CPT V24P7-Art1 (Content).pmd - Taxmann
CPT V24P7-Art1 (Content).pmd - Taxmann CPT V24P7-Art1 (Content).pmd - Taxmann
Direct Tax Laws the assessee. 33 Now even if the life and nonlife insurance businesses are separate and do not constitute separate departments of the same business, still the aforesaid provision can be effected. 34 Under this rule the annual average of the surplus disclosed by the actuarial valuation 35 made for the last inter-valuation period 36 pending before the commencement of the assessment year is to be taken as the basis of computation subject to certain adjustments. 37 It is not open to the department to make an addition to the surplus other than the adjustments specifically provided for in the Schedule, even if an item of the income escapes tax as a result of not being taken into account in making the actuarial valuation. The provision also stipulates that in case of any carry forward of losses or surplus, an adjustment for the surplus or deficit of an earlier inter-valuation period must be made to the surplus disclosed by actuarial valuation before the assessable annual average is calculated. 38 5.1.2 RULE 2 39 - This rule stipulates that a surplus or deficit disclosed by the valuation for the relevant inter-valuation period includes the surplus or deficit of an earlier inter-valuation period. The same should be fragmented and the surplus or deficit from any previous intervaluation period must be excluded. 40 For instance, if the actuarial valuation depicts a surplus of ` 24 lakhs which includes ` 4 lakhs as surplus of the previous inter-valuation period which has been carried forward, the surplus to be actually taken into consideration shall be ` 20 lakhs arrived at after ignoring ` 4 lakhs of the surplus carried forward from the previous inter-valuation period. For clarification, it was observed in LIC (supra) that when the assessee had taken over the assets and liabilities of the existing insurers, the refund received by the assessee in respect of excess tax paid by the predecessor companies must be deemed to be included in the previous 664 August 1 to 15, 2012 u TAXMANN’S CORPORATE PROFESSIONALS TODAY u Vol. 24 u 44 inter-valuation period, rather than being included in the relevant inter-valuation period. 41 It is pertinent to note that only the notional figure arrived at according to the valuation under rule 2 is to be taken as the basis of assessment and not the actual income of the relevant year, which might be more or less than the annual average of the last inter-valuation period 42 . 5.1.3 RULE 4 43 - This rule specifies that when an assessment has been made under rule 2 on the basis of the annual average of surplus disclosed by actuarial valuation for an intervaluation period exceeding 12 months, no credit should be given in accordance with section 199 for the tax deducted at source in the previous year, but credit should be given for annual average of tax deducted at source during such inter-valuation period. 44 It has been clarified that this rule applies only to tax deducted at source and not when the tax is directly paid on assessment. 45 METHOD OF CALCULATING THE PROFITS OF THE NON-LIFE INSURANCE BUSINESS 6. Rule 5 46 of the First Schedule prescribes the method of calculating the income of a Non- Life Insurance Business for the purpose of tax assessment. It stipulates that the profits of non-life insurance businesses shall be taken to be the profits revealed by the annual accounts required to be furnished under the Insurance Act, 1938. 47 It is pertinent to note that the figures in the accounts of the assessee drawn in accordance with the provisions of the First Schedule and satisfying the requirements of the Insurance Act are binding on the Assessing Officer. He has no general power to correct errors in accounts of the insurance business and undo any entry made therein. 48 However, in terms of rule 5(a), if the profit has been arrived at after deducting any
expenditure or allowance which is not admissible under sections 30 to 43B of the Income-tax Act, 1961, then such expenditure or allowance shall be added back to the profits disclosed by the annual accounts in order to arrive at the assessable profit. However, the Assessing Officer has no jurisdiction to add back any expenditure or allowance on the ground that it was deducted contrary to the provisions of the Insurance Act, 1938. 49 It is also important to note that in case the amount is not expenditure or an allowance, the question of making an adjustment for it under rule 5(a) shall not arise at all! 50 METHOD OF CALCULATING INDIAN PROFITS OF NON-RESIDENT INSURANCE BUSINESSES 7. Rule 6 51 of the First Schedule provides an extremely synthetic mode of calculating the profits of the non-resident insurance businesses. It stipulates that in the absence of ‘more reliable data,’ the profits of the Indian branches of the non-resident insurance businesses shall be taken to be the proportion of the world income corresponding to the proportion which the Indian premium income bears to the total premium income. 52 Also, for calculating the world income of a non-resident insurance business, the assessable income shall be calculated in the manner stipulated by the First Schedule for computation of profits of an insurance business carried out in India. 53 The Privy Council has made some sagacious observations in the construction of this rule in CIT v. Great Eastern Life Assurance Co. Ltd. 54 and have since been regarded as the leading case on the construction of this rule. 55 SERVICE TAX TO BE CHARGED ON INSURANCE BUSINESS 8. The insurance businesses, because of their nature of being service providing businesses, are liable to be charged with Service Tax as well. The method, procedure, deductions and rates of levying service tax on Life Insurance Businesses 56 and General Insurance Businesses 57 are governed by separate notifications of the Ministry of Finance, Government of India. MINIMUM ALTERNATE TAX APPLICABLE TO THE INSURANCE COMPANIES 9. The Insurance Businesses are required to furnish their financial statements according to the provisions of the Insurance Act, 1938 and IRDA Regulations and are exempt from furnishing such statements under section 210 of the Companies Act, 1956. Therefore, the insurance businesses come under the purview of section 115JB of the Incometax Act, 1961. This provision provides the minimum amount of tax applicable on insurance businesses according to their book profits. This minimum amount of tax has been termed as Minimum Alternate Tax and the rate of such tax applicable to the insurance businesses has been thoroughly prescribed under section 115JB. DIRECT TAX CODE, 2010 ON TAXATION OF INSURANCE BUSINESS 10. Direct Tax Code Bill, 2010 has dealt with taxation of insurance business 58 in expressed terms and has proposed to bring about significant change in taxation of insurance business in India. Section 32 of the Bill has proposed to charge profits and gains from insurance business under the head ‘Computation of income from the businesses’. It provides that ‘income from the businesses shall be presumed as the profits from the business and the profits gained by insurance companies shall be charged under provisions mentioned in Eighth Schedule of the Bill. 59 10.1 Computation of profits of life insurance business - The profits of the business of life insurance shall be the profits determined in shareholders’ accounts in accordance with the August 1 to 15, 2012 u TAXMANN’S CORPORATE PROFESSIONALS TODAY u Vol. 24 u 45 665
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expenditure or allowance which is not admissible<br />
under sections 30 to 43B of the Income-tax<br />
Act, 1961, then such expenditure or allowance<br />
shall be added back to the profits disclosed<br />
by the annual accounts in order to arrive at<br />
the assessable profit.<br />
However, the Assessing Officer has no jurisdiction<br />
to add back any expenditure or allowance on<br />
the ground that it was deducted contrary to the<br />
provisions of the Insurance Act, 1938. 49<br />
It is also important to note that in case the<br />
amount is not expenditure or an allowance,<br />
the question of making an adjustment for it<br />
under rule 5(a) shall not arise at all! 50<br />
METHOD OF CALCULATING INDIAN<br />
PROFITS OF NON-RESIDENT INSURANCE<br />
BUSINESSES<br />
7. Rule 6 51 of the First Schedule provides an<br />
extremely synthetic mode of calculating the<br />
profits of the non-resident insurance businesses.<br />
It stipulates that in the absence of ‘more reliable<br />
data,’ the profits of the Indian branches of the<br />
non-resident insurance businesses shall be taken<br />
to be the proportion of the world income<br />
corresponding to the proportion which the Indian<br />
premium income bears to the total premium<br />
income. 52 Also, for calculating the world income<br />
of a non-resident insurance business, the<br />
assessable income shall be calculated in the<br />
manner stipulated by the First Schedule for<br />
computation of profits of an insurance business<br />
carried out in India. 53<br />
The Privy Council has made some sagacious<br />
observations in the construction of this rule in<br />
CIT v. Great Eastern Life Assurance Co. Ltd. 54<br />
and have since been regarded as the leading<br />
case on the construction of this rule. 55<br />
SERVICE TAX TO BE CHARGED ON<br />
INSURANCE BUSINESS<br />
8. The insurance businesses, because of their<br />
nature of being service providing businesses,<br />
are liable to be charged with Service Tax as<br />
well. The method, procedure, deductions and<br />
rates of levying service tax on Life Insurance<br />
Businesses 56 and General Insurance Businesses 57<br />
are governed by separate notifications of the<br />
Ministry of Finance, Government of India.<br />
MINIMUM ALTERNATE TAX APPLICABLE<br />
TO THE INSURANCE COMPANIES<br />
9. The Insurance Businesses are required to<br />
furnish their financial statements according to<br />
the provisions of the Insurance Act, 1938 and<br />
IRDA Regulations and are exempt from<br />
furnishing such statements under section 210<br />
of the Companies Act, 1956.<br />
Therefore, the insurance businesses come under<br />
the purview of section 115JB of the Incometax<br />
Act, 1961. This provision provides the<br />
minimum amount of tax applicable on insurance<br />
businesses according to their book profits. This<br />
minimum amount of tax has been termed as<br />
Minimum Alternate Tax and the rate of such<br />
tax applicable to the insurance businesses has<br />
been thoroughly prescribed under section 115JB.<br />
DIRECT TAX CODE, 2010 ON TAXATION<br />
OF INSURANCE BUSINESS<br />
10. Direct Tax Code Bill, 2010 has dealt with<br />
taxation of insurance business 58 in expressed<br />
terms and has proposed to bring about significant<br />
change in taxation of insurance business in<br />
India. Section 32 of the Bill has proposed to<br />
charge profits and gains from insurance business<br />
under the head ‘Computation of income from<br />
the businesses’. It provides that ‘income from<br />
the businesses shall be presumed as the profits<br />
from the business and the profits gained by<br />
insurance companies shall be charged under<br />
provisions mentioned in Eighth Schedule of<br />
the Bill. 59<br />
10.1 Computation of profits of life insurance<br />
business - The profits of the business of life<br />
insurance shall be the profits determined in<br />
shareholders’ accounts in accordance with the<br />
August 1 to 15, 2012 u TAXMANN’S CORPORATE PROFESSIONALS TODAY u Vol. 24 u 45<br />
665
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