Disallowance of expenditure under Section 14A: Applicability to Insurance business
This issue revolves around the applicability of 14A to an insurance business when it is governed by special provisions as specified under Section 44 of the Income Tax Act, 1961.
The outcome was in favour of the assessee as the court held that section 14A is not applicable to insurance companies governed by the special provisions.
Most of the litigation on this issue has favoured the assessee. There are no significant High Court or Supreme Court judgements on this issue yet. So if you are tax professional who serves the insurance domain, it may be prudent to track this issue in particular or the Insurance and Pension industry in particular using the Telescope feature of Riverus.
- The Assessee had claimed various incomes as exempt under Section 10(38) of the Act.
- In the course of the assessment proceedings, the Assessee was called upon to explain as to why disallowance of expenditure incurred for earning the exempt income may not be worked out as per Section 14A read with Rule 8D.
- In reply, it was submitted by the Assessee that as it was a wholly owned Government of India undertaking into general insurance business, whose income was computed as per the provisions of Section 44 of the Act read with Rule 5 of the ‘First Schedule’, therefore, the provisions of Section 14A were not applicable in its case.
- However, the Assessing Officer rejected the said claim of the Assessee and worked out the disallowance under Section 14A read with Rule 8D at Rs.13.05 Crores.
- The Tribunal placed reliance on the decision laid down in Assessee’s own case, wherein it was held that the provisions of Section 14A had no applicability in the cases of General Insurance Companies, which were governed by the special provisions laid down in Section 44 of the Act.
- Further, it was observed that Section 44 was a non obstante provision wherein the income was to be computed as per Profit & Loss account prepared under the Insurance Act 1938. Section 14A contemplates exception for deduction allowable under the Act, whereas Section 44 creates special application of provision of computation of profit as per the Insurance Act.
- Therefore, following the same in the present facts of the case, no disallowance under Section 14A could be made in case of the Assessee.