Ita/593/2013 Of Commissioner Of Income Tax v. M/S. Medi Assist (India)

IN THE HIGH COURT OF KARNATAKA AT BENGALURUDATED THIS THE 27 DAY OF OCTOBER 272020PRESENT THE HON’BLE MR. JUSTICE ALOK ARADHE AND| THE HON’BLE MR. JUSTICE H.T.NARENDRA PRASADLT.A. NCO.593 OF 2013 BETWEEN: 1.|COMMISSIONER OF INCOME TAX) CENTRAL REVENUE BUILDINGS QUEENS ROAD, BANGALORE-560001.. 2.|THE ASSISTANT COMMISSIONER OF INCOME TAX) CIRCLE 12(1), BANGALORE. .., APPELLANTS~ (BY Mr. E.I. SANMATHI, ADV.,) AND* M/S. MEDI ASSIST (INDIA) TPA PVT. LTD‘SRI KRISHNA ARCADENO.47/1, 9TH CROSS, 1ST MAIN ROADSARAKKI INDL LAYOUT|BANGALORE-5600 7/PAN: AACCMS8044R. ALSO ‘SHILPA VIDYA, 49, 1ST MAIN ROADSARAKKI INDL. LAYOUT3RD PHASE, J.P. NAGAR|BANGALORE. (BY Mrs. VANI H, ADV.) .., RESPONDENT THIS ITA IS FILED UNDER SECTION 260-A OF I.T. ACT,|1961 ARISING OUT OF ORDER DATED 12.06.2013 PASSED IN ITA.NO.1200/BANG/2012 FOR THE ASSESSMENT YEAR 2009-10,PRAYING THAT THIS HON’'BLE COURT MAY BE PLEASED TO: (1) DECIDE THE FOREGOING QUESTION OF LAW AND/OR|SUCH OTHER QUESTIONS OF LAW AS MAY BE FORMULATED BYTHE HON BLE COURT AS DEEMED FIT. (11) SET ASIDE THE APPELLATE ORDER DATED 12-06-2013)PASSED BY THE INCOME TAX APPELLATE TRIBUNAL, A’ BENCH,BANGALORE,IN|APPEAL|PROCEEDINGSNO.I.T.A.NO.1200/BANG/2012 FOR ASSESSMENT YEAR 2009-10, ASSOUGHT FOR IN THIS APPEAL. THIS|LIACOMING|ONFOR.HEARING,THISDAY, |ALOK ARADHE J.,DELIVERED THE FOLLOWING: | JUDGMENT This appeal under Section 260A of the Income Tax Act, 1961 (hereinafter referred to as the Act for short)has been preferred by the revenue. The subject matter| of the appeal pertains to the Assessment year2009-10The appeal was admitted by a bench of this Court videorder dated 17.03.2014 on the following substantial|question of law: (i) Whether on the facts and in thecircumstances of the case, the Tribunal Is correct in holding that the assessee Isentitled to disclose revenue from certainactivitiesspreadOVertheperiodof insurance policies for Income Tax purpose|rather than recognizing the entire amount|in the year in which tne invoices in respect|of fee was raised on insurance companies? (ii) Whether on the facts and in thecircumstances of the case, the Tribunal Is correct in holding that the assessee Isallowed to change the method of accounting in the assessment year under reference inrespect of TPA fee without appreciating tnefact that as per AS-11 notified by the|Central Government under section 145(2)|of I.T. Act, change in accounting policy Is.allowed only if sucn change Is required by the statute or if it is considered that thechange would result in more appropriate|preparation of financial statements and|sucn conditions are absent In the Instant|Case ? (iii) Whether on the facts and in thecircumstances of the case, the Tribunal Is correct in holaing that the activities of tne|assessee company are not of an insurance|company/business without appreciating the fact that Hon'ble High Court in the case of.Same assessee has held that the assessee's|business activities fall under the activities of|insurance company? (iv) Whether on the facts and in thecircumstances of the case, the Tribunal Is correct in coming to conclusion that the|assessee is entitled to follow accountingStandard 9 for revenue recognition’ inrespect of TPA fee received from insurance|companles? 2 |Thefactualbackground,In|whichtheaforesaid questions of law framed by a bencn of this.court, which arise for consideration in this appeal, needmention which are stated hereinafter. The assessee Is a.private limited company whicn is engaged in thebusiness as third party administrator of insurancecompanies. The assessee derived income as third partyagent fees from the insurance companies as percentageof premium paid by the policy holders to the insurancecompany. The assessee filed its return of income on. (iv) Whether on the facts and in thecircumstances of the case, the Tribunal Is correct in coming to conclusion that the|assessee is entitled to follow accountingStandard 9 for revenue recognition’ inrespect of TPA fee received from insurance|companles? 2 |Thefactualbackground,In|whichtheaforesaid questions of law framed by a bencn of this.court, which arise for consideration in this appeal, needmention which are stated hereinafter. The assessee Is a.private limited company whicn is engaged in thebusiness as third party administrator of insurancecompanies. The assessee derived income as third partyagent fees from the insurance companies as percentageof premium paid by the policy holders to the insurancecompany. The assessee filed its return of income on. 30.09.2009 declaring total income of Rs.9,20,45,514/-|and revised return on 30.09.2009 declaring an incomeofRs.2,82,19,530/-.The.return|ofincome|WaSprocessed under Section 143(1) of the Act and the casewas selected for scrutiny under Computer Aided ScrutinySelection (CASS).|Thereupon.notices.under|Section143(2) and 142(1) of the Act were issued. The.Assessing Officer by an order dated 30.12.2011 interalia held that an amount of Rs.16,48,34,975/- was.mentioned under the head of 'unearned income’. It was.furtner held that business of a third party agent isinsurance business as third party agent makes paymentsto the hospital / individuals policy holders. Therefore,Accounting Standard - 9 is not applicable in the factsituation of tne case. It was furtner held tnat INVOICES|raised in the financial year but not recognized as'revenue nave to be tIncluded in tne income of tneassessee. The Assessing Officer therefore, added a sum|of Rs.6,09,84,904/- to the income of the assessee and. subjected the same to tax and directed initiation of|proceeding|under|Section2/1(1)(c)OF theAct.separately.3The assessee thereupon filed an appealbefore the Commissioner of Income Tax (Appeals) who.by an order dated 19.07.2012|inter aliaheld that in the|assessee's own case for the Assessment Year 2008-09,it was held by the Commissioner of Income Tax.(Appeals) that the Assessing Officer was not justified in treating the unearned income as revenue by consideringthe assessee to be an insurance company by treating itas outside the purview of Accounting Standard - 9. It!was further held that the facts of the instant appeal arethe same and accordingly the Assessing Officer wasdirected to delete the addition of Rs.6,09,84,904/-. The.Assessing Officer was further directed to examine thereturn filed by the assessee and to determine the correctfigure in respect of the figure of Rs.2,44,29,771/-|declared by the assessee. Thus, the appeal was partly allowed. Being aggrieved, the revenue filed an appeal|before the Income Tax Appellate Tribunal (hereinafterreferred to as ‘the tribunal’ for short). The tribunalvideorder dated 12.06.2013 by placing reliance on the order|dated 11.01.2013 passed by it in respect of Assessment.Year 2007-08 In case of assessee that assessee has/rightly followed Accounting Standard -9 on revenue|recognition on a pro rata basis / term of policy. It was.furtner held tnat the activity of the assessee Is not in thenature of insurance business. In the result, the appealpreferred by the revenue was dismissed. In tneaforesaidfactualbackground,|therevenuehas.approached this court. 4Learned counsel for the revenue submittedthat the assessee is following mercantile system of accounting and under the aforesaid system the income.accrues once Invoices are raised and the assessee|cannot postpone the recognition of income under the|aforesaid system of accounting. It is also submitted that 4Learned counsel for the revenue submittedthat the assessee is following mercantile system of accounting and under the aforesaid system the income.accrues once Invoices are raised and the assessee|cannot postpone the recognition of income under the|aforesaid system of accounting. It is also submitted that the income accrues / arises when the assessee acquiresa right to receive the same. In support of aforesaidsubmissions, reliance has been placed in decision of the.Supreme Court In'MORVI INDUSTRIES LTD. VS.|COMMISSIONER OF INCOME-TAX', 82 ITR 835and|‘COMMISSIONER OF INCOME-TAX VS. GAJAPATHY|NAIDU’, 53 ITR 114.It is also urged that Accounting|Standard -9 excludes insurance company and therefore,tne Assessing Officer has rightly rejected the contentions.of the assessee and has followed the decision of this|court wherein this court has held that ‘business of third|party agent is business of insurance. It is also argued|that the tribunal as well as the Commissioner of IncomeTax (Appeals) grossly erred in placing reliance on thedecisionIn|theCASCof'CIT|YS,BILHARIINVESTMENTS (P.) LTD.', 299 ITR 1 (SC)and the'aforesaid decision is distinguishable and is not applicable|to the facts of the case. It is also pointed out that in theaforesaiddecisiontheIssue|whicharOSefor. consideration was whether the assessee is entitled to|recognize the revenue in respect of chit discount amount.only in the year of termination of chit period following.completed contract method or pro rata basis in various.Assessment Years falling under chit period by following.‘deferred revenue expenditure method’. In the aforesaidcontext, the Supreme Court held that the assessee is.entitled to follow completed contract method. It is also.argued tnat the principle of taxation that right person.has to be taxed at right time and on right event, in other|words, on occurrence when taxable activity which occurs.by virtue of transaction taking place and in relation to profit pertaining to transaction is generated, the taxable|event occurs, which cannot be postponed. It is also.argued that the assessee has not given any reasons for.change of accounting system. 5.|On the other hand, learned counsel for theassessee submitted that the first substantial question oflaw framed by this court in fact, is a question of fact and concurrent findings of fact have been recorded by the|Commissioner of Income Tax (Appeals) as well as by the.Income Tax Appellate Tribunal and the aforesaid findings have not been challenged on the ground of perversity. It.is further submitted that the assessee is entitled to.change its method of accounting and every assessee is.entitled to arrange its affairs and follow the method of.accounting. It is further submitted that for theAssessment Years 2010-11, 2011-12 and 2012-13, thedepartment has accepted the method of accounting|adopted by the assessee. It is further submitted thatchange in the accounting policy has been made as per|Accounting Standard -5 and the assessee does not Carry|on the insurance business. Reference in this connection|has also been made to the Insurance Regulatory andDevelopment.AuthorityOF India.(ThirdPartyAdministrators - Health Services) Regulations, 2016. In.Support of aforesaid submissions, reliance has been.placedON|decisions.of Supreme.CourtIn| ‘COMMISSIONER OF INCOME-TAX VS, BILAHARIINVESTMENT P. LTD.', (2008) 289 ITR 1 (SC),‘COMMISSIONER OF INCOME-TAX-IIIL, BANGALOREVS. NCR CORPORATION (P.) LTD.', (2020) 274|TAXMAN 139 (KARNATAKA)and|"‘COMMISSTONEROF INCOME-[AX AND ANOTHER VS, BANJARA|DEVELOPERS AND CONSTRUCTIONS PVT. LTD.',(2020) 425 ITR 673 (KAR). ‘COMMISSIONER OF INCOME-TAX VS, BILAHARIINVESTMENT P. LTD.', (2008) 289 ITR 1 (SC),‘COMMISSIONER OF INCOME-TAX-IIIL, BANGALOREVS. NCR CORPORATION (P.) LTD.', (2020) 274|TAXMAN 139 (KARNATAKA)and|"‘COMMISSTONEROF INCOME-[AX AND ANOTHER VS, BANJARA|DEVELOPERS AND CONSTRUCTIONS PVT. LTD.',(2020) 425 ITR 673 (KAR). 6.|We have considered the submissions made.by learned counsel for the parties and have perused therecord. Section 145 of tne Act deals witn metnod of.accounting. Section145(1).providesthat|incomechargeable under the head ‘profits and gains of business|Or profession or income from other sources shall be.subject to provisions of sub-Section (2), be computed inaccordance witn either casn or mercantile system ofaccounting regularly employed by the assessee. Tne.Supreme Court in the case of Bilahari Investments P..Ltd., Supra Nas neld as under: Fvery assessee is entitled to arrange its|affairs and follow the method of accounting|whicn the Department nas earlier accepted. Itis only in those cases where the Department|records a finding that the method adopted by|the assessee results in distortion or profitsthat the Department can insist on substitutionof the existing method. 7The assessee in the instant case has changedinvoice metnod to proportionate completion method. Till31.03.2007, the assessee used to recognize revenue|immediately on raising of invoice, even though, the|service under the contract is not completed orsubstantially completed. The assessee is involved inexecution of more than one act I.e., rendering service inthe entire year, therefore, it adopted the proportionatecompletion|method.TherevenuefromServicetransactions usually recognized as the service isperformed either by proportionate completion method or.completed service contract method. The assessee istherefore, rightly adopted proportionate completion. method as it is engaged in rendering service in the|entire year. The assessee in the instant case is coveredby Accounting Standard - 9 as it does not deal withrevenue of inSurance companies arising from insurance|contracts. The Accounting Standard - 9 applies asfinancial service rendered by the assessee, which resultsin revenue, which in turn has to be taken into account)having regard to incidence of costs relating to service. Itis also pertinent to mention here that it is open for theassessee to change the method of accounting and the|burden is on the department to prove that the methodinvoked is not correct and that such a method distorts.the profits of a particular year. The aforesaid burden has_not been discharged by the revenue in the instant case.Besides that, the revenue has accepted the change inthe method of accounting in subsequent Assessment|Years viz., 2010-11, 2011-12 and 2012-13, therefore,there is no justification on the part of the Assessing|Officer to change the method adopted by the assessee| and to determine the income on estimate basis. For the|aforementioned reasons, the substantial questions oflaw No.1, 2 and 4 are answered against the revenue and.in favour of the assessee. 8 _Now we may advert to the third substantialquestion of law. The assessee is a third party agent andis governed by the provisions of the Insurance|Regulatory and Development Authority of India (ThirdParty Administrators - Health Services) Regulations,|2016. Regulation 2(1)(m) defines the expression ‘third|party administrator to mean a company registered with.the authority and engaged by an insurer, for a fee or'remuneration, by whatever name called and as may be.mentioned in the agreement, for providing healthservices mentioned under these Regulations. Regulation|3 prescribes the health services, which may be provided.by a third party agent to an insurer under theagreement in connection with health insurance business.Section 2(9) of the Insurance Act defines the expression. 8 _Now we may advert to the third substantialquestion of law. The assessee is a third party agent andis governed by the provisions of the Insurance|Regulatory and Development Authority of India (ThirdParty Administrators - Health Services) Regulations,|2016. Regulation 2(1)(m) defines the expression ‘third|party administrator to mean a company registered with.the authority and engaged by an insurer, for a fee or'remuneration, by whatever name called and as may be.mentioned in the agreement, for providing healthservices mentioned under these Regulations. Regulation|3 prescribes the health services, which may be provided.by a third party agent to an insurer under theagreement in connection with health insurance business.Section 2(9) of the Insurance Act defines the expression. ‘Insurer’ which includes insurance company. Thus, it is.evident that the third party agent and the insurancecompany are different entities. Therefore, the finding.recorded by the tribunal that the assessee’s business.activities do not fall under the business of insurance|company is correct. So far as reliance placed by theassessee on the decision of learned Single Judge of this|court in the case of assessee is concerned, suffice it to.say that the aforesaid decision nas been set aside Dy adivision bench of this court. In the result, the thirdsubstantial question of law is also answered against therevenue and in favour of the assessee. In the result, we do not find any merit in this|appeal, the same fails and is hereby dismissed. Sd/-—JUDGE. Sd/-—JUDGE.