ICICI PRUDENTIAL LIFE INSURANCE CO. LTD, MUMBAI V. ASST CIT CIR 6(1), MUMBAI

ITA 6854/MUM/2010

• Counselvise Citation: [2012] 119 COUNSELVISE.COM (IT) 8994 (ITAT-MUMBAI)
• Duration Of Justice: 1 year(s) 11 month(s) 13 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 14-09-2012
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: F
• Next Hearing Date: 19-06-2012
• Assessment Year: 2005-2006
• Appeal Filed On: 01-10-2010
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: SUBACHAN RAM
• Assessee Lawyers: S E DASTUR
• Keywords: Capital asset; Gift; Depreciation; Charitable institution; Source of fund; Question of law; Tangible material; Bad and doubtful debts; Difference of opinion; Valuation report; Right to appeal; Capital receipt; Revised return; Reason to believe; Change of opinion
• Section: 43B; 143(3); 14A; 147; 148; 37; 56; 263; 63; 28; 15

Judgement Text

ITA NOS.6854 TO 6856 6509 7765 TO 7767 AND 7213 ICI CI PRULIFE MUMBAI F BENCH PAGE 1 OF 77 IN THE INCOME TAX APPELLATE TRIBUNAL 'F' BENCH, MUMBAI BEFORE SHRI B. RAMAKOTAIAH, ACCOUNTANT MEMBER AND SHRI VIVEK VARMA, JUDICIAL MEMBER ITA NO.6854/MUM/2010 : (ASSESSMENT YEAR: 2005-06) ITA NO.6855/MUM/2010 : (ASSESSMENT YEAR: 2006-07) ITA NO.6856/MUM/2010 : (ASSESSMENT YEAR: 2007-08) ITA NO.6059/MUM/2010 : (ASSESSMENT YEAR: 2008-09) ICICI PRUDENTIAL INSURANCE CO. LTD, 1089 APPASAHEB MARATHE MARG, PRABHADEVI, MUMBAI 400025 PAN: AAACI 7351 P VS. ASSTT. CIT, CIR-6(1) MUMBAI (APPELLANT) (RESPONDENT) ITA NO.7765/MUM/2010 : (ASSESSMENT YEAR: 2005-06) ITA NO.7766/MUM/2010 : (ASSESSMENT YEAR: 2006-07) ITA NO.7767/MUM/2010 : (ASSESSMENT YEAR: 2007-08) ITA NO.7213/MUM/2010 : (ASSESSMENT YEAR: 2008-09) ASSTT. CIT, CIR-6(1) MUMBAI VS. ICICI PRUDENTIAL INSURANCE CO. LTD, 1089 APPASAHEB MARATHE MARG, PRABHADEVI, MUMBAI 400025 PAN: AAACI 7351 P (APPELLANT) (RESPONDENT) ASSESSEE BY: SHRI S.E. DASTUR AND MS. ARATI VISSANJI DEPARTMENT BY: SHRI SUBACHAN RAM DATE OF HEARING: 20/06/2012 DATE OF PRONOUNCEMENT: 14/09/2012 O R D E R PER BENCH: THESE APPEALS ARE BY ASSESSEE FOR THE ASSESSMENT YE ARS 2005- 06 TO 2008-09 AND CROSS APPEALS BY REVENUE FOR THE RESPECTIVE ASSESSMENT YEARS. THESE APPEALS ARE ON COMMON ISSUE S, EVEN THOUGH AMOUNTS VARY FROM YEAR TO YEAR. THEREFORE, A LL THE APPEALS WERE HEARD TOGETHER AND COMMON ORDER IS PASSED. ITA NOS.6854 TO 6856 6509 7765 TO 7767 AND 7213 ICI CI PRULIFE MUMBAI F BENCH PAGE 2 OF 77 2. WE HAVE HEARD THE LEARNED COUNSEL SHRI S.E. DASTUR AND THE LEARNED CIT (DR) SHRI SUBACHAN RAM IN DETAIL AND AL SO PERUSED THE SUBMISSIONS MADE BY THE RESPECTIVE PARTIES AND RELI ANCE ON VARIOUS CASE LAW AND PAPER BOOKS PLACED ON RECORD IN RESPEC TIVE YEARS. THEIR ARGUMENTS WERE INCORPORATED WHEREVER NECESSAR Y. FOR THE SAKE OF CONVENIENCE, THE ISSUES IN ASSESSMENT YEAR 2005-06 ARE DISCUSSED ELABORATELY. ITA NO.6854/MUM/2010 AY 2005-06 : 3. THIS IS AN ASSESSEES APPEAL IN WHICH ASSESSEE HAS RAISED THE FOLLOWING GROUNDS: 1. THE CIT (APPEALS) HAS ERRED IN NOT ACCEPTING TH E LOSS OF ` .150.45 CRORES RETURNED BY THE APPELLANT. 2. THE CIT (APPEALS) ERRED IN HOLDING THAT THE SURP LUS AS REFLECTED IN FORM-I IS THE TAXABLE INCOME OF THE AP PELLANT. 3. THE CIT(APPEALS) ERRED IN UPHOLDING THE TAXABLE INCOME FOR THE YEAR AT ` .98.96 CRORES BY HOLDING THAT THE AMOUNT TRANSFERRED FROM THE SHAREHOLDERS ACCOUNT TO ACCO UNT IS NOT TO BE REDUCED FROM THE SURPLUS DISCLOSED IN FORM-I. IT IS PRAYED THAT THE SURPLUS CONSIDERED FOR COMPUTING TA XABLE INCOME SHOULD BE AFTER REMOVING THE EFFECT OF TRANS FER FROM SHAREHOLDERS ACCOUNT TO ACCOUNT. 4. THE CIT (APPEALS) HAS ERRED IN NOT ACCEPTING DIS ALLOWANCE UNDER SECTION 14A OFFERED IN REVISED RETURN OF INCO ME IS ON REASONABLE BASIS BUT DIRECTED AO TO DECIDE THE ISSU E AFRESH. 4. THE FACTS IN BRIEF ARE THAT ASSESSEE IS A PUBLIC LI MITED COMPANY REGISTERED UNDER THE COMPANIES ACT, 1956. T HE COMPANY WAS INCORPORATED ON JULY 20, 2000 WITH THE OBJECT O F CARRYING ON LIFE INSURANCE BUSINESS. THE ACTIVITIES OF THE INSU RANCE ARE GOVERNED BY THE INSURANCE ACT, 1938, INSURANCE REGU LATORY AND DEVELOPMENT AUTHORITY (IRDA) ACT, 1999 AS AMENDED F ROM TIME TO TIME, IRDA RULES AND REGULATIONS FROM TIME TO TIME MADE THERE UNDER. THE RETURN OF INCOME FOR AY 2005-06 WAS FILE D ON 27.10.2005 DECLARING A LOSS OF ` .150,46,83,807/-. THE CASE WAS SELECTED FOR SCRUTINY AND AO WHILE ACCEPTING THAT A SSESSEE IS IN THE BUSINESS OF LIFE INSURANCE CONSIDERED THAT INCOME O F ASSESSEE FROM ITA NOS.6854 TO 6856 6509 7765 TO 7767 AND 7213 ICI CI PRULIFE MUMBAI F BENCH PAGE 3 OF 77 INSURANCE BUSINESS IS ASSESSABLE AS PER SECTION 44 OF THE INCOME TAX ACT. HE HAS CONSIDERED THE ACTUARIAL VALUATION REPORT SUBMITTED IN FORM-I EXTRACTED IN THE ASSESSMENT ORDER WHICH IS AS UNDER: FORM -I OF THE ACTUARIAL REPORT: ITEM NO. DESCRIPTION BALANCE OF FUND SHOWN IN BALANCE SHEET ( ` `` ` .) MATHEMATICAL RESERVES (EXCLUDING COST OF BONUS ALLOCATED)( `) `)`) `) SURPLUS ( ` `` ` .) NEGATIVE RESERVES ( ` `` ` .) SURRENDER VALUE DEFICIT RESERVED ( ` `` ` .) (1) (2) (3) (4) (5) (6) (7) 01 BUSINESS WITHIN INDIA PAR POLICIES 6702408920 6411682550 290726370 12539400 00 02 NON PAR POLICIES 28131258270 28064221830 67969900 59423230 00 03 TOTALS 34833667190 34475904380 358696280 71962640 00 04 TOTAL BUSINESS PAR POLICIES 6702408920 6411682550 290726370 12539400 00 05 NON PAR POLICIES 28131258270 28064221830 67969900 59423230 00 06 TOTAL 34833667190 34475904380 358696280 71962640 00 SINCE THERE IS A SURPLUS DECLARED AT ` .35,86,92,280/- IN THE FORM I AO ASKED ASSESSEE TO EXPLAIN WHY THE COMPUTATION IS NOT MADE ACCORDING TO THE ACTUARIAL VALUATION IT WAS THE C ONTENTION OF ASSESSEE THAT THE ACTUARIAL VALUATION HAS RESULTED IN DEFICIT WHICH WERE SHOWN AS LOSS WHEREAS THE FORM-I REPRESENTS TH E TOTAL SURPLUS AFTER TRANSFER OF ASSETS FROM SHAREHOLDERS ACCOUNT TO THE ACCOUNT AS PER THE IRDA RULES. THE SURPLUS HAS TO BE SHOWN IN ORDER TO DECLARE DIVIDEND, BONUS ETC. UNDER THE RULES AND TH E AMOUNT WAS TRANSFERRED BY WAY OF INFUSION OF FRESH CAPITAL INT O THE COMPANY AND TRANSFERRED TO THE POLICYHOLDERS ACCOUNT. IT WAS S UBMITTED THAT THE TRANSFER OF SHAREHOLDERS FUNDS DOES NOT GIVE RISE TO ANY INCOME AND THE ACTUARIAL SURPLUS ARRIVED AT WAS A DEFICIT ON W HICH THE RETURN WAS FILED AND IN CASE AO HAS TO CONSIDER THE SURPLU S IN FORM-I, THEN TRANSFER OF FUNDS FROM SHAREHOLDERS ACCOUNT S HOULD BE REDUCED FROM THE ABOVE AMOUNT AS IT IS ONLY TRANSFE R OF CAPITAL ASSETS AND NOT INCOME. AO, HOWEVER, RELYING ON THE PRINCIPLES LAID ITA NOS.6854 TO 6856 6509 7765 TO 7767 AND 7213 ICI CI PRULIFE MUMBAI F BENCH PAGE 4 OF 77 DOWN BY THE HON'BLE SUPREME COURT IN THE CASE OF LI C VS. CIT, 51 ITR 773 WHEREIN IT WAS HELD THAT THE ASSESSMENT OF THE PROFITS OF AN INSURANCE BUSINESS IS COMPLETELY GOVERNED BY THE RU LES UNDER THE SCHEDULES AND THERE IS NO POWER TO DO ANYTHING NOT CONTAINED IN IT. FURTHER HE ALSO RELIED ON THE JUDGMENT OF THE HON'B LE BOMBAY HIGH COURT IN THE CASE OF LIC VS. CIT, 115 ITR 45 TO COM E TO A CONCLUSION THAT AO HAS NO POWER TO MAKE ADJUSTMENT ONCE PROVIS IONS OF SECTION 44 WERE INVOKED. ACCORDINGLY HE TOOK THE SU RPLUS AS DECLARED IN FORM-I AS THE BASIS FOR COMPUTATION OF INCOME AND ACCORDINGLY ARRIVED AT THE SURPLUS AT ` .35,86,96,280/-. HE ALSO MADE AN ADDITION OF DEFICIT FROM PENSION SCHEME AT ` .63,09,19,492/- BEFORE SETTING OF THE BROUGHT FORWA RD LOSSES. HE ALSO MADE DISALLOWANCE UNDER SECTION 14A TO AN EXTE NT OF ` .4,42,584/- EVEN THOUGH NO ADJUSTMENT WAS MADE IN THE COMPUTATION OF INCOME. 5. THE MATTER WAS CONTESTED BEFORE THE CIT (A) AND ASS ESSEE MADE ELABORATE SUBMISSIONS. THE MAIN CONTENTION WAS THAT FORM-I IS A REPORT PREPARED AS A PART OF ACTUARIAL REPORT AND ABSTRACTS UNDER THE IRDA REGULATIONS TO ASCERTAIN SEGMENT-WIS E CUMULATIVE ALLOWABILITY OF ACTUARIAL VALUATION SHOWN AS MATHEM ATICAL ERRORS. IT WAS SUBMITTED THAT FORM I DOES NOT PROVIDE THE PR OFIT & LOSS A/C OF ENTIRE BUSINESS BUT SHOWS THE ASSET- LIABILITY P OSITION OF ONLY . IT WAS FURTHER EXPLAINED THAT IRDA HAS MADE SPECIFIC R ULES TO SEGREGATE THE ACCOUNT AND SHAREHOLDERS ACCOUNT AND REVISED THE FORM FOR PRESENTATION OF INSURANCE ACCOUNTS AS PRES CRIBED IN IRDA(PREPARATION OF FINANCIAL STATEMENTS AND AUDITO RS REPORT OF INSURANCE COMPANIES) REGULATIONS 2002. ACCORDING TO THE REGULATIONS, PROFIT & LOSS A/C OF LIFE INSURANCE CO MPANY IS DIVIDED INTO A TECHNICAL ACCOUNT (POLICY HOLDERS ACCOUNT) ALSO CALLED AS REVENUE ACCOUNT AND NON-TECHNICAL ACCOUNT (SHAREHOL DERS ACCOUNT) ALSO CALLED PROFIT & LOSS A/C. IT WAS FURTHER SUBMITTED THAT TECHNICAL ACCOUNTS DEALS WITH ALL THE TRANSACTIONS RELATING TO THE ITA NOS.6854 TO 6856 6509 7765 TO 7767 AND 7213 ICI CI PRULIFE MUMBAI F BENCH PAGE 5 OF 77 INCLUDING INCOME FROM PREMIUM AND EXPENDITURE AND A CTUARIAL PROVISION SHOWN SEGMENT-WISE. ALL THE TRANSACTIONS RELATING TO SHAREHOLDERS LIKE FUNDING THE DEFICIT OF THE ACCOU NT, INCOME EARNED ON INVESTMENT OF SHARE CAPITAL AND RESERVES ARE DEA LT WITH THE NON TECHNICAL ACCOUNT CALLED SHAREHOLDERS ACCOUNT. AS PER THE REGULATIONS THE FORMAT FOR PRESENTATION OF ACCOUNT, THE IMPACT OF ACTUARIAL VALUATION IS SHOWN IN THE REVENUE ACCOUNT RELATING TO FOR THE YEAR AND THE SURPLUS/DEFICIT IS ARRIVED AT. IT WAS SUBMITTED THAT IN ORDER TO COMPUTE THE EFFECT FOR THE INCOME TAX C OMPUTATION RESULT OF ACCOUNT AND SHAREHOLDERS ACCOUNT NEEDS TO BE COMBINED AND ACCORDINGLY ASSESSEE FILED SURPLUS/DEFICIT CALC ULATED AFTER COMBINING THE AND SHAREHOLDERS ACCOUNTS. 6. THE LEARNED CIT (A) HOWEVER, DID NOT AGREE WITH THE ABOVE CONTENTIONS AND STATED THAT SECTION 44 R.W. PART-A OF FIRST SCHEDULE TO THE INCOME TAX (RULE 2) PROVIDES FOR MECHANISM O F ARRIVING AT THE SURPLUS OF THE INSURANCE BUSINESS AND THE ACTUARIAL SURPLUS AS DISCLOSED IN FORM-I WHICH IS PART OF THE ACTUARIAL REPORT DULY CERTIFIED BY THE APPOINTED ACTUARY OF THE COMPANY S HOULD BE CONSIDERED AS INCOME FROM LIFE INSURANCE BUSINESS A S PER THE ACT. THEREFORE, HE AGREED WITH AOS ACTION AND REJECTED ASSESSEES CONTENTION. ASSESSEE IS AGGRIEVED ON THIS ISSUE AND RAISED GROUNDS NO 1 TO 3. 7. THE LEARNED COUNSEL DRAWING OUR ATTENTION TO THE SP ECIAL SCHEME OF ASSESSMENT AS PROVIDED IN SECTION 44 OF T HE INCOME TAX ACT AND FIRST SCHEDULE OF INCOME TAX ACT AND MORE P ARTICULARLY RULE-2 SUBMITTED THAT INSURANCE BUSINESS WAS GOVERN ED BY THE ACTUARIAL VALUATION AND NOT BY THE GENERAL PROFIT & LOSS A/C PREPARED IN OTHER COMPANY. INSURANCE BUSINESS IS RE GULATED BY THE INSURANCE ACT 1938 AND FURTHER BY THE IRDA ACT 1999 . AS PER THE REGULATIONS ISSUED BY THE IRDA WHICH ASSESSEE HAS T O FOLLOW, AS IT WAS INCORPORATED AFTER THE LEGISLATION OF THE IRDA ACT, IT HAS TO MAINTAIN THE ACCOUNTS AS PER THE NEW REGULATIONS AN D ACCORDINGLY ITA NOS.6854 TO 6856 6509 7765 TO 7767 AND 7213 ICI CI PRULIFE MUMBAI F BENCH PAGE 6 OF 77 SHOWN POLICY HOLDERS ACCOUNT AND SHAREHOLDERS ACC OUNT. THERE WAS A NEGATIVE BALANCE IN POLICYHOLDERS ACCOUNT TO AN EXTENT OF ` .201.60 CRORES. THE LAW REQUIRES THE DEFICIT IN POL ICYHOLDERS ACCOUNT SHOULD BE MADE GOOD BEFORE DECLARING ANY BO NUS OR DIVIDEND AND THIS DEFICIT SHOULD BE FULFILLED BY TR ANSFERRING CORRESPONDING AMOUNT FROM SHAREHOLDERS ACCOUNT. AC CORDINGLY DURING THE YEAR, ASSESSEE HAS TRANSFERRED AN AMOUNT TO THE EXTENT OF ` .233.35 CRORES FROM SHAREHOLDERS ACCOUNT TO POLICY HOLDERS ACCOUNT. AS THE TRANSFER SHOULD BE SUPPORTED BY ASS ETS, ASSESSEE HAS ISSUED SHARES AFRESH TO THE EXTENT OF ` .250 CRORES AND INCREASED THE CAPITAL TO THAT EXTENT. SINCE THE AMOUNT TRANSF ERRED FROM SHAREHOLDERS ACCOUNT IS NOTHING BUT TRANSFER OF CA PITAL FROM SHAREHOLDERS ACCOUNT TO POLICYHOLDERS ACCOUNT, IT WAS THE SUBMISSION THAT THE SURPLUS ARRIVED AT AFTER THE TR ANSFER OF THE CAPITAL CANNOT BE CONSIDERED AS INCOME OF ASSESSEE. IT WAS LIKE TAXING THE CAPITAL RECEIPT/ SUM WHICH CAN NOT BE RE GARDED AS INCOME. WITHOUT PREJUDICE TO THE CLAIM, IT WAS ALSO SUBMITTED THAT ASSESSEE HAS FILED THE RETURNS CONSOLIDATING THE PO LICYHOLDERS ACCOUNT AND SHAREHOLDERS ACCOUNT AND THE CREDIT IN THE POLICYHOLDERS ACCOUNT IS MATCHED BY THE DEBIT IN T HE SHAREHOLDERS ACCOUNT. THIS IS TAX NEUTRAL. THEREFORE, AO WAS NOT CORRECT IN CONSIDERING THE SURPLUS WHICH AROSE DUE TO TRANSFER OF SHARE CAPITAL AS PER THE IRDA REGULATIONS. 8. THE LEARNED COUNSEL ALSO EXPLAINED THE HISTORY OF T HE CASE. IT WAS THE SUBMISSION THAT THIS ISSUE OF EXAMINING THE ACTUARIAL SURPLUS WAS FIRST TIME TAKEN UP UNDER SECTION 263 I N ASSESSMENT YEARS 2003-04 AND 2004-05, FOR THE FIRST TIME BY TH E CIT AND THIS MATTER HAS BEEN CONTESTED BEFORE THE ITAT. ITAT VID E ITA NO.3270 AND 4685/MUM/2008 DATED 22.01.2009 HAS SET ASIDE TH E ORDERS OF THE CIT AS THERE WAS NO PREJUDICE CAUSED TO THE REV ENUE IN THE ORDER UNDER SECTION 143(3). THIS ORDER WAS CONTESTE D BEFORE THE HON'BLE HIGH COURT WHICH DISMISSED THE REVENUE APPE AL AND ITA NOS.6854 TO 6856 6509 7765 TO 7767 AND 7213 ICI CI PRULIFE MUMBAI F BENCH PAGE 7 OF 77 FURTHER CONTESTED BEFORE THE HON'BLE SUPREME COURT WHICH ALSO DID NOT ADMIT AND DISMISSED REVENUE APPEALS. HOWEVER, T HE REVENUE TOOK PROCEEDINGS UNDER SECTION 147 AND REOPENED ASS ESSMENT FROM ASSESSMENT YEARS 2002-03 TO 2004-05 ON THE VERY SAM E ISSUE WHICH WAS CONTESTED BY WAY OF WRIT PETITION FILED BEFORE THE HON'BLE HIGH COURT. THE HON'BLE HIGH COURT VIDE ORDERS DATED 19/ 03/2010 REPORTED IN 325 ITR 471 QUASHED THE NOTICES UNDER S ECTION 148 ISSUED IN THIS REGARD. THE HON'BLE HIGH COURT ALSO CONSIDERED ON MERITS ALL THE ISSUES AND REJECTED THE REVENUE CONT ENTIONS. SO, IT WAS SUBMITTED THAT UPTO THE ASSESSMENT YEAR 2004-05 ASSESSEES COMPUTATION OF ACTUARIAL DEFICIT I.E. LOSS ARRIVED AT IN THE LIFE INSURANCE BUSINESS WAS ACCEPTED. 9. REFERRING TO THE NOTES TO THE COMPUTATION, THE LEAR NED COUNSEL DREW OUR ATTENTION TO VARIOUS NOTES (PAGE-5 OF THE PAPER BOOK) TO SUBMIT THAT CONSEQUENT TO THE IRDA RECOMME NDATIONS, THE INSURANCE COMPANIES ARE MAINTAINING THE ACCOUNT AS PER THE FORMAT PRESCRIBED UNDER INSURANCE ACT 1938 FOR PRESENTATIO N OF INSURANCE ACCOUNTS AND AS PER THE REVISED FORMAT FOR THE PRES ENTATION OF ACCOUNTS IN THE NEW REGULATIONS UNDER IRDA, THE IMP ACT OF THE ACTUARIAL VALUATION IS TRANSFERRED TO THE REVENUE A CCOUNT RELATING TO POLICY HOLDERS FOR THE YEAR AND THE SURPLUS/DEFICIT IS DISCLOSED THEREIN. IT WAS FURTHER SUBMITTED THAT THE EARLIER FORMATS FOR PRESENTATION OF ACCOUNTS AGGREGATED THE RESULTS REL ATING TO SHAREHOLDERS AND POLICYHOLDERS AND THUS THE SURPL US/DEFICIT WAS INCLUDING THE IMPACT OF BOTH. THERE IS A SCHEME OF PRESENTATION OF ACCOUNTS CURRENTLY IN FORCE FOR LIFE INSURANCE COMP ANIES AND THE NEW FORMATS WERE PRESCRIBED FOR COMPLYING WITH THE IRDA REGULATIONS. IT WAS THE SUBMISSION THAT EVEN THOUGH AMENDMENT WAS BROUGHT IN RULE 5 IN FIRST SCHEDULE FOR GENERAL INSURANCE BUSINESS TO INCORPORATE CHANGES BROUGHT BY I R D AC T NO SUCH AMENDMENT WAS BROUGHT IN RULE-2. THEREFORE, THE MAN NER OF TAXING THE LIFE INSURANCE COMPANIES HAS NOT BEEN REALIGNED WITH THE ITA NOS.6854 TO 6856 6509 7765 TO 7767 AND 7213 ICI CI PRULIFE MUMBAI F BENCH PAGE 8 OF 77 CHANGES AS PRESCRIBED BY THE IRDA. IT WAS FURTHER S UBMITTED THAT THERE IS A DEFICIT OF ` .233,34,76,828/- IN THE POLICYHOLDERS ACCOUNT FORMAT-A-RA WHICH HAS BEEN MADE GOOD BY TRANSFER OF FUNDS FROM THE SHAREHOLDERS ACCOUNT. THEREFORE, THE FIGURES T HAT APPEARED IN FORM-I ARE SUBSEQUENT TO THIS TRANSFER FROM SHAREHO LDERS ACCOUNT. IT WAS FURTHER SUBMITTED THAT THE EARLIER FORMAT D ID NOT PROVIDE FOR SEGREGATING INSURANCE BUSINESS INTO AND SHAREHOLDE RS AND THEREFORE, THE REQUIREMENT TO TRANSFER FUNDS FROM O NE ACCOUNT TO OTHER AND THE NEED THEREOF FOR AGGREGATING TWO ACCO UNTS TO REFLECT THE OUTCOME OF SURPLUS OR DEFICIT DID NOT ARISE AT THAT TIME. IN ORDER TO ARRIVE AT THE ACTUARIAL SURPLUS/ DEFICIT AS PER THE INSURANCE ACT, 1938 IT WAS SUBMITTED THAT THE ACCOUNTS ARE AGGREGA TED AND ACCORDINGLY ASSESSEE HAS FILED THE RETURN OF INCOME . AS PER THE ACCOUNT BEFORE TRANSFER OF THE AMOUNTS, THERE WAS A DEFICIT TO AN EXTENT OF ` .161,40,61,362/- AND SURPLUS IN SHAREHOLDERS ACCOU NT OF ` .10,93,77,555/-. IN VIEW OF THIS ASSESSEE ARRIVED A T A LOSS OF ` .150,46,83,807/- FOR THE VALUATION YEAR ENDED 31.03 .2005 BY COMBING BOTH ACCOUNTS. THE LEARNED COUNSEL REFERRED TO THE ACTUARIAL VALUATION REPORT PLACED IN THE PAPER BOOK AND ALSO RECONCILIATION STATEMENT AS PER RULE-2 AND SUBMITTE D THAT THE RECONCILIATION STATEMENT IS AS PER THE RULES UNDER INSURANCE ACT 1938. 10. IT WAS FURTHER SUBMITTED THAT EVEN IF ONE WERE TO A CCEPT THE FLIPSIDE OF THE ACCOUNTING, AO CANNOT TAKE ONLY ONE SIDE OF THE ACCOUNT TO TAX THE SURPLUS ARRIVED AFTER TRANSFER O F CAPITAL FUNDS FROM THE SHAREHOLDERS ACCOUNT. IF ONE WERE TO ACCE PT THE TRANSFER FROM ONE ACCOUNT TO ANOTHER, THE SURPLUS IN POLICYH OLDERS ACCOUNT WILL GET NULLIFIED BY DEFICIT IN SHAREHOLDERS ACCO UNT CONSEQUENT TO TRANSFER FROM ONE TO ANOTHER. IF THE METHOD IS TO B E FOLLOWED AS PER THE INSURANCE ACT, 1938, THEN THE COMBINED ACCOUNT WHICH ASSESSEE HAS FOLLOWED IS CORRECT METHOD AND AO HAS NO OPTION THAN TO ACCEPT THE ACCOUNTS AS PREPARED UNDER THE INSURA NCE ACT, 1938. ITA NOS.6854 TO 6856 6509 7765 TO 7767 AND 7213 ICI CI PRULIFE MUMBAI F BENCH PAGE 9 OF 77 11. THE LEARNED COUNSEL REFERRING TO RULE-2 SUBMITTED T HAT THE ACTUARIAL VALUATION MADE IN ACCORDANCE WITH THE INS URANCE ACT, 1938 (ACT NO.4 OF 1938) SHOULD BE READ TO MEAN THAT IT IS AN INCORPORATION INTO THE INCOME TAX ACT AND NOT A MER E REFERENCE. THEREFORE, IT WAS HIS SUBMISSION THAT THE ACTUARIAL VALUATION HAS TO BE COMPUTED IN ACCORDANCE WITH THE INSURANCE ACT, 1 938 THEN EXISTING AND NOT WITH REFERENCE TO THE SUBSEQUENT A MENDMENTS MADE IN THE FORMATS UNDER THE IRDA ACT. HE THEN REF ERRED TO THE PRINCIPLE OF LEGISLATION BY INCORPORATION AND LE GISLATION BY REFERENCE AND REFERRED TO THE DECISIONS OF THE HON 'BLE SUPREME COURT OF INDIA IN THE CASE OF MAHINDRA & MAHINDRA L TD VS. UNION OF INDIA & OTHERS (1979) 2 SUPREME COURT CASES 529 GIV EN IN THE CONTEXT OF MRTP ACT, 1969 AND BHARAT COOPERATIVE BA NK MUMBAI LTD VS. COOPERATIVE BANK EMPLOYEES UNION AIR 2007 ( SC) 2320 12. THE LEARNED COUNSEL ALSO SUBMITTED THAT IN CASE THE LANGUAGE OF THE STATUTORY PROVISION IS AMBIGUOUS AND CAPABLE OF TWO CONSTRUCTIONS, THAT CONSTRUCTION MUST BE ADOPTED WH ICH WILL GIVE MEANING AND EFFECT TO THE OTHER PROVISIONS OF THE E NACTMENT RATHER THAN THAT WHICH WILL GIVE NONE. HE REFERRED TO THE DECISION OF THE HON'BLE SUPREME COURT IN THE CASE OF ADDL. CIT VS. SURAT ART SILK CLOTH MANUFACTURERS ASSOCIATION 121 ITR 1(SC) TO SU BMIT THAT THE CONSTRUCTION WHICH IS IN TUNE WITH THE PROVISIONS O F THE ACT CAN ONLY BE ADOPTED AND REFERRED TO THE FOLLOWING FROM THE A BOVE SAID ORDER. IT IS TRUE THAT THE CONSEQUENCES OF A SUGGESTED CO NSTRUCTION CANNOT ALTER THE MEANING OF A STATUTORY PROVISION W HERE SUCH MEANING IS PLAIN AND UNAMBIGUOUS, BUT THEY CAN CERT AINLY HELP TO FIX ITS MEANING IN CASE OF DOUBT OR AMBIGUI TY. LET US EXAMINE WHAT WOULD BE THE CONSEQUENCES OF THE CONST RUCTION CONTENDED FOR ON BEHALF OF THE REVENUE. IF THE CONS TRUCTION PUT FORWARD ON BEHALF OF THE REVENUE WERE ACCEPTED, THE N AS ALREADY POINTED OUT ABOVE, NO TRUST OR INSTITUTION WHOSE PURPOSE IS PROMOTION OF AN OBJECT OF GENERAL PUBLIC UTILITY, WOULD BE ABLE TO CARRY ON ANY BUSINESS, EVEN THOUGH SUCH BUSINESS IS HELD UNDER TRUST OR LEGAL OBLIGATION TO APPLY ITS INCOME WHOLLY TO THE CHARITABLE PURPOSE OR IS CARRI ED ON BY THE TRUST OR INSTITUTION FOR THE PURPOSE OF EARNING PRO FIT TO BE ITA NOS.6854 TO 6856 6509 7765 TO 7767 AND 7213 ICI CI PRULIFE MUMBAI F BENCH PAGE 10 OF 77 UTILIZED EXCLUSIVELY FOR FEEDING THE CHARITABLE PUR POSE. IF ANY SUCH BUSINESS IS CARRIED ON, THE PURPOSE OF THE TRU ST OR INSTITUTION WOULD CEASE TO BE CHARITABLE AND NOT ON LY THE INCOME FROM SUCH BUSINESS BUT THE ENTIRE INCOME OF THE TRUST OR INSTITUTION FROM WHATEVER SOURCE DERIVED, WOULD LOSE THE TAX EXEMPTION. THE RESULT WOULD BE THAT NO TRUST OR INS TITUTION ESTABLISHED FOR PROMOTION OF AN OBJECT OF GENERAL P UBLIC UTILITY WOULD BE ABLE TO ENGAGE IN BUSINESS FOR FEAR THAT I T MIGHT LOSE THE TAX EXEMPTION ALTOGETHER AND A MAJOR SOURCE OF INCOME FOR PROMOTING OBJECTS OF GENERAL PUBLIC UTILITY WOULD B E DRIED UP. IT IS DIFFICULT TO BELIEF THAT THE LEGISLATURE COULD H AVE INTENDED TO BRING ABOUT A RESULT SO DRASTIC IN ITS CONSEQUENCE. IF THE INTENTION OF THE LEGISLATURE WERE TO PROHIBIT A TRU ST OR INSTITUTION ESTABLISHED FOR THE PROMOTION OF AN OBJ ECT OF GENERAL PUBLIC UTILITY FROM CARRYING ON ANY ACTIVITY FOR PR OFIT, IT WOULD HAVE PROVIDED IN THE CLEAREST TERMS THAT NO SUCH TR UST OR INSTITUTION SHALL CARRY ON ANY ACTIVITY FOR PROFIT, INSTEAD OF USING INVOLVED AND OBSCURE LANGUAGE GIVING RISE TO LINGUISTIC PROBLEMS AND PROMOTING INTERPRETATIVE LITIGATION. T HE LEGISLATURE WOULD HAVE USED LANGUAGE LEAVING NO DOU BT AS TO WHAT WAS INTENDED AND NOT LEFT ITS INTENTION TO BE GATHERED BY DOUBTFUL IMPLICATION FROM AN AMENDMENT MADE IN THE DEFINITION CLAUSE AND THAT TOO IN LANGUAGE FAR FROM CLEAR. 13. THE LEARNED COUNSEL FURTHER RELIED ON PRINCIPLE LAI D DOWN BY HONBLE HIMACHAL PRADESH HIGH COURT DECISION IN YOG ENDRA CHANDRA VS CWT 187 ITR 58 TO SUBMIT THAT IF A LITE RAL INTERPRETATION AS SUGGESTED BY REVENUE IS ACCEPTED, IT WOULD LEAD TO A MANIFESTLY ABSURD RESULT WHICH IS NOT THE INTENT ION OF LEGISLATURE. IN THIS CASE THE CAPITAL TRANSFER WAS CONSIDERED AS INCOME IN THE PRETEXT OF RELYING ON FORM I. HE REFERRED TO AOS O RDER TO SUBMIT THAT THE HON'BLE SUPREME COURT IN THE CASE OF LIC VS. CI T 51 ITR 773 HAD APPROVED THAT AO HAS TO ARRIVE AT THE PROFITS O F THE INSURANCE BUSINESS AS PER FIRST SCHEDULE AND HE WAS NOT EMPOW ERED TO MAKE ANY VARIATION. TO THAT EXTENT, THE ACCOUNTS THAT WE RE PREPARED UNDER THE INSURANCE ACT, 1938 ARE TO BE ACCEPTED. H OWEVER, IT WAS SUBMITTED THAT RELIANCE ON THE HON'BLE BOMBAY HIGH COURT JUDGMENT IN LIC VS. CIT 115 ITR 45 IS NOT CORRECT A S THAT JUDGMENT WAS REVERSED BY THE HON'BLE SUPREME COURT IN 219 IT R 410. THEREFORE, IT WAS SUBMITTED THAT AO RELIED ON THE O VER-RULED ITA NOS.6854 TO 6856 6509 7765 TO 7767 AND 7213 ICI CI PRULIFE MUMBAI F BENCH PAGE 11 OF 77 JUDGMENT TO DENY ASSESSEE THE BENEFIT OF COMBINING THE ACCOUNTS. IT WAS SUBMITTED THAT THE RULES AND PROVISIONS HAS TO BE IMPLEMENTED BY MAKING A HARMONIOUS READING OF THE PROVISIONS AN D INTERNAL TRANSFER SHOULD BE PERMITTED WHICH WAS MADE AS PER IRDA REGULATIONS FOR WHICH THE INCOME TAX ACT WAS NOT AM ENDED TO INCORPORATE THE CHANGES. 14. LD. COUNSEL ALSO REFERRED TO THE ANNUAL ACCOUNTS, V ARIOUS FORMS AND REGULATIONS AND FILED RECONCILIATION STAT EMENTS PLACED BEFORE AUTHORITIES TO EXPLAIN THE RATIONALE OF ARRI VING AT SURPLUS/DEFICIT AS WAS DONE BY ASSESSEE COMPANY. 15. IN REPLY THE LEARNED DR SUBMITTED THAT THERE IS NO RELEVANCE OF THE PROCEEDINGS INITIATED UNDER SECTION 263 AND 147 TO THE ISSUE IN PRESENT AS THEIR ACTIONS ARE UNDER DIFFERENT PRO VISIONS AND ARE DIFFERENT MATTER ALTOGETHER. IT WAS HIS SUBMISSION THAT THE ITAT ORDER AGAINST APPEAL ON ORDER UNDER SECTION 263 HAD NO IMPACT AS ITAT CONSIDERED THE ISSUE IN THE CONTEXT OF ERRONEO US AND PREJUDICE TO THE INTEREST OF REVENUE. LIKEWISE DISMISSAL OF S LP DOES NOT ESTABLISH ANY LAW AND THE FACTUAL POSITION WAS NOT AFFECTED BY THE ORDERS OF THE HIGH COURT OR SUPREME COURT. HE THEN REFERRED TO THE PROVISIONS OF LAW UNDER SECTION 44 OF THE INCOME TA X ACT, RULE-2 OF FIRST SCHEDULE AND THE ACTUARIAL REPORT PLACED ON R ECORD TO SUBMIT THAT ASSESSEE HAS PREPARED THE ACTUARIAL SURPLUS UN DER THE IRDA REGULATIONS WHICH AO HAS ACCEPTED AS PER THE PROVIS IONS OF LAW. THERE MAY BE CREDIT OR TRANSFER FROM SHAREHOLDERS FUNDS BUT AO HAS NO OPTION THAN TO ARRIVE AT THE SURPLUS AS DISC LOSED IN FORM-I AS PER THE RULES. HE ALSO REFERRED TO FORM-I AND THE S URPLUS AS PER THE ACTUARIAL VALUATION EXTRACTED BY AO IN THE ASSESSME NT ORDER ITSELF. HE RELIED ON THE PRINCIPLES LAID DOWN BY THE HON'BL E SUPREME COURT IN THE CASE OF VEGETABLE PRODUCTS, 88 ITR 192 WITH REFERENCE TO THE PROVISIONS FOR INTERPRETATION OF LAW AND FURTHER IN THE CASE OF HINDUSTAN CONSTRUCTION CO. LTD. V. CIT 208 ITR 291. ITA NOS.6854 TO 6856 6509 7765 TO 7767 AND 7213 ICI CI PRULIFE MUMBAI F BENCH PAGE 12 OF 77 16. LD CIT DR FURTHER SUBMITTED THAT IN CASE THERE ARE ANY TRANSFERS FROM ONE ACCOUNT TO ANOTHER ACCOUNT, THAT ISSUE IS NOT FOR AO TO EXAMINE AS THE ACTUARY ARRIVED AT THE SURPLUS AND REPORTED IN FORM-I WHICH IS THE BASIS FOR ASSESSMENT UNDER RULE -2 OF FIRST SCHEDULE TO THE INCOME TAX ACT. WHETHER THERE IS A SURPLUS OR NOT IN THE ACTUARIAL REPORT CAN ONLY BE VERIFIED BY AO UNDER RULE-2 AND HE IS DUTY BOUND TO ACT ON THE BASIS OF FORM AS PR ESCRIBED UNDER THE REGULATIONS WHICH INDICATE SURPLUS DURING THE Y EAR WHICH AO HAS ACCEPTED AS MANDATED BY THE STATUTORY PROVISION S AND THE LEGAL INTERPRETATIONS. IT WAS FURTHER SUBMITTED THAT AS F AR AS LIFE INSURANCE BUSINESS IS CONCERNED, THE OLD PROVISIONS WILL APPLY AND AS THERE IS NO AMENDMENT TO THE ACT AS SUCH THE IRD A CAN ONLY MODIFY THE FORMAT OF REPORTING. HE ALSO SUBMITTED T HAT THERE IS NO CONTRADICTION IN THE OLD AND NEW FORMAT PRESCRIBED UNDER THE IRDA AND RELIED ON THE DECISION OF THE HON'BLE SUPREME C OURT IN THE CASE OF SURANA STEELS PVT. LTD VS. DY. CIT, 104 TAXMAN 1 88 (SC) TO SUBMIT THAT REFERENCE TO THE OTHER PROVISIONS ARE N OT REQUIRED WHEN THE ACT IS VERY CLEAR. IT WAS FURTHER SUBMITTED THA T THE REGULATORY PROVISIONS FOR OTHER INSURANCE BUSINESSES HAVE TAKE N PROFIT AS PROFIT & LOSS A/C AS BASIS FOR THE COMPUTATION BUT FOR THE LIFE INSURANCE BUSINESS, THEY HAVE TAKEN A DIFFERENT METHOD OF CAL CULATION BASED ON DETERMINATION OF ACTUARIAL SURPLUS/DEFICIT. IT W AS SUBMITTED THAT AS FAR AS LIFE INSURANCE BUSINESS IS CONCERNED, THE INTENTION OF THE LEGISLATURE IS NOT TO CONSIDER CAPITAL OR REVENUE B UT ONLY TO ARRIVE AT SURPLUS OR DEFICIT. IT WAS FURTHER SUBMITTED THAT E VEN THOUGH AMENDMENT WAS MADE TO RULE-5, NO SUCH AMENDMENT WAS MADE IN RULE-2 OF PART-A OF FIRST SCHEDULE AND VIRTUALLY TH ERE WAS NO CHANGE FROM THE SITUATION FROM INSURANCE ACT 1938 TO IRDA ACT1999. IT IS VERY CLEAR THAT ACTUARIAL REPORT IS NOTHING TO DO W ITH SHAREHOLDERS BUT ONLY. 17. LD.CIT DR FURTHER SUBMITTED THAT MEANING OF ACTUARI AL SURPLUS USED IN RULE-2 IS NOT DEFINED. AS PER RULE 4 OF THE IRDA ITA NOS.6854 TO 6856 6509 7765 TO 7767 AND 7213 ICI CI PRULIFE MUMBAI F BENCH PAGE 13 OF 77 REGULATIONS, ACTUARIAL REPORT WAS ABSTRACTED IN A S TATEMENT TO BE PREPARED BY THE ACTUARY AS PER PROCEDURE. IN VIEW O F THIS THE ACTUARIAL REPORT PROVIDED IN FORM-I IS THE BASE FOR THE ASSESSMENT FOR AO. THE REGULATIONS 8 OF THE IRDA STARTS AS A S TATEMENT SHOWING TOTAL AMOUNT OF SURPLUS ARISEN DURING THE I NTER VALUATION PERIOD. FURTHER IT DEPENDS ON THE COMPOSITION OF SU RPLUS WHICH CONSIST OF A TO F ITEMS AND ITEM J TALKS ABOUT THE TOTAL SURPLUS (A TO I). SINCE FORM I INDICATE SURPLUS FOR THE TOTAL BUS INESS, THE TOTAL SURPLUS HAS TO BE CONSIDERED AS ACTUARIAL SURPLUS F OR THE PURPOSE OF RULE-2 FOR THE INTER VALUATION PERIOD. HE ALSO FURT HER REFERRED TO THE GUIDELINES ISSUED IN IRDA CIRCULAR 2004 TO STATE TH AT TRANSFER OF FUNDS SHALL NOT BE REVERSIBLE IN NATURE. HE ALSO RE FERRED TO AOS ORDER PASSED IN ASSESSMENT YEAR 2008-09 WHICH IS LI TTLE MORE ELABORATE THAN THE ORDER IN ASSESSMENT YEAR 2005-06 TO SUPPORT THE STAND OF THE REVENUE THAT THE SURPLUS ARRIVED AT IN FORM I IS THE ACTUARIAL SURPLUS TO BE BROUGHT TO TAX UNDER THE RU LES. THE LEARNED DR IN HIS SUBMISSION ALSO REFERRED TO THE HON'BLE S UPREME COURT JUDGMENT IN THE CASE OF LIC VS. CIT 51 ITR 773 (SC) FOR THE PRIMACY OF SECTION 44 AND RULE-2 IN ARRIVING AT THE ACTUARI AL VALUATION. HE SUPPORTED THE ORDER OF AO AND THE CIT (A). 18. WE HAVE CONSIDERED THE SUBMISSIONS AND PERUSED THE RECORD AND RELEVANT PROVISIONS AND THE CASE LAWS RELIED UP ON. THERE IS NO DISPUTE WITH THE TAXABILITY OF INSURANCE BUSINESS A S GOVERNED BY THE PROVISIONS OF SECTION 44 OF THE ACT R.W. FIRST SCHE DULE OF INCOME TAX ACT 1961. SECTION 44 PROVIDES AS UNDER: 44. NOTWITHSTANDING ANYTHING TO THE CONTRARY CONTA INED IN THE PROVISIONS OF THIS ACT RELATING TO THE COMPUTAT ION OF INCOME CHARGEABLE UNDER THE HEAD 'INTEREST ON SECURITIES', 'INCOME FROM HOUSE PROPERTY', 'CAPITAL GAINS' OR 'INCOME FR OM OTHER SOURCES', OR IN SECTION 199 OR IN SECTIONS 28 TO[43B ], THE PROFITS AND GAINS OF ANY BUSINESS OF INSURANCE, INCLUDING A NY SUCH BUSINESS CARRIED ON BY A MUTUAL INSURANCE COMPANY O R BY A CO-OPERATIVE SOCIETY, SHALL BE COMPUTED IN ACCORDAN CE WITH THE RULES CONTAINED IN THE FIRST SCHEDULE. ITA NOS.6854 TO 6856 6509 7765 TO 7767 AND 7213 ICI CI PRULIFE MUMBAI F BENCH PAGE 14 OF 77 THE FIRST SCHEDULE CONTAINS THREE PARTS A, B & C. PART-A PERTAINS TO LIFE INSURANCE BUSINESS, PART-B FOR OTHER BUSINE SS AND PART-C OTHER PROVISIONS. THE RELEVANT RULES IN PART A FOR LIFE INSURANCE BUSINESS ARE AS UNDER: PROFITS OF LIFE INSURANCE BUSINESS TO BE COMPUTED SEPARATELY 1. IN THE CASE OF A PERSON WHO CARRIES ON OR AT ANY TIME IN THE PREVIOUS YEAR CARRIED ON LIFE INSURANCE BUSINESS, T HE PROFITS AND GAINS OF SUCH PERSON FROM HAT BUSINESS SHALL BE COMPUTED SEPARATELY FROM HIS PROFITS AND GAINS FROM ANY OTHER BUSINESS. COMPUTATION OF PROFITS OF LIFE INSURANCE BUSINESS 2. THE PROFITS AND GAINS OF LIFE INSURANCE BUSINESS SHALL BE TAKEN TO BE THE ANNUAL AVERAGE OF THE SURPLUS ARRIV ED AT BY ADJUSTING THE SURPLUS OR DEFICIT DISCLOSED BY THE A CTUARIAL VALUATION MADE IN ACCORDANCE WITH THE INSURANCE ACT , 1938 (4 OF 1938) IN RESPECT OF THE LAST INTER-VALUATION PER IOD ENDING BEFORE THE COMMENCEMENT OF THE ASSESSMENT YEAR, SO AS TO EXCLUDE FROM IT ANY SURPLUS OR DEFICIT INCLUDED THE REIN WHICH WAS MADE IN ANY EARLIER INTER-VALUATION PERIOD. DEDUCTIONS 3. OMITTED 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 A NNUAL AVERAGE OF A SURPLUS DISCLOSED BY A VALUATION FOR A N INTER- VALUATION PERIOD EXCEEDING TWELVE MONTHS, THEN IN C OMPUTING THE INCOME-TAX PAYABLE FOR THAT YEAR, CREDIT SHALL NOT BE GIVEN IN ACCORDANCE WITH SECTION 199 FOR THE INCOME-TAX P AID IN THE PREVIOUS YEAR, BUT CREDIT SHALL BE GIVEN FOR THE AN NUAL AVERAGE OF THE INCOME-TAX PAID BY DEDUCTION AT SOURCE FROM INTEREST ON SECURITIES OR OTHERWISE DURING SUCH PERIOD. RULE-7 DEFINES LIFE INSURANCE BUSINESS MEANS LIFE INSURANCE BUSINESS AS DEFINED IN CLAUSE-2 OF SECTION 2 OF INS URANCE ACT 1938. ASSESSEE INCORPORATED AFTER THE ENACTMENT OF THE IR DA 1999, IS IN THE LIFE INSURANCE BUSINESS AND THERE IS NO DISPUTE WITH THAT. AS PER SECTION 44 FOR A BUSINESS INVOLVED IN INSURANCE BUS INESS NOTWITHSTANDING CONTAINED IN ANY OTHER HEAD OF INCO ME LIKE INTEREST ITA NOS.6854 TO 6856 6509 7765 TO 7767 AND 7213 ICI CI PRULIFE MUMBAI F BENCH PAGE 15 OF 77 ON SECURITIES, HOUSE PROPERTY, CAPITAL GAINS AND OT HER SOURCES, THE INCOME FROM PROFITS AND BUSINESS ARE TO BE COMPUTED ACCORDING TO THE FIRST SCHEDULE. PRIMACY OF SEC.44 AND POWER OF AO TO COMPUTE AS PER RULE 2 OF FIRST SCHEDULE WAS ALSO DECIDED BY HONBLE SUPREME COURT IN NUMBER CASES RELIED ON BY BOTH PAR TIES. AS THE DISPUTE IS NOT WITH THE ABOVE, THERE IS NO NEED TO REITERATE THOSE PRINCIPLES OR DISCUSS CASES IN THIS ORDER. 19. RULE-2 IS THE MAIN COMPUTATION PROVISION WHICH IS A PPLICABLE TO THE LIFE INSURANCE BUSINESS. AS PER RULE-2 THE P ROFITS AND GAINS OF LIFE INSURANCE BUSINESS SHALL BE TAKEN TO BE THE AN NUAL AVERAGE OF THE SURPLUS ARRIVED AT BY ADJUSTING THE SURPLUS OR DEFI CIT DISCLOSED BY THE ACTUARIAL VALUATION MADE IN ACCORDANCE WITH THE INS URANCE ACT, IN RESPECT OF THE LAST INTER VALUATION PERIOD SO AS TO EXCLUDE ANY SURPLUS OR DEFICIT INCLUDED THEREIN WHICH WAS MADE IN ANY I NTER VALUATION PERIOD. ACCORDING TO THE RULE THE SURPLUS OR DEFICI T BETWEEN TWO VALUATION PERIODS CAN ONLY BE TAKEN AS INCOME OR LO SS 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 D IFFERENCE BETWEEN X & Y WILL BE THE INCOME OF THE INTER VALUATION PERIO D FOR THE PURPOSE OF RULE 2. THEREFORE, ACTUARIAL EVALUATION DONE IN RES PECTIVE PERIODS HAS IMPORTANCE. BEFORE THE IRDA ACT, ONLY LIFE INSURANC E CORPORATION WAS PERMITTED TO INVOLVE ITSELF IN LIFE INSURANCE B USINESS. THE ACTUARIAL VALUATION WAS NOT UNDERTAKEN EVERY YEAR B UT ONCE IN THREE YEARS. THEREFORE, THE RULE PROVIDES FOR ONLY AVERAG E OF THE SURPLUS TO ARRIVE BETWEEN TWO INTER VALUATION PERIODS. HOWEVER , WITH THE ENACTMENT OF IRDA ACT 1999 AND REGULATIONS THEREIN NOT ONLY THE PRIVATE PARTICIPANTS WERE PERMITTED TO DO BUSINESS BUT PRESENTATION OF ACCOUNTS AND REPORTS WERE MODIFIED. PAST HISTORY OF THE ASSESSEE COMPANY : 20. ASSESSEE COMPANY WAS GOVERNED BY THE IRDA ACT AND I TS REGULATIONS FROM ITS INCEPTION. IN EARLIER YEARS AT TEMPTS WERE MADE ITA NOS.6854 TO 6856 6509 7765 TO 7767 AND 7213 ICI CI PRULIFE MUMBAI F BENCH PAGE 16 OF 77 BY REVENUE TO DISTURB THE INCOMES OR LOSSES ASSESSE D BOTH UNDER SEC. 263 AND SEC. 147, AS BRIEFLY STATED IN LD. COU NSELS ARGUMENTS. THE INCOMES AND LOSSES SHOWN BY ASSESSEE IN VARIOUS ASSESSMENT YEARS ARE AS UNDER: A.Y. RETURNED INCOME/(LOSS) SURPLUS/(DEFICIT) AS PER A-RA AMOUNT TRANSFERRED FROM SHA SURPLUS AS PER FORM I 2001-02 (204,359,146) (206,619,000) - - 2001-03 (854,736,440) 177,434,000 1,241,806,000 - 2003-04 (987,036,885) 22,000 1,583,784,000 - 2004-05 (1,742,378,630) (22,000) 2,367,746,000 - 2005-06 (1,505,539,430) (317,487,000) 2,333,474,000 358,696,280 2006-07 (2,005,534,043) 1100,641,000) 2,306,655,000 775,734,930 2007-08 (4,128,758,204) (1,360,152,000) 7,579,972,000 1,426,033,160 2008-09 8,233,771,502) (3,251,153,000) 16,063,495,000 3,029,120,030 21. THE DISPUTE IN THIS CASE IS IN ADOPTING THE AMOUNT OF SURPLUS OR DEFICIT AS PER ACTUARIAL VALUATION. THERE IS NO DISPUTE WITH METHOD OF ACTUARIAL VALUATION. THE DISPUTE IS CENTERED ARO UND THE AMOUNTS REPRESENTED IN FORM-I AS PER THE IRDA REGULATIONS. CONSEQUENT TO CHANGES BROUGHT BY IRDA ACT, AND ITS REGULATIONS TH E REVISED FORMAT IN FORM I DEVIATES FROM THE FORM-I PRESCRIBED UNDER INSURANCE ACT 1938. ASSESSEE RECONCILES THE FORM WITH OLD REGULAT IONS AND FILED RETURN OF INCOME/ LOSS. THE AO ADOPTS THE TOTAL S URPLUS STATED IN FORM-I UNDER NEW REGULATIONS IGNORING THE ASSESSEE SUBMISSIONS ABOUT CHANGES IN ACCOUNTING PROCEDURES AND NEED FOR RECONCILIATION. THIS ASPECT WAS EXAMINED BY THE HON'BLE BOMBAY HIGH COURT IN THE ASSESSEE OWN CASE OF ICICI PRUDENTIAL LIFE INSURANC E CO. LTD. VS. ACIT 325 ITR 471 (BOM.). THE FACTS EXAMINED BY THE HON'BLE BOMBAY HIGH COURT PERTAIN TO THE ASSESSMENT YEAR 2003-04 W HEREIN CONSEQUENT TO THE REOPENING OF THE ASSESSMENT UNDER SECTION 148, THE MATTER WAS CHALLENGED BEFORE THE HON'BLE BOMBAY HIGH COURT. THE ENTIRE SCHEME, VARIOUS REGULATIONS APPLICABLE, CHANGE IN FORMATS AND METHOD OF ACCOUNTS WERE ELABORATELY DIS CUSSED BY THE HON'BLE BOMBAY HIGH COURT AS UNDER: DURING THE COURSE OF THE ASSESSMENT YEAR 2003-04, THE PETITIONER FILED A RETURN OF INCOME ON NOVEMBER 27, 2003, ITA NOS.6854 TO 6856 6509 7765 TO 7767 AND 7213 ICI CI PRULIFE MUMBAI F BENCH PAGE 17 OF 77 REPORTING A NET LOSS OF RS. 98.70 CRORES. THE STATE MENT OF THE COMPUTATION OF PROFITS AND GAINS FROM BUSINESS SHOW S AN ACTUARIAL DEFICIT OF RS. 158.37 CRORES. AFTER EXCLU DING A DEFICIT OF RS. 48.47 CRORES, ARISING OUT OF PENSION SCHEMES EXEMPT UNDER SECTION 10(23AAB), THE DEFICIT IN THE ACCOU NT STOOD AT RS. 109.90 CRORES. THE PETITIONER HAD AN INCOME SU RPLUS IN THE SHAREHOLDERS' ACCOUNT OF RS. 11.20 CRORES. AS A RE SULT, THE DEFICIT FROM THE INSURANCE BUSINESS WAS RS. 98.70 C RORES. SECTION 44 OF THE INCOME-TAX ACT, 1961, PROVIDES TH AT NOTWITHSTANDING ANYTHING CONTAINED TO THE CONTRARY IN THE PROVISIONS OF THE ACT RELATING TO THE COMPUTATION O F INCOME CHARGEABLE UNDER THE HEAD 'INTEREST ON SECURITIES', 'INCOME FROM HOUSE PROPERTY', 'CAPITAL GAINS' OR 'INCOME FROM OT HER SOURCES' OR IN SECTION 199 OR IN SECTIONS 28 TO 43B THE PROF ITS AND GAINS OF ANY BUSINESS OF INSURANCE SHALL BE COMPUTED IN A CCORDANCE WITH THE RULES CONTAINED IN THE FIRST SCHEDULE TO T HE ACT. RULE 2 OF THE FIRST SCHEDULE PROVIDES AS FOLLOWS: 'THE PROFITS AND GAINS OF LIFE INSURANCE BUSINESS S HALL BE TAKEN TO BE THE ANNUAL AVERAGE OF THE SURPLUS ARRIVED AT BY ADJUSTING THE SURPLUS OR DEFICIT DISC LOSED 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.' 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 INCLUDE SUB-SECTIONS (1A) AND (1B) . SUBSECTION (1A) TO SECTION 11 PROVIDES THAT EVERY I NSURER, ON OR AFTER THE COMMENCEMENT OF THE IRDA ACT, 1999, IN RESPECT OF INSURANCE BUSINESS TRANSACTED BY HIM AND IN RESPECT OF SHAREHOLDERS' FUNDS, SHALL, AT THE EXPI RATION OF EACH FINANCIAL YEAR, PREPARE WITH REFERENCE TO THAT YEAR, A BALANCE SHEET, A PROFIT AND LOSS ACCOUNT, A SEPAR ATE ACCOUNT OF RECEIPTS AND PAYMENTS, AND REVENUE ACCOU NT IN ACCORDANCE WITH THE REGULATIONS MADE BY THE AUTHORITY. SECTION 13(1) PROVIDES THAT EVERY INSURE R CARRYING ON LIFE INSURANCE BUSINESS SHALL, INTER A LIA, IN RESPECT OF THE LIFE INSURANCE BUSINESS TRANSACTED IN INDIA, CAUSE AN INVESTIGATION TO BE MADE EACH YEAR BY AN ACTUARY INTO THE FINANCIAL CONDITION OF THE LIFE IN SURANCE BUSINESS CARRIED ON BY HIM, INCLUDING A VALUATION OF HIS LIABILITIES AND SHALL CAUSE AN ABSTRACT OF THE REP ORT OF SUCH ACTUARY TO BE MADE IN ACCORDANCE WITH THE REGULATIONS LAID DOWN IN PART I OF THE FOURTH SCHE DULE ITA NOS.6854 TO 6856 6509 7765 TO 7767 AND 7213 ICI CI PRULIFE MUMBAI F BENCH PAGE 18 OF 77 AND IN CONFORMITY WITH THE REQUIREMENTS OF PART II OF THAT SCHEDULE. THE FIFTH PROVISO TO SECTION 13 STI PULATES THAT ON OR AFTER THE COMMENCEMENT OF THE IRDA ACT, 1999 EVERY INSURER SHALL CAUSE AN ABSTRACT OF THE REPOR T OF THE ACTUARY TO BE MADE IN THE MANNER SPECIFIED BY THE REGULATIONS MADE 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 REP ORT AND ABSTRACT) REGULATIONS, 2000. REGULATIONS 3 AND 4 STIPULATE THE PROCEDURE FOR PREPARATION OF ACTUARIA L REPORTS AND ABSTRACTS AND THE REQUIREMENTS APPLICAB LE. UNDER REGULATION 3(4)(V), EACH ABSTRACT AND STATEM ENT IS TO BE ACCOMPANIED BY A CERTIFICATE SIGNED BY THE APPOINTED ACTUARY, INTER ALIA, STATING THAT IN HIS OPINION, THE MATHEMATICAL RESERVES ARE ADEQUATE TO MEET THE INSURER'S FUTURE COMMITMENTS UNDER CONTRACTS AND T HE REASONABLE EXPECTATION OF POLICYHOLDERS. EACH INSU RER IS REQUIRED TO PREPARE STATEMENTS WHICH ARE TO BE ANNE XED TO THE ABSTRACT AND A LIST OF THOSE STATEMENTS IS S ET OUT IN REGULATION 4(2). REGULATION 8 PROVIDES THAT A STAT EMENT SHOWING THE TOTAL AMOUNT OF SURPLUS ARISING DURING THE INTER-VALUATION PERIOD AND ALLOCATION OF SUCH SURPL US, SHALL BE FURNISHED SEPARATELY FOR PARTICIPATING BU SINESS AND FOR NON-PARTICIPATING BUSINESS, 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 T HE INTER-VALUATION PERIOD. THE AUTHORITY HAS ALSO NOTIFIED THE INSURANCE REGUL ATION AND DEVELOPMENT AUTHORITY (PREPARATION OF FINANCIAL STATEMENTS AND AUDITOR'S REPORT OF INSURANCE COMPAN IES) REGULATIONS, 2002. PART V DEALS WITH THE PROVISION OF FINANCIAL STATEMENTS. EVERY INSURER IS REQUIRED TO PREPARE (I) A REVENUE ACCOUNT WHICH IS ALSO DESCRIBED AS A POLICYHOLDERS' ACCOUNT; AND (II) A PROFIT AND LOSS ACCOUNT, WHICH IS ALSO DESCRIBED AS A SHAREHOLDERS' ACCOUNT , APART FROM A BALANCE-SHEET. THE STATUTORY FORMS ARE PRESCRIBED BY THE REGULATIONS. FORM A-RA IS PRESCRI BED FOR THE PREPARATION OF THE REVENUE ACCOUNT OR THE POLICYHOLDERS' ACCOUNT. FORM A-RA REFLECTS THE SUR PLUS OR, AS THE CASE MAY BE, THE DEFICIT GENERATED IN TH E REVENUE ACCOUNT FOR THE YEAR ENDING 31ST MARCH. AS A RESULT OF THE REGULATIONS, THE PETITIONER WHIC H IS ENGAGED IN THE BUSINESS OF LIFE INSURANCE IS REQUI RED TO PREPARE AND MAINTAIN TWO ACCOUNTS NAMELY, (I) A RE VENUE ITA NOS.6854 TO 6856 6509 7765 TO 7767 AND 7213 ICI CI PRULIFE MUMBAI F BENCH PAGE 19 OF 77 ACCOUNT OF POLICYHOLDERS, AND (II) A PROFIT AND LO SS ACCOUNT OF SHAREHOLDERS. FOR THE PREVIOUS YEAR WHICH ENDED ON MARCH 31, 2003, THE POLICYHOLDERS' ACCOUNT REFL ECTED A DEFICIT OF RS. 158.37 CRORES. THIS DEFICIT WAS MADE GOOD BY THE TRANSFER OF AN AMOUNT OF RS. 158.37 CRORES FROM THE SHAREHOLDERS' ACCOUNT TO THE POLICYHOLDERS ACCOUN T. THIS WAS ESSENTIALLY AN INTERNAL TRANSFER OF FUNDS. FORM I W HICH HAS BEEN PREPARED BY THE PETITIONER IN PURSUANCE OF THE IRD A REGULATIONS OF 2000 REFLECTED A NIL DEFICIT CONSEQ UENT UPON THE TRANSFER OF AN AMOUNT OF RS. 158.37 CRORES FROM TH E SHAREHOLDERS' ACCOUNT TO THE POLICYHOLDERS ACCOUN T. THE SOURCE FOR MAKING A TRANSFER OF RS. 158.37 CRORES FROM THE SHAREHOLDERS' ACCOUNT ORIGINATED IN THE INFUSION O F CAPITAL FROM SHAREHOLDERS DURING THE COURSE OF THE PREVIOUS YEA R RELEVANT TO THE ASSESSMENT YEAR IN QUESTION. DURING THE COURSE OF THE ASSESSMENT PROCEEDINGS FOR THE ASSESSMENT YEAR 2003-04, THE PETITIONER FURNISHED A NOTE TO THE COMPUTATION OF INCOME. THE SALIENT ASPECTS WHICH W ERE HIGHLIGHTED IN THE NOTE WERE AS FOLLOWS: (I) THE ERSTWHILE FORMAT FOR THE PRESENTATION OF SURPLUS/DEFICIT REQUIRED EACH INSURANCE COMPANY TO AGGREGATE THE RESULTS RELATING TO SHAREHOLDERS' OP ERATIONS AND POLICYHOLDERS' OPERATIONS. THE IMPACT OF THE CONSOLIDATED REVENUE ACCOUNT WAS TRANSFERRED TO THE ACTUARY'S VALUATION BALANCE-SHEET IN FORM I WHICH DISCLOSED THE SURPLUS/DEFICIT FOR THE YEAR; (II) THE FORMAT FOR PRESENTATION OF THE INSURANCE A CCOUNTS WAS AMENDED BY THE REGULATIONS OF 2000 AND BY THE REVISED FORMAT, THE IMPACT OF THE ACTUARIAL VALUAT ION WAS TRANSFERRED TO 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 SURPLUS/DEFICIT FOR POLICYHOLDERS ARE SINCE SEGREG ATED INTO TWO SEPARATE ACCOUNTS AFTER THE AMENDED REGULATIONS ; (IV) FOR THE FINANCIAL YEAR ENDING MARCH 31, 2003, THE ACTUARIAL VALUATION AS DISCLOSED IN FORM I SHOWS A NIL SURPLUS/DEFICIT AS REGARDS THE BUSINESS OF POLICYHO LDERS. THE ACTUAL DEFICIT OF RS. 158.37 CRORES IN THE POLI CYHOLDERS' ACCOUNT (FORM A-RA) WAS MADE GOOD BY A TRANSFER OF AN EQUIVALENT SUM FROM THE SHAREHOLDERS' ACCOUNT. HEN CE, THE FIGURES SHOWING A NIL DEFICIT IN FORM I WERE SUBSEQ UENT TO THE TRANSFER; (V) THE TOTAL DEFICIT IN THE POLICYHOLDERS' ACCOUN T FOR TAX PURPOSES WAS RS. 109.90 CRORES (RS.158.37 CRORES LE SS AN ITA NOS.6854 TO 6856 6509 7765 TO 7767 AND 7213 ICI CI PRULIFE MUMBAI F BENCH PAGE 20 OF 77 AMOUNT OF RS. 48.47 CRORES ON ACCOUNT OF EXEMPT PEN SION SCHEMES); (VI) IN THE SHAREHOLDERS' ACCOUNT, THERE WAS A NET SURPLUS OF RS. 11.19 CRORES; (VII) CONSEQUENTLY, WHILE THERE WAS A NET SURPLUS I N THE SHAREHOLDERS' ACCOUNT OF RS. 11.19 CRORES, THERE W AS A NET DEFICIT IN THE POLICYHOLDERS' ACCOUNT OF RS. 109.9 0 CRORES; (VIII) CONSEQUENTLY, IN DETERMINING THE PROFITS AND GAINS UNDER SECTION 44 READ WITH RULE 2, THE LOSS WAS COM PUTED AT RS. 98.70 CRORES BY AGGREGATING THE SURPLUS IN T HE SHAREHOLDERS' ACCOUNT WITH THE DEFICIT IN THE POLI CYHOLDERS' ACCOUNT FOR THE PURPOSES OF TAXATION. DURING THE COURSE OF THE ASSESSMENT PROCEEDINGS, LE TTERS WERE ADDRESSED TO THE ASSESSING OFFICER SPECIFICALLY IN ORDER TO CLARIFY THE POSITION OF THE DEFICIT IN THE POLICYHO LDERS' ACCOUNT. BY ITS LETTER DATED DECEMBER 27, 2005, THE PETITION ER CLARIFIED THAT THE DEFICIT IN THE POLICYHOLDERS' ACCOUNT AS REFLECTED BY FORM A-RA HAD BEEN MET BY A TRANSFER FROM THE SHARE HOLDERS' ACCOUNT. THE FIGURES RELATING TO SURPLUS/DEFICIT IN FORM I WERE SUBSEQUENT TO THE INTERNAL TRANSFER OF FUNDS. THE A SSESSEE CONTENDED THAT THE TRANSFER FROM THE SHAREHOLDERS' TO THE POLICYHOLDERS' ACCOUNT WAS AN INTERNAL ADJUSTMENT AND WAS TAX NEUTRAL. BEFORE THE ASSESSMENT PROCEEDINGS CAME TO BE CONCLUDED FOR THE ASSESSMENT YEAR 2003-04, AN AUDIT QUERY WAS RAISED WITH REFERENCE TO THE ASSESSMENT YEAR 20 02-03. THE AUDIT REPORT DATED MAY 4, 2005 SPECIFICALLY RA ISED A QUESTION AS TO WHETHER THE PETITIONER SHOULD HAVE BEEN ALLOWED TO CLAIM A DEFICIT IN THE POLICYHOLDERS' A CCOUNT SINCE THE DEFICIT DISCLOSED BY THE ACTUARIAL VALUATION I N FORM I WAS SHOWN TO BE NIL. IN RESPONSE TO THE AUDIT QUERY, T HE PETITIONER ADDRESSED A LETTER DATED DECEMBER 29, 2005, CONTEND ING THAT THE FIRST SCHEDULE TO THE INCOME-TAX ACT DID NOT R EFER TO ANY PARTICULAR FORM FOR CALCULATING THE TAXABLE SURPLUS AND INSTEAD MENTIONS THAT THE ACTUARIAL SURPLUS CALCULA TED UNDER THE PROVISION OF THE INSURANCE ACT, 1938, HAS TO B E CONSIDERED. THE PETITIONER REITERATED ITS POSITION THAT FORM I SHOWED A ZERO SURPLUS BECAUSE, IT HAS ALREADY CONSI DERED, INTER ALIA, THE TRANSFERS MADE FROM THE SHAREHOLDER S' ACCOUNT TO THE POLICYHOLDERS' ACCOUNT TO NULLIFY THE DEFI CIT AS PER THE IRDA REGULATIONS. THE SAME POSITION HAS BEEN REITE RATED BY A LETTER DATED DECEMBER 30, 2005 TO THE ASSESSING O FFICER. IT WAS FURTHER OBSERVED VIDE PARA 18 (PAGE NO.480) AS UNDER: THE RECORD BEFORE THE COURT SHOWS THAT THE ASSESSEE HAD IN ITS COMPUTATION OF INCOME DISCLOSED THAT THE POLICYHOLD ERS' ACCOUNT SHOWED THAT (I) THERE WAS A DEFICIT OF RS. 109.90 ITA NOS.6854 TO 6856 6509 7765 TO 7767 AND 7213 ICI CI PRULIFE MUMBAI F BENCH PAGE 21 OF 77 CRORES (COMPRISING RS. 158.37 CRORES MINUS RS. 48. 47 CRORES ARISING OUT OF EXEMPT PENSION FUNDS) ; (II) THERE W AS A TRANSFER OF FUNDS TO THE EXTENT OF RS. 158.37 CRORES FROM TH E SHAREHOLDERS' ACCOUNT TO THE POLICYHOLDERS' ACCO UNT ; AND (III) THAT THE DEFICIT IN THE POLICYHOLDERS' ACCOUNT WA S ADJUSTED ONLY BY AN INTERNAL TRANSFER OF FUNDS FROM THE SHA REHOLDERS' ACCOUNT TO THE POLICYHOLDERS' ACCOUNT. BY ITS LETT ERS DATED DECEMBER 27, 2005 AND DECEMBER 30, 2005, WHICH WERE FILED IN RESPONSE TO QUERIES RAISED BY THE ASSESSING OFF ICER, THE ASSESSEE DISCLOSED (A) THE MANNER IN WHICH THE PRO FITS AND GAINS UNDER SECTION 44 READ WITH THE FIRST SCHEDUL E WERE ARRIVED AT, SO AS TO REFLECT A LOSS OF RS. 98.70 CR ORES ; (B)THE FACT THAT THE NIL SURPLUS SHOWN IN THE REPORT OF TH E ACTUARIAL VALUATION IN FORM I WAS SUBSEQUENT TO THE TRANSFER OF FUNDS FROM THE SHAREHOLDERS' ACCOUNT TO THE POLICYHOLDER S' ACCOUNT. WHEN THE ASSESSMENT PROCEEDINGS PERTAINING TO THE ASSESSMENT YEAR 2003-04 WERE PENDING, AN AUDIT QUER Y CAME TO BE RAISED IN REGARD TO A SIMILAR CLAIM FOR LOSS DURING THE ASSESSMENT YEAR 2002-03. THE PETITIONER RESPONDED T O THE AUDIT QUERY BY ITS LETTER DATED DECEMBER 29, 2005. THE LETTERS ADDRESSED BY THE PETITIONER, INCLUDING THE NOTE APP ENDED TO THE COMPUTATION OF INCOME CLEARLY SET OUT THE FACT THAT THERE WAS A SURPLUS IN THE SHAREHOLDERS' ACCOUNT AND THA T THE DEFICIT IN THE POLICYHOLDERS' ACCOUNT WAS MET BY A TRANSFER FROM THE SHARE HOLDERS' ACCOUNT TO THE POLICYHOLDER S' ACCOUNT. THE PETITIONER DISCLOSED THAT IN FORM I, THE SURPL US/DEFICIT WAS SHOWN TO BE NIL AND SUBMITTED THAT THE POSITIO N REFLECTED IN FORM I WAS SUBSEQUENT TO THE INTERNAL TRANSFER O F FUNDS WHICH TOOK PLACE FROM THE SHAREHOLDERS' TO THE POL ICYHOLDERS' ACCOUNT. IT IS AFTER THE PETITIONER HAD FILED ITS E XPLANATION BY SEVERAL LETTERS THAT THE ASSESSING OFFICER PASSED A N ORDER OF ASSESSMENT UNDER SECTION 143(3). 22. FURTHER VIDE PARA 21 (PAGE 482), THE METHOD OF ACC OUNTING AND REGULATIONS WERE FURTHER ANALYSED AS UNDER: WHILE DEALING WITH THE REOPENING OF THE ASSESSMENT FOR THE ASSESSMENT YEAR 2004-05, THE PRINCIPAL QUESTION BEF ORE THE COURT IS AS TO WHETHER THERE WAS ANY TANGIBLE MATER IAL BEFORE THE ASSESSING OFFICER TO FORM A REASON TO BELIEVE T HAT INCOME CHARGEABLE TO TAX HAD ESCAPED ASSESSMENT. IN THE P REFATORY PART OF THIS JUDGMENT, A REFERENCE HAS BEEN MADE TO THE RELEVANT PROVISIONS OF THE INSURANCE ACT, 1938 AND TO THE REGULATIONS OF 2000 AND 2002, WHICH HAVE A BEARING ON THE FORMULATION OF THE ACCOUNTS, OF AN ASSESSEE LIKE TH E PETITIONER WHO ENGAGES IN THE BUSINESS OF LIFE INSURANCE. SECT ION 13(1) OF THE INSURANCE ACT, 1938 WHICH WAS INSERTED BY THE I NSURANCE REGULATORY AUTHORITY ACT, 1999 REQUIRES EVERY INSUR ER UPON ITA NOS.6854 TO 6856 6509 7765 TO 7767 AND 7213 ICI CI PRULIFE MUMBAI F BENCH PAGE 22 OF 77 THE COMMENCEMENT OF THE ACT TO MAINTAIN SEPARATE AC COUNTS IN RESPECT OF THE INSURANCE BUSINESS TRANSACTED BY TH E INSURER AND IN RESPECT OF THE SHAREHOLDERS FUNDS. REGULAT IONS 3 AND 4 OF THE REGULATIONS OF 2000 PROVIDE THE PROCEDURE AND REQUIREMENTS IN THE PREPARATION OF THE ACTUARIAL RE PORT AND ABSTRACT. FORM I, IT MAY BE NOTED, IS ONE OF THE SU MMARY STATEMENTS THAT IS REQUIRED TO BE PREPARED BY THE I NSURER UNDER REGULATION 4(2). PART V OF THE 2000 REGULATIO NS DEALS WITH THE PREPARATION OF THE FINANCIAL STATEMENT AND REQUIRES THE INSURER TO PREPARE; (I) A REVENUE ACCOUNT, ALSO CALLED A POLICYHOLDERS' ACCOUNT ; AND (II) A PROFIT AND LO SS ACCOUNT, ALSO CALLED THE SHAREHOLDERS' ACCOUNT. FORM A-RA IS TH E FORM IN WHICH THE POLICYHOLDERS' ACCOUNT IS TO BE FILED. F ORM A-RA REQUIRES A DISCLOSURE OF (A) PREMIUMS EARNED, INCOM E FROM INVESTMENTS AND OTHER INCOME ; (B) COMMISSION, OPER ATING EXPENSES, PROVISION FOR DOUBTFUL DEBTS, DEBTS WRIT TEN OFF, PROVISION FOR TAX AND OTHER THAN TAXATION ; (C) BE NEFITS, INTERIM BONUSES AND CHANGE IN VALUATION OF LIABILITY IN RE SPECT OF LIFE POLICIES. THE SURPLUS/DEFICIT IS COMPUTED AT THE FO OT OF THE ACCOUNT BY DEDUCTING THE AMOUNTS COMPUTED UNDER (B) AND (C) ABOVE FROM THE FIGURES OF INCOME IN (A). DURING THE COURSE OF THE ASSESSMENT, THE ASSESSEE HAD SET OUT THE COMPUTATION IN THE POLICYHOLDERS' ACCOUNT AND IN THE SHAREHOLDERS' ACCOUNT. ACCORDING TO THE ASSESSEE, THE NET RESULT OF THE OPERATIONS IS REFLECTED IN THE POLICYHOLDERS' ACCOUNT WHICH HAS BEEN MADE GOOD BY TRANSFER FROM THE SHAREHOLDERS' ACCOUNT. A CIRCULAR HAS BEEN ISSUED ON MARCH 23, 2004 BY THE INSURANCE REGULATORY DEVELOPMENT AUTHORITY, TO SPECIFY THE CONDITIONS WHICH ARE REQUIRED TO BE FULFILLED WHERE AN INSURER INTENDS TO DECLARE A BONUS WHEN THERE IS A DEFICIT IN THE LIFE FUND. THE CONDITION WHICH IS PRESCRIBED IN THE CIRCULAR IS THAT THE ACCUMULATED DEFICIT IN THE POLICYHOLDERS' ACCOUNT MUST BE MADE GOOD BY A TRANSFER OF FUNDS FROM THE SHAREHOLDERS' ACCOUNT TO THE POLICYHOLDERS' ACCOUNT. THE CIRCULA R CLARIFIES THAT THE TRANSFER FROM THE SHAREHOLDERS' ACCOUNT CAN BE OUT OF THE PROFIT AND LOSS ACCOUNT, BALANCE OR RESERVES IN THE SHAREHOLDERS' ACCOUNT O R BY DRAWING UPON THE PAID UP CAPITAL OF THE INSURER. THE TRANSFER OF FUNDS MADE FROM THE SHAREHOLDERS' ACCOUNT TO THE POLICYHOLDERS' ACCOUNT IS TO BE IRREVERSIBLE. WHAT THE CIRCULAR EMPHASIZES IS THAT AN INSURER WHO INTENDS TO DECLARE A BONUS HAS TO ENSURE, IN THE EVENT THAT THERE IS A DEFICIT IN THE POLICYHOLDERS' ACCOUNT, THAT THE DEFICIT IS EFFACE D ITA NOS.6854 TO 6856 6509 7765 TO 7767 AND 7213 ICI CI PRULIFE MUMBAI F BENCH PAGE 23 OF 77 BY A TRANSFER OF FUNDS FROM THE SHAREHOLDERS' ACCOUNT. THE ASSESSING OFFICER, WHILE REOPENING THE ASSESSME NT HAS NOT PUT FORTH ANY TANGIBLE MATERIAL ON THE BASIS OF WHICH HE COULD HAVE FORMED A REASONABLE BELIEF THAT INCOME C HARGEABLE TO TAX HAS ESCAPED ASSESSMENT. HE HAS MERELY ALTERE D OR CHANGED THE OPINION WHICH WAS FORMED DURING THE ASSESSMENT PROCEEDINGS. (EMPHASIS SUPPLIED) THE HON'BLE BOMBAY HIGH COURT ON THE FACTS OF THE C ASE HELD THAT REOPENING IS BAD IN LAW. IN ARRIVING AT THAT DECISI ON, THE HON'BLE HIGH COURT EXAMINED THE ENTIRE SCHEME OF PRESENTATI ON OF ACCOUNTS AND ARRIVING AT SURPLUS. THEREFORE NOT ONLY THE REG ULATIONS WHICH ARE BINDING ON THE ASSESSEE WERE DISCUSSED BUT COMP UTATION MADE THERE UNDER WAS ALSO CONSIDERED IN THE ABOVE DECISI ON. 23. THE DISPUTE IN THESE YEARS IS ALSO SIMILAR. EVENTHO UGH LD.CIT DR SUBMITTED THAT THOSE YEARS HAS NO EFFECT ON DECI DING THIS ISSUE, WE ARE AWARE ABOUT CONSEQUENTIAL EFFECTS IN LATER Y EARS AND THE NEED TO FOLLOW UNIFORM METHODOLOGY. THEREFORE AN ATTEMP T WAS MADE TO EXAMINE AND RECONCILE THE VARIOUS CONTENTIONS IN TH IS ORDER. IT WAS THE ASSESSEE CONTENTION THAT THE SURPLUS OR DEFICIT AMOUNT SHOULD BE ARRIVED AT AFTER ADJUSTING BOTH ACCOUNTS THERE B Y NEUTRALISING THE TRANSFER OF CAPITAL FUNDS FROM SHAREHOLDERS ACCOUN T TO POLICYHOLDERS ACCOUNT AS PER REGULATIONS AND PRUDE NT BUSINESS PRACTICE AND INTERNATIONAL PRACTICES BEING FOLLOWED BY ASSESSEE COMPANY. AOS CONTENTION IS BASED ON AMOUNTS REFERR ED IN FORM I. IMPORT OF INSURANCE ACT 1938: 24. BEFORE ANALYZING THE ISSUE, IT IS NECESSARY TO DIS CUSS THE PRINCIPLES OF INCORPORATION OF INSURANCE ACT 1938 INTO THE INCOME TAX ACT 1961. AS RIGHTLY POINTED OUT BY THE LEARNED COUNSEL, THE REFERENCE TO THE INSURANCE ACT 1938 IN THE INCOME T AX ACT AS SUCH CAN ONLY BE CONSIDERED AS LEGISLATION BY INCORPORA TION. THE PRINCIPLES OF LEGISLATION BY INCORPORATION AND L EGISLATION BY ITA NOS.6854 TO 6856 6509 7765 TO 7767 AND 7213 ICI CI PRULIFE MUMBAI F BENCH PAGE 24 OF 77 REFERENCE ARE DISCUSSED BY THE HON'BLE SUPREME COU RT IN A NUMBER OF CASES, MORE SO IN THE FOLLOWING CASES. 25. IN THE CASE OF MAHINDRA & MAHINDRA LTD VS. UNION OF INDIA & OTHERS, THE HON'BLE SUPREME COURT ON THE PRINCIPLES OF INTERPRETATION OF STATUTES ON SECTION 8(1) OF GENE RAL CLAUSES ACT 1897 HELD AS UNDER: INTERPRETATION OF STATUTES - LEGISLATION BY REFEREN CE AND BY INCORPORATION-DIFFERENCE - IN FORMER CASE SECTIO N 8(1) OF GENERAL CLAUSES ACT APPLICABLE - BUT IN LATTER C ASE SUBSEQUENT REPEAL OR AMENDMENT OF THE PROVISION INCORPORATED DOES NOT AFFECT THE INCORPORATING STAT UTE - GENERAL CLAUSES ACT, 1897,SECTION 8(1) (PARAS 8 AND 9) 8. THE FIRST QUESTION THAT ARISES FOR CONSIDERATIO N ON THE PRELIMINARY OBJECTION OF THE RESPONDENTS IS AS TO W HAT IS THE TRUE SCOPE AND AMBIT OF AN APPEAL UNDER SECTION 55. , THAT SECTION PROVIDES INTER ALIA THAT ANY PERSON AGGRIEV ED BY AN ORDER MADE BY THE COMMISSION UNDER SECTION 13 MAY P REFER AN APPEAL TO THIS COURT ON 'ONE OR MORE OF 'THE GROUND S SPECIFIED IN SECTION 100 OF THE CODE OF CIVIL PROCEDURE, 1908'. NOW AT THE PATE WHEN SECTION 55 WAS ENACTED, NAMELY, DECEMBER 27, 1969, BEING THE DATE OF COMING INTO FORCE OF THE ACT, SEC TION 100 OF THE CODE OF CIVIL PROCEDURE SPECIFIED THREE GRO UNDS ON WHICH A SECOND APPEAL COULD BE, BROUGHT TO THE HIGH COURT AND ONE OF THESE GROUNDS WAS THAT THE DECISION APPEALED AGAINST WAS CONTRARY IT WAS SUFFICIENT UNDER SECTION 100 AS IT STOOD THEN THAT THERE SHOULD BE A QUESTION OF LAW IN ORDER TO ATTR ACT THE JURISDICTION OF THE HIGH COURT IN SECOND APPEAL AND, THEREFORE, IF THE REFERENCE IN SECTION 55 WERE TO T HE GROUNDS SET OUT IN THE THEN EXISTING SECTION 100, THERE CAN BE NO DOUBT THAT AN APPEAL WOULD LIE TO THIS COURT UNDER SECTION 55 ON A QUESTION OF LAW. BUT SUBSEQUENT TO THE ENACTMENT OF SECTION 55, SECTION 100 OF THE CODE OF CIVIL PROCEDURE WAS SUBSTITUTED BY A NEW SECTION BY SECTION 37 OF THE CODE OF CIVIL PROC EDURE (AMENDMENT) ACT, J 976 WITH EFFECT FROM FEBRUARY 1, 19'77 AND THE NEW SECTION 100 PROVIDED THAT A SECOND APPEAL SHALL LIE TO THE HIGH COURT ONLY IF THE HIGH COURT IS SAT ISFIED THAT THE CASE INVOLVES A SUBSTANTIAL QUESTION OF LAW. THE TH REE GROUNDS ON WHICH A SECOND APPEAL COULD LIE UNDER THE FORMER SECTION 100 WERE ABROGATED AND IN THEIR PLACE ONLY ONE GROUND W AS SUBSTITUTED WHICH WAS A HIGHLY STRINGENT GROUND, NA MELY, THAT THERE' SHOULD BE A SUBSTANTIAL QUESTION OF LAW. THI S WAS THE NEW SECTION 100 WHICH WAS IN FORCE ON THE DATE WHEN THE PRESENT APPEAL WAS 'PREFERRED BY THE APPELLANT AND THE ARGUMENT OF THE RESPONDENTS WAS THAT THE MAINTAINAB ILITY OF ITA NOS.6854 TO 6856 6509 7765 TO 7767 AND 7213 ICI CI PRULIFE MUMBAI F BENCH PAGE 25 OF 77 THE APPEAL WAS, THEREFORE, REQUIRED TO BE JUDGED BY REFERENCE TO THE GROUND SPECIFIED IN THE NEW SECTION 100 AND THE APPEAL COULD BE ENTERTAINED ONLY IF THERE WAS A SUBSTANTIA L QUESTION OF LAW. THE RESPONDENTS LEANED HEAVILY ON SECTION 8(1) OF THE GENERAL CLAUSES ACT, 1897 WHICH PROVIDES: WHERE THIS ACT OR ANY CENTRAL ACT OR REGULATION MAD E AFTER THE COMMENCEMENT OF THIS ACT, REPEALS AND RE-ENACTS, WI TH OR WITHOUT MODIFICATION, ANY PROVISION OF A FORMER ENA CTMENT, THEN REFERENCES IN ANY OTHER ENACTMENT OR IN ANY INSTRUM ENT TO THE PROVISION SO REPEALED SHALL, UNLESS A DIFFERENT INT ENTION APPEARS, BE CONSTRUED AS REFERENCES TO .THE PROVISI ON SO RE- ENACTED AND CONTENDED THAT THE SUBSTITUTION OF THE NEW SECTION 100 AMOUNTED TO REPEAL AND RE-ENACTMENT, OF THE FORMER SECTION 100 AND, THEREFORE, ON AN APPLICATION OF THE RULE OF INTERPRETATION ENACTED IN SECTION 8(1), THE REFERENCE IN SECTION 55 TO SECTION 100 MUST BE CONSTRUED AS REFERENCE TO THE NEW SECTION 100 AND THE- APPEAL COULD BE MAINTAINED ONLY ON GROUND' SPECIFIED IN THE NEW SECTION 100, THAT IS, ON A SUBSTANTIAL QUESTION OF LAW. WE DO NOT THINK THIS C ONTENTION IS WELL FOUNDED. IT IGNORES THE 'DISTINCTION BETWEEN A MERE REFERENCE TO OR CITATION' OF ONE STATUTE IN ANOTHER AND AN INCORPORATION WHICH IN EFFECT MEANS BODILY LIFTING A PROVISION OF ONE ENACTMENT AND MAKING IT A PART OF ANOTHER. WHER E THERE IS MERE REFERENCE TO OR CITATION OF ONE ENACTMENT IN A NOTHER WITHOUT INCORPORATION; SECTION 8(1) APPLIES AND THE REPEAL AND RE-ENACTMENT OF THE PROVISION REFERRED TO OR CITED, HAS THE EFFECT SET OUT IN THAT SECTION AND THE REFERENCE TO THE PR OVISION REPEALED IS REQUIRED TO BE CONSTRUED, AS REFERENCE TO THE PROVISION AS' 'RE-ENACTED. SUCH WAS THE CASE IN THE COLLECTOR OF CUSTOMS V. NATHELLA SAMPATHU CHETTY' AND NEW CENTRA L JUTE MILLS CO. LTD. V. ASSISTANT COLLECTOR OF CENTRAL EX CISE. BUT WHERE A PROVISION OF ONE STATUTE IS INCORPORATED IN ANOTH ER, 'THE REPEAL OR AMENDMENT OF THE FORMER DOES NOT AFFECT THE LATT ER. THE EFFECT OF INCORPORATION IS AS IF 'THE PROVISION INCORPORATED WERE WRITTEN' OUT IN THE INCORPORATING STATUTE AND WERE A PART OF IT. LEGISLATION BY INCORPORATION IS A COMMON LEGISLATIVE DEVICE EMPLOYED BY THE LEGISLATURE, WHERE THE LEGISLATURE FOR CONVENIENCE OF DRAFTING INCORPORATES PROVISIONS FRO M AN EXISTING STATUTE BY REFERENCE TO: THAT STATUTE INSTEAD OF SE TTING OUT FOR ITSELF AT LENGTH THE PROVISIONS WHICH IT DESIRES TO ADOPT. ONCE THE INCORPORATION IS MADE, THE PROVISION INCORPORAT ED BECOMES AN INTEGRAL PART OF THE STATUTE IN WHICH IT IS TRAN SPOSED AND THEREAFTER THERE IS NO NEED TO REFER TO THE STATUTE FROM WHICH THE INCORPORATION IS MADE AND ANY' SUBSEQUENT AMENDMENT MADE IN IT HAS NO EFFECT ON THE INCORPORATION STATUTE. L ORD ESHER, M. R.' WHILE DEALING WITH LEGISLATION IN INCORPORATION IN IN RE WOOD'S ESTATE' POINTED OUT AT PAGE 615 : IF A SUBSEQUENT ACT BRINGS INTO ITSELF BY REFERENCE SOME OF THE ITA NOS.6854 TO 6856 6509 7765 TO 7767 AND 7213 ICI CI PRULIFE MUMBAI F BENCH PAGE 26 OF 77 CLAUSES OF A FORMER ACT, THE LEGAL EFFECT OF THAT, AS HAS OFTEN BEEN HELD, IS TO WRITE THOSE SECTIONS INTO THE NEW ACT, JUST AS IF THEY' HAD BEEN ACTUALLY WRITTEN IN IT WITH THE PEN, OR PRINTED IN IT, AND, THE .MOMENT YOU PAVE THOSE CLAUSES IN THE LATER ACT, YOU HAVE NO OCCASION TO REFER TO .THE FORMER ACT AT ALL. ' LORD JUSTICE BRETT, ALSO OBSERVED TO' THE SAME EFFE CT IN 'CLARKE V. BRADLAUGH': .. THERE IS A' RULE OF CONSTRUCTION TH AT, WHERE STATUTE IS INCORPORATED BY REFERENCE INTO A SECOND . STATUT E, THE REPEAL OF THE FIRST STATUTE BY A THIRD STATUTE DOES NOT AFFEC T THE SECOND. THIS WAS THE RULE APPLIED BY THE JUDICIAL COMMITTEE OF THE PRIVY COUNCIL IN SECRETARY OF STATE' FOR INDIA IN COUNCIL V; HIND USTAN CO-OPERATIVE INSURANCE SOCIETY LTD.'. THE JUDICIAL COMMITTEE POI NTED OUT IN THIS CASE THAT THE PROVISIONS OF THE LAND ACQUISITION AC T, 1894 HAVING BEEN INCORPORATED IN THE CALCUTTA IMPROVEMENT ACT, 1911 AND BECOME AN INTEGRAL PART OF IT, THE SUBSEQUENT AMEND MENT OF THE LAND ACQUISITION ACT, 1894 BY THE ADDITION OF SUB-S ECTION (2) IN SECTION 26 HAD NO EFFECT ON THE CALCUTTA IMPROVEMEN T ACT, 1911 AND COULD NOT BE READ INTO IT. 'SIR GEORGE LOWNDES DELIVERING THE OPINION OF THE JUDICIAL COMMITTEE OBSERVED AT PAGE 267 : IN THIS COUNTRY IT IS ACCEPTED THAT WHERE A STATUE IS INCORPORATED BY REFERENCE INTO A SECOND STATUTE, THE REPEAL OF THE FIRST STATUTE DOES NOT AFFECT THE SECOND: SEE THE CASES COLLECTED IN C RAIES ON STATUE LAW 3RD ED. PP. 349, 350 THE INDEPENDENT EXISTENCE OF THE TWO ACTS IS, THEREFORE, RECOGNIZED; DESPITE THE DEATH O F THE PARENT ACT, ITS .OFFSPRING SURVIVES IN, THE INCORPORATING ACT. IT SEEMS TO BE NO LESS .LOGICAL: TO HOLD THAT WHER E CERTAIN PROVISIONS FROM AN EXISTING ACT, HAVE BEEN INCORPORATED INTO A SUBSEQUENT ACT, .NO ADDITION TO THE FORMER ACT, WHICH IS NOT EXPRES SLY MADE APPLICABLE TO THE SUBSEQUENT ACT, :CAN BE DEEMED TO BE INCORPORATED IN IT, AT ALL EVENTS IF IT IS POSSIBLE FOR THE SUBSEQUENT ACT TO FUNCTION EFFECTUALLY WITHOUT THE ADDITION. SO ALSO IN RAM SARUP V. M MUNSHI, IT WAS HELD BY TH IS COURT THAT SINCE THE DEFINITION OF 'AGRICULTURAL LAND' IN THE PUNJAB ALIENATION, OF LAND' ACT, 1900 AS BODILY INCORPORATED, IN THE PUNJ AB PRE-EMPTION ACT, 1913, THE' REPEAL OF THE FORMER ACT .HAD NO EF FECT ON THE CONTINUED OPERATION OF, THE LATTER. RAJAGOPALA AYYA NGAR, J., 'SPEAKING FOR THE COURT OBSERVED AT PAGES 868-869 O F THE REPORT : WHERE THE PROVISIONS OF AN ACT ARE' INCORPORATED' B Y REFERENCE IN A LATER ACT THE' 'REPEAL 'OF 'THE' EARLIER ACT HAS, I N GENERAL, NO EFFECT UPON THE CONSTRUCTION OR EFFECT OF THE ACT' IN WHIC H ITS PROVISIONS HAVE BEEN INCORPORATED. IN THE CIRCUMSTANCES, THEREFORE, THE REPEAL OF THE PUNJAB ALIENATION ITA NOS.6854 TO 6856 6509 7765 TO 7767 AND 7213 ICI CI PRULIFE MUMBAI F BENCH PAGE 27 OF 77 OF LAND ACT OF 1900 HAS NO EFFECT ON THE CONTINUED OPERATION OF THE PRE-EMPTION ACT AND THE EXPRESSION~, 'AGRICULTURAL LAND' IN THE LATER ACT HAS TO BE READ AS IF THE DEFINITION IN THE ALIE NATION OF LAND ACT 1900, HAD BEEN BODILY TRANSPOSED INTO IT. : THE DECISION OF THIS COURT IN BOLANI ORES LTD. V. S TATE 'OF ORISSA' ALSO PROCEEDED ON THE SAME PRINCIPLE. THERE THE QUE STION AROSE IN REGARD TO THE INTERPRETATION OF SECTION 2(C) OF THE BIHAR AND ORISSA MOTOR VEHICLES TAXATION' ACT, 1930 (HEREINAFTER REF ERRED TO AS THE TAXATION ACT). THIS SECTION WHEN ENACTED ADOPTED TH E DEFINITION OF 'MOTOR VEHICLE' CONTAINED IN SECTION 2(18) OF THE M OTOR VEHICLES ACT, 1939. SUBSEQUENTLY, SECTION 2(18) WAS AMENDED BY AC T 100 OF 1956 BUT NO CORRESPONDING AMENDMENT WAS MADE IN THE DEFINITION CONTAINED IN SECTION 2(C) OF THE TAXATION ACT. THE ARGUMENT ADVANCED BEFORE THE COURT WAS THAT THE DEFINITION I N SECTION 2(C) OF THE TAXATION ACT WAS NOT A DEFINITION BY INCORPORAT ION BUT ONLY A DEFINITION BY REFERENCE AND THE MEANING OF 'MOTOR V EHICLE' IN SECTION 2(C) MUST, THEREFORE, BE TAKEN TO BE THE SAME AS DE FINED FROM TIME. TO TIME IN SECTION 2(18) OF THE' MOTOR VEHICLES ACT , 1939. THIS ARGUMENT WAS NEGATIVED BY THE COURT AND IT WAS HELD THAT THIS WAS A CASE OF INCORPORATION AND NOT REFERENCE AND T HE DEFINITION' IN SECTION 2(18) OF THE MOTOR VEHICLES ACT, 1939 AS TH EN EXISTING WAS INCORPORATED IN SECTION 2(C) OF THE 'TAXATION ACT A ND NEITHER REPEAL OF THE MOTOR VEHICLES ACT, 1939 NOR ANY .AMENDMENT IN, IT WOULD AFFECT THE DEFINITION OF 'MOTOR VEHICLE' IN SECTION 2 (C) OF THE.-TAXATION ACT. IT IS, THEREFORE, CLEAR THAT IF THERE IS MERE REFERENCE TO A PROVISION. OF ONE STATUTE IN ANOTHER WITHOUT INCORP ORATION, THEN, UNLESS A DIFFERENT INTENTION CLEARLY APPEARS, SECTI ON 8(1) WOULD APPLY AND THE REFERENCE- WOULD ; BE CONSTRUED AS A REFERENCE TO THE PROVISION AS MAY BE IN FORCE FROM TIME TO TIME IN THE FORMER STATUTE. BUT IF A PROVISION OF ONE STATUTE IS INCOR PORATED IN ANOTHER, ANY SUBSEQUENT. AMENDMENT IN THE FORMER STATUTE OR EVEN ITS TOTAL REPEAL WOULD NOT AFFECT THE PROVISION AS INCORPORAT ED IN THE LATTER STATUTE. THE QUESTION IS TO WHICH CATEGORY THE PRES ENT CASE BELONGS. 9. WE HAVE NO DOUBT THAT SECTION 55 IS AN INSTANCE OF LEGISLATION BY INCORPORATION AND NOT LEGISLATION BY REFERENCE. SECTION 55 PROVIDES FOR AN APPEAL TO THIS COURT ON' 'ONE OR MO RE OF THE GROUNDS SPECIFIED IN SECTION 100'. IT IS OBVIOUS THAT THE L EGISLATURE DID NOT WANT TO CONFER AN UNLIMITED RIGHT OF APPEAL, BUT WA NTED TO RESTRICT IT AND TURNING TO SECTION 100, IT FOUND THAT THE GROUN DS THERE SET OUT WERE APPROPRIATE FOR RESTRICTING THE RIGHT OF APPEA L AND HENCE IT INCORPORATED THEM IN SECTION 55. THE RIGHT OF APPEA L WAS CLEARLY INTENDED TO BE LIMITED TO THE GROUNDS SET OUT IN TH E THEN EXISTING SECTION 100. THOSE WERE THE GROUNDS WHICH WERE BEFO RE THE LEGISLATURE AND TO WHICH THE LEGISLATURE COULD HAVE APPLIED ITS MIND AND IT IS REASONABLE TO ASSUME THAT IT WAS WITH REF ERENCE TO THOSE SPECIFIC AND KNOWN GROUNDS THAT THE LEGISLATU RE INTENDED TO ITA NOS.6854 TO 6856 6509 7765 TO 7767 AND 7213 ICI CI PRULIFE MUMBAI F BENCH PAGE 28 OF 77 RESTRICT THE RIGHT OF APPEAL. THE LEGISLATURE COULD NEVER HAVE BEEN INTENDED TO LIMIT THE RIGHT OF APPEAL TO ANY GROUND OR GROUNDS WHICH MIGHT FROM TIME TO TIME FIND PLACE IN SECTION 100 WITHOUT KNOWING WHAT THOSE GROUNDS WERE. THE GROUNDS SPECIF IED IN SECTION 100 MIGHT BE CHANGED FROM' TIME TO TIME HAV ING REGARD TO THE LEGISLATIVE POLICY RELATING TO SECOND APPEALS A ND IT IS DIFFICULT TO SEE' ANY VALID REASON WHY THE LEGISLATURE SHOULD HA VE THOUGHT IT NECESSARY THAT THESE CHANGES SHOULD ALSO BE REFLECT ED IN SECTION 55 WHICH DEALS WITH THE RIGHT OF APPEAL IN A TOTALL Y DIFFERENT CONTEXT. WE FAIL TO APPRECIATE WHAT RELEVANCE THE L EGISLATIVE POLICY IN 'REGARD TO SECOND APPEALS HAS TO THE RIGHT OF AP PEAL UNDER SECTION 55 SO THAT SECTION 55 SHOULD BE INSEPARABLY LINKED OR YOKED TO .SECTION 100 AND WHATEVER CHANGES TAKE PLA CE IN SECTION 100 MUST BE AUTOMATICALLY READ INTO SECTION 55. IT MUST BE REMEMBERED THAT THE ACT IS A SELF-CONTAINED CODE DE ALING WITH MONOPOLIES AND RESTRICTIVE TRADE PRACTICES AND IT I S NOT POSSIBLE TO BELIEVE THAT THE LEGISLATURE COULD HAVE MADE THE RI GHT OF 'APPEAL UNDER SUCH A CODE. DEPENDENT ON THE VICISSITUDES TH ROUGH WHICH A SECTION IN ANOTHER STATUTE MIGHT PASS FROM TIME TO TIME. THE SCOPE AND AMBIT OF THE APPEAL COULD NOT HAVE BEEN INTENDE D TO FLUCTUATE OR VARY WITH EVERY CHANGE IN THE GROUNDS SET OUT IN SECTION 100. APART FROM THE ABSENCE OF ANY RATIONAL JUSTIFICATIO N FOR DOING SO, SUCH AN INDISSOLUBLE LINKING OF SECTION 55 WITH SEC TION 100 COULD CONCEIVABLY LEAD TO A RATHER ABSURD AND STARTLING R ESULT. TAKE FOR EXAMPLE A SITUATION WHERE SECTION 100 MIGHT BE REPE ALED ALTOGETHER BY THE LEGISLATURE - A SITUATION WHICH C ANNOT BE REGARDED AS WHOLLY UNTHINKABLE. IF THE CONSTRUCTION CONTENDED FOR ON BEHALF OF THE RESPONDENTS WERE ACCEPTED, SECTION 55 WOULD IN SUCH A CASE BE REDUCED TO FUTILITY AND THE RIGHT OF APPEAL WOULD BE WHOLLY GONE, BECAUSE THEN THERE WOULD BE NO GROUNDS ON WHICH AN APPEAL COULD LIE. COULD SUCH A CONSEQUENCE EVER HAV E BEEN CONTEMPLATED BY THE LEGISLATURE? - THE LEGISLATURE CLEARLY 'INTENDED THAT THE E SHOULD BE A RIGHT OF APPEAL, T HOUGH ON LIMITED GROUNDS, AND IT WOULD BE ABSURD TO PLACE ON THE LAN GUAGE OF SECTION 55 AN INTERPRETATION WHICH MIGHT, IN A GIVE N SITUATION, RESULT IN DENIAL OF THE RIGHT OF APPEAL ALTOGETHER AND THUS DEFEAT THE PLAIN OBJECT AND PURPOSE OF THE SECTION. WE MUST, T HEREFORE, HOLD THAT ON A PROPER INTERPRETATION THE GROUNDS SPECIFI ED IN THE THEN EXISTING SECTION 100 WERE INCORPORATED IN SECTION 5 5 AND THE SUBSTITUTION OF THE NEW SECTION 100 DID NOT AFFECT OR RESTRICT THE GROUNDS AS INCORPORATED AND SINCE THE PRESENT APPEA L ADMITTEDLY RAISES QUESTIONS OF LAW, IT IS CLEARLY MAINTAINABLE UNDER SECTION 55. WE MAY POINT OUT THAT EVEN IF THE RIGHT OF APPEAL U NDER SECTION 55 WERE RESTRICTED TO THE GROUND SPECIFIED IN THE NEW SECTION 100, THE PRESENT APPEAL WOULD STILL BE MAINTAINABLE, SINCE I T INVOLVES A SUBSTANTIAL QUESTION OF LAW RELATING TO THE INTERPRETATION OF SECTION 13(2). WHAT SHOULD BE THE TEST FOR DETERMINING WHET HER A QUESTION OF LAW RAISED IN AN APPEAL IS SUBSTANTIAL HAS BEEN LAID. DOWN BY THIS COURT IN SIR CHUNILAL V. .MEHTA AND SONS LTD. N. THE CENTURY ITA NOS.6854 TO 6856 6509 7765 TO 7767 AND 7213 ICI CI PRULIFE MUMBAI F BENCH PAGE 29 OF 77 SPINNING AND MANUFACTURING CO. LTD.' AND IT HAS BEEN HELD THAT THE PROPER TEST WOULD BE WHETHER THE QUESTION OF' L AW - IS OF GENERAL PUBLIC IMPORTANCE OR WHETHER IT DIRECTLY AND SUBSTA NTIALLY AFFECTS, THE RIGHTS OF THE' PARTIES, AND IF SO, WHETHER IT I S 'EITHER AN OPEN QUESTION IN THE SENSE THAT IT IS NOT FINALLY SETTLE D BY THIS COURT OR 'BY THE 'PRIVY COUNCILOR BY THE FEDERAL COURT OR IS NOT FREE FROM DIFFICULTY OR CALLS FOR DISCUSSION OF ALTERNATIVE' VIEWS. THE QUESTION OF INTERPRETATION OF SECTION 13(2) WHICH ARISES IN THE PRESENT APPEAL DIRECTLY AND SUBSTANTIALLY AFFECTS T HE RIGHTS OF THE PARTIES AND IT IS AN OPEN QUESTION IN THE SENSE THA T IT IS NOT FINALLY SETTLED BY THIS COURT AND IT IS, THEREFORE, CLEARLY A SUBSTANTIAL QUESTION OF JAW WITHIN THE MEANING OF. THIS TEST. W E MUST, THEREFORE, REJECT THE PRELIMINARY OBJECTION RAISED ON BEHALF OF THE RESPONDENTS AGAINST THE MAINTAINABILITY OF THE PRES ENT APPEAL: 26. FURTHER IN THE CASE OF BHARAT CO-OPERATIVE B ANK (MUMBAI) LTD VS. CO-OPERATIVE BANK EMPLOYEES UNION,( SUPRA) THIS ISSUE WAS CONSIDERED BY THE HON'BLE SUPREME COURT VIDE PARAS 12 TO 29 AND HELD AS UNDER: 12. THE MAIN QUESTION RAISED FOR DETERMINATION IS WHETHER THE AFORE-NOTED AMENDMENTS TO THE BR ACT, PARTICULARLY INSERTION OF SECTION 56 IN THE NEW FORMAT W.E.F. 1ST MARCH, 1966 , AFTER THE INSERTION OF THE DEFINITION OF 'BANKING COMPANY' IN THE ID ACT BY ACT 54 OF 1949 WILL APPLY MUTATIS MUTANDIS TO THE M ATTERS GOVERNED BY THE ID ACT? 13. AS THERE IS NO INDICATION IN THE ID ACT AS TO T HE APPLICABILITY OR OTHERWISE OF THE SUBSEQUENT AMENDMENTS IN THE BR ACT, THE QUESTION POSED HAS TO BE ANSWERED IN THE LIGHT OF T HE TWO CONCEPTS OF STATUTORY INTERPRETATION, NAMELY, INCOR PORATION BY REFERENCE AND MERE REFERENCE OR CITATION OF ONE STA TUTE INTO ANOTHER. THUS, ANSWER TO A RATHER INTRICATE QUESTIO N HINGES ON THE TEST WHETHER AT THE TIME OF INSERTION OF THE DE FINITION OF THE TERM 'BANKING COMPANY' IN THE FORM OF SUB-SECTION ( BB) OF SECTION 2 OF THE ID ACT BY THE 1949 ACT IT WAS A ME RE REFERENCE TO THE BANKING COMPANIES ACT, 1949 (LATER RE-CHRIST ENED AS THE BANKING REGULATION ACT) OR THE INTENDMENT OF THE LE GISLATURE WAS TO INCORPORATE THE SAID DEFINITION AS IT IS IN THE ID ACT? 14. BEFORE ADVERTING TO THE SAID CORE ISSUE, WE MAY BRIEFLY NOTICE THE DISTINCTION BETWEEN THE TWO AFORE-MENTIONED CON CEPTS OF STATUTORY INTERPRETATION, VIZ., A MERE REFERENCE OR CITATION OF ONE STATUTE IN ANOTHER AND INCORPORATION BY REFERENCE. LEGISLATION BY INCORPORATION IS A COMMON LEGISLATIVE DEVICE WHERE THE LEGISLATURE, FOR THE SAKE OF CONVENIENCE OF DRAFTIN G INCORPORATES PROVISIONS FROM AN EXISTING STATUTE BY REFERENCE TO THAT STATUTE INSTEAD OF VERBATIM REPRODUCING THE PROVISIONS, WHI CH IT DESIRES ITA NOS.6854 TO 6856 6509 7765 TO 7767 AND 7213 ICI CI PRULIFE MUMBAI F BENCH PAGE 30 OF 77 TO ADOPT IN ANOTHER STATURE. ONCE INCORPORATION IS MADE, THE PROVISION INCORPORATED BECOMES AN INTEGRAL PART OF THE STATUTE IN WHICH IT IS TRANSPOSED AND THEREAFTER THERE IS NO N EED TO REFER TO THE STATUTE FROM WHICH THE INCORPORATION IS MADE AN D ANY SUBSEQUENT AMENDMENT MADE IN IT HAS NO EFFECT ON TH E INCORPORATING STATUTE. ON THE CONTRARY, IN THE CASE OF A MERE REFERENCE OR CITATION, A MODIFICATION, REPEAL OR RE -ENACTMENT OF THE STATUTE, THAT IS REFERRED WILL ALSO HAVE EFFECT ON THE STATURE IN WHICH IT IS REFERRED. THE EFFECT OF 'INCORPORATION BY REFERENCE' WAS APTLY STATED BY LORD ESHER, M.R. IN RE: WOOD'S ESTATE, EX PARTE HER MAJESTY'S COMMISSIONERS OF WORKS AND BUIL DINGS IN THE FOLLOWING WORDS AT PAGE 615: 'IF A SUBSEQUENT ACT BRINGS INTO ITSELF BY REFERENC E SOME OF THE CLAUSES OF A FORMER ACT, THE LEGAL EFFECT OF THAT, AS HAS OFTEN BEEN HELD, IS TO WRITE THOSE SECTIONS INTO THE NEW ACT J UST AS IF THEY HAD BEEN ACTUALLY WRITTEN IN IT WITH THE PEN, OR PR INTED IN IT, AND, THE MOMENT YOU HAVE THOSE CLAUSES IN THE LATER ACT, YOU HAVE NO OCCASION TO REFER TO THE FORMER ACT AT ALL.' 15. THE PRIVY COUNCIL IN SECRETARY OF STATE FOR IND IA IN COUNCIL VS. HINDUSTAN CO-OPERATIVE INSURANCE SOCIETY LTD. W HILE AMPLIFYING THE DOCTRINE OF INCORPORATION, OBSERVED AS FOLLOWS: 'THEIR LORDSHIPS REGARD THE LOCAL ACT ASDOING NOTHI NG MORE THAN INCORPORATING CERTAIN PROVISIONS FROM AN EXISTING A CT, AND FOR CONVENIENCE OF DRAFT DOING SO BY REFERENCE TO THAT ACT, INSTEAD OF SETTING OUT FOR ITSELF AT LENGTH THE PROVISIONS WHI CH IT WAS DESIRED TO ADOPT THE INDEPENDENT EXISTENCE OF THE TWO ACTS IS THEREFORE RECOGNIZED; DESPITE THE DEATH OF THE PARENT ACT, IT S OFFSPRING SURVIVES IN THE INCORPORATING ACT. THOUGH NO SUCH S AVING CLAUSE APPEARS IN THE GENERAL CLAUSES ACT, THEIR LORDSHIPS THINK THAT THE PRINCIPLE INVOLVED IS AS APPLICABLE IN INDIA AS IT IS IN THIS COUNTRY.' 16. THE DOCTRINE OF LEGISLATION BY INCORPORATION AN D ITS EFFECT HAS BEEN DEALT WITH BY THIS COURT IN A CATENA OF DECISI ONS. IN RAM SARUP VS. MUNSHI & ORS. A CONSTITUTION BENCH HELD T HAT REPEAL OF PUNJAB ALIENATION OF LAND ACT, 1900 HAD NO EFFEC T ON THE CONTINUED OPERATION OF THE PUNJAB PRE-EMPTION ACT, 1913 AND THAT THE EXPRESSION 'AGRICULTURAL LAND' IN THE LATE R ACT HAD TO BE READ AS IF THE DEFINITION OF THE ALIENATION OF LAND ACT HAD BEEN BODILY TRANSPOSED INTO IT. AFTER REFERRING TO WHAT BRETT, L.J. SAID ON THE EFFECT OF INCORPORATION IN CLARKE VS. BRADLA UGH , NAMELY, 'WHERE A STATUTE IS INCORPORATED, BY REFERENCE, INT O A SECOND STATUTE THE REPEAL OF THE FIRST STATUTE BY A THIRD DOES NOT AFFECT THE SECOND', IT WAS OBSERVED AS FOLLOWS:- 'WHERE TH E PROVISIONS OF AN ACT ARE INCORPORATED BY REFERENCE IN A LATER ACT THE REPEAL OF THE EARLIER ACT HAS, IN GENERAL, NO EFFECT UPON THE CONSTRUCTION OR EFFECT OF THE ACT IN WHICH ITS PROVISIONS HAVE B EEN ITA NOS.6854 TO 6856 6509 7765 TO 7767 AND 7213 ICI CI PRULIFE MUMBAI F BENCH PAGE 31 OF 77 INCORPORATED. IN THE CIRCUMSTANCES, THEREFORE, THE REPEAL OF THE PUNJAB ALIENATION OF LAND ACT OF 1900 HAS NO EFFECT ON THE CONTINUED OPERATION OF THE PRE- EMPTION ACT AND THE EXPRESSION 'AGRICULTURAL LAND' IN THE LATER ACT HAS TO BE READ AS IF THE DEFINITION IN THE ALIENATION OF LAND ACT HAD BEEN B ODILY TRANSPOSED INTO IT.' 17. THE SAME PRINCIPLE WAS APPLIED IN BOLANI ORES L TD. VS. STATE OF ORISSA . IN THAT CASE THIS COURT WAS CONSIDERING THE QUESTION REGARDING THE INTERPRETATION OF SECTION 2(C) OF THE BIHAR AND ORISSA MOTOR VEHICLES TAXATION ACT, 1930 (FOR SHORT 'THE TAXATION ACT'). THIS SECTION WHEN ENACTED ADOPTED THE DEFINI TION OF 'MOTOR VEHICLE' CONTAINED IN SECTION 2(18) OF THE MOTOR VE HICLES ACT, 1939. SUBSEQUENTLY, SECTION 2(18) WAS AMENDED BY AC T 100 OF 1956 BUT NO CORRESPONDING AMENDMENT WAS MADE IN THE DEFINITION CONTAINED IN SECTION 2(C) OF THE TAXATIO N ACT. THE ARGUMENT ADVANCED WAS THAT THE DEFINITION IN SECTIO N 2(C) OF THE TAXATION ACT WAS NOT A DEFINITION BY INCORPORATION BUT ONLY A DEFINITION BY REFERENCE AND THE MEANING OF 'MOTOR V EHICLE' IN SECTION 2(C) MUST, THEREFORE, BE TAKEN TO BE THE SA ME AS DEFINED FROM TIME TO TIME IN SECTION 2(18) OF THE MOTOR VEH ICLES ACT, 1939. THE ARGUMENT WAS REJECTED BY THIS COURT AND IT WAS HELD THAT THIS WAS A CASE OF INCORPORATION AND NOT REFERENCE AND THE DEFINITION IN SECTION 2(18) OF THE MOTOR VEHICLES A CT, 1939, AS THEN EXISTING, WAS INCORPORATED IN SECTION 2(C) OF THE TAXATION ACT AND NEITHER REPEAL OF THE MOTOR VEHICLES ACT, 1 939 NOR ANY AMENDMENT IN IT WOULD AFFECT THE DEFINITION OF 'MOT OR VEHICLE' IN SECTION 2(C) OF THE TAXATION ACT. 18. THE DECISION OF THIS COURT IN MAHINDRA & MAHIND RA LTD. VS. UNION OF INDIA & ANR. ALSO PROCEEDED ON THE SAME PR INCIPLE. THERE THE QUESTION WAS IN REGARD TO THE EFFECT OF S UBSEQUENT AMENDMENT IN SECTION 100 OF THE CODE OF CIVIL PROCE DURE, 1908 ON SECTION 55 OF THE MONOPOLIES AND RESTRICTIVE TRA DE PRACTICES ACT, 1969 (FOR SHORT 'THE MRTP ACT'). SECTION 55 OF THE MRTP ACT PROVIDES FOR AN APPEAL TO THIS COURT AGAINST THE OR DERS OF THE MONOPOLIES AND RESTRICTIVE TRADE PRACTICES COMMISSI ON ON 'ONE OR MORE OF THE GROUNDS SPECIFIED IN SECTION 100 OF THE CODE OF CIVIL PROCEDURE, 1908'. SECTION 100 OF THE CODE OF CIVIL PROCEDURE WAS SUBSTITUTED BY A NEW SECTION IN 1976, WHICH NARROWED THE GROUNDS OF APPEAL UNDER THAT SECTION. IN CONSTRUING SECTION 55 OF THE MRTP ACT THIS COURT HE LD THAT SECTION 100 OF THE CODE AS IT EXISTED IN 1969 WAS I NCORPORATED IN SECTION 55 AND THE SUBSTITUTION OF NEW SECTION I N THE CODE, ABRIDGING THE GROUNDS OF APPEAL, HAD NO AFFECT ON T HE APPEAL UNDER SECTION 55 OF THE MRTP ACT. 19. THE PRINCIPLE LAID DOWN IN THESE DECISIONS WAS REITERATED IN U.P. AVAS EVAM VIKAS PARISHAD VS. JAINUL ISLAM & ANR. AND LATELY IN P.C. AGARWALA VS. PAYMENT OF WAGES INSPE CTOR, ITA NOS.6854 TO 6856 6509 7765 TO 7767 AND 7213 ICI CI PRULIFE MUMBAI F BENCH PAGE 32 OF 77 M.P. & ORS. IT IS, THEREFORE, CLEAR FROM THE AFORE-NOTED DECISION S THAT IF THERE IS A MERE REFERENCE TO A PROVISION OF ONE STATUTE IN ANOTHER WITHOUT INCORPORATION, THEN, UNLESS A DIFFE RENT INTENTION CLEARLY APPEARS, THE REFERENCE WOULD BE CONSTRUED A S A REFERENCE TO THE PROVISION AS MAY BE IN FORCE FROM TIME TO TI ME IN THE FORMER STATUTE. BUT IF A PROVISION OF ONE STATUTE I S INCORPORATED IN ANOTHER, ANY SUBSEQUENT AMENDMENT IN THE FORMER STA TUTE OR EVEN ITS TOTAL REPEAL WOULD NOT AFFECT THE PROVISIO N AS INCORPORATED IN THE LATTER STATUTE. 20. HOWEVER, THE DISTINCTION BETWEEN INCORPORATION BY REFERENCE AND ADOPTION OF PROVISIONS BY MERE REFERENCE OR CIT ATION IS NOT TOO EASY TO HIGHLIGHT. THE DISTINCTION IS ONE OF DI FFERENCE IN DEGREE AND IS OFTEN BLURRED. THE FACT THAT NO CLEAR -CUT GUIDELINES OR DISTINGUISHING FEATURES HAVE BEEN SPELT OUT TO A SCERTAIN WHETHER IT BELONGS TO ONE OR THE OTHER CATEGORY MAK ES THE TASK OF IDENTIFICATION DIFFICULT. THE SEMANTICS ASSOCIATED WITH INTERPRETATION PLAY THEIR ROLE TO A LIMITED EXTENT. ULTIMATELY, IT IS A MATTER OF PROBE INTO LEGISLATIVE INTENTION AND/OR T AKING AN INSIGHT INTO THE WORKING OF THE ENACTMENT IF ONE OR THE OTH ER VIEW IS ADOPTED. THEREFORE, THE KIND OF LANGUAGE USED IN TH E PROVISION, THE SCHEME AND PURPOSE OF THE ACT ASSUME SIGNIFICAN CE IN FINDING ANSWER TO THE QUESTION. (SEE:COLLECTOR OF C USTOMS VS. SAMPATHU CHETTY & ANR. ). THE DOCTRINAIRE APPROACH TO ASCERTAIN WHETHER THE LEGISLATION IS BY INCORPORATION OR REFE RENCE IS, ON ULTIMATE ANALYSIS, DIRECTED TOWARDS THAT END. (SEE: MAHARASHTRA STATE ROAD TRANSPORT CORPORATION VS. STATE OF MAHAR ASHTRA & ORS. ) THUS, THE QUESTION FOR DETERMINATION IS TO WHICH CATEGORY THE PRESENT CASE BELONGS. 21. THE PLAIN LANGUAGE OF SECTION 2(BB) OF THE ID A CT MAKES THE INTENTION OF THE LEGISLATURE VERY CLEAR AND WE HAVE NO HESITATION IN HOLDING THAT REFERENCE TO SECTION 5 OF THE BANKI NG COMPANIES ACT, 1949 IN THE SAID PROVISION IS AN INSTANCE OF L EGISLATION BY INCORPORATION AND NOT LEGISLATION BY REFERENCE. 22. SECTION 2(BB) OF THE ID ACT AS INITIALLY INTROD UCED BY ACT 54 OF 1949 USED THE WORD 'MEANS.. AND INCLUDES' AND WAS C ONFINED TO A 'BANKING COMPANY' AS DEFINED IN SECTION 5 OF THE BANKING COMPANIES ACT, 1949, HAVING BRANCHES OR OTHER ESTAB LISHMENTS IN MORE THAN ONE PROVINCE AND INCLUDES IMPERIAL BAN K OF INDIA. SIMILARLY, SECTION 2(KK), WHICH WAS ALSO INTRODUCED BY ACT 54 OF 1949, DEFINES INSURANCE COMPANY AS 'AN INSURANCE CO MPANY DEFINED IN SECTION 2 OF THE INSURANCE ACT, 1938 (IV OF 1938), HAVING BRANCHES OR OTHER ESTABLISHMENTS IN MORE THA N ONE PROVINCE'. IT IS TRITE TO SAY THAT WHEN IN THE DEFI NITION CLAUSE GIVEN IN ANY STATUTE THE WORD 'MEANS' IS USED, WHAT FOLLOWS IS INTENDED TO SPEAK EXHAUSTIVELY. WHEN THE PHRASE 'ME ANS' IS USED IN THE DEFINITION, TO BORROW THE WORDS OF LORD ESHER M.R. IN GOUGH VS. GOUGH , IT IS A 'HARD AND FAST' DEFINITIO N AND NO ITA NOS.6854 TO 6856 6509 7765 TO 7767 AND 7213 ICI CI PRULIFE MUMBAI F BENCH PAGE 33 OF 77 MEANING OTHER THAN THAT WHICH IS PUT IN THE DEFINIT ION CAN BE ASSIGNED TO THE SAME. (ALSO SEE: P. KASILINGAM AND ORS. VS. P.S.G. COLLEGE OF TECHNOLOGY AND OTHERS ). ON THE OTHER HAND, WHEN THE WORD 'INCLUDES' IS USED IN THE DEFINITION, THE LEGISLATURE DOES NOT INTEND TO RESTRICT THE DEFINIT ION; MAKES THE DEFINITION ENUMERATIVE BUT NOT EXHAUSTIVE. THAT IS TO SAY, THE TERM DEFINED WILL RETAIN ITS ORDINARY MEANING BUT I TS SCOPE WOULD BE EXTENDED TO BRING WITHIN IT MATTERS, WHICH IN IT S ORDINARY MEANING MAY OR MAY NOT COMPRISE. THEREFORE, THE USE OF THE WORD 'MEANS' FOLLOWED BY THE WORD 'INCLUDES' IN SEC TION 2(BB) OF THE ID ACT IS CLEARLY INDICATIVE OF THE LEGISLATIVE INTENT TO MAKE THE DEFINITION EXHAUSTIVE AND WOULD COVER ONLY THOS E BANKING COMPANIES WHICH FALL WITHIN THE PURVIEW OF THE DEFI NITION AND NO OTHER. 23. MOREOVER, SECTION 2(BB) HAS SUBSEQUENTLY BEEN A MENDED FROM TIME TO TIME BY VARIOUS AMENDMENTS TO INCLUDE CERTAIN SPECIFIED BANKS AND INSTITUTIONS, WHICH WOULD OTHER WISE NOT FALL WITHIN THE EXHAUSTIVE DEFINITION OF THE 'BANKING CO MPANY' IN SECTION 2(BB) READ WITH SECTION 5(C), 5(B) AND 5(D) OF THE BR ACT. IT IS PLAIN THAT IF THE PARLIAMENT HAD INTENDED AN EXPANSIVE INTERPRETATION OF THE ORIGINAL WORDS, THEN THERE WO ULD HAVE BEEN NO REASON WHATSOEVER TO KEEP AMENDING THE DEFINITIO N FROM TIME TO TIME. IN OUR VIEW, THEREFORE, THE LANGUAGE OF SE CTION 2(BB) CLEARLY DEMONSTRATES THE LEGISLATIVE INTENT NOT TO BRING WITHIN ITS AMBIT ALL THE BANKS TRANSACTING THE BUSINESS OF BAN KING IN INDIA. 24. WE ARE, THEREFORE, OF THE OPINION THAT INTRODUC TION OF THE BANKING COMPANIES ACT, 1949 IN CLAUSE (BB) OF SECTI ON 2 OF THE ID ACT IS A CASE OF INCORPORATION BY REFERENCE; IT HAS BECOME ITS INTEGRAL PART AND THEREFORE, SUBSEQUENT AMENDMENTS IN THE BR ACT WOULD NOT HAVE ANY EFFECT ON THE EXPRESSION 'BA NKING COMPANY' AS DEFINED IN THE SAID SECTION. 25. AT THIS JUNCTURE, WE MAY ALSO CONSIDER AN ALTER NATIVE SUBMISSION MADE ON BEHALF OF THE BANK THAT EVEN IF IT IS ASSUMED THAT THE PROVISIONS OF SECTION 5 OF THE BR ACT WERE INTRODUCED INTO SECTION 2(BB) OF THE ID ACT BY WAY OF LEGISLATIVE INCORPORATION, TWO OF THE EXCEPTIONS, NAMELY, EXCEP TIONS (C) AND (D), CARVED OUT BY THIS COURT IN STATE OF MADHYA PR ADESH VS. M.V. NARASIMHAN AND REITERATED IN P.C. AGARWALA'S C ASE (SUPRA), WOULD APPLY IN THE INSTANT CASE. THE EXCEPTIONS SO ENUMERATED ARE: (A) WHERE THE SUBSEQUENT ACT AND THE PREVIOUS ACT A RE SUPPLEMENTAL TO EACH OTHER; (B) WHERE THE TWO ACTS ARE IN PARI MATERIA; (C) WHERE THE AMENDMENT IN THE PREVIOUS ACT, IF NOT IMPORTED INTO THE SUBSEQUENT ACT ALSO, WOULD RENDER THE SUBSEQUEN T ACT WHOLLY UNWORKABLE AND INEFFECTUAL; AND ITA NOS.6854 TO 6856 6509 7765 TO 7767 AND 7213 ICI CI PRULIFE MUMBAI F BENCH PAGE 34 OF 77 (D) WHERE THE AMENDMENT OF THE PREVIOUS ACT, EITHER EXPRESSLY OR BY NECESSARY INTENDMENT, APPLIES THE SAID PROVISION S TO THE SUBSEQUENT ACT. 26. IN OUR VIEW, THERE IS NO SUBSTANCE IN THE CONTE NTION. THE ID ACT IS A COMPLETE AND SELF CONTAINED CODE IN ITSELF AND ITS WORKING IS NOT DEPENDANT ON THE BR ACT. IT COULD NO T ALSO BE SAID THAT THE AMENDMENTS IN THE BR ACT EITHER EXPRESSLY OR BY NECESSARY INTENDMENT APPLIED TO THE ID ACT. WE, THE REFORE, REJECT THE CONTENTION ADVANCED BY LEARNED COUNSEL FOR THE APPELLANT ON THIS ASPECT AS WELL. 27. FURTHER, AS NOTICED ABOVE, THE DEFINITION OF TH E 'BANKING COMPANY' IN CLAUSE (BB) OF SECTION 2 OF THE ID ACT BEING EXHAUSTIVE, IT IS ONLY WITH RESPECT TO THE 'BANKING COMPANY' FALLING WITHIN THE AMBIT OF THE SAID DEFINITION IN THE ID ACT, THAT THE CENTRAL GOVERNMENT WOULD BE THE APPROPRIATE GOV ERNMENT, WHICH ADMITTEDLY IS NOT THE CASE HERE. 28. IN THE LIGHT OF THE ANALYSIS WE HAVE MADE OF TH E PROVISION CONTAINED IN SECTION 2(BB) OF THE ID ACT, WE DEEM I T UNNECESSARY TO DILATE ON THE IMPACT OF THE IDBIC ACT ON THE ID ACT. 29. FOR ALL THESE REASONS, WE HAVE NO HESITATION IN UPHOLDING THE VIEW TAKEN BY THE HIGH COURT THAT FOR THE PURPOSE O F DECIDING AS TO WHICH IS THE 'APPROPRIATE GOVERNMENT', WITHIN TH E MEANING OF SECTION 2(A) OF THE ID ACT, THE DEFINITION OF THE ' BANKING COMPANY' WILL HAVE TO BE READ AS IT EXISTED ON THE DATE OF INSERTION OF SECTION 2(BB) AND SO READ, THE 'APPROP RIATE GOVERNMENT' IN RELATION TO A MULTI-STATE CO-OPERATI VE BANK, CARRYING ON BUSINESS IN MORE THAN ONE STATE, WOULD BE THE STATE GOVERNMENT. 27. RESPECTFULLY FOLLOWING THE ABOVE PRINCIPL ES AND EXAMINING THE PROVISIONS OF IT ACT, WE ARE OF THE OPINION THA T THE ACTUARIAL VALUATION MADE IN ACCORDANCE WITH THE INSURANCE ACT , 1938 DO MEAN THAT THE ACTUARIAL VALUATION DONE IN ACCORDAN CE WITH THE INSURANCE ACT, 1938. IN ARRIVING AT THE ABOVE DECIS ION WE HAVE ALSO TAKEN INTO CONSIDERATION THAT RULE-5 IN PART-B OF T HE FIRST SCHEDULE WITH REFERENCE TO OTHER INSURANCE BUSINESS DID IN CORPORATE THE IRDA AND ITS REGULATIONS AS AMENDED BY THE FINANCE ACT 2009 W.E.F. 1.4.2011 WHICH IS AS UNDER: B- OTHER INSURANCE BUSINESS: COMPUTATION OF PROFITS AND GAINS OF OTHER INSURANCE BUSINESS. ITA NOS.6854 TO 6856 6509 7765 TO 7767 AND 7213 ICI CI PRULIFE MUMBAI F BENCH PAGE 35 OF 77 5. THE PROFITS AND GAINS OF ANY BUSINESS OF INSURAN CE OTHER THAN LIFE INSURANCE SHALL BE TAKEN TO BE THE PROFIT BEFORE TAX AND APPROPRIATIONS AS DISCLOSED IN THE P ROFIT & LOSS A/C PREPARED IN ACCORDANCE WITH THE PROVISIONS OF THE INSURANCE ACT, 1938 (4 OF 1938) OR THE RULES MADE THEREUNDER OR THE PROVISIONS OF THE INSURANCE REGULATORY AND DEVELOPMENT AUTHORITY ACT, 1999 (4 OF 1999) OR THE REGULATIONS MADE THEREUNDER SUBJECT TO THE FOLLOWING ADJUSTMENTS:- (A) SUBJECT TO THE OTHER PROVISIONS OF THIS RULE, A NY EXPENDITURE OR ALLOWANCE INCLUDING ANY AMOUNT DEBIT ED TO THE PROFIT AND LOSS ACCOUNT EITHER BY WAY OF A PROV ISION FOR ANY TAX, DIVIDEND, RESERVE OR ANY OTHER PROVISION A S MAY BE PRESCRIBED WHICH IS NOT ADMISSIBLE 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 REALIZATION OF INVESTME NTS SHALL BE ADDED OR DEDUCTED, AS THE CASE MAY BE, IF SUCH G AIN OR LOSS IS NOT CREDITED OR DEBITED TO THE PROFIT & LOS S A/C ; (C) SUCH AMOUNT CARRIED OVER TO A RESERVE FOR UNEXP IRED RISKS AS MAY BE PRESCRIBED IN THIS BEHALF SHALL BE ALLOWED AS A DEDUCTION. ( EMPHASIS SUPPLIED) THIS INDICATES THAT THE LEGISLATURE CONSCIOUSLY OMI TTED INCORPORATING THE PROVISIONS OF IRDA OR THE REGULATIONS MADE THER E UNDER IN RULE 2 WHICH STILL REFERS TO THE INSURANCE ACT 1938 ONLY . 28. FURTHER, WE ALSO NOTICE THAT THE INSURANCE AC T ITSELF WAS AMENDED ALONG WITH THE INTRODUCTION OF IRDA ACT 199 9. ALONG WITH THE SAID IRDA ACT, THERE ARE VARIOUS AMENDMENTS PRO POSED IN THE INSURANCE ACT IN TUNE WITH IRDA ACT BY AMENDING THE RELEVANT PROVISIONS OF INSURANCE ACT 1938. HOWEVER, SINCE TH E RULE 5 WAS AMENDED IN THE FIRST SCHEDULE BY SPECIFICALLY REFER RING TO THE IRDA ACT 1999 OR THE REGULATIONS MADE THERE UNDER, WE AR E OF THE OPINION THAT THE LEGISLATURE INTENDED NOT TO MODIFY OR AMEND THE RULE-2. THIS INDICATES THE INTENTION OF LEGISLATURE THAT THE ACTUARIAL VALUATION HAS TO BE MADE IN ACCORDANCE WITH THE UNA MENDED INSURANCE ACT, 1938. WE ARE OF THE FIRM OPINION THA T THE UNAMENDED PROVISIONS OF INSURANCE ACT 1938 WERE ONL Y INCORPORATED INTO THE INCOME TAX ACT AS FAR AS LIFE INSURANCE ITA NOS.6854 TO 6856 6509 7765 TO 7767 AND 7213 ICI CI PRULIFE MUMBAI F BENCH PAGE 36 OF 77 BUSINESS IS CONCERNED. THEREFORE, AOS ACTION IN FO LLOWING THE FORMAT PRESCRIBED UNDER THE REGULATIONS OF IRDA ACT IS NOT IN ACCORDANCE WITH THE SPIRIT OF RULE-2 AND PROVISIONS AS MADE APPLICABLE UNDER THE INCOME TAX ACT. 29. WE ALSO NOTICE THAT THE ACTUARIAL REPORT A ND ABSTRACTS UNDER THE INSURANCE ACT 1938 HAS TO BE PREPARED VIDE SECT ION 13 OF THAT ACT IN ACCORDANCE WITH THE REGULATIONS CONTAINED IN PART-I OF THE FOURTH SCHEDULE AND IN CONFORMITY WITH THE REQUIREM ENT OF PART-II OF THAT SCHEDULE. SECTION 13 OF INSURANCE ACT 1938( AS AMENDED NOW) IS AS UNDER: 13. ACTUARIAL REPORT AND ABSTRACT. (1) EVERY INSURER CARRYING ON LIFE INSURANCE BUSINE SS SHALL, IN RESPECT OF THE LIFE INSURANCE BUSINESS TR ANSACTED 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 INSURANCE B USINESS TRANSACTED BY HIM,(EVERY YEAR) CAUSE AN INVESTIGAT ION TO BE MADE BY AN ACTUARY INTO THE FINANCIAL CONDITION OF THE LIFE INSURANCE BUSINESS CARRIED ON BY HIM, INCLUDIN G A VALUATION OF HIS LIABILITIES IN RESPECT THERETO AND SHALL CAUSE AN ABSTRACT OF THE REPORT OF SUCH ACTUARY TO BE MADE IN ACCORDANCE WITH THE REGULATIONS CONTAINED I N PART I OF THE FOURTH SCHEDULE AND IN CONFORMITY WIT H 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 COMMENCEMENT OF THE INSURANCE REGULATORY AND DEVELOPMENT AUTHORITY ACT, 1999 SHALL CAUSE AN ABST RACT OF THE REPORT OF THE ACTUARY TO BE MADE IN THE MANN ER SPECIFIED BY THE REGULATIONS MADE BY THE AUTHORITY . ITA NOS.6854 TO 6856 6509 7765 TO 7767 AND 7213 ICI CI PRULIFE MUMBAI F BENCH PAGE 37 OF 77 30. THE FIRST TO FOURTH SCHEDULE OF THE INSU RANCE ACT 1938 WAS OMITTED BY THE INSURANCE AMENDMENT ACT 2002 AFTER I NCORPORATION OF THE RELEVANT SCHEDULES IN THE IRDA ACT. EVEN THO UGH THE SAID SCHEDULES WERE OMITTED FROM THE INSURANCE ACT, 1938 , WE ARE OF THE OPINION THAT AS FAR AS RULE-2 IS CONCERNED BY THE P RINCIPLE OF LEGISLATION BY INCORPORATION UNAMENDED INSURANCE ACT, 1938 IS APPLICABLE AND THE ACTUARIAL VALUATION HAS TO BE MA DE IN ACCORDANCE WITH THE THEN EXISTING PART-I OF THE FOURTH SCHEDUL E AND IN CONFORMITY WITH THE REQUIREMENTS OF PART-II OF THAT SCHEDULE. THEREFORE, ASSESSEES CONTENTION THAT THE IRDA REGU LATIONS EVEN THOUGH ARE APPLICABLE TO ASSESSEE SINCE IT HAS COMM ENCED BUSINESS AFTER THE COMMENCEMENT OF THE IRDA ACT, 1999, FOR T HE PURPOSE OF RULE-2, THE ACTUARIAL VALUATION HAS TO BE DONE IN A CCORDANCE WITH THE REGULATIONS CONTAINED IN ERSTWHILE FOURTH SCHED ULE PART-I AND PART-II. THIS IS WHAT ASSESSEE IS CONTENDING AND M ERGING THE ACCOUNTS OF POLICYHOLDERS AND SHAREHOLDERS ACCOUN T AND ARRIVING AT THE ACTUARIAL DEFICIT, WITHOUT TAKING INTO CONSIDER ATION THE TRANSFER OF FUNDS FROM THE SHAREHOLDERS ACCOUNT TO POLICYHO LDERS ACCOUNT. 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 POLIC IES, TO REGULATE, TO PROMOTE AND ENSURE ORDERLY GROWTH OF INSURANCE INDU STRY NUMBER OF REGULATIONS HAVE BEEN PRESCRIBED BY THE IRDA. ON E SUCH IS, INSURANCE REGULATORY AND DEVELOPMENT AUTHORITY (IRD A) (ACTUARIAL REPORT AND ABSTRACT) REGULATIONS 2000 BY WHICH METH OD OF PREPARATION OF ACTUARIES REPORT AND ABSTRACTS WERE PRESCRIBED. AN ACTUARY IS RESPONSIBLE FOR ANALYSING POSSIBLE OUT C OMES OF THE TYPES OF EVENTS THAT WOULD POTENTIALLY COST POLICY HOLDER S TO MAKE CLAIMS AGAINST THEIR INSURANCE POLICIES. INSURANCE COMPANI ES NEED TO MAKE SURE THAT THE MONEY THEY ARE CHARGING AND COLLECTIN G FROM POLICY HOLDERS IS ADEQUATE TO COVER THE COSTS OF CERTAIN C LAIMS THAT MIGHT BENEFICIALLY BE MADE BY POLICY HOLDERS AS WELL AS T HEIR OTHER ITA NOS.6854 TO 6856 6509 7765 TO 7767 AND 7213 ICI CI PRULIFE MUMBAI F BENCH PAGE 38 OF 77 EXPENSES. IN FACT, THE WORK THAT ACTUARIES PERFORM IS CRUCIAL TO AN INSURANCE COMPANYS ABILITY TO REMAIN IN BUSINESS. ACTUARIES ARE INVOLVED AT ALL STAGES IN PRODUCT DEVELOPMENT AND I N 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 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 PAY. THIS INVOLVES ARRIVING AT ACTUARIAL SURPLUS OR DEFICIT DEPENDING ON VARIOUS FACTORS. IN ORDER TO ENSURE A FAIR PLAY IN THE BUSINESS, THE IRDA PRESCRIBED REGULATIONS ACCORDING TO WHICH VARIOUS NORMS WERE P RESCRIBED IN ORDER TO ENSURE THAT LIFE INSURANCE BUSINESS (EVEN OTHER INSURANCE BUSINESS) ARE DONE ACCORDING TO HEALTHY BUSINESS PR ACTICES. AS PER THE ABOVE REGULATIONS, REGULATION 4 PRESCRIBES NUMB ER 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 PRESCR IBED FOR THE PURPOSE OF VALUATION RESULTS AND TO INDICATE THE SU RPLUS OR DEFICIT IN THE LIFE INSURANCE BUSINESS OF A COMPANY. APART FRO M THE ABOVE REGULATIONS, IRDA ALSO PRESCRIBED INSURANCE REGULAT ORY AND DEVELOPMENT AUTHORITY (PREPARATION OF FINANCIAL STA TEMENTS AND AUDITORS REPORT OF INSURANCE COMPANIES) REGULATION S 2002. THE SURPLUS OR DEFICIT ARRIVED AT BY THE ACTUARY IN HIS VALUATION FOR THE INTER VALUATION PERIOD HAS TO BE TAKEN INTO CONSIDE RATION UNDER THE REGULATIONS IN FINANCIAL ACCOUNTS AS WELL. 32. IRDA REGULATIONS SPECIFICALLY REQUIRE TO MAIN TAIN THE POLICYHOLDERS ACCOUNT AND THE SHAREHOLDERS ACCOUN T SEPARATELY AND PERMITS TRANSFER OF FUNDS FROM SHAREHOLDERS AC COUNT TO POLICYHOLDERS ACCOUNT AS AND WHEN THERE IS A DEFIC IT IN POLICYHOLDERS ACCOUNT. AS RIGHTLY NOTED BY THE HON 'BLE BOMBAY ITA NOS.6854 TO 6856 6509 7765 TO 7767 AND 7213 ICI CI PRULIFE MUMBAI F BENCH PAGE 39 OF 77 HIGH COURT, AS A POLICY, COMPANY IS TRANSFERRING FU NDS/ASSETS FROM SHAREHOLDERS ACCOUNT TO POLICYHOLDERS ACCOUNT EVE N DURING THE YEAR PERIODICALLY AS AND WHEN THE ACTUARIAL VALUATI ON WAS ARRIVED AT IN POLICYHOLDERS ACCOUNT. MOST OF THE COMPANIES AR E REQUIRED TO SUBMIT QUARTERLY ACCOUNTS UNDER THE COMPANY LAW, TH ERE IS REQUIREMENT OF ACTUARIAL VALUATION REPORT PERIODICA LLY 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 YEARS, LOT OF CAPITAL HAS TO BE INFUSED SO AS TO BALANCE THE DEFI CIT IN THE POLICYHOLDERS ACCOUNT. DURING THE YEAR AS ALREADY STATED ASSESSEE HAS ISSUED FRESH CAPITAL TO THE EXTENT OF ` .250 CRORES AND TRANSFERRED FUNDS TO THE EXTENT OF ` .233 CRORES FROM THE SHAREHOLDERS ACCOUNT TO POLICYHOLDERS ACCOUNT. SI NCE ASSESSEE IS HAVING ONLY ONE BUSINESS OF LIFE INSURANCE, THE ENT IRE TRANSACTIONS BOTH UNDER THE POLICYHOLDERS AND SHAREHOLDERS ACC OUNT DO PERTAIN TO THE LIFE INSURANCE BUSINESS ONLY AS IT WAS NOT P ERMITTED TO DO ANY OTHER BUSINESS. ONCE ASSESSEE IS IN THE LIFE INSURA NCE 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 & SHAREHOL DERS ACCOUNT HAS TO BE CONSOLIDATED INTO ONE AND TRANSFER FROM O NE ACCOUNT TO ANOTHER IS TAX NEUTRAL. WHAT AO HAS DONE IS TO TAX THE SURPLUS AFTER THE FUNDS HAVE BEEN TRANSFERRED FROM SHAREHOLDERS ACCOUNT TO THE POLICYHOLDERS ACCOUNT AT THE GROSS LEVEL WHILE IGN ORING SUCH TRANSFER IN SHAREHOLDERS ACCOUNT, WHILE BRINGING T O TAX ONLY THE INCOMES DECLARED IN THE SHAREHOLDERS ACCOUNT THAT TOO UNDER THE HEAD OTHER SOURCES OF INCOME. IN FACT WHILE GIVIN G THE FINDING THAT ASSESSEE IS IN THE LIFE INSURANCE BUSINESS ONLY AND INCOMES ARE TO BE TREATED AS INCOME FROM LIFE INSURANCE BUSINESS, THE CIT (A) SURPRISINGLY IN SUBSEQUENT ASSESSMENT YEARS APPEALS ACCEPTED AOS CONTENTION THAT SURPLUS IN SHAREHOLDERS ACCOUNT IS TO BE TAXED AS ITA NOS.6854 TO 6856 6509 7765 TO 7767 AND 7213 ICI CI PRULIFE MUMBAI F BENCH PAGE 40 OF 77 OTHER SOURCES OF INCOME. BUT ONCE THE PROVISIONS OF SECTION 44 OF IT ACT ARE INVOKED ANYTHING CONTAINED IN THE HEADS OF INCOME LIKE INCOME FROM OTHER SOURCES, CAPITAL GAINS, HOUSE PRO PERTY OR EVEN INTEREST ON SECURITIES DOES NOT COME INTO PLAY AND ONLY FIRST SCHEDULE HAS TO BE INVOKED TO ARRIVE AT THE PROFIT. THEREFORE, IN OUR OPINION BOTH THE POLICYHOLDERS AND SHAREHOLDERS A CCOUNT HAS TO BE CONSOLIDATED FOR THE PURPOSE OF ARRIVING AT THE DEF ICIT OR SURPLUS. COMPARISON OF FORMS-I UNDER THE INSURANCE ACT AND T HE IRDA REGULATIONS. 33. LET US EXAMINE WHETHER AOS ACTION IN ADOPTIN G FORM-I PRESCRIBED UNDER THE IRDA REGULATIONS SAME AS THAT OF ACTUARIAL VALUATION MADE IN ACCORDANCE WITH THE INSURANCE ACT 1938. EVEN THOUGH INSURANCE ACT 1938 ALSO REFERS TO FORM-I, TH ERE IS SUBSTANTIAL DIFFERENCE IN THE FORMATS. BOTH AO AND THE CIT (A) HAS GIVEN CREDENCE TO FORM I WITHOUT UNDERSTANDING THAT THE OLD FORM-I PRESCRIBED UNDER THE INSURANCE ACT 1938 IS ENTIRELY DIFFERENT FROM NEW FORM-I PRESCRIBED UNDER THE IRDA REGULATIONS. I N FACT THE OLD FORM -I HAS THIS FORMAT: THE INSURANCE ACT, 1938 FORM I VALUATION OF BALANCE SHEET OF AS AT 19 NET LIABILITY UNDER BUSINESS AS SHOWN IN THE SUMMARY AND VALUATION OF POLICIES ` . BALANCE OF LIFE INSURANCE FUND AS SHOWN IN THE BALANCE SHEET ` . SURPLUS, IF ANY DEFICIENCY, IF ANY.. NOTE IF THE PROPORTION OF SURPLUS ALLOCATED TO THE INSURER, OR IN THE CASE OF AN INSURANCE COMPANY TO SHAREHOLDERS, IS N OT UNIFORM IN RESPECT OF ALL CLASSES OF INSURANCES, THE SURPLUS M UST BE SHOWN SEPARATELY FOR THE CLASSES TO WHICH THE DIFFERENT P ROPORTIONS RELATE. NEW FORM -I UNDER THE IRDA ACTUARIAL REPORT AND ABSTRACTS 2000 IS AS UNDER WHICH WAS PRESCRIBED UNDER THE REGULATIONS 4 . ITA NOS.6854 TO 6856 6509 7765 TO 7767 AND 7213 ICI CI PRULIFE MUMBAI F BENCH PAGE 41 OF 77 (FORM -I) (SEE REGULATION 4) INSURANCE REGULATORY AND DEVELOPMENT AUTHORITY (ACT UARIAL REPORT AND ABSTRACT) REGULATIONS, 2000 VALUATION RESULTS AS AT 31 ST MARCH, 20__ FORM CODE___________ NAME OF INSURER: REGN.NO. DATE OF REGN. ITEM NO. DESCRIPTION BALANCE OF FUND SHOWN IN BALANCE SHEET MATHEMATICAL RESERVES (EXCLUDING COST OF BONUS ALLOCATED) SURPLUS NEGATIVE RESERVE SURRENDER VALUE DEFICIENCY RESERVE (1) (2) (3) (4) (5) (6) (7) 01 BUSINESS WITHIN INDIA PAR POLICIES 02 NON-PAR POLICIES 03 TOTAL 04 T OTAL BUSINESS PAR POLICIES 05 NON PAR POLICIES 06 TOTALS 34. NOT ONLY THAT ANOTHER FORMAT OF THE FORM -I IS PRESCRIBED IN THE IRDA RECOMMENDATIONS UNDER REGULATION 8 IN T HE FOLLOWING FORMAT: STATEMENT OF COMPOSITION AND DISTRIBUTION OF SURPLU S IN RESPECT OF POLICYHOLDERS FUND AS PRESCRIBED IN RE GULATION 8: (1) A STATEMENT SHOWING TOTAL AMOUNT COMPOSITION OF SURPLUS ; A) SURPLUS SHOWN UNDER FORM I; B) INTERIM BONUS PAID DURING THE INTER-VALUATION PERIO D; C) TERMINAL BONUSES PAID DURING THE INTER-VALUATION PE RIOD; D) LOYALTY ADDITIONS OR OTHER FORMS OF BONUSES, IF ANY , PAID DURING THE INTER-VALUATION PERIOD; ITA NOS.6854 TO 6856 6509 7765 TO 7767 AND 7213 ICI CI PRULIFE MUMBAI F BENCH PAGE 42 OF 77 E) SUM TRANSFERRED FROM SHAREHOLDERS FUNDS DURING THE INTER VALUATION PERIOD; F) AMOUNT OF SURPLUS FROM POLICYHOLDERS FUNDS, BROUG HT FORWARD FROM PRECEDING VALUATION; G) TOTAL SURPLUS (TOTAL OF THE ITEMS (A) TO (F) 35. WE HAVE SPECIFICALLY ASKED THE CIT DR TO EXPLAI N WHAT IS THE SURPLUS SHOWN UNDER FORM I IE. AT COLUMN (A) ABOVE. REGULATION 8 AS SHOWN ABOVE HAS COLUMN (A) SURPLUS SHOWN UNDER FORM I. IN COL.(E) ONE HAS TO REPRESENT SUM TRANSFERRED FROM S HAREHOLDERS FUND DURING THE INTER VALUATION PERIOD. ITEM (G) RE FERS TO THE TOTAL SURPLUS AFTER TAKING INTO ACCOUNT ITEMS (A) TO (F) . UNDER COL.(A) SURPLUS SHOWN IN FORM I IS A DEFICIT AS PER FORM AR -A IN THE POLICYHOLDERS DEFICIT ACCOUNT IN THIS YEAR. THIS C ORRESPONDS THE ACTUARIAL VALUATION SURPLUS OR DEFICIT REFERRED T O UNDER THE INSURANCE ACT, 1938. THIS AMOUNT ALSO TALLIES WITH FORM I PRESCRIBED UNDER REGULATION 4. IRDA REGULATIONS HO WEVER, AFTER ARRIVING AT THE SURPLUS OR DEFICIT IN THE FORM I AL SO PRESCRIBES A SEPARATE STATEMENT AGAIN AS FORM I WITH DETAILS OF (A) TO (F) UNDER REGULATION 8. AS CAN BE SEEN FROM THESE TWO FORMS, THERE IS VARIATION IN THE AMOUNTS ARE PRESENTED, AS THESE FO RMS SERVE DIFFERENT PURPOSES. THE FORM I WHICH WAS PRESCRIBE D UNDER REGULATIONS 8 IS AFTER ARRIVING AT THE DISTRIBUTION SURPLUS UNDER REGULATIONS 6. THE REGULATIONS 6, 7 AND 8 ARE AS UN DER: DISTRIBUTION OF SURPLUS: 6. THE BASIS ADOPTED IN THE DISTRIBUTION OF SURPLUS A S BETWEEN THE SHAREHOLDERS AND THE POLICYHOLDERS, A ND WHETHER SUCH DISTRIBUTION WAS DETERMINED BY THE INSTRUMENTS CONSTITUTING THE COMPANY OR BY ITS REGULATIONS OR BY-LAWS OR HOW OTHERWISE SHALL BE MENTIONED. PRINCIPLES ADOPTED IN DISTRIBUTION OF PROFITS: 7. THE GENERAL PRINCIPLES ADOPTED IN DISTRIBUTION OF P ROFITS AMONG POLICYHOLDERS, INCLUDING STATEMENTS ON FOLLO WING POINTS, SHALL BE FURNISHED: ITA NOS.6854 TO 6856 6509 7765 TO 7767 AND 7213 ICI CI PRULIFE MUMBAI F BENCH PAGE 43 OF 77 (I) WHETHER THE PRINCIPLES WERE DETERMINED BY INSTRUMENTS CONSTITUTING THE INSURER, OR BY ITS REGULATIONS OR BY-LAWS OR HOW OTHERWISE: (II) THE NUMBER OF YEARS PREMIUM TO BE PAID, PERIOD TO ELAPSE AND OTHER CONDITIONS TO BE FULFILLED BEFORE A BONUS IS ALLOTTED; (III) WHETHER THE BONUS IS ALLOCATED IN RESPECT OF EACH YEARS PREMIUM PAID OR IN RESPECT OF EACH CALENDAR YEAR OR YEAR OF ASSURANCE OR HOW OTHERWISE AND (IV) WHETHER THE BONUS VESTS IMMEDIATELY ON ALLOCAT ION OR IF NOT CONDITIONS OF VESTING. STATEMENTS OF COMPOSITION OF SURPLUS AND DISTRIBUTION OF SURPLUS IN RESPECT OF POLICYHOLDER S FUNDS: ( 8 ) A STATEMENT, SHOWING TOTAL AMOUNT OF SURPLUS ARIS ING DURING THE INTER VALUATION PERIOD AND THE ALLOCATIO N OF SUCH SURPLUS, SHALL BE FURNISHED SEPARATELY FOR PARTICIP ATING BUSINESS AND FOR NON PARTICIPATING BUSINESS, WITH T HE PARTICULARS AS MENTIONED BELOW: COMPOSITION OF SURPLUS: (A) SURPLUS SHOWN UNDER FORM I (B) INTERIM BONUSES PAID DURING THE INTER-VALUATION PERIOD; (C) TERMINAL BONUSES PAID DURING THE INTER-VALUATION PERIOD; (D) LOYALTY ADDITIONS OR OTHER FORMS OF BONUSES, IF ANY , PAID DURING THE INTER VALUATION PERIOD. (E) SUM TRANSFERRED FROM SHAREHOLDERS FUNDS DURING THE INTER VALUATION PERIOD; (F) AMOUNT OF SURPLUS, FROM POLICYHOLDERS FUNDS, BROUGHT FORWARD FROM PRECEDING VALUATION; (G) TOTAL SURPLUS (TOTAL OF THE ITEMS (A) TO (F). DISTRIBUTION OF SURPLUS: POLICYHOLDERS FUND: (A) TO TERMINAL BONUSES PAID; (B) TO TERMINAL BONUSES; (C) TO LOYALTY ADDITIONS OR ANY OTHER FORMS OF BONUSES, IF ANY; ITA NOS.6854 TO 6856 6509 7765 TO 7767 AND 7213 ICI CI PRULIFE MUMBAI F BENCH PAGE 44 OF 77 (D) AMONG POLICYHOLDERS WITH IMMEDIATE PARTICIPATION GIVING THE NUMBER OF POLICIES WHICH PARTICIPATED AN D THE SUMS ASSURED THEREUNDER (EXCLUDING BONUSES); (E) AMONG POLICYHOLDERS WITH DEFERRED PARTICIPATION, GIVING THE NUMBER OF POLICIES WHICH PARTICIPATED AN D THE SUMS ASSURED THEREUNDER (EXCLUDING BONUSES); (F) AMONG POLICYHOLDERS IN THE DISCOUNTED BONUS CLASS GIVING THE NUMBER OF POLICIES WHICH PARTICIPATED AN D THE SUMS ASSURED THEREUNDER (EXCLUDING BONUSES); (G) TO EVERY RESERVE FUND OR OTHER FUND OR ACCOUNT (ANY SUCH SUMS PASSED THROUGH THE ACCOUNTS DURING THE INTER VALUATION PERIOD TO BE SEPARATELY STATED); (H) AS CARRIED FORWARD UN-APPROPRIATED. SHAREHOLDERS FUND: (I) TO THE SHAREHOLDERS FUNDS (ANY SUCH SUMS PASSED THROUGH THE ACCOUNTS DURING THE INTER-VALUATION PERIOD TO BE SEPARATELY STATED); TOTALS: (J) TOTAL SURPLUS ALLOCATED: (TOTAL OF THE ITEMS (A) TO (J) (2) SPECIMEN OF BONUSES ALLOTTED TO POLICIES FOR ONE TH OUSAND RUPEES TOGETHER WITH THE AMOUNTS APPORTIONED UNDER THE VARIOUS MANNERS IN WHICH THE BONUS IS RECEIVABLE FO R EACH TYPE OF PARTICIPATING PRODUCE, SHALL BE FURNISHED. THUS AS CAN BE SEEN FROM ABOVE REGULATIONS, THE FOR M I UNDER REGULATION 8 REPRESENT THE TOTAL SURPLUS FOR THE PU RPOSE OF DISTRIBUTION OF BONUSES/ DIVIDENDS TO POLICY HOLDER S AND DOES NOT REPRESENT SURPLUS OR DEFICIT OF ACTUARIAL VALUATION FOR THE PURPOSES OF BALANCE SHEET. THIS AMOUNT IS REPRESENTED IN FORM I PREPARED UNDER REGULATION 4 FOR THE PURPOSE OF FINANCIAL ACCOUNTS. RECONCILIATION OF AMOUNTS: 36. AS SEEN FROM THE ORDERS OF THE AUTHORITIES, THE TOTAL SURPLUS PREPARED UNDER REGULATION 8 WAS TAKEN AS BASIS IGNO RING THE FORM- I OF REGULATION 4. WHILE ACCEPTING THE LD.CIT DR AR GUMENT THAT FOR THE PURPOSES OF LIFE INSURANCE BUSINESS THE ACT PRO VIDES FOR SURPLUS OF VALUATION TO BE TAXED AT LESSER RATE, WE CAN NOT ACCEPT THE ARGUMENT THAT SURPLUS IS TOTAL SURPLUS INCLUDING TR ANSFERS FROM SHARE HOLDERS ACCOUNT. BASICALLY TRANSFERS ARE TAX NEUTRAL AS A ITA NOS.6854 TO 6856 6509 7765 TO 7767 AND 7213 ICI CI PRULIFE MUMBAI F BENCH PAGE 45 OF 77 CREDIT IN ONE ACCOUNT GETS CANCELLED BY DEBIT IN OT HER ACCOUNT WHEN ACCOUNTS ARE CONSOLIDATED. WHAT THE RULE.2 PRESCRIB ED WAS ONLY AVERAGE SURPLUS ARRIVED BY ADJUSTING THE SURPLUS DISCLOSED IN THE ACTUARIAL VALUATION MADE WITH REGARD TO THE INSURAN CE ACT, 1938 IN RESPECT OF INTER VALUATION PERIOD. ASSESSEE IN THE COURSE OF THE ASSESSMENT PROCEEDINGS HAS FURNISHED GENERAL BALANC E SHEET IN FORM-A WHICH IS AS UNDER: FORM -A GENERAL BALANCE SHEET GENERAL BALANCE SHEET OF ICICI PRUDENTIAL LIFE INSU RANCE COMPANY LIMITED AS AT MARCH 31, 2006 (AMOUNT IN RUPEES 000) PARTICULARS MAR-05 MAR-04 PARTICULARS MAR-05 MAR-04 SHARE CAPITAL 92,50,000 67,50,000 LOANS 25,225 21,619 SHARE APPLICATION MONEY - - INVESTMENTS 3,75,88,023 1,64,46,429 EMPLOYEE STOCK OPTION OUTSTANDING - - AGENTS BALANCES RESERVE FOR CONTINGENCY OUTSTANDING PREMIUMS 84,426 61,287 GENERAL RESERVE - - INTEREST, DIVIDEND AND RENTS OUTSTANDING 1,47,531 77,589 SHARE PREMIUM - - INT. DIVIDEND AND RENTS ACCRUED BUT NOT DUE 1,86,899 1,48,778 PROPERTY REVALUATION RESERVE - - AMOUNT DUE FROM OTHER PERSONS OR BODIES CARRYING ON INSURANCE BUSINESS INVESTMENT RESERVE SUNDRY DEBTORS, ADVANCES AND DEPOSITS 2,95,504 1,78,792 PROPERTY INSURANCE RESERVE FIXED ASSETS 6,30,124 5,48,131 PROFIT & LOSS APPROPRIATE A/C CASH: AT BANKERS ON DEPOSIT ACCOUNT 3,00,000 44,900 BALANCE OF FUNDS 2,78,28,554 95,97,898 AT BANKERS ON NOTICE DEPOSIT ACCOUNT - - DEBENTURE STOCK AT BANKERS ON CURRENT ACCOUNT AND IN HAND 16,95,868 4,58,304 ESTIMATED LIABILITY IN RESPECT OF OUTSTANDING CLAIMS, WHETHER DUE OR INTIMATED ANNUITIES DUE AND ITA NOS.6854 TO 6856 6509 7765 TO 7767 AND 7213 ICI CI PRULIFE MUMBAI F BENCH PAGE 46 OF 77 UNPAID AMOUNT DUE TO OTHER PERSONS OR BODIES CARRYING ON INSURANCE BUSINESS - - CURRENT LIABILITIES & PROVISIONS 38,75,046 16,37,931 TOTAL ` . 4,09,53,600 1,79,85,829 TOTAL ` . 4,09,53,600 1,79,85,829 LIKEWISE IT ALSO GIVEN FORM-G CONSOLIDATING REVENUE ACCOUNT AS UNDER: FORM -G CONSOLIDATED REVENUE ACCOUNT REVENUE ACCOUNT OF ICICI PRUDENTIAL LIVE INSURANCE COMPANY LIMITED AS AT MARCH 31, 2006 (AMOUNT IN RUPEES 000) PARTICULARS MAR-05 MAR-04 PARTICULARS MAR-05 MAR-04 CLAIMS UNDER POLICIES, LESS RE-INSURANCE: BALANCE OF FUND AT THE BEGINNING YEAR 95,97,898 26,58,698 BY DEATH 1,11,348 59,627 PREMIUMS: BY MATURITY 2,539 - 1 ST YEAR PREMIUMS 1,45,43,024 62,91,180 ANNUITIES, LESS RE- INSURANCE - - RENEWAL PREMIUMS 77,94,747 23,84,328 SURRENDERS (INCL. SUR BONUS) LESS RE- INSURANCE 9,286 4,076 SINGLE PREMIUMS LESS: REINSURANCE 13,00,401 (38,177) 12,17,250 (19,075) BONUSES IN CASH, LESS RE-INSURANCE - - CONSIDERATION FOR ANNUITIES GRANTED, LESS REINSURANCE BONUSES IN REDUCTION OF PREMIUMS 56,434 17,904 INTEREST, DIVIDENDS AND RENTS 6,92,979 6,27,033 OTHER BENEFIT FEES AND CHARGES 23,629 2,348 EXPENSES OF MANAGEMENT: LINKED INCOME 4,92,380 3,61,463 COMMISSION 17,79,564 8,65,104 OTHER INCOME 1,055 1,098 OTHER OPERATING EXPENSES 46,20,211 29,79,714 REGISTRATION FEES - - BAD DEBTS LOSS TRANSFERRED TO PROFIT & LOSS A/C UK, INDIAN, DOMINION AND FOREIGN TAXES TRANSFERRED FROM APPROPRIATION A/C PROVISION FOR TAX FRINGE BENEFIT TAX PROFIT TRANSFERRED TO PROFIT & LOSS A/C 2,78,28,554 95,97,898 TOTAL ` . 3,44,07,936 1,35,24,323 TOTAL ` . 3,44,07,936 1,35,24,323 ITA NOS.6854 TO 6856 6509 7765 TO 7767 AND 7213 ICI CI PRULIFE MUMBAI F BENCH PAGE 47 OF 77 FORM -I VALUATION BALANCE SHEET HAS BEEN FURNISHED AS UNDER: FORM-I VALUATION BALANCE SHEET VALUATION BALANCE SHEET OF ICICI PRUDENTIAL LIFE IN SURANCE COMPANY LIMITED AS AT MARCH 31, 2005 PARTICULARS MAR-05 MAR-04 PARTICULARS MAR-05 MAR-04 ACTUARIAL VALUATION LIABILITY 3,44,75,905 1,43,38,641 BALANCE OF FUND AS SHOWN IN GENERAL BALANCE SHEET 2,78,28,554 95,97,898 SURPLUS DEFICIT 66,47,351 47,40,743 TOTAL ` . 3,44,75,905 1,43,38,641 TOTAL ` , 3,44,75,905 1,43,38,641 PARTICULARS AMOUNT ( ` `` ` .000) DEFICIT AS AT MARCH 31,2005 (664,73,51) LESS: DEFICIT AS AT MARCH 31,2004 (474,07,43) DEFICIT FOR THE YEAR ENDED ON MARCH 31,2005 (190,66,08) INCOME OFFERED IN RETURN OF INCOME BEFORE CLAIMING EXEMPTION UNDER SECTION 10 OF THE INCOME TAX ACT, 1961 (190,66,08) 37. THUS AS CAN BE SEEN, THE DEFICIT FOR THE YEAR ENDED MARCH, 2005 WAS ARRIVED AT ` .190,66,08/- (000) WHICH WAS ALSO TALLYING WITH ASSESSEES COMPUTATION OF INCOME. FURTHER ASSE SSEE ALSO FURNISHED THE RECONCILIATION OF FORM-I TOTAL SURPL US WITH RETURN OF INCOME: ICICI PRUDENTIAL LIFE INSURANCE COMPANY LIMITED FY 2004-05/ AY 2005-06: RECONCILIATION OF FORM -I SURPLUS WITH RETURN OF INCOME PARTICULARS AMOUNT ( ` `` ` .) AMOUNT ( ` `` ` .) FORM-I SURPLUS AS ON 31.3.2005 (PAGE-14B 35,86,96,280 LESS FORM I SURPLUS AS AT 31.3.2004 - SURPLUS FOR FY 2004-05/AY 2005-06 35,86,96,280 LESS: SHAREHOLDERS FUNDING DEFICIT FUNDING TRANSFERS FROM SHAREHOLDERS FUND (PAGE 8PB) 2,33,34,74,000 ITA NOS.6854 TO 6856 6509 7765 TO 7767 AND 7213 ICI CI PRULIFE MUMBAI F BENCH PAGE 48 OF 77 ADVANCE FUNDING BASED ON ESTIMATES (NOTE 1) 4,12,09 ,280 (2,37,46,82,280) LESS: ROUND OFF (12,808) DEFICIT IN ACCOUNT (2,01,59,99,808) SURPLUS FOR PARTICIPATING BUSINESS 10,41,05,196 DEFICIT FOR NON-PARTICIPATING BUSINESS (36,30,236) SURPLUS FOR PARTICIPATING ANNUITIES (PENSION BUSINESS) 21,33,71,824 DEFICIT FOR LINKED BUSINESS (1,66,59,51,826) DEFICIT FOR LINKED PENSION BUSINESS (63,09,19,492) DEFICIT FOR LINKED GROUP BUSINESS (3,29,75,274) DEFICIT IN POLICYHOLDERS ACCOUNT (2,01,59,99,808) ADD: SURPLUS IN SHAREHOLDERS ACCOUNT 10,93,77,555 INCOME AS PER RULE 2 OF SCHEDULE 1 OF THE ACT (1,90,66,22,253) EXEMPTION UNDER SECTION 10(23AAB) LESS: SURPLUS FOR PARTICIPATING PENSION BUSINESS (2 1,33,71,824) ADD: DEFICIT FOR LINKED PENSION BUSINESS 63,09,19,4 92 41,75,47,668 EXEMPTION UNDER SECTION 10(34) DIVIDEND INCOME 2,21,29,204 LESS: IN PENSION SCHEME (65,19,982) LESS: DISALLOWANCE UNDER SECTION 14A 1,44,377) (1,54,64,845) TOTAL SURPLUS/(DEFICIT) FROM LIFE INSURANCE BUSINES S (1,50,45,39,430) 38. THE ABOVE STATEMENT FURNISHED IS IN ACCORDANCE WITH THE INSURANCE ACT, 1938, THEREFORE, IT CANNOT BE STATED THAT ASSESSEE RETURNED INCOME IS NOT IN ACCORDANCE WITH THE INSUR ANCE ACT, 1938. THERE IS NO BASIS FOR AO TO TAKE FORM-I TOTAL SURP LUS AS SURPLUS OF THE LIFE INSURANCE BUSINESS IGNORING TRANSFER FROM SHAREHOLDERS ACCOUNT. 39. IT IS ALSO ON RECORD THAT ASSESSEE FOLLOWED THE IRDA RECOMMENDATIONS AND ACCORDINGLY PREPARED THE ACTUAR IAL VALUATION REPORT INCLUDING THE SURPLUS OR DEFICIT. HOWEVER, R ULE-2 PRESCRIBES ONLY ACTUARIAL VALUATION IN ACCORDANCE WITH THE INS URANCE ACT, 1938. THEREFORE, AO IS DUTY BOUND TO INSIST ON ACTU ARIAL VALUATION IN ACCORDANCE WITH THE INSURANCE ACT, 1938, SO AS T O BRING TO TAX THE SURPLUS OR DEFICIT. WHAT WE NOTICE IS THAT AO, IGNORING RULE-2, ITA NOS.6854 TO 6856 6509 7765 TO 7767 AND 7213 ICI CI PRULIFE MUMBAI F BENCH PAGE 49 OF 77 HAS RELIED ON THE ACTUARIAL VALUATION REPORT PRESCR IBED UNDER THE IRDA RECOMMENDATIONS UNDER REGULATION 8 THAT TOO AT TOTAL SURPLUS, WHICH IS AT VARIANCE WITH THE INSURANCE A CT, 1938. SINCE NO AMENDMENT WAS BROUGHT TO RULE-2 TO INCORPORATE I RDA RECOMMENDATIONS, WE ARE OF THE OPINION THAT THE ACT ION OF AO IN RELYING ON THE IRDA REGULATIONS IS NOT ACCORDING TO THE LAW. ASSESSEE HAD SUBMITTED ITS ACCOUNTS AS STATED ABOVE , WHICH ARE IN ACCORDANCE WITH THE INSURANCE ACT, 1938. INSTEAD OF EXAMINING THESE STATEMENTS, JUST BECAUSE ASSESSEE HAS SHOWN T OTAL SURPLUS IN THE ACCOUNTS IN SIMILARLY NAMED FORM-I( UNDER REGUL ATION 8), AO WANTS TO TAX THE AMOUNT WHICH IS AFTER TAKING INTO ACCOUNT THE TRANSFER OF ASSETS BY WAY OF FRESH CAPITAL FROM SHA REHOLDERS ACCOUNT. THIS IN A WAY IS TAXING FRESH CAPITAL INFU SED INTO BUSINESS INDIRECTLY WHICH CANNOT BE DONE AS THIS IS NOT BUSI NESS SURPLUS BUT INFUSION OF CAPITAL DIRECTLY. 40. IN OUR OPINION WHAT ASSESSEE HAS DONE IN RECO NCILING THE IRDA FORMAT WITH THAT OF OLD INSURANCE FORM IS CORRECT A ND 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 T HE ENTIRE AMOUNT SHOWN UNDER THE NEW REGULATIONS INCLUDING TRANSFER FROM SHAREHOLDERS ACCOUNT IS NOT CORRECT. INSTEAD OF AO IN TAKING THE SURPLUS AT REGULATION 8(1)(A) WHICH IS THE ACTUARIA L SURPLUS / DEFICIT FOR THE YEAR TOOK THE AMOUNT AS DISCLOSED AT REGULA TION 8 (1) (F) (TOTAL SURPLUS AFTER TRANSFER FROM SHAREHOLDERS AC COUNT) WHICH IS NOT AT ALL CORRECT. 41. LEARNED COUNSEL IN THE COURSE OF THE ARGUMENT A LSO PLACED RECONCILIATION OF THE VARIOUS FIGURES AS UNDER: ITA NOS.6854 TO 6856 6509 7765 TO 7767 AND 7213 ICI CI PRULIFE MUMBAI F BENCH PAGE 50 OF 77 TABLE: STATEMENT OF DEFICIT IN POLICYHOLDERS ACCOU NT (PHA), SHAREHOLDER ACCOUNT (SHA) FUNDING AND NET DEFICIT: S.NO PARTICULARS AMOUNT ( ` `` ` . IN CRS.) AMOUNT ( ` `` ` IN CRS.) PAPER BOOK PAGE REFERENCE DEFICIT IN PHA A/C 233.34 PAGE 70 PART OF ACTUARIAL REPORT AND ALSO PAGE 8 REVENUE A/C MET BY TRANSFER FROM SHA A/C AMOUNTING TO: 237.46 A.TRANSFER TO MEET THE DEFICIT B.ADDITIONAL TRANSFER 233.34 4.12 237.46 PAGE 70 PART OF ACTUARIAL REPORT AND ALSO AT PAGE 8 REVENUE ACCOUNT I SCENARIO 1: IF TRANSFER DISREGARDED AS INCOME: THE AMOUNT TRANSFERRED CANNOT BE OF INCOME NATURE, IF DISREGARDED, THERE WILL BE A NET DEFICIT IN THE PHA OF ADD: SURPLUS IN SHA -201.59 10.93 - 190.66 PAGE 8 REVENUE ACCOUNT (31.74- 233.33) PAGE 9 PROFIT & LOSS A/C (11.34-0.41) II SCENARIO 2: IF TRANSFER DISREGARDED AS INCOME: IF AMOUNT TRANSFERRED IS REGARDED AS INCOME NATURE, THE SURPLUS IN PHA ACCOUNT WILL BE DEFICIT IN SHA NET DEFICIT 31.74 -222.40 190.66 PAGE 8 REVENUE ACCOUNT (SURPLUS/DEFICIT) PAGE 9 PROFIT & LOSS A/C (PROFIT/LOSS BEFORE TAX) NET DEFICIT AS PER THE RETURN ON INCOME (BEFORE CLAIMING EXEMPTIONS UNDER SECTION 10) DEFICIT IN PHA SHA INCOME DETAILS AS PER RETURN BEFORE CLAIMING EXEMPTIONS -201.59 10.93 -190.66 PAGE 8 REVENUE ACCOUNT (SURPLUS/DEFICIT) PAGE 9 PROFIT & LOSS A/C (PROFIT/LOSS) BEFORE TAX. CONCLUSION: BOTH SCENARIOS GIVE THE SAME RESULT AND REFLECT THE ACTUAL DEFICIT AS ITA NOS.6854 TO 6856 6509 7765 TO 7767 AND 7213 ICI CI PRULIFE MUMBAI F BENCH PAGE 51 OF 77 DISCLOSED IN THE RETURN OF INCOME FILED (BEFORE CLAIMING EXEMPTIONS UNDER SECTION 10). NOTE DUE TO EXCESS FUNDING DONE, THE SURPLUS AS DISCLOSED BY THE ACTUARIAL VALUATION IS MORE THAN THE SURPLUS DISCLOSED IN THE FINANCIALS: THE SURPLUS AS PER FINANCIALS ADD EXCESS FUNDING DONE SURPLUS AS PER ACTUARIAL VALUATION 31.74 4.12 35.86 PAGE 8 REVENUE ACCOUNT (SURPLUS/DEFICIT) PAGE 70 PART OF ACTUARIAL REPORT EXCESS FUNDING DISCLOSED BY WAY OF A NOTE (AMOUNT NOT MENTIONED) PAGE 14 ACTUARIAL VALUATION IN FORM-I 42. IN VIEW OF THE ABOVE, LOOKING AT THE ISSU E IN ANY WAY WHAT WE NOTICE IS THAT THE COMPUTATION MADE BY ASSESSEE IS IN ACCORDANCE WITH RULE-2 OF THE INSURANCE ACT 1938 AC CORDING TO WHICH ONLY AO CAN BASE HIS COMPUTATION. THIS ALSO C ORRESPONDS TO THE WAY INCOMES WERE ASSESSED IN EARLIER YEARS IE. THE CORRECT METHOD AS PER RULE 2 AND SEC 44 OF IT ACT. IN VIEW OF THE DISCUSSION ABOVE AND AFTER ANALYZING THE FORMS, REG ULATIONS AND PROVISIONS WE HAVE NO HESITATION TO HOLD THAT THE A SSESSEE WORKING OF ACTUARIAL SURPLUS/ DEFICIT IS IN ACCORDANCE WITH RULE 2 OF FIRST SCHEDULE. THEREFORE, ASSESSEE GROUNDS ON THIS ISSUE ARE ALLOWED AND AO IS DIRECTED TO MODIFY THE ORDER ACCORDINGLY. GROUND NOS.1 TO 3 ARE CONSIDERED ALLOWED. 43. GROUND NO.4 PERTAINS TO DISALLOWANCE UNDER SECT ION 14A OFFERED IN REVISED RETURN ON REASONABLE BASIS. ASSESSEE OFF ERED AN AMOUNT OF ` .1,44,377/- AS AGAINST THE DIVIDEND INCOME MOSTLY C LAIMED AT ` .1,56,09,222/- ARRIVED AT IN PARTICIPATING LIFE INS URANCE BUSINESS. ASSESSEE GAVE METHODOLOGY IN CONTRIBUTING THE EXPEN SES. HOWEVER, AO DID NOT ACCEPT AND TOOK THE ESTIMATION 0.5% OF T HE AVERAGE INVESTMENT THEREBY MAKING THE ADDITION. THE CIT (A) FOLLOWING THE JUDGMENT OF THE HON'BLE BOMBAY HIGH COURT IN THE CA SE OF GODREJ & ITA NOS.6854 TO 6856 6509 7765 TO 7767 AND 7213 ICI CI PRULIFE MUMBAI F BENCH PAGE 52 OF 77 BOYCE VS. DCIT DATED ON 12/08/2010 DIRECTED AO TO W ORKOUT ON A REASONABLE BASIS. ASSESSEE HAS RAISED THE ADDITIONA L GROUND OF APPEAL AS UNDER: GROUND: AO AND THE CIT (A) ERRED IN INVOKING THE PROVISION S OF SECTION 14A OF THE INCOME TAX ACT 1961 AND DISALLOW ING EXPENSES ATTRIBUTABLE TO EARNING EXEMPTED INCOME, WITHOUT APPRECIATING THE FACT THAT THE PROVISIONS O F SECTION 14A ARE NOT APPLICABLE TO INSURANCE COMPANI ES. 44. THE LEARNED COUNSEL SUBMITTED THAT IN VIEW OF T HE PROVISIONS OF SECTION 44, THE PROVISIONS OF SECTION 14A ARE NOT A PPLICABLE. HE RELIED ON THE ORDERS OF BAJAJ ALLIANCE GENERAL INSU RANCE CO. VS. ADDL.CIT IN ITA NO.1447/MUM/2007 DATED 31/08/2009, JCIT VS. RELIANCE GENERAL INSURANCE COMPANY IN ITA NO.3085/M UM/2008 AND OTHER CASES WHEREIN THE COORDINATE BENCH HAVE A LREADY DECIDED THE PROVISIONS OF SECTION 14A ARE NOT APPLI CABLE. HE ALSO PLACED ON RELIANCE IN THE CASE OF GENERAL INSURANCE CORPORATION OF INDIA VS. ADDL. CIT IN ITA NO.3554/MUM/2011 DATED 1 5/02/2012 TO SUBMIT THAT THE PROVISIONS OF SECTION 14A DOES N OT APPLY TO THE INSURANCE BUSINESS. 45. THE LEARNED DR HOWEVER, RELIED ON THE ORDERS OF AO AND THE CIT (A) AND THE FACT THAT ASSESSEE ITSELF HAS OFFERED I NCOME DISALLOWING UNDER SECTION 14A. 46. THIS ISSUE IS ALREADY DECIDED BY THE COORDINATE BENCHES IN VARIOUS CASES. FOR THE SAKE OF RECORD, THE ORDER IN THE CASE OF GENERAL INSURANCE CORPORATION OF INDIA IN ITA NO.35 54/MUM/2011 VIDE PARA 9 IS AS UNDER: 9 . ISSUE NO.6 NON APPLICABILITY OF PROVISIONS OF SECTION 14A. (MODIFIED GROUND OF APPEAL NO.3.1 TO 3.4 ORIGINAL GROUND OF APPEAL NO.3.1 TO 3.5). THE ISSUE IS WITH REFERENCE TO THE APPLICABILITY OF SECTION 14A AND DISALLOWANCE OF EXPENDITURE IN RESPECT OF SALE OF INVESTMENT WHICH ARE NOT TAXED. WE HAVE HEARD THE R IVAL CONTENTIONS. WE ALSO NOTE THAT THIS ISSUE IS ALSO C ONSIDERED ITA NOS.6854 TO 6856 6509 7765 TO 7767 AND 7213 ICI CI PRULIFE MUMBAI F BENCH PAGE 53 OF 77 BY THE COORDINATE BENCH IN ASSESSEES OWN CASE FOR 2006- 07 VIDE PARA 7 TO 9: 7 . GROUNDS OF APPEAL NO.4 REGARDING THE EXPENDITURE UNDER SECTION 14A. 8. WE HAVE HEARD THE RIVAL CONTENTIONS AND PERUSED THE RELEVANT RECORD. WE NOTE THAT THIS ISSUE HAS BEEN CONSIDERED AND DECIDED BY THE PUNE BENCH OF THIS TRIBUNAL IN THE CASE OF B AJAJ ALLIANZ GENERAL INSURANCE COMPANY LIMITED V/S ADD. CIT IN I TA NO.1447/PN/2007 FOR THE ASSESSMENT YEAR 2003-04 ORD ER DATED 31.08.2009. THIS TRIBUNAL IN THE CASE OF JCITV/S M/ S RELIANCE GENERAL INSURANCE CO. IN ITA NO.3085/MUM/2008 FOR T HE ASSESSMENT YEAR 2005-06 VIDE ORDER DATED 26.2.2010 HAS CONSIDERED THIS ISSUE AND DECIDED IN FAVOUR OF THE ASSESSEE. THIS ORDER WAS FOLLOWED BY THIS TRIBUNAL WHILE DECI DING THE ISSUE IN ITA NO.781/MUM/2007 VIDE ORDER DATED 30.4.2010. THUS, THIS ISSUE HAS BEEN CONSISTENTLY DECIDED IN FAVOUR OF TH E ASSESSEE AND AGAINST THE REVENUE BY THIS TRIBUNAL. THE PUNE BENCH OF THIS TRIBUNAL IN THE CASE OF BAJAJ ALLIANZ GENERAL INSUR ANCE COMPANY LIMITED V/S ADD. CIT (SUPRA) HAS DECIDED THIS ISSUE IN PARAGRAPHS 17 TO 20 AS UNDER: 17. FINALLY THE QUEST ION TO BE ANSWERED IS ABOUT THE APPLICABILITY OF S. 14A IN RESPECT OF SALE OF INVES TMENT WHICH IS NOT TAXED UNDER THE SPECIAL CIRCUMSTANCES OF DELETION OF A SUB-RULE FROM THE STATUTE. IT IS NOT QUESTIONED THAT THE IMPUGNED PROFIT WAS NON-TAXABLE PER SE RATHER THE ACCEPTED LEGAL POSITION IS THAT T HE IMPUGNED PROFIT WAS VERY MUCH TAXABLE IN THE PAST .NOW IT HAS BEEN INFORMED THAT THIS CONTROVERSY IN RESPECT OF INSURANCE COMPANY SET AT REST BY A DECIS ION OF TRIBUNAL , DELHI BENCH VERDICT IN THE CASE OF OR IENTAL INSURANCE CO. LTD. (ITA NOS. 5462 & 5463/DEL /2003) ASST. YRS. 2000-01 AND 2001-02 ORDER DT. 27TH FEB. 2009 [REPORTED AS ORIENTAL INSURANCE CO. LTD. V. AS ST T . CIT [2010] 130 TTJ (DELHI)388 : [2010] 38 DTR (DELH I ) 225ED. ] . THEREFORE CONSIDERING THE VEHEMENT RELIANCE OF LEARNED AUTHORIZED REPRESENTATIVE IT IS WORTH TO MENTION AT THE OUTSET ITSELF THAT THE ISSU E NOW STOOD RESOLVED BY THIS LATEST DECISION OF DELHI, TR IBUNAL IN THE CASE OF ORIENTAL INSURANCE CO. LTD. (SUPRA), THE RELEVANT PORTION REPRODUCED BELOW: '17. WE HAVE HEARD RIVAL SUBMISSIONS OF THE PARTIES AND HAVE GONE THROUGH THE MATERIAL AVAILABLE ON RECORD. IDENTICAL ISSUE AROSE IN ASSESSEE'S OWN CASE FOR ASST. YR. 1985-86. THE TRIBUNAL ACCEPTED THE PLEA OF THE ASSESSEE AND IN FACT THE ISSUE WENT UP TO ITA NOS.6854 TO 6856 6509 7765 TO 7767 AND 7213 ICI CI PRULIFE MUMBAI F BENCH PAGE 54 OF 77 THE HON'BLE DELHI HIGH COURT IN ASST . YRS. 1986-87 TO 1988-89, WHICH IS REPORTED AS CIT V. ORIENTAL INSURANCE CO. LTD. [2003] 179 CTR (DELHI ) 85 : [2002] 125 TAXMAN 1094 (DELHI ), DECIDED THE ISSUE IN FAVOUR OF THE ASSESSEE BY HOLDING THAT S. 44 OF THE ACT IS A SPECIAL PROVISION DEALING WITH THE COMPUTATION OF PROFITS AND GIFTS OF BUSINESS OF INSURANCE. IT BEING A NON OBSTINATE PROVISION, HAS TO PREVAIL OVER OTHER PROVISIONS IN THE ACT. IT CLEARLY PROVIDES THAT INCOME FROM INSURANCE BUSINESS HAS TO BE COMPUTED IN ACCORDANCE WITH THE RULE CONTAINED IN THE FIRST SCHEDULE. IT IS NOT THE CASE OF THE REVENUE THAT THE ASSESSEE HAS NOT COMPUTED THE PROFITS AND GAINS OF ITS INSURANCE BUSINESS IN ACCORDANCE WITH THE SAID RULES. RELIANCE WAS PLACED ON THE SCOPE OF S. 144, AS HELD IN THE CASE OF GENERAL INSURANCE CORPORATION OF INDIA V. CIT [1999] 156 CTR (SC) 425 : [1999] 240 ITR 139 (SC), WHEREIN THEIR LORDSHIPS OF THE APEX COURT HAVE CATEGORICALLY HELD THAT THE PROVISIONS OF S. 44 BEING A SPECIAL PROVISION GOVERN COMPUTATION OF TAXABLE INCOME EARNED FROM BUSINESS OF INSURANCE. I T MANDATES THE TAX AUTHORITIES TO COMPUTE THE TAXABLE INCOME IN RESPECT OF INSURANCE BUSINESS IN ACCORDANCE WITH THE PROVISIONS OF THE FIRST SCHEDULE TO THE ACT. IN THE LIGHT OF THESE, THEIR LORDSHIPS OF DELHI HIGH COURT HAVE HELD THAT NO QUEST ION OF LAW, MUCH LESS A SUBSTANTIAL QUEST ION OF LAW SURVIVES FOR THEIR CONSIDERATION. IN OTHER WORDS, ORDER OF THE TRIBUNAL HAS BEEN AFFIRMED. FOLLOWING THE SAME REASONING, ADDITION MADE BY THE AO IS DELETED. 22. WE HAVE CONSIDERED THE RIVAL CONTENTIONS AND GO NE THROUGH THE RECORDS. THE PROVISIONS OF S. 44 READ A S UNDER: 44. INSURANCE BUSINESS.NOTWITHSTANDING ANYTHING TO THE CONTRARY CONTAINED IN THE PROVISIONS OF THIS ACT RELATING TO THE COMPUTATION OF INCOME CHARGEABLE UNDER THE HEAD ' INTEREST ON SECURITIES' . 'INCOME FROM HOUSE PROPERTY' , 'CAPITAL GAINS' OR ' INCOME FROM OTHER SOURCES' , OR IN S. 199 OR IN SS. 28 TO 43B, THE PROFITS AND GAINS OF ANY BUSINESS ITA NOS.6854 TO 6856 6509 7765 TO 7767 AND 7213 ICI CI PRULIFE MUMBAI F BENCH PAGE 55 OF 77 OF INSURANCE, INCLUDING ANY SUCH BUSINESS CARRIED ON BY A MUTUAL INSURANCE COMPANY OR BY A CO OPERATIVE SOCIETY, SHALL BE COMPUTED IN ACCORDANCE WITH THE RULES CONTAINED IN THE FIRST SCHEDULE'. 23. THE ABOVE PROVISION MAKES IT VERY CLEAR THAT S. 44 APPLIES NOTWITHSTANDING ANYTHING TO THE CONTRARY CONTAINED WITHIN THE PROVISIONS OF THE IT ACT RELAT ING TO COMPUTATION OF INCOME CHARGEABLE UNDER DIFFERENT HEADS. WE AGREE WITH THE LEARNED COUNSEL THAT THERE IS NO REQUIREMENT OF HEAD-WISE BIFURCATION CALLED F OR WHILE COMPUTING THE INCOME UNDER S. 44 OF THE ACT I N THE CASE OF AN INSURANCE COMPANY. THE INCOME OF THE BUSINESS OF INSURANCE IS ESSENTIALLY TO BE AT THE AMOUNT OF THE BALANCE OF PROFITS DISCLOSED BY THE ANNUAL ACCOUNTS AS FURNISHED IN THE CONTROLLER OF INSURANCE. THE ACTUAL COMPUTATION OF PROFITS AND GAINS OF INSURANCE BUSINESS WILL HAVE TO BE COMPUTE D IN ACCORDANCE WITH R. 5 OF THE FIRST SCHEDULE. IN T HE LIGHT OF THESE SPECIAL PROVISIONS COUPLED WITH NON OBSTANTE CLAUSE THE AO IS NOT PERMITTED TO T RAVEL BEYOND THESE PROVISIONS. 24. SEC. 14A CONTEMPLATES AN EXCEPTION FOR DEDUCTIONS AS ALLOWABLE UNDER THE ACT ARE THOSE CONTAINED UNDER SS. 28 TO 43B OF THE ACT. SEC. 44 CREATES SPECIAL APPLICATION OF THESE PROVISIONS IN THE CASES OF INSURANCE COMPANIES. WE THEREFORE, AGREE WITH THE ASSESSEE AND DELETE THE ACT AS ACCORDING T O US, IT IS NOT PERMISSIBLE TO THE AO TO TRAVEL BEYON D S. 44 AND FIRST SCHEDULE OF THE IT ACT .' 18. I T MAY NOT BE OUT OF PLACE TO MENTION THAT THE RESPECTED CO-ORDINATE BENCH HAS DULY TAKEN THE NOTE OF AN EARLIER DECISION OF THAT VERY BENCH DECIDED IN THE CASE OF THAT VERY ASSESSEE VIDE ORDER DT . 29 TH SEPT. 2004 BEARING ITA NOS. 7815/DEL/1989, 3607 TO 3609/DEL /1990; 5035/DEL / 1998 AND 3910/DEL /2000 NAMED AS DY. CIT V. ORIENTAL GENERAL INSURANCE CO. LTD. [2005] 92 TTJ (DELHI ) 300. AS SEEN FROM THE PARAS REPRODUCED ABOVE ON DUE CONSIDERATION OF THE RELEVANT PROVISIONS AS APPLICABLE TO RESOLVE THIS ISSUE A CONCLUSION WAS DRAWN THAT SINCE THE COURTS HAVE HELD, S. 44 CREATES A SPECIAL PROVISION IN THE CASES OF ASSESSMENT OF INSURANCE COMPANIES THEREFORE IT WAS NOT PERMISSIBLE TO THE AO TO ITA NOS.6854 TO 6856 6509 7765 TO 7767 AND 7213 ICI CI PRULIFE MUMBAI F BENCH PAGE 56 OF 77 TRAVEL BEYOND S. 44 OF FIRST SCHEDULE OF IT ACT . 18. THE NEXT COMMON DISPUTE RELATES TO THE ORDER OF THE CIT (A) IN SUSTAINING THE ACT ION OF AO IN AL LOWING ONLY 50 PER CENT OF THE MANAGEMENT EXPENSES BY INVOKING THE PROVISIONS OF S. 14A OF THE ACT . THE ADDITION IS MADE BY THE AO ON THE PLEA THAT THE PROVISIONS OF S.14A WAS INSERTED BY FINANCE ACT, 2001 W.E.F. 1ST APRIL, 1962. IT IS STATED THAT THE INVESTMENTS MADE BY THE ASSESSEE ARE BOTH TAXABLE AS WELL AS TAX FREE. AN ESTIMATED DISALLOWANCE OF 50 PER CENT OUT OF THE MANAGEMENT EXPENSES INCURRED AND AS CLAIMED IN THE P&L A/C IS TREATED AS EXPENSES INCUR RED IN CONNECT ION WITH THE LOOKING AFTER TAX-FREE INVESTMENT. 19. THE LEARNED COUNSEL FOR THE ASSESSEE VEHEMENTLY ARGUED THAT THE INCOME OF THE ASSESSEE IS TO BE COMPUTED UNDER S. 44 R/W R. 5 OF SCH. 1 OF THE IT ACT. SEC. 44 IS A NON OBSTINATE CLAUSE AND APPLIES NOTWITHSTANDING ANYTHING TO THE CONTRARY CONTAINED WITHIN THE PROVISIONS OF THE IT ACT RELATING TO COMPUTATION OF INCOME CHARGEABLE UNDER DIFFERENT HEADS, OTHER THAN THE INCOME TO BE COMPUTED UNDER THE HEAD 'PROFIT AND GAINS OF BUSINESS OR PROFESSION' . FOR COMPUTATION OF PROFITS AND GAINS OF BUSINESS OR PROFESSION THE MANDATE TO THE AO IS TO COMPUTE THE SAID INCOME IN ACCORDANCE WITH THE PROVISIONS OF SS. 28 TO 43B OF THE ACT . IN THE CASE OF THE COMPUTATION OF PROFITS AND GAINS OF ANY BUSINESS OF INSURANCE, THE SAME SHALL BE DONE IN ACCORDANCE WITH THE RULES PRESCRIBED IN FIRST SCHEDULE OF THE ACT, MEANING THEREBY SS. 28 TO 43B SHALL NOT APPLY. NO OTHER PROVISION PERTAINING TO COMPUTATION OF INCOME WILL BECOME RELEVANT. ACCORDING TO THE LEARNED COUNSEL, TWO PRESUMPTIONS THAT FOLLOW ON A COMBINED READING OF SS. 14, 14A, 44 AND R. 5 OF THE FIRST SCHEDULE ARE: (A)THAT NO HEAD-WISE BIFURCATION IS CAL LED FOR. THE INCOME, INTER ALIA, OF THE BUSINESS OF INSURANCE IS ESSENTIALLY TO BE AT THE AMOUNT OF THE BALANCE OF PROFITS DISCLOSED BY THE ANNUAL ACCOUNTS AS FURNISHED TO THE ITA NOS.6854 TO 6856 6509 7765 TO 7767 AND 7213 ICI CI PRULIFE MUMBAI F BENCH PAGE 57 OF 77 CONTROLLER OF INSURANCE UNDER THE INSURANCE ACT, 1938. THE SAID BALANCE OF PROFITS IS SUBJECT ONLY TO ADJUSTMENTS THERE UNDER. THE ADJUSTMENTS DO NOT REFER TO DISALLOWANCE UNDER S. 14A OF THE ACT. (B) PROFITS AND GAINS OF BUSINESS AS REFER RED TO IN (A) ABOVE HAVE ONLY TO BE COMPUTED IN ACCORDANCE WITH R. 5 OF THE FIRST SCHEDULE. 22. SEC. 44 CREATES A SPECIFIC EXCEPT ION TO THE APPLICABILITY OF SS. 28 TO 43B. THEREFORE, THE PURPOSE, OBJECT AND PURVIEW OF S. 14A HAS NO APPLICABILITY TO THE PROFITS AND GAINS OF AN INSURANCE BUSINESS. 21. THE LEARNED DEPARTMENTAL REPRESENTATIVE STRONGLY JUSTIFIED THE ACT ION OF THE AO AND THAT OF THE CIT(A) IN THE LIGHT OF THE CLEAR PROVISIONS OF S. 14A OF THE ACT . SINCE THE VIEW HAS AL READY BEEN EXPRESSED BY RESPECTED CO-ORDINATE BENCH THEREFORE, WE HAVE NO REASON TO TAKE ANY OTHER VIEW EXCEPT TO FOLLOW THE SAME. WITH THE RESULT WE HEREBY ACCEPT THE ARGUMENT OF LEARNED AUTHORIZED REPRESENTATIVE TO THE EXTENT THAT IN THE PRESENT SITUATION THE PROVISIONS OF S. 14A NEED NOT TO APPLY WHILE GRANTING EXEMPT ION TO AN INCOME EARNED ON SALE OF INVESTMENT PRIMARILY BECAUSE OF THE REASON OF THE WITHDRAWAL OR DELETION OF SUB- R. 5(B) TO FIRST SCHEDULE OF S. 44 OF IT ACT. ONCE WE HAVE TAKEN THIS VIEW THEREFORE THE ENHANCEMENT AS PROPOSED BY LEARNED CIT(A) IS REVERSED AND THE DIRECTIONS IN THIS REGARD ARE SET ASIDE. RESULTANTLY GROUND NO. 1 IS ALLOWED CONSEQUENT THEREUPON GROUND NO. 2 AUTOMATICALLY GOES IN FAVOUR OF THE ASSESSEE. ACCORDINGLY, BY FOLLOWING THE ORDERS OF THIS TRIBUN AL, WE DECIDE THIS ISSUE IN FAVOUR OF THE ASSESSEE. THEREF ORE, THE GROUND IS ALLOWED. RESPECTFULLY FOLLOWING THE SAME, WE MODIFY THE ORDE R OF THE CIT (A) AND DELETE THE ADDITION MADE BY AO. THE GROUND AND ADDITIONAL GROUNDS ARE CONSIDERED AS ALLOWED. ITA NOS.6854 TO 6856 6509 7765 TO 7767 AND 7213 ICI CI PRULIFE MUMBAI F BENCH PAGE 58 OF 77 REVENUE APPEAL IN ITA NO.7765/MUM/2010 , AY 2005-06 47. THE REVENUE IN ITS APPEAL HAS RAISED THE FOLLO WING GROUNDS: 1. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CA SE AND IN LAW, THE LEARNED CIT (A) ERRED IN DELETING THE D EFICIT FROM PENSION SCHEMES OF ` .63,09,19,492/- IGNORING THE FACTS THAT THE SURPLUS OF PENSION SCHEMES DO NOT FO RM PART OF TOTAL INCOME AS PER SECTION 10(23AAB), SO T HE DEFICIT WOULD ALSO NOT FORM PART OF TOTAL INCOME. 2. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CAS E AND IN LAW, THE LEARNED CIT (A) ERRED IN HOLDING THAT T HE INCOME FROM SURPLUS OF PARTICIPATING ANNUITIES BUSI NESS REPRESENT SURPLUS FROM PARTICIPATING PENSION BUSIN ESS AND ACCORDINGLY ALLOWING THE RELIEF TO ASSESSEE OF ` .21.34 CRORES. 3. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CAS E AND IN LAW, THE LEARNED CIT (A) ERRED IN ALLOWING THE D IVIDEND INCOME OF ASSESSEE OF ` .1,56,09,222/- AS EXEMPTED UNDER SECTION 10(34) OF THE INCOME TAX ACT, 1961 IG NORING THE FACTS THAT DIVIDEND INCOME IS CONSIDERED AS PAR T OF INCOME OF LIFE INSURANCE BUSINESS AND IS INCLUDED A S AN INCOME BY THE ACTUARY. 48. ALL THE ABOVE THREE GROUNDS ARE ON THE ISSUE WHETHER EXEMPTION UNDER SEC 10 CAN BE ALLOWED WHEN INCOMES ARE COMPUTED UNDER SEC.44 OF THE IT ACT. IN ARRIVING AT THE DEFICIT FROM THE INSURANCE BUSINESS, ASSESSEE CLAIMED CERTAIN EX EMPT INCOMES UNDER SECTION 10(23AAB) WITH REFERENCE TO PENSION B USINESS AND DIVIDEND UNDER SECTION 10(34). AO DID NOT ALLOW THE AMOUNTS ON THE REASON THAT THESE INCOMES ARE PART OF INCOME OF LIF E INSURANCE BUSINESS AND IT IS INCLUDED AS INCOME BY THE ACTUAR Y, THEREFORE, THEY CANNOT BE EXEMPTED. THIS ISSUE IS COVERED IN F AVOUR OF ASSESSEE AND AGAINST THE REVENUE BY THE ORDERS OF T HE GENERAL INSURANCE COMPANY OF INDIA IN ITA NO.3554/MUM/2011 WHEREIN THE ISSUE OF DEDUCTION UNDER SECTION 10 HAVE BEEN C ONSIDERED AND ALLOWED FOLLOWING THE HON'BLE BOMBAY HIGH COURT JUD GMENT IN WRIT PETITION NO.2560 OF 2011 DATED 1.12.2011. THE ORDER IN THE CASE OF GIC OF INDIA IN ITA NO.3554/MUM 2011 VIDE PARA 7 TO 8 IS AS UNDER: ITA NOS.6854 TO 6856 6509 7765 TO 7767 AND 7213 ICI CI PRULIFE MUMBAI F BENCH PAGE 59 OF 77 7.ISSUE NO.5: AVAILABILITY OF SECTION 10 EXEMPTION (MODIFIED GROUND OF APPEAL NO.2 ORIGINAL GROUND O F APPEAL NO.2.1 & 2.2) . THE ISSUE ARISES IN A PECUL IAR MANNER IN THIS ASSESSMENT YEAR. WHILE DEALING WITH THE ISSUE OF PROFIT ON SALE OF INVESTMENTS, THE ASSESSI NG OFFICER PROPOSED TO DIFFER FROM ASSESSEE STAND AND BRING TO TAX THE PROFIT ON SALE OF INVESTMENT. THE ASSESS EE ALTERNATELY SUBMITTED THAT THE DEDUCTION UNDER SECT ION 10(38) IN RESPECT OF LONG TERM CAPITAL GAIN WAS AVA ILABLE. WHEN THIS ISSUE CAME UP BEFORE THE CIT (A), THE CIT (A) NOT ONLY REJECTED THE CLAIM UNDER SECTION 10(38) BUT AL SO CONSIDERED AND ELABORATELY DISCUSSED HOW AND WHY TH E ASSESSEE WAS NOT ELIGIBLE FOR DEDUCTIONS ALREADY AL LOWED BY THE ASSESSING OFFICER IN RESPECT OF INTEREST ON TAX FREE BONDS AMOUNTING TO ` 3,45,19,352/- UNDER SECTION 10(15) AND DIVIDEND INCOME AMOUNTING TO ` 270,66,46,489/- UNDER SECTION 10(34). HE HAS ELABORATELY DISCUSSED THIS ISSUE FROM PARA 6 ONWARDS AND ULTIMATELY MADE AN ENHANCEMENT OF INCOME TO AN EXTENT OF ` 274,11,65,844/- THE AMOUNT WHICH WAS ALLOWED BY THE ASSESSING OFFIC ER AS EXEMPT UNDER SECTION 10. THE CONTENTION OF THE C IT (A) WAS THAT THE ASSESSEE WAS NOT ELIGIBLE FOR DEDUCTIO N UNDER SECTION 10, ONCE THE INCOMES ARE BROUGHT TO T AX UNDER SECTION 44 R.W. RULE 5 OF FIRST SCHEDULE TO T HE INCOME TAX ACT, 1961. 8. THERE IS NO NEED TO CONSIDER THE ARGUMENTS OF TH E CIT (A) AND HOW HE HAS ARRIVED AT THAT CONCLUSION IN TH IS ORDER AS THIS ISSUE WAS DECIDED BY THE HON'BLE BOMBAY HIG H COURT IN FAVOUR OF THE ASSESSEE IN WRIT PETITION NO .2560 OF 2011 IN THE ASSESSEES OWN CASE DATED 1.12.2011. CONSEQUENT TO THE FINDINGS OF THE CIT(A) IN AY 2007 -08 (IMPUGNED AY ) THE ASSESSING OFFICER SEEMS TO HAVE ISSUED NOTICE UNDER SECTION 148 FOR REOPENING THE ASSESSMENT FOR THE AY 2006-07 ON THE REASON THAT T HE ASSESSEE WAS NOT ELIGIBLE FOR CLAIMING INCOME AS EX EMPT UNDER SUB-SECTIONS 15, 23G, 34 AND 38 OF SECTION 10 AND ASSESSEE CHALLENGED THE ISSUE BY WAY OF WRIT PETITI ON. THE HON'BLE BOMBAY HIGH COURT NOT ONLY DISAPPROVED THE REOPENING OF THE ASSESSMENT BUT GAVE THE FINDINGS O N MERIT ALSO WHICH ARE AS UNDER:- 11. SECTION 44 OF THE INCOME TAX ACT, 1961 STIPU LATES AS FOLLOWS: 44. NOTWITHSTANDING ANYTHING TO THE CONTRARY CONTAINED IN THE PROVISIONS OF THIS ACT RELATING TO THE COMPUTATION OF INCOME CHARGEABLE UNDER THE HEAD INTEREST ON SECURITIES, INCOME FROM HOUSE PROPERTY, CAPITAL GAINS OR INCOME ITA NOS.6854 TO 6856 6509 7765 TO 7767 AND 7213 ICI CI PRULIFE MUMBAI F BENCH PAGE 60 OF 77 FROM OTHER SOURCES, OR IN SECTION 199 OR IN SECTIONS 28 TO (43B), THE PROFITS AND GAINS OF ANY BUSINESS OF INSURANCE, INCLUDING ANY SUCH BUSINESS CARRIED ON BY A MUTUAL INSURANCE COMPANY OR BY A COOPERATIVE SOCIETY, SHALL BE COMPUTED IN ACCORDANCE WITH THE RULES CONTAINED IN THE FIRST SCHEDULE. SECTION 44 PROVIDES THAT THE PROFITS AND GAINS OF A NY BUSINESS OF INSURANCE OF A MUTUAL INSURANCE COMPANY SHALL BE COMPUTED IN ACCORDANCE WITH THE RULES IN T HE FIRST SCHEDULE. PART A OF THE FIRST SCHEDULE CON TAINING RULES 1 TO 4 DEALS WITH PROFITS OF LIFE INSURANCE B USINESS WHILE PART B CONSISTING OF RULE 5 DEALS WITH COMPU TATION OF PROFITS AND GAINS OF OTHER INSURANCE BUSINESS. R ULE 5 PROVIDES AS FOLLOWS: 5. THE PROFITS AND GAINS OF ANY BUSINESS OF INSURANCE OTHER THAN LIFE INSURANCE SHALL BE TAKEN TO BE THE BALANCE OF THE PROFITS DISCLOSED BY THE ANNUAL ACCOUNTS, COPIES OF WHICH ARE REQUIRED UNDER THE INSURANCE ACT, 1938 (4 OF 1938), TO BE FURNISHED TO THE CONTROLLER OF INSURANCE SUBJECT TO THE FOLLOWING ADJUSTMENTS: (A) SUBJECT TO THE OTHER PROVISIONS OF THIS RULE, ANY 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 OTHER PROVISION AS MAY BE PRESCRIBED) WHICH IS NOT ADMISSIBLE UNDER THE PROVISIONS OF SECTION 30 TO (43B) IN COMPUTING THE PROFITS AND GAINS OF A BUSINESS SHALL BE ADDED BACK; (B) () (C) SUCH AMOUNT CARRIED OVER TO A RESERVE FOR UNEXPIRED RISKS AS MAY BE PRESCRIBED IN THIS BEHALF SHALL BE ALLOWED AS A DEDUCTION. THE ASSESSING OFFICER HAS IN THE REASONS FOR REOPEN ING THE ASSESSMENT PROCEEDED ON THE PREMISE THAT IN COMPUTING THE PROFITS AND GAINS OF BUSINESS FOR AN ASSESSEE WHO CARRIES ON GENERAL INSURANCE BUSINESS NO OTHER SECTION OF THE ACT WOULD APPLY AND THAT THE COMPUTATION COULD BE CARRIED OUT ONLY IN ACCORDANCE WITH SECTION 44 READ WITH RULE 5 OF THE FIRST SCHEDULE. IN LIFE INSURANCE CORPORATION OF INDIA, BOMBAY V. COMMISSIONER OF INCOME TAX BOMBAY CITY-III , A DIVISION BENCH OF THIS COURT CONSTRUED THE PROVISIO NS OF SECTION 44 AND OF THE FIRST SCHEDULE. THE ASSESSEE IN ITA NOS.6854 TO 6856 6509 7765 TO 7767 AND 7213 ICI CI PRULIFE MUMBAI F BENCH PAGE 61 OF 77 THAT CASE WHICH CARRIED ON LIFE INSURANCE BUSINESS HAD MADE A CLAIM TO EXEMPTION UNDER SECTION 10(15) AND SECTION 19(1). IN A REFERENCE BEFORE THE COURT, THE QUESTIONS REFERRED INCLUDED WHETHER IN COMPUTING TH E PROFITS AND GAINS OF THE BUSINESS OF INSURANCE UNDE R SECTION 44 READ WITH THE FIRST SCHEDULE CERTAIN ITE MS WHICH WERE ORDINARILY NOT INCLUDIBLE IN THE TOTAL I NCOME WERE RIGHTLY INCLUDED IN THE TAXABLE SURPLUS. THE D IVISION BENCH OF THIS COURT HELD AS FOLLOWS: THE QUESTION WHICH ESSENTIALLY FALLS TO BE DETERMI NED IN THIS REFERENCE IS WHETHER, IN VIEW OF THE PROVISION S IN SECTION 44 OR RULE 2 OF THE FIRST SCHEDULE, THE LIF E INSURANCE CORPORATION WILL NOT BE ENTITLED TO CLAIM THE DEDUCTIONS WHICH ARE OTHERWISE ADMISSIBLE IN THE CA SE OF AN ASSESSEE, COMPUTATION OF WHOSE INCOME IS GOVERNED BY THE OTHER PROVISIONS OF THE ACT. THE ARGUMENT OF MR. KOLAH FOR THE LIFE INSURANCE CORPOR ATION IS THAT UNLESS THERE ARE EXPRESS PROVISIONS WHICH D ISABLE THE CORPORATION FROM CLAIMING THE DEDUCTIONS REFERR ED TO ABOVE, THE CORPORATION CANNOT BE DEPRIVED OF THE BE NEFIT OF THE PROVISIONS REFERRED TO IN THE QUESTIONS NOS. 1 TO 6. SECTION 44, WHICH DEALS WITH COMPUTATION OF PROFITS AND GAINS OF BUSINESS OF INSURANCE, BEGINS WITH A NON- OBSTANTE CLAUSE, THE EFFECT OF WHICH IS THAT THE PR OVISIONS OF THE ACT RELATING TO THE COMPUTATION OF INCOME CHARGEABLE UNDER THE HEAD INTEREST ON SECURITIES, INCOME FROM HOUSE PROPERTY, CAPITAL GAINS OR INCOME FROM OTHER SOURCES, DO NOT APPLY IN THE CA SE OF COMPUTATION OF INCOME FROM INSURANCE BUSINESS. THE EFFECT OF THE NON-OBSTANTE CLAUSE SO FAR AS THE EAR LIER PART OF SECTION 44 IS CONCERNED, THEREFORE, IS THAT THE PROVISIONS OF SECTION 44 WILL PREVAIL NOTWITHSTANDI NG THE FACT THAT THERE ARE CONTRARY PROVISIONS IN THE ACT RELATING TO COMPUTATION OF INCOME CHARGEABLE UNDER THE FOUR HEADS MENTIONED IN SECTION 44. THE ONLY OTHER OVERR IDING EFFECT OF SECTION 44 IS THAT ITS PROVISIONS OPERATE NOTWITHSTANDING THE PROVISIONS OF SECTION 191 AND O F SECTION 28 TO 43A. THUS, THE ONLY EFFECT OF SECTION 44 IS THAT THE OPERATION OF THE PROVISIONS REFERRED TO TH EREIN IS EXCLUDED IN THE CASE OF AN ASSESSEE WHO CARRIED ON INSURANCE BUSINESS AND IN WHOSE CASE THE PROVISIONS OF RULE 2 OF THE FIRST SCHEDULE ARE ATTRACTED. IF THE DEDUCTIONS WHICH ARE CLAIMED BY THE ASSESSEE DO NOT FALL WITHIN THE PROVISIONS WHICH ARE REFERRED TO IN SECTION 44, IT WILL HAVE TO BE HELD THAT THE APPLICABILITY OF THOSE PROVISIONS IN THE CASE OF AN ASSESSEE WHOSE ASSESSM ENT IS GOVERNED BY SECTION 44 READ WITH RULE 2 IN THE F IRST SCHEDULE IS NOT EXCLUDED. ITA NOS.6854 TO 6856 6509 7765 TO 7767 AND 7213 ICI CI PRULIFE MUMBAI F BENCH PAGE 62 OF 77 THIS JUDGMENT IS SOUGHT TO BE DISTINGUISHED BY THE ASSESSING OFFICER WHILE DISPOSING OF THE OBJECTIONS ON THE GROUND THAT THE DECISION WAS RENDERED IN THE CO NTEXT OF AN ASSESSEE WHICH CARRIED ON LIFE INSURANCE BUSI NESS TO WHOM RULES 1 TO 4 OF THE FIRST SCHEDULE APPLIED WHEREAS IN THE CASE OF THE ASSESSEE IN THIS CASE WH ICH CARRIES ON GENERAL INSURANCE BUSINESS RULE 5 COULD APPLY. ACCORDING TO THE ASSESSING OFFICER, RULE 5 W OULD NOT PERMIT ANY ADJUSTMENT TO THE BALANCE OF PROFIT AS PER ANNUAL ACCOUNTS PREPARED UNDER THE INSURANCE ACT, A ND HENCE THE JUDGMENT WOULD NOT BE APPLICABLE. THE ASSESSING OFFICER HAS CLEARLY NOT NOTICED THAT THE DECISION IN LIFE INSURANCE CORPORATION (SUPRA) THOUGH RENDERED IN THE CONTEXT OF AN ASSESSEE WHICH CARRIE S ON LIFE INSURANCE BUSINESS, FOLLOWED AN EARLIER DECISI ON OF A DIVISION BENCH OF THIS COURT IN COMMISSIONER OF INCOME-TAX V. NEW INDIA ASSURANCE CO LTD. THAT WAS A CASE OF AN ASSESSEE WHICH CARRIED ON NON LIFE INSURANCE BUSINESS. IN NEW INDIA ASSURANCE CO. LTD. THE DIVISION BENCH DEALT INTER ALIA WITH THE PROVISIONS OF SECTION 19(7) OF THE INCOME TAX ACT, 1922. THE QUES TIONS REFERRED TO THIS COURT INCLUDED WHETHER THE ASSESSE E WAS ENTITLED TO CLAIM AN EXEMPTION FROM TAX UNDER SECTION 15B AND 15C (4) AND IN RESPECT OF INTEREST ON A GOVERNMENT LOAN UNDER A NOTIFICATION ISSUED UNDER SECTION 60. SECTION 10(7) OF THE INCOME TAX ACT, 19 22 PROVIDED THAT NOTWITHSTANDING ANYTHING TO THE CONTR ARY CONTAINED IN SECTION 8,9,10,12 OR 18, THE PROFITS A ND GAINS OF ANY BUSINESS OF INSURANCE AND THE TAX PAYA BLE THEREON SHALL BE COMPUTED IN ACCORDANCE WITH THE RU LES CONTAINED IN THE SCHEDULE TO THE ACT. THE DIVISION BENCH HELD THAT UPON THE LANGUAGE OF SUB-SECTION (7) OF S ECTION 10 READ ALONG WITH RULE 6 IT WAS IMPOSSIBLE TO HOLD THAT THE PROVISIONS RELATING TO EXEMPTIONS STOOD EXCLUDE D FROM OPERATION. IN THAT CONTEXT THE DIVISION BENCH HELD AS FOLLOWS: IT IS ONLY AFTER THE PROFITS AND GAINS OF A BUSINESS ARE COMPUTED THAT ANY QUESTION OF GRANTING EXEMPTIONS ARISES AND IF THE LATTER STAGE WERE INTENDED TO BE EXCLUDED BY THE LAW WE SHOULD HAVE THOUGHT THAT A CLEARER PROVISION THAN IS MADE IN SUB-SECTION (7) OF SECTION 10 AND IN RULE 6 WOULD HAVE BEEN MADE. IN THE SUBSEQUENT JUDGMENT OF THE DIVISION BENCH IN LIFE INSURANCE CORPORATION (SUPRA), THE DIVISION BENCH NOTED THAT THERE WAS A DIFFERENCE IN THE LANGUAGE O F ITA NOS.6854 TO 6856 6509 7765 TO 7767 AND 7213 ICI CI PRULIFE MUMBAI F BENCH PAGE 63 OF 77 SECTION 10(7) OF THE ACT OF 1922 WHEN COMPARED WITH SECTION 44 OF THE ACT OF 1961 SINCE SECTION 44 DOES NOT REFER TO THE COMPUTATION OF TAX BUT MERELY TO THE COMPUTATION OF PROFITS AND GAINS IN THE BUSINESS OF INSURANCE. THE DIVISION BENCH HELD THAT THIS WOULD HOWEVER NOT MAKE ANY DIFFERENCE TO THE PRINCIPLE LA ID DOWN BY THE COURT IN THE EARLIER DECISION IN THE CA SE OF NEW INDIA ASSURANCE CO. LTD. ACCORDINGLY, THE DECISION OF LIFE INSURANCE CORPORATION (SUPRA) COULD NOT HAVE BEEN IGNORED BY THE ASSESSING OFFICER ON T HE SUPPOSITION THAT THE DECISION WAS RENDERED IN THE CONTEXT OF AN ASSESSEE WHO CARRIED ON LIFE INSURANC E BUSINESS AND WAS, THEREFORE, NOT AVAILABLE TO AN ASSESSEE WHICH CARRIES ON GENERAL INSURANCE BUSINES S. 12. IN GENERAL INSURANCE CORPORATION OF INDIA V. COMMISSIONER OF INCOME-TAX , THE SUPREME COURT CONSIDERED IN AN APPEAL ARISING OUT OF A JUDGMENT O F THE HIGH COURT THE ISSUE AS TO WHETHER A SUM OF ` 3 CRORES, BEING A PROVISION FOR REDEMPTION OF PREFERENCE SHAR ES, WAS NOT LIABLE TO BE ADDED BACK IN THE TOTAL INCOME OF THE ASSESSEE FOR AY 1977-78?. THE SUPREME COURT HEL D THAT A PLAIN READING OF RULE 5(A) OF THE FIRST SCHE DULE MADE IT CLEAR THAT IN ORDER TO ATTRACT THE APPLICAB ILITY OF THE PROVISION THE AMOUNT SHOULD FIRSTLY BE AN EXPENDITURE OR ALLOWANCE AND SECONDLY IT SHOULD BE ONE NOT ADMISSIBLE UNDER THE PROVISIONS OF SECTION 30 T O 43A. THE SUPREME COURT HELD THAT THE SUM OF ` 3 CRORES IN THAT CASE WHICH WAS SET APART AS A PROVISION FOR REDEMPT ION OF PREFERENCE SHARES COULD NOT HAVE BEEN TREATED AS AN EXPENDITURE AND HENCE COULD NOT HAVE BEEN ADDED BAC K UNDER RULE 5(A). IN THAT CONTEXT THE SUPREME COURT HELD AS FOLLOWS: THERE IS ANOTHER APPROACH TO THE SAME ISSUE. SECTION 44 OF THE INCOME-TAX AT READ WITH THE RULES CONTAINED IN THE FIRST SCHEDULE TO THE ACT LAYS DOWN AN ARTIFICIAL MODE OF COMPUTING THE PROFITS AND GAINS OF INSURANCE BUSINESS. FOR THE PURPOSE OF INCOME-TAX, THE FIGURES IN THE ACCOUNTS OF THE ASSESSEE DRAWN UP IN ACCORDANCE WITH THE PROVISIONS OF THE FIRST SCHEDULE TO THE INCOME-TAX ACT AND SATISFYING THE REQUIREMENTS OF THE INSURANCE ACT ARE BINDING ON THE ASSESSING OFFICER UNDER THE INCOME-TAX ACT AND HE HAS NO GENERAL POWER TO CORRECT THE ERRORS IN THE ACCOUNTS OF AN INSURANCE BUSINESS AND UNDO THE ENTRIES MADE THEREIN. ITA NOS.6854 TO 6856 6509 7765 TO 7767 AND 7213 ICI CI PRULIFE MUMBAI F BENCH PAGE 64 OF 77 THE QUESTION WHETHER AN ASSESSEE WHO CARRIES ON GENERAL INSURANCE BUSINESS WOULD BE ENTITLED TO AVA IL OF AN EXEMPTION UNDER SECTION 10 DID NOT ARISE. THE IS SUE AS TO WHETHER THE ASSESSEE WHICH CARRIES ON THE BUSINESS OF GENERAL INSURANCE WOULD BE ENTITLED TO THE BENEFIT OF AN EXEMPTION UNDER CLAUSES (15), (23G) A ND (33) OF SECTION 10 IS DIRECTLY GOVERNED BY THE DECI SION RENDERED BY THE DIVISION BENCH IN LIFE INSURANCE CORPORATION VS. COMMISSIONER OF INCOME-TAX (SUPRA) FOLLOWING THE EARLIER DECISION IN COMMISSIONER OF INCOME-TAX VS. NEW INDIA ASSURANCE CO. LTD (SUPRA). THE ASSESSING OFFICER COULD NOT HAVE IGNORED THE BI NDING PRECEDENT CONTAINED IN THE TWO DIVISION BENCH DECIS IONS OF THIS COURT. MOREOVER, THE ASSESSING OFFICER IN A LLOWING THE BENEFIT OF THE EXEMPTION IN THE ORDER OF ASSESS MENT UNDER SECTION 143(3) SPECIFICALLY RELIED UPON THE V IEW TAKEN BY THE CBDT IN ITS COMMUNICATION DATED 21 FEBRUARY 2006 TO THE CHAIRMAN OF IRDA. THE COMMUNICATION CLARIFIES THAT THE EXEMPTION AVAILABL E TO ANY OTHER ASSESSEE UNDER ANY CLAUSES OF SECTION 10 IS ALSO AVAILABLE TO A PERSON CARRYING ON NON-LIFE INS URANCE BUSINESS SUBJECT TO THE FULFILLMENT OF THE CONDITIO NS, IF ANY, UNDER A PARTICULAR CLAUSE OF SECTION 10 UNDER WHICH EXEMPTION IS SOUGHT. IT NEEDS TO BE EMPHASIZED THAT IT IS NOT THE CASE OF THE ASSESSING OFFICER THAT THE ASSE SSEE HAD FAILED TO FULFILL THE CONDITION WHICH ATTACHED TO THE PROVISIONS OF THE RELEVANT CLAUSES OF SECTION 10 IN RESPECT OF WHICH THE EXEMPTION WAS ALLOWED. THIS OF COURSE IS APART FROM CLAUSE (38) OF SECTION 10 WHERE THE ASSE SSING OFFICER HAD REJECTED THE CLAIM FOR EXEMPTION IN THE ORIGINAL ORDER OF ASSESSMENT UNDER SECTION 143(3). THE ASSESSING OFFICER ABOVE ALL WAS BOUND BY THE COMMUNICATION OF THE CBDT. HAVING FOLLOWED THAT IN THE ORDER UNDER SECTION 143(3) HE COULD NOT HAVE TAKEN A DIFFERENT VIEW WHILE PURPORTING TO REOPEN THE ASSESSMENT. HAVING APPLIED HIS MIND SPECIFICALLY TO THE ISSUE AN HAVING TAKEN A VIEW ON THE BASIS OF THE COMMUNICATION NOTED EARLIER, THE ACT OF REOPENING T HE ASSESSMENT WOULD HAVE TO BE REGARDED AS A MERE CHANGE OF OPINION WHICH HAS ALSO NOT BEEN BASED ON ANY TANGIBLE MATERIAL. CONSEQUENTLY, WE HOLD THAT THE REOPENING OF THE ASSESSMENT IS CONTRARY TO LAW. THE PETITION WOULD HAVE, THEREFORE, TO BE ALLOWED. RESPECTFULLY FOLLOWING THE ABOVE, WE HOLD THAT THE ASSESSEE IS ENTITLED FOR EXEMPTION UNDER SECTION 10 . THE ENHANCEMENT MADE BY THE CIT (A) IS THEREFORE, CANCE LLED. GROUND IS ACCORDINGLY ALLOWED. ITA NOS.6854 TO 6856 6509 7765 TO 7767 AND 7213 ICI CI PRULIFE MUMBAI F BENCH PAGE 65 OF 77 49. IN VIEW OF THE ABOVE AND RESPECTFULLY FOLL OWING THE SAME, WE HOLD THAT ASSESSEE IS ENTITLED TO EXEMPTION UNDER S ECTION 10. THEREFORE, WE DO NOT SEE ANY REASON TO DIFFER FROM THE ORDER OF THE CIT (A) WHERE HE HAS ALLOWED ASSESSEES CLAIM OF EX EMPTION UNDER SECTION 10(23AAB) OF SURPLUS OF PARTICIPATING PENSI ON BUSINESS AND ALSO DIVIDEND UNDER SECTION 10(34). ACCORDINGLY REV ENUE GROUND ON THIS ISSUE IS REJECTED. 50. IN THE RESULT, ASSESSEE APPEAL IN ITA NO.6854/M UM/2010 FOR THE ASSESSMENT YEAR 2005-06 IS ALLOWED AND REVENUE APPEAL IN ITA NO.7765/MUM/2010 FOR THE ASSESSMENT YEAR 2005-06 IS DISMISSED. ITA NO.6855/MUM/2010- AY 2006-07 51. THIS IS AN ASSESSEE APPEAL WHEREIN ASSESSEE HAS RAISED THE FOLLOWING GROUNDS: 1. THE CIT (A) HAS ERRED IN NOT ACCEPTING THE LOSS OF ` .200.55 CRORES RETURNED BY THE APPELLANT. 2. THE CIT (A) ERRED IN HOLDING THAT THE INSURANCE INCOME OF THE APPELLANT WHICH IS TAXABLE IS THE AMOUNT OF SURPLUS DISCLOSED IN FORM I. 3. THE CIT (A) HAS ERRED IN UPHOLDING THE COMPUTATI ON OF TAXABLE INCOME FOR THE YEAR AT ` .27.34 CRORES BY HOLDING THAT THE AMOUNT TRANSFERRED FROM THE SHAREHOLDERS ACCOUNT TO ACCOUNT IS NOT TO BE REDUCED FROM THE S URPLUS DISCLOSED IN FORM I. 4. THE CIT (A) HAS ERRED IN HOLDING THAT THE INCOME OF ` .27.34 CRORES IN SHAREHOLDERS ACCOUNT IS SEPARATEL Y TAXABLE UNDER THE HEAD INCOME FROM OTHER SOURCES. 5. THE CIT (A) HAS ERRED IN REJECTING THE ALTERNATE PLEA THAT IN AN EVENT THE INCOME IN POLICYHOLDER ACCOUNT IS COMPUTED AFTER CONSIDERING TRANSFERS FROM SHAREHOLD ERS ACCOUNT TO ACCOUNT, THEN INCOME IN SHAREHOLDERS AC COUNT SHOULD BE COMPUTED BY ALLOWING A CORRESPONDING DEDUCTION OF TRANSFERS TO ACCOUNT. 6. THE CIT (A) HAS ERRED IN NOT ACCEPTING THE DISALLOWANCE UNDER SECTION 14A OFFERED IN REVISED R ETURN OF INCOME IS ON REASONABLE BASIS BUT DIRECTED AO TO DECIDE THE ISSUE AFRESH. 7. THE CIT (A) HAS ERRED IN CONFIRMING THAT THE INC OME IN THE SHAREHOLDERS ACCOUNT IS TAXABLE AT THE NORMAL ITA NOS.6854 TO 6856 6509 7765 TO 7767 AND 7213 ICI CI PRULIFE MUMBAI F BENCH PAGE 66 OF 77 CORPORATE RATE OF TAX INSTEAD OF RATE SPECIFIED IN SECTION 115B OF THE ACT. 52. IN ASSESSEE APPEAL GROUND NOS.1, 2, 3, 5 IS ON TAXING THE TRANSFER FROM SHARE HOLDERS FUND, WHILE CONSIDERING THE TOTAL SURPLUS AS SURPLUS FOR PURPOSES OF RULE 2. THIS ISS UE WAS DISCUSSED ELABORATELY IN AY 2005-06 VIDE GROUNDS 1 TO 3 IN IT A NO 6854/M/2010 ABOVE AND FOR THE DETAILED REASONS STAT ED THERE IN THE GROUNDS ARE ALLOWED. AO IS DIRECTED TO MODIFY THE O RDER ACCORDINGLY. 53. GROUND NO 6 AND ADDITIONAL GROUND RAISED ARE SI MILAR TO THE GROUNDS RAISED IN AY 2005-06 ON THE ISSUE OF DISALL OWANCE U/S 14A. THIS ISSUE WAS ALSO ELABORATELY CONSIDERED IN APPEA L NO ITA NO 6854/M/2010 ABOVE IN GROUND NO.4. FOR THE REASONS S TATED THERE IN FOLLOWING COORDINATE BENCH DECISIONS, THESE GROU NDS ARE ALLOWED. 54. GROUND NO 4 AND 7 IS ON THE ISSUE OF TREATIN G INCOMES IN SHAREHOLDERS ACCOUNT AS INCOME FROM OTHER SOURCES. THIS ISSUE ARISES FOR THE FIRST TIME IN THIS YEAR. THE ASSESSI NG OFFICER WAS OF THE VIEW THAT POLICY HOLDERS ACCOUNT REPRESENT LIFE INS URANCE BUSINESS TO BE TAXED U/S 44 WHERE AS SHAREHOLDERS ACCOUNT IS SEPARATE INVESTMENT ACCOUNT OF ASSESSEE AND INCOMES ARE TO B E TAXED UNDER THE HEAD INCOME FROM OTHER SOURCES. AN AMOUNT OF RS.27,33,67,000, ADJUSTED BY ASSESSEE IN DEFICIT IN POLICY HOLDERS ACCOUNT, WAS BROUGHT TO TAX SEPARATELY, WHILE CONSI DERING THE TOTAL SURPLUS IN LIFE INSURANCE BUSINESS. THE CIT(A) UPH ELD THE SAME STATING THAT INCOME OF LIFE INSURANCE ACTIVITY IS T O BE COMPUTED AS PER FORM I AND SINCE THERE IS INCOME FROM OTHER ACT IVITIES NOT INCLUDED IN FORM I, SAME SHOULD BE SUBJECTED TO TAX AS INCOME FROM OTHER SOURCES. 55. WE HAVE HEARD THE RIVAL CONTENTIONS. AS BRIEFLY DISCUSSED WHILE DECIDING THE ISSUE OF TAXING SURPLUS, ASSESSEE IS I N LIFE INSURANCE BUSINESS AND IT IS NOT PERMITTED TO DO ANY OTHER BU SINESS. ALL ACTIVITIES CARRIED OUT BY ASSESSEE ARE FOR FURTHERA NCE OF LIFE INSURANCE BUSINESS. MAINTAINING ADEQUATE CAPITAL IS NECESSARY TO ITA NOS.6854 TO 6856 6509 7765 TO 7767 AND 7213 ICI CI PRULIFE MUMBAI F BENCH PAGE 67 OF 77 COMPLY WITH IRDA( ASSETS, LIABILITIES AND SOLVENCY MARGIN OF INSURERS)REGULATIONS,2000. INCOME EARNED ON CAPITAL INFUSED IN BUSINESS IS INTEGRAL PART OF LIFE INSURANCE BUSINES S. THE LD. CIT(A) GIVES A FINDING THAT ASSESSEE IS EXCLUSIVELY IN LIF E INSURANCE BUSINESS. HOWEVER, SINCE HE GAVE PRIMACY TO FORM I PROFORMA HE CONCLUDED THAT OTHER INCOMES ARE NOT OF LIFE INSURA NCE BUSINESS. WE HAVE ALREADY CONSIDERED AND DECIDED THAT ASSESSE E WAS MANDATED TO MAINTAIN SEPARATE ACCOUNTS BY IRDA REGU LATIONS. JUST BECAUSE SEPARATE ACCOUNTS ARE MAINTAINED THE INCOME S IN SHAREHOLDERS ACCOUNT DOES NOT BECOME SEPARATE FROM LIFE INSURANCE BUSINESS. AS PER INSURANCE ACT 1938 ALL I NCOMES ARE PART OF ONE BUSINESS ONLY AND THESE INCOMES ARE CONSIDER ED AS PART OF SAME BUSINESS. THEREFORE, THE INCOMES IN SHAREHOLDE RS ACCOUNT ARE TO BE CONSIDERED AS ARISING OUT OF LIFE INSURANCE B USINESS ONLY. MORE OVER SEC 44 MANDATES THAT ONLY FIRST SCHEDULE WILL APPLY FOR COMPUTING INCOMES AND EXCLUDES OTHER HEADS OF INCOM E LIKE, INTEREST ON SECURITIES, INCOME FROM HOUSE PROPERTY, CAPITAL GAINS OR INCOME FROM OTHER SOURCES. BEING NON-OBSTANTE CLAU SE, SEC. 44 MANDATES THAT THE PROFITS AND GAINS OF INSURANCE BU SINESS SHALL BE COMPUTED IN ACCORDANCE WITH THE RULES CONTAINED IN FIRST SCHEDULE. THEREFORE, THE INCOMES IN SHAREHOLDERS ACCOUNT ARE TO BE TAXED AS PART OF LIFE INSURANCE BUSINESS ONLY, AS THEY ARE P ART OF SAME BUSINESS AND INVESTMENTS ARE MADE AS PART OF SOLVEN CY RATIO OF SAME BUSINESS. THE GROUNDS ARE ALLOWED. AO IS DIREC TED TO TREAT THEM AS PART OF LIFE INSURANCE BUSINESS AND TAX THE M U/S 115B. ITA NO.7766/MUM/2010 A.Y 2006-07 56. IN THIS APPEAL, THE REVENUE HAS RAISED THE FOLL OWING THREE GROUNDS: 1. ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE LEARNED CIT (A) ERRED IN NOT SUBJECTING THE NEGATIV E RESERVE AMOUNTING TO ` .27.27 CRORES IGNORING THE FACTS THAT NEGATIVE RESERVE HAS AN IMPACT OF REDUCING THE TAXABLE SURPL US AS PER FORM-I. ITA NOS.6854 TO 6856 6509 7765 TO 7767 AND 7213 ICI CI PRULIFE MUMBAI F BENCH PAGE 68 OF 77 2. ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND I N LAW, THE LEARNED CIT (A) ERRED IN DELETING THE ADDITION MADE ON ACCOUNT OF CLAIM OF 100% DEPRECIATION OF ` .15,79,707/- IGNORING THE FACTS THAT ACTUARIAL SURPLUS IS DETERMINED ON THE B ASIS OF THE TOTAL ASSETS OF THE COMPANY AND THEREFORE BY NOT CA PITALIZING THE ABOVE ASSETS, THE ASSETS OF THE ASSESSEE COMPAN Y ARE UNDER STATED IN THE BOOKS AND THEREBY IT HAS AN IMP ACT OF REDUCING THE SURPLUS OF OR INCREASE IN THE BOOKS AN D THEREBY IT HAS AN IMPACT OF REDUCING THE SURPLUS OF OR INCREAS E IN THE DEFICIT AND THEREFORE, THE ASSETS SO WRITTEN OFF AR E ALSO CONSIDERED AS PART OF THE SURPLUS AND TAXABLE UNDER SECTION 44 OF THE I.T. ACT. 3. ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND I N LAW, THE LEARNED CIT (A) ERRED IN ALLOWING THE DIVIDEND INCO ME OF ASSESSEE OF ` .2,24,05,934/- AS EXEMPTED UNDER SECTION 10(34) OF THE INCOME TAX ACT, 1961 IGNORING THE FACTS THAT DIVIDEND INCOME IS CONSIDERED AS PART OF INCOME OF LIFE INSU RANCE BUSINESS AND IS INCLUDED AS AN INCOME BY THE ACTUAR Y. 57. GROUND NO. 1 IS ON THE ISSUE OF TREATING NEGATI VE RESERVE AND DISALLOWING THE AMOUNT. WHILE COMPLETING THE ASSESS MENT OF LIFE INSURANCE BUSINESS THE AO, AFTER TAKING THE TOTAL S URPLUS FROM FORM-I, REDUCED THE NEGATIVE RESERVE AMOUNTING TO ` 27.27 CRORES. ASSESSEE SUBMITTED BEFORE THE CIT(A) AS UNDER: - METHOD OF DETERMINATION OF MATHEMATICAL RESERVES (1) MATHEMATICAL RESERVES SHALL BE DETERMINED SEPAR ATELY FOR EACH CONTRACT BY A PROSPECTIVE METHOD OF VALUATION IN ACCORDANCE WITH SUB-PARAS (2) TO (4). (2) THE VALUATION METHOD SHALL TAKE INTO ACCOUNT AL L PROSPECTIVE CONTINGENCIES UNDER WHICH ANY PREMIUMS (BY THE POLICYHOLDER) OR BENEFITS (TO THE POLICYHOLDER/BENE FICIARY) MAY BE PAYABLE UNDER THE POLICY, AS DETERMINED BY THE P OLICY CONDITIONS. THE LEVEL OF BENEFITS SHALL TAKE INTO A CCOUNT THE REASONABLE EXPECTATIONS OF POLICYHOLDERS (WITH REGA RD TO BONUSES, INCLUDING TERMINAL BONUSES, IF ANY) AND AN Y ESTABLISHED PRACTICES OF AN INSURER FOR PAYMENT OF BENEFITS. (3) THE VALUATION METHOD SHALL TAKE INTO ACCOUNT TH E COST OF ANY OPTIONS THAT MAY BE AVAILABLE TO THE POLICYHOLD ER UNDER THE TERMS OF THE CONTRACT. (4) THE DETERMINATION OF THE AMOUNT OF LIABILITY UN DER EACH POLICY SHALL BE BASED ON PRUDENT ASSUMPTIONS O F ALL RELEVANT PARAMETERS. THE VALUE OF EACH SUCH PARAMETER SHALL BE BASED ON THE INSURERS EXPECTED ITA NOS.6854 TO 6856 6509 7765 TO 7767 AND 7213 ICI CI PRULIFE MUMBAI F BENCH PAGE 69 OF 77 EXPERIENCE AND SHALL INCLUDE AN APPROPRIATE MARGIN FOR ADVERSE DEVIATIONS (HEREINAFTER REFERRED TO AS MAD) THAT MAY RESULT IN AN INCREASE IN THE AMOUNT OF MATHEMATICAL RESERVES. (5) (1) THE AMOUNT OF MATHEMATICAL RESERVE IN RESPE CT OF A POLICY, DETERMINED IN ACCORDANCE WITH SUB-PARA (4 ), MAY BE NEGATIVE (CALLED NEGATIVE RESERVES) OR LES S THAN THE GUARANTEED SURRENDER VALUE AVAILABLE (CALLED GUARANTEED SURRENDER VALUE DEFICIENCY RESERVES) A T THE VALUATION DATE. THE APPOINTED ACTUARY SHALL, FOR THE PURPOSE OF SEC TION 35 OF THE ACT, USE THE AMOUNT OF SUCH MATHEMATICAL RESERVES WITHOUT ANY MODIFICATION. THE APPOINTED ACTUARY SHALL, FOR THE PURPOSE OF SEC TIONS 13, 49, 64V AND 64VA OF THE ACT, SET THE AMOUNT OF SUCH MATHEMATICAL RESERVE TO ZERO, IN CASE OF SUCH NEGAT IVE RESERVE, OR TO THE GUARANTEED SURRENDER VALUE, IN C ASE OF SUCH GUARANTEED SURRENDER VALUE DEFICIENCY RESERVES , AS THE CASE MAY BE. (6) THE VALUATION METHOD SHALL BE CALLED GROSS PRE MIUM METHOD. (7) IF IN THE OPINION OF THE APPOINTED ACTUARY, A M ETHOD OF VALUATION OTHER THAN THE GROSS PREMIUM METHOD OF VA LUATION IS TO BE ADOPTED, THEN, OTHER APPROXIMATIONS (E.G. RET ROSPECTIVE METHOD) MAY BE USED. PROVIDED THAT THE AMOUNT OF CALCULATED RESERVE IS E XPECTED TO BE ATLEAST EQUAL TO THE AMOUNT THAT SHALL BE PRODUC ED BY THE APPLICATION OF GROSS PREMIUM METHOD. (8) THE METHOD OF CALCULATION OF THE AMOUNT OF LIAB ILITIES AND THE ASSUMPTIONS FOR THE VALUATION PARAMETERS SHALL NOT BE SUBJECT TO ARBITRARY DISCONTINUITIES FOR ONE YEAR T O THE NEXT. (9) THE DETERMINATION OF THE AMOUNT OF MATHEMATICAL RESERVES SHALL TAKE INTO ACCOUNT THE NATURE AND TERM OF THE ASSETS REPRESENTING THOSE LIABILITIES AND THE VALUE PLACED UPON THEM AND SHALL INCLUDE PRUDENT PROVISION AGAINST THE EFF ECTS OF POSSIBLE FUTURE CHANGES IN THE VALUE OF ASSETS ON T HE ABILITY TO THE INSURER TO MEET ITS OBLIGATIONS ARISING UNDER P OLICIES AS THEY ARISE. MANDATE TO APPOINTED ACTUARY UNDER REGULATIONS SUB-RULE 4 MANDATES APPOINTED ACTUARY TO HAVE PRUDE NT ASSUMPTION OF ALL RELEVANT PARAMETERS AND TO INCLUD E AN APPROPRIATE MARGIN FOR ADVERSE DEVIATIONS THAT MAY RESULT IN AN INCREASE IN THE AMOUNT OF MATHEMATICAL RESERVES. ITA NOS.6854 TO 6856 6509 7765 TO 7767 AND 7213 ICI CI PRULIFE MUMBAI F BENCH PAGE 70 OF 77 SUB-RULE 5 DEFINES SUCH MARGIN AS NEGATIVE RESERVE , WHICH IS BEING DISCLOSED IN COLUMN 6 OF THE FORM 1. FURTHER, CLAUSE (III) TO SUB-RULE 5 MANDATES APPOIN TED ACTUARY TO PROVIDE FOR NEGATIVE RESERVE IN MATHEMATICAL RES ERVE, ACCORDINGLY NOT TO INCLUDE IN DISTRIBUTABLE SURPLUS AS PER SECTION 49 OF THE INSURANCE ACT, 1938. CLAUSE (II) TO SUB-RULE 5 MANDATES APPOINTED ACTUAR Y TO INCLUDE NEGATIVE RESERVE IN MATHEMATICS RESERVE ONL Y AT THE TIME OF AMALGAMATION AND TRANSFER OF INSURANCE BUSI NESS AND OTHERWISE. TAXABLE SURPLUS SINCE TAXATION OF LIFE INSURANCE BUSINESS IS ON SUR PLUS DISCLOSED AS PER SECTION 49 WHICH IS COVERED BY RUL E 2(5)(III), WHERE IN APPOINTED ACTUARY IS MANDATED TO ARRIVE AT SURPLUS AFTER EXCLUDING NEGATIVE RESERVE. IN VIEW OF THE ABOVE WE HUMBLY SUBMIT BEFORE YOUR G OODSELF TO KINDLY NOT TREAT NEGATIVE RESERVE AS TAXABLE. SUB-R ULE 4 MANDATES APPOINTED ACTUARY TO HAVE PRUDENT ASSUMPTI ON OF ALL RELEVANT PARAMETERS AND TO INCLUDE AN APPROPRIA TE MARGIN FOR ADVERSE DEVIATIONS THAT MAY RESULT IN AN INCREA SE IN THE AMOUNT OF MATHEMATICAL RESERVES. 58. THE CIT(A), IN HIS BRIEF ORDER VIDE PARA 17, CONSID ERED THE DETAILED EXPLANATION ABOVE AND ACCEPTED THAT THE NE GATIVE RESERVE DISCLOSED IN FORM-I DOES NOT GIVE RISE TO DISTRIBUT ABLE SURPLUS. ACCORDINGLY HE DISALLOWED THE SAME. 59. AFTER CONSIDERING THE RIVAL SUBMISSIONS AND EXAMINI NG THE METHOD OF ACCOUNTING AND THE MANDATE GIVEN BY REGUL ATIONS TO APPOINT ACTUARIAL ON THE CONCEPT OF MATHEMATICAL RE SERVES, WE DO NOT SEE ANY REASON TO INTERFERE WITH THE ORDER OF T HE CIT(A). THE MATHEMATICAL RESERVE IS PART OF ACTUARIAL VALUATION AND THE SURPLUS AS DISCUSSED IN FORM-I UNDER REGULATION 4 TAKES INT O CONSIDERATION THIS MATHEMATICAL RESERVE ALSO. THEREFORE THE ORDER OF THE CIT(A) IS APPROVE. MOREOVER THE ASSESSING OFFICER HAS NO POWE R TO MODIFY THE AMOUNT AFTER ACTUARIAL VALUATION WAS DONE, WHICH WA S THE BASIS FOR ASSESSMENT UNDER RULE 2 OF 1 ST SCHEDULE R.W.S. 44 OF THE I.T. ACT. THE PRINCIPLES LAID DOWN BY THE HONBLE SUPREME COU RT IN LIC VS. CIT 512 ITR 773 ABOUT THE POWERS OF ASSESSING OFFIC ER ALSO RESTRICTS ITA NOS.6854 TO 6856 6509 7765 TO 7767 AND 7213 ICI CI PRULIFE MUMBAI F BENCH PAGE 71 OF 77 THE SCOPE AND ADJUSTMENTS BY THE AO. IN VIEW OF THI S WE UPHOLD THE ORDER OF THE CIT(A) AND DISMISS THE REVENUE GROUND. 60. GROUND NO. 2 IS ABOUT DELETION OF ADDITION MADE ON ACCOUNT OF CLAIM OF 100% DEPRECIATION OF ` 15,79,707/-. IT WAS THE CONTENTION OF THE REVENUE THAT THE CIT(A) IGNORED THE ACTUARIA L SURPLUS DETERMINED ON THE BASIS OF THE TOTAL ASSETS IF THE COMPANY AND THEREFORE NOT CAPITALIZED IN THE ABOVE ASSETS. THE ASSETS OF ASSESSEE TO THAT EXTENT ARE NOT STATED, THEREFORE, IT HAS AN IMPACT OF REDUCING THE TOTAL SURPLUS. 61. BEFORE THE CIT(A) IT WAS SUBMITTED THAT THE ASSESSE E PREPARED ITS ACCOUNTS AS PER THE FORMAT PRESCRIBED BY THE IR DA IN TUNE WITH THE INSURANCE ACT 1938. THE ASSETS WERE ORIGINALLY CAPITALIZED IN THE BOOKS AND BEING ELIGIBLE FOR 100% DEPRECIATION THEY ARE WRITTEN OFF. THE CIT(A), AFTER CONSIDERING THE SUBMISSIONS, ACCE PTED THE CONTENTION AS UNDER: - 19. THE APPELLANT HAS TO PREPARE ITS ACCOUNTS AS P ER THE FORMATS PRESCRIBED BY THE IRDA UNDER THE INSURANCE ACT, 1938. THESE ACCOUNTS HAVE ACCORDINGLY BEEN PREPARED BY THE APPELLANT AND HAVE BEEN SUBJECT TO STATUTORY AUDIT. FURTHER, THE ACCOUNTING POLICY OF CLAIMING 100% DEPRECIATION IN ITS FINANCIAL STATEMENTS HAS BEEN CONSISTENTLY FOLLOWED BY THE APPELLANT AND HAS ALSO BEEN DULY ACCEPTED BY THE IR DA. THE APPELLANT HAS STATED THAT THE ASSETS ON WHICH DEPRE CIATION HAS BEEN CLAIMED HAVE BEEN INITIALLY CAPITALIZED IN THE BOOKS AND THEN 100% DEPRECIATION HAS BEEN CLAIMED ON THES E ASSETS. TAXATION OF LIFE INSURANCE IS PRESUMPTIVE T AXATION WITH ONLY THE SURPLUS AS DISCLOSED BY FORM I BEING SUBJECTED TO TAX. IN MY VIEW, AS PER THE PROVISIONS OF LAW ON LY THOSE ADJUSTMENTS WHICH ARE EXPRESSLY NOT PROHIBITED UNDE R SECTION 44 OF THE ACT COULD BE MADE. CONSEQUENTLY DEPRECIAT ION WHICH HAS BEEN DEBITED IN THE AUDITED ACCOUNTS AS PER THE CONSISTENTLY FOLLOWED AND ACCEPTED ACCOUNTING POLIC Y NEED NOT BE DISALLOWED. 62. AFTER CONSIDERING THE RIVAL SUBMISSIONS, WE ARE OF THE OPINION THAT THE ACTION OF THE CIT(A) IN DELETING THE AMOUN T IS CONSISTENT WITH THE ACCOUNTING PRINCIPLES FOLLOWED AND THE PRO VISIONS OF SECTION ITA NOS.6854 TO 6856 6509 7765 TO 7767 AND 7213 ICI CI PRULIFE MUMBAI F BENCH PAGE 72 OF 77 44 READ WITH RULE 2 OF THE 1 ST SCHEDULE. THEREFORE WE UPHOLD THE ORDER OF THE CIT(A) AND DISMISS THE GROUND RAISED B Y THE REVENUE. 63. GROUND NO. 3 IS ON THE ISSUE OF CLAIM OF EXEMPTION UNDER SECTION 10(34) ON THE DIVIDEND INCOME EARNED BY THE ASSESSEE, WHICH WAS ALLOWED BY THE CIT(A). THIS GROUND IS ALR EADY CONSIDERED VIDE PARAS 48 & 49 OF THE ABOVE IN ITA NO. 7765/MUM /2010 FOR A.Y. 2005-06. THEREFORE, GROUND NO. 3 RAISED BY THE REVENUE IS ACCORDINGLY DISMISSED. ITA NO.6856/MUM/2010 A.Y. 2007-08. 64. ASSESSEE IN THIS APPEAL HAS RAISED SEVEN GROUNDS WH ICH IS EXTRACTED BELOW: 1. THE CIT (A) HAS ERRED IN NOT ACCEPTING THE LOSS OF ` .412.88 CRORES RETURNED BY THE APPELLANT. 2. THE CIT (A) ERRED IN HOLDING THAT THE APPELLANT S TAXABLE INCOME FROM INSURANCE IS THE AMOUNT OF SURPLUS DISC LOSED IN FORM I. 3. THE CIT (A) HAS ERRED IN UPHOLDING THE COMPUTATI ON OF TAXABLE INCOME FOR THE YEAR AT ` .31.72 CRORES BY HOLDING THAT THE AMOUNT TRANSFERRED FROM THE SHAREHOLDERS ACCOU NT TO POLICYHOLDERS ACCOUNT IS NOT TO BE REDUCED FROM TH E SURPLUS DISCLOSED IN FORM I. 4. THE CIT (A) HAS ERRED IN HOLDING THAT INCOME OF ` .31.72 CRORES IN SHAREHOLDERS ACCOUNT IS SEPARATELY TAXAB LE UNDER THE HEAD INCOME FROM OTHER SOURCES. 5. THE CIT (A) HAS ERRED IN REJECTING THE ALTERNATE PLEA THAT IN AN EVENT THE INCOME IN POLICYHOLDER ACCOUNT IS COMP UTED AFTER CONSIDERING TRANSFERS FROM SHAREHOLDERS ACCOUNT TO ACCOUNT, THEN INCOME IN SHAREHOLDERS ACCOUNT SHOULD BE COMP UTED BY ALLOWING A CORRESPONDING DEDUCTION OF TRANSFERS TO POLICYHOLDERS ACCOUNT. 6. THE CIT (A) HAS ERRED IN NOT HOLDING DISALLOWANC E UNDER SECTION 14A OFFERED IN REVISED RETURN OF INCOME IS ON REASONABLE BASIS BUT DIRECTED AO TO DECIDE THE ISSU E AFRESH. 7. THE CIT (A) HAS ERRED IN CONFIRMING THAT THE INC OME IN THE SHAREHOLDERS ACCOUNT IS TAXABLE AT THE NORMAL CORP ORATE RATE OF TAX INSTEAD OF RATE SPECIFIED IN SECTION 115B OF THE ACT . ITA NOS.6854 TO 6856 6509 7765 TO 7767 AND 7213 ICI CI PRULIFE MUMBAI F BENCH PAGE 73 OF 77 65. GROUNDS NO. 1,2,3 & 5 ARE ON THE ISSUE OF ACTUARIAL SURPLUS. THIS ISSUE WAS DISCUSSED ELABORATELY IN AY 2005-06 VIDE GROUNDS 1 TO 3 IN ITA NO 6854/MUM/2010 ABOVE AND FOR THE DETA ILED REASONS STATED THERE IN THE GROUNDS ARE ALLOWED. AO IS DIRE CTED TO MODIFY THE ORDER ACCORDINGLY. 66. GROUNDS NO. 4 & 7 ON THE ISSUE OF TREATING THE INCO ME IN SHAREHOLDERS ACCOUNT AS INCOME FROM OTHER SOURCES. THIS ISSUE IS ALREADY DECIDED IN GROUNDS NO. 4 & 7 IN ITA NO. 685 5/MUM/2010 FOR A.Y. 2006-07. FOR THE REASONS STATED THEREIN VI DE PARAS 54 & 55 WE DIRECT THE AO TO TREAT THE INCOME IN SHAREHOLDER S ACCOUNT AS PART OF LIFE INSURANCE BUSINESS ONLY. GROUNDS ARE A LLOWED. 67. GROUND NO. 6 PERTAINS TO THE ISSUE OF DISALLOWANCE UNDER SECTION 14A AND ASSESSEE ALSO RAISED ADDITIONAL GRO UND ON THE REASON THAT SECTION 14A IS NOT APPLICABLE ONCE INCO MES ARE ASSESSED UNDER SECTION 44. THIS ISSUE IS ALSO CONSIDERED IN A.Y. 2005-06 IN ITA NO. 6854/MUM/2010 IN GROUND NO. 4. FOR THE REAS ONS STATED THEREIN, FOLLOWING THE ABOVE, THIS GROUND AND THE A DDITIONAL GROUND ARE ALLOWED. AO IS DIRECTED TO DO ACCORDINGLY. ITA NO.7767/MUM/2010 A.Y. 2007-08 68. THE REVENUE IN THIS APPEAL HAS RAISED THE FOLLOWING TWO GROUNDS: 1. ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN L AW, THE LEARNED CIT (A) ERRED IN DELETING THE ADDITION MADE ON ACCOUNT OF CLAIM OF 100% DEPRECIATION OF ` .76,60,380/- IGNORING THE FACTS THAT ACTUARIAL SURPLUS IS DETERM INED ON THE BASIS OF THE TOTAL ASSETS OF THE COMPANY AND TH EREFORE BY NOT CAPITALIZING THE ABOVE ASSETS, THE ASSETS OF THE ASSESSEE COMPANY ARE UNDER STATED IN THE BOOKS AND THEREBY IT HAS AN IMPACT OF REDUCING THE SURPLUS OF OR INCREASE IN THE DEFICIT AND THEREFORE, THE ASSETS S O WRITTEN OFF ARE ALSO CONSIDERED AS PART OF THE SURPLUS AND TAXABLE UNDER SECTION 44 OF THE I.T. ACT. 2. ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN L AW, THE LEARNED CIT (A) ERRED IN ALLOWING THE DIVIDEND INCOME OF ASSESSEE AS EXEMPTED UNDER SECTION 10(34) OF THE IN COME TAX ACT, 1961 IGNORING THE FACTS THAT DIVIDEND INCO ME IS ITA NOS.6854 TO 6856 6509 7765 TO 7767 AND 7213 ICI CI PRULIFE MUMBAI F BENCH PAGE 74 OF 77 CONSIDERED AS PART OF INCOME OF LIFE INSURANCE BUSI NESS AND IS INCLUDED AS AN INCOME BY THE ACTUARY. 69. GROUND NO. 1 IS ABOUT DELETION OF ADDITION MADE ON ACCOUNT OF CLAIM OF 100% DEPRECIATION OF ` 76,60,380/-. THIS GROUND IS ALREADY CONSIDERED VIDE GROUND NO.2 IN ITA NO. 7766 /MUM/2010 FOR A.Y. 2005-06. THEREFORE, FOR THE REASONS MENTIO NED THEREIN GROUND NO. 2 RAISED BY THE REVENUE IS ACCORDINGLY D ISMISSED. 70. GROUND NO. 2 IS ON THE ISSUE OF CLAIM OF EXEMPTION UNDER SECTION 10(34) ON THE DIVIDEND INCOME EARNED BY THE ASSESSEE, WHICH WAS ALLOWED BY THE CIT(A). THIS GROUND IS ALR EADY CONSIDERED VIDE PARAS 48 & 49 OF THE ABOVE IN ITA NO. 7765/MUM /2010 FOR A.Y. 2005-06. THEREFORE, GROUND NO. 3 RAISED BY THE REVENUE IS ACCORDINGLY DISMISSED. ITA NO.6059/MUM/2010 A.Y. 2008-09 71. ASSESSEE IN THIS APPEAL RAISED THE FOLLOWING GROUN DS: 1. THE CIT (A) HAS ERRED IN NOT ACCEPTING THE LOSS OF ` .823.38 CRORES RETURNED BY THE APPELLANT, 2. THE CIT (A) ERRED IN HOLDING THAT THE APPELLANT S TAXABLE INCOME FROM INSURANCE IS THE AMOUNT OF SURPLUS DISC LOSED IN FORM I. 3. THE CIT (A) HAS ERRED IN UPHOLDING THE COMPUTATI ON OF TAXABLE INCOME FOR THE YEAR AT ` .228.98 CRORES BY HOLDING THAT THE AMOUNT TRANSFERRED FROM THE SHAREHOLDERS ACCOUNT TO POLICYHOLDERS ACCOUNT IS NOT TO BE REDUCED FROM THE SURPLUS DISCLOSED IN FORM I. 4. THE CIT (A) HAS ERRED IN HOLDING THAT INCOME OF ` .61.09 CRORES IN SHAREHOLDERS ACCOUNT IS SEPARATELY TAXAB LE UNDER THE HEAD INCOME FROM OTHER SOURCES. 5. THE CIT (A) HAS ERRED IN REJECTING THE ALTERNATE PLEA THAT IN AN EVENT THE INCOME IN POLICYHOLDER ACCOUNT IS C OMPUTED AFTER CONSIDERING TRANSFERS FROM SHAREHOLDERS ACCO UNT TO ACCOUNT, THEN INCOME IN SHAREHOLDERS ACCOUNT SHOUL D BE COMPUTED BY ALLOWING A CORRESPONDING DEDUCTION OF TRANSFERS TO POLICYHOLDERS ACCOUNT. 6. SECTION 14A IS NOT APPLICABLE TO INSURANCE COMPA NIES AS THIS SECTION CONTEMPLATES TO RESTRICT THE DEDUCTION S AS ALLOWABLE UNDER THE ACT WHICH ARE CONTAINED UNDER S ECTION 28 TO 43B OF THE ACT. SECTION 44 CREATES A SPECIAL EXCEPTION ITA NOS.6854 TO 6856 6509 7765 TO 7767 AND 7213 ICI CI PRULIFE MUMBAI F BENCH PAGE 75 OF 77 TO THE APPLICABILITY OF THESE PROVISIONS IN THE CAS ES OF INSURANCE COMPANIES AND THEREFORE, SECTION 14A IS N OT APPLICABLE TO INSURANCE COMPANIES. 7. THE CIT (A) HAS ERRED UPHOLDING THAT THE AMOUNT OF DISALLOWANCE AS COMPUTED BY AO UNDER SECTION 14A OF THE ACT IS APPROPRIATE IGNORING THE AMOUNT OFFERED BY T HE APPELLANT UNDER SECTION 14A IN RETURN OF INCOME. 8. THE CIT (A) HAS ERRED IN CONFIRMING THAT THE INC OME IN THE SHAREHOLDERS ACCOUNT IS TAXABLE AT THE NORMAL CORPORATE RATE OF TAX INSTEAD OF RATE SPECIFIED IN SECTION 115B OF THE ACT. 72. GROUNDS NO. 1,2,3 & 5 ARE ON THE ISSUE OF ACTUARIAL SURPLUS. THIS ISSUE WAS DISCUSSED ELABORATELY IN AY 2005-06 VIDE GROUNDS 1 TO 3 IN ITA NO 6854/MUM/2010 ABOVE AND FOR THE DETA ILED REASONS STATED THERE IN THE GROUNDS ARE ALLOWED. AO IS DIRE CTED TO MODIFY THE ORDER ACCORDINGLY. 73. GROUNDS NO. 4 & 8 ARE ON THE ISSUE OF TREATING THE INCOME IN SHAREHOLDERS ACCOUNT AS INCOME FROM OTHER SOURCES. THIS ISSUE IS ALREADY DECIDED IN GROUNDS NO. 4 & 7 IN ITA NO. 685 5/MUM/2010 FOR A.Y. 2006-07. FOR THE REASONS STATED THEREIN VI DE PARAS 54 & 55 WE DIRECT THE AO TO TREAT THE INCOME IN SHAREHOLDER S ACCOUNT AS PART OF LIFE INSURANCE BUSINESS ONLY. GROUNDS ARE A LLOWED. 74. GROUNDS NO. 6 & 7 PERTAIN TO THE ISSUE OF DISALLOWA NCE UNDER SECTION 14A AND ASSESSEE ALSO RAISED ADDITIONAL GRO UND ON THE REASON THAT SECTION 14A IS NOT APPLICABLE ONCE INCO MES ARE ASSESSED UNDER SECTION 44. THIS ISSUE IS ALSO CONSIDERED IN A.Y. 2005-06 IN ITA NO. 6854/MUM/2010 IN GROUND NO. 4. FOR THE REAS ONS STATED THEREIN, FOLLOWING THE ABOVE, THIS GROUND AND THE A DDITIONAL GROUND ARE ALLOWED. AO IS DIRECTED TO DO ACCORDINGLY. ITA NO.7213/MUM/2010 A.Y 2008-09 75. THE REVENUE IN THIS APPEAL HAS RAISED THE FOLLOWING FOUR GROUNDS: 1. ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE LEARNED CIT (A) ERRED IN NOT UPHOLDING THE ITA NOS.6854 TO 6856 6509 7765 TO 7767 AND 7213 ICI CI PRULIFE MUMBAI F BENCH PAGE 76 OF 77 FINDINGS OF AO THAT ASSESSEE IS EARNING INCOME FROM ACTIVITIES OTHER THAN LIFE INSURANCE BUSINESS IGNOR ING THE FACTS THAT ASSESSEE IS GETTING DIVIDEND INCOME AND INCOME FROM OTHER SOURCES ALSO. 2. ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND I N LAW, THE LEARNED CIT (A) ERRED IN NOT SUBJECTING THE NEG ATIVE RESERVE AMOUNTING TO ` .87.94 CRORES IGNORING THE FACTS THAT NEGATIVE RESERVE HAS AN IMPACT OF REDUCING THE TAXABLE SURPLUS AS PER FORM-I. 3. ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND I N LAW, THE LEARNED CIT (A) ERRED IN DELETING THE ADDITION OF ` .61,88,017/- IGNORING THE FACT THAT ACTUARIAL SURPL US IS DETERMINED ON THE BASIS OF THE TOTAL ASSETS OF THE COMPANY AND THEREFORE BY NOT CAPITALIZING THE ABOVE ASSETS, THE ASSETS OF THE ASSESSEE COMPANY ARE UNDERSTATED IN THE BOOKS AND THEREBY IT HAS AN IMPA CT OF REDUCING THE SURPLUS OF OR INCREASE IN THE DEFICIT AND THEREFORE, THE ASSETS SO WRITTEN OFF ARE ALSO CONSI DERED AS PART OF THE SURPLUS AND TAXABLE UNDER SECTION 44 OF THE IT ACT. 4. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CAS E AND IN LAW, THE LEARNED CIT (A) ERRED IN ALLOWING THE D IVIDEND INCOME OF ASSESSEE OF ` .78,27,74,249/- AS EXEMPTED UNDER SECTION 10(34) OF THE INCOME TAX ACT, 1961 IG NORING THE FACTS THAT DIVIDEND INCOME IS CONSIDERED AS PAR T OF INCOME OF LIFE INSURANCE BUSINESS AND IS INCLUDED A S AN INCOME BY THE ACTUARY. 76. GROUNDS NO. 1 & 2 ARE ON THE ISSUE OF ACTUARIAL SUR PLUS. THIS ISSUE WAS DISCUSSED ELABORATELY IN AY 2005-06 VIDE GROUNDS 1 TO 3 IN ITA NO 6854/MUM/2010 ABOVE AND FOR THE DETAILED REASONS STATED THERE IN THE GROUNDS ARE ALLOWED. AO IS DIRE CTED TO MODIFY THE ORDER ACCORDINGLY. 77. GROUND NO. 3 PERTAINS TO DELETION OF ADDITION ON DE PRECATION CLAIMED AT 100%. THIS ISSUE WAS DISCUSSED ABOVE IN ITA NO. 7766/MUM/2010 VIDE GROUND NO. 2. FOR THE REASONS ST ATED THEREIN THE GROUND RAISED BY THE REVENUE IS REJECTED. 78. GROUND NO. 4 IS ON THE ISSUE OF CLAIM OF EXEMPTION UNDER SECTION 10(34) ON THE DIVIDEND INCOME EARNED BY THE ASSESSEE, WHICH WAS ALLOWED BY THE CIT(A). THIS GROUND IS ALR EADY CONSIDERED ITA NOS.6854 TO 6856 6509 7765 TO 7767 AND 7213 ICI CI PRULIFE MUMBAI F BENCH PAGE 77 OF 77 VIDE PARA 47, 48 & 49 OF THE ABOVE IN ITA NO. 7765/ MUM/2010 FOR A.Y. 2005-06. THEREFORE, GROUND NO. 3 RAISED BY THE REVENUE IS ACCORDINGLY DISMISSED. 79. IN THE RESULT APPEALS FILED BY ASSESSEE IN ITA NOS. 6854 TO 6856/MUM/2010, & 6059/MUM/2010 ARE ALLOWED AND THE REVENUE APPEALS IN ITA NOS. 7765 TO 7767/MUM/2010 & 7213/MUM/2010 ARE DISMISSED. ORDER PRONOUNCED IN THE OPEN COURT ON 14 TH SEPTEMBER, 2012. SD/- SD/- (VIVEK VARMA) (B. RAMAKOTAIAH) JUDICIAL MEMBER ACCOUNTANT MEMBER MUMBAI, DATED 14 TH SEPTEMBER, 2012. VNODAN/SPS COPY TO: 1. THE APPELLANT 2. THE RESPONDENT 3. THE CONCERNED CIT(A) 4. THE CONCERNED CIT 5. THE DR, F BENCH, ITAT, MUMBAI BY ORDER ASSISTANT REGISTRAR INCOME TAX APPELLATE TRIBUNAL, MUMBAI BENCHES, MUMBAI