Insurance Company can set off declared Bonus against the Premium received from Policyholders: ITAT [Read Order]

Delhi bench of the Income Tax Appellate Tribunal (ITAT), while granting relief to Max New York Life Insurance Company Limited, held that the bonus declared by Insurance Company can be set off against the premium received while calculating taxable income.

Before the Tribunal, the appellant contended that the premiums received are embedded with the obligation to declare bonus to participating policyholders. In that view of the matter, on the matching principle, the amount declared as bonus is necessarily to be set off against the premium received. According to them, the amount of bonus declared is unconditionally made available to the policyholder and is paid at the time of maturity / death. In some cases, bonus is paid in cash after declaration, while in case of some policies, bonus amounts are adjusted with next due premium, as per product features. The contended that the amount of bonus declared, which the assessee is mandatorily bound to declare in terms of the contract of insurance in respect of participating policies, cannot be held back by the assessee and has to be transferred to the account of the policy holder. Therefore, such bonus is ascertained liability accrued to the assessee while determining the acturial surplus and such bonus has to be taken into account while determining the actuarial surplus, subject of taxation under section 44 of the Act read with the First Schedule.

The division bench accepted the above contention and held that the premium received by the assessee are embedded with the obligation to declare bonus to participating policy holders, therefore, it has to be set off against the premium received.

“Once the bonus is declared, which the assessee is bound to declare as per the terms of the contract of insurance for the participating policies, the assessee in our view cannot reverse the same and once bonus is declared it becomes ascertained liability. Since the bonus is being paid to the insured persons who are not the shareholder but customers of the assessee, therefore, when it is declared it becomes ascertained liability towards the customers. No doubt in form A-RA (Actuarial Report and Abstract) Regulations 2000, this forms part of the distribution of the surplus.”