DCIT, Circle -6 Kolkata, Kolkata V. M/s National Insurance Co. Ltd., Kolkata

ITA 606/KOL/2012

• Counselvise Citation: [2016] 121 COUNSELVISE.COM (IT) 3190 (ITAT-KOLKATA)
• Duration Of Justice: 3 year(s) 9 month(s) 20 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 03-02-2016
• Appeal Filed By: Department
• Bench Allotted: B
• Next Hearing Date: 21-08-2014
• Assessment Year: 2005-2006
• Appeal Filed On: 13-04-2012
• Court: TRIBUNAL
• Department Lawyers: NIRAJ KUMAR
• Assessee Lawyers: SANJAY BHATTACHARJEE
• Keywords: Depreciation; Earning of tax free income; Retrospective amendment
• Section: 43B; 14A

Judgement Text

1 ITA NOS.606&675/KOL/2012-NATIONAL INSURANCE CO.LTD. A.Y.2005-06 & 2006-07 IN THE INCOME TAX APPELLATE TRIBUNAL, BENCH B KOL KATA [BEFORE HONBLE SHRI N.V.VASUDEVAN, JM & SHRI M.B ALAGANESH, AM ] ITA NOS.606&675/KOL/2012 ASSESSMENT YEARS : 2005-06&2006-07 D.C.I.T., CIRCLE-6, -VERSUS- NATIONAL INSURANCE CO.LTD. KOLKATA KOLKATA (PAN:AAACN 9967E) (APPELLANT) (RESPONDENT) FOR THE APPELLANT: SHRI NIRAJ KUMAR, CIT(DR) FOR THE RESPONDENT : SHRI SANJAY BHATTACHARJEE, FCA DATE OF HEARING : 18.01.2016. DATE OF PRONOUNCEMENT : 03.02.2016. ORDER PER N.V.VASUDEVAN, JM: ITA NO.606/KOL/2012 IS AN APPEAL BY THE REVENUE AGA INST THE ORDER DATED 21.12.2011 OF CIT(A)-VI, KOLKATA RELATING TO A.Y.2 005-06. ITA NO.675/KOL/2012 IS ALSO AN APPEAL BY THE REVENUE AGAINST THE ORDER DAT ED 16.01.2012 OF CIT(A)-VI, KOLKATA RELATING TO A.Y.2006-07. BOTH THESE APPEAL WERE HEARD TOGETHER AS THERE ARE COMMON ISSUES ARISING OUT OF THE SAME FACTS AND CIR CUMSTANCES. WE DEEM IT CONVENIENT TO PASS A CONSOLIDATED ORDER. 2. THERE IS A DELAY OF 14 DAYS IN FILING ITA NO.606 /KOL/2012 AND DELAY OF 11 DAYS IN FILING ITA NO.675/KOL/.2012. THE DELAY HAS BEEN EXPLAINED DUE TO INTERVENING HOLIDAYS AND ADMINISTRATIVE DIFFICULTIE S. IN OUR OPINION THE REASONS ARE ADDUCED ARE SUFFICIENT CAUSE FOR THE DELAY IN FILIN G THESE APPEALS. HENCE THE DELAY IN FILING THESE APPEALS ARE CONDONED. ITA NO.606/KOL/2012 (A.Y.2005-06) : 3. THE ONLY GROUND RAISED BY THE REVENUE IN THIS AP PEAL READS AS FOLLOWS :- 2 ITA NOS.606&675/KOL/2012-NATIONAL INSURANCE CO.LTD. A.Y.2005-06 & 2006-07 1. THAT ON THE FACTS AND CIRCUMSTANCES OF THE CASE , LD. CIT(A) ERRED IN LAW DELETING THE ADDITION OF RS.245,09,18,028/- BEING THE PROFIT ON SALE OF INVESTMENTS MADE BY THE ASSESSEE. THE ORDER OF THE CIT(A) SHOULD BE CANCELL ED AND THE ORDER OF THE ASSESSING OFFICER SHOULD BE RESTORED. 4. AS CAN BE SEEN FROM THE GROUNDS, THE REVENUE HA S OBJECTED TO THE DECISION OF THE CIT(APPEALS) IN DELETING THE ADDITION OF PROFIT ON SALE OF INVESTMENTS (RS.245,09, 18,028). 5. THE ASSESSEE IS A COMPANY ENGAGED IN BUSINESS O F INSURANCE OTHER THAN LIFE INSURANCE. IN VIEW OF THE FACT THAT THE ASSESSEE I S IN THE BUSINESS OF INSURANCE OTHER THAN LIFE INSURANCE, ITS INCOME HAD TO BE IN ACCO RDANCE WITH SECTION 44 OF THE INCOME TAX ACT, 1961 (ACT) READ WITH RULE 5 OF THE FIRST SCHEDULE TO THE ACT. THE AO THEREFORE HAS LIMITED POWER AS REGARDS MAKING AD DITIONS OR DISALLOWANCES. IN THE ABOVE-REFERRED RULE 5 OF THE FIRST SCHEDULE, FOR AN D UP TO THE ASSESSMENT YEAR 1998- 99 THERE HAD BEEN A SPECIFIC REQUIREMENT OF TREATIN G THE GAINS ON THE REALISATION OF THE INVESTMENTS AS PART OF BUSINESS PROFIT OF THE CONCE RNED INSURANCE COMPANY. HOWEVER, BY THE FINANCE ACT, 1988 WITH EFFECT FROM THE ASSES SMENT YEAR 1989-90 THE AFORESAID REQUIREMENT OF TREATING THE GAINS ON REALISATION OF INVESTMENTS AS TAXABLE INCOME, WAS OMITTED. THE CBDT VIDE ITS CIRCULAR NO.528 DATED 16 -12-1988 CLARIFIED THE REASON AS TO WHY THE OMISSION HAD BEEN MADE 'TO ENABLE THE GE NERAL INSURANCE CORPORATION AND ITS SUBSIDIARIES TO PLAY A MORE ACTIVE ROLE IN CAPI TAL MARKETS FOR THE BENEFIT OF POLICY- HOLDERS, THE FINANCE ACT HAS AMENDED SUB-RULE (B) O F RULE 5 OF THE FIRST SCHEDULE TO PROVIDE FOR EXEMPTION OF THE PROFITS EARNED BY THEM ON THE SALE OF INVESTMENT'. THE SAME READS THUS: FINANCE ACT, 1988 CIRCULAR NO.528, DATED 16-1219 88 FINANCE ACT, 1988 'LIBERALISATION OF PROVISIONS IN RESPECT OF TAXATIO N OF PROFITS AND DEDUCTION OF TAX AT SOURCE APPLICABLE TO THE GENERAL INSURANCE C ORPORATION AND ITS SUBSIDIARIES 45.1 UNDER THE EXISTING PROVISIONS OF SECTION 44 OF THE INCOME-TAX ACT, THE PROFITS AND GAINS OF ANY INSURANCE BUSINESS IS COMP UTED IN ACCORDANCE, WITH 3 ITA NOS.606&675/KOL/2012-NATIONAL INSURANCE CO.LTD. A.Y.2005-06 & 2006-07 THE RULES CONTAINED IN THE FIRST SCHEDULE TO THE AC T. UNDER RULE 5 OF THIS SCHEDULE, PROFITS AND GAINS OF ANY BUSINESS OF INSU RANCE OTHER THAN LIFE INSURANCE ARE TAKEN TO BE BALANCE OF PROFITS DISCLO SED IN THE ANNUAL ACCOUNTS FURNISHED TO .THE CONTROLLER OF INSURANCE SUBJECT T O CERTAIN ADJUSTMENTS. ONE OF THE ADJUSTMENTS PROVIDED THEREIN IS IN RESPECT OF ANY AMOUNT EITHER WRITTEN OFF OR 'RESERVED IN THE ACCOUNTS TO MEET DEPRECIATION O R LOSS ON THE REALISATION OF INVESTMENT WHICH IS TO BE ALLOWED AS DEDUCTION. SIM ILARLY, ANY SUM CREDITED TO THE ACCOUNT, DUE TO APPRECIATION OF OR GAIN ON THE REALISATION OF INVESTMENT IS TAKEN AS PART OF THE PROFITS AND GAINS OF THE BUSIN ESS. TO ENABLE THE GENERAL INSURANCE CORPORATION AND ITS SUBSIDIARIES TO PLAY A MORE ACTIVE ROLE IN CAPITAL MARKETS FOR THE BENEFIT OF POLICY-HOLDERS, THE FINA NCE ACT HAS AMENDED SUB- RULE (B) OF RULE 5 OF THE FIRST SCHEDULE TO PROVIDE FOR EXEMPTION OF THE PROFITS EARNED BY THEM ON THE SALE OF INVESTMENT. AS A CORO LLARY, IT HAS ALSO BEEN PROVIDED THAT THE LOSSES INCURRED BY THE GENERAL IN SURANCE CORPORATION ON THE REALISATION OF THE INVESTMENT SHALL NOT BE ALLOWED AS A DEDUCTION IN COMPUTING THE PROFITS CHARGEABLE TO LAX. 45.2 THIS AMENDMENT WILL TAKE EFFECT FROM THE 1ST A PRIL, 1989, AND WILL, ACCORDINGLY APPLY IN RELATION TO THE ASSESSMENT YEA R 1989-90 AND SUBSEQUENT YEARS. 6. BEFORE ITS OMISSION WITH EFFECT FROM 1.4.1989. CLAUSE (B) OF RULE 5 STOOD AS UNDER:- '(B) ANY AMOUNT EITHER WRITTEN OFF OR RESERVED IN T HE ACCOUNTS TO MEET DEPRECIATION OF OR LOSS ON THE REALIZATION OF INVESTMENTS SHALL BE ALL OWED AS A DEDUCTION AND ANY SUMS TAKEN CREDIT FOR IN THE ACCOUNTS ON ACCOUNT OF APPR ECIATION OF OR GAINS ON THE REALIZATION OF INVESTMENTS SHALL BE TREATED AS PART OF THE PROF ITS AND GAINS: PROVIDED THAT THE ASSESSING OFFICER IS SATISFIED AB OUT THE REASONABLENESS OF THE AMOUNT WRITTEN OFF OR RESERVED IN THE ACCOUNTS, AS THE CASE MAY BE, TO MEET DEPRECIATION OF OR LOSS ON THE REALIZATION OF INVESTMENT.' 7. ON THE BASIS OF THE AMENDMENT AS CLARIFIED BY THE CBDT, THE ASSESSEE IN ITS RETURN HAD CLAIMED EXEMPTION OF THE NET PROFIT ON S ALE OF INVESTMENTS OF RS.245,09,18,028. 8. THE AO HOWEVER HELD THAT IF THE PROVISIONS OF CLAUSE (B) OF RULE 5 OF PART B OF SCHEDULE I TO THE ACT PUTS TAXATION OF INCOME OF AN INSURANCE COMPANY WITHIN THE 4 ITA NOS.606&675/KOL/2012-NATIONAL INSURANCE CO.LTD. A.Y.2005-06 & 2006-07 PARAMETERS OF CLAUSE (A) & (C ) OF RULE-5 OF PART B SCHEDULE-I TO THE ACT. FOR THE SAKE OF READY REFERENCE, THE RELEVANT RULE-5 (A) & (C ) ARE REPRODUCED HEREINBELOW: THE FIRST SCHEDULE B.OTHER INSURANCE BUSINESS 5. COMPUTATION OF PROFITS AND GAINS OF OTHER INSURAN CE BUSINESS. THE PROFITS AND GAINS OF ANY BUSINESS OF INSURANCE OTHE R THAN LIFE INSURANCE SHALL BE TAKEN TO BE THE PROFIT BEFORE TAX AND APPROPRIATION S AS DISCLOSED IN THE PROFIT AND LOSS ACCOUNT PREPARED IN ACCORDANCE WITH THE PROVIS IONS OF THE INSURANCE ACT, 1938 (4 OF 1938) OR RULES MADE THEREUNDER OR THE PR OVISION OF THE INSURANCE REGULATORY AND DEVELOPMENT AUTHORITY ACT, 1999 (41 OF 1999) OR REGULATIONS MADE THEREUNDER, SUBJECT TO THE FOLLOWING ADJUSTMEN TS: (A) SUBJECT TO THE OTHER PROVISIONS OF THIS RULE, A NY EXPENDITURE OR ALLOWANCE, INCLUDING ANY AMOUNT DEBITED TO THE PROFIT AND LOSS ACCOUNT EITHER BY WAY OF A PROVISION FOR ANY TAX, DIVIDEND, RESERVE OR ANY OTH ER PROVISION AS MAY BE PRESCRIBED WHICH IS NOT ADMISSIBLE UNDER THE PROVIS IONS OF SECTIONS 30 TO 43B IN COMPUTING THE PROFITS AND GAINS OF A BUSINESS SHALL BE ADDED BACK; (C) SUCH AMOUNT CARRIED OVER TO A RESERVE FOR UNEXP IRED RISKS AS MAY BE PRESCRIBED IN THIS BEHALF SHALL BE ALLOWED AS A DED UCTION. 9. ACCORDING TO THE AO, THE PROFIT AS PER ANNUAL A CCOUNTS OF THE ASSESSEE HAS TO BE DEEMED TO BE INCOME OF THE ASSESSEE AND THEREFORE T HE INCOME FROM SALE OF INVESTMENTS HAS TO BE BROUGHT TO TAX. 10. THE CIT(APPEALS) FOLLOWING THE APPELLATE ORDER S FOR THE EARLIER YEARS AND ALSO THE DECISION OF THE HON'BLE ITAT, MUMBAI 'B' BENCH, IN THE CASE OF NEW INDIA ASSURANCE CO. LTD. V. ADDL, CIT .[(2011) 142 TTJ (M UM) 312 IN ITS ORDER DATED 29- 07-2011] DELETED THE ADDITION MADE BY THE AO OF THE PROFIT ON SALE OF INVESTMENTS. 11. AGGRIEVED BY THE ORDER OF THE CIT(A), THE REVE NUE HAS PREFERRED THE PRESENT APPEAL BEFORE THE TRIBUNAL. 12. WE HAVE HEARD THE RIVAL SUBMISSIONS. THE LEAR NED DR RELIED ON THE ORDER OF THE AO. THE LEARNED COUNSEL FOR THE ASSESSEE RELIED ON THE ORDER OF THE CIT(A). HE ALSO BROUGHT TO OUR NOTICE THAT FOR THREE OF THE EARLIER ASSESSMENT YEARS, VIZ., 1991-92, 1992-93 AND 1993-94 THE ADDITIONS MADE BY THE AO OF THE PROFIT ON SALE OF INVESTMENTS HAD BEEN CONFIRMED BY THE CLT(APPEALS) IN THE RESPECTIVE APPEALS AND 5 ITA NOS.606&675/KOL/2012-NATIONAL INSURANCE CO.LTD. A.Y.2005-06 & 2006-07 THE HON'BLE ITAT, KOLKATA RESTORED THE ISSUE FOR AL L THE THREE YEARS TO THE CIT(APPEALS) FOR FRESH ADJUDICATION. IN EACH OF THE THREE RESTORED CASES THE CIT(APPEALS) SUBSEQUENTLY HELD THAT PROFIT ON SALE OF INVESTMENTS COULD NOT BE INCLUDED IN THE RESPONDENT'S TOTAL INCOME AND FOR N ONE OF THESE THREE ASSESSMENT YEARS THE INCOME-TAX DEPARTMENT WENT ON TO APPEAL B EFORE THE ITAT. IT WAS ALSO SUBMITTED BY HIM THAT EXCEPTING THIS ASSESSMENT YEA R 2005-06 AND THE SUBSEQUENT YEAR, VIZ., 2006-07, IN ALL THE ASSESSMENT YEARS TH E AO HAD ACCEPTED THE RESPONDENT'S CLAIM THAT PROFIT ON SALE OF INVESTMENTS COULD NOT BE INCLUDED IN THE RESPONDENT'S TOTAL INCOME. COPIES OF THE RELEVANT ORDERS OF THE HON'BL E ITAT AND THE CIT(APPEALS) HAVE BEEN FURNISHED IN THE PAPER BOOK FILED IN RESP ECT OF THE APPEAL FOR THE ASSESSMENT YEAR 2006-07 (ITA NO.6751KJ12). 13. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS. IN VIEW OF THE FACT THAT THE ASSESSEE IS IN THE BUSINESS OF INSURANCE OTHER THAN LIFE INSURA NCE, ITS INCOME HAD TO BE IN ACCORDANCE WITH SECTION 44 OF THE INCOME TAX ACT, 1 961 (ACT) READ WITH RULE 5 OF THE FIRST SCHEDULE TO THE ACT. THE AO THEREFORE HAS LI MITED POWER AS REGARDS MAKING ADDITIONS OR DISALLOWANCES. THE AMOUNT OF PROFIT, A S DISCLOSED BY THE P&L A/C DRAWN AS PER THE INSURANCE ACT, SHALL BE TAKEN AS AN INIT IAL POINT. SUCH AMOUNT OF PROFIT SHALL BE INCREASED BY THE AMOUNTS WHICH ARE NOT ADMISSIBL E UNDER THE PROVISIONS OF SS. 30 TO 43B IN COMPUTING THE PROFITS AND GAINS OF BUSINESS AS PER R. 5(A). THE RESULTANT FIGURE OF PROFIT SHALL BE REDUCED BY THE AMOUNT OF RESERVE S FOR UNEXPIRED RISKS AS PER CL. (C) OF R. 5. NO ADJUSTMENT OTHER THAN THOSE SPECIFICALLY P ERMITTED AS PER R. 5 CAN BE CARRIED OUT TO THE AMOUNT OF PROFIT AS PER THE P&L A/C. AS PER CL. (B) OF R. 5 OF SCH. I IN THE PRE-OMISSION ERA, THE AMOUNT OF PROFIT DETERMINED A S PER THE ANNUAL ACCOUNTS OF THE INSURANCE COMPANY WAS REQUIRED TO BE ADJUSTED BY WA Y OF DEDUCTION TOWARDS THE DEPRECIATION RESERVE OR LOSS ON REALIZATION OF INVE STMENTS AND INCREMENT TOWARDS APPRECIATION IN OR GAINS ON THE REALIZATION OF INVE STMENTS. CLAUSE (B) WAS OMITTED BY THE FINANCE ACT, 1988 LEADING TO THE SITUATION THAT NOW NEITHER THE LOSS WRITTEN OFF OR RESERVED IN THE ACCOUNTS TO MEET DEPRECIATION IS RE QUIRED TO BE REDUCED FROM THE PROFITS NOR APPRECIATION IN OR GAIN ON THE REALIZATION OF I NVESTMENTS IS TO BE ADDED. THIS 6 ITA NOS.606&675/KOL/2012-NATIONAL INSURANCE CO.LTD. A.Y.2005-06 & 2006-07 POSITION HAS BEEN CLARIFIED BY THE MEMORANDUM EXPLA INING THE PROVISION IN THE FINANCE BILL, 1988. AS SEEN FROM THE LEGISLATIVE I NTENT MADE EXPLICIT THROUGH MEMORANDUM EXPLAINING THE PROVISION, NOTES AND CLAU SES AND ALSO CIRCULAR ISSUED BY THE CBDT EXEMPTION IS TO BE PROVIDED IN RESPECT OF THE PROFITS EARNED BY THE INSURANCE COMPANY ON SALE OF INVESTMENT AND CONSEQU ENTLY NO DEDUCTION IS TO BE ALLOWED TOWARDS LOSSES INCURRED ON THE REALIZATION OF INVESTMENTS. IN SIMPLE WORDS THE PRESCRIPTION OF THE HITHERTO CL. (B) OF R. 5 HAS BE EN TAKEN BACK, WHICH GRANTED DEDUCTION TOWARDS THE DEPRECIATION RESERVE OR LOSS ON REALIZA TION OF INVESTMENTS AND INCREMENT TOWARDS APPRECIATION IN OR GAINS ON THE REALIZATION OF INVESTMENTS. 14. THE AOS VIEWPOINT CANNOT BE ACCEPTED FOR THE REASON THAT WITH THE OMISSION OF CL. (B) OF R. 5 IT HAS BEEN MADE CLEAR THAT NEITHER THE LOSS ON ACCOUNT OF DIMINUTION IN THE VALUE OF INVESTMENT SHALL BE ALLOWED AS DEDUCTI ON NOR ANY INCOME ON INVESTMENT SHALL BE SUBJECTED TO TAX. BOTH THE ITEMS OF LOSS A ND INCOME FROM THE INVESTMENTS ARE TO BE CONSIDERED AS NEITHER DEDUCTIBLE NOR INCLUDIB LE IN THE TOTAL INCOME OF THE ASSESSEE. THEREFORE THE CIT(A) WAS JUSTIFIED IN DE LETING THE ADDITION MADE BY THE AO. WE DO NOT FIND ANY GROUNDS TO INTERFERE WITH THE OR DER OF THE CIT(A). ACCORDINGLY THE APPEAL OF THE REVENUE IS DISMISSED. 15. IN THE RESULT THE APPEAL FILED BY THE REVENUE IS DISMISSED FOR REASONS GIVEN ABOVE. ITA NO.675/KOL/2012 (A.Y.2006-07) 16. GROUND NO.1 RAISED BY THE REVENUE READS AS FOL LOWS :- 1. THAT ON THE FACTS AND CIRCUMSTANCES OF THE CASE , LD. CIT(A) ERRED IN LAW IN HOLDING THAT A SUM OF RS.534.08 CRORES BEING THE PROFIT ON SALE OF INVESTMENTS IS NOT TAXABLE. REASONS GIVEN BY THE CIT(A) ARE NOT TENABLE ON THE FACTS OF THE CASE AND IN LAW. 17. THIS GROUND IS IDENTICAL TO THE GROUND RAISED BY THE REVENUE IN ITA NO.606/KOL/2012 FOR THE REASONS GIVEN WHILE DECIDIN G UNDER SIMILAR GROUND OF THE REVENUE FOR A;.Y.2005-06. WE DISMISS GROUND NO.1 RA ISED BY THE REVENUE. 18. GROUND NO.2 RAISED BY THE REVENUE READS AS FOL LOWS :- 7 ITA NOS.606&675/KOL/2012-NATIONAL INSURANCE CO.LTD. A.Y.2005-06 & 2006-07 2. THAT ON THE FACTS AND CIRCUMSTANCES OF THE CASE , LD. CIT(A) ERRED IN LAW IN HOLDING THAT THE A.O. WAS NOT JUSTIFIED IN MAKING DISALLOWA NCE OF RS.30,28,25,750/- U/S 14A OF THE ACT READ WITH RULE 8D OF THE INCOME TAX RULES. ON PROPER APPRECIATION OF THE FACTS OF THE CASE AND CORRECT CONSTRUCTION OF LAW, CIT(A) SHOULD HAVE UPHELD THE DISALLOWANCE MADE BY THE A.O. 19. THE ASSESSEE IN ITS RETURN CLAIMED EXEMPTION O F TWO SUMS OF RS.1,66,04.042 AND RS.107,65,70,000 BEING INTEREST ON TAX FREE BONDS A ND DIVIDEND FROM DOMESTIC COMPANIES RESPECTIVELY AND THE ASSESSEES CLAIM WAS ACCEPTED BY THE ASSESSING OFFICER. IN THE RETURN THE ASSESSEE ITSELF COMPUTED A SUM OF RS.1,00,69,998 AS EXPENSES INCURRED IN RELATION TO THE EXEMPT INCOME AND OFFERED THE SAID SUM OF RS.L,00,69,998 AS DISALLOWABLE U/S 14A. THE ASSESSI NG OFFICER OBSERVED THAT ACCORDING TO HIM THE AFORESAID SUM OF RS..1,00,69,9 98 WAS ALLEGEDLY 'TOO LOW A SUM FOR THE DISALLOWANCE' AND WAS OF THE VIEW THAT THE ASSESSEE HAD ALLEGEDLY NOT CONSIDERED HUGE EXPENSES DEBITED AS BANK CHARGES AN D OTHER INDIRECT EXPENSES IN INSURANCE REVENUE ACCOUNT FOR THE CALCULATION OF DI SALLOWANCE U/S.14A OF THE ACT. THE ASSESSING OFFICER MADE A REFERENCE TO THE DECIS ION OF THE SPECIAL BENCH ITAT, MUMBAI IN THE CASE OF DAGA CAPITAL MARKET MANAGEMEN T (P) LTD. IN ITA NO.85071M/03 DATED 28-10-08 FOR CONSIDERING THE APP LICABILITY OF RULE 8D WITH RETROSPECTIVE EFFECT. THE ASSESSING OFFICER BY APPL YING THE ABOVE-REFERRED RULE 8D, COMPUTED A SUM OF RS..30,28,25,750 AS ALLEGEDLY DIS ALLOWABLE U/S 14A AND MADE DISALLOWANCE OF THE SAID SUM OF RS.30,28,25,750 INS TEAD OF THE SUM OF RS.1,00,69,998 AS OFFERED BY THE ASSESSEE IN ITS RETURN. 20. BEFORE CIT(A), THE ASSESSEE SUBMITTED THAT TH E ASSESSEE HAD TAKEN INTO ACCOUNT THE EXPENSES OF MANAGEMENT AS SHOWN IN THE PROFIT & LOSS ACCOUNT AND THEN CALCULATED THE DISALLOWABLE PORTION THERE FROM BY C ONSIDERING THE PROPORTION OF EXEMPT INCOME OF THE TOTAL RECEIPT AS REFLECTED IN THE PROFIT & LOSS ACCOUNT. IT WAS SUBMITTED THAT THE MANDATE OF SEC.14A OF THE ACT WAS THAT THE ASSESSING OFFICER, HAVING REGARD TO THE ACCOUNTS OF THE ASSESSEE, COME TO A CONCLUSION THAT THE AMOUNT CLAIMED BY THE ASSESSEE AS EXPENDITURE INCURRED FOR EARNING EXEMPT INCOME, WAS NOT CORRECT. IT WAS SUBMITTED THAT SUCH SATISFACTION D ID NOT EMANATE FROM THE ORDER OF THE 8 ITA NOS.606&675/KOL/2012-NATIONAL INSURANCE CO.LTD. A.Y.2005-06 & 2006-07 AO WHEN THE CLAIM OF THE ASSESSEE WAS REJECTED. I T WAS SUBMITTED THAT IN VIEW OF THE ASSESSING OFFICER'S FAILURE TO COMPLY CORRECTLY WIT H THE PROVISIONS OF SUB-SECTION (2) OF SECTION 14A, HIS INVOKING RULE 8D SHOULD BE HELD AS UNJUSTIFIED. IT WAS POINTED OUT THAT THE DECISION OF THE ITAT'S SPECIAL BENCH, MUMB AI IN THE CASE OF DAGA CAPITAL MARKET MANAGEMENT (P) LTD. (SUPRA) WHICH WAS REFERR ED TO BY THE ASSESSING OFFICER IN HIS ASSESSMENT ORDER, SHOULD NOT HAVE BEEN APPLI ED IN THE ASSESSEE'S CASE WHICH WAS FOR THE ASSESSMENT YEAR 2006-07. THE ASSESSEE P OINTED OUT THAT THE BOMBAY HIGH COURT IN THE CASE OF GODREJ & BOYCE MFG. CO. L TD. V. DY. CIT [2010J 328 ITR 87(BOM) HAS MEANWHILE HELD THAT RULE 8D COULD NOT B E CONSIDERED AS RETROSPECTIVE AND THE SAID RULE COULD BE APPLIED ONLY WITH EFFECT FROM THE ASSESSMENT YEAR 2008- 09. FURTHER, THE BOMBAY HIGH COURT ALSO OBSERVED IN THE ABOVE-REFERRED CASE THAT THE ASSESSING OFFICER WOULD FIRST BE REQUIRED TO CHECK THE CONCERNED ASSESSEE'S OFFER OF DISALLOWANCE AND ONLY AFTER RECORDING HIS DISSATISF ACTION, IF ANY, THE ASSESSING OFFICER COULD COMMUTE THE AMOUNT TO BE DISALLOWED IN ACCORD ANCE WITH SUB-SECTION (2) OF SECTION 14A. THE ASSESSEE SUBMITTED THAT THE ABOVE- REFERRED SUB-SECTION (2) OF SECTION 14A WAS INSERTED BY THE FINANCE ACT, 2006, WITH EFF ECT FROM THE ASSESSMENT YEAR 2007-08. IT WAS POINTED OUT THAT THE ASSESSEES CAS E BEING FOR THE ASSESSMENT YEAR 2006-07, THERE CANNOT BE ANY APPLICABILITY OF THE A BOVE-REFERRED SUB-SECTION (2) OF SECTION 14A IN THE ASSESSEE'S CASE FOR THE ASSESSME NT YEAR 2006-07. HENCE, THE ASSESSEE SUBMITTED THAT THE COMPUTATION OF ALLEGED DISALLOWABLE SUM OF RS.30, 28,25, 750 MADE BY THE ASSESSING OFFICER AFTER APPLYING RU LE 8D, SHOULD BE HELD TO BAD. 21. WITHOUT PREJUDICE TO THE ABOVE, THE ASSESSEE S UBMITTED THAT WHILE COMPUTING THE DISALLOWABLE SUM U/S 14A THE ASSESSING OFFICER TOOK INTO ACCOUNT ALL THE INVESTMENTS FROM WHICH THE INCOME THAT MAY BE RECEIVED, WOULD B E EXEMPT FROM TAX, IRRESPECTIVE OF THE FACT AS TO WHETHER ANY SUCH INCOME HAS ACTUA LLY BEEN RECEIVED OR NOT. IT WAS SUBMITTED THAT AS PER THE LANGUAGE OF SECTION 14A, THE EXPENSE WHICH HAS BEEN INCURRED IN RELATION TO INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME FOR THE YEAR, IS DISALLOWABLE. HENCE, THERE IS NO SCOPE OF CONSIDERING ANY INCOME WHICH HAS NOT ACTUALLY BEEN EARNED DURING THE YEAR, FOR THE P URPOSES OF SECTION 14A. IT WAS 9 ITA NOS.606&675/KOL/2012-NATIONAL INSURANCE CO.LTD. A.Y.2005-06 & 2006-07 POINTED OUT THAT THE ASSESSING OFFICER CONSIDERED EVEN THOSE INVESTMENTS FROM WHICH NO INCOME WAS EARNED DURING THE YEAR. 22. THE CIT(A) AGREED WITH THE SUBMISSIONS SO MADE AND HELD THAT ONLY 1% OF THE EXEMPT INCOME CAN BE DISALLOWED U/S.14A OF THE ACT. THE FOLLOWING WERE THE RELEVANT OBSERVATIONS OF THE CIT(A): 19. I HAVE GONE THROUGH THE ASSESSMENT ORDER AS WELL AS THE SUBMISSIONS MADE BY THE AUTHORISED REPRESENTATIVE. IT IS NOTED THAT TH E ASSESSING OFFICER APPLIED RULE 80 ON THE BASIS OF THE DECISION OF THE SPECIAL BENCH O F THE ITAT, MUMBAI IN THE CASE OF DAGA CAPITAL MARKET MANAGEMENT (P) LTD. IN FACT, TH E ITAT , SPECIAL BENCH HAD DECIDED THAT RULE 80 WOULD BE CONSIDERED AS RETROSP ECTIVE IN NATURE AND THUS THE SAID RULE COULD BE APPLIED EVEN FOR ANY ASSESSMENT YEAR PRIOR TO THE ASSESSMENT YEAR 2008-09. AS POINTED OUT BY THE AUTHORISED REPRESENT ATIVE AS PER THE SUBSEQUENT DECISION OF THE BOMBAY HIGH COURT IN THE CASE OF GO DREJ & BOYCE MFG. CO. LTD. V. DY. CIT [2010] 328 ITR 87(BOM), RULE 80 COULD NOT B E CONSIDERED AS RETROSPECTIVE AND THE SAID RULE COULD BE APPLIED ONLY WITH EFFECT FROM THE ASSESSMENT YEAR 2008- 09. HE SUBMITTED FURTHER THAT IT WAS OBSERVED BY TH E BOMBAY HIGH COURT THAT ASSESSING OFFICER WOULD FIRST BE REQUIRED TO CHECK THE CONCERNED ASSESSEE'S OFFER OF DISALLOWANCE AND ONLY AFTER RECORDING HIS DISSATISF ACTION, IF ANY, THE ASSESSING OFFICER COULD COMPUTE THE AMOUNT TO BE DISALLOWED IN ACCORD ANCE WITH SECTION 14A(2). THE ASSESSING OFFICER NOTED THAT THE APPELLANT HAD NOT CONSIDERED THE HUGE EXPENSES DEBITED AS BANK CHARGES AND OTHER INDIRECT EXPENSES IN INSURANCE REVENUE ACCOUNT FOR THE CALCULATION WHEREAS THE DIVIDEND AND EXEMPT INTEREST INCOME WERE DISCLOSED IN INSURANCE REVENUE ACCOUNT ALSO. ON THE BASIS OF HIS ABOVE OBSERVATIONS THE ASSESSING OFFICER APPLIED RULE 80. 20. THE APPELLANT IS A GENERAL INSURANCE COMPANY AN D DOES NOT TAKE MONEY ON INTEREST AS IN THE CASE OF BANKS; NBFCS AND OTHER CORPORATE ASSESSEES. THE APPELLANT HAS INVESTED ITS SURPLUS FUNDS INTO THE INVESTMENTS WHI CH HAVE GROWN IN VALUE OVER THE PERIOD OF TIME. THE APPELLANT HAS SUBMITTED THE CAL CULATION OF DISALLOWANCE OFFERED BY IT AMOUNTING TO RS.1 ,00,69,998/- WHICH IS GIVEN AS BELOW:- 'THE DETAILS OF EXPENSES INCURRED DURING THE F. Y. 2005-06 (A. Y. 2006-07) RELATED TO INVESTMENT ACTIVITIES: SR. NO. HEAD OF EXPENSES AMOUNT RS.. 1. LEGAL EXPENSES 3.532 2. SHARE TRANSFER EXPENSES 1,43,878 3. SAFE CUSTODY CHARGES 1,23,16,950 4. BANK CHARGES 38,250 5. SERVICE CHARGES 24,24,080 6. OCTL CHARGES (SOFTWARE) 1,94,694 10 ITA NOS.606&675/KOL/2012-NATIONAL INSURANCE CO.LTD. A.Y.2005-06 & 2006-07 7. DEPRECIATION 7,157 8. SUNDRY DEBTORS WRITTEN OFF 65,625 9. MISCELLANEOUS EXPENSES 7,834 TOTAL 1,52,18,000 THE DETAILS OF INVESTMENTS ON WHICH EXEMPTED INCOM E RECEIVED : HEAD OF INVESTMENTS COST COST AS ON 31.3.2006 AS ON 31.3.2005 RS. RS. 1. UNIT TRUST OF INDIA-64 BOND 35,03,435 35,62,803 2. PREFERENCE SHARES 14,76,387,474 14,88,77,070 3. EQUITY SHARES 640,87,13,316 630,28,3 3,447 4. TAX FREE BOND 8,00,00,000 23,,00,00,000 TOTAL 663,98,55,225 668,52,73,320 DISALLOWABLE U/S 14A AS PER APPELLANT'S COMPUTATION . EXEMPT INCOME DIVIDEND 107.65,70,000 INTEREST ON TAX FREE BOND 1,66,04,042 109.31,74,042 PROFIT ON SALE OF INVESTMENTS 534,08,00,400 643,39,74,442 DISALLOWANCE :- EXEMPT INCOME X EXPENSES FOR INVESTMENT 643.39.74.442 X 1.52.18.000 NET INVESTMENT INCOME = 972,31,62,000 = 1,00,69,998 21. IN THE FOLLOWING CASES, THE HON'BLE ITAT, KOLKA TA HAS HELD THAT 1% OF THE EXEMPTED INCOME/DIVIDEND SHALL BE CONSIDERED AS EXP ENSES/EXPENDITURE RELATING TO THE EARNING OF EXEMPTED INCOME U/S 14A IN THE ASSESSMEN T YEARS WHERE THE RULE 8D WAS NOT APPLICABLE:- 1. HIMTAJ CONSULTANTS PVT. LTD. VS. I.T.O. (ITA NO. 721/KO1L2007- AY. 2004-05) ORDER DATED 27.04.2007. 2. CHNHS ASSOCIATION VS. ACIT(ITA NO.74/KOI/2008-AY .2004-05) ORDER DATED 19.02.2008. 3. I.T.O. VS. M/S S.P.S. SECURITIES (P) LTD. (ITA N O.123/KOI/2010- AY.2000-01 )ORDER DATED 19.08.2010 22. THEREFORE, FOLLOWING THE JUDGEMENTS OF THE HON' BLE ITAT, KOLKATA AS GIVEN ABOVE AN AMOUNT OF RS. 6.43.39.744/- @1% OF EXEMPTED INCO ME OF RS.643.39,74.442/- AS 11 ITA NOS.606&675/KOL/2012-NATIONAL INSURANCE CO.LTD. A.Y.2005-06 & 2006-07 GIVEN ABOVE BY THE APPELLANT HIMSELF IN THE CALCULA TION IS DISALLOWED OUT OF EXPENDITURE AS PER THE PROVISIONS OF SECTION 14A OF INCOME TAX ACT, 1961. ACCORDINGLY, IT IS HELD THAT RULE 80 IS NOT APPLICA BLE IN A.Y. 2006-07 AS PER THE LAW PREVALENT AS ON DATE WHERE IT HAS BEEN HELD THAT RU LE 8D IS APPLICABLE FROM A.Y.2008- 09. THE ASSESSING OFFICER IS DIRECTED TO REDUCE THE DISALLOWABLE AMOUNT U/S 14A FROM RS.30,28,25,705/- TO RS.6,43,39,744/- INCLUDING THE DISALLOWANCE OF RS.1,00,69,998/- MADE BY THE APPELLANT ITSELF. HENCE, THIS GROUND OF APPEAL IS PARTLY ALLOWED. 23. AGGRIEVED BY THE ORDER OF THE CIT(A), THE REVE NUE HAS RAISED GR.NO.2 BEFORE THE TRIBUNAL. WE HAVE HEARD THE RIVAL SUBMISSIONS. TH E LEARNED DR RELIED ON THE ORDER OF THE AO. THE LEARNED COUNSEL FOR THE ASSESSEE RELIE D ON THE ORDER OF THE CIT(A). 24. AFTER CONSIDERING THE RIVAL SUBMISSIONS, WE AR E OF THE VIEW THAT THE ORDER OF THE CIT(A) DOES NOT CALL FOR ANY INTERFERENCE. THE HON BLE BOMBAY HIGH COURT IN THE CASE OF GODREJ & BOYCE MFG. CO. LTD. V. DY. CIT [20 10J 328 ITR 87(BOM) HAS HELD THAT RULE 8D COULD NOT BE CONSIDERED AS RETROSPECTI VE AND THE SAID RULE COULD BE APPLIED ONLY WITH EFFECT FROM THE ASSESSMENT YEAR 2 008-09. FURTHER, THE BOMBAY HIGH COURT ALSO OBSERVED IN THE ABOVE-REFERRED CASE THAT THE ASSESSING OFFICER WOULD FIRST BE REQUIRED TO CHECK THE CONCERNED ASSESSEE'S OFFER OF DISALLOWANCE AND ONLY AFTER RECORDING HIS DISSATISFACTION, IF ANY, THE ASSESSIN G OFFICER COULD COMMUTE THE AMOUNT TO BE DISALLOWED IN ACCORDANCE WITH SUB-SECTION (2) OF SECTION 14A. THE ABOVE- REFERRED SUB-SECTION (2) OF SECTION 14A WAS INSERTE D BY THE FINANCE ACT, 2006, WITH EFFECT FROM THE ASSESSMENT YEAR 2007-08. THE ASSES SEES CASE BEING FOR THE ASSESSMENT YEAR 2006-07, THERE CANNOT BE ANY APPLIC ABILITY OF THE ABOVE-REFERRED SUB- SECTION (2) OF SECTION 14A OR RULE 8D IN THE ASSESS EE'S CASE FOR THE ASSESSMENT YEAR 2006-07. IN THE GIVEN CIRCUMSTANCES, THE QUANTUM O F DISALLOWANCE HAD TO BE DECIDED IN THE LIGHT OF THE DECISIONS RENDERED BY THE ITAT KOLKATA BENCHES IN THE CASES REFERRED TO BY THE CIT(A) IN THE IMPUGNED ORDER. I N THOSE DECISIONS, THE ITAT, KOLKATA BENCHES HAVE CONSISTENTLY TAKEN A VIEW THAT 1% OF THE EXEMPTED INCOME/DIVIDEND SHALL BE CONSIDERED AS EXPENSES/EXP ENDITURE RELATING TO THE EARNING OF EXEMPTED INCOME U/S 14A IN THE ASSESSMENT YEARS WHE RE THE RULE 8D WAS NOT APPLICABLE. FOLLOWING THOSE RULINGS, WE UPHOLD THE ORDER OF THE CIT(A) AND DISMISS GR.NO.2 RAISED BY THE REVENUE. 12 ITA NOS.606&675/KOL/2012-NATIONAL INSURANCE CO.LTD. A.Y.2005-06 & 2006-07 25. IN THE RESULT, THE APPEAL BEING ITA NO.675/KOL /12 IS DISMISSED. 26. IN THE RESULT BOTH THE APPEALS OF THE REVENUE ARE DISMISSED. O RDER PRONOUNCED IN THE COURT ON 03.02.2016. SD/- SD/- [M.BALAGANESH ] [ N.V.VASUDEVAN ] ACCOUNTANT MEMBER JUDICIAL MEMBER DATED :03.02.2016. [RG PS] COPY OF THE ORDER FORWARDED TO: 1.NATIONAL INSURANCE CO.LTD., 3, MIDDLETON STREET, KOLKATA-700071. 2. D.C.I.T., CIRCLE-6, KOLKATA. 3. CIT(A)-VI, KOLKATA 4. CIT-II, KOLKATA. 5. CIT(DR), KOLKATA BENCHES, KOLKATA. TRUE COPY BY ORDER, DEPUTY /ASST. REGISTRAR, ITAT, KOLKATA BENCHES