High Court Of Calcutta
Pr.CIT-2, Kolkata vs. National Insurance Co. Ltd.
Section : 44
Assessment year : 2005-06
Aniruddha Bose And Arindam Sinha, JJ.
G.A. No. 2362 Of 2016
ITAT No. 285 Of 2016
February 10, 2017
JUDGMENT
Aniruddha Bose, J. – This appeal by the Revenue seeks to invalidate an order of the Income Tax Appellate Tribunal (ITAT) upholding, in substance, the claim of the assessee – a general insurance company – for total exemption on income out of sale/redemption of investments. The order under appeal is a composite one, dealing with two appeals of the same assessee, being ITA No. 606/Kol/2012 (A.Y. 2005-06) and ITA No. 675/Kol/2012 (A.Y. 2006-07). This appeal has been preferred in respect of decision of the Tribunal delivered in ITA No. 606/Kol/2012 (A.Y. 2005-2006), dated 3rd February 2016. The subject dispute pertains to the assessment year 2005-06.
2. The assessee is engaged in the business of insurance other than life insurance. In respect of the said assessment year, the assessee wanted Rs.245,09,18,028/-, being profit earned by them on sale of investments, to be exempted from tax. The assessee, being a general insurance company, is required to be taxed in terms of Section 44 of the Income Tax Act, 1961 read with the provisions of Rule 5 of Part B to Schedule 1 to the Act. The aforesaid Rule, for the assessment year involved, provided:—
“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.”
3. The aforesaid Rule originally included a sub-clause (b). The said sub- clause specified:—
“(b) (i) deduction in respect of any amount either written off or provided in the accounts to meet diminution in or loss on realisation of investments in accordance with the regulations made by Insurance Regulatory and Development Authority;
(ii) increase in respect of any amount taken credit for in the accounts on account of appreciation of or gains on realisation of investments in accordance with the regulations made by Insurance Regulatory and Development Authority;”
4. The said sub-clause was deleted by the Finance Act, 1988. The Notes on Clauses of the Finance Bill, 1988 [as reproduced in (1988)170 ITR (St.)] 166 stipulated:—
“The proposed amendment seeks to omit clause (b) and the proviso thereunder so as to exempt profits and gains on investments made by the General Insurance Corporation of India and the four companies formed under section 16 of the General Insurance Business (Nationalisation) Act, 1972.”
5. Sub-clause (b) was again introduced by the Finance Act, 2009 with effect from 1st April, 2011 in the following terms:—
“(b) (i) any gain or loss on realisation of investments shall be added or deducted, as the case may be, if such gain or loss is not credited or debited to the profit and loss account;
(ii) any provision for diminution in the value of investment debited to the profit and loss account, shall be added back;”
6. Thus, for the subject assessment year the aforesaid Clause (b) was not there on the statute book. A Circular, Bearing No. 528 dated 16th December 1988 was issued by the authorities, which, inter alia, stipulated:—
“FINANCE ACT, 1988 – CIRCULAR NO. 528, DATED 16-12-1988
FINANCE ACT, 1988
Liberalisation of provisions in respect of taxation of profits and deduction of tax at source applicable to the General Insurance Corporation and its subsidiaries
45.1 Under the existing provisions of section 44 of the Income-tax Act, the profits and gains of any insurance business is computed in accordance, with the rules contained in the First Schedule to the Act. Under rule 5 of this Schedule, profits and gains of any business of insurance other than life insurance are taken to be balance of profits disclosed in the annual accounts furnished to the Controller of Insurance subject to certain adjustments. One of the adjustments provided therein is in respect of any amount either written off or ‘reserved in the accounts to meet depreciation or loss on the realisation of investment which is to be allowed as deduction. Similarly, any sum credited to the account, due to appreciation of or gain on the realization of investment is taken as part of the profits and gains of the business. To enable the General Insurance Corporation and its subsidiaries to play a more active role in capital markets for the benefit of policy-holders, the Finance Act has amended sub-rule (b) of rule 5 of the First Schedule to provide for exemption of the profits earned by them on the sale of investment. As a corollary, it has also been provided that the losses incurred by the General Insurance Corporation on the realisation of the investment shall not be allowed as a deduction in computing the profits chargeable to tax.
45.2 this amendment will take effect from the 1st April, 1989, and will, accordingly apply in relation to the assessment year 1989-90 and subsequent years.”
7. The assessee’s claim for exemption is founded on this circular. The assessee claimed exemption of the aforesaid sum, being profits on sale of investments for that assessment year. The Assessing Officer in an order passed on 31st December 2007 under Section 143(3) of the Act rejected the claim of the assessee for reduction of Rs.245.09 crores from book profit and added back the said sum to the total income computed for the purpose of income tax assessment. The assessment order deals with certain other issues, but this appeal is primarily concerned with dealing of profit from sale or redemption of investments. For the next assessment year, 2006-07, same course was followed by the Assessing Officer.
8. The CIT in appeal of the assessee deleted the addition of Rs.245.09 crores. We would like to point out here that the order of the CIT (Appeals), as annexed to the stay petition related to an order passed on 16th January, 2012 in respect of a proceeding under Section 147/143(3) of the Act. The order of the CIT (Appeals), against which appeal was preferred before the Tribunal was passed on 21st December, 2011. A copy of this order passed in Appeal No. 320/VI/WD 5(2)/07-08/Kol was produced before us by the learned counsel for the Revenue. We direct this copy to be retained with the records. The Revenue went up in appeal before the Income Tax Appellate Tribunal against this order of the CIT (Appeals). Contention of the Revenue before the Tribunal was that if deletion of the provisions of clause (b) of Rule 5 of Part B of the First Schedule to the Act placed taxation of income of a general insurance company within the parameters of clauses (a) and (c), in such a situation also the assessee company would not have been entitled to any exemption on profit on sale of investments. This was, in fact, the reasoning of the Assessing Officer also. It was also recorded in the order of the Assessing Officer that income out of sale/redemption of investments in the case of an insurance company had not been included in any of the clauses of Section 10 of the Act making them exempted from computation of total income. The Tribunal, in the order appealed against, sustained the decision of CIT (Appeals) delivered on 21st December 2011.
9. In respect of three earlier assessment years, 1991-92, 1992-93 and 1993-94, similar additions made by the Assessing Officer to profit on sale of investments to total income as computed for the purpose of income tax assessment had been initially sustained by the CIT (Appeals). For these three assessment years the assessee appealed to the Tribunal and the Tribunal had restored the matters back to CIT (Appeals). In each of these restored cases, CIT (Appeals) had held that profit on sale of investments could not be included in the assessee’s total income. It has been submitted on behalf of the assessee that the decisions of the CIT in the restored cases were not further challenged by the Revenue in any appellate forum.
10. It has also been submitted by Mr. Poddar, learned Senior Counsel appearing for the assessee that between the assessment years 1991-92 and 2010-11, the period during which clause 5(b) had remained out of the statute book, same course was adopted by the Revenue, barring the assessment years 2005-06 and 2006-07. Argument of Mr. Poddar is that this consistent view taken by the Revenue ought not to be upset. He has also argued that the circulars, notifications explaining or dealing with statutory provisions constitute contemporaneous instruments guiding interpretation of statutes. Consistent construction of a statutory provision in a particular direction ought not to be deviated from. He has cited the following authorities in support of his submission that circulars similar to Circular No. 528 of 16th December 1988 have binding effect on Revenue:—
(i) Navnit Lal C. Javeri v. K. K. Sen, AAC [1965] 56 ITR 198 (SC)
(ii) K.P. Varghese v. ITO [1981] 131 ITR 597/7 Taxman 13 (SC)
(iii) Paper Products Ltd. v. CCE [2001] 247 ITR 128/115 Taxman 147 (SC)
(iv) Collector of Central Excise v. Dhiren Chemical Industries [2002] 254 ITR 554 (SC)
(v) State of Kerala v. Kurian Abraham (P.) Ltd.[2008] 303 ITR 284 (SC)]
(vi) Steel Authority of India v. Collector of Customs 2000 (115) ELT 42 (SC)
11. In all these authorities, impact of circulars issued by the Revenue Authorities under different statutory provisions have been held to be binding on the Revenue. In the case of Steel Authority of India (supra), the Supreme Court dealt with an exemption notification as also a trade notice issued by the customs authorities and held:—
“This Court has consistently held that the authorities are bound by the trade notices and they issued and cannot argue to the contrary…”
12. Second limb of Mr. Poddar’s submission is that if on a particular point the earlier decisions of the income tax authorities on the same question remain unchallenged, the same should apply to later cases also. The judgments relied upon by Mr. Poddar on this point are:—
(i) CIT v. Smt. Sarita Aggarwal [2001] 10 SCC 382
(ii) CIT v. Shivsagar Estate [2002] 257 ITR 59/124 Taxman 606 (SC)
13. The Revenue Authorities in this appeal have suggested the following questions before us for answer upon formulating them as substantial questions of law:—
‘(a) Whether on the facts and in the circumstances of the case the Learned Income Tax Appellate Tribunal, “B” Bench Kolkata erred in law in dismissing the appeal of the Revenue and up holding the decision of CIT (A) regarding deletion of Rs.245,09,18,028/- on account profit on sale/redemption of investment?
(b) Whether the impugned order is bad, arbitrary, illegal perverse and the same is nothing but a total non-application of mind of the Income Tax Appellate Tribunal, Kolkata and the same is liable to be set aside and/or quashed?’
14. As we have already indicated, the Revenue’s stand is that there is no specific provision in the statute which allows a general insurance company’s profits from sale of investments to be exempted from total income for the purpose of taxation under the 1961 Act. Mr. Poddar, sought to repel the Revenue argument on three grounds. His first submission is that upon omission of clause (b) from Rule 5 of the First Schedule, the Assessing Officer was denuded of the power to make any adjustment by way of adding back the said sum to total income of the assessee for the purpose of Income Tax assessment, which power the Assessing Officer sought to exercise in the case of the assessee. His second submission is that the Circular of 1988 clearly stipulated that profit on sale of investments was not taxable in the case of a general insurance company. Thirdly, he has argued that the consistent stand of the income tax authorities between the assessment years 1991-92 and 2004-05 as also 2007-08 till 2010-11 reflects that the mandate of the circular was accepted by the tax authorities and followed. There was consistent practice of not making adjustment by way of adding back in similar fashion and this practice ought not to be deviated for the relevant assessment year. He has also pointed out that such adjustment is permissible from the assessment years 2011-12 onwards by reason of reinsertion of clause (b) in Rule 5 to the said schedule.
15. Main stand of the assessee is on binding nature of the circular, so far as income tax authorities are concerned. Even if a circular appears to go against statutory provisions, Mr. Poddar has submitted, referring to the judgment of the Supreme Court in the case of Paper Products Ltd. (supra), the circular would prevail. In this judgment it has been held that:—
“The question for our consideration in these appeals is : What is the true nature and effect of the circulars issued by the Board in exercise of its power under section 37B of the Central Excise Act, 1944 ? This question is no more res integra in view of the various judgments of this court. This court in a catena of decisions has held that the circulars issued under section 37B of the said Act are binding on the Department and the Department cannot be permitted to take a stand contrary to the instructions issued by the Board. These judgments have also held that the position may be different with regard to an assessee who can contest the validity or legality of such instructions but so far as the Department is concerned, such right is not available. (see Collector of Central Excise v. Usha Martin Industries [1997] 7 SCC 47; [1997] 94 ELT 460 (SC). In the case of Ranadey Micronutrients v. Collector of Central Excise [1996] 10 SCC 387; [1996] 87 ELT 19, this court held that the whole objective of such circulars is to adopt a uniform practice and to inform the trade as to how a particular product will be treated for the purposes of excise duty. The court also held that it does not lie in the mouth of the Revenue to repudiate a circular issued by the Board on the basis that it is inconsistent with a statutory provision (emphasis supplied). Consistency and discipline are, according to this court, of far greater importance than the winning or losing of court proceedings. In the case of Collector of Central Excise v. Jayant Dalal Pvt. Ltd.[1997] 10 SCC 402; [1998] 100 ELT 10, this court has held that it is not open to the Revenue to advance an argument or even file an appeal against the correctness or the binding nature of the circulars issued by the Board. Similar is the view taken by this court in the case of Collector of Central Excise v. Kores (India) Ltd. [1997] 10 SCC 338; [1997] 89 ELT 441 (SC).”
16. We do not find any reason to accept the argument of the Revenue which goes contrary to the consistent stand taken by them on similar point in earlier assessment years on the same point of law. The Circular of 16th December, 1988 clearly stipulated the object behind deletion of aforesaid sub-clause (b). The manner in which profits from investments of a general insurance company is to be treated for income tax purpose also can be construed from the Notes on Clauses extracted from the Finance Bill, 1988. We have reproduced the relevant portion thereof earlier in this judgment. Having regard to the provisions of Section 44 of the Act read with First Schedule thereto, in our opinion the Assessing Officer for the applicable assessment year did not have power to add back the profit of Rs.245.09 crores arising out of sale of investments to the total income of the assessee.
17. Mr. Nizamuddin also could not explain to us why deviation was made on treatment of profits on sale of investments for the two assessment years.
On binding nature of the aforesaid Circular of 1988, no negative argument has been advanced on behalf of the Revenue. We find that on no occasion earlier to or later than these two assessment years, the Revenue had preferred any appeal before the Tribunal or otherwise questioned such reduction by the assessee. In the cases of Smt. Sarita Agarwal (supra) and Shivsagar Estate (supra), special leave petitions of the Revenue were dismissed by the Supreme Court having regard to the fact that no appeal had been carried against the orders of identical assessments for the previous years. The same principle ought to apply in respect of the assessment year 2005-2006, with which this appeal is concerned. As regards assessment year 2006-2007, we are dealing with the same in another appeal filed by the Revenue before us.
18. We do not find any legal justification in the stand of the Revenue taken before us in this appeal. In our opinion, no substantial question of law is involved in this appeal. The law is settled otherwise than what the Revenue wants us to construe and hold. We accordingly dismiss the appeal and the connected application.
[Citation : 393 ITR 52]
