1 IN THE HIGH COURT OF JUDICATURE AT BOMBAY ORDINARY ORIGINAL CIVIL JURISDICTION WRIT PETITION NO.2471 OF 2009 WITH WRIT PETITION NO.2470 OF 2009 WITH WRIT PETITION NO.2472 OF 2009 ICICI Prudential Life Insurance ) Company Limited having their ) Office at ICICI Prulife Towers, ) 1089 Appahaseb Marathe Marg, ) Prabhadevi, Mumbai - 400 025. )..Petitioner. V/s. 1. Asstt. Commissioner of Income-tax, ) Circle 6(1), Mumbai, having his ) office at Aaykar Bhavan, M.Karve ) Road, Mumbai - 400 020. ) 2. The Union of India, ) through Ministry of Law, ) Aaykar Bhavan, M.K.Road ) Mumbai - 400 020. )..Respondents. Mr. S.E. Dastur, senior Advocate with Ms. Arati Vissanji and S.J. Mehta for petitioner in all the petitions. Mr. Suresh Kumar for respondents in all the petitions. 2 CORAM : DR. D.Y.CHANDRACHUD AND J.P.DEVADHAR, JJ. DATED : 8/9TH MARCH, 2010 ORAL JUDGMENT (PER DR. D.Y.CHANDRACHUD. J.) 1) Rule, by consent made returnable forthwith. Counsel for the respondents waives service. With the consent of counsel, all the petitions are taken up for final hearing. 2) The sole business which the petitioner carries on is of life insurance. A certificate of registration was granted to the petitioner on 24 November, 2000 by the Insurance Regulatory and Development Authority of India (IRDA) under Section 3(2) (a) of the Insurance Act, 1938. The petitioner is by the mandate of law required to maintain its accounts in accordance with the provisions of the Insurance Regulatory and Development Authority (Preparation of Financial Statements and Auditor's Report of Insurance Companies) Regulations, 2002 read with Section 211 of the Companies' Act, 1956. 3) The three petitions under Article 226 of the Constitution relate to the reopening of assessments for 3 assessment years 2002-03, 2003-04 and 2004-05. The facts, as they pertain to assessment year 2003-04 are representative, and can be narrated. The difference in so far as the notices for the reopening of assessments are concerned is that for assessment years 2002-03 and 2003-04, the assessments have been sought to be reopened beyond a period of four years of the expiry of the relevant assessment year. The reopening of the assessment for assessment year 2004-05 is within four years. 4) During the course of assessment year 2003-04, the petitioner filed a return of income on 27 November, 2003 reporting a net loss of Rs.98.70 crores. The statement of the computation of profits and gains from business shows an actuarial deficit of Rs.158.37 crores. After excluding a deficit of Rs.48.47 crores, arising out of pension schemes exempt under Section 10(23AAB), the deficit in the policyholder's account stood at Rs.109.90 crores. The Petitioner had an income surplus in the share -holders account of Rs.11.20 crores. As a result, the deficit from the insurance business was Rs.98.70 crores. 4 5) Section 44 of the Income Tax Act, 1961 provides that notwithstanding anything contained to the contrary in the provisions of the Act relating to the computation of income chargeable under the head interest on securities, income from house property, capital gains or income from other sources or in section 199 or in sections 28 to 43B the profits and gains of any business of insurance shall be computed in accordance with the rules contained in the First Schedule to the Act. Rule 2 of the First schedule provides as follows:- " The profits and gains of life insurance business shall be taken to be the annual average of the surplus arrived at by adjusting the surplus or deficit disclosed by the actuarial valuation made in accordance with the Insurance Act, 1938, in respect of the last inter-valuation period ending before the commencement of the assessment year, so as to exclude from it any surplus or deficit included therein which was made in any earlier inter-valuation period.' 6) Before 1999, Companies engaged in the business of life insurance were required to prepare one consolidated account. Section 11 of the Insurance Act, 1938 was amended so as to include sub-sections 1A and 1B. Sub-section 1A to Section 11 provides that every insurer, on or after the commencement of the IRDA Act, 1999, in respect of insurance business transacted by him and in respect of shareholders' 5 funds, shall, at the expiration of each financial year, prepare with reference to that year, a balance-sheet, a profit and loss account, a separate account of receipts and payments, and revenue account in accordance with the regulations made by the Authority. Section 13(1) provides that every insurer carrying on life insurance business shall inter alia in respect of the life insurance business transacted in India, cause an investigation to be made each year by an actuary into the financial condition of the life insurance business carried on by him, including a valuation of his liabilities and shall cause an abstract of the report of such actuary to be made in accordance with the regulations laid down in Part I of the fourth schedule and in conformity with the requirements of Part II of that schedule. The fifth proviso to Section 13 stipulates that on or after the commencement of the IRDA Act, 1999 every insurer shall cause an abstract of the report of the actuary to be made in the manner specified by the regulations made by the Authority. 7) In exercise of the powers conferred by Section 114A of the Insurance Act, 1938, IRDA notified the Insurance Regulatory and Development Authority (Actuarial Report and 6 Abstract) Regulations, 2000. Regulations 3 and 4 stipulate the procedure for preparation of actuarial reports and abstracts and the requirements applicable. Under Regulation 3(4)(v) each abstract and statement is to be accompanied by a certificate signed by the appointed actuary inter alia stating that in his opinion, the mathematical reserves are adequate to meet the insurer's future commitments under contracts and the reasonable expectation of policyholders. Each insurer is required to prepare statements which are to be annexed to the abstract and a list of those statements is set out in Regulation 4(2). Regulation 8 provides that a statement showing the total amount of surplus arising during the inter-valuation period and allocation of such surplus, shall be furnished separately for participating business and for non participating business, together with the particulars as mentioned in the Regulation. The composition of surplus inter alia includes the surplus shown by Form I, interim bonuses, loyalty additions and sums transferred from shareholders' funds during the inter-valuation period. 8) The authority has also notified the Insurance Regulation and Development Authority (Preparation of 7 Financial Statements and Auditor's Report of Insurance Companies) Regulations, 2002. Part V deals with the provision of financial statements. Every insurer is required to prepare (i) a revenue account which is also described as a policyholders' account; and (ii) a profit and loss account, which is also described as a shareholders' account, apart from a balance sheet. The statutory forms are prescribed by the regulations. Form A-RA is prescribed for the preparation of the Revenue account or policyholders' account. Form A-RA reflects the surplus or, as the case may be, the deficit generated in the revenue account for the year ending 31 March. 9) As a result of the regulations, the petitioner which is engaged in the business of life insurance is required to prepare and maintain two accounts namely (i) A Revenue account of policyholders and (ii) A Profit and loss Account of shareholders. For the previous year which ended on 31 March, 2003, the Policyholders' account reflected a deficit of Rs.158.37 crores. This deficit was made good by the transfer of an amount of Rs. 158.37 crores from the Shareholders' account to the Policy- holders account. This was essentially an internal transfer of 8 funds. Form I which has been prepared by the petitioner in pursuance of the IRDA Regulations of 2000 reflected a Nil deficit consequent upon the transfer of an amount of Rs.158.37 crores from the Shareholders' account to the Policyholders' account. The source for making a transfer of Rs.158.37 crores from the shareholders account originated in the infusion of capital from shareholders during the course of the previous year relevant to the assessment year in question. 10) During the course of the assessment proceedings for assessment year 2003-04, the petitioner furnished a note to the computation of income. The salient aspects which were highlighted in the note were as follows:- (i) The erstwhile format for the presentation of surplus / deficit required each insurance company to aggregate the results relating to shareholders' operations and policyholders' operations. The impact of the consolidated revenue account was transferred to the actuary's valuation balance-sheet in form I which disclosed the surplus / deficit for the year; 9 (ii) The format for presentation of the insurance accounts was amended by the Regulations of 2000 and by the revised format, the impact of the actuarial valuation was transferred to the revenue account relating to the policyholders for the year and the surplus / deficit was disclosed therein; (iii) The Profit and loss for shareholders and the surplus / deficit for policyholders are since segregated into two separate accounts after the amended regulations; (iv) For the financial year ending 31 March, 2003, the actuarial valuation as disclosed in Form I shows a Nil surplus / deficit as regards the business of policyholders. The actual deficit of Rs.158.37 crores in the Policyholders' account (form A-RA) was made good by a transfer of an equivalent sum from the Shareholders' account. Hence the figures showing a Nil deficit in form I were subsequent to the transfer; (v) The total deficit in the Policyholders' account for tax purposes was Rs.109.90 crores (Rs.158.37 crores less an amount of Rs.48.47 crores on account of exempt 10 pension schemes); (vi) In the Shareholders' account, there was a net surplus of Rs.11.19 crores; (vii) Consequently, while there was a net surplus in the Shareholders' account of Rs.11.19 crores, there was a net deficit in the Policyholders' account of Rs.109.90 crores; (viii) Consequently, in determining the profits and gains under Section 44 read with Rule 2, the loss was computed at Rs.98.70 crores by aggregating the surplus in the Shareholders' account with the deficit in the Policyholders' account for the purposes of taxation. 11) During the course of the assessment proceedings, letters were addressed to the Assessing Officer specifically in order to clarify the position of the deficit in the Policyholders' account. By its letter dated 27 December, 2005, the petitioner clarified that the deficit in the Policyholders' account as reflected by form A-RA had been met by a transfer from the Shareholders' account. The figures relating to surplus / deficit 11 in Form I were subsequent to the internal transfer of funds. The assessee contended that the transfer from the Shareholders' to the Policyholders' account was an internal adjustment and was tax neutral. Before the assessment proceedings came to be concluded for assessment year 2003-04, an audit query was raised with reference to assessment year 2002-3. The audit report dated 4th May, 2005 specifically raised a question as to whether the petitioner should have been allowed to claim a deficit in the Policyholders' account since the deficit disclosed by the actuarial valuation in form I was shown to be Nil. In response to the audit query, the petitioner addressed a letter dated 29 December, 2005 contending that the First schedule to the Income Tax Act did not refer to any particular form for calculating the taxable surplus and instead mentions that the actuarial surplus calculated under the provision of the Insurance Act, 1938 has to be considered. The petitioner reiterated its position that form I showed a zero surplus because, it has already considered inter alia the transfers made from the Shareholders' account to the Policyholders' account to nullify the deficit as per IRDA regulations. The same position has been reiterated by a letter dated 30 December, 12 2005 to the Assessing Officer. 12) The Assessing Officer issued an order of assessment under Section 143(3) on 30 December, 2005 for assessment year 2003-04. The assessment order accepts that there was a loss to the extent of Rs.98.70 crores and that it was allowed to be carried forward. After the order of assessment, the provisions of Section 263 were invoked by the Commissioner of Income Tax on 25 August, 2008. While invoking Section 263, the Commissioner was of the view that it needed to be examined as to whether the income shown in Shareholders' account was liable to be taxed under the head of business or from other sources. Aggrieved by the invocation of Section 263, the assessee filed an appeal to the Tribunal which was allowed on 22 January, 2009. During the course of its judgment, the Tribunal noted that it was not disputed by the Commissioner that there is a deficit in the Policyholders' account. The Tribunal noted that the assessee had adjusted the income in the Shareholders' account against the deficit. The Tribunal observed that even assuming that the Commissioner was correct in holding that the income from the Shareholders' account is assessable under the head of other 13 sources, in that case, the set off of the current year's income in the Shareholders' account against the deficit in the Policyholders' account was permissible under Section 71. Hence according to the Tribunal, there was no prejudice to the interest of the Revenue. The Tribunal also noted that the Assessing Officer had examined the case of the assessee before the completion of the assessment; the return filed by the assessee contained various details and an audited report; and that written submissions were filed on 27, 29 and 30 December, 2005 in response to the queries of the Assessing Officer. The invocation of the jurisdiction under Section 263 was consequently held to be unwarranted. The judgment of the Tribunal was carried in appeal to this Court. On 14 December, 2009 a Division Bench of this Court dismissed the appeals filed by the Revenue (Income Tax Appeal No.1345 of 2009 with Income Tax Appeal (L) No.1625 of 2009). 13) The Assessing Officer has purported now to reopen the assessment for assessment year 2003-04. As already noted earlier, the assessments which have been completed for assessment years 2002-03 and 2004-05 have also been reopened. The reasons which have been furnished in support 14 of the reopening of the assessments are that, under Section 44 read with Rule 2 of the First schedule to the Act, income of life insurance business assessable under the Income Tax Act has to be as per the surplus declared in an actuarial valuation made in accordance with the Insurance Act, 1938. Form I which constitutes a part of the actuarial report, declares the surplus to be Nil, whereas, the returned income as well as the assessed income show a loss. The Assessing Officer has hence opined, that the assessee had filed an incorrect computation of total income along with the return and an assessment has been made on the basis of the incorrect computation of total income filed by the assessee. According to the Assessing officer, the loss which is reflected in the Policyholders' account is not in accordance with the actuarial report; whereas, the income / loss according to the actuarial report in form 1 is Nil. The assessee, according to the Assessing Officer, has made a misleading statement for computing the total income. The assessments for all the three years have been reopened on these grounds. 14) In assailing the grounds on which the assessment is sought to be reopened, Counsel appearing on behalf of the 15 petitioner submitted that (i) The reopening of the assessment is bad in law because, there was no failure on the part of the assessee to disclose fully and truly all material facts relevant to the assessment for the assessment years 2002-03 and 2003-04; (ii) As a matter of fact, there is no escapement of income, because an internal transfer from the Shareholders' account to the Policyholders' account does not result in any income to the assessee; (iii) Though this is merely an internal transfer, the Revenue still wants to treat it as income and which the Revenue asserts will reduce the extent of loss in the Shareholders' account; (iv) The Assessing Officer has by reopening the assessment sought to reduce the loss not by expenditure which has been disallowed but by setting off the capital receipts comprising Shareholders' funds in the shareholders account. Counsel submitted that this submission would govern the reopening of the assessment for assessment years 2002-03 and 2003-04 which, admittedly is beyond the period of four years from the end of the relevant assessment year. For assessment year 2004-05, where the power under Section 147 has been invoked within a period of four years of the end of the relevant assessment year, it is urged that the reasons asserted by the Assessing Officer constitute only a 16 change of opinion which is not permissible in view of the law laid down by the Supreme Court in Commissioner of Income Tax V/s. Kelvinator of India Ltd.1 Counsel submitted that specific questions were raised during the course of the assessment by the Assessing Officer to which the assessee had responded in its several replies and the assessment order was passed after the replies were considered. Hence there was no tangible material before the Assessing Officer to reopen the assessment. 15) On the other hand, counsel appearing on behalf of the Revenue supported the reasons on the basis of which the assessment was sought to be reopened by urging that (i) There was no discussion in the assessment order; (ii) The transfer from the Shareholders' to the Policyholders' account would be permissible only when a bonus was to be declared; (iii) The surplus / deficit in form I is declared to be Nil, whereas the assessee had returned a loss which was accepted by the Assessing Officer. Hence, the Assessing Officer was justified in reopening the assessment. 1 [2010] 320 ITR 561 (S.C.) 17 16) All the three petitions before the Court, which pertain to assessment years 2002-03, 2003-04 and 2004-05, have been heard together. The reasons on the basis of which the assessment is sought to be reopened are similar. The assessment is sought to be reopened on the basis that whereas Form I showed a Nil surplus / deficit, the assessee had in its computation of income, showed a loss for each of the relevant assessment years to which the petitions relate. In so far as assessment years 2002-03 and 2003-04 are concerned, the assessments have been reopened admittedly, beyond a period of four years from the end of the assessment years in question. The reopening of the assessment for assessment year 2004 -05 is within four years. 17) The condition precedent to the exercise of the power to reopen an assessment under Section 147 is the formation of a reason to believe by the Assessing Officer that income chargeable to tax has escaped assessment. By the proviso to Section 147, where an assessment under Section 143(3) has been made and it is sought to be reopened beyond a period of four years from the end of the relevant year, the exercise of power is subject to the condition that income should 18 have escaped assessment by a failure of the assessee to disclose fully and truly all material facts necessary for assessment for that assessment year. For assessment years 2002-03 and 2003-04, the validity of the notice for reopening the assessments must, therefore, depend upon whether there was, as a matter of fact, a failure on the part of the assessee to disclose fully and truly all material facts necessary for the assessment. 18) The record before the Court shows that the assessee had in its computation of income disclosed that the Policyholders' account showed that (i) There was a deficit of Rs.109.90 crores (comprising Rs.158.37 crores minus Rs. 48.47 crores arising out of exempt pension funds); (ii) There was a transfer of funds to the extent of Rs.158.37 crores from the Shareholders' account to the Policyholders' account; and (iii) That the deficit in the Policyholders' account was adjusted only by an internal transfer of funds from the Shareholders' account to the Policyholders' account. By its letters dated 27 December, 2005 and 30 December, 2005, which were filed in response to queries raised by the Assessing Officer, the assessee disclosed (a) The manner in which the profits and 19 gains under Section 44 read with the First schedule were arrived at, so as to reflect a loss of Rs.98.70 crores; (b) The fact that the Nil surplus shown in the report of the actuarial valuation in form I was subsequent to the transfer of funds from the Shareholders' account to the Policyholders' account. When the assessment proceedings pertaining to assessment year 2003-04 were pending, an audit query came to be raised in regard to a similar claim for loss during assessment year 2002-03. The petitioner responded to the audit query by its letter dated 29 December, 2005. The letters addressed by the petitioner, including the note appended to the computation of income clearly set out the fact that there was a surplus in the Shareholders' account and that the deficit in the Policyholders' account was met by a transfer from the Shareholders' account to the Policyholders' account. The petitioner disclosed that in Form I, the surplus / deficit was shown to be Nil and submitted that the position reflected in Form I was subsequent to the internal transfer of funds which took place from the Shareholders' to the Policyholders' account. It is after the petitioner had filed its explanation by several letters that the Assessing Officer passed an order of assessment under Section 143(3). 20 19) Hence, the record before the Court shows that the computation which was filed by the petitioner of the total income could not be regarded as either being incorrect or misleading. The computation discloses a nil surplus / deficit in form I. The petitioner set forth its case about how form I could not be regarded as being reflective of the correct position in regard to the loss sustained by the petitioner since it was after the internal transfer of funds from the Shareholders' to the Policyholders' account that the loss was effaced. There was thus, no failure on the part of the petitioner to set out fully and truly all the material facts necessary for the assessment for assessment years 2002-03 and 2003-04. The condition precedent to the exercise of the jurisdiction to reopen the assessments for assessment years 2002-03 and 2003-04, beyond a period of four years from the end of the relevant assessment year was, therefore, not fulfilled. The notices for the reopening of assessments for assessment years 2002-03 and 2003-04 will, therefore, have to be quashed on that ground. Parliament has made the invocation of the power to reopen an assessment beyond four years conditional on compliance with a statutory requirement. Once that 21 requirement is not fulfilled, the invocation of the power has to be regarded as extraneous to the statute and hence, invalid. 20) For assessment year 2004-05, it would be necessary to note that during the course of the assessment proceedings, the petitioner submitted replies similar to those which were submitted during the course of the earlier assessment years. Since the nature of the explanation has already been set out while dealing with the previous assessment years, it would not be necessary to reiterate the contents of the replies, save and except to record that the disclosure by the petitioner was with reference to a query raised by the Assessing Officer on 27 November, 2006. By his query, the Assessing officer drew the attention of the petitioner to note 4 appended to the computation of income and specifically to Para 4.4 by which the petitioner had disclosed a Nil surplus / deficit in form I. The petitioner had stated in the note that the deficit in the Policyholders' account as shown in form A-RA has been made good by a transfer of an equivalent