BACKGROUND

Insurance companies operating in India are governed by a special computational mechanism prescribed under Section 44 of the Income-tax Act, 1961 (Act), read with the First Schedule thereto and it deviates from the general computational provisions contained under Sections 28 to 43B of the Act.

Further, the insurance companies are required to create specific provisions, namely ‘Incurred But Not Reported (IBNR) and Income But Not Enough Reported (IBNER)’ in their books of accounts in accordance with the relevant Insurance Regulatory Development Authority of India (IRDAI) Regulations. These provisions are made basis the scientific calculations with proper rationale and thus, eligible to be termed as “ascertained liability’ in the books of accounts as per the said regulations.

In this regard, the Madras High Court in its recent ruling¹  held that provisions of Section 14A of the Act are not applicable while computing income of general insurance businesses as they fall within the ambit of a specific tax regime as prescribed under section 44 read with First Schedule of the Act. Further, with respect to the IBNR/ IBNER claims, the Hon’ble High Court concluded that provision made in respect of IBNR/ IBNER is an ascertainable liability, and hence, it is an allowable deduction under section 37 of the Act.

We, at BDO in India, have summarised the above ruling and have provided our comments on the impact of this decision hereunder.

FACTS OF THE CASE

• The taxpayer is engaged in the business of general insurance in India.

• For the relevant fiscal year, the taxpayer computed its income in accordance with Section 44, read with rule 5 of First Schedule of the Act.
• During the course of assessment proceedings, the Tax Officer disallowed certain expenses by specifically invoking provisions of Section 14A of the Act, contending that expenses relating to exempt income ought to be disallowed while computing income from insurance businesses.
• Additionally, the Tax Officer disallowed the claim of provisions created towards IBNR and IBNER by treating the said as expenses in the nature reserve/ provision, which is inadmissible under the provisions of Section 37 of the Act.
• Aggrieved by the Tax Officer’s disallowances, the taxpayer filed an appeal before the First Appellate Authority. The First Appellate Authority allowed the taxpayer’s claim i.e. reversing the disallowances made by the Tax Officer by holding that Section 14A of the Act was not applicable to insurance companies and that IBNR/ IBNER provisions were based on scientific mathematical calculation leading it to ascertained liability and thus, allowable under the provisions of the Act.
• On appeal by the Revenue before the Mumbai Tax Tribunal, the Tribunal reversed the order of the First Appellate Authority and upheld the disallowances made by the Tax Officer.
• Aggrieved by the said order of the Mumbai Tax Tribunal, the taxpayer preferred an appeal before the Madras High Court.

MADRAS HIGH COURT’S RULING

The Madras High Court, while ruling in favour of the taxpayer, made the following key observations:
1. Inapplicability of Section 14A of the Act to insurance companies:

• The provisions of section 44 read with Rule 5 of First Schedule of the Act specifically exclude the application of section 28 to 43B and section 199 of the Act, and thus, there is no role of section 14A of the Act.
• Rule 5 of First Schedule of the Act provides a self-contained code for the computation of profits of insurance businesses, and it specifically stipulates the adjustments that are to be made to profit before tax and appropriations as per Profit and Loss Account prepared in accordance with IRDAI Act and Rules and Regulations issued thereto.
• Thus, the legislative intent clearly distinguishes computation mechanism to compute profit for insurance businesses from other businesses and does not contemplate any adjustments outside the context of such mechanism, including disallowance under Section 14A of the Act.

2. Allowability of IBNR and IBNER provisions:

• The creation of IBNR and IBNER provisions is a mandate under the IRDAI Regulations, 2002 and later regulations.
•  Although procedural aspects between the IRDAI Regulations of 2002 and 2016 differed slightly, the essential requirement for transparent reporting and disclosure of the said claims remained consistent.
• While the occurrence of the insured event gives rise to the liability, quantification is a matter of actuarial estimation, which is based on scientific mathematical calculations and does not render the liability to be contingent/ ad hoc in nature.
• The provisions for IBNR and IBNER are based on scientific assessment by an appointed actuary, and such provisions are integral to the financial statements of an insurance company.
• It was further clarified that once the insurer adheres to IRDAI guidelines and parameters while maintaining its accounts, no additional verification regarding the veracity of the claims is necessary.
• Reliance has been placed on various decisions of High Court ² deliberating on the identical issue and allowed the claim in favour of insurance companies. 
• The Revenue's contention that such provisions lack a scientific basis was rejected while affirming that the actuarial assessments constitute sound and reliable methodology for estimating claims, thus, an allowable expenditure under the provisions of section 37 of the Act.

BDO INDIA COMMENTS

This ruling reaffirms the principle that insurance companies are governed by a specific and self-contained tax regime under Section 44 read with the First Schedule of the Act. Consequently, no adjustment other than the adjustments contemplated in Rule 5 of First Schedule of the Act is permitted while computing profits/ gains of other insurance businesses. 

Furthermore, the High Court’s decision upholding the provisions made towards IBNR and IBNER claims highlights the significance of adhering to regulatory frameworks prescribed by the IRDAI. It confirms that  actuarial valuations performed by a competent professional (appointed actuary), backed by statutory regulations, provide a sound basis for claiming such provisions as admissible deduction as per provisions of the Act.

 

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¹M/s Cholamandalam MS General Insurance Co Ltd v DCIT [TCA No 755, 855 of 2018, 49, 51, 52 of 2023 dated 16 April, 2025] 
² Care Health Insurance Ltd {Delhi High Court (164 taxmann.com 53)}, Whirlpool of India Ltd {Delhi High Court (242 CTR 245)}, National Insurance Co Ltd {Calcutta High Court (ITA No 76 of 2019)}, General Insurance Corporation of India Ltd {Bombay High Court (422 ITR 248), Kerala Transport Company {Kerala High Court (239 ITR 183)}