IN THAT YEAR,THAT ASSESSEE WAS HAVING ONLY ONE BUSINESS OF LIF E INSURANCE, THAT THE ENTIRE TRANSACTIONS BOTH UNDER THE POLICY - HOLDERS AND SHARE - HOLDERS ACCOUNT PERTAINED TO THE LIFE INSURANCE BUSINESS ONLY,THAT THE ASSESSEE WAS NOT PERMITTED TO DO ANY OTHER BUSINESS,THAT ONCE ASSESSEE WAS IN THE LIFE INSURANCE BUSI NESS THE COMPUTATION HAD TO BE MADE IN ACCORDANCE WITH THE RULE - 2 AS PER PROVISIONS OF SECTION 44,THAT BOTH THE POLICY - HOLDERS AND SHARE HOLDER'S ACCOUNT HAD TO BE CONSOLIDATED INTO ONE AND TRANSFER FROM ONE ACCOUNT TO ANOTHER WAS TAX NEUTRAL,THAT THE AO HAD TAXED THE SURPLUS AFTER THE FUNDS HAD BEEN TRANSFERRED FROM SHARE - HOLDER'S ACCOUNT TO THE POLICY - HOLDERS ACCOUNT AT THE GROSS LEVEL WHILE IGNORING SUCH TRANSFER IN SHARE HOLDER'S ACCOUNT,THAT AS PER THE PROVISIONS OF SECTION 44 OF ACT HEADS OF INCOME LIKE INCOME FROM OTHER SOURCES,CAPITAL GAINS, HOUSE PROPERTY OR EVEN INTEREST ON SECURITIES DID NOT COME INTO PLAY AND ONLY FIRST SCHEDULE HAD TO BE INVOKED TO ARRIVE AT THE PROFIT,THAT BOTH ACCOUNTS - THE POLICYHOLDERS AND SHARE - HOLDERS ACCOUNT - HAD TO BE CONSOLIDATED FOR THE PURPOSE OF ARRIVING AT THE DEFICIT OR SURPLUS.WE FURTHER FIND THAT THE HONBLE BOMBAY COURT IN THE CASE OF IPLIC HAS ALSO DEALT WITH ISSUE AS HAS HELD THAT ANY DEFICIT IN THE SHARE - HOLDERS ACCOUNT OUGHT TO BE SET OFF AGAINST THE PO LICY - HOLDERS ACCOUNT. RESPECTFULLY FOLLOWING THE ABOVE,WE DECIDE GROUND NO.5 IN FAVOUR OF THE ASSESSEE. 11 HDFC STANDARD LIFE INSURANCE CO. LTD. 12 . RESPECTFULLY FOLLOWING THE DECI SION OF THE CO ORDINATE BENCH ( SUPRA ) , WE UPHOLD THE DECISION OF THE LEARNED COMMISSIONER (APPEALS) BY DISMISSING THE GROUND RAISED. 13 . IN GROUND NO.9, THE REVENUE HAS CHALLENGED THE DECISION OF THE LEARNED COMMISSIONER (APPEALS) WITH REGARD TO THE DISALLOWANCE MADE UNDER SECTION 14A. 14 . AS COULD BE SEEN, THE LEARNED COMMISSIONER (APPEALS) WHILE DECIDING THE ISSUE HELD THAT IN VIEW OF SPECIAL PROVISIONS OF SECTION 44 OF THE ACT, PROVISIONS OF SECTION 14A, IS NOT ATTRACTED. IT IS WORTH MENTIONING, SIMILAR ISSUE AROSE IN ASSESSEES OWN CASE IN THE PRECEDING ASSESSMENT YEAR S AND THE TRIBUNAL WHILE DECIDING THE ISSUE FOLLOWED ITS OWN DECISION IN ICICI PRUDENTIAL INSURANCE CO. LTD. (SUPRA) AND HELD THAT SINCE ASSESSEES INCOME IS TO BE COMPUTED UNDER SECTION 44, NO DISALLOWANCE UNDER SECTION 14A CAN BE MADE. RESPECTFULLY FOLLOWING THE DECISION OF CO ORDINATE BENCH CITED SUPRA, WE UPHOLD THE DECISION OF THE LEARNED COMMISSIONER (APPE ALS) ON THIS ISSUE. THIS GROUND IS DISMISSED. 15 . IN GROUND NO.10, THE REVENUE HAS CHALLENGED THE DECISION OF THE LEARNED COMMISSIONER (APPEALS) ON LEVY OF INTEREST UNDER SECTION 234B OF THE ACT. 12 HDFC STANDARD LIFE INSURANCE CO. LTD. 16 . IT IS EVIDENT, WHILE DECIDING THE ISSUE OF CHARGEABILITY OF IN TEREST UNDER SECTION 234B, THE LEARNED COMMISSIONER (APPEALS) HELD THAT THE LEVY OF INTEREST UNDER SECTION 234B IS MANDATORY, HENCE, DIRECTED THE ASSESSING OFFICER TO REVISE THE COMPUTATION OF INTEREST LEVIABLE WHILE GIVING EFFECT TO THE APPEAL ORDER. WE F AIL TO UNDERSTAND, HOW THE DEPARTMENT CAN HAVE ANY GRIEVANCE AGAINST THE AFORESAID DIRECTION OF THE LEARNED COMMISSIONER (APPEALS). IN ANY CASE OF THE MATTER, WHILE DECIDING IDENTICAL ISSUE IN ASSESSEES OWN CASE FOR PRECEDING ASSESSMENT YEAR S , THE TRIBUNA L CONSIDE RED THE FACT THAT ASSESSEE USED TO CALCULATE ADVANCED TAX ON THE BASIS OF ITS RETURN OF INCOME FILED FOR THE PAST YEARS AND THE INCOME LIKELY TO BE EARNED IN THE IMPUGNED ASSESSMENT YEAR, HAD A BONAFIDE BELIEF THAT IT WAS NOT LIABLE TO PAY ADVANCE TAX. THEREFORE, THE TRIBUNAL HELD THAT INTEREST IS NOT LEVIABLE UNDER SECTION 234B OF THE ACT. FACTS IN THE IMPUGNED ASSESSMENT YEAR ARE MORE OR LESS IDENTICAL . T HAT BEING THE CASE NO INTEREST UNDER SECTION 234B IS LEVIABLE. THIS GROUND IS DISMISSED. 17 . IN GROUND NO.11, THE REVENUE HAS CHALLENGED THE DECISION OF THE LEARNED COMMISSIONER (APPEALS) IN HOLDING THAT NEGATIVE RESERVE DOES NOT GIVE RISE TO ANY SURPLUS OR TAXABLE INCOME AT THE HANDS OF THE ASSESSEE. 13 HDFC STANDARD LIFE INSURANCE CO. LTD. 18 . BRIEF FACTS ARE, DURING THE ASSESSMENT PROCEEDIN GS, THE ASSESSING OFFICER WHILE VERIFYING THE ACCOUNT S FOUND THAT AS PER THE ACTUARIAL VALUATION IN FORM I, AS AT 31 ST MARCH 2010, AN AMOUNT OF ` 3101,92,92,000, WAS SHOWN AS NEGATIVE RESERVE. HE ALSO FOUND THAT NEGATIVE RESERVE WAS NOT INCLUDED AS PART OF SURPLUS BASED ON ACTUARIAL VALUATION FOR THE YEAR. IN RESPONSE TO QUERRY RAISED BY THE ASSESSING OFFICER, THE ASSESSEE SUBMITTED, NEGATIVE RESERVE REFLECT THE ESTIMATED NET PRESENT VALUE OF FUTURE PROBABLE INCOME BASED ON THE ACTUARIAL CALCULATION AND SUC H INCOME MAY OR MAY NOT BE RECEIVED. IT WAS SUBMITTED, THESE PROFITS WILL BE FORMING PART OF SURPLUS ONLY WHEN THEY ACTUALLY AR I SE. THE ASSESSEE SUBMITTED, IRDA ALSO RECOGNIZES THAT NEGATIVE RESERVE DO NOT REPRESENT SURPLUS. HOWEVER, ASSESSING OFFICER TREA TED THE NEGATIVE RESERVE AS INCOME OF ASSESSEE. 19 . THE LEARNED COMMISSIONER (APPEALS), CONSIDERING THE SUBMISSIONS OF THE ASSESSEE AND HAVING FOUND THAT IN ASSESSEES OWN CASE IN THE PRECEDING ASSESSMENT YEAR S , THE TRIBUNAL HAS HELD THAT NEGATIVE RESERVE SHO ULD NOT FORM PART OF SURPLUS, DELETED THE ADDITION MADE BY THE ASSESSING OFFICER. 20 . AS COULD BE SEEN IN ASSESSEES OWN CASE FOR PRECEDING ASSESSMENT YEAR S , THE TRIBUNAL WHILE DECIDING THE ISSUE HELD AS UNDER: 14 HDFC STANDARD LIFE INSURANCE CO. LTD. 6.3. WE HAVE HEARD RIVAL SUBMISSIONS AND PERUSED THE MATERIAL BEFORE US. WE ARE OF THE OPINION THAT TREATMENT GIVEN TO NEGATIVE RESERVES BY ACTUARY CANNOT BE DISTURBED BY THE AO.HERE,IT WOULD BE USEFUL TO UNDERSTAND MEANING OF NEGATIVE RESERVE IN SIMPLE TERMS.WHILE MAKING ACTUARIAL VALUATION,REQU IREMENT OF RESERVE TO SERVICE INSURANCE POLICIES ISSUED IS ASCERTAINED.SUCH RESERVE (CALLED MATHEMATICAL RESERVE OR VALUE OF LIABILITY)IS EQUAL TO PRESENT VALUE OF FUTURE BENEFITS PAYABLE AND FUTURE EXPENSES TO BE INCURRED LESS PRESENT VALUE OF FUTURE PREM IUM RECEIVABLE. WHEN THE PRESENT VALUE OF FUTURE PREMIUM IS MORE THAN THE PRESENT VALUE OF FUTURE BENEFITS PAYABLE AND FUTURE EXPENSES TO BE INCURRED, THIS AMOUNT BECOMES NEGATIVE, KNOWN AS NEGATIVE RESERVE. IN SIMPLE WORDS, IT MEANS THAT THE INSURANCE C ONTRACTS UNDER CONSIDERATION DO NOT WARRANT ANY PROVISION AND IS,IN FACT,AN ASSET.HOWEVER, IN CERTAIN CIRCUMSTANCES, SUCH AS FOR FOLLOWING IRDA GUIDELINES, INSURERS MAY NOT TREAT POLICIES AS ASSETS AND THEY SET ANY NEGATIVE RESERVES TO ZERO.FOR EXAMPLE,IF AN INSURER HAD TWO POLICIES,ONE WITH A RESERVE OF 100 AND THE OTHER WITH A RESERVE OF - 10,IT MIGHT THINK OF ITS LIABILITIES AT100 RATHER THAN 90 TO TAKE INTO ACCOUNT THE EVENTUALITY IN CASE THE SECOND POLICY LAPSED.THIS PROCESS IS CALLED ELIMINATING NEGAT IVE RESERVES.AS MENTIONED EARLIER,A POLICY WHICH HAS A NEGATIVE RESERVE IS IN NATURE OF AN ASSET. WE FIND THAT IN THE CASE OF ICICI PRUDENTIAL INSURANCE CO.(SUPRA),AO HAD DISALLOWED NEGATIVE RESERVE RELATED TO LIFE INSURANCE BUSINESS OF THE ASSESSEE. IN APPELLATE PROCEEDINGS FAA ALLOWED THE APPEAL OF THE ASSESSEE.AO CHALLENGED THE ORDER OF THE FAA BEFORE THE TRIBUNAL. WE FIND THAT AO HAS RAISED THE FOLLOWING GROUND OF APPEAL IN THE APPEAL FILED BY HIM FOR AY 2006 - 07. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE LEARNED CIT(A)ERRED IN NOT SUBJECTING THE NEGATIVE RESERVE AMOUNTING TO RS.27.27 CRORES IGNORING THE FACTS THAT NEGATIVE RESERVES HAS IMPACT OF REDUCING THE TAXABLE SURPLUS AS PER FROM I. DISPOSING HIS APPEAL,TRI BUNAL HELD AS UNDER: AFTER CONSIDERING THE RIVAL SUBMISSIONS AND EXAMINING THE METHOD OF ACCOUNTING AND THE MANDATE GIVEN BY REGULATIONS TO APPOINT ACTUARIAL ON THE CONCEPT OF MATHEMATICAL RESERVES WE DO NOT SEE ANY REASON TO INTERFERE WITH THE ORDER OF THE CIT(A).THE MATHEMATICAL RESERVE IS A PART OF ACTUARIAL VALUATION AND THE SURPLUS AS DISCUSSED IN FORM - I UNDER REGULATION 4 TAKES IN TO CONSIDERATION THIS MATHEMATICAL RESERVE ALSO. THEREFORE THE ORDER OF THE ORDER OF THE CIT(A) IS APPROVED.MOREOVER THE ASSESSING OFFICER HAS NO POWER TO MODIFY THE AMOUNT AFTER ACTUARIAL VALUATION 15 HDFC STANDARD LIFE INSURANCE CO. LTD. WAS DONE, WHICH WAS THE BASIS FOR ASSESSMENT UNDER RULE 2 OF 1ST SCHEDULE R.W.S.44 OF THE I.T. ACT.THE PRINCIPLE LAID DOWN BY THE HONBLE SUPREME COURT IN LIC VS.CIT 51 ITR 773 ABOUT THE POWER OF THE ASSESSING OFFICER ALSO RESTRICTED THE SCOPE AND ADJUSTMENT BY THE AO. IN VIEW OF THIS UPHOLD THE ORDER OF THE CIT(A) AND DISMISS THE REVENUES GROUND. RESPECTFULLY,FOLLOWING THE ABOVE WE DECIDE EFFECTIVE GROUND OF APPEAL AGAINST TH E AO. 21 . RESPECTFULLY FOLLOWING THE AFORESAID OBSERVATIONS OF THE TRIBUNAL, WE UPHOLD THE ORDER OF THE LEARNED COMMISSIONER (APPEALS) BY DISMISSING THE GROUND RAISED BY THE REVENUE. 22 . IN THE RESULT, REVENUES APPEALS FOR A.Y. 2010 11 AND 2011 12 ARE DISMISSED. C.O. NO.34/MUM./2015 AND C.O. NO.35/MUM./2015 23 . THE FIRST COMMON ISSUE IN BOTH THE CROSS OBJECTIONS ARE WITH REGARD TO LEVY OF INTEREST UNDER SECTION 234B OF THE ACT. WHILE DECIDING GROUND NO.10 IN REVENUES APPEAL FOLLOWING THE ORDER OF THE TRIBUNAL IN ASSESSEES OWN CASE FOR PRECEDING ASSESSMENT YEAR, WE H E LD THAT INTEREST IN THE PRESENT CASE IS NOT LEVIABLE. IN THAT VIEW OF THE MATTER, GROUND NO.1, IN BOTH THE CROSS OBJECTIONS ARE ALLOWED. 24 . THE COMMON ISSUE RAISED IN GROUND NO.2, IN BOTH THE CROSS OBJECTION I S RELATING TO TAXABILITY OF NEGATIVE RESERVES. WHILE DECIDING GROUND NO.11, OF DEPARTMENTS APPEAL IN THE EARLIER PART OF THE ORDER, 16 HDFC STANDARD LIFE INSURANCE CO. LTD. WE H E LD THAT NEGATIVE RESERVES CANNOT BE TREATED AS IN COME OF THE ASSESSEE. IN VIEW OF THE AFORESAID, THIS GROUND RAISED IN THE CROSS OBJECTIONS BEING MERELY OF ACADEMIC INTEREST DO NOT REQUIRE ADJUDICATION, HENCE, DISMISSED. 25 . IN THE RESULT, CROSS OBJECTIONS ARE PARTLY ALLOWED. 26 . TO SUM UP, REVENUES APPEALS ARE DISMISSED AND ASSESSEES CROSS OBJECTIONS ARE PARTLY ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON 23.08.2017 SD/ - RAMIT KOCHAR ACCOUNTANT MEMBER SD/ - SAKTIJIT DEY JUDICIAL MEMBER MUMBAI, DATED: 23.08.2017 COPY OF THE ORDER FORWARDED TO : ( 1 ) THE ASSESSEE; ( 2 ) THE REVENUE; ( 3 ) THE CIT(A); ( 4 ) THE CIT, MUMBAI CITY CONCERNED; ( 5 ) THE DR, ITAT, MUMBAI; ( 6 ) GUARD FILE . TRUE COPY BY ORDER PRADEEP J. CHOWDHURY SR. PRIVATE SECRETARY (DY./ASSTT. REGISTRAR) ITAT, MUMBAI