In a major relief to Care Health Insurance, the Delhi High Court ruled that the Incurred But Not Reported ( IBNR ) provisioning is not contingent liability.
The Principal Commissioner of Income Tax called in question the order of the Income Tax Appellate Tribunal ( ITAT ) on the issue of whether on the facts and circumstances of the case and in law, the Hon’ble ITAT has erred in deleting the disallowance of provision for unsettled claims outstanding as on March 31st ignoring that the amount is shown as a provision in books of account of the assessee and can be allowed in the year when it is materialised and not in the year under consideration.
The Tribunal took note of the contention of the respondent-assessee that the provision for unsettled claims cannot be viewed as being ad hoc or an estimate since they record all outstanding claims to the extent lodged by policy holders. It is on the basis of the claims so lodged that the respondent appears to have made appropriate provisions in its books of account.
It was asserted before the Tribunal that while the quantification or adjudication of the claim may happen subsequently, the same would only have an impact in the subsequent period and that such post facto circumstances which were not envisaged would not warrant the same being viewed as a contingent liability. The assessee also contended that once the claim comes to be lodged by the policy holder, it is only an exercise of verification and quantification which remains.
A Division Bench of Justices Yashwant Varma and Purushaindra Kumar Kuarav observed that “The Tribunal was clearly justified in taking into consideration the indubitable fact of the distinction that must be borne in mind between the incurrence of a liability and its ultimate quantification. Before us it was not disputed by the appellant that the provision was made by the respondent-assessee on the basis of customer wise details of claims lodged. Merely because those claims ultimately came to be adjudicated subsequently would have no bearing on a provision being validly made.”
“Upon due consideration of the principles enunciated in the aforenoted decisions, we come to the firm conclusion that it would be wholly incorrect to understand IBNR provisioning to be a contingent liability. We, in this regard, bear in consideration the precepts of reasonable estimation, the capability of a liability being quantified based upon historical trends and the known actuarial methods for estimation which are liable to be adopted in accordance with the IRDA Regulations. We consequently find no error in the view ultimately taken by the Tribunal: the Court noted.
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