Page 229 - India Insurance Report 2023- BIMTECH

India Insurance Report - Series II 217

inspection report is obtained before entering into an insurance contract with the insured to analyse the
risk involved and form a preliminary opinion as to whether it makes commercial sense to bear the risk.
The risk inspection charges are paid to surveyors and their services typically includes visit to the relevant
sites, analysis of various hazards and evaluation of risks, etc. and providing a final assessment report, for
taking an informed underwriting decision. Inputs received from such assessment reports are general
guides which help the general insurance companies to analyse risk from a company and portfolio level.

In a particular case, an income-tax search took place at the surveyor’s office, and based on the
statements of third-party surveyors, the tax officer alleged that the risk inspection charges paid to such
specified parties were non-genuine expenditures and were in the nature of accommodation entries.
Accordingly, the A.O. disallowed the amount paid to such specified parties and also disallowed an ad-
hoc amount from the total risk inspection charges.

The first appellate authority confirmed the disallowance of payments made to specified parties and
reduced the adhoc allowance to 10% of the entire expenses on the risk inspection report.

The second appellate authority, the Tribunal, also confirmed the disallowance of payments made to
specified parties in view of the statements made by such parties despite documents provided by the
general insurance company but deleted the entire adhoc expenses.

Thus, there could be disallowance of expenses not being genuine expenses even where there is all
documentary proofs and PAN and other details of the payee, based on statements recorded by the payee.

Source: Pune ITAT in Deputy Commissioner of Income-tax vs Bajaj Allianz General Insurance
order dated 19 April, 2022

4. Timing Differences in Allowability of Expenditure and Applicability of Rule
5(a) of the First Schedule to the Act

Section 43B of the Act provides that specified expenditure is allowable as a deduction only on a
payment basis.

Per proviso (inserted vide Finance Act 2020 w.e.f. assessment year 2020-21) to Rule 5 of the First
Schedule, in computing the profits of general insurance business, any expenses which were disallowed
under section 43B shall be allowed in the year of payment. Thus, there is no ambiguity towards claiming
deduction under section 43B. However, there could be situations where the expenditure is disallowable
due to timing differences and allowable in subsequent years on the happening of an event, e.g., Section
32 (depreciation), Section 35DD of the Act (amortization of amalgamation expenses), Section 40(a)
allowable in the year of payment of TDS. There is no express provision in Rule 5(a) for allowing
deduction under sections 32, 35DD, 40(a), etc.

The Hon’ble Mumbai ITAT in the case of New India Assurance Co. Ltd. v. Addl. CIT [2011] 12
taxmann.com 465 (Mumbai) (relating to the year prior to the amendment) held that section 44 read with
rule 5 of the First Schedule makes figure of profit disclosed by Profit and loss account drawn as per
Insurance Act as absolute and binding both on assessee-insurance company as well as revenue and it is