General Insurance Companies Entitled to S. 10(38) Income Tax Exemption on Equity Gains: ITAT [Read Order]

The Chennai Bench of Income Tax Appellate Tribunal (ITAT) ruled that general insurance companies can claim income tax exemption under Section 10(38) on long-term capital gains from sale of equity investments.

United India Insurance Co. Ltd., the assessee, is a general insurance company. The Assessing Officer (AO) allowed income tax exemption for profits from sale of equity shares under Section 10(38) in original assessment.

The PCIT initiated revision proceedings questioning the income tax exemption. According to the PCIT, the income of insurance companies is required to be computed strictly under Section 44 of the Income Tax Act read with Rule 5 of the First Schedule which forms a special code.

The commissioner argued that profits from the sale of investments form part of business income and cannot be excluded by claiming exemption under Section 10(38). On this basis, the PCIT set aside the assessments and directed fresh assessments.

Before the Tribunal, the assessee’s counsel argued that there is no provision in Section 44 or Rule 5 of the First Schedule that prohibits a general insurance company from claiming exemption under Section 10(38).

The assessee explained that profits from the sale of equity investments were duly credited to the profit and loss account prepared in accordance with the Insurance Act and IRDA regulations, and exemption was claimed only where the statutory conditions under Section 10(38) were satisfied.

The Revenue argued that Section 44 overrides the general provisions of the Act and that Section 10(38) applies only to capital gains and not to business income of insurance companies.

The two-member bench comprising S.S. Viswanethra Ravi (Judicial Member) and Jagadish (Accountant Member) observed that coordinate benches had consistently allowed exemption under Section 10(38) to general insurance companies even after the amendment to Rule 5. The tribunal observed that Rule 5(b)(i) applies only where gains or losses on investments are not credited to the profit and loss account, which was not the case here.

The tribunal also observed that the Assessing Officer had examined the issue in detail, and revision could not be based on a mere change of opinion. The tribunal partly allowed the appeals, and set aside the revision orders on the Section 10(38) issue.

Support our journalism by subscribing to Taxscan premium. Follow us on Telegram for quick updates