High Court Of Bombay
General Insurance Corporation of India vs. DCIT – 1(3), Mumbai
Assessment Year : 2006-07
Section : 147
Dr. D.Y. Chandrachud & A.A. Sayed, JJ.
Writ Petition (L) No. 2560 Of 2011
December 1, 2011
JUDGMENT
Dr. D.Y. Chandrachud, J. – Rule. Learned Counsel for the Respondents waives service. By consent taken up for final hearing on the request of learned Counsel for the parties.
2. By a notice of the First Respondent dated 17 March, 2011 issued under Section 148 of the Income Tax Act, 1961 an assessment for Assessment Year 2006-07 has been sought to be reopened.
3. The Petitioner is engaged in the business of general insurance. For Assessment Year 2006-07 the Petitioner filed a return of income on 30 November 2006 declaring a loss of Rs. 504.68 crores after excluding exempt incomes under clauses (15), (23G), (33) and (38) of Section 10. On 12 October 2007, the Assessing Officer issued a notice under Section 142(1) seeking details of income exempted and of expenditure under Section 14A. The Petitioner, during the course of the assessment proceedings, made a submission before the Assessing Officer in a letter dated 25 October 2007 inter alia in regard to the claim of exemption under Section 10(38). Reliance was placed on a communication dated 21 February 2006 of the Central Board of Direct Taxes to the Chairman of the Insurance Regulatory & Development Authority (IRDA) to the effect that exemptions available to any other assessee under any clause of Section 10 are also available to a person carrying on non-life insurance business subject to fulfillment of the conditions under the particular clause under which an exemption is sought. By a further communication dated 22 November 2007 the assessee once again relied upon the aforesaid circular.
4. In the computation of income for the assessment year, the assessee had claimed inter alia an exemption under Section 10(15) of the interest on tax free bonds; under Section 10(23G) on interest on investment with infrastructure companies and under Section 10(33) on dividend income. In the notes forming part of the computation of income, the assessee also stated that it was reserving its right to claim an exemption under Section 10(38). The Assessing Officer while passing an order of assessment on 31 March 2008 denied to the assessee the benefit of an exemption under Section 10(38) on the ground that during the assessment year, the assessee had carried on a regular business of trading in equity shares; the intention of the assessee being to earn profit and not to act as an investor. The exemptions claimed under Section 10(15), 10(23G) and 10(33) were however, allowed.
5. The Assessing Officer issued a notice under Section 148 on 17 March 2011 purporting to reopen the assessment for Assessment Year 2006-07. The reasons which have been disclosed to the assessee for reopening the assessment are as follows :
“The assessee company is involved in general insurance business, hence the income is to be assessed as per special provisions for assessment given in section 44. Section 44 provides that the total income of the assessee company has to be assessed as per the First Schedule of the Act. The insurance company in the business other than life insurance are to be assessed as per Rule 5 of the First Schedule and the company involved in life insurance business as per Rule 1 to 4 of the first Schedule. On combined reading of section 44 and First Schedule it can be ascertained that no other sections of the Act applies to these companies except for the provisions provided in the First Schedule Rule 5. In view of this, the claim of the assessee for exemption of dividend income [u/s. 10(34)], interest on tax-free bonds [u/s 10(15)] is not according to law and deserves to be disallowed. However, for this assessment year, in the assessment u/s 143(3) of the Act, the above claims have been wrongly allowed.”
The assessee submitted objections to the reopening of the assessment on 25 April 2011 which have been disposed of by an order dated 14 November 2011.
6. Learned Counsel appearing on behalf of the assessee submitted that :
(i) During the course of assessment proceedings, the assessee had claimed an exemption under four clauses of Section 10 and had specifically placed reliance on a circular of the Central Board of Direct Taxes dated 21 February 2006. The Assessing Officer brought his mind to bear on whether the assessee has fulfilled the conditions for the grant of exemption under Section 10 and specifically disallowed the claim for an exemption under Section 10(38). The exemptions under the other three clauses were allowed;
(ii) The Assessing Officer had no new material and certainly no tangible material on the basis of which the assessment could be reopened even within the period of four years. As a matter of fact, the reasons which have been disclosed to the assessee state that in the assessment under Section 143(3) exemptions have been wrongly allowed and this is reiterated in the order disposing of the objections which states that the Assessing Officer failed to correctly apply the statutory provisions. There is in the present case, it is urged, only a change of opinion and the Assessing Officer has purported to review his earlier decision, which is not permissible in view of the law laid down by the Supreme Court.
7. On the other hand, learned Counsel appearing on behalf of the Revenue urged that :
(i) No case has been made out for exercise of the writ jurisdiction under Article 226 of the Constitution since it would be open to the assessee following the reopening of the assessment to urge all appropriate contentions before the Assessing Officer in regard to the entitlement of the assessee to claim an exemption under Section 10;
(ii) The exercise of the writ jurisdiction is not warranted having regard to the factual issues which arise; and
(iii) Since the reopening has taken place within a period of four years, there was no bar on the Assessing Officer reopening the assessment, once he comes to the conclusion that income had escaped assessment.
8. The record before the Court discloses the fact that during the course of the assessment proceedings the Assessing Officer had brought his mind to bear on the issue as to whether the assessee which carries on the business of general insurance is entitled to an exemption under Section 10. Both in the letter dated 25 October 2007 and in the subsequent communication dated 22 November 2011 the assessee had relied upon a communication issued by the CBDT, in response to a query, to the Chairperson of the Insurance Regulatory and Development Authority (IRDA). The communication is to the following effect :
“The undersigned is directed to refer to the write-up on the captioned subject submitted by you during the month to the Hon’ble Finance Minister and Secretary (Revenue).
2. It is clarified that the exemption available to any other assessee under any clause of section 10 of the Income-tax Act 1961 (including clause (38) of section 10 regarding long-term capital gains) is also available to a person carrying on non-life insurance business subject to fulfilment of the conditions, if any, under a particular clause of section 10 under which exemption is sought. General Insurance Companies are therefore, on par with other assesses who are entitled to or are eligible for exemption under section 10 of the Income-tax Act of long-term capital gains.”
The Assessing Officer declined to grant the benefit of an exemption under Section 10(38) to the assessee on the ground that during the assessment year the assessee had carried on a regular business activity of trading in shares and was not an investor. The exemptions under clauses (15), (23G) and (33) of Section 10 were however allowed. The Assessing Officer, in the reasons which have been declared to the assessee for reopening assessment has now taken the view that on a combined reading of Section 44 of the Income Tax Act, 1961 and the First Schedule the position that emerges is that no other Section of the Act applies to a company which carries on general insurance business except the provisions contained in Rule 5 of the First Schedule. On this basis, it has been contended that the claims have been “wrongly allowed”. We find merit in the contention of the Petitioner that the reasons which have been set out by the Assessing Officer constitute a mere change of opinion and there was no tangible material on the basis of which the assessment could be reopened. Our reasons for this are now set out.
9. Under Section 147 the Assessing Officer is empowered to reopen an assessment where he has reason to believe that any income chargeable to tax has escaped assessment for any assessment year. Under clause (3) of Explanation 2 the Legislature has set out cases where income chargeable to tax is deemed to have escaped assessment. Such cases include a case where an assessment is made but (i) income chargeable to tax has been underassessed; or (ii) such income has been assessed at too low a rate; or (iii) such income has been made the subject of excessive relief under the Act; or (iv) excessive loss or depreciation allowance or any other allowance under the Act has been computed. The power of the Assessing Officer to reopen an assessment even within a period of four years is structured. Following the amendment of Section 147 by the Direct Tax Laws (Amendment) Act, 1987 with effect from 1 April 1989 Parliament has provided for only one condition for exercise of the power to reopen an assessment within four years which is that the Assessing Officer has reason to believe that income has escaped assessment. While recognizing that after 1 April 1989 the power to reopen assessment is wider than before, the Supreme Court has held in CIT v. Kelvinator of India Ltd [2010] 320 ITR 561/ 187 Taxman 312 (SC) that a “schematic interpretation” should be given to the words “reason to believe” failing which Section 147 would confer arbitrary power upon the Assessing Officer to reopen an assessment on the basis of a mere change of opinion. In that context, Hon’ble Mr. Justice S.H. Kapadia (as the learned Chief Justice of India then was) speaking for the Supreme Court held as follows :
“….Therefore, post – 1st April, 1989, power to reopen is much wider. However, one needs to give a schematic interpretation to the words “reason to believe” failing which, we are afraid, section 147 would give arbitrary powers to the Assessing Officer to reopen assessments on the basis of “mere change of opinion”, which cannot be per se reason to reopen. We must also keep in mind the conceptual difference between power to review and power to reassess. The Assessing Officer has no power to review; he has the power to reassess. But reassessment has to be based on fulfilment of certain pre-conditions and if the concept of “change of opinion” is removed, as contended on behalf of the Department, then, in the garb of reopening the assessment, review would take place. One must treat the concept of “change of opinion” as an in-built test to check abuse of power by the Assessing Officer. Hence, after 1st April, 1989, the Assessing Officer has power to reopen, provided there is “tangible material” to come to the conclusion that there is escapement of income from assessment. Reasons must have a live link with the formation of the belief. Our view gets support from the changes made to section 147 of the Act, as quoted hereinabove. Under the Direct Tax Laws (Amendment) Act, 1987, Parliament not only deleted the words “reason to believe” but also inserted the word “opinion” in section 147 of the Act. However, on receipt of representations from the companies against omission of the words “reason to believe”, Parliament reintroduced the said expression and deleted the word “opinion” on the ground that it would vest arbitrary powers in the Assessing Officer.”
10. In the present case, it is apparent that the Assessing Officer had applied his mind to the claim of the assessee to exemption under clauses (15), (23G), (33) and (38) of Section 10. The exemption under clause (38) was specifically denied. The reasons for reopening the assessment merely postulate that the exemption under Section 10 was wrongly allowed. This is clearly a situation where there is a change in opinion by the Assessing Officer. There is no tangible material for the Assessing Officer to reopen the assessment.
11. Section 44 of the Income Tax Act, 1961 stipulates 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 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 co-operative society shall be computed in accordance with the rules contained in the First Schedule.”
Section 44 provides that the profits and gains of any business of insurance of a mutual insurance company shall be computed in accordance with the rules in the First Schedule. Part ‘A’ of the First Schedule containing Rules 1 to 4 deals with profits of life insurance business while Part B consisting of Rule 5 deals with computation of profits and gains of other insurance business. Rule 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 sections 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 reopening 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 Corpn. of India v. CIT [1978] 115 ITR 45 (Bom.) a Division Bench of this Court construed the provisions of Section 44 and of the First Schedule. The assessee in that case which carried on life insurance business had made a claim to exemption under Section 10(15) and Section 10(1). In a reference before the Court the questions referred included whether in computing the profits and gains of the business of insurance under Section 44 read with the First Schedule certain items which were ordinarily not includible in the total income were rightly included in the taxable surplus. The Division Bench of this Court held as follows :
“The question which essentially falls to be determined in this reference is whether, in view of the provisions in section 44 or rule 2 of the First schedule, the Life Insurance Corporation will not be entitled to claim the deductions which are otherwise admissible in the case 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 Corporation is that unless there are express provisions which disable the Corporation from claiming the deductions referred to above, the Corporation cannot be deprived of the benefit 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 provisions 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 case of computation of income from insurance business. The effect of the non obstante clause so far as the earlier part of section 44 is concerned, therefore, is that the provisions of section 44 will prevail notwithstanding 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 overriding effect of section 44 is that its provisions operate notwithstanding the provisions of section 191 and of sections 28 to 43A. Thus, the only effect of section 44 is that the operation of the provisions referred to therein is excluded in the case of an assessee who carries 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 assessment is governed by section 44 read with rule 2 in the First Schedule is not excluded.”
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 context of an assessee which carried on life insurance business to whom Rules 1 to 4 of the First Schedule applied whereas in the case of the assessee in this case which carries on general insurance business Rule 5 could apply. According to the Assessing Officer, Rule 5 would not permit any adjustment to the balance of profit as per annual accounts prepared under the Insurance Act, and 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 carries on life insurance business, followed an earlier decision of a Division Bench of this Court in CIT v. New India Assurance Co. Ltd. [1969] 71 ITR 761 (Bom.). 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 10(7) of the Income Tax Act, 1922. The questions referred to this Court included whether the assessee 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, 1922 provided that notwithstanding anything to the contrary contained in Section 8, 9, 10, 12 or 18, the profits and gains of any business of insurance and the tax payable thereon shall be computed in accordance with the rules contained in the Schedule to the Act. The Division Bench held that upon the language of sub-section (7) of section 10 read along with rule 6 it was impossible to hold that the provisions relating to exemptions stood excluded 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 of 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 laid down by the Court in the earlier decision in the case of New India Assurance Co. Ltd. Accordingly, the decision in Life Insurance Corporation (supra) could not have been ignored by the Assessing Officer on the supposition that the decision was rendered in the context of an assessee who carried on life insurance business and was, therefore, not available to an assessee which carries on general insurance business.
12. In General Insurance Corp. of India v. CIT [1999] 240 ITR 139/ 106 Taxman 389 (SC) the Supreme Court considered in an appeal arising out of a judgment of the High Court the issue as to whether a sum of Rs. 3 crores, being a provision for redemption of preference shares, was not liable to be added back in the total income of the assessee for Assessment Year 1977-78?. The Supreme Court held that a plain reading of rule 5(a) of the First Schedule made it clear that in order to attract the applicability 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 to 43A. The Supreme Court held that the sum of Rs. 3 crores in that case which was set apart as a provision for redemption of preference shares could not have been treated as an expenditure and hence could not have been added back 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 Act 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.”
The question whether an assessee who carries on general insurance business would be entitled to avail of an exemption under Section 10 did not arise. The issue 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) and (33) of Section 10 is directly governed by the decision rendered by the Division Bench in Life Insurance Corporation v. Commissioner of Income-tax (supra) following the earlier decision in Commissioner of Income-tax v. New India Assurance Co. Ltd. (supra). The Assessing Officer could not have ignored the binding precedent contained in the two Division Bench decisions of this Court. Moreover, the Assessing Officer in allowing the benefit of the exemption in the order of assessment under Section 143(3) specifically relied upon the view taken by the CBDT in its communication dated 21 February 2006 to the Chairman of IRDA. The communication clarifies that the exemption available to any other assessee under any clauses of Section 10 is also available to a person carrying on non-life insurance business subject to the fulfilment of the conditions, if any, under a particular clause of Section 10 under which exemption is sought. It needs to be emphasised that it is not the case of the Assessing Officer that the assessee had failed to fulfil 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 Assessing 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 and having taken a view on the basis of the communication noted earlier, the act of reopening the 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.
13. Rule is, therefore, made absolute by quashing and setting aside the notice dated 17 March 2011 reopening the assessment under Section 148 of the Income Tax Act, 1961. In the circumstances of the case, there shall be no order as to costs.
[Citation : 342 ITR 27]
