Tax Insights
from India Tax & Regulatory Services
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Delhi High Court holds section 44 of the Act being a special provision for insurance companies, overrides the applicability of section 14A of the Act for such companies
March 13, 2020
In brief
Recently, the Delhi High Court1 upheld the Delhi bench of the Income-tax Appellate Tribunal’s (Tribunal) order, holding that the provisions of section 14A of the Income-tax Act, 1961 (the Act) are not applicable in case of insurance companies. The High Court held that section 44 of the Act, which is a special provision dealing with the insurance business, overrides various provisions of the Act, including those generally dealing with the computation of profits and gains from any business.
Therefore, the overriding provisions of section 44 of the Act would also cover the provisions of section 14A of the Act. Consequently, the High Court held that the Tax Officer (TO) could not have made any disallowance under section 14A of the Act for an insurance company.
In detail
Facts
• The taxpayer, a non-life insurance company, earned exempt income and claimed that it had not incurred any expenditure in earning such exempt income.
• The TO made an addition under section 14A of the Act read with Rule 8D of the Income-tax Rules, 1962 (the Rules) rejecting the
contentions of the taxpayer.
• The Commissioner of Income-tax (Appeal) ruled in favour of the taxpayer and reversed the
disallowance.
1 ITA No. 172/ 2020
• On further appeal, the Tribunal dismissed the appeal filed by the TO relying on its previous orders passed in the taxpayer’s case.
Revenue’s contentions
• The Revenue argued that the applicability of section 14A of the Act does not stand excluded on reading section 44 with the first schedule of the Act.
• The objective of section 14A of the Act is to prevent the taxpayer from claiming double benefit, by claiming deduction of expenditure incurred in deriving income
that does not form part of the total income.
High Court’s decision
• The High Court held that no substantial question of law arose in the appeal filed by the Revenue.
• Section 14A of the Act does not have independent legs to stand on and begins with the words “while computing the total income under this chapter…” The chapter referred to in section 14A of the Act comprises various provisions, including those generally dealing with the computation of profits and gains of any business or
Tax Insights
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profession. In addition, sections 28 to 43B of the Act form part of the provisions dealing with the computation of profits and gains of any business or profession, as adverted to by the High Court.
• Section 44 of the Act governs the computation of income of insurance companies. Section 44 of the Act begins with a non-obstante clause and overrides certain provisions of the Act stated therein,
including sections 28 to 43B of the Act.
• Therefore, the exclusionary provisions of section 44 of the Act would also cover section 14A of the Act.
2Oriental Insurance Company Limited v.
ACIT [2009] 130 TTJ 388 (Delhi);
• In order to compute the profits and gains of an insurance company, the TO has to resort to section 44 of the Act and the rules prescribed therein. In such a case, the TO cannot apply sections 28 to 43B of the Act, as they are specifically excluded by section 44 of the Act. Consequently, the provisions of section 14A of the Act would stand excluded by virtue of the overriding provisions of section 44 of the Act to compute the profits and gains of an insurance
company.
• Accordingly, the TO could not have made a disallowance under section 14A of the Act
Birla Sunlife Insurance Co. Limited v.
DCIT (ITA No. 602/Mum/2009);
for the insurance company.
The takeaways
• There are various Tribunal rulings2, wherein it has been held that provisions of section 14A are not applicable to insurance companies.
• This is a welcome decision as this is the first High Court judgement in case of an insurance company on this contentious issue.
Let’s talk
For a deeper discussion of how this issue might affect your business, please contact your local PwC advisor
ICICI Prudential Insurance Company Limited v. ACIT [2013] 140 ITD 41 (Mumbai)
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