The Delhi High Court, on Wednesday, ruled that the income earned on sale/redemption of investment is not chargeable to tax under the provisions of the Income Tax Act, 1961.
The department and the assesse approached the High Court against the Tribunal orders. The assesse, is a subsidiary of General Insurance Corporation of India (‘GIC’) and is engaged in the business of General Insurance comprising of Fire, Marine and Miscellaneous Insurance Business.
Justices S. Muralidhar and Prathiba S Singh noted that as the Assessee is carrying on a general insurance business, it was bound by the provisions of the IA as well as the IRDA Regulations. Even the CBDT, in its Circular No. 5/2010 dated 3rd June 2010, acknowledged that, after the introduction of the IRDA Regulations in 2002, non-life insurance companies are required to credit income from the sale of investments directly to the P&L Account. This requirement, which would make the income so earned amenable to tax, was made applicable only from AY 2011-12. Prior to 1st April 2011, there was no provision which required the Revenue to disallow the deduction of loss on sale of investments.
It was observed that for the AY in question, the AO did not accept the case of the Assessee that the income earned on the sale/redemption was not chargeable to tax since the profit on sale of investment was sometimes shown in the balance sheet and sometimes in the P&L account in the past.
It was observed that according to the AO, Circular No. 528 dated 16th December 1988 of the CBDT did not create a dent insofar as it stated that both profit and loss on sale of investments will not be taken into account in calculation of insurance profits.
The Hon’ble High Court observed that approach of the AO in relation to Circular No. 528 and its binding nature was flawed. The Revenue could not disown its own Circular No. 528 and contend that it did not apply to the facts of the present case.
Citing a plethora of decisions, the bench observed that the well settled position is that, where the CBDT circular has not been withdrawn and is beneficial to the Assessee, it would be binding on the AO and other Revenue authorities.
In the opinion of the bench, the legislative policy was not to bring the profit on sale of investments to tax. The legislature had chosen to re-introduce the earlier provision by virtue of the amendment effective from AY 2011-12. The intention behind omitting Rule 5(b) was clearly expressed in the Circular. If the Circular was not intended to fill the gap brought about by the omission of Rule 5(b), viz., to exempt the profits on sale of investments made by the insurance companies from tax, there was no need to re-introduce Rule 5(b) with effect from AY 2011-12. The resultant position is that for the period during which there was no Rule 5(b) the profits on sale of investments were not taxable in the hands of the Assessee, it said.
Read the full text of the Judgment below.
