CPT V24P7-Art1 (Content).pmd - Taxmann

The true profits of the insurance business cannot
be fairly arrived at by following the ordinary
methods of accounting. 20 This is because there
is no recognized business method of ascertaining
the profits derived from the life insurance
businesses. 21 The profits and liabilities calculated
must be ascertained on the basis of actuarial
valuations and calculations. 22
In this manner the accounts of the insurance
business are furnished to the authorities and
it helps in the taxation of their business as per
the provisions mentioned in the Income-tax
Act, 1961.
LIFE INSURANCE BUSINESS
5. Rule 7(1)(iv) provides that the definition of
‘Life Insurance Business’ in section 2(11) 23 of
the Insurance Act, 1938 applies under the First
Schedule.
It has been settled in a leading judgment that
where the business consists of granting terminable
pensions 24 or annuities 25 dependent on human
life in favour of the subscribers or their nominees,
the business must be assessed in accordance
with rule 2 of the First Schedule.
Further, for life insurance businesses, a special
rate of tax has been prescribed by sec. 115B
of the Income-tax Act.
5.1 Method of calculating the profits of the
life insurance business - For the purpose of
assessment, the income of a life insurance business
is synthetically calculated in consonance with
the provisions of the First Schedule of the
Income-tax Act, 1961.
5.1.1 RULE 1 - Rule 1 26 of the First Schedule
states that the profits of life insurance business
must be computed separately from the profits
of ‘any other businesses.’ This means that if
a person is also carrying out businesses other
than the life insurance business, the income
that is to be computed for computation of tax
must be separately done so as to enable the
profits from the life insurance business to be
separately determined from the profits which
arise from other businesses being carried on
by the person.
A good example of the aforesaid situation is
the profits of a ’Composite Insurance Company 27 ’
which has to be split up for income-tax purposes
into life insurance business and other insurance
business. 28
Further, if a life insurer also carries on any
other business other than insurance, the income
of the life insurance business alone is to be
computed under this Schedule, while the income
from other businesses shall be separately
computed under sections 28 to 43A. 29 Moreover,
it has also been held by the Allahabad High
Court that where certain activities of an insurance
company have been financed from the funds
of the miscellaneous insurance branch and partly
from the funds of the life insurance branch,
the profits accruing from such an activity must
be distributed proportionately between the two
branches for the computation of the profits of
those branches separately. 30
It has also been observed by the Courts that
income from investments will be considered
as profits and gains of life insurance business. 31
5.1.1.1 SET OFF AND CARRY FORWARD OF LOSS IN
CASE OF LIFE INSURANCE BUSINESS - Even though
there is a mandate for separate computation
of profits for life insurance businesses and
other businesses, yet there is no restriction on
setting off any loss incurred in life insurance
business against the profits of non-life insurance
businesses or other businesses carried on by
the assessee in the same year. A vice versa
application of this statement is also applicable.
This is because of the operation of section 70
which clarifies that it is only the net result of
the profits and losses of various businesses
which is assessable to tax. 32
Loss incurred in the life insurance business
can be carried forward and set off against the
profits made in a subsequent year from the
same business, where the life insurance and
non-life insurance businesses are departments
of one and the same business carried on by
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