Page 228 - India Insurance Report 2023- BIMTECH

216 India Insurance Report - Series II

The Chennai Tribunal in the case of Deputy Commissioner of Income-tax, Chennai v.
Cholamandalam MS General Insurance Co. Ltd. [2018] 96 taxmann.com 625 (Chennai - Trib.) https://
indiankanoon.org/doc/175154120/ held that payment of premium to non-resident reinsurers was
disallowable under section 40(a)(i) of the Act. Further, it was also held that the if the assessee claims
there was no person in India and premium was paid directly to the non-resident re-insurance company,
then the transaction of the assessee is clearly in violation of provisions of section 2(9)(I) of Insurance
Act, 1938 and hence, disallowance has to be made under Explanation 1 to section 37.

On further appeal, the Madras High Court in the case of Cholamandalam MS General insurance Co.
Ltd v. DCIT [2019] 411 ITR 386 held that Tribunal has no jurisdiction to declare any provisions of the
regulations to be inconsistent with the provisions of the Insurance Act and disallow the same under the
Explanation to section 37(1) of the Act. The Madras High Court had remanded the question to the Tribunal
to decide whether the ld. AO was right in disallowing the reinsurance premium u/s. 40(a)(i) of the Act.

Presently, the Department has filed an SLP before the Supreme Court against the order of the Mad
HC, which is pending admission.

Recently Mumbai Tribunal in the case of Tata AIG General Insurance Company Ltd. v. Deputy
Commissioner of Income-tax [2022] 141 taxmann.com 70 (Mumbai - Trib.) wherein reference is made to
the aforementioned judgement and the appeal has been decided in favour of the assessee.

Thus, the judicial precedents have held that the income-tax officer does not have jurisdiction to
declare any expenditure as being violative of regulations if the Regulator has not treated the same as
violative of the regulations.

The Finance Act 2022 has recently inserted an Explanation 3, which reads as under: “For the removal
of doubts, it is hereby clarified that the expression “expenditure incurred by an assessee for any purpose
which is an offence or which is prohibited by law” under Explanation 1, shall include and shall be
deemed to have always included the expenditure incurred by an assessee,—
(i) for any purpose which is an offence under, or which is prohibited by, any law for the time being in
force, in India or outside India; or

(ii) to provide any benefit or perquisite, in whatever form, to a person, whether or not carrying on a
business or exercising a profession, and acceptance of such benefit or perquisite by such person is in
violation of any law or rule or regulation or guideline, as the case may be, for the time being in
force, governing the conduct of such person; or

(iii) to compound an offense under any law for the time being in force, in India or outside India.”

Whether the Explanation to Section 37(1) makes any change to the allowability of expenditure,
which the IRDA does not hold as violative of the regulations.

3. Disallowance of Expenses Incurred for Risk Inspection Charges

A general insurance company generally incurs charges for obtaining risk inspection reports. The risk